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| 1. | Nature of Business and Significant Accounting Policies |
Novatel Wireless, Inc. (the "Company" or "our") is a provider of wireless broadband access solutions for the worldwide mobile communications market. Our broad range of products principally includes intelligent mobile hotspots, USB modems, embedded PCI and wireless PC-card modems, and communications and applications software. In addition, through our acquisition of Enfora, Inc. ("Enfora") on November 30, 2010, we provide asset-management solutions utilizing wireless technology and machine-to-machine ("M2M") communications devices.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent liabilities. Actual results could differ materially from these estimates. Significant estimates include allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets including goodwill valuation, contingent consideration, litigation, provision for warranty costs, income taxes and share-based compensation expense.
Difficult global economic conditions, tight credit markets, volatile equity, foreign currency and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in these estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, particularly those related to the condition of the economy.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist of demand deposits and money market funds. Cash and cash equivalents are recorded at market value, which approximates cost. Gains and losses associated with the Company's foreign currency denominated demand deposits are recorded as a component of other income (expense).
Allowance for Doubtful Accounts Receivable
The Company provides an allowance for its accounts receivable for estimated losses that may result from its customers' inability to pay. The Company determines the amount of the allowance by analyzing known uncollectible accounts, aged receivables, economic conditions, historical losses, and changes in customer payment cycles and our customers' credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this allowance. To minimize the likelihood of uncollectibility, the Company reviews its customers' credit-worthiness periodically based on credit scores generated by independent credit reporting services, its experience with its customers and the economic condition of its customers' industries. Material differences may result in the amount and timing of expense for any period if the Company were to make different judgments or utilize different estimates. If the financial condition of the Company's customers deteriorates resulting in an impairment of their ability to make payments, additional allowances may be required.
Marketable Securities
Marketable securities predominantly consist of highly liquid debt investments with a maturity of greater than three months when purchased. The Company holds an insignificant amount of marketable equity securities. All of the Company's marketable securities are treated as "available-for-sale" as defined in the accounting guidance. While it is the Company's intent to hold its debt securities until maturity, the Company may sell certain securities for cash flow purposes. Thus, the Company's marketable securities are classified as available-for-sale and are carried on the balance sheet at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders' equity. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. The Company determines the fair value of its financial assets and liabilities by reference to the hierarchy of inputs which consists of three levels: Level 1 fair values are valuations based on quoted market prices in active markets for identical assets or liabilities that the entity has the ability to access; Level 2 fair values are those valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and Level 3 fair values are valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
All securities whose maturity or sale is expected within one year are classified as "current" on the consolidated balance sheet. All other securities are classified as "long term" on the consolidated balance sheet.
Inventories and Provision for Excess and Obsolete Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or market. Shipping and handling costs are classified as a component of cost of net revenues in the consolidated statements of operations. The Company reviews the components of its inventory and its inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions, technological advances or new product introductions by the Company or its customers that vary from its current expectations. Whenever inventory is written down, a new cost basis is established and the inventory is not subsequently written up if market conditions improve.
The Company believes that, when made, the estimates used in calculating the inventory provision are reasonable and properly reflect the risk of excess and obsolete inventory. If customer demand for the Company's inventory is substantially less than its estimates, inventory write-downs may be required, which could have a material adverse effect on its consolidated financial statements.
Property and Equipment
Property and equipment are initially stated at cost and depreciated using the straight-line method. Test equipment, computer equipment, purchased software, furniture, and fixtures and product tooling are depreciated over lives ranging from eighteen months to five years and leasehold improvements are depreciated over the shorter of the related remaining lease period or useful life. Amortization of assets held under capital leases is included in depreciation expense.
Expenditures for repairs and maintenance are expensed as incurred. Expenditures for major renewals and betterments that extend the useful lives of existing property and equipment are capitalized and depreciated. Upon retirement or disposition of property and equipment, any resulting gain or loss is recognized in the consolidated statements of operations.
Intangible Assets
Intangible assets include purchased intangible assets acquired from Enfora and the costs of non-exclusive and perpetual worldwide software technology licenses. These costs are amortized on an accelerated basis or on a straight-line basis over the estimated useful lives of the assets, depending on the anticipated utilization of the asset. The majority of intangible assets relate to the developed technologies and trade name resulting from the acquisition of Enfora. Developed technologies are amortized on a straight-line basis over their useful lives, ranging from five to eight years. Trade name is amortized on a straight-line basis over ten years.
Long-Lived Assets
The Company periodically evaluates the carrying value of the unamortized balances of its long-lived assets, including property and equipment and intangible assets, to determine whether impairment of these assets has occurred or whether a revision to the related amortization periods should be made. When the carrying value of an asset exceeds the associated undiscounted expected future cash flows, it is considered to be impaired and is written down to fair value. Fair value is determined based on an evaluation of the assets associated undiscounted future cash flows or appraised value. This evaluation is based on management's projections of the undiscounted future cash flows associated with each class of asset. If management's evaluation indicates that the carrying values of these assets are impaired, such impairment is recognized by a reduction of the applicable asset carrying value to its estimated fair value and the impairment is expensed as a part of continuing operations.
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair value assigned to assets acquired and liabilities assumed in a business combination. Goodwill is allocated as of the date of the business combination to the reporting units that are expected to benefit from the synergies of the business combination. Goodwill is considered to be impaired if the Company determines that the carrying value of the reporting unit to which the goodwill has been assigned exceeds its estimated fair value. The Company performs its annual goodwill impairment test each year at the beginning of the fourth quarter, or more frequently if events or circumstances indicate that the carrying value of goodwill exceeds its fair value. The Company recorded $3.3 million, $0, and $0 of goodwill impairment during the years ended December 31, 2011, 2010, and 2009, respectively.
Contingent Consideration
Contingent consideration is recorded at the acquisition date estimated fair value for all acquisitions. The fair value of the contingent consideration is remeasured at each reporting period with any adjustments in fair value included in the Company's consolidated statement of operations.
Revenue Recognition
The Company's revenue is principally generated from the sale of wireless modems to wireless operators, OEM customers and value added resellers and distributors. In addition, the Company generates revenue from the sale of asset-management solutions utilizing wireless technology and M2M communication devices predominantly to transportation and industrial companies, medical device manufacturers and security system providers. Revenue from product sales is generally recognized upon the later of transfer of title or delivery of the product to the customer. Where the transfer of title or risk of loss is contingent on the customer's acceptance of the product, we will not recognize revenue until both title and risk of loss have transferred to the customer. We record deferred revenue for cash payments received from customers in advance of when revenue recognition criteria are met. We have granted price protection to certain customers in accordance with the provisions of the respective contracts and track pricing and other terms offered to customers buying similar products to assess compliance with these provisions. We estimate the amount of price protection for current period product sales utilizing historical experience and information regarding customer inventory levels. To date, we have not incurred material price protection obligations. Revenues from sales to certain customers are subject to cooperative advertising allowances. Cooperative advertising allowances are recorded as an operating expense to the extent that the advertising benefit is separable from the revenue transaction and the fair value of that advertising benefit is determinable. To the extent that such allowances either do not provide a separable benefit to us, or the fair value of the advertising benefit cannot be reliably estimated, such amounts are recorded as a reduction of revenue. We establish reserves for estimated product returns allowances in the period in which revenue is recognized. In estimating future product returns, we consider various factors, including our stated return policies and practices and historical trends.
Predominantly all of our revenues represent the sale of hardware with accompanied software that is essential to the functionality of the hardware. The Company records revenue associated with the agreed upon price on hardware sales, and accrues any estimated costs of post-delivery performance obligations such as warranty obligations. The Company considers the four basic revenue recognition criteria discussed under Staff Accounting Bulletin #104 when assessing appropriate revenue recognition as follows:
Criterion #1—Persuasive evidence of an arrangement must exist;
Criterion #2—Delivery has occurred;
Criterion #3—The Company's price to the buyer must be fixed or determinable; and,
Criterion #4—Collectibility is reasonably assured.
Under Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2009-13, in multiple element arrangements, the total consideration received from customers must be allocated to the elements, which may include hardware and non essential software elements, based on a relative selling price. The accounting guidance establishes a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendors specific objective evidence (VSOE), (ii) third party evidence (TPE), and (iii) best estimate of selling price (ESP). Because the Company has neither VSOE nor TPE, revenue has been based on the Company's ESP. Amounts allocated to the delivered hardware and the related essential software are recognized at the time of the sale provided all other revenue recognition criteria have been met. Amounts allocated to other deliverables based upon ESP are recognized in the period the revenue recognition criteria have been met.
Our process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Our prices are determined based upon cost to produce our products, expected order quantities and acceptance in the marketplace. In addition, when developing ESPs for products we may consider other factors as appropriate including the pricing of competitive alternatives if they exist, and product-specific business objectives.
We account for nonessential software licenses and related post contract support (PCS) under multiple element arrangements by recognizing revenue for such arrangements ratably over the term of the PCS as we have not established VSOE for the PCS element.
For the years ended December 31, 2011, 2010, and 2009, we have not recorded any significant revenues from multiple element or software arrangements.
Research and Development Costs
Research and development costs are expensed as incurred.
Warranty Costs
The Company accrues warranty costs based on estimates of future warranty related replacement, repairs or rework of products. Our warranty policy generally provides one to three years of coverage for products following the date of purchase. The Company's policy is to accrue the estimated cost of warranty coverage as a component of cost of revenue in the accompanying consolidated statements of operations at the time revenue is recognized. In estimating its future warranty obligations the Company considers various factors, including the historical frequency and volume of claims, and the cost to replace or repair products under warranty. The warranty provision for its products is determined by using a financial model to estimate future warranty costs. The Company's financial model takes into consideration actual product failure rates; estimated replacement, repair or rework expenses; and potential risks associated with our different products. The risk levels, warranty cost information, and failure rates used within this model are reviewed throughout the year and updated, if and when, these inputs change.
Income Taxes
The Company recognizes federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company's estimate of future tax effects attributable to temporary differences and carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence. If the Company is unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, the Company could be required to increase its valuation allowance against its deferred tax assets which could result in an increase in the Company's effective tax rate and an adverse impact on operating results. The Company will continue to evaluate the necessity of the valuation allowance based on the remaining deferred tax assets.
The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Uncertain tax positions are recognized in the first subsequent financial reporting period in which that threshold is met or from changes in circumstances such as the expiration of applicable statutes of limitations.
Derivatives and Hedging
The Company's derivative financial instruments consist solely of foreign currency forward exchange contracts. The purpose of these derivative instruments is to hedge the Company's economic exposure associated with accounts receivable and cash balances denominated in Euros. The Company's forward contracts do not qualify as accounting hedges. As a result, the Company marks-to-market the forward contracts and includes unrealized gains and losses in the current period as a component of other income (expense) in the consolidated statements of operations.
Litigation
The Company is currently involved in certain legal proceedings. The Company will record a loss when the Company determines information available prior to the issuance of the financial statements indicates the loss is both probable and estimable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to the Company's pending litigation and revises its estimates, if necessary. The Company's policy is to expense litigation costs as incurred.
Share-Based Compensation
The Company has granted stock options to employees and restricted stock units. The Company also has an employee stock purchase plan ("ESPP") for eligible employees. The Company measures the compensation cost associated with all share-based payments based on grant date fair values. The fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. The Company currently uses the Black-Scholes option pricing model to estimate the fair value of our stock options and stock purchase rights. The Black-Scholes model is considered an acceptable model but the fair values generated by it may not be indicative of the actual fair values of our equity awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends.
For grants of stock options, the Company uses a blend of historical and implied volatility for traded options on its stock in order to estimate the expected volatility assumption required in the Black-Scholes model. The Company's use of a blended volatility estimate in computing the expected volatility assumption for stock options is based on its belief that while that implied volatility is representative of expected future volatility, the historical volatility over the expected term of the award is also an indicator of expected future volatility. Due to the short duration of employee stock purchase rights under our ESPP, the Company utilizes historical volatility in order to estimate the expected volatility assumption of the Black-Scholes model.
The expected term of stock options granted is estimated using the average of the vesting date, the contractual term and historical experience. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of our stock options and employee stock purchase rights. The dividend yield assumption is based on the Company's history and expectation of no dividend payouts. The Company estimates forfeitures at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates its forfeiture rate assumption for all types of share based compensation awards based historical forfeiture rates related to each category of award.
Compensation cost associated with grants of restricted stock units are measured at fair value, which has historically been the closing price of the Company's stock on the date of grant.
The Company recognizes share-based compensation expense using the straight-line method for awards that contain only service conditions. For awards that contain performance conditions, the Company recognizes the share-based compensation expense on a straight-line basis for each vesting tranche.
The Company evaluates the assumptions used to value stock awards on a quarterly basis. If factors change and the Company employs different assumptions, share-based compensation expense may differ significantly from what it has recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. To the extent that the Company grants additional equity securities to employees or it assumes unvested securities in connection with any acquisitions, its share-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.
Computation of Net Income (Loss) Per Share
The Company computes basic and diluted per share data for all periods for which a statement of operations is presented. Basic net income (loss) per share excludes dilution and is computed by dividing the net income (loss) by the weighted-average number of shares that were outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to acquire common stock were exercised or converted into common stock. Potential dilutive securities are excluded from the diluted EPS computation in loss periods as their effect would be anti-dilutive.
Fair Value of Financial Instruments
The Company's fair value measurements relate to its cash equivalents, marketable debt securities, and marketable equity securities, which are classified pursuant to authoritative guidance for fair value measurements. The Company places its cash equivalents and marketable debt securities in instruments that meet credit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
Our financial instruments consist principally of cash and cash equivalents, short-term and long-term marketable securities, and short-term and long-term debt. The Company's cash and cash equivalents consist of its investment in money market securities and treasury bills. The Company's marketable securities consist primarily of government agency securities, municipal bonds, time deposits and investment-grade corporate bonds. From time to time, the Company may utilize foreign exchange forward contracts. These contracts are valued using pricing models that take into account the currency rates as of the balance sheet date.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net earnings and unrealized gains and losses on available-for-sale securities.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This standard results in a common requirement between the FASB and the International Accounting Standards Board (IASB) for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. We do not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05." ASU 2011-12 indefinitely defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement, while still requiring companies to adopt the other requirements contained in ASU 2011-05, the new standard on comprehensive income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect the adoption of ASU 2011-05 to have a material impact on the consolidated financial statements.
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| 2. | Merger and Acquisition Activities in Prior Years |
Enfora
On November 30, 2010, the Company completed the acquisition of Enfora. The acquisition of Enfora diversifies the Company's customer base and product lines into adjacent markets and advances the Company's strategy of providing intelligent devices to all end markets—enterprise, consumer and vertical applications.
Enfora's results of operations and estimated fair value of assets acquired and liabilities assumed were included in the Company's consolidated financial statements beginning November 30, 2010. The revenue and operating results contributed by Enfora during the year ended December 31, 2011 are disclosed in our Segment Information and Concentrations of Risk footnote (see Note 12). Acquisition costs related to the merger of Enfora of $1.9 million were recorded and classified as general and administrative expenses in the consolidated statement of operations during the year ended December 31, 2010.
Acquisition consideration
Under the terms of the acquisition agreement, the Company paid cash consideration of $64.5 million and additional cash consideration of $13.0 million in exchange for an agreed upon amount of Enfora working capital. The Company also agreed to pay additional cash consideration ("contingent consideration") of up to $6.0 million based on the operating results of Enfora for the 15 month period from October 1, 2010 to December 31, 2011. The estimated fair value of this contingent consideration at the acquisition date was $0.9 million, resulting in total estimated cash to be paid of $78.4 million. During the quarter ended March 31, 2011, the Company revised its estimate of contingent consideration to $0 and reflected this change as a benefit to general and administrative expenses for the quarter ended March 31, 2011. There were no changes in the fair value of the contingent consideration recorded in the nine months ended December 31, 2011 as the operating results necessary to receive payment of the contingent consideration were not achieved.
Fair Value of Assets Acquired and Liabilities Assumed
The Company accounted for the transaction using the acquisition method and, accordingly, estimated the fair value of the tangible and intangible assets acquired and liabilities assumed as set forth below. During the third quarter of 2011, the Company made a $297,000 adjustment to increase Enfora net deferred tax assets, with a corresponding dollar amount decrease to goodwill, based on completed studies of available tax benefits existing as of the date of acquisition. The total purchase price is summarized below (in thousands):
|
Cash and cash equivalents |
$ | 4,600 | ||
|
Accounts receivables |
7,448 | |||
|
Inventories |
10,469 | |||
|
Property and equipment |
1,597 | |||
|
Prepaid expenses and other assets |
304 | |||
|
Accounts payable, accrued expenses and deferred taxes |
(12,220 | ) | ||
|
Intangible assets |
42,520 | |||
|
Goodwill |
23,661 | |||
|
|
|
|||
|
Purchase price |
$ | 78,379 | ||
|
|
|
Actual and Pro Forma Results of Enfora Acquisition
The following table presents the unaudited pro forma financial information for the years ended December 31, 2010 and December 31, 2009. The unaudited pro forma financial information combines the results of operations of Novatel Wireless and Enfora as though the companies had been combined as of the beginning of fiscal 2009. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place at the beginning of fiscal 2009. The following unaudited pro forma financial information presented includes amortization charges for acquired intangible assets, inventory fair value adjustments, eliminations of intercompany transactions, adjustments to interest expense, reduction in share-based compensation and related tax effects (in thousands, except per share data):
| 2010 | 2009 | |||||||
|
Net revenue |
$ | 392,047 | $ | 389,936 | ||||
|
Net loss |
(46,572 | ) | (5,863 | ) | ||||
|
Basic and diluted net loss per share |
(1.48 | ) | (0.19 | ) | ||||
Cinterion
In June 2010, the Company submitted a bid to purchase certain assets of Cinterion, a company in the cellular M2M communications industry, in connection with an insolvency proceeding. The Company was not the successful bidder at the conclusion of the process on June 28, 2010. In connection with the bid, the Company borrowed $30.0 million under a bridge loan facility in June 2010 which was subsequently repaid in July 2010. The Company recognized $3.1 million of debt issuance costs related to the bridge loan facility. This amount was recorded as interest expense in the consolidated statement of operations for the year ended December 31, 2010. The Company also realized $1.7 million of foreign currency gain, net of hedging transaction costs, to address foreign currency risk also related to the bid. This amount was recorded in other income in the consolidated statement of operations during the year ended December 31, 2010. The Company also incurred $1.3 million in legal, advisory and professional fees related to the acquisition bid, which were recorded and classified as general and administrative expenses in the consolidated statement of operations during the year ended December 31, 2010.
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| 3. | Fair Value Measurement of Assets and Liabilities |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A fair value measurement reflects the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risk inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model.
We classify our inputs to measure fair value using a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Pricing inputs are based on quoted market prices for identical assets or liabilities in active markets (e.g., NYSE). Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Pricing inputs include benchmark yields, trade data, reported trades and broker dealer quotes, two-sided markets and industry & economic events, yield to maturity, Municipal Securities Rule Making Board reported trades and vendor trading platform data. Level 2 includes those financial instruments that are valued using various pricing services and broker pricing information including Electronic Communication Networks and broker feeds.
Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources, including the Company's own assumptions.
The fair value of the majority of our cash equivalents and marketable equity securities were determined based on Level 1 inputs. The fair value of our marketable debt securities was determined based on Level 2 inputs. At December 31, 2011, the Company did not have any securities in the Level 3 category. The Company reviews the fair value hierarchy classification on a quarterly basis. We validate the quoted market prices provided by our primary pricing service by comparing their assessment of the fair values of our investments by using a third party investment manager. The third party investment manager uses similar techniques to our primary pricing service to derive the pricing describe above. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following table summarizes the Company's financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2011 (in thousands):
|
Description |
Balance as of December 31, 2011 |
Level 1 | Level 2 | |||||||||
|
Assets: |
||||||||||||
|
Cash equivalents: |
||||||||||||
|
Money market funds |
$ | 25,137 | $ | 25,137 | $ | — | ||||||
|
US Treasury notes |
5,784 | — | 5,784 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total cash equivalents |
30,921 | 25,137 | 5,784 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Short-term marketable securities: |
||||||||||||
|
Corporate debenture/bonds |
8,612 | — | 8,612 | |||||||||
|
Municipal bonds |
8,384 | — | 8,384 | |||||||||
|
Certificates of deposit |
4,321 | — | 4,321 | |||||||||
|
Government agency securities |
6,912 | — | 6,912 | |||||||||
|
Marketable equity securities |
38 | 38 | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total short-term marketable securities |
28,267 | 38 | 28,229 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Long-term marketable securities: |
||||||||||||
|
Municipal bonds |
5,969 | — | 5,969 | |||||||||
|
Certificates of deposit |
3,788 | — | 3,788 | |||||||||
|
Government agency securities |
3,738 | — | 3,738 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total long-term marketable securities |
13,495 | — | 13,495 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total financial assets |
$ | 72,683 | $ | 25,175 | $ | 47,508 | ||||||
|
|
|
|
|
|
|
|||||||
The following table summarizes the Company's financial instruments measured at fair value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2010 (in thousands):
|
Description |
Balance as of December 31, 2010 |
Level 1 | Level 2 | Level 3 | ||||||||||||
|
Assets: |
||||||||||||||||
|
Cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | 5,380 | $ | 5,380 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total cash equivalents |
5,380 | 5,380 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Short-term marketable securities: |
||||||||||||||||
|
Corporate debenture/bonds |
33,384 | — | 33,384 | — | ||||||||||||
|
Municipal bonds |
5,255 | — | 5,255 | — | ||||||||||||
|
Certificates of deposit |
925 | — | 925 | — | ||||||||||||
|
Government agency securities |
20,211 | — | 20,211 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total short-term marketable securities |
59,775 | — | 59,775 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Description |
Balance as of December 31, 2010 |
Level 1 | Level 2 | Level 3 | ||||||||||||
|
Long-term marketable securities: |
||||||||||||||||
|
Corporate debenture/bonds |
8,794 | — | 8,794 | — | ||||||||||||
|
Certificates of deposit |
2,403 | — | 2,403 | — | ||||||||||||
|
Government agency securities |
9,479 | — | 9,479 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total long-term marketable securities |
20,676 | — | 20,676 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total financial assets |
$ | 85,831 | $ | 5,380 | $ | 80,451 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Liabilities: |
||||||||||||||||
|
Contingent consideration liability |
$ | (880 | ) | $ | — | $ | — | $ | (880 | ) | ||||||
|
Foreign exchange forward contracts |
(8 | ) | — | (8 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total financial liabilities |
$ | (888 | ) | $ | — | $ | (8 | ) | $ | (880 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
There were no transfers between Level 1 and Level 2 securities during the year ended December 31, 2011 and 2010. All of our long-term marketable debt securities had maturities of between one and two years in duration at December 31, 2011.
The table below presents Level 3 activity for our contingent consideration liability for the twelve months ended December 31, 2011 (in thousands):
|
Contingent consideration liability |
Level 3 | |||
|
Beginning balance at January 1, 2011 |
$ | (880 | ) | |
|
Adjustments |
880 | |||
|
|
|
|||
|
Ending balance at December 31, 2011 |
$ | — | ||
|
|
|
|||
As of December 31, 2011, the Company had no outstanding foreign currency exchange forward contracts. At December 31, 2010, the Company recorded an unrealized loss of $8,000 on its outstanding foreign currency forward exchange contracts.
For the years ended December 31, 2011, 2010 and 2009, the Company recorded gains of $8,000, gains of $38,000 and losses of $446,000, respectively, on its Euro-denominated foreign exchange forward contracts. During the years ended December 31, 2011, 2010 and 2009, the Company recorded foreign currency gains and losses on foreign currency denominated transactions of approximately $836,000 loss, $1.7 million gain and $420,000 loss, respectively. The loss during the year ended December 31, 2011 primarily related to foreign currency losses on South Korean won denominated trade payables. The gains during the year ended December 31, 2010 primarily relate to a $2.9 million foreign currency gain realized on the liquidation of the Company's cash holdings in Euros at the conclusion of the insolvency proceeding for the sale of Cinterion net of $1.2 million in expense to enter into several Euro-denominated put options to hedge the foreign currency risk associated with its cash holdings in Euros related to the Cinterion bid process. These put options expired unexercised on June 25, 2010.
All recorded gains and losses on foreign exchange transactions are recorded in other income (expense), net, within the consolidated statements of operations.
|
|||
| 4. | Financial Statement Details |
Marketable Securities
The Company's portfolio of available-for-sale securities by contractual maturity consists of the following (in thousands):
|
December 31, 2011 |
Maturity in Years |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||||
|
Corporate debenture/bonds |
1 or less | $ | 8,615 | $ | — | $ | (3 | ) | $ | 8,612 | ||||||||||
|
Municipal bonds |
1 or less | 8,390 | — | (6 | ) | 8,384 | ||||||||||||||
|
Certificates of deposit |
1 or less | 4,319 | 2 | — | 4,321 | |||||||||||||||
|
Government agency securities |
1 or less | 6,913 | — | (1 | ) | 6,912 | ||||||||||||||
|
Marketable equity securities |
1 or less | 38 | — | — | 38 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total short-term marketable securities |
28,275 | 2 | (10 | ) | 28,267 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Municipal bonds |
1 to 2 | 5,967 | 2 | — | 5,969 | |||||||||||||||
|
Certificates of deposit |
1 to 2 | 3,797 | — | (9 | ) | 3,788 | ||||||||||||||
|
Government agency securities |
1 to 2 | 3,734 | 4 | — | 3,738 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total long-term marketable securities |
13,498 | 6 | (9 | ) | 13,495 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 41,773 | $ | 8 | $ | (19 | ) | $ | 41,762 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
The Company's available-for-sale securities are carried on the consolidated balance sheet at fair market value with the related unrealized gains and losses included in accumulated other comprehensive (loss) income on the consolidated balance sheet, which is a separate component of stockholders' equity. Realized gains and losses on the sale of available-for-sale marketable securities are determined using the specific-identification method.
At December 31, 2011 and 2010, the Company recorded net unrealized loss of $8,000, net of taxes, and net unrealized gains of $21,000, respectively. The Company's net unrealized gains (loss) is the result of market conditions affecting its fixed-income debt securities, which are included in accumulated other comprehensive (loss) income on the consolidated balance sheet for the periods then ended.
As of December 31, 2011, the Company's investment portfolio included $385,000 of marketable equity securities at original cost, with a fair value of $38,000. These securities are currently traded on the Over the Counter Bulletin Board (OTCBB) and are not traded on major exchanges such as the NYSE. During the year ended December 31, 2011, the Company recorded an other-than-temporary loss of $347,000 within other income (expense), net in the consolidated statement of operations.
Inventories
Inventories consist of the following (in thousands):
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Finished goods |
$ | 35,211 | $ | 36,764 | ||||
|
Raw materials and components |
7,068 | 6,330 | ||||||
|
|
|
|
|
|||||
| $ | 42,279 | $ | 43,094 | |||||
|
|
|
|
|
|||||
Property and Equipment
Property and equipment consists of the following (in thousands):
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Test equipment |
$ | 52,311 | $ | 48,689 | ||||
|
Computer equipment and purchased software |
13,766 | 12,254 | ||||||
|
Product tooling |
3,768 | 2,968 | ||||||
|
Furniture and fixtures |
2,240 | 1,807 | ||||||
|
Leasehold improvements |
5,628 | 3,786 | ||||||
|
|
|
|
|
|||||
| 77,713 | 69,504 | |||||||
|
Less—accumulated depreciation and amortization |
(59,217 | ) | (48,223 | ) | ||||
|
|
|
|
|
|||||
| $ | 18,496 | $ | 21,281 | |||||
|
|
|
|
|
|||||
For the years ended December 31, 2011, 2010 and 2009, the Company recorded $70,000, $167,000 and $92,000, respectively, in its cost of net revenues as a result of its impairment analysis of property and equipment.
Depreciation and amortization expense relating to property and equipment was $11.1 million, $10.0 million and $11.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Royalties |
$ | 5,861 | $ | 6,461 | ||||
|
Payroll and related |
8,706 | 5,704 | ||||||
|
Product warranty |
1,525 | 2,279 | ||||||
|
Market development fund and price protection |
1,750 | 1,452 | ||||||
|
Deferred rent |
1,135 | 1,092 | ||||||
|
Professional fees |
1,213 | 1,103 | ||||||
|
Other |
4,854 | 7,959 | ||||||
|
|
|
|
|
|||||
| $ | 25,044 | $ | 26,050 | |||||
|
|
|
|
|
|||||
Accrued Warranty Obligations
Accrued warranty obligations consist of the following (in thousands):
| 2011 | 2010 | |||||||
|
Warranty liability at beginning of period |
$ | 2,279 | $ | 3,039 | ||||
|
Additions charged to operations |
2,642 | 1,350 | ||||||
|
Deductions from liability |
(3,396 | ) | (2,110 | ) | ||||
|
|
|
|
|
|||||
|
Warranty liability at end of period |
$ | 1,525 | $ | 2,279 | ||||
|
|
|
|
|
|||||
|
|||
| 5. | Intangible Assets |
The Company's amortizable purchased intangible assets resulting from its acquisition of Enfora are composed of (in thousands):
| Years ended December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Gross (1) | Accumulated Amortization (1) |
Net | Gross | Accumulated Amortization |
Net | |||||||||||||||||||
|
Developed technologies |
$ | 26,000 | $ | (4,163 | ) | $ | 21,837 | $ | 29,200 | $ | (371 | ) | $ | 28,829 | ||||||||||
|
Trade name |
12,800 | (1,387 | ) | 11,413 | 12,800 | (107 | ) | 12,693 | ||||||||||||||||
|
Other |
3,720 | (1,609 | ) | 2,111 | 2,220 | (356 | ) | 1,864 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total amortizable purchased intangible assets |
$ | 42,520 | $ | (7,159 | ) | $ | 35,361 | $ | 44,220 | $ | (834 | ) | $ | 43,386 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (1) | During the year ended December 31, 2011, the Company corrected its purchase price allocations to gross intangible assets and related amortization expense related to the 2010 Enfora acquisition (see Note 6). |
The following table presents details of the amortization of purchased intangible assets of Enfora included in the cost of net revenues and operating costs and expenses categories (in thousands):
| Years ended December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Cost of net revenues |
$ | 4,102 | $ | 655 | ||||
|
General and administrative expenses |
2,220 | 179 | ||||||
|
|
|
|
|
|||||
|
Total amortization expense |
$ | 6,322 | $ | 834 | ||||
|
|
|
|
|
|||||
The following table presents details of the amortization of existing amortizable purchased intangible assets of Enfora that is currently estimated to be expensed in the future (in thousands):
|
Fiscal year: |
Amount | |||
|
2012 |
$ | 5,571 | ||
|
2013 |
5,333 | |||
|
2014 |
5,333 | |||
|
2015 |
5,226 | |||
|
Thereafter |
13,898 | |||
|
|
|
|||
|
Total |
$ | 35,361 | ||
|
|
|
|||
Additionally, at December 31, 2011 and 2010, the Company had net acquired software licenses of $341,000 and $879,000, respectively, net of accumulated amortization of $3.7 million and $3.2 million, respectively. The acquired software licenses represent rights to use certain software necessary for the development and commercial sale of the Company's products.
The Company monitors its intangible and long-lived asset balances and conducts formal tests when impairment indicators are present. The Company recorded $133,000 of impairment loss related to acquired software licenses during the year ended December 31, 2011. There was no impairment loss recorded for the years ended December 31, 2010 or 2009.
Amortization expense relating to acquired software licenses was $422,000, $744,000 and $1.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. Amortization expense related to licenses obtained for research purposes is recorded within research and development expense in the consolidated statements of operations. Amortization expense related to licenses obtained for commercial products is recorded in cost of net revenues in the consolidated statements of operations.
At December 31, 2011, the weighted average remaining useful life of the Company's long-lived intangible assets is 7.0 years.
|
|||
| 6. | Goodwill |
In the third quarter of 2011, the Company identified errors in its consolidated financial statements for the year ended December 31, 2010 and for each of the quarterly periods ended March 31, 2011 and June 30, 2011. The errors were due to the amount of recorded goodwill in connection with the 2010 acquisition of Enfora. The errors were made in connection with the Company's initial allocation of the consideration transferred in the acquisition resulting in understated goodwill and overstated acquired intangibles at the time of the acquisition by $1.7 million. As a result, the Company adjusted the gross value of goodwill and acquired intangible by $1.7 million to reflect the proper allocation.
The changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2010 are as follows (in thousands):
| M2M Products and Solutions | ||||||||
| 2011 | 2010 | |||||||
|
Balance at beginning of period |
$ | 22,258 | $ | — | ||||
|
Goodwill acquired during the period |
— | 22,258 | ||||||
|
Goodwill acquisition price correction |
1,700 | — | ||||||
|
Net deferred tax asset related adjustment due to goodwill correction |
(612 | ) | — | |||||
|
Completion of deferred tax asset valuation (Note 2) |
(297 | ) | — | |||||
|
Goodwill impairment during the period |
(3,277 | ) | — | |||||
|
|
|
|
|
|||||
|
Balance at December 31, |
$ | 19,772 | $ | 22,258 | ||||
|
|
|
|
|
|||||
During the third quarter of 2011, the Company experienced a sustained, significant decline in its stock price and based on actual and forecasted operating results of the M2M products and solutions reporting unit, the Company determined there were sufficient indicators of impairment present to require an interim impairment analysis.
Based upon fair value tests performed by a third party independent appraisal, the Company recorded a preliminary pre-tax goodwill impairment charge of approximately $3.5 million during the third quarter of 2011. In the fourth quarter of 2011, the Company finalized the impairment by reducing the previous estimate of impairment by approximately $237,000 for a total goodwill impairment of $3.3 million in 2011.
There were no further adjustments to the goodwill during its annual impairment test in the fourth quarter of 2011. The Company used the third party independent appraisal report from the third quarter of 2011 as its basis for its annual impairment analysis.
|
|||
| 8. | Stockholders' Equity |
Preferred Stock
The Company has a total of 2,000,000 shares of Series A and Series B preferred stock authorized for issuance at a par value of $0.001 per share. No preferred shares are currently issued or outstanding.
Common Shares Reserved for Future Issuance
The Company has reserved shares of common stock for possible future issuance as of December 31, 2011 as follows (in thousands):
| Shares | ||||
|
Stock options outstanding under the 2009 Omnibus Incentive Compensation Plan and previous plans |
4,481 | |||
|
Restricted stock units outstanding |
1,289 | |||
|
Future grants of awards under the 2009 Omnibus Incentive Compensation Plan |
1,493 | |||
|
Shares available under the Employee Stock Purchase Plan |
1,087 | |||
|
|
|
|||
|
Total shares of common stock reserved for issuance |
8,350 | |||
|
|
|
|||
|
|||
| 9. | Stock Incentive and Employee Stock Purchase Plans |
During the year ended December 31, 2011, the Company granted awards under the 2009 Omnibus Incentive Compensation Plan (the "2009 Plan"). The Compensation Committee of the Board of Directors administers the plan.
Under the 2009 Plan, a maximum of 2.5 million shares of common stock may be issued upon the exercise of stock options, in the form of restricted stock, or in settlement of restricted stock units or other awards, including awards with alternative vesting schedules such as performance-based criteria.
For the years ended December 31, 2011, 2010 and 2009, the following table presents total share-based compensation expense in each functional line item on our consolidated statements of operations (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Cost of net revenues |
$ | 579 | $ | 645 | $ | 743 | ||||||
|
Research and development |
2,088 | 2,368 | 2,608 | |||||||||
|
Sales and marketing |
1,254 | 1,164 | 1,149 | |||||||||
|
General and administrative |
2,062 | 2,294 | 2,382 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Totals |
$ | 5,983 | $ | 6,471 | $ | 6,882 | ||||||
|
|
|
|
|
|
|
|||||||
The per share fair values of stock options granted under the 2009 Plan and rights granted under the ESPP have been estimated with the following assumptions.
| Employee Stock Options | Employee Stock Purchase Rights | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
|
Expected dividend yield: |
0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
|
Risk-free interest rate: |
1.2 | % | 2.2 | % | 1.9 | % | 0.2 | % | 0.5 | % | 0.5 | % | ||||||||||||
|
Volatility: |
69 | % | 53 | % | 73 | % | 63 | % | 60 | % | 80 | % | ||||||||||||
|
Expected term (in years): |
6.0 | 5.8 | 5.6 | 1.1 | 1.3 | 1.2 | ||||||||||||||||||
Stock Options
The Compensation Committee of the Board of Directors determines eligibility, vesting schedules and exercise prices for options granted. Options granted under the 2009 Plan and previous plans generally have a term of ten years, and in the case of new hires, generally vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months thereafter. Subsequent option grants to existing employees generally vest and become exercisable ratably on a monthly basis over a period of 48 months measured from the date of grant.
A summary of stock option activity for the year ended December 31, 2011 is presented below (dollars and shares in thousands, except per share data):
| Stock Options Outstanding |
Weighted Average Exercise Price Per Option |
Weighted Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
|
Options outstanding December 31, 2010 |
4,592 | $ | 10.88 | |||||||||||||
|
Granted |
180 | $ | 5.55 | |||||||||||||
|
Exercised |
(9 | ) | $ | 3.79 | ||||||||||||
|
Cancelled |
(282 | ) | $ | 12.51 | ||||||||||||
|
|
|
|||||||||||||||
|
Balance December 31, 2011 |
4,481 | $ | 10.58 | 5.43 | $ | 17 | ||||||||||
|
|
|
|||||||||||||||
|
Options Exercisable, December 31, 2011 |
3,696 | $ | 11.39 | 4.82 | $ | 17 | ||||||||||
|
|
|
|||||||||||||||
The total intrinsic value of options exercised to purchase common stock during the years ended December 31, 2011, 2010 and 2009 was approximately $28,000, $364,000 and $633,000, respectively. As of December 31, 2011, total unrecognized share-based compensation cost related to unvested stock options was $3.0 million, which is expected to be recognized over a weighted average period of approximately 1.8 years. The total fair value of option awards recognized as expense during the years ended December 31, 2011, 2010 and 2009 was approximately $2.7 million, $3.5 million and $3.6 million, respectively. The weighted average fair value of option awards granted during years ended December 31, 2011, 2010 and 2009 was $3.40, $3.62 and $4.07, respectively.
Restricted Stock Units
The Company may issue restricted stock units ("RSUs") that, upon satisfaction of vesting conditions, allow for employees and non-employee directors to receive common stock. Issuances of such awards reduce common stock available under the 2009 Plan for stock incentive awards. The Company measures compensation cost associated with grants of RSUs at fair value, which is generally the closing price of the Company's stock on the date of grant.
During 2011, the Compensation Committee of the Board of Directors, pursuant to the 2009 Plan, awarded employees a total of 903,214 RSUs at fair values ranging from $3.06 per share to $9.71 per share. Generally, one-third of the shares underlying each grant become issuable on the anniversary of each grant date, assuming continued employment or to the Company through such date. Based on the fair value of the Company's common stock price at the grant dates, the Company estimated the aggregate fair value of these awards at approximately $4.9 million. The estimated fair value of these awards is being amortized to compensation expense for each grant on a straight-line basis over the estimated service period.
During 2010, the Compensation Committee of the Board of Directors, pursuant to the 2009 Plan, awarded employees a total of 620,236 RSUs, including 235,900 RSUs to Enfora employees in connection with the acquisition (the "Enfora RSUs"), at fair values ranging from $6.95 per share to $9.76 per share. Generally, one-third of the shares underlying each grant become issuable on the anniversary of each grant date, assuming continued employment or to the Company through such date. However, one-fourth of the shares underlying each grant of the Enfora RSUs become issuable on the anniversary of each grant date, assuming continued employment or to the Company through such date. Based on the fair value of the Company's common stock price at the grant dates, the Company estimated the aggregate fair value of these awards at approximately $5.0 million. The estimated fair value of these awards is being amortized to compensation expense for each grant on a straight-line basis over the estimated service period.
During 2009, the Compensation Committee of the Board of Directors, awarded a total of 424,416 RSUs to employees at fair values ranging from $5.51 per share to $11.83 per share. Generally, one-third of the shares underlying each grant become issuable on the anniversary of each grant date, assuming continued employment or to the Company through such date. Based on the fair value of the Company's common stock price at the grant dates, the Company estimated the aggregate fair value of these awards at approximately $2.5 million. The estimated fair value of these awards is being amortized to compensation expense for each grant on a straight-line basis, which is predominately over a three-year service period.
A summary of restricted stock unit activity for the year ended December 31, 2011 is presented below (shares in thousands):
| Shares | ||||
|
Non-vested at December 31, 2010 |
829 | |||
|
Granted |
903 | |||
|
Vested |
(362 | ) | ||
|
Forfeited |
(81 | ) | ||
|
|
|
|||
|
Non-vested at December 31, 2011 |
1,289 | |||
|
|
|
|||
As of December 31, 2011, there was $6.8 million of unrecognized compensation expense related to non-vested RSUs. That expense is expected to be recognized over a weighted average period of 1.8 years. The total fair value of RSUs recognized as expense during the years ended December 31, 2011, 2010 and 2009 was $2.6 million, $1.7 million and $2.1 million, respectively.
2000 Employee Stock Purchase Plan
The Company's 2000 Employee Stock Purchase Plan (the "ESPP") permits eligible employees of the Company to purchase newly issued shares of common stock, at a price equal to 85% of the lower of the fair market value on (i) the first day of the offering period or (ii) the last day of each six-month purchase period, through payroll deductions of up to 10% of their annual cash compensation. In June 2009, the Company's shareholders approved an amendment to the ESPP to increase the number of shares available for issuance under the ESPP by 750,000 shares, extend the term of the ESPP to June 2019, cease the automatic annual increase in the number of shares available for issuance under the ESPP and make certain other technical changes.
During the years ended December 31, 2011, 2010 and 2009, the Company issued 163,142 shares, 514,540 shares and 425,941 shares, respectively, under the ESPP. During the years ended December 31, 2011, 2010 and 2009, the Company received $470,000, $1.7 million and $1.3 million, respectively, in cash through employee withholdings.
On November 4, 2010, the Company announced the termination of the ESPP as of November 15, 2010 due to a lack of available shares. The cancellation of the awards was accounted for as a repurchase for no consideration. The previously unrecognized compensation cost as of November 15, 2010 of $316,000 was fully expensed in the fourth quarter of 2010. On August 30, 2011, the Company announced the reinstatement of the ESPP program effective as of September 8, 2011. The ESPP authorizes the Company to issue 1,250,111 shares of common stock for purchase by eligible employees.
The total fair value of ESPP awards recognized as expense during the years ended December 31, 2011, 2010 and 2009 was $707,000, $994,000 and $1.2 million, respectively.
|
|||
| 10. | Income Taxes |
Total income taxes for the years ended December 31, 2011, 2010 and 2009 were allocated as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
To income |
$ | (9,503 | ) | $ | 7,893 | $ | 527 | |||||
|
To stockholders' equity |
240 | 277 | 232 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total income taxes |
$ | (9,263 | ) | $ | 8,170 | $ | 759 | |||||
|
|
|
|
|
|
|
|||||||
Income (loss) before taxes for the years ended December 31, 2011, 2010 and 2009 is comprised of the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Domestic |
$ | (36,091 | ) | $ | (27,091 | ) | $ | 2,674 | ||||
|
Foreign |
1,696 | 1,534 | 1,765 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Income (loss) before taxes |
$ | (34,395 | ) | $ | (25,557 | ) | $ | 4,439 | ||||
|
|
|
|
|
|
|
|||||||
The provision (benefit) for income taxes for the years ended December 31, 2011, 2010 and 2009 is comprised of the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Current: |
||||||||||||
|
Federal |
$ | (10,786 | ) | $ | (3,602 | ) | $ | 76 | ||||
|
State |
— | 11 | 288 | |||||||||
|
Foreign |
84 | 43 | (9 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total Current |
(10,702 | ) | (3,548 | ) | 355 | |||||||
|
|
|
|
|
|
|
|||||||
|
Deferred: |
||||||||||||
|
Federal |
(114 | ) | 9,882 | (230 | ) | |||||||
|
State |
— | 789 | 1,054 | |||||||||
|
Foreign |
1,313 | 770 | (652 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total Deferred |
1,199 | 11,441 | 172 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Provision (benefit) for income taxes |
$ | (9,503 | ) | $ | 7,893 | $ | 527 | |||||
|
|
|
|
|
|
|
|||||||
The Company's deferred tax assets consist of the following (in thousands):
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Deferred tax assets: |
||||||||
|
Accrued expenses |
$ | 4,941 | $ | 3,592 | ||||
|
Inventory obsolescence provision |
1,647 | 2,510 | ||||||
|
Depreciation and amortization |
4,626 | 4,166 | ||||||
|
Deferred rent |
409 | 391 | ||||||
|
Net operating loss and tax credit carryforwards |
32,569 | 22,911 | ||||||
|
Stock-based compensation |
5,662 | 4,972 | ||||||
|
Unrecognized tax benefits |
439 | 1,181 | ||||||
|
|
|
|
|
|||||
|
Deferred tax assets |
50,293 | 39,723 | ||||||
|
Deferred tax liabilities: |
||||||||
|
Amortization of acquired intangibles |
(12,777 | ) | (15,619 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax assets |
37,516 | 24,104 | ||||||
|
Valuation allowance |
(36,395 | ) | (21,783 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax assets |
$ | 1,121 | $ | 2,321 | ||||
|
|
|
|
|
|||||
The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company's estimate of future tax effects attributable to temporary differences and carry forwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a "more likely than not" realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.
After a review of the four sources of taxable income described above and after being in a three year cumulative loss position at the end of 2011, the Company recognized an increase in the valuation allowance related to its U.S.-based deferred taxes created in 2011 and its Canadian deferred taxes, with a corresponding charge to income tax expense, of $14.6 million.
Related to the Company's acquisition of Enfora on November 30, 2010, the Company assumed U.S. -based net deferred tax liabilities of $3.9 million. This net deferred tax liability predominantly resulted from the estimated future tax impact of fair values assigned to intangible assets purchased upon acquisition of Enfora as offset by Enfora related estimated deferred tax assets resulting from net operating loss and research and development tax credit carry forwards generated prior to the acquisition of Enfora by the Company. Consistent with accounting guidance, the Company released $4.8 million of its U.S.-based valuation allowance in 2010 and increased its allowance by $0.9 million in 2011 related to the then existing 100% valuation allowance against the Company's U.S.-based deferred tax assets upon completion of its purchase price allocation.
At December 31, 2011, the valuation allowance consisted of $32.1 million relating to the Company's domestic tax assets and $4.3 million related to the Company's Canadian deferred tax assets. At December 31, 2010, the valuation allowance consisted of $18.9 million relating to the Company's domestic tax assets and $2.9 million related to certain to the Company's Canadian deferred tax assets.
The net unreserved portion of the Company's remaining deferred tax assets at December 31, 2011 primarily related to research and development tax credits associated with the Company's Canadian subsidiary.
During the years ended December 31, 2011 and 2010, the Company recorded deferred income tax expense of $14.6 million and $17.9 million, respectively, related to the changes in the valuation allowances on deferred tax assets. During the year ended 2009, the Company recorded a deferred income tax expense of $1.2 million related to the changes in the valuation allowances on deferred tax assets.
The provision (benefit) for income taxes reconciles to the amount computed by applying the statutory federal income tax rate of 34% in 2011, 2010 and 2009 to income before provision for income taxes as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Federal tax provision, at statutory rate |
$ | (11,694 | ) | $ | (8,690 | ) | $ | 1,509 | ||||
|
State tax, net of federal benefit |
(733 | ) | (509 | ) | 87 | |||||||
|
Change in valuation allowance—current year |
14,612 | 7,888 | 1,152 | |||||||||
|
Change in valuation allowance—prior year deferreds |
— | 14,840 | — | |||||||||
|
Tax expense (benefit) from business combination |
909 | (4,838 | ) | — | ||||||||
|
Research and development credits |
(1,731 | ) | (2,044 | ) | (3,073 | ) | ||||||
|
Share-based compensation |
526 | 917 | 1,106 | |||||||||
|
Merger fees |
— | 674 | — | |||||||||
|
Uncertain tax positions |
(11,809 | ) | 322 | (528 | ) | |||||||
|
Goodwill impairment |
596 | |||||||||||
|
Other |
(179 | ) | (667 | ) | 274 | |||||||
|
|
|
|
|
|
|
|||||||
| $ | (9,503 | ) | $ | 7,893 | $ | 527 | ||||||
|
|
|
|
|
|
|
|||||||
At December 31, 2011, the Company has U.S. federal net operating loss carryforwards of approximately $63.0 million. Federal net operating loss carryforwards expire at various dates from 2026 through 2032. The Company has California net operating loss carryforwards of approximately $24.4 million, which expire at various dates from 2014 through 2032. The Company has California research and development tax credit carryforwards of approximately $5.0 million. The California tax credits have no expiration date. The Company also has federal research and development tax credit carryforwards of approximately $3.0 million. The federal tax credits expire at various dates from 2027 through 2031.
It is the Company's intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes on United States income taxes which may become payable if undistributed earnings of the foreign subsidiary were paid as dividends to the Company.
The Company follows the accounting guidance related to financial statement recognition, measurement and disclosure of uncertain tax positions. The Company recognizes the impact of an uncertain income tax position on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. During the year ended December 31, 2011, the Company recognized approximately $9.5 million of income tax benefit plus $2.3 million of associated interest due to expiration of the applicable statutes of limitations for certain tax years. As of December 31, 2011 and 2010, the total liability for unrecognized tax benefits was $0.4 million and $12.0 million, respectively, and is included in other long-term liabilities.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
| Amount | ||||
|
Unrecognized tax benefits balance at December 31, 2008 |
$ | 41,435 | ||
|
Increases related to current and prior year tax positions |
2,590 | |||
|
Settlements and lapses in statutes of limitations |
(2,890 | ) | ||
|
|
|
|||
|
Unrecognized tax benefits balance at December 31, 2009 |
41,135 | |||
|
Increases related to current and prior year tax positions |
251 | |||
|
Settlements and lapses in statutes of limitations |
— | |||
|
|
|
|||
|
Unrecognized tax benefits balance at December 31, 2010 |
41,386 | |||
|
Increases related to current and prior year tax positions |
899 | |||
|
Settlements and lapses in statutes of limitations |
(9,490 | ) | ||
|
|
|
|||
|
Unrecognized tax benefits balance at December 31, 2011 |
$ | 32,795 | ||
|
|
|
|||
Included in the balances of unrecognized tax benefits at December 31, 2011 are $0.2 million of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2011 and 2010, the Company recorded approximately $0.2 million and $2.3 million, respectively, of accrued interest related to uncertain tax positions.
In the third quarter of 2012, the Company may release $50,000 of its liability for unrecognized tax benefits due to the expiration of the statute of limitations applicable to the 2007 taxable year.
The Company and its subsidiaries file U.S., state, and foreign income tax returns in jurisdictions with various statutes of limitations. The California Franchise Tax Board is currently conducting an examination of the Company's California income tax returns for 2006 and 2007. The State of Texas is currently conducting an examination of the Company's 2007 Texas franchise tax return. The Company is also subject to various federal income tax examinations for the 2003 through 2010 calendar years due to the availability of net operating loss carryforwards. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company's current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open years.
|
|||
| 11. | Commitments and Contingencies |
Capital Leases
The Company did not purchase equipment under capital leases during the year ended December 31, 2011 or 2010. At December 31, 2011 and 2010, assets held under capital leases had a net book value of $52,000 and $154,000, respectively, net of accumulated amortization of $458,000 and $356,000, respectively. The present value of the net minimum lease payments as of December 31, 2011 is $47,000.
Operating Leases
The Company leases its office space and certain equipment under non-cancelable operating leases with various terms through 2016. The minimum annual rent on the Company's office space is subject to increases based on stated rental adjustment terms, property taxes and operating costs and contains rent concessions. For financial reporting purposes, rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized in excess of rent paid is reflected as deferred rent. Rental expense under operating leases in 2011, 2010 and 2009 was $4.7 million, $3.5 million and $3.1 million, respectively. The Company's office space lease contains incentives in the form of reimbursement from the landlord for a portion of the costs of leasehold improvements incurred by the Company which are recorded to rent expense on a straight-line basis over the term of the lease.
The minimum future lease payments under non-cancelable operating leases as of December 31, 2011 are as follows (in thousands):
|
For the Period Ending December 31, |
Amount | |||
|
2012 |
$ | 3,238 | ||
|
2013 |
2,771 | |||
|
2014 |
2,806 | |||
|
2015 |
2,354 | |||
|
2016 |
2,425 | |||
|
|
|
|||
|
Total minimum lease payments |
$ | 13,594 | ||
|
|
|
|||
Committed Purchase Orders
The Company has entered into purchase commitments totaling approximately $117.2 million with certain contract manufacturers under which the Company has committed to buy a minimum amount of designated products between January 2012 and December 2012. In certain of these agreements, the Company may be required to acquire and pay for such products up to the prescribed minimum or forecasted purchases.
Management Retention Agreements
During 2005 and 2004, the Company entered into management retention agreements with certain of the Company's executive officers. The agreements entitle those employees to enumerated severance benefits if, within the one year period immediately following a change of control (as defined in the agreement) or at the direction of an acquirer in anticipation of such an event, the Company terminates the employee's employment other than for cause or disability or the employee terminates his or her employment for good reason. These severance benefits would include a lump sum payment of three times the sum of the employee's annual base salary then in effect and the applicable targeted annual bonus, continued employee benefits, accelerated vesting of the employee's stock incentive awards, a tax equalization payment to eliminate the effects of any applicable excise tax and financial planning and outplacement services.
In November 2007, the Company entered into an employment agreement with the Company's Chief Executive Officer, with an initial term of three years. Under the agreement, Mr. Leparulo will continue to serve as Chairman of the Board and as the Company's most senior officer. The agreement entitles Mr. Leparulo to enumerated severance benefits under various circumstances if Mr. Leparulo's employment with the Company is terminated. These enumerated severance benefits vary according to whether (a) Mr. Leparulo's employment with the Company is terminated within the one year period immediately following a change in control (as defined in the agreement) or at the direction of an acquirer in anticipation of such an event; (b) the Company terminates his employment other than for cause or he terminates his employment for good reason; or (c) the Company terminates his employment for cause or he terminates his employment for other than good reason. Depending on the cause of the employment termination, the enumerated severance benefits include a lump sum payment ranging from one to three years annual base salary then in effect, an additional lump sum bonus payment representing certain multiples of his targeted bonus, and varying periods of ongoing employee benefits including health care and outplacement services.
Legal Matters and Indemnification
The Company is, from time to time, party to various legal proceedings arising in the ordinary course of business. For example, the Company is currently named as a defendant or co-defendant in a number of patent infringement lawsuits in the U.S. and is indirectly participating in other U.S. patent infringement actions pursuant to its contractual indemnification obligations to certain customers. Based on evaluation of these matters and discussions with Company's counsel, the Company believes that liabilities arising from or sums paid in settlement of these existing matters would not have a material adverse effect on its consolidated results of operations or financial condition.
On September 15, 2008 and September 18, 2008, two putative securities class action lawsuits were filed in the United States District Court for the Southern District of California on behalf of persons who allegedly purchased our stock between February 5, 2007 and August 19, 2008. On December 11, 2008, these lawsuits were consolidated into a single action entitled Backe v. Novatel Wireless, Inc., et al., Case No. 08-CV-01689-H (RBB) (Consolidated with Case No. 08-CV-01714-H (RBB)) (U.S.D.C., S.D. Cal.). In May 2010, the district court re-captioned the case In re Novatel Wireless Securities Litigation. The plaintiffs filed the consolidated complaint on behalf of persons who allegedly purchased our stock between February 27, 2007 and November 10, 2008. The consolidated complaint names the Company and certain of our current and former officers as defendants. The consolidated complaint alleges generally that we issued materially false and misleading statements during the relevant time period regarding the strength of our products and market share, our financial results and our internal controls. The plaintiffs are seeking an unspecified amount of damages and costs. The court has denied defendants' motions to dismiss. In May 2010, the court entered an order granting the plaintiffs' motion for class certification and certified a class of purchasers of Company common stock between February 27, 2007 and September 15, 2008. On February 14, 2011, following extensive discovery, the Company filed a motion for summary judgment on all of plaintiffs' claims. A trial date was set for May 10, 2011. On March 15, 2011, the case was reassigned to a new district judge, the Honorable Anthony J. Battaglia. Following the reassignment, the court vacated the trial date pending the court's consideration of dispositive motions. Oral argument on the motion for summary judgment was heard by the court on June 17, 2011. On November 23, 2011, the court issued an order granting in part and denying in part the motion for summary judgment. A new trial date has not yet been set. The Company intends to defend this litigation vigorously. At this time, there can be no assurance as to the ultimate outcome of this litigation. We have not recorded any significant accruals for contingent liabilities associated with this matter based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.
On October 8, 2008, a purported shareholder, Jerry Rosenbaum, filed a derivative action in the Superior Court for the State of California, County of San Diego, against the Company, as nominal defendant, and certain of our current and former officers and directors, as defendants. Two other purported shareholders, Mark Campos and Chris Arnsdorf, separately filed substantially similar lawsuits in the same court on October 20, 2008 and November 5, 2008, respectively. On October 16, 2009, the plaintiffs filed a consolidated complaint. The consolidated complaint, Case No. 37-2008-00093576-CU-NP-CTL, alleges claims for breaches of fiduciary duties, violations of certain provisions of the California Corporations Code, unjust enrichment, and gross mismanagement. In February 2010, the court granted the defendants' motion to stay the action pending the resolution of the federal securities class action described above. In July 2010, the parties executed a memorandum of understanding setting forth the terms to be included in a contemplated settlement. Any settlement would be subject to court approval. The memorandum of understanding does not contemplate any restitution from the defendants. Following execution of the memorandum of understanding, plaintiffs conducted certain confirmatory discovery and sought to negotiate an award of legal fees as part of the terms to be included in a stipulation of settlement. Plaintiffs have since purported to terminate the memorandum of understanding. On January 28, 2011, the court held an informal status conference, at which plaintiffs requested that the court lift the stay of the action. The court declined plaintiffs' request. Following certain additional confirmatory discovery and negotiations, on March 2, 2012, the parties executed a Stipulation of Settlement, which settlement will be submitted to the court for approval. The settlement, if approved, would require the Company to maintain and/or implement certain corporate governance measures and would provide for the payment of fees and expenses to the plaintiffs' counsel of an amount not to exceed $900,000, $500,000 of which is expected to be paid out of insurance proceeds, and $400,000 to be paid by the Company.
In the normal course of business, the Company periodically enters into agreements that require the Company to indemnify and defend its customers for, among other things, claims alleging that the Company's products infringe third-party patents or other intellectual property rights. The Company's maximum exposure under these indemnification provisions cannot be estimated but the Company does not believe that there are any matters individually or collectively that would have a material adverse effect on its financial condition.
The Company has accrued $500,000 as of December 31, 2011 related to our best estimate of potential settlements on legal and indemnification matters for which we have deemed the outcome to be probable.
Credit Facility
During July 2011, the Company entered into a credit facility with a bank to allow margin borrowings based on the Company's investments in cash equivalents and marketable securities held with the bank. This facility is collateralized by the Company's cash equivalents and marketable securities held with the bank. Borrowings under the facility incur an interest rate at the bank's base rate plus 1%. This margin account facility provides the Company with the flexibility to access cash for short periods of time and avoids the need to sell marketable securities for these short-term requirements. At December 31, 2011, the Company had approximately $25.1 million in cash equivalents and marketable securities held at this bank. Any monies borrowed and interest incurred are payable on demand, and there is no express expiration date to the credit facility. During the third quarter ended September 30, 2011, the Company borrowed $12.0 million and repaid the entire amount during the same period. As of December 31, 2011, the Company had no outstanding borrowings under the credit facility.
|
|||
| 12. | Segment Information and Concentrations of Risk |
Segment Information
The Company operates in the wireless broadband technology industry and senior management makes decisions about allocating resources based on the following reportable segments:
Mobile Computing Products segment—includes our MiFi products, USB and PC-card modems and Embedded Modules that enable data transmission and services via cellular wireless networks. All products within the segment represent a single product family.
M2M Products and Solutions segment—includes our intelligent asset-management solutions utilizing wireless technology and M2M communications acquired with our acquisition of Enfora (Note 2).
Segment net revenues and segment operating income (loss) represent the primary financial measures used by senior management to assess performance and include the net revenues, cost of net revenues, and operating expenses for which management is held accountable. Segment operating expenses include sales and marketing, research and development, general and administration, and amortization expenses that are directly related to individual segments. Segment earnings (loss) also may include acquisition-related costs, purchase price amortization, restructuring and integration costs.
The table below presents net revenues and operating income (loss) for our reportable segments (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Net revenues from reportable segment: |
||||||||||||
|
Mobile Computing Products |
$ | 358,106 | $ | 332,464 | $ | 337,422 | ||||||
|
M2M Products and Solutions |
44,756 | 6,478 | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 402,862 | $ | 338,942 | $ | 337,422 | ||||||
|
|
|
|
|
|
|
|||||||
|
Operating income (loss): |
||||||||||||
|
Mobile Computing Products |
$ | (13,764 | ) | $ | (23,027 | ) | $ | 2,750 | ||||
|
M2M Products and Solutions |
(19,963 | ) | (1,975 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | (33,727 | ) | $ | (25,002 | ) | $ | 2,750 | ||||
|
|
|
|
|
|
|
|||||||
| December 31, | ||||||||
| 2011 | 2010 | |||||||
|
Identifiable assets by reportable segment: |
||||||||
|
Mobile Computing Products |
$ | 181,180 | $ | 217,445 | ||||
|
M2M Products and Solutions |
67,999 | 84,663 | ||||||
|
|
|
|
|
|||||
|
Total |
$ | 249,179 | $ | 302,108 | ||||
|
|
|
|
|
|||||
The Company has operations in the United States, Canada, Europe and Asia. The following table details the geographic concentration of the Company's assets in the United States, Canada, Europe and Asia (in thousands):
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
|
United States |
$ | 243,030 | $ | 293,227 | ||||
|
Canada |
4,764 | 8,059 | ||||||
|
Europe |
280 | 318 | ||||||
|
Asia |
1,105 | 504 | ||||||
|
|
|
|
|
|||||
| $ | 249,179 | $ | 302,108 | |||||
|
|
|
|
|
|||||
The following table details the Company's concentration of net revenues by geographic region based on shipping destination:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
North America |
93.5 | % | 95.0 | % | 93.0 | % | ||||||
|
Europe |
4.0 | 4.7 | 6.6 | |||||||||
|
Asia |
2.5 | 0.3 | 0.4 | |||||||||
|
|
|
|
|
|
|
|||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||
|
|
|
|
|
|
|
|||||||
Concentrations of Risk
Substantially all of the Company's net revenues are derived from sales of wireless access products. Any significant decline in market acceptance of the Company's products or in the financial condition of the Company's customers would have an adverse effect on the Company's results of operations and financial condition.
A significant portion of the Company's net revenues come from a small number of customers. Two customers accounted for 50.8% and 13.1% of 2011 net revenues. Two customers accounted for 55.7% and 17.1% of 2010 net revenues. Three customers accounted for 38.1%, 20.5% and 10.7% of 2009 net revenues. All significant customers are included in the Company's Mobile Computing Products segment.
A significant portion of the Company's accounts receivables comes from a small number of customers. At December 31, 2011, the Company had two customers who accounted for 46.5% and 19.8% of total accounts receivable. At December 31, 2010, the Company had two customers who accounted for 35.04% and 30.9% of total accounts receivable.
The Company outsources its manufacturing to four third-party manufacturers. If they were to experience delays, disruptions, capacity constraints or quality control problems in its manufacturing operations, product shipments to the Company's customers could be delayed or its customers could consequently elect to cancel the underlying order, which would negatively impact the Company's net revenues and results of operations.
|
|||
| 13. | Retirement Savings Plan |
The Company has a defined contribution 401(K) retirement savings plan (the "Plan"). Substantially all of the Company's U.S. employees are eligible to participate in the Plan after meeting certain minimum age and service requirements. Employees may make discretionary contributions to the Plan subject to Internal Revenue Service limitations. Employer matching contributions under the plan amounted to approximately $1.1 million, $1.0 million and $858,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Employer matching contributions vest over a two-year period. The Company has a registered retirement savings plan for its Canadian employees. Substantially all of the Company's Canadian employees are eligible to participate in this plan. Employees make discretionary contributions to the plan subject to local limitations. Employer contributions to the Canadian plan amounted to approximately $280,000, $236,000 and $472,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
|
|||
| 14. | Quarterly Financial Information (Unaudited) |
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2011 and 2010.
| Quarter | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
|
2011: |
||||||||||||||||
|
Net revenues |
$ | 61,784 | $ | 118,021 | $ | 113,263 | $ | 109,794 | ||||||||
|
Gross profit |
5,994 | 26,182 | 26,690 | 25,726 | ||||||||||||
|
Net loss applicable to common stockholders |
(22,088 | ) | (3,898 | ) | 4,498 | (3,404 | ) | |||||||||
|
Basic net earning (loss) per common share |
(0.69 | ) | (0.12 | ) | 0.14 | (0.11 | ) | |||||||||
|
Diluted net earnings (loss) per common share |
(0.69 | ) | (0.12 | ) | 0.14 | (0.11 | ) | |||||||||
|
2010: |
||||||||||||||||
|
Net revenues |
$ | 72,239 | $ | 71,823 | $ | 75,602 | $ | 119,278 | ||||||||
|
Gross profit |
17,769 | 13,592 | 13,190 | 21,743 | ||||||||||||
|
Net loss applicable to common stockholders |
(3,389 | ) | (22,039 | ) | (7,105 | ) | (917 | ) | ||||||||
|
Basic net loss per common share |
(0.11 | ) | (0.70 | ) | (0.22 | ) | (0.03 | ) | ||||||||
|
Diluted net earnings (loss) per common share |
(0.11 | ) | (0.70 | ) | (0.22 | ) | (0.03 | ) | ||||||||
|
|||
NOVATEL WIRELESS, INC.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2011, 2010 and 2009 (in thousands):
| Balance At Beginning of Year |
Additions Charged to Operations |
Deductions From Reserves |
Balance At End of Year |
|||||||||||||
|
Allowance for Doubtful Accounts: |
||||||||||||||||
|
December 31, 2011 |
$ | 228 | $ | 41 | $ | 24 | $ | 245 | ||||||||
|
December 31, 2010 |
741 | 141 | 654 | 228 | ||||||||||||
|
December 31, 2009 |
1,010 | 35 | 304 | 741 | ||||||||||||
|
Warranty: |
||||||||||||||||
|
December 31, 2011 |
2,279 | 2,642 | 3,396 | 1,525 | ||||||||||||
|
December 31, 2010 |
3,039 | 1,350 | 2,110 | 2,279 | ||||||||||||
|
December 31, 2009 |
3,471 | 2,580 | 3,012 | 3,039 | ||||||||||||
|
Deferred Tax Asset Valuation Allowance: |
||||||||||||||||
|
December 31, 2011 |
21,783 | 14,612 | — | 36,395 | ||||||||||||
|
December 31, 2010 |
3,897 | 22,724 | 4,838 | 21,783 | ||||||||||||
|
December 31, 2009 |
2,746 | 1,151 | — | 3,897 | ||||||||||||
|
Sales Returns Allowance: |
||||||||||||||||
|
December 31, 2011 |
346 | 911 | 712 | 545 | ||||||||||||
|
December 31, 2010 |
303 | 188 | 145 | 346 | ||||||||||||
|
December 31, 2009 |
478 | 194 | 369 | 303 | ||||||||||||