PART I
Overview
We are a provider of intelligent wireless solutions for the worldwide mobile communications market. Our broad range of
products principally includes intelligent mobile hotspots, USB modems, embedded modules for machine-to-machine (M2M) and mobile computing OEMs, integrated asset-management M2M devices, and communications and applications software.
Our mainstream Mobile Computing Products currently support Long Term Evolution (LTE) platforms and other major cellular wireless
technology platforms as required by our global carrier customers. Our mobile hotspots, embedded modules, and modems provide subscribers with secure and convenient high-speed access to corporate, public and personal information through the Internet
and enterprise networks. Our mobile computing customer base is comprised of wireless operators, including AT&T, Sprint, and Verizon Wireless; laptop PC and other original equipment manufacturers, or OEMs, including Dell and Hewlett-Packard; as
well as distributors.
Our M2M products enable devices to communicate with each other and with server or cloud-based
application infrastructure. Our M2M customer base is comprised of transportation companies, industrial companies, manufacturers, application service providers and distributors. Our solutions address multiple vertical markets for our customers
including commercial telematics, after market telematics, remote monitoring and control, security and connected home. We have strategic relationships with several of these customers that provide input and validation of our product requirements
across the various vertical markets.
For the years ended December 31, 2013, 2012, and 2011, net revenues recognized from
sales of our products were $335.1 million, $344.3 million, and $402.9 million, respectively.
We were incorporated in 1996
under the laws of the State of Delaware.
Our Strategy
Our objective is to be a leading provider of intelligent wireless solutions. The key elements of our strategy are to:
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Leverage Our Mobile Computing Expertise and Technology Platforms to Expand Our M2M Portfolio.
We are leveraging our Mobile Computing technology
expertise such as cellular wireless engineering radio development and the MiFi technology platform to expand our M2M portfolio. This enables us to leverage our development efforts, improve time-to-market and expand our portfolio in key markets.
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Broaden Our M2M Product Offerings.
We intend to diversify and continue to broaden our integrated solutions and embedded module product lines for
commercial telematics, after market telematics, remote monitoring and control, security, and connected home.
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Enhance Our M2M Software Support Through Our Device Manager or Service Delivery Platform
. Through our N4A Device Manager (DM) and
N4A Communication and Management Software (CMS) we enable our customers applications to support their specific business needs. Data such as driver location, driving behavior, driver ID, vehicle status, and OBD status is gathered from our
integrated products and delivered to our software applications or service delivery platform.
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Align Our Mobile Computing Product Offerings With Key Carrier Customers
. Leveraging our expertise in delivering wireless broadband solutions, we
support our key carrier customers with innovation and product portfolio flexibility enabling them to address both premium and value segments for their markets. Our products operate on the major wireless technology platforms, including Second
Generation (2G) networks: GSM, CDMA, GPRS; Third Generation (3G) networks: CDMA2000 1xEV-DO, HSDPA and HSUPA; and Fourth Generation (4G) networks: LTE, dual carrier HSPA+, and WiMAX.
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Lead the Intelligent Mobile Hotspot Product Category
. We invented and developed the MiFi
®
Intelligent Mobile Hotspot, a new category in wireless mobile data devices. In May 2009, the first nationwide commercial deployment of MiFi hotspots was launched by
Verizon Wireless. In 2013, we announced software enhancements to the MiFi Technology Platform which allowed us to differentiate our MiFi family of products related to key performance indicators such as usage time, throughput and value added software
applications. During 2013, we shipped MiFi Intelligent Mobile Hotspots to all three leading US carriers Verizon Wireless, AT&T and Sprint.
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Capitalize on Our Direct Relationships with Wireless Operators.
We intend to continue to capitalize on our direct and long-standing
relationships with wireless operators in order to increase our worldwide market position. In the United States and internationally, we are working closely with wireless operators to provide the best mobile computing solutions and relevant M2M
solutions to consumers and enterprise customers.
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Leverage Strategic Relationships.
We believe that strategic relationships with wireless carriers and enterprises that utilize mobile computing
and M2M technology are critical to our ability to leverage sales opportunities and ensure that our technology investments address customer needs. Through strategic relationships, we believe that we can increase market penetration and differentiate
our products by leveraging resources and knowledge including sales, marketing, and distribution systems. We are also addressing new market opportunities through innovation with our strategic partners.
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Continue to Target Key Vertical Market Opportunities and Penetrate New M2M Markets.
We believe that continuing developments in wireless
technologies will create additional vertical market opportunities and more applications for our products. Currently, we market our M2M solutions to key vertical industry segments by offering innovative solutions that are intended to increase
productivity, reduce costs and create operational efficiencies.
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Increase the Value of Our Products
. We will continue to add new features, functionality and intellectual property to our products and develop
new services and software applications to enhance the overall value and ease of use that our products provide to our customers and end users.
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Acquire Companies that Accelerate the Growth of Our Business
. We will continue to seek strategic acquisitions of companies in closely aligned
businesses and technologies that will provide synergistic growth in revenue and profitability.
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Our Segments
We operate in the wireless communications industry in the following reportable segments:
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Mobile Computing Productsincludes our MiFi Intelligent Mobile Hotspot devices, USB and PC-card modems and embedded modules that enable internet
access and data transmission and services via cellular wireless networks.
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M2M Products and Solutionsincludes our M2M embedded modules, integrated M2M communications devices and our service delivery platformthe
N4A Device Manager (DM) and N4A Communication and Management Software (CMS) that provides easy device management and service enablement.
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For additional information on our segments, see Note 12 to our consolidated financial statements.
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Mobile Computing Products
We have a growing portfolio of leading-edge technology solutions that enable data transmission and services via cellular wireless
networks. In 2013, we launched new products in our line of MiFi mobile hotspots that provided LTE multi-mode support for CDMA and GSM networks.
Below are our major Mobile Computing product lines:
MiFi
®
Intelligent Mobile
Hotspot
is our flagship product. Introduced in 2009, it has quickly become a leading brand in mobile communications. MiFi hotspots are gaining acceptance as a standard connectivity option for Wi-Fi-enabled devices such as the iPad, Kindle,
tablets, PCs, MP3 players, and gaming devices. MiFi hotspots function by connecting to a cellular-wireless network and creating a secure Wi-Fi signal that can connect to as many as 10 devices simultaneously. MiFi hotspots accounted for 74%, 72%, and
63% of revenue in 2013, 2012, and 2011, respectively.
Our strategy for the MiFi platform is to continue to innovate with a
focus on ease of use, key performance indicators and value added features that take the device beyond just basic connectivity. In 2013, we launched the MiFi 5510L Intelligent Mobile Hotspot with Verizon Wireless, the LTE MiFi 500 with Sprint, and
the MiFi 2 Touchscreen intelligent mobile hotspot with Bell Canada.
4G LTE Gateway
branded MiFi Home,
launched with Verizon branded as the 4G LTE Broadband Router With Voice, is a wireless solution that supports both wireless voice and data. The wireless data support provides internet access over LTE and 1xRTT voice which is software upgradable to
support high definition voice as VoLTE support becomes available on the carrier network.
Modems
continue to be
used to access wireless broadband networks. We originally introduced USB and PC-Card modems in North America, and continue to provide advanced wireless access in the industry. USB and PC-Card Modems accounted for 9%, 11%, and 20% of revenue in 2013,
2012, and 2011, respectively.
Embedded Modules
are utilized in a wide range of computing devices, such as
laptop PCs, netbooks, tablets, and various other electronic products to provide wireless broadband access. Embedded modules accounted for 5%, 5%, and 4% of revenue in 2013, 2012, and 2011, respectively.
M2M Products and Solutions
During 2013, we have expanded our M2M portfolio significantly by adding additional technologies and features to our line of embedded integrated devices and embedded modules to improve performance, and
strengthen the competitive advantages of our solutions. M2M products and solutions accounted for 11%, 9%, and 11% of revenue in 2013, 2012, and 2011, respectively. M2M product lines consist of the following:
MT, SA & AT Integrated Solutions
bring together essential elements for monitoring and managing mobile and fixed
assets, vehicle tracking and telemetric functions, along with workforce tracking and management. We add value by developing solutions to meet the needs of specific customers with a particular emphasis on select vertical markets including:
transportation and logistics, usage-based-insurance, security and asset tracking, industrial automation and smart grid, and remote patient monitoring. These solutions can be scaled from a small fleet customer to company-wide
enterprise deployments. Our M2M solutions can be coupled with our robust N4A Device Manager and N4A Communications and Management Software (CMS) platform and be monitored, managed and reconfigured remotely from almost anywhere in the
world. By combining the N4A CMS platform with the intelligence of the integrated M2M devices, customers will gain a solution that offers ease-of-deployment and superior, reliable performance in small and flexible packages.
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In 2013 we certified the MT3050 with Verizon Wireless and subsequently expanded the feature
set in alignment with the requirements of our key customers and launched the MT3060. These products are well positioned for the insurance telematics market, including usage-based-insurance applications and fleet management markets. The MT3060 is a
plug-and-play device that can be self-installed into a vehicles OBD-II port and supports advanced features for crash detection and driver behavior. The devices also support access to cloud applications for over-the-air device management and
data acquisition to support third party or customer applications.
We also launched the MiFi Powered SA 2100 product
which addresses vertical markets such as connected car, fleet management and fixed telemetry. The SA 2100 supports internet connectivity through WiFi to the carrier LTE network. We offer configurations supporting GPS and accelerometer applications
for fleet management and connected car applications as well as Ethernet interfaces for Telemetry applications.
N4A Software and Design Services
include our N4A Device Manager and N4A Communications &
Management Software, or N4A CMS, and design services that we provide to other companies, primarily for asset management solutions. Our N4A CMS 4.1 platform is a next-generation service delivery platform that eases the development, deployment,
and operation of asset-management applications. N4A CMS provides a standardized, scalable way to connect and manage remote assets and improve business operations. The platform is flexible and supports both on-premise server or cloud-based
deployments and is the basis for delivery of a wide range of M2M services.
Enabler
®
III & HS Embedded Solutions
are integrated into various products or equipment so that those assets may communicate with other computers. These
machine-to-machine applications enable back-end IT systems to receive data from remote assets. A common example is vehicle modules that transmit data about location, engine conditions, and abnormal situations to critical decision support
or monitoring systems. During 2012, we launched the Enabler HS 3001 (1X) module, and during 2013 we launched the HS 3002 (HSDPA) module. These two modules build on the legacy proven design of the Enfora Enabler series. Our CDMA2000 1X and
GSM/GPRS/EDGE/HSDPA low power platforms deliver small size and industry-leading performance, reliable connectivity, and device intelligence needed for todays demanding M2M applications. These solutions are ideal for markets including but not
limited to security, telemetry, POS, mHealth, AVL and AMI/AMR market segments looking for high reliability and a common design across multiple technologies.
Customers
Our customer base is comprised of wireless operators,
distributors, OEMs, and various companies in vertical markets. Our tier-one wireless-operator customers include AT&T, Sprint, and Verizon Wireless. OEM customers include Dell and Hewlett-Packard. Our M2M customer base is a mix across various
verticals including customers such as RAC Monitoring Services, Telogis, Linear Technology, Vehicle Tracking Solutions LLC, Fleetmatics, DigiCore Holdings Ltd., and Nextraq.
We also have strategic technology, development and marketing relationships with several of our customers.
Our strong customer relationships provide us with the opportunity to expand our market reach and sales.
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Wireless Operators and Distributors
. By working closely with our wireless operator and distributor customers, we are able to drive demand for
our products by combining our expertise in wireless technologies with our customers sales and marketing reach over a global subscriber base. Our customers also provide us with important services, including field trial participation, technical
support, wireless data marketing and access to additional indirect distribution channels.
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M2M Customers
. We believe the M2M market provides substantial opportunities for growth. Machine-to-machine and smart-systems technologies are
being integrated into a growing number of manufactured devices and machineswhether fixed, movable or fully mobile. We have a growing market presence in many of the high-growth segments of the M2M market. These include commercial telematics,
after market telematics, remote monitoring and control, security, and connected home. We expect to work with these customers to develop customized solutions that incorporate our software and other intellectual property, providing significant product
differentiation.
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OEMs
. Our OEM customers integrate our products into devices that they manufacture and sell through their own direct sales forces and indirect
distribution channels. Our products are capable of being integrated into a broad range of devices that utilize wireless-data capabilities. We seek to build strong relationships with our OEM partners by working closely with them and providing radio
frequency, or RF, design consulting, performance optimization, software integration and customization and application engineering support during the integration of our products.
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Strategic Relationships
We continue to develop and maintain strategic relationships with wireless and computer industry leaders like QUALCOMM, Sprint, AT&T,
Verizon Wireless and major software vendors. Through strategic relationships, we have been able to increase market penetration by leveraging the resources, knowledge and technology of our channel partners.
Sales and Marketing
We
sell our Mobile Computing Products primarily to wireless operators either directly or through strategic relationships, as well as to OEM partners and distributors located worldwide. Most of our Mobile Computing Products are sold directly by our
sales force, or to a lesser degree, through distributors.
In order to maintain strong sales relationships, we provide
co-marketing, trade show support, product training and demo units for merchandising. We are also engaged in a wide variety of activities, such as awareness and lead-generation programs, as well as product marketing. Other marketing initiatives
include public relations, seminars and co-branding with partners.
We sell our M2M Products and Solutions primarily to
enterprises in the following industries: transportation; energy and industrial automation; security and safety; and medical monitoring. We sell our M2M Products and Solutions through our direct sales force and through distributors.
A significant portion of our revenue comes from a small number of customers. Our revenues from sales to Verizon Wireless represented
approximately 58% of our total revenues for the year ended December 31, 2013.
A substantial majority of our revenue is
derived from sales in the U.S. See Note 12 to our consolidated financial statements for a discussion of our revenue and asset concentrations by geographic location.
Product Research and Development
Our research and development efforts are
focused on developing innovative new wireless products and improving the functionality, design and performance of our existing products. Our research and development expenses for the years ended December 31, 2013, 2012, and 2011 were $48.2
million, $60.4 million, and $61.4 million, respectively.
In both segments, we intend to continue to identify and respond
to our customers needs by introducing new product designs with an emphasis on supporting cutting edge wireless data technology, ease-of-use, performance, weight, cost and power consumption.
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We manage our products through a structured life-cycle process, from identifying initial
customer requirements through development and commercial introduction to eventual phase-out. During product development, emphasis is placed on innovation, time-to-market, performance, meeting industry standards and customer-product specifications,
ease of integration, cost reduction, manufacturability, quality and reliability.
Our product development efforts leverage our
core expertise in the following key technology areas:
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Advanced Radio Frequency and Hardware Design.
Advanced RF design is a key technology that determines the performance of wireless devices. We
have specialized in 700/800/900/1800/1900/2100/2500 MHz and AWS designs for digital cellular, packet data, CDMA, HSPA, WiMAX, and LTE technologies. Our expertise in RF, baseband, and firmware technology contributes to the performance, cost
advantages and small size of our products.
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Miniaturization and System Integration
. Our expertise includes the integration of RF and baseband chipsets and printed circuit board, or PCB
technologies. We will continue to augment our miniaturization technology, working to further reduce the size and cost of current and future products.
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Software Development.
We specialize in integrating and customizing 3G and 4G software to meet carrier and regulatory requirements. We supply
end-to-end solutions to enable our customers to achieve a time-to-market advantage. This includes firmware that runs on a modem processor, drivers for various host operating systems, software development kits, or SDK, modem-manager software that
controls modem operation, and server applications for over-the-air updates.
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Embedded Operating System.
We have developed an embedded operating system that runs applications on our mobile hotspot products and allows us to
introduce innovative applications.
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M2M Solutions.
We have developed customized asset-tracking systems and service-delivery platforms that utilize advanced radio-frequency
technology and specialized software that interfaces with the information technology systems of our customers.
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Manufacturing and Operations
The hardware used in our solutions is produced by contract manufacturers. Their services include component procurement, assembly, testing, quality control and fulfillment. We currently have manufacturing
agreements in place with the following companies:
Mobile Computing Products and M2M Products and Solutions
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Inventec Appliances Corporation
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Hon Hai Precision Industry Co., Ltd.
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M2M Products and Solutions
These contract manufacturers are located in China and Thailand, and are able to produce our products using modern state-of-the-art equipment and facilities and relatively low-cost labor.
We outsource our manufacturing in an effort to:
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focus on our core competencies of design, development and marketing;
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minimize our capital expenditures and lease obligations;
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realize manufacturing economies of scale;
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achieve production scalability by adjusting manufacturing volumes to meet changes in demand; and
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access best-in-class component procurement and manufacturing resources.
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We believe that additional manufacturing efficiencies are realized due to our product
architecture and our commitment to process design. Direct materials for our products consist of custom tooled parts such as printed circuit boards, molded plastic components and fabricated metal components, semi-custom parts such as batteries and
cables, as well as industry-standard components such as Application Specific Integrated Circuits or ASICs, RF power amplifiers, flash memory, transistors, integrated circuits, piezo-electric filters, duplexers, inductors, resistors and capacitors.
Many of the components used in our products are similar to those used in cellular telephone handsets, helping to reduce our component costs through the use of standard parts.
Our operations organization manages our relationships with the contract manufacturers as well as other key suppliers. Our operations team focuses on supply chain management, quality, cost optimization,
customer order management and new product introduction.
Intellectual Property
Mobile Computing Products
Our wireless broadband access solutions
rely on and benefit from our portfolio of intellectual property, including patents and trademarks. We currently own 50 United States patents. In addition, we currently have 50 patent applications pending. From time to time, we also seek to have
our patents registered in selected foreign jurisdictions. The patents that we currently own expire at various times between 2014 and 2031.
We have licensed software and other intellectual property for use in our products from third-parties, such as QUALCOMM. In the case of QUALCOMM, these licenses allow us to manufacture CDMA, UMTS, HSPA,
EV-DO, and LTE-based wireless modems and to sell or distribute them worldwide. In connection with such sales, we pay royalties to QUALCOMM. The license from QUALCOMM does not have a specified term and may be terminated by us or by QUALCOMM for cause
or upon the occurrence of other specified events. In addition, we may terminate the licenses for any reason upon 60 days prior written notice. We have also granted to QUALCOMM a nontransferable, worldwide, nonexclusive, fully-paid and royalty-free
license to use, in connection with wireless communications applications, certain of our intellectual property that incorporates the technology licensed to us by QUALCOMM. This license allows QUALCOMM to make, use, sell or dispose of such products
and the related components. We also hold a number of trademarks including Expedite, MiFi, MiFi OS, MiFi Intelligent Mobile Hotspot, MobiLink and Ovation.
M2M Products and Solutions
Our M2M products and solutions
incorporate patents, licensed technology, and trade secrets gained from our deep experience in providing customized solutions to our customers.
We currently own 9 United States patents related to M2M products and solutions. In addition, we currently have 19 patent applications pending. From time to time, we also seek to have our patents
registered in selected foreign jurisdictions. The patents that we currently own expire at various times between 2020 and 2031.
We have licensed software and other intellectual property for use in our products from various third-parties, such as Ericsson, Siemens,
NEC and Interdigital Communications Corporation. These licenses allow us to use the licensed intellectual property for the worldwide manufacture and sale of GSM-based wireless devices. We pay royalties in connection with such sales. The licenses do
not have a specified term and may be terminated by either party for cause or upon the occurrence of other specified events.
We also hold a number of trademarks including Enfora, Spider, Enabling Information Anywhere, Enabler, and N4A.
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Backlog
We do not believe that backlog is currently a meaningful indicator of our future business prospects due to the many variables, some of which are outside of our control, which could cause the actual volume
of our product shipments to differ from those that comprise our backlog. Additionally, we sometimes have relatively short lead times between receipt of customer purchase orders and shipment of products.
Competition
The market
for wireless broadband access and M2M solutions is rapidly evolving and highly competitive. It is likely to continue to be significantly affected by the evolution of new wireless technology standards, additional companies entering the market, new
product introductions and the product pricing and other market activities of industry participants.
We believe the principal
competitive factors impacting the market for our products are price, form factor, time-to-market, features and functionality, performance, quality, and brand. To maintain and improve our competitive position, we must continue to develop new products
and solutions, expand our customer base, grow our distribution network, and leverage our strategic relationships and our investment in R&D.
Our products compete with a variety of devices, including other wireless modems and mobile hotspots, wireless handsets, wireless handheld computing devices and M2M wireless solutions. Our current
competitors include:
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wireless data modem and mobile hotspot providers, such as Huawei, ZTE, Sierra Wireless, PCD, LG Innotek, Samsung and Franklin Wireless;
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wireless handset manufacturers, such as HTC, Apple, Motorola, Nokia, and Samsung;
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wireless M2M solution providers, such as Sierra Wireless, Telit Wireless Solutions, Gemalto, CalAmp and Huawei.
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We believe that we have advantages over each of our primary competitors due in varying measure to the technical and engineering design of
our products, the broad range of customized solutions that we offer, the ease-of-use of our products, our ability to adapt our products to specific customer needs and our competitive pricing. As the market for wireless data solutions expands, other
entrants may seek to compete with us either directly or indirectly.
Employees
As of December 31, 2013, we had 316 employees. By segment, Mobile Computing Products had 263 employees, including corporate
functions, and M2M Products and Solutions had 53 employees. By function, we had 178 employees in research and development, 55 in sales and marketing, 41 in operations, and 42 in general and administrative functions. We also use the services of
consultants and temporary workers from time to time. Our employees are not represented by any collective bargaining unit and we consider our relationship with our employees to be good.
Website Access to SEC Filings
We maintain an Internet website at
www.novatelwireless.com
. The information contained on our website or that can be accessed through our website does not constitute a part of this report. We make available, free of charge through our Internet website, our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as
reasonably practicable after we electronically file or furnish this information to the Securities and Exchange Commission, or SEC.
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An investment in our common stock involves various risks. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other
cautionary statements and risks described elsewhere in this report and in the documents incorporated by reference herein and therein. The risks and uncertainties described below are those that we currently deem to be material, and do not represent
all of the risks that we face. Additional risks and uncertainties not presently known to us or that we currently do not consider material may in the future become material and impair our business operations. If any of the following risks actually
occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. As a result, the trading price of our securities could decline, and you might lose all or part of your
investment. You should also refer to the other information contained in this Form 10-K, including our consolidated financial statements and the related notes.
The market for wireless broadband data access products and services is rapidly evolving and highly competitive. We may be unable to compete effectively.
The market for wireless broadband data access products and services is rapidly evolving and highly competitive. We expect competition to
continue to increase and intensify. Many of our competitors or potential competitors have significantly greater financial, technical, operational and marketing resources than we do. These competitors, for example, may be able to respond more rapidly
or more effectively than we can to new or emerging technologies, changes in customer requirements, supplier related developments, or a shift in the business landscape. They also may devote greater or more effective resources than we do to the
development, manufacture, promotion, sale, and post-sale support of their respective products and services.
Many of our
current and potential competitors have more extensive customer bases and broader customer, supplier and other industry relationships that they can leverage to establish competitive dealings with many of our current and potential customers. Some of
these companies also have more established and larger customer support organizations than we do. In addition, these companies may adopt more aggressive pricing policies or offer more attractive terms to customers than they currently do, or than we
are able to do. They may bundle their competitive products with broader product offerings and may introduce new products and enhancements. Current and potential competitors might merge or otherwise establish cooperative relationships among
themselves or with third parties to enhance their products or market position. In addition, at any time any given customer or supplier of ours could elect to enter our then existing line of business and thereafter compete with us, whether directly
or indirectly. As a result, it is possible that new competitors or new or otherwise enhanced relationships among existing competitors may emerge and rapidly acquire significant market share to the detriment of our business.
Our products compete with a variety of devices, including other wireless modems and mobile hotspots, wireless handsets, wireless handheld
computing devices and M2M wireless solutions. Our current competitors include:
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wireless data modem and mobile hotspot providers, such as Huawei, ZTE, Sierra Wireless, PCD, LG Innotek, Samsung and Franklin Wireless;
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wireless handset manufacturers, such as HTC, Apple, Motorola, Nokia, and Samsung;
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wireless M2M solution providers, such as Sierra Wireless, Telit Wireless Solutions, Gemalto, CalAmp and Huawei.
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We expect our competitors to continue to improve the features and performance of their current products and to introduce new products,
services and technologies which, if successful, could reduce our sales and the market acceptance of our products, generate increased price competition and make our products obsolete. For our products to remain competitive, we must, among other
things, continue to invest significant resources (financial, human and otherwise) in, among other things, research and development, sales and marketing, and customer
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support. We cannot be sure that we will have or will continue to have sufficient resources to make these investments or that we will be able to make the technological advances necessary for our
products to remain competitive. Increased competition could result in price reductions, fewer or smaller customer orders, reduced product margins and loss of our market share. Our failure to compete successfully could seriously harm our business,
financial condition and results of operations.
If we fail to develop and timely introduce new products successfully, we may lose key
customers or product orders and our business could be harmed.
The development of new wireless data products requires
technological innovation that can be difficult, lengthy and costly. In addition, wireless operators require that wireless data systems deployed on their networks comply with their own technical and product performance standards, which may differ
from the standards our products are required to meet for other operators. This increases the complexity and might impact the timing of the product development and customer approval process. In addition, as we introduce new products or new versions
of our existing products, our current customers may not require or desire the technological innovations of these products and may not purchase them or might purchase them in smaller quantities than we had expected.
Further, as part of our business, we may enter into contracts with some customers in which we would agree to develop products that we
would sell to that customer. Our ability to generate future revenue and operating income under any such contracts would depend upon, among other factors, our ability to timely and profitably develop products that are suitable for manufacturing in a
cost effective manner and that meet defined product design, technical and performance specifications.
If we are unable to
successfully manage these risks or meet required delivery specifications or deadlines in connection with one or more of our key contracts, we may lose key customers or orders and our business could be harmed.
Any acquisitions we make could disrupt our business and harm our financial condition and results of operations.
As part of our business strategy, we review and intend to continue to review, acquisition opportunities that we believe would be
advantageous or complementary to the development of our business. In November 2010, we completed our acquisition of Enfora. We may acquire additional businesses, assets, or technologies in the future. If we make any acquisitions, we could take any
or all of the following actions, any one of which could adversely affect our business, financial condition, results of operations or share price:
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use a substantial portion of our available cash;
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incur substantial debt, which may not be available to us on favorable terms and may adversely affect our liquidity;
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issue equity or equity-based securities that would dilute existing stockholders percentage ownership;
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assume contingent liabilities; and
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take substantial charges in connection with acquired assets.
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Acquisitions, including the Enfora acquisition, also entail numerous other risks, including: difficulties in assimilating acquired
operations, products, technologies and personnel; unanticipated costs; diversion of managements attention from existing operations; adverse effects on existing business relationships with suppliers and customers; risks of entering markets in
which we have limited or no prior experience; and potential loss of key employees from either our existing business or the acquired organization. Acquisitions may result in substantial accounting charges for restructuring and other expenses,
amortization of purchased technology and
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intangible assets and stock-based compensation expense, any of which could materially adversely affect our operating results. We may not be able to realize the anticipated benefits of or
successfully integrate with our existing business the businesses, products, technologies or personnel that we acquire, and our failure to do so could harm our business and operating results.
Weakness or deterioration in global economic conditions could have a material adverse effect on our results of operations and financial condition.
As a result of weak or deteriorating economic conditions globally, we could experience lower demand for our products, which could
adversely impact our results of operations.
Additionally, there could be a number of related effects on our business
resulting from weak economic conditions, including the insolvency of one or more of our parts suppliers resulting in product launch or product delivery delays, customer insolvencies resulting in that customers inability to order products from
us or pay for already delivered product, an inability on the part of our customers to obtain credit to finance purchases of our products and reduced demand by the ultimate end-users of our products.
Although we continue to monitor market conditions, we cannot predict future market conditions or their impact on demand for our products.
Our failure to predict carrier and end user customer preferences among the many evolving wireless industry standards could hurt our
ability to introduce and sell new products.
In our industry, it is critical to our success that we accurately
anticipate evolving wireless technology standards and that our products comply with these standards in relevant respects. We are currently focused on engineering and manufacturing products that comply with several different wireless standards. Any
failure of our products to comply with any one of these or future applicable standards could prevent or delay their introduction and require costly and time-consuming engineering changes. Additionally, if an insufficient number of wireless operators
or subscribers adopt the standards to which we engineer our products, then sales of our new products designed to those standards could be materially harmed.
If we fail to develop and maintain strategic relationships, we may not be able to penetrate new markets.
A key element of our business strategy is to penetrate new markets by developing new products through strategic relationships with industry participants in wireless communications. We are currently
investing, and plan to continue to invest, significant resources to develop these relationships. We believe that our success in penetrating new markets for our products will depend, in part, on our ability to develop and maintain these relationships
and to cultivate additional or alternative relationships. There can be no assurance, however, that we will be able to develop additional strategic relationships, that existing relationships will survive and successfully achieve their purposes or
that the companies with whom we have strategic relationships will not form competing arrangements with others or determine to compete unilaterally with us.
We expect to continue to depend upon only a small number of our customers for a substantial portion of our revenues. Our business could be negatively affected by an adverse change in our dealings
with these customers.
A significant portion of our net revenues come from only a few customers. Our revenue could be
materially adversely affected if we are unable to retain the level of business of any of our significant customers and if we are unable to offset this loss fully from alternative customers. We expect that a small number of customers will continue to
account for a substantial portion of our revenue for the foreseeable future and any impairment of our relationship with, or the material financial impairment of, these customers could adversely affect our business.
11
In addition, a majority of our current customers purchase our products pursuant to contracts
that do not require them to purchase any specific minimum quantity of units other than the number of units ordered on an individual purchase order that might be issued to us from time to time. These customers have no contractual obligation to
continue to purchase our products and if they do not continue to make purchases consistent with their historical purchase levels, our net revenue would decline if we are unable to increase sales from other existing or new customers.
In light of the limited number of leading wireless operators and OEMs that form our primary customer base, many of whom are already
customers, it would be difficult to replace revenue resulting from the loss of any significant existing customer or from a material reduction in the volume of business we conduct with any significant existing customer. Consolidation among our
customers may further concentrate our business to a more limited number of customers and expose us to increased risks relating to dependence on a limited number of customers, which dependence could adversely affect our operating results.
We have had to qualify, and are required to maintain our status, as a supplier for each of our customers. This is a lengthy process that
involves the inspection and approval by each customer of our engineering, documentation, manufacturing and quality control procedures before that customer will place volume orders. Attempts to lessen the adverse effect of any loss of, or any
material reduction in the volume of business we conduct with, any significant existing customer through the rapid addition of one or more new customers would be difficult because of these qualification requirements. Consequently, our business and
operating results could be adversely affected by the loss of, or any material reduction in the volume of business we conduct with, any existing significant customer.
The sale of our products depends on the demand for broadband wireless access to enterprise networks and the internet.
The markets for broadband wireless access solutions are rapidly evolving, both technologically and competitively, and the successful sale of related products and services depends in part on the strength
of the demand for wireless access to both enterprise networks and the Internet. At times, market demand for both wireless products and wireless access services for the transmission of data developed at a slower rate than we had anticipated and as a
result our product sales did not generate sufficient revenue to cover our corresponding operating costs. The failure of these markets to continue to grow at the rate that we currently anticipate may adversely impact the growth in the demand for our
products and our concomitant rate of growth, and as a result, our business, financial condition and results of operations may be harmed.
The marketability of our products may suffer if wireless telecommunications operators do not deliver acceptable wireless services.
The success of our business depends, in part, on the capacity, affordability, reliability and prevalence of wireless
data networks provided by wireless telecommunications operators and on which our products operate. Currently, various wireless telecommunications operators, either individually or jointly with us, sell our products in connection with the sale of
their wireless data services to their customers. Growth in demand for wireless data access may be limited if, for example, wireless telecommunications operators cease or materially curtail operations, fail to offer services that customers consider
valuable at acceptable prices, fail to maintain sufficient capacity to meet demand for wireless data access, delay the expansion of their wireless networks and services, fail to offer and maintain reliable wireless network services or fail to market
their services effectively.
In addition, our future growth depends on the successful deployment of next generation wireless
data networks provided by third parties, including those networks for which we are currently developing products. If these next generation networks are not deployed or widely accepted, or if deployment is delayed, there will be no market for the
products we are developing to operate on these networks. If any of these events occurs, or if for any other reason the demand for wireless data access fails to grow, sales of our products will decline or remain stagnant and our business could be
harmed.
12
If we do not properly manage the development of our business, we may experience significant strains on
our management and operations and disruptions in our business.
Various risks arise if companies and industries quickly
evolve. If our business or industry develops more quickly than our ability to respond, our ability to meet customer demand in a timely and efficient manner could be challenged. We may also experience development, certification or production delays
as we seek to meet increased demand for our products or unanticipated product requirements. Our failure to properly manage the developments that we or our industry might experience could negatively impact our ability to execute on our operating plan
then in effect and, accordingly, could have an adverse impact on our business, our cash flow and results of operations, and our reputation with our current or potential customers.
We currently rely on third parties to manufacture and warehouse our products, which exposes us to a number of risks and uncertainties outside our control.
We currently outsource our manufacturing to Inventec Appliances Corporation, Hon Hai Precision Industry Co., Ltd., and Benchmark
Electronics. These contract manufacturers have operations in China and Thailand and, in 2011, severe flooding in Thailand caused damage to infrastructure and factories and affected our supply of products from our contract manufacturer located in
Thailand, which constrained our revenue in 2011. If one of these third-party manufacturers were to experience delays, disruptions, capacity constraints or quality control problems in its manufacturing operations, product shipments to our customers
could be delayed or rejected by them or our customers could consequently elect to cancel the underlying product purchase order. These disruptions would negatively impact our revenues, competitive position and reputation. Further, if we are unable to
manage successfully our relationship with a manufacturer, the quality and availability of our products may be harmed. None of our third-party manufacturers is obligated to supply us with a specific quantity of products, except as may be provided in
a particular purchase order that we may submit to them and that has been accepted. Our third-party manufacturers could under some circumstances decline to accept new purchase orders from us or otherwise reduce their business with us. If a
manufacturer stopped manufacturing our products for any reason or reduced manufacturing capacity, we may be unable to replace the lost manufacturing capacity on a timely and comparatively cost effective basis, which would adversely impact our
operations. In addition, we generally do not enter into long-term contracts with our manufacturers. As a result, we are subject to price increases due to the availability and price volatility in the marketplace of the components and materials needed
to manufacture our products. If a third-party manufacturer were to negatively change the product pricing and other terms under which it agrees to manufacture for us and we are unable to locate a suitable alternative manufacturer, our manufacturing
costs could significantly increase.
Because we outsource the manufacture of all of our products, the cost, quality and
availability of third-party manufacturing operations are essential to the successful production and sale of our products. Our reliance on third-party manufacturers exposes us to a number of risks which are outside our control, including:
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unexpected increases in manufacturing costs;
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interruptions in shipments if a third-party manufacturer is unable to complete production in a timely manner;
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inability to control quality of finished products;
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inability to control delivery schedules;
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inability to control production levels and to meet minimum volume commitments to our customers;
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inability to control manufacturing yield;
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inability to maintain adequate manufacturing capacity; and
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inability to secure adequate volumes of acceptable components at suitable prices or in a timely manner.
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Although we promote ethical business practices and our operations personnel periodically
visit and monitor the operations of our manufacturers, we do not control the manufacturers or their labor practices. If our current manufacturers, or any other third-party manufacturer which we may use in the future, violate United States or foreign
laws or regulations, we may be subjected to extra duties, significant monetary penalties, adverse publicity, the seizure and forfeiture of products that we are attempting to import or the loss of our import privileges. The effects of these factors
could render the conduct of our business in a particular country undesirable or impractical and have a negative impact on our operating results.
We might forecast customer demand incorrectly and order the manufacture of excess or insufficient quantities of particular products.
We have historically placed purchase orders with our manufacturers at least three months prior to the scheduled delivery of the
corresponding finished goods to our customer. In some instances, due to the length of component lead times, we might need to place manufacturing orders with our contract manufacturers solely on the basis of our receipt of a good-faith but
non-binding customer forecast of the quantity and timing of the customers expected purchases from us. Accordingly, if the actual number and timing of delivery of units that a customer orders from us on the subsequently issued purchase order
differs materially from the number of units in respect of which we contractually ordered our manufacturer to procure component parts, we might be unable to obtain adequate quantities of components in time to meet our customers binding delivery
requirements or, alternatively, we might accumulate excess inventory that we are unable to timely use or resell, if at all. Our operating results and financial condition have been in the past and may in the future be materially adversely affected by
our ability to manage our current or finished goods inventory levels and respond to short-term or unexpected shifts in customer demand as to quantities or our customers product delivery schedule.
We depend on sole source suppliers for some components used in our products. The availability and sale of those finished products would be harmed
if any of these suppliers is not able to meet our demand and production schedule and alternative suitable components are not available on acceptable terms, if at all.
Our products contain a variety of components, some of which are procured from single suppliers. These components include both tooled parts and industry-standard parts, some of which are also used in
cellular telephone handsets. From time to time, certain components used in our products have been in short supply worldwide or their anticipated commercial introduction has been delayed or their availability has been subsequently interrupted for
reasons outside our control. For example, some of our product components are manufactured in Japan, which experienced a significant earthquake in 2011. Although our suppliers facilities were undamaged, some manufacturers experienced temporary
suspension of production due to power outages. If there is a shortage or interruption in the availability to us of any such components, and we cannot timely obtain a commercially and technologically suitable substitute or make sufficient and timely
design or other product modifications to permit the use of such a substitute component, we may not be able to timely deliver sufficient quantities of our products to satisfy our contractual obligations and particular revenue expectations. Moreover,
even if we timely locate a substitute part (or locate the originally specified component from a parts broker) and its price materially exceeds the original cost of the component in our costed bill of materials, then our results of operations would
be adversely affected.
We are currently party to litigation that could be costly to defend and distracting to management.
As of the date of this report, a class action lawsuit has been filed on behalf of persons who allegedly purchased our
common stock between February 27, 2007 and September 15, 2008. The lawsuit names us and certain of our current and former officers as defendants. On December 6, 2013, counsel for the defendants and counsel for the lead plaintiffs, entered
into a binding memorandum of understanding reflecting a proposed settlement of the class action. On March 7, 2014, the federal court handling this case entered an order giving its preliminary approval to the settlement as set forth in the
memorandum of understanding. The court set a hearing date of June 20, 2014, for the final approval of the settlement.
14
Additional litigation may be initiated against us based on the alleged false statements at
issue in the pending litigation. Although we believe the existing lawsuit is likely to be resolved at the courts hearing on June 20, 2014, we cannot predict the likelihood that further proceedings will be instituted against us. The cost
of defending any future lawsuits may be high, and these legal proceedings may also result in the diversion of our managements time and attention away from our business. In the event that there is an adverse ruling in any legal proceeding, we
may be required to make payments to third parties that could harm our business or financial results.
Third parties may claim that our
products, or components within our products, infringe on their intellectual property rights. These claims may result in substantial costs, diversion of resources and management attention, harm to our reputation or interference with our current or
prospective customer or supplier relations.
Third parties have in the past and may claim in the future that we, or our
customers or suppliers, have violated their intellectual property rights. Defending an infringement or misappropriation claim, for example, regardless of the merits or success of the claim, could result in our incurring substantial legal and other
costs. These claims could also divert our engineering and other human resources and management attention and cause harm to our reputation. These claims can be difficult and costly to assess and defend. A successful infringement claim related to our
products could result in, among other things, our becoming liable for damages and litigation costs or unexpected and costly engineering changes to affected products.
In addition, any finding that our products infringe (or in some instances, our customers reasonable conclusion that a bona fide infringement claim is likely to be made with respect to such products)
could have other negative consequences. Those consequences could include prohibiting us from further use of the intellectual property, causing us to have to modify our product design, if possible, so it does not infringe, or causing us to have to
license the intellectual property at issue, incurring licensing fees, some of which could be retroactive. Upon a finding of infringement, we or one of our suppliers may also have to develop a non-infringing alternative, which if available could be
costly, and delay or prevent sales of affected products.
A number of putative patent infringement claims have been filed by
various plaintiffs in a number of U.S. District Courts against us and/or numerous third parties, some of whom are our customers. These cases generally allege that the defendants use, sale and importation of specified products and/or processes
constitutes infringement of certain U.S. patents allegedly owned or exclusively licensed by each plaintiff. Under certain circumstances, we may have an obligation to indemnify and/or defend our customers against these lawsuits.
Our business depends on our continued ability to license necessary third-party technology, which we may not be able to do on commercially
competitive terms, if at all.
We license technology from third parties for the development of our products. We have
licensed from third parties, such as QUALCOMM, software, patents and other intellectual property for use in our products and from time to time we may elect or be required to license additional intellectual property. There can be no assurance that we
will be able to maintain our third-party licenses or that these licenses or the technologies that are the subject of these licenses will not be the subject of dispute or litigation, or that additional third-party licenses will be available to us on
commercially reasonable terms, if at all. The inability to maintain or obtain third-party licenses required for our products or to develop new products and product enhancements could require us to seek to obtain substitute technology of lower
quality or performance standards, if such exists, or at greater cost, which could seriously harm our competitive position, revenue and prospects.
We are subject to the risks of doing business internationally.
In
addition to our manufacturing activities in Asia, we have staff located in Canada, China and Europe. We also sell our products outside the U.S. These international business activities expose the Company to additional business risks, including:
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difficulty in managing sales, research and development operations and post-sales logistics and support across these continents;
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changes in a specific countrys or regions political or economic conditions, particularly in emerging markets, and changes in diplomatic and
trade relationships;
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less effective protection of intellectual property and general exposure to different legal processes, standards and expectations;
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trade protection measures and import or export licensing requirements;
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potentially negative consequences from changes in tax laws;
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increased expenses associated with customizing products for different countries;
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unexpected changes in regulatory requirements resulting in unanticipated costs and delays;
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longer collection cycles and difficulties in collecting accounts receivable;
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international terrorism;
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loss or damage to products in transit;
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international dock strikes or other transportation delays; and
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court ordered injunctions in a given jurisdiction in connection with alleged intellectual property rights infringement by our products or components
contained with our products which might prohibit the importation, sale or offer for sale of our products in the jurisdiction subject to such injunction.
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Any disruption in our ability to obtain products from our foreign manufacturers or in our ability to conduct international operations and sales could have a material adverse effect on our business,
financial condition and results of operations.
Our international business activities expose the Company to fluctuations in exchange
rates between the United States dollar and foreign currencies which may affect our operating results.
A portion of our
revenues are generated from sales agreements denominated in foreign currencies, and we expect to enter into additional such agreements as we expand our international customer base. As a result, we are exposed to changes in foreign currency exchange
rates. At times, we may attempt to manage this risk, in part, by minimizing the effects of volatility on cash flows by identifying forecasted transactions exposed to these risks and using foreign exchange forward contracts. Since there is a high
correlation between the hedging instruments and the underlying exposures, the gains and losses on these underlying exposures are generally offset by reciprocal changes in the value of the hedging instruments. We may use derivative financial
instruments as risk management tools and not for trading or speculative purposes. Nevertheless, there can be no assurance that we will not incur foreign currency losses or that foreign exchange forward contracts we may enter into to reduce the risk
of such losses will be successful.
Our products, including our proprietary or third party software contained in our products, may
contain errors or defects, which could prevent or decrease their market acceptance and lead to unanticipated costs or other adverse business consequences.
Our products are technologically complex and must meet stringent industry, regulatory and customer requirements. We must develop our hardware and software products quickly to keep pace with the rapidly
changing and technologically advanced wireless communications market. Products as sophisticated as ours may contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our products may not be
free from errors or defects at the time commercial shipments have begun, which could result in the rejection of our products, the loss of an existing or potential customer or the failure to obtain one, damage to our reputation, lost revenue,
diverted development resources, increased customer service and support costs, unanticipated warranty claims, and the payment of monetary damages to our customers.
16
Our quarterly operating results may vary significantly from quarter to quarter and may cause our stock
price to fluctuate.
Our future quarterly operating results may fluctuate significantly and may fall short of or exceed
the expectations of securities analysts, investors or management. If this occurs, the market price of our stock could fluctuate, in some cases materially. The following factors may cause fluctuations in our operating results:
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Decreases in revenue or increases in operating expenses
. We budget our operating expenses based on anticipated sales, and a significant portion
of our sales and marketing, research and development and general and administrative costs are fixed, at least in the short term. If revenue decreases, due to pricing pressures or otherwise, or does not increase as planned and we are unable to reduce
our operating costs quickly and sufficiently, our operating results could be materially adversely affected.
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Product mix.
The product mix of our sales affects profit margins in any given quarter. As our business evolves and the revenue from the product
mix of our sales varies from quarter to quarter, our operating results will likely fluctuate in ways that might not be directly proportionate to the fluctuation in revenue.
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New product introductions.
As we introduce new products, the timing of these introductions within any given quarter will affect our quarterly
operating results. We may have difficulty predicting the timing of new product introductions and the market acceptance of these new products. If products and services are introduced earlier or later than anticipated, or if market acceptance is
unexpectedly high or low, our quarterly operating results may fluctuate unexpectedly.
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Lengthy sales cycle.
The length of time between the date of initial contact with a potential customer and the execution of and product delivery
under a contract may take several months or longer, and is subject to delays or interruptions over which we have little or no control. The sale of our products is subject to delays from, among other things, our customers budgeting, product
testing and vendor approval mechanics, and competitive evaluation processes that typically accompany significant information technology purchasing decisions. As a result, our ability to anticipate the timing and volume of sales to specific customers
is limited, and the delay or failure to complete one or more large transactions could cause our operating results to vary significantly from quarter to quarter.
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Foreign currency
. We are exposed to market risk from changes in foreign currency exchange rates. Our attempts to minimize the effects of
volatility in foreign currencies on cash flows may not be successful.
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Due to these and other factors, our
results of operations may fluctuate substantially in the future and quarter-to-quarter comparisons may not be reliable indicators of future operating or share price performance.
We may not be able to maintain and expand our business if we are not able to hire, retain and manage additional qualified personnel.
Our success in the future depends in part on the continued contribution of our executive, technical, engineering, sales, marketing,
operations and administrative personnel. The success of our acquisitions, such as Enfora, depends in part on our retention and integration of key personnel from the acquired company or business. Recruiting and retaining skilled personnel in the
wireless communications industry, including software and hardware engineers, is highly competitive.
Although we may enter
into employment agreements with members of our senior management and other key personnel in the future, currently only Peter Leparulo, the Companys Chairman and CEO, is a party to an employment agreement. If we are not able to attract or
retain qualified personnel in the future, or if we experience delays in hiring required personnel, particularly qualified engineers, we may not be able to maintain and expand our business.
17
Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse
fluctuations in our reported results of operations or affect how we conduct our business.
A change in accounting
pronouncements or taxation rules or practices can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying
interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future. The change to existing rules, future changes, if any, or the need for us to modify a current tax position may adversely affect our
reported financial results or the way we conduct our business.
We may not be able to develop products that comply with applicable
government regulations.
Our products must comply with government regulations. For example, in the United States, the
Federal Communications Commission, or FCC, regulates many aspects of communications devices, including radiation of electromagnetic energy, biological safety and rules for devices to be connected to telephone networks. In addition to the federal
government, some states have adopted regulations applicable to our products. Radio frequency devices, which include our modems, must be approved by obtaining equipment authorization from the FCC prior to being offered for sale. Regulatory
requirements in Canada, Europe, Asia and other jurisdictions must also be met. Additionally, we cannot anticipate the effect that changes in domestic or foreign government regulations may have on our ability to develop and sell products in the
future. Failure to comply with existing or evolving government regulations or to obtain timely regulatory approvals or certificates for our products could materially adversely affect our business, financial condition and results of operations or
cash flows.
Failure or circumvention of our controls and procedures could seriously harm our business.
Any system of control and procedures, however well designed and operated, is based in part on certain assumptions and can provide only
reasonable, and not absolute, assurances that the objectives of the controls and procedures are met. Acquired companies or businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to
implement and harmonize company-wide financial, accounting, billing, information and other systems. Acquisitions of privately held companies, such as Enfora, and/or non-US companies are particularly challenging because their prior practices in these
areas may not meet the requirements of the Sarbanes-Oxley Act and public accounting standards. The failure or circumvention of our controls, policies and procedures could have a material adverse effect on our business, results of operations and
financial position.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our
internal operations or information technology services provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our
confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products
or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and software and applications that we produce or procure from third parties may contain defects in design or manufacture, including
bugs and other problems that could unexpectedly interfere with the operation of our or our customers systems. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software
programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede
our sales, manufacturing, distribution or other critical functions.
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We manage and store various proprietary information and sensitive or confidential data
relating to our business. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our clients, including the potential loss
or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers affected to a risk of loss or misuse of this information, result in litigation and potential liability for us,
damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with
systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and
resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected in the past, and in the
future could adversely affect, our financial results, stock price and reputation.
We are exposed to fluctuations in the market values
of our portfolio investments and in interest rates.
At December 31, 2013, we had $23.0 million in cash, cash
equivalents and marketable securities, excluding restricted marketable securities of $2.6 million. Substantially all of our marketable securities are invested in fixed income securities.
Investments in fixed-rate instruments carry a degree of interest rate risk. The market value of fixed-rate securities may be adversely
impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates decline. Due in part to these factors, our future investment market values and income may fall short of
expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt instruments is judged to be other-than-temporary.
We may also suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates or if declines in value are determined to be other-than-temporary.
Item 1B.
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Unresolved Staff Comments
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None.
Our principal executive offices are located in San Diego, California where we lease approximately 96,000 square feet under an
arrangement that expires in December 2016. In connection with our acquisition of Enfora, Inc., we currently lease approximately 21,000 square feet in Richardson, Texas under a lease arrangement that expires in June 2020. In Calgary, Canada, we lease
approximately 24,000 square feet under a lease that expires in September 2017. In Shanghai, China, we lease approximately 1,200 square meters for our Chinese staff under a lease agreement that expires in April 2015. We also lease space in various
geographic locations abroad primarily for sales and support personnel or for temporary facilities. We believe that our existing facilities are adequate to meet our current needs and that we can renew our existing leases or obtain alternative space
on terms that would not have a material impact on our financial condition.
Item 3.
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Legal Proceedings
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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 (the
Court) on behalf of alleged stockholders of the Company. On December 11, 2008, these lawsuits were consolidated into a single action and
19
in May 2010, the consolidated lawsuits were captioned the case
In re Novatel Wireless Securities Litigation (the Litigation)
. The Litigation is being pursued on behalf of
persons who purchased the Companys common stock between February 27, 2007 and September 15, 2008.
As
previously disclosed, on December 6, 2013, to avoid the costs, disruption and distraction of further litigation, legal counsel for the defendants entered into a binding Memorandum of Understanding (MOU) with legal counsel for the
lead plaintiffs, reflecting a proposed agreement to settle the Litigation. The proposed agreement did not admit any liability and the Company and the individual defendants continue to deny any and all liability.
Under the terms of the proposed settlement, the Company would pay $6 million in cash, $5 million in the Companys common stock and a
$5 million secured promissory note, to resolve all claims asserted in the Litigation on behalf of class members. A portion of the $6 million in cash would be funded by insurers for the Company. The $5 million in shares of the Companys common
stock would be unrestricted and freely tradable shares and either registered or exempt from registration at the time of issuance and distribution to class members, which would occur within 10 business days after the entry of a final order of
approval by the Court. The $5 million secured note, with a 5% interest rate, would have a 30 month maturity and be secured by the Companys accounts receivables. The Company has the right, at its sole option, to substitute cash for the
note prior to the entry of final approval by the Court.
The settlement is subject to the following conditions: (1) the
funding by the Company of the settlement; (2) the Companys right to terminate the settlement if an agreed upon portion of the class members deliver timely and valid requests for exclusion from the class; (3) entry of final judgment
by the Court approving the settlement; and (4) satisfaction of waiver of all covenants in the MOU.
On March 7,
2014, the Court entered an order giving preliminary approval to the settlement. The Court set a hearing for June 20, 2014, for final approval of the settlement of the Litigation.
On September 24, 2010, NovAtel, Inc., a Canadian company (NovAtel Canada) filed a trademark infringement lawsuit
entitled
NovAtel, Inc. v. Novatel Wireless Technologies, Ltd., et al
, Action No. 1001-14265 in the Court of Queens Bench of Alberta Canada, Judicial District of Calgary. The Statement of Claim alleges that Novatel Wireless Technologies,
Ltd., Novatel Wireless Solutions, Inc. and Novatel Wireless, Inc., or collectively, the Company, are infringing NovAtel Canadas purported rights in the Novatel trademark in breach of a settlement agreement between NovAtel Canada
and the Company. The parties resolved all claims alleged in this matter without any payment by the Company. The matter was dismissed on March 12, 2013.
Item 4.
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Mine Safety Disclosures
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None.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
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Nature of Business and Significant Accounting Policies
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Novatel Wireless, Inc. (the Company, our or we) 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.
Basis of Presentation
We have recently incurred operating losses and had a
net loss of $43.4 million during the year ended December 31, 2013. As of December 31, 2013, we had available cash, cash equivalents and short-term marketable securities totaling $19.5 million, excluding $2.6 million of restricted
marketable securities, and working capital of $40.9 million. Our ability to transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. If events or circumstances occur such
that we do not meet our operating plan as expected, we may be required to reduce planned research and development activities, incur additional restructuring charges or reduce other operating expenses which could have an adverse impact on our ability
to achieve our intended business objectives. We believe our working capital resources are sufficient to fund our operations through at least December 31, 2014.
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, litigation, provision for warranty costs, income taxes, share-based compensation expense and best estimate of selling price in a multiple element arrangement.
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. Cash and cash equivalents
consist of demand deposits, US Treasury securities, and money market funds. Cash and cash equivalents are recorded at market value, which approximates cost. Gains and losses associated with the Companys foreign currency denominated demand
deposits are recorded as a component of other income (expense).
F-8
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.
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 Companys marketable debt securities are treated as available-for-sale. While it is the Companys intent to hold its debt securities until
maturity, the Company may sell certain securities for cash flow purposes. Thus, the Companys marketable debt 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 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 Companys 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
F-9
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 the remaining one year useful life. Trade name is amortized on a straight-line basis over the
remaining useful life of three 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
managements projections of the undiscounted future cash flows associated with each class of asset. If managements 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 $19.8 million, and $3.3 million
of goodwill impairment losses during the years ended December 31, 2012, and 2011, respectively. As of December 31, 2012, all historical goodwill had been fully impaired.
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 Companys consolidated statement of operations.
Revenue Recognition
The Companys 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
F-10
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 customers 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 No. 104 when assessing appropriate revenue recognition as follows:
Criterion #1Persuasive evidence of an arrangement must exist;
Criterion #2Delivery has occurred;
Criterion #3The Companys price to the buyer must be fixed or determinable; and,
Criterion #4Collectibility is reasonably assured.
For multiple element arrangements, total consideration received from customers is allocated to the elements. This may include hardware,
non essential software elements and/or essential software, 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 (BESP). Because the Company has neither VSOE nor TPE, revenue has been based on the Companys BESP. 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 BESP are recognized in
the period the revenue recognition criteria have been met.
Our process for determining its BESP 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, acceptance in the
marketplace and internal pricing parameters. In addition, when developing BESPs 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, 2013, 2012, and 2011, we have not recorded any significant revenues from multiple element or
software arrangements.
F-11
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 Companys 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 Companys 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 Companys estimate of future tax effects attributable to temporary differences and
carryforwards. 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 Companys 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.
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 Companys pending litigation and revises its estimates, if necessary. The Companys policy is to expense litigation costs as incurred.
F-12
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 Companys 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 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 Companys 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 Companys 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 loss per share excludes dilution and is computed by dividing the net 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. For all periods presented, there is no difference in the number of shares
used to calculate basic and diluted shares outstanding due to the Companys net loss position.
F-13
Fair Value of Financial Instruments
The Companys 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 Companys cash and cash equivalents consist of its investment in money market
securities and treasury bills. The Companys 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 Loss
Comprehensive loss consists of net earnings and
unrealized gains and losses on available-for-sale securities.
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 Companys
customer base and product lines into adjacent markets and advances the Companys strategy of providing intelligent devices to all end marketsenterprise, consumer and vertical applications.
Enforas results of operations and estimated fair value of assets acquired and liabilities assumed were included in the
Companys consolidated financial statements beginning November 30, 2010. The revenue and operating results contributed by Enfora for the years ended December 31, 2013, 2012, and 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. During the third quarter of 2011, the Company made a $0.3 million
adjustment to increase Enfora net deferred tax assets, with a corresponding
F-14
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
|
|
|
|
|
|
|
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 Companys own assumptions.
At December 31, 2013, 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.
F-15
The following table summarizes the Companys financial instruments measured at fair
value on a recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of
December 31, 2013
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities
|
|
$
|
487
|
|
|
$
|
0
|
|
|
$
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
487
|
|
|
|
0
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency securities
|
|
|
2,351
|
|
|
|
0
|
|
|
|
2,351
|
|
Municipal bonds
|
|
|
2,829
|
|
|
|
0
|
|
|
|
2,829
|
|
Certificates of deposit
|
|
|
3,360
|
|
|
|
0
|
|
|
|
3,360
|
|
Corporate debentures / bonds
|
|
|
10,638
|
|
|
|
0
|
|
|
|
10,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term marketable securities
|
|
|
19,178
|
|
|
|
0
|
|
|
|
19,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
1,300
|
|
|
|
0
|
|
|
|
1,300
|
|
Corporate debentures / bonds
|
|
|
2,143
|
|
|
|
0
|
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term marketable securities
|
|
|
3,443
|
|
|
|
0
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
23,108
|
|
|
$
|
0
|
|
|
$
|
23,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys financial instruments measured at fair value on a
recurring basis in accordance with the authoritative guidance for fair value measurements as of December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of
December 31, 2012
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
47
|
|
|
$
|
47
|
|
|
$
|
0
|
|
US Treasury securities
|
|
|
3,429
|
|
|
|
0
|
|
|
|
3,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
3,476
|
|
|
|
47
|
|
|
|
3,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency securities
|
|
|
3,266
|
|
|
|
0
|
|
|
|
3,266
|
|
Municipal bonds
|
|
|
11,260
|
|
|
|
0
|
|
|
|
11,260
|
|
Certificates of deposit
|
|
|
6,205
|
|
|
|
0
|
|
|
|
6,205
|
|
Corporate debentures / bonds
|
|
|
17,333
|
|
|
|
0
|
|
|
|
17,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term marketable securities
|
|
|
38,064
|
|
|
|
0
|
|
|
|
38,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
1,201
|
|
|
|
0
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term marketable securities
|
|
|
1,201
|
|
|
|
0
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
42,741
|
|
|
$
|
47
|
|
|
$
|
42,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
There were no transfers between Level 1 and Level 2 securities during the years
ended December 31, 2013 and 2012. All of our long-term marketable debt securities had maturities of between one and two years in duration at December 31, 2013.
As of December 31, 2013 and 2012, the Company had no outstanding foreign currency exchange forward contracts.
For the years ended December 31, 2013, 2012 and 2011, the Company recorded gains of $0, $0, $8,000, respectively, on its Euro-denominated foreign exchange forward contracts. During the years ended
December 31, 2013, 2012 and 2011, the Company recorded foreign currency losses on foreign currency denominated transactions of approximately $183,000, $51,000, and $836,000, respectively. The loss during the years ended December 31, 2013
and 2012 primarily related to foreign currency losses on foreign currency denominated bank accounts. The loss during the year ended December 31, 2011 primarily related to foreign currency losses on South Korean won denominated trade payables.
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 Companys portfolio of available-for-sale securities by contractual maturity consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Maturity in
Years
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency securities
|
|
|
1 or less
|
|
|
$
|
2,350
|
|
|
$
|
1
|
|
|
$
|
0
|
|
|
$
|
2,351
|
|
Municipal bonds
|
|
|
1 or less
|
|
|
|
2,828
|
|
|
|
1
|
|
|
|
0
|
|
|
|
2,829
|
|
Certificates of deposit
|
|
|
1 or less
|
|
|
|
3,360
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,360
|
|
Corporate debentures / bonds
|
|
|
1 or less
|
|
|
|
10,635
|
|
|
|
3
|
|
|
|
0
|
|
|
|
10,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term marketable securities
|
|
|
|
|
|
|
19,173
|
|
|
|
5
|
|
|
|
0
|
|
|
|
19,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
1 to 2
|
|
|
|
1,300
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,300
|
|
Corporate debentures / bonds
|
|
|
1 to 2
|
|
|
|
2,143
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term marketable securities
|
|
|
|
|
|
|
3,443
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,616
|
|
|
$
|
5
|
|
|
$
|
0
|
|
|
$
|
22,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Maturity in
Years
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency securities
|
|
|
1 or less
|
|
|
$
|
3,265
|
|
|
$
|
1
|
|
|
$
|
0
|
|
|
$
|
3,266
|
|
Municipal bonds
|
|
|
1 or less
|
|
|
|
11,246
|
|
|
|
14
|
|
|
|
0
|
|
|
|
11,260
|
|
Certificates of deposit
|
|
|
1 or less
|
|
|
|
6,200
|
|
|
|
5
|
|
|
|
0
|
|
|
|
6,205
|
|
Corporate debentures / bonds
|
|
|
1 or less
|
|
|
|
17,330
|
|
|
|
3
|
|
|
|
0
|
|
|
|
17,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term marketable securities
|
|
|
|
|
|
|
38,041
|
|
|
|
23
|
|
|
|
0
|
|
|
|
38,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
1 to 2
|
|
|
|
1,200
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term marketable securities
|
|
|
|
|
|
|
1,200
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,241
|
|
|
$
|
24
|
|
|
$
|
0
|
|
|
$
|
39,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
The Companys 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, 2013 and 2012, the Company recorded net unrealized gains of $5,000, and net unrealized gains of $24,000, respectively. The Companys 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 Companys investment portfolio included $385,000 of marketable equity securities at original cost, with a fair value of $38,000. During the years ended
December 31, 2013, 2012 and 2011, the Company recorded an other-than-temporary loss of $0, $38,000 and $347,000, respectively, within other income (expense), net in the consolidated statement of operations.
Inventories
Inventories
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Finished goods
|
|
$
|
20,870
|
|
|
$
|
26,776
|
|
Raw materials and components
|
|
|
6,923
|
|
|
|
12,240
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,793
|
|
|
$
|
39,016
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Test equipment
|
|
$
|
52,108
|
|
|
$
|
53,368
|
|
Computer equipment and purchased software
|
|
|
10,814
|
|
|
|
12,310
|
|
Product tooling
|
|
|
3,204
|
|
|
|
2,232
|
|
Furniture and fixtures
|
|
|
2,015
|
|
|
|
2,219
|
|
Leasehold improvements
|
|
|
4,094
|
|
|
|
4,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,235
|
|
|
|
74,931
|
|
Lessaccumulated depreciation and amortization
|
|
|
(62,334
|
)
|
|
|
(59,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,901
|
|
|
$
|
15,229
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2013, 2012 and 2011, the Company recorded $70,000, $100,000 and
$70,000, 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 $7.9 million, $9.4 million and $11.1 million for the years
ended December 31, 2013, 2012 and 2011, respectively.
F-18
Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Royalties
|
|
$
|
4,243
|
|
|
$
|
4,349
|
|
Payroll and related expenses
|
|
|
4,828
|
|
|
|
7,788
|
|
Product warranty
|
|
|
2,244
|
|
|
|
2,329
|
|
Market development funds and price protection
|
|
|
3,059
|
|
|
|
2,147
|
|
Professional fees
|
|
|
1,040
|
|
|
|
1,549
|
|
Deferred revenue
|
|
|
2,999
|
|
|
|
4,630
|
|
Restructuring
|
|
|
610
|
|
|
|
0
|
|
Other
|
|
|
4,248
|
|
|
|
5,008
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,271
|
|
|
$
|
27,800
|
|
|
|
|
|
|
|
|
|
|
Accrued Warranty Obligations
Accrued warranty obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Warranty liability at beginning of period
|
|
$
|
2,329
|
|
|
$
|
1,525
|
|
Additions charged to operations
|
|
|
5,055
|
|
|
|
6,261
|
|
Deductions from liability
|
|
|
(5,140
|
)
|
|
|
(5,457
|
)
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
2,244
|
|
|
$
|
2,329
|
|
|
|
|
|
|
|
|
|
|
The Companys amortizable purchased intangible assets resulting from its acquisition of Enfora are composed of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Accumulated
Impairment
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Impairment
|
|
|
Net
|
|
Developed technologies
|
|
$
|
26,000
|
|
|
$
|
(6,120
|
)
|
|
$
|
(19,547
|
)
|
|
$
|
333
|
|
|
$
|
26,000
|
|
|
$
|
(5,786
|
)
|
|
$
|
(19,547
|
)
|
|
$
|
667
|
|
Trade name
|
|
|
12,800
|
|
|
|
(2,665
|
)
|
|
|
(8,582
|
)
|
|
|
1,553
|
|
|
|
12,800
|
|
|
|
(2,147
|
)
|
|
|
(8,582
|
)
|
|
|
2,071
|
|
Other
|
|
|
3,720
|
|
|
|
(1,967
|
)
|
|
|
(1,620
|
)
|
|
|
133
|
|
|
|
3,720
|
|
|
|
(1,923
|
)
|
|
|
(1,620
|
)
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable purchased intangible assets
|
|
$
|
42,520
|
|
|
$
|
(10,752
|
)
|
|
$
|
(29,749
|
)
|
|
$
|
2,019
|
|
|
$
|
42,520
|
|
|
$
|
(9,856
|
)
|
|
$
|
(29,749
|
)
|
|
$
|
2,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2013
|
|
|
2012
|
|
Cost of net revenues
|
|
$
|
334
|
|
|
$
|
1,623
|
|
General and administrative expenses
|
|
|
562
|
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
896
|
|
|
$
|
2,697
|
|
|
|
|
|
|
|
|
|
|
F-19
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
|
|
2014
|
|
$
|
895
|
|
2015
|
|
|
562
|
|
2016
|
|
|
562
|
|
|
|
|
|
|
Total
|
|
$
|
2,019
|
|
|
|
|
|
|
Additionally, at December 31, 2013 and 2012, the Company had net acquired software licenses of
$112,000 and $248,000, respectively, net of accumulated amortization of $2.2 million and $2.1 million, respectively. The acquired software licenses represent rights to use certain software necessary for the development and commercial sale of the
Companys products.
The Company monitors its intangible and long-lived asset balances and conducts formal tests when
impairment indicators are present (see Note 6 for a discussion of the impairment indicators). There was no impairment loss recorded for the year ended December 31, 2013. During the quarter ended March 31, 2012, the Company recorded an
impairment loss of $22.8 million related to a decrease in the estimated fair values of the purchased intangible assets fair values. At September 30, 2012, the Company recorded a further preliminary impairment loss of $7.3 million related to the
continued decrease in the estimated fair values of the purchased intangible assets. During the fourth quarter of 2012, the Company completed the impairment analysis and reduced the third quarter impairment by $300,000. The Company recorded $133,000
of impairment loss related to acquired software licenses during the year ended December 31, 2011.
Amortization expense
relating to acquired software licenses was $113,000, $196,000 and $422,000 for the years ended December 31, 2013, 2012 and 2011, 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, 2013, the weighted average remaining useful life of the Companys long-lived intangible assets including
acquired software licenses is 2.1 years.
As a result of goodwill impairment charges recorded during the twelve months ended December 31, 2012, the carrying
amount of goodwill at December 31, 2013 and December 31, 2012 was zero. The carrying amount of goodwill at December 31, 2011 was $19.8 million.
During the third quarter of 2012, the first quarter of 2012 and the third quarter of 2011, based on actual operating results, and reductions in managements then estimates of forecasted operating
results of the M2M Products and Solutions reporting unit principally due to updated views of competitive pressures impacting average selling prices, customer product and technology selections, and the loss of certain customers, the Company
determined there were sufficient indicators of impairment present to require an interim impairment analysis during the respective impacted quarters.
Based upon fair value tests performed with the assistance of third party independent appraisals, during the third quarter of 2012, the first quarter of 2012 and the third quarter of 2011, the Company
recorded pre-tax goodwill impairment charges of $13.2 million, $6.6 million and $3.3 million, respectively.
F-20
Basic earnings per share (EPS) excludes dilution and is computed by dividing net income (loss) attributable
to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock using the treasury stock method. Potentially dilutive securities (consisting of options and restricted stock units (RSUs) and employee stock purchase plan (ESPP) withholdings using the treasury stock
method) are excluded from the diluted EPS computation in loss periods and when the applicable exercise price is greater than the market price on the period end date as their effect would be anti-dilutive.
For the years ended December 31, 2013, 2012 and 2011, basic and diluted weighted-average common shares outstanding were 33,948,000,
32,852,000 and 32,043,000, respectively.
Weighted average options, restricted stock units and ESPP shares to acquire a total
of 4,424,000 shares, 5,793,000 shares and 4,657,000 shares of common stock for the years ended December 31, 2013, 2012 and 2011, respectively, were outstanding but not included in the computation of diluted earnings per share as their effect
was anti-dilutive.
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, 2013 and 2012 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
2013
|
|
|
2012
|
|
Stock options outstanding under the 2009 Omnibus Incentive Compensation Plan and previous plans
|
|
|
3,933
|
|
|
|
4,282
|
|
Restricted stock units outstanding
|
|
|
1,108
|
|
|
|
1,662
|
|
Future grants of awards under the 2009 Omnibus Incentive Compensation Plan
|
|
|
3,668
|
|
|
|
702
|
|
Shares available under the Employee Stock Purchase Plan
|
|
|
1,500
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total shares of common stock reserved for issuance
|
|
|
10,209
|
|
|
|
6,646
|
|
|
|
|
|
|
|
|
|
|
9.
|
Stock Incentive and Employee Stock Purchase Plans
|
During the year ended December 31, 2013, 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.
F-21
For the years ended December 31, 2013, 2012 and 2011, 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,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cost of revenues
|
|
$
|
84
|
|
|
$
|
747
|
|
|
$
|
579
|
|
Research and development
|
|
|
1,114
|
|
|
|
3,042
|
|
|
|
2,088
|
|
Sales and marketing
|
|
|
669
|
|
|
|
1,403
|
|
|
|
1,254
|
|
General and administrative
|
|
|
1,576
|
|
|
|
2,308
|
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,443
|
|
|
$
|
7,500
|
|
|
$
|
5,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected dividend yield:
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate:
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Volatility:
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
69
|
%
|
|
|
0
|
%
|
|
|
68
|
%
|
|
|
63
|
%
|
Expected term (in years):
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
0.0
|
|
|
|
1.3
|
|
|
|
1.1
|
|
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 over a period of 36 months measured from the date of grant.
A summary of stock option
activity for the year ended December 31, 2013 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, 2012
|
|
|
4,282
|
|
|
$
|
10.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
425
|
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(38
|
)
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(736
|
)
|
|
|
10.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2013
|
|
|
3,933
|
|
|
$
|
9.45
|
|
|
|
4.15
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable, December 31, 2013
|
|
|
3,394
|
|
|
$
|
10.53
|
|
|
|
3.40
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised to purchase common stock during the years ended
December 31, 2013, 2012 and 2011 was approximately $44,000, $0 and $28,000, respectively. As of December 31, 2013, total unrecognized share-based compensation cost related to unvested stock options was $724,000, which is expected to be
recognized over a weighted average period of approximately 1.9 years. The total fair value of option awards recognized as expense during the years ended December 31, 2013, 2012 and 2011 was approximately $818,000, $1.7 million and $2.7 million,
respectively. The weighted average fair value of option awards granted during years ended December 31, 2013, 2012 and 2011 was $1.20, $1.97 and $3.40, respectively.
F-22
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 Companys stock on the date of
grant.
During 2013, the Compensation Committee of the Board of Directors, pursuant to the 2009 Plan, awarded employees a
total of 447,703 RSUs at fair values ranging from $1.74 per share to $4.17 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 Companys common stock price at the grant dates, the Company estimated the aggregate fair value of these awards at approximately $900,000. 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 2012, the
Compensation Committee of the Board of Directors, pursuant to the 2009 Plan, awarded employees a total of 1,015,638 RSUs at fair values ranging from $1.28 per share to $3.58 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 Companys common stock price at the grant dates, the Company estimated the aggregate fair value of
these awards at approximately $3.4 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 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 Companys 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.
A summary of restricted stock unit
activity for the year ended December 31, 2013 is presented below (shares in thousands):
|
|
|
|
|
|
|
Shares
|
|
Non-vested at December 31, 2012
|
|
|
1,662
|
|
Granted
|
|
|
448
|
|
Vested
|
|
|
(628
|
)
|
Forfeited
|
|
|
(374
|
)
|
|
|
|
|
|
Non-vested at December 31, 2013
|
|
|
1,108
|
|
|
|
|
|
|
As of December 31, 2013, there was $3.4 million of unrecognized compensation expense related to
non-vested RSUs. That expense is expected to be recognized over a weighted average period of 1.9 years. The total fair value of RSUs recognized as expense during the years ended December 31, 2013, 2012 and 2011 was $2.6 million, $3.4
million and $2.6 million, respectively.
2000 Employee Stock Purchase Plan
The Companys 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.
F-23
During the years ended December 31, 2013, 2012 and 2011, the Company issued
0 shares, 1,086,837 shares and 163,142 shares, respectively, under the ESPP. During the years ended December 31, 2013, 2012 and 2011, the Company received $0, $1.6 million and $470,000, 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. The Company reinstated the ESPP program effective as of September 8, 2011. The reinstated ESPP authorized the Company to issue 1,250,111 shares of common stock for purchase by eligible employees.
On October 22, 2012, the Company announced the termination of the ESPP as of November 15, 2012 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, 2012 of $1.0 million was fully expensed in the fourth quarter of 2012.
The total fair value of ESPP awards recognized as expense during the years ended December 31, 2013, 2012 and 2011 was $0, $1.4
million and $707,000, respectively.
Total income taxes for the years ended December 31, 2013, 2012 and 2011 were allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
To income
|
|
$
|
83
|
|
|
$
|
611
|
|
|
$
|
(9,503
|
)
|
To stockholders equity
|
|
|
0
|
|
|
|
10
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
83
|
|
|
$
|
621
|
|
|
$
|
(9,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes for the years ended December 31, 2013, 2012 and 2011 is comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Domestic
|
|
$
|
(44,142
|
)
|
|
$
|
(88,945
|
)
|
|
$
|
(36,091
|
)
|
Foreign
|
|
|
812
|
|
|
|
290
|
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
$
|
(43,330
|
)
|
|
$
|
(88,655
|
)
|
|
$
|
(34,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
The provision (benefit) for income taxes for the years ended December 31, 2013, 2012
and 2011 is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(248
|
)
|
|
$
|
0
|
|
|
$
|
(10,786
|
)
|
State
|
|
|
33
|
|
|
|
29
|
|
|
|
0
|
|
Foreign
|
|
|
(229
|
)
|
|
|
74
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
(444
|
)
|
|
|
103
|
|
|
|
(10,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
53
|
|
|
|
14
|
|
|
|
(114
|
)
|
State
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Foreign
|
|
|
474
|
|
|
|
494
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
527
|
|
|
|
508
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
83
|
|
|
$
|
611
|
|
|
$
|
(9,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net deferred tax assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
11,292
|
|
|
$
|
6,271
|
|
Inventory obsolescence provision
|
|
|
3,539
|
|
|
|
1,992
|
|
Depreciation and amortization
|
|
|
4,136
|
|
|
|
6,680
|
|
Deferred rent
|
|
|
559
|
|
|
|
892
|
|
Net operating loss and tax credit carryforwards
|
|
|
55,010
|
|
|
|
42,994
|
|
Stock-based compensation
|
|
|
4,518
|
|
|
|
6,069
|
|
Unrecognized tax benefits
|
|
|
1,190
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
80,244
|
|
|
|
65,511
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles
|
|
|
(699
|
)
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
79,545
|
|
|
|
64,495
|
|
Valuation allowance
|
|
|
(79,458
|
)
|
|
|
(63,881
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
87
|
|
|
$
|
614
|
|
|
|
|
|
|
|
|
|
|
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 Companys estimate of future tax effects attributable to
temporary differences and carryforwards. 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.
F-25
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 2010, the Company recognized a full valuation allowance.
During 2012 and
2013, the Company recognized valuation allowances of $27.5 million and $15.6 million, related to its U.S.-based and Canadian deferred tax assets created in those respective years. As a result, no net income tax benefits resulted in the
Companys statements for operations from the operating losses created during those years.
At December 31, 2013, the
deferred tax asset valuation allowance consisted of $74.7 million relating to the Companys domestic deferred tax assets and $4.7 million related to the Companys Canadian deferred tax assets. At December 31, 2012, the valuation
allowance consisted of $58.9 million relating to the Companys domestic deferred tax assets and $5.0 million related to the Companys Canadian deferred tax assets.
The net unreserved portion of the Companys remaining deferred tax assets of $87,000 at December 31, 2013 primarily related to research and development tax credits associated with the
Companys Canadian subsidiary.
The provision (benefit) for income taxes reconciles to the amount computed by applying
the statutory federal income tax rate of 34% in 2013, 2012 and 2011 to income (loss) before provision for income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal tax benefit, at statutory rate
|
|
$
|
(14,732
|
)
|
|
$
|
(30,142
|
)
|
|
$
|
(11,694
|
)
|
State benefit, net of federal benefit
|
|
|
(922
|
)
|
|
|
(757
|
)
|
|
|
(733
|
)
|
Change in valuation allowance
|
|
|
15,577
|
|
|
|
27,486
|
|
|
|
14,612
|
|
Tax expense/(benefit) from business combination
|
|
|
0
|
|
|
|
0
|
|
|
|
909
|
|
Research and development credits
|
|
|
(1,084
|
)
|
|
|
(856
|
)
|
|
|
(1,731
|
)
|
Share-based compensation
|
|
|
2,433
|
|
|
|
1,616
|
|
|
|
526
|
|
Uncertain tax positions
|
|
|
(307
|
)
|
|
|
(46
|
)
|
|
|
(11,809
|
)
|
Goodwill impairment
|
|
|
0
|
|
|
|
3,700
|
|
|
|
596
|
|
Change in state apportionment
|
|
|
(767
|
)
|
|
|
0
|
|
|
|
0
|
|
Other
|
|
|
(115
|
)
|
|
|
(390
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83
|
|
|
$
|
611
|
|
|
$
|
(9,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, the Company has U.S. federal net operating loss carryforwards of approximately
$116.3 million. Federal net operating loss carryforwards expire at various dates from 2026 through 2033. The Company has California net operating loss carryforwards of approximately $39.3 million, which expire at various dates from 2014
through 2033. 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 $4.7 million. The federal tax credits expire at various dates from 2027 through 2032.
Pursuant
to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Companys net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a
three-year period. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Due to the existence of the valuation allowance, future changes
in the Companys unrecognized tax benefits will not impact the Companys effective tax rate.
F-26
It is the Companys 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 years ended December 31, 2013 and 2012, the Company recognized approximately $71,000 and $50,000,
respectively, of income tax benefit plus $236,000 and $5,000, respectively, of associated interest due to expiration of the applicable statutes of limitations applicable to certain tax years. As of December 31, 2013 and 2012, the total
liability for unrecognized tax benefits was $62,000 and $367,000, 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, 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
|
|
Increases related to current and prior year tax positions
|
|
|
475
|
|
Settlements and lapses in statutes of limitations
|
|
|
(50
|
)
|
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2012
|
|
|
33,220
|
|
Increases related to current and prior year tax positions
|
|
|
2,653
|
|
Settlements and lapses in statutes of limitations
|
|
|
(373
|
)
|
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2013
|
|
$
|
35,500
|
|
|
|
|
|
|
Included in the balances of unrecognized tax benefits at December 31, 2013 are $62,000 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, 2013 and 2012, the Company recorded approximately $0 and $0.2 million, respectively, of accrued interest related to uncertain tax positions.
In the fourth quarter of 2014, the Company expects to release $62,000 of its liability for unrecognized tax benefits due to the
expiration of the statute of limitations applicable to the 2009 taxable year.
The Company and its subsidiaries file U.S.,
state, and foreign income tax returns in jurisdictions with various statutes of limitations. In the fourth quarter of 2013, the Company reduced its uncertain tax liability by approximately $552,000, including a related interest accrual of
approximately $236,000, due to the expiration of the statute of limitations applicable to the 2008 taxable year and the completion of its 2006 and 2007 state tax returns. The Company is also subject to various federal income tax examinations for the
2003 through 2012 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 Companys current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open years.
F-27
11.
|
Commitments and Contingencies
|
Capital Leases
The Company did not purchase equipment under capital leases
during the year ended December 31, 2013 or 2012. At December 31, 2013 and 2012, assets held under capital leases had a net book value of $0, net of accumulated amortization of $510,000. The present value of the net minimum lease payments
as of December 31, 2013 is $0.
Operating Leases
The Company leases its office space and certain equipment under non-cancelable operating leases with various terms through 2017. The
minimum annual rent on the Companys 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 2013, 2012 and 2011 was $4.1 million, $4.5 million and $4.7
million, respectively. The Companys 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, 2013 are as follows (in thousands):
|
|
|
|
|
For the Period Ending December 31,
|
|
Amount
|
|
2014
|
|
$
|
3,626
|
|
2015
|
|
|
3,417
|
|
2016
|
|
|
3,394
|
|
2017
|
|
|
806
|
|
2018
|
|
|
422
|
|
Thereafter
|
|
|
653
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
12,318
|
|
|
|
|
|
|
Committed Purchase Orders
The Company has entered into purchase commitments totaling approximately $52.0 million with certain contract manufacturers under which the Company has committed to buy a minimum amount of designated
products between January 2014 and December 2014. 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 2004 and 2005, the Company entered into management retention agreements with certain of the Companys 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 employees 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 employees annual base salary then in effect and the applicable
targeted annual bonus, continued employee benefits, accelerated vesting of the employees stock incentive awards, a tax equalization payment to eliminate the effects of any applicable excise tax and financial planning and outplacement services.
F-28
In November 2007, the Company entered into an employment agreement with the Companys
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 Companys most senior officer. The agreement entitles Mr. Leparulo to
enumerated severance benefits under various circumstances if Mr. Leparulos employment with the Company is terminated. These enumerated severance benefits vary according to whether (a) Mr. Leparulos 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.
During 2010, the Company entered into management retention
agreements with certain of the Companys executive officers. The agreements entitle those employees to enumerated severance benefits if, within the two year period immediately following a change of control (as defined in the agreement), the
Company terminates the employees 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
employees annual base salary then in effect and the applicable targeted annual bonus, continued employee benefits, accelerated vesting of the employees stock incentive awards and financial planning and outplacement services. The
agreements do not provide for any additional payments by the Company for excise or other taxes.
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 some 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 Companys intellectual property litigation 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 (the
Court) on behalf of alleged stockholders of the Company. On December 11, 2008, these lawsuits were consolidated into a single action and in May 2010, the consolidated lawsuits were captioned the case
In re Novatel Wireless Securities
Litigation
(the Litigation). The Litigation is being pursued on behalf of persons who purchased the Companys common stock between February 27, 2007 and September 15, 2008. As previously disclosed, on
December 6, 2013, to avoid the costs, disruption and distraction of further litigation, legal counsel for the defendants entered into a binding Memorandum of Understanding (MOU) with legal counsel for the lead plaintiffs, reflecting
a proposed agreement to settle the Litigation. The proposed agreement did not admit any liability and the Company and the individual defendants continue to deny any and all liability. Under the terms of the proposed settlement, the Company would pay
$6 million in cash, $5 million in the Companys common stock and a $5 million secured promissory note, to resolve all claims asserted in the Litigation on behalf of class members. A portion of the $6 million in cash would be funded by
insurers for the Company. The $5 million in shares of the Companys common stock would be unrestricted and freely tradable shares and either registered or exempt from registration at the time of issuance and distribution to class members, which
would occur within 10 business days after the entry of a final order of approval by the Court. The $5 million secured note, with a 5% interest rate, would have a 30 month maturity and be secured by the Companys accounts receivables. The
Company has the right, at its sole option, to substitute cash for the note prior to the entry of final approval by the Court. The settlement is subject to the following conditions: (1) the funding by the Company of the settlement; (2) the
Companys right to terminate
F-29
the settlement if an agreed upon portion of the class members deliver timely and valid requests for exclusion from the class; (3) entry of final judgment by the Court approving the
settlement; and (4) satisfaction of waiver of all covenants in the MOU.
On March 7, 2014, the Court entered an
order giving preliminary approval to the settlement. The Court set a hearing for June 20, 2014, for final approval of the settlement of the Litigation.
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
Companys products infringe third-party patents or other intellectual property rights. The Companys 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, results of operation or cash flows.
The Company has accrued $14.3 million as of December 31, 2013 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
The Company has a credit facility with a bank to allow margin borrowings based on the Companys investments in cash equivalents and marketable securities held with the bank. This facility is
collateralized by the Companys cash equivalents and marketable securities held with the bank. Borrowings under the facility incur an interest rate at the banks 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, 2013, the Company had approximately $5.2 million in marketable securities held at this
bank, and the Companys unused borrowing capacity at December 31, 2013 under the credit facility was $1.8 million. Any monies borrowed and interest incurred are payable on demand, and there is no express expiration date to the credit
facility. During the twelve months ended December 31, 2012, the Company borrowed $14.0 million against the facility and repaid the entire amount during the same period. During the twelve months ended December 31, 2013, the Company borrowed
$20.3 million against the facility and had outstanding borrowings of $2.6 million under this facility at December 31, 2013. Under the terms of the credit facility, the bank may liquidate any of the Companys cash equivalents or marketable
securities held at any time in order to recoup the outstanding balance of the facility. Accordingly, a like amount of marketable equity securities have been classified by the Company as restricted marketable securities on the balance sheet at
December 31, 2013. At December 31, 2013 the Company had no cash equivalents held at this bank.
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 segmentincludes 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 was established as a result of our acquisition of Enfora in 2010. It includes our intelligent
asset-management solutions utilizing cellular wireless technology, and M2M communication devices, and embedded modules that enable M2M data transmission and services via cellular wireless networks.
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, sales and other
F-30
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 includes acquisition-related costs, purchase price amortization, impairment charges, restructuring and integration costs.
The table below presents net revenues from external customers, operating income (loss) and identifiable assets for our reportable
segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net revenues by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Computing Products
|
|
$
|
297,499
|
|
|
$
|
312,508
|
|
|
$
|
358,106
|
|
M2M Products and Solutions
|
|
|
37,554
|
|
|
|
31,780
|
|
|
|
44,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
335,053
|
|
|
$
|
344,288
|
|
|
$
|
402,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Computing Products
|
|
$
|
(27,939
|
)
|
|
$
|
(22,924
|
)
|
|
$
|
(13,764
|
)
|
M2M Products and Solutions
|
|
|
(15,282
|
)
|
|
|
(65,819
|
)
|
|
|
(19,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(43,221
|
)
|
|
$
|
(88,743
|
)
|
|
$
|
(33,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Identifiable assets by reportable segment:
|
|
|
|
|
|
|
|
|
Mobile Computing Products
|
|
$
|
96,516
|
|
|
$
|
141,045
|
|
M2M Products and Solutions
|
|
|
14,949
|
|
|
|
20,486
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
111,465
|
|
|
$
|
161,531
|
|
|
|
|
|
|
|
|
|
|
The Company has operations in the United States, Canada, Europe, Latin America and Asia. The following
table details the geographic concentration of the Companys assets in the United States, Canada, Europe, Latin America and Asia (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
United States
|
|
$
|
108,932
|
|
|
$
|
157,661
|
|
Canada
|
|
|
808
|
|
|
|
2,836
|
|
Europe, Latin America and Asia
|
|
|
1,725
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,465
|
|
|
$
|
161,531
|
|
|
|
|
|
|
|
|
|
|
The following table details the Companys concentration of net revenues by geographic region based
on shipping destination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States and Canada
|
|
|
95.6
|
%
|
|
|
93.1
|
%
|
|
|
93.5
|
%
|
Latin America
|
|
|
0.8
|
|
|
|
2.4
|
|
|
|
0.0
|
|
Europe, Middle East and Africa
|
|
|
3.4
|
|
|
|
4.1
|
|
|
|
4.0
|
|
Asia and Australia
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
Concentrations of Risk
Substantially all of the Companys net revenues are derived from sales of wireless access products. Any significant decline in market
acceptance of the Companys products or in the financial condition of the Companys customers would have an adverse effect on the Companys results of operations and financial condition.
A significant portion of the Companys net revenues come from a small number of customers. One customer accounted for 58.0% of 2013
net revenues. One customer accounted for 57.5% of 2012 net revenues. Two customers accounted for 50.8% and 13.1% of 2011 net revenues. All significant customers are included in the Companys Mobile Computing Products segment.
A significant portion of the Companys accounts receivables comes from a small number of customers. At December 31, 2013, the
Company had three customers who accounted for 24.5%, 12.6% and 12.0% of total accounts receivable. At December 31, 2012, the Company had three customers who accounted for 20.7%, 18.5% and 11.5% of total accounts receivable.
The Company outsources its manufacturing to several third-party manufacturers. If they were to experience delays, disruptions,
capacity constraints or quality control problems in its manufacturing operations, product shipments to the Companys customers could be delayed or its customers could consequently elect to cancel the underlying order, which would negatively
impact the Companys 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
Companys 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 $1.0 million, $1.2 million and $1.1 million for the years ended December 31, 2013, 2012 and 2011, 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 Companys 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 $157,000, $232,000 and $280,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
In September 2013, the Company commenced certain restructuring initiatives including the closure of the Companys
development site in Calgary, Canada, and the consolidation of certain supply chain management activities, resulting in a reduction in force of 72 employees across all functional areas of the Company. During the year ended December 31, 2013, the
Company recorded restructuring charges of $3.3 million consisting primarily of employee-related compensation charges, as well as expenses from vacating all or a portion of certain facilities in the United States, Canada and the United Kingdom in the
fourth quarter of 2013. The restructuring charges for the year ended December 31, 2013 consisted of $2.3 million in employee severance costs and $1.0 million in facility exit related costs. Of the $3.3 million of restructuring charges for
the year ended December 31, 2013, $3.1 million relates to the Mobile Computing Products segment, and $206,000 relates to the M2M Products and Solutions segment.
During the fourth quarter of 2013, as a result of the September 2013 restructuring initiatives, the Company exited its development site in Calgary, Canada, and a portion of its San Diego facility. The
Company has not yet entered into sublease agreements for these facilities. The Company recorded $893,000 in restructuring expense in the fourth quarter of 2013 relating to exiting these facilities, which is included in operating expenses in the
F-32
consolidated statement of operations. As of December 31, 2013, accrued liabilities relating to this restructuring totaled $881,000, which includes $424,000 of deferred rent previously
recorded for these properties. Of the $1.5 million in facilities exit related costs, $348,000 relates to fixed asset impairments.
The Company accounts for facility exit costs in accordance with ASC 420 Exit or Disposal Cost Obligations, which requires that a liability for such costs be recognized and measured initially
at fair value on the cease-use date based on remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced by the estimated sublease rentals that could be reasonably obtained even if it is not the intent to
sublease.
The Company is required to estimate future sublease income and future net operating expenses of the facilities,
among other expenses. The most significant of these estimates relate to the timing and extent of future sublease income which reduce lease obligations, and the probability for which the sublease income can be expected. The Company based estimates of
sublease income, in part, on information from third party real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, and the location of the respective facility,
among other factors. Further adjustments to the facility exit liability accrual will be required in future periods if actual exit costs or sublease income differ from amounts currently expected. Exit costs the Company records under these provisions
are neither associated with, nor do they benefit, continuing activities.
The following table sets forth activity in the
restructuring liability for the year ended December 31, 2013, which is primarily comprised of employee severance costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Severance
Costs
|
|
|
Facility Exit
Related Costs
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Accruals
|
|
|
2,273
|
|
|
|
1,455
|
|
|
|
3,728
|
|
Payments
|
|
|
(2,273
|
)
|
|
|
(574
|
)
|
|
|
(2,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
0
|
|
|
$
|
881
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of the restructuring liability at December 31, 2013 consists of $610,000 in short-term
and $271,000 in long-term. The balance of the restructuring liability at December 31, 2013 is anticipated to be fully distributed by the end of the third quarter of 2017, at the expiration of our facility lease in Canada. We do not expect to
incur significant additional expenses related to the September 2013 restructuring initiatives.
During February 2014, the Company commenced certain reduction in force initiatives as part of an overall plan to reduce
annual operating costs. As a result of these reduction in force initiatives, the Company estimates it will incur employee-related compensation charges of approximately $0.8 million in the first quarter of 2014.
F-33
16.
|
Quarterly Financial Information (Unaudited)
|
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2013 and
2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(in thousands, except per share amounts)
|
|
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
85,921
|
|
|
$
|
91,124
|
|
|
$
|
92,673
|
|
|
$
|
65,335
|
|
Gross profit
|
|
|
16,848
|
|
|
|
19,024
|
|
|
|
20,383
|
|
|
|
12,039
|
|
Net loss applicable to common stockholders
|
|
|
(9,122
|
)
|
|
|
(7,892
|
)
|
|
|
(5,093
|
)
|
|
|
(21,306
|
)
|
Basic and diluted net loss per common share
|
|
|
(0.27
|
)
|
|
|
(0.23
|
)
|
|
|
(0.15
|
)
|
|
|
(0.63
|
)
|
|
|
|
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
100,150
|
|
|
$
|
102,446
|
|
|
$
|
71,017
|
|
|
$
|
70,675
|
|
Gross profit
|
|
|
20,988
|
|
|
|
23,251
|
|
|
|
14,646
|
|
|
|
13,558
|
|
Net loss applicable to common stockholders
|
|
|
(37,921
|
)
|
|
|
(4,500
|
)
|
|
|
(31,933
|
)
|
|
|
(14,912
|
)
|
Basic and diluted net loss per common share
|
|
|
(1.17
|
)
|
|
|
(0.14
|
)
|
|
|
(0.97
|
)
|
|
|
(0.44
|
)
|
F-34