Attached files
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8-K/A - FORM 8-K/A - TELECOMMUNICATION SYSTEMS INC /FA/ | w77465e8vkza.htm |
EX-23.1 - EX-23.1 - TELECOMMUNICATION SYSTEMS INC /FA/ | w77465exv23w1.htm |
EX-23.2 - EX-23.2 - TELECOMMUNICATION SYSTEMS INC /FA/ | w77465exv23w2.htm |
EX-99.3 - EX-99.3 - TELECOMMUNICATION SYSTEMS INC /FA/ | w77465exv99w3.htm |
EX-99.2 - EX-99.2 - TELECOMMUNICATION SYSTEMS INC /FA/ | w77465exv99w2.htm |
Exhibit 99.1
Consolidated Financial Statements
Networks In Motion, Inc.
December 31, 2008 and 2007
With Reports of Independent Auditors
December 31, 2008 and 2007
With Reports of Independent Auditors
Networks In Motion, Inc.
Consolidated Financial Statements
Consolidated Financial Statements
Contents
Reports of Independent Auditors |
1 | |||
Consolidated Financial Statements |
||||
Consolidated Balance Sheets as of December 31, 2008 and 2007 |
3 | |||
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007 |
4 | |||
Consolidated Statements of Stockholders Deficit for the years ended December 31, 2008 and 2007 |
5 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 |
6 | |||
Notes to Consolidated Financial Statements |
7 |
Report of Independent Auditors
The Board of Directors and Stockholders
Networks in Motion, Inc.
Networks in Motion, Inc.
We have audited the accompanying consolidated balance sheet of Networks in Motion, Inc. and its
subsidiaries (the Company), as of December 31, 2008, and the related consolidated statement of
operations, stockholders deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated financial statements of
the Company for the year ended December 31, 2007 were audited by other auditors whose report dated
September 8, 2008 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2008 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Networks in Motion, Inc. at December 31,
2008, and the consolidated results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young
August 26, 2009
1
Report of Independent Auditors
The Board of Directors and Stockholders of
Networks in Motion, Inc.
Networks in Motion, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements
of operations, stockholders deficit and cash flows present fairly, in all material respects, the
financial position of Networks in Motion, Inc. and its subsidiaries (the Company) at December 31,
2007, and the results of their operations and their cash flows for the year ended December 31, 2007
in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
September 8, 2008
2
Networks In Motion, Inc.
Consolidated Balance Sheets
As of December 31, 2008 and 2007
(in thousands, except per share data)
Consolidated Balance Sheets
As of December 31, 2008 and 2007
(in thousands, except per share data)
2008 | 2007 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,851 | $ | 812 | ||||
Accounts receivable |
15,371 | 5,543 | ||||||
Prepaid expenses and other current assets |
645 | 471 | ||||||
Deferred income taxes |
1,695 | | ||||||
Total current assets |
20,562 | 6,826 | ||||||
Property and equipment, net |
7,101 | 3,622 | ||||||
Security deposit |
118 | | ||||||
Deferred financing costs |
3 | 20 | ||||||
Deferred income taxes |
1,220 | | ||||||
Total assets |
$ | 29,004 | $ | 10,468 | ||||
Liabilities and stockholders deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,886 | $ | 1,330 | ||||
Accrued liabilities |
4,423 | 2,446 | ||||||
Deferred revenue |
626 | 156 | ||||||
Revolving line of credit |
1,600 | | ||||||
Term loans |
1,052 | 764 | ||||||
Capital lease obligation |
| 14 | ||||||
Total current liabilities |
10,587 | 4,710 | ||||||
Term loans, less current portion |
1,682 | 83 | ||||||
Deferred revenue |
411 | 500 | ||||||
Warrant liability |
232 | 201 | ||||||
Deferred tax liability |
710 | | ||||||
Other liabilities |
30 | 14 | ||||||
Total liabilities |
13,652 | 5,508 | ||||||
Preferred stock; $0.001 per share par value; 34,751 shares
authorized |
||||||||
Series A convertible preferred stock; 2,500 shares
issued and outstanding |
250 | 250 | ||||||
Series A-1 convertible preferred stock; 1,719 shares
issued and outstanding |
1,028 | 1,027 | ||||||
Series B convertible preferred stock;13,849 shares
authorized; 13,553 shares issued and outstanding |
6,201 | 6,185 | ||||||
Series C convertible preferred stock; 16,683 shares
authorized, issued and outstanding |
9,958 | 9,948 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Stockholders deficit: |
||||||||
Common stock; $0.001 par value; 60,000 and 55,000
shares authorized; 6,693 and 6,609 shares issued and
outstanding at December 31, 2008 and 2007, respectively |
7 | | ||||||
Additional paid-in capital |
665 | 304 | ||||||
Accumulated other comprehensive income (loss) |
80 | (16 | ) | |||||
Accumulated deficit |
(2,837 | ) | (12,738 | ) | ||||
Total stockholders deficit |
(2,085 | ) | (12,450 | ) | ||||
Total liabilities and stockholders deficit |
$ | 29,004 | $ | 10,468 | ||||
See accompanying notes.
3
Networks In Motion, Inc.
Statements of Operations
Years ended December 31, 2008 and 2007
(in thousands)
Statements of Operations
Years ended December 31, 2008 and 2007
(in thousands)
2008 | 2007 | |||||||
Revenue |
$ | 41,538 | $ | 15,703 | ||||
Cost of revenue |
5,263 | 2,277 | ||||||
Gross profit |
36,275 | 13,426 | ||||||
Operating expenses: |
||||||||
Sales and marketing |
7,508 | 5,263 | ||||||
Research and development |
13,745 | 5,162 | ||||||
General and administrative |
6,386 | 3,887 | ||||||
Income (loss) from operations |
8,636 | (886 | ) | |||||
Other income (expense): |
||||||||
Interest income |
48 | 117 | ||||||
Interest expense |
(342 | ) | (164 | ) | ||||
Change in fair value of warrant liability |
43 | (102 | ) | |||||
Foreign exchange loss |
(67 | ) | | |||||
Income (loss) before income taxes |
8,318 | (1,035 | ) | |||||
Income tax benefit |
1,583 | | ||||||
Net income (loss) |
$ | 9,901 | $ | (1,035 | ) | |||
See accompanying notes.
4
Networks In Motion, Inc.
Consolidated Statements of Stockholders Deficit
Years ended December 31, 2008 and 2007
(in thousands)
Consolidated Statements of Stockholders Deficit
Years ended December 31, 2008 and 2007
(in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Loss | Deficit | Total | |||||||||||||||||||
Balance December 31, 2006 |
6,587 | $ | | $ | 89 | $ | | $ | (11,703 | ) | $ | (11,614 | ) | |||||||||||
Exercise of stock options |
22 | | 2 | | | 2 | ||||||||||||||||||
Nonemployee stock-based compensation expense |
| | 18 | | | 18 | ||||||||||||||||||
Employee stock-based compensation expense |
| | 221 | | | 221 | ||||||||||||||||||
Accretion of preferred stock issuance costs |
| | (26 | ) | | | (26 | ) | ||||||||||||||||
Components of comprehensive income (loss) |
| |||||||||||||||||||||||
Translation adjustment |
| | | (16 | ) | | (16 | ) | ||||||||||||||||
Net income (loss) |
| | | | (1,035 | ) | (1,035 | ) | ||||||||||||||||
Comprehensive income (loss) |
| | | | | (1,051 | ) | |||||||||||||||||
Balance December 31, 2007 |
6,609 | | 304 | (16 | ) | (12,738 | ) | (12,450 | ) | |||||||||||||||
Exercise of stock options |
84 | 7 | 6 | | | 13 | ||||||||||||||||||
Nonemployee stock-based compensation expense |
| | 9 | | | 9 | ||||||||||||||||||
Employee stock-based compensation expense |
| | 373 | | | 373 | ||||||||||||||||||
Accretion of preferred stock issuance costs |
| | (27 | ) | | | (27 | ) | ||||||||||||||||
Components of comprehensive income (loss) |
||||||||||||||||||||||||
Translation adjustment |
| | | 96 | | 96 | ||||||||||||||||||
Net income (loss) |
| | | | 9,901 | 9,901 | ||||||||||||||||||
Comprehensive income (loss) |
| | | | | 9,997 | ||||||||||||||||||
Balance December 31, 2008 |
6,693 | $ | 7 | $ | 665 | $ | 80 | $ | (2,837 | ) | ($2,085 | ) | ||||||||||||
See accompanying notes.
5
Networks In Motion, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2008 and 2007
(in thousands)
Consolidated Statements of Cash Flows
Years Ended December 31, 2008 and 2007
(in thousands)
2008 | 2007 | |||||||
Operating activities |
||||||||
Net income (loss) |
$ | 9,901 | $ | (1,035 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities |
||||||||
Depreciation and amortization |
1,426 | 725 | ||||||
Increase (decrease) in fair value of warrant liability |
(43 | ) | 102 | |||||
Interest expense related to warrants |
29 | 13 | ||||||
Amortization of deferred financing costs |
17 | 17 | ||||||
Stock-based compensation expense |
382 | 239 | ||||||
Foreign currency transaction expense |
67 | | ||||||
Deferred tax assets |
(2,205 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(9,828 | ) | (4,039 | ) | ||||
Prepaid expenses and other assets |
(338 | ) | (216 | ) | ||||
Accounts payable |
1,508 | 944 | ||||||
Accrued liabilities |
2,078 | 2,148 | ||||||
Deferred revenue |
483 | 581 | ||||||
Net cash provided by (used in) operating activities |
3,477 | (521 | ) | |||||
Investing activities |
||||||||
Purchases of property and equipment |
(4,959 | ) | (3,035 | ) | ||||
Net cash used in investing activities |
(4,959 | ) | (3,035 | ) | ||||
Financing activities |
||||||||
Proceeds from borrowings on term loans |
3,000 | | ||||||
Repayment of term loans |
(1,113 | ) | (764 | ) | ||||
Proceeds from borrowings on line of credit |
3,200 | 500 | ||||||
Repayment of line of credit |
(1,600 | ) | (500 | ) | ||||
Repayment of capital lease obligations |
(14 | ) | (23 | ) | ||||
Proceeds from exercise of stock options |
13 | 2 | ||||||
Net cash provided by (used in) financing activities |
3,486 | (785 | ) | |||||
Effect of exchange rate on cash |
35 | (16 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
2,039 | (4,357 | ) | |||||
Cash and cash equivalents at beginning of year |
812 | 5,169 | ||||||
Cash and cash equivalents at end of year |
$ | 2,851 | $ | 812 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the year for interest |
$ | 277 | $ | 151 | ||||
Supplemental disclosure of noncash investing and
financing activities |
||||||||
Accretion of redeemable preferred stock |
$ | 27 | $ | 26 |
See accompanying notes.
6
Networks In Motion, Inc.
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
1. Business
On May 1, 2001, Networks In Motion, Inc. (Networks In Motion, NIM or the Company) was
incorporated in the state of Delaware. The Company was initially formed as gpsOnTrack Corporation,
a California corporation, on September 21, 2000, which was merged into Networks In Motion on May
16, 2001.
Networks In Motion provides wireless navigation solutions for GPS-enabled mobile phones. The
Companys platforms deliver location-centric information, offering access to local directories,
maps, turn-by-turn voice-prompted driving directions, traffic alerts, weather reports, gas prices,
movie times and reviews, entertainment event schedules and other location-based services.
The Companys products deliver navigation directions, maps, and other location-based information in
real time to GPS-enabled mobile phones via advanced client/server architecture. The Company also
provides a child finder application for parents to monitor the location of their children, and
NAVBuilder products for software developers and enterprises to provide a platform for the
integration of location-based services into applications and business processes.
2. Liquidity and Capital Resources
Prior to the fiscal year ending December 31, 2008, the Company incurred recurring losses and
negative cash flows from operations and through that period, the Company funded its operational and
capital needs primarily through the net proceeds received from the sale of redeemable convertible
preferred stock and issuance of debt (Notes 5 and 9), and revenue generated from operations. In
2008, the Company has earned profits and has positive cash flow from operations. While continuing
to face many risks, the Company believes that current cash and cash equivalents, available lines of
credit, and growing operations are sufficient to meet anticipated cash needs for working capital
and capital expenditures for at least the next twelve months. If events or circumstances occur
such that the Company does not meet its operating plan, the Company may be required to reduce
certain discretionary spending, which could have a material adverse effect on the Companys ability
to achieve its intended business objectives.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements and related notes include the accounts of the Company and its
wholly owned subsidiaries located in the United States, Sweden and China. All material intercompany
transactions and balances have been eliminated in consolidation.
Foreign Currency Translation
The Company has determined that the local currencies of its Swedish and China subsidiaries are the
functional currencies, since their principal economic activities are more closely tied to the local
currencies. Assets and liabilities are translated into US dollars at current exchange rates and
revenue and expenses
7
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
are translated at average exchange rates for the period. Resultant translation adjustments are
reflected as a component of stockholders deficit.
Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency are included as foreign currency exchange gains and
losses in the consolidated statement of operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
On an ongoing basis, management evaluates its estimates, including those related to (i) the
collectibility of customer accounts; (ii) the realization of tax assets and estimates of tax
liabilities; (iii) the valuation of equity securities and financial instruments; and (iv) the
recognition and disclosure of contingent liabilities. These estimates are based on historical data
and experience, as well as various other factors that management believes to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. The Company may
engage third-party valuation specialists to assist with estimates related to the valuation of
financial instruments associated with various contractual arrangements, as well as the underlying
value of its common equity. Such estimates often require the selection of appropriate valuation
methodologies and models, and significant judgment in evaluating ranges of assumptions and
financial inputs. Actual results may differ from those estimates under different assumptions or
circumstances.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
At December 31, 2008 and 2007, cash and cash equivalents consisted of cash and money market funds.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of cash, to the extent balances exceed limits that are insured by the
Federal Deposit Insurance Corporation, cash equivalents and trade accounts receivable.
Cash equivalents are invested in money market funds of a major US financial services company. The
Company maintains its cash accounts in a commercial bank. At December 31, 2008 and 2007, cash on
deposit was in excess of the federally insured limit of $250,000 by approximately $2,601,000 and
$712,000, respectively.
The Company extends differing levels of credit to customers, does not require collateral deposits,
and maintains reserves for potential credit losses based upon the expected collectibility of
accounts receivable. The Company determined that an allowance for doubtful accounts was not
required at December 31, 2008 and 2007.
8
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
One customer accounted for 95% and 96% of the Companys accounts receivable balance at December 31,
2008 and 2007, respectively. One customer accounted for 95% and 96% of the Companys revenue for
the years ended December 31, 2008 and 2007, respectively.
Revenue Recognition
The Company derives the vast majority of its revenue from hosted navigation services, which are
delivered pursuant to multi-year software licensing and hosting arrangements with wireless
carriers. The Companys hosted navigation services allow a wireless carrier to offer its customers
navigation directions, maps and other location-based information in real time to GPS-enabled mobile
phones.
The Company recognizes revenue from hosted navigation services in accordance with Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, and Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. The Company evaluates arrangements
that include the integrated licensing and hosting of the Companys proprietary software and related
services in accordance with EITF Issue No. 00-03, Application of AICPA Statement of Position 97-2
to Arrangements that Include the Right to Use Software Stored on Another Entitys Hardware. Based
on such evaluation, the Company has determined that its revenue arrangements are outside the scope
of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
Software Revenue Recognition.
The Company recognizes revenue from hosted navigation services when persuasive evidence of an
arrangement exists, mobile navigation services are provided, the customer fee is fixed or
determinable and collectibility is reasonably assured. Under EITF Issue No. 00-21, the Companys
hosted navigation services represent a single unit of accounting and, accordingly, revenue is
recognized over the period in which such services are provided over the term of the related
contract period. Fees for hosted navigation services are billed and payable monthly based on a
carriers subscriber count data. Upfront, non-refundable fees, if any, received under hosted
navigation service arrangements in connection with initial set-up and development activities are
initially recorded as deferred revenue and recognized over the longer of the contract period or
estimated customer relationship. The Company recognized $115,162 and $0 for the years ended
December 31, 2008 and 2007, respectively, for arrangements involving these upfront, non-refundable
fees.
The Company warrants certain levels of uptime reliability under the service level agreement
provisions of its mobile navigation service arrangements that permit a customer to receive credits
in the month of a service disruption. Such credits only apply to the month in which the Company
fails to meet the service level requirements, are capped as a percentage of the applicable monthly
billing and do not provide the right to a credit applicable to past or future service under the
arrangement, and are thus recorded as a reduction of revenue in the period incurred. During 2008
and 2007, the Company issued credits in the amount of $839,202 and $428,687, respectively.
Cost of Revenue
Cost of revenue primarily consists of hosting services in conjunction with access to the Companys
mobile navigation service, connectivity costs, depreciation of customer service servers,
amortization of capitalized software development costs, royalties, and labor associated with
network operations and customer service.
9
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at historical cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets, which is
five years for furniture and equipment, three years for computer software, and five years for
computers. Leasehold improvements are amortized over the lesser of the related lease term or their
estimated useful life. Expenditures for major renewals and betterments are capitalized, while minor
replacements, maintenance and repairs that do not extend the asset lives are charged to operations
as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed
from the accounts, and any gain or loss is included in the Companys results of operations.
The Company capitalizes costs to develop internal use software under the provisions of SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1
requires the capitalization of external and internal computer software costs incurred during the
application development stage, assuming it is probable that the project will be completed and the
software will be used to perform the function intended. The application development stage is
characterized by software design and configuration activities, coding, testing and installation for
applications that have been determined to be reasonably completed. Costs incurred in the
preliminary project and post-implementation stages of internal use software development, as well as
training and maintenance, are expensed as incurred. Upgrades and enhancements of existing internal
use software are capitalized if it is probable that such expenditures will result in additional
functionality. Costs incurred in the research or development of entirely new mobile navigation
capabilities are expensed as incurred due to the associated risk and speculative nature of these
activities. Capitalized internal-use software development costs are classified as property and
equipment, and are amortized using the straight-line method over an estimated useful life of 2 to 4
years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, primarily consisting of property and equipment, for
impairment whenever events or changes in circumstances indicate the carrying amount of such assets
may not be recoverable. Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows attributable to such assets including any cash flows upon their eventual
disposition, to their carrying value. If the carrying value of the assets exceeds the forecasted
undiscounted cash flows, then the assets are written down to their fair value. As of December 31,
2008, there have been no such impairments.
Income Taxes
The Company accounts for its income taxes using the liability method whereby deferred tax assets
and liabilities are determined based on temporary differences between the bases used for financial
reporting and income tax reporting purposes. Deferred income taxes are provided based on the
enacted tax rates in effect at the time such temporary differences are expected to reverse. A
valuation allowance is provided for deferred tax assets if it is more likely than not that the
Company will not realize those tax assets through future operations.
10
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Research and Development Costs
Research and development costs are expensed as incurred.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses changes in equity from transactions and other events and
circumstances from non-owner sources and is disclosed in the statements of stockholders deficit.
Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments
and was not significant in the periods presented.
Preferred Stock Warrants
The Company issued warrants exercisable into preferred stock that is redeemable. Accordingly, at
the issuance date, the warrants have been recorded as liabilities under Financial Accounting
Standards Board (FASB) Staff Position 150-5, Issuers Accounting under FASB Statement No. 150 for
Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable, based on their
estimated fair values at issuance. Subsequent changes in fair value are recorded as nonoperating
income (loss) at each reporting period (Note 9).
Stock-Based Compensation
The Company accounts for stock-based compensation by estimating the fair-value of stock-based
payment awards at the grant date using an option pricing model, and the portion that is ultimately
expected to vest is recognized as compensation expense over the requisite service period. The
Company uses the Black-Scholes option-pricing model to estimate fair-value of the stock-based
awards.
Calculating stock-based compensation expense requires the input of highly subjective assumptions,
including the expected term of the stock-based awards, stock price volatility, and pre-vesting
forfeitures. The estimate of the expected term of options granted was determined by analyzing
historical data on employees stock option exercises. Since the Company is a private entity with no
historical data on volatility of its stock, the expected volatility is based on the volatility of
similar entities (referred to as guideline companies). In evaluating similarity, the Company
considered factors such as industry, stage of life cycle, size and financial leverage. The
assumptions used in calculating the fair value of stock-based awards represent the Companys best
estimates, but these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different assumptions, stock-based
compensation expense could be materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and only recognize expense for those shares
expected to vest. The Company estimates the forfeiture rate based on historical experience of its
stock-based awards that are granted, exercised and cancelled. If its actual forfeiture rate is
materially different from its estimate, stock-based compensation expense could be significantly
different from what has been recorded in the current period.
The risk-free rate for periods within the contractual life of the option is based on United States
treasury yield for a term consistent with the expected life of the stock option in effect at the
time of grant. The Company has never declared or paid any cash dividends and does not presently
plan to pay cash dividends in the foreseeable future.
11
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
The Company has elected to recognize stock-based compensation expense on a straight-line basis (net
of estimated forfeitures) over the employee service vesting period. Shares of common stock issued
upon exercise of stock options will be from previously unissued shares.
The Company accounts for equity instruments issued to nonemployees in accordance with the
provisions of SFAS No. 123R and EITF Consensus No. 96-18, Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. Under SFAS No. 123R and EITF 96-18, stock option awards issued to nonemployees are
accounted for at fair value using the Black-Scholes option-pricing model. Management believes that
the fair value of the stock options is more reliably measurable than the fair value of the services
received. The fair value of each nonemployee stock award is remeasured each period until a
commitment date is reached, which is generally the vesting date.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, which establishes the
principles and requirements for how an acquirer: (1) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (3) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141 (R) replaces SFAS No. 141, Business Combinations. SFAS No. 141
(R) applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008, and
will only have an impact on any transactions recorded by the Company beginning January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. SFAS No. 160 was established to improve the relevance,
comparability and transparency of the financial information that a reporting entity provides in its
consolidated financial statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
also amends certain of ARB 51s consolidation procedures for consistency with the requirements of
SFAS No. 141 (R), Business Combinations. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except for not-for-profit organizations. This statement is
effective as of the beginning of the first fiscal year beginning after December 15, 2008, with
early adoption prohibited. Management is assessing the potential impact on the Companys financial
condition and results of operations, but does not believe the implementation of the provisions of
SFAS No. 160 will have a significant effect on the consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133, which enhances the disclosure requirements for
derivatives and hedging activities. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. SFAS No. 161 will only affect the Companys derivatives
disclosures beginning January 1, 2009 and will not have any impact on the Companys consolidated
financial statements.
12
4. Composition of Certain Balance Sheet Components
Composition of certain balance sheet components is as follows:
Property and equipment consist of the following at December 31:
2008 | 2007 | |||||||
Furniture and equipment |
$ | 607,000 | $ | 404,000 | ||||
Computers |
3,982,000 | 2,307,000 | ||||||
Software for internal use |
4,787,000 | 1,837,000 | ||||||
Leasehold improvements |
219,000 | 149,000 | ||||||
9,595,000 | 4,697,000 | |||||||
Less: accumulated depreciation and amortization |
(2,494,000 | ) | (1,075,000 | ) | ||||
2008 | 2007 | |||||||
$ | 7,101,000 | $ | 3,622,000 | |||||
Depreciation expense for the years ended December 31, 2008 and 2007 was $576,000 and $448,000,
respectively. Amortization of internal use software costs for the years ended December 31, 2008 and
2007 was $779,000 and $274,000, respectively. Amortization of capital leases for the years ended
December 31, 2008 and 2007 was $64,000 and $13,000, respectively.
Accrued liabilities consist of the following at December 31:
2008 | 2007 | |||||||
Wages and compensation |
$ | 902,000 | $ | 501,000 | ||||
Bonus |
1,111,000 | 586,000 | ||||||
Vacation |
609,000 | 247,000 | ||||||
Professional services |
91,000 | 405,000 | ||||||
Royalties |
1,334,000 | 516,000 | ||||||
Other |
376,000 | 191,000 | ||||||
$ | 4,423,000 | $ | 2,446,000 | |||||
5. Preferred Stock
Issuances of preferred stock are as follows:
Date of | Number of | Gross | ||||||||||
Issuance | Shares Issued | Proceeds | ||||||||||
Series A Preferred Stock |
June 2001 | 2,500,000 | $ | 250,000 | ||||||||
Series A-1 Preferred Stock |
September 2003 | 1,719,492 | 1,032,000 | |||||||||
Series B Preferred Stock |
September 2004 | 7,606,119 | 3,517,000 | |||||||||
Series B Preferred Stock |
December 2004 | 5,946,889 | 2,750,000 | |||||||||
Series C Preferred Stock |
March 2006 | 16,682,606 | 10,000,000 |
In June 2001, the Company completed the issuance of 2,500,000 shares of its Series A redeemable
convertible preferred stock (Series A Preferred Stock) at a price of $0.10 per share, for gross
proceeds of $250,000.
In September 2003, the Company completed the issuance of 1,719,492 shares of its Series A-1
redeemable convertible preferred stock (Series A-1 Preferred Stock) at a price of $0.60 per
share, for gross proceeds of $1,032,000, including $782,000 from the conversion of notes payable
and $125,000 previously advanced to the Company from an investor.
13
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
5. Preferred Stock (continued)
In September 2004, the Company completed the issuance of 7,606,119 shares of its Series B
redeemable convertible preferred stock (Series B Preferred Stock) at a price of $0.4624267 per
share, for gross proceeds of $3,517,000, including $517,000 from the conversion of notes payable.
The second closing was completed in December 2004 with the issuance of 5,946,889 shares of Series B
Preferred Stock at a price of $0.4624267 per share, for gross proceeds of $2,750,000.
In April 2006, the Company completed the issuance of 16,682,606 shares of Series C convertible
preferred stock (Series C Preferred Stock) at a price of $0.599427 per share, for gross proceeds
of $10,000,000.
In conjunction with the issuance of the Series C Preferred Stock, the Company amended the Articles
of Incorporation to increase authorized shares to 55,000,000 common shares and 34,751,302 preferred
shares with a par value of $0.001 per share. The Company has designated 2,500,000, 1,719,492, and
13,849,204 and 16,682,606 of Series A, A-1, B and C Preferred Stock, respectively.
In November 2005, the Company entered into a three year Master Agreement for Acquisition of
Software and Services (the Agreement) with a preferred stock investor that owns 1,081,253 shares
of Series B Preferred Stock and 670,641 shares of Series C Preferred Stock. The Agreement provides
for consideration related to the Companys mobile navigation services. This agreement included a
one-year automatic extension at the end of the three-year period, which went into effect in
November 2008. Revenues recognized in conjunction with the Agreement were $39,508,000 and
$15,527,000 for the years ended December 31, 2008 and 2007, respectively.
The rights, privileges and preferences of Series A Preferred Stock, Series A-1 Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock (Preferred Stock) are presented below:
Voting Rights
The holders of Preferred Stock are entitled to a number of votes equal to the number of shares of
common stock into which each share of preferred stock could be converted, and have voting rights
and powers equal to the voting rights and powers of the common stockholders.
As long as at least 500,000 shares of Series A Preferred Stock and Series A-1 Preferred Stock
remain outstanding, the holders of Series A Stock and Series A-1 Preferred Stock are entitled,
voting together as a single class, one member of the Companys Board of Directors.
As long as at least 1,000,000 shares of Series B Preferred Stock remain outstanding, the holders of
shares of Series B Preferred Stock are entitled, voting separately as a single class, to elect two
members of the Companys Board of Directors.
Additionally, as long as at least 1,000,000 shares of Series C Preferred Stock remain outstanding,
the holders of shares of Series C Preferred Stock are entitled, voting separately as a single
class, to elect one member of the Companys Board of Directors.
If at any time less than 500,000 shares of Series A and Series A-1 Preferred Stock remain
outstanding, or 1,000,000 shares of Series B Preferred Stock or Series C Preferred Stock remain
outstanding, then the holders of shares of the then-outstanding preferred and common stock, voting
together as a single class, on an as-converted basis, are entitled to elect the directors that the
holders of Series A Preferred Stock,
14
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
5. Preferred Stock (continued)
Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock would have
otherwise been entitled to elect.
The holders of shares of common stock are entitled, voting separately as a single class, to elect
one member of the Companys Board of Directors. The holders of each class of preferred and common
stock, voting together as a single class, on an as-converted basis, are entitled to elect the
remaining directors of the Company.
Dividends
Dividends may be declared and paid upon shares of Series A Preferred Stock and Series A-1 Preferred
Stock in any fiscal year only if a distribution has been paid to or declared upon all shares of the
Series B Preferred Stock and Series C Preferred Stock. All dividends are noncumulative, and no
right shall accrue to the holders of Preferred Stock if dividends are not declared during any
fiscal year. No dividends on Preferred Stock or common stock have been declared by the Board of
Directors from inception through December 31, 2008.
Redemption
Commencing March 27, 2013, upon the written consent of a majority of the shares of Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
the Company will be required to redeem all such shares then outstanding in three equal installments
at a price equal to $0.10, $0.60, $0.4624267 and $0.599427 per share, respectively, plus all
declared and unpaid dividends. The first installment is due on the sixtieth day following the
receipt by the Company of the written request for redemption. The second and third installments are
due on the first and second anniversaries of the first installment date.
Liquidation Preference
In the event of liquidation, including a merger, acquisition or sale of assets where there is a
change in control, the holders of Series B Preferred Stock and Series C Preferred Stock are
entitled to receive $0.4624267 and $0.599427 per share, respectively, plus any declared but unpaid
dividends prior to and in preference to holders of all other classes of stock. If the assets
distributed are insufficient to pay the entire preferential amounts, then the entire assets
available for distribution will be distributed ratably among the Series B and Series C preferred
stockholders in proportion to the full preferential amount each holder is otherwise entitled to
receive. The holders of Series A Preferred Stock and Series A-1 Preferred Stock are then entitled
to receive a per share amount equal to $0.10 and $0.60, respectively, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of common stock. If the
assets distributed are insufficient to pay the entire preferential amounts, then the entire assets
available for distribution will be distributed ratably among the holders of Series A Preferred
Stock and Series A-1 Preferred Stock in proportion to the full preferential amount each holder is
otherwise entitled to receive. Upon completion of the distributions to the preferred stockholders,
all of the remaining assets of the Company available for distribution will be distributed among the
holders of common stock pro-rata based on the number of shares of common stock held by each
stockholder.
15
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
5. Preferred Stock (continued)
The liquidation preference of each series of preferred stock as of December 31, 2008 is as follows:
Series A Preferred Stock |
$ | 250,000 | ||
Series A-1 Preferred Stock |
1,032,000 | |||
Series B Preferred Stock |
6,267,000 | |||
Series C Preferred Stock |
10,000,000 |
Conversion
Each share of Preferred Stock is immediately convertible at the holders option into shares of
common stock based on the issuance price divided by the Conversion Price. The Conversion Price for
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock is $0.10, $0.5032, $0.4197 and $0.5032, respectively, subject to adjustments for
certain dilutive issuances, splits and combinations, and other recapitalizations or
reorganizations. Each share of Preferred Stock automatically converts into the number of shares of
common stock into which those shares are convertible at the then effective Conversion Price upon
the earlier of (a) the closing of a public offering of common stock with gross proceeds of at least
$15,000,000 and a per share price of at least $1.80, or (b) the written consent or agreement of the
holders of at least a majority of the then outstanding shares of Preferred Stock voting together as
a single class. For the years ended December 31, 2008 and 2007, the aggregate number of common
shares authorized and reserved for conversion of Preferred Stock was 39,355,836.
At December 31, 2008, the number of shares of common stock into which each series of Preferred
Stock is convertible is as follows:
Series A Preferred Stock |
2,500,000 | |||
Series A-1 Preferred Stock |
2,050,269 | |||
Series B Preferred Stock |
14,932,744 | |||
Series C Preferred Stock |
19,872,823 | |||
39,355,836 | ||||
In conjunction with the issuance of the Series C Preferred Stock, the Company modified the
redemption date of the Series A Preferred Stock, Series A-1 Preferred Stock and Series B Preferred
Stock. The information disclosed herein reflects the modified terms of the Preferred Stock.
Classification of Preferred Stock
The liquidation preferences and the redemption provisions of the Preferred Stock are considered
redemption provisions that are not solely within the control of the Company. The Preferred Stock is
required to be classified outside of stockholders deficit in the mezzanine section of the balance
sheet. Additionally, if the redemption became certain of occurrence, the Preferred Stock would be
classified as a liability.
16
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
6. Stock Option Plan
In March 2005, the Board of Directors and stockholders approved the 2005 Stock Incentive Plan (the
Plan). The Plan provided for the direct sale of shares of restricted stock and the grant of
options to purchase up to a maximum of 10,073,019 shares of the Companys common stock to
employees, officers, consultants and directors and includes incentive stock options (ISOs) and
nonstatutory stock options (NSOs). Rights to exercise ISOs and NSOs vest at rates determined by the
Board of Directors over periods ranging from one to four years. Options expire within a period of
not more than ten years from the date of grant. An option granted to a person who is a 10% or
greater shareholder on the date of grant may not be exercisable more than five years after the date
it is granted. Vested options expire three months after employee termination.
In September 2007, the Company modified 3,988,500 stock options to increase the exercise price. As
a result of the modification, stock options granted to 62 employees were affected, and there was no
incremental compensation cost for the year ended December 31, 2007. The weighted-average exercise
price of outstanding modified options before and after the modification was $0.18 and $0.28,
respectively. In February 2008, the Board of Directors approved an increase in the number of shares
of the Companys common stock reserved for issuance under the 2005 Stock Incentive Plan from a
maximum of 10,073,019 to 10,923,019. In December 2008, this was further increased from 10,923,019
to 12,923,019.
The Company records compensation expense for stock-option grants based on the estimated fair value
of the options on the date of grant using the Black-Scholes option-pricing model with the
assumptions included in the table below:
2008 | 2007 | |||||||
Expected volatility |
58 | % | 73 | % | ||||
Expected term |
6 years | 6 years | ||||||
Risk-free interest rate |
2.92 | % | 4.48 | % | ||||
Dividend yield |
0 | % | 0 | % |
The weighted-average grant date fair value per options granted was $0.48 and $0.24 for the years
ended December 31, 2008 and 2007, respectively. Employee stock-based compensation expense
recognized under SFAS No. 123(R) for the years ended December 31, 2008 and 2007 was $373,000 and
$221,000, respectively, related to stock options.
17
Networks in Motion, Inc.
Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements (continued)
6. Stock Option Plan (continued)
A summary of the stock option activity under the Plan for employees is as follows:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Number of | Exercise Price | Contractual | Aggregate | |||||||||||||
Options | Per Option | Life (Years) | Intrinsic Value | |||||||||||||
Outstanding at
December 31, 2006 |
8,336,301 | $ | 0.11 | 8.8 | $ | 1,533,000 | ||||||||||
Granted |
716,000 | $ | 0.19 | |||||||||||||
Option repricing
pre-modification |
(3,948,500 | ) | $ | (0.18 | ) | |||||||||||
Option repricing
post-modification |
3,948,500 | $ | 0.28 | |||||||||||||
Exercised |
(22,395 | ) | $ | 0.10 | ||||||||||||
Forfeited |
(122,605 | ) | $ | 0.27 | ||||||||||||
Outstanding at
December 31, 2007 |
8,907,301 | $ | 0.15 | 7.9 | $ | 2,718,000 | ||||||||||
Granted |
1,339,000 | $ | 0.50 | |||||||||||||
Exercised |
(43,644 | ) | $ | 0.25 | ||||||||||||
Forfeited |
(323,148 | ) | $ | 0.31 | ||||||||||||
Outstanding at
December 31, 2008 |
9,879,509 | $ | 0.20 | 7.1 | $ | 3,155,000 | ||||||||||
Exercisable at
December 31, 2008 |
7,568,112 | |||||||||||||||
Vested and expected
to vest as of
December 31, 2008 |
7,568,112 | |||||||||||||||
The aggregate intrinsic value was determined based on the difference between the estimated fair
value of the Companys common stock at December 31, 2008 and the exercise price.
The following table summarizes information regarding options outstanding and options exercisable
for employees under the Plan at December 31, 2008:
Options Outstanding | Options Exercisable | ||||||||||||||||||||
Weighted- | Weighted- | Weighted- | |||||||||||||||||||
Range of | Average | Average | Number | Average | |||||||||||||||||
Exercise | Number of | Remaining Life | Exercise | Vested and | Exercise | ||||||||||||||||
Prices | Options | (Years) | Price | Exercisable | Price | ||||||||||||||||
$0.05-$0.10 |
4,818,801 | 6.3 | $ | 0.05 | 4,788,398 | $ | 0.05 | ||||||||||||||
$0.18-$0.27 |
3,068,708 | 7.4 | $ | 0.27 | 2,006,506 | $ | 0.27 | ||||||||||||||
$0.29-$0.33 |
786,000 | 8.3 | $ | 0.31 | 384,755 | $ | 0.31 | ||||||||||||||
$0.37-$0.59 |
990,000 | 9.3 | $ | 0.47 | 172,453 | $ | 0.40 | ||||||||||||||
$0.61-$0.74 |
216,000 | 9.5 | $ | 0.63 | 216,000 | $ | 0.63 | ||||||||||||||
9,879,509 | 7,568,112 | ||||||||||||||||||||
18
6. Stock Option Plan (continued)
The Company did not grant any nonemployee stock options during 2008. The assumptions used in
estimating the fair value of nonemployee stock options are as follows:
2007 | ||||
Volatility |
91 | % | ||
Risk-free interest rate |
4.75 | % | ||
Dividend yield |
0 | % | ||
Term of option |
10 years |
A summary of the stock option activity under the Plan for nonemployees is as follows:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Number of | Exercise Price | Contractual | Aggregate | |||||||||||||
Options | Per Share | Life (Years) | Intrinsic Value | |||||||||||||
Outstanding at
December 31, 2006 |
130,000 | $ | 0.12 | 9.1 | $ | 26,000 | ||||||||||
Granted |
50,000 | $ | 0.33 | |||||||||||||
Option repricing
pre-modification |
(40,000 | ) | $ | (0.18 | ) | |||||||||||
Option repricing
post-modification |
40,000 | $ | 0.28 | |||||||||||||
Outstanding at
December 31, 2007 |
180,000 | $ | 0.20 | 8.6 | $ | 47,000 | ||||||||||
Granted |
||||||||||||||||
Exercised |
(40,000 | ) | $ | 0.10 | ||||||||||||
Forfeited |
||||||||||||||||
Outstanding at
December 31, 2008 |
140,000 | $ | 0.23 | 7.8 | $ | 39,000 | ||||||||||
Exercisable at December
31, 2008 |
135,890 | |||||||||||||||
The following table summarizes information regarding options outstanding and options exercisable
for nonemployees under the Plan at December 31, 2008:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted- | Weighted- | Weighted- | ||||||||||||||||||
Range of | Average | Average | Number | Average | ||||||||||||||||
Exercise | Number of | Remaining Life | Exercise | Vested and | Exercise | |||||||||||||||
Prices | Shares | (Years) | Price | Exercisable | Price | |||||||||||||||
$0.05-$0.10 |
50,000 | 6.8 | $ | 0.10 | 50,000 | $ | 0.10 | |||||||||||||
$0.18-$0.27 |
40,000 | 7.8 | $ | 0.27 | 40,000 | $ | 0.27 | |||||||||||||
$0.29-$0.33 |
50,000 | 8.7 | $ | 0.33 | 45,890 | $ | 0.33 | |||||||||||||
140,000 | 135,890 | |||||||||||||||||||
19
6. Stock Option Plan (continued)
For the years ended December 31, 2008 and 2007, the Company recorded $9,000 and $18,000,
respectively, of compensation expense for options granted to nonemployees.
At December 31, 2008, the number of shares available for issuance under the Plan was 2,710,000.
Stock-based compensation expense for employees and nonemployees included in the statement of
operations are as follows:
2008 | 2007 | |||||||
Cost of revenue |
$ | 19,000 | $ | 18,000 | ||||
Sales and marketing |
88,000 | 88,000 | ||||||
Research and development |
233,000 | 53,000 | ||||||
General and administrative |
42,000 | 80,000 | ||||||
$ | 382,000 | $ | 239,000 | |||||
7. Commitments and Contingencies
Leases
The Company leases office facilities under noncancelable operating leases. The terms of the
Companys corporate office facility lease provide for rental increases on a graduated scale and
include an option to extend the lease term for two additional eighteen month periods. The Company
recognizes rent expense on a straight-line basis over the lease period. Accordingly, rent expense
recognized in excess of paid rent is reflected as deferred rent.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease
terms in excess of one year) as of December 31, 2008 are as follows:
Operating | ||||
Leases | ||||
Years ending December 31, |
||||
2009 |
$ | 735,000 | ||
2010 |
677,000 | |||
2011 |
858,000 | |||
2012 |
936,000 | |||
2013 |
475,000 | |||
Total minimum lease payments |
$ | 3,681,000 | ||
Rent expense for the years ended December 31, 2008 and 2007 was $565,000 and $303,000,
respectively.
Indemnifications
The Company provides hosted navigation services to its customers under various contractual
arrangements. Each agreement contains the relevant terms of the contractual arrangement with the
customer, and generally includes certain provisions for indemnifying the customer against losses,
expenses and liabilities from damages that may be awarded against the customer in the event the
Companys intellectual property is found to infringe upon a patent, copyright, trademark or other
proprietary right of a third party. The contract generally limits the scope of and remedies for
such indemnification obligations in a variety of industry-standard respects, including but not
limited to certain time and geography based scope limitations and a right to replace an infringing
product.
20
7. Commitments and Contingencies (continued)
The Company believes its internal development processes and other policies and practices limit its
exposure related to the indemnification provisions associated with its contractual arrangements. In
addition, the Company requires its employees to sign a proprietary information and inventions
agreement, which assigns the rights to its employees development work to the Company. To date, the
Company has not had to reimburse any of its customers for any losses related to these
indemnification provisions. For several reasons, including the lack of prior indemnification claims
and the lack of a monetary liability limit for certain infringement cases under the licenses, the
Company cannot determine the maximum amount of potential future payments, if any, related to such
indemnification provisions.
Litigation
In June 2007, the Company received notice that a patent-holding company had filed a patent
infringement suit alleging that the Companys mobile navigation service infringes upon a US patent
of the plaintiff. The case was originally scheduled to go to trial in March of 2008, and in
February 2008, the court ruled in favor of the Companys motion for summary judgment to dismiss the
case. The ruling was appealed by the Plaintiff, but the appeals courts upheld the dismissal of the
case.
From time to time, the Company may be involved in other routine litigation arising in the ordinary
course of business. While the results of such litigation cannot be predicted with certainty, the
Company does not believe the outcome of such matters will have a material adverse effect on its
financial position, results of operations or cash flows.
8. Income Taxes
Components of the provision (benefit) for incomes taxes are as follows:
2008 | ||||
Current: |
||||
Federal |
$ | 192,000 | ||
State |
430,000 | |||
622,000 | ||||
Deferred: |
||||
Federal |
(622,000 | ) | ||
State |
(1,583,000 | ) | ||
(2,205,000 | ) | |||
$ | (1,583,000 | ) | ||
There was no provision (benefit) for income taxes recorded in 2007.
The provision for income tax reflected in the accompanying Consolidated Statement of Operations for
2008 is primarily due to state taxes. The recorded tax benefit differs from the expected tax
expense based on the federal statutory tax rate of 34% primarily due to the release of
substantially all of the Companys valuation allowance that had been previously established against
the federal and state deferred taxes. During 2008, the Company had determined that it is more
likely than not that a portion of these deferred tax assets will be realized based on current and
expected profit trends of the Company.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the period in which
those temporary differences become deductible. Management considers projected future taxable
income and tax planning strategies in making this assessment. At December 31, 2007, the Company
provided
21
8. Income Taxes (continued)
for a full valuation allowance against its deferred tax assets due to uncertainty surrounding the
realization of those assets due to historical taxable net losses. During 2008, management
determined that it is more likely than not that a portion of these deferred tax assets will be
realized based on current and expected profit trends of the Company. The Company released $5.4
million of the beginning of the year valuation allowance related to deferred tax assets which
resulted in a benefit being recorded for the year ended December 31, 2008. The Company retained
its valuation allowance against its domestic federal and state net operating losses carryforwards
not expected to be utilized by 2010. The Company also retained its valuation allowance against its
foreign net operating loss carryforward due to the uncertainty surrounding the realization of the
related deferred tax asset. The Company has provided a valuation allowance of $0.9 million at
December 31, 2008 against its domestic and foreign net operating loss carryforwards unutilized at
December 31, 2010 of $152,000 and $771,000, respectively.
As of December 31, 2008 the Company has net operating loss carryforwards available to offset future
taxable income for federal, state and foreign income tax purposes of approximately $2.2 million,
$12.7 million, and $2.8 million, respectively. The Companys net operating loss carryforward
utilization is subject to limitation in accordance with Internal Revenue Code §382, however, none
of the Companys net operating loss carryforwards are expected to expire unutilized. The foreign
net operating loss can be carried forward indefinitely. As of December 31, 2008, the Company has
credits for increasing research activities available to offset future federal and state payable of
approximately $0.8 million and $0.7 million, respectively, that will begin to expire in 2021 and
2011, respectively. The Companys research and development credit utilization is subject to
Internal Revenue Code §382, however, management concluded that it is more likely than not that the
credits will not expire unutilized.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability
threshold that a tax position must meet before a financial statement benefit is recognized. FIN 48
must be applied to all existing positions upon initial adoption. The cumulative effect, if any, of
applying FIN 48 at adoption, is reported as an adjustment to opening retained earnings in the year
of adoption. The Company will adopt FIN 48 when it becomes effective on January 1, 2009. The
Company is evaluating any impact that the adoption of this guidance may have on the Companys
financial position, results of operations or cash flows.
9. Debt
In August 2005, the Company entered into a loan and security agreement with a bank. The agreement
provides for a term loan facility (the Term Loan) of up to $1,750,000 and an equipment facility
(the Equipment Loan) of up to $750,000. The agreement is collateralized by substantially all of
the Companys assets.
In accordance with the debt agreement, up to $1,250,000 of the Term Loan was available through
February 28, 2006 (Advance Period) with the remaining $500,000 becoming available upon the
Companys receipt of a signed term sheet for at least $5,000,000 in new equity from investors
satisfactory to the bank. This condition was satisfied in February 2006 in connection with the
Series C Preferred Stock financing (Note 5). The Company borrowed $1,250,000 during fiscal year
2005 and $500,000 during fiscal year 2006. Borrowings under the Term Loan bear interest at 8% per
annum. The Company was required to make interest-only payments through the Advance Period.
Thereafter, all Term Loan advances were aggregated as a single loan, which is payable in 36 equal
monthly installments.
All amounts were borrowed under the Equipment Loan during fiscal year 2005. Each draw is payable
over a 36-month period beginning the month following each advance. Borrowings under the Equipment
Loan bear interest at 7.5% per annum.
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9. Debt (continued)
At December 31, 2008 and 2007, the Term Loan had an outstanding balance of $97,000 and $680,000,
respectively, and the Equipment Loan had an outstanding balance of $0 and $181,000, respectively.
In April 2008, the Company secured an additional term loan (New Term Loan) with a bank, which
provides for a loan facility of up to $3,000,000, by amending the August 2005 loan agreements that
secured the Companys Term Loan and Equipment Loan. The New Term Loan bears interest at prime rate
plus 2.5% per annum, and expires on July 2011. The Company borrowed the full New Term Loan amount
in April 2008. The loan is payable over a 36-month period beginning August 1, 2008. Borrowings
under the New Term Loan bear interest at 7.5%. At December 31, 2008 the New Term Loan had an
outstanding balance of $2,624,000.
Required principal payments under the Companys debt total term loan obligations as of December 31,
2008 are as follows:
Years ending December 31, |
||||
2009 |
$ | 1,052,000 | ||
2010 |
1,102,000 | |||
2011 |
638,000 | |||
Total principal payments |
2,792,000 | |||
Less discount from warrants |
(58,000 | ) | ||
Total debt balance |
$ | 2,734,000 | ||
As of December 31, 2008, the Company was not in compliance with the covenant to deliver audited
financial statements within 210 days from year-end. The Company obtained a waiver from the bank to
waive this covenant until August 2009. There are no financial covenants associated with the term
loan agreements.
Revolving Line of Credit
In April 2007, the Company entered into a $4,000,000 revolving line of credit with a bank by
amending the August 2005 loan agreements entered into in connection with the Companys Term Loan
and Equipment Loan. The revolving line of credit bears interest at Prime rate plus 0.5% per annum,
and expires in April 2009. During the year ended December 31, 2007, the Company borrowed and repaid
$500,000 under the line of credit. As of December 31, 2007, no amounts were outstanding under the
revolving line of credit. In conjunction with the bank loan amendment, all outstanding warrants,
which were originally due to expire in 2012, were extended to 2014. As a result of the
modification, the Company recorded $10,000 in additional interest expense during the year ended
December 31, 2007.
On October 9, 2008 the Company entered into a $5,000,000 revolving line of credit with a bank that
replaced the April 2007 revolving line. The 2008 revolving line bears interest at an annualized
rate of prime plus one half of one percent, which was 5.0% at December 31, 2008. As of December 31,
2008 the amount outstanding against the line was $1,600,000.
The Company was in compliance with all covenants as of December 31, 2008 and the only financial
covenant is to maintain an adjusted quick ratio of 1.15 to 1.00. Substantially all of the
Companys assets serve as collateral under this agreement.
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9. Debt (continued)
Warrants
In connection with the closing of the Term Loan, the Company issued a warrant to purchase 95,109
shares of Series B Preferred Stock at an exercise price of $0.46 per share, which expires in 2012.
The estimated fair value of the warrant was $30,000 and is accounted for as a deferred financing
cost (Note 3). The value of the warrant at the date of issuance was calculated based on the
following assumptions: risk-free interest rate of 4.06%, no dividend yield, term of seven years and
volatility of 74%.
In connection with the closing of the Equipment Loan, the Company issued warrants to purchase
48,912 shares of Series B Preferred Stock. The estimated fair value of the warrants was $15,000 and
is accounted for as a deferred financing cost (Note 3). The value was calculated based on the
following assumptions: risk-free interest rate of 4.06%, no dividend yield, term of seven years and
volatility of 74%.
During each of the years ended December 31, 2008 and 2007, the Company recorded interest expense of
$17,000 related to the amortization of these deferred financing costs. The future remaining
amortization related to deferred amortization costs will be $7,000 in 2009.
At the time of each Term Loan draw, the Company is required to grant a warrant to the bank for a
number of shares equal to 3% of the draw amount at the Series B price per share. In December 2005
and February 2006, the Company borrowed $1,250,000 and $500,000, respectively, resulting in the
issuance of warrants for the purchase of 81,522 shares and 32,609 shares respectively, of Series B
Preferred Stock. The Series B Preferred Stock is redeemable; accordingly, the December 2005 and
February 2006 loan proceeds were first allocated to the $29,000 and $12,000 estimated fair value of
the warrants with the remaining balance allocated to the debt. The debt discounts are amortized
over the life of the related debt of 37 to 42 months, on a straight-line basis, which approximates
the effective interest method. The value of the December 2005 warrant at the date of issuance was
calculated based on the following assumptions: risk-free interest rate of 4.41%, no dividend yield,
term of seven years and volatility of 74%. The value of the February 2006 warrant at the date of
issuance was calculated based on the following assumptions: risk-free rate of 4.58%, no dividend
yield, term of seven years and volatility of 74%.
Upon the Companys receipt of the signed term sheet for at least $5,000,000 and the Companys
activation of the $500,000 optional facility in February 2006, the Company provided the bank an
additional warrant to purchase 38,044 shares of Series B Preferred Stock. The Series B Preferred
Stock is redeemable; accordingly, the proceeds from the loan were first allocated to the $14,000
estimated fair value of the warrant with the remaining balance allocated to the debt. The value of
the warrant at the date of issuance was calculated based on the following assumptions: risk-free
interest rate of 4.58%, no dividend yield, term of seven years and volatility of 74%.
In connection with the $3,000,000 draw on the New Term Loan in April 2008, the Company issued the
bank a warrant to purchase 100,000 shares of Series C Preferred Stock at an exercise price of $0.60
per share, which expires in 2015. The Series C Preferred Stock is redeemable; accordingly the New
Term Loan proceeds were first allocated to the $73,000 estimated fair-value of the warrant with the
recurring balance allocated to debt. The debt discount is amortized over the life of the New Term
Loan of seven months, on a straight-line basis which approximates the effective interest method.
The value of the April 2008 warrant and the date of issuance was calculated based on the following
assumptions: risk-free rate of 2.99%, no dividend yield, term of seven years and volatility of 58%.
Warrants exercisable into Series B Preferred Stock and Series C Preferred Stock are classified as a
liability on the balance sheet. The warrants are carried at fair value with decreases or increases
in fair value at each reporting date recorded as other income (expense). During the years ended
December 31, 2008 and 2007, the Company recorded income of $43,000 and expense of $102,000,
respectively, relating to these warrants.
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10. Defined Contribution Plan
In May 2005, the Company established a defined contribution plan under Section 401(k) of the
Internal Revenue Code (the Plan). All employees are eligible for participation in the Plan.
Depending on age, participants may contribute up to 15% or 18% of their compensation, subject to a
maximum amount determined by the Internal Revenue Code. The Company matches the contributions made
by the employee in an amount equal to 25% of up to 4% of the employees compensation, subject to a
maximum amount established by the IRS. During the years ended December 31, 2008 and 2007, the
Company contributed $62,000 and $42,000, respectively, to the Plan.
11. Subsequent Events
On January 13, 2009, the revolving line was amended to increase the borrowing limit to $10,000,000.
In January 2009, the Company acquired certain intellectual property assets of TrafficGauge, Inc for
$800,000 plus 274,877 shares of the Companys common stock. The Company also hired certain of the
employees of TrafficGauge.
In July 2009, the Company entered into a four year renewal of its existing operating lease for
office space at the Companys Aliso Viejo, California headquarters through June 2013. The agreement
calls for base rent in the amount of $51,000 for per month for the first year with annual increases
thereafter.
Through June 2009, the Company granted 750,900 stock options at a weighted-average exercise price
of $0.59 per share.
12. Acquisition of Networks in Motion (unaudited)
On December 15, 2009, TeleCommunication Systems, Inc. (the Acquirer) completed its acquisition of
Networks in Motion. The acquisition was made pursuant to an Agreement and Plan of Merger dated
November 25, 2009 (the Merger Agreement).
Under the terms of the Merger Agreement, immediately prior to the effective time of the Merger, (i)
shares of NIMs outstanding preferred stock automatically converted into shares of NIM common stock
in accordance with the terms of NIMs Certificate of Incorporation, as amended, and (ii) shares of
NIMs outstanding common stock (other than shares of NIMs common stock that had not voted in favor
of the Merger Agreement and with respect to which a demand for payment and appraisal had been
properly made in accordance with Section 262 of the Delaware General Corporation Law), warrants and
certain options were canceled and converted in exchange for the right to receive, following
surrender of stock certificates, if applicable, and the execution and delivery of certain other
documents required by the Merger Agreement, the following: (i) an aggregate amount in cash equal to
$110,000,000, plus or minus customary working capital and excess cash adjustments; (ii) 2,236,258
shares of Class A common stock, par value $0.01 per share, of the Acquirer; (iii) an aggregate of
$20,000,000 principal amount payable in promissory notes of the Acquirer which mature on the one
year anniversary of the closing date of the Merger; and (iv) an aggregate of $20,000,000 principal
amount payable in promissory notes of the Acquirer, $10,000,000 of which matures on the one year
anniversary of the closing date of the Merger, $5,000,000 of which matures on the date on which is
eighteen months following the closing date of the Merger and $5,000,000 of which matures on the
second anniversary of the closing date of the Merger.
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