XNAS:WRLS Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

telular_10q-033112.htm
United States Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 
 For the Quarterly Period Ended March 31, 2012

OR

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

For the Transition Period from            to         .
 
Commission File Number 0-23212

Telular Corporation
(Exact name of Registrant as specified in its charter)
 
Delaware     36-3885440
 (State or other jurisdiction of    (I.R.S. Employer
 incorporation or organization)     Identification No.)
                         
311 South Wacker Drive, Suite 4300, Chicago, Illinois 60606-6622
 (Address of principal executive offices and zip code)

(312) 379-8397
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X      No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer                                                                             Accelerated filer   X
 Non-accelerated filer                                                                                Smaller reporting company        
(Do not check if a smaller reporting company)

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No X

The number of shares outstanding of the Registrant's common stock, par value $.01 per share, as of May 4, 2012, the latest practicable date, was 16,580,034 shares.
 
 
1

 
 
 
TELULAR CORPORATION
Index
 
Part I - Financial Information
Page No.
   
Item 1.  Financial Statements:
 
   
Consolidated Balance Sheets March 31, 2012 (unaudited) and September 30, 2011
3
   
Consolidated Statements of Operations (unaudited) Three and Six Months Ended March 31, 2012 and March 31, 2011
4
   
Consolidated Statement of Stockholders’ Equity (unaudited) Six Months Ended March 31, 2012
5
   
Consolidated Statements of Cash Flows (unaudited) Six Months Ended March 31, 2012 and March 31, 2011
6
   
Notes to Consolidated Financial Statements
7
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
22
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
34
   
Item 4. Controls and Procedures
34
   
   
Part II - Other Information
 
   
Item 1.  Legal Proceedings
35
   
Item 1A.  Risk Factors
35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
35
   
Item 3. Defaults Upon Senior Securities
35
   
Item 4. Mine Safety Disclosure
35
   
Item 5. Other Information
35
   
Item 6.  Exhibits
35
   
Signatures
37
 
 
2

 
 
TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

   
March 31,
   
September 30,
 
   
2012
   
2011
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 10,147     $ 12,642  
Trade accounts receivable, net
    10,466       5,859  
Inventories, net
    4,658       3,005  
Deferred taxes, net
    1,588       672  
Prepaid expenses and other current assets
    1,851       465  
Total current assets
    28,710       22,643  
                 
Property and equipment, net
    3,444       2,282  
Other assets:
               
Goodwill
    19,718       7,502  
Intangible assets, net
    25,986       3,469  
Long term deferred taxes, net
    33,502       31,839  
Other
    451       69  
Total other assets
    79,657       42,879  
Total assets
  $ 111,811     $ 67,804  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Trade accounts payable
  $ 5,331     $ 2,916  
Accrued liabilities
    6,129       4,212  
Current portion of long term debt
    3,000       -  
Total current liabilities
    14,460       7,128  
                 
Long term debt
    27,000       -  
Other long term liabilities
    57       249  
Total long term liabilities
    27,057       249  
Total liabilities
    41,517       7,377  
                 
Stockholders' equity:
               
Common stock; $.01 par value; 75,000,000 shares authorized; 21,108,552 and 19,712,493 shares issued at March 31, 2012 and September 30, 2011, respectively
    211       197  
Additional paid-in capital
    191,910       181,266  
Dividends
    (24,835 )     (21,248 )
Accumulated deficit
    (87,419 )     (90,215 )
Treasury stock, at cost; 4,577,163 shares at March 31, 2012 and September 30, 2011, respectively
    (9,573 )     (9,573 )
Total stockholders' equity
    70,294       60,427  
Total liabilities and stockholders' equity
  $ 111,811     $ 67,804  

See accompanying notes
 
3

 

TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
 
   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
                       
M2M hardware sales
  $ 7,986     $ 3,729     $ 13,017     $ 7,361  
M2M service revenue
    11,418       7,784       19,704       15,104  
Subtotal M2M
    19,404       11,513       32,721       22,465  
Other product sales
    390       979       778       2,117  
Total revenue
    19,794       12,492       33,499       24,582  
                                 
Cost of sales
                               
M2M hardware cost of sales
    5,879       2,515       9,112       5,107  
M2M service cost of sales
    3,155       3,037       5,465       5,873  
Subtotal M2M
    9,034       5,552       14,577       10,980  
Other product cost of sales
    334       940       982       2,013  
Total cost of sales
    9,368       6,492       15,559       12,993  
                                 
Gross margin
    10,426       6,000       17,940       11,589  
                                 
Operating expenses
                               
Engineering and development expenses
    2,030       1,042       3,317       2,236  
Selling and marketing expenses
    2,699       1,683       4,484       3,481  
General and administrative expenses
    3,644       1,819       5,518       3,905  
Total operating expenses
    8,373       4,544       13,319       9,622  
                                 
Income from operations
    2,053       1,456       4,621       1,967  
Other income (expense), net
    (154 )     10       (154 )     131  
Income from continuing operations before income taxes
    1,899       1,466       4,467       2,098  
Provision for income taxes
    727       1,355       1,671       1,597  
Net income
  $ 1,172     $ 111     $ 2,796     $ 501  
                                 
Income per common share:
                               
Basic
  $ 0.07     $ 0.01     $ 0.18     $ 0.03  
Diluted
  $ 0.07     $ 0.01     $ 0.17     $ 0.03  
                                 
Weighted average number of common shares outstanding:                                
Basic
    16,044,418       15,030,397       15,600,956       14,976,290  
Diluted
    17,088,771       15,994,650       16,603,771       15,818,086  
                                 
Dividends paid per share of common stock
  $ 0.11     $ 0.10     $ 0.22     $ 1.19  

See accompanying notes

 
4

 
 
TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
(Unaudited)
 
   
Common Stock and
                               
   
Additional Paid-In
                           
Total
 
   
Capital
         
Accumulated
   
Treasury Stock
   
Stockholders'
 
   
Amount
   
Shares
   
Dividends
   
Deficit
   
Amount
   
Shares
   
Equity
 
                                           
Balance at September 30, 2011
  $ 181,463       19,712     $ (21,248 )   $ (90,215 )   $ (9,573 )     (4,577 )   $ 60,427  
                                                         
                                                         
Comprehensive and Net Income
    -       -       -       2,796       -       -       2,796  
Stock based compensation expense
    739       -       -       -       -       -       739  
Stock issued:
                                                       
Purchase of SkyBitz
    8,760       1,000       -       -       -       -       8,760  
Options exercised
    1,785       377       -       -       -       -       1,785  
Stock withheld for strike price and taxes on options exercised
    (649 )     (79 )     -       -       -       -       (649 )
Restricted stock units converted
    -       112       -       -       -       -       -  
Stock withheld for taxes on restricted stock conversions
    (82 )     (14 )     -       -       -       -       (82 )
Dividends paid
    -       -       (3,444 )     -       -       -       (3,444 )
Dividends payable
    -       -       (38 )     -       -       -       (38 )
Dividend equivalent units issued
    105       -       (105 )     -       -       -       -  
                                                         
Balance at March 31, 2012
  $ 192,121       21,108     $ (24,835 )   $ (87,419 )   $ (9,573 )     (4,577 )   $ 70,294  
 
See accompanying notes
 
 
5

 
 
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
   
Six months ended March 31,
 
   
2012
   
2011
 
Operating Activities:
           
Net income
  $ 2,796     $ 501  
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
               
Depreciation
    663       498  
Amortization
    1,346       296  
Stock based compensation expense
    739       1,012  
Loss on disposal of operating assets
    21       1  
Deferred income taxes
    922       1,502  
Changes in assets and liabilities, net of the effects of acquisition:
               
Trade accounts receivable
    (901 )     2,710  
Inventories
    (65 )     1,198  
Prepaid expenses and other assets
    (474 )     (390 )
Trade accounts payable
    1,143       78  
Accrued liabilities
    (1,387 )     547  
Income Taxes Payable
    -       (41 )
Net cash provided by operating activities
    4,803       7,912  
                 
Investing Activities:
               
Acquisition of property and equipment
    (570 )     (589 )
Purchase of SmartTank
    -       (7,921 )
Purchase of SkyBitz
    (42,783 )     -  
Net cash used in investing activities
    (43,353 )     (8,510 )
                 
Financing Activities:
               
Proceeds from the exercise of stock options
    739       240  
Payment of dividends
    (3,444 )     (17,878 )
Proceeds from bank loan
    30,000       -  
Stock issued for purchase of SkyBitz
    8,760       -  
Net cash provided by (used in) financing activities
    36,055       (17,638 )
                 
Net decrease in cash and cash equivalents
    (2,495 )     (18,236 )
                 
Cash and cash equivalents, beginning of period
    12,642       27,678  
Cash and cash equivalents, end of period
  $ 10,147     $ 9,442  
 
See accompanying notes
 
 
6

 

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31. 2012
(Unaudited, in thousands, except share data)

1.            Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, the accompanying financial statements include all adjustments considered necessary for a fair presentation. Operating results for the six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2012. For additional information, please refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2011. The amounts presented herein are in U.S. dollars and are in thousands, except for per share information.

2.            Summary of Significant Accounting Policies

Financial Instruments
Financial instruments that potentially subject Telular Corporation (“Telular”) to significant concentrations of credit risk consist principally of cash and cash equivalents, trade accounts receivable, trade accounts payable and bank borrowings. The credit risks related to cash and cash equivalents are limited to Telular’s investments of cash in money market funds and the possibility that the per-unit value of these funds may decline below $1.00.  As of March 31, 2012 and September 30, 2011, the per-unit value of these funds was $1.00.

   
March 31,
   
September 30,
 
   
2012
   
2011
 
             
Cash
  $ 9,010     $ 12,559  
Money market funds
    87       83  
Short term certificate of deposit
    1,050       -  
Total cash and cash equivalents
  $ 10,147     $ 12,642  
 
At March 31, 2012 and September 30, 2011, the majority of Telular’s cash and cash equivalents are maintained at one institution, Silicon Valley Bank (“SVB”). The short-term certificates of deposit were all closed out subsequent to March 31, 2012 and the funds were transferred to operating cash accounts.  All funds in Telular’s non-interest bearing deposit account are currently fully insured by the FDIC. Telular regularly reviews the investments that are included in the money market funds it invests in and, when appropriate, limits its credit risk by diversifying its investments.  Credit risks with respect to trade accounts receivables are limited due to the diversity of customers comprising Telular’s customer base. For international sales, Telular generally receives payment in advance of shipment or irrevocable letters of credit that are confirmed by U.S. banks. Telular performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible. Credit risks associated with trade accounts payable are limited due to the following: (1) a significant amount of Telular’s purchases are from its contract manufactures with whom it has agreements with; (2) substantially all of Telular’s significant purchases are done with accepted purchase orders and (3) substantially all of Telular’s payments to its vendors are made in U.S. currency. In determining the fair value of its financial instruments, Telular uses Level 1 guidance in which quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets.
 
 
7

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)
 
Income Taxes
Telular utilizes the liability method of accounting for income taxes whereby it recognizes deferred tax assets and liabilities for future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets are reduced by a valuation allowance if, based upon management’s estimates, it is more likely than not, that a portion of the deferred tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances. Telular recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement with the relevant tax authority. Telular does not include interest and penalties related to income tax matters in tax expense.

Earnings Per Share
Basic earnings per share of common stock is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is computed by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents, which relate to the assumed exercise of stock options and warrants and the assumed conversion of restricted stock units. In the event of a net loss for the period, both basic and diluted earnings per share of common stock are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

 The following table reconciles the dilutive effect of common stock equivalents:

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Common Shares:
                       
Basic weighted average common shares outstanding
    16,044,418       15,030,397       15,600,956       14,976,290  
Dilutive effect of stock options
    750,580       742,427       705,118       618,746  
Dilutive effect of restricted stock units
    293,773       221,826       297,697       223,050  
Dilutive effect of warrants
    -       -       -       -  
Total
    17,088,771       15,994,650       16,603,771       15,818,086  
                                 
                                 
Net Income
  $ 1,172     $ 111     $ 2,796     $ 501  
                                 
Income per common share:
                               
Basic
  $ 0.07     $ 0.01     $ 0.18     $ 0.03  
Diluted
  $ 0.07     $ 0.01     $ 0.17     $ 0.03  

 
The following stock options, restricted stock units and warrants were excluded as being antidilutive from the shares outstanding used to compute diluted earnings per share:
 
   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Stock options
    -       219,500       193,000       466,204  
Restricted stock units
    13,815       -       37,487       106,211  
Warrants
    50,000       50,000       50,000       50,000  
      63,815       269,500       280,487       622,415  
 
 
8

 

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)

Stock Based Compensation
Telular has a Stock Incentive Plan, a 2008 Employee Stock Incentive Plan and a Non-Employee Director Stock Incentive Plan. The cost of stock options granted is calculated based on their grant date fair value and recognized over the vesting period.  The fair value of stock options granted and warrants issued is estimated at the grant date or issuance date using a Black-Scholes stock option valuation model.  Key factors in determining the valuation of a grant under the Black-Scholes model are: a volatility factor of the expected market price of Telular’s common stock, a risk-free interest rate, a dividend yield on Telular’s common stock and the expected term of the option.

On November 8, 2011 Telular awarded to officers and employees 187,400 stock options and 59,300 performance stock units (“PSUs”). Telular valued the stock options granted at $333 using the Black-Scholes valuation method. The PSUs were valued at $356 based on the price of Telular’s common stock on the date of issuance. The stock options will vest over a three year period and the cost will be taken as a charge to operating expenses over the vesting period. The PSUs will be earned based on the level of achievement of certain fiscal 2012 performance measures and will vest ratably from the grant date through September 30, 2014. For fiscal 2012 these performance measures include the achievement of targeted Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Non-Cash Compensation (“Adjusted EBITDA”) and the achievement of strategic revenue levels. The cost of these PSUs will be taken as a charge to operating expenses on a pro-rata basis over the vesting period. At September 30, 2012, the level of achievement of the performance measures will be determined and the actual amount of PSUs earned will be finalized.

Also on November 8, 2011, Telular made a final determination of the performance measures related to the PSUs issued to officers and employees on February 1, 2011.  As a result, an additional 3,177 PSUs were issued to officers and employees. These PSUs were valued at $21 and include the true-up of DEUs valued at $1.

On November 29, 2011 in conjunction with the payment of Telular’s regular quarterly dividend, Telular issued 7,146 dividend equivalent units (“DEUs”) to director and employee holders of restricted stock units and PSUs. These DEUs were valued at $51 and were recorded as a dividend on common stock.

On January 31, 2012 Telular awarded 26,915 RSUs to directors, valued at $225, based on the price of Telular’s common stock on the date of issuance.  The RSUs will vest over a one year period and the cost will be taken as a charge to operating expenses on a pro-rata basis over the vesting period.

On February 1, 2012 Telular awarded 46,800 PSUs to officers and employees of SkyBitz, Inc. (“SkyBitz”).  The PSUs were valued at $410 based on the price of Telular’s common stock on the date of issuance.  The PSUs will be earned based on the level of achievement of targeted Adjusted EBITDA over the nine months ended September 30, 2012 and will vest ratably from the grant date through September 30, 2014.  The cost of these PSUs will be taken as a charge to operating expenses on a pro-rata basis over the vesting period. At September 30, 2012, the level of achievement of the performance measures will be determined and the actual amount of PSUs earned will be finalized.

On February 21, 2012 in conjunction with the payment of Telular’s regular quarterly dividend, Telular issued 6,725 DEUs to director and employee holders of RSUs and PSUs. These DEUs were valued at $53 and were recorded as a dividend on common stock.

 
9

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)

Telular recognized stock-based compensation expense as follows:

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Stock based compensation:
                       
Stock options
  $ 113     $ 129     $ 245     $ 246  
Restricted stock
    253       198       494       291  
Common stock
    -       -       -       475  
    $ 366     $ 327     $ 739     $ 1,012  
 
Fair Value of Financial Instruments
At March 31, 2012 and September 30, 2011, Telular’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable and bank borrowings. The carrying values reported in the consolidated balance sheet for these financials instruments approximate their fair value because of their short maturities.

Warranty
Telular provides warranty coverage for a period of 12 months on its tank monitoring and asset tracking equipment, 15 months on terminal products and 24 months on event monitoring products from the date of shipment.  A provision for warranty expense is recorded at the time of shipment and adjusted quarterly based on historical warranty experience.

The following table is a summary of Telular’s accrued warranty obligations;
 
   
Six Months Ended March 31,
 
   
2012
   
2011
 
             
Balance at the beginning of the period
  $ 115     $ 95  
Opening balance from acquisition during the period
    1,677       -  
Warranty expense during the period
    230       101  
Warranty payments made during the period
    (158 )     (115 )
Balance at the end of the period
  $ 1,864     $ 81  

Segment Reporting
Telular reports segment information based on the “management” approach.  The management approach designates the internal reporting used by management for making decisions regarding resource allocations and assessing performance as the source of Telular’s reportable segments. Information about Telular’s major customers and geographic areas is also disclosed.

Dividends and Common Stock Issued
In November 2011, Telular declared a regular quarterly dividend of $0.11 per share of common stock payable on November 29, 2011to shareholders of record on November 22, 2011. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $51. The DEUs were then converted to RSUs at a per-unit value of $7.09, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of November 29, 2011. Telular paid $1,670 for the cash dividend and issued 7,146 RSUs.
 
 
10

 

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)
 
In February 2012, Telular declared a regular quarterly dividend of $0.11 per share of common stock payable on February 21, 2012, to shareholders of record on February 14, 2012. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $53. The DEUs were then converted to RSUs at a per-unit value of $7.91, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of February 21, 2012. Telular paid $1,774 for the cash dividend, recorded a dividend payable of $38 and issued 6,725 RSUs.

Recently Issued Accounting Pronouncements
In the second quarter of fiscal 2012, there were no accounting standard updates that affected Telular.

3.            Business Combinations

SkyBitz Acquisition
On February 1, 2012, Telular purchased 100% of the capital stock of SkyBitz. SkyBitz provides mobile resource management solutions focusing on over-the-road tracking via satellite. SkyBitz’s satellite-based technology provides real-time visibility of many asset types, including truck trailers, intermodal containers, sea-going containers, rail cars, power generators and rental equipment.  The purchase was accounted for using the purchase method in accordance with ASU: Business Combinations (Topic 805), (“ASU 805”). Under the terms of the agreement, Telular paid consideration of approximately $42,783, comprised of $34,023 in cash and 1,000,024 shares of Telular’s common stock, valued at approximately $8,760. The cash portion of the consideration was funded with a $30,000 five-year term loan from SVB and approximately $4,023 from Telular’s cash on hand.

The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed at the date of the acquisition:
 
Cash and cash equivalents
  $ 2,334  
Accounts receivable, net
    3,706  
Inventories, net
    1,589  
Deferred tax assets - current
    2,216  
Other current assets
    667  
Property and equipment, net
    1,276  
Customer relationships
    9,080  
Developed technology
    6,130  
Tradenames and trademarks
    2,730  
Backlog
    5,560  
Patents and other long term assets
    374  
Deferred tax assets - long term
    11,362  
Goodwill
    12,216  
Total assets acquired
    59,240  
         
Accounts payable
    1,272  
Accrued liabilties
    4,813  
Deferred tax liabilities - current
    827  
Deferred revenue
    280  
Deferred tax liabilities - long term
    9,251  
Other long term liabilities
    14  
Total liabilities assumed
    16,457  
Net assets acquired
  $ 42,783  
 
 
11

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)

The following summarized unaudited pro forma financial information for the full year ended September 30, 2011 and the six months ended March 31, 2012, assumes the acquisition occurred as of October 1, 2010 and October 1, 2011, respectively:

   
Twelve Months Ended
   
Six Months Ended
 
   
September 30, 2011
   
March 31, 2012
 
             
Net revenues
  $ 85,297     $ 46,216  
Net income
  $ 3,593     $ 3,471  
Basic income per common share
  $ 0.22     $ 0.21  
Diluted income per common share
  $ 0.21     $ 0.20  
 
Telular purchased SkyBitz on February 1, 2012.  The financial results of its operations were fully consolidated with Telular’s results of operations for the months of February and March in the second quarter of fiscal 2012.

The pro forma results include adjustments for amortization of intangibles, the reduction of interest expense related to SkyBitz debt which was fully paid in conjunction with the purchase, the addition of interest expense related to the new loan Telular incurred as part of the funding of the purchase of SkyBitz, and the adjustment of income tax expense. The pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had actually been completed on October 1, 2010 and October 1, 2011, nor are they necessarily indicative of future consolidated results of operations.

SMARTank Acquisition
On January 7, 2011, Telular acquired certain assets and assumed certain liabilities underlying the SMARTank line of business of SmartLogix, Inc. (“SmartLogix”), Telular’s largest value added reseller of TankLink tank monitoring solutions.  Telular also entered into a Sales and Service Agreement (“Service Agreement”) with SmartLogix. The purchase was accounted for using the purchase method in accordance with ASU 805.

Pursuant to the Asset Purchase Agreement (the “Agreement”), the aggregate purchase price was $7,921, which consisted of: $2,294 of cash paid directly to SmartLogix, $4,484 applied to the existing trade receivable balance due to TankLink from SmartLogix, and $1,143 of accrued earn-outs.  Under the Agreement, Telular agreed to purchase certain net working capital assets for cash, such as trade accounts receivables, inventory, leased monitoring equipment, and trade accounts payable and deferred revenue.  The total value of the net working capital of approximately $678 is included in the total cash paid to SmartLogix.  Pursuant to an earn-out provision contained in the Agreement, SmartLogix has the ability to earn a total of $2,400 over a two year period depending on the future performance of SMARTank.  Changes in the estimates of the amount of earn-outs that may be paid are taken to operations. At March 31, 2012 the accrued earn-outs totaled $251 and represent Telular’s best estimate of the actual amount of this future liability.

Under the Service Agreement, Telular appointed SmartLogix as an exclusive sales representative for the purpose of selling tank monitoring equipment to customers in the fuels and lubricants market.  Pursuant to the terms in the Service Agreement, Telular will pay SmartLogix a 20% commission on gross product revenue, as well as a commission on service revenue earned on the monitoring units sold, typically calculated as three months of related service revenue.  The initial term of the Service Agreement is two years and may be renewed for an additional year.
 
 
12

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)

The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition:

Accounts receivable
  $ 438  
Inventories
    436  
Property and equipment
    94  
Customer relationships
    2,810  
Non-compete agreement
    20  
Tradename
    70  
Goodwill
    4,343  
Total assets acquired
    8,211  
         
Accounts payable - Vendors
    30  
Deferred revenue
    260  
Total liabilities assumed
    290  
Net assets acquired
  $ 7,921  
 
4.            Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable represents sales made to customers on credit.  An allowance for doubtful accounts is maintained based upon estimated losses resulting from the inability of customers to make payments for goods and services.  Trade accounts receivable, net of the allowance for doubtful accounts, are as follows:

   
March 31,
   
September 30,
 
   
2012
   
2011
 
             
             
Trade receivables
  $ 10,856     $ 5,898  
Less: allowance for doubtful accounts
    (390 )     (39 )
    $ 10,466     $ 5,859  

The allowance for doubtful accounts increased by $351 primarily as a result of including SkyBitz’s allowance for doubtful accounts and identifiying certain customers who have outstanding accounts receivable balances that are significantly past due.

5.            Inventories

Inventories consist of the following:

   
March 31,
   
September 30,
 
   
2012
   
2011
 
             
             
Raw materials
  $ 1,041     $ 1,559  
Finished goods
    4,161       2,095  
      5,202       3,654  
Less: reserve for obsolescence
    (544 )     (649 )
    $ 4,658     $ 3,005  
 
 
13

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)

The reserve for obsolescence decreased by $105 from fiscal year end 2011 to March 31, 2012 primarily due to $415 of disposal of parts that were no longer being used for the production of current finished goods, offset by the inclusion of SkyBitz’s reserve for obsolescence.

6.            Property and Equipment

Property and equipment consists of the following:

 
 
March 31,
   
September 30,
 
   
2012
   
2011
 
             
             
Furniture and fixtures
  $ 317     $ 108  
Computer equipment
    4,773       3,177  
Machinery and equipment
    7,683       3,769  
Leasehold improvements
    728       461  
Product certification costs
    571       546  
      14,072       8,061  
Less accumulated depreciation and amortization
    (10,628 )     (5,779 )
Property and equipment, net
  $ 3,444     $ 2,282  
 
7.            Goodwill and Intangible Assets

Goodwill balances as of March 31, 2012 and September 30, 2011 are as follows:

Balance at September 30, 2011
  $ 7,502  
Additional goodwill
    12,216  
Impairment of goodwill
    -  
Balance at March 31, 2012
  $ 19,718  
 
The increase in goodwill is attributable to Telular’s acquisition of SkyBitz. Telular evaluates the fair value and recoverability of the goodwill annually during Telular’s third quarter or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. During the second quarter of fiscal 2012, there were no events or changes in circumstances that would indicate that the carrying value of goodwill may not be recoverable.

During the first quarter of fiscal 2012, Telular incurred $7 of costs related to new patents. These costs are not complete, and therefore have not yet been amortized.
 
 
14

 

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)

Telular is amortizing its intangible assets over a period of 36 to 198 months.  The balances are as follows:
 
   
Weighted Average
   
March 31, 2012
   
September 30, 2011
 
   
Useful Life
         
Accumulated
               
Accumulated
       
   
(in months)
   
Cost
   
Amortization
   
Net
   
Cost
   
Amortization
   
Net
 
                                           
Customer Relationships
    70.6     $ 13,120     $ (1,595 )   $ 11,525     $ 4,040     $ (971 )   $ 3,069  
Developed Technology
    53.3       6,450       (468 )     5,982       320       (192 )     128  
Backlog
    36.0       5,560       (309 )     5,251       -       -       -  
Tradename
    58.2       2,870       (205 )     2,665       140       (96 )     44  
Patents & Trademarks
    197.7       524       (76 )     448       116       (18 )     98  
License Agreement
    75.0       150       (47 )     103       150       (35 )     115  
Non-Compete Agreement
    36.0       20       (8 )     12       20       (5 )     15  
Total intangible assets
          $ 28,694     $ (2,708 )   $ 25,986     $ 4,786     $ (1,317 )   $ 3,469  
  
As a result of the acquisition of SkyBitz, Telular recorded $23,500 of intangible assets consisting of $9,080 of customer relationships, $6,130 of developed technology, $5,560 of backlog and $2,730 of tradenames and trademarks. The amortization expense for the three months ended March 31, 2012 and 2011 was $1,123 and $224 respectively. Amortization expense for the six months ended March 31, 2012 and 2011 was $1,346 and $296 respectively. Telular reviews for the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. There were no events or changes in circumstances during the three months ended March 31, 2012 that would indicate that the carrying value of intangibles may not be recoverable.

Amortization expense for the remaining estimated useful life of the acquired intangible assets is as follows for the years ending September 30:

Fiscal Year
     
2012
  $ 3,153  
2013
    6,281  
2014
    6,125  
2015
    4,488  
2016
    3,225  
Thereafter
    2,714  
    $ 25,986  
 
8.            Income Taxes

Telular has provided for income taxes based on U.S tax laws and rates. Deferred tax assets and liabilities are determined based on the difference between GAAP financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. For the three and six months ended March 31, 2012 and 2011, income tax expense consisted of the following:

 
15

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)

   
For the Three Months
   
For the Six Months
 
   
Ended March 31,
   
Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Current:
                       
Federal
  $ 595     $ 32     $ 643     $ 49  
State
    58       38       106       46  
Current income tax provision
    653       70       749       95  
                                 
Deferred:
                               
Federal
    78       462       925       657  
State
    (4 )     823       (3 )     845  
Deferred income tax provision
    74       1,285       922       1,502  
    $ 727     $ 1,355     $ 1,671     $ 1,597  

The decrease in Telular’s income tax expense for the three months ended March 31, 2012 over the corresponding period in 2011 is due to an increase in the valuation allowance against net deferred tax assets during the second quarter of fiscal 2011 due to changes in tax provisions in the State of Illinois. In January of 2011, Illinois raised its corporate income tax rate to 9.5% from 7.3%. Additionally, Illinois suspended the utilization of net operating losses (“NOLs”) for three years. Telular adopted a tax strategy to minimize current tax liabilities to the State of Illinois. The increase in Telular’s income tax provision for the six months ended March 31, 2012 over the corresponding period in 2011 is due to increase in taxable income.

The provision for income taxes differs from the amount obtained by applying the statutory rate as follows for the three and six month periods ended March 31:

   
For the Three Months
   
For the Six Months
 
   
Ended March 31,
   
Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Provision for income taxes at statutory rate
    34.0 %     34.0 %     34.0 %     34.0 %
Increases (decreases) in taxes resulting from:                                
Valuation allowance
    0.0 %     82.0 %     0.0 %     57.3 %
Acquisition costs
    1.7 %     0.0 %     1.7 %     0.0 %
Effect of state rate change
    0.0 %     -26.7 %     0.0 %     -18.6 %
State taxes net of federal benefit
    1.9 %     2.3 %     1.5 %     2.5 %
Other
    0.7 %     0.9 %     0.2 %     1.0 %
      38.3 %     92.5 %     37.4 %     76.2 %

Telular recorded a tax provision of $727 for the three months ended March 31, 2012 as compared to a tax provision of $1,355 for the three months ended March 31, 2011, representing effective tax rates of 38.3% and 92.5% respectively. The difference between Telular’s effective tax rate and the 34% federal statutory rate in the current period is due primarily to the acquisition costs related to the purchase of SkyBitz which are not deductible for tax.  The difference between Telular’s effective tax rate and the 34% statutory rate for the three months ended March 31, 2011 is due primarily to the change in valuation allowance and state taxes described above. Telular recorded a tax provision of $1,671 for the six months ended March 31, 2012 as compared to a tax provision of $1,597 for the same period of fiscal 2011, representing effective tax rates of 37.4% and 76.2%, respectively. The difference between Telular’s effective tax rate and the 34% federal statutory rate for the first six months of fiscal 2012 is due primarily to the acquisition costs related to the purchase of SkyBitz which are not deductible for tax and the effect of state taxes.
 
 
16

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of Telular’s deferred tax assets are as follows:

   
March 31,
   
September 30,
 
   
2012
   
2011
 
Deferred tax assets:
           
Reserve for inventory obsolescence
  $ 145     $ 231  
Allowance for doubtful accounts
    143       13  
Fixed assets
    24       5  
Intangible assets
    136       43  
Non-cash compensation
    1,693       1,698  
Alternative minimum tax credits
    453       324  
Accrued liabilities
    937       427  
Deferred revenue net of deferred cost of sales
    363       -  
Net operating loss carryfowards
    46,070       35,810  
Other
    114       1  
Total deferred tax assets
    50,078       38,552  
                 
Deferred tax liabilities:
               
Intangible assets
    (8,804 )     (282 )
Non-cash compensation
    -       -  
Fixed assets
    (368 )     (29 )
Production certification costs
    (107 )     (118 )
Total deferred tax liabilities
    (9,279 )     (429 )
Net deferred tax asset
    40,799       38,123  
Less valuation allowance
    5,709       5,612  
Net deferred tax assets
  $ 35,090     $ 32,511  
 
Telular files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions.  As of October 1, 2010, Telular is no longer subject to U.S. Federal examinations by taxing authorities for years prior to 2008. Income tax returns for fiscal years 2009, 2010 and 2011 are still open for examination. However, utilization of net operating loss carryforwards that were generated in years prior to 2008 may result in a prior tax year being open for IRS examination.

Based on Internal Revenue Code Section 382, changes in the ownership of Telular may limit the utilization of NOLs of Telular. Telular has determined, as of March 31, 2012, that there are no limitations on the utilization of its NOLs.  SkyBitz was purchased on February 1, 2012.  SkyBitz, as a result of ownership changes prior to Telular’s acquisition, has two limitations on the utilization of its NOLs.  Telular’s acquisition has resulted in another limitation. Telular has made a preliminary assessment of the future utilization of SkyBitz’s NOLs. Approximately $11,631 of SkyBitz’s NOLs would expire unused as a result of its pre-Telular acquisition limitations. Telular estimates that there would be no further utilization limitations in the future.  Accordingly, a deferred tax asset was recorded only for those NOLs Telular believes it will be able to utilize.  Telular’s estimate may be revised subsequent to SkyBitz’s final tax return filing.
 
 
17

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)
 
9.            Debt
 
On January 22, 2011, Telular executed an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with SVB.  The Amended Loan Agreement provided for a two year term with total maximum borrowings of $10,000. Telular had the option under the Amended Loan Agreement to have interest calculated on SVB’s prime rate (with a floor of 5%) up to a maximum of prime plus 0.5% or calculated on the current LIBOR rate up to a maximum of LIBOR plus 3.0%.  The Amended Loan Agreement also permitted Telular to borrow up to $7,000 under a revolving line of credit, with the ability to convert up to $5,000 of borrowings under the revolver into a three year term loan.   The Amended Loan Agreement required Telular to comply with certain financial covenants such as maintaining certain levels of assets to liabilities and minimum levels of cash flow generation. Telular had no outstanding borrowings under the Amended Loan Agreement as of February 1, 2012, on which date Telular and SVB amended the Amended Loan Agreement in connection with the SkyBitz acquisition.

Simultaneous with the acquisition of SkyBitz on February 1, 2012, Telular executed the Second Amended and Restated Loan and Security Agreement with SVB (the “Second Amended Loan Agreement”).  Under the Second Amended Loan Agreement, Telular borrowed $30,000 in the form of a term loan which was applied as a portion of the cash consideration for the acquisition of SkyBitz. The term loan matures on February 1, 2017, the 5th anniversary of the amendment.  The loan requires quarterly payments of interest and principal, with annual principal amortization of 10%, 15%, 20%, 20% and 25% in each of the first five years, respectively, with the final 10% due on the maturity date.  At the closing of the SkyBitz acquisition, the interest rate was 3.1%. At the option of Telular, interest will be incurred based on a rate ranging from 2.25% to 2.75% (depending on the calculation of the senior leverage ratio) above the published LIBOR rates, or at a rate of .25% to .75% above the Prime interest rate.  The Second Amended Loan Agreement requires Telular  to comply with certain financial covenants such as maintaining a maximum senior leverage ratio and a minimum fixed charge coverage ratio.  The loan is secured is secured by substantially all of the assets of Telular. At March 31, 2012 the outstanding loan balance was $30,000 and Telular was in compliance with all financial covenants. As of March 31, 2012, $338 of loan fees and related costs were paid by Telular and are being amortized over the term of the loan.

10.           Commitments

Telular has entered into agreements with Speedy-Tech Electronics Ltd. (“Speedy”) and Creation Technologies Wisconsin Inc. (“Creation”) to manufacture final assemblies of Telular’s products.  Creation also provides fulfillment services to Telular.  The agreement with Speedy may be terminated upon 90 days prior written notice to either party. The agreement with Creation may be terminated upon six months prior written notice to either party.  Under both agreements, Telular has the right to offset amounts due to Telular against amounts owed to the respective vendor by Telular.  As of March 31, 2012, Telular had $4,399 and $1,594 in open purchase commitments with Speedy and Creation, respectively.  Telular, through SkyBitz, has entered into an agreement with Flextronics International Ltd (“Flextronics”) to manufacture final assemblies of SkyBitz’s products.  This agreement with Flextronics automatically renews annually for one year terms. The agreement with Flextronics may be terminated by either party upon written notice delivered 90 days prior to renewal.  As of March 31, 2012, SkyBitz had $321 in open purchase commitments with Flextronics. Additionally, SkyBitz has entered into a five year agreement with a key supplier to manufacture modems that are included in SkyBitz’s new line of products.  As of March 31, 2012, SkyBitz had $307 in open commitments with this key supplier.

11.           Segment Information and Geographic Data

Telular reports segment information based on the “management” approach.  The management approach designates the internal reporting used by management for making decisions regarding resource allocations and assessing performance as the source of Telular’s reportable segments.

Telular manages its business primarily along distinct product functions. Accordingly Telular has identified its reportable operating segments as Event Monitoring (“EM”) and Asset Tracking (“AT”). Both segments sell M2M products and monitoring services.  The EM segment focuses on products and services that monitor discrete events and reports those events utilizing cellular transceiver devices.  The AT segment provides mobile resource management solutions focusing on over-the-road tracking via satellite.

 
18

 

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)

Telular evaluates the performance of its operating segments based on net sales, margins, net income before taxes and Adjusted EBITDA, a non-GAAP measure. Net sales are based on the types of products and services sold. Income before taxes for each segment includes net sales to third parties, related costs of sales, operating expenses directly attributable to the segment and other income and expenses directly attributable to the segment.  Costs excluded from segment income before taxes include the following: (1) certain corporate costs directly related to being a publicly traded company, such as exchange fees; (2) corporate costs incurred for the benefit of the consolidated entity, such as insurance, interest expense relate to corporate debt and directors’ expenses; (3) a portion of expenses related to corporate level employees, such as salaries and related benefits; and, (4) income taxes which are managed on a consolidated basis. Segment assets exclude cash and cash equivalents which are managed on a consolidated basis.

Summary information by operating reportable segment for the three and six months ended March 31, 2012 is as follows:
 
   
For the Three Months Ended March 31, 2012
 
   
Event
   
Asset
             
   
Monitoring
   
Tracking
   
Corporate
   
Total
 
                         
Revenues
  $ 13,861     $ 5,933     $ -     $ 19,794  
                                 
Net income (loss) before income taxes
    3,656       (592 )     (1,165 )     1,899  
                                 
Depreciation and amortization
    504       1,009       -       1,513  
                                 
Property and equipment additions
    160       158       -       318  
 
   
For the Six Months Ended March 31, 2012
 
   
Event
   
Asset
                 
   
Monitoring
   
Tracking
   
Corporate
   
Total
 
                                 
Revenues
  $ 27,566     $ 5,933     $ -     $ 33,499  
                                 
Net income (loss) before income taxes
    7,332       (592 )     (2,273 )     4,467  
                                 
Depreciation and amortization
    1,000       1,009       -       2,009  
                                 
Property and equipment additions
    412       158       -       570  
 
   
As of March 31, 2012
 
   
Event
   
Asset
                 
   
Monitoring
   
Tracking
   
Corporate
   
Total
 
                                 
Identifiable assets
  $ 53,594     $ 48,070     $ 10,147     $ 111,811  
 
 
19

 
 
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited, in thousands, except share data)

Telular exports its products to three regions around the world:  Central America / Latin America (“CALA”), Europe / Africa (“EA”) and Asia / Middle East (“AME”).  Export sales are summarized in the tables below:

Three Months Ended March 31, 2012 and 2011:  
                                     
   
Export Sales by Region
           
   
CALA
   
EA
   
AME
   
Total
   
Domestic
 
Total Sales
 
                                     
Fiscal 2012 sales
  $ 15     $ -     $ -     $ 15     $ 19,779     $ 19,794  
Region's sales as % of total export sales
    100.00 %     0.00 %     0.00 %     100.00 %                
Region's sales as % of Total Telular sales
    0.08 %     0.00 %     0.00 %     0.08 %     99.92 %     100.00 %
                                                 
Fiscal 2011 sales
  $ 184     $ 4     $ 5     $ 193     $ 12,299     $ 12,492  
Region's sales as % of total export sales
    95.34 %     2.07 %     2.59 %     100.00 %                
Region's sales as % of Total Telular sales
    1.47 %     0.03 %     0.04 %     1.54 %     98.46 %     100.00 %
 
Six Months Ended March 31, 2012 and 2011:                                                
                                                 
   
Export Sales by Region
               
   
CALA
   
EA
   
AME
   
Total
   
Domestic
 
Total Sales
 
                                                 
Fiscal 2012 sales
  $ 36     $ -     $ -     $ 36     $ 33,463     $ 33,499  
Region's sales as % of total export sales
    100.00 %     0.00 %     0.00 %     100.00 %                
Region's sales as % of Total Telular sales
    0.11 %     0.00 %     0.00 %     0.11 %     99.89 %     100.00 %
                                                 
Fiscal 2011 sales
  $ 184     $ 4     $ 19     $ 207     $ 24,375     $ 24,582  
Region's sales as % of total export sales
    88.89 %     1.93 %     9.18 %     100.00 %                
Region's sales as % of Total Telular sales
    0.75 %     0.01 %     0.08 %     0.84 %     99.16 %     100.00 %
 
 
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TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
 (Unaudited, in thousands, except share data)

12.           Major Customers

For the three months ended March 31, 2012 and 2011, Telular derived approximately $4,712 (24%) and $4,790 (38%), respectively, of its total revenue from one customer located in the United States.

For the six months ended March 31, 2012 and 2011, Telular derived approximately $9,840 (29%) and $9,481 (39%), respectively, of its total revenue from one customer located in the United States.

Trade accounts receivable from this customer totaled $1,871 at March 31, 2012 and $1,795 at September 30, 2011.

13.          Supplemental Disclosures of Cash Flow Information

   
Six Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Supplemental disclosure of cash flow information:
           
Interest paid
  $ 79     $ -  
Income taxes paid
  $ 222     $ 144  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Dividend equivalent units awarded to holders of restricted common stock units - 14,051 and 48,265 shares, respectively
  $ 105     $ 262  
Restricted stock units converted to common stock - 98,192 and 0 shares, respectively
  $ -     $ -  
 
14.          Subsequent Events

On May 3, 2012, Telular announced the declaration of a regular quarterly dividend of $0.11 per share, payable on May 22, 2012 to shareholders of record at the close of business on May 15, 2012. Telular estimates the cost of this dividend to be approximately $1,826 depending on the number of shares outstanding at the time of the dividend.

 
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except when referring to ARPUs, units or share data)

Forward Looking Information

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Telular includes certain estimates, projections and other forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 in its reports and in other publicly available material. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements. These statements reflect management’s judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, customer growth and retention, pricing, operating costs and the economic environment.

The words “estimate”, “project”, “intend”, “expect”, “believe”, “target” and similar expressions are intended to identify forward-looking statements.  Forward-looking statements are found throughout Management’s Discussion and Analysis.  The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report.  Except as required by law, Telular is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events.

Introduction

Telular creates services that utilize wireless networks for the remote monitoring, control, or tracking of equipment and facilities. Telular’s software-as-a-service (“SaaS”) offerings are created through Telular’s competence in developing complex software systems and data communication devices that utilize the data transport capabilities of today’s commercial wireless networks. To enable these services, Telular is a significant reseller of such commercial wireless services.

Telular generates a majority of its revenue through the delivery of machine-to-machine (“M2M”) services such as event monitoring service and asset tracking through its Telguard, TankLink, and SkyBitz business lines. A portion of its revenue comes from the sale of specialty cellular hardware products designed by Telular for use exclusively with its M2M services. Telular's operating expense levels are based in large part on its expectations for its future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and Telular's operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Item 1A of this Quarterly Report Form 10-Q.

The market for Telular’s products is primarily in North and South America and consists of a number of vertical applications including Telguard security alarm conveyance; TankLink tank level monitoring; SkyBitz asset tracking, and general purpose wireless terminals for voice calls and Internet access. These markets are addressed primarily through indirect channels consisting of third party Value Added Resellers (“VARs”), distributors, representatives and agents along with in-house sales and customer support teams.  A direct sales model is utilized for certain large customers.  Fabrication of Telular’s products is accomplished through contract manufacturing. Contract manufacturers in China, Mexico, and the United States make and test all hardware products.
 
The following details areas of product delivery and research either undertaken or anticipated in fiscal 2012.

Telguard - Telular’s engineering team continues to update the Telguard product and service portfolio in various ways that will attract incremental demand from our security dealer customers. In fiscal 2011, Telular launched new features, such as Telguard Interactive Services which let end users remotely arm and disarm their security systems. In addition, we launched Telguard Voice, which allowed security dealers to speak with their end user customers in the event that an alarm condition was triggered. Perhaps the most significant development activity was the conversion of our full Telguard hardware product lines to 3G/4G capability. While 3G/4G capability was launched in early fiscal 2012, most of the development was accomplished in fiscal 2011. Product innovation within this space is important for the long-term success of Telguard and we expect to continue to enhance our Telguard software platform and underlying hardware products going forward. In 2012, the Telguard Message Center (“TMC”) server platform, which is the underlying core software system for the Telguard service, was enhanced such that Telular can offer service to dealers in Canada.  Furthermore, the architecture of TMC will be updated so that it can support even more end-user, feature development and increased traffic volumes in the future.

 
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TankLink – The fiscal 2009 acquisition of TankLink Corp. brought Telular a successful wireless communicator product line for tank level monitoring. In early fiscal 2011, the acquisition of TankLink end-user accounts from our key value added reseller, SmartLogix, Inc., gave Telular more direct control over the TankLink end users as well as improved profitability. Enhancements to the TankLink software platform, TankData Online, have been made during 2011.  Telular plans to further enhance both the software platform and the hardware product during fiscal 2012, to  include a new hardware device which will be more suitable for smaller tank vessels and will operate on 3G/4G networks.

SkyBitz – Telular closed on the acquisition of SkyBitz, Inc. (“SkyBitz”), on February 1, 2012.  SkyBitz  is a leading provider of mobile resource management (“MRM”) solutions focusing on tracking and management of truck trailers, intermodal containers, sea-going containers, rail cars, power generators and rental equipment.  SkyBitz’s unique Global Locating System (“GLS”) satellite-based technology provides real-time visibility of many asset types.  SkyBitz addresses a multi-billion dollar market opportunity by reducing operating costs, increasing efficiency and aiding in the compliance with regulatory requirements across an increasingly complex set of supply chains and business ecosystems.

Competition

Telular believes its advantages over the competition include:

Greater Focus –Telular is focused on creating M2M solutions, which we develop by combining our historical competency in designing cellular networking electronics and real-time transaction processing software with the data transport capabilities of commercial wireless networks. This focus allows us to develop high functioning software and products best suited to our customers’ needs, resulting in products that are easier to install and maintain and are more reliable.  Our primary competitors have the bureaucracy normally associated with large companies and the management distraction associated with overseeing a broad array of products and services; many of which are unrelated to one another.

More Experience – Telular has been in the cellular electronics business for over 20 years. Telular has been creating and operating real-time transaction processing software for over a decade and understands the importance of high reliability in that regard. We have deployed products in more than 130 countries worldwide, reflecting the quality, reliability and innovation of our product portfolio.

Broader Product line –Telguard, our largest line of business, includes targeted software features and a more diverse set of hardware products than any of our competitors and we believe this gives our customers a greater selection of features and hardware devices from which to choose.

Economies of Scale –Telguard’s fully integrated end-to-end cellular solution is now utilized by over 589,000 individual subscribers, which helps to minimize costs on a per user basis.  This large customer base also reflects our significant experience and demonstrates credibility to the market.

Service and Support – Telular provides customers with comprehensive customer service and product support. We believe that our commitment and ability to provide superior service differentiates us from our competition.

Financial Strength – Telular is currently generating cash from operations. We believe that this financial strength gives us an ability to develop new products and services and defend against competitive initiatives very well.

There are several firms that compete with Telular’s Telguard products and services.  These primary competitors include:  Honeywell, DSC, Numerex and Alarm.com.  Based on its own internal estimates, Telular believes it has a 15-20% market share for all currently active cellular alarm communicators in the United States, having introduced the first such device for digital cellular networks in 2005.  Demand for cellular communicators has once again increased markedly over the past year.  We believe this is due to consumers eliminating traditional telephone lines and therefore, requiring a cellular communicator to enable a home security system.  If this trend continues, Telular believes that Telular and its competitors will continue to see substantial demand for products and related services.

Telular’s Telguard hardware products will only interface with Telular’s proprietary message center, which interprets and forwards any alarms received to Telular’s security monitoring customers in near real-time.  Telular believes its competitive advantages for this service are the fact that its hardware products interface with the vast majority of alarm panels on the market and that installers can quickly activate the hardware and service.
 
 
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There are numerous, small competitors to Telular’s TankLink offering.  The most significant of these is Centeron, a division of Robertshaw Industries, which in turn is a subsidiary of Invensys, Inc.  More often, the TankLink offering competes against the pre-existing, manual methods utilized by tank owners to determine the fill level and reorder timing for products held within tank vessels.  Telular believes the key to growing its TankLink revenue is lowering its prices to the greatest extent possible in order to cost justify implementation of the TankLink solution.

Our SkyBitz asset tracking solutions also have competition from numerous sources, including I.D. Systems, Inc., and Qualcomm.  Telular differentiates its SkyBitz solutions by providing advanced features on the web portal through which its customers receive tracking data, maximizing battery life on the tracking units to minimize the frequency of changing batteries, and through efficient design and manufacturing of its products to enable a low cost solution for its customers.

With regard to the Fixed Cellular Terminals (“FCTs”) sold by Telular, there are a large number of competitors that manufacture and sell FCTs.  They include:  Ericsson, Axesstel, YX and numerous other manufacturers in Asia and elsewhere. Much of the demand for these terminals is outside the United States and demand is concentrated among the large wireless carriers that operate in various countries around the world.  The FCT business is not a focus of Telular.

OUTLOOK

The statements contained in this outlook are based on current expectations. These statements are forward looking, and actual results may differ materially.

Telular expects to expend most of its market and product development resources on the M2M space, including continuing to capitalize on its favorable market position in the domestic security alarm market by virtue of its well-regarded Telguard offerings, as well as continuing to improve overall penetration in the tank level monitoring market through TankLink.  Telular expects SkyBitz to continue to leverage its leading position in the trailer-tracking market while expanding into adjacent markets such as intermodal container and government asset tracking.  Due to uncertainties in international markets and pending new product introductions, Telular is unable to forecast results and resource allocations for FCT products.

UNIT SALES

During the second quarter of fiscal 2012, Telular sold approximately 40,500 billable M2M units, compared with approximately 22,600 billable M2M units for the same period in fiscal 2011. During the first six months of fiscal 2012, Telular sold approximately 72,600 billable M2M units compared with approximately 43,900 billable M2M units for the same period in fiscal 2011. These increases were primarily a result of strong demand for Telguard’s new 3G/4G security products and the inclusion of SkyBitz in the total units sold beginning on February 1, 2012. Our Telguard subscriber base rose in the quarter to approximately 589,100 at March 31, 2012 from 569,100 subscribers at the end of the first quarter of fiscal 2012 and increased by 20,500 subscribers from a March 31, 2011 subscriber base of 568,600..  This increase was due primarily to a strong overall demand for our new Telguard 3G/4G products. Comparing fiscal year 2012 to 2011, Telguard’s subscriber base increased by 20,500 subscribers from a base of approximately 568,600 as of March 31, 2011 to a base of approximately 589,100 at March 31, 2012.  We expect Telguard sales of between 25,000 and 35,000 units on a quarterly basis throughout fiscal 2012. Telular ended the second quarter of fiscal 2012 with combined billable M2M units of 798,400, compared to 588,500 for the same period of fiscal 2011, due in large part to SkyBitz