United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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 þ 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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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

The number of shares outstanding of the Registrant’s common stock, par value $.01, as of January 31, 2010, the latest practicable date, was 14,934,038 shares.

 

 

TELULAR CORPORATION
Index

		Page No.
Part I — Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets December 31, 2009 (unaudited) and September 30, 2009			3
Consolidated Statements of Operations (unaudited) Three Months Ended December 31, 2009 and December 31, 2008			4
Consolidated Statement of Stockholders’ Equity (unaudited) Three Months Ended December 31, 2009			5
Consolidated Statements of Cash Flows (unaudited) Three Months Ended December 31, 2009 and December 31, 2008			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			21
Item 4. Controls and Procedures			22
Item 4T. Controls and Procedures			22
Part II — Other Information
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3. Defaults Upon Senior Securities			22
Item 4. Submission of Matters to a Vote of Security Holders			23
Item 5. Other Information			23
Item 6. Exhibits			24
Signatures			25
Exhibit Index			26
Exhibit 31.1
Exhibit 31.2
Exhibit 32

TELULAR CORPORATION

		December 31,				September 30,
		2009				2009
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	20,770			$	17,904
Trade accounts receivable, net			7,304				7,589
Inventories, net			6,759				7,803
Prepaid expenses and other current assets			444				273
Total current assets			35,277				33,569
Property and equipment, net			2,162				2,193
Other assets:
Goodwill			3,159				3,159
Intangible assets			1,267				1,338
Other			66				66
Total other assets			4,492				4,563
Total assets		$	41,931			$	40,325
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	3,065			$	2,213
Accrued liabilities			2,053				2,665
Income taxes payable			9				25
Total current liabilities			5,127				4,903
Stockholders’ equity:
Common stock; $.01 par value; 75,000,000 shares authorized; 19,387,385 and 19,365,035 shares issued at December 31, 2009 and September 30, 2009, respectively			194				194
Additional paid-in capital			177,286				176,879
Accumulated deficit			(131,515	)			(132,490	)
Treasury stock, at cost; 4,453,347 at December 31, 2009 and September 30, 2009, respectively			(9,161	)			(9,161	)
Total stockholders’ equity			36,804				35,422
Total liabilities and stockholders’ equity		$	41,931			$	40,325

See accompanying notes

TELULAR CORPORATION

		Three Months Ended December 31,
		2009				2008
Revenue
Net product sales		$	6,568			$	5,660
Service revenue			6,454				5,115
Total revenue			13,022				10,775
Cost of sales
Net product cost of sales			5,205				3,959
Service cost of sales			2,601				2,358
Total cost of sales			7,806				6,317
Gross margin			5,216				4,458
Operating Expenses
Engineering and development expenses			1,254				1,248
Selling and marketing expenses			1,614				1,510
General and administrative expenses			1,450				1,659
Total operating expenses			4,318				4,417
Income from operations			898				41
Other income, net			98				76
Net income before taxes			996				117
Provision for income taxes			21				—
Net income		$	975			$	117
Income per common share
Basic		$	0.07			$	0.01
Diluted		$	0.06			$	0.01
Weighted average number of common shares outstanding
Basic			14,922,219				18,768,494
Diluted			15,334,272				18,773,967

See accompanying notes

TELULAR CORPORATION

		Common Stock and																				Total
		Additional Paid-In Capital								Accumulated				Treasury Stock								Stockholders’
		Amount				Shares				Deficit				Amount				Shares				Equity
Balance at September 30, 2009		$	177,073				19,365			$	(132,490	)		$	(9,161	)			(4,453	)		$	35,422
Comprehensive income:
Net income for period from October 1, 2009 to December 31, 2009			—				—				975				—				—				975
Compensation expense — stock options			367				—				—				—				—				367
Stock options exercised			40				22				—				—				—				40
Balance at December 31, 2009		$	177,480				19,387			$	(131,515	)		$	(9,161	)			(4,453	)		$	36,804

See accompanying notes

TELULAR CORPORATION

		Three Months Ended December 31,
		2009				2008
Operating Activities:
Net income		$	975			$	117
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation			211				199
Amortization			71				70
Compensation expense — stock options			367				512
Compensation expense — restricted stock units			11				39
Loss on disposal of operating assets			14				—
Changes in assets and liabilities, net of the effects of acquisition:
Trade accounts receivable			285				1,782
Inventories			1,044				425
Prepaid expenses and other assets			(182	)			545
Trade accounts payable			852				(1,396	)
Accrued and other liabilities			(628	)			(1,583	)
Net cash provided by operating activities of continuing operations			3,020				710
Investing Activities:
Acquisition of property and equipment			(194	)			(231	)
Purchase of business			—				(2,179	)
Net cash used in investing activities of continuing operations			(194	)			(2,410	)
Financing Activities:
Proceeds from the exercise of stock options			40				—
Payment of notes payable			—				(923	)
Purchases of treasury stock, at cost			—				(875	)
Net cash provided by (used in) financing activities of continuing operations			40				(1,798	)
Cash Flows of Discontinued Operations
Net cash provided by operating activities of discontinued operations			—				1,494
Net cash provided by investing activities of discontinued operations			—				94
Net cash provided by discontinued operations			—				1,588
Net increase (decrease) in cash and cash equivalents			2,866				(1,910	)
Cash and cash equivalents, beginning of period			17,904				21,168
Cash and cash equivalents, end of period		$	20,770			$	19,258

See accompanying notes

TELULAR CORPORATION

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with 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 three months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2010. 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, 2009.

2. Summary of Significant Accounting Policies

Financial Instruments

Financial instruments that potentially subject Telular Corporation (the “Company”) to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The credit risks related to cash and cash equivalents are limited to the Company’s investments of cash in money market funds and the possibility that the per unit value of these funds may decline below $1.00. At December 31, 2009 and September 30, 2009, the majority of the Company’s cash and cash equivalents are maintained at one institution, Silicon Valley Bank, and are federally insured only up to $250. The Company 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. At December 31, 2009 and September 30, 2009, the Company had approximately $2,116 or 10%, and $2,148 or 12%, of its cash and cash equivalents invested in U.S. Treasury Reserves, respectively. Credit risks with respect to trade accounts receivables are limited due to the diversity of customers comprising the Company’s customer base. For international sales, the Company generally receives payment in advance of shipment, irrevocable letters of credit that are confirmed by U.S. banks or purchases international credit insurance to reduce its credit risk. The Company performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible.

Income Taxes

The Company 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 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(Unaudited, in thousands, except share data)

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 entirely to the assumed exercise of stock options and warrants. 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 weighted average number of shares of common stock outstanding for computation of basic and diluted earnings per share was as follows:

		Three Months Ended December 31,
		2009				2008
Basic			14,922,219				18,768,494
Diluted			15,334,272				18,773,967

The following stock options and warrants were excluded as being antidilutive from the shares outstanding used to compute diluted earnings per share:

		Three Months Ended December 31,
		2009				2008
Stock options			1,529,246				2,140,008
Warrants			2,326,235				2,523,425
			3,855,481				4,663,433

Stock Based Compensation

The Company has an officer and 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 the Company’s common stock, a risk-free interest rate, a dividend yield on the Company’s common stock and the expected term of the option.

On November 3, 2009, the Company awarded 240,000 stock options to officers and employees, valued at $434, based on the price of the Company’s common stock on the date of issuance. The stock options will vest over a three year period. The cost of these awards will be taken as a charge to operating expenses on a pro-rata basis over the vesting periods.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

(Unaudited, in thousands, except share data)

The Company recognized stock-based compensation expense as follows:

		Three Months Ended December 31,
		2009				2008
Stock based compensation:
Stock options		$	367			$	512
Restricted stock units			11				39
		$	378			$	551

Reclassifications

Certain general and administrative expenses approximating $102 for the first quarter of fiscal 2009 have been reclassed to sales and marketing expenses in the prior year to be consistent with the current year presentation. These expenses relate to a department whose focus and activities have changed and are more properly associated with the sales function. Additionally, non-income business tax expenses have been reclassed from other income and expenses to general and administrative expenses in the prior year to be consistent with the current year presentation.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance for the accounting of distributions to shareholders that have components of stock and cash. The amendments in this guidance clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This guidance is effective for the first interim or annual reporting period ending after December 15, 2009. The Company adopted this guidance in the first quarter of fiscal year 2010. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued authoritative guidance for the accounting and reporting for decreases in ownership of a subsidiary. This guidance clarifies that the scope of the decrease in ownership provision applies to: a subsidiary or group of assets that is a business or nonprofit activity; a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. This guidance also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets. This guidance is effective for the first interim or annual reporting period ending after December 15, 2009. The Company adopted this guidance in the first quarter of fiscal year 2010. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued authoritative guidance for disclosure requirements for fair value measurements. This guidance requires disclosures regarding the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, the reasons for the transfers and the separate presentation of information about purchases, sales issuances and settlements. Additionally, the guidance clarifies the requirements for disclosures about the use of judgment in determining the appropriate classes of assets and liabilities and about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for the first interim or annual reporting period ending after December 15, 2009. The Company has adopted this guidance in this first quarter of fiscal year 2010. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(Unaudited, in thousands, except share data)

3. Business Combination

On October 1, 2008, the Company acquired all of the outstanding common stock of TankLink Corporation (“TankLink”), formerly known as SupplyNet Communications, Inc. TankLink provides private label and branded tank monitoring solutions. Pursuant to the Merger Agreement, the final aggregate purchase price was $2,409 which consisted of: $964 in cash paid directly to shareholders of TankLink; $215 of cash paid directly to the shareholders during fiscal 2009 related to earn-outs, $851 temporary loan from the Company, which was forgiven; $290 of assumed liabilities and $89 in direct costs related to the acquisition. The purchase has been accounted for using the purchase method as required by the Business Combinations Topic of the FASB Accounting Standards Codification.

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:

		December 31,				September 30,
		2009				2009
		(unaudited)
Trade receivables		$	7,333			$	7,609
Less: allowance for doubtful accounts			(29	)			(20	)
		$	7,304			$	7,589

5. Inventories

Inventories consist of the following:

		December 31,				September 30,
		2009				2009
		(unaudited)
Raw materials		$	1,747			$	2,144
Finished goods			5,110				5,750
			6,857				7,894
Less: reserve for obsolescence			(98	)			(91	)
		$	6,759			$	7,803

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

(Unaudited, in thousands, except share data)

6. Goodwill and Intangible Assets

Goodwill as of December 31, and September 30, 2009 was $3,159, of which $1,116 relates to the purchase of TankLink. The Company evaluates the fair value and recoverability of the goodwill annually during the Company’s third quarter or whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. During the first quarter of fiscal 2010, there were no events or changes in circumstance that would indicate that the carrying value of goodwill may not be recoverable.

All intangible assets are related to the acquisition of TankLink. The balances are as follows:

		Weighted Average				December 31, 2009												September 30, 2009
		Useful Life								Accumulated												Accumulated
		(in months)				Cost				Amortization				Net				Cost				Amortization				Net
Customer relationships			84.6			$	1,230			$	(229	)		$	1,001			$	1,230			$	(183	)		$	1,047
Developed technology			60.0				320				(80	)			240				320				(64	)			256
Tradename			24.0				70				(44	)			26				70				(35	)			35
Total intangible assets						$	1,620			$	(353	)		$	1,267			$	1,620			$	(282	)		$	1,338

The Company reviews for the impairment of other intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. There were no events or changes in circumstances during the first quarter of fiscal 2010 that would indicate that the carrying amount of intangibles may not be recovered.

7. Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the use of the liability method of accounting for deferred income taxes. Effective January 1, 2007, the Company implemented ASC 740 Subtopic 10, Accounting for Uncertainty in Income Taxes. ASC 740 Subtopic 10 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. In the first step of the prescribed two-step process, the Company evaluates the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. In the second step, the Company measures the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The Company determined that there is a less than 50% likelihood that its research and development (R&D) tax credits would be sustained upon audit as the Company has not completed gathering the necessary documentation required by the taxing authority to substantiate the credit. The Company has classified $2,486 of the valuation allowance for deferred tax assets as a tax reserve for an uncertain tax position. This has no impact on the Company’s effective tax rate. The credits will expire at varying amounts through September 30, 2025, with $348 expiring in fiscal 2010.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(Unaudited, in thousands, except share data)

The Company recorded a tax provision of $21 for the three months ended December 31, 2009 as compared to no provision for the three months ended December 31, 2008, representing effective tax rates of 2% and 0%, respectively. The difference between the Company’s effective tax rate and the 34% federal statutory rate in the current period is due primarily to release of the valuation allowance against the deferred tax asset associated with the Company’s net operating loss carryforward.

The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. As of October 1, 2009, the Company is no longer subject to U.S. federal examinations by taxing authorities for years prior to 2006. Income tax returns for fiscal years 2006, 2007 and 2008 are still open for examination. However, utilization of net operating loss carryforwards that were generated in years prior to 2005 may result in a prior tax year being open for IRS examination. The Company is subject to examination by the California Franchise Tax Board and the Texas State Comptroller for fiscal years 2004 through 2007. The Company has concluded New York state audits for years 2004 through 2006 and Illinois state audits for years 2005 and 2006. Tax years 2005 through 2008 remain open to examination by multiple state taxing jurisdictions.

Based on Internal Revenue Code Section 382, changes in the ownership of the Company may limit the utilization of net operating loss carryforwards of the Company. The Company has determined, as of December 31, 2009, that there are no limitations on the utilization of its net operating loss carryforwards.

8. Commitments

The Company has entered into agreements with Speedy-Tech Electronics Ltd. (“Speedy”) and Creation Technologies Wisconsin Inc. (“Creation”) to manufacture final assemblies of the Company’s products. Creation also provides fulfillment services. 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, the Company has the right to offset amounts due to the Company against amounts owed to the vendor by the Company. As of December 31, 2009, the Company had $3,723 and $2,180 in open purchase commitments with Speedy and Creation, respectively.

9. Major Customers

For the three months ended December 31, 2009 the Company derived approximately $5,769 (44%) of its total revenue from two customers located in the United States. For the three months ended December 31, 2008 the Company derived approximately $4,817 (45%) of its total revenues from two customers located in the United States. Trade accounts receivable from these customers totaled $934 at December 31, 2009 and $2,092 at September 30, 2009.

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(Unaudited, in thousands, except share data)

10. Export Sales

The Company 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 for the three months ended December 31:

		Export Sales by Region
		CALA				EA				AME				Total				Domestic				Total Sales
Fiscal 2010 sales		$	392			$	37			$	30			$	459			$	12,563			$	13,022
Region’s sales as % of total export sales			85.40	%			8.06	%			6.54	%			100.00	%
Region’s sales as % of Total Company sales			3.01	%			0.28	%			0.23	%			3.52	%			96.48	%			100.00	%
Fiscal 2009 sales		$	189			$	161			$	29			$	379			$	10,396			$	10,775
Region’s sales as % of total export sales			49.87	%			42.48	%			7.65	%			100.00	%
Region’s sales as % of Total Company sales			1.75	%			1.50	%			0.27	%			3.52	%			96.48	%			100.00	%

11. Supplemental Disclosures of Cash Flow Information

		Three Months Ended December 31,
		2009				2008
Supplemental disclosure of cash flow information:
Income taxes paid		$	37			$	—
Supplemental disclosure of non-cash investing and financing activities:
Restricted common stock units awarded as director compensation — 0 and 152,349 shares, respectively		$	—			$	227

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
(Unaudited, in thousands, except share data)

12. Discontinued Operations

During July 2007, the Company formulated a plan to sell the net assets of its Fixed Cellular Phone (“FCP”) segment and exit the cellular phone market. As required by the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, the Company designated the assets and liabilities of this segment as “held for sale”. The assets and liabilities in this disposal group were measured at the lower of their carrying value or fair value less cost to sell and were separately identified in the consolidated balance sheets at September 30, 2007. During the third quarter of fiscal 2008, the Company determined it would be unable to secure a buyer of the FCP business unit. As a result, the Company made a strategic decision to abandon the FCP business effective June 30, 2008. All of the assets of the business have been disposed of or collected. As of December 31, 2009 and September 30, 2009 the remaining liabilities of $116 and $138, respectively, consisted of accrued royalties and accrued warranty expenses and are included in accrued liabilities in the consolidated balance sheets. For the three months ended December 31, 2009 and 2008, there were no revenues or expenses incurred associated with the discontinued operations.

13. Subsequent Events

The Company has evaluated all events that occurred after the balance sheet date of December 31, 2009 through February 12, 2010, the date we issued these consolidated financial statements, and determined that no events have occurred which would require an adjustment to the consolidated financial statements.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except when referring to units)

Forward Looking Information

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company 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, the Company is not obligated to publically release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events.

Overview

Telular designs, develops and distributes products and services that utilize wireless networks to provide data and voice connectivity among people and machines. Telular’s product and service offerings combine the Company’s historical competency in developing cellular networking electronics with the data transport capabilities of commercial wireless networks in order to create information networking solutions.

The Company generates most of its revenue by designing, producing and selling products and through the delivery of machine-to-machine (M2M) and event monitoring services, such as its Telguard and TankLink services. Although the Company has a wide base of customers in the Western Hemisphere, much of its revenue is generated from a small number of major customers.

The Company’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 the Company’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, Risk Factors.

The markets for the Company’s products are primarily in North and South America and consists of a number of vertical applications including Telguard security alarm conveyance; TankLink storage tank monitoring; 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.

The Company believes that its future success depends on its ability to continue to meet customers’ needs through product innovation, including the creation of event monitoring services that can be sold with products.

The following details areas of product delivery and research currently in process and anticipated in fiscal 2010.

Telguard — Telular’s engineering team continues to update the Telguard digital product portfolio by addressing the growing demand and technology changes in the electronics security market. In fiscal 2009, Telular enhanced the functionality of its TG-9 product and undertook a redesign of certain other Telguard hardware devices. The launch of these redesigned products is expected to occur in fiscal 2010 and will improve the Company’s ability to profitably serve the security markets. In addition, Telular is designing a new hardware product for security dealers that it plans to release in fiscal 2010.

TankLink — TankLink develops and distributes a wireless communicator product line for tank level monitoring. Telular plans to enhance this product line during fiscal 2010 to support a wider array of sensors and to add additional features to the hardware products which enable the service offering.

Other M2M Solutions — Telular continues to evaluate a number of vertical and sub-vertical M2M markets to determine the viability of creating or acquiring a product and/or service for these markets.

Fabrication of Telular’s products is accomplished through contract manufacturing. Contract manufacturers in China and the United States make and test all hardware products.

Competition

There are several firms that compete with the Company’s Telguard products and services. These primary competitors include: Honeywell, DSC, Numerex and Alarm.com. Telular believes it has a significant portion of the market share for cellular alarm communicators, having introduced the first such device for digital cellular networks in March 2006. Demand for cellular communicators has 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, the Company believes that Telular and its competitors will continue to see substantial demand for products and related services.

With regard to the other terminal products 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. Competition is based on reputation, features and pricing. Telular’s products have historically sold well in Latin America and the Company is able to realize an acceptable selling price due to Telular’s reputation for quality products in that region. The FCT business is not a primary focus of Telular but it continues to earn an acceptable contribution margin and will be maintained for as long as it continues to do so.

Results of Operations

First quarter fiscal year 2010 compared to first quarter fiscal year 2009

Revenues and Cost of Sales

										Change
		2010				2009				Amount				Percentage
Net product sales
Monitoring Equipment		$	5,655			$	3,789			$	1,866				49	%
Terminal			913				1,871				(958	)			-51	%
Total product revenues			6,568				5,660				908				16	%
Service revenues			6,454				5,115				1,339				26	%
Total revenues			13,022				10,775				2,247				21	%
Cost of sales
Products			5,205				3,959				1,246				31	%
Services			2,601				2,358				243				10	%
			7,806				6,317				1,489				24	%
Gross margin		$	5,216			$	4,458			$	758				17	%

Revenues

Product revenues increased 16% primarily due to the increased sales of our Telguard monitoring equipment as a result of higher customer demand. Approximately 38,000 Telguard units were sold in the first three months of fiscal 2010, compared to approximately 20,000 units sold in the same period of fiscal 2009. Demand for these products during the first quarter of fiscal 2009 was lower due to the depressed economy and housing market. Terminal product revenue decreased 51% primarily due to depressed economies in the CALA region and to certain distributors, both domestic and foreign, reducing their existing inventory during the quarter, resulting in decreased purchases.

Service revenues increased 26% due to an increase in the number of monitoring units placed in service during the quarter as a result of increased unit sales. In the first quarter of fiscal 2010, over 36,000 new subscribers were activated, compared with approximately 23,000 activations for the same period of fiscal 2009. Telular ended the period with approximately 532,000 subscribers, as compare to 423,000 subscribers at the end of the same period of fiscal 2009. Service revenue as a percentage of total revenue was 50% for the three months ended December 31, 2009, compared to 47% for the same period of fiscal 2009. The average revenue per user remained constant between the two periods presented.

Cost of Sales

The increase in products cost of sales of 31% in the first quarter of fiscal 2010 when compared to the same period of fiscal 2009 is due to higher sales volumes of the Telguard products. The increase in services cost of sales of 10% is due to increased subscribers and a reduction in the cost of providing the monitoring service as a result of the elimination of the use of a third party billing provider. The Company was able to internalize the billing function in the third quarter of fiscal 2009.

Total gross margin, as a percentage of sales, was 40% for the first quarter of fiscal 2010 as compared to 41% for the same period last year. Product gross margin was 21% for the first quarter of fiscal 2010 as compared to 30% for the same period last year. Service gross margin increased to 60% in the first quarter of fiscal 2010 from 54% for the same period last year.

Operating Expenses

										Change								% of Revenues
		2010				2009				Amount				Percentage				2010				2009
Engineering and development		$	1,254			$	1,248			$	6				0	%			10	%			12	%
Selling and marketing			1,614				1,510				104				7	%			12	%			14	%
General and administrative			1,450				1,659				(209	)			-13	%			11	%			15	%
		$	4,318			$	4,417			$	(99	)							33	%			41	%

Engineering and Development

The increase of $6 (0%) in engineering and development was primarily due to:

	•		$125 increased payroll expenses related to the hiring of additional staff;
	•		$18 increase in allocation of facility expenses attributable to engineering and development, such as rent, utilities, and maintenance; and,
	•		$137 decrease in consulting expenses as a result of reduced utilization of contract engineers.

Selling and Marketing

The increase in selling and marketing of $104 (7%) was primarily due to:

	•		$189 increase in payroll related expenses as a result of an increase in sales staff partially offset by a $23 decrease in consulting expenses;
	•		$39 decrease in non-cash compensation related to a reduction in the number of stock options granted to employees; and,
	•		$23 decrease in travel expenses as a result of increased utilization of outside sales agents, which reduced the travel expenses incurred by Telular employees.

General and Administrative

The decrease of $209 (13%) was primarily due to reductions of:

	•		$83 in non-cash compensation due to adjustments made to the calculation of expenses for stock options in the first quarter of fiscal 2009, which increased compensation expense in the fiscal 2009;
	•		$94 in professional fees related to decreased legal fees as a result of reduced costs from outside counsel relating to the fact that there was a proxy contest in 2009, but no similar contest in 2010. This decrease was also attributable to a decrease in accounting fees resulting from factors impacting the cost of our external audit;

	•		$46 in non-cash compensation related to the issuance of stock awards to the independent directors of the Company. In the prior year, restricted stock awards were granted to the independent directors in the first quarter of the fiscal year as part of their annual compensation. The Company changed this policy during fiscal 2009 to have the granting of these awards coincide with the date of the annual shareholders meeting. Stock awards similar to fiscal 2009 are anticipated to be granted during the second quarter of fiscal 2010; and,
	•		$41 in annual report and proxy costs. These costs were lower due to the proxy contest in fiscal 2009. There was no such contest in fiscal 2010.

Offsetting these reductions was a $15 increase in credit card fee as a result of increased activity and a $40 increase in non-income business taxes reflect the finalization, and reduction, of Singapore taxes in the first quarter of fiscal 2009.

Other Income

Other income for the three months ended December 31, 2009 increased $22 to $98 from $76 for the same period of fiscal 2009. The increase was primarily due to a loss of $48 related to the disposition of capital assets in fiscal 2009 and a decrease of $22 of interest income as a result of lower interest rates.

Income Taxes

The Company recorded an income tax provision for the three months ended December 31, 2009 of $21 related to alternative minimum taxes compared to $0 provision for the three months ended December 31, 2008.

Liquidity

Management regularly reviews net working capital in addition to available cash to determine if it has enough cash to operate the business. On December 31, 2009, the Company had $20,770 of unrestricted cash and cash equivalents and working capital of $30,150, compared to cash and cash equivalents of $17,904 and working capital of $28,666 on September 30, 2009. The Company can draw upon a Loan and Security Agreement with Silicon Valley Bank that provides an aggregate working capital line of credit up to $10,000. Management expects trade accounts receivable and inventory to turn into cash in short periods of time. As such, given the level of cash and cash equivalents, trade accounts receivable and inventory, management believes the Company has adequate resources to fund current and planned operations in a manner consistent with historical practices.

Operations

The Company generated $3,020 of cash from operations during the first three months of fiscal year 2010 compared to cash generated of $710 during the same period of fiscal year 2009. The components of cash generated for the first three months of fiscal 2010 are as follows:

$	975			Net income for the period
	285			The decrease in trade accounts receivable is due to the timely collection of outstanding balances, resulting from a more favorable product mix of service revenue to total revenue. Service revenue represents 50% of Telular’s total revenues for the three month period ending December 31, 2009. The accounts receivable associated with this revenue stream are generally collected within 30 days of invoicing.
	1,044			The decrease in inventory reflects the Company’s overall inventory strategy to reduce existing stock and manage production levels to augment the sales levels.
	852			The increase in trade accounts payable reflects increased purchases in the last month of the quarter from our contract manufacturers, which have extended payment terms, and from the Company’s increased focus on managing cash flows.
	(628	)		The decrease in accrued liabilities was primarily due to payments for bonuses earned in the prior fiscal year, partially offset with increases in liability balances related to increased sales volumes such as agent commissions, professional fees and certain operating expenses.
	674			Non-cash expenses: $378 from stock based compensation; $211 depreciation expense; $71 of amortization expense and $14 related to loss on disposal of operating assets.
	(182	)		Net cash provided by other working capital items.
$	3,020			Total cash provided by continuing operations

Investing Activities

Investing activities used $194 of cash for the first three months of fiscal 2010 from the acquisition of capital equipment. This compares to cash used by investing activities of $2,410 for the same period of fiscal 2009; $2,179 from the acquisition of TankLink and $231 from the purchase of equipment.

Financing Activities

Financing activities generated $40 of cash for the first three months of fiscal 2010 from the exercise of stock options. For the same period of fiscal year 2009, cash of $1,798 was used by the Company to pay down $923 of notes payable, which were acquired in the TankLink purchase and the repurchase of its common stock on the open market of $875.

Critical Accounting Policies

The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following represent the critical accounting policies that currently affect the presentation of the Company’s financial condition and results of operations.

Reserve for Obsolescence

Significant management judgment is required to determine the reserve for obsolete or excess inventory. The Company currently considers inventory quantities greater than a one-year supply based on current year activity as well as any additional specifically identified inventory to be excess. The Company also provides for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies. At December 31, 2009, and September 30, 2009, the inventory reserves were $98 and $91, respectively. Changes in strategic direction, such as discontinuance or expansion of product lines, changes in technology or changes in market conditions, could result in significant changes in required reserves.

Goodwill and Intangible Assets

The Company evaluates the fair value and recoverability of the goodwill annually during the Company’s third quarter or whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In determining fair value and recoverability, the Company makes projections regarding future cash flows. These projections are based on assumptions and estimates of growth rates for the related reporting units, anticipated future economic conditions, and the assignment of discount rates relative to risk associated with companies in similar industries and estimates of terminal values. An impairment loss is assessed and recognized in operating earnings when the fair value of the asset is less than its carrying amount.

The Company reviews for the impairment of other intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates recoverability of other intangible assets by comparing the carrying amount of the intangible asset to future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets calculated using a discounted cash flow analysis.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Currently, the Company has significant deferred tax assets principally related to the carryforward of net operating losses. Deferred tax assets are reviewed regularly for recoverability, and when necessary, valuation allowances are established based on historical tax losses, projected future taxable income, and expected timing of reversals of existing temporary differences. Valuation allowances have been provided for all deferred tax assets, as management makes assessments about the realizability of such deferred tax assets. Changes in the Company’s expectations could result in significant adjustments to the valuation allowances, which would significantly impact the Company’s results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s market risk exposure from the exposures described in its Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Item 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the end of the period covered by this report an evaluation of the effectiveness of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.

During the quarter ended December 31, 2009, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 4T. CONTROLS AND PROCEDURES

Not applicable.

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings that arose in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of all pending legal proceedings will not have a material adverse effect on the Company’s consolidated results of operation or financial position. However, because of the nature and inherent uncertainties of litigation, should the outcome of any legal actions be unfavorable, the Company may be required to pay damages and other expenses, which could have a material adverse effect on the Company’s financial position and results of operations.

Item 1A. RISK FACTORS

For information regarding risk factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as previously filed with the SEC, which is hereby incorporated by reference, and the information under Forward-Looking Statements included in this report. At December 31, 2009, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended September 30, 2009.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchase of Equity Securities

In July 2008, the Board of Directors approved a stock repurchase program for up to $5,000 of the Company’s common stock. There were no shares repurchased during the first quarter of fiscal 2010 under this program. The approximate dollar value of shares that may yet be purchased under the program is $1,225 as of December 31, 2009.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The tables below present the votes cast at the Company’s Annual Meeting of Shareholders on February 2, 2010, by the shareholders of the Company entitled to vote thereon. The total eligible shares to vote were 14,933,938; total shares voted were 13,939,319.

Proposal 1: Election of Directors

										Broker
Name		For				Withheld				Non-Votes
Larry J. Ford			5,931,797				1,125,233				6,882,289
Lawrence S. Barker			6,793,700				263,330				6,882,289
Joseph A. Beatty			6,785,792				271,238				6,882,289
Betsy J. Bernard			6,168,843				888,187				6,882,289
Brian J. Clucas			6,788,409				268,621				6,882,289
Jeffrey Jacobowitz			6,385,485				671,545				6,882,289
M. Brian McCarthy			6,170,577				886,453				6,882,289

														Broker
		For				Against				Abstentions				Non-Votes
Proposal 2: To approve the First Amended and Restated 2008 Employee Stock Incentive Plan and to increase the number of shares of common stock reserved for issuance under the plan by 650,000.			4,693,829				2,316,666				46,535				6,882,289
Proposal 3: To approve the Second Amended and Restated Non-Employee Director Stock Incentive Plan and to increase the number of shares of common stock reserved for issuance under the plan by 80,000.			6,606,553				407,742				42,735				6,882,289
Proposal 4: To ratify the appointment of Grant Thornton LLP as the Company’s independent registered public accountants for the fiscal year ending September 30, 2010.			13,390,421				395,239				153,659				—

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

The following documents are filed as Exhibits to this report:

Number				Description		Reference
	31.1			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
	31.2			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
	32			Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Exhibit Index

Number				Description		Reference
	31.1			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
	31.2			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
	32			Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Furnished herewith