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
		For the quarterly period ended June 30, 2015
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: 000-22920

 

NUMEREX CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania		11-2948749
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

3330 Cumberland Parkway, Suite 700

Atlanta, GA 30339-2119
(Address of principal executive offices) (Zip Code)

 

(770) 693-5950
(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 ☐

 

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 þ  No ☐

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

As of August 4, 2015, 19,094,109, shares of the registrant’s Class A common stock, no par value (being the registrant’s only class of common stock outstanding) were outstanding.

  

 

NUMEREX CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 

		Page
PART I—FINANCIAL INFORMATION
Item 1.           Financial Statements.		3
Item 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations.		14
Item 3.           Quantitative and Qualitative Disclosures about Market Risk.		23
Item 4.           Controls and Procedures.		23
PART II—OTHER INFORMATION
Item 1.           Legal Proceedings.		24
Item 1A.        Risk Factors.		24
Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds.		24
Item 3.           Defaults Upon Senior Securities.		24
Item 4.           Mine Safety Disclosures.		24
Item 5.           Other Information.		24
Item 6.           Exhibits.		24
SIGNATURES

  

 

NUMEREX CORP. AND SUBSIDIARIES PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.   Index to Financial Statements		Page
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014		4
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014		5
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2015		6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014		7
Unaudited Condensed Notes to Consolidated Financial Statements		8

   

 

NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
		June 30,				December 31,
		2015				2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	14,210			$	17,270
Accounts receivable, less allowance for doubtful accounts of $1,516 and $1,106			15,167				12,287
Financing receivables, current			1,763				1,595
Inventory, net of reserve for obsolescence			8,609				8,410
Prepaid expenses and other current assets			2,174				2,329
Deferred tax assets, current			3,161				3,161
TOTAL CURRENT ASSETS			45,084				45,052
Financing receivables, less current portion			2,952				2,984
Property and equipment, net of accumulated depreciation and amortization of $4,959 and $3,815			4,953				4,889
Software, net of accumulated amortization			6,484				6,106
Other intangible assets, net of accumulated amortization			18,718				19,163
Goodwill			44,348				44,348
Deferred tax assets, less current portion			6,029				5,816
Other assets			2,565				2,585
TOTAL ASSETS		$	131,133			$	130,943
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	13,732			$	12,257
Accrued expenses and other current liabilities			2,663				2,471
Deferred revenues			1,828				2,258
Current portion of long-term debt			3,908				4,251
Obligations under capital lease			-				148
TOTAL CURRENT LIABILITIES			22,131				21,385
Long-term debt, less current portion			17,474				19,350
Other liabilities			1,665				1,346
TOTAL LIABILITIES			41,270				42,081
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; authorized 3,000; none issued			-				-
Class A common stock, no par value; 30,000 authorized; 20,398 and 20,284 issued; 19,094 and 18,992 outstanding			-				-
Class B common stock, no par value; authorized 5,000; none issued			-				-
Additional paid-in capital			100,519				99,056
Treasury stock, at cost, 1,305 and 1,292 shares			(5,444	)			(5,352	)
Accumulated other comprehensive loss			(66	)			(48	)
Accumulated deficit			(5,146	)			(4,794	)
TOTAL SHAREHOLDERS’ EQUITY			89,863				88,862
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	131,133			$	130,943

 

The accompanying notes are an integral part of these financial statements.

 

 

NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Net revenues:
Subscription and support revenues		$	16,721			$	16,216			$	33,250			$	30,101
Embedded devices and hardware			8,932				6,362				14,080				13,249
Total net revenues			25,653				22,578				47,330				43,350
Cost of sales, exclusive of a portion of depreciation and amortization shown below:
Subscription and support revenues			6,471				6,278				13,190				11,636
Embedded devices and hardware			8,042				5,578				12,895				11,152
Gross profit			11,140				10,722				21,245				20,562
Operating expenses:
Sales and marketing			3,026				3,084				6,089				6,037
General and administrative			3,672				4,180				7,601				7,778
Engineering and development			2,201				2,086				4,494				3,365
Depreciation and amortization			1,658				1,624				3,312				2,973
Operating income (loss)			583				(252	)			(251	)			409
Interest expense			210				232				415				286
Other income, net			(37	)			(40	)			(69	)			(1,174	)
Income (loss) from continuing operations before income taxes			410				(444	)			(597	)			1,297
Income tax expense (benefit)			141				(670	)			(245	)			(75	)
Income (loss) from continuing operations, net of income taxes			269				226				(352	)			1,372
Loss from discontinued operations, net of income taxes			-				(436	)			-				(492	)
Net income (loss)			269				(210	)			(352	)			880
Other items of comprehensive income, net of income taxes:
Foreign currency translation adjustment			25				7				18				3
Comprehensive income (loss)		$	294			$	(203	)		$	(334	)		$	883
Basic earnings per share:
Income (loss) from continuing operations		$	0.01			$	0.01			$	(0.02	)		$	0.07
Loss from discontinued operations			-				(0.02	)			-				(0.02	)
Net income (loss)		$	0.01			$	(0.01	)		$	(0.02	)		$	0.05
Diluted earnings per share:
Income (loss) from continuing operations		$	0.01			$	0.01			$	(0.02	)		$	0.07
Loss from discontinued operations			-				(0.02	)			-				(0.02	)
Net income (loss)		$	0.01			$	(0.01	)		$	(0.02	)		$	0.05
Weighted average shares outstanding used in computing earnings per share:
Basic			19,029				18,889				19,011				18,871
Diluted			19,269				19,198				19,011				19,249

 

The accompanying notes are an integral part of these financial statements.

 

 

NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
															Accumulated Other								Total
		Common				Additional					Treasury				Comprehensive					Accumulated			Shareholders’
		Shares						Paid-in Capital			Stock				Loss					Deficit				Equity
Balance at January 1, 2015			20,284			$		99,056			$	(5,352	)		$	(48	)		$	(4,794	)		$	88,862
Equity-based compensation expense			-					1,581				-				-				-				1,581
Equity-based compensation plan activity			114					138				-				-				-				138
Value of shares retained to pay employee taxes			-					(258	)			(92	)			-				-				(350	)
Translation adjustment			-									-				(18	)			-				(18	)
Other			-					2				-				-				-				2
Net loss			-					-				-				-				(352	)			(352	)
Balance at June 30, 2015			20,398			$		100,519			$	(5,444	)		$	(66	)		$	(5,146	)		$	89,863

 

The accompanying notes are an integral part of these financial statements.

 

 

NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	Six Months Ended
	June 30,
		2015				2014
Cash flows from operating activities:
Net (loss) income	$	(352	)		$	880
Less (loss) income from discontinued operations, net of income taxes		-				(492	)
(Loss) income from continuing operations, net of income taxes		(352	)			1,372
Adjustments to reconcile net (loss) income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		3,782				3,180
Equity-based compensation expense		1,581				1,139
Deferred income taxes		(213	)			(200	)
Bad debt expense		200				263
Inventory reserves		271				286
Gain on sale of cost method investment		-				(1,109	)
Other non-cash expense		41				54
Changes in assets and liabilities, net of effects of acquisitions:
Accounts and financing receivables		(3,216	)			1,321
Inventory, net		(470	)			559
Accounts payable		1,486				(2,121	)
Deferred revenue		(102	)			133
Other		161				181
Net cash provided by operating activities		3,169				5,058
Cash flows from investing activities:
Net cash paid for acquisition		-				(37,113	)
Purchases of property and equipment		(1,219	)			(968	)
Capitalized software development and purchases of software		(2,431	)			(1,648	)
Proceeds from sale of cost basis investment		-				1,309
Net cash used in investing activities		(3,650	)			(38,420	)
Cash flows from financing activities:
Principal payments on debt		(2,219	)			(942	)
Principal payments on capital lease obligations		(148	)			(142	)
Proceeds from long-term debt		-				25,000
Equity-based compensation plan activity		138				602
Payment of taxes on equity-based awards		(350	)			(236	)
Deferred financing costs		-				(286	)
Net cash (used in) provided by financing activities		(2,579	)			23,996
Cash flows from discontinued operations:
Cash provided by operating activities		-				166
Net cash provided by discontinued operations		-				166
Net decrease in cash and cash equivalents		(3,060	)			(9,200	)
Cash and cash equivalents at beginning of period		17,270				25,603
Cash and cash equivalents at end of period	$	14,210			$	16,403
Supplemental disclosures of cash flow information:
Cash paid for interest	$	377			$	232
Cash paid for income taxes		28				79
Disclosure of non-cash investing and financing activities:
Deferred payment in connection with acquisition		-				215
Note issued in conjunction with disposal of discontinued operations		-				35
Capital expenditures in accounts payable		407				178

 

The accompanying notes are an integral part of these financial statements.

 

  

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSDED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

 

NOTE A – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Numerex Corp. (NASDAQ:NMRX) is a leading provider of interactive and on-demand machine-to-machine (M2M) products and technology enabling the Internet of Things (IoT). The Company’s cloud-based solutions deliver actionable and secure Smart Data to its customers that produce new revenue streams and create operating efficiencies designed to improve profitability. Technology and services are delivered through integrated highly-scalable industrial IoT platforms. Services and solutions are typically sold on a subscription basis. Smart Devices, Network connectivity and services, and software Applications, branded Numerex DNA®, are available as components or bundled and offered as pre-engineered, pre-configured solutions that are designed to accelerate deployment. Also, business and professional services are available to assist in the development and commercialization of customized solutions. Numerex is ISO 27001 information security-certified, highlighting the Company's focus on data security, service reliability and around-the-clock support of its customers' M2M solutions. For additional information, please visit www.numerex.com.

 

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and the Rules and Regulations issued by the Securities Exchange Commission, or SEC, as applicable. These financial statements include all of our accounts and those of our wholly-owned subsidiaries. We have eliminated intercompany transactions and balances in consolidation.

 

Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying financial statements reflect all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, considered necessary for a fair presentation of our financial position as of June 30, 2015 and our operating results and cash flows for the interim periods presented. The accompanying condensed consolidated balance sheet as of December 31, 2014 was derived from our audited financial statements, but does not include all disclosures required by GAAP. The financial information presented herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014 which includes information and disclosures not included in this quarterly report.

 

The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ materially from these estimates. Operating results for the three and six months ended June 30, 2015, may not be indicative of the results that may be expected for the year ending December 31, 2015 or any future periods.

 

NOTE B – MERGER

 

On May 5, 2014, in accordance with the terms and conditions of the merger agreement, we merged our wholly-owned subsidiary with and into Omnilink Systems Inc. (Omnilink) with Omnilink surviving the merger as a wholly-owned subsidiary of Numerex. The purchase price of $37.5 million was composed of a cash payment of $37.3 million and a working capital adjustment of $0.2 million.

 

Omnilink provides tracking and monitoring services for people and valuable assets via Omnilink’s M2M platform that connects hardware, networks, software, and support services. Our combination with Omnilink has provided operating synergies and created growth opportunities through product enhancement and channel expansion. The assets, liabilities and operating results of Omnilink are included in our condensed consolidated financial statements commencing from the merger date.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSDED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 

 

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the closing date of the Omnilink merger (dollars in thousands):

 

							Estimated
			Fair Value				Useful Lives
Cash		$	195				n/a
Accounts receivable			2,677				n/a
Inventory			873				n/a
Prepaid and other assets			377				n/a
Property and equipment			1,613				4 (a)
Deferred tax asset			2,400				n/a
Customer relationships			6,056				11
Technology			4,998				14
Trade names			3,632				Indefinite
Goodwill			17,518				Indefinite
Total identifiable assets acquired			40,339
Accounts payable			(1,756	)			n/a
Accrued expenses			(1,037	)			n/a
Deferred revenue			(64	)			n/a
Total liabilities assumed			(2,857	)
Net assets acquired		$	37,482

 

(a)

The weighted average remaining useful life for all property and equipment is approximately four years.

 

The total purchase consideration for the merger was allocated to identifiable assets purchased and liabilities assumed based on fair value. The estimated fair value attributed to intangible assets, other than goodwill, was based on common valuation techniques. The fair value of acquired software was estimated using a cost approach based on assumptions of our historical software development costs. The fair value of trade names was based on an income approach with key assumptions including estimated royalty rates to license the trade names from a third party. The valuation of customer relationships utilized an income approach and discounted cash flows taking into consideration the number of customer relationships acquired and estimated customer turnover.

 

The gross amount of accounts receivable in the table above is $2.9 million. Based on the nature and financial strength of the customers on the date of acquisition, we expected to collect amounts due for the accounts receivable of $2.7 million.

 

The value of the deferred tax asset and goodwill as disclosed above reflect a subsequent measurement period adjustment of $0.2 million recorded during the three months ended June 30, 2015 to record the final calculation of acquired deferred tax assets. The measurement period adjustment had no impact on the statements of operations or cash flows. The residual allocation to goodwill results from such factors as an assembled workforce, expected significant synergies for market growth and profitability as well as Omnilink’s service and product lines contributing to our becoming the market leader in select M2M vertical markets. The total amount of goodwill will not be deductible for income tax purposes.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSDED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 

  

During the three months ended June 30, 2015, we recorded the final measurement period adjustments related to merger with Omnilink. The measurement period adjustment resulted in recasting the December 31, 2014 consolidated balance sheet, as follows (in thousands):

 

		December 31,				Measurement				December 31,
		2014				Period				2014
		As Reported				Adjustment				Recast
Assets
Goodwill		$	44,548			$	(200	)		$	44,348
Deferred tax assets, less current portion			5,616				200				5,816
		$	50,164			$	-			$	50,164

 

The measurement period adjustment had no effect on the statements of operations and comprehensive income (loss) or cash flows.

 

NOTE C - INVENTORY

 

Inventory consisted of the following (in thousands):

 

		June 30,				December 31,
		2015				2014
Raw materials		$	2,174			$	2,228
Finished goods			8,103				7,579
Reserve for obsolescence			(1,668	)			(1,397	)
		$	8,609			$	8,410

 

NOTE D – INTANGIBLE ASSETS

 

Intangible Assets Other Than Goodwill

 

Intangible assets other than goodwill are summarized as follows (dollars in thousands):

 

		As of June 30, 2015																	As of December 31, 2014
		Remaining Useful Lives					Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Purchased and developed software			1.3				$	12,546			$	(7,881	)		$	4,665			$	11,176			$	(6,409	)		$	4,767
Software in development			n/a					1,819				-				1,819				1,339				-				1,339
Total software								14,365				(7,881	)			6,484				12,515				(6,409	)			6,106
Licenses			0.4					12,764				(12,018	)			746				12,763				(11,886	)			877
Customer relationships			8.1					8,287				(1,829	)			6,458				8,287				(1,359	)			6,928
Technologies			12.9					4,998				(417	)			4,581				4,998				(237	)			4,761
Patents and trademarks			3.7					4,310				(1,902	)			2,408				3,343				(1,657	)			1,686
Trade names			Indefinite					3,632				-				3,632				3,632				-				3,632
Other			n/a					893				-				893				1,279				-				1,279
Total other intangible assets								34,884				(16,166	)			18,718				34,302				(15,139	)			19,163
							$	49,249			$	(24,047	)		$	25,202			$	46,817			$	(21,548	)		$	25,269

 

Remaining useful lives in the preceding table were calculated on a weighted average basis as of June 30, 2015. We did not incur significant costs to renew or extend the term of acquired intangible assets during the three or six months ending June 30, 2015. 

 

Amortization expense related to intangible assets was $1.3 million and $2.5 million for the three and six months ended June 30, 2015 compared to $1.2 million and $2.2 million and for the respective periods in 2014. Amortization expense recorded in cost of subscription revenues in the accompanying condensed consolidated statements of operations and comprehensive income (loss) was $0.1 million for the three and six months ended June 30, 2015, and $0.1 million and $0.2 million for the three and six months ended June 30, 2014. Additionally, we have capitalized approximately $0.8 million and $1.2 million of internally generated software development costs for the three and six months ended June 30, 2015 respectively and $0.5 million and $1.0 million for the three and six months ended June 30, 2014, respectively.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSDED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 

 

NOTE E – INCOME TAXES

 

We calculate our interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, we make our best estimate of the annual expected effective tax rate and apply that rate to our ordinary year-to-date income or loss.  In addition, we calculate a year-to-date adjustment to increase or decrease our income tax provision to take into account our current expected effective tax rate.  The tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

 

We recorded a provision for income tax expense of $0.1 million for the three months ended June 30, 2015 and an income tax benefit of $0.2 million for the six months ended June 30, 2015. The effective tax rates were 34.3% and 41.0% for the three and six months ended June 30, 2015, respectively. The effective tax rates for the three months and six months ended June 30, 2015 differed from the federal statutory rate applied to income and losses before income taxes primarily as a result of the effect of expenses that are not deductible for income tax purposes and state income taxes, including the tax effect of changes in effective state income tax rates, partially offset by an income tax benefit on disqualifying dispositions of incentive stock options.

 

For the three and six months ended June 30, 2014, we recorded an income tax benefit of $0.7 million and $0.1 million, respectively, representing effective tax rates of 150.9% and (5.8%), respectively. The difference between our effective tax rates and the federal statutory tax rate resulted primarily from (1) the income tax benefit for the capital loss from the disposal of discontinued operations effective June 30, 2014 and the ability to offset capital gains in the current tax year and to carry back for capital gains in prior tax years, (2) the portion of transaction costs incurred in the Omnilink merger that were not deductible for income taxes and (3) state income taxes, including the tax effect of changes in effective state income tax rates resulting from the Omnilink merger.

  
We continue to maintain a valuation allowance for deferred tax assets related to certain state and foreign net operating losses, and federal loss carryforwards for which we have determined it is more likely than not expiration will occur before utilization. We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2011 through 2014 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.

 

NOTE F – DEBT

 

Debt consisted of the following (dollars in thousands):

		June 30,				December 31,
		2015				2014
Note payable to Silicon Valley Bank, with interest at our option of prime rate or LIBOR rate plus margin		$	21,224			$	23,125
Seller financed note payable, with interest at 4.25%, monthly payments of principal and interest, secured by equipment,due September 2015			158				476
			21,382				23,601
Less current portion of long-term debt			3,908				4,251
Noncurrent portion of long-term debt		$	17,474			$	19,350

 

  

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSDED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 

 

On May 5, 2014, we entered into a Second Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank in order to, among other things, establish a term loan of $25.0 million and a revolving line of credit of up to $5.0 million (collectively, the “Credit Facility”). As of June 30, 2015, there was $5.0 million available under the revolving line of credit. The proceeds from the term loan were used to finance the Omnilink merger. See Note B –– Merger.

 

The maturity date of the loan is May 5, 2019 with regular required quarterly principal payments which began June 30, 2014. The scheduled outstanding principal balance of $5.0 million will be due at maturity if not otherwise repaid earlier by way of voluntary Permitted Prepayments or by mandatory Excess Cash Flow Recapture Payments (as defined in the Loan Agreement). The interest rate applicable to amounts drawn pursuant to the Loan Agreement is currently 2.75% and is, at our option, determined by reference to the prime rate or LIBOR rate plus a margin established in the Loan Agreement.

 

Our obligations under the Credit Facility are secured by substantially all of our assets and the assets of our subsidiaries. In addition, we are required to meet certain financial and other restrictive covenants customary with this type of facility, including maintaining a senior leverage ratio, a fixed charge coverage ratio and minimum liquidity availability. We are also prohibited from entering into any debt agreements senior to the Credit Facility and paying dividends. The Amended Loan Agreement contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the Credit Facility may be accelerated. We were in compliance with all of the Bank’s financial covenants at June 30, 2015.

 

In connection with our acquisition of a small technology business in October 2012, we entered into a Promissory Note of $1.9 million payable to the sellers of the business. This Promissory Note is subordinate to the Credit Facility, bears interest at the greater of prime plus 1% or 4.25% (4.25% as of June 30, 2015) and is payable in monthly installments through September 2015. As of June 30, 2015, the balance outstanding on the Promissory Note was $0.2 million, all classified as current.

 

NOTE G – NET EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period excluding the dilutive impact of common stock equivalents. Diluted earnings per share include the effect of all potentially dilutive securities on earnings per share. The dilutive effect of outstanding equity-based compensation awards is computed using the treasury stock method. The computation of diluted earnings per share does not assume exercise of securities that would have an anti-dilutive effect on earnings.

 

The following table presents a reconciliation of the shares used in the calculation of basic and diluted net income (loss) per share from continuing operations contained in our condensed consolidated statements of operations and comprehensive (loss) income (in thousands):

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Income (loss) from continuing operations, net of income taxes		$	269			$	226			$	(352	)		$	1,372
Weighted average shares outstanding:
Basic			19,029				18,889				19,011				18,871
Dilutive effect of common stock equivalents			240				309				-				378
Total			19,269				19,198				19,011				19,249
Anti-dilutive equity-based compensation awards			850				757				1,773				757

 

NOTE H – RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2015, the Financial Accounting Standards Board (FASB) issued guidance intended to simplify the presentation of applicable inventory at the lower of cost or net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSDED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 

 

In March 2015, the FASB issued guidance about simplifying the presentation of debt issuance costs. The guidance is intended to help clarify debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.

 

In August 2014, the FASB issued guidance about disclosing an entity’s ability to continue as a going concern. The guidance is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter, with early application permitted. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.

 

In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard will be effective for us prospectively for fiscal years, and interim reporting periods within those years, beginning January 1, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.

 

In May 2014, the FASB issued new accounting guidance for revenue recognized from contracts with customers. The core principle of the guidance is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance was set to become effective for us for fiscal years, and interim reporting periods within those years, beginning January 1, 2017 and will require retrospective application when adopted. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating how the adoption of this standard will impact our Consolidated Financial Statements.

 

NOTE I – SUBSEQUENT EVENTS

 

During the quarter ended June 30, 2015, we entered into a lease for an additional 10,000 square feet of office space at our corporate headquarters. The lease for the additional space is effective August 1, 2015 and coterminous with our existing lease. We also vacated 13,000 square feet of office space in Alpharetta, Georgia and relocated the effected employees to our corporate headquarters on July 6, 2015. We anticipate subleasing the vacated space for the remaining term of our lease.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward Looking Statements

 

This document contains, and other statements may contain, forward-looking statements with respect to our future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,”“assume,” “strategy,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “trend,” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. We caution that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this filing, and we assume no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.

 

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to capture greater recurring subscription revenues; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers and/or wireless network operators materially change or disrupt the flow of products or services; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new products and services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances, partnerships and/or wireless network operators will not yield substantial revenues; changes in financial and capital markets and the inability to raise growth capital on favorable terms, if at all; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; and the extent and timing of technological changes.

 

Overview

 

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or “Numerex” refers to Numerex Corp. and subsidiaries.

 

The following Management’s Discussion and Analysis is intended to help the reader understand our results of operations and financial condition. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q for the period ended June 30, 2015.

 

We are a holding company that, acting through our subsidiaries, is a leading provider of interactive and on-demand M2M products and technology enabling the Internet of Things (IoT) with a presence predominately in North America. Our cloud-based solutions deliver actionable and secure smart data to our customers to produce new revenue streams and create operating efficiencies designed to improve profitability. Our technology and services are delivered through integrated highly-scalable industrial IoT platforms. Smart Devices, Network connectivity and services, and software Applications, branded Numerex DNA®, are available as components or bundled and offered as pre-engineered, pre-configured solutions that are designed to accelerate deployment. Also, business and professional services are available to assist in the development and commercialization of customized solutions. We are ISO 27001 information security-certified, highlighting our focus on data security, service reliability and around-the-clock support of our customers' M2M solutions.

 

On May 5, 2014, we acquired the business operations of Omnilink, the financial results of which have now been included in our consolidated results. The purchase consideration of $37.5 million was composed of a cash payment of $37.3 million and a working capital adjustment of $0.2 million.

 

During the quarter ended June 30, 2015, we had revenues of $25.7 million, and net income of $0.3 million; compared with revenues and net loss from continuing operations of $22.6 million and of $0.2 million, respectively for the quarter ended June 30, 2014.

 

For the six months ended June 30, 2015, we had revenues of $47.3 million, and a net loss of $0.4 million; compared with revenues and net income from continuing operations of $43.4 million and $1.4 million, respectively, for the six months ended June 30, 2014.

 

 

In recent years, we have embarked on a strategic transformation as advances in technology have changed the way our customers interact in their professional and personal lives and the way that businesses operate. To meet the changing needs of our customers and to address the changing technological landscape, we are focusing efforts on higher margin and growing areas of business.

 

Our strategy requires significant capital investment to develop and enhance our use of technology and to maintain our leadership position and competitive advantage in the markets we serve.

 

Subscription and support revenue is recognized monthly as services are provided and sales of embedded devices and hardware are recognized when title passes. Other upfront payment revenue is deferred and amortized on a straight line basis.

 

Due to fluctuations of the commencement of new contracts and renewal of existing contracts, we expect variability of sequential quarterly trends in revenues, margins and cash flows. Other factors contributing to sequential quarterly trends include usage, rate changes, and re-pricing of contract renewals and technology changes.

  

As part of our effort to build and enhance our core business, we conduct ongoing business strategy reviews. During our reviews, we consider opportunities for growth in existing and new markets that may involve growth derived from both existing operations as well as from future acquisitions, if any. To the extent existing business lines and service offerings are not considered to be compatible with delivery of our core business services or with meeting our financial objectives, we may exit non-core lines of business or stop offering these services in part or in whole.

 

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we perform our annual assessment of goodwill for impairment as of October 1. The valuations of goodwill and other intangible assets require assumptions and estimates of many critical factors, including projections of revenues, costs, operating cash flows, capital expenditures, terminal growth rates and discount rates. As part of our assessment as of October 1, 2014, we projected significant growth for certain of our smaller product lines. Lower revenue growth and operating results for these product lines and/or unfavorable changes in other economic factors could impact the underlying key assumptions and our estimated fair values, potentially leading to a future non-cash impairment charge for either or both goodwill and other intangible assets.

  

 

Results of Operations

 

Three Months Ended June 30, 2015 and 2014

 

The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):

 

		Three Months Ended June 30,
		2015								2014								2015 vs. 2014
Net revenues:
Subscription and support revenues		$	16,721				65.2	%		$	16,216				71.8	%		$	505				3.1	%
Embedded devices and hardware			8,932				34.8	%			6,362				28.2	%			2,570				40.4	%
Total net revenues			25,653				100.0	%			22,578				100.0	%			3,075				13.6	%
Cost of revenue, exclusive of a portion of depreciation and amortization shown below:
Subscription and support revenues			6,471				25.2	%			6,278				27.8	%			193				3.1	%
Embedded devices and hardware			8,042				31.4	%			5,578				24.7	%			2,464				44.2	%
Gross profit			11,140				43.4	%			10,722				47.5	%			418				3.9	%
Operating expenses:
Sales and marketing			3,026				11.8	%			3,084				13.7	%			(58	)			-1.9	%
General and administrative			3,672				14.3	%			4,180				18.5	%			(508	)			-12.2	%
Engineering and development			2,201				8.6	%			2,086				9.2	%			115				5.5	%
Depreciation and amortization			1,658				6.5	%			1,624				7.2	%			34				2.1	%
Operating income (loss)			583				2.3	%			(252	)			-1.1	%			835				-331.2	%
Interest expense			210				0.8	%			232				1.0	%			(22	)			-9.5	%
Other income, net			(37	)			-0.1	%			(40	)			-0.2	%			3				-7.5	%
Income (loss) from continuing operations before income taxes			410				1.6	%			(444	)			-2.0	%			854				-192.2	%
Income tax expense (benefit)			141				0.6	%			(670	)			-3.0	%			811				-121.1	%
Income from continuing operations, net of income taxes			269				1.1	%			226				1.0	%			43				19.2	%
Loss from discontinued operations, net of income taxes			-				0.0	%			(436	)			-1.9	%			436				-100.0	%
Net income (loss)		$	269				1.1	%		$	(210	)			-0.9	%		$	479				-228.3	%
Adjusted EBITDA(1)		$	3,410				13.3	%		$	2,978				13.2	%		$	432				14.5	%

 

(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.

 

Total revenue increased $3.1 million, or 13.6%, for the three months ended June 30, 2015 to $25.7 million from $22.6 million for the same period in 2014. The increase is primarily attributable to the growth in embedded devices and hardware which grew $2.6 million, or 40.4%, to $8.9 million from $6.4 million in 2014. These increases in embedded devices and hardware were driven by second quarter module sales to one of our largest customers who periodically makes large purchases.
 

Subscription and support revenues increased $0.5 million or 3.1% to $16.7 million for the three months ended June 30, 2015 compared to $16.2 million for the same period in 2014. The increase in subscription and support revenues stems primarily from our introduction of new product lines, including those recently acquired. We also continue to focus on higher value generating customers and subscriptions, which purchase full solutions that include device, network and application (DNA), offsetting declines in subscriptions and revenue for lower value network-only customers.

 

  

Total cost of revenue for the three months ended June 30, 2015 increased $2.7 million, or 22.4%, to $14.5 million compared to $11.9 million for the same period in 2014. Comprising that increase, the cost of revenue for subscription and support services increased $0.2 million, or 3.1%, to $6.5 million for the three months ended June 30, 2015 compared to $6.3 million for the same period in 2014. Cost of revenue for embedded devices and hardware increased $2.5 million, or 44.2% to $8.0 million for the three months ended June 30, 2015 compared to $5.6 million for the same period in 2014. The increases in cost of sales relate to overall revenue growth, including the module sales to one of our largest customers as noted above.

  

Total gross profit for the three months ended June 30, 2015 increased $0.4 million, or 3.9% to $11.1 million compared to $10.7 million for the same period in 2014. Gross margin for subscription and support revenues remained constant at 61.3% for the three months ended June 30, 2015 compared to the same period in 2014. Gross margin for embedded devices and hardware decreased to 10.0% for the three months ended June 30, 2015 compared to 12.3% for the three months ended June 30, 2014. The decrease in gross margin for embedded devices and hardware sales was due to product mix.

 

Sales and marketing expense remained consistent quarter over quarter. The expense remained consistent due to full integration of the sales and marketing teams that were being expanded throughout the previous year. Sales and marketing expense was 13.4% of total revenue for the three months ended June 30, 2015 compared to 13.7% of total revenue for the same period in 2014.

 

General and administrative expenses decreased 12.2% to $3.7 million for the three-month period ended June 30, 2015, compared to $4.2 million for the three-month period ended June 30, 2014. As a percentage of net sales, general and administrative expenses decreased to 14.3% for the three months ended June 30, 2015 compared to 18.5% for the three months ended June 30, 2014. The decrease in total expense is primarily related to merger and other costs incurred in the three months ended June 30, 2014. General and administrative expenses for the three months ended June 30, 2014 include $0.9 million in professional fees and transaction costs associated with our acquisition compared to $0.1 million of infrequent or unusual costs in the three months ended June 30, 2015.

 

Engineering and development expenses increased 5.5% to $2.2 million for the three-month period ended June 30, 2015, compared to $2.1 million for the three-month period ended June 30, 2014. The increase was primarily driven by the continued development associated with newly introduced product lines and continued development associated with certain large industrial IoT projects. Engineering and development expenses decreased to 8.6% of total revenue for the three months ended June 30, 2015 compared to 9.2% of total revenue for the same period in 2014.

 

Depreciation and amortization expense and interest expense remained consistent quarter over quarter.

 

We recorded a provision for income tax expense of $0.1 million for the three months ended June 30, 2015 and an income tax benefit of $0.7 million for the three months ended June 30, 2014. The effective tax rates were 34.4% and 150.1% for the three months ended June 30, 2015 and 2014, respectively. The effective tax rate for the three months ended June 30, 2015 differed from the federal statutory rate applied to income and losses before income taxes primarily as a result of the effect of expenses that are not deductible for income tax purposes and state income taxes, including the tax effect of changes in effective state income tax rates, partially offset by an income tax benefit on disqualifying dispositions of incentive stock options. For the three months ended June 30, 2014, the difference between our effective tax rate and the federal statutory tax rate resulted primarily from (1) the income tax benefit for the capital loss from the disposal of discontinued operations effective June 30, 2014 and the ability to offset capital gains in the current tax year and to carry back for capital gains in prior tax years, (2) the portion of transaction costs incurred in the Omnilink merger that were not deductible for income taxes and (3) state income taxes, including the tax effect of changes in effective state income tax rates resulting from the Omnilink merger.

 

 

Six Months Ended June 30, 2015 and 2014

 

The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):

  

		Six Months Ended June 30,
		2015								2014								2015 vs. 2014
Net revenues:
Subscription and support revenues		$	33,250				70.3	%		$	30,101				69.4	%		$	3,149				10.5	%
Embedded devices and hardware			14,080				29.7	%			13,249				30.6	%			831				6.3	%
Total net revenues			47,330				100.0	%			43,350				100.0	%			3,980				9.2	%
Cost of revenue, exclusive of a portion of depreciation
and amortization shown below:
Subscription and support revenues			13,190				27.9	%			11,636				26.8	%			1,554				13.4	%
Embedded devices and hardware			12,895				27.2	%			11,152				25.7	%			1,743				15.6	%
Gross profit			21,245				44.9	%			20,562				47.4	%			683				3.3	%
Operating expenses:
Sales and marketing			6,089				12.9	%			6,037				13.9	%			52				0.9	%
General and administrative			7,601				16.1	%			7,778				17.9	%			(177	)			-2.3	%
Engineering and development			4,494				9.5	%			3,365				7.8	%			1,129				33.6	%
Depreciation and amortization			3,312				7.0	%			2,973				6.9	%			339				11.4	%
Operating (loss) income			(251	)			-0.5	%			409				0.9	%			(660	)			-161.4	%
Interest expense			415				0.9	%			286				0.7	%			129				45.2	%
Other income, net			(69	)			-0.1	%			(1,174	)			-2.7	%			1,105				-94.1	%
(Loss) income from continuing operations
before income taxes			(597	)			-1.3	%			1,297				3.0	%			(1,894	)			-146.0	%
Income tax benefit			(245	)			-0.5	%			(75	)			-0.2	%			(170	)			226.6	%
(Loss) income from continuing
operations, net of income taxes			(352	)			-0.7	%			1,372				3.2	%			(1,724	)			-125.7	%
Loss from discontinued
operations, net of income taxes			-				0.0	%			(492	)			-1.1	%			492				-100.0	%
Net (loss) income		$	(352	)			-0.7	%		$	880				2.0	%		$	(1,232	)			-140.0	%
Adjusted EBITDA(1)		$	5,694				12.0	%		$	5,751				13.3	%		$	(57	)			-1.0	%

 

(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.

 

Total revenue increased $4.0 million, or 9.2%, for the six months ended June 30, 2015 to $47.3 million from $43.4 million for the same period in 2014. The increase is primarily attributable to subscription and support revenues which grew $3.1 million, or 10.5%, to $33.3 million from $30.1 million in 2014.

 

The increase in subscription and support revenues stems primarily from our introduction of new product lines, including those recently acquired. We also continue to focus on higher value generating customers and subscriptions, which purchase full solutions that include device, network and application (DNA), offsetting declines in subscriptions and revenue for lower value network-only customers.

 

Embedded device and hardware revenue increased $0.8 million, or 6.3%, to $14.1 million for the six months ended June 30, 2015 compared to $13.2 million recorded in the same period in 2014. The comparative increase in embedded devices and hardware revenue is attributable primarily to sales of devices to upgrade and replace older generation (2G) devices.

 

 

Total cost of revenue for the six months ended June 30, 2015 increased $3.3 million, or 14.5%, to $26.1 million compared to $22.8 million for the same period in 2014. Comprising that increase, the cost of revenue for subscription and support services increased $1.5 million, or 13.4%, to $13.2 million for the six months ended June 30, 2015 compared to $11.6 million for the same period in 2014. Cost of revenue for embedded devices and hardware increased $1.7 million, or 15.6% to $12.9 million for the six months ended June 30, 2015 compared to $11.2 million for the same period in 2014. The increases in cost of sales relates to overall revenue growth and product mix as described above. 

 

Total gross profit for the six months ended June 30, 2015 increased $0.7 million or 3.3% compared to the same period in 2014. Gross margin for subscription and support revenues was 60.3% for the six months ended June 30, 2015 compared to 61.3% for the six months ended June 30, 2014. Gross margin for embedded devices and hardware was 8.4% for the six months ended June 30, 2015 compared to 15.8% for the six months ended June 30, 2014. The decrease in gross margin for subscription and support revenues is primarily related to renegotiated pricing for a large customer in the first quarter of 2015. The decrease in gross margin for embedded devices and hardware was primarily due to product mix.

 

Sales and marketing expense remained consistent quarter over quarter. The expense remained consistent due to full integration of the sales and marketing teams that were being expanded throughout the previous year. Sales and marketing expense was 12.9% of total revenue for the six months ended June 30, 2015 compared to 13.9% of total revenue for the same period in 2014.

 

General and administrative expense decreased $0.2 million, or 2.3%, to $7.6 million for the six months ended June 30, 2015, compared to $7.8 million for the same period in 2014. The decrease is driven primarily by lower professional fees and transaction-related costs with fewer infrequent or unusual costs incurred during the six months ended June 30, 2015 compared to the prior period. General and administrative expenses for the six months ended June 30, 2014 include $1.0 million in professional fees and transaction costs associated with our acquisition compared to $0.6 million of infrequent or unusual costs in the six months ended June 30, 2015. General and administrative expense was 16.1% of total revenue for the six months ended June 30, 2015 compared to 17.9% of total revenue for the same period in 2014.

 

Engineering and development expenses increased 33.6% to $4.5 million for the six-month period ended June 30, 2015, compared to $3.4 million for the six-month period ended June 30, 2014. The increase was primarily driven by the continued development associated with newly introduced product lines with $0.8 million related to recently acquired product lines as well as $0.4 million in salary expense for newly hired employees. Engineering and development expense was 9.5% of total revenue for the six months ended June 30, 2015 compared to 7.8% of total revenue for the same period in 2014.

 

Depreciation and amortization expense increased $0.3 million, or 11.4%, to $3.3 million for the six months ended June 30, 2015, compared to $3.0 million for the same period in 2014. The increase in depreciation and amortization is related to recently acquired product lines and development of new product and project initiatives, including the amortization of new intangible assets.

 

Other income decreased $1.1 million for the six months ended June 30, 2015. The decrease is related to a pre-tax gain of $1.1 million on the sale of a cost method investment in a privately-held business during the six months ended June 30, 2014. The carrying value of the investment was $0.2 million and was sold for $1.3 million.
 

We recorded an income tax benefit of $0.3 million and $0.1 million for the six months ended June 30, 2015 and 2014, respectively. The effective tax rates were 41.0% and (5.8%) for the six months ended June 30, 2015 and 2014, respectively. The effective tax rate for the six months ended June 30, 2015 differed from the federal statutory rate applied to income and losses before income taxes primarily as a result of the effect of expenses that are not deductible for income tax purposes and state income taxes, including the tax effect of changes in effective state income tax rates, partially offset by an income tax benefit on disqualifying dispositions of incentive stock options. For the six months ended June 30, 2014, the difference between our effective tax rate and the federal statutory tax rate resulted primarily from (1) the income tax benefit for the capital loss from the disposal of discontinued operations effective June 30, 2014 and the ability to offset capital gains in the current tax year and to carry back for capital gains in prior tax years, (2) the portion of transaction costs incurred in the Omnilink merger that were not deductible for income taxes and (3) state income taxes, including the tax effect of changes in effective state income tax rates resulting from the Omnilink merger.

 

 

Segment Information

 

We have one reportable segment, providing interactive and on-demand Machine to Machine (M2M) enterprise solutions enabling the Internet of Things (IOT).

 

Non-GAAP Financial Measures

 

Earnings before interest, taxes, depreciation and amortization expenses (EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share are useful to and used by investors and other users of the financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across periods.
 

We believe that
 

	●	EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, income taxes, depreciation and amortization, which can vary substantially from company-to-company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
	●	Investors commonly adjust EBITDA information to eliminate the effect of equity-based compensation and other unusual or infrequently occurring items which vary widely from company-to-company and impair comparability.

 

We use EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share:

 

	●	as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis
	●	as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and
	●	in communications with the board of directors, analysts and investors concerning our financial performance.

 

Although we believe, for the foregoing reasons, that the presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, the non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.
 

Use of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement GAAP financial measures. The non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the same manner, as those used by other companies.
 

Adjusted EBITDA is calculated by excluding the effect of equity-based compensation and non-operational items from the calculation of EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.
 

We believe that excluding depreciation and amortization of property, equipment and intangible assets to calculate EBITDA and Adjusted EBITDA provides supplemental information and an alternative presentation that is useful to investors’ understanding of our core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that may have little bearing on present or future replacement costs, but also they are based on our estimates of remaining useful lives.

 

 

We believe that excluding the effects of equity-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors’ understanding of our core operating results and trends. Investors have indicated that they consider financial measures of our results of operations excluding equity-based compensation as important supplemental information useful to their understanding of our historical results and estimating our future results.
 

We also believe that, in excluding the effects of equity-based compensation, our non-GAAP financial measures provide investors with transparency into what management uses to measure and forecast our results of operations, to compare on a consistent basis our results of operations for the current period to that of prior periods and to compare our results of operations on a more consistent basis against that of other companies, in making financial and operating decisions and to establish certain management compensation.
 

Equity-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP income from continuing operations by providing income from continuing operations, excluding the effect of equity-based compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons.  

 

Adjusted EBITDA excludes infrequent or unusual items including costs and fees related to an internal ERP systems integration upgrade, a network systems evaluation and acquisition related costs. We believe that these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.
 

EBITDA and Adjusted EBITDA are not measures of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to – not a substitute for – results of operations presented on the basis of GAAP. EBITDA and Adjusted EBITDA do not purport to represent cash flow provided by operating activities as defined by GAAP. Furthermore, EBITDA and Adjusted EBITDA are not necessarily comparable to similarly-titled measures reported by other companies.

 

The following table reconciles the specific items excluded from GAAP in the calculation of EBITDA and Adjusted EBITDA for the periods indicated below (in thousands except per share amounts):

 

		For The Three Months								For The Six Months
		Ended June 30,								Ended June 30,
		2015				2014				2015				2014
Income (loss) from continuing operations, net of income taxes (GAAP)		$	269			$	226			$	(352	)		$	1,372
Depreciation and amortization			1,901				1,762				3,782				3,180
Interest expense and other non-operating expense (income), net			173				192				346				(888	)
Income tax expense (benefit)			141				(670	)			(245	)			(75	)
EBITDA (non-GAAP)			2,484				1,510				3,531				3,589
Equity-based compensation			797				584				1,581				1,139
Infrequent or unusual items, including transaction and other costs			129				884				582				1,023
Adjusted EBITDA (non-GAAP)		$	3,410			$	2,978			$	5,694			$	5,751
Income (loss) from continuing operations, net of income taxes, per diluted share (GAAP)		$	0.01			$	0.01			$	(0.02	)		$	0.07
EBITDA per diluted share (non-GAAP)			0.13				0.08				0.19				0.19
Adjusted EBITDA per diluted share (non-GAAP)			0.18				0.16				0.30				0.30
Weighted average shares outstanding used in computing diluted per share amounts			19,029				19,198				19,011				19,249

 

As noted above infrequent or unusual items include costs and fees related to an internal ERP systems integration upgrade, a network systems evaluation and acquisition related costs.

 

 

Liquidity and Capital Resources

 

We use the net cash generated from our operations to fund new product development, upgrades to our technology and to invest in new businesses. Our sources of funds, principally from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operations and investing requirements.

 

We had working capital of $23.0 million as of June 30, 2015, compared to $23.7 million as of December 31, 2014, respectively. We had cash balances of $14.2 million and $17.3 million as of June 30, 2015 and December 31, 2014, respectively; and available credit of $5.0 million as of June 30, 2015 and December 31, 2014. Our allowance for doubtful accounts reflected in the accompanying balance sheet includes bad debt reserves and revenue reserves.

 

Net cash provided by operating activities for the six-month period ended June 30, 2015 was $3.2 million compared with net cash of $5.1 million provided by operating activities of continuing operations for the six-month period ended June 30, 2014.
 

Net cash used in investing activities for the six-month period ended June 30, 2015 was $3.7 million, representing expenditures for tangible assets, purchases of software and capitalization of internally developed software.
 

Net cash used in financing activities for the six-month period ended June 30, 2015 was $2.6 million, primarily for payments on debt.
 

On May 5, 2014, we entered into a Second Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement was entered into by the Company in contemplation of the cash funding required in connection with our acquisition of Omnilink (see Note B – Merger) and to provide additional funding as needed for future capital investments for the business. In that regard, the Loan Agreement provides for $30.0 million of aggregate credit which is comprised of a $25.0 million term loan that was specifically structured and designated as funds to be borrowed and used by the Company toward payment of cash purchase consideration for the Omnilink transaction and an additional $5.0 million revolving line of credit for general corporate needs.

 

The maturities for both the term and revolving credit facilities contemplated in the Loan Agreement are May 5, 2019. As is typical in the case of term loan structures, the Loan Agreement provides for mandatory scheduled quarterly payments of principal as set forth in the table below that will cumulatively have the effect of repaying 80%, or $20.0 million, of the principal borrowed before the maturity date in May, 2019. The remaining principal of $5.0 million will be due at maturity if not otherwise repaid earlier by way of voluntary Permitted Prepayments or by mandatory Excess Cash Flow Recapture Payments (as defined in the Loan Agreement).

 

Loan Agreement Principal Repayment Schedule
		Quarterly				Annually
June 2014 - March 2015		$	625,000			$	2,500,000
June 2015 - March 2016			937,500				3,750,000
June 2016 - March 2017			937,500				3,750,000
June 2017 - March 2018			1,250,000				5,000,000
June 2018 - March 2019			1,250,000				5,000,000
Outstanding balance due May 2019			-				5,000,000

 

Our obligations under the Loan Agreement are secured by substantially all of our assets and the assets of our subsidiaries. In addition, we are required to meet certain financial and other restrictive covenants customary with this type of facility, including maintaining a senior leverage ratio, a fixed charge coverage ratio and minimum liquidity availability. We are also prohibited from paying dividends. The Loan Agreement contains customary events of default. If a default occurs and is not cured within any applicable cure period or is not waived, any outstanding obligations under the Loan Agreement may be accelerated. We were in compliance with all of the Bank’s financial covenants at June 30, 2015.

 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2015, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies, estimates and judgments during the six months ended June 30, 2015 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risks.

  

The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities. We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under our $25.0 million term loan. Our term loan provides for variable interest rates determined by reference to the prime rate or LIBOR rate. A one-eighth percent increase or decrease in assumed interest rates for the $25.0 million term loan for the one year period following its inception would result in a corresponding increase or decrease in interest expense of $30,000.

 

We also hold cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks outside the United States are denominated in the local currency and are minor.

 

Foreign Currency

 

The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates, and revenues and expenses are translated at the ending exchange rate from the prior period which materially approximates the average exchange rates for each period. Resulting translation adjustments are reflected as other comprehensive (loss) income within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Except for transactions with customers and vendors in Canada, substantially all other transactions are denominated in U.S. dollars. Foreign operations were not significant to us for the quarter ended June 30, 2015.

 

Item 4.

Controls and Procedures.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act Rules 13a – 15(f). Our internal control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance as to the reliability of financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework, issued in 2013. Based on this assessment, management concludes that, as of June 30, 2015, our internal control over financial reporting is effective based on those criteria.

 

Management has excluded Omnilink Systems, Inc. (Omnilink) from its assessment of internal control over financial reporting as of June 30, 2015 because we merged our wholly-owned subsidiary with and into Omnilink with Omnilink surviving the merger as a wholly-owned subsidiary of the Company in a purchase business combination during 2014. Omnilink’s internal controls over financial reporting will be assessed throughout the year as part of our controls over financial reporting and reported on for the year ended December 31, 2015.

 

 

PART II—OTHER INFORMATION

 

Item 1.        Legal Proceedings.

 

We currently are not involved in any pending material litigation.

 

Item 1A.     Risk Factors.

 

For information regarding 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 December 31, 2014 as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

 

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.

 

Issuer Purchases of Equity Securities

Total

Average

Total shares purchased

Maximum number of shares

shares

price paid

as part of publicly

that may yet be purchased

Period

purchased

per share

announced programs

under the plans of the program

April 1-30*

8,029

$

11.36

n/a

n/a

Total

8,029

$

11.36

n/a

n/a

*All shares are common shares repurchased in connection with employee equity-based compensation under the Numerex Corporation 2006 Long Term Incentive Plan, as amended, to satisfy employee payroll tax withholding obligations. These shares were not repurchased pursuant to publicly announced plans or programs. Numerex does not have a publicly announced plan or program to repurchase its equity securities.

 

Item 3.        Defaults Upon Senior Securities.

 

  None - not applicable.

 

Item 4.        Mine Safety Disclosures.

 

  None - not applicable.

 

Item 5.        Other Information.

  

  None - not applicable.

 

Item 6.        Exhibits

  

	Exhibit 31.1	Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
	Exhibit 31.2	Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a).
	Exhibit 32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 101	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, (ii) Unaudited Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2015 and 2014, (iii) Unaudited Consolidated Statements of Cash Flows for the three months ended June 30, 2015 and 2014, (iv) Unaudited Condensed Consolidated Statement of Shareholders Equity for the three months ended June 30, 2015 and (v) Unaudited Condensed Notes to Consolidated Financial Statements.

 

 

SIGNATURES

  

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

	NUMEREX CORP.
	(Registrant)
August 5, 2015	/s/ Stratton J. Nicolaides
	Stratton J. Nicolaides
	Chairman of the Board of Directors and Chief Executive Officer
August 5, 2015	/s/ Richard A. Flynt
	Richard A. Flynt
	Chief Financial Officer and
	Principal Financial and Accounting Officer