NUMEREX CORP. (Name of Registrant as Specified in Its Charter) | Pennsylvania | | 11-2948749 | | (Name of Registrant as Specified in Its Charter) |
Pennsylvania | | 11-2948749 | (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) | | | | | 3330 Cumberland Blvd, SE Suite 700, Atlanta, GA | | 30339 | | (Address of Principal Executive Offices) | | (Zip Code) |
(770) 693-5950 (Registrant’s Telephone Number, Including Area Code) (770) 693-5950
Securities Registered Pursuant to Section 12(b) of the Act: (Registrant’s Telephone Number, Including Area Code) | | Securities Registered Pursuant to Section 12(b) of the Act: |
Class A Common Stock, no par value | | The NASDAQ Stock Market LLC (Name of each exchange on which registered) |
Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act. Yes ¨o No þ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 o¨ Accelerated filer þ Non-accelerated filer o¨ Smaller Reporting Companyo¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o¨ No þ The aggregate market value of the registrant’s outstanding common stockClass A Common Stock held by non-affiliates of the registrant was $160.0$130.6 million based on a closing price of $11.16$8.54 on June 28, 2013,30, 2015, as quoted on the NASDAQ Global market. The number of shares outstanding of the registrant’s Class A Common Stock as of March 3, 2014,10, 2016, was 18.919.4 million shares. DOCUMENTS INCORPORATED BY REFERENCE Not applicable. The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2013. The proxy statement is incorporated herein by reference into the following parts of the Form 10-K:
Part III, Item 10, Directors, Executive Officers and Corporate Governance;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters;
Part III, Item 13, Certain Relationships and Related Transactions, and Director Independence; and
Part III, Item 14, Principal Accountant Fees and Services.
NUMEREX CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
Forward-Looking Statements
This document contains, and other statements may contain, forward-looking statements with respect to Numerex 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. Numerex cautions 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 Numerex assumes 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 reposition our platform to capture greater recurring subscription revenues; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers 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; 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 extent and timing of technological changes.
Overview
Numerex Corp. (“Numerex,” the “Company” or “we”) is headquartered in Atlanta, Georgia, and organized under the laws of the Commonwealth of Pennsylvania. We are a leading provider of on-demand and interactive machine-to-machine, referred to as “M2M”, enterprise solutions.
Our long-term strategy has remained, at its core, the same: to generate long term and sustainable recurring revenue through the use of our integrated M2M horizontal platforms. These platforms incorporate the key M2M elements of Device (D), Network (N), and Application (A), and are offered, for the most part, on a subscription basis through a “service bureau”, thereby simplifying and speeding the delivery of an M2M solution to targeted vertical markets.
We provide a broad range of M2M business services, technology, and products used in the development and support of M2M solutions for the enterprise and government markets worldwide. We have built innovative platforms that are cloud-based and service-centric to facilitate the development, deployment and use of our customers’ M2M, Internet of Things (IoT) solutions across a wide range of markets. At the end of 2013, we supported 2.2 million M2M subscriptions.
An M2M solution is generally viewed as a combination of devices, software and services that operate with little or no human interaction. More specifically, it consists of using a device (D) (e.g., sensor, meter, etc.) to capture “event” data (e.g., inventory level, location, environment status, etc.) relaying the data through a network (N) (e.g., wireless, wired or hybrid) to an application (A) (software program), which translates the captured data into actionable information (e.g., there is a breach, vending machine needs to be restocked, pipe is corroded, lost vehicle is located, tank level is too low, etc.). We refer to this combination as Numerex DNA®.
Our subscription-based platform services, which are intended to generate streams of long-term, high-margin recurring revenues, are the cornerstone of our business model. We create value by helping our customers implement M2M solutions through a single source - rapidly, efficiently, reliably and securely. We put a strong emphasis on data security. In addition to the use of authentication, encryption and virtual private network, referred to as “VPN”, technologies to protect customer data, our internal organization has undergone ISO/IEC 27001:2005 (an international information security standard) scrutiny and certification.
We operate in the Business-to-Business market, and our customers, in general, serve the final end users. Our products and services are primarily sold to enterprise and government organizations, some with global deployments. Our targeted vertical markets include supply chain, asset tracking and security.
We work with our customers to develop M2M, IoT solutions that integrate Numerex DNA®, and that include the foundational components, i.e., smart device, cellular and satellite network and software application, necessary for any M2M solution. We offer a complete solution through a single source, rather than requiring customers to utilize multiple vendors and partners. We also provide several enabling value-added services.
We accelerate the development process for our customers, through our cloud-based horizontal M2M platform Numerex FAST®, which can be accessed through various service delivery options, separately or combined, such as: Network-as-a-Service (NaaS); Platform-as-a-Service (PaaS); and Software-as-a-Service (SaaS).
In addition to specifically configured business solutions in targeted vertical markets, we sell unbranded, end-user ready (white label) solutions typically to channel partners who have well-defined markets that do not necessarily require a preconfigured or customized solution. Examples of such white label platforms include: security; Location-Based Services, referred to as “LBS”; and a number of additional fixed-wireless or “static” applications.
Our offerings use cellular, satellite, broadband and wireline networks worldwide to transmit data. We understand and manage all the requirements associated with international connectivity including regulations, processes and data requirements.
We utilize a diverse range of manufacturing sources and telecommunications standards. We believe that our ability to manage disparate networks and devices while providing customers with a consolidated view of their activity is a unique strength of Numerex. We focus on solution and service-based activity and sell hardware that we believe will connect to our platforms in order to generate a subscription and, as a result, will produce recurring revenue.
HISTORY
We were first traded publicly in March 1994 on the NASDAQ stock market. At that time, the Company focused on “derived channel”, a wireline-based telemetry data communications solution (“telemetry” was eventually subsumed by the ‘M2M’ acronym) and served select vertical markets that included alarm security and line monitoring. In November 1999, we sold our wireline business to British Telecommunications PLC (BT) in order to focus on our nascent wireless data communications business.
In May 1998, Numerex Corp., BellSouth Corporation and BellSouth Wireless, (which became Cingular in 2001 and AT&T in January 2007, following the merger between BellSouth and AT&T in December 2006), completed a transaction whereby Cellemetry LLC, a joint venture between Numerex and Cingular, was formed. Cellemetry LLC provided a cost-effective, two-way wireless data communications network throughout the United States, Canada, Mexico, Colombia, Argentina, Paraguay, the Dutch Antilles, and Puerto Rico. On March 28, 2003, we acquired Cingular’s interest in Cellemetry LLC.
During this period, we developed a service bureau, “Data1Source”, based on short message service, referred to as “SMS”. Data1Source provided SMS-related services to tier 2 and 3 carriers throughout the USA. While the Data1Source revenue base was subsequently sold, the related technology infrastructure was retained and it helped advance our technical expertise in Global Systems for Mobile Communications and Code Division Multiple Access technologies, referred to as “GSM” and “CDMA”, providing a solid foundation on which to build our current network platforms. In parallel, we expanded our technical platform to serve the mobile tracking and alarm monitoring markets.
At the beginning of 2006, we further enhanced our portfolio of wireless products and services through the acquisition of the assets of Airdesk, Inc. Airdesk’s wireless data solutions, network access and technical support were subsequently fully integrated into the Company’s operations.
In 2007, we acquired the assets of Orbit One Communications, Inc., which provides satellite data products and services to government agencies and the emergency service market.
In January 2008, we were awarded the international ISO/IEC 27001:2005 Certification (ISO 27001). ISO 27001 is ISO’s highest security certification for information security that ensures data confidentiality, integrity and availability every step of the way. The ISO 27001 certification facilitates compliance with an array of information security-related legislation and regulations in Numerex’s target markets such as utilities (NERC CIP Cyber Security mandates), financial services (GLBA and PCI DSS), healthcare (HIPAA), government (FISMA), and across markets (state laws governing security breach notification and Sarbanes Oxley Act). In December 2013, we completed the three-year ISO 27001 standard re-certification.
In October 2008, we acquired Ublip, Inc., a privately-held M2M software and service company headquartered in Dallas, Texas. With this acquisition, we gained an infusion of technology and expertise, including middleware designed to simplify and jumpstart application development and deployment.
In October 2012, we strengthened our capabilities in the alarm monitoring arena through the acquisition of certain assets, technology and intellectual property including a portfolio of patents that will support and widen our M2M platform capabilities in real-time monitoring of critical assets and events. In February 2013, we purchased a privately-held M2M business headquartered in Dallas, TX; and in December 2013 we purchased another privately-held M2M business headquartered in Oklahoma. These acquisitions included certain assets, products and technology used primarily in monitoring of oil and gas production, pipeline monitoring, and in the remote monitoring and management of bulk tanks.
SERVICE DELIVERY PLATFORM AND ENABLING SERVICES
In a rapidly changing business environment requiring visibility and real-time access to information, rapid solutions deployment with the ability to manage networks, devices and applications from a single source can have a significant impact on business processes and contribute to improved operational efficiencies. Our broad M2M horizontal service delivery platform, Numerex FAST®, was designed with that goal in mind.
Numerex FAST combines M2M service enablement features with configurable application frameworks to deploy solutions quickly and to reduce or eliminate costly development. Operating in a cloud-based environment, Numerex FAST focuses on the core enablement of M2M solutions, and provides the ability to deliver value-added services with speed and ease. Numerex FAST® provides a wide range of capabilities such as applications frameworks; self-care portal for device and subscriber; data management and warehousing; managed services; policy and performance management; connectivity management and network management.
The platform provides scalability and flexibility with service delivery options that can be accessed independently or as a fully integrated solution without costly development and coding. Whether customers desire to exploit a new revenue opportunity or to gain visibility into existing operations to reduce costs, the FAST platform can be utilized in many ways. Typical offerings include white labeled applications; application extension to a mobile M2M environment; sensor & tracking data management from wireless devices into the customer’s back office enterprise applications and distributed service offerings to dealers/reps.
We offer an extensive range of products and services that work with our hosted platforms and that make integration between smart device, network, and application a seamless process. From asset tracking on a global scale to stationary, or ‘static’, solutions that involve monitoring, measuring, and metering applications, our team of M2M on-boarding specialists and engineers work to optimize commercialization of a solution. Examples of enabling services include: 24x7x365 customer support; flexible billing; integration services; automated provisioning; a device management portal; a network operations center; network redundancy; product certification and ancillary services such as, but not limited to, warehousing and fulfillment.
SALES, MARKETING AND DISTRIBUTION
We sell our configured solutions and related services to, with, and through our strategic partner channels including integrators, consultative groups, wireless networks operators, key supply chain partners and large end-user enterprises.
We primarily employ an indirect sales model for our unbranded (white label) products through Value Added Resellers (VARs), vertically focused System Integrators (SIs) and Original Equipment Manufacturers (OEMs) who integrate our products and services into their own solutions. We also indirectly market and sell certain Numerex branded products and services through distribution and dealer channels, specifically the Uplink platform. Uplink alarm security products are sold “off the shelf” into distribution and to dealers throughout North America.
KEY CUSTOMERS
We have a hardware customer who accounted for 11.1% or $8.7 million of our consolidated revenue for the year ended December 31, 2013. No customers exceeded 10% of consolidated revenue for the years ended December 31, 2012 or 2011.
SUPPLIERS
We rely on third-party contract manufacturers, component suppliers, and wireless network operators and carriers, both in the United States and overseas, to manufacture most of the equipment used to provide our wireless M2M solutions, networking equipment and products. We also rely on multiple third-party wireless network operators both in the United States and Canada, to provide the underlying network service infrastructure that we use to support our M2M data network.
Several GSM-based wireless carriers have announced their intention to discontinue their second generation (2G) networks and fully deploy third and fourth generation (3G/4G) networks between 2016 and 2018. CDMA-based carriers have announced their intention to discontinue 2G networks as early as 2020. We and our network service providers intend to continue supporting 2G well into this decade, providing reliable 2G network services while at the same time we have introduced 3G/4G products for more advanced services.
COMPETITION
The market for our technology and platforms remains characterized by rapid technological change. The principal competitive factors in this market continue to be product performance, ease of use, reliability, price, breadth of product lines, sales and distribution capability, technical support and service, customer relations, and general industry and economic conditions.
Several businesses that share our M2M space can be viewed to some extent as competitors, including companies offering Service Delivery Platforms (SDP), Service Enablement Services (SES), Application Enablement Platforms (AEP), Application Development Platforms (ADP), and Connected Device Platforms (CDP); Mobile Virtual Network Operators (MVNOs); system integrators; and wireless operators and carriers that offer a variety of the components and services required for the delivery of complete M2M solutions. However, we believe that, as a global M2M managed solution provider, we have a competitive advantage and are uniquely positioned since we provide all of the key components of the M2M value chain, including cloud-based enabling platforms, multiple wireless technologies, custom applications, and wireless network services through one single source. We market and sell complete network-enabled solutions, or individual components, based upon the specific needs of the customer. Some module manufacturers have started to market application development platforms while other M2M players offer airtime services, making available to their customers integration capabilities.
We believe that our current M2M services, combined with the continuing development of our network offerings, infrastructure and technology, positions us to compete effectively with emerging providers of M2M and IoT solutions using GSM, CDMA and satellite technologies. Other potentially competitive offerings may include “wireless fidelity” (Wi-Fi), World Interoperability for Microwave Access (WiMAX) and other cellular/satellite technologies and networks.
We believe that our longevity in the industry; our repository of intellectual property, know-how, prior art, and numerous patents and licenses in conjunction with our ability to offer fully-integrated solutions; global reach; data protection; rapid response, scalability and flexibility are critical differentiators.
Our Uplink security products and services have three primary competitors in the existing channels of distribution — Alarm.com; Honeywell’s AlarmNet; NAPCO Security Technologies; Telular’s Teleguard and DSC, the security division of Tyco. We believe that the principal competitive factors when making a product selection in the business and consumer security industry are hardware price, service price, reliability, industry certification status and feature requirements for specific security applications, for example fire, burglary, bank vault, etc.
Regarding the transition to 3G/4G, we remain committed to the security marketplace, including supporting expanded home automation and video capabilities and offerings. We will continue to work with our customers to provide the services required to meet their security customers’ needs.
M2M STANDARDIZATION INVOLVEMENT
We believe that sharing our M2M expertise with international groups and forums focused on standards and the industry’s growth is mutually beneficial. Our Chief Innovation and Technology Officer, Dr. Jeffrey O. Smith is the Chair of the Global Standards Collaboration (GSC) M2M Standardization Task Force (MSTF), which is comprised of all major standards developing organizations from around the world. GSC’s mandates include supporting the International Telecommunication Union (ITU), a specialized agency of the United Nations, as the preeminent global telecommunication and radio-communication standards development organization. The goal of the GSC MSTF is to foster global coordination and harmonization in the area of M2M standardization. In addition, Numerex’s CEO, Mr. Stratton J. Nicolaides is a member of the board of directors of the U.S. Telecommunications Industry Association (TIA), a leader in setting standards in the telecommunications arena. TIA is a founding member of the oneM2M international partnership that was established in July 2012. The purpose and goal of oneM2M is to develop technical specifications which address the need for a common M2M Service Layer that can be readily embedded within various hardware and software, and relied upon to connect the myriad of devices in the field with M2M application servers worldwide.
ENGINEERING AND DEVELOPMENT
Our success depends, in part, on our ability to enhance our existing products and introduce new products and applications on a timely basis. We plan to continue to devote a portion of our resources to engineering and development. We incurred $4.9 million of engineering and development costs during the year ended December 31, 2013, of which $1.5 million was capitalized as software development costs.
We continue to invest in new services and improvements to our various technologies, especially networks and digital fixed and mobile solutions. We primarily focus on the development of M2M solutions and enabling platforms, enhancement of our gateway and network services, reductions in the cost of delivery of our solutions, and enhancements and expansion of our application capabilities including application frameworks.
PRODUCT WARRANTY AND SERVICES
Our M2M business typically provides a limited, one-year repair or replacement warranty on all hardware-based products. To date, warranty costs and the cost of maintaining our warranty programs have not been material to our business.
INTELLECTUAL PROPERTY
We and our subsidiaries hold rights to patents in the United States and a number of foreign countries relating to certain aspects of our hardware devices, software, and network services. We have also registered or applied for trademarks in the United States, Europe, Canada, Mexico and a number of other foreign countries. Our portfolio of registered United States, European, Canadian, and Mexican trademarks includes such “core” marks as NUMEREX®, UPLINK®, NUMEREX DNA®, and NUMEREX FAST®. Although we believe the ownership of patents and trademarks is an important factor in our business and that our success depends in part on such ownership, we rely more on the talent, competence, and professional abilities of our personnel than on the accumulation of intellectual property rights.
We regularly file patent applications to protect innovations arising from our internal engineering and development initiatives, and are currently pursuing patent applications around the world. Our current patent portfolio consists of 49 issued or allowed U.S. patents and 30 issued foreign patents. In addition, 46 patents have been applied for in the United States and 38 foreign patents have been applied for. A majority of those applications have or are anticipated to have a corresponding application in Europe, Canada, and/or Mexico.
Most of our patents, patent applications, and patents pending fall into one or more of the following categories:
| ●
| Wireless/cellular signal transport |
| ●
| Alarm and security system signaling |
| ●
| Location-based signaling |
| ●
| Remote asset monitoring and tracking |
| ●
| Voice and video signal transport |
No single patent is solely responsible for protecting our products. United States patents have a limited legal lifespan, typically 20 years from the filing date for a utility patent filed on or after June 8, 1995. Our currently issued patents expire from 2014 to 2032. We believe the duration of our patents is adequate relative to the expected lifespan of our products. No assurance can be given regarding the scope of patent protection.
Many of our products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of our products and business methods. While we have generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of technological changes in the industries in which we compete, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of our products and business methods may unknowingly infringe upon existing patents or intellectual property rights of others. We periodically receive offers from third parties to obtain licenses for patents and other intellectual rights in exchange for royalties or other payments. From time to time, we have been notified that we may be infringing certain patents or other intellectual property rights of third parties.
We also hold other intellectual property rights including, without limitation, copyrights, trademarks, and trade secret protections relating to our technology, products, and processes. We believe that rapid technological developments in the telecommunications and location based services industries may limit the protection afforded by patents.
In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require all of our employees and consultants to sign confidentiality, non-compete, and non-solicit agreements. Employees and consultants involved in technical endeavors also sign invention assignment agreements.
REGULATION
Federal, state, and local telecommunications laws and regulations have not posed any significant impediments to either the delivery of wireless data signals/messaging or services using our various platforms. However, we may be subject to certain governmentally imposed taxes, surcharges, fees, and other regulatory charges, as well as new laws and regulations governing fixed and mobile communications devices, associated services, our business and markets. As we expand our international sales, we may be subject to telecommunications regulations in those foreign jurisdictions.
EMPLOYEES
As of March 3, 2014, we had 159 employees in the U.S., consisting of 69 in sales, marketing and customer service, 63 in engineering and operations and 27 in management and administration. We have experienced no work stoppages and none of our employees are represented by collective bargaining arrangements. We believe our relationship with our employees is good.
AVAILABLE INFORMATION
We make available free of charge through our website at www.numerex.com our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto filed or furnished pursuant to 13(a) or 15(d) of the Securities and Exchange act of 1934, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission. Our filings are also available through the Securities and Exchange Commission via their website, http://www.sec.gov. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The information contained on our website is not incorporated by reference in this annual report on form 10-K and should not be considered a part of this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, and all persons chosen to become executive officers, and their ages and positions as of March 3, 2014, are as follows:
| | Chief Financial Officer | Louis Fienberg2 | | 59 | | Executive Vice President, Corporate Development | Jeffery O. Smith, PhD | | 53 | | Chief Innovation and Technology Officer |
EXPLANATORY NOTE This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) amends Numerex Corp’s (“Numerex”, “we”, “our”, “us” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2016 (the “Original Filing”). We are filing this Amendment No. 1 solely for the purpose of providing the information required in Part III of Form 10-K. Except as described above, this Amendment No. 1 does not amend any other information set forth in the Original Filing, and we have not updated disclosures included therein to reflect any subsequent events. As used in the Amendment No. 1, “FY 2014,” “FY 2015” and “FY 2016” mean the Company’s fiscal year ended December 31, 2014, 2015 and 2016, respectively. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information About our Executive Officers A list of our executive officers and their biographical information appears in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the SEC on March 15, 2016. Information About our Board of Directors (the “Board”) Listed below are the Company’s eight directors. Each of the directors serves a one-year term expiring at the next annual meeting of shareholders. | Name | | Age | | Position | | Director Since | | E. James Constantine | | 69 | | Director | | 2008 | | Tony G. Holcombe | | 60 | | Director | | 2011 | | Sherrie G. McAvoy | | 56 | | Director | | 2013 | | Stratton J. Nicolaides | | 62 | | Chairman of the Board | | 1999 | | Jerry A. Rose | | 57 | | Director | | 2013 | | Andrew J. Ryan | | 57 | | Director | | 1996 | | Eric Singer | | 42 | | Director | | 2016 | | Marc Zionts | | 54 | | Director and Chief Executive Officer | | 2015 |
Set forth below is a brief description of the principal occupation and business experience of each of our nominees for director, as well as the summary of our views as to the qualifications of each nominee to serve on the Board and each board committee of which he or she is a member. Our views are formed not only by the current and prior employment and educational background of our directors, but also by the Board's experience in working with their fellow directors. All but two directors have served on the Board for at least three years, and certain directors have ten or more years of experience on our Board. Accordingly, the Board has had significant experience with the incumbent directors and has had the opportunity to assess the contributions that the directors have made to the board as well as their industry knowledge, judgment and leadership capabilities. E. James Constantine has served as a director of the Company since October 2008. From 2006 through 2011, Mr. Constantine has served as CEO of HPE America LLC, a holding of Piero Ferrari involved in power train development for NASCAR and Formula 1 racing vehicles. The Company closed its operations in the U.S. in 2011 at which time Mr. Constantine retired. From February 2003 until July 2006, Mr. Constantine was the CEO of Delta Motors LLC and a private holding company, MY Ventures, LLC, which held entities engaged in development of embedded cellular transceivers, GPS and location-based services and technology, special purpose vehicles, and commercial real estate. He previously served on the Board of Governors of Claremont McKenna College's Kravis Leadership Institute, and was the commercial consultant to the City of Los Angeles for the creation of its electric vehicle initiative and development of the first parallel hybrid vehicle. Mr. Constantine’s tenure as CEO of a company in the auto industry and a wireless communications company provide valuable business, leadership and management experience, including expertise in creating value and product development for our customers in the auto and real estate sectors. Mr. Constantine's experience as a CEO also provides valuable insights as a member of the Nominating and Corporate Governance Committee and a member of the Audit Committee. Tony G. Holcombe was appointed as a director in 2011. Currently, Mr. Holcombe is Vice Chairperson of the Board of Directors Mr. Nicolaides hasSyniverse, where he served as Chief Executive Officerthat company’s President and CEO from 2006 to until his retirement in 2011. He has been a member of the Syniverse Board since 2003. He also serves on the Nominating and Governance Committee of Syniverse. During his time as President and CEO of Syniverse, Mr. Holcombe's many accomplishments included diversifying the business through several key acquisitions; defining a strategic vision that transformed Syniverse from a North American roaming and clearing house provider to a leading global provider of technology and business services to the mobile industry; and solidifying The Carlyle Group as the company's single investor in January 2011 for $2.6 billion. Before becoming Syniverse's President and CEO, Mr. Holcombe served as president of Emdeon Corp., formerly WebMD, and as president of Emdeon Business Services. Mr. Holcombe has more than 20 years of executive-level experience in the transaction processing and technology services industry. He was CEO of Valutec Card Solutions and served in various executive positions at Ceridian Corporation, including EVP of Ceridian Corporation, president of Ceridian Employer Employee Services and president of Comdata. Mr. Holcombe received his bachelor’s degree from Georgia State University, where he currently serves as an Advisor for the Robinson College of Business. Mr. Holcombe’s wide-ranging business experience provides valuable knowledge to our Audit Committee and as the Chairperson of the Compensation Committee.Sherrie G. McAvoywas appointed to the board in 2013. She spent her 31 year career at Deloitte & Touche LLP, a global accounting, auditing and professional services firm. During her last five years with Deloitte, Ms. McAvoy served as the lead audit partner supervising audits of both public and private companies in a diverse group of industries including retail, leisure and technology services. She also held regional and national leadership positions in the retail and governance practices. Ms. McAvoy brings to our Board diversified business experience as well as deep expertise on accounting, auditing, internal controls, risk management, corporate compliance and ethics, and corporate governance. Ms. McAvoy received her Bachelor of Science degree from The Pennsylvania State University in 1980. She is a Certified Public Accountant and a member of The American Institute of Certified Public Accountants. Ms. McAvoy served as an advisor to The Institute for Excellence in Corporate Governance at The University of Texas at Dallas from its inception in 2002 through 2011. We believe that Ms. McAvoy's expertise garnered over 31 years with Deloitte brings a valuable perspective to our Board on accounting, financial and internal control matters. She is Chairperson of the Audit Committee and a member of the Nominating and Governance Committee and the Compensation Committee. Stratton J. Nicolaides served as CEO of the Company sincefrom April 2000 havingto September 2015, and served as Chief Operating OfficerCOO from April 1999 until March 2000, and as Chairman of the Board since December 1999. In 2007, Mr. Nicolaides began serving as a director of the Taylor Hooton Foundation, a non-profit organization formed to fight steroid abuse by America's youth. With his years of experience in the wireless communication industry, including more than fifteen years of senior management experience at Numerex , we believe that Mr. Nicolaides' deep industry knowledge and expertise in operations, product development, competitive intelligence and corporate strategy provides the Board with significant insight across a broad range of issues critical to our business. Jerry A. Rosewas appointed to the board in 2013 and brings a successful track record of leading and driving growth in key businesses such as General Electric (GE) and United Technologies Corporation (UTC). He was a Vice President of Product Management of GE Security, Inc. since June 2007 until 2010 and was instrumental in the sale of GE Security to UTC. In 2010, Mr. Rose joined UTC as Vice President of Global Product Management. Mr. Rose held several global leadership positions during his 26 years at GE including Executive Officer roles in GE's Appliances, Lighting and Security businesses. We believe his product development and management knowledge and his leadership in global strategy and integration is a valuable addition to the Board. Mr. Rose currently serves as Chair of the Nominating and Governance Committee and as a member of the Board of Directors for the Telecommunications Industry Association (TIA)Compensation Committee. Andrew J. Ryanhas served as well as the Taylor Hooten Foundation. Mr. Flynt was appointed the Chief Financial Officera director of the Company since May 1996. Mr. Ryan currently practices law with The Ryan Law Group (TRLG) a law firm he founded in June 2013.May 2014. Prior to that,TRLG, he was Chief Financial Officerpracticed law with the firm of Immucor, Inc. from December 2007.Salisbury & Ryan since August 1994. Mr. Flynt servedRyan serves as Vice President — Financethe Board designee of Gwynedd Resources, Ltd. in accordance with McKesson Corporation beginning in January 2007 after McKesson Corporation acquired Per-Se Technologies, Inc. Priorits contractual right to that,designate a member of the Board. Mr. Flynt served as Senior Vice President — Corporate Controller & Chief Accounting OfficerRyan's wide-ranging legal practice and breadth of experience gained with Per-Se Technologies, Inc., a healthcare business services and information technology company, from 2004. From 1997 to 2004, Mr. Flynt held various financial leadership positions with Exide Technologies, GTS Energy and GNB Technologies. Mr. Flynt is a Certified Public Accountant and hashis more than 30 years of financial management experience, including 1520 years of experience with Ernst & Young LLP.
the Company has been of particular value in assisting the Board with evaluating business and strategic issues. Mr. FienbergRyan provides the Board with significant operational insights regarding strategies and corporate governance issues.Eric Singer was appointed as Director and a member of the Audit and Nominating and Governance Committee in March of 2016. Mr. Singer serves as the Company’s Executive Vice President for Corporate Development and has been withdesignee of VIEX Capital Advisors, LLC pursuant to the Company since July 2004. From August 2003 to July 2004,agreement described below. Mr. Fienberg served as Managing Director of an investment banking firm. From 1992 to 2003, Mr. Fienberg was a Senior Vice President and merger and acquisition specialist with Jefferies and Company, Inc. Dr. SmithSinger has served as the Chief Innovationmanaging member of each of VIEX GP, LLC, the general partner of VIEX Opportunities Fund, LP, and Technology Officervarious VIEX Opportunities Funds, as well as certain other investment funds since October 9, 2008.May 2014. Mr. Singer served as co-managing member of Potomac Capital Management III, LLC from March 2012 until September 2014, and General Partner of several of its related entities from May 2009 until September 2014. From JuneJuly 2007 to October 2008, heApril 2009, Mr. Singer was a senior investment analyst at Riley Investment Management. He has served on the board of directors of TigerLogic Corporation since January 2015 and IEC Electronics Corp., since February 2015. Singer previously served as a director at Meru Networks, Inc. from January 2014 until January 2015, PLX Technology, Inc. from December 2013 until its sale in August 2014, Sigma Designs, Inc. from August 2012 until December 2013, including as its Chairman of the PresidentBoard from January 2013 until December 2013, and Zilog Corporation from August 2008 until its sale in February 2010. Mr. Singer holds a B.A. from Brandeis University. Mr. Singer brings to the Board experience as a director at other public companies and significant financial and investment experience, including capital allocation and transactional experience.Marc Zionts was appointed Chief Executive Officer of Ublip, Inc.Numerex Corp. in September of 2015. Mr. Zionts, a provider of M2Mtelecom executive and location basedentrepreneur over three decades, focuses on developing emerging technologies and services that Dr. Smith founded. From January 2002 until June 2007, Dr. Smith served ascompanies in high growth markets. Mr. Zionts has previously led 6 companies since 1987, resulting in 5 trade sales and 1 IPO. Most recently, Mr. Zionts was the President and Chief Executive OfficerCEO of SensorLogic, Inc.,Aicent, sold to Syniverse. Prior to starting his first company in 1987, Mr. Zionts worked for GTE (now Verizon). Mr. Zionts earned his Bachelor’s degree and Master’s degree in Management from the Georgia Institute of Technology and remains active at Georgia Tech as an M2M application service provider that heAlumni Mentor. Mr. Zionts is also founded. From June 1996 until January 2000, Dr. Smith served as regional Presidentan Independent Board Director for Pivot 3, based in Austin, TX, TEOCO, a TA Associates portfolio company, based in Fairfax, VA, and directorFriends of NTT/Verio, an internet service provider and web hosting company. From October 1993 until January 1997, he served as President and Chief Executive Officer of OnRamp Technologies, an internet service provider that he co-founded. Investingthe Earth, a Washington, D.C. based environmental group. Mr. Zionts provides insight to the Board regarding day-to-day operations, customer information, competitive intelligence, general trends in our common stock involves a high degree of risk. You should carefully consider the following information about these risks before buying shares of our common stock. If any of these risks occur, our business could be materially harmed, and ourindustry as well as financial condition and results of operations could be materially and adversely affected. As a result, the price of our common stock could decline, and you could lose all or part of your investment. You should also refer to the other information contained in this Annual Report on Form 10-K for the year ended December 31, 2013 (the Annual Report) or incorporated herein by reference, including our consolidated financial statements and the notes to those statements. See also Forward-Looking Statements.results.We have a history of losses andFamily Relationships There are uncertain as to our future profitability. We have had mixed success with regard to generating profits. While we were profitable in 2013, 2012, and 2011, we incurred losses in 2010, 2009, and 2008. As a holding company our primary material assets are our ownership interests in our subsidiaries and in certain intellectual property rights. Consequently, our earnings derive from our subsidiaries and we depend on accumulated cash flows, distributions, and other inter-affiliate transfers from our subsidiaries. In view of our history of losses, operating costs, and all other risk factors discussed in this annual report, we may not be profitable in the future.
Adverse macroeconomic conditions could magnify our customers’ current financial difficulties.
We provide solutions that are resold by our customers – primarily value-added resellers whose customers are end users of our solutions and distributors who sell to other resellers of our solutions. Many of our customers operate on narrow margins and have been adversely affected by overall economic conditions. Current economic conditions, while improving, may deteriorate and negatively impact demand for our customers’ solutions, reducing their demand for our solutions. Our customers may also face higher financing and operating costs. If current economic conditions do not continue to improve, or alternatively, worsen, we may experience reduced revenue growth or a decrease in revenues and an increase in expenses, particularly in the form of bad debts on the part of our customers. All of these and other macroeconomic factors could have a material adverse effect on demand for our solutions and on our financial condition and operating results.
Our operations are influenced by the economic strength of the housing sector. If improvements in the housing sector are not sustained, sales of our residential alarm monitoring solutions may be impaired. If overall conditions do not continue to improve, residential and commercial consumers may decide to cancel wireless monitoring services in an effort to eliminate expenses viewed as discretionary or non-critical. Similarly, a reversal of the current uptick in vehicle sales would negatively impact sales of our vehicle tracking solutions.
The markets in which we operate are highly competitive, and we may not be able to compete effectively.
We sell our products in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do. Existing or new products and services that provide alternatives to our products and services could materially impact our ability to compete in these markets. As the markets for our products and services continue to develop, additional companies, including companies with significant market presence in the M2M industry, could enter the markets in which we compete and further intensify competition. In addition, we believe price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.
As a further result of such competition, our new solutions could fail to gain market acceptance. Over the past several years, we have introduced a system enabling alarm signals to be transmitted digitally over cellular networks to central monitoring stations; a cellular and GPS-based vehicle tracking solution; a satellite-based mobile asset monitoring and tracking solution; enhanced “back end” services and application development platforms. If these solutions and services, orno family relationships among any of our other existing solutionsdirectors or executive officers.Right to Designate Director and services, do not perform as expected, or if our sales fall short of expectations, our business may be adversely affected. We operate in newBoard CompositionOn March 30, 2016, the Company entered into an agreement with Vertex Opportunities Fund, LP – Series One, Vertex Special Opportunities Fund II, LP, Vertex Special Opportunities Fund III, LP, Vertex GP, LLC, Vertex Special Opportunities GP II, LLC, Vertex Special Opportunities GP III, LLC, Vertex Capital Advisors, LLC, and rapidly evolving markets where rapid technological change can quickly make hardware solutions and services, including those that we offer, obsolete. Eric Singer (collectively, “VIEX”) under which the Company agreed: | (a) | to increase the number of members of the Board to eight and for a period until the date that is ten business days prior to the deadline for the submission of shareholder nominations of individuals for election to the Board at the 2017 Annual Meeting (the “Standstill Period”) and not to recommend or take action to increase the size of the Board to more than eight directors; |
| (b) | to appoint Eric Singer to fill the vacancy created thereby and elect Mr. Singer to the Audit Committee and the Nominating and Corporate Governance Committee; |
| (c) | to nominate Brian Igoe, Eric Singer, Stratton Nicolaides, Marc Zionts, Tony Holcombe, Sherrie G McAvoy, Jerry A, Rose, and Andrew Ryan (the “2016 Nominees”) for election to the Board at the 2016 Annual Meeting; and |
| (d) | if Eric Singer, Brian Igoe, or any replacement director for Eric Singer or Brian Igoe is unable to serve as a director during the Standstill Period then VIEX will be given the right to recommend a substitute person to the Board, provided that VIEX, at the time such individual is unable to serve as a director, beneficially owns in the aggregate at least 5% of the Company’s then outstanding Class A Common Stock (Common Stock), such substitute person is independent pursuant to the SEC and NASDAQ listing standards, and such substitute person is not an Affiliate or Associate of VIEX. |
The markets we operate in are subjectCompany previously entered into an agreement providing Gwynedd Resources Ltd. (Gwynedd) the right to rapid advances in technology, continuously evolving industry standards and regulatory requirements, and ever-shifting customer requirements. The M2M industry, in particular, is currently undergoing profound and rapid technological change. For example, most ofdesignate one director to the current subscribers we host connect to cellular networks using 2G-based devices. Several GSM-based wireless carriers have announced their intention to discontinue their 2G networks and fully deploy 3G/4G networks between 2016 and 2018. CDMA-based carriers have announced their 2G sunset for as early as 2020. While we are beginning to market, sell, and support 3G/4G-based devices and service, we may not be successful in transitioning all of our 2G-based subscribers to 3G/4G and may lose customers as a result. The introduction of unanticipated new technologies by carriers, or the development of unanticipated new end applications by our customers, could render our current solutions obsolete. In that regard, we must discern current trends and anticipate an uncertain future. We must engage in product development efforts in advance of events that we cannot be sure will happen and time our production cycles and marketing activities accordingly. If our projections are incorrect, or if our product development efforts are not properly directed and timed, orBoard. Additionally, if the demandsBoard consists of the marketplace shift in directions that we failed to anticipate, wemore than seven directors, Gwynedd, at its option, may lose market share and revenues as a result. To remain competitive, we continue to support engineering and development efforts intended to bring new hardware solutions and services to the markets that we serve. However, those efforts are capital intensive. If we are unable to adequately fund our engineering and development efforts, we may not be successful in keeping our product line current with advances in technology and evolving customer requirements. Even with adequate funding, our development efforts may not yield any appreciable short-term results and may never result in hardware solutions and services that produce revenues over and above our cumulative development costs or that gain traction in the marketplace, causing us to either lose market share or fail to increase and forego increased sales and revenues as a result. We experience long sales cycles for some of our solutions.
Certain of our product offerings are subject to long sales cycles in view of the need for testing of our hardware solutions and services in combination with our customers’ applications and third parties’ technologies, the need for regulatory approvals and export clearances, and the need to resolve other complex operational and technical issues. For example, in the government contracting arena in particular, longer sales cycles are reflective of the fact that government contracts can take months or longer to progress from a “request for proposal” to a finalized contract document pursuant to which we are able to sell a finished product or service. Terms and conditions of sale unique to the government sector may also affect when we are able to recognize revenues. Delays in sales could cause significant variability in our revenue and operating results for any particular period. For that reason, quarter-over-quarter comparisons of our financial results may not always be meaningful.
We face substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
We record a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value and accrue necessary cancellation fee reserves for orders of excess products and components. We also review our long-lived assets for impairment whenever events or changed circumstances indicate the carrying amount of an asset may not be recoverable. If we determine that impairment has occurred, we record a write-down equal to the amount by which the carrying value of the assets exceeds its fair market value. Although we believe the provisions related to inventory, other assets and purchase commitments are currently adequate, no assurance can be given that wedesignate one additional director. Any designee’s appointment will not incur additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which we compete. Such charges could materially adversely affect our financial condition and operating results.
We are contractually obligated to provide our manufacturers and network service providers with forecasts of our demand for components of our hardware solutions and network capacity. Specific terms and conditions vary by contract, however, if our forecasts do not result in the production of a quantity of units or network capacity sufficient to meet demand we may be subject to contractual penalties under somethe exercise by the Board of our contracts with our customers. By contrast, overproductionits fiduciary duties and the approval of units based on forecasts that that overestimate demand could result inthe Company’s shareholders upon the expiration of any appointed term at the next annual meeting of shareholders. Gwynedd waived its right to appoint an accumulation of excess inventory that, under some of our contracts with our customers, would haveadditional director during the Standstill Period. Gwynedd’s right to be manageddesignate a director will cease at our expense thus adversely impacting our margins.
Excess inventory that becomes obsolete or that we are otherwise unable to sell would also be subject to write-offs resulting in adverse effects on our margins. Because our markets are volatile, competitive and subject to rapid technology and price changes, there is a risk that we will forecast incorrectly and order excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments. Our financial condition and operating results couldsuch time as Gwynedd’s equity interest in the future be materially adversely affected by our ability to manage our inventory levels and respond to short-term shifts in customer demand patterns.
If we achieve our growth goals, we may be unable to manage our resulting expansion.
ToCompany drops below 10% of the extent that we are successful in implementing our business strategy, we may experience periodsoutstanding shares of rapid expansion.Common Stock. Mr. Ryan currently serves as Gwynedd’s sole designee on the Board. In order to effectively manage growth, whether organic or through acquisitions, we will need to maintain and improve our operations and effectively train and manage our employees. Our expansion through acquisitions is contingent on successful management of those acquisitions, which will require proper integration of new employees, processes and procedures, and information systems, which can be both difficult and demanding from an operational, managerial, cultural, and human resources perspective. We must also expand the capacity of our sales and distribution networks in order to achieve continued growth in our existing and future markets. The failure to manage growth effectively in any of these areas could have a material adverse effect on our financial condition and operating results.
We are dependent on third party telecommunications service providers and other suppliers, including domestic and international cellular and satellite carriers and hardware manufacturers, the loss of any one of which could adversely impact our ability to supply or service our customers.
Our long-term success depends on our ability to operate, manage, and maintain a reliable and cost effective network, as well as our ability to keep pace with changes in technology. As described above, several wireless carriers have announced their intention to discontinue their 2G networks and fully deploy 3G and 4G networks. The loss or disruption of key telecommunications infrastructure and key wireless and satellite-based network services supplied to us by carriers in the U.S., Canada, and other locations would unfavorably impact our ability to adequately service our customers. If we experience technical or logistical impediments to our ability to transfer traffic to third party facilities, or if our third party carriers experience technical or logistical difficulties of their own, such as disruptions to their supply chains caused by weather events, natural disasters, or terrorism, and are unable to carry our network traffic, we may not achieve our revenue goals or otherwise be successful in growing our business. We may not be able to continue providing service to 2G customers and may not be able to successfully transition 2G customers to other services. Given our dependence on cellular and satellite telecommunications service providers, risks specific or unique to their technologies should also be viewed as having the potential to impair our ability to provide services. For example, the loss or malfunction of a cell tower, a satellite, or a satellite ground station, could impair our ability to provide services.
We outsource our hardware manufacture to independent companies and do not have internal manufacturing capabilities to meet the demands of our customers. Any delay, interruption, or termination of our hardware manufacture could harm our ability to provide our solutions to our customers and, consequently, could have a material adverse effect on our business and operations. Our hardware manufacture requires specialized know-how and capabilities possessed by a limited number of enterprises. Consequently, we are reliant on just a few manufacturers. If a key supplier experiences production problems, financial difficulties, or has difficulties with its supply chain as a result of severe weather, a natural disaster, terrorism, or other unforeseen event, we may not be able to obtain enough units to meet demand, which could result in failure to meet our contractual commitments to our customers, further causing us to lose sales and generate less revenue.
We may experience quality problems from time to time, resulting in decreased sales and operating margins and the loss of customers.
While we test our products and services, they may still have errors, defects, or bugs that we find only after commercial production has begun. In the past, we have experienced errors, defects, and bugs in connection with new solutions. Our customers may not make purchases from us, or may make fewer purchases, if they are concerned about such problems. Furthermore, correcting problems could require additional capital expenditures, resultthe Company’s agreement with VIEX, Gwynedd agreed to vote all its shares of Common Stock in increased design and development costs, and force us to divert resources from other efforts. Failure to remediate problems could result in lost revenue, harm our reputation, and lead to costly warranty or other legal claims against us by our customers, and could have a material adverse impact on our financial condition and operating results. Historically, the time required for us to correct problems has caused delays in product shipments and has resulted in lower than expected revenues.
Interruptions in service or performance problems, no matter what their ultimate cause, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new customers. In addition, because most of our customers are businesses, any significant interruption in service could result in lost profits or other losses to our customers. It may also be difficult to identify the sourcefavor of the problem due toelection of the overlay2016 Nominees.Section 16(a) Beneficial Ownership Compliance Under Section 16(a) of our network with cellular, and/or satellite networks and our network’s reliance on those other networks. The occurrence of hardware or software errors, regardless of whether such errors are caused by our hardware solutions or services, or our internal facilities, may result in the delay or loss of market acceptance of our solutions, and any necessary revisions may result in significant and additional expenses. Although we attempt to disclaim or limit our liability for hardware, system, and software failures in our agreements with our customers, a court may not enforce a limitation of liability, which could expose us to substantial losses. If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicateExchange Act, the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.
A natural disaster, terrorist attack, or other catastrophic event could diminish our ability to provide service and hardware to our customers and our revenues may be impacted by weather patterns and climate change.
Events such as severe storms, tornadoes, earthquakes, floods, solar flares, industrial accidents, and terrorist attacks including, without limitation, the actions of computer hackers, could damage or destroy both our primary and redundant facilities as well as the facilities and operations of third party cellular and satellite carriers and hardware suppliers we are reliant on, which could result in a significant disruption of our operations. Further, in the event of an emergency, the telecommunications networks that we rely upon may become capacity constrained or preempted by governmental authorities. We may also be unable, due to loss of personnel or the inability of personnel to access our facilities, to provide some services to our customers or maintain all of our operations for a period of time. With respect to our satellite-based mobile asset tracking solution in particular, sales may be influenced by weather patterns and climate change. For example, if government agencies and emergency responders anticipate relatively “mild” weather over one or more storm seasons on account of cyclical weather patterns or long-term climate change, they may buy fewer of our mobile asset tracking units for deployment in support of disaster response operations.
The loss of a few key personnel could have an adverse effect on us in the short-term.
Due to the specialized knowledge and skills each of ourCompany’s directors, executive officers and other key employees possesses with respect topersons who are the development and maintenance and our operations, the loss of service of any of our officers could negatively impact the success of our business. Any unplanned turnover could diminish our institutional knowledge base and erode our competitive advantage. We may need to hire additional personnel in the future, and we believe the success of the combined business depends, in large part, upon our ability to attract and retain key employees. The loss of the services of any key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenues and to operate our business.
We may require additional capital to fund further development, and our competitive position could decline if we are unable to obtain additional capital, or access the credit markets.
To address our long-term capital needs, we intend to continue to pursue strategic relationships that would provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we may seek to raise capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock.
Our Loan and Security Agreement with Silicon Valley Bank, or SVB, contains financial and operating restrictions that may limit our access to credit. If we fail to comply with covenants in the SVB Credit Facility, we may be required to repay any potential indebtedness thereunder, which may have an adverse effect on our liquidity.
In November 2012, we amended our Loan and Security Agreement (the “Loan Agreement”) with SVB to increase the credit facility from $10.0 million to $19.8 million, among other changes. Provisions in the Loan Agreement impose restrictions on our ability to, among other things:
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| incur additional indebtedness; |
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| enter into transactions with affiliates; |
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| pay dividends or make distributions on, or repurchase our stock; or |
In addition, we are required to meet certain financial covenants and ratios customary with this type of credit facility. The SVB credit facility also contains other customary covenants. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow under the SVB credit facility. In addition to preventing additional borrowings under the SVB credit facility, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the SVB credit facility, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all. At December 31, 2013 we had no amounts outstanding pursuant to the credit facility.
We are subject to risks associated with laws, regulations and industry-imposed standards related to fixed and mobile communications devices and associated services.
Laws and regulations related to fixed and mobile communications devices and associated services and end applications are extensive, vary by jurisdiction, and are subject to change. Such changes, could include, without limitation, restrictions on the production, manufacture, distribution, and use of communications devices, restrictions on the ability to port devices and associated services to new carriers’ networks, requirements to make devices and associated services compatible with more than one carrier’s network, or restrictions on end use could, by preventing us from fully serving affected markets, have a material adverse effect on our financial condition and operating results.
In particular, communication devices we sell, or which our customer wish us to support, are subject to regulation or certification by governmental agencies such as the Federal Communications Commission (FCC), industry standardization bodies such as the PCS Type Certification Review Board (PTCRB), and particular carriers for use on their networks. The procedures for obtaining required regulatory approvals and certifications are extensive and time consuming, and can require us to conduct additional testing requirements, makes modifications to our hardware solutions and services, or delay in product launch and shipment dates, which could have a material adverse effect on our financial condition and operating results.
We may be subject to breaches of our information technology systems, which could damage our reputation, vendor and customer relationships, and our customers’ access to our services.
Our business requires us to use and store customer, employee, and business partner personally identifiable information (PII). This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data.
These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. If a computer security breach affects our systems or results in the unauthorized release of personally identifiable information, our reputation and brand could be materially damaged and use of our products and services could decrease. We would also be exposed to a risk of loss or litigation and possible liability, which could result in a material adverse effect on our business, results of operations and financial condition. We have not experienced any breaches of our information technology systems during the year ended December 31, 2013 or through the date of filing this annual report.
Our business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
We are subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and our subsidiaries, and among the Company, our subsidiaries and other parties with which we have commercial relations. Several jurisdictions have passed new laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result in penalties or significant legal liability.
Our privacy policies and practices concerning the use and disclosure of data are posted on our website and its customer contracts. Any failure by the Company, our suppliers or other parties with whom we do business to comply with our posted privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others, which could have a material adverse effect on our business, results of operations and financial condition.
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for the cost of associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
Changes in domestic tax regulations or unanticipated foreign tax liabilities could affect our results.
The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations could impose costs on us that we are unable to fully recover.
We are doing business in, and are expanding into, foreign tax jurisdictions. We believe that we have complied in all material respects with our obligations to pay taxes in these jurisdictions. If the applicable taxing authorities were to challenge successfully our current tax positions, or if there were changes in the manner in which we conduct our activities, we could become subject to material unanticipated tax liabilities. We may also become subject, prospectively or retrospectively, to additional tax liabilities following changes in tax laws. The application of existing, new or future laws could have adverse effects on our business, prospects and operating results. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
A portion of our future revenue, in particular the revenue deriving from our sale of satellite-based mobile asset tracking solutions, may be derived from contracts with the U.S. government, state governments, or government contractors. Those contracts are subject to uncertain funding.
The funding of government programs is uncertain and, at the federal level, is dependent on continued congressional appropriations and administrative allotment of funds based on an annual budgeting process. We cannot assure you that current levels of congressional funding for programs supporting by our offerings will continue, particularly as result of the Budget Control Act and the mandated substantial automatic spending cuts beginning in 2013 and lasting for ten years, unless Congress modifies these cuts. In particular, a significant portion of our revenues from the sale of satellite-based tracking solutions through our location-based services division has been derived from sales made by us indirectly as a subcontractor to a prime government contractor that has the direct relationship with the U.S. government. In addition, these cuts could adversely affect the viability of the prime contractor of our program. If the prime contractor loses business with respect to which we serve as a subcontractor, our government business would be hurt.
Our operating results may be negatively affected by developments affecting government programs generally, including the following:
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| changes in government programs that are related to our hardware solutions and services; |
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| adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations; changes in political or public support for programs; |
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| delays or changes in the government appropriations process; and |
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| delays in the payment of invoices by government payment offices and the prime contractors. |
These developments and other factors could cause governmental agencies to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain from renewing contracts, any of which would cause our revenue to decline and could otherwise harm our business, financial condition and results of operations.
Government contracts contain provisions that are unfavorable to us.
Government contracts contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts. These provisions may allow the government to
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| terminate existing contracts for convenience, as well as for default; |
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| reduce or modify contracts or subcontracts; |
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| cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; |
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| decline to exercise an option to renew a multi-year contract; |
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| claim rights in our hardware solutions and services; |
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| suspend or debar us from doing business with the federal government or with a governmental agency; and |
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| control or prohibit the export of our hardware solutions and services. |
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. We may experience performance issues on some of our contracts. We may receive show cause or cure notices under contracts that, if not addressed to the government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts in the future.
Agreements with government agencies may lead to regulatory or other legal action against us including, without limitation, claims against us under the Federal False Claims Act or other federal statutes. These claims could result in substantial fines and other penalties.
We must comply with a complex set of rules and regulations applicable to government contractors and their subcontractors. Failure to comply with an applicable rule or regulation could result in our suspension of doing business with the government, or with the prime government contractors, or cause us to incur substantial penalties. Our agreements with the U.S. government are subject to substantial financial penalties under the Civil Monetary Penalties Act and the False Claims Act and, in particular, actions under the False Claims Act’s “whistleblower” provisions. Private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in large part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits by private individuals, known as qui tam actions, may be filed by almost anyone, including present and former employees. The False Claims Act statute provides for treble damages and up to $11,000 per claim on the basis of the alleged claims. Prosecutions, investigations or qui tam actions could have a material adverse effect on our liquidity, financial condition and results of operations.
Finally, various state false claim and anti-kickback laws also may apply to us. Violation of any of the foregoing statutes can result in criminal and/or civil penalties that could have a material adverse effect our business.
We operate internationally, which subjects us to international regulation and business uncertainties that create additional risk for us.
We have been doing business directly, or via our distributors, in Australia, Canada, and Mexico, and are expanding, directly or via our distributors, into additional countries in Latin America, Europe, the Middle East, and Asia. Accordingly, we or our distributors are subject to additional risks, such as:
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| an international economic downturn; |
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| export control requirements, including restrictions on the export of critical technology; |
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| restrictions imposed by local laws and regulations; |
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| restrictions imposed by local product certification requirements; |
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| currency exchange rate fluctuations; |
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| generally longer receivable collection periods and difficulty in collecting accounts receivable; |
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| trade restrictions and changes in tariffs; |
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| difficulties in repatriating earnings; |
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| difficulties in staffing and managing international operations; and |
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| potential insolvency of channel partners. |
We have only limited experience in marketing and operating our services in certain international markets. Moreover, we have in some cases experienced and expect to continue to experience in some cases higher costs as a percentage of revenues in connection with establishing and providing services in international markets versus the U.S. In addition, certain international markets may be slower than the U.S. in adopting the outsourced communications solutions and so our operations in international markets may not develop at a rate that supports our level of investments.
Furthermore, because regulatory schemes vary by country, we may also be subject to regulations in foreign countries of which we are not presently aware. If that were to be the case, we could be subject to sanctions by a foreign government that could materially and adversely affect our ability to operate in that country. We cannot assure you that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we wish to operate, or that applicable restrictions in those jurisdictions will not be unduly burdensome. The failure to obtain the authorizations necessary to operate satellites internationally could have a material adverse effect on our ability to generate revenue and our overall competitive position. We, our customers and companies with whom we do business may be required to have authority from each country in which we or they provide services or provide our customers use of our hardware solutions and services. Because regulations in each country are different, we may not be aware if some of our customers and/or companies with which we do business do not hold the requisite licenses and approvals.
Unfavorable results of legal proceedings could materially adversely affect us.
We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of its merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. In recognition of these considerations, we may enter into material settlements. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that would materially adversely affect a portion of our business and might materially affect our financial condition and operating results.
The loss of intellectual property protection, both in the U.S. and internationally, could have a material adverse effect on our operations.
Our future success and competitive position depend upon our ability to obtain and maintain intellectual property protection, especially with regard to our core business. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology. Our services are highly dependent upon our technology and the scope and limitations of our proprietary rights therein. If our assertion of proprietary rights is held to be invalid, or if another party’s use of our technology were to occur to any substantial degree, our business, financial condition and results of operations could be materially adversely affected. In order to protect our technology, we rely on a combination of patents, copyrights, and trade secret laws, as well as certain customer licensing agreements, employee and customer confidentiality and non-disclosure agreements, and other similar arrangements. Loss of such protection could compromise any advantage obtained and, therefore, impact our sales, market share, and results. To the extent that our licensees develop inventions or processes independently that may be applicable to our hardware solutions and services, disputes may arise as to the ownership of the proprietary rights to this information. These inventions or processes will not necessarily become our property, but may remain the property of these persons or their full-time employers. We could be required to make payments to thebeneficial owners of these inventions or processes, in the form of either cash or equity, or a combination of both.
Furthermore, our future or pending patent applications may not be issued with the scope of the claims sought by us, if at all. In addition, others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned or licensed by us. Effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in foreign countries where we may need protection.
We rely on access to third-party patents and intellectual property, and our future results could be materially adversely affected if we are unable to secure such access in the future.
Many of our hardware solutions and services are designed to include third-party intellectual property, and in the future we may need to seek or renew licenses relating to such intellectual property. Although we believe that, based on past experience and industry practice, such licenses generally can be obtained on reasonable terms; there is no assurance that the necessary licenses would be available on acceptable terms or at all. Some licenses we obtain may be nonexclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our hardware solutions and services, and there can be no assurance that we would be able to design and incorporate alternative technologies, without a material adverse effect on our business, financial condition, and results of operations.
Our competitors have or may obtain patents that could restrict our ability to offer our hardware solutions and services, or subject us to additional costs, which could impede our ability to offer our hardware solutions and services and otherwise adversely affect us. We may, from time to time, also be subject to litigation over intellectual property rights or other commercial issues.
Several of our competitors have obtained and can be expected to obtain patents that cover hardware solutions and services directly or indirectly related to those offered by us. There can be no assurance that we are aware of all patents containing claims that may pose a risk of infringement by its hardware solutions and services. In addition, patent applications in the United States are confidential until a patent is issued and, accordingly, we cannot evaluate the extent to which our hardware solutions and services may infringe on future patent rights held by others.
Even with technology that we develop independently, a third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as engineering and development and the sale of any of our hardware solutions and services. Furthermore, because of technological changes in the M2M industry, current extensive patent coverage, and the rapid issuance of new patents, it is possible that certain components of our hardware solutions, services, and business methods may unknowingly infringe the patents or other intellectual property rights of third parties. From time to time, we have been notified that we may be infringing such rights.
In the highly competitive and technology-dependent telecommunications field in particular, litigation over intellectual property rights is significant business risk, and some entities are pursuing a litigation strategy the goal of which is to monetize otherwise unutilized intellectual property portfolios via licensing arrangements entered into under threat of continued litigation. Regardless of merit, responding to such litigation can consume significant time and expense. In certain cases, we may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. If we are found to be infringing such rights, we may be required to pay substantial damages. If there is a temporary or permanent injunction prohibiting us from marketing or selling certain hardware solutions and services or a successful claim of infringement against us requires us to pay royalties to a third party, our financial condition and operating results could be materially adversely affected, regardless of whether we can develop non-infringing technology. While in management’s opinion we do not have a potential liability for damages or royalties from any known current legal proceedings or claims related to the infringement of patent or other intellectual property rights that would individually or in the aggregate have a material adverse effect on our financial condition and operating results, the results of such legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others or should several of these matters be resolved against us in the same reporting period, our financial condition and operating results could be materially adversely affected.
Because our stock is held by a relatively small number of investors and is thinly traded, it may be more difficult for shareholders to sell our shares or buy additional shares when they desire and share prices may be volatile.
Our common stock is currently listed on the NASDAQ. Our stock is thinly traded and we cannot guarantee that an active trading market will develop, or that it will maintain its current market price. A large number of shares of our common stock are held by a small number of investors. An attempt to sell a large number of shares by a large holder could adversely affect the price of our stock. In addition, it may be difficult for a purchaser of our shares of our common stock to sell such shares without experiencing significant price volatility.
The exercise or conversion of outstanding stock options, stock appreciation rights and warrants into common stock will dilute the percentage ownership of our other shareholders and the sale of such shares may adversely affect the market price of our common stock.
As of March 3, 2014, there are outstanding stock options and stock appreciation rights to purchase an aggregate of approximately 1.6 million shares of our common stock and more stock options and stock appreciation rights will likely be granted in the future to our officers, directors, employees and consultants. We may issue additional warrants in connection with acquisitions, borrowing arrangement or other strategic or financial transactions. The exercise of outstanding stock options, stock appreciation rights and warrants will dilute the percentage ownership of our other shareholders. The exercise of these stock options, stock appreciation rights and warrants and the subsequent sale of the underlying common stock could cause a decline in our stock price.
The structure of our company limits the voting power of our stockholders and certain factors may inhibit changes in control of our company.
The concentration of ownership of our common stock may have the effect of delaying, deferring, or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own approximately 37% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters. The interests of these stockholders may be different than those of our unaffiliated stockholders and our unaffiliated stockholders may be dissatisfied with the outcome of votes that may be controlled by our affiliated stockholders.
Our articles of incorporation generally limit holdings by persons of our common stock to no more than 10% without prior approval by our Board. Except as otherwise permitted by the Board, no stockholder has the right to cast more than 10% of the total votes regardlessoutstanding Common Stock are required to report their beneficial ownership of Common Stock and any changes in that ownership to the SEC. Based solely on a review of the numbercopies of sharesreports furnish to, or filed by, us and written representations that no other reports were required, we believe that during FY 2015, the Company’s officers and directors complied with all applicable Section 16(a) filing requirements, except as follows:There was one late Form 4 filing in FY 2015 as follows: July 29, 2015 for Jeffrey Smith for grants of commonshare-based compensation. Stock Ownership and Holding Requirements In March 2015, we instituted a named executive officer stock owned. In addition, if a person acquires holdings in excess of this ownership limit, our Board may terminate all voting rights ofpolicy to more closely align the person during the time that the ownership limit is violated, bring a lawsuit against the person seeking divestiture of amounts in excess of the limit, or take other actions as the Board deems appropriate. Our articles of incorporation also have a procedure that gives us the right to purchase shares of common stock held in excess of the ownership limit. In addition, our articles of incorporation permit our Board to authorize the issuance of preferred stock without stockholder approval. Any future series of preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our common stockholders. None.
AllNamed Executive Officers (NEOs) with those of our facilities are leased. Set forth below is certain information with respectstockholders. The stock ownership policy requires the CEO to our leased facilities:
| Location | | | Principal Business | | | Square
Footage | | Lease Term | | Atlanta, Georgia | | M2M Services and Principal Executive Office | | 37,538 | | 2022 | | Dallas, Texas | | M2M Services and Engineering and Development | | 13,256 | | 2018 | | Bozeman, Montana | | M2M Services | | 1,345 | | Month to Month | | Doylestown, Pennsylvania | | M2M Services | | 600 | | Month to Month | | State College, Pennsylvania | | Discontinued Operations | | 10,788 | | Month to Month |
We conduct engineering, salesown stock worth at least 3.0 times his base salary and marketing, and administrative activitiesall other NEOs to own stock worth at manyleast 1.0 times their base salary. NEOs have five years from the date of these locations. We believe that our existing facilities are adequate for our current needs. As we grow and expand into new markets and develop additional hardware, we may require additional space, which we believe will be available at reasonable rates.
We engage in limited manufacturing, equipment and hardware assembly and testing for certain hardware. We also use contract manufacturers for production, sub-assembly and final assembly of certain hardware and a third-party logistics service provider to manage a portion of our inventory. We believe there are other manufacturers and service providers that could perform this work on comparable terms.
As of December 31, 2013, we were not involved in any pending material litigation.
Not applicable.
The Company’s Common Stock trades publicly on the NASDAQ Global Market System under the symbol “NMRX”.
The following table sets forth, for the fiscal quarters indicated, the high and low sales prices per share for the Common Stock on the NASDAQ Global Market for the applicable periods.
| | | | | | | | | | | | Fiscal 2013 | | | High | | | Low | | | First Quarter (January 1, 2013 to March 31, 2013) | | $ | 13.86 | | | $ | 11.60 | | | Second Quarter (April 1, 2013 to June 30, 2013) | | | 12.75 | | | | 8.85 | | | Third Quarter (July 1, 2013 to September 30, 2013) | | | 11.87 | | | | 9.57 | | | Fourth Quarter (October 1, 2013 to December 31, 2013) | | | 13.99 | | | | 10.75 | |
| | | | | | | | | | | | Fiscal 2012 | | | High | | | Low | | | First Quarter (January 1, 2012 to March 31, 2012) | | $ | 10.88 | | | $ | 7.75 | | | Second Quarter (April 1, 2012 to June 30, 2012) | | | 10.23 | | | | 8.18 | | | Third Quarter (July 1, 2012 to September 30, 2012) | | | 11.71 | | | | 9.00 | | | Fourth Quarter (October 1, 2012 to December 31, 2012) | | | 13.65 | | | | 10.06 | |
On March 3, 2014, the last reported sale price of our Class A common stock on The NASDAQ Global Market was $14.95 per share.
As of March 3, 2014, there were 49 holders of record of our Common Stock and 18.9 million shares of Common Stock outstanding. Because manyadoption of the sharespolicy to meet their respective stock ownership guideline.Compensation Claw Back Policy In March 2015, we adopted a compensation “claw back” policy applying to NEOs. In the event of our common stock are held by brokers and other institutions on behalfa material restatement of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We currently do not pay any cash dividends. In deciding whether or not to declare or pay dividends in the future,Company’s financial results, the Board of Directors, will considerafter considering the facts and circumstances of the restatement, may take action against the NEO including recoupment of all relevant factors, including our earnings,or part of any compensation paid to the NEO that was based up on the achievement of the financial conditionresults that were subsequently restated.Board Committees The Board has a standing Audit Committee (the “Audit Committee”), Compensation Committee (the “Compensation Committee”), and working capital, capital expenditure requirements, any restrictions contained in loan agreementsNominating and market factorsCorporate Governance Committee (the “Nominating Committee”). The Board has determined that all committee chairs and conditions. We have no plans now or in the foreseeable future to declare or pay cash dividends on our common stock.
Performance Graph
The information includedcommittee members are independent under the heading “Performance Graph” in this Item 5applicable NASDAQ and SEC rules. The members of this Annual Report on Form 10-K is “furnished” and not “filed” and shall not be deemed to be “soliciting material” or subject to Regulation 14A or 14C, nor shall it be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into any such filing.
The following graph shows a comparison of the cumulative total return for Common Stock, the NASDAQ Composite Index and the NASDAQ Telecomm Index, assuming (i) an investment of $100 in each on December 31, 2007, the last trading day before the beginning of the Company’s six preceding years, and, (ii) in the case of the Indices, the reinvestment of all dividends.
The following selected financial data should be read in conjunction with the consolidated financial statements and the notes contained in “Item 8. Financial Statements and Supplementary Data” and the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. Historical resultscommittees during FY 2015 are not necessarily indicative of future results.
The following financial information was derived using the consolidated financial statements of Numerex Corp. The table lists historical financial data of the Company for each of the five years in the period ended December 31, 2013.
| | | | | | | | | | | | | | | | | | | | | | | | | | As of and for the year ended December 31, | | | | (in thousands except per share data) | | 2013( 1) | | | 2012( 1) | | | 2011(1) | | | 2010 | | | 2009 | | | Statement of Operations Data | | | | | | | | | | | | | | | | | Net sales | | $ | 77,832 | | | $ | 65,032 | | | $ | 55,920 | | | $ | 58,243 | | | $ | 50,836 | | | Gross profit | | | 32,140 | | | | 27,875 | | | | 24,903 | | | | 25,657 | | | | 22,348 | | | Litigation settlement and related expenses | | | - | | | | - | | | | 338 | | | | 3,025 | | | | 1,637 | | | Operating (loss) income | | | (419 | ) | | | 2,967 | | | | 1,697 | | | | (400 | ) | | | (1,656 | ) | | Costs of early extinguishment of debt | | | - | | | | - | | | | - | | | | - | | | | (2,936 | ) | | (Loss) income from continuing operations before income taxes | | | (404 | ) | | | 2,131 | | | | 1,498 | | | | (524 | ) | | | (5,544 | ) | Income tax (benefit) expense(2) | | | (2,369 | ) | | | (4,902 | ) | | | (62 | ) | | | (144 | ) | | | 285 | | Income (loss) from continuing operations, net of income tax (benefit) expense | | | 1,965 | | | | 7,033 | | | | 1,560 | | | | (380 | ) | | | (5,829 | ) | | (Loss) income from discontinued operations, net of income taxes | | | (1,380 | ) | | | 132 | | | | 294 | | | | - | | | | - | | | Net income (loss) | | | 585 | | | | 7,165 | | | | 1,854 | | | | (380 | ) | | | (5,829 | ) | | Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | $ | 0.11 | | | $ | 0.46 | | | $ | 0.10 | | | $ | (0.03 | ) | | $ | (0.40 | ) | | (Loss) income from discontinued operations | | | (0.08 | ) | | | 0.00 | | | | 0.02 | | | | 0.00 | | | | 0.00 | | | Net income (loss) | | $ | 0.03 | | | $ | 0.46 | | | $ | 0.12 | | | $ | (0.03 | ) | | $ | (0.40 | ) | | Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | $ | 0.10 | | | $ | 0.44 | | | $ | 0.10 | | | $ | (0.03 | ) | | $ | (0.40 | ) | | (Loss) income from discontinued operations | | | (0.07 | ) | | | 0.01 | | | | 0.02 | | | | 0.00 | | | | 0.00 | | | Net income (loss) | | $ | 0.03 | | | $ | 0.45 | | | $ | 0.12 | | | $ | (0.03 | ) | | $ | (0.40 | ) | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents, restricted cash and short term investments | | | 25,603 | | | | 4,948 | | | | 9,768 | | | | 10,516 | | | | 5,306 | | | Total assets | | | 101,290 | | | | 72,147 | | | | 61,428 | | | | 57,146 | | | | 52,747 | | | | | | | | | | | | | | | | | | | | | | | | | Total debt and capital lease obligations (short and long term) | | | 1,562 | | | | 8,294 | | | | 5,937 | | | | 684 | | | | 523 | | Shareholders’ equity | | | 83,977 | | | | 52,805 | | | | 44,197 | | | | 42,718 | | | | 42,037 | | | | | | | | | | | | | | | | | | | | | | | | | Cash Flow Data | | | | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) continuing operations | | | 6,088 | | | | 1,924 | | | | (1,722 | ) | | | 8,555 | | | | 5,089 | |
| (1) | In June 2013, we decided to exit certain businesses and related products that were not core to future business plans. All statement of operations and cash flow data presented for the years ended December 31, 2013, 2012 and 2011 reflect discontinued operations on a reclassified and segregated basis from continuing operations. Discontinued operations have not been reclassified for statement of operations and cash flow data presented for the years ended December 31, 2010 or 2009. See Note B to the accompanying consolidated financial statements. |
| (2) | During the year ended December 31, 2013, we recognized a $2.4 million deferred income tax benefit from a tax accounting method change allowing a one-time acceleration and catch-up of depreciation and amortization. During the year ended December 31, 2012, we recognized a deferred income tax benefit of $4.9 million from the release of a valuation allowance against certain deferred tax assets. See Note J to the accompanying consolidated financial statements. |
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. See “Forward Looking Statements” on page 4 for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” in Section 1A of this Annual Report.
Overview
We are a leading provider of on-demand and interactive M2M enterprise solutions. We incorporate the key M2M elements of Device (D), Network (N), and Application (A), to create packaged and custom designed M2M solutions for the enterprise and government markets worldwide. We refer to this combination as Numerex DNA.
For the year ended December 31, 2013, our revenues increased $12.8 million, or 19.7%, to $77.8 million from $65.0 million for the year ended December 31, 2012. We added 485,000 net new subscriptions during the year ended December 31, 2013, bringing the year-end total to 2.2 million, compared to adding 389,000 net new subscriptions during the year ended December 31, 2012. Results of operations reflect continued progress identifying and responding to managed service opportunities and return on investments we made in our M2M solutions during the past year. Demand remains strong for our integrated solutions and we will continue to focus on expanding our presence in the supply chain, asset tracking, and security markets.
Our gross margin was 41.3% for 2013 compared to 42.9% for 2012. Operating expense for the year ended December 31, 2013, which includes selling, general and administrative costs, and engineering and development expenses, was $32.6 million as compared to $24.9 million for the year ended December 31, 2012. We have made significant improvements in operating cash flow. Net cash provided by operating activities increased to $6.1 million for the year ended December 31, 2013 compared to $1.9 million for the year ended December 31, 2012.
During the second quarter of the year ended December 31, 2013, the decision was made to exit certain businesses and related products that are not core to future business plans. These non-core businesses include BNI Solutions, Inc. (BNI), Digilog, Inc. and DCX Systems, Inc. These businesses were previously reported in our consolidated financial statements as a separate segment, “Other Services”. The related products and services include video conferencing hardware and installation of telecommunications equipment, all of which are unrelated to our core M2M communication products and services. As a result of the decision to exit non-core businesses and their subsequent reclassification to discontinued operations, we have a single reportable segment. We anticipate the disposal of the discontinued operations to be completed within one year from the initial classification as discontinued operations.
All assets and liabilities of the discontinued operations have been reclassified into two line items, assets and liabilities of discontinued operations, which are each classified as current in the accompanying consolidated balance sheets. All revenue and expense of the discontinued operations have been reclassified and presented in the accompanying consolidated statements of income and comprehensive income as results of discontinued operations, net of income taxes, after income from continuing operations, net of income tax benefit and before net income. Similarly, all cash flows of the discontinued operations have been reclassified and presented in the accompanying consolidated statements of cash flows as cash flows from discontinued operations.
While our overall business has grown and we believe that our pipeline of future sales opportunities is solid, general economic uncertainty remains and may reduce our future growth. We have maintained tightened credit policies in response to the economic climate, in particular to our hardware-only sales.
Results of Operations
The following table sets forth selected financial data from our consolidated statements of income and comprehensive income for the periods presented along with percentage change between the periods (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | 2013 vs. 2012 | | | 2012 vs. 2011 | | | | | 2013 | | | 2012 | | | 2011 | | | % Change | | | % Change | | | Net Sales: | | | | | | | | | | | | | | | | | Subscription and support revenue | | $ | 51,640 | | | $ | 43,067 | | | $ | 37,578 | | | | 19.9 | % | | | 14.6 | % | | Embedded devices and hardware sales | | | 26,192 | | | | 21,965 | | | | 18,342 | | | | 19.2 | % | | | 19.8 | % | | Total net sales | | | 77,832 | | | | 65,032 | | | | 55,920 | | | | 19.7 | % | | | 16.3 | % | | Cost of revenue, exclusive of depreciation and amortization shown below: | | | | | | | | | | | | | | | | | | | | | | Subscription and support | | | 21,754 | | | | 17,955 | | | | 15,356 | | | | 21.2 | % | | | 16.9 | % | | Embedded devices and hardware | | | 23,938 | | | | 19,202 | | | | 15,661 | | | | 24.7 | % | | | 22.6 | % | | Gross profit | | | 32,140 | | | | 27,875 | | | | 24,903 | | | | 15.3 | % | | | 11.9 | % | | Gross profit % | | | 41.3 | % | | | 42.9 | % | | | 44.5 | % | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | Sales and marketing | | | 9,544 | | | | 8,242 | | | | 8,453 | | | | 15.8 | % | | | -2.5 | % | | General and administrative | | | 13,281 | | | | 10,257 | | | | 9,078 | | | | 29.5 | % | | | 13.0 | % | | Engineering and development | | | 4,915 | | | | 3,096 | | | | 2,642 | | | | 58.8 | % | | | 17.2 | % | | Depreciation and amortization | | | 4,819 | | | | 3,313 | | | | 3,033 | | | | 45.5 | % | | | 9.2 | % | | Operating (loss) income | | | (419 | ) | | | 2,967 | | | | 1,697 | | | | -114.1 | % | | | 74.8 | % | | Interest expense | | | 304 | | | | 336 | | | | 217 | | | | -9.5 | % | | | 54.8 | % | | Other (income) expense, net | | | (319 | ) | | | 500 | | | | (18 | ) | | | -163.8 | % | | nm | | | (Loss) income from continuing operations before income taxes | | | (404 | ) | | | 2,131 | | | | 1,498 | | | | -119.0 | % | | | 42.5 | % | | Income tax benefit | | | (2,369 | ) | | | (4,902 | ) | | | (62 | ) | | | -51.7 | % | | nm | | | Income from continuing operations, net of income taxes | | | 1,965 | | | | 7,033 | | | | 1,560 | | | | -72.1 | % | | | 350.8 | % | | (Loss) income from discontinued operations, net of income taxes | | | (1,380 | ) | | | 132 | | | | 294 | | | nm | | | | -55.1 | % | | Net income | | $ | 585 | | | $ | 7,165 | | | $ | 1,854 | | | | -91.8 | % | | | 286.5 | % | Adjusted EBITDA(1) | | $ | 8,353 | | | $ | 8,037 | | | $ | 6,299 | | | | 3.9 | % | | | 27.6 | % |
| (1) | Refer to the section “Non-GAAP Financial Measures” for a discussion of these non-GAAP financial measures |
Comparison of Fiscal Years Ended December 31, 2013 and December 31, 2012
Total revenue increased to $77.8 million for the year ended December 31, 2013, from $65.0 million for the year ended December 31, 2012. The increase is primarily attributable to the growth in M2M subscriptions as well as associated hardware. We added 485,000 net new subscriptions during the year ended December 31, 2013, bringing the year-end total to 2.2 million, compared to adding 389,000 net new subscriptions during the year ended December 31, 2012. Recurring revenue derived from subscriptions, the primary component of subscription and support revenue, grew 19.9% during the year-ended December 31, 2013. Embedded device and hardware revenue was $26.2 million in 2013 compared to $22.0 million recorded in the same period last year. The increase was primarily related to a greater sales volume in our modules and security hardware, partially offset by a decrease in the sales volume of modems and tracking devices. Recent business acquisitions have contributed approximately $1.0 million of additional revenue during the year ended December 31, 2013 compared to the prior year. We have also offered modest promotional price discounts for our second generation (2G) and other older technology devices and hardware to maintain sales of those products as we continue to introduce new fourth generation (4G) products. Prices of other products and services have remained consistent with the prior year.
Cost of revenue for subscription and support services increased 21.2% to $21.8 million for the year ended December 31, 2013 compared to $18.0 million for the year ended December 31, 2012. The increase is primarily due to higher recurring service revenue, specifically resulting in $3.4 million in additional carrier fees associated with subscription growth. The increase also includes $0.4 million in colocation costs for a new redundant network site to support revenue growth and to ensure continued maximum service reliability for our customers. Gross profit as a percentage of revenue decreased to 57.9% for the year ended December 31, 2013 compared to 58.3% for the year ended December 31, 2012. The redundant network site and other infrastructure costs have, at least temporarily, caused a decrease in gross margin.
Cost of revenue for embedded devices and hardware increased 24.7% to $23.9 million for the year ended December 31, 2013 compared to $19.2 million for the year ended December 31, 2012 reflecting the increase in sales volume and higher product costs associated with the newer 4G devices. The newer products have higher per unit costs than older devices largely because of more advanced components and technology, but those product costs are beginning to decrease. During the third quarter of 2013, we began to realize increased gross profit on those devices. In the second quarter of 2013, we increased our inventory reserve for obsolescence by $0.5 million for older technology products. We continue to monitor the valuation of our technologically older inventory and record reserves for obsolescence when appropriate. As circumstances change, we may record additional increases in the reserve for obsolescence in the future.Gross profit as a percentage of revenue decreased to 8.6% for the year ended December 31, 2013 compared to 12.6% for the year ended December 31, 2012, attributed to the higher costs of the newer 4G devices, an increase in the inventory reserve for obsolescence, and the promotional price discounts noted above.
In total, gross profit as a percentage of revenue decreased to 41.3% for the year ended December 31, 2013, from 42.9% for the year ended December 31, 2012.
Sales and marketing expense increased 15.8% to $9.5 million for the year ended December 31, 2013, compared to $8.2 million for the year ended December 31, 2012. However, sales and marketing expense decreased as a percentage of total revenue to 12.3% for the year ended December 31, 2013 compared to 12.7% for the year ended December 31, 2012. The overall increase is primarily due to the addition of new employees increasing compensation costs by $1.1 million.
General and administrative expense increased 29.5% to $13.3 million for the year ended December 31, 2013, compared to $10.3 million for the year ended December 31, 2012. General and administrative expense also increased as a percentage of total net sales, to 17.1% for the year ended December 31, 2013 from 15.8% for the year ended December 31, 2012. The $3.0 million increase includes increases in employee cash compensation and related expenses of $0.7 million; equity-based compensation of $0.4 million; professional, consulting and other outside services fees of $1.2 million; and rent expense of $0.4 million. Increases in employee compensation, rent and other costs largely represent additional headcount and resources to support our growth and expansion. Salary and equity-based compensation increased $1.1 million, including $0.3 million incurred as part of the realignment of our executive team during the three months ended June 30, 2013 and an additional $0.4 million in expense for a broad equity-based compensation grant in April 2013. Increases in professional, consulting and other outside services included (a) additional costs incurred in response to and remediation of the internal control deficiencies identified in the audit of our annual financial statements for the year ended December 31, 2012, (b) legal fees associated with potential new product development for one of our customers and (c) costs incurred in conjunction with development of our long-term plan.
Engineering and development expenses increased 58.8% to $4.9 million for the year ended December 31, 2013, compared to $3.1 million for the year ended December 31, 2012. As a percentage of total net sales, engineering and development expense increased to 6.3% for the year ended December 31, 2013 from 4.8% for the year ended December 31, 2013. The increase is primarily due to the addition of personnel resources and third party contractors, especially during the three months ended June 30, 2013, related to the development of new products, services and applications to support our current customers. The additional resources have also been added to facilitate growth opportunities in our managed service offering and targeted vertical markets. Recent business acquisitions increased employee compensation $1.1 million over the prior year.
Depreciation and amortization expense increased 45.5% to $4.8 million for the year ended December 31, 2013, compared to $3.3 million for the year ended December 31, 2012. The increase includes additional amortization of internally developed software and other acquired intangible assets of $1.0 million as well as continued investment in network infrastructure that increased depreciation expense $0.5 million.
Other income (expense), net includes a gain of $0.3 million during the year ended December 31, 2013 from the sale of a cost-basis investment. Other income (expense), net includes $0.5 million of additional financing costs related to assets previously transferred to a vendor in a nonmonetary exchange.
We recorded a tax benefit of $2.4 million for the year ended December 31, 2013, compared to a tax benefit of $4.9 million for the year ended December 31, 2012. During the year ended December 31, 2013, we recorded an income tax benefit of $2.4 million primarily consisting of a tax accounting method change allowing a one-time acceleration and catch-up of depreciation and amortization. The tax accounting method change related to our 2003 acquisition of our former joint venture partner’s interest in our Cellemetry LLC subsidiary. We also recorded an income tax benefit during the year ended December 31, 2012 of $4.8 million for the reversal of most of our valuation allowance on our deferred tax assets.
The loss from discontinued operations, net of income taxes,table below. Mr. Singer was $1.4 million for the year ended December 31, 2013 compared to $0.1 million for the year ended December 31, 2012. For the year ended December 31, 2013, the loss included a $0.9 million impairment of goodwill and a $0.6 million reserve for uncollectible accounts receivable. As previously discussed, the discontinued businesses are unrelated to our core M2M communication products and services.
Comparison of Fiscal Years Ended December 31, 2012 and December 31, 2011
Net revenues increased to $65.0 million for the year ended December 31, 2012, from $55.9 million for the year ended December 31, 2011. The increase in net revenues is primarily attributable to the growth in M2M subscriptions as well as associated hardware. We added 389,000 net new subscriptions during the year ended December 31, 2012, bringing the year-end total to 1.7 million, compared to adding 204,000 net new subscriptions during the year ended December 31, 2011. Recurring revenue derived from subscriptions grew 14.6% during the year-ended December 31, 2012. Embedded device and hardware revenue was $22.0 million in 2012 compared to $18.3 million recorded in the same period in 2011.
Gross profitappointed as a percentage of net revenue decreased to 42.9% for the year ended December 31, 2012, compared to 44.5% for the year ended December 31, 2011. The decrease was a result of new product promotional discounts that impacted gross profit and higher embedded device and hardware revenue recorded during the year, which carry significantly lower margin than our recurring revenue and support. Gross margin was 58.3% from recurring revenue and 12.6% from embedded devices and hardware for the year ended December 31, 2012 compared to 59.1% and 14.6%, respectively, for the year ended December 31, 2011.
Sales and marketing expenses decreased 2.5% to $8.2 million for the year ended December 31, 2012, compared to $8.5 million for the year ended December 31, 2011. The decrease in sales and marketing expense is primarily from reduced non-recurring consultant services.
General and administrative expenses increased 13.0% to $10.3 million for the year ended December 31, 2012, compared to $9.1 million for the year ended December 31, 2011. The $1.2 million increase is primarily due to increased employee related expenses of $0.6 million, an increase in share based compensation of $0.2 million and an increase in outside services of $0.1 million. The overall increase in employee-related expenses and outside services represent additional headcount and resources to support our growth and expansion. During the year ended December 31, 2012, we added approximately ten net new employees.
Engineering and development expenses increased 17.2% to $3.1 million for the year ended December 31, 2012, compared to $2.6 million for the year ended December 31, 2011. The increase was due to higher salary expense from increased headcount as well as additional expenditures for consultants and contractors as we continue developing new products, services and applications.
Depreciation and amortization expense increased 9.2% to $3.3 million for the year ended December 31, 2012, compared to $3.0 million for the year ended December 31, 2011. The increase includes the amortization of additional internally developed software and intangible assets from the acquisition completed in October 2012.
Interest expense increased to $0.3 million for the year ended December 31, 2012, compared to $0.2 million for the year ended December 31, 2011 for advances on our bank loans. All outstanding amounts of principal and accrued interest on our bank loans were repaid in January 2013 using the proceeds from a public equity offering of our shares of common stock.
Other income (expense), net includes $0.5 million additional financing costs related to assets previously transferred to a vendor in a nonmonetary exchange.
We recorded an income tax benefit of $4.9 million for the year ended December 31, 2012 compared to a benefit of $0.1 million for the year ended December 31, 2011. The increase in our income tax benefit was due to the reversal of most of our valuation allowance on our deferred tax assets.
The income from discontinued operations, net of income taxes, was $0.1 million for the year ended December 31, 2012 compared to income of $0.3 million for the year ended December 31, 2011. During the year ended December 31, 2011, the discontinued operations segment had an increase in sales of video conferencing hardware, which is sold directly and indirectly to distance-learning customers. Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period.
Non-GAAP Financial Measures
In addition to providing financial measurements based on accounting principles generally accepted in the United States of America (GAAP), we have provided EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share, financial measures that are not prepared in accordance with GAAP (non-GAAP). The most directly comparable GAAP equivalent to EBITDA and Adjusted EBITDA is income from continuing operations, net of income tax benefit. The most directly comparable GAAP equivalent to EBITDA and Adjusted EBITDA per diluted share is diluted earnings per share from continuing operations.
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| EBITDA is income from continuing operations, net of income tax benefit, plus depreciation and amortization, interest and other non-operating expense and income tax expense. Any other non-operating income and income tax benefit is subtracted from income from continuing operations, net of income tax benefit. |
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| Adjusted EBITDA is EBITDA less non-cash stock-based compensation and infrequent or unusual items further described below. |
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| EBITDA and Adjusted EBITDA per diluted share is EBITDA and Adjusted EBITDA divided by weighted average diluted shares outstanding. |
Reconciliations of our non-GAAP financial measures to the most directly comparable financial measure are provided below. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results of operations.
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.
Similarly, we believe that excluding the effects of stock-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 stock-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 stock-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.
Stock-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 normalized income from continuing operations, excluding the effect of stock-based compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons.
Adjusted EBITDA also excludes infrequent or unusual items, consisting of temporarily higher carrier fees, professional service fees incurred in response to and in remediation of internal control weaknesses, acquisition-related expenses, costs related to the realignment of our executive team, and asset write-downs. 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.
We believe EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share are useful to and used by investors and other usersmember 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
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| 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 |
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| Investors commonly adjust EBITDA information to eliminate the effect of stock-based compensation and other unusual or infrequently occurring items which vary widely from company-to-company and impair comparability. |
We use EBITDA, Adjusted EBITDANominating and Adjusted EBITDA per diluted share:
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| as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis |
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| as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and |
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| 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.
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 Years Ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Income from continuing operations, net of income tax benefit (GAAP) | | $ | 1,965 | | | $ | 7,033 | | | $ | 1,560 | | | Depreciation and amortization | | | 5,119 | | | | 3,313 | | | | 3,033 | | | Interest expense and other non-operating expense, net | | | (15 | ) | | | 836 | | | | 199 | | | Income tax expense (benefit) | | | (2,369 | ) | | | (4,902 | ) | | | (62 | ) | | EBITDA (non-GAAP) | | | 4,700 | | | | 6,280 | | | | 4,730 | | | Equity-based compensation | | | 1,879 | | | | 1,388 | | | | 1,231 | | | Infrequent or unusual items | | | 1,774 | | | | 369 | | | | 338 | | | Adjusted EBITDA (non-GAAP) | | $ | 8,353 | | | $ | 8,037 | | | $ | 6,299 | | | | | | | | | | | | | | | | Income from continuing operations, net of income tax benefit, per diluted share (GAAP) | | $ | 0.10 | | | $ | 0.44 | | | $ | 0.10 | | | EBITDA per diluted share (non-GAAP) | | | 0.25 | | | | 0.39 | | | | 0.30 | | | Adjusted EBITDA per diluted share (non-GAAP) | | | 0.44 | | | | 0.50 | | | | 0.40 | | | | | | | | | | | | | | | | | Weighted average shares outstanding in computing diluted earnings per share | | | 18,950 | | | | 16,014 | | | | 15,710 | |
Infrequent or unusual items include temporarily higher carrier fees; professional services fees incurred in response to and in remediation of internal control weaknesses, acquisition-related expenses, costs related to the realignment of our executive team and asset write-downs.
Liquidity and Capital Resources
We had working capital of $34.9 million as of December 31, 2013, compared to $13.4 million as of December 31, 2012. We had cash balances of $25.6 million and $4.9 million as of December 31, 2013 and 2012, respectively, and available credit of $15.0 million and $6.7 million as of December 31, 2013 and 2012, respectively.
Net cash provided by operating activities of continuing operations for the year ended December 31, 2013 was $6.1 million. The primary non-cash adjustments to income from continuing operations, net of income tax benefit, were additions of $4.9 million for depreciation and amortization and $1.9 million for equity-based compensation expense less $2.1 million for deferred income taxes. Changes in operating assets and liabilities, net of effects of acquisitions, which represented a use cash of $1.7 million, was primarily driven by an increase in accounts receivable of $3.2 million.
Net cash used in investing activities of continuing operations for the year ended December 31, 2013 was $5.9 million. This included the purchase of business assets, technology and patents of $2.8 million, purchases of property and equipment of $1.0 million, and expenditures of $3.4 million for intangible and other assets. Significant expenditures for intangible and other assets include costs for internally developed software and purchases of property and equipment.
Net cash provided by financing activities of continuing operations for the year ended December 31, 2013 was $20.3 million, primarily comprised of $27.7 million net proceeds of our underwritten offering, discussed further below, less repayment of $7.2 million for the outstanding balance of our bank debt and principal payments on seller-financed debt.
Net cash provided by discontinued operations for the year ended December 31, 2013 was $0.1 million. Cash flows associated with the revenue-producing and cost-generating activities of the discontinued operations will be eliminated following their disposal.
On April 25, 2011, we filed a universal shelf registration statement on Form S-3 with the SEC. Subject to market conditions, the registration statement allows us, from time to time, to offer and sell up to $30.0 million of equity securities as described in the registration statement. The registration statement was declared effective on May 2, 2011.
On January 23, 2013, we filed a prospectus supplement with the SECAudit committees in connection with an offering of up to 2.3 million shares of our class A common stockthe Company’s agreement with an additional 0.4 million shares available for purchase by the underwritersVIEX on exercise of its overallotment option. We received net proceeds of $27.7 million after underwriting fees and discounts for 2.7 million shares. We used $6.5 million of the proceeds to repay all outstanding amounts of principal and accrued interest owed to Silicon Valley Bank in January 2013.
At December 31, 2013, we had no outstanding balance on our credit facility, no letters of credit outstanding, and available credit of $15.0 million at a variable interest rate of 4%. Available credit includes $5.0 million for working capital and general business requirements and $10.0 million for acquisitions. Available credit is the lesser of $15.0 million or two and half times Adjusted EBITDA (as defined in the Amended Loan Agreement). We were in compliance with all financial covenants of the credit agreement at December 31, 2013. As of the date of the filing of this Annual Report on Form 10-K, no further borrowings had been made under the credit facility.
We believe that our existing cash balance together with expected cash generated from operations will be sufficient to meet our operating requirements for well beyond the next twelve months. This belief could be affected by future results that differ from expectations or a material adverse change in our operating business.
Contractual Obligations
The table below sets forth our contractual obligations at December 31, 2013. Additional details regarding these obligations are provided in the accompanying notes to our consolidated financial statements (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | Payments due by period | | | | | | | | Less than | | | | | | | | More than | | | | | Total | | | 1 Year | | 1 - 3 Years | | 3 - 5 Years | | 5 Years | | Promissory note(1) | | $ | 1,148 | | | $ | 666 | | | $ | 482 | | | $ | - | | | $ | - | | Capital lease obligations(2) | | | 555 | | | | 398 | | | | 157 | | | | - | | | | - | | Operating lease obligations(3) | | | 10,255 | | | | 1,159 | | | | 2,442 | | | | 2,603 | | | | 4,051 | | Purchase commitments(4) | | | 3,478 | | | | 3,478 | | | | - | | | | - | | | | - | | Total(5) | | $ | 15,346 | | | $ | 5,701 | | | $ | 3,081 | | | $ | 2,603 | | | $ | 4,051 | |
March 30, 2016.| Name | | Audit Committee | Amounts represent future principal and interest payments at a 4.25% interest rate. |
| | (2)Compensation
Committee | Amounts represent future minimum lease payments under non-cancelable capital leases for networking and computer equipment. |
| | (3) | Amounts represent future minimum rental payments under non-cancelable operating leases for our facilities.Nominating
Committee |
| E. James Constantine | | (4)* | Amounts represent future obligations to purchase inventory. |
| | (5) | Liabilities of approximately $0.1 million related to Accounting Standards Codification Subtopic 740-10, Income Taxes have not been included in the table above because we are uncertain as to if or when such amounts may be settled. See Note J to the accompanying consolidated financial statements.
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Off-Balance Sheet Arrangements
As of December 31, 2013, 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
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, the allowance for uncollectible accounts receivable, reserves for excess and obsolete inventories, capitalized software, goodwill and long-lived assets and income taxes.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
We have identified the policies below as critical to our business and the understanding of our results of operations. See Note A to the accompanying consolidated financial statements for a detailed discussion on the application of these and other accounting policies.
Revenue Recognition
Our revenue is generated from two primary sources, subscription fees and the sale of M2M devices and hardware. Revenue is recognized when persuasive evidence of an agreement exists, the hardware or service has been delivered, fees and prices are fixed and determinable, collection is reasonably assured and all other significant obligations have been fulfilled. Revenue is recognized net of sales and any transactional taxes.
Subscription fees are based on the number of devices (subscriptions) on our integrated M2M horizontal platform network. Subscription fees are typically invoiced and recognized as revenue as we provide the services or process transactions in accordance with contractual performance standards. Customer contracts are generally recurring or multi-year agreements. Subscription fees also include volume-based excess message, network usage and other activity that are recognized as revenue as incurred, consistent with contractual terms. We may, under an appropriate agreement, bill subscription fees in advance for the network service to be provided. In these instances, we recognize the advance charge (even if nonrefundable) as deferred revenue and recognize the revenue over future periods in accordance with the contract term as the network service (time, data or minutes) is provided, delivered or performed. Subscription revenue may also include set-up fees which are typically deferred and recognized ratably over the life of the contract. Direct and incremental costs associated with deferred revenue are deferred, classified as deferred costs in prepaid expense and other assets in our consolidated balance sheets and recognized in the period revenue is recognized. Unbilled revenue consists of earned but unbilled revenue that results from non-calendar month billing cycles and the one-month lag time in billing related to certain of our services.
We recognize revenue from the sale of M2M devices and hardware at the time of shipment and passage of title. Provisions for rebates, promotions, product returns and discounts to customers are recorded as a reduction in revenue in the same period that the revenue is recognized. We offer customers the right to return hardware that does not function properly within a limited time after delivery. We continuously monitor and track such hardware returns and record a provision for the estimated amount of such future returns based on historical experience and any notification received of pending returns. While such returns have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have experienced in the past. Any significant increase in hardware failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize. Shipping and handling fees received from customers is recorded with embedded device and hardware revenue and associated costs are recorded in cost of embedded hardware and devices.
On occasion we sell both hardware and monthly recurring services to the same customer. In such cases, we evaluate such arrangements to determine if a multiple-element arrangement exists. For multiple-deliverable revenue arrangements we allocate arrangement consideration at the inception of an arrangement to all deliverables using the relative selling price method. The hierarchy for determining the selling price of a deliverable includes (a) vendor-specific objective evidence, if available, (b) third-party evidence, if vendor-specific objective evidence is not available and (c) best estimated selling price, if neither vendor-specific nor third-party evidence is available. In most cases, vendor-specific objective evidence is available for us, as the vast majority of our business is either selling hardware or service on a standalone basis. Certain judgments and estimates are made and used to determine revenue recognized in any accounting period. If estimates are revised, material differences may result in the amount and timing of revenues recognized for a given period.
Allowance for Uncollectible Accounts Receivable
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance for uncollectible accounts is based principally upon specifically identified amounts where collection is deemed doubtful. Additional non-specific allowances are recorded based on historical experience and our assessment of a variety of factors related to the general financial condition and business prospects of our customer base. Significant management judgment and estimates must be made and used in connection with establishing the allowance for uncollectible accounts receivable in any accounting period. Changes in economic conditions could significantly affect our collection efforts and results of operations, particularly in the form of bad debts on the part of our customers.
Inventory and Reserves for Excess, Slow-Moving and Obsolete Inventory
We value our inventory at the lower of first-in, first-out (FIFO) cost or market. We continually evaluate the composition of our inventory and estimate potential future excess, obsolete and slow-moving inventory. We specifically identify obsolete hardware for reserve purposes and analyze historical usage, forecasted production based on demand forecasts, current economic trends, and historical write-offs when evaluating the adequacy of the reserve for excess and slow-moving inventory. Significant management judgment and estimates must be made and used in connection with establishing inventory reserves in any accounting period. If we are not able to achieve our expectations of the net realizable value of the inventory at its current carrying value, we adjust our reserves accordingly.
Capitalized Software
We capitalize software both for internal use and for inclusion in our products. For internal use software, costs incurred in the preliminary project stage of developing or acquiring internal use software are expensed as incurred. After the preliminary project stage is completed, management has approved the project and it is probable that the project will be completed and the software will be used for its intended purpose, we capitalize certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. We amortize capitalized internal use software costs using the straight-line method over the estimated useful life of the software, generally from three to seven years.
For software embedded in our products we capitalize software development costs when project technological feasibility is established and conclude capitalization when the hardware is ready for release. We amortize capitalized costs for software to be sold using the straight-line method over the estimated useful life based on anticipated revenue streams of the software, generally from three to seven years. Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred as engineering and development.
Judgment is required in determining which software projects are capitalized and the resulting economic life.
Goodwill and Long-Lived Assets
We evaluate goodwill and long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that management considers important which could result in an evaluation for impairment include but are not limited to the following:
| | ●
| significant decrease in the market value of an asset;* |
| Tony G. Holcombe | | ●
* | significant adverse change in physical condition or manner of use of an asset; |
| | ●
| significant adverse change in legal factors or negative industry or economic trends; |
| ●
| a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; |
| ●
| significant decline in our stock price for a sustained period; and |
| ●
| an expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its previously estimated useful life. |
Goodwill is not amortized, but is subject to an annual impairment assessment performed at the reporting unit level. Goodwill must be assessed more frequently if indicators of impairment are identified. An impairment charge will be recognized only when the implied fair value of a reporting unit’s goodwill is less than its carrying amount. We assess goodwill for three separate reporting units, all of which are components of our single reportable operating segment. We elected to change our annual goodwill impairment testing measurement date from December 31 to October 1 effective October 1, 2013, primarily to correspond to our annual strategic, financial planning and budgeting processes. The change in annual testing dates did not affect our financial results for any interim period or the year ended December 31, 2013.
Our annual assessment includes comparing the fair value of each reporting unit to the carrying value, referred to as step one. We estimate fair value using discounted cash flow models and compare the aggregate fair value of the reporting units to our overall market value. If the fair value of a reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is necessary. If the carrying value of a reporting unit exceeds its fair value, we perform a second test, referred to as step two, to measure the amount of impairment to goodwill, if any. To measure the amount of any impairment, we determine the implied fair value of goodwill in the same manner as if we were acquiring the affected reporting unit in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.
Our assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, projected results of operations and cash flows; discount rates; terminal growth rates; and capital expenditures forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in additional non-cash impairment charges in the future.
We did not identify any impairment as a result of our annual October 1, 2013 assessment. In addition, we assess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist. We considered the likelihood of triggering events that might cause us to reassess goodwill on an interim basis and concluded that none had occurred subsequent to October 1, 2013.
Other intangible assets, including patents, acquired intellectual property and customer relationships, have finite lives and we record these assets at cost less accumulated amortization. We calculate amortization on a straight-line basis over the estimated economic useful life of the assets, which is 7 to 16 years for patents and acquired intellectual property and 4 to 9 years for customer relationships. We assess other intangible assets and long-lived assets for impairment on a quarterly basis whenever any events have occurred or circumstances have changed that would indicate impairment could exist. Any assessment for impairment is based on estimated future cash flows directly associated with the asset or asset group. If we determine that the carrying value is not recoverable, we may record an impairment charge, reduce the estimated remaining useful life or both. We concluded that no impairment indicators existed to cause us to reassess our other intangible assets during the year ended December 31, 2013.
Income Taxes
Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets arising from net operating losses, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
Deferred tax assets are required to be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. In evaluating the ability to recover the deferred tax assets, in full or in part, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years and the forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we consider assumptions for the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. Actual operating results and the underlying amount and category of income in future years could differ materially from our current assumptions, judgments and estimates of recoverable net deferred tax assets.
During the year ended December 31, 2012, we determined that it would be more likely than not that the cumulative federal net operating losses and certain other deferred tax assets would be recoverable. This determination was based on our sustained profitable operating performance over the past three years and continued expectations for future income. Accordingly, we initially released our valuation allowance against these items during the three months ended September 30, 2012. We maintain a valuation allowance against certain other deferred tax assets that we determine would not be more likely than not to utilize before expiration. These deferred tax assets consist of certain state net operating losses, tax credits, and foreign net operating losses. As a result of the release of a portion of the valuation allowance, we recognized a deferred tax benefit of $4.8 million for the year ended December 31, 2012.
In the normal course of business, we are subject to inquiries and routine income tax audits from U.S. and non-U.S. tax authorities with respect to income taxes which may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. Further, during the ordinary course of business, other facts and circumstances may impact our ability to utilize tax benefits and could also impact estimated income taxes to be paid in future periods. We believe we have appropriately accrued for tax exposures. If we are required to pay an amount less than or exceeding our tax provisions for uncertain tax matters, the financial impact will be reflected in the period in which the matter is resolved or identified. In the event that actual results differ from these estimates, we may need to adjust tax accounts which could materially impact our financial condition and results of operations.
Recent Accounting Pronouncements
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note A to the accompanying consolidated financial statements.
Effect of Inflation
Inflation has not been a material factor affecting our business. In recent years the cost of electronic components has remained relatively stable, due to competitive pressures within the industry, which has enabled us to contain our hardware costs. Our general operating expenses, such as salaries, employee benefits, and facilities costs are subject to normal inflationary pressures, but to date inflation has not had a material effect on our operating results.
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 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 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 fiscal year ended December 31, 2013.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Chairperson | | | | Sherrie G. McAvoy | | Page | Consolidated Balance Sheets as of December 31, 2013 and 2012Chairperson | | 38 | Consolidated Statements of Income and Comprehensive Income for the Years ended December 31, 2013, 2012 and 2011* | | 39* | Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2013, 2012 and 2011 | | 40 | Consolidated Statements of Cash Flows for the Years ended December 31, 2013, 2012 and 2011 | | 41 | Notes to Consolidated Financial Statements | | 43 | Report of Independent Registered Public Accounting Firm | | 68 |
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | | | | | | As of December 31, | | | | | 2013 | | | 2012 | | | ASSETS | | | | | | | | CURRENT ASSETS | | | | | | | | Cash and cash equivalents | | $ | 25,603 | | | $ | 4,948 | | | Accounts receivable, less allowance for doubtful accounts of $674 and $367 | | | 9,385 | | | | 8,466 | | | Financing receivables, current | | | 1,223 | | | | 512 | | | Inventory, net of reserve for obsolescence | | | 8,315 | | | | 7,363 | | | Prepaid expenses and other current assets | | | 1,833 | | | | 1,464 | | | Deferred tax assets | | | 2,742 | | | | 1,021 | | | Assets of discontinued operations | | | 840 | | | | 2,284 | | | TOTAL CURRENT ASSETS | | | 49,941 | | | | 26,058 | | | | | | | | | | | | | Financing receivables | | | 3,029 | | | | 1,329 | | | Property and equipment, net of accumulated depreciation and amortization | | | 3,125 | | | | 2,449 | | | Software, net of accumulated amortization | | | 5,130 | | | | 3,596 | | | Other intangibles, net of accumulated amortization | | | 6,868 | | | | 7,057 | | | Goodwill | | | 26,941 | | | | 25,418 | | | Deferred tax assets | | | 3,958 | | | | 3,551 | | | Other assets | | | 2,298 | | | | 2,689 | | | TOTAL ASSETS | | $ | 101,290 | | | $ | 72,147 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | | Accounts payable | | $ | 9,953 | | | $ | 7,673 | | | Accrued expenses and other current liabilities | | | 2,004 | | | | 685 | | | Deferred revenues | | | 1,894 | | | | 1,823 | | | Current portion of long-term debt | | | 633 | | | | 2,286 | | | Obligations under capital leases | | | 306 | | | | - | | | Liabilities of discontinued operations | | | 207 | | | | 188 | | | TOTAL CURRENT LIABILITIES | | | 14,997 | | | | 12,655 | | | | | | | | | | | | | Notes payable, less current portion | | | 475 | | | | 6,008 | | | Obligations under capital lease, less current portion | | | 148 | | | | - | | | Other liabilities | | | 1,693 | | | | 679 | | | TOTAL LIABILITIES | | | 17,313 | | | | 19,342 | | | | | | | | | | | | | 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; 20,069 and 17,171 issued; 18,828 and 15,609 outstanding | | | - | | | | - | | | Class B common stock, no par value; authorized 5,000; none issued | | | - | | | | - | | | Additional paid-in capital | | | 95,777 | | | | 68,072 | | | Treasury stock, at cost, 1,241 and 1,562 shares | | | (5,238 | ) | | | (8,136 | ) | | Accumulated other comprehensive loss | | | (24 | ) | | | (8 | ) | | Accumulated deficit | | | (6,538 | ) | | | (7,123 | ) | | TOTAL SHAREHOLDERS’ EQUITY | | | 83,977 | | | | 52,805 | | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 101,290 | | | $ | 72,147 | |
The accompanying notes are an integral part of these financial statements.Stratton J. Nicolaides
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
| | | | | | | | For the Years Ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Net sales: | | | | | | | | | | | Subscription and support revenue | | $ | 51,640 | | | $ | 43,067 | | | $ | 37,578 | | | Embedded devices and hardware | | | 26,192 | | | | 21,965 | | | | 18,342 | | | Total net sales | | | 77,832 | | | | 65,032 | | | | 55,920 | | | Cost of sales, exclusive of depreciation and amortization shown below: | | | | | | | | | | | | | | Subscription and support revenue | | | 21,754 | | | | 17,955 | | | | 15,356 | | | Embedded devices and hardware | | | 23,938 | | | | 19,202 | | | | 15,661 | | | Gross profit | | | 32,140 | | | | 27,875 | | | | 24,903 | | | Operating expense: | | | | | | | | | | | | | | Sales and marketing | | | 9,544 | | | | 8,242 | | | | 8,453 | | | General and administrative | | | 13,281 | | | | 10,257 | | | | 9,078 | | | Engineering and development | | | 4,915 | | | | 3,096 | | | | 2,642 | | | Depreciation and amortization | | | 4,819 | | | | 3,313 | | | | 3,033 | | | Operating (loss) income | | | (419 | ) | | | 2,967 | | | | 1,697 | | | Interest expense | | | 304 | | | | 336 | | | | 217 | | | Other (income) expense, net | | | (319 | ) | | | 500 | | | | (18 | ) | | (Loss) income from continuing operations before income taxes | | | (404 | ) | | | 2,131 | | | | 1,498 | | | Income tax benefit | | | (2,369 | ) | | | (4,902 | ) | | | (62 | ) | | Income from continuing operations, net of income tax benefit | | | 1,965 | | | | 7,033 | | | | 1,560 | | | (Loss) income from discontinued operations, net of income taxes | | | (1,380 | ) | | | 132 | | | | 294 | | | Net income | | | 585 | | | | 7,165 | | | | 1,854 | | | Other items of comprehensive (loss) income, net of income taxes: | | | | | | | | | | | | | | Foreign currency translation adjustment | | | (16 | ) | | | 5 | | | | (13 | ) | | Comprehensive income | | $ | 569 | | | $ | 7,170 | | | $ | 1,841 | | | | | | | | | | | | | | | | | Basic earnings per share: | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.11 | | | $ | 0.46 | | | $ | 0.10 | | | (Loss) income from discontinued operations | | | (0.08 | ) | | | 0.00 | | | | 0.02 | | | Net income | | $ | 0.03 | | | $ | 0.46 | | | $ | 0.12 | | | | | | | | | | | | | | | | | Diluted earnings per share: | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.10 | | | $ | 0.44 | | | $ | 0.10 | | | (Loss) income from discontinued operations | | | (0.07 | ) | | | 0.01 | | | | 0.02 | | | Net income | | $ | 0.03 | | | $ | 0.45 | | | $ | 0.12 | | | | | | | | | | | | | | | | Weighted average shares outstanding used in computing earnings (loss) per share: | | | | | | | | | | | | | | Basic | | | 18,413 | | | | 15,412 | | | | 15,055 | | | Diluted | | | 18,950 | | | | 16,014 | | | | 15,710 | |
The accompanying notes are an integral part of these financial statements.
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | Common | | | Additional Paid- | | | Treasury | | | Accumulated Other Comprehensive | | | Accumulated | | | Total Shareholders’ | | | Balance at January 1, 2011 | | | 16,363 | | | $ | 64,099 | | | $ | (5,238 | ) | | $ | - | | | $ | (16,142 | ) | | $ | 42,719 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity-based compensation expense | | | 51 | | | | 1,231 | | | | - | | | | - | | | | - | | | | 1,231 | | | Equity-based compensation plan activity | | | 70 | | | | 366 | | | | - | | | | - | | | | - | | | | 366 | | | Exercise of warrants | | | 200 | | | | 879 | | | | - | | | | - | | | | - | | | | 879 | | | Purchase of treasury shares | | | - | | | | - | | | | (2,898 | ) | | | - | | | | - | | | | (2,898 | ) | | Other | | | 7 | | | | 59 | | | | - | | | | - | | | | - | | | | 59 | | | Translation adjustment | | | - | | | | - | | | | - | | | | (13 | ) | | | - | | | | (13 | ) | | Net income | | | - | | | | - | | | | - | | | | - | | | | 1,854 | | | | 1,854 | | | Balance at December 31, 2011 | | | 16,691 | | | | 66,634 | | | | (8,136 | ) | | | (13 | ) | | | (14,288 | ) | | | 44,197 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of shares in connection with acquisition | | | 42 | | | | 476 | | | | - | | | | - | | | | - | | | | 476 | | | Equity-based compensation expense | | | 54 | | | | 1,388 | | | | - | | | | - | | | | - | | | | 1,388 | | | Equity-based compensation plan activity | | | 336 | | | | 560 | | | | - | | | | - | | | | - | | | | 560 | | | Value of shares retained to pay employee taxes | | | - | | | | (1,202 | ) | | | - | | | | - | | | | - | | | | (1,202 | ) | | Exercise of warrants | | | 45 | | | | 187 | | | | - | | | | - | | | | - | | | | 187 | | | Other | | | 3 | | | | 29 | | | | - | | | | - | | | | - | | | | 29 | | | Translation adjustment | | | - | | | | - | | | | - | | | | 5 | | | | - | | | | 5 | | | Net income | | | - | | | | - | | | | - | | | | - | | | | 7,165 | | | | 7,165 | | | Balance at December 31, 2012 | | | 17,171 | | | | 68,072 | | | | (8,136 | ) | | | (8 | ) | | | (7,123 | ) | | | 52,805 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sale of shares, net of issuance costs and expenses | | | 2,662 | | | | 27,731 | | | | - | | | | - | | | | - | | | | 27,731 | | | Issuance of shares in connection with acquisition | | | 74 | | | | 925 | | | | - | | | | - | | | | - | | | | 925 | | | Equity-based compensation expense | | | 190 | | | | 1,879 | | | | - | | | | - | | | | - | | | | 1,879 | | | Equity-based compensation plan activity | | | 199 | | | | 338 | | | | - | | | | - | | | | - | | | | 338 | | | Value of shares retained to pay employee taxes | | | - | | | | (466 | ) | | | - | | | | - | | | | - | | | | (466 | ) | | Exercise of warrants | | | 92 | | | | 193 | | | | - | | | | - | | | | - | | | | 193 | | | Retirement of treasury shares | | | (321 | ) | | | (2,898 | ) | | | 2,898 | | | | - | | | | - | | | | - | | | Other | | | 2 | | | | 3 | | | | - | | | | - | | | | - | | | | 3 | | | Translation adjustment | | | - | | | | - | | | | - | | | | (16 | ) | | | - | | | | (16 | ) | | Net income | | | - | | | | - | | | | - | | | | - | | | | 585 | | | | 585 | | | Balance at December 31, 2013 | | | 20,069 | | | $ | 95,777 | | | $ | (5,238 | ) | | $ | (24 | ) | | $ | (6,538 | ) | | $ | 83,977 | |
The accompanying notes are an integral part of these financial statements.
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | For the years ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Cash flows from operating activities: | | | | | | | | | | | Net income | | $ | 585 | | | $ | 7,165 | | | $ | 1,854 | | | Less (loss) income from discontinued operations | | | (1,380 | ) | | | 132 | | | | 294 | | | Income from continuing operations, net of income tax benefit | | | 1,965 | | | | 7,033 | | | | 1,560 | | Adjustments to reconcile net income to net cash provided by(used in) operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 4,902 | | | | 3,442 | | | | 3,033 | | | Equity-based compensation expense | | | 1,879 | | | | 1,388 | | | | 1,231 | | | Deferred income taxes | | | (2,128 | ) | | | (4,872 | ) | | | - | | | Bad debt expense | | | 444 | | | | 188 | | | | 284 | | | Inventory reserves | | | 807 | | | | 148 | | | | 101 | | | Gain on sale of cost method investment | | | (328 | ) | | | - | | | | - | | | Other non-cash expense | | | 296 | | | | 93 | | | | 89 | | | Changes in assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | | | | Accounts and financing receivables | | | (3,201 | ) | | | (3,405 | ) | | | (1,002 | ) | | Inventory | | | (1,625 | ) | | | (633 | ) | | | (2,424 | ) | | Accounts payable | | | 1,477 | | | | (670 | ) | | | 723 | | | Deferred revenue | | | 508 | | | | (46 | ) | | | (496 | ) | | Accrued litigation settelement costs | | | - | | | | - | | | | (1,730 | ) | | Other | | | 1,092 | | | | (742 | ) | | | (3,091 | ) | | Net cash provided by (used in) operating activities | | | 6,088 | | | | 1,924 | | | | (1,722 | ) | | Cash flows from investing activities: | | | | | | | | | | | | | | Net cash paid for acquisitions | | | (2,794 | ) | | | (2,000 | ) | | | - | | | Purchases of property and equipment | | | (1,004 | ) | | | (1,679 | ) | | | (601 | ) | | Purchases of intangible and other assets | | | (3,430 | ) | | | (2,773 | ) | | | (2,116 | ) | | Proceeds from sale-leaseback of equipment | | | 716 | | | | - | | | | - | | | Purchase of cost basis investment | | | - | | | | - | | | | (322 | ) | | Proceeds from sale of cost method investment | | | 650 | | | | - | | | | - | | | Net cash used in investing activities | | | (5,862 | ) | | | (6,452 | ) | | | (3,039 | ) | | Cash flows from financing activities: | | | | | | | | | | | | | | Proceeds from debt | | | - | | | | 3,000 | | | | 6,000 | | | Principal payments on debt | | | (7,186 | ) | | | (2,306 | ) | | | (300 | ) | | Fees paid for credit facility | | | - | | | | (73 | ) | | | (100 | ) | | Principal payments on capital lease obligations | | | (263 | ) | | | (237 | ) | | | (446 | ) | | Proceeds from underwritten offering, net of offering costs | | | 27,731 | | | | - | | | | - | | | Proceeds from exercise of warrants | | | 193 | | | | 187 | | | | 879 | | | Equity-based compensation plan activity | | | 338 | | | | 560 | | | | 365 | | | Payment of employee taxes on equity-based awards | | | (466 | ) | | | (1,202 | ) | | | - | | | Purchase of treasury stock | | | - | | | | - | | | | (2,898 | ) | | Restricted cash | | | - | | | | 221 | | | | 44 | | | Net cash provided by financing activities | | | 20,347 | | | | 150 | | | | 3,544 | | | Cash flows from discontinued operations: | | | | | | | | | | | | | | Cash provided by (used in) operating activities | | | 93 | | | | (221 | ) | | | 515 | | | Cash used in investing activities | | | (11 | ) | | | - | | | | (2 | ) | | Net cash provided by (used in) discontinued operations | | | 82 | | | | (221 | ) | | | 513 | | | Net increase (decrease) in cash and cash equivalents | | | 20,655 | | | | (4,599 | ) | | | (704 | ) | | Cash and cash equivalents at beginning of year | | | 4,948 | | | | 9,547 | | | | 10,251 | | | Cash and cash equivalents at end of year | | $ | 25,603 | | | $ | 4,948 | | | $ | 9,547 | |
The accompanying notes are an integral part of these financial statements.
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | For the years ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | | | Cash paid for interest | | $ | 272 | | | $ | 271 | | | $ | 169 | | | Cash paid for income taxes | | | 97 | | | | 175 | | | | 219 | | | Disclosure of non-cash investing activities: | | | | | | | | | | | | | | Acquisition of property under capital lease | | | 716 | | | | - | | | | - | | | Capital expenditures in accounts payable | | | 923 | | | | 202 | | | | - | | | Exchange of note receivable for license agreement | | | - | | | | - | | | | 980 | | | Exchange of equipment for prepaid carrier fees | | | - | | | | - | | | | 2,187 | | | Common stock issued in connection with acquisition | | | 925 | | | | 476 | | | | - | | | Deferred payment issued in connection with acquisition | | | 200 | | | | - | | | | - | | | Promissory note issued in connection with acquisition | | | - | | | | 1,900 | | | | - | |
The accompanying notes are an integral part of these financial statements .
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Numerex Corp. (NASDAQ: NMRX) is a leading provider of interactive and on-demand machine-to-machine, (referred to as M2M), technology and service, offered on a subscription basis, used in the development and support of M2M solutions for the enterprise and government markets worldwide. The Company offers Numerex DNA® that may include hardware and smart Devices, cellular and satellite Network services, and software Applications that are delivered through Numerex FAST® (Foundation Application Software Technology). In addition, business services are offered to enable the development of efficient, reliable, and secure solutions while accelerating deployment. Numerex is ISO 27001 information security-certified, highlighting the Company’s focus on M2M data security, service reliability, and round-the-clock support of its customers’ M2M solutions.
Basis of Presentation
The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Intercompany accounts and transactions have been eliminated in consolidation.
Discontinued Operations
Businesses to be divested are classified in the consolidated financial statements as either discontinued operations or held for sale. For businesses classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities of discontinued operations on the consolidated balance sheet and to discontinued operations on the consolidated statements of operations and cash flows, respectively, for all periods presented. The gains or losses associated with these divested businesses are also recorded in discontinued operations the consolidated statements of income. Additionally, the accompanying notes do not include the assets, liabilities, or operating results of businesses classified as discontinued operations for all periods presented. Management does not expect any significant continuing involvement with these businesses following their divestiture and these businesses are expected to be disposed of within one year from the initial classification as discontinued operations.Use of Estimates
In preparing our financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, doubtful accounts, inventory reserves, goodwill and intangible assets and income taxes. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are primarily cash investments and accounts and financing receivables. We maintain our cash and overnight investment balances in financial institutions, which typically exceed federally insured limits. We had cash balances in excess of these limits of $25.4 million and $4.7 million at December 31, 2013 and 2012, respectively. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash and cash equivalents. Concentration of credit risk with respect to accounts and financing receivables from customers is limited. We perform credit evaluations of prospective customers and we evaluate our trade receivables periodically. Our accounts and financing receivables are at risk to the extent that we may not be able to collect from some of our customers. See Notes D, E and Q for more information.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue Recognition
Our revenue is generated from two primary sources, subscription fees and the sale of M2M devices and hardware. Revenue is recognized when persuasive evidence of an agreement exists, the hardware or service has been delivered, fees and prices are fixed and determinable, collection is reasonably assured and all other significant obligations have been fulfilled. Revenue is recognized net of sales and any transactional taxes.
Subscription fees are based on the number of devices (subscriptions) on our integrated M2M horizontal platform network. Subscription fees are typically invoiced and recognized as revenue as we provide the services or process transactions in accordance with contractual performance standards. Customer contracts are generally recurring or multi-year agreements. Subscription fees also include volume-based excess message, network usage and other activity that are recognized as revenue as incurred, consistent with contractual terms. We may, under an appropriate agreement, bill subscription fees in advance for the network service to be provided. In these instances, we recognize the advance charge (even if nonrefundable) as deferred revenue and recognize the revenue over future periods in accordance with the contract term as the network service (time, data or minutes) is provided, delivered or performed. Subscription revenue may also include set-up fees which are typically deferred and recognized ratably over the life of the contract. Direct and incremental costs associated with deferred revenue are deferred, classified as deferred costs in prepaid expense and other assets in our consolidated balance sheets and recognized in the period revenue is recognized. Unbilled revenue consists of earned but unbilled revenue that results from non-calendar month billing cycles and the one-month lag time in billing related to certain of our services.
We recognize revenue from the sale of M2M devices and hardware at the time of shipment and passage of title. Provisions for rebates, promotions, product returns and discounts to customers are recorded as a reduction in revenue in the same period that the revenue is recognized. We offer customers the right to return hardware that does not function properly within a limited time after delivery. We continuously monitor and track such hardware returns and record a provision for the estimated amount of such future returns based on historical experience and any notification received of pending returns. While such returns have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have experienced in the past. Any significant increase in hardware failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize. Shipping and handling fees received from customers is recorded with embedded device and hardware revenue and associated costs are recorded in cost of embedded hardware and devices.
On occasion we sell both hardware and monthly recurring services to the same customer. In such cases, we evaluate such arrangements to determine if a multiple-element arrangement exists. For multiple-element revenue arrangements, we allocate arrangement consideration at the inception of an arrangement to all elements using the relative selling price method. The hierarchy for determining the selling price of a deliverable includes (a) vendor-specific objective evidence, if available, (b) third-party evidence, if vendor-specific objective evidence is not available and (c) best estimated selling price, if neither vendor-specific nor third-party evidence is available. In most cases, vendor-specific objective evidence is available for us, as the vast majority of our business is either selling hardware or service on a standalone basis. Certain judgments and estimates are made and used to determine revenue recognized in any accounting period. If estimates are revised, material differences may result in the amount and timing of revenues recognized for a given period.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
We consider all investments with an original maturity of three months or less at date of purchase to be cash equivalents. Cash equivalents consist of overnight repurchase agreements and amounts on deposit in foreign banks. Cash of $0.2 million and $0.4 million at December 31, 2013 and 2012, respectively was held in foreign bank accounts.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at gross invoiced amounts less discounts, other allowances and provision for uncollectible accounts. Trade accounts receivable include earned but unbilled revenue that results from non-calendar month billing cycles and lag time in billing related to certain of our services. Credit is extended to customers based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30-90 days. We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based principally upon specifically identified amounts where collection is deemed doubtful. Additional non-specific allowances are recorded based on historical experience and our assessment of a variety of factors related to the general financial condition and business prospects of our customer base. We review the collectability of individual accounts and assess the adequacy of the allowance for doubtful accounts quarterly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Financing Receivables
Financing receivables are due in installments. We evaluate the credit quality of our financing receivables on an ongoing basis utilizing an aging of the accounts and write-offs, customer collection experience, the customer’s financial condition, known risk characteristics impacting the respective customer base, and other available economic conditions, to determine the appropriate allowance. Similar to accounts receivable, we typically do not require collateral. All amounts due at December 31, 2013 and 2012 were deemed fully collectible and an allowance was not necessary.
Inventories and Reserves for Excess, Slow-Moving and Obsolete Inventory
Inventories are valued at the lower of cost or market and consist of (1) security devices and (2) cellular M2M Modems and Modules and (3) satellite M2M Modems. Cost is generally determined on the first-in, first-out (FIFO) basis. Inbound freight costs, including raw material freight costs to contract manufacturers is recorded in inventory and these costs are recognized in cost of sales when the product is sold. Lower of cost or market value of inventory is determined at the operating unit level and evaluated quarterly. Estimated reserves for obsolescence or slow moving inventory are maintained based on current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories. Such inventories are recorded at estimated realizable value net of the costs of disposal.
Property and Equipment
Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Property and equipment under capital leases are amortized over the lives of the respective leases or over the service lives of the assets for those leases and leasehold improvements, whichever is shorter. Depreciation and amortization for property and equipment is calculated using the straight-line method over the following estimated lives:
| | | | | ● | Machinery and equipment | 4-10 years | | | | | | ● | Furniture, fixtures and fittings | 3-10 years | | | | | | ● | Leasehold improvements | up to 10 years |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We capitalize software both for internal use and for inclusion in our products. For internal use software, costs incurred in the preliminary project stage of developing or acquiring internal use software are expensed as incurred. After the preliminary project stage is completed, management has approved the project and it is probable that the project will be completed and the software will be used for its intended purpose, we capitalize certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. We amortize capitalized internal use software costs using the straight-line method over the estimated useful life of the software, generally three years.
We capitalize software development costs for software embedded in our products when technological feasibility is established and conclude capitalization when the hardware is ready for release. We amortize capitalized costs for software to be sold using the straight-line method over the estimated useful life based on anticipated revenue streams of the software, generally three years. Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred as engineering and development.
Intangible Assets, Including Goodwill
Intangible assets consist of patents and acquired intellectual property, trademarks, customer relationships and goodwill. These assets, except for goodwill, are amortized over their expected useful lives. Patents and acquired intellectual property are amortized using the straight-line method over 7 to 16 years, representing the shorter of their estimated useful lives or the period until the patent renews. Costs to maintain patents are expensed as incurred while costs to renew patents are capitalized and amortized over the remaining estimated useful lives. Customer relationships are amortized using the straight-line method over four to seven years.
Goodwill is not amortized but is subject to an annual impairment test, and more frequently if events or circumstances occur that would indicate a potential decline in its fair value. An impairment charge will be recognized only when the implied fair value of a reporting unit’s goodwill is less than its carrying amount. The annual assessment of goodwill for impairment includes comparing the fair value of each reporting unit to the carrying value, referred to as step one. If the fair value of a reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is necessary. If the carrying value of a reporting unit exceeds its fair value, a second test is performed, referred to as step two, to measure the amount of impairment to goodwill, if any. To measure the amount of any impairment, we determine the implied fair value of goodwill in the same manner as if we were acquiring the affected reporting unit in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on the consolidated balance sheet, an impairment charge for the difference is recorded.
We base the impairment analysis of goodwill on estimated fair values. The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time the valuation is performed. These estimates and assumptions primarily include, but are not limited to, discount rates, terminal growth rates, projected revenues and costs, projected cash flows, and capital expenditure forecasts.
We perform our annual goodwill impairment test as of October 1, absent any impairment indicators or other changes that may cause more frequent analysis. We did not identify any impairment as a result of our annual assessment. In addition, we assess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist.
We elected to change our annual goodwill impairment testing measurement date from December 31 to October 1 effective October 1, 2013, primarily to correspond to our annual strategic, financial planning and budgeting processes. The change in annual testing dates did not affect our financial results for the year ended December 31, 2013 or any interim or prior periods. Furthermore, the change did not impact the evaluation of goodwill as there have been no events or circumstances that have occurred subsequent to October 1, 2013 that would raise concern that the conclusion that would have been reached when evaluating goodwill as of December 31, 2013 would be different than the conclusion reached when evaluating goodwill as of October 1, 2013.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Impairment of Long-lived Assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount which the carrying amount of the asset exceeds the fair value of the asset.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applied to taxable income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized.
We conduct business globally and file income tax returns in the United States and in many state and certain foreign jurisdictions. We are subject to state and local income tax examinations for years after and including 1998. These tax years remain open due to the net operating losses generated in these years that have not been utilized as of the year ended December 31, 2013. Likewise, the existence of net operating losses from earlier periods could subject us to United States federal income tax examination for years including and after 2001, since such net operating losses have not been utilized as of the year ended December 31, 2013. Our 2007 U.S. federal return was audited by the Internal Revenue Service and the examination was concluded in March 2010 with a minor increase to the federal alternative minimum tax liability.
Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued at a higher price than its cost, the difference is recorded as a component of additional paid-in capital to the extent that there are gains to offset the losses. If there are no treasury stock gains in additional paid-in capital, the losses are recorded as a component of accumulated deficit.
Foreign Currency Translation
The assets and liabilities of our foreign operations are translated into U.S. dollars at the period end spot exchange rates, and revenues and expenses are translated at estimated average exchange rates for each period. Resulting translation adjustments are reflected as other comprehensive 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. Foreign operations are not significant to us for the years ended December 31, 2013, 2012 or 2011.
Engineering and Development
Engineering and development expenses that are not capitalizable as software development costs are charged to operations in the period in which they are incurred. Engineering and development costs consist primarily of salaries and other personnel-related costs, bonuses, and third-party services. For the years ended December 31, 2013, 2012 and 2011, engineering and development costs recorded in operations were $4.9 million, $3.1 million and $2.6 million, respectively.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Advertising Expenses
Advertising expenses are charged to operations in the period in which they are incurred. For the years ended December 31, 2013, 2012 and 2011, advertising costs were approximately $0.7 million, $0.8 million and $0.7 million, respectively.
Fair Value of Financial Instruments
The hierarchy below lists three levels of fair value, which prioritizes the inputs used in the valuation methodologies, as follows:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The fair value of financial instruments classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate carrying value, principally because of the short-term, maturity of those items. The fair value of our capitalized lease obligation approximates carrying value based on the short-term maturity of the obligation. The fair value of our long-term financing receivables and note payable approximates carrying value based on their effective interest rates compared to current market rates and similar type borrowing arrangements.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. We will comply with the presentation requirements of this guidance for the quarterly period ending March 31, 2014. Because the guidance only affects presentation, we do not expect adoption to have a material effect on our financial condition or results of operations.
In March 2013, the FASB issued an update to the accounting standards to clarify the applicable guidance for a parent company’s accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to derecognition events occurring after the effective date. Adoption is not expected to have a material impact on our financial condition or results of operations.NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 2013, the FASB issued an update to the accounting standards to improve the reporting of reclassifications out of accumulated other comprehensive income. We adopted the new standard effective January 1, 2013 and the adoption did not have any impact on our financial conditions or results of operations.
NOTE B – DISCONTINUED OPERATIONS
During the year ended December 31, 2013, the decision was made to exit certain businesses and related products that are not core to future business plans. These non-core businesses include BNI Solutions, Inc. (BNI), Digilog, Inc. and DCX Systems, Inc. These businesses were previously reported in our consolidated financial statements as a separate segment, “Other Services”. The related products and services include video conferencing hardware and installation of telecommunications equipment, all of which are unrelated to our core M2M communication products and services. We anticipate the disposal of the discontinued operations to be completed within one year from the initial classification as discontinued operations.
All assets and liabilities of the discontinued operations have been reclassified into two line items, assets and liabilities of discontinued operations, and classified as current in the accompanying consolidated balance sheets. All revenue and expense of the discontinued operations have been reclassified and presented in the accompanying consolidated statements of income and comprehensive income as results of discontinued operations, net of income taxes, after income from continuing operations, net of income tax benefit and before net income. Similarly, all cash flows of the discontinued operations have been reclassified and presented in the accompanying consolidated statements of cash flows as cash flows from discontinued operations.
The following table presents the financial results of the discontinued operations for the years ended December 31, 2013, 2012, and 2011 (in thousands):
| | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Net sales: | | | | | | | | | | | Subscription and support revenue | | $ | 881 | | | $ | 976 | | | $ | 1,827 | | | Embedded devices and hardware | | | 282 | | | | 732 | | | | 612 | | | Total net sales | | | 1,163 | | | | 1,708 | | | | 2,439 | | Cost of sales, exclusive of depreciation and amortization shown below: | | | | | | | | | | | | | | Subscription and support revenue | | | 396 | | | | 403 | | | | 768 | | | Embedded devices and hardware | | | 320 | | | | 377 | | | | 373 | | | Gross profit | | | 447 | | | | 928 | | | | 1,298 | | | Operating expenses: | | | | | | | | | | | | | | Sales and marketing | | | 741 | | | | 420 | | | | 715 | | | General and administrative | | | 212 | | | | 139 | | | | 120 | | | Engineering and development | | | 99 | | | | 88 | | | | 84 | | | Depreciation and amortization | | | 13 | | | | 56 | | | | 79 | | | Goodwill impairment | | | 949 | | | | - | | | | - | | | Operating (loss) income | | | (1,567 | ) | | | 225 | | | | 300 | | | Income tax (benefit) expense | | | (187 | ) | | | 93 | | | | 6 | | (Loss) income from discontinued operations, net of income taxes | | $ | (1,380 | ) | | $ | 132 | | | $ | 294 | |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Discontinued operations include $0.9 million for the impairment of historical BNI goodwill, $0.6 million additional reserve for uncollectible accounts receivable and less than $0.1 million estimated costs to sell the discontinued operations. The carrying value of BNI goodwill was reevaluated for impairment in conjunction with our decision to exit these non-core businesses. We will not be pursuing new sales of BNI products and services and do not anticipate significant recurring sales to existing customers. These qualitative factors were indicators that it was more likely than not that the fair value of the BNI reporting unit was less than its carrying amount, including goodwill. We estimated the fair value of the reporting unit using a discounted cash flow model, resulting in the estimated fair value being less than carrying value of the reporting unit. To measure the amount of any impairment, we determined the implied fair value of goodwill in the same manner as if we were acquiring the reporting unit in a business combination. Specifically, we allocated the fair value of the reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation. Based on this calculation, we determined that the associated goodwill was fully impaired.
The following table summarizes the assets and liabilities reported as discontinued operations for the periods presented (in thousands):
| | | | | | | | | | | | | December 31, | | | | | 2013 | | | 2012 | | | ASSETS | | | | | | | | CURRENT ASSETS | | | | | | | | Accounts receivable, less allowance for doubtful accounts of $600 and $16 | | $ | 253 | | | $ | 915 | | | Inventory, net of reserve for obsolescence of $30 and $30 | | | 122 | | | | 140 | | | Prepaid expenses and other current assets | | | 164 | | | | 70 | | | TOTAL CURRENT ASSETS | | | 539 | | | | 1,125 | | | Property and equipment, net | | | 9 | | | | 1 | | | Software, net | | | - | | | | 7 | | | Goodwill | | | - | | | | 949 | | | Other assets | | | 292 | | | | 202 | | | TOTAL ASSETS OF DISCONTINUED OPERATIONS | | $ | 840 | | | $ | 2,284 | | | | | | | | | | | | | LIABILITIES | | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | | Accounts payable | | $ | 10 | | | $ | 6 | | | Accrued expenses and other current liabilities | | | 171 | | | | 181 | | | Deferred revenue | | | 26 | | | | 1 | | | TOTAL LIABILITIES OF DISCONTINUED OPERATIONS | | $ | 207 | | | $ | 188 | |
NOTE C – ACQUISITIONS
2013 Acquisitions
On February 1, 2013, we acquired substantially all of the assets and business of a small technology company that provided products and services for environmental monitoring, wireless remote control and monitoring, wireless sensor networks, and connected device consulting. We acquired the company’s assets to expand our technical capabilities and the markets we serve. Total consideration was $1.1 million, comprised of $0.2 million in cash and 73,587 shares of our common stock having a fair value at the time of issuance of $0.9 million and the assumption of certain liabilities. The issued shares of common stock are subject to various time-based selling restrictions.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the allocation of the purchase price and a summary of estimated useful lives (dollars in thousands):
| | | | | | | | | | | | | Fair | | | Useful | | | | | Value | | | Lives | | | Accounts receivable | | $ | 35 | | | | n/a | | | Inventory | | | 55 | | | | n/a | | | Fixed assets | | | 25 | | | | 3-5 | | | Software | | | 967 | | | | 3.5 | | | Trademarks | | | 32 | | | | 5 | | | Deferred revenue | | | (12 | ) | | | n/a | | | Net assets acquired | | $ | 1,102 | | | | | | | | | | | | | | | |
On December 2, 2013, we acquired substantially all the assets, products and technologies of a small technology company that provided remote monitoring and management of bulk storage tanks. The acquisition expands the scope and scale of our capabilities in supply chain and remote monitoring markets. Total consideration was $2.8 million in cash (of which $0.2 million will be paid on December 2, 2014).
The following table sets forth the preliminary allocation of the purchase price and a summary of estimated useful lives (dollars in thousands):
| | | | Fair | | | | Useful | | | | | Value | | | Lives | | | Accounts receivable | | $ | 175 | | | | n/a | | | Inventory | | | 78 | | | | n/a | | | Fixed assets | | | 5 | | | | 3 | | | Software | | | 110 | | | | 3 | | | Customer relationships | | | 265 | | | | 7 | | | Other intangibles | | | 389 | | | | 3 | | | Goodwill | | | 1,523 | | | Indefinite | | | Leases receivable | | | 364 | | | | n/a | | | Accounts payable | | | (81 | ) | | | n/a | | | Other liabilities | | | (11 | ) | | | n/a | | | Net assets acquired | | $ | 2,817 | | | | | | | | | | | | | | | |
The gross amount of leases receivable in the table above was $0.4 million. Based on the nature and financial strength of the lessees, we expect to fully collect all amounts due pursuant to the lease agreements. The allocation to intangible assets is preliminary, pending completion of our final determination of their fair value.
The total purchase consideration for both of the 2013 acquisitions was allocated to identifiable assets purchased and liabilities assumed based on fair value. The fair values of intangible assets other than goodwill acquired in the two acquisitions were estimated using 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 trademarks was based on an income approach with key assumptions including estimated royalty rates to license the trademarks 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. Amortization expense related to the two acquisitions was less than $0.3 million from the date of their respective acquisitions.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
No portion of the purchase price was allocated to goodwill in the February 2013 acquisition. The $1.5 million excess of the total consideration over the fair value of the net assets acquired in December 2013 was recorded as goodwill. Goodwill represents expected synergies between us and the acquired business and the value that the acquisition provides to support and widen our M2M platform capabilities in the supply chain and remote monitoring markets. Goodwill is expected to be fully deductible for tax purposes.
The results of operations and cash flows are included in the accompanying consolidated financial statements from the date of acquisition and include $0.4 million of revenue and approximately $0.2 million net loss before income taxes. Each of the 2013 acquisitions included the addition of five employees. Total transaction costs related to the acquisitions were $0.1 million and recorded as general and administrative expense as incurred.
2012 Acquisition
On October 1, 2012, we acquired substantially all of the assets of a small technology business. The acquired assets consisted primarily of technology and intellectual property, including a portfolio of patents. The acquisition supports and widens our M2M platform capabilities in real-time monitoring of critical assets and events. Total consideration was $4.4 million, comprised of $2.0 million in cash, $1.9 million promissory note payable to the sellers, 41,521 shares of our common stock having a fair value at the time of issuance of $0.5 million and the assumption of certain liabilities.
The following table sets forth the allocation of the purchase price and a summary of estimated useful lives (dollars in thousands):
| | | | | | Useful | | | | | Fair Value | | | Lives | | | Inventory | | $ | 46 | | | n/a | | | Customer list | | | 1,241 | | | 7 | | | Patents | | | 748 | | | 12 | | | Software | | | 215 | | | 3 | | | Other intangible assets | | | 211 | | | 5 | | | Goodwill | | | 2,580 | | | Indefinite | | | Deferred revenue | | | (665 | ) | | n/a | | | Net assets acquired | | $ | 4,376 | | | | |
Total consideration was allocated to identifiable assets purchased and liabilities assumed based on estimated fair value. The fair values of intangible assets other than goodwill were estimated using common valuation techniques. 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 valuation of patents was also based on an income approach with key assumptions including estimated royalty rates to license the patents from a third party and the remaining term of the patents. The fair value of acquired software was estimated using a cost approach based on assumptions of our historical software development costs. Amortization charges were approximately $0.4 million and $0.1 million and for the years ended December 31, 2013 and 2012, respectively.
The excess of the total consideration over the fair value of the net assets acquired was recorded as goodwill. The $2.6 million portion of the purchase price allocated to goodwill represents expected synergies of the combined businesses and the value that the acquisition provides to support and widen our M2M platform capabilities in real-time monitoring of critical assets and events. Goodwill is expected to be fully deductible for tax purposes.
The results of operations and cash flows are included in the accompanying consolidated financial statements from the date of acquisition and include $1.4 million and $0.4 million of revenue and approximately $0.8 million and less than $0.1 million of net loss before income taxes for the years ended December 31, 2013 and 2012, respectively. Total transaction costs related to the acquisitions were less than $0.1 million and recorded as general and administrative expense as incurred. In addition, interest expense on the seller-financed note payable was less than $0.1 million during both the years ended December 31, 2013 and 2012.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D – ACCOUNTS RECEIVABLE
Accounts receivable and related allowance for doubtful accounts consisted of the following (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Accounts receivable | | $ | 9,521 | | | $ | 8,273 | | | Unbilled accounts receivable | | | 538 | | | | 560 | | | Allowance for doubtful accounts | | | (674 | ) | | | (367 | ) | | | | $ | 9,385 | | | $ | 8,466 | |
NOTE E – FINANCING RECEIVABLES
We lease certain hardware devices to a small number of hardware distributors under sales-type leases expiring in various years through 2018. These receivables typically have terms ranging from two to four years and bear interest at 2%. Because the devices are not functional on our network without an active service agreement with us, we can de-activate devices for non-payment, and have therefore established a history of successfully collecting amounts due under the original payment terms without making concessions to customers. In addition, our long-standing relationship with these high credit quality customers supports our assertion that revenues are fixed and determinable and probable of collection. Financing receivables also include leases acquired in a recent business combination. The acquired leases are also with high credit quality customers and have terms ranging from 4 to 5 years and bear interest at 7% to 8%. See Note C.
The components of lease receivables were as follows (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Total minimum lease payments receivable | | $ | 4,338 | | | $ | 1,923 | | | Unearned income | | | (86 | ) | | | (82 | ) | | Present value of future minimum lease payments receivable | | | 4,252 | | | | 1,841 | | | Less current portion | | | (1,223 | ) | | | (512 | ) | | Amounts due after one year | | $ | 3,029 | | | $ | 1,329 | |
Future minimum lease payments to be received subsequent to December 31, 2013 are as follows (in thousands):
| 2014 | | $ | 1,530 | | | 2015 | | | 1,173 | | | 2016 | | | 1,012 | | | 2017 | | | 597 | | | 2018 | | | 26 | | | Net lease receivable | | $ | 4,338 | |
Our financing receivables are comprised of a single portfolio segment because of the small number of customers and the similar nature of the sales-type leasing arrangements. We evaluate the credit quality of financing receivables based on a combination of factors, including, but not limited to, customer collection experience, economic conditions, the customer’s financial condition and known risk characteristics impacting the respective end users of our customers. In addition to specific account identification, we utilize historical collection experience from our population of similar customers to establish any allowance for credit losses. Financing receivables are placed in non-accrual status after 60 days of nonpayment and written off only after we have exhausted all collection efforts. We have been successful collecting financing receivables and consider the credit quality of such arrangements to be good, especially as the underlying service is required for functionality and can be deactivated for non-payment. We have not experienced any credit losses for any period in the three years ended December 31, 2013.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. As of December 31, 2013, there were no financing receivables past due more than 30 days.
NOTE F – INVENTORY
Inventory consisted of the following (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Raw materials | | $ | 1,503 | | | $ | 834 | | | Finished goods | | | 7,922 | | | | 6,861 | | | Reserve for obsolescence | | | (1,110 | ) | | | (332 | ) | | | | $ | 8,315 | | | $ | 7,363 | |
NOTE G – PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other current assets consisted of the following (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Prepaid expenses | | | 1,223 | | | | 531 | | | Deferred costs | | | 488 | | | | 772 | | | Other | | | 122 | | | | 161 | | | | | $ | 1,833 | | | $ | 1,464 | |
Other noncurrent assets consisted of the following (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Prepaid carrier fees | | $ | 1,658 | | | $ | 1,879 | | | Cost method investments | | | 200 | | | | 522 | | | Deposits | | | 168 | | | | 186 | | | Other | | | 272 | | | | 102 | | | | | $ | 2,298 | | | $ | 2,689 | |
During 2011, we purchased and installed telecommunication infrastructure equipment and related equipment to improve the capacity and functionality of our devices operating on one of our carrier networks. To comply with the needs of one of our carriers and in exchange for more favorable carrier fees, we transferred the legal right to the equipment to the vendor. Thus, our existing agreement with this vendor was amended to provide for the new carrier fees and the legal transfer of the equipment. We accounted for this transaction as a non-monetary exchange. The $2.2 million cost of the equipment was determined to be its fair value and we recorded this transaction by transferring the equipment cost to prepaid carrier fees. The prepaid expense is being amortized in cost of sales for subscription revenue on a straight-line basis over the term of the agreement, which is ten years.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cost method investments include our minority interests of less than 20% in two privately-held businesses. In October 2013, we completed the sale of a cost method investment in a privately-held M2M solutions company based in the United Kingdom. The carrying value of our investment was $0.3 million and we sold it for net proceeds of $0.6 million resulting in a gain of $0.3 million.
Our investments did not provide us the ability to exercise significant influence over operating and financial policies of the entities. Since the entities were not publicly traded, no established market for the securities existed. Our cost-method investment is carried at historical cost in our consolidated financial statements and assessed for impairment when indicators of impairment exist. We have not recorded any impairment charges for the cost-method investments for any period during the three years ended December 31, 2013.
NOTE H – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Leasehold improvements | | $ | 208 | | | $ | 340 | | | Plant and equipment | | | 4,196 | | | | 2,782 | | | Furniture and fixtures | | | 600 | | | | 511 | | | Total property and equipment | | | 5,004 | | | | 3,633 | | | Accumulated depreciation and amortization | | | (1,879 | ) | | | (1,184 | ) | | | | $ | 3,125 | | | $ | 2,449 | |
Depreciation and amortization expense for property and equipment, including assets recorded as capital leases, was $1.1 million, $0.7 million, and $0.7 million for the years ended December 31, 2013, 2012, and 2011. Assets recorded as capital leases included $0.7 million in computers, network and other equipment and $0.3 million in accumulated depreciation and amortization at December 31, 2013. During the year ended December 31, 2012, we wrote off $12.3 million of fully depreciated and amortized property and equipment.
NOTE I – INTANGIBLE ASSETS
Intangible Assets Other Than Goodwill
Intangible assets other than goodwill are summarized as follows (dollars in thousands):
| | | As of December 31, 2013 | | | As of December 31, 2012 | | | | | | | | Gross | | | | | | | | | Gross | | | | | | | | | | | Remaining | | | Carrying | | Accumulated | | | Net Book | | | Carrying | | Accumulated | | | Net Book | | | | | Useful Lives | | | Amount | | Amortization | | | Value | | | Amount | | Amortization | | | Value | | | Purchased and developed software | | | 2.1 | | | $ | 8,836 | | | $ | (3,706 | ) | | $ | 5,130 | | | $ | 5,411 | | | $ | (1,815 | ) | | $ | 3,596 | | | Patents and trademarks | | | 5.3 | | | | 3,260 | | | | (1,172 | ) | | | 2,088 | | | | 2,456 | | | | (803 | ) | | | 1,653 | | | Customer relationships | | | 4.7 | | | | 2,231 | | | | (602 | ) | | | 1,629 | | | | 1,966 | | | | (294 | ) | | | 1,672 | | | Licenses and other intangible assets | | | 1.0 | | | | 12,646 | | | | (11,415 | ) | | | 1,231 | | | | 12,816 | | | | (10,582 | ) | | | 2,234 | | | Software and other intangible assets in development and not in service | | | n/a | | | | 1,920 | | | | - | | | | 1,920 | | | | 1,498 | | | | - | | | | 1,498 | | | | | | | | | $ | 28,893 | | | $ | (16,895 | ) | | $ | 11,998 | | | $ | 24,147 | | | $ | (13,494 | ) | | $ | 10,653 | |
Remaining useful lives in the preceding table were calculated on a weighted average basis as of December 31, 2013. We did not incur costs to renew or extend the term of acquired intangible assets during the year ended December 31, 2013. During the year ended December 31, 2012, we wrote off $9.0 million of fully amortized intangible assets. Amortization of intangible assets for the years ended December 31, 2013, 2012 and 2011 was $3.8 million, $2.6 million, and $2.3 million, respectively. In addition, $0.2 million of amortization of intangible assets is recorded in cost of subscription revenue in the accompanying consolidated statement of income and comprehensive income for each year ended December 31, 2013 and 2012; and $0.1 million for the year ended December 31, 2011.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2013 and 2012, we have capitalized approximately $1.8 million and $1.7 million, respectively of internally generated software development costs. Amortization of capitalized software development costs for the years ended December 31, 2013, 2012 and 2011 was $1.1 million, $1.0 million and $1.0 million, respectively included in total amortization disclosed above.
We expect amortization expense for the next five years to be as follows based on intangible assets as of December 31, 2013 (in thousands):
| 2014 | | $ | 3,781 | | | 2015 | | | 2,982 | | | 2016 | | | 1,476 | | | 2017 | | | 656 | | | 2018 | | | 567 | | | | | $ | 9,462 | |
Goodwill
The carrying amount of goodwill for each of the two years for the period ended December 31, 2013 is as follows (in thousands):
| December 31, 2011 | | $ | 22,838 | | | Acquisition | | | 2,580 | | | December 31, 2012 | | | 25,418 | | | Acquisition | | | 1,523 | | | December 31, 2013 | | $ | 26,941 | |
Additions to goodwill were the result of business acquisitions. See Note C.
Our gross goodwill balance as of December 31, 2013 and 2012 was $33.0 million and $31.5 million, respectively. Accumulated impairment losses were $6.1 million as of both December 31, 2013 and 2012. We have not recorded any goodwill impairment losses in continuing operations for the years ended December 31, 2013 and 2012.
NOTE J – INCOME TAXES
The (benefit) provision for income taxes consisted of the following (in thousands):
| | | For The Years Ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Current: | | | | | | | | | | | Federal | | $ | (183 | ) | | $ | (19 | ) | | $ | 39 | | | State | | | 22 | | | | 30 | | | | 65 | | | Reserve | | | (80 | ) | | | (41 | ) | | | (166 | ) | | Deferred: | | | | | | | | | | | | | | Federal | | | (2,033 | ) | | | (4,502 | ) | | | - | | | State | | | (95 | ) | | | (370 | ) | | | - | | | | | $ | (2,369 | ) | | $ | (4,902 | ) | | $ | (62 | ) |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income taxes recorded by us differ from the amounts computed by applying the statutory U.S. federal income tax rate to income before income taxes. The following schedule reconciles income tax (benefit) provision at the statutory rate and the actual income tax expense as reflected in the consolidated statements of income and comprehensive income for the respective periods (in thousands):
| | | For The Years Ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Income tax expense (benefit) computed at | | | | | | | | | | | U.S. corporate tax rate of 34% | | $ | (137 | ) | | $ | 725 | | | $ | 509 | | | Adjustments attributable to: | | | | | | | | | | | | | | Deferred balance adjustments | | | (1,893 | ) | | | - | | | | 302 | | | Valuation allowance | | | - | | | | (5,545 | ) | | | (889 | ) | | Federal alternative minimum tax | | | - | | | | (19 | ) | | | 39 | | | Income tax payable adjustments | | | (71 | ) | | | - | | | | - | | | State income tax | | | (73 | ) | | | 24 | | | | 65 | | | Reserve for uncertain tax positions | | | (80 | ) | | | (41 | ) | | | (166 | ) | | Non-deductible expenses | | | (97 | ) | | | (56 | ) | | | 78 | | | Other | | | (18 | ) | | | 10 | | | | - | | | | | $ | (2,369 | ) | | $ | (4,902 | ) | | $ | (62 | ) |
During the year ended December 31, 2013, we recorded a deferred income tax benefit of $2.4 million primarily consisting of a tax accounting method change allowing a one-time acceleration and catch-up of depreciation and amortization. The tax accounting method change related to our 2003 acquisition of our former joint venture partner’s interest in our Cellemetry LLC subsidiary.
During the year ended December 31, 2012, we determined that it would be more likely than not that the cumulative federal net operating losses and certain other deferred tax assets would be recoverable. This determination was based on our sustained profitable operating performance over the past three years and continued expectations for future income. Accordingly, we released our valuation allowance against these items. We have maintained a valuation allowance against certain deferred tax assets that we determined we will likely not utilize before expiration. These deferred tax assets consist of certain state net operating losses, tax credits, and foreign net operating losses. As a result of the release of the valuation allowance we recognized a deferred tax benefit of $4.8 million.
The components of our net deferred tax assets and liabilities are as follows (in thousands):
| | | As of December 31, | | | | | 2013 | | | 2012 | | | Current deferred tax asset (liability): | | | | | | | | Inventories | | $ | 438 | | | $ | 180 | | | Accruals | | | 145 | | | | 58 | | | Federal and state net operating loss carryforwards | | | 2,463 | | | | 984 | | | Other | | | 318 | | | | 199 | | | Valuation allowance | | | (622 | ) | | | (400 | ) | | | | | 2,742 | | | | 1,021 | | | | | | | | | | | | | Non-current deferred tax asset | | | | | | | | | | Intangible assets | | | 621 | | | | 683 | | | Federal, state and foreign net operating loss carryforwards | | | 1,763 | | | | 1,792 | | | Tax credit carry forward | | | 1,251 | | | | 1,372 | | Difference between book and tax basis of property | | | (111 | ) | | | (65 | ) | | Equity-based compensation | | | 1,357 | | | | 1,019 | | | Valuation allowance | | | (923 | ) | | | (1,250 | ) | | | | | 3,958 | | | | 3,551 | | | Net deferred tax assets | | $ | 6,700 | | | $ | 4,572 | |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net operating loss carryforwards available at December 31, 2013, expire as follows (in thousands):
| | | | | | | | | | Jerry A. Rose | | | | * | | Year of | Chairperson | | | Amount | | | Expiration | | | | Andrew J. Ryan | | | | | | | Federal net operating lossesEric Singer | | $ | 7,174* | | | | 2023-2034* |
Audit Committee The Board determined that Sherrie McAvoy, Chairperson of the Audit Committee during FY 2015, is an “audit committee financial expert” as defined by the SEC. The principal functions of the Audit Committee are to: (a) assist in the oversight of the integrity of the Company’s financial statements, the Company’s internal controls related to compliance with legal and regulatory requirements, the qualifications and independence, as well as the performance, of the Company’s independent accountants; (b) approve the selection, appointment, retention and/or termination of the Company’s independent accountants, as well as approving the compensation thereof; and (c) approve all audit and permissible non-audit services provided to the Company and certain other persons by such independent accountants. The Audit Committee Charter is available on the Company’s website athttp://www.numerex.com/about/corporate-governance. Compensation Committee The Compensation Committee is responsible primarily for reviewing the compensation arrangements for the Company's executive officers, including the CEO, and for formulating the Company's equity compensation plans. The Compensation Committee Charter is available on the Company’s website at http://investor.numerex.com/corporate-governance.cfm. All of the members of the Compensation Committee have been determined by the Board to be independent under applicable NASDAQ and SEC rules.
Nominating and Corporate Governance Committee The Nominating Committee assists the Board in identifying qualified individuals to become directors, determines the composition of the Board and its committees, monitors the process to assess the Board's effectiveness and helps develop and implement the Company's Corporate Governance Guidelines. The Nominating Committee reviews the performance of the Board, its committees and individual members of the Board. The Nominating Committee also considers nominees for election as directors proposed by shareholders. The Nominating Committee Charter specifies that the composition of the Board should reflect experience in the following areas: finance, compensation, sales and marketing, technology and production. The Nominating Committee Charter is available on the Company’s website athttp://investor.numerex.com/corporate-governance.cfm. Code of Ethics The Company has a Code of Ethics and Business Conduct (the “Code”) that applies to the Company’s directors, officers, and employees, including the Company’s NEOs. The Code is available on the Company’s website at.http://investor.numerex.com/corporate-governance.cfm. We will disclose any future amendments to, or waivers from, provisions of these ethics policies and standards on our website as promptly as practicable, as may be required under applicable SEC and NASDAQ rules. Director Independence The Board has determined that all Board members, excluding Mssrs. Nicolaides, Zionts, and Ryan, are independent under applicable NASDAQ and SEC rules. Furthermore, the Board has determined that each member of each of the committees of the Board is independent within the meaning of NASDAQ’s and the SEC’s director independence standards. In making this determination, the Board solicited information from each of the Company’s directors regarding several factors, including whether such director, or any member of his immediate family, had a direct or indirect material interest in any transactions involving the Company, was involved in a debt relationship with the Company or received personal benefits outside the scope of such person’s normal compensation. The Board considered the responses of the Company’s directors, and independently considered all other material information relevant to each such director in determining such director’s independence under applicable SEC and NASDAQ rules. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS This Compensation Discussion and Analysis explains the objectives, strategy and features of our executive compensation program, and it describes how the compensation of our executive management aligns with our corporate objectives and shareholder interests. Although our executive compensation program is generally applicable to all our senior executives, this discussion and analysis focuses primarily on the program as applied to our “Named Executive Officers” (“NEOs”): the CEO, the CFO and the other officers included in the “Summary Compensation Table”. EXECUTIVE SUMMARY The Company requires a highly skilled, motivated and experienced executive team to lead its efforts to develop and sell complex end-to-end IoT solutions that help customers monitor processes, equipment, condition or location. We must make investments that might not pay off for several years, while managing costs and staying ahead of a market that changes rapidly due to advances in technology and competitive conditions. While our business offers great opportunities, as the uses of our products and services are broad-ranging, there is potential for over-investment in initiatives that do not find a market. Consequently, our FY 2015 growth strategy maintained a balance of revenue and earnings targets. During FY 2015, Numerex transitioned to a new leadership team and began the process of revisiting its growth strategy. While that process was completed in FY 2015, with one exception, the new leadership team was hired under the same compensation strategy and financial targets set earlier in FY 2015. Annual cash bonuses were based on achieving revenue and Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, excluding the effect of equity-based compensation and non-operational items) goals set by the Compensation Committee at the beginning of FY 2015. The one exception is that the new Chief Revenue Officer had a bonus target based purely on revenue targets for the entire company for the period subsequent to his hire. No formal compensation benchmarking was used to determine pay for the new leadership team. Instead, the compensation committee of the Board (“Compensation Committee”) negotiated the employment terms with the new CEO and assessed competitiveness by considering the compensation package of the former CEO and relying on the business experience of Compensation Committee members. Similarly, the new CEO negotiated the employment terms with each new member of his team assessing competitiveness using his business experience, the pay of similarly situated prior executives at Numerex with advice and approval from the Compensation Committee. During FY 2015, our results fell short of our bonus targets and, consequently, with the exception of the Chief Revenue Officer, neither any prior NEO nor any newly hired NEO earned an incentive cash award under our 2015 non-equity incentive plan. Our Chief Revenue Officer received a fourth quarter bonus assessed at 75% of target (prorated for his hire date). THE ROLE OF THE COMPENSATION COMMITTEE The three-member Compensation Committee oversees the Company’s executive compensation program. All of the members of the Compensation Committee have been determined by the Board to be independent under applicable NASDAQ and SEC rules. The Compensation Committee’s responsibilities include: | · | Establishing the overall level of targeted compensation for each NEO and how targeted compensation should be allocated among the three principal elements of compensation: |
| – | Non-equity incentive plan awards – commonly referred to as cash bonuses; and |
| · | Setting the performance levels that must be achieved for NEOs to receive or exceed their targeted bonuses. |
| · | Approving base pay adjustments for the NEOs after reviewing, among a number of factors, performance, business results and competitive benchmarks. |
| · | Approving non-equity incentive awards after reviewing the NEO’s performance and business results against established performance benchmarks. |
| · | Approving equity compensation grants to NEOs after reviewing, among a number of factors, performance, business results, prior equity grants, and competitive benchmarks. |
| · | Reviewing and recommending to the full board appropriate levels of board compensation. |
The Company’s CEO participates in the Compensation Committee’s meetings and provides input into compensation decisions at the Compensation Committee’s request. In particular, the Company’s CEO participates by making recommendations on NEO compensation and input on objectives (other than for himself). The CEO’s compensation is determined solely by the Compensation Committee. The Use of Compensation Consultants In FY 2015, the committee engaged Deloitte Consulting, LLP as its compensation consultant. During FY 2015, Deloitte provided the Compensation Committee with ad hoc advice on pay issues, equity targets for new hires and in reviewing the new CEO’s employment agreement. The Committee is solely and directly responsible for the appointment, compensation and oversight of the consultant. The Committee considers a number of factors that could affect Deloitte’s independence including that the consultant provides no other services for Numerex other than its engagement by the Committee. Based on this review, the Committee has determined the consultant’s work for the Committee to be free from conflicts of interest. The compensation consultant met as needed with the Compensation Committee and has direct access to the Compensation Committee chair during and between meetings.
The Use of Compensation Survey Data and Peer Companies During FY 2015, the Compensation Committee did not conduct any formal competitive pay benchmarking. Instead the competitiveness of the pay offered to the newly hired leadership team was based on negotiations, reference to general compensation trends, the pay of prior similarly situated executives at Numerex, and the broad business experience of members of the Compensation Committee. COMPENSATION OBJECTIVES AND INDIVIDUAL ELEMENTS The Committee does not use any particular formula to determine specific allocations among the key elements of NEO compensation: base, annual cash bonus and equity. Instead, the Committee looks to ensure that NEO compensation effectively drives a mix of short- and long-term performance and is aligned with shareholders’ long-term interests. The following describes the general purpose of each element of compensation and how the Committee made FY 2015 pay decisions around each element. Elements of Compensation
Base Salaries We strive to provide competitive base salaries that allow us to attract and retain a high performing leadership team at a reasonable level of fixed costs. Base pay levels generally are set with reference to what the Compensation Committee determines to be market competitive but recognizes that exceptions can exist to reflect a variety of factors such as skills and experience, individual performance track record, the difficulty of replacement and affordability. Base salaries are reviewed annually and at other times if an executive officer’s responsibilities have materially changed or other special circumstances warrant a review. Non-Equity Incentive Based Awards The annual “non-equity incentive based awards,” or cash bonuses, are designed to maintain NEO focus and motivation around annual activities deemed critical to growing shareholder value. In FY 2015, we continued our focus on a balance of growing both revenue and earnings and our bonus plan was structured to support that. With the exception of our Chief Revenue Officer, the incentive awards pay out at targeted levels if revenue and Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, excluding the effect of equity-based compensation and non-operational items) achieve the challenging growth goals budgeted for the fiscal year. Goals are based on company-wide results to encourage alignment among the business units. The Committee determined the revenue and Adjusted EBITDA budgets prior to the beginning of the fiscal year. Our Committee derives compensation targets from the same process by which we develop our internal annual budget for the current fiscal year and projections for future fiscal years. The Committee sets targets that it believes will be challenging for the NEOs to achieve and will require significant growth and progress by the Company in furtherance of its business objectives. The Chief Revenue Officer’s targets were based solely on achievement of company-wide revenue goals determined for the period subsequent to his hire. The targeted bonus is payable only if both revenue and Adjusted EBITDA reach at least the budgeted goal. An additional bonus, up to a maximum, is payable, prorated on a straight line basis, if the results are between the budget and the “stretch” target. The FY 2015 targets were $121.4 million for revenue and $19.7 million for Adjusted EBITDA (prior to bonus payments). Our targets were not met in either of these areas and no bonuses were paid relative to these metrics. The all-company revenue goal for the Chief Revenue Officer was established at $19.9 million for the fourth quarter and Numerex’s total revenue was 94.5% of the goal resulting in a bonus payout of 75% of the CRO’s target. The Compensation Committee decided to keep the FY 2014 bonus targets in place for the prior NEOs during FY 2015. The newly hired NEOs, with the exception of the Chief Revenue Officer as noted above, had the same bonus targets as the similarly situated prior NEOs.
| | | Non-Equity Plan Incentive Compensation payable for FY 2015 as a % of Base Pay | | | | | If Corporate Results Achieve
Threshold | | If Corporate Results Achieve
Budget | | Maximum payable if Corporate
Results Exceeds Budget up to Stretch
Targets (1) | | | Position | | Revenue | | Adjusted
EBITDA | | Revenue | | Adjusted
EBITDA | | Revenue | | Adjusted
EBITDA | | | CEO | | 30.0% | | 20.0% | | 45.0% | | 30.0% | | 67.5% | | 45.0% | | | CFO | | 16.0% | | 10.7% | | 24.0% | | 16.0% | | 36.0% | | 24.0% | | | CRO(2) | | 25% | | Not Applicable | | 100% | | Not Applicable | | 200% | | Not Applicable | | | CMO | | 16.0% | | 10.7% | | 24.0% | | 16.0% | | 36.0% | | 24.0% | | | CTO | | 16.0% | | 10.7% | | 24.0% | | 16.0% | | 36.0% | | 24.0% | | | EVP | | 16.0% | | 10.7% | | 24.0% | | 16.0% | | 36.0% | | 24.0% | |
| (1) | The bonus is prorated for revenue or Adjusted EBITDA results between Budget and Stretch Target |
| (2) | The Chief Revenue Officer’s non-equity plan incentive compensation is based solely on corporate-wide revenue during the 4th quarter period subsequent to his hire. |
Equity Awards We use equity compensation as a long-term incentive to enhance the alignment of NEO compensation with shareholder returns and as a retention tool focused on top executives that have the most direct line of sight to results. In FY 2014, the Company established a range of annual target equity grants based on those recommended as competitive by our Independent Compensation Consultant. These targets remain unchanged for FY 2015 as follows: | Position | | The Value of Annual Equity
Grants as a % of Base Pay (1) | | CEO | | 80% - 120% | | CFO | | 40% - 60% | | CRO | | 40% - 60% | | CMO | | 40% - 60% | | CTO | | 40% - 60% | | EVP | | 40% - 60% |
| (1) | The value of stock options is based on the Black-Scholes option pricing model value at the time of grant and the value of RSUs is based on the product of the number of shares and the prevailing stock price at the time of grant. |
The primary form of equity compensation awarded by the Committee is nonqualified stock options and restricted share units (RSUs) with the granted value split between the two. While the Committee references the competitive annual target range, the number of stock options and RSUs awarded also reflects the Committee’s qualitative assessment of a variety of factors including the Company’s overall financial performance, individual contributions towards that performance, prior grants and holdings, and individual contributions to particular strategic initiatives or special projects. Perquisites and Other Benefits The Company does not provide its NEOs with perquisites or employee benefits that are not generally available to other full-time employees. These include a medical, dental, and life insurance plans and a 401(k) that matches 50% of an employee’s contributions up to the first 6% of the employee’s salary subject to an overall dollar cap. The Company does not provide a pension plan or a supplemental retirement plan for its named executive officers or any other employees. During FY 2015, the Company implemented an Incentive Share Purchase Incentive Program in which all employees, including NEOs, are eligible to participate. The Plan allows employees to elect to “purchase” Numerex shares through an irrevocable annual payroll reduction. Shares are granted at January 1, 2016 and have a value of 150% of the annual payroll reduction. The entire share grant, including the additional 50%, vests at 50% per year over two years. Vesting is prorated upon involuntary termination of employment. COMPENSATION DECISIONS FOR FY 2015 Pay for the newly hired CEO was negotiated by the Compensation Committee. For the other newly hired NEOs, pay was negotiated between the CEO and the NEOs with Compensation Committee approval. There were no base pay adjustments or bonuses paid to any former NEO. Former NEOs received an equity grant at the target level during FY 2015. As noted above, the Chief Revenue Officer received a bonus in FY 2015 based on his performance against revenue targets for the period subsequent to his hire in the 4th quarter. SUMMARY COMPENSATION TABLE The following table sets forth certain information with respect to compensation for the fiscal years ended December 31, 2015, 2014 and 2013 earned by or paid to the Company’s named executive officers, as determined in accordance with applicable SEC rules. | Name and Title | | Year | | Salary
($) | | | Bonus
($) | | | Stock
Awards
($)(1) | | | Option
Awards
($)(2) | | | Non-Equity
Incentive Plan
Compensation
($) | | | All Other
Compensation
($)(3) | | | Total
($)(4) | | | Marc Zionts, CEO (5) | | 2015 | | | 133,333 | | | | — | | | | 1,266,674 | | | | 66,514 | | | | — | | | | 310,132 | | | | 1,776,653 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stratton J. Nicolaides | | 2015 | | | 400,000 | | | | — | | | | 147,384 | | | | 122,108 | | | | — | | | | 18,578 | | | | 688,070 | | | Former CEO (5) | | 2014 | | | 400,000 | | | | — | | | | 208,050 | | | | 243,722 | | | | — | | | | 15,490 | | | | 867,262 | | | | | 2013 | | | 350,000 | | | | — | | | | — | | | | — | | | | — | | | | 13,611 | | | | 363,611 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Richard A. Flynt | | 2015 | | | 300,000 | | | | — | | | | 55,476 | | | | 45,619 | | | | — | | | | 19,753 | | | | 420,848 | | | CFO | | 2014 | | | 300,000 | | | | — | | | | 214,620 | | | | 91,249 | | | | — | | | | 18,367 | | | | 624,236 | | | | | 2013 | | | 175,000 | | | | 28,800 | | | | — | | | | 693,400 | | | | — | | | | 7,261 | | | | 904,461 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vincent Costello, CRO (5) | | 2015 | | | 61,522 | | | | 60,000 | (6) | | | 186,990 | | | | 189,168 | | | | 45,396 | | | | 1,755 | | | | 544,831 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shu Gan, CMO (5) | | 2015 | | | 60,737 | | | | — | | | | 170,730 | | | | 172,278 | | | | — | | | | 2,380 | | | | 406,125 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Jeffrey Smith, PhD | | 2015 | | | 275,000 | | | | — | | | | 55,476 | | | | 45,619 | | | | — | | | | 14,862 | | | | 390,957 | | | Former Chief Innovation | | 2014 | | | 300,000 | | | | — | | | | 1,095,000 | | | | — | | | | — | | | | 15,033 | | | | 1,410,033 | | | and Technology Officer (5) | | 2013 | | | 300,000 | | | | 28,800 | | | | 62,750 | | | | 712,400 | | | | — | | | | 16,335 | | | | 1,120,285 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Louis Fienberg | | 2015 | | | 208,333 | | | | — | | | | 192,131 | (7) | | | 38,073 | | | | — | | | | 261,585 | | | | 700,122 | | | Former EVP, | | 2014 | | | 250,000 | | | | 48,388 | | | | 209,145 | | | | 75,972 | | | | — | | | | 13,104 | | | | 596,609 | | | Corporate Development (5) | | 2013 | | | 230,000 | | | | 58,208 | | | | 62,750 | | | | 142,480 | | | | — | | | | 13,490 | | | | 506,928 | |
| (1) | The dollar value of stock awards shown represents the grant date fair value calculated on the basis of the fair market value of the underlying shares of our Common Stock on the respective grant dates in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Certification (ASC) Topic 718 without any adjustment for estimated forfeitures. The actual value that an executive will realize on each stock award will depend on the price per share of our Common Stock at the time shares underlying the stock award are sold. There can be no assurance that the actual value realized by an executive will be at or near the grant date fair value of the stock awarded. |
| (2) | The amount in this column reflects the aggregate grant date fair value of the award in accordance with FASB ASC Topic 718. The dollar value of the stock options, including stock-settled stock appreciation rights (SARs) shown, represents the estimated grant date fair value pursuant to the Black-Scholes option pricing model, with no adjustment for estimated forfeitures. The actual value, if any, which an executive may realize on each stock option will depend on the excess of the stock price over the exercise/base price on the date the stock option is exercised and the shares underlying such stock option are sold. There is no assurance that the actual value realized by an executive will be at or near the value estimated by the Black-Scholes model. |
| · | Contributions by the Company to the individual’s health, dental, and life/disability insurance premiums and health savings accounts. All of these benefits are also available to all of the Company’s full-time employees. |
| · | Company contributions to its qualified defined contribution plan available to all of the Company’s full time employees. This is a 401(k) Plan matching contribution up to a maximum of 50% of 6% of the individual’s salary in the following amounts: Mr. Zionts ($2,000), Mr. Gan ($625), Mr. Nicolaides ($11,000), Mr. Flynt ($9,000), Mr. Fienberg ($6,593) and Dr. Smith ($7,250). |
| · | Relocation payments to Mr. Zionts in the amount of $162,459 and a tax-gross up in the amount of $143,017. |
| · | A severance benefit of $250,000 to Mr. Fienberg. |
| (4) | Totals do not reflect the compensation actually paid but includes, as required by SEC rules, the fair value of equity-based compensations awarded in the applicable fiscal year; see notes (1) and (2) above. |
| (5) | Mr. Zionts was hired as the CEO on 9/1/2015; Mr. Nicolaides transitioned from the CEO role on 9/1/2015; Mr. Costello was hired as the Chief Revenue Officer on 10/12/2015; Mr. Gan was hired as the Chief Marketing Officer on 10/5/2015; Dr. Smith separated from Numerex on 11/30/2015; Mr. Fienberg separated from Numerex on 10/31/2015. |
| (6) | Signing bonus upon hire |
| (7) | Amount includes $145,763 due to accelerated vesting of stock awards upon Mr. Fienberg’s separation of employment. |
GRANTS OF PLAN-BASED AWARDS The following table summarizes, except as noted, all plan based awards that the Company’s NEOs were eligible to receive for FY 2015 performance. With the exception of Mr. Costello, none of the Company’s NEO received an award payout under the Non-Equity Incentive Plan | Name | | Grant
Date | | Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards
($) | | | All Other
Stock
Awards:
Number of
Shares or
Units | | | All Other
Option
Awards:
Number of
Securities
Underlying
Options | | | Exercise
or Base
Price of
Option
Awards
($) | | | Grant Date
Fair
Value of
Stock and
Option
Awards ($) | | | | | | | Threshold | | | Target(1) | | | Maximum | | | | | | | | | | | | | | | Marc Zionts(2) | | 9/1/2015 | | | 66,667 | | | | 100,000 | | | | 150,000 | | | | 139,964 | | | | 17,813 | | | | 9.05 | | | | 1,333,188 | | | Stratton Nicolaides | | 7/29/2015 | | | 200,000 | | | | 300,000 | | | | 450,000 | | | | 17,800 | | | | 35,600 | | | | 8.28 | | | | 269,492 | | | Rick Flynt | | 7/29/2015 | | | 80,000 | | | | 120,000 | | | | 180,000 | | | | 6,700 | | | | 13,300 | | | | 8.28 | | | | 101,095 | | | Vincent Costello(2) | | 10/28/2015 | | | 15,132 | | | | 60,528 | | | | 121,056 | | | | 23,000 | | | | 56,000 | | | | 8.13 | | | | 376,158 | | | Shu Gan(2) | | 10/28/2015 | | | 16,144 | | | | 24,095 | | | | 36,142 | | | | 21,000 | | | | 51,000 | | | | 8.13 | | | | 343,008 | | | Jeffrey Smith(3) | | 5/16/2014 | | | - | | | | - | | | | - | | | | 6,700 | | | | 13,300 | | | | 8.28 | | | | 101,095 | | | Louis Fienberg(3) | | 7/29/2015 | | | - | | | | - | | | | - | | | | 5,600 | | | | 11,100 | | | | 8.28 | | | | 84,441 | |
| (1) | With the exception of Mr. Costello, amounts shown are payable in the event that both revenue and Adjusted EBIDTA targets were met. Mr. Costello’s target was based solely on fourth quarter revenue. See the discussion on Non-Equity Incentive Compensation under the Compensation Discussion & Analysis. |
| (2) | Non-Equity Compensation Targets shown for the partial year subsequent to hire for Messrs. Zionts, Gan and Costello. |
| (3) | Mr. Fienberg and Dr. Smith separated from Numerex prior to the end of 2015 and were not eligible for a Non-Equity Compensation Award. |
STOCK OPTION EXERCISES AND STOCK VESTED The following table shows the number of shares acquired upon exercise of stock options and vesting of performance shares for each of our named executive officers during FY 2015. | Name | | Option Awards | | | Stock Awards | | | | | Number of
Shares Acquired
on Exercise | | | Value Realized
on Exercise($) | | | Number of
Shares Acquired
on Vesting | | | Value Realized
on Vesting ($) | | | Marc Zionts | | | - | | | | - | | | | - | | | | - | | | Stratton Nicolaides | | | 25,000 | | | | 80,500 | | | | 4,750 | | | | 47,750 | | | Rick Flynt | | | — | | | | — | | | | 4,900 | | | | 44,100 | | | Vincent Costello | | | - | | | | - | | | | - | | | | - | | | Shu Gan | | | - | | | | - | | | | - | | | | - | | | Jeff Smith | | | — | | | | — | | | | 26,250 | | | | 239,200 | | | Louis Fienberg | | | 5,000 | | | | 22,100 | | | | 28,450 | (1) | | | 202,938 | |
| (1) | Vesting of 22,425 shares was accelerated as part of Mr. Fienberg’s severance agreement with Numerex. |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table sets forth certain information with respect to the outstanding equity awards at December 31, 2015 for each of the named executive officers. | Name | | Securities
Underlying
Unexercised
Options
(#) Exercisable | | | Securities
Underlying
Unexercised
Options (#)
Unexercisable | | | Option Exercise
Price ($) | | | Option
Expiration Date
(1) | | No. of Shares or
Units of Stock
that have not
vested(2) | | | Market Value
of Shares or
Units of Stock
that have not
vested ($) | | | Marc Zionts | | | — | | | | 17,813 | | | | 9.05 | | | 9/1/2025 | | | 139,964 | | | | 898,569 | | | Stratton | | | 50,000 | | | | — | | | | 9.46 | | | 10/25/2016 | | | 32,050 | | | | 205,761 | | | Nicolaides J. | | | 55,932 | | | | — | | | | 4.51 | | | 5/21/2020 | | | — | | | | — | | | | | | 10,350 | | | | 31,050 | | | | 10.95 | | | 5/16/2024 | | | — | | | | — | | | | | | — | | | | 35,600 | | | | 8.28 | | | 7/29/2025 | | | — | | | | — | | | Richard A. Flynt | | | 50,000 | | | | 50,000 | | | | 10.97 | | | 6/11/2023 | | | 21,400 | | | | 137,388 | | | | | | 3,875 | | | | 11,626 | | | | 10.95 | | | 5/16/2024 | | | — | | | | — | | | | | | — | | | | 13,300 | | | | 8.28 | | | 7/29/2025 | | | — | | | | — | | | Vincent Costello | | | — | | | | 56,000 | | | | 8.13 | | | 10/28/2025 | | | 23,000 | | | | 147,660 | | | Shu Gan | | | — | | | | 51,000 | | | | 8.13 | | | 10/28/2025 | | | 21,000 | | | | 134,820 | | | Jeffrey Smith (3) | | | 75,000 | | | | — | | | | 3.49 | | | 2/29/2016 | | | — | | | | — | | | | | | 25,000 | | | | — | | | | 4.35 | | | 2/29/2016 | | | — | | | | — | | | | | | 42,373 | | | | — | | | | 4.51 | | | 2/29/2016 | | | — | | | | — | | | | | | 50,000 | | | | — | | | | 11.16 | | | 2/29/2016 | | | — | | | | — | | | Louis Fienberg | | | 15,000 | | | | — | | | | 9.46 | | | 7/29/2016 | | | — | | | | — | | | Executive (4) | | | 15,000 | | | | — | | | | 9.34 | | | 7/29/2016 | | | — | | | | — | | | | | | 17,500 | | | | — | | | | 5.50 | | | 7/29/2016 | | | — | | | | — | | | | | | 17,500 | | | | — | | | | 4.35 | | | 7/29/2016 | | | — | | | | — | | | | | | 33,898 | | | | — | | | | 4.51 | | | 7/29/2016 | | | — | | | | — | | | | | | 10,000 | | | | — | | | | 6.03 | | | 7/29/2016 | | | — | | | | — | | | | | | 10,000 | | | | — | | | | 11.16 | | | 7/29/2016 | | | — | | | | — | | | | | | 3,225 | | | | — | | | | 10.95 | | | 7/29/2016 | | | — | | | | — | |
| (1) | Except as in noted below, all stock options granted by the Company vest at the rate of 25% per year over four years from the date of grant and expire ten years from the grant date. The following stock options having an exercise price of $4.51 per share cliff vested 100% four years from the date of grant: (i) Mr. Stratton for 55,932 shares, (ii) Mr. Fienberg for 33,898 shares and (iii) Dr. Smith for 42,373 shares. The following stock options include multiple market exercise conditions the stock price must exceed to be exercisable: (i) Mr. Nicolaides for 50,000 shares with an exercise price of $9.46 per share, (ii) Mr. Flynt for 100,000 shares with an exercise price of $10.97 per share, (iii) Mr. Fienberg for 17,500 shares with an exercise price of $5.50 per share, 17,500 shares with an exercise price of $4.35 per share, 10,000 shares with an exercise price of $6.03 per share, and 10,000 shares with an exercise price of $11.16 per share, and (iv) Dr. Smith for 75,000 shares with an exercise price of $3.49 per share, 25.000 shares with an exercise price of $4.35 per share and 50,000 shares with an exercise price of $11.16 per share. |
| (2) | Except for 132,597 shares for Mr. Zionts, restricted stock vests at the rate 25% per year over four years. The 132,597 shares for Mr. Zionts cliff vests 100% four years from the date of grant. |
| (3) | Dr. Smith may exercise his vested stock options for three months following the termination of his employment. |
| (4) | Pursuant to Mr. Fienberg’s severance agreement, the right to exercise previously vested stock options was extended through July 29, 2016. |
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL The employment of all of our named executive officers is at will. However, they are entitled to certain severance benefits upon their termination of employment under certain defined circumstances, as described further below. There are no payments made to the named executive officers upon voluntary retirement, voluntary resignation or upon death or disability. The Company’s named executive officers have taken professional risks in leaving prior employers or, in the case of former NEOs, made major contributions towards building the Company into the enterprise that it is today. The Company believes that it is important to protect them in the event of an involuntary termination. Further, it is the Company’s belief that the interests of its shareholders will be best served if the interests of the Company’s senior management team are aligned with them, and providing change in control benefits should eliminate, or at least reduce, the reluctance of senior management to pursue potential change in control transactions that are in the best interests of the Company’s shareholders. Accordingly, the Company has entered into agreements with the NEOs that provide the following benefits: | Marc Zionts | · One year of base pay in the event of a termination without cause or resignation for good reason; after one year of employment, an additional payment equal to target bonus. | | | State net operating lossesStratton Nicolaides | · One year of base pay in the event of a termination without cause or resignation for good reason within one year following a change-in-control. | | | | Rick Flynt | · One year of base pay in the event of a termination without cause or resignation for good reason within one year following a change-in-control. | | | | Vincent Costello | · 6 months of base pay in the event of a termination without cause or resignation for good reason. | | | | Shu Gan | · 6 months of base pay in the event of a termination without cause or resignation for good reason. | | | | Jeff Smith | · One year of base pay in the event of a termination without cause or resignation for good reason within one year following a change-in-control. | | | | Louis Fienberg | · One year of base pay in the event of a termination without cause or resignation for good reason within one year following a change-in-control. |
In all cases, all unvested equity grants are vested upon a change-in-control. Pursuant to those agreements, “termination without cause” is deemed to be a “separation from service” as defined under Section 409A of the Internal Revenue Code of 1986 (“the Code”). The concept of “resignation for good reason” encompasses termination of employment following a diminution in title, responsibility, or salary level as well as required relocation outside of 50 miles from the Company’s current headquarters location. A “change in control” as defined in the change in control agreements is deemed to occur if (a) the Company consummates a sale, transfer, assignment, exchange, or other conveyance of all or substantially all of the assets of the Company, (b) there is a sale, transfer, assignment, exchange, or other conveyance resulting in any third party’s acquisition of more than 50% of the outstanding voting stock of the Company, or a merger or consolidation occurs which results in a third party’s ownership of more than 50% of the merged or consolidated entity. The table below reflects the amount of compensation payable to each of the Company’s named executive officers in the event of a termination as defined above. For illustrative purposes, the tables assume that such termination was effective as of December 31, 2015. The stock price used was the closing price of the Company’s Common Stock on December 31, 2015, or $6.42 per share. | | Payout ($) | | | Marc Zionts | | Cash Severance Payment | | | 53,800400,000 | | | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | | 2017-2034958,198 | | Minimum tax credit carryforward | | Total: | | | 7371,358,198 | | | Stratton Nicolaides | | Cash Severance Payment | | | | n/a400,000 | | General business credit carryforward | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | 513205,761 | | | | Total: | | | 605,761 | 2018-2031 | | Rick Flynt | | Cash Severance Payment | | | 300,000 | | | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | 182,109 | | | | Total: | | | 482,109 | | | Vin Costello | | Cash Severance Payment | | | 137,500 | | | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | 229,650 | | | | Total: | | | 367,150 | | | Shu Gan | | Cash Severance Payment | | | 125,000 | | | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | 157,181 | | | | Total: | | | 282,181 | | | Jeffrey Smith(1) | | Cash Severance Payment | | | NA | | | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | NA | | | | Total: | | | NA | | | Louis Fienberg(1) | | Cash Severance Payment | | | NA | | | | Fair Value of Options/Shares that Vest on a Change-in-Control | | | NA | | | | Total: | | | NA | |
We file U.S., state
| (1) | Not employed as of 12/31/2015 |
Compensation of Directors – FY 2015 The Board uses a combination of cash and foreign income tax returnsstock-based incentives to attract and retain qualified candidates to serve as directors. In determining director compensation, the Board considers the significant amount of time required of our directors in jurisdictionsfulfilling their duties, as well as the skill and expertise of our directors. The Compensation Committee periodically reviews director compensation with varying statutesthe assistance of limitation. The 2010 through 2012 tax years generally remain subject to examination by federalour independent compensation consultant 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. We evaluate liabilities for uncertain tax positions and, as of December 31, 2013, we recorded a net decreaserecommends to the liabilityBoard the form and amount of compensation to be provided.The annual retainer fee for unrecognized tax benefitsdirectors is $25,000 plus additional fees for participation on committees of $0.1 millionthe Board as follows: $6,500 for the Lead Director, Compensation Committee Chairperson, and Nominating Committee Chairperson, $10,000 for the Audit Committee Chairperson, and $5,000 for Audit, Compensation, Nominating and Executive Committee members. Fees are paid quarterly. Directors also receive reimbursement of expenses incurred in income tax benefit. This amount is comprisedattending meetings. Non-employee directors may elect to have a portion or all of tax benefits recognized on the settlementtheir annual fees paid in shares of certain prior period state tax matters and the corresponding accrual of estimated penalties and interest. Our total unrecognized tax benefits as of December 31, 2013 were approximately $0.1 million including estimated penalties and interest. We anticipatestock having a decreasevalue equivalent to the balance of total unrecognized tax benefits of less than $0.1 million within the next 12 months. Our effective tax rate will be favorably affected if we are able to recognize these tax benefits.
The following table summarizes the activity related to our unrecognized tax benefits, net of federal benefit, and excludes interest and penalties (in thousands):
| | | | | | | | | | | | | 2013 | | | 2012 | | | Balance at January 1 | | $ | 159 | | | $ | 189 | | | Decreases as a result of positions taken during prior periods | | | (57 | ) | | | (30 | ) | | Balance at December 31 | | $ | 102 | | | $ | 159 | |
NOTE K – OTHER LIABILITIES
Other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | As of December 31, | | | | | 2013 | | | 2012 | | | Payroll related | | $ | 1,269 | | | $ | 341 | | | Other liabilities | | | 735 | | | | 344 | | | | | $ | 2,004 | | | $ | 685 | |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other noncurrent liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | | As of December 31, | | | | | | 2013 | | | 2012 | | | | Deferred rent | | $ | 1,006 | | | $ | 323 | | | | Deferred revenue and other noncurrent liabilities | | | 687 | | | | 356 | | | | | | $ | 1,693 | | | $ | 679 | |
NOTE L – DEBT
At December 31, 2013, debt included $1.1 million due on a seller-financed note payable from a 2012 business acquisition and no outstanding balance or letters of credit on our combined $15.0 million credit facility further described below.
On May 4, 2010, we and our subsidiaries entered into a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (Bank). On April 25, 2011, we, our subsidiaries and the Bank entered into an Amended and Restated Loan and Security Agreement in order to, among other things, increase the revolving line of credit from $5.0 million to $10.0 million. On November 5, 2012, we further amended our Loan and Security Agreement (Amended Loan Agreement) with the Bank. This amendment created a total loan facility of $19.8 million (Credit Facility) which included a $10.0 million acquisition line of credit (Acquisition Line); a $5.0 million revolving line of credit and the conversion of existing borrowings from the Bank to a $4.8 million Term Loan. The revolving line of credit and the Term Loan are for working capital and general business requirements. The Acquisition Line is to finance permitted acquisitions which are defined as a similar line of business as us or a reasonable extension thereof.
Thecash amount available to us under the revolving line of credit and the acquisition line at any given time is the lesser of (a) $15.0 million or (b) the amount available under its borrowing base (two and half times Adjusted EBITDA (as defined in the Amended Loan Agreement), measured on a 12 month trailing average) minus (1) the dollar equivalent amount of all outstanding letters of credit plus an amount equal to the letter of credit reserve amount (as set forth in the Amended Loan Agreement), (2) 10% of each outstanding foreign exchange contract and (3) any amounts used for cash management service. We are obligated to repay the principal amount of the Term Loan in consecutive quarterly installments of $300,000 each. We must also repay 5% of the principal amount outstanding under the Acquisition Line on the first day of each calendar quarter.
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 paying dividends. The Amended 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 Credit Facility may be accelerated. We were in compliance with all of the Bank’s financial covenants at December 31, 2013.
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 bears interest at the greater of prime plus 1% or 4.25% (4.25% as of December 31, 2013) and is payable in monthly installments through September 2015. As of December 31, 2013, the balance outstanding on the Promissory Note was $1.1 million and future maturities are summarized as follows (in thousands).
| | | | | | | | | 2014 | | $ | 633 | | | | 2015 | | | 475 | | | | | | $ | 1,108 | |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M – LEASES, COMMITMENTS AND CONTINGENCIES
Capital Leases
We record leases in which we have substantially all of the benefits and risks of ownership as capital leases and all other leases as operating leases. For leases determined to be capital leases, we record the assets held under capital lease and related obligations at lesser of the present value of aggregate future minimum lease payments or the fair value of the assets held under capital lease. We amortize the underlying assets over the expected life of the assets if we will retain title to the assets at the end of the lease term; otherwise we amortize the asset over the termfiscal quarter. One director, Ms. McAvoy, has elected to receive stock for a portion of her compensation in lieu of cash. All of the lease.other non-employee directors elected to have all FY 2015 annual fees paid in cash.During 2013, we entered intoIn addition to the fees discussed above, each non-employee director receives an award of restricted stock units with a sale leaseback arrangement for computer and network equipment having atargeted value of $0.7 million$125,000 on the date of the grant. On July 29, 2016, non-employee directors were awarded 15,100 restricted stock units that will vest on the first anniversary of the grant date and expiring inwill be settled with shares of Common Stock. The following table provides information concerning compensation paid by the Company to its non-employee directors for FY 2015. Mr. Nicolaides was not additionally compensated for his service as director. | Name | | Fees Earned or
Paid in Cash
($)(1) | | | Stock
Award
($)(2) | | | Options ($) | | | All Other Compensation
($) | | | Total ($) | | | E. James Constantine | | | 35,000 | | | | 125,028 | | | | — | | | | — | | | | 160,028 | | | Tony G. Holcombe | | | 43,000 | | | | 125,028 | | | | — | | | | — | | | | 168,028 | | | Sherrie G. McAvoy | | | 45,000 | | | | 125,028 | | | | — | | | | — | | | | 170,028 | | | Jerry A. Rose | | | 36,500 | | | | 125,028 | | | | — | | | | — | | | | 161,528 | | | Andrew J. Ryan | | | 30,000 | | | | 125,028 | | | | — | | | | — | | | | 155,028 | |
| (1) | Includes annual fees and committee fees. Directors may elect to have a portion or all of their annual and committee fees paid in shares of the Common Stock.During FY 2015, Ms. McAvoy elected to have $10,000 of her fees paid in stock. |
| (2) | On July 29, 2015 each director was granted 15,100 restricted stock units of Common Stock with a grant date fair market value of $8.28 per share.These shares vest after one year. |
Compensation Committee Interlocks and Insider Participation Messrs. Holcombe, Rose and Ms. McAvoy served on our Compensation Committee during FY 2015. No members of the Committee during FY 2015 served as an officer, former officer, or employee of the Company or had a relationship requiring disclosure under “Related Person Transactions.” During FY 2015, none of our executive officers served as: | · | a member of the Compensation Committee (or other committee performing equivalent functions or, in the absence of any such committee, the entire Board) of another entity, one of whose executive officers served on our Compensation Committee; |
| · | a director of another entity, one of whose executive officers served on our Compensation Committee; or |
| · | a member of the Compensation Committee (or other committee performing equivalent functions or, in the absence of any such committee, the entire Board) of another entity, one of whose executive officers served as a director on our Board. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The arrangement was recordedfollowing table sets forth certain information regarding the beneficial ownership of the Company’s common stock as of April 25, 2016, by (i) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each director, director nominee, and named executive officer of the Company, and (iii) all current directors and executive officers of the Company as a capital lease because we retainedgroup. Except as otherwise indicated below, the risks and benefitsbeneficial owners of the underlying assets. Future minimum capital lease paymentsCommon Stock listed below have sole investment and voting power with respect to such shares. The shares “beneficially owned” by an individual are determined in accordance with the present valuedefinition of “beneficial ownership” set forth in the regulations of the net minimum lease paymentsSEC. Accordingly, they may include shares owned by or for, all capital leasesamong other things, the spouse, minor children or certain other relatives of such individual, as well as other shares as to which the individual has or shares votes or investment power or has the right to acquire within 60 days after April 25, 2016. | | | Shares Beneficially Owned (1) | | | Name and Address of Beneficial Owner or Identity of Group | | (#) | | | (%) | | | More Than 5% Shareholders | | | | | | | | | Gwynedd Resources, Ltd. (2)
1011 Centre Road, Suite 322
Wilmington, DE 19805 | | | 2,947,280 | | | | 15.2 | % | VIEX Capital Advisors LLC (3) 825 Third Ave, 33rd Floor New York, NY 10022 | | | 1,881,394 | | | | 9.7 | % | Kenneth Lebow (4)
The Lebow Family Revocable Trust
Santa Barbara, CA 93108 | | | 1,356,692 | | | | 7.0 | % | Yorkmont Capital Partners, LP (5)
2313 Lake Austin Blvd, Suite 202
Austin, TX 78703 | | | 1,343,058 | | | | 6.9 | % | Paul J. Solit (6)
Potomac Capital Partners, L.P.
825 Third Ave, 33rd Floor
New York, NY 10022 | | | 1,202,270 | | | | 6.2 | % | | Directors and Executive Officers | | | | | | | | | | E. James Constantine (7) | | | 83,556 | | | | * | | | Vincent Costello | | | — | | | | — | | | Louis Fienberg (8) | | | 192,192 | | | | * | | | Richard A. Flynt (9) | | | 92,960 | | | | * | | | Shu Gan | | | 2,000 | | | | * | | | Kenneth Gayron (10) | | | — | | | | — | | | Tony G. Holcombe (11) | | | 80,250 | | | | * | | | Sherrie G. McAvoy (12) | | | 22,982 | | | | * | | | Stratton J. Nicolaides (13) | | | 269,468 | | | | 1.4% | | | Sri Ramachandran | | | — | | | | — | | | Jerry A. Rose (14) | | | 20,900 | | | | * | | | Andrew J. Ryan (15) | | | 316,873 | | | | 1.6% | | | Eric Singer (3) | | | 1,881,394 | | | | 9.7% | | | Jeffrey Smith (16) | | | 327,584 | | | | 1.7% | | | Marc J. Zionts (17) | | | 144,097 | | | | * | | | All Current Directors and Executive Officers as a group | | | 2,821,520 | | | | 14.4% | |
| (1) | Percentage calculations are based on the 19,437,322 shares of the Company’s Common Stock, no par value, that were outstanding at the close of business on April 25, 2016; includes the subset of shares issuable upon the exercise of outstanding stock options and restricted stock units exercisable or vesting within 60 days after April 25, 2016. |
| (2) | The shareholders of Gwynedd Resources, Ltd. include various trusts for the benefit of Maria E. Nicolaides and her children for which Elizabeth Baxavanis, Mrs. Nicolaides’ mother-in-law, serves as trustee. The Gwynedd trusts beneficially own, directly or indirectly, 2,947,280 shares representing ownership of approximately 89% of the outstanding stock of Gwynedd. Mrs. Baxavanis disclaims beneficial ownership of all shares of Common Stock owned by Gwynedd. Mrs. Nicolaides disclaims beneficial ownership of 327,143 shares owned by Gwynedd that may be deemed to be beneficially owned by the other shareholders of Gwynedd, including trusts for the benefit of her children. |
| (3) | VIEX Capital Advisors LLC beneficially owns, directly or indirectly, an aggregate of 1,881,394 shares of Common Stock consisting of: (i) 399, 837 shares owned by VIEX Opportunities Fund LP - Series One (Series One), (ii) 1,259,908 shares owned by VIEX Special Opportunities Fund II, LP (VSO II), and (iii) 221,649 shares owned by VIEX Special Opportunities Fund III, LP (VSO III) Mr. Singer, by virtue of his position as managing member of each of the general partners of VIEX, Series One, VSO II, and VSO III may be deemed to beneficially own the shares owned directly by such entities. |
| (4) | According to Schedule 13D/A, filed jointly with the SEC on August 2, 2010, by Kenneth Lebow, et al (Lebow), Lebow beneficially owned 1,356,692 shares. |
| (5) | Based on information provided by Yorkmont Capital Partners, LP, Yorkmont Capital Management, LLC, and Graeme P. Rein in a Schedule 13G/A filed on January 8, 2016. According to the Schedule 13G/A. each of Yorkmont Capital Partners, LP, Yorkmont Capital Management, LLC, and Graeme P. Rein has sole voting and dispositive power over 1,339,158 shares of Common Stock and Graeme P. Rein has sole voting and dispositive power over 3,900 additional shares of Common Stock. |
| (6) | Based on information provided by Potomac Capital Partners, L.P., Paul J. Solit, Potomac Capital Management, LLC, and Potomac Capital Management, Inc. in a Schedule 13G/A filed on February 12, 2016. According to the Schedule 13G/A, each of Potomac Capital Partners, L.P., Potomac Capital Management, LLC, Potomac Capital Management, Inc. and Paul J. Solit has sole voting and dispositive power over 600,210 shares of Common Stock and Paul J. Solit has sole voting and dispositive power over 602,060 additional shares of Common Stock. |
| (7) | The subset of shares held by Mr. Constantine includes: (i) 59,556 shares of Common Stock and (ii) 24,000 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of April 25, 2016, but does not include 15,100 nonvested restricted stock units that vest more than 60 days after April 25, 2016. |
| (8) | The subset of shares held by Mr. Fienberg includes: (i) 78,819 shares of Common Stock and (ii) 113,373 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of April 25, 2016. Mr. Fienberg’s employment terminated effective October 31, 2015. |
| (9) | The subset of shares held by Mr. Flynt includes: (i) 5,310 shares of Common Stock, (ii) 4,900 restricted stock units vesting within 60 days of April 25, 2016, and (iii) 82,750 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of April 25, 2016, but does not include 28,366 nonvested restricted stock units or stock options to acquire 46,050 shares that vest more than 60 days after April 25, 2016. Mr. Flynt’s service as the Company’s Chief Financial Officer ended effective March 7, 2016. |
| (10) | Mr. Gayron was appointed Chief Financial Officer effective March 7, 2016. |
| (11) | The subset of shares held by Mr. Holcombe includes 80,250 shares of Common Stock but does not include 15,100 nonvested restricted stock units that vest more than 60 days after April 25, 2016. |
| (12) | The subset of shares held by Ms. McAvoy includes 22,974 shares of Common Stock but does not include 15,100 nonvested restricted stock units that vest more than 60 days after April 25, 2016. |
| (13) | The subset of shares held by Mr. Nicolaides includes: (i) 138,086 shares of Common Stock, (ii) 4,750 restricted stock units vesting within 60 days of April 25, 2016, and (iii) 126,632 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of April 25, 2016, but does not include 32,050 nonvested restricted stock units or stock options to acquire 56,300 shares of Common Stock that vest more than 60 days after April 25, 2016. Shares beneficially owned by Mr. Nicolaides also do not include the 2,947,280 shares of Common Stock owned by Gwynedd, with respect to which Mr. Nicolaides disclaims beneficial ownership. |
| (14) | The subset of shares held by Mr. Rose includes 20,900 shares of Common Stock but does not include 15,100 nonvested restricted stock units that vest more than 60 days after April 25, 2016. |
| (15) | The subset of shares held by Mr. Ryan includes: (i) 304,873 shares of Common Stock and (ii) 12,000 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of April 25, 2016 but does not include (i) 15,100 nonvested restricted stock units that vest more than 60 days after April 25, 2016 or (ii) the 2,947,280 shares of Common Stock owned by Gwynedd, with respect to which Mr. Ryan disclaims beneficial ownership. |
| (16) | Dr. Smith’s employment terminated effective November 30, 2015. |
| (17) | The subset of shares held by Mr. Zionts includes: (i) 11,500 shares of Common Stock and (ii) 132,597 shares of voting nonvested restricted stock awards, but does not include 16,655 nonvested restricted stock units or stock options to acquire 17,813 shares of Common Stock that vest more than 60 days after April 25, 2016.. |
*Represents less than 1% of the Company’s total number of shares outstanding on April 25, 2016. Equity Compensation Plan Information The following table provides information as of December 31, 20132015 about the securities authorized for issuance to our employees and non-employee directors under our stock-based compensation plans: | Plan Category | | Column A | | | Column B | | | Column C | | | | | Securities to be issued upon
exercise of outstanding
options, warrants and
rights(#) | | | Weighted-average exercise
price of outstanding
options, warrants and
rights($) | | | Securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in Column A(#) | | Equity compensation plans approved by security holders | | | 1,529,204 | | | | 8.69 | | | | 2,259,930 | | Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | | Total | | | 1,529,204 | | | | 8.69 | | | | 2,259,930 | |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Certain Relationships and Related Transactions The Company does not have a formal written policy regarding the review of related party transactions. However, the Board reviews all relationships and transactions in which the Company and its directors and senior executive officers or their immediate family members are as follows (in thousands): | | | | | | | | | Total minimum lease payments | | $ | 555 | | | | Less amounts representing interest | | | (101 | ) | | | Present value of future minimum lease payments | | | 454 | | | | Less current portion | | | (306 | ) | | | Amounts due after one year | | $ | 148 | |
Operating Leases
We lease certain property and equipment under non-cancelable operating leases.participants to determine whether such persons have a direct or indirect material interest. The leases expire at various dates through 2022. Certain of our leases for office space have annual periods of free rent and escalation clauses of 2.5% to $1.00 per square foot. The leases also have options to renew for 60-65 months at the end of their terms. Rent expense, including short-term leases, amounted to approximately $1.3 million, $1.1 million and $0.9 millionCompany’s senior management is primarily responsible for the years ended December 31, 2013, 2012development and 2011, respectively
Future minimum lease payments under such non-cancelable operating leases subsequentimplementation of processes and controls to December 31, 2013, are as follows (in thousands):
| | | | | | | Year Ending December 31, | | | | | 2014 | | $ | 1,159 | | | 2015 | | | 1,190 | | | 2016 | | | 1,252 | | | 2017 | | | 1,289 | | | 2018 | | | 1,314 | | | Thereafter | | | 4,051 | | | | | $ | 10,255 | |
NOTE N – WARRANTS
Duringobtain information from the year ended December 31, 2013, holders of warrantsdirectors and senior executive officers with respect to purchase shares of our common stock exercised their respective warrants. A total of 91,961 shares of common stock were issued in a combination of cashrelated person transactions and cashless exercises of warrants to purchase 266,627 shares of common stock. The warrants had a weighted average exercise price of $8.68 per share. We have no remaining warrants outstanding as of December 31, 2013.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE O – EQUITY-BASED COMPENSATION
Compensation cost is recognized for all equity-based payments granted and expected to vest and isthen determining, based on the grant-date fair value estimated usingfacts and circumstances, whether the Black-Scholes option pricing modelcompany or a related person has a direct or indirect material interest in the transaction. As required under SEC rules, transactions, if any, that are determined to be directly or indirectly material to the company or a related person are disclosed in the company’s proxy statement. In addition, the Audit Committee reviews and a lattice model for awards with market conditions. Our determination of fair value of equity-based payment awards on the date of grant using the option-pricing modelapproves or ratifies any related person transaction that is affected by our share price and our valuation assumptions. These primary variables include our expected share price volatility over the estimated liferequired to be disclosed. Any member of the awards and actual and projected exercise behaviors.
As employees vest in their awards, compensation cost is recognized over the requisite service period with an offsetting credit to additional paid-in capital. Equity-based compensation expense is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures are expected to differ from those estimates. For the years ended December 31, 2013, 2012 and 2011, equity-based compensation expense was $1.9 million, $1.4 million and $1.2 million, respectively.
We have outstanding awards granted pursuant to two shareholder approved equity-based compensation plans: the Long Term Incentive Plan (1999 Plan) and the 2006 Long Term Incentive Plan (2006 Plan). The 1999 Plan was terminated and replaced by the 2006 Plan. Equity-based awards outstanding under the 1999 Plan remain in effect, but no new awards may be granted under that plan. A total of 3.0 million shares of our common stock have been reserved for issuance through the plans. Stock options and equity-settled stock appreciation rights (SARs) are generally granted with an exercise price equal to the market price of our common stock on the date of grant; the awards generally vest over four years of continuous service and have a contractual term of ten years. Grants of non-vested restricted stock awards to employees generally vest over four years of continuous service and grants to non-employee directors generally vest over one year. Certain awards provide for accelerated vesting if thereAudit Committee who is a change in control (as defined in the plans).
The recipient of a SAR is generally entitled to receive, upon exercise and without payment to us (but subject to required tax withholdings), that number of shares having an aggregate fair market value as of the date of exercise multiplied by an amount equal to the excess of the fair market value per share on the date of exercise over the fair market value per share at the date of the grant.
The fair value of stock options and SARs is estimated on the date of grant using the Black-Scholes option pricing model. Certain grants to executives require achievement of market conditions before the grant may be exercised. The fair value of awards with market exercise conditions is estimated on the date of grant using a lattice model with a Monte Carlo simulation. The fair value of all awards is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Use of a valuation model requires us to make certain assumptionsrelated person with respect to selected model inputs. Changesa transaction under review may not participate in these input variables would affectthe deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the Committee that considers the transaction.Mr. Ryan, a Director of the Company, is principal partner of The Ryan Law Group. The Ryan Law Group provided legal services to the Company in FY 2015 and will continue to provide such services in FY 2016. For services performed in FY 2015, The Ryan Law Group invoiced the Company legal fees in the amount of expense associated with equity-based compensation. Expected volatility is based onapproximately $429,000. Independent Directors For identification of each director determined to be independent, see “Director Independence” under Item 10 “Directors, Executive Officers and Corporate Governance.” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Audit Committee Charter contains procedures for the historical volatilitypre-approval of our common shares overaudit and non-audit services (the “Pre-Approval Policy”) to ensure that all audit and permitted non-audit services to be provided to the expected termCompany have been pre-approved by the Committee. Specifically, the Committee pre-approves the use of the stock option or SAR. Expected termCompany’s independent registered accounting firm for specific audit and non-audit services, except that pre-approval of non-audit services is based on historical exercise and employee termination data and representsnot required if the period“de minimis” provisions of time that options and SARsSection 10A(i)(1)(B) of the Exchange Act are expected to be outstanding. The risk-free rate is based on U.S. Treasury Daily Treasury Yield Curve Rates correspondingsatisfied. If a proposed service has not been pre-approved pursuant to the expected life assumed atPre-Approval Policy, then it must be specifically pre-approved by the date of grant. Dividend yield is zero as there are no payments of dividends made or expected. The fair value of non-vested restricted stock awards is based onCommittee before it may be provided by the fair market valueindependent registered accounting firm. For additional information concerning the Committee and its activities with the independent registered accounting firm, see “Corporate Governance — Audit Committee” and “Report of the shares awarded atAudit Committee” in this proxy statement. During FY 2014 and FY 2015, the date of grant multiplied by the number of shares awarded.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The assumptions to estimate the grant date fair value of stock options and SARs, including those with market conditions, are summarized as follows:
| | | | | | | | | | | | | | | | | For The Years Ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Expected volatility | | | 53.4% - 69.9 | % | | | 55.9% - 72.4 | % | | | 66.6% - 77.1 | % | | Weighted-average volatility | | | 67.7 | % | | | 67.8 | % | | | 72.3 | % | | Expected term (in years) | | | 6.1 | | | | 6.3 | | | | 5.5 | | | Risk-free rate | | | 1.51 | % | | | 1.03 | % | | | 1.91 | % | | Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
A summary of stock option and SAR activity as of and for the year ended December 31, 2013 follows (shares in thousands):
| | | | | | | | | | | | | | | | | Weighted | | | | | | | | Average | | | | | Shares | | | Exercise Price | | | Outstanding, January 1, 2013 | | | 1,662 | | | $ | 6.37 | | | Granted | | | 478 | | | | 11.19 | | | Exercised | | | (433 | ) | | | 5.90 | | | Forfeited or expired | | | (270 | ) | | | 8.32 | | | Outstanding, at December 31, 2013 | | | 1,437 | | | $ | 7.77 | | | Exercisable at December 31, 2013 | | | 722 | | | $ | 6.86 | |
As of December 31, 2013, stock options and SARs are further summarized as follows (shares and dollars in thousands):
| | | | | | | | | | | | | Outstanding | | | Exercisable | | | Total shares | | | 1,437 | | | | 722 | | | Aggregate intrinsic value | | $ | 7,452 | | | $ | 4,398 | | | Weighted-average remaining | | | | | | | | | | contractual term (years) | | | 6.3 | | | | 4.4 | |
We issued stock options for a total of 300,000 shares during the year ended December 31, 2013 with time-based vesting over four years and market-based exercise conditions. As of December 31, 2013, a total of 440,000 stock options and SARs with market-based exercise conditions are outstanding, of which 172,500 are exercisable.
The weighted average grant-date fair value of stock options and SARs granted during the years ended December 31, 2013, 2012 and 2011Company’s independent registered accounting firm was $6.28, $5.99 and $4.47, respectively.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock option and SAR exercise data is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Options and SARs exercised | | | 433 | | | | 638 | | | | 205 | | | Net shares issued | | | 199 | | | | 336 | | | | 70 | | | Total intrinsic value exercised | | $ | 2,552 | | | $ | 3,967 | | | $ | 404 | | | Cash received | | | 338 | | | | 560 | | | | 366 | | | Recognized tax benefit | | | 2,208 | | | | 2,619 | | | | 372 | |
Non-vested restricted stock award activity for the year ended December 31, 2013 is summarized as follows (shares in thousands):
| | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Average Grant | | | | | Shares | | | Date Fair Value | | | Outstanding, January 1, 2013 | | | 54 | | | $ | 8.92 | | | Granted | | | 212 | | | | 12.14 | | | Vested | | | (54 | ) | | | 8.92 | | | Forfeited | | | (22 | ) | | | 12.55 | | | Outstanding, as of December 31, 2013 | | | 190 | | | $ | 12.09 | |
The total vest date fair value of non-vested restricted shares that vested during the years ended December 31, 2013, 2012 and 2011 was $0.5 million, $0.5 million and less than $0.1 million, respectively.
As of December 31, 2013, 0.4 million shares remain available for grant under the 2006 Plan. Total unrecognized compensation costs related to all non-vested equity-based compensation arrangements was $4.6 million as of December 31, 2013 and is expected to be recognized over a weighted-average period of 1.4 years.
During the year ended December 31, 2013, vesting was accelerated for a portion of stock options and SARs held by a former executive. As a result of that modification, we recognized additional compensation expense of less than $0.1 million.
NOTE P – OTHER (INCOME) EXPENSE, NET
Other (income) expense, net includes $0.3 million during the year ended December 31, 2013 for a gain on the sale of an investment. See Note G.
During the year ended December 31, 2012, other (income) expense, net includes $0.5 million for additional financing costs related to assets previously transferred to a vendor in a nonmonetary exchange.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE Q – SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES
We have a hardware customerGrant Thornton LLP, who accounted for 11.1% or $8.7 million of our consolidated revenue. No customers exceeded 10% of consolidated revenue for the years ended December 31, 2012 or 2011. At December 31, 2013 and 2012, one customer accounted for 24% and 19% of outstanding accounts receivable, respectively.
We had three suppliers from which our purchases were 72% of our hardware cost of sales and two suppliers from which our purchases were 55% of our service cost of sales for the year ended December 31, 2013. Our accounts payable to these suppliers was $4.8 million at December 31, 2013.
We had two suppliers from which our purchases were 49% of our hardware cost of sales and two suppliers from which our purchases were 51% of our service cost of sales for the year ended December 31, 2012. Our accounts payable to these suppliers was $3.2 million at December 31, 2012.
We had one supplier from which our purchases were 36% of our hardware cost of sales and two suppliers from which our purchases were 46% of our service cost of sales for the year ended December 31, 2011.
Related parties that we conducted business with include the law firm of Salisbury & Ryan LLP and Mr. E. James Constantine. Mr. Andrew Ryan is a member of our Board of Directors and a partner of Salisbury & Ryan. During the years ended December 31, 2013, 2012 and 2011, Salisbury & Ryan invoiced us legal fees of $224,000, $138,000 and $134,000, respectively. Our accounts payable to Salisbury & Ryan was $22,000 and $19,000 at December 31, 2013 and 2012, respectively. A firm affiliated with a family member of our chairman and chief executive officer has provided marketing services to us. Total fees invoiced were $80,000 annually for each of the years ended December 31, 2013, 2012 and 2011.
NOTE R – BENEFIT PLAN
We sponsor a 401(k) savings and investment plan that covers all eligible employees of the Company and our subsidiaries. Employees are eligible for participation beginning on their first day of employment. We contribute an amount equal to 50% of the portion of the employee’s elective deferral contribution that do not exceed 6% of the employee’s total compensation for each payroll period in which an elective deferral is made. Our contributions are made in cash on a monthly basis. Our matching contributions are vested over a three year period at a rate of 33% per year. For the years ended December 31, 2013, 2012, and 2011, we recorded expense of $0.3 million, $0.2 million, and $0.2 million, respectively.
NOTE S – EARNINGS PER SHARE
Basic earnings per common share available to common shareholders is based on the weighted-average number of common shares outstanding excluding the dilutive impact of common stock equivalents. We compute diluted net earnings per share on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive outstanding equity-based compensation.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The numerator in calculating both basic and diluted income per common share for each period is the same as net income. The denominator is based on the number of common shares as shown in the following table (in thousands except per share data):
| | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | | Income from continuing operations | | $ | 1,965 | | | $ | 7,033 | | | $ | 1,560 | | | (Loss) income from discontinued operations | | | (1,380 | ) | | | 132 | | | | 294 | | | Net income | | $ | 585 | | | $ | 7,165 | | | $ | 1,854 | | | Common Shares: | | | | | | | | | | | | | | Weighted average common shares outstanding | | | 18,413 | | | | 15,412 | | | | 15,055 | | | Dilutive effect of common stock equivalents | | | 537 | | | | 602 | | | | 655 | | | Total | | | 18,950 | | | | 16,014 | | | | 15,710 | | | | | | | | | | | | | | | | | Basic earnings per share: | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.11 | | | $ | 0.46 | | | $ | 0.10 | | | (Loss) income from discontinued operations | | | (0.08 | ) | | | 0.00 | | | | 0.02 | | | Net income | | $ | 0.03 | | | $ | 0.46 | | | $ | 0.12 | | | | | | | | | | | | | | | | | Diluted earnings per share: | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.10 | | | $ | 0.44 | | | $ | 0.10 | | | (Loss) income from discontinued operations | | | (0.07 | ) | | | 0.01 | | | | 0.02 | | | Net income | | $ | 0.03 | | | $ | 0.45 | | | $ | 0.12 | |
Ascategories and amounts:| Audit and Other Fees | | FY 2015
($) | | | FY 2014
($) | | | | | | | | | | | Audit Fees | | $ | 895,259 | | | $ | 741,190 | | | Audit-Related Fees | | | — | | | | — | | | Tax Fees | | | — | | | | — | | | All Other Fees | | | — | | | | — | |
“Audit Fees” consist of December 31, 2013, 2012 and 2011, 0.5 million, 0.4 million and 0.5 million, respectively of stock options, SARs and warrants were excluded fromfees for professional services associated with the computation of diluted earnings per share as their effect was anti-dilutive. NOTE T – SEGMENT INFORMATION
Following the decision to exit non-core businesses and their subsequent reclassification to discontinued operations, we reevaluated our reportable operating segments. Based on theannual consolidated financial data reviewed by the chief operating decision maker, our chief executive officer, we have concluded that continuing operations are a single reportable operating segment. See Note B.
Revenue generated from customers based outsidestatements audit, review of the U.S. is summarized as follows:
| | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2013 | | | 2012 | | | 2011 | | U.S. | | | 94 | % | | | | 88 | % | | | | 90 | % | | | Canada | | | 4 | % | | | | 10 | % | | | | 5 | % | | | Others | | | 2 | % | | | | 2 | % | | | | 5 | % | | | | | | 100 | % | | | | 100 | % | | | | 100 | % | |
Substantially all revenue generated from outside the U.S. and Canada is invoiced and collected in U.S. dollars. As of December 31, 2013 and 2012, long-lived assets located outside of the U.S. were less than 1% of total assets.
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE U – SUBSEQUENT EVENTS
In February 2014, we received net proceeds of $1.3 million from the sale of our cost method investment in a wireless communications company. The carrying value of our investment was $0.2 million, resulting in a gain of $1.1 million to be recognized during the three months ending March 31, 2014.
NOTE V – UNAUDITED SELECTED QUARTERLY DATA
The following tables summarize selected unaudited financial data for each quarter of the years ended December 31, 2013 and 2012 (in thousands except share data):
| | | | | | | | | | | | | | | | | | | | | For The Three Months Ended | | | | | March 31, | | | June 30, | | | September 30, | | | December 31, | | | | | 2013 | | | 2013 | | | 2013 | | | 2013 | | | Net sales | | $ | 16,437 | | | $ | 17,271 | | | $ | 21,951 | | | $ | 22,173 | | | Gross profit | | | 6,905 | | | | 6,666 | | | | 8,981 | | | | 9,588 | | | Operating earnings (loss) | | | 45 | | | | (1,983 | ) | | | 645 | | | | 874 | | | (Loss) income from continuing operations before income taxes | | | (37 | ) | | | (2,042 | ) | | | 540 | | | | 1,135 | | | Income tax (benefit) expense | | | (65 | ) | | | (2,454 | ) | | | (35 | ) | | | 185 | | | Income from continuing operations, net of income tax benefit | | | 28 | | | | 412 | | | | 575 | | | | 950 | | | (Loss) income from discontinued operations | | | (17 | ) | | | (1,424 | ) | | | - | | | | 61 | | | Net income (loss) | | | 11 | | | | (1,012 | ) | | | 575 | | | | 1,011 | | | | | | | | | | | | | | | | | | | | | Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.00 | | | $ | 0.02 | | | $ | 0.03 | | | $ | 0.05 | | | Income (loss) from discontinued operations | | | 0.00 | | | | (0.07 | ) | | | 0.00 | | | | 0.00 | | | Net income (loss) | | $ | 0.00 | | | $ | (0.05 | ) | | $ | 0.03 | | | $ | 0.05 | | | | | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.00 | | | $ | 0.02 | | | $ | 0.03 | | | $ | 0.05 | | | Income (loss) from discontinued operations | | | 0.00 | | | | (0.08 | ) | | | 0.00 | | | | 0.00 | | | Net income (loss) | | $ | 0.00 | | | $ | (0.06 | ) | | $ | 0.03 | | | $ | 0.05 | |
| | | For The Three Months Ended | | | | | March 31, | | June 30, | | September 30, | | December 31, | | | | | 2012 | | 2012 | | 2012 | | 2012 | | | Net sales | | $ | 14,267 | | | $ | 15,786 | | | $ | 17,178 | | | $ | 17,801 | | | Gross profit | | | 6,656 | | | | 6,917 | | | | 7,087 | | | | 7,215 | | | Operating earnings | | | 474 | | | | 651 | | | | 961 | | | | 881 | | | Income from continuing operations before income taxes | | | 394 | | | | 579 | | | | 909 | | | | 249 | | | Income tax expense (benefit) | | | 3 | | | | 8 | | | | (4,786 | ) | | | (127 | ) | | Income from continuing operations, net of income tax benefit | | | 391 | | | | 571 | | | | 5,695 | | | | 376 | | | (Loss) income from discontinued operations | | | (71 | ) | | | 126 | | | | (158 | ) | | | 235 | | | Net income | | | 320 | | | | 697 | | | | 5,537 | | | | 611 | | | | | | | | | | | | | | | | | | | | | Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.03 | | | $ | 0.04 | | | $ | 0.37 | | | $ | 0.02 | | | (Loss) income from discontinued operations | | | (0.01 | ) | | | 0.01 | | | | (0.01 | ) | | | 0.02 | | | Net income | | $ | 0.02 | | | $ | 0.05 | | | $ | 0.36 | | | $ | 0.04 | | | | | | | | | | | | | | | | | | | | | Diluted earnings (loss) per share | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.35 | | | $ | 0.02 | | | Income (loss) from discontinued operations | | | 0.00 | | | | 0.00 | | | | (0.01 | ) | | | 0.02 | | | Net income | | $ | 0.02 | | | $ | 0.04 | | | $ | 0.34 | | | $ | 0.04 | |
NUMEREX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As described in Note J – Income Taxes, we recorded a significant income tax benefit during the three months ended June 30, 2013 for a tax accounting method change allowing a one-time acceleration and catch-up of depreciation and amortization. The tax accounting method change related to our 2003 acquisition of our former joint venture partner’s interest in our Cellemetry LLC subsidiary. We also released of a portion of the valuation allowance against federal net operating losses and certain other deferred tax assets during the three months ended September 30, 2012.
The sum of earnings per share for the four quarters may differ from the annual amounts due to the required method for calculating the weighted average shares for the respective periods.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Numerex Corp. and subsidiaries
We have audited the accompanying consolidated balance sheets of Numerex Corp. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits of the basicinterim consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15 (a)(2). These financial statementsCompany’s quarterly reports on Form 10-Q, and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An auditregulatory filings. Audit fees also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisinclude fees for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Numerex Corp. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 6, 2014 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Atlanta, Georgia
March 6, 2014
None.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded these disclosure controls are effective as of December 31, 2013.
Changes in Internal Control Over Financial Reporting
Management previously reported deficiencies in internal control over financial reporting that it considered to be material weaknesses. We made changes to remediate the weaknesses as discussed below.
Segregation of Duties: We made improvements to the segregation of duties through the combination of increasing finance personnel and reassigning certain responsibilities within the group.
Financial Close: We reevaluated the appropriate supporting documentation, preparation, review and approval (with additional standards for format and timing of general ledger account reconciliations) and completed initial staff training. Reevaluation and training will be ongoing. We identified standard and non-standard manual journal entries and established appropriate levels of review with related supporting documentation included and retained with the journal entries. We also added additional qualified personnel so that the financial close process procedures can be performed in a more appropriate and timely manner.
Non-routine transactions: We added the identification and review of non-routine transactions to our monthly financial review meetings including documenting such transactions. In addition, we have conducted and intend to periodically provide internal control and accounting training sessionsprofessional services rendered for the benefitaudits of the accounting department, designed to ensure staff have the opportunity to further develop their knowledge, expertise and training in US GAAP with respect to significant non-routine transactions and technical accounting matters.
Inventory: Physical Inventory procedures were completely rewritten and expanded to provide additional controls including:
| | | | ● | Creating a pre-inventory preparation checklist | | ● | Introduction of dated and signed decals to mark counted boxes |
| ● | Improved labeling of locations and SKUs | | ● | Addition of locations for quarantine and receiving |
| ● | Required two-person count teams and arbiter |
We completed training of all employees supporting physical inventory on the above procedures and we hired an experienced Inventory Manager responsible for overseeing and reconciling the companywide physical inventory. Warehouses were also reorganized to improve the inventory count process and quality control managers observed several physical inventory counts and conducted mock audits.
Contractual Agreements: We licensed and began implementation and training on a new contract management solution. The contract management solution requires review and pre-approval of contracts, including accounting personnel, to identify potential accounting issues. Training has been and will continue to be targeted to personnel in the sales and procurement/purchasing areas of the Company. We will seek external expertise where necessary for new complex arrangements. Effective June 1, 2013, we have implemented new internal controls requiring all new contracts to be processed through the new contract management solution. The process of identifying, locating and entering all previously executed contracts into the new contract management solution is ongoing and we expect this process related to contracts executed prior to June 1, 2013 to continue throughout the next calendar year.
Management’s Annual Report on Internal Control Over Financial Reporting
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 December 31, 2013. 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 1992. Based on this assessment, management concludes that, as of December 31, 2013, our internal control over financial reporting is effective based on those criteria.
The independent registered public accounting firm, Grant Thornton, LLP has audited the consolidated financial statements as of and for the year ended December 31, 2013, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, including in this report on page 71.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Numerex Corp. and subsidiaries
We have audited the internal control over financial reporting of Numerex Corp. (a Pennsylvania Corporation) and subsidiaries (the “Company”) as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for itsmanagement’s assessment of the effectiveness of internal controlcontrols over financial reporting included inand Sarbanes-Oxley compliance. The Audit Committee reviews each non audit service to be provided and assesses the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionimpact of the service on the Company’s internal control over financial reporting based on our audit.independent registered public accountant’s independence. There were no Audit-Related Fees for FY 2014 or FY 2015.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2013, and our report dated March 6, 2014 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Atlanta, Georgia
March 6, 2014
None.
Except as set forth above under “Business - Executive Officers of the Registrant,” the information required by Item 10 of Form 10-K is incorporated by reference from the Company’s Proxy Statement relating to the 2013 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K. Also incorporated by reference is the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Incorporated by reference from our Proxy Statement relating to the 2013 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K.
The information required by Item 12 of Form 10-K is incorporated by reference from our Company’s Proxy Statement relating to the 2013 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K.
Incorporated by reference from our Proxy Statement relating to the 2013 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K.
Incorporated by reference from our Proxy Statement relating to the 2013 Annual Meeting of Shareholders to be filed pursuant to General Instruction G (3) to Form 10-K.
(a) Documents filed as part of this report: | 1. | Consolidated Financial Statements. All financial statements of the Company as described in Item I8 of thisthe original report on Form 10-K. The consolidated financial statements required to be filed hereunder are listed in the Index to Consolidated Financial Statements on page 37 of this report. |
| 2. | Financial statement schedule included in Part IV of this Form: |
Schedule II - Valuation and qualifying accounts
| | Schedule II – Valuation and qualifying accounts as described in this Item 15 of the original report on Form 10-K. |
| 3. | ExhibitsThe following exhibits are filed as part of this report: |
| Exhibit | | | | Number | | Description | | | | | 3.11(1) | | Amended and Restated Articles of Incorporation of the Company | | 3.2(1) | | | | 3.21
| Bylaws of the Company | | 10.1(2) | | | | 4.12
| Common Stock Purchase Warrant, dated May 30, 2006 by and between the Company and Laurus Master Fund, Ltd. | | | | | 4.23
| Common Stock Purchase Warrant, dated December 29, 2006 by and between the Company and Laurus Master Fund, Ltd. | | | | | 10. 14
| Registration Agreement between the Company and Dominion dated July 13, 19921994 | | 10.2(3) | | | | 10. 25
| Letter Agreement between the Company and Dominion (now Gwynedd) dated October 25,15, 1994, re: designation of director | | 10.3(4) | | | | 10. 36
| 2006 Long-Term Incentive Plan (2006 Plan)* | | 10.4(5) | | | | 10.47
| Form of Non-Qualified2014 Stock Option Grant Agreement (consultants) under 2006 Long-Termand Incentive Plan* | | | | | 10. 57
| Form of Non-Qualified Stock Option Grant Agreement (non-employee directors) under 2006 Long-Term Incentive Plan* | | | | | 10. 67
| Form of Incentive Stock Option Grant Agreement (employees) under 2006 Long-Term Incentive Plan* | | | | | 10.78
| Severance Agreement, by and between Stratton Nicolaides and the Company dated November 1, 2006. (Management CompensationPlan (2014 Plan)* | | 10.5(6) | | | | 10.88
| Severance Agreement, by and between Alan Catherall and the Company dated November 1, 2006. (Management Compensation Plan)* | | | | | 10.98
| Severance Agreement, by and between Michael Marett and the Company dated November 1, 2006. (Management Compensation Plan)* | | | | | 10.109
| Form of Stock Appreciation Right Agreement under 2006 Long-Term Incentive Plan * | | | | | 10.1110
| Loan and Security Agreement, by and among Numerex Corp., its subsidiaries and Silicon Valley Bank, dated as of May 4, 2010 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) | | | | | 10.1211
| Second Amended and Restated Loan and Security Agreement, by and among the Company, its subsidiaries party thereto and Silicon Valley Bank, dated as April 25, 2011of May 5, 2014. | | 10.6(7) | | Form of Change in Control Agreement dated August 5, 2014* | | 10.1310.7(7)12
| Amendment Amended and Restated Loan and Security Agreement, by and among the Company, its subsidiaries party thereto and Silicon Valley Bank, effective as of November 5, 2012. | | | Form of Stock Option Agreement under 2014 Equity and Incentive Plan* | | 10.8(7) | 10.1413
| ConfidentialForm of Restricted Stock Unit Grant Notice and Agreement* | | 10.9(8) | | Marc Zionts employment agreement* | | 10.10(8) | | First Amendment to Second Amended And Restated Loan And Security Agreement dated November 3, 2015 | | 10.11(8) | | Stratton Nicolaides Employment Agreement dated November 4, 2015* | | 10.12(8) | | Louis Fienberg Separation Agreement and General Release by and between Alan Catherall and the Company effective July 1, 2013dated November 5, 2015* | | 10.13(8) | | Shu Gan Offer Letter for Employment dated September 22, 2015* | | 10.14(8) | | Vin Costello Offer Letter for Employment dated September 22, 2015* | | 10.15 | | Sridhar Ramachandran Offer Letter for Employment dated November 20, 2015* (previously filed) | | 10.16 | | Kenneth Gayron Offer Letter for Employment dated November 24, 2015* (previously filed) | 18.11316.1(9) | | Letter re: change in accounting principles (Preferability letter) for change in annual goodwill impairment testing measurement date from December 31Grant Thornton LLP to October 1, effective September 20, 2013the Securities and Exchange Commission dated February 9, 2016 |
| 21.1 | 21 | Subsidiaries of Numerex Corp. (previously filed) | | 23.1 | | | | 23 | Consent of Grant Thornton, LLP (previously filed) | | 24.1 | | | | 24 | Power of Attorney (included with signature page)(previously filed) | | 31.1 | | | | 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | | 31.2 | | | | 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | | 101 | | | | 32.1 | Rule 13a-14(b) Certification of Chief Executive Officer | | | | | 32.2 | Rule 13a-14(b) Certification of Chief Financial Officer | | | | | 101 | Interactive Data Files - The following financial information from Numerex Corp. Annual Report on Form 10-K for the year ended December 31, 20112015 filed with the SEC on March 15, 2012,14, 2016, formatted in XBRL includes: (i) Consolidated Balance Sheets at December 31, 20112015 and December 31, 2010,2014, (ii) Consolidated Statements IncomeOperations for the fiscal periods ended December 31, 2011, 20102015, 2014 and 2009,2013, (iii) Consolidated Statements of Cash Flows for the fiscal periods ended December 31, 2011, 20102015, 2014 and 2009,2013, (iv) Consolidated Statement of Shareholders’ Equity and Comprehensive (Loss) Income for the fiscal period ended December 31, 2011,2015, and (v) the Notes to Consolidated Financial Statements.** (previously filed) |
* Indicates a management contract of any compensatory plan, contract or arrangement.
** This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
1 Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended October 31, 1995 (File No. 000-22920)
2 Incorporated by reference to Exhibit 10.4 filed with the Company’s Current Report on Form 8-K Filed with the Securities and Exchange Commission on June 5, 2006 (File No. 000-22920)
3 Incorporated by reference to Exhibit 10.3 filed with the Company’s Current Report on Form 8-K Filed with the Securities and Exchange Commission on January 5, 2007 (File No. 000-22920)
4 Incorporated by reference to the Exhibit filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 1994 (File No. 000-22920)
5 Incorporated by reference to the Exhibits filed with the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission (File No. 33-89794)
6 Incorporated by reference to the Exhibits filed with the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 10, 2006 (File No. 000-22920)
7 Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007 (File No. 000-22920)
8 Incorporated by reference to Exhibits 10.1, 10.2, and 10.3 filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2006 (File No. 000-22920)
9 Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed with Securities and Exchange Commission on May 27, 2010 (File No. 000-22920)
10 Incorporated by reference to Exhibit 10.1 filed with the Company’s Quarterly Report on Form 10-Q filed with Securities and Exchange Commission on August 16, 2010 (File No. 000-22920)
11 Incorporated by reference to Exhibit 10.1 filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 15, 2011 (File No. 000-22920)
12 Incorporated by reference to Exhibit 10.13 filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2013 (File No. 000-22920)
13 Incorporated by reference to Exhibit 18.1 filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2013 (File No. 000-22920)
SCHEDULE II
NUMEREX CORP.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2013, 2012, 2011
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | Balance at | | | Additions | | | | | | | | | | | | beginning of | | | charged to | | | | | | | Balance at | | | Description | | Period | | | expense | | | Deductions | | | | end of Period | | | Year ended December 31, 2013: | | | | | | | | | | | | | | | Accounts and financing receivables | | | | | | | | | | | | | | | Allowance for uncollectible accounts, continuing operations | | $ | 367 | | | $ | 444 | | | | (137 | ) | (a) | | $ | 674 | | | Allowance for uncollectible accounts, discontinued operations | | | 16 | | | | 602 | | | | (18 | ) | (a) | | | 600 | | | Inventory | | | | | | | | | | | | | | | | | | | Reserve for obsolescence, continuing operations | | | 332 | | | | 807 | | | | (29 | ) | | | | 1,110 | | | Reserve for obsolescence, discontinued operations | | | 30 | | | | - | | | | - | | | | | 30 | | | Deferred tax assets | | | | | | | | | | | | | | | | | | | Valuation allowance, continuing operations | | | 1,650 | | | | - | | | | (105 | ) | | | | 1,545 | | | Valuation allowance, discontinued operations | | | 460 | | | | - | | | | 2 | | | | | 462 | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2012: | | | | | | | | | | | | | | | | | | | Accounts and financing receivables | | | | | | | | | | | | | | | | | | | Allowance for uncollectible accounts, continuing operations | | | 236 | | | | 188 | | | | (57 | ) | (b) | | | 367 | | | Allowance for uncollectible accounts, discontinued operations | | | - | | | | 67 | | | | (51 | ) | (b) | | | 16 | | | Inventory | | | | | | | | | | | | | | | | | | | Reserve for obsolescence, continuing operations | | | 578 | | | | 148 | | | | (394 | ) | (c) | | | 332 | | | Reserve for obsolescence, discontinued operations | | | - | | | | - | | | | 30 | | (c) | | | 30 | | | Deferred tax assets | | | | | | | | | | | | | | | | | | | Valuation allowance, continuing operations | | | 11,000 | | | | - | | | | (9,350 | ) | (c) | | | 1,650 | | | Valuation allowance, discontinued operations | | | - | | | | | | | | 460 | | (c) | | | 460 | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2011: | | | | | | | | | | | | | | | | | | | Accounts receivable | | | | | | | | | | | | | | | | | | | Allowance for uncollectible accounts | | | 356 | | | | 370 | | | | (490 | ) | | | | 236 | | | Inventory | | | | | | | | | | | | | | | | | | | Reserve for obsolescence | | | 624 | | | | 83 | | | | (129 | ) | | | | 578 | | | Deferred tax assets | | | | | | | | | | | | | | | | | | | Valuation allowance | | | 11,970 | | | | - | | | | (970 | ) | | | | 11,000 | |
(a) Amounts written off as uncollectible, net of recoveries
(b) Amounts written off as uncollectible, net of recoveries and reclassification to discontinued operations
(c) Includes reclassification to discontinued operations.
| * | | Indicates a management contract of any compensatory plan, contract or arrangement. | | ** | | This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference. | | (1) | | Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended October 31, 1995 (File No. 000-22920) | | (2) | | Incorporated by reference to the Exhibit filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 1994 (File No. 000-22920) | | (3) | | Incorporated by reference to the Exhibits filed with the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission (File No. 33-89794) | | (4) | | Incorporated by reference to the Exhibits filed with the Company's Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 10, 2006 (File No. 000-22920) | | (5) | | Incorporated by reference to Exhibit filed with the Company's Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 2, 2014 (File No. 000-22920) | | (6) | | Incorporated by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2014 (File No. 000-22920) | | (7) | | Incorporated by reference to Exhibits filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2014 (File No. 000-22920) | | (8) | | Incorporated by reference to Exhibits filed with the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2015 (File No. 000-22920) | | (9) | | Incorporated by reference to Exhibit 16.1 filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 9, 2016 (File No. 000-22920) |
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportAmendment No. 1 on Form 10-K/A for the year ended December 31, 2015 to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 27, 2016 | By: | /s/ Marc Zionts | | By: | /s/ Stratton J. NicolaidesMarc Zionts | | | | Stratton J. Nicolaides, | | | Chairman and Chief Executive Officer | | | Date: March 6, 2014 |
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Flynt and Andrew Ryan and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date | | | | | | /s/ Stratton J. Nicolaides | | Chairman of the Board of Directors | | March 6, 2014
| Stratton J. Nicolaides | | and Chief Executive Officer | | | /s/ Brian C. Beazer | | Director | | March 6, 2014 | Brian C. Beazer | | | | |
| | | Director | | | George Benson | | | | | /s/ E. James Constantine | | Director | | March 6, 2014 | E. James Constantine | | | | | /s/ Tony G. Holcombe | | Director | | March 6, 2014 | Tony G. Holcombe | | | | | /s/ Sherrie G. McAvoy | | Director | | March 6, 2014 | Sherrie G. McAvoy | | | | | /s/ Jerry A. Rose | | Director | | March 6, 2014 | Jerry A. Rose | | | | | /s/ Andrew J. Ryan | | Director | | March 6, 2014 | Andrew J. Ryan | | | | | /s/ Richard A. Flynt | | Chief Financial Officer, Principal | | March 6, 2014 | Richard A. Flynt | | Financial and Accounting Officer | 26 | |
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