UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2012 | ||
| or | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number: 0-22920
Numerex Corp
(Exact Name of Registrant as Specified in Its Charter)
| Pennsylvania | 11-2948749 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
1600 Parkwood Circle, Suite 500
Atlanta, GA 30339-2119
(Address of Principal Executive Offices) (Zip Code)
(770) 693-5950
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 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 company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 07, 2012, an aggregate of 15,421,792 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| Numerex Corp. and Subsidiaries | ||||||||
Consolidated Balance Sheets | ||||||||
| (In thousands) | ||||||||
| March 31, | December 31, | |||||||
2012 (unaudited) | 2011 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 9,012 | $ | 9,547 | ||||
| Restricted cash | 221 | 221 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $273 at March 31, 2012 and $236 at December 31, 2011 | 6,569 | 6,846 | ||||||
| Note receivable | 166 | 165 | ||||||
| Inventory, net of provision of $568 at March 31, 2012 and $578 at December 31, 2011 | 6,537 | 7,057 | ||||||
| Prepaid expenses and other current assets | 1,536 | 957 | ||||||
| TOTAL CURRENT ASSETS | 24,041 | 24,793 | ||||||
| Property and equipment, net | 1,333 | 1,252 | ||||||
| Software, net | 3,567 | 3,388 | ||||||
| Other intangibles, net | 4,575 | 4,901 | ||||||
| Other assets – long term | 3,238 | 3,307 | ||||||
| Goodwill, net | 23,787 | 23,787 | ||||||
| TOTAL ASSETS | $ | 60,541 | $ | 61,428 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 6,073 | $ | 8,239 | ||||
| Other current liabilities | 1,310 | 1,392 | ||||||
| Current portion of term loan | 2,200 | 1,200 | ||||||
| Deferred revenues | 1,151 | 1,317 | ||||||
| Obligations under capital leases | 120 | 237 | ||||||
| TOTAL CURRENT LIABILITIES | 10,854 | 12,385 | ||||||
| LONG TERM LIABILITIES | ||||||||
| Term loan, net of current portion | 4,200 | 4,500 | ||||||
| Other long-term liabilities | 332 | 346 | ||||||
| TOTAL LIABILITIES | 15,386 | 17,231 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock - no par value; authorized 3,000; none issued | - | - | ||||||
| Class A common stock – no par value; authorized 30,000; issued 16,881 shares at March 31, 2012 and 16,691 shares at December 31, 2011; outstanding 15,320 shares at March 31, 2012 and 15,143 shares at December 31, 2011 | - | - | ||||||
| Class B common stock – no par value; authorized 5,000; none issued | - | - | ||||||
| Additional paid-in-capital | 67,289 | 66,634 | ||||||
| Treasury stock, at cost, 1,562 shares at March 31, 2012 and December 31, 2011 | (8,136 | ) | (8,136 | ) | ||||
| Accumulated other comprehensive loss | (31 | ) | (13 | ) | ||||
| Accumulated deficit | (13,967 | ) | (14,288 | ) | ||||
| TOTAL SHAREHOLDERS' EQUITY | 45,155 | 44,197 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 60,541 | $ | 61,428 | ||||
The accompanying notes are an integral part of these financial statements.
3
| Numerex Corp. and Subsidiaries |
Consolidated Statements of Operation and Comprehensive Income |
(In thousands, except per share data) (unaudited) |
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2012 | 2011 | |||||||
| Net sales: | ||||||||
| M2M Services: | ||||||||
| Recurring revenue and support | $ | 10,107 | $ | 8,995 | ||||
| Embedded devices & hardware | 4,356 | 4,472 | ||||||
| 14,463 | 13,467 | |||||||
| Other Services | 69 | 301 | ||||||
| Total net sales | 14,532 | 13,768 | ||||||
| Cost of sales: | ||||||||
| Cost of recurring revenue and support | 4,130 | 3,653 | ||||||
| Cost of embedded devices & hardware | 3,588 | 3,850 | ||||||
| Cost of other services | 31 | 179 | ||||||
| Gross profit | 6,783 | 6,086 | ||||||
| Sales and marketing | 2,072 | 2,235 | ||||||
| General, administrative and legal | 2,688 | 2,212 | ||||||
| Research and development | 805 | 594 | ||||||
| Depreciation and amortization | 815 | 775 | ||||||
| Operating income | 403 | 270 | ||||||
| Interest expense, net | (77 | ) | (26 | ) | ||||
| Other (expense) income, net | (3 | ) | - | |||||
| Income before income taxes | 323 | 244 | ||||||
| Provision for income taxes | 2 | 14 | ||||||
| Net income | 321 | 230 | ||||||
| Other comprehensive income (loss), net of income tax: | ||||||||
| Foreign currency translation adjustment | (18 | ) | 12 | |||||
| Comprehensive income | $ | 303 | $ | 242 | ||||
| Basic earnings per share | $ | 0.02 | $ | 0.02 | ||||
| Diluted earnings per share | $ | 0.02 | $ | 0.01 | ||||
| Weighted average common shares used in per share calculation | ||||||||
| Basic | 15,189 | 14,985 | ||||||
| Diluted | 15,870 | 15,763 | ||||||
The accompanying notes are an integral part of these financial statements.
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| NUMEREX CORP. AND SUBSIDIARIES | ||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY | ||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common | Paid-In | Treasury | Comprehensive | Retained | ||||||||||||||||||||
| Shares | Capital | Stock | Earnings | Earnings | Total | |||||||||||||||||||
| Balance at January 1, 2012 | 16,691 | $ | 66,634 | $ | (8,136 | ) | $ | (13 | ) | $ | (14,288 | ) | $ | 44,197 | ||||||||||
| Issuance of common stock in connection with directors stock plan | 1 | 11 | - | - | - | 11 | ||||||||||||||||||
| Issuance of common stock in connection with employee stock option plan | 144 | 223 | - | - | - | 223 | ||||||||||||||||||
| Conversion of warrants | 45 | - | - | - | - | - | ||||||||||||||||||
| Share-based compensation | - | 421 | - | - | - | 421 | ||||||||||||||||||
| Translation adjustment | - | - | - | (18 | ) | - | (18 | ) | ||||||||||||||||
| Net Earnings | - | - | - | - | 321 | 321 | ||||||||||||||||||
| Balance at March 31, 2012 | 16,881 | $ | 67,289 | $ | (8,136 | ) | $ | (31 | ) | $ | (13,967 | ) | $ | 45,155 | ||||||||||
| Balance at January 1, 2011 | 16,363 | $ | 64,099 | $ | (5,239 | ) | $ | - | $ | (16,142 | ) | $ | 42,718 | |||||||||||
| Issuance of common stock in connection with directors stock plan | 4 | 31 | - | - | - | 31 | ||||||||||||||||||
| Issuance of common stock in connection with employee stock option plan | 37 | 244 | - | - | 244 | |||||||||||||||||||
| Conversion of warrants | 200 | 880 | - | - | - | 880 | ||||||||||||||||||
| Retirement of treasury shares | - | - | (2,897 | ) | - | - | (2,897 | ) | ||||||||||||||||
| Share based compensation | - | 193 | - | - | - | 193 | ||||||||||||||||||
| Translation adjustment | - | - | - | 12 | - | 12 | ||||||||||||||||||
| Net Earnings | - | - | - | - | 230 | 230 | ||||||||||||||||||
| Balance at March 31, 2011 | 16,604 | $ | 65,447 | $ | (8,136 | ) | $ | 12 | $ | (15,912 | ) | $ | 41,411 |
The accompanying notes are an integral part of these financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(In thousands) (unaudited) |
Three Months Ended March 31, | ||||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 321 | $ | 230 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 831 | 775 | ||||||
| Bad debt expense | 37 | 81 | ||||||
| Inventory reserves | (10 | ) | (8 | ) | ||||
| Non-cash interest expense | 11 | 4 | ||||||
| Share based compensation expense | 421 | 193 | ||||||
| Stock issued in lieu of directors fees | 11 | 31 | ||||||
| Changes in assets and liabilities which provided (used) cash: | ||||||||
| Accounts and notes receivable | 281 | (319 | ) | |||||
| Inventory | 529 | 349 | ||||||
| Prepaid expenses and other assets | 16 | (407 | ) | |||||
| Other assets | (577 | ) | ||||||
| Accounts payable | (2,166 | ) | (1,781 | ) | ||||
| Other liabilities | (69 | ) | (2,647 | ) | ||||
| Deferred revenues | (166 | ) | 110 | |||||
| Income taxes | (26 | ) | (7 | ) | ||||
| Net cash (used in) provided by operating activities: | (556 | ) | (3,396 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (242 | ) | (139 | ) | ||||
| Purchase of intangible and other assets | (524 | ) | (406 | ) | ||||
| Purchase of investment | - | (322 | ) | |||||
| Net cash used in investing activities | (766 | ) | (867 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of common stock options and warrants | 222 | 1,124 | ||||||
| Purchase of treasury stock | - | (2,897 | ) | |||||
| Principal payments on capital lease obligations | (117 | ) | (112 | ) | ||||
| Proceeds from debt | 1,000 | - | ||||||
| Principal payments on debt | (300 | ) | - | |||||
| Net cash provided by (used in) financing activities: | 805 | (1,885 | ) | |||||
| Effect of exchange differences on cash | (18 | ) | 12 | |||||
| Net (decrease) increase in cash and cash equivalents | (535 | ) | (6,136 | ) | ||||
| Cash and cash equivalents at beginning of year | 9,547 | 10,251 | ||||||
| Cash and cash equivalents at end of year | $ | 9,012 | $ | 4,115 | ||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Cash payments for: | ||||||||
| Interest | $ | 66 | $ | 22 | ||||
| Taxes | $ | 53 | $ | 21 | ||||
The accompanying notes are an integral part of these financial statements.
6
NUMEREX CORP AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
NOTE A – BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012. For further information, reference is also made to Numerex Corp.’s (the “Company’s”, “We” or “Our”) Annual Report on Form 10-K for the year ended December 31, 2011 and the consolidated financial statements contained therein.
Numerex Corp (NASDAQ: NMRX) is a leading provider of business services, technology, and products used in the development and support of machine-to-machine (M2M) solutions for the enterprise and government markets worldwide. The Company offers Numerex DNA(R) that includes hardware and smart Devices, cellular and satellite Network services, and software Applications that are delivered through Numerex FAST(TM) (Foundation Application Software Technology). Customers typically subscribe to device management, network, and application services through hosted platforms. We believe our business services enable the development of efficient, reliable and secure solutions while simplifying and speeding up deployment through streamlined processes and comprehensive integration services. Numerex is ISO 27001 information security-certified. "Machines Trust Us(R)" represents the Company's focus on M2M data security, service reliability, and round-the-clock support of its customers' M2M solutions.
The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Prior year net sales and cost of sales information has been reclassified to conform to the current year presentation.
NOTE B - INVENTORY
Inventory consisted of the following:
| March 31, | December 31, | |||||||
| (In thousands) | 2012 | 2011 | ||||||
| Raw materials | $ | 1,066 | $ | 1,290 | ||||
| Work-in-progress | 17 | 14 | ||||||
| Finished goods | 6,022 | 6,331 | ||||||
| Less reserve for obsolescence | (568 | ) | (578 | ) | ||||
| Inventory, net | $ | 6,537 | $ | 7,057 | ||||
NOTE C – GOODWILL, SOFTWARE AND OTHER INTANGIBLE ASSETS
We did not have any changes to goodwill during the three months ended March 31, 2012.
We did not incur costs to renew or extend the term of existing software and acquired intangible assets during the three months ending March 31, 2012. Software and intangible assets, which will continue to be amortized, consisted of the following (in thousands):
7
| March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||
Purchased and developed software | $ | 11,898 | $ | (8,331 | ) | $ | 3,567 | $ | 11,411 | $ | (8,022 | ) | $ | 3,389 | ||||||||||
| Patents, trade and service marks | 14,084 | (11,499 | ) | 2,585 | 14,084 | (11,232 | ) | 2,852 | ||||||||||||||||
| Intangible and other assets | 3,236 | (1,246 | ) | 1,990 | 3,199 | (1,151 | ) | 2,048 | ||||||||||||||||
| Total intangible and other assets | $ | 29,218 | $ | (21,075 | ) | $ | 8,142 | $ | 28,694 | $ | (20,405 | ) | $ | 8,289 | ||||||||||
Amortization expense of intangible assets and software was $670,000 and $583,000 for the three months ended March 31, 2012 and 2011, respectively.
As of March 31, 2012, the estimated remaining amortization expense associated with the Company’s intangible assets and software is as follows:
| Remainder of 2012 | $ 2.0 million |
| 2013 | 2.6 million |
| 2014 | 1.7 million |
| 2015 | 0.3 million |
| 2016 | 0.1 million |
| Thereafter | 1.4 million |
NOTE D – INCOME TAXES
We account for income taxes in accordance with ASC 740, "Income Taxes," which requires the use of the liability method of accounting for deferred income taxes. We follow ASC 740 Subtopic 10, "Accounting for Uncertainty in Income Taxes.” ASC 740 Subtopic 10 in accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
We do not anticipate any material changes in the uncertain tax positions during the 2012 year.
We recorded a tax provision of $2,000 for the three months ended March 31, 2012, as compared to a tax provision of $14,000 for the three months ended March 31, 2011, representing effective tax rates of 0.62% and 5.79%, respectively. The difference between our effective tax rate and the 34% federal statutory rate in both the three months ended March 31, 2012 and the three months ended March 31, 2011 resulted primarily from our valuation allowance against all net deferred tax assets, incentive stock option exercises, the amortization of goodwill and state tax accruals related to unrecognized tax benefits. Management continues to review the allowance for deferred taxes on a periodic basis and concluded no change in the reserve was necessary. Management will continue to monitor prospectively in order to determine if an adjustment to the allowance in the future will be necessary if the current earnings trend continues.
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2008 through 2011 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.
NOTE E – SHARE-BASED COMPENSATION
For the three months ended March 31, 2012 and 2011, share-based compensation expense was $421,000 and $193,000, respectively. Total unrecognized compensation related to unvested share-based awards granted to employees and members of our board of directors at March 31, 2012, net of estimated forfeitures, is $3.0 million and is expected to be recognized over a weighted-average period of 1.4 years.
A summary of stock option activity and related information for the three months ended March 31, 2012 follows:
8
| Weighted | Weighted | Weighted Avg. | Aggregate | |||||||||||||||||
| Average | Average Remaining | Grant Date | Intrinsic | |||||||||||||||||
| Shares | Ex. Price | Contractual Life (Yrs) | Fair Value | Value | ||||||||||||||||
| Outstanding, at 01/01/12 | 1,586,072 | $ | 5.40 | - | $ | - | $ | 4,891,538 | ||||||||||||
| Options granted | 75,000 | 4.80 | - | 3.17 | - | |||||||||||||||
| Options exercised | (408,950 | ) | 3.18 | - | - | 2,697,083 | ||||||||||||||
| Options expired | (50,000 | ) | 4.80 | - | - | - | ||||||||||||||
| Outstanding, at 03/31/12 | 1,202,122 | $ | 6.14 | 4.81 | - | $ | 4,407,336 | |||||||||||||
| Exercisable, at 03/31/12 | 1,071,022 | $ | 6.31 | 4.53 | - | $ | 3,749,380 | |||||||||||||
A summary of SARs activity and related information for the three months ended March 31, 2012 follows:
| Weighted | Weighted | Weighted Avg. | Aggregate | |||||||||||||||||
| Average | Average Remaining | Grant Date | Intrinsic | |||||||||||||||||
| Shares | Ex. Price | Contractual Life (Yrs) | Fair Value | Value | ||||||||||||||||
| Outstanding, at 01/1/12 | 638,671 | $ | 6.05 | - | $ | - | $ | 1,586,666 | ||||||||||||
| Granted | 67,500 | 9.55 | - | 6.19 | - | |||||||||||||||
| Exercised | (12,125 | ) | 4.54 | - | - | 63,556 | ||||||||||||||
| Cancelled | (50,000 | ) | 5.91 | - | - | - | ||||||||||||||
| Outstanding, at 03/31/12 | 644,046 | $ | 6.45 | 8.10 | - | $ | 2,178,275 | |||||||||||||
| Exercisable, at 03/31/12 | 125,448 | $ | 5.51 | 7.40 | - | $ | 543,633 | |||||||||||||
The following tables summarize information related to stock options and SARS outstanding at March 31, 2012:
| Options outstanding | Options exercisable | |||||||||||||||||||||
| Range of exercise prices | Number outstanding at March 31, 2012 | Weighted average remaining contractual life (years) | Weighted average exercise price | Number exercisable at March 31, 2012 | Weighted average exercise price | |||||||||||||||||
| $ | 1.00 – 4.00 | 227,200 | 4.83 | $ | 3.59 | 193,600 | $ | 3.61 | ||||||||||||||
| 4.01 – 8.00 | 670,922 | 4.95 | 5.46 | 573,422 | 5.50 | |||||||||||||||||
| 8.01 – 10.60 | 304,000 | 4.48 | 9.55 | 304,000 | 9.55 | |||||||||||||||||
| 1,202,122 | 4.81 | $ | 6.14 | 1,071,022 | $ | 6.31 | ||||||||||||||||
| SARS outstanding | SARs exercisable | |||||||||||||||||||||
| Range of exercise prices | Number outstanding at March 31, 2012 | Weighted average remaining contractual life (years) | Weighted average exercise price | Number exercisable at March 31, 2012 | Weighted average exercise price | |||||||||||||||||
| $ | 4.51 – 6.00 | 293,796 | 7.35 | $ | 4.60 | 100,448 | $ | 4.58 | ||||||||||||||
| 6.01 – 8.00 | 181,750 | 8.20 | 6.25 | 8,250 | 7.25 | |||||||||||||||||
| 8.01 – 10.25 | 168,500 | 9.30 | 9.91 | 16,750 | 10.25 | |||||||||||||||||
| 644,046 | 8.10 | $ | 6.45 | 125,448 | $ | 5.51 | ||||||||||||||||
9
A summary of restricted share activity for the three months ended March 31, 2012 follows:
| Restricted shares | Shares | Weidghted Avg. Grant Date Fair Value | ||||||
| Outstanding, at 01/01/2012 | 50,711 | $ | 9.40 | |||||
| Granted | - | - | ||||||
| Outstanding, at 03/31/12 | 50,711 | $ | 9.40 | |||||
A summary of the status of the nonvested shares for three months ended March 31, 2012 follows:
| Weighted Average | ||||||||
| Grant-date | ||||||||
| Shares | Fair Value | |||||||
| Nonvested, 01/01/12 | 143,600 | 3.35 | ||||||
| Options granted | 75,000 | 3.17 | ||||||
| Options vested | (37,500 | ) | - | |||||
| Options forfeited | (50,000 | ) | - | |||||
| Nonvested, at 03/13/12 | 131,100 | 3.07 | ||||||
The key assumptions used in the valuation model for the three months ended March 31, 2012 follows:
| Valuation Assumptions: | ||||
| Volatility | 71.6 | % | ||
| Expected term | 6.2 years | |||
| Risk free interest rate | 2.82 | % | ||
| Dividend yield | 0.00 | % | ||
10
NOTE F – INCOME PER SHARE
Basic net income per common share available to common shareholders is based on the weighted-average number of common shares outstanding. For periods in which we have net income, we base diluted net earnings per share on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive employee stock options.
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:
| Three Months Ended March 31, | ||||||||
| (In thousands, except per share data) | 2012 | 2011 | ||||||
| Common Shares: | ||||||||
| Weighted average common shares outstanding | 15,189 | 14,985 | ||||||
| Dilutive effect of common stock equivalents | 681 | 778 | ||||||
| Total | 15,870 | 15,763 | ||||||
| Net income | $ | 321 | $ | 230 | ||||
| Net income per common share: | ||||||||
| Basic | $ | 0.02 | $ | 0.02 | ||||
| Diluted | $ | 0.02 | $ | 0.01 | ||||
For the three months ended March 31, 2012, the effect of our 264,750 outstanding stock options, 105,708 outstanding warrants, and 168,500 outstanding stock appreciation rights was not included in the computation of diluted earnings per share as their effect was anti-dilutive.
For the three months ended March 31, 2011, the effect of our 295,125 outstanding stock options, 105,708 outstanding warrants, and 81,000 outstanding stock appreciation rights was not included in the computation of diluted earnings per share as their effect was anti-dilutive.
NOTE G – 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 carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of their short maturity.
NOTE H – LIQUIDITY
We believe that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over the next twelve months. This belief could be affected by future operating earnings that are lower than expectations or a material change in our operating business, including but not limited to, a significant change in the rate of growth of our services and products, the impact of any significant acquisitions or transactions or a change in strategy or product development plans.
11
NOTE I – LEGAL PROCEEDINGS
We currently are not involved in any pending material litigation.
NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued ASU 2011-04, which is an update to Topic 820, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. We adopted this new accounting guidance during the first quarter of 2012. The adoption of this guidance did not have a material impact on our fair value measurements, financial condition, results of operations or cash flows.
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”). The new guidance requires the presentation of components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. There is no change to the items that we must report in other comprehensive income or when we must reclassify an item of other comprehensive income to net income. We adopted this new accounting guidance during the first quarter of 2012 and because the guidance impacts presentation only, it had no effect on our financial condition, results of operations or cash flows.
In September 2011, the FASB issued new accounting guidance which allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment. An entity will be required to perform the two-step impairment test only if it concludes, based on a qualitative assessment, the fair value of a reporting unit is more likely than not to be less than its carrying value. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this new accounting guidance during the first quarter of 2012. The adoption had no impact on our financial condition or results of operations.
NOTE K – SEGMENT INFORMATION
We have two reportable operating segments. These segments are M2M (Machine-to-Machine) and Other Services. The M2M segment is made up of all our cellular and satellite machine-to-machine communications hardware and services. The Other Services segment includes our video conferencing hardware and installation of telecommunications equipment.
Our chief operating decision maker is the Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating income or loss that includes an allocation of common expenses, but excludes certain unallocated expenses. The CEO does not view segment results below operating income (loss) before unallocated costs, and therefore unallocated expenses, interest income and other, net, and the provision for income taxes are not broken out by segment. Items below segment operating income or loss are reviewed on a consolidated basis.
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Summarized below are our revenues and operating income (loss) by reportable segment. Prior year information has been reclassified to conform to the current year presentation. Certain corporate expenses are allocated to the segments based on segment revenues.
Three Months Ended March 31, | ||||||||||
| (In thousands) | 2012 | 2011 | ||||||||
| Revenues: | ||||||||||
| M2M | $ | 14,463 | $ | 13,467 | ||||||
| Other services | 69 | 301 | ||||||||
| Total | $ | 14,532 | $ | 13,768 | ||||||
| Operating income (loss): | ||||||||||
| M2M | $ | 4,268 | $ | 3,506 | ||||||
| Other services | (31 | ) | (6 | ) | ||||||
| Unallocated Corporate | (3,834 | ) | (3,230 | ) | ||||||
| Total | $ | 403 | $ | 270 | ||||||
| Depreciation and amortization: | ||||||||||
| M2M | $ | 633 | $ | 592 | ||||||
| Other services | 18 | 20 | ||||||||
| Unallocated corporate | 164 | 163 | ||||||||
| Total | $ | 815 | $ | 775 | ||||||
| Identifiable Assets: | March 31, 2012 | December 31, 2011 | ||||||||
| M2M | $ | 47,498 | $ | 47,985 | ||||||
| Other services | 1,778 | 1,779 | ||||||||
| Unallocated Corporate | 11,265 | 11,664 | ||||||||
| $ | 60,541 | $ | 61,428 | |||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
This document 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 press release, 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 continue to expand our subscription-based sales mode; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services, including a prolonged deterioration of the housing market; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets, the inability to raise growth capital on favorable terms, if at all; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; unexpected costs associated with our continued investments and expansion in international markets; and extent and timing of technological changes. Numerex SEC reports identify additional factors that can affect forward-looking statement.
Overview
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the accompanying notes to the unaudited financial statements in this Quarterly Report on Form 10-Q for the period ended March 31, 2012.
While our overall business has grown and we believe that our pipeline of future sales opportunities is strong, particularly demand from our channel partners for our network and application platforms, general economic uncertainty remains and may reduce our future growth. We have continued to closely monitor our credit policies in response to the economic climate, in particular to our hardware-only sales.
Net sales increased 5.5% to $14.5 million for the three-month period ended March 31, 2012, compared to $13.8 million in 2011.
Operating income increased 49.3% to $403,000 for the three-month period ended March 31, 2012, compared to $270,000 in 2011.
Net income increased 39.6% to $321,000 for the three-month period ended March 31, 2012, compared to net income of $230,000 in 2011.
Critical Accounting Policies
There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.
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Results of Operations
The following table sets forth, for the periods indicated, certain revenue and expense items and the percentage increases and decreases for those items in the Company’s Consolidated Statements of Operations.
| Three Months Ended March 31, | 2011 vs. 2010 | |||||||||||
| (in thousands) | 2012 | 2011 | % Change | |||||||||
| Net sales: | ||||||||||||
| M2M services | $ | 14,463 | $ | 13,467 | 7.4 | % | ||||||
| Other services | 69 | 301 | -77.1 | % | ||||||||
| Total net sales | 14,532 | 13,768 | 5.5 | % | ||||||||
| Cost of sales, exclusive of depreciation shown below: | ||||||||||||
| Cost of M2M services | 7,718 | 7,503 | 2.9 | % | ||||||||
| Cost of other services | 31 | 179 | -82.7 | % | ||||||||
| Gross profit | 6,783 | 6,086 | 11.5 | % | ||||||||
| Gross profit % | 46.7 | % | 44.2 | % | ||||||||
| Sales and marketing | 2,072 | 2,235 | -7.3 | % | ||||||||
| General, administrative and legal | 2,688 | 2,212 | 21.5 | % | ||||||||
| Engineering and development | 805 | 594 | 35.5 | % | ||||||||
| Depreciation and amortization | 815 | 775 | 5.2 | % | ||||||||
| Operating income | 403 | 270 | 49.3 | % | ||||||||
| Interest expense, net | (77 | ) | (26 | ) | nm | |||||||
| Other income (expense), net | (3 | ) | - | nm | ||||||||
| Provision for income tax | (2 | ) | (14 | ) | nm | |||||||
| Net income | 321 | 230 | 39.6 | % | ||||||||
Three Months Ended March 31, 2012 and 2011
Net sales increased 5.5% to $14.5 million for the three-month period ended March 31, 2012, compared to $13.8 million in 2011. The increase was due to an increase in M2M services sales, primarily related to growth in M2M subscriptions.
Gross profit, as a percentage of net revenue, increased to 46.7% for the three-month period ended March 31, 2012, compared to 44.2% in 2011. The increase was primarily due to the increase in recurring revenue of $1.0 million. This increase causes an overall margin improvement since recurring revenues have a higher gross margin than those achieved through the sale of embedded devices.
Sales and marketing expenses decreased 7.3% to $2.1 million for the three-month period ended March 31, 2012, compared to $2.2 million in 2011. The decrease is primarily due to reduced employee related expenses of $125,000 and a reduction in promotional and marketing related costs of $33,000.
General, administrative and legal expenses increased 21.5% to $2.7 million for the three-month period ended March 31, 2012, compared to $2.2 million in 2011. The increase is primarily due to an increase in share-based compensation of $228,000, an increase in employee related expenses of $107,000 and an increase in professional service fees of $69,000.
Engineering and development expenses increased 35.5% to $805,000 for the three-month period ended March 31, 2012, compared to $594,000 in 2011. The increase is primarily due to an increase in employee related expenses of $139,000, and an increase of $56,000 in expenses related to new product testing and certifications.
Depreciation and amortization expense increased 5.3% to $815,000 for the three-month period ended March 31, 2012, compared to $775,000 in 2011. The increase is primarily due to the purchase of certain tangible and intangible assets.
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Segment Information
We have two reportable segments. These segments are M2M (Machine-to-Machine) and Other Services. The M2M segment is made up of all our cellular and satellite machine-to-machine communications hardware and services. The Other Services segment includes our video conferencing hardware and installation of telecommunications equipment.
Our chief operating decision maker is the Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating income or loss that includes an allocation of common expenses, but excludes certain unallocated expenses. The CEO does not view segment results below operating income (loss) before unallocated costs, and therefore unallocated expenses, interest income and other, net, and the provision for income taxes are not broken out by segment. Items below segment operating income or loss are reviewed on a consolidated basis.
Three Months Ended March 31, | 2011 vs. 2010 | |||||||||||
| (In thousands) | 2012 | 2011 | % Change | |||||||||
| Net sales: | ||||||||||||
| M2M: | ||||||||||||
| Recurring revenue and support | $ | 10,107 | $ | 8,995 | 12.4 | % | ||||||
| Embedded devices and hardware | 4,356 | 4,472 | -2.6 | % | ||||||||
| Total M2M revenue | 14,463 | 13,467 | 7.4 | % | ||||||||
| Other services | 69 | 301 | -77.1 | % | ||||||||
| Total net sales | 14,532 | 13,768 | 5.5 | % | ||||||||
| Cost of sales, exclusive of depreciation: | ||||||||||||
| M2M: | ||||||||||||
| Recurring revenue and support | 4,130 | 3,653 | 13.1 | % | ||||||||
| Embedded devices and hardware | 3,588 | 3,850 | -6.8 | % | ||||||||
| Total M2M cost of sales | 7,718 | 7,503 | 2.9 | % | ||||||||
| Other services | 31 | 179 | -82.7 | % | ||||||||
| Total cost of sales | 7,749 | 7,682 | 0.9 | % | ||||||||
| Gross profit | $ | 6,783 | $ | 6,086 | 11.5 | % | ||||||
| Gross profit % | 46.7 | % | 44.2 | % | ||||||||
Three Months Ended March 31, 2012 and 2011
M2M Segment
Recurring revenue and support increased 12.4% to $10.1 million for the three-month period ended March 31, 2012, compared to $9.0 million in 2011. This increase was primarily due to the growth in M2M subscriptions to 1.52 million at March 31, 2012 compared to 1.22 million at March 31, 2011.
Embedded devices and hardware revenue decreased 2.6% to $4.4 million for the three-month period ended March 31, 2012, compared to $4.5 million in 2011. This decrease was primarily the result of the discontinuation of sales of certain hardware devices that do not lead to a subscription and recurring revenue, as we continue to focus on transitioning to a subscription-based model.
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Cost of M2M recurring subscription revenue increased 13.1% to $4.1 million for the three-month period ended March 31, 2012, compared to $3.7 million in 2011. The increase is in direct correlation to the increase in recurring revenue and support.
Cost of M2M embedded devices and hardware revenue decreased 6.8% for the three-month period ended March 31, 2012 to $3.6 million, compared to $3.9 million for the year ended March 31, 2011. The decrease is in direct correlation to the decrease in sales of embedded devices and hardware.
Other Services Segment
Other services revenue decreased 77.1% to $69,000 for the three-month period ended March 31, 2012, compared to $0.3 million in 2011. The decrease is the result of a decrease in sales of our 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. The decrease is also due to a decrease in demand for our installation and integration services. Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.
Cost of other services revenue decreased 82.7% to $31,000 for the three-month period ended March 31, 2012, compared to $0.2 million in 2011. The decrease is in direct correlation to the decrease in other services revenue.
Liquidity and Capital Resources
We had working capital of $13.2 million as of March 31, 2012 and $12.4 million as of December 31, 2011. We had cash balances of $9.2 million, included restricted cash and $9.8 million, including restricted cash as of March 31, 2012 and December 31, 2011, respectively.
Net cash used by operating activities for the three-month period ended March 31, 2012 was $0.6 million. The primary non-cash adjustments to net income for the three-month period ended March 31, 2012 were $0.8 million for depreciation and amortization and $0.4 million for share based compensation expense. The changes in operating assets and liabilities included a $0.6 million increase in other assets and a $2.2 million decrease in accounts payable, partially offset by a $0.5 million decrease in inventory.
Net cash used in investing activities for the three-month period ended March 31, 2012 was $0.8 million primarily due to purchases of property and equipment of $0.2 million and intangible and other assets of $.5 million.
Net cash provided in financing activities for the three-month period ended March 31, 2012 was $0.8 million due primarily to proceeds from debt of $1.0 million, partially offset by payments on capital leases and debt of $0.4 million.
Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material. To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.
At March 31, 2012, we had a balance outstanding on our credit facility of $6.4 million at an interest rate of 4%. We were in compliance with all financial covenants of our credit agreement at March 31, 2012 and there were no letters of credit outstanding. As of the date of the filing of this Quarterly Report on Form 10-Q, no further borrowings had been made under the credit facility.
On April 25, 2011, we filed a universal shelf registration statement on Form S-3 with the SEC. The registration statement allows us, from time to time, to offer and sell up to $30 million of equity securities as described in the registration statement. The registration statement was declared effective by the SEC on May 3, 2011. We have not issued or sold any securities pursuant to the shelf registration statement
We believe that our existing cash and cash equivalents together with expected cash generated from operations will be sufficient to meet our operating requirements for at least 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, including noncompliance with the financial covenants under our credit facility
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Off-Balance Sheet Arrangements
As of March 31, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities.
Our credit agreement provides us with a revolving Credit Facility of up to $10.0 million. The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s option, equal to either (i) the Prime Rate plus the Prime Rate Margin (as such terms are defined in the credit agreement) or (ii) the LIBOR Rate plus the LIBOR Rate Margin (as such terms are defined in the Credit Agreement). The Credit Facility includes an annual fee of 0.375% of the average unused portion. As of March 31, 2012, we had outstanding indebtedness of $6.4 million under the Credit Facility at 4% interest rate. Accordingly, we could be exposed to market risk from changes in interest rates on our long-term debt. We estimate that a one percent interest rate change would change our interest expense and payments by $64,000 per year, assuming we do not increase our amount outstanding.
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.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the period ended March 31, 2012, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We currently are not involved in any pending material litigation.
Item 1A. Risk Factors.
For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q. At March 31, 2012, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None - not applicable.
Item 5. Other Information.
None - not applicable.
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Item 6. Exhibits
| Exhibit 31.1 | Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a). |
| Exhibit 31.2 | Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a). |
| Exhibit 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Exhibit 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Exhibit 101 | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011, (ii) Unaudited Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (iii) Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, (iv) Unaudited Condensed Consolidated Statements of Shareholders Equity at March 31, 2012 and 2011 and (v) Notes to Unaudited Consolidated Financial Statements (tagged as blocks of text).* |
* 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.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NUMEREX CORP. | |
| (Registrant) | |
May 10, 2012 | /s/ Stratton J. Nicolaides |
| Stratton J. Nicolaides | |
| Chief Executive Officer and Chairman | |
May 10, 2012 | /s/ Alan B. Catherall |
| Alan B. Catherall | |
| Chief Financial Officer | |
| Executive Vice President and | |
| Principle Financial and Accounting Officer |
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