| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Numerex Corp. (NASDAQ: NMRX) is a holding company incorporated in Pennsylvania and, through its subsidiaries, is a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). An IoT solution is generally viewed as a combination of devices, software and services that operate with little or no human interaction. Our managed IoT solutions are simple, innovative, scalable and secure. Our solutions incorporate each of the four key IoT building blocks – Device, Network, Application and Platform. We provide our technology and service solutions through our integrated IoT horizontal platforms, which are generally sold on a subscription basis. 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 comprehensive (loss) income and cash flows, respectively, for all periods presented. The gains or losses associated with these divested businesses are also recorded in discontinued operations in the consolidated statements of operations and comprehensive (loss) income. Additionally, the accompanying notes do not include the operating results of businesses classified as discontinued operations for all periods presented. As of June 30, 2014, we completed the divestiture of the businesses classified as discontinued operations. We have not had and do not expect to have any significant continuing involvement with these businesses following their divestiture. See Note C – Discontinued Operations for more information. Estimates and Assumptions The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, doubtful accounts, goodwill and intangible assets, expenses, accruals, equity-based compensation, income taxes, restructuring charges, leases, long-term service contracts, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe 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 materially from these estimates. Fair Value of Financial Instruments 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 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. We measure and report certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents. The major categories of nonfinancial assets and liabilities that we measure at fair value include reporting units measured at fair value in our goodwill impairment test as well as certain indefinite lived intangible assets. See Note D – Fair Value Measurements for more information. 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 $9.3 million and $16.0 million at December 31, 2016 and 2015, 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 and financing 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 Note E – Accounts Receivable, Note F – Financing Receivables and Note Q – Significant Customer, Concentration of Risk and Related Parties for more information. 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. We held $0.3 million and $0.5 million in foreign bank accounts at December 31, 2016 and 2015, respectively. Restricted Cash As of December 31, 2016, cash of $0.2 million was held in escrow related to certain vendor obligations as a result of entering into our loan agreement in March 2016. See Note M – Debt. There was no restricted cash at December 31, 2015. 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. See Note E – Accounts Receivable for more information. 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, 2016 and 2015 were deemed fully collectible and an allowance was not necessary. See Note F – Financing Receivables for more information. Inventories and Reserves for Excess, Slow-Moving and Obsolete Inventory Inventories are valued at the lower of cost or market and consist principally of (1) security devices and (2) cellular IoT Modems and Modules and (3) satellite IoT Modems and other accessories. Cost is 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 product 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. The establishment of a reserve for obsolete or slow moving inventory establishes a new cost basis in the inventory. See Note G – Inventory for more information. Property and Equipment Property and equipment are carried at cost, net of accumulated depreciation and amortization. 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 See Note I – Property and Equipment for more information. 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 for three years. For software embedded in our products, we capitalize software development costs when technological feasibility is established and conclude capitalization when the hardware product 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 for three years. Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred as engineering and development. See Note J – Intangible Assets for more information. Intangible Assets, Including Goodwill Intangible assets consist of acquired customer relationships and intellectual property, patents and trademarks, and goodwill. These assets, except for goodwill and trade names, are amortized over their expected useful lives. Acquired customer relationships are amortized using the straight line method, which approximates the pattern over which the economic benefits are being utilized, using lives of 4 to 11 years. Acquired intellectual property and patents 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. Goodwill and trade names are not amortized but are 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 assess goodwill (and trade names as applicable) annually for our four 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 October 1 to December 1 effective October 1, 2016, primarily to better align our measurement date with our financial projections, as well as our annual strategic, financial planning, and budgeting processes. There was no impact of the change in measurement date. We base the impairment analysis of intangible assets, including goodwill on estimated fair values. The fair value of reporting units for assessing goodwill is principally based on discounted cash flow models and using a relief from royalty method for other intangible assets. The assumptions, inputs and judgments used in estimating fair values are inherently subjective and reflect estimates based on known facts and circumstances at the time the valuations are performed. These estimates and assumptions primarily include, but are not limited to, discount rates, terminal growth rates, projected revenues and costs, projected cash flows, capital expenditure forecasts, and royalty rates. In 2016, we recorded impairment charges of $2.1 million and $9.7 million for tradenames and goodwill related to our Omnilink product line, respectively. Additionally we recorded impairment charges of $0.2 million and $0.1 million for goodwill and technology for our DIY product line. See Note J – Intangible Assets for more information. Impairment of Long-lived Assets Long-lived assets, such as property and equipment and other assets 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. No impairment charges were recorded during the year ended December 31, 2016. During the year ended December 31, 2015, we recorded an impairment charge of $1.3 million for prepaid carrier fees in other assets affecting multiple reporting units. See Note H – Prepaid Expenses and Other Assets for more information. 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, 2016. 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, 2016. See Note K – Income Taxes for more information. 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. Other Comprehensive (Loss) Income and Foreign Currency Translation Other comprehensive (loss) income consists of adjustments, net of tax, related to unrealized gains (losses) on foreign currency translation. These are reported in accumulated other comprehensive (loss) income as a separate component of shareholders’ equity until realized in earnings. 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 loss in the consolidated statements of operations and comprehensive (loss) income and 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, 2016, 2015 or 2014. Revenue Recognition Our revenue is generated from two primary sources, subscription fees and the sale of IoT 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 tax and any other transactional taxes. Subscription fees are based on the number of devices (subscriptions) on our integrated IoT 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 fee revenues for managed service arrangements include all of the key IoT components – device, network, application and platform. Subscription fees also include volume-based excess network usage, messages and other activity that are recognized in 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 activation fees which are deferred and recognized ratably over the estimated life of the subscription to which the activation fee relates. Direct and incremental costs associated with deferred revenue are also deferred, classified as deferred costs in prepaid expense and other assets in our consolidated balance sheets, and recognized in the period revenue is recognized under managed service arrangements. For managed services, cost of embedded devices and hardware are capitalized as fixed assets and depreciated over the estimated life of the hardware. Unbilled revenue consists of earned 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 IoT 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 thirty to ninety days 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 are recorded with embedded device and hardware revenue and associated costs are recorded in cost of embedded devices and hardware. On occasion we sell both hardware and monthly recurring services to the same customer. In such cases, we evaluate such arrangements to determine whether 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) our best estimate of the selling price, if neither vendor-specific nor third-party evidence is available. In most cases, neither vendor-specific objective evidence nor third-party evidence is available, and we use the best estimate of the selling price, which is based on consistent selling price. 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. Advertising Expenses Advertising expenses are charged to operations in the period in which they are incurred. For the years ended December 31, 2016, 2015 and 2014, advertising costs were approximately $1.1 million, $1.0 million and $0.9 million, respectively. Equity-Based Compensation Compensation cost is recognized for all equity-based payments granted and is based on the grant-date fair value estimated using the Black-Scholes option pricing model. Our determination of fair value of equity-based payment awards on the date of grant using the option-pricing model is affected by our share price and our valuation assumptions. 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. These primary variables include our expected share price volatility over the estimated life 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. See Note O – Equity-Based Compensation for more information. Engineering and Development Engineering and development expenses that are not capitalizable as internally developed software 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, 2016, 2015 and 2014, engineering and development costs recorded in operations were $9.2 million, $9.0 million and $8.0 million, respectively. Earnings Per Share Basic earnings per share is computed by dividing net (loss) income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of outstanding stock options and restricted stock units, calculated using the treasury stock method. See Note S – Earnings Per Share for more information. Liquidity As indicated in the accompanying consolidated financial statements, the Company incurred operating losses totaling $22.8 million and $8.6 million and cash used in operations totaling $0.5 million and cash provided by operations of $8.9 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the Company has an accumulated deficit of $48.3 million, and cash and cash equivalents of $9.5 million. The Company’s cash flow requirements during 2016 were financed by cash on hand and cash generated by operations. The Company had total long term debt, including current portion, of $16.2 million as of December 31, 2016. The Company’s ability to continue in business is dependent on its ability to continue to generate operating cash flows, to maintain sufficient cash on hand, to raise additional capital, and an ability to control expenditures. Management believes that the Company will maintain sufficient liquidity through at least March 2018. The consolidated financial statements do not include any adjustments that might result from this uncertainty. Reclassifications As a result of the adoption of a recent accounting pronouncement, see Recently Adopted Accounting Guidance below, the balance sheet as of December 31, 2015 reflects the following reclassifications (dollars in thousands):
Historical Reclassi-
Presentation fication As Adjusted
Prepaid expenses and other current assets $ 2,037 $ (150 ) $ 1,887
Other assets 699 (290 ) 409
Current portion of long-term debt 3,750 (150 ) 3,600
Long-term debt, less current portion 15,599 (290 ) 15,309 Recently Adopted Accounting Guidance In March 2015, the Financial Accounting Standards Board (FASB) issued guidance about simplifying the presentation of deferred financing costs. The guidance was intended to help clarify deferred financing costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for deferred financing costs were not affected. The guidance was effective January 1, 2016 and, in accordance with the guidance, $0.8 million of deferred financing costs is netted against long-term debt as of December 31, 2016 and $0.4 million of deferred financing costs was reclassified from current and noncurrent other assets to the current and noncurrent portions of long-term debt as of December 31, 2015. In September 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments for an acquirer in a business combination. The update requires an acquirer to recognize any adjustments to provisional amounts of the initial accounting for a business combination with a corresponding adjustment to goodwill in the reporting period in which the adjustments are determined in the measurement period, as opposed to revising prior periods presented in financial statements. Thus, an acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. This update was effective January 1, 2016 and the adoption of this guidance did not have a material impact on our financial statements. In March 2016, the FASB issued guidance to improve the accounting for employee share-based payments. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement, and additional paid-in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. It also makes several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. This guidance is effective for annual periods beginning after December 16, 2016, and interim periods within those annual periods, but may be adopted earlier. The Company adopted this guidance in the fourth quarter of fiscal 2016 for the annual period ended December 31, 2016. The impact of the adoption of this standard was to reduce our deferred tax assets as well as the offsetting valuation allowance by $3.4 million. See Footnote K - Income Taxes. Periods prior to January 1, 2016 have not been adjusted. In August 2014, the FASB issued guidance about disclosing an entity’s ability to continue as a going concern. The guidance is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This update was effective December 15, 2016 and the adoption of this guidance did not have a material impact on our financial statements. In November 2015, the FASB issued guidance requiring all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. The Company adopted this guidance in the fourth quarter of fiscal 2016 for the annual period ended December 31, 2016. Periods prior to January 1, 2016 have not been adjusted, as we are adopting prospectively. In July 2015, the FASB issued guidance intended to simplify the presentation of applicable inventory at the lower of cost or net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This update was effective December 15, 2016 and the adoption of this guidance did not have a material impact on our financial statements. In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. This updat |
