UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended |
Commission File Number |
|
SEPTEMBER 30, 2004 |
0-22920 |
NUMEREX CORP.
(Exact name of registrant as specified in its charter)
|
PENNSYLVANIA |
11-2948749 |
|
(State or other jurisdiction of |
(I.R.S. Employer Identification No.) |
|
incorporation or organization) |
|
1600 Parkwood Circle, Suite 200
Atlanta, Georgia 30339-2119
(Address of principal executive offices)
(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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of November 8, 2004, an aggregate of 10,802,152 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.
NUMEREX CORP. AND SUBSIDIARIES
Page
Part I. FINANCIAL INFORMATION
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Exhibits |
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Forward-looking Statements
This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements regarding trends, strategies, plans, beliefs, intentions, expectations, goals and opportunities. 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. All statements and information herein and incorporated by reference herein, other than statements of histor
ical fact, are forward-looking statements that are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Many phases of the Company's operations are subject to influences outside its control. The Company 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 report, and the Company 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.
Any one or any combination of factors could have a material adverse effect on the Company's results of operations or could cause actual results to differ materially from forward-looking statements or historical performance. These factors include: competition; the pace of technological change; customer acceptance of products and services; inability to manage rapid expansion; the availability of capital to fund further development of products and services to meet technological or competitive changes; unforeseen product defects or failures; the introduction, withdrawal, success and timing of business initiatives and strategies; interruption in flow of products from our suppliers; changes in customer distribution channels; changes in telecommunications regulations;
ability to maintain and operate our Cellemetry® network efficiently; network failures; international regulations; loss of intellectual property protection; inability to maintain secrecy and confidentiality obligations; product certification requirements; indirect regulations on our network; changes in customer spending patterns; variations in quarterly operating results; the inability to attain revenue and earnings growth; changes in interest rates; inflation; general economic conditions and conditions affecting the capital markets. Actual events, developments and results could differ materially from those anticipated or projected in the forward-looking statements as a result of certain uncertainties set forth below and elsewhere in this document. Subsequent written or oral statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this report and those in the Company’s reports previously and subsequently filed wi
th the Securities and Exchange Commission.
PART I. FINANCIAL INFORMATION
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(In Thousands, Except Number of Shares) |
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| |
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September 30, |
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ASSETS |
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2004 |
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December 31, |
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(UNAUDITED) |
|
2003 |
|
|
CURRENT ASSETS |
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|
|
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|
Cash and cash equivalents |
|
$ |
1,402 |
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$ |
734 |
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Accounts receivable, net of allowances of $619 |
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and $609, respectively |
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4,323 |
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3,093 |
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Notes receivable, net |
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91 |
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|
99 |
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Inventory, net of reserves of $969 and $681, respectively (Note B-4) |
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2,078 |
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|
3,461 |
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Prepaid expenses & interest receivable |
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|
791 |
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|
700 |
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TOTAL CURRENT ASSETS |
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|
8,685 |
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|
8,087 |
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| |
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Property and equipment, net |
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931 |
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1,296 |
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Goodwill, net (Note B-2) |
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15,014 |
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15,014 |
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Intangible assets, net |
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7,421 |
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7,979 |
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Software, net |
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604 |
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825 |
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Notes receivable, long term (B-5) |
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42 |
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176 |
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Other assets (Note B-6) |
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|
876 |
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|
593 |
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| |
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|
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TOTAL ASSETS |
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$ |
33,573 |
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$ |
33,970 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
3,418 |
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$ |
2,498 |
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Income taxes (Note B-3) |
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- |
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- |
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Other current liabilities |
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Deferred revenues |
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815 |
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775 |
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Other accrued liabilities |
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1,311 |
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1,487 |
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Note Payable, current portion (Note B-7) |
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1,429 |
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3,500 |
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Obligations under capital leases, current portion |
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115 |
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282 |
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TOTAL CURRENT LIABILITIES |
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7,088 |
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8,542 |
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LONG-TERM DEBT |
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Obligations under capital leases and other long term liabilities |
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2 |
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62 |
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Note Payable, long-term portion (Note B-7) |
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2,692 |
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- |
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TOTAL LONG TERM LIABILITIES |
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2,694 |
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62 |
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SHAREHOLDERS' EQUITY |
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Preferred stock - no par value; authorized 3,000,000, none issued |
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- |
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- |
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Class A common stock - no par value; authorized 30,000,000 |
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shares; issued 13,191,328 and 13,181,547 shares, respectively |
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36,810 |
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36,793 |
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Class B common stock - no par value; authorized |
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5,000,000 shares; none issued |
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- |
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- |
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Additional paid-in capital (Note B-8) |
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749 |
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439 |
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Treasury stock, at cost, 2,391,400 on September 30, 2004 and |
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December 31, 2003 |
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(10,197 |
) |
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(10,197 |
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Accumulated other comprehensive income |
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13 |
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97 |
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Retained earnings |
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(3,584 |
) |
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(1,766 |
) |
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TOTAL SHAREHOLDERS' EQUITY |
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23,791 |
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25,366 |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
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$ |
33,573 |
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$ |
33,970 |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND |
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COMPREHENSIVE INCOME |
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(In thousands, except per share data) |
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For the three month period |
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For the nine month period |
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ended September 30, |
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ended September 30, |
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2004 |
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2003 |
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2004 |
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2003 |
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(UNAUDITED) |
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(UNAUDITED) |
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(UNAUDITED) |
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(UNAUDITED) |
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Net product sales |
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$ |
2,852 |
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$ |
2,346 |
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$ |
7,015 |
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$ |
5,556 |
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Net service sales |
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3,320 |
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|
3,110 |
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|
9,678 |
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|
9,306 |
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Total net sales |
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|
6,172 |
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|
5,456 |
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|
16,693 |
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|
14,862 |
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| |
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Cost of product sales (excluding depreciation of $1 for the |
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three-month periods and $2 for the nine-month periods included below) |
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|
2,043 |
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|
1,731 |
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|
5,529 |
|
|
4,260 |
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|
Cost of services (excluding depreciation and amortization) |
|
|
1,395 |
|
|
1,158 |
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|
3,595 |
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|
3,353 |
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|
Depreciation and amortization |
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|
87 |
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|
181 |
|
|
297 |
|
|
534 |
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|
Gross profit |
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|
2,647 |
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|
2,386 |
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|
7,272 |
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|
6,715 |
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| |
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|
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Selling, general, administrative and |
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|
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|
|
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other expenses |
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|
2,054 |
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|
2,060 |
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|
6,617 |
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|
6,376 |
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|
Research and development expenses |
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|
205 |
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|
261 |
|
|
684 |
|
|
846 |
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Bad debt expense |
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|
132 |
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|
150 |
|
|
297 |
|
|
451 |
|
|
Depreciation and amortization |
|
|
411 |
|
|
480 |
|
|
1,245 |
|
|
1,474 |
|
|
Operating loss |
|
|
(155 |
) |
|
(565 |
) |
|
(1,571 |
) |
|
(2,432 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense) |
|
|
(163 |
) |
|
(127 |
) |
|
(446 |
) |
|
(278 |
) |
|
Foreign currency gain (loss) |
|
|
(3 |
) |
|
(5 |
) |
|
(34 |
) |
|
75 |
|
|
Gain on sale of business unit (Note C) |
|
|
- |
|
|
1,712 |
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|
250 |
|
|
1,712 |
|
|
Earnings (loss) before income taxes |
|
|
(321 |
) |
|
1,015 |
|
|
(1,801 |
) |
|
(923 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (Notes B-3) |
|
|
19 |
|
|
23 |
|
|
18 |
|
|
56 |
|
|
Net earnings (loss) |
|
|
(340 |
) |
|
992 |
|
|
(1,819 |
) |
|
(979 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss), net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(13 |
) |
|
10 |
|
|
(84 |
) |
|
55 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings (loss) |
|
$ |
(353 |
) |
$ |
1,002 |
|
$ |
(1,903 |
) |
$ |
(924 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share (Note B-10) |
|
$ |
(0.03 |
) |
$ |
0.09 |
|
$ |
(0.17 |
) |
$ |
(0.09 |
) |
|
Diluted earnings (loss) per share (Note B-10) |
|
$ |
(0.03 |
) |
$ |
0.09 |
|
$ |
(0.17 |
) |
$ |
(0.09 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
10,799 |
|
|
10,787 |
|
|
10,795 |
|
|
10,983 |
|
|
Diluted |
|
|
10,799 |
|
|
10,878 |
|
|
10,795 |
|
|
10,983 |
|
| |
|
|
|
|
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The accompanying notes are an integral part of these statements. |
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|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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|
(In Thousands) |
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| |
|
For the nine month period |
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| |
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ended September 30, |
|
|
Cash flows from operating activities: |
|
|
2004 |
|
|
2003 |
|
|
Net loss |
|
$ |
(1,819 |
) |
$ |
(979 |
) |
|
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
517 |
|
|
850 |
|
|
Amortization |
|
|
1,040 |
|
|
1,159 |
|
|
Bad debt reserves |
|
|
297 |
|
|
450 |
|
|
Inventory reserves |
|
|
288 |
|
|
193 |
|
|
Gain on sale of business unit |
|
|
(250 |
) |
|
(1,712 |
) |
| |
|
|
|
|
|
|
|
|
Changes in assets and liabilities which provided (used) cash: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
(1,520 |
) |
|
1,258 |
|
|
Inventory |
|
|
1,095 |
|
|
607 |
|
|
Prepaid expense & interest receivable |
|
|
(14 |
) |
|
424 |
|
|
Accounts payable |
|
|
920 |
|
|
(2,425 |
) |
|
Other accrued liabilities |
|
|
(25 |
) |
|
(103 |
) |
|
Net cash provided by (used in) operating activities |
|
|
529 |
|
|
(278 |
) |
| |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(152 |
) |
|
(59 |
) |
|
Purchase of intangible and other assets |
|
|
(2,773 |
) |
|
(2,341 |
) |
|
Proceeds from sale of business unit |
|
|
200 |
|
|
3,197 |
|
|
Increase (decrease) in deposit and long term receivables |
|
|
89 |
|
|
(41 |
) |
|
Net cash provided by (used in) investing activities |
|
|
(2,636 |
) |
|
756 |
|
| |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
16 |
|
|
11 |
|
|
Purchase of treasury stock |
|
|
(975 |
) |
|
- |
|
|
Principal payments on capital lease obligations |
|
|
(208 |
) |
|
(1,201 |
) |
|
Proceeds from long term borrowings |
|
|
4,270 |
|
|
- |
|
|
Principal payments on long term borrowings |
|
|
(234 |
) |
|
- |
|
|
Proceeds from line of credit |
|
|
- |
|
|
400 |
|
|
Principal payments on line of credit |
|
|
- |
|
|
(400 |
) |
|
Payment of preferred stock dividends |
|
|
- |
|
|
(480 |
) |
|
Net cash provided by (used in) financing activities |
|
|
2,869 |
|
|
(1,670 |
) |
| |
|
|
|
|
|
|
|
|
Effect of exchange differences on cash |
|
|
(94 |
) |
|
60 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
668 |
|
|
(1,132 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
734 |
|
|
2,137 |
|
|
Cash and cash equivalents, end of period |
|
$ |
1,402 |
|
$ |
1,005 |
|
| |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Disclosure of non-cash: |
|
|
|
|
|
|
|
|
Note Payable |
|
$ |
- |
|
$ |
3,500 |
|
|
Purchase of Treasury Stock |
|
$ |
- |
|
$ |
975 |
|
|
Purchase of minority interest in Cellemetry |
|
$ |
- |
|
$ |
2,525 |
|
|
Inventory sold based on revenue share, transferred to other assets |
|
$ |
- |
|
$ |
716 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. |
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
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 of America 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-month and nine-month periods ended September 30, 2004 may not be indicative of the results that may be expected for the year ending December 31, 2004. For furt
her information, reference is also made to Numerex Corp.’s (the "Company’s") Annual Report on Form 10-K as amended for the year ended December 31, 2003 and the consolidated financial statements contained therein.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
1. Nature of Business
The Company is a communications technology business comprised of operating subsidiaries that primarily utilize existing wireless or cellular, Internet and cable infrastructure thereby enabling network access and information management through the deployment of proprietary software and technology which provides an entrance to and exit from a communications network. Such technology is referred to as a "gateway" in the communications industry. The Company primarily markets and sells products and services in wireless data communications through Cellemetry®, Uplink™, MobileGuardian™, VendView™, and digital multimedia through PowerPlay™ and IPContact™. These products and services enable customers around the globe to monitor and move information for a variety of applications from home and
business security to distance learning. In addition, the Company offers wireline alarm security products and services, as well as telecommunications network support.
2. Goodwill
On March 28, 2003, the Company acquired Cingular’s interest in Cellemetry and the 625,000 shares of the Company’s stock owned by Cingular for $5,000,000. Of the $5,000,000, $4,000,000 was added to goodwill. In addition, there were $51,000 in transaction costs capitalized as goodwill.
3. Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with SFAS 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of ²temporary differences² by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance
is provided for deferred tax assets when it is more likely than not that the assets will not be realized.
4. Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
The components of inventory, net of reserves are as follows:
|
(in thousands) |
|
|
|
|
|
| |
|
September 30, |
|
December 31, |
|
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Raw materials |
|
$ |
1,162 |
|
$ |
1,237 |
|
|
Work-in-progress |
|
|
18 |
|
|
8 |
|
|
Finished goods |
|
|
898 |
|
|
2,216 |
|
| |
|
$ |
2,078 |
|
$ |
3,461 |
|
5. Notes Receivable
The Company had $133,000 of notes receivable ($91,000 short term and $42,000 long term) at September 30, 2004 and $275,000 ($99,000 short term and $176,000 long term) at December 31, 2003. These notes are payable to the Company in installments for periods ranging from 9 to 48 months. For purposes of valuation, the collectability of notes receivable and accounts receivable is evaluated separately and any required allowance is held in total under accounts receivable allowance for doubtful accounts.
6. Other Assets
In May 2003, the Company shipped $583,000 of wire-line security detection equipment to a customer in Australia. This equipment has been installed at several sites based on an equipment supply agreement (the "Agreement") with this customer. The Agreement allows the customer to generate additional revenues by providing additional services to its customers. The Company will share in these revenues as payment for the equipment. While this customer retains title to this equipment from acceptance (which occurred May 2003), it must meet certain obligations under the Agreement or pay amounts specified in the Agreement. Since the actual revenue that will be generated by the sale of the equipment is uncertain at this time, the Company is recognizing revenue on the sale of the equipment equal to the payments received from
this customer from this revenue share. The Company also recognized cost of sales equal to the payments received from the customer and reduced the value of this asset. While the Company only received its first payments from this customer in September 2004, the Company and our customer in Australia continue to promote the new service now that the installation has been completed and tested. Currently the Company expects to receive at least the full value of the equipment from this revenue share, however, as more information becomes available, the Company will reassess the accounting treatment for the project. In May 2003, the value of the wire-line equipment was transferred from inventory to other assets.
7. Note Payable
On January 13, 2004, the Company completed a private placement to Laurus Master Fund, Ltd. ("Laurus") of (i) a Convertible Term Note in the principal amount of $4,500,000 (the "Company Note"), and (ii) a Common Stock Purchase Warrant (the "Warrant" and together with the Company Note, the "Securities") to purchase up to 300,000 shares of the Company’s Class A common stock, no par value per share ("Common Stock"). The Company used the net proceeds of $4,270,000 to retire the $3,500,000 debt owed to Cingular (see Note C - Investments) and to provide additional working capital. The Company Note has a term of three years maturing on January 12, 2007, and is secured by substantially all of the assets of the Company and its U.S. subsidiaries except DCX Systems Australia Pty Limited. Each of the Company’s U.S.
subsidiaries also has provided a guaranty to Laurus. Interest accrues on the Company Note at an annual rate of 8%, and interest and principal may be paid by the Company in either cash or in Common Stock. The Company may only use Common Stock to make such payment if the price per share of its Common Stock is greater than $5.02. However, the entire principal amount of the Company Note, and any accrued interest, may be converted by Laurus into the Company’s Common Stock at a price equal to $4.56 per share (the "Fixed Conversion Price"), subject to certain limitations. If the amount due and payable is paid by the Company using Common Stock, the number of shares to be issued to Laurus by the Company will be determined based upon the Fixed Conversion Price. Otherwise, cash payments of interest and principal due on the Company Note must be paid at 102% of the amount then payable. During the six-month period following the
effectiveness of a registration statement (as discussed below) and if no Event of Default (as defined in the terms of the Company Note) has occurred, Laurus may not voluntarily convert, on a month to month basis, a portion of the Company Note that exceeds 10% of that number of shares of the Company traded in the one-month period preceding a voluntary conversion by Laurus. The Warrant is exercisable by Laurus until January 13, 2011, and has three separate tranches. The first tranche is exercisable for up to 150,000 shares of Common Stock at a price of $4.75 per share. The second tranche is exercisable for up to 100,000 shares of Common Stock at a price of $5.17 per share. The third tranche is exercisable for up to 50,000 shares of Common Stock at a price of $5.99 per share. The Company has also agreed to register
all of the Common Stock that can be issued to Laurus pursuant to the Securities, as described in the Registration Rights Agreement between the Company and Laurus. The total potential common shares that could be issued relating to this transaction are 1,400,980. The Company is required to register these Securities and have the registration declared effective by August 13, 2004. If the registration statement has not been declared effective by August 13, 2004, then for each 30 day period thereafter (or portion thereof), the Company must issue to Laurus warrants covering 15,000 shares of the Company’s common stock (at an exercise price of $5.99). As of September 30, 2004, these warrants totaled 38,000 (See Note B-8 - Shareholders’ Equity). Currently, the Company does not anticipate that the issuance of such warrants will have an adverse affect on the Company’s capital structure. If the registration statement is not declared effective by January 13, 2005, then Laurus has the right to demand full p
ayment of all outstanding principal and interest due under the Company Note and invoke its right to the collateral under a related security agreement.
8. Shareholders’ Equity
Shareholders’ Equity decreased by $287,000 and $1,575,000 in the three-month and nine-month periods ending September 30, 2004, respectively. For the three-month period the decrease in Shareholders’ Equity was attributable to the net loss of $340,000 and foreign currency translation of $16,000, partially offset by an increase in additional paid-in capital of $69,000. For the nine-month period ended September 30, 2004, Shareholder’s Equity decreased due to the net loss of $1,819,000 for the nine-month period, foreign currency translation of $83,000 and was partially offset by the valuation of the warrants issued of $241,000 and by the valuation of the warrants valued at $69,000 issued for late registration of the securities, both related to the Company Note (See Note B-7 - Note Payable). The Company
valued these warrants using a Black-Scholes model, which was used to allocate a portion of the Company Note to Additional Paid-in Capital. The $241,000 was offset against the Note Payable as discount and will be amortized to interest expense over the term of the Company Note of three years and the $69,000 was included in deferred financing costs and is also being amortized to interest expense over the term of the note. The decrease in Shareholders’ Equity for the nine-month period ended September 30, 2004 was also partially offset by $17,000 relating to the issuance of 8,781 shares of Class A Common Stock of the Company under the employee and director stock purchase plan.
9. Stock-Based Compensation
The Company accounts for employee options or share awards under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with pro forma disclosures of net earnings and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 "Accounting for Stock Based Compensation" had been applied. SFAS No. 123 establishes a fair value based method of accounting for stock based employee compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under SFAS No. 123, the Company's net loss and net loss per share would have changed as reflected in the following pro forma amounts.
| |
|
For the three months |
|
For the nine months |
|
|
(In thousands except per share data) |
|
ended September 30, |
|
ended September 30, |
|
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss - as reported |
|
$ |
(340 |
) |
$ |
992 |
|
$ |
(1,819 |
) |
$ |
(979 |
) |
|
Net loss - pro forma |
|
|
(730 |
) |
|
701 |
|
|
(2,988 |
) |
|
(1,851 |
) |
|
Loss per share - as reported |
|
|
(0.03 |
) |
|
0.09 |
|
|
(0.17 |
) |
|
(0.09 |
) |
|
Loss per share - pro forma |
|
|
(0.07 |
) |
|
0.06 |
|
|
(0.28 |
) |
|
(0.17 |
) |
10. Loss Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which supersedes APB No. 15, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share as well as other disclosures. Basic earnings per share excludes the dilutive impact of common stock equivalents and is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share includes the effect of potential dilution from the exercise of outstanding common stock equivalents into common stock, using the treasury stock method at the average market price of the Company's common stock for the period.
For the three-month and nine-month periods ended September 30, 2004 and nine-month period ended September 30, 2003, the Company's potential common shares have an anti-dilutive effect on loss per share and, therefore, have not been used in determining the total weighted average number of common shares outstanding. Potential common shares resulting from options, convertible debt and warrants that would be used to determine diluted loss per share were 168,000 and 91,000 for the three-month periods ended September 30, 2004 and 2003, respectively and 181,000 and 46,000 for the nine-month periods ended September 30, 2004 and 2003, respectively.
11. Recent Accounting Pronouncements
The Securities and Exchange Commission recently issued Staff Accounting Bulletin (SAB) 104, Revenue Recognition, to update SAB 101, Revenue Recognition in Financial Statements (codified in Topic 13: Revenue Recognition), primarily for the following reasons:
| |
· |
to reflect the issuance of EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables." Because some revenue arrangements contain multiple deliverables, the staff believes that an entity should determine the units of accounting in an arrangement before applying the guidance in SAB 104. |
| |
· |
to delete the guidance on reporting revenues gross as a principal or net as an agent because EITF Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," provides that guidance. |
| |
· |
to rescind SAB 101: Revenue Recognition in Financial Statements - Frequently Asked Questions and Answers (FAQ) and incorporate selected portions of the FAQ into Topic 13. The FAQ permitted registrants to elect a policy of not recognizing any revenue on equipment sold on an installed basis until installation is complete. Because EITF Issue 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting if the criteria in paragraph 9 are met, this election is no longer available to registrants upon adoption of EITF Issue 00-21. |
Since SAB 104 is not creating new GAAP, the issuance of SAB 104 should not be considered a change in accounting principle. The implementation of SAB 104 did not have a material impact on the financial statements of the Company.
12. Savings and Investment Plan
The Company sponsors a 401k savings and investment plan, that covers all of the employees of Numerex Corp. and its subsidiaries who elect to participate. Employees are eligible for participation on the enrollment date following six months of service. The Company contributed an amount equal to 50% of the portion of the each participant’s elective deferral contribution that does not exceed 6% of such participant’s total compensation for each payroll period in which an elective deferral is made. The Company’s contribution is made in cash on a monthly basis. Matching contributions made by the Company vest over a three-year period at a rate of 33% per year. Approximately $18,000 and $14,000 were expensed for the quarters ended September 30, 2004 and September 30, 2003, respectively and $53,000 and $44,
000 for the nine-month periods ended September 30, 2004 and 2003, respectively.
13. Reclassification
Certain prior year amounts have been reclassified to conform to the current period presentation.
NOTE C - INVESTMENTS AND DIVESTITURES
On September 15, 2003, the Company sold the Data1Source mobile messaging service through an entity Data1Source LLC. The selling price was approximately $3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six months, if certain criteria were met. The resulting gain included in other income in the three-month and nine-month periods ended September 30, 2003 was $1,712,000. Cost associated with the transaction included the net book value of the assets sold, including software and computer hardware, and transaction costs, including finder’s fees and legal costs. At closing, certain obligations of the Company were paid. These costs included the first payment due on the note payable to Cingular (see below) of $1,500,000 and a $605,000 payoff of the lease obligation on the software sold with Data
1Source. Subsequent to the sale of Data1Source LLC, the Company used a portion of the proceeds to pay off the entire outstanding balance of $400,000 on its revolving line of credit. The sale of Data1Source LLC did not meet the requirements to be considered a significant disposition. In March 2004, the Company received the contingent payment on the sale of Data1Source LLC because the criteria specified in the agreement had been met, accordingly the Company recognized an additional $250,000 gain on the sale during the nine-month period ended September 30, 2004.
On March 28, 2003, the Company acquired Cingular’s interest in Cellemetry and the 625,000 shares of the Company’s stock owned by Cingular for $5,000,000. Under the terms of the agreement, the Company agreed to pay Cingular $1,500,000 by December 15, 2003, $2,000,000 by September 30, 2004 and $1,500,000 by December 15, 2004. The Company’s obligation was secured by the pledge of the stock of all the Company’s subsidiaries (except Digilog) and a lien on the assets of all the Company’s subsidiaries (except Digilog) and accrued interest at a rate of eight percent (8%) per annum. On September 15,
2003, the Company made the first payment of $1,500,000 due Cingular on the note using a portion of the proceeds from the sale of Data1Source LLC and paid the remaining balance on January 13, 2004 from a portion of the proceeds from the term note payable to Laurus Master Fund, Ltd. (see Note B-7 - Note Payable).
NOTE D - LIQUIDITY
While the Company’s operations provided cash during the nine-month period ended September 30, 2004, the Company continues to generate operating losses, and the Company's operations used significant amounts of cash in 2003. The Company continues to add products and distribution channels for its products, and the Company's long-term success will depend upon further reductions in operating losses and further increases in positive cash flow. At December 31, 2003 the Company had a short-term principal balance due Cingular on its note payable of $3,500,000 (See Note C - Investments and Note B-7 - Note Payable). The proceeds from the C
ompany Note were used to pay the $3,500,000 due Cingular, financing costs, and to provide additional working capital (which resulted in increased cash balance at September 30, 2004 versus December 31, 2003). Under the financing agreement on the Company Note, the Company only paid interest during the first six-months of 2004. The Company began paying interest and principal on the Company Note during the second half of 2004. Laurus has the option to convert the note payable into the Company’s common stock if the stock price is greater than $4.56. If the trading price of the Company’s common stock exceeds certain thresholds, the Company has the right to repay principal and interest due under the Company Note using the Company’s common stock.
The Company believes that the combination of the convertible long-term debt, and reduction in operating losses will be sufficient to meet the Company's operating requirements through at least December 31, 2004. This belief could be affected by future operating losses in excess of expectations, a material adverse change in the Company’s operating business or a default under the Company Note. The Company is also considering other sources of funding, including the sale of certain non-core assets.
NOTE E - GEOGRAPHIC INFORMATION
Segment Information
Below is segment information for reportable segments of Wireless Data Communications which is made up of all the Company’s wireless machine-to-machine communications products and services, Digital Multimedia and Networking which includes the Company’s networking products and services and video conferencing products, Wireline which are the Company’s wire-line security detection products and services, and unallocated corporate expenses.
These are no inter-segment revenues and there were no material changes in assets from the year ended December 31, 2003.
| |
|
|
|
|
|
|
(in thousands)
|
|
|
|
Wireless Data Communications |
|
Digital Multimedia & Networking |
|
Wireline |
|
Total |
|
|
For the three-month period ended, September 30, 2004 |
|
|
|
|
|
|
|
|
Revenues from external customers |
$ |
3,636 |
|
$ |
2,350 |
|
$ |
186 |
|
$ |
6,172 |
|
|
Segment profit/(loss) before tax |
|
(328 |
) |
|
333 |
|
|
(31 |
) |
|
(26 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended, September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
$ |
3,193 |
|
$ |
1,842 |
|
$ |
421 |
|
$ |
5,456 |
|
|
Gain on sale of assets |
|
1,712 |
|
|
- |
|
|
- |
|
|
1,712 |
|
|
Segment profit/(loss) before tax |
|
783 |
|
|
139 |
|
|
187 |
|
|
1,109 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-month period ended, September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
$ |
10,498 |
|
$ |
5,351 |
|
$ |
844 |
|
$ |
16,693 |
|
|
Gain on sale of assets |
|
250 |
|
|
- |
|
|
- |
|
|
250 |
|
|
Segment profit/(loss) before tax |
|
(1,212 |
) |
|
164 |
|
|
92 |
|
|
(956 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-month period ended, September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
$ |
9,232 |
|
$ |
4,592 |
|
$ |
1,038 |
|
$ |
14,862 |
|
|
Gain on sale of assets |
|
1,712 |
|
|
- |
|
|
- |
|
|
1,712 |
|
|
Segment profit/(loss) before tax |
|
(802 |
) |
|
(265 |
) |
|
442 |
|
|
(625 |
) |
Budgeted corporate expenses are allocated to the segments based on budgeted revenues.
Reconciliation of segment items to consolidated amounts: (in thousands)
|
Net Loss |
|
Three-month period ended September 30, |
|
Nine-month period ended September 30, |
|
| |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
Total loss for reportable segments |
|
$ |
(26 |
) |
$ |
1,109 |
|
$ |
(956 |
) |
$ |
(625 |
) |
|
Unallocated corporate expenses |
|
|
295 |
|
|
94 |
|
|
845 |
|
|
298 |
|
|
Loss before income taxes |
|
$ |
(321 |
) |
$ |
1,015 |
|
$ |
(1,801 |
) |
$ |
(923 |
) |
Overview
Numerex Corp. ("we" or the "Company") is a technology company comprised of operating subsidiaries that develop and market a wide range of communications products and services. The Company’s primary focus is wireless data communications utilizing proprietary network technologies.
The third quarter of 2004 continued the sound growth that we have seen from our wireless data products and services. After eliminating revenues of $378,000 associated with Data1Source, LLC which was sold in September 2003, wireless data revenues increased over 28% compared to the third quarter last year and almost 6% sequentially. Specifically, the results for the third-quarter of 2004 included another strong performance from Uplink Security with regard to both product sales and recurring service revenue. Uplink recurring service revenues have grown sequentially from the past twenty-two quarters with the exception of one. The third quarter of 2004 also saw the transition of MobileGuardian distribution to Southwest Dealer Services. This change had the dual benefits of reduced selling costs with no loss in sal
es performance.
Our digital multimedia business experienced an even stronger quarter than the second quarter of 2004. A substantial amount of video conferencing equipment was shipped to two school districts in the third quarter with a backlog that still remains to be delivered in the fourth quarter. However, many of these sales have been funded through the FCC E-rate program, which is currently under review and we are uncertain of the delay that this will cause to future E-rate awards.
Numerex provided cash from operations of $529,000 for the third quarter as a result of both diminished operating losses as well as continued working capital efficiencies. Cash balances also increased from the prior quarter despite paying over $300,000 principal and interest on the $4,500,000 million term note that we issued in January 2004. Future cash outlays could be lower if the equity conversion feature of the note is available to be exercised.
The Company’s goals continue to include improving operating results and to further improve the Company’s liquidity position through inventory reductions and the sale of non-core assets.
Critical Accounting Policies
For additional information regarding the Company’s critical accounting policies see Note B to the Consolidated Financial Statements included in Part 1, Item 1 above. Also, reference is made to the Company’s Annual Report on Form 10-K as amended for the year ended December 31, 2003 and the consolidated financial statements contained therein.
General
The following tables set forth, for the periods indicated, the amounts and percentages of net sales represented by selected items in the Company’s Condensed Consolidated Statements of Operations.
|
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS |
|
(in thousands, except per share data) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Three Month Period Ended |
|
Nine Month Period Ended |
|
September 30, |
|
September 30, |
| |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
2004 |
|
|
2003 |
|
|
Change |
|
|
|
2004 |
|
|
2003 |
|
|
Change |
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless Data Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
$ |
1,486 |
|
$ |
1,229 |
|
|
20.9 |
% |
|
$ |
4,215 |
|
$ |
3,329 |
|
|
26.6 |
% |
|
Service |
|
2,150 |
|
|
1,964 |
|
|
9.5 |
% |
|
|
6,283 |
|
|
5,903 |
|
|
6.4 |
% |
|
Sub-total |
|
3,636 |
|
|
3,193 |
|
|
13.9 |
% |
|
|
10,498 |
|
|
9,232 |
|
|
13.7 |
% |
|
Digital Multimedia and Networking |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
1,322 |
|
|
944 |
|
|
40.0 |
% |
|
|
2,461 |
|
|
1,843 |
|
|
33.5 |
% |
|
Service |
|
1,028 |
|
|
898 |
|
|
14.5 |
% |
|
|
2,890 |
|
|
2,749 |
|
|
5.1 |
% |
|
Sub-total |
|
2,350 |
|
|
1,842 |
|
|
27.6 |
% |
|
|
5,351 |
|
|
4,592 |
|
|
16.5 |
% |
|
Wireline Security |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
44 |
|
|
173 |
|
|
-74.6 |
% |
|
|
339 |
|
|
384 |
|
|
-11.7 |
% |
|
Service |
|
142 |
|
|
248 |
|
|
-42.7 |
% |
|
|
505 |
|
|
654 |
|
|
-22.8 |
% |
|
Sub-total |
|
186 |
|
|
421 |
|
|
-55.8 |
% |
|
|
844 |
|
|
1,038 |
|
|
-18.7 |
% |
|
Total net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
2,852 |
|
|
2,346 |
|
|
21.6 |
% |
|
|
7,015 |
|
|
5,556 |
|
|
26.3 |
% |
|
Service |
|
3,320 |
|
|
3,110 |
|
|
6.8 |
% |
|
|
9,678 |
|
|
9,306 |
|
|
4.0 |
% |
|
Total net sales |
|
6,172 |
|
|
5,456 |
|
|
13.1 |
% |
|
|
16,693 |
|
|
14,862 |
|
|
12.3 |
% |
|
Cost of product sales |
|
2,043 |
|
|
1,731 |
|
|
18.0 |
% |
|
|
5,529 |
|
|
4,260 |
|
|
29.8 |
% |
|
Cost of service sales |
|
1,395 |
|
|
1,158 |
|
|
20.5 |
% |
|
|
3,595 |
|
|
3,353 |
|
|
7.2 |
% |
|
Depreciation and amortization |
|
87 |
|
|
181 |
|
|
-51.9 |
% |
|
|
297 |
|
|
534 |
|
|
-44.4 |
% |
|
Gross profit |
|
2,647 |
|
|
2,386 |
|
|
10.9 |
% |
|
|
7,272 |
|
|
6,715 |
|
|
8.3 |
% |
|
% |
|
42.9% |
|
|
43.7% |
|
|
|
|
|
|
43.6% |
|
|
45.2% |
|
|
|
|
|
Selling, general, administrative and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other expenses |
|
2,054 |
|
|
2,060 |
|
|
-0.3 |
% |
|
|
6,617 |
|
|
6,376 |
|
|
3.8 |
% |
|
Research and development expenses |
|
205 |
|
|
261 |
|
|
-21.5 |
% |
|
|
684 |
|
|
846 |
|
|
-19.1 |
% |
|
Bad debt expense |
|
132 |
|
|
150 |
|
|
-12.0 |
% |
|
|
297 |
|
|
451 |
|
|
-34.1 |
% |
|
Depreciation and amortization |
|
411 |
|
|
480 |
|
|
-14.4 |
% |
|
|
1,245 |
|
|
1,474 |
|
|
-15.5 |
% |
|
Operating loss |
$ |
(155) |
|
$ |
(565) |
|
|
72.6 |
% |
|
$ |
(1,571) |
|
$ |
(2,432) |
|
|
35.4 |
% |
|
Gain on sale of business |
$ |
- |
|
$ |
1,712 |
|
|
-100.0 |
% |
|
$ |
250 |
|
$ |
1,712 |
|
|
-85.4 |
% |
|
Profit (loss) before income taxes |
$ |
(321) |
|
$ |
1,015 |
|
|
131.6 |
% |
|
$ |
(1,801) |
|
$ |
(923) |
|
|
-95.1 |
% |
|
Net earnings (loss) |
$ |
(340) |
|
$ |
992 |
|
|
134.3 |
% |
|
$ |
(1,819) |
|
$ |
(979) |
|
|
-85.8 |
% |
|
Basic earnings (loss) per share |
$ |
(0.03) |
|
$ |
0.09 |
|
|
|
|
|
$ |
(0.17) |
|
$ |
(0.09) |
|
|
|
|
|
Basic weighted average shares |
|
10,799 |
|
|
10,787 |
|
|
|
|
|
|
10,795 |
|
|
10,983 |
|
|
|
|
See notes to consolidated financial statements
|
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Three Month Period Ended |
|
Nine Month Period Ended |
|
| |
|
September 30, |
|
September 30, |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
Wireless Data Communications |
|
|
|
|
|
|
|
|
|
|
Product |
|
|
24.1 |
% |
|
22.5 |
% |
|
25.3 |
% |
|
22.4 |
% |
|
Service |
|
|
34.8 |
% |
|
36.0 |
% |
|
37.6 |
% |
|
39.7 |
% |
|
Sub-total |
|
|
58.9 |
% |
|
58.5 |
% |
|
62.9 |
% |
|
62.1 |
% |
|
Digital Multimedia and Networking |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
21.4 |
% |
|
17.3 |
% |
|
14.7 |
% |
|
12.4 |
% |
|
Service |
|
|
16.7 |
% |
|
16.5 |
% |
|
17.3 |
% |
|
18.5 |
% |
|
Sub-total |
|
|
38.1 |
% |
|
33.8 |
% |
|
32.1 |
% |
|
30.9 |
% |
|
Wireline Security |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
0.7 |
% |
|
3.2 |
% |
|
2.0 |
% |
|
2.6 |
% |
|
Service |
|
|
2.3 |
% |
|
4.5 |
% |
|
3.0 |
% |
|
4.4 |
% |
|
Sub-total |
|
|
3.0 |
% |
|
7.7 |
% |
|
5.1 |
% |
|
7.0 |
% |
|
Total net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
46.2 |
% |
|
43.0 |
% |
|
42.0 |
% |
|
37.4 |
% |
|
Service |
|
|
53.8 |
% |
|
57.0 |
% |
|
58.0 |
% |
|
62.6 |
% |
|
Total net sales |
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
Cost of product sales |
|
|
33.1 |
% |
|
31.7 |
% |
|
33.1 |
% |
|
28.7 |
% |
|
Cost of service sales |
|
|
22.6 |
% |
|
21.2 |
% |
|
21.5 |
% |
|
22.6 |
% |
|
Depreciation and amortization |
|
|
1.4 |
% |
|
3.3 |
% |
|
1.8 |
% |
|
3.6 |
% |
|
Gross profit |
|
|
42.9 |
% |
|
43.7 |
% |
|
43.6 |
% |
|
45.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, administrative and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other expenses |
|
|
33.3 |
% |
|
37.8 |
% |
|
39.6 |
% |
|
42.9 |
% |
|
Research and development expenses |
|
|
3.3 |
% |
|
4.8 |
% |
|
4.1 |
% |
|
5.7 |
% |
|
Bad debt expense |
|
|
2.1 |
% |
|
2.7 |
% |
|
1.8 |
% |
|
3.0 |
% |
|
Depreciation and amortization |
|
|
6.7 |
% |
|
8.8 |
% |
|
7.5 |
% |
|
9.9 |
% |
|
Operating loss |
|
|
-2.5 |
% |
|
-10.4 |
% |
|
-9.4 |
% |
|
-16.4 |
% |
|
Gain on sale of business |
|
|
0.0 |
% |
|
31.4 |
% |
|
1.5 |
% |
|
11.5 |
% |
|
Earnings (loss) before income taxes |
|
|
-5.2 |
% |
|
18.6 |
% |
|
-10.8 |
% |
|
-6.2 |
% |
|
Net earnings (loss) |
|
|
-5.5 |
% |
|
18.2 |
% |
|
-10.9 |
% |
|
-6.6 |
% |
See notes to consolidated financial statements
Results of Operations
Net sales increased 13.1% to $6,172,000 for the three-month period ended September 30, 2004 as compared to $5,456,000 for the three-month period ended September 30, 2003. Sales increased to $10,498,000 for the nine-month period ended September 30, 2004 versus $9,232,000 for the same period in 2003. The increase in total net sales for the third quarter was attributable to a 21.6% increase in total product sales and a 6.8% increase in sales of services. Most of the product and service sales increase for the quarter ended September 30, 2004, compared to the same period in 2003, was in Digital Multimedia and Networking and Wireless Data Communications. These increases were partially offset by a decrease in Wireline Security product and service sales of $235,000. For the nine-month period ended September 30, 2004
versus the same period in 2003, net sales increased 12.3%, which was also primarily in Digital Multimedia and Networking and Wireless Data Communications. These increases were partially offset by a decrease in Wireline Security net sales of $194,000 for the nine-month period ended September 30, 2004 versus the same period in 2003.
Net sales from Wireless Data Communications increased 13.9% to $3,636,000 for the three-month period ended September 30, 2004 as compared to $3,193,000 for the three-month period ended September 30, 2003. The increase in net sales for the three-month period ended September 30, 2004 was the result of an increase in product sales (up 20.9% from the same period last year) and an increase in service sales (up 9.5% versus the same period last year). The increase in Wireless Data Communications product sales of $257,000 for the third quarter of 2004 versus the same period in 2003 was primarily the result of increased sales of its new wireless vending machine monitoring product (VendView™) and an increase in vehicle security products and tracking services, MobileGuardian™. Together, these sales accounted
for $254,000 of the increase in product sales. The VendView product was only introduced in the fourth quarter of 2003. For the nine-month period ended September 30, 2004 as compared the same period in 2003, Wireless Data Communications product sales increased by $885,0000. Again, the primary reason for this increase was sales of the Mobile Guardian product that was introduced at the end of the first quarter of 2003 and sales of the vending product that was introduced in December 2003. The Company expects VendView to continue to supplement the sales of its other wireless products. Product sales also increased due to higher demand for Uplink Security devices used for wireless communications between alarm installations and central monitoring stations.
During the three-month period ended September 30, 2004, Wireless Data Communications service revenues increased over the same period in 2003 by 9.5% to $2,150,000 and for the nine-month period ended September 30, 2004 as compared to the same period in 2003 service revenues increased by 6.4% to $6,283,000. These increases were achieved even though the Company sold its short messaging service Data1Source in September 2003 and were primarily due to an increase in the number of connections to the Company’s Cellemetry wireless network. Revenues from connections to the Company’s network increased $518,000 or 33.5% for the three-month period ended September 30, 2004 compared to the same period in 2003 and increased $1,511,000 or 32.5% for the nine-month period ended September 30, 2004 versus the same peri
od in 2003. Connection increases were generated by sales of the Company’s security products as well as those generated by value added resellers who utilize the Cellemetry network to provide customer solutions. The Company also anticipates that VendView will continue to add additional connections in subsequent periods. The Company continues to focus on increasing connections to its network due to the recurring nature of the service revenues.
Net sales from Digital Multimedia and Networking increased 27.6% to $2,350,000 for the three-month period ended September 30, 2004 compared to $1,842,000 for the three-month period ended September 30, 2003 and for the nine-month period ended September 30, 2004 increased 16.5% to $5,351,000 versus $4,592,000 the same period in 2003. The increase in third quarter revenues compared to the third quarter of 2003 was due to a 40.0% increase in product revenues to $1,322,000 primarily due to increased sales of the Company’s interactive videoconferencing products (PowerPlay™) directly or indirectly (as a subcontractor) 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 signifi
cantly from period to period, however the Company continues to see signs of increased activity in this area. The growth in the PowerPlay sales is the primary reason for the 33.5% increase in Digital Multimedia product sales to $1,139,000 for the nine-month month period ended September 30, 2004 as compared to the same period in 2003. Digital Multimedia and Networking service sales increased 14.5% to $1,028,000 for the quarter ended September 30, 2004 over the same period in 2003, and service revenues increased by 5.1% to $2,890,000 for the nine-month period ended September 30, 2004 versus the same period in the prior year. Most of this was from integration and installation services, which increased substantially compared to the same period in the prior year. Installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies. Demand for these services from the wireline carriers has declined as they have reduced capital spendin
g. Wireless carrier demand for these services can fluctuate dramatically in response to an environment of increasing customer demand for their services while at the same time they attempt to control their own capital
expenditures. There was a significant increase of installation and integration services by the wireless carriers in the second and third quarter of 2004 as a result of government mandated provision of emergency 911 services by the end of this year. While service revenues have increased in the first nine-months of 2004, we cannot predict whether telecommunications customers will maintain their current level of capital expenditures.
Wireline Security net sales decreased 55.8% to $186,000 for the three-month period ended September 30, 2004 as compared to $421,000 for the three-month period ended September 30, 2003, and decreased 18.7% to 844,000 for the first nine-months of 2004 versus the same period in 2003. Most of the Wireline product sales in 2003 were the sales of maintenance parts to a customer in Australia with which we have an equipment supply agreement (the "Agreement"). Pursuant to the Agreement, in May 2003, the Company shipped $583,000 of wireline security detection equipment to the customer, in exchange for a share of the customer’s future revenues. Although, under the Agreement, the customer retains title to this equipment following its acceptance, it must meet certain obligations under the Agreement, or pay amounts s
pecified in the Agreement. Since the actual revenue that will be generated by the sale of the equipment is uncertain at this time, the Company did not recognize revenue on the equipment sale as of September 30, 2004. During the nine-month period ended September 30, 2004 there were sales of maintenance parts to the customer that were not made pursuant to the Agreement. The sale price was fixed and payable in accordance with the Company’s normal terms and conditions. Accordingly, we recognized revenues from the sales of the maintenance parts to the customer in the nine-month periods ended September 30, 2004 and 2003. The customer completed installation of the wireline security detection equipment by December 31, 2003. Currently, the Company and the customer are promoting the new expanded service. The Company received its first share of revenues from the services in the third quarter of 2004. Currently, the Company expects to receive at least the full value of the equipment from this revenue share, however
, as more information becomes available, the Company will reassess the accounting treatment for the project. (In May 2003, the value of the wire-line equipment was transferred from inventory to other assets.) The Company expects to continue to sell maintenance parts and perform services for this customer for the term of the Agreement.
Cost of product sales increased 18.0% to $2,043,000 for the three-month period ended September 30, 2004 as compared to $1,731,000 for the three-month period ended September 30, 2003 and cost of sales increased 28.8% to $5,529,000 for the nine-month period ended September 30, 2004 versus $4,260,000 the same period last year. The increase in cost of sales was primarily the result of higher product sales volume in the Wireless Data Communications and Digital Multimedia & Networking, which were partially offset by lower Wireline product sales. The Company also experienced an increase in the cost of its Wireless Services products during the three and nine-month periods ended September 30, 2004 versus the same periods in 2003, however, the Company has found alternative sources of these products that should def
ray some of these increases in the future.
Cost of services increased 20.5% to $1,395,000 for the three-month period ended September 30, 2004 as compared to $1,158,000 for the three-month period ended September 30, 2003 and cost of services increased 7.2% to $3,595,000 for the nine-month period ended September 30, 2004 versus $3,353,000 the same period last year. The increase in cost of sales for the three and nine month periods ended September 30, 2004 versus the same period in 2003 was primarily the result of higher service sales volume in Wireless Data Communications and higher service sales volume in Digital Multimedia and Networking. Additionally, the Company received a one-time credit against network service provider costs that occurred in quarter ended June 30, 2003 that did not occur in 2004.
Cost of sales depreciation and amortization expense decreased 51.9% to $87,000 for the three-month period ended September 30, 2004 as compared to $181,000 for the three-month period ended September 30, 2003 and decreased 44.4% to $297,000 for the nine-month period ended September 30, 2004 versus $534,000 for the same period in 2003. This decrease was primarily due to the sale of the assets relating to Data1Source, which was sold in September 2003.
Gross profit, as a percentage of net sales, was 42.9% for the three-month period ended September 30, 2004, compared to 43.7% for the three-month period ended September 30, 2003 and was 43.6% for the nine-month period ended September 30, 2004 versus 45.2% for the nine-month period ended September 30, 2004. The total gross profit as a percentage of sales decreased for the quarter and nine-month period ended September 30, 2004 compared to the same period in 2003 because product sales were 46.2% of total sales for the quarter ended September 30, 2004 versus 43.0% for the quarter ended September 30, 2003 and 42.0% versus 37.4% for the nine-month period ended September 30, 2004 and 2003, respectively. Since, gross profit as a percentage of sales is generally less on product sales than for service sales, the increase in p
roduct sales versus service sales decreased the total gross profit as a percentage of sales. The decreases in gross profit as a percentage of sales for the three and nine-month periods ended September 30, 2004 versus the same period in 2003 were partially offset by a reduction of depreciation expense due to the sale of the assets relating of Data1Source.
Selling, general, administrative and other expenses increased 0.3% to $2,054,000 for the three-month period ended September 30, 2004 as compared to $2,060,000 for the three-month period ended September 30, 2003 and increased 3.8% to $6,617,000 for the nine-month period ended September 30, 2004 versus $6,376,000 for the same period in 2003. As noted previously, we reached an agreement with Southwest Dealer Services to distribute our Mobile Guardian product using Southwest Dealer Services infrastructure and employees. Accordingly third quarter 2004 expenses reflect the reduction in Mobile Guardian employees. The increase in the nine-month period was primarily due to increased selling resources associated with Wireless Data Services products as well as the Mobile Guardian severance costs.
Research and development expenses decreased to $205,000 for the three-month period ended September 30, 2004 as compared to $261,000 for the three-month period ended September 30, 2003 and was primarily due to increased software capitalization in the third quarter of 2004 of $65,000 versus $0 for the same period in 2003 which was partially offset by additional costs incurred in the third quarter of 2004 for the development of digital wireless products that did not occur in the same period last year. Research and development expenses decreased to $684,000 for the nine-month period ended September 30, 2004 versus $846,000 for the same period in 2003. The decrease of research and development expenses for the nine-month period was a result of reductions in research and development personnel and increased software
capitalization of $125,000 for the nine-month period ended September 30, 2004 as compared to $91,000 for the same period in 2003.
Bad debt expense decreased to $132,000 for the quarter ended September 30, 2004 from $150,000 in the same quarter in 2003 and bad debt expense decreased to $297,000 for the nine-month period ended September 30, 2004 versus $451,000 for the same period in 2003. Bad debt decreased during these periods as a result of the implementation of more stringent credit policies and collections processes as well as an improvement in general economic conditions.
Operating expense depreciation and amortization expense decreased 14.4% to $411,000 for the three-month period ended September 30, 2004 as compared to $480,000 for the three-month period ended September 30, 2003. Operating expense depreciation decreased 15.5% to $1,245,000 for the nine-month period ended September 30, 2004 versus $1,474,000 for the same period in 2003. This decrease was attributable to certain older assets becoming fully depreciated while the Company has purchased few new capital assets.
Interest expense increased for the three-month period ended September 30, 2004 to $163,000 as compared to $127,000 for the three-month period ended September 30, 2003 and increased to $446,000 for the nine-month period ended September 30, 2004 versus $278,000 for the same period in 2003. This increase was primarily the result of interest expense on the $4,500,000 the Company received from a convertible note payable to Laurus Master Fund on January 15, 2004. (For a discussion of the note payable to Laurus, see Note B-7 Note Payable, in the consolidated financial statements). This convertible note payable replaced the $5,000,000 note payable to Cingular, (see Note C Investments, in the consolidated financial statements). The note payable to Laurus Master Fund has a higher effective interest rate than the Cingu
lar note payable, however, the Laurus note payable has a longer term. The Company issued the note payable to Cingular on March 28, 2003, thus the nine-month period ended September 30, 2003 had approximately six months of interest expense, while the Laurus Master Fund note payable was issued by the Company on January 15, 2004, therefore, the nine-month period ended September 30, 2004 had approximately eight and a half months of interest expense.
Gain on the sale of business of $250,000 for the nine-month period ended September 30, 2004 was due to the receipt of a contingent payment in March 2004 on the sale of Data1Source in September 2003 since the contingency was favorably met. The gain on the sale of business of $1,712,000 for the three and nine month periods ended September 30, 2003 was attributable to the sale of Data1Source (see Note C- Investments and Divestitures).
Due to the loss position for the three-months ended September 30, 2004, the Company has not recorded federal tax provisions. The $19,000 in the three-month period ended September 30, 2004 and the $23,000 for the same period in 2003 related to certain state and foreign income taxes. This is also the case for the $18,000 of income tax expense for the nine-month period ended September 30, 2004. The $56,000 in income tax expense for the nine-month period ended September 30, 2003 related to the Company’s operations in Australia and certain state income taxes.
The Company recorded a net loss of $340,000 for the three-month period ended September 30, 2004 compared to a net income of $992,000 for the three-month period ended September 30, 2003 which included the gain on the sale of Data1Source of $1,712,000 in the quarter ended September 30, 2003. The Company recorded a net loss of $1,819,000 for the nine-month period ended September 30, 2004 versus a net loss of $979,000, which included gains on the sale of Data1Source of $250,000 and $1,712,000 respectively.
Basic and diluted loss per common share was $0.03 for three-month period ended September 30, 2004 as compared to basic and fully diluted earnings per share of $0.09 for the three-month period ended September 30, 2003 which includes the gain on the sale of Data1Source in the three-month period ended September 30, 2003. Basic and diluted loss per common share was $0.17 for the nine-month period ended September 30, 2004 versus $0.09 for the same period in 2003.
The basic and diluted weighted average shares outstanding was 10,799,000 for the three-month period ended September 30, 2004 as compared to basic weighted average shares outstanding of 10,787,000 and diluted weighted average shares outstanding of 10,878,000 for the three-month period ended September 30, 2003. This increase was due to shares issued under the Company’s employee stock option and stock purchase plans. The basic and diluted weighted average shares outstanding decreased to 10,795,000 for the nine-month period ended September 30, 2004 versus 10,983,000 for the same period in 2003. The decrease in weighted average basic shares outstanding for these nine-month periods were primarily due to the Company’s repurchase on March 28, 2003 of 625,000 share
s of the Company’s common stock held by Cingular. This was partially offset by shares issued under the employee stock purchase plan.
Liquidity and Capital Resources
The Company had working capital of $1,597,000 as of September 30, 2004 compared to a working capital deficit of $455,000 at December 31, 2003. The Company had cash balances of $1,402,000 and $734,000, respectively, as of September 30, 2004 and December 31, 2003.
The majority of the increase in working capital reflects the repayment of $3,500,000 in short-term debt payable to Cingular. The Company repaid Cingular using a portion of the net proceeds from the Company Note, $1,429,000 of which is classified as current and $2,692,000 of which is classified as long term. The Company Note also provided additional working capital.
Net cash provided by operating activities was $529,000 for the nine-month period ended September 30, 2004 as compared to net cash used in operating activities of $278,000 for the nine-month period ended September 30, 2003. This $807,000 improvement from cash used in operating activities to cash provided by operating activities was due to decreased net operating losses excluding the non-operating gains on the sale of Data1Source in the first nine-months of 2004 by $622,000 from $2,069,000 as compared to $2,691,000 for the same period in 2003. There was also an improvement of $695,000 in working capital balances, excluding cash, in the nine-months ended September 30, 2004, which resulted in a source of cash of $456,000 compared to a cash use of $239,000 for the nine-months ended September 30, 2003. Additionally,
the improvement in working capital balances was partially offset by a reduction of non-cash expenses in depreciation, amortization, bad debt reserves and inventory reserves of $510,000 from $2,142,000 for the nine-months ended September 30, 2004 as compared to $2,652,000 for the same period in 2003.
Net cash used in investing activities was $2,636,000 for the nine-month period ended September 30, 2004 as compared to a source of cash of $756,000 for the nine-month period ended September 30, 2003. The increase in cash used in investing activities as opposed to a source of cash from investing activities was primarily due to the payoff of the short-term debt payable to Cingular as described above and the repurchase of 625,000 shares of the Company’s common stock owned by Cingular on March 28, 2003. Of the $3,500,000 payment, $2,525,000 related to the purchase of the Cingular’s minority interest and $975,000 related to the purchase of the Company’s common stock. This payment was partially offset by additional proceeds received f
rom the sale of Data1Souce of $200,000. These proceeds were contingent on certain criteria being met within six months following the original sale. The Company received this payment during the quarter ended March 31, 2004 since the contingency was satisfied. The cash provided by investing activities for the first nine months of 2003 was primarily due to the sale of Data1Source LLC. The selling price was approximately $3,400,000 with $3,200,000 paid in cash at closing and $200,000 due in six months, if certain criteria are met (see "Net cash provided by financing activities" below). These proceeds were partially offset by the purchases of intangible and other assets for the nine-month period ended September 30, 2003. These were primarily payments made at the closing for sale of Data1Source LLC, including a payment to Cingular of $1,500,000 relating to the purchase of their minority share in Cellemetry LLC and payoffs of the software and hardware leases for the assets sold with Data1Souce LLC including $605,00
0 paid at the closing
Net cash provided by financing activities was $2,869,000 for the nine-month period ended September 30, 2004 as compared to net cash used in financing activities of $1,670,000 for the nine-month period ended September 30, 2003. The increase in cash provided by financing activities was primarily due to proceeds from the Company Note (see Note B-7 - Note Payable in the footnotes to the Company’s financial statements) partially offset by principal payments on this note of $243,000, the purchase of treasury shares purchased from Cingular for $975,000 and principal payments on capital lease obligations of $208,000. The cash used in financing activities during the nine-month period ended September 30, 2003 was primarily to the payoff of the lease payable of $605,000 for the software sold with Data1Souce LLC (see
"Net cash provided by investing activities" above) and the regular payments on capital lease obligations. The cash usage also included the payments of preferred stock dividends and the payoff of the entire outstanding balance of $400,000 on the Company’s revolving line of credit that offset cash provided by the line of credit during the nine-month period ended September 30, 2003.
In connection with the Company Note, the Company has agreed to register all of the Common Stock that can be issued to Laurus by no later than January 13, 2005. If the registration statement has not been declared effective by August 13, 2004, then for each 30 day period thereafter (or portion thereof), the Company must issue to Laurus warrants covering 15,000 shares of the Company’s common stock (at an exercise price of $5.99). As of September 30, 2004, these warrants totaled 38,000 (See Note B-8 - Shareholders’ Equity). Currently, the Company does not anticipate that the issuance of such warrants will have an adverse affect on the Company’s capital structure. If the registration statement is not declared effective by January 13, 2005, then Laurus has the right to demand full payment of all outsta
nding principal and interest due under the Company Note and invoke its right to the collateral under a related security agreement.
The Company’s business has traditionally not been capital intensive; accordingly, capital expenditures have not been material. To date, the Company has funded all capital expenditures from working capital, capital leases and other long-term obligations, proceeds from the public offering, from the sale of its derived channel technology in November 1999 and the proceeds from the sale of Data1Source LLC.
In March 2003, in order to provide additional short-term liquidity, the Company negotiated a $1,000,000 line of credit with a related party. This line of credit expired on March 28, 2004.
While the Company’s operations provided cash during the nine-month period ended September 30, 2004, the Company continues to generate operating losses, and the Company's operations used significant amounts of cash in 2003. Even though the Company continues to launch new products and establish new distribution channels for its products and services, the Company's longer-term success will depend upon further reductions in operating losses and further increases in positive cash flow. The Company paid principal and interest of approximately $320,000 on the Company Note in the quarter ended September 30, 2004, and will be required to pay principal and interest of approximately $320,000 in the forth quarter 2004 and approximately $1,900,000 in the calendar year 2005. However, if the Company’s common stock p
rice exceeds $5.02 within the appropriate time frames, the Company will consider using shares of common stock to repay amounts due on the Company Note and reduce cash expenditures.
In the absence of additional funding, the Company believes that its available cash reserves and cash generated from operations will be sufficient to fund operations beyond the end of 2004. The Company intends to fund its continuing operations and repayments of amounts due under the Company Note through a combination of operating cash flow, and cash on hand and the possible sale of certain non-core assets. The Company is also exploring establishing a line of credit. In addition, the Company is continuing to explore additional funding sources including. Such additional funding sources could include the public or private sale of securities or proceeds from the sale of assets. If the Company is successful in raising additional funds through the issuance of equity securities, stockholders may experience dilution, or
the equity securities may have rights, preferences or privileges senior to those of the common stockholders. If the Company raises funds through the issuance of debt securities, those securities would have rights, preferences and privileges senior to those of the common stock holders. There can be no assurance, however, that additional funding will be available on terms favorable to the Company or at all or that the Company will raise significant or sufficient proceeds from the sale of assets. If the Company is unable to repay the Company Note, Laurus could take action on its security interests or if the registration statement related to the Company Note is not declared effective by January 13, 2005, Laurus has the right to demand full payment of all outstanding principal and interest due under the Company Note and invoke its right to the collateral under a related security agreement.
Cash requirements for future expansion of the Company’s operations will be evaluated on an as-needed basis and may involve additional external financing. The Company does not expect that such additional financing, should it occur, will have a materially negative impact on the Company’s ability to fund its existing operations.
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risks. |
At September 30, 2004 the Company was not invested in any material balances of market risk sensitive instruments held for either trading purposes or for purposes other than trading. As a result, the Company is not subject to interest rate risk, commodity price risk, or other relevant market risks, such as equity price risk, other than risks created in the ordinary course of business through its operations.
At September 30, 2004 the Company has obligations under a note payable and under capital leases, both of which have fixed interest rates. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates or foreign currency exchange rates on the Company’s financial position, results of operations and cash flows should not be material.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of September 30, 2004. No changes were made in the Company’s internal control over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
As previously disclosed, on May 5, 2003 Hawkeye Switching LLC and an affiliated entity, RSA No. 2 (collectively "Hawkeye"), sued Numerex Solutions LLC ("Numerex") a wholly owned subsidiary of the Company in Iowa District Court for Mills County, alleging breach of contract and fraudulent inducement related to a Data1Source contract for over-the-air activation and SMS text messaging. Hawkeye settled this matter, which included a full release of Numerex, on April 20, 2004. The settlement did not have a material impact on the Company’s financial statements.
None - not applicable.
None - not applicable.
None - not applicable.
Exhibit 31.1 Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14.
Exhibit 31.2 Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
Through its website at www.nmrx.com, the Company makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.
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)
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| Date: November 15, 2004 |
By: |
/s/ Stratton J. Nicolaides |
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Title: |
Chairman and Chief Executive Officer |
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| Date: November 15, 2004 |
By: |
/s/ Alan B. Catherall |
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Title: |
Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer |