NUMEREX CORP /PA/ - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - NUMEREX CORP /PA/	Financial_Report.xls
EX-32.1 - NMRX EXHIBIT 32.1 - NUMEREX CORP /PA/	nmrxexh32_1.htm
EX-32.2 - NMRX EXHIBIT 32.2 - NUMEREX CORP /PA/	nmrxexh32_2.htm
EX-31.2 - NMRX EXHIBIT 31.2 - NUMEREX CORP /PA/	nmrxexh31_2.htm
EX-31.1 - NMRX EXHIBIT 31.1 - NUMEREX CORP /PA/	nmrxexh31_1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2012
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 0-22920

Numerex Corp

(Exact Name of Registrant as Specified in Its Charter)


Pennsylvania		11-2948749
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1600 Parkwood Circle, Suite 500

Atlanta, GA 30339-2119

(Address of Principal Executive Offices) (Zip Code)

(770) 693-5950

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

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

As of August 6, 2012, an aggregate of 15,479,573 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	3
Condensed Consolidated Statements of Operations and Comprehensive Earnings for the three and six months ended June 30, 2012 and 2011	4
Condensed Consolidated Statement of Shareholders' Equity for the six months ended June 30, 2012 and 2011	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011	6
Notes to Condensed Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures about Market Risk	17
Item 4. Controls and Procedures	18

PART II - OTHER INFORMATION
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 5. Other Information	18
Item 6. Exhibits	19
Signature Page	20
Certifications	21
Exhibits

Numerex Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
	June 30,			December 31,
	2012 (unaudited)			2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,789		$	9,547
Restricted cash		221			221
Accounts receivable, less allowance for doubtful accounts of $342 at June 30, 2012 and $236 at December 31, 2011		8,119			6,846
Note receivable		223			165
Inventory, net of provision of $614 at June 30, 2012 and $578 at December 31, 2011		6,880			7,057
Prepaid expenses and other current assets		1,269			957
TOTAL CURRENT ASSETS		25,501			24,793

Property and equipment, net		1,343			1,252
Software, net		3,814			3,388
Other intangibles, net		4,470			4,901
Other assets – long term		3,407			3,307
Goodwill, net		23,787			23,787
TOTAL ASSETS	$	62,322		$	61,428

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	6,735		$	8,239
Other current liabilities		1,228			1,392
Current portion of term loan		2,200			1,200
Deferred revenues		1,761			1,317
Obligations under capital leases		-			237
TOTAL CURRENT LIABILITIES		11,924			12,385

LONG TERM LIABILITIES
Term loan, net of current portion		3,900			4,500
Other long-term liabilities		326			346
TOTAL LIABILITIES		16,150			17,231

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Preferred stock - no par value; authorized 3,000; none issued		-			-
Class A common stock – no par value; authorized 30,000; issued 17,041 shares at June 30, 2012 and 16,691 shares at December 31, 2011; outstanding 15,479 shares at June 30, 2012 and 15,129 shares at December 31, 2011		-			-
Class B common stock – no par value; authorized 5,000; none issued		-			-
Additional paid-in-capital		67,587			66,634
Treasury stock, at cost, 1,562 shares at June 30, 2012 and December 31, 2011		(8,136	)		(8,136	)
Accumulated other comprehensive loss		(10	)		(13	)
Accumulated deficit		(13,269	)		(14,288	)
TOTAL SHAREHOLDERS' EQUITY		46,172			44,197
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	62,322		$	61,428

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

Consolidated Statements of Operation and Comprehensive Earnings

(In thousands, except per share data)

(unaudited)


	Three Months Ended						Six Months Ended
	06/30/12			06/30/11			06/30/12			06/30/11
Net revenues:
Recurring revenue and support	$	10,664		$	9,461		$	20,807		$	18,472
Embedded devices & hardware		5,692			4,912			10,081			9,670
Total net revenues:		16,356			14,373			30,888			28,142
Cost of revenues, exclusive of depreciation shown below:
Cost of recurring subscription and support		4,470			3,930			8,600			7,642
Cost of embedded devices & hardware		4,641			4,143			8,259			8,114
Gross Profit		7,245			6,300			14,029			12,386
General, administrative and legal expenses		2,491			2,272			5,134			4,484
Sales and marketing expenses		2,396			2,326			4,468			4,560
Engineering and development expenses		803			574			1,654			1,169
Depreciation and amortization		778			766			1,593			1,541
Operating earnings		777			362			1,180			632
Interest expense		69			21			146			47
Other income		(3	)		15			(5	)		15
Earnings before tax		705			356			1,029			600
Provision (benefit) for income tax		7			16			11			30
Net earnings		698			340			1018			570
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustment		21			(13	)		3			(1	)
Comprehensive earnings	$	719		$	327		$	1,021		$	569

Basic earnings per common share	$	0.05		$	0.02		$	0.07		$	0.04
Diluted earnings per common share	$	0.04		$	0.02		$	0.06		$	0.04
Number of shares used in per share calculation
Basic		15,419			15,053			15,304			15,019
Diluted		15,913			15,844			15,892			15,767

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

NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

								Accumulated
			Additional					Other
	Common		Paid-In		Treasury			Comprehensive			Accumulated
	Shares		Capital		Stock			Loss			Deficit			Total

Balance at January 1, 2012		16,691	$	66,634	$	(8,136	)	$	(13	)	$	(14,288	)	$	44,197
Issuance of common stock in connection with Directors Stock Plan		2		20		-			-			-			20
Exercise of options in connection with employee stock option plan		249		185		-			-			-			185
Issuance of restricted shares		54		242											242
Exercise of warrants		45		-		-			-			-			-
Share based compensation		-		506		-			-			-			506
Translation adjustment		-		-		-			3			-			3
Net earnings		-		-		-			-			1,018			1,018
Balance at June 30, 2012		17,041	$	67,587	$	(8,136	)	$	(10	)	$	(13,269	)	$	46,172


Balance at January 1, 2011	16,363	$	64,099	$	(5,239	)	$	-		$	(16,142	)	$	42,718
Issuance of common stock in connection with Directors Stock Plan	4		40		-			-			-			40
Issuance of restricted shares	45		49		-			-			-			49
Exercise of stock options in connection with employee stock option plan	59		360		-			-			-			360
Exercise of warrants	200		880		-			-			-			880
Purchase of treasury shares	-		-		(2,897	)		-			-			(2,897	)
Share based compensation	-		388		-			-			-			388
Translation adjustment	-		-		-			(1	)		-			(1	)
Net earnings	-		-		-			-			570			570
Balance at June 30, 2011	16,671	$	65,816	$	(8,136	)	$	(1	)	$	(15,572	)	$	42,107

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

NUMEREX CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
	For the six month period
	ended June 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	1,018		$	570
Adjustments to reconcile net earnings (loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization		1,661			1,541
Bad debt expense		106			179
Provision for inventory Reserves		16			16
Non-cash interest expense		21			17
Stock options compensation expense		747			437
Stock issued in lieu of directors fees		20			40
Deferred income taxes		-			-
Changes in assets and liabilities which provided/(used) cash:
Accounts and notes receivable		(1,605	)		(95	)
Inventory		161			(185	)
Prepaid expenses & interest receivable		46			(469	)
Other assets		(311	)		(21	)
Accounts payable		(1,504	)		(1,535	)
Other current liabilities		(102	)		(2,578	)
Deferred revenue		444			(27	)
Income taxes		(61	)		(93	)
Other long-term liabilities		(20	)		(66	)
Other		4
Net cash provided by operating activities:		641			(2,269	)
Cash flows from investing activities:
Purchase of property and equipment		(410	)		(433	)
Purchase of intangible and other assets		(1,337	)		(705	)
Purchase of investment		-			(322	)
Net cash used in investing activities		(1,747	)		(1,460	)
Cash flows from financing activities:
Fees paid for credit facility		-			(100	)
Proceeds from exercise of common stock options and warrants		185			1,240
Purchase of Treasury Stock		-			(2,897	)
Principal payments on capital lease obligations		(237	)		(221	)
Proceeds from credit debt		1,000			6,000
Principal payments on debt		(600	)		-
Net cash used in financing activities:		348			4,022
Effect of exchange differences on cash		-			(1	)
Net increase in cash and cash equivalents		(758	)		292
Cash and cash equivalents at beginning of year		9,547			10,251
Cash and cash equivalents at end of year	$	8,789		$	10,543
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest		126			30
Income taxes		111			123

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

NUMEREX CORP AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

NOTE A – BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012. For further information, reference is also made to Numerex Corp.’s (the “Company’s”, “We” or “Our”) Annual Report on Form 10-K for the year ended December 31, 2011 and the consolidated financial statements contained therein.

Numerex Corp (NASDAQ: NMRX) is a leading provider of machine-to-machine (M2M) business services, technology, and products used in the development and support of M2M solutions for the enterprise and government markets worldwide. The Company offers Numerex DNA® that includes hardware and smart Devices, cellular and satellite Network services, and software Applications that are delivered through Numerex FAST® (Foundation Application Software Technology). Customers typically subscribe to device management, network, and application services through hosted platforms. Business services enable the development of efficient, reliable, and secure solutions while simplifying and speeding up deployment through streamlined processes and comprehensive integration services. Numerex is ISO 27001 information security-certified. "Machines Trust Us®" represents the Company's focus on M2M data security, service reliability, and round-the-clock support of its customers' M2M solutions.

The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Prior year net sales and cost of sales information has been reclassified to conform to the current year presentation.

NOTE B - INVENTORY

Inventory consisted of the following:

	June 30,			December 31,
(In thousands)	2012			2011
Raw materials	$	1,139		$	1,290
Work-in-progress		12			14
Finished goods		6,343			6,331
Less reserve for obsolescence		(614	)		(578	)
Inventory, net	$	6,880		$	7,057

NOTE C – GOODWILL, SOFTWARE AND OTHER INTANGIBLE ASSETS

We did not have any changes to goodwill during the six months ended June 30, 2012.

We did not incur costs to renew or extend the term of existing software and acquired intangible assets during the six months ending June 30, 2012. Software and intangible assets, which will continue to be amortized, consisted of the following (in thousands):

	June 30, 2012							December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Purchased and developed software	$	12,244	$	(8,430	)	$	3,814	$	11,410	$	(8,022	)	$	3,388
Patents, trade and service marks		14,365		(11,768	)		2,597		14,085		(11,232	)		2,853
Intangible and other assets		3,212		(1,339	)		1,873		3,199		(1,151	)		2,048
Total intangible and other assets	$	29,821	$	(21,537	)	$	8,284	$	28,694	$	(20,405	)	$	8,289

Amortization expense of intangible assets and software was $672,000 and $585,000 for the three months ended June 30, 2012 and 2011, respectively, and $1.3 million and $1.2 million for the six months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012, the estimated remaining amortization expense associated with the Company’s intangible assets and software is as follows:

Remainder of 2012	$1.3 million
2013	2.6 million
2014	2.0 million
2015	0.6 million
2016	0.3 million
Thereafter	1.4 million

NOTE D – INCOME TAXES

We account for income taxes in accordance with Financial Accounting Standards Board or FASB, Accounting Standards Codification 740 – “Income Taxes” or “ASC 740," which requires the use of the liability method of accounting for deferred income taxes. We follow ASC 740 Subtopic 10, "Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

We do not anticipate any material changes in the uncertain tax positions during the 2012 year.

We recorded a tax provision of $11,000 for the six months ended June 30, 2012, as compared to a tax provision of $30,000 for the six months ended June 30, 2011, representing effective tax rates of 1.07% and 4.88%, respectively. The difference between our effective tax rate and the 34% federal statutory rate in the six months ended June 30, 2012 and 2011 is primarily from the change in our valuation allowance against all net deferred tax assets, the utilization of certain federal tax credits, stock based compensation, and state tax accruals related to unrecognized tax benefits.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2008 through 2010 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.

NOTE E – SHARE-BASED COMPENSATION

Share-based compensation was $326,000 and $255,000 for the three months ended June 30, 2012 and 2011, respectively, and $747,000 and $437,000 for the six months ended June 30, 2012 and 2011, respectively. Total unrecognized compensation related to unvested share-based awards granted to employees and members of our board of directors at June 30, 2012, net of estimated forfeitures, is $2.3 million and is expected to be recognized over a weighted-average period of 2 years.

NOTE F – EARNINGS PER SHARE

Basic net earnings per common share available to common shareholders is based on the weighted-average number of common shares outstanding. For periods in which we have net earnings, we base diluted net earnings per share on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive employee stock options.

The numerator in calculating both basic and diluted earnings per common share for each period is the same as net earnings. The denominator is based on the number of common shares as shown in the following table:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2012		2011		2012		2011
Common Shares:
Weighted average common shares outstanding		15,419		15,053		15,304		15,019
Dilutive effect of common stock equivalents		494		791		588		748
Total		15,913		15,844		15,892		15,767
Net earnings	$	698	$	340	$	1,018	$	570
Net earnings per common share:
Basic	$	0.05	$	0.02	$	0.07	$	0.04
Diluted	$	0.04	$	0.02	$	0.06	$	0.04

For the three and six months ended June 30, 2012, the effect of 289,500 outstanding stock options, 105,708 outstanding warrants and 239,000 outstanding stock appreciation rights were not included in the computation of diluted earnings per share as their effect was anti-dilutive.

For the three and six months ended June 30, 2011, the effect of 44,000 outstanding stock options, 105,708 outstanding warrants and 81,500 outstanding stock appreciation rights was not included in the computation of diluted earnings per share as their effect was anti-dilutive.

NOTE G – LIQUIDITY

We believe that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over the next twelve months. This belief could be affected by future operating earnings that are lower than expectations or a material change in our operating business, including but not limited to, a significant change in the rate of growth of our revenues, the impact of any significant acquisitions or transactions or a change in strategy or product development plans.

NOTE H – LEGAL PROCEEDINGS

We currently are not involved in any pending material litigation.

NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, (ASU 2011-04), which is an update to Topic 820, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards” (“IFRS”). The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. We adopted this new accounting guidance during the first quarter of 2012. The adoption of this guidance did not have a material impact on our fair value measurements, financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. The new guidance requires the presentation of components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. There is no change to the items that we must report in other comprehensive income or when we must reclassify an item of other comprehensive income to net income. We adopted this new accounting guidance during the first quarter of 2012 and because the guidance impacts presentation only, it had no effect on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued new accounting guidance which allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment. An entity will be required to perform the two-step impairment test only if it concludes, based on a qualitative assessment, the fair value of a reporting unit is more likely than not to be less than its carrying value. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this new accounting guidance during the first quarter of 2012. The adoption had no impact on our financial condition or results of operations.

NOTE J – SEGMENT INFORMATION

We have two reportable operating segments. These segments are M2M (Machine-to-Machine) and Other Services. The M2M segment is made up of all our cellular and satellite machine-to-machine communications hardware and services. The Other Services segment includes our video conferencing hardware and installation of telecommunications equipment.

Our chief operating decision maker is the Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating earnings (loss) that includes an allocation of common expenses, but excludes certain unallocated expenses. The CEO does not view segment results below operating earnings (loss) before unallocated costs, and therefore unallocated expenses, interest income and other, net, and the provision for income taxes are not broken out by segment. Items below segment operating earnings (loss) are reviewed on a consolidated basis.

Summarized below are our revenues and operating earnings (loss) by reportable segment. Prior year information has been reclassified to conform to the current year presentation. Certain corporate expenses are allocated to the segments based on segment revenues.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2012			2011			2012			2011
Net revenues:
M2M Services	$	16,009		$	14,151		$	30,472		$	27,619
Other Services		347			222			416			523
	$	16,356		$	14,373		$	30,888		$	28,142
Operating earnings (loss):
M2M Services	$	4,510		$	3,780		$	8,778		$	7,276
Other Services		160			(21	)		131			(27	)
Unallocated Corporate		(3,893	)		(3,397	)		(7,729	)		(6,617	)
	$	777		$	362		$	1,180		$	632
Depreciation and amortization:
M2M Services	$	614		$	621		$	1,248		$	1,254
Other Services		18			20			36			40
Unallocated Corporate		146			125			309			247
	$	778		$	766		$	1,593		$	1,541

(In thousands)	June 30,			December 31
Identifiable assets:		2012			2011
M2M Services	$	50,218		$	47,985
Other Services		1,977			1,779
Unallocated Corporate		10,127			11,664
	$	62,322		$	61,428

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

Forward-looking Statements

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

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to continue to expand our subscription-based sales mode; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services, including a prolonged deterioration of the housing market; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets, the inability to raise growth capital on favorable terms, if at all; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; unexpected costs associated with our continued investments and expansion in international markets; and extent and timing of technological changes. Numerex SEC reports identify additional factors that can affect forward-looking statement.

Overview

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the accompanying notes to the unaudited financial statements in this Quarterly Report on Form 10-Q for the period ended June 30, 2012.

Results of operations

While our overall business has grown and we believe that our pipeline of future sales opportunities is strong, particularly demand from our channel partners for our network and application platforms, general economic uncertainty remains and may reduce our future growth. Although we are focused on generating recurring revenues from services and support, hardware-only sales were $5.7 million for the three-month period ended June 30, 2012 compared to $4.9 million in 2011. Hardware only sales were $10.1 million for the six-month period ended June 3, 2012 compared to $9.7 million in 2011. We have continued to closely monitor our credit policies in response to the economic climate, in particular to our hardware-only sales.

Net revenues increased 13.8% to $16.4 million for the three-month period ended June 30, 2012, compared to $14.4 million in 2011. Net revenues increased 9.8% to $30.9 million for the six-month period ended June 30, 2012, compared to $28.1 million in 2011. The increase in net sales is primarily attributable to the growth in M2M subscriptions.

Operating earnings increased 114.6% to $0.8 million for the three-month period ended June 30, 2012, compared to $0.4 million in 2011. Operating earnings increased 86.7% to $1.2 million for the six-month period ended June 30, 2012, compared to $0.6 million in 2011.

Net earnings increased 105.3% to $0.7 million for the three-month period ended June 30, 2012, compared to net earnings of $0.3 million in 2011. Net earnings increased 78.6% to $1.0 million for the six-month period ended June 30, 2012, compared to net earnings of $0.6 million in 2011.

Critical Accounting Policies

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Three Months Ended June 30, 2012 and 2011

Net Revenues, Gross Profit and Cost of Sales

Net revenues, gross profit and cost of sales are summarized in the following table:

	Three Months Ended
	06/30/12			06/30/11			% Change
Net revenues:
Recurring revenue and support	$	10,664		$	9,461			12.7	%
Embedded devices & hardware		5,692			4,912			15.9	%
Total net revenues:		16,356			14,373			13.8	%
Cost of revenues, exclusive of depreciation:
Cost of recurring revenue and support		4,470			3,930			13.7	%
Cost of embedded devices & hardware		4,641			4,143			12.0	%
Gross Profit	$	7,245		$	6,300			15.0	%
		44.3	%		43.8	%

Net Revenues

Recurring revenue and support increased 12.7% to $10.7 million for the three-month period ended June 30, 2012, compared to $9.5 million in 2011. This increase was primarily due to an increase of 116,000 subscriptions for the three months ended June 30, 2012 compared to a 42,000 increase in subscriptions for the three months ended June 30, 2011.

Embedded devices and hardware increased 15.9% to $5.7 million for the three-month period ended June 30, 2012, compared to $4.9 million in 2011. The increase is primarily due to increased sales of our wireless module and security products.

Gross Profit

Gross profit, as a percentage of net sales, increased to 44.3% for the three-month period ended June 30, 2012, compared to 43.8% in 2011. The increase was primarily due to the increase in recurring revenue of $1.2 million. This increase causes an overall margin improvement since recurring revenues have a higher gross margin than those achieved through the sale of embedded devices.

Cost of Revenues

Recurring revenue and support cost of revenues increased 13.7% to $4.5 million for the three-month period ended June 30, 2012, as compared to $3.9 million in 2011. The increase is the result of the increase in subscriptions, licensing and support sales.

Embedded devices and hardware cost of revenues increased 12.0% to $4.6 million for the three-month period ended June 30, 2012, as compared to $4.1 million in 2011. The increase is the result of the increase in sales of embedded devices and hardware.

Operating Expenses

Operating expenses are summarized in the following table:

	Three Months Ended
(In thousands)	06/30/12		06/30/11		% Change
Operating expenses
General, administrative and legal expenses	$	2,491	$	2,272		9.6	%
Sales and marketing expenses		2,396		2,326		3.0	%
Engineering and development expenses		803		574		39.9	%
Depreciation and amortization		778		766		1.6	%
Operating earnings	$	777	$	362		114.6	%

General, administrative and legal expenses increased 9.6% to $2.5 million for the three-month period ended June 30, 2012, compared to $2.3 million in 2011. The increase is primarily due to an increase in employee related expenses of $138,000, and an increase in share-based compensation of $81,000,

Sales and marketing expenses increased 3.0% to $2.4 million for the three-month period ended June 30, 2012, compared to $2.3 million in 2011. The increase is primarily due an increase in promotional fees of $42,000, and an increase in personnel related fees of $28,000.

Research and development expenses increased 39.9% to $0.8 million for the three-month period ended June 30, 2012, compared to $0.6 million in 2011. The increase is primarily due to an increase in personnel related fees of $180,000 and an increase in facility related fees of $46,000.

Depreciation and amortization expense remained constant at $0.8 million for the three-month period ended June 30, 2012 and 2011.

Income Taxes

Management continues to review the allowance for deferred taxes on a periodic basis and concluded no change in the reserve was necessary. Management will continue to monitor prospectively in order to determine if an adjustment to the allowance in the future will be necessary if the current earnings trend continues. Should management determine that a release the valuation allowance is appropriate, it could have a positive significant impact on our earnings.

Six Months Ended June 30, 2012 and 2011

Net Revenues, Gross Profit and Cost of Sales

Net revenues, gross profit and cost of sales are summarized in the following table:

	Six Months Ended
	06/30/12			06/30/11			% Change
Net revenues:
Recurring revenue and support	$	20,807		$	18,472			12.6	%
Embedded devices & hardware		10,081			9,670			4.3	%
Total net revenues:		30,888			28,142			9.8	%
Cost of sales, exclusive of depreciation:
Cost of recurring revenue and support		8,600			7,642			12.5	%
Cost of embedded devices & hardware		8,259			8,114			1.8	%
Gross Profit	$	14,029		$	12,386			13.3	%
		45.4	%		44.0	%

Net Revenues

Recurring revenue and support increased 12.6% to $20.8 million for the six-month period ended June 30, 2012, compared to $18.5 million in 2011. This increase was primarily due to the growth in subscriptions to 1.63 million at June 30, 2012 compared to 1.26 million at June 30, 2011.

Embedded devices and hardware increased 4.3% to $10.1 million for the six-month period ended June 30, 2012, compared to $9.7 million in 2011. The increase is primarily due to increased sales of our wireless module and security products.

Gross Profit

Gross profit, as a percentage of net revenue, increased to 45.4% for the six-month period ended June 30, 2012, compared to 44.0% in 2011. The increase was primarily due to the increase in recurring revenue of $2.0 million. This increase causes an overall margin improvement since recurring revenues have a higher gross margin than those achieved through the sale of embedded devices.

Cost of Revenues

Recurring revenue and support cost of revenues increased 12.5% to $8.6 million for the six-month period ended June 30, 2012, as compared to $7.6 million in 2011. The increase is the result of the increase in M2M subscriptions, licensing and support sales.

Embedded devices and hardware cost of revenues increased 1.8% to $8.3 million for the six-month period ended June 30, 2012, as compared to $8.1 million in 2011. The increase is the result of the increase in sales of embedded devices and hardware.

Operating Expenses

Operating expenses are summarized in the following table:

	Six Months Ended
(In thousands)	06/30/12		06/30/11		% Change
Operating expenses
General, administrative and legal expenses	$	5,134	$	4,484		14.5	%
Sales and marketing expenses		4,468		4,560		-2.0	%
Engineering and development expenses		1,654		1,169		41.5	%
Depreciation and amortization		1,593		1,541		3.4	%
Operating earnings	$	1,180	$	632		86.7	%

General, administrative and legal expenses increased 14.5% to $5.1 million for the six-month period ended June 30, 2012, compared to $4.5 million in 2011. The increase is primarily due to an increase in share-based compensation of $310,000, and an increase in employee related expenses of $340,000.

Sales and marketing expenses decreased 2.0% to $4.5 million for the six-month period ended June 30, 2012, compared to $4.6 million in 2011. The decrease is primarily due to reduced employee related expenses of $107,000 offset by an increase in office related supplies of $15,000.

Research and development expenses increased 41.5% to $1.7 million for the six-month period ended June 30, 2012, compared to $1.2 million in 2011. The increase is primarily due to an increase in personnel related expenses of $360,000 and an increase in facility office related expenses of $125,000.

Depreciation and amortization expense increased 3.4% to $1.6 million for the six-month period ended June 30, 2012, compared to $1.5 million in 2011. The increase is primarily due to the purchase of certain tangible and intangible assets.

Income Taxes

Liquidity and Capital Resources

We had working capital of $13.6 million as of June 30, 2012 and $12.4 million as of December 31, 2011. We had cash balances of $9.0 million and $9.8 million, as of June 30, 2012 and December 31, 2011, respectively.

Net cash provided by operating activities for the six-month period ended June 30, 2012 was $0.6 million. The primary non-cash adjustments to net income for the six-month period ended June 30, 2012 were $1.7 million for depreciation and amortization and $0.7 million for share-based compensation expense. The changes in operating assets and liabilities included a $1.6 million increase in accounts and note receivable, a $0.3 million increase in other assets and a $1.5 million decrease in accounts payable, partially offset by a $0.4 million increase in deferred revenues.

Net cash used in investing activities for the six-month period ended June 30, 2012 was $1.7 million due primarily to purchases of property and equipment of $0.4 million and intangible and other assets of $1.3 million.

Net cash provided by financing activities for the six-month period ended June 30, 2012 was $0.3 million due primarily to proceeds from debt of $1.0 million, partially offset by payments on capital leases of $0.2 million and debt of $0.6 million.

To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.

At June 30, 2012, we had a balance outstanding on our credit facility of $6.1 million at an interest rate of 4%. We were in compliance with all financial covenants of our credit agreement at June 30, 2012 and there were no letters of credit outstanding. As of the date of the filing of this Quarterly Report on Form 10-Q, no further borrowings had been made under the credit facility.

On April 25, 2011, we filed a universal shelf registration statement on Form S-3 with the SEC. Subject to market conditions, the registration statement allows us, from time to time, to offer and sell up to $30 million of equity securities as described in the registration statement. The registration statement was declared effective by the SEC on May 3, 2011. We have not issued or sold any securities pursuant to the shelf registration statement

We believe that our existing cash and cash equivalents together with expected cash generated from operations will be sufficient to meet our operating requirements for at least the next twelve months. This belief could be affected by future results that differ from expectations or a material adverse change in our operating business, including noncompliance with the financial covenants under our credit facility

Off-Balance Sheet Arrangements

As of June 30, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risks.

The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities.

Our credit agreement provides us with a revolving Credit Facility of up to $10.0 million. The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s option, equal to either (i) the Prime Rate plus the Prime Rate Margin (as such terms are defined in the credit agreement) or (ii) the LIBOR Rate plus the LIBOR Rate Margin (as such terms are defined in the Credit Agreement). The Credit Facility includes an annual fee of 0.375% of the average unused portion. As of June 30, 2012, we had outstanding indebtedness of $6.1 million under the Credit Facility at 4% interest rate. Accordingly, we could be exposed to market risk from changes in interest rates on our long-term debt. We estimate that a one percent interest rate change would change our interest expense and payments by $61,000 per year, assuming we do not increase our amount outstanding.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the period ended June 30, 2012, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

We currently are not involved in any pending material litigation.

Item 1A. Risk Factors.

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q. At June 30, 2012, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

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

None.

Item 3.

Defaults Upon Senior Securities.

None - not applicable.

Item 5. Other Information.

None - not applicable.

Item 6. Exhibits

Exhibit 31.1

Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).

Exhibit 31.2

Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a).

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101

The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (ii) Unaudited Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, (iii) Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, (iv) Unaudited Condensed Consolidated Statements of Shareholders Equity at June 30, 2012 and 2011 and (v) Notes to Unaudited Consolidated Financial Statements (tagged as blocks of text).*

* This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

SIGNATURES

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

	NUMEREX CORP.
	(Registrant)

August 09, 2012	/s/ Stratton J. Nicolaides
	Stratton J. Nicolaides
	Chief Executive Officer and Chairman


August 09, 2012	/s/ Alan B. Catherall
	Alan B. Catherall
	Chief Financial Officer
	Executive Vice President and
	Principle Financial and Accounting Officer

NUMEREX CORP /PA/ - FORM 10-Q - August 9, 2012

Attached files

NUMEREX CORP /PA/ Reports