Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - NUMEREX CORP /PA/ | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - NUMEREX CORP /PA/ | ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - NUMEREX CORP /PA/ | ex32-1.htm |
EX-32.2 - EXHIBIT 32.2 - NUMEREX CORP /PA/ | ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - NUMEREX CORP /PA/ | ex31-2.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 September 30, 2014
|
||
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: 000-22920
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.)
|
3330
Cumberland Parkway, Suite 700
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 (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yesþ 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 (Do not check
if a smaller reporting company) 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 November 5, 2014, 18,976,496 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
TABLE
OF CONTENTS
Page
|
||
PART
I—FINANCIAL INFORMATION
|
||
Item
1. Financial Statements.
|
3
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
|
18
|
|
Item
3. Quantitative and Qualitative Disclosures about Market Risk.
|
28
|
|
Item
4. Controls and Procedures.
|
28
|
|
PART
II—OTHER INFORMATION
|
||
Item
1. Legal Proceedings.
|
29
|
|
Item
1A. Risk Factors.
|
29
|
|
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
|
29
|
|
Item
3. Defaults Upon Senior Securities.
|
29
|
|
Item
4. Mine Safety Disclosures.
|
29
|
|
Item
5. Other Information.
|
29
|
|
Item
6. Exhibits.
|
30
|
|
SIGNATURES
|
2 |
NUMEREX
CORP. AND SUBSIDIARIES
PART
I—FINANCIAL INFORMATION
|
||
Item
1. Financial Statements.
Index
to Financial Statements
|
Page
|
|
Unaudited
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
|
4
|
|
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September
30, 2014 and 2013
|
5
|
|
Unaudited
Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2014
|
6
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013
|
7
|
|
Unaudited
Condensed Notes to Consolidated Financial Statements
|
8
|
|
3 |
NUMEREX
CORP. AND SUBSIDIARIES
|
||||||||
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
||||||||
(In
thousands)
|
||||||||
September
30,
|
December
31,
|
|||||||
2014
|
2013
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 16,357 | $ | 25,603 | ||||
Accounts
receivable, less allowance for doubtful accounts of $1,495 and $674
|
13,018 | 9,385 | ||||||
Financing
receivables, current
|
1,568 | 1,223 | ||||||
Inventory,
net of reserve for obsolescence
|
8,250 | 8,315 | ||||||
Prepaid
expenses and other current assets
|
1,704 | 1,833 | ||||||
Deferred
tax assets, current
|
2,742 | 2,742 | ||||||
Assets
of discontinued operations
|
- | 840 | ||||||
TOTAL
CURRENT ASSETS
|
43,639 | 49,941 | ||||||
Financing
receivables, less current portion
|
3,133 | 3,029 | ||||||
Property
and equipment, net of accumulated depreciation and amortization of $3,257 and $1,879
|
4,503 | 3,125 | ||||||
Software,
net of accumulated amortization
|
6,255 | 6,381 | ||||||
Other
intangibles, net of accumulated amortization
|
19,518 | 5,617 | ||||||
Goodwill
|
48,340 | 26,941 | ||||||
Deferred
tax assets, less current portion
|
2,596 | 3,958 | ||||||
Other
assets
|
2,210 | 2,298 | ||||||
TOTAL
ASSETS
|
$ | 130,194 | $ | 101,290 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 11,531 | $ | 9,953 | ||||
Accrued
expenses and other current liabilities
|
2,872 | 2,004 | ||||||
Deferred
revenues
|
1,993 | 1,894 | ||||||
Current
portion of long-term debt
|
3,758 | 633 | ||||||
Obligations
under capital leases
|
233 | 306 | ||||||
Liabilities
of discontinued operations
|
- | 207 | ||||||
TOTAL
CURRENT LIABILITIES
|
20,387 | 14,997 | ||||||
Long-term
debt, less current portion
|
20,625 | 475 | ||||||
Obligations
under capital lease, less current portion
|
- | 148 | ||||||
Other
liabilities
|
1,590 | 1,693 | ||||||
TOTAL
LIABILITIES
|
42,602 | 17,313 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Preferred
stock, no par value; authorized 3,000; none issued
|
- | - | ||||||
Class
A common stock, no par value; 30,000 authorized; 20,269 and 20,069 issued; 18,969 and 18,828 outstanding
|
- | - | ||||||
Class
B common stock, no par value; authorized 5,000; none issued
|
- | - | ||||||
Additional
paid-in capital
|
98,371 | 95,777 | ||||||
Treasury
stock, at cost, 1,300 and 1,241 shares
|
(5,352 | ) | (5,238 | ) | ||||
Accumulated
other comprehensive loss
|
(34 | ) | (24 | ) | ||||
Accumulated
deficit
|
(5,393 | ) | (6,538 | ) | ||||
TOTAL
SHAREHOLDERS’ EQUITY
|
87,592 | 83,977 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 130,194 | $ | 101,290 |
The
accompanying notes are an integral part of these financial statements.
4 |
NUMEREX
CORP. AND SUBSIDIARIES
|
||||||||||||||||
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
AND
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Net
sales:
|
||||||||||||||||
Subscription
and support revenues
|
$ | 17,429 | $ | 13,482 | $ | 47,530 | $ | 37,932 | ||||||||
Embedded
devices and hardware
|
8,234 | 8,469 | 21,483 | 17,727 | ||||||||||||
Total
net sales
|
25,663 | 21,951 | 69,013 | 55,659 | ||||||||||||
Cost
of sales, exclusive of a portion of depreciation and amortization shown below:
|
||||||||||||||||
Subscription
and support revenues
|
7,011 | 5,622 | 18,647 | 16,531 | ||||||||||||
Embedded
devices and hardware
|
7,365 | 7,348 | 18,517 | 16,575 | ||||||||||||
Gross
profit
|
11,287 | 8,981 | 31,849 | 22,553 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Sales
and marketing
|
3,029 | 2,636 | 9,066 | 6,907 | ||||||||||||
General
and administrative
|
3,429 | 3,174 | 11,207 | 9,828 | ||||||||||||
Engineering
and development
|
2,430 | 1,317 | 5,794 | 3,626 | ||||||||||||
Depreciation
and amortization
|
1,597 | 1,209 | 4,570 | 3,485 | ||||||||||||
Operating
income (loss)
|
802 | 645 | 1,212 | (1,293 | ) | |||||||||||
Interest
expense
|
278 | 75 | 564 | 220 | ||||||||||||
Other
(income) expense, net
|
(97 | ) | 30 | (1,272 | ) | 25 | ||||||||||
Income
(loss) from continuing operations before income taxes
|
621 | 540 | 1,920 | (1,538 | ) | |||||||||||
Income
tax expense (benefit)
|
358 | (35 | ) | 283 | (2,549 | ) | ||||||||||
Income
from continuing operations, net of income taxes
|
263 | 575 | 1,637 | 1,011 | ||||||||||||
Loss
from discontinued operations, net of income taxes
|
- | - | (492 | ) | (1,437 | ) | ||||||||||
Net
income (loss)
|
263 | 575 | 1,145 | (426 | ) | |||||||||||
Other
items of comprehensive (loss) income, net of income taxes:
|
||||||||||||||||
Foreign
currency translation adjustment
|
(13 | ) | 8 | (10 | ) | (13 | ) | |||||||||
Comprehensive
income (loss)
|
$ | 250 | $ | 583 | $ | 1,135 | $ | (439 | ) | |||||||
Basic
earnings per share:
|
||||||||||||||||
Income
from continuing operations
|
$ | 0.01 | $ | 0.03 | $ | 0.09 | $ | 0.06 | ||||||||
Loss
from discontinued operations
|
0.00 | 0.00 | (0.03 | ) | (0.08 | ) | ||||||||||
Net
income (loss)
|
$ | 0.01 | $ | 0.03 | $ | 0.06 | $ | (0.02 | ) | |||||||
Diluted
earnings per share:
|
||||||||||||||||
Income
from continuing operations
|
$ | 0.01 | $ | 0.03 | $ | 0.09 | $ | 0.05 | ||||||||
Loss
from discontinued operations
|
0.00 | 0.00 | (0.03 | ) | (0.07 | ) | ||||||||||
Net
income (loss)
|
$ | 0.01 | $ | 0.03 | $ | 0.06 | $ | (0.02 | ) | |||||||
Weighted
average shares outstanding used in computing earnings per share:
|
||||||||||||||||
Basic
|
18,956 | 18,565 | 18,900 | 18,193 | ||||||||||||
Diluted
|
19,263 | 19,014 | 19,253 | 18,746 |
The
accompanying notes are an integral part of these financial statements.
5 |
NUMEREX
CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Accumulated
Other
|
Total
|
|||||||||||||||||||||||
Common
|
Additional
|
Treasury
|
Comprehensive
|
Accumulated
|
Shareholders’
|
|||||||||||||||||||
Shares
|
Paid-in
Capital
|
Stock
|
Income
(Loss)
|
Deficit
|
Equity
|
|||||||||||||||||||
Balance
at January 1, 2014
|
20,069 | $ | 95,777 | $ | (5,238 | ) | $ | (24 | ) | $ | (6,538 | ) | $ | 83,977 | ||||||||||
Equity-based
compensation expense
|
1 | 1,833 | - | - | - | 1,833 | ||||||||||||||||||
Equity-based
compensation plan activity
|
199 | 935 | - | - | - | 935 | ||||||||||||||||||
Value
of shares retained to pay employee taxes
|
- | (174 | ) | (114 | ) | - | - | (288 | ) | |||||||||||||||
Translation
adjustment
|
- | - | - | (10 | ) | - | (10 | ) | ||||||||||||||||
Net
income
|
- | - | - | - | 1,145 | 1,145 | ||||||||||||||||||
Balance
at September 30, 2014
|
20,269 | $ | 98,371 | $ | (5,352 | ) | $ | (34 | ) | $ | (5,393 | ) | $ | 87,592 |
The
accompanying notes are an integral part of these financial statements.
6 |
NUMEREX
CORP. AND SUBSIDIARIES
|
||||||||
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
(In
thousands)
|
||||||||
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2014
|
2013
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 1,145 | $ | (426 | ) | |||
Less loss from discontinued operations, net of income taxes
|
(492 | ) | (1,437 | ) | ||||
Income
from continuing operations, net of income taxes
|
1,637 | 1,011 | ||||||
Adjustments
to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
4,969 | 3,552 | ||||||
Equity-based compensation expense
|
1,833 | 1,323 | ||||||
Deferred income taxes
|
36 | (2,473 | ) | |||||
Bad debt expense
|
364 | 350 | ||||||
Inventory reserves
|
415 | 704 | ||||||
Gain on sale of cost method investment
|
(1,109 | ) | - | |||||
Other non-cash expense
|
76 | 187 | ||||||
Changes in assets and liabilities, net of effects of acquisitions:
|
||||||||
Accounts and financing receivables
|
(1,638 | ) | (2,886 | ) | ||||
Inventory, net
|
613 | (1,045 | ) | |||||
Accounts payable, accrued expenses and other liabilities
|
208 | 412 | ||||||
Deferred
revenue
|
(77 | ) | 990 | |||||
Other
|
(275 | ) | 1,210 | |||||
Net
cash provided by operating activities
|
7,052 | 3,335 | ||||||
Cash
flows from investing activities:
|
||||||||
Net
cash paid for acquisition
|
(37,113 | ) | (177 | ) | ||||
Purchases
of property and equipment
|
(1,335 | ) | (1,002 | ) | ||||
Purchases
of intangible and other assets
|
(2,709 | ) | (2,599 | ) | ||||
Proceeds
from sale-leaseback of equipment
|
- | 716 | ||||||
Proceeds
from sale of cost basis investment
|
1,309 | - | ||||||
Other
|
- | (11 | ) | |||||
Net
cash used in investing activities
|
(39,848 | ) | (3,073 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Principal
payments on debt
|
(1,725 | ) | (6,975 | ) | ||||
Principal
payments on capital lease obligations
|
(221 | ) | (198 | ) | ||||
Proceeds
from underwritten offering, net of offering costs
|
- | 27,731 | ||||||
Proceeds
from long-term debt
|
25,000 | - | ||||||
Equity-based
compensation plan activity
|
647 | (28 | ) | |||||
Deferred
financing costs
|
(293 | ) | - | |||||
Proceeds
from exercise of warrants
|
- | 193 | ||||||
Net
cash provided by financing activities
|
23,408 | 20,723 | ||||||
Cash
flows from discontinued operations:
|
||||||||
Cash
provided by (used in) operating activities
|
142 | (105 | ) | |||||
Cash
provided by (used in) investing activities
|
- | (11 | ) | |||||
Net
cash provided by (used in) discontinued operations
|
142 | (116 | ) | |||||
Net
(decrease) increase in cash and cash equivalents
|
(9,246 | ) | 20,869 | |||||
Cash
and cash equivalents at beginning of year
|
25,603 | 4,948 | ||||||
Cash
and cash equivalents at end of period
|
$ | 16,357 | $ | 25,817 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 488 | $ | 144 | ||||
Cash
paid for income taxes
|
83 | 76 | ||||||
Disclosure
of non-cash investing and financing activities:
|
||||||||
Note
issued in conjunction with disposal of discontinued operations
|
35 | - | ||||||
Capital
Expenditures in Accounts Payable
|
386 | - | ||||||
Capital
leases
|
- | 716 | ||||||
Common
stock issuable in connection with acquisition
|
- | 925 |
The
accompanying notes are an integral part of these financial statements.
7 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
NOTE
A – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
used herein, except as otherwise indicated by context, references to “we,” “us,” or “Numerex”
refer to Numerex Corp. and its subsidiaries. We are a leading provider of interactive and on-demand machine-to-machine (M2M) enterprise
solutions enabling the Internet of Things (IoT). The Company provides its technology and services through its integrated
M2M horizontal platforms, which are generally sold on a subscription basis. The Company offers Numerex DNA® that may include
hardware and smart Devices, cellular and satellite Network services, and software Applications that are delivered through Numerex
FAST® (Foundation Application Software Technology). The Company also provides business services to enable the development
of efficient, reliable, and secure solutions while accelerating deployment. Numerex is ISO 27001 information security-certified,
highlighting the Company’s focus on M2M data security, service reliability and around-the-clock support of its customers’
M2M solutions.
We
prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America, referred to as GAAP, for interim financial information and the Rules and Regulations
issued by the Securities Exchange Commission, or SEC, as applicable. These financial statements include all of our accounts and
those of our wholly-owned subsidiaries. We have eliminated intercompany transactions and balances in consolidation.
Certain
information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed
or omitted, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion
of management, the accompanying financial statements reflect all adjustments, which consist of normal recurring adjustments unless
otherwise disclosed, considered necessary for a fair presentation of our financial position as of September 30, 2014 and our operating
results and cash flows for the interim periods presented. The accompanying condensed consolidated balance sheet as of December
31, 2013 was derived from our audited financial statements, but does not include all disclosures required by GAAP. The financial
information presented herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31,
2013 which includes information and disclosures not included in this quarterly report.
The
preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ materially from these
estimates. Operating results for the three and nine months ended September 30, 2014 may not be indicative of the results that
may be expected for the year ending December 31, 2014 or any future periods.
Reclassifications
Certain
prior period amounts in the accompanying consolidated balance sheet have been reclassified to conform to the current period presentation.
NOTE
B – MERGER AND ACQUISITIONS
2014
Merger
On
May 5, 2014, in accordance with the terms and conditions of the merger agreement, we merged our wholly-owned subsidiary with and
into Omnilink Systems Inc. (Omnilink) with Omnilink surviving the merger as a wholly-owned subsidiary of the Company. The
purchase price of $37.5 million was composed of a cash payment of $37.3 million and a working capital adjustment of $0.2 million,
subject to post-closing purchase price adjustments and escrows as provided in the merger agreement.
Omnilink
provides tracking and monitoring services for people and valuable assets via Omnilink’s M2M platform that connects
hardware, networks, software, and support services. We expect our combination with Omnilink to provide operating synergies
and create potential growth opportunities through product enhancement and channel expansion. The assets, liabilities and
operating results of Omnilink are reflected in our condensed consolidated financial statements commencing from the merger
date. Transaction costs of $1.0 million for the nine months ended September 30, 2014 have been recorded in general and
administrative expense in the accompanying consolidated statement of operations and comprehensive income (loss).
8 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the closing date of
the Omnilink merger (dollars in thousands):
Estimated
|
||||||||
Fair
Value
|
Useful
Lives
|
|||||||
Cash
|
$ | 195 | n/a | |||||
Accounts
receivable
|
2,677 | n/a | ||||||
Inventory
|
963 | n/a | ||||||
Prepaid
and other assets
|
377 | n/a | ||||||
Property
and equipment
|
1,613 | 4 | (a) | |||||
Other
non-current assets
|
2 | n/a | ||||||
Customer
relationships
|
6,056 | 11 | ||||||
Technology
|
4,998 | 14 | ||||||
Trade
names
|
3,632 | Indefinite
|
||||||
Goodwill
|
21,310 | Indefinite
|
||||||
Total
identifiable assets acquired
|
41,823 | |||||||
Accounts
payable
|
(1,756 | ) | n/a | |||||
Accrued
expenses
|
(1,195 | ) | n/a | |||||
Deferred
revenue
|
(64 | ) | n/a | |||||
Deferred
tax liability
|
(1,326 | ) | n/a | |||||
Total
liabilities assumed
|
(4,341 | ) | ||||||
Net
assets acquired
|
$ | 37,482 |
(a)
|
The weighted average remaining useful life
for all property and equipment is approximately four years.
|
The
above fair value purchase price allocations are provisional and subject to change. The total purchase consideration for the merger
was allocated to identifiable assets purchased and liabilities assumed based on fair value. The estimated fair value attributed
to intangible assets, other than Goodwill, was based on appropriate valuation techniques. The final valuation of assets acquired
and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date. Given
the scope of the operational integration and valuation efforts, as well as the complexity presented in the valuation of the tax
effects related to tax attributes and other deferred tax items, the valuation of certain assets and liabilities is still being
completed. The primary area that is not yet finalized relates to the calculation of deferred taxes and the corresponding
effect on the residual value of goodwill. We have recorded deferred tax liabilities for indefinite lived assets which will not
be offset against deferred tax assets.
The
gross amount of accounts receivable in the table above is $2.9 million. Based on the nature and financial strength of the customers,
we expect to collect amounts due for the accounts receivable of $2.7 million. Our best estimate at the merger date of the contractual
cash flows not expected to be collected is $0.2 million.
The
residual allocation to goodwill results from such factors as an assembled workforce, expected significant synergies for market
growth and profitability as well as Omnilink’s service and product lines contributing to our becoming the market leader
in select M2M vertical markets. The total amount of goodwill will not be deductible for tax purposes.
9 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
Unaudited
Pro forma Results
The
condensed consolidated statement of operations for the nine months ended September 30, 2014 includes approximately $5.4 million
of revenues contributed by Omnilink products and services for the period from May 5, 2014 through September 30, 2014. Immediately
upon closing the merger, we began integrating Omnilink’s operations with our existing operations. As a result, the
legacy and acquired businesses are now sharing various selling, general and administrative functions. Any measure of
stand-alone profitability for Omnilink in the post-acquisition period is not material and cannot be calculated accurately due
to the shared cost structure of the acquired and legacy businesses.
The
following table presents the Company’s unaudited pro forma consolidated net sales, income (loss) from continuing operations
before income taxes and net income (loss) for the nine months ended September 30, 2014 and 2013, based on the historical statements
of operations of Numerex and of Omnilink, giving effect to the Omnilink merger and related financing as if they had occurred on
January 1, 2013. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated
results of operations actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited
pro forma financial information does not attempt to project the future results of operations of the combined company.
Unaudited
Pro Forma Results
|
||||||||
Nine
Months Ended
|
||||||||
September
30,
|
September
30,
|
|||||||
2014
|
2013
|
|||||||
Net
sales
|
$ | 73,412 | $ | 62,261 | ||||
Income
(loss) from continuing operations,
|
||||||||
before
income tax
|
2,134 | (3,234 | ) | |||||
Net
income (loss)
|
1,725 | (490 | ) | |||||
Basic
and diluted income (loss) per
|
||||||||
common
share
|
$ | 0.09 | $ | (0.13 | ) |
The
unaudited pro forma financial information above gives effect to the following:
●
|
Adjust depreciation expense for a 2014
net reduction of $88,000 and a 2013 net reduction of $44,000 for the effect of recording property and equipment at estimated fair
value.
|
●
|
Adjust amortization expense for a 2014
net increase of $0.3 million and a 2013 net increase of $0.7 million for the effect of recording intangible assets at estimated
fair value.
|
●
|
Adjust
interest expense for a 2014 net increase of $0.1 million and a 2013 net increase of $0.5 million due to the repayment of Omnilink’s
debt balances in conjunction with the merger and the merger-related debt incurred by Numerex and related amortization of deferred
financing costs.
|
●
|
Adjust
expense by $1.0 million to reclassify expense recorded for merger-related costs in the nine month period ended September 30, 2014,
to the nine month period ended September 30, 2013, to reflect the expenses as of the pro forma merger date of January 1, 2013.
|
The
unaudited pro forma results do not include any revenue or cost reductions that may be achieved through the business combination,
or the impact of non-recurring items directly related to the business combination.
2013
Acquisitions
On
December 2, 2013, we acquired substantially all the assets, products and technologies of a small technology company that provided
remote monitoring and management of bulk storage tanks. The acquisition expands the scope and scale of our capabilities in supply
chain and remote monitoring markets. Total consideration was $2.8 million in cash, of which $0.2 million will be paid on December
2, 2014. Goodwill of $1.5 million was recorded in connection with this acquisition. Pro forma results of operations were not presented
as the acquisition was not material to our results of operations for the periods presented.
10 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
On
February 1, 2013, we purchased substantially all of the assets and business of a small technology company that provides products
and services for environmental monitoring, wireless remote control and monitoring, wireless sensor networks, and connected device
consulting. We acquired the company’s assets to expand our technical capabilities and the market segments we serve. Total
consideration was $1.1 million, comprised of $0.2 million in cash and 73,587 shares of our common stock having a fair value at
the time of issuance of $0.9 million and the assumption of certain liabilities. The shares of common stock are subject to various
time-based selling restrictions. Pro forma results of operations were not presented as the acquisition was not material to our
results of operations for the periods presented.
NOTE
C – DISCONTINUED OPERATIONS
During
the year ended December 31, 2013, we decided to exit certain businesses and related products that are not core to our future business
plans. These non-core businesses include BNI Solutions, Inc. (BNI), Digilog, Inc. and DCX Systems, Inc. These businesses were
previously reported in our consolidated financial statements as a separate segment, “Other Services”. The related
products and services included video conferencing hardware and installation of telecommunications equipment, all of which were
unrelated to our core M2M communication products and services.
All
assets and liabilities of the discontinued operations were reclassified into two line items, assets and liabilities of discontinued
operations, and classified as current in the accompanying December 31, 2013 condensed consolidated balance sheets. All revenues
and expenses of the discontinued operations were reclassified and presented in the accompanying condensed consolidated statements
of operations and comprehensive income (loss) as loss from discontinued operations, net of income taxes, after income from continuing
operations, net of income taxes and before net loss. Similarly, all cash flows of the discontinued operations were reclassified
and presented in the accompanying condensed consolidated statements of cash flows as cash flows from discontinued operations.
On
June 30, 2014, we completed the sale and disposition of all of the capital stock of BNI and remaining discontinued operations
were subsequently dissolved. The following table presents the summarized financial results of the discontinued operations for
the nine months ended September 30, 2014, and the three and nine months ended September 30, 2013 (in thousands):
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||
September
30,
|
September
30,
|
|||||||||||
2014
|
2013
|
2013
|
||||||||||
Revenues
from discontinued operations
|
$ | 207 | $ | 960 | $ | 377 | ||||||
Loss
(income) from discontinued operations before
|
||||||||||||
income
taxes
|
(285 | ) | (1,527 | ) | 125 | |||||||
Income
tax benefit (expense)
|
127 | 90 | (125 | ) | ||||||||
(Loss)
income from discontinued operations, net of
|
||||||||||||
income
taxes
|
(158 | ) | (1,437 | ) | - | |||||||
Loss
on disposal of subsidiary included in
|
||||||||||||
discontinued
operations
|
(309 | ) | - | - | ||||||||
Loss
on dissolution of subsidiaries included in
|
||||||||||||
discontinued
operations
|
(25 | ) | - | - | ||||||||
Net
loss from discontinued operations
|
$ | (492 | ) | $ | (1,437 | ) | $ | - |
11 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
There
are no assets or liabilities reported as discontinued operations as of September 30, 2014 due to our disposal and dissolution
of all discontinued operations. The following table summarizes the assets and liabilities reported as discontinued operations
as of December 31, 2013 (in thousands):
December
31,
|
||||
2013
|
||||
ASSETS
|
||||
CURRENT
ASSETS
|
||||
Accounts
receivable, less allowance
|
||||
for
doubtful accounts of $600
|
$ | 253 | ||
Inventory,
net of reserve for obsolescence of $30
|
122 | |||
Prepaid
expenses and other current assets
|
164 | |||
TOTAL
CURRENT ASSETS
|
539 | |||
Property
and equipment, net
|
9 | |||
Other
assets
|
292 | |||
TOTAL
ASSETS OF DISCONTINUED OPERATIONS
|
$ | 840 | ||
LIABILITIES
|
||||
CURRENT
LIABILITIES
|
||||
Accounts
payable
|
$ | 10 | ||
Accrued
expenses and other current liabilities
|
171 | |||
Deferred
revenues
|
26 | |||
TOTAL
LIABILITIES OF DISCONTINUED OPERATIONS
|
$ | 207 |
We
recorded a pre-tax loss on the disposal of discontinued operations of $0.3 million for the nine months ended September 30, 2014
related to the sale of assets related to BNI. The loss on the disposal of discontinued operations is calculated as follows:
Proceeds
|
$ | 35,000 | ||
Less:
|
||||
Carrying
value
|
(344,016 | ) | ||
Pre-tax
loss on disposal of discontinued operations
|
$ | (309,016 | ) | |
We
recorded a pre-tax loss of $25,000 on the dissolution of other subsidiaries included in discontinued operations for the nine months
ended September 30, 2014.
NOTE
D - INVENTORY
Inventory
consisted of the following (in thousands):
September
30,
|
December
31,
|
|||||||
2014
|
2013
|
|||||||
Raw
materials
|
$ | 889 | $ | 1,503 | ||||
Finished
goods
|
8,620 | 7,922 | ||||||
Reserve
for obsolescence
|
(1,259 | ) | (1,110 | ) | ||||
$ | 8,250 | $ | 8,315 |
12 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
NOTE
E – INTANGIBLE ASSETS
Intangible
Assets Other Than Goodwill
Intangible
assets other than goodwill are summarized as follows (dollars in thousands):
As
of September 30, 2014
|
As
of December 31, 2013
|
|||||||||||||||||||||||||||
Weighted-Average
Remaining
Lives |
Gross
Carrying Amount |
Accumulated
Amortization
|
Net
Book
Value |
Gross
Carrying Amount |
Accumulated
Amortization
|
Net
Book
Value |
||||||||||||||||||||||
Purchased
and developed software
|
1.6 | $ | 9,800 | $ | (5,696 | ) | $ | 4,104 | $ | 8,836 | $ | (3,706 | ) | $ | 5,130 | |||||||||||||
Software
in development
|
n/a | 2,151 | - | 2,151 | 1,251 | - | 1,251 | |||||||||||||||||||||
Total
software
|
11,951 | (5,696 | ) | 6,255 | 10,087 | (3,706 | ) | 6,381 | ||||||||||||||||||||
Licenses
|
0.5 | 12,763 | (11,813 | ) | 950 | 12,646 | (11,415 | ) | 1,231 | |||||||||||||||||||
Customer
relationships
|
8.8 | 8,287 | (1,124 | ) | 7,163 | 2,231 | (602 | ) | 1,629 | |||||||||||||||||||
Technologies
|
13.6 | 4,998 | (149 | ) | 4,849 | - | - | - | ||||||||||||||||||||
Patents
and trademarks
|
4.3 | 4,082 | (1,536 | ) | 2,546 | 3,260 | (1,172 | ) | 2,088 | |||||||||||||||||||
Trade
names
|
Indefinite
|
3,632 | - | 3,632 | - | - | - | |||||||||||||||||||||
Other
|
n/a | 378 | - | 378 | 669 | - | 669 | |||||||||||||||||||||
Total
other intangibles
|
34,140 | (14,622 | ) | 19,518 | 18,806 | (13,189 | ) | 5,617 | ||||||||||||||||||||
$ | 46,091 | $ | (20,318 | ) | $ | 25,773 | $ | 28,893 | $ | (16,895 | ) | $ | 11,998 |
Remaining
useful lives in the preceding table were calculated on a weighted average basis as of September 30, 2014. We
did not incur significant costs to renew or extend the term of acquired intangible assets during the three or nine months ending
September 30, 2014. We acquired intangible assets, excluding goodwill, totaling $14.7
million in the merger during the nine months ended September 30, 2014. See Note B – Merger and Acquisitions.
Amortization
expense related to intangible assets was $1.2 million and $0.9 million for the three months ended September 30, 2014 and 2013,
respectively, and was $3.4 million and $2.7 million for the nine months ended September 30, 2014 and 2013, respectively. Amortization
expense recorded in cost of subscription revenues in the accompanying condensed consolidated statements of operations and comprehensive
(loss) income was $0.2 million and $0.1 million for the three months ended September 30, 2014 and 2013, respectively, and was
$0.4 million and $0.2 million for the nine months ended September 30, 2014 and 2013, respectively.
Goodwill
The
carrying amount of goodwill for the nine months ended September 30, 2014 is as follows (in thousands):
December
31, 2013
|
$ | 26,941 | ||
Acquisition
|
21,310 | |||
Measurement
period adjustment
|
89 | |||
September
30, 2014
|
$ | 48,340 |
Acquisition
related goodwill additions were the result of the Omnilink merger. See Note B - Merger and Acquisitions.
The
measurement period adjustment is related to lease receivables on the opening balance sheet of our December 2013 acquisition with
no effect on the statement of operations and an immaterial effect on the associated balance sheet captions.
Accumulated
impairment losses were $6.1 million as of September 30, 2014 and December 31, 2013. We did not record any goodwill impairment
losses in continuing operations for the three or nine months ended September 30, 2014 or 2013.
13 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
NOTE
F – DEBT
Debt
consisted of the following (dollars in thousands):
September
30,
|
December
31,
|
|||||||
2014
|
2013
|
|||||||
Seller
financed note payable, with interest at 4.25%, monthly
|
||||||||
payments
of principal and interest, secured by equipment,
|
||||||||
due
September 2015
|
$ | 633 | $ | 1,108 | ||||
Note
payable to Silicon Valley Bank, with interest at our
|
||||||||
option
of prime rate or LIBOR rate plus margin, quarterly
|
||||||||
payments
of principal and interest, secured by assets of
|
||||||||
our
subsidiaries, due May 2019
|
23,750 | - | ||||||
24,383 | 1,108 | |||||||
Less
current portion of long-term debt
|
3,758 | 633 | ||||||
Noncurrent
portion of long-term debt
|
$ | 20,625 | $ | 475 |
On
May 5, 2014, we entered into a Second Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with
Silicon Valley Bank in order to, among other things, establish a term loan of $25.0 million and a revolving line of credit of
up to $5.0 million (collectively, the “Credit Facility”). The proceeds from the term loan were used to finance the
Omnilink merger. See Note B – Merger and Acquisitions.
Under
the Loan Agreement, the maturity date of the loan is May 5, 2019 with regular required quarterly principal payments beginning
June 30, 2014 equal to one fourth of 10% of the original principal amount through the quarter ended March 31, 2015 and increments
to 15% for the quarterly periods through March 31, 2017 and to 20% for the quarterly periods through March 31, 2019 with any unpaid
principal due at maturity. The interest rate applicable to amounts drawn from the Credit Facility currently is 3.4% as of September
30, 2014 and is, at our option, determined by reference to the prime rate or LIBOR rate plus a margin established in the Loan
Agreement. The Credit Facility is secured by all assets, including our intellectual property. The Loan Agreement includes customary
representations and warranties as well as affirmative and negative covenants.
NOTE
G – LOSS CONTINGENCY
We
have a loss contingency for a billing dispute with one of our vendors. The contingency relates to the transition to an amended
agreement with the vendor. The financial statements as of September 30, 2014 reflect our best estimate of costs related to the
transition to the amended agreement. However, if we cannot satisfactorily resolve the dispute, we may owe the vendor an additional
amount of up $0.5 million.
NOTE
H – EQUITY-BASED COMPENSATION
At
our annual shareholder meeting on May 16, 2014, our shareholders approved the 2014 Stock and Incentive Plan (the “Plan”)
to replace the Numerex Corporation 2006 Long Term Incentive Plan, as amended (the “2006 Plan”). The maximum number
of shares of Class A common stock that may be issued under the Plan is 3.3 million shares less any shares remaining to be issued
from the 2006 Plan plus the number of shares, but not in excess of 500,000 shares, covered by awards providing for the issuance
of shares granted under the 2006 Plan that cease to be covered by such awards by reason of termination, expiration or forfeiture
of the award after adoption of the Plan.
14 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
NOTE
I – INCOME TAXES
We
calculate our interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At
the end of each interim period, we make our best estimate of the annual expected effective tax rate and apply that rate
to our ordinary year-to-date income or loss. In addition, we calculate a year-to-date adjustment to increase or decrease
our income tax provision to take into account our current expected effective tax rate. The tax or benefit related to significant,
unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually
computed and recognized in the interim period in which those items occur.
For
the three and nine months ended September 30, 2014, we recorded income tax expense from continuing operations of $0.4 million
and $0.3 million, respectively, as compared to an income tax benefit of less than $0.1 million and $2.5 million, respectively,
for the three and nine months ended September 30, 2013. Our income tax expense of $0.4 million for the three months ended
September 30, 2014 includes a year-to-date adjustment of $0.2 million or 31.3% of the quarter’s pre-tax income, to increase
our tax provision for the six months ended June 30, 2014 to our current estimated effective tax rate. Our effective
tax rates for the three and nine months ended September 30, 2014 differed from the federal statutory rate applied to income and
losses before income taxes primarily as a result of a number of discrete items, including (1) the effect of expenses that are
not deductible for income tax purposes, including a portion of transaction costs incurred in the Omnilink merger and (2) state
income taxes, including the tax effect of changes in effective state income tax rates resulting from the merger with Omnilink.
In addition, the effective tax rate for the nine months ended September 30, 2014, was reduced for the income tax benefit from
the capital loss on the disposal of BNI due to the ability to offset capital gains in our current tax year and to carry back for
capital gains in prior tax years.
For
the three months ended September 30, 2013, the difference between our effective tax rate and the federal statutory tax rate resulted
primarily from a reduction in our reserve for state income taxes related to unrecognized tax benefits. The difference between
our effective tax rate and the federal statutory tax rate for the nine months ended September 30, 2013 was primarily from our
tax accounting method change related to our 2003 acquisition of our former joint venture partner’s interest in our Cellemetry
LLC subsidiary. State tax accruals related to unrecognized tax benefits also contributed to the difference between the effective
and federal statutory tax rates for the nine months ended September 30, 2013.
We
continue to maintain a valuation allowance for deferred tax assets related to certain state and foreign net operating losses for
which we have determined it is more likely than not expiration will occur before utilization. We file U.S., state and foreign
income tax returns in jurisdictions with varying statutes of limitation. The 2010 through 2013 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.
We
are in the process of finalizing the fair value purchase price allocations for the Omnilink acquisition. Income taxes related
to Omnilink have not been recorded because the analysis for deferred taxes related to some assets, liabilities, tax attributes
and other items is incomplete and we have not yet determined the magnitude of net deferred tax assets and associated valuation
allowances, if any. See Note B – Merger and Acquisitions.
NOTE
J – OTHER (INCOME) EXPENSE, NET
Other
(income) expense, net includes $1.1 million for the nine months ended September 30, 2014 for a pre-tax gain on the sale of a cost
method investment in a privately-held business. The carrying value of our investment was $0.2 million and we sold it for proceeds
of $1.3 million.
NOTE
K – NET EARNINGS PER SHARE
Basic
earnings per share is computed by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period excluding the dilutive impact of common stock equivalents. Diluted earnings per share
include the effect of all potentially dilutive securities on earnings per share. The dilutive effect of outstanding equity-based
compensation awards and warrants is computed using the treasury stock method. The computation of diluted earnings per share does
not assume exercise of securities that would have an anti-dilutive effect on earnings.
15 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
The
following table presents a reconciliation of the shares used in the calculation of basic and diluted net income (loss) per share
from continuing operations contained in our condensed consolidated statements of operations and comprehensive income (loss) (in
thousands):
For
the three months ended
|
For
the nine months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Income
from continuing operations, net of income taxes
|
$ | 263 | $ | 575 | $ | 1,637 | $ | 1,011 | ||||||||
Weighted
average shares outstanding:
|
||||||||||||||||
Basic
|
18,956 | 18,565 | 18,900 | 18,193 | ||||||||||||
Dilutive
effect of common stock equivalents
|
307 | 449 | 353 | 553 | ||||||||||||
Diluted
|
19,263 | 19,014 | 19,253 | 18,746 | ||||||||||||
Anti-dilutive
equity-based compensation awards and warrants
|
757 | 626 | 757 | 626 |
NOTE
L – RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2014, the Financial Accounting Standards Board (FASB) issued guidance that applies to all reporting entities that grant their
employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be
achieved after the requisite service period. It requires that a performance target that affects vesting, and that could be achieved
after the requisite service period, be treated as a performance condition and follows existing accounting guidance for the treatment
of performance conditions. The standard will be effective for us prospectively for fiscal years, and interim reporting periods
within those years, beginning January 1, 2016, with early adoption permitted. We do not expect the adoption of this guidance to
have a material impact on our financial position or results of operations.
In
May 2014, the FASB issued new accounting guidance for revenue recognized from contracts with customers. The core principle
of the guidance is that a company will recognize revenue when it transfers promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing
so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation. The guidance will become effective for us for fiscal
years, and interim reporting periods within those years, beginning January 1, 2017 and will require retrospective application. We
are currently in the process of evaluating the impact of adoption on our consolidated financial statements.
In
April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity.
The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s
financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments
also expand the disclosure requirements for discontinued operations. The amendments are effective for us prospectively for fiscal
years, and interim reporting periods within those years, beginning January 1, 2015 (early adoption is permitted only for disposals
that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact
on our consolidated financial position or results of operations.
16 |
NUMEREX
CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014
In
July 2013, the FASB issued new accounting guidance related to the presentation of unrecognized tax benefits when a net operating
loss carry-forward, a similar tax loss, or a tax credit carry-forward exists. This guidance clarifies that an unrecognized tax
benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward if such settlement is required
or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carry-forward, a similar
tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction
or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose,
the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred
tax assets. This guidance was effective for us prospectively for fiscal years, and interim periods within those years, beginning
January 1, 2014. Because the guidance only affects presentation, adoption did not have a material effect on our financial condition
or results of operations.
In
March 2013, the FASB issued an update to the accounting standards to clarify the applicable guidance for a parent company’s
accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries
or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance was effective for us prospectively
for fiscal periods beginning after January 1, 2014. Adoption did not have a material impact on our financial condition or
results of operations.
17 |
Item 2.
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
|
Forward
Looking Statements
This
document contains, and other statements may contain, forward-looking statements with respect to our 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. We caution that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date
of this filing, and we assume 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: the risks and uncertainties related to our ability to successfully integrate the operations, products and employees
of Omnilink; the effect of the merger on relationships with customers, vendors and lenders; our inability to capture greater recurring
subscription revenues; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial
portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers and/ or wireless
network operators materially change or disrupt the flow of products or services; variations in quarterly operating results; delays
in the development, introduction, integration and marketing of new products and services; customer acceptance of services; economic
conditions resulting in decreased demand for our products and services; the risk that our strategic alliances, partnerships and/or
wireless network operators will not yield substantial revenues; changes in financial and capital markets and the inability to
raise growth capital 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; and extent and timing
of technological changes.
Overview
As
used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or
“Numerex” refers to Numerex Corp. and subsidiaries.
The
following Management’s Discussion and Analysis is intended to help the reader understand our results of operations and financial
condition. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our unaudited
condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q for the
period ended September 30, 2014.
We
are a leading provider of interactive and on-demand machine-to-machine (M2M) enterprise solutions enabling the Internet of Things
(IoT). The Company provides its technology and services through its integrated M2M horizontal platforms, which are generally
sold on a subscription basis. The Company offers Numerex DNA® that may include hardware and smart Devices, cellular and satellite
Network services, and software Applications that are delivered through Numerex FAST® (Foundation Application Software Technology).
The Company also provides business services to enable the development of efficient, reliable, and secure solutions while accelerating
deployment. Numerex is ISO 27001 information security-certified, highlighting the Company’s focus on M2M data security,
service reliability and around-the-clock support of its customers’ M2M solutions.
For
the three months ended September 30, 2014, we generated total net sales of $25.7 million, an increase of 17.0% compared to
the three months ended September 30, 2013. Gross margins increased 7.5% over the same period. Income from continuing
operations, net of income taxes was $0.3 million, or $0.01 per diluted share.
As
further described below, during the nine months ended September 30, 2014, we completed a merger with Omnilink Systems, Inc.
(Omnilink). For the nine months ended September 30, 2014, we generated total net sales of $69.0 million, an increase of
24.0% compared to the nine months ended September 30, 2013. Gross margins increased 13.9% over the same period. Income from
continuing operations, net of income taxes was $1.6 million, or $0.09 per diluted share.
18 |
Our
net income, excluding the effect of the operations of Omnilink, for the three and nine months ended September 30, 2014, as compared
to the corresponding prior year periods, reflect favorable gross profit results due principally to higher embedded device and
hardware margins in 2014 as compared to nominal or negative margins in 2013. Operating expenses for both the three and nine months
ended September 30, 2014, as compared to the same periods in 2013, are higher primarily due to equity-based compensation granted
to a broad group of employees, including new employees from the Omnilink merger and other recent acquisitions, increased marketing
efforts and recent network investments. In addition, operating expenses for the nine months ended September 30, 2014 include transaction
costs associated with the Omnilink merger. Interest expense was higher for the second and third quarter of 2014 due to the financing
of the Omnilink merger.
Results
of Operations
Three
Months Ended September 30, 2014 and 2013
The
following table sets forth selected consolidated results of operations for the periods indicated, including comparative information
between the periods (dollars in thousands):
Three
Months Ended September 30,
|
Change
from
|
|||||||||||||||||||||||
2014
|
2013
|
2013
to 2014
|
||||||||||||||||||||||
Net
sales:
|
||||||||||||||||||||||||
Subscription
and support revenues
|
$ | 17,429 | 67.9 | % | $ | 13,482 | 61.4 | % | $ | 3,947 | 29.3 | % | ||||||||||||
Embedded
devices and hardware
|
8,234 | 32.1 | % | 8,469 | 38.6 | % | (235 | ) | -2.8 | % | ||||||||||||||
Total
net sales
|
25,663 | 100.0 | % | 21,951 | 100.0 | % | 3,712 | 16.9 | % | |||||||||||||||
Cost
of sales, exclusive of a portion of
|
||||||||||||||||||||||||
depreciation
and amortization shown below:
|
||||||||||||||||||||||||
Subscription
and support
|
7,011 | 27.3 | % | 5,622 | 25.6 | % | 1,389 | 24.7 | % | |||||||||||||||
Embedded
devices and hardware
|
7,365 | 28.7 | % | 7,348 | 33.5 | % | 17 | 0.2 | % | |||||||||||||||
Gross
profit
|
11,287 | 44.0 | % | 8,981 | 40.9 | % | 2,306 | 25.7 | % | |||||||||||||||
Gross
margin
|
44.0 | % | 40.9 | % | 3.1 | % | 7.5 | % | ||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Sales
and marketing
|
3,029 | 11.8 | % | 2,636 | 12.0 | % | 393 | 14.9 | % | |||||||||||||||
General
and administrative
|
3,429 | 13.4 | % | 3,174 | 14.5 | % | 255 | 8.0 | % | |||||||||||||||
Engineering
and development
|
2,430 | 9.5 | % | 1,317 | 6.0 | % | 1,113 | 84.5 | % | |||||||||||||||
Depreciation
and amortization
|
1,597 | 6.2 | % | 1,209 | 5.5 | % | 388 | 32.1 | % | |||||||||||||||
Operating
income
|
802 | 3.1 | % | 645 | 2.9 | % | 157 | 24.3 | % | |||||||||||||||
Interest
expense
|
278 | 1.1 | % | 75 | 0.3 | % | 203 | 270.7 | % | |||||||||||||||
Other
(income) expense, net
|
(97 | ) | -0.4 | % | 30 | 0.1 | % | (127 | ) | nm
|
* | |||||||||||||
Income
from continuing operations before
|
||||||||||||||||||||||||
income
taxes
|
621 | 2.4 | % | 540 | 2.5 | % | 81 | 15.0 | % | |||||||||||||||
Income
tax (expense) benefit
|
358 | 1.4 | % | (35 | ) | -0.2 | % | 393 | -1122.9 | % | ||||||||||||||
Income
from continuing operations,
|
||||||||||||||||||||||||
net
of income taxes
|
263 | 1.0 | % | 575 | 2.6 | % | (312 | ) | -54.3 | % | ||||||||||||||
Income
from discontinued operations,
|
||||||||||||||||||||||||
net
of income taxes
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||
Net
income (loss)
|
$ | 263 | 1.0 | % | $ | 575 | 2.6 | % | $ | (312 | ) | -54.3 | % | |||||||||||
Adjusted
EBITDA(1)
|
$ | 3,326 | 13.0 | % | $ | 2,514 | 11.5 | % | $ | 812 | 32.3 | % |
nm*
– not meaningful
(1)
– Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the
caption Non-GAAP Financial Measures below.
Subscription
and support revenues increased $3.9 million to $17.4 million for the three months ended September 30, 2014, compared to $13.5
million for the three months ended September 30, 2013. The increase includes approximately $3.0 million contributed by recently
acquired service lines. The balance of the increase was related principally to growth in M2M subscriptions. During the three
months ended September 30, 2014, we added 31,000 net new subscriptions. Total subscriptions were 2.4 million as of September 30,
2014, compared to 2.1 million total subscriptions as of September 30, 2013.
19 |
Subscription
and support cost of revenues increased 24.7% to $7.0 million for the three months ended September 30, 2014 compared to $5.6 million
for the three months ended September 30, 2013. The recently acquired service lines directly contributed to the majority of the
increase. The balance of the increase in subscription and support cost of revenues are directly attributable to carrier fees related
to overall subscription growth. Total subscription and support costs have increased at a slower pace than corresponding revenues
as we add more customers and subscriptions with higher average revenue per unit to our customer base. Furthermore, the recent
merger contributed an additional $0.6 million in cost. Gross margin for subscription and support revenues increased
to 59.8% for the three months ended September 30, 2014 from 58.3% for the three months ended September 30, 2013.
Sales
of embedded devices and hardware decreased 2.8% to $8.2 million for the three months ended September 30, 2014, compared to $8.5
million for the three months ended September 30, 2013. The recently acquired product lines contributed approximately $0.2 million
in new hardware sales as compared to the same period in the prior year. The gains received from the new product lines were offset
by lower sales in other product lines.
Cost
of sales for embedded devices and hardware remained relatively flat at $7.4 million for the three months ended September 30, 2014,
compared to $7.3 million for the three months ended September 30, 2013. We continue to monitor the valuation of our technologically
older inventory and may record additional increases in the reserve for obsolescence in the future.
Gross
margin for embedded devices and hardware decreased to 11.0% for the three months ended September 30, 2014 from 13.2% for the comparable
period in the prior year. The decrease in gross margin is due in part to higher cost of sales for embedded devices and hardware
related to our recently acquired product lines.
Total
net sales increased 16.9% to $25.7 million for the three months ended September 30, 2014 from $22.0 million for the three months
ended September 30, 2013. Gross profit as a percentage of net sales increased 25.7% to $11.3 million for the three months ended
September 30, 2014 from $9.0 million for the three months ended September 30, 2013. Total gross profit, as a percentage of total
net sales, increased to 44.0% for the three-month period ended September 30, 2014, compared to 40.9% for the three-month period
ended September 30, 2013.
Sales
and marketing expenses increased 14.9% to $3.0 million for the three-month period ended September 30, 2014, compared to $2.6 million
for the three-month period ended September 30, 2013. The increase is primarily due to new sales and marketing associates that
were hired at the end of the prior year and, more recently, in conjunction with the acquisition of new service and product lines.
Sales and marketing expenses as a percentage of net sales decreased to 11.8% for the three months ended September 30, 2014 from
12.0% for the three months ended September 30, 2013.
General
and administrative expenses increased 8.0% to $3.4 million for the three-month period ended September 30, 2014, compared to $3.2
million for the three-month period ended September 30, 2013. As a percentage of net sales, general and administrative expenses
decreased to 13.4% for the three months ended September 30, 2014 compared to 14.5% for the three months ended September 30, 2013.
The increase in total expense is primarily related to recent merger and acquisitions. General and administrative expenses for
the three months ended September 30, 2014 include $0.5 million in costs directly attributable to the recently acquired service
lines. Professional and other consulting fees were also higher for the three months ended September 30, 2014. These costs were
partially offset by lower compensation costs.
Engineering
and development expenses increased 84.5% to $2.4 million for the three-month period ended September 30, 2014, compared to $1.3
million for the three-month period ended September 30, 2013. The increase is primarily related to personnel expenditures as we
continue developing new products, services and applications in addition to development associated with integration of our platforms
and engineering resources. As a percentage of net sales, engineering and development expenses increased to 9.5% for the three
months ended September 30, 2014 compared to 6.0% for the three months ended September 30, 2013.
20 |
Depreciation
and amortization expense increased 32.1% to $1.6 million for the three-month period ended September 30, 2014, compared to $1.2
million for the three-month period ended September 30, 2013. The increase is attributable to the recent merger and acquisitions
and investments in network infrastructure as well as additional internally developed software.
Interest
expense increased to $0.3 million for the three-month period ended September 30, 2014, compared to $0.1 million for the three-month
period ended September 30, 2013. The increase is due to the financing of the recent merger.
We
recorded income tax expense of $0.4 million for the three months ended September 30, 2014, as compared to a nominal income
tax benefit for the three months ended September 30, 2013, representing effective tax rates of 57.6% and (6.5%), respectively.
Our income tax expense of $0.4 million for the three months ended September 30, 2014 includes a year-to-date adjustment of $0.2
million or 31.3% of the quarter’s pre-tax income, to increase our tax provision for the six months ended June 30, 2014 to
our current estimated effective tax rate.
21 |
Nine
Months Ended September 30, 2014 and 2013
The
following table sets forth selected consolidated results of operations for the periods indicated, including comparative information
between the periods (dollars in thousands):
Nine
Months Ended September 30,
|
Change
from
|
|||||||||||||||||||||||
2014
|
2013
|
2013
to 2014
|
||||||||||||||||||||||
Net
sales:
|
||||||||||||||||||||||||
Subscription
and support revenues
|
$ | 47,530 | 68.9 | % | $ | 37,932 | 68.2 | % | $ | 9,598 | 25.3 | % | ||||||||||||
Embedded
devices and hardware
|
21,483 | 31.1 | % | 17,727 | 31.8 | % | 3,756 | 21.2 | % | |||||||||||||||
Total
net sales
|
69,013 | 100.0 | % | 55,659 | 100.0 | % | 13,354 | 24.0 | % | |||||||||||||||
Cost
of sales, exclusive of a portion of
|
||||||||||||||||||||||||
depreciation
and amortization shown below:
|
||||||||||||||||||||||||
Subscription
and support
|
18,647 | 27.0 | % | 16,531 | 29.7 | % | 2,116 | 12.8 | % | |||||||||||||||
Embedded
devices and hardware
|
18,517 | 26.8 | % | 16,575 | 29.8 | % | 1,942 | 11.7 | % | |||||||||||||||
Gross
profit
|
31,849 | 46.1 | % | 22,553 | 40.5 | % | 9,296 | 41.2 | % | |||||||||||||||
Gross
margin
|
46.1 | % | 40.5 | % | 5.6 | % | 13.9 | % | ||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Sales
and marketing
|
9,066 | 13.1 | % | 6,907 | 12.4 | % | 2,159 | 31.3 | % | |||||||||||||||
General
and administrative
|
11,207 | 16.2 | % | 9,828 | 17.7 | % | 1,379 | 14.0 | % | |||||||||||||||
Engineering
and development
|
5,794 | 8.4 | % | 3,626 | 6.5 | % | 2,168 | 59.8 | % | |||||||||||||||
Depreciation
and amortization
|
4,570 | 6.6 | % | 3,485 | 6.3 | % | 1,085 | 31.1 | % | |||||||||||||||
Operating
income (loss)
|
1,212 | 1.8 | % | (1,293 | ) | -2.3 | % | 2,505 | -193.7 | % | ||||||||||||||
Interest
expense
|
564 | 0.8 | % | 220 | 0.4 | % | 344 | 156.4 | % | |||||||||||||||
Other
(income) expense, net
|
(1,272 | ) | -1.8 | % | 25 | 0.0 | % | (1,297 | ) | nm
|
* | |||||||||||||
Income
(loss) from continuing operations
|
||||||||||||||||||||||||
before
income taxes
|
1,920 | 2.8 | % | (1,538 | ) | -2.8 | % | 3,458 | -224.8 | % | ||||||||||||||
Income
tax (expense) benefit
|
283 | 0.4 | % | (2,549 | ) | -4.6 | % | 2,832 | -111.1 | % | ||||||||||||||
Income
from continuing operations,
|
||||||||||||||||||||||||
net
of income taxes
|
1,637 | 2.4 | % | 1,011 | 1.8 | % | 626 | 61.9 | % | |||||||||||||||
Loss
from discontinued operations,
|
||||||||||||||||||||||||
net
of income taxes
|
(492 | ) | -0.7 | % | (1,437 | ) | -2.6 | % | 945 | -65.8 | % | |||||||||||||
Net
income (loss)
|
$ | 1,145 | 1.7 | % | $ | (426 | ) | -0.8 | % | $ | 1,571 | nm
|
* | |||||||||||
Adjusted
EBITDA(1)
|
$ | 9,078 | 13.2 | % | $ | 5,521 | 9.9 | % | $ | 3,557 | 64.4 | % |
nm* – not meaningful
(1)
– Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the
caption Non-GAAP Financial Measures below.
Subscription
and support revenues increased 25.3% to $47.5 million for the nine months ended September 30, 2014, compared to $37.9 million
for the nine months ended September 30, 2013. The increase includes approximately $4.9 million contributed by recently acquired
service lines. The balance of the increase was related primarily to growth in M2M subscriptions. During the nine months ended
September 30, 2014, we added 207,000 net new subscriptions, of which approximately 20% were acquired in the recent merger. Total
subscriptions were 2.4 million as of September 30, 2014, compared to 2.1 million total subscriptions as of September 30, 2013.
The increase in the number of subscriptions resulted in a period-to-period increase of $9.4 million in recurring revenues derived
from subscriptions, the primary component of subscription and support revenues.
22 |
Subscription
and support cost of revenues increased 12.8% to $18.6 million for the nine months ended September 30, 2014 compared to $16.5 million
for the nine months ended September 30, 2013. The recently acquired service lines directly contributed $1.8 million of additional
costs while carrier fees related to overall subscription growth increased $0.7 million compared to the same period in the prior
year. These costs were partially offset by lower compensation expenses due to an internal realignment in 2013. The subscription
and support costs have increased at a slower pace than corresponding revenues as we add more customers and subscriptions with
higher average revenue per unit to our customer base. Gross margin for subscription and support revenues increased to 60.8%
for the nine months ended September 30, 2014 from 56.4% for the nine months ended September 30, 2013.
Sales
of embedded devices and hardware increased 21.2% to $21.4 million for the nine months ended September 30, 2014, compared to $17.7
million for the nine months ended September 30, 2013. The increase was primarily related to higher hardware sales for the nine
months ended September 30, 2014, compared to the nine months ended September 30, 2013. Product prices have remained consistent
with the prior year.
Cost
of sales for embedded devices and hardware increased 11.7% to $18.5 million for the nine months ended September 30, 2014 compared
to $16.6 million for the nine months ended September 30, 2013. The increase is primarily related to the corresponding increase
in hardware sales during the nine months ended September 30, 2014.
Gross
margin for embedded devices and hardware increased to 13.8% for the nine months ended September 30, 2014 from 6.5% for the comparable
period in the prior year. The increase in gross margin is due in part to the integration of higher margin next generation embedded
devices and the result of fewer product promotions. Similar to sales noted above, the recent merger and acquisitions have also
contributed to corresponding higher total costs, but have not had a material effect on total hardware margins.
Total
net sales increased 24.0% to $69.0 million for the nine months ended September 30, 2014 from $55.7 million for the nine months
ended September 30, 2013. Gross profit as a percentage of net sales increased 13.9% to $31.9 million for the nine months ended
September 30, 2014 from $22.6 million for the nine months ended September 30, 2013. Total gross profit, as a percentage of total
net sales, increased to 46.1% for the nine-month period ended September 30, 2014, compared to 40.5% for the nine-month period
ended September 30, 2013.
Sales
and marketing expenses increased 31.3% to $9.1 million for the nine-month period ended September 30, 2014, compared to $6.9 million
for the nine-month period ended September 30, 2013. Sales and marketing expenses as a percentage of net sales increased to
13.1% for the nine months ended September 30, 2014 from 12.4% for the nine months ended September 30, 2013. The increase is primarily
due to new sales and marketing associates that were hired at the end of the prior year and, and more recently, in conjunction
with the acquisition of new service and product lines.
General
and administrative expenses increased 14.0% to $11.2 million for the nine-month period ended September 30, 2014, compared to $9.8
million for the nine-month period ended September 30, 2013. As a percentage of net sales, general and administrative expenses
decreased to 16.2% for the nine months ended September 30, 2014 compared to 17.7% for the nine months ended September 30, 2013.
The increase in total expense is primarily related to an increase in equity-based compensation of $0.6 million, and approximately
$1.6 million added from the recent merger and acquisitions. These costs were partially offset by a decrease in bad debt expense.
Engineering
and development expenses increased 59.8% to $5.8 million for the nine-month period ended September 30, 2014, compared to $3.6
million for the nine-month period ended September 30, 2013. The increase is primarily due to higher costs associated with the
recent merger and acquisitions. As a percentage of net sales, engineering and development expenses increased to 8.4% for the nine
months ended September 30, 2014 compared to 6.5% for the nine months ended September 30, 2013.
Depreciation
and amortization expense increased 31.1% to $4.6 million for the nine-month period ended September 30, 2014, compared to $3.5
million for the nine-month period ended September 30, 2013. The increase of $1.1 million is attributable to the recent merger
and acquisitions and investment in network infrastructure as well as additional internally developed software.
23 |
Interest
expense increased to $0.6 million for the nine-month period ended September 30, 2014, compared to $0.2 million for the nine-month
period ended September 30, 2013. The increase is due to financing of the recent merger.
Other
(income) expense, net includes $1.1 million for the nine months ended September 30, 2014 for a pre-tax gain on the sale of an
investment in a privately-held business. The carrying value of our investment was $0.2 million and we sold it for proceeds of
$1.3 million.
We
recorded income tax expense of $0.3 million for the nine months ended September 30, 2014, as compared to an income tax benefit
of $2.5 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the difference between our effective tax rate and the 34.0% federal
statutory rate resulted primarily from the income tax benefit generated by the capital loss from the disposal of BNI and our ability
to utilize the capital loss to offset capital gains generated in both our current and recent tax years, partially offset by (1)
the effect of expenses that are not deductible for income tax purposes, including a portion of transaction costs incurred in the
Omnilink merger and (2) state income taxes, including the tax effect of changes in effective state income tax rates resulting
from the merger with Omnilink.
For
the nine months ended September 30, 2013 an income tax benefit resulted primarily from our tax accounting method change allowing a one-time acceleration and
catch-up of depreciation and amortization. The tax accounting method change related to our 2003 acquisition of our
former joint venture partner’s interest in our Cellemetry LLC subsidiary. State tax accruals related to unrecognized
tax benefits also contributed to the difference between the effective and federal statutory tax rates for the nine months
ended September 30, 2013.
The
loss from discontinued operations, net of income taxes, was $0.5 million for the nine months ended September 30, 2014 compared
to a net loss of $1.4 million in the comparable prior year. The net loss for the nine months ended September 30, 2014, included
a $0.3 million pre-tax loss on disposal. The net loss for the nine months ended September 30, 2013 included a $0.9 million impairment
of goodwill and $0.6 million reserve for uncollectible accounts receivable. As previously discussed, the discontinued businesses
were unrelated to our core M2M communication products and services. We completed the disposal and dissolution of all the assets
and liabilities of discontinued operations on June 30, 2014. See Note C – Discontinued Operations in the accompanying condensed
consolidated financial statements.
Segment
Information
As
a result of the decision to exit non-core businesses and their subsequent reclassification to discontinued operations, we have
one reportable segment.
Non-GAAP
Financial Measures
In
addition to providing financial measurements based on accounting principles generally accepted in the United States of America
(GAAP), we have provided EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share, financial measures that are not prepared
in accordance with GAAP (non-GAAP). The most directly comparable GAAP equivalent to EBITDA and Adjusted EBITDA is (loss) income
from continuing operations, net of income taxes. The most directly comparable GAAP equivalent to EBITDA and Adjusted EBITDA per
diluted share is diluted earnings per share from continuing operations.
●
|
EBITDA
is income (loss) from continuing operations, net of income taxes, plus depreciation and amortization, interest and other non-operating
expenses and income tax expense. Any other non-operating income, net of income taxes is subtracted from income (loss) from continuing
operations, net of income taxes.
|
|
●
|
Adjusted
EBITDA is EBITDA plus non-cash equity-based compensation and infrequent or unusual items eliminated as further described below.
|
|
●
|
EBITDA
and Adjusted EBITDA per diluted share is EBITDA and Adjusted EBITDA divided by weighted average diluted shares outstanding.
|
24 |
Reconciliations
of our non-GAAP financial measures to the most directly comparable financial measure are provided below. We believe that presentation
of these non-GAAP financial measures provides useful information to investors regarding our results of operations.
We
believe that excluding depreciation and amortization of property, equipment and intangible assets to calculate EBITDA and Adjusted
EBITDA provides supplemental information and an alternative presentation that is useful to investors’ understanding of our
core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that
may have little bearing on present or future replacement costs, but also they are based on our estimates of remaining useful lives.
Similarly,
we believe that excluding the effects of equity-based compensation from non-GAAP financial measures provides supplemental information
and an alternative presentation useful to investors’ understanding of our core operating results and trends. Investors have
indicated that they consider financial measures of our results of operations excluding equity-based compensation as important
supplemental information useful to their understanding of our historical results and estimating our future results.
We
also believe that, in excluding the effects of equity-based compensation, our non-GAAP financial measures provide investors with
transparency into what management uses to measure and forecast our results of operations, to compare on a consistent basis our
results of operations for the current period to that of prior periods and to compare our results of operations on a more consistent
basis against that of other companies, in making financial and operating decisions and to establish certain management compensation.
Equity-based
compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that
supplementing GAAP income (loss) from continuing operations by providing Adjusted EBITDA, excluding the effect of equity-based
compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons.
Adjusted
EBITDA also excludes infrequent or unusual items. For the three and nine month periods ended September 30, 2014, infrequent or
unusual items include merger related costs and gain on sale of a cost-method investment while the three and nine months ended
September 30, 2013 include temporarily higher carrier fees and merger-related costs. We believe that these are costs that we will
not incur on a regular basis, and consequently, we do not consider these items components of ongoing operations.
EBITDA
and Adjusted EBITDA are not measures of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to
– not a substitute for – results of operations presented on the basis of GAAP. EBITDA and Adjusted EBITDA do not purport
to represent cash flow provided by operating activities as defined by GAAP. Furthermore, EBITDA and Adjusted EBITDA are not necessarily
comparable to similarly-titled measures reported by other companies.
We
believe EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share are useful to and used by investors and other users of the
financial statements in evaluating our operating performance because it provides them with an additional tool to compare business
performance across periods.
We
believe that:
●
|
EBITDA
is widely used by investors to measure a company’s operating performance without regard to items such as interest expense,
income taxes, depreciation and amortization, which can vary substantially from company-to-company depending upon accounting methods
and book value of assets, capital structure and the method by which assets were acquired; and
|
|
●
|
Investors
commonly adjust EBITDA information to eliminate the effect of equity-based compensation and other unusual or infrequently occurring
items which vary widely from company-to-company and impair comparability.
|
25 |
We
use EBITDA, Adjusted EBITDA and Adjusted EBITDA per diluted share:
●
|
as
a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis
|
|
●
|
as
a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and
|
|
●
|
in
communications with the board of directors, analysts and investors concerning our financial performance.
|
Adjusted
EBITDA is also a component of our loan covenant calculations. Although we believe, for the foregoing reasons, that the presentation
of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, the
non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure
of financial performance prepared in accordance with GAAP.
Use
of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included
under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial
measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such
information to supplement GAAP financial measures. The non-GAAP financial measures may not be the same non-GAAP measures, and
may not be calculated in the same manner, as those used by other companies.
The
following table reconciles the specific items excluded from GAAP in the calculation of EBITDA and Adjusted EBITDA for the periods
indicated below (in thousands, except per share amounts):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Income
from continuing operations, net of income taxes (GAAP)
|
$ | 263 | $ | 575 | $ | 1,637 | $ | 1,011 | ||||||||
Depreciation
and amortization expense
|
1,789 | 1,280 | 4,969 | 3,716 | ||||||||||||
Interest
expense and other non-operating expense (income), net
|
181 | 105 | (708 | ) | 245 | |||||||||||
Income
tax (benefit) expense
|
358 | (35 | ) | 283 | (2,549 | ) | ||||||||||
EBITDA
(non-GAAP)
|
2,591 | 1,925 | 6,181 | 2,423 | ||||||||||||
Equity-based
compensation expense
|
694 | 589 | 1,833 | 1,323 | ||||||||||||
Infrequent
or unusual items
|
41 | - | 1,064 | 1,775 | ||||||||||||
Adjusted
EBITDA (non-GAAP)
|
$ | 3,326 | $ | 2,514 | $ | 9,078 | $ | 5,521 | ||||||||
Income
from continuing operations, net of income taxes,
|
||||||||||||||||
per
diluted share (GAAP)
|
$ | 0.01 | $ | 0.03 | $ | 0.09 | $ | 0.05 | ||||||||
EBITDA
per diluted share (non-GAAP)
|
0.13 | 0.10 | 0.32 | 0.13 | ||||||||||||
Adjusted
EBITDA per diluted share (non-GAAP)
|
0.17 | 0.13 | 0.47 | 0.29 | ||||||||||||
Weighted
average shares outstanding used in computing
|
||||||||||||||||
diluted
earnings per share
|
19,263 | 19,014 | 19,253 | 18,746 |
For
the three and nine month periods ended September 30, 2014, infrequent or unusual items include merger related costs while the
nine months ended September 30, 2013 include temporarily higher carrier fees, professional services fees incurred in response
to and in remediation of internal control weaknesses, merger-related expenses, costs related to the realignment of our executive
team and asset write-downs.
26 |
Liquidity
and Capital Resources
We
had working capital of $23.7 million as of September 30, 2014 compared to $34.9 million as of December 31, 2013. We had cash
and cash equivalents of $16.4 million and $25.6 million, as of September 30, 2014 and December 31, 2013, respectively. At
September 30, 2014, we had available credit of $5.0 million.
Net
cash provided by operating activities of continuing operations for the nine-month period ended September 30, 2014 was
$7.1 million. The primary non-cash adjustments to net income for the nine-month period ended September 30, 2014 were $5.0
million for depreciation and amortization and $1.8 million for equity-based compensation expense less $1.1 million pre-tax
gain on the sale of an investment in a privately held business. The changes in operating assets and
liabilities included a $1.6 million decrease in accounts and financing receivables and a $0.6 million increase in inventory,
less $0.2 million decrease in accounts payable. The changes in working capital as of September 30, 2014 compared to December
31, 2013 resulted in day’s sales outstanding in accounts receivable increasing to 48 from 44, days of inventory on hand
decreasing to 114 from 119, and days outstanding in accounts payable remaining steady at 78.
Net
cash used in investing activities of continuing operations for the nine-month period ended September 30, 2014 was $39.8 million,
which includes $37.1 million in net cash paid for the merger, discussed further below. Capital expenditures for tangible assets
and purchases and capitalization of internally developed software were $2.7 million.
Net
cash provided by financing activities of continuing operations for the nine-month period ended September 30, 2014 was $23.4 million,
primarily from proceeds received from a note payable to finance the recent merger.
Net
cash provided by discontinued operations for the nine month period ended September 30, 2014 was $0.1 million. Cash flows associated
with the revenue-producing and cost-generating activities of the discontinued operations have been eliminated as of June 30, 2014.
On
May 5, 2014, we closed on the merger with Omnilink. The purchase price was $37.3 million in cash (subject to the adjustments set
forth in the merger agreement) and accrued expenses of $0.2 million. The transaction was funded through cash-on-hand and a $25.0
million term loan as part of an amended and restated credit facility with Silicon Valley Bank. At September 30, 2014, we had $5.0
million of credit available on our Credit Facility and $23.8 million outstanding on our term loan. We were in compliance with
all financial covenants of our credit agreement at September 30, 2014 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.
Under
the Loan Agreement, the maturity date of the loan is May 5, 2019 with regular required quarterly principal payments beginning
June 30, 2014 equal to one fourth of 10% of the original principal amount through the quarter ended March 31, 2015 and increments
to 15% for the quarterly periods through March 31, 2017 and to 20% for the quarterly periods through March 31, 2019 with any unpaid
principal due at maturity. The interest rate applicable to amounts drawn from the Credit Facility currently is 3.4% as of September
30, 2014 and is, at our option, determined by reference to the prime rate or LIBOR rate plus a margin established in the Loan
Agreement. The Credit Facility is secured by all assets, including our intellectual property. The Loan Agreement includes customary
representations and warranties as well as affirmative and negative covenants.
We
believe that our existing cash balance together with the anticipated amended and restated credit facility and expected cash generated
from operations will be sufficient to meet our operating requirements through 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.
Off-Balance
Sheet Arrangements
As
of September 30, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
Critical
Accounting Policies
There
have been no material changes in our critical accounting policies, estimates and judgments during the three and nine months ended
September 30, 2014 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2013.
27 |
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. We are subject to interest rate market risk in connection with of our long-term
debt. Our principal interest rate exposure relates to outstanding amounts under our $25.0 million term loan. Our term loan provides
for variable interest rates determined by reference to the prime rate or LIBOR rate. A one-eighth percent increase or decrease
in assumed interest rates for the $25.0 million term loan for the one year period following its inception would result in a corresponding
increase or decrease in interest expense of $30,000.
We
also hold cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent
operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks
outside the United States are denominated in the local currency and are minor.
Foreign
Currency
The
assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at the ending exchange rate from the prior period which materially approximates the average exchange rates
for each period. Resulting translation adjustments are reflected as other comprehensive (loss) income within shareholders’
equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as incurred. Except for transactions with customers and
vendors in Canada, substantially all other transactions are denominated in U.S. dollars. Foreign operations were not significant
to us for the quarter ended September 30, 2014.
Item 4.
|
Controls and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
Based
on our management’s evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, as of
the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
During
the quarter ended September 30, 2014, there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting. We acquired Omnilink on
May 5, 2014 and, as a result, we continue to integrate the processes and controls relating to Omnilink into our existing system
of internal control over financial reporting. Specific controls for Omnilink are also in place. We expect to complete the integration
of Omnilink’s business into our control processes during the calendar year ending December 31, 2015.
28 |
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 our results of operations, financial condition and liquidity, see the risk factors
discussion set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and quarter ended
June 30, 2014, each as previously filed with the SEC, and the information under “Forward-Looking Statements” included
in this Quarterly Report on Form 10-Q.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
None
– not applicable
Item 3.
|
Defaults Upon Senior Securities.
|
None
- not applicable.
Item 4.
|
Mine Safety Disclosures.
|
None
- not applicable.
Item
5. Other Information.
None - not applicable.
29 |
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 September 30, 2014, formatted in eXtensible Business Reporting Language
(XBRL): (i) Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Unaudited Condensed Consolidated
Statement of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013, (iii) Unaudited
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, (iv) Unaudited Condensed Consolidated
Statement of Shareholders Equity at September 30, 2014 and (v) Unaudited Condensed Notes to Consolidated Financial Statements.*
|
*
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.
30 |
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)
|
||
November 5, 2014
|
/s/ Stratton J. Nicolaides
|
|
Stratton
J. Nicolaides
|
||
Chairman
of the Board of Directors
and
Chief Executive Officer
|
||
November 5, 2014
|
/s/ Richard A. Flynt
|
|
Richard
A. Flynt
|
||
Chief
Financial Officer and
|
||
Principal
Financial and Accounting Officer
|
31 |