UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2016

 

or

 

¨	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 ¨

 

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).

Yes þ No ¨

 

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 ¨	Accelerated filer þ
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨     No þ

 

As of May 3, 2016, 19,437,322 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.	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	21
Item 4.	Controls and Procedures.	21
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings.	23
Item 1A.	Risk Factors.	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23
Item 3.	Defaults Upon Senior Securities.	23
Item 4.	Mine Safety Disclosures.	23
Item 5.	Other Information.	23
Item 6.	Exhibits.	24
SIGNATURES		25

 

 

NUMEREX CORP. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

Index to Financial Statements	Page
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	4
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2015	5
Unaudited Condensed Consolidated Statement of Shareholders' Equity for the three months ended March 31, 2016	6
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	7
Unaudited Condensed Notes to Consolidated Financial Statements	8

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		March 31,				December 31,
		2016				2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	11,220			$	16,237
Restricted cash			221				-
Accounts receivable, less allowance for doubtful accounts of $716 and $618			8,794				9,237
Financing receivables, current			1,917				1,780
Inventory, net of reserves			7,995				7,617
Prepaid expenses and other current assets			2,373				1,887
Deferred tax assets, current			603				603
TOTAL CURRENT ASSETS			33,123				37,361
Financing receivables, less current portion			2,457				2,330
Property and equipment, net of accumulated depreciation and amortization of $7,253 and $6,632			4,863				4,795
Software, net of accumulated amortization			7,247				7,146
Other intangible assets, net of accumulated amortization			15,261				15,722
Goodwill			43,424				43,424
Other assets			421				409
TOTAL ASSETS		$	106,796			$	111,187
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	10,768			$	11,390
Accrued expenses and other current liabilities			3,544				2,864
Deferred revenues			1,789				1,942
Current maturities of long-term debt, net of debt issuance costs			-				3,600
TOTAL CURRENT LIABILITIES			16,101				19,796
Long-term debt, net of debt issuance costs, less current maturities			15,956				15,309
Deferred tax liabilities, noncurrent			1,655				1,595
Other liabilities			1,873				1,891
TOTAL LIABILITIES			35,585				38,591
COMMITMENTS AND CONTINGENCIES (NOTE H)
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; 3,000 authorized; none issued			-				-
Class A common stock, no par value; 30,000 authorized; 20,752 and 20,652 issued; 19,434 and 19,177 outstanding			-				-
Class B common stock, no par value; 5,000 authorized; none issued			-				-
Additional paid-in capital			103,034				102,108
Treasury stock, at cost, 1,316 shares			(5,444	)			(5,444	)
Accumulated other comprehensive loss			(102	)			(117	)
Accumulated deficit			(26,277	)			(23,951	)
TOTAL SHAREHOLDERS’ EQUITY			71,211				72,596
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	106,796			$	111,187

 

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

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(In thousands, except per share data)

 

		Three Months Ended
		March 31,
		2016				2015
Net revenues:
Subscription and support revenues		$	14,984			$	16,529
Embedded devices and hardware			3,066				5,149
Total net revenues			18,050				21,678
Cost of sales, exclusive of a portion of depreciation and amortization shown below:
Subscription and support revenues			5,701				6,719
Embedded devices and hardware			3,118				4,853
Gross profit			9,231				10,106
Operating expenses:
Sales and marketing			2,945				3,064
General and administrative			4,129				3,929
Engineering and development			2,247				2,293
Depreciation and amortization			1,658				1,654
Operating loss			(1,748	)			(834	)
Interest expense			267				210
Loss on extinguishment of debt			290				-
Other income, net			(43	)			(38	)
Loss before income taxes			(2,262	)			(1,006	)
Income tax expense (benefit)			64				(386	)
Net loss			(2,326	)			(620	)
Other items of comprehensive (income) loss, net of income taxes:
Foreign currency translation adjustment			(15	)			25
Comprehensive loss		$	(2,311	)		$	(645	)
Basic and diluted loss per share		$	(0.12	)		$	(0.03	)
Weighted average shares outstanding used in computing basic and diluted loss per share			19,377				18,993

 

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

 

 

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				Loss				Deficit				Equity
Balance at January 1, 2016			20,652			$	102,108			$	(5,444	)		$	(117	)		$	(23,951	)		$	72,596
Equity-based compensation expense			-				621				-				-				-				621
Exercisces, vesting and other equity- based compensation plan activity, net			99				300				-				-				-				300
Other			1				5				-				-				-				5
Translation adjustment			-				-				-				15				-				15
Net loss			-				-				-				-				(2,326	)			(2,326	)
Balance at March 31, 2016			20,752			$	103,034			$	(5,444	)		$	(102	)		$	(26,277	)		$	71,211

 

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

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Three Months Ended
		March 31,
		2016				2015
Cash flows from operating activities:
Net loss		$	(2,326	)		$	(620	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			1,965				1,881
Equity-based compensation expense			621				784
Loss on extinguishment of debt			289				-
Deferred income taxes			60				(351	)
Bad debt expense			120				140
Inventory reserves			27				134
Other non-cash expense			21				21
Changes in assets and liabilities:
Accounts and financing receivables			59				(1,094	)
Inventory, net			(953	)			185
Accounts payable			(680	)			(657	)
Deferred revenue			(150	)			51
Other			107				(154	)
Net cash (used in) provided by operating activities			(840	)			320
Cash flows from investing activities:
Purchases of property and equipment			(297	)			(554	)
Capitalized software development and purchases of software			(983	)			(1,119	)
Net cash (used in) investing activities			(1,280	)			(1,673	)
Cash flows from financing activities:
Proceeds from long-term debt			17,000				-
Principal payments on debt			(19,349	)			(1,121	)
Principal payments on capital lease obligations			-				(90	)
Exercisces, vesting and other equity-based compensation plan activity, net			300				1
Payment of taxes on equity-based awards			-				(2	)
Deferred financing costs paid			(848	)			-
Net cash (used in) financing activities			(2,897	)			(1,212	)
Net decrease in cash and cash equivalents			(5,017	)			(2,565	)
Cash and cash equivalents at beginning of period			16,237				17,270
Cash and cash equivalents at end of period		$	11,220			$	14,705
Supplemental disclosures of cash flow information:
Cash paid for interest		$	251			$	191
Net cash (refunded) paid for income taxes			(350	)			28
Disclosure of non-cash investing and financing activities:
Capital expenditures in accounts payable			286				407
Deferred financing costs in accounts payable			213				-

 

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

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Numerex Corp. (NASDAQ: NMRX) is a holding company and, through its subsidiaries, is a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). An IoT solution is generally viewed as a combination of devices, software and services that operate with little or no human interaction. Our managed IoT solutions are simple, innovative, scalable and secure. Our solutions incorporate each of the four key IoT building blocks – Device, Network, Application and Platform. We provide our technology and service solutions through our integrated IoT horizontal platforms, which are generally sold on a subscription basis. We are ISO 27001 information security-certified, highlighting our focus on IoT data security, service reliability and around-the-clock support of our customers’ IoT solutions. Foreign operations were not significant to us for the three months ended March 31, 2016 or 2015.

 

Basis of Presentation

 

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 March 31, 2016 and our operating results and cash flows for the interim periods presented. The accompanying condensed consolidated balance sheet as of December 31, 2015 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, 2015 which includes information and disclosures not included in this quarterly report.

 

Estimates and Assumptions

 

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 months ended March 31, 2016 may not be indicative of the results that may be expected for the year ending December 31, 2016 or any future periods.

 

Restricted Cash 

As of March 31, 2016, cash of $0.2 million was held in escrow related to certain vendor obligations as a result of entering into our new loan agreement. See Note E – Debt. There was no restricted cash at December 31, 2015.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

Reclassifications

 

As a result of the adoption of a recent accounting pronouncement, see Note G – Recent Accounting Pronouncements, the balance sheet as of December 31, 2015 reflects the following reclassifications (dollars in thousands):

 

		Historical				Reclassi-
		Presentation				fication				As Adjusted
Prepaid expenses and other current assets		$	2,037			$	(150	)		$	1,887
Other assets			699				(290	)			409
Current portion of long-term debt			3,750				(150	)			3,600
Long-term debt, less current portion			15,599				(290	)			15,309

 

NOTE B – INVENTORY

 

Inventory consisted of the following as of the dates below (in thousands):

 

		March 31,				December 31,
		2016				2015
Raw materials		$	2,032			$	1,903
Finished goods			8,678				8,420
Inventory reserves			(2,715	)			(2,706	)
		$	7,995			$	7,617

 

NOTE C – INTANGIBLE ASSETS

 

Intangible Assets Other Than Goodwill

 

Intangible assets other than goodwill are summarized as follows (dollars in thousands):

 

		As of March 31, 2016																As of December 31, 2015
		Remaining Useful Lives				Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Purchased and developed software			1.2			$	16,128			$	(10,369	)		$	5,759			$	15,399			$	(9,503	)		$	5,896
Software in development			n/a				1,488				-				1,488				1,250				-				1,250
Total software							17,616				(10,369	)			7,247				16,649				(9,503	)			7,146
Licenses			0.4				13,215				(12,259	)			956				13,215				(12,167	)			1,048
Customer relationships			7.4				8,167				(2,478	)			5,689				8,167				(2,285	)			5,882
Technologies			12.1				4,316				(680	)			3,636				4,316				(595	)			3,721
Patents and trademarks			2.8				4,251				(2,243	)			2,008				4,236				(2,137	)			2,099
Trade names			Indefinite				2,972				-				2,972				2,972				-				2,972
Total other intangible assets							32,921				(17,660	)			15,261				32,906				(17,184	)			15,722
						$	50,537			$	(28,029	)		$	22,508			$	49,555			$	(26,687	)		$	22,868

 

Remaining useful lives in the preceding table were calculated on a weighted average basis as of March 31, 2016. We did not incur significant costs to renew or extend the term of acquired intangible assets during the three months ending March 31, 2016.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

Amortization expense related to intangible assets was $1.3 million and $1.2 million for the three months ended March 31, 2016 and 2015, respectively. Amortization expense recorded in cost of subscription revenues in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss was $0.3 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. Additionally, we have capitalized approximately $0.3 million and $0.4 million of internally generated software development costs for the three months ended March 31, 2016 and 2015 respectively.

 

NOTE D – 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.

 

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projections of future taxable income, tax planning strategies and the reversal of temporary differences in making this assessment.

 

During 2015, we determined that we would not meet the criteria of “more likely than not” that the cumulative federal net operating losses and certain other deferred tax assets would be recoverable. This determination was based on our cumulative loss over the past three years. Accordingly, we recorded a valuation allowance against these items. The deferred tax assets consist of federal net operating losses, state net operating losses, tax credits, and other deferred tax assets, most of which expire between 2016 and 2036. We will maintain the valuation allowance against the net deferred tax assets until sufficient positive evidence outweighs any negative evidence to support reversal.

 

We recorded deferred income tax expense of less than $0.1 million, representing an effective tax rate of (2.8%), for the three months ended March 31, 2016. The difference in the effective tax rate compared to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income taxes, are due primarily to the book and tax basis and accounting differences for certain long and indefinite lived intangible assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses. Income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.

 

For the three months ended March 31, 2015, we recorded income tax benefit of $0.4 million representing an effective tax rate of 38.4%. The effective tax rate for the three months ended March 31, 2015 differed from the federal statutory rate primarily as a result of (1) the effect of expenses that are not deductible for income tax purposes, (2) state income taxes, including the tax effect of changes in effective state income tax rates, and (3) a partially offsetting benefit from disqualifying dispositions of incentive stock options.

 

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2012 through 2015 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.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

NOTE E – DEBT

 

Debt consisted of the following as of the dates below (dollars in thousands):

 

		March 31,				December 31,
		2016				2015
Note payable to Crystal Financial LLC, with interest at LIBOR plus margin		$	17,000			$	-
Note payable to Silicon Valley Bank, repaid in 2016			-				19,349
Less long-term deferred financing costs			(1,044	)			(440	)
			15,956				18,909
Less current portion of long-term debt			-				(3,600	)
Noncurrent portion of long-term debt		$	15,956			$	15,309

 

On March 9, 2016, we and certain of our wholly-owned, consolidated subsidiaries entered into a new term loan agreement with Crystal Financial LLC as Term Agent, and the term lenders party thereto (the “Crystal Loan Agreement”) pursuant to which the term lenders made a term loan to us in the amount of $17.0 million. The net proceeds from the term loan (after payment of the fees and expenses of the Term Agent), along with $2.9 million of cash on hand, were used to repay the $19.4 million outstanding debt under the Silicon Valley Bank (SVB) Loan Agreement and pay related transaction fees. We recorded a charge of $0.3 million to loss on extinguishment of debt for unamortized deferred financing costs related to the SVB Loan Agreement during the three months ended March 31, 2016.

 

The maturity date of the term loan is March 9, 2020. We are required to make regular quarterly principal payments of $637,500 beginning September 1, 2017 with the balance due on the maturity date, if not otherwise repaid earlier by way of voluntary prepayments, or upon the occurrence of certain Prepayment Events or Excess Cash Flow (as defined in the Crystal Loan Agreement), or as a result of acceleration of the loan as a result of an event of default. Prepayments of the loan are subject to a prepayment penalty of 3% of the amount prepaid if prepayment occurs prior to the first anniversary of the closing date and 2% of the amount prepaid if the prepayment occurs on or after the first anniversary of the closing date but prior to the second anniversary date of the closing date. There is no prepayment penalty for prepayments that occur on or after the second anniversary of the closing date. The interest rate payable on the outstanding loan amount is determined by reference to LIBOR plus a margin established in the agreement. At March 31, 2016, the applicable interest rate was 9.1%.

 

Our obligations under the Crystal Loan Agreement are secured by a first priority security interest in substantially all of our assets and the assets of our subsidiaries. In addition, we are required to meet certain financial and other restrictive covenants customary with this type of facility, including maintaining a minimum Adjusted EBITDA, minimum Consolidated Fixed Charge Coverage Ratio, maximum Consolidated Total Net Leverage, maximum subscriber Churn, and minimum Liquidity, all of which are defined in the Crystal Loan Agreement. We are also prohibited from incurring indebtedness, disposing of or permitting liens on our assets and making restricted payments, including cash dividends on shares of our common stock, except as expressly permitted under the Crystal Loan Agreement. The agreement contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the agreement may be accelerated. As of March 31, 2016, we were in compliance with all covenants.

 

NOTE F – NET LOSS PER SHARE

 

Basic net loss per share attributable to common shareholders is based on the weighted-average number of common shares outstanding excluding the dilutive impact of common stock equivalents. Diluted net loss per share is not presented separately because there are no adjustments to the numerator in calculating dilutive net loss per share and all potentially dilutive common stock equivalents would be antidilutive. Potentially dilutive common stock equivalents included 1.8 million shares as of both March 31, 2016 and 2015 for outstanding equity-based compensation.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

NOTE G – RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Guidance

 

In March 2015, the Financial Accounting Standards Board (FASB) issued guidance about simplifying the presentation of deferred financing costs. The guidance was intended to help clarify deferred financing costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for deferred financing costs were not affected. The guidance was effective January 1, 2016 and, in accordance with the guidance, $1.0 million of deferred financing costs is included in long-term debt as of March 31, 2016 and $0.4 million of deferred financing costs was reclassified from current and noncurrent other assets to the current and noncurrent portions long-term debt as of December 31, 2015.

 

In September 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments for an acquirer in a business combination. The update requires an acquirer to recognize any adjustments to provisional amounts of the initial accounting for a business combination with a corresponding adjustment to goodwill in the reporting period in which the adjustments are determined in the measurement period, as opposed to revising prior periods presented in financial statements. Thus, an acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. This update was effective January 1, 2016 and the adoption of this guidance did not have a material impact on our financial statements.

 

Recently Issued Accounting Guidance

 

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payments transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 31, 2016. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the effect that the updated standard will have on our financial statements, but expect the guidance will add modest volatility in our equity-based compensation expense, provision for income taxes, and net income (loss).

 

In February 2016, the FASB issued guidance that requires lessees to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual and interim periods beginning after December 31, 2018. The updated standard mandates a modified retrospective transition method with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our financial statements.

 

In November 2015, the FASB issued guidance requiring all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. This standard is effective for public companies for annual periods beginning after December 15, 2016. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

In July 2015, the FASB issued guidance intended to simplify the presentation of applicable inventory at the lower of cost or net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

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, 2018 and will require retrospective application. We are evaluating the effect that this amendment will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. 

 

NOTE H – COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT

 

In March 2016, we entered into a commitment for a 60 month lease arrangement for computer and network equipment, software and related costs having a value of $1.2 million. The lease commenced in April 2016 and will be accounted for as a capital lease, reflecting the corresponding assets and related obligations in the subsequent balance sheet.

 

 

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

 

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring subscription revenues; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers 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; the inability to attain revenues 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,” the “Company” 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 March 31, 2016.

 

We are a holding company and, through our subsidiaries, are a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). We empower enterprise operations with world-class, managed IoT solutions that are simple, innovative, scalable and secure. An IoT solution is generally viewed as a combination of devices, software and services that operate with little or no human interaction. Our solutions incorporate each of the four key IoT building blocks – Device, Network, Application and Platform.

 

Our network services are provided through cellular, satellite, broadband and wireline networks. Cellular networks include national and regional carriers and consist of second (2G), third (3G) and fourth generation (4G and LTE) technology. Several wireless carriers have announced their intention to discontinue their 2G networks and fully deploy 3G and 4G networks between 2016 and 2020 while other carriers have announced their intention to discontinue 2G networks as early as 2020. We intend to continue support existing 2G customers through the transition to subsequent technology. Additionally, we have introduced 3G/4G and LTE products offering advanced services across our product lines.

 

Beginning in the third quarter of 2015, we began to concentrate on selling higher margin, integrated managed service subscriptions that include the full suite of our devices, networks, applications and platform while moving away from the sale of individual components – especially hardware only. We expect this strategic change to help us grow sustainable service revenues along with corresponding higher gross margins. However, we also anticipate hardware revenues will decline significantly in 2016 and remain relatively modest as compared to historical levels thereafter.

 

 

During the quarter ended March 31, 2016, we had revenues of $18.1 million, and a net loss of $2.3 million; compared with revenues and a net loss of $21.7 million and $0.6 million, respectively for the quarter ended March 31, 2015.

 

Our core strategy is to generate long term and sustainable recurring revenues through a portfolio of managed, end-to-end IoT solutions which are generally sold on a subscription basis and built on our horizontal, integrated platform. Our solutions incorporate the key IoT building blocks – Device, Network, Application and Platform. Our solutions also simplify the implementation and improve the speed to market for enterprise users in select, targeted verticals in the asset monitoring and optimization, asset tracking, and safety and security markets.

 

Our strategy requires significant capital investment to develop and enhance our use of technology and to maintain our leadership position and competitive advantage in the markets we serve.

 

Subscription revenues are recognized monthly as services are provided and sales of embedded devices and hardware are recognized when title passes. Other upfront payment revenues are deferred and amortized on a straight line basis.

 

Due to fluctuations of the commencement of new contracts and renewal of existing contracts, we expect variability of sequential quarterly trends in revenues, margins and cash flows. Other factors contributing to sequential quarterly trends include usage, rate changes, and re-pricing of contract renewals and technology changes.

 

Historically, our revenues and expenses in the first quarter have been modestly affected by slowing of customer purchase activities during the holidays. As a result, historical quarterly fluctuations may not be indicative of future operating results.

 

As part of our effort to build and enhance our core business, we conduct ongoing business strategy reviews. During our reviews, we consider opportunities for growth in existing and new markets that may involve growth derived from both existing operations as well as from future acquisitions, if any. To the extent existing business lines and service offerings are not considered to be compatible with delivery of our core business services or with meeting our financial objectives, we may exit non-core lines of business or stop offering these services in part or in whole.

 

 

Results of Operations

 

The following table sets forth selected financial data from our unaudited condensed consolidated statements of operations and comprehensive loss for the periods indicated along with the percentage change between periods (dollars in thousands):

 

		Three Months Ended March 31,																Change from
		2016								2015								2015 to 2016
Net revenues:
Subscription and support revenues		$	14,984				83.0	%		$	16,529				76.2	%		$	(1,545	)			-9.3	%
Embedded devices and hardware			3,066				17.0	%			5,149				23.8	%			(2,083	)			-40.5	%
Total net revenues			18,050				100.0	%			21,678				100.0	%			(3,628	)			-16.7	%
Cost of revenue, exclusive of a portion of depreciation and amortization shown below:
Subscription and support revenues			5,701				31.6	%			6,719				31.0	%			(1,018	)			-15.2	%
Embedded devices and hardware			3,118				17.3	%			4,853				22.4	%			(1,735	)			-35.7	%
Gross profit			9,231				51.1	%			10,106				46.6	%			(875	)			-8.7	%
Operating expenses:
Sales and marketing			2,945				16.3	%			3,064				14.1	%			(119	)			-3.9	%
General and administrative			4,129				22.9	%			3,929				18.1	%			200				5.1	%
Engineering and development			2,247				12.4	%			2,293				10.6	%			(46	)			-2.0	%
Depreciation and amortization			1,658				9.2	%			1,654				7.6	%			4				0.2	%
Operating loss			(1,748	)			-9.7	%			(834	)			-3.8	%			(914	)			109.6	%
Interest expense			267				1.5	%			210				1.0	%			57				27.1	%
Loss on extinguishment of debt			290				1.6	%			-				0.0	%			-				n/a
Other income, net			(43	)			-0.2	%			(38	)			-0.2	%			(5	)			13.2	%
Loss before income taxes			(2,262	)			-12.5	%			(1,006	)			-4.6	%			(1,256	)			124.9	%
Income tax expense (benefit)			64				0.4	%			(386	)			-1.8	%			450				-116.6	%
Net loss		$	(2,326	)			-12.9	%		$	(620	)			-2.9	%		$	(1,706	)			275.2	%
Adjusted EBITDA(1)		$	858				4.8	%		$	2,284				10.5	%		$	(1,426	)			-62.4	%

 _________________

(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.

 

Total revenues decreased $3.6 million, or 16.7%, for the three months ended March 31, 2016 to $18.1 million from $21.7 million for the same period in 2015. The decrease is primarily attributable to a strategic shift in how we sell our products and services. During the third quarter of 2015, we began to concentrate on selling higher margin, integrated managed service subscriptions that include the full suite, or subsets, of our devices, networks, applications, and platform while moving away from the sale of individual components – especially hardware only.

 

Subscription and support revenues decreased $1.5 million, or 9.3%, to $15.0 million from $16.5 million in 2015. The decrease reflects losses associated with network customers’ 2G conversions stemming from a period of time in which we did not have a competitive offering. Pricing has remained consistent year over year for similar services, although current period revenues also include higher value services. The decrease in embedded devices and hardware revenues is attributed to the shift to the integrated managed service subscription offerings. In addition, sales to our historically largest hardware only customer decreased to $0.3 million for the three months ended March 31, 2016 compared to $2.0 million for the same period in 2015.

 

Direct cost of revenues for the three months ended March 31, 2016 decreased $2.8 million, or 23.8%, to $8.8 million compared to $11.6 million for the same period in 2015. Direct cost of subscription and support revenues decreased $1.0 million, or 15.2%, to $5.7 million for the three months ended March 31, 2016 compared to $6.7 million for the same period in 2015. Subscription and support revenues less direct costs were $9.3 million, or 62.0% of corresponding revenues for the three months ended March 31, 2016 compared to $9.8 million, or 59.4% for the three months ended March 31, 2015. In addition to lower direct costs associated with lost 2G conversions, we also had a larger proportional decrease in direct cost of subscription and support due in part to lower negotiated network and carrier costs and our strategic efforts to sell higher margin integrated managed services. Direct cost of subscription and support revenues include $0.3 million and $0.2 million of depreciation and amortization for the three months ended March 31, 2016 and 2015, respectively.

 

 

Direct cost of revenue for embedded devices and hardware decreased $1.7 million, or 35.7%, to $3.1 million for the three months ended March 31, 2016 compared to $4.9 million for the three months ended March 31, 2015. Embedded devices and hardware revenue less direct costs was $(0.1) million, or (1.7)% of embedded devices and hardware revenue for the three months ended March 31, 2016 compared to $0.3 million, or 5.7% for the three months ended March 31, 2015, resulting from the decrease in hardware only sales to our historically largest hardware only customer. The overall decrease in direct costs is due to lower corresponding revenues related to our strategic move away from hardware only sales.

 

Total gross profit for the period ended March 31, 2016 decreased $0.9 million, or 8.7% to $9.2 million compared to $10.1 million for the same period in 2015.

 

Sales and marketing expense decreased $0.1 million, or 3.9%, for the three months ended March 31, 2016 to $3.0 million compared to $3.1 million for the same period in 2015. The decrease is primarily attributable to contract labor incurred during the three months ended March 31, 2015 for sales and marketing related to an ERP system upgrade that did not recur during the three months ended March 31, 2016.

 

General and administrative expense increased $0.2 million, or 5.1%, to $4.1 million for the three months ended March 31, 2016, compared to $3.9 million for the same period in 2015. The increase is driven primarily by the year over year increase in accounting and audit fees.

 

Engineering and development expenses decreased 2.0% to $2.2 million for the three-month period ended March 31, 2016, compared to $2.3 million for the three-month period ended March 31, 2015. The decrease is primarily attributable to a decrease in contract labor, especially related to specific projects in process during the three months ended March 31, 2015 that were subsequently completed. We may experience volatility in contract labor and overall engineering and development costs in the future as our business and operating needs evolve.

 

Depreciation and amortization expense remained consistent at $1.7 million for the three months ended March 31, 2016 and 2015.

 

The $0.3 million loss on extinguishment of debt was related to unamortized deferred financing costs related to the SVB Loan Agreement that was repaid during the three months ended March 31, 2016.

 

We recorded deferred income tax expense of $0.1 million for the three months ended March 31, 2016, compared to an income tax benefit of $0.4 million for the same period in 2015. The effective tax rates were (2.8%) and 38.4% for the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016, the difference in the effective tax rate compared to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income taxes, are due primarily to the book and tax basis and accounting differences for certain long and indefinite lived intangible assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses.

 

Non-GAAP Financial Measures

 

Earnings before interest, taxes, depreciation and amortization expenses (EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. 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, income tax, and depreciation and amortization expenses, 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.

 

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.

 

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.

 

Adjusted EBITDA is calculated by excluding the effect of equity-based compensation and non-operational items from the calculation of EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.

 

We believe that excluding depreciation and amortization expenses 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.

 

Equity-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, 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.

 

Adjusted EBITDA excludes non-cash and other charges including executive recruiting, costs and fees related to an internal ERP systems integration upgrade, a network systems evaluation and acquisition related costs. We believe that these costs are infrequent costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component 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.

 

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 March 31,
		2016				2015
Net loss		$	(2,326	)		$	(620	)
Depreciation and amortization expense			1,965				1,881
Interest expense and other non-operating  expense (income), net			514				172
Income tax expense (benefit)			64				(386	)
EBITDA (non-GAAP)			217				1,047
Equity-based compensation expense			621				784
Non-cash and other items			20				453
Adjusted EBITDA (non-GAAP)		$	858			$	2,284
Net loss per diluted share (GAAP)		$	(0.12	)		$	(0.03	)
EBITDA per diluted share (non-GAAP)			0.01				0.06
Adjusted EBITDA per diluted share (non-GAAP)			0.04				0.12
Weighted average shares outstanding used in computing diluted per share amounts			19,377				18,993

 

As noted above, non-cash and other charges include executive recruiting, costs and fees related to an internal ERP systems integration upgrade, a network systems evaluation and acquisition related costs.

 

Liquidity and Capital Resources

 

We use cash generated to support our operations and to fund new product development, upgrades to our technology and to invest in new businesses. During the three months ended March 31, 2016, cash decreased $5.0 million, with cash on hand used to pay $3.2 million of principal on long-term debt and associated deferred financing costs. We believe that our sources of funds, principally from operations and cash on hand, are sufficient to meet ongoing operations and investing requirements.

 

We had working capital of $17.0 million as of March 31, 2016, compared to $17.6 million as of December 31, 2015. We had unrestricted cash balances of $11.2 million and $16.2 million as of March 31, 2016 and December 31, 2015, respectively.

 

Net cash used in operating activities for the three-month period ended March 31, 2016 was $0.8 million compared with net cash provided by operating activities of $0.3 million for the three-month period ended March 31, 2015. The decrease in cash provided by operations is primarily a result of our net loss for the period. The use of cash related to inventory for the three months ended March 31, 2016 reflects a build up for a recent new product launch.

 

Net cash used in investing activities for the three-month period ended March 31, 2016 was $1.3 million, representing expenditures of $0.3 million for tangible assets and $1.0 million for software and capitalization of internally developed software.

 

 

Net cash used in financing activities for the three-month period ended March 31, 2016 was $2.9 million, primarily for net cash on hand used to repay the SVB debt and payment of deferred financing costs.

 

In April 2016, we entered into a 60 month lease arrangement for computer and network equipment, software and related costs having a value of $1.2 million. The lease will be accounted for as a capital lease, reflecting the corresponding assets and related obligations in the subsequent balance sheet.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2016, 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 months ended March 31, 2016 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

As a result of the adoption of a recent accounting pronouncement, certain balance sheet amounts as of December 31, 2015 have been reclassified to conform to the current period presentation. See Note A – Summary of Significant Accounting Policies. 

 

 

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 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. We held $0.4 million and $0.5 million in foreign bank accounts at March 31, 2016 and December 31, 2015, respectively.

 

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 in the consolidated statements of operations and comprehensive loss and within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. 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 three months ended March 31, 2016 or fiscal year ended December 31, 2015.

 

Interest Rate Risk

 

We are exposed to changes in interest rates on our long term debt that carries variable rate interest. The impact of a 100 basis point change in interest rates would result in a change in annual interest expense of $0.2 million.

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2016, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on management’s identification of the previously reported deficiencies in internal control over financial reporting that it considers to be material weaknesses, management has concluded that disclosure controls and procedures were not effective at March 31, 2016. Steps being undertaken to remediate these weaknesses are discussed below.

 

The Company is continuing to reinforce its processes to address the previously reported material weaknesses.  The Company believes the steps being taken to remediate these weaknesses are appropriate and the Company expects them to be fully remediated before the end of its fiscal year. Remediation efforts include:

 

·

Evaluation Process for Impairment of Goodwill and Other Intangible Assets Material Weakness:

·

Enhance the formality of rigor of review as it relates to assumptions that are utilized pertaining to the goodwill impairment evaluation process, and

·

Perform more rigorous sensitivity analyses on financial projections and other inputs.

 

·

Capitalized Internally Developed Software Material Weakness:

·

Implement additional monitoring controls as it relates to internal costs that are incurred and capitalized, and

·

Implement additional monitoring controls verifying the hours and rates that are incorporated into the capitalized internally developed software calculation.

 

The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in our controls. The Company has started to implement these steps, however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weakness described above will continue to exist.

 

 

Notwithstanding the material weaknesses described above, management has concluded that the Company’s unaudited condensed consolidated financial statements included in this report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended March 31, 2016, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

We currently are not involved in any pending material litigation.

 

Item 1A.

Risk Factors.

 

For information regarding factors that could affect 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, 2015 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.

 

 

Item 6.

Exhibits.

 

Exhibit Number		Description
10.1		Term Loan Agreement Dated as of March 9, 2016 by and among Numerex Corp. and Crystal Finance LLC, as Term Agent
31.1		Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)
31.2		Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a)
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (ii) Unaudited Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income for the three months ended March 31, 2016 and 2015, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, (iv) Unaudited Condensed Consolidated Statement of Shareholders Equity for the three months ended March 31, 2016 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.

 

 

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)
May 9, 2016	/s/ Marc Zionts
	Marc Zionts
	Chief Executive Officer
May 9, 2016	/s/ Kenneth L. Gayron
	Kenneth L. Gayron
	Chief Financial Officer and
	Principal Financial and Accounting Officer