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Numerex Corp (NMRX) SEC Filing 10-K Annual report for the fiscal year ending Saturday, December 31, 2011

Numerex Corp

CIK: 870753 Ticker: NMRX


Numerex Corp. Contact:
Alan Catherall
770 485-2527

Investor Relations Contact:
Seth Potter
646 277-1230


         
Exhibit 99.1                                                                                           Press Release

For Immediate Release

 
Numerex Reports Fourth Quarter and Full Year 2011 Financial Results
 
 
          25% Q4 Growth Drives M2M Subscription Base To 1.44 Million, Generating 19% increase in Q4 recurring revenues
 
ATLANTA, GA February 21, 2012—Numerex Corp (NASDAQ:NMRX),
 a leading provider of business services, technology, and products for the worldwide machine-to-machine (M2M) market, today announced financial results for its fourth quarter and full year ended December 31, 2011.

“Numerex solidified its position as a leader in the M2M industry with a strong performance in the fourth quarter and for the full year 2011,” stated Stratton Nicolaides, chairperson and CEO of Numerex. "Currently, we host nearly 1.5 million subscriptions, servicing and supporting over 50 vertical and sub-vertical markets, on our integrated cloud-based horizontal platforms. The Company's subscription base grew 25% in the fourth quarter compared to Q4 of 2010, reflecting increased activity in several markets. Accordingly, we have upwardly revised our subscription growth estimates to the 25% to 30% range for the full year 2012, as a result of the momentum created in the fourth quarter and robust activity experienced so far this year. We continue to reinforce our position as a leading Global M2M Managed Solutions Provider as we deliver 'M2M as a Service'.”

"The fourth quarter registered a strong finish as evidenced by the solid growth in our M2M subscription base and 19% increase in recurring revenues compared to the fourth quarter of 2010," continued Mr. Nicolaides.  “The Company anticipates strong operating leverage during 2012, due to the combination of the expected 18% to 23% growth in recurring revenues and continued cost controls resulting in improved profitability. Full year results for 2011 reflect a 25% decline in hardware revenues and related loss of margin contribution as well as $1.2 million in product-related charges that are not expected to re-occur in 2012."

Financial metrics for the fourth quarter of 2011 include:
($ millions, except per share and subscription data)
   
Three Months Ended
   
Twelve Months Ended
 
   
December 31
   
December 31
 
   
2011
   
2010
   
2011
   
2010
 
 
M2M recurring revenue
    10.4       8.7       38.6       33.4  
M2M embedded device and hardware revenue
    4.5       5.9       18.6       23.3  
Gross margin
    46.0 %     44.5 %     44.9 %     44.1 %
GAAP net earnings/(loss)
    0.7       (1.4 )     1.9       (0.3 )
Earnings per share (EPS)
    0.05       (0.09 )     0.12       (0.03 )
Non-GAAP net earnings before non-cash &
         exceptional items
    2.1       2.0       6.5       7.0  
New subscriptions
    93,000       69,000       268,000       234,000  
Total subscriptions
    1,438,000       1,171,000       1,438,000       1,171,000  




-continued-
The Company’s Fourth Quarter Financial Highlights:

·  
During the quarter ended December 31, 2011, the Company added 93,000 subscriptions, as compared to 80,000 subscriptions added in the third quarter 2011 and the 69,000 subscriptions added in the fourth quarter of 2010.

·  
Reported M2M revenues of $14.9 million in the fourth quarter of 2011, compared to $14.7 million both in the third quarter 2011 and in the fourth quarter of 2010.  During the quarter ended December 31, 2011, the Company reported M2M recurring revenues of $10.4 million, as compared $9.8 million in the third quarter 2011 and $8.7 million during the fourth quarter of 2010, which computes to growth rates of 7% and 19% respectively.

·  
Consolidated gross margin for the three months ended December 31, 2011 was 46.0% compared to 45.4% in the third quarter 2011 and 44.5% during the fourth quarter in 2010.

·  
GAAP net earnings for the three months ended December 31, 2011 were $692,000 compared to $592,000 in the third quarter 2011 and a net loss of $1.4 million during the fourth quarter of 2010.

·  
GAAP net earnings adjusting for the impact of non-cash stock option compensation expenses for the three months ended December 31, 2011 were $1.1 million compared to $1.0 million in the third quarter 2011 and a net loss of $1.2 million during the fourth quarter of 2010.

·  
Non-GAAP net earnings before non-cash charges and litigation related legal fees was $2.1 million during the fourth quarter of 2011 compared to $1.9 million for the third quarter 2011 and $2.0 million for the three months ended December 31, 2010. A reconciliation of this measure to GAAP results has been provided in the financial table below and further discussion of this measure as compared to GAAP is included elsewhere in the press release.

The Company’s Fiscal Year 2011 Financial Highlights:

·  
Added 268,000 new subscriptions in 2011 compared to 234,000 new subscriptions in 2010.  173,000 of the 268,000 annual additions took place in the second half of 2011. Subscriptions grew by 23% to 1,438,000 recorded at the end of 2011 compared to 1,171,000 recorded at the end of 2010.

·  
Reported M2M revenues of $57.2 million in the full year of 2011, compared to $56.7 million in 2010.  During the year ended December 31, 2011, the Company reported M2M recurring revenues of $38.6 million, an increase of 16% from $33.4 million during 2010.

·  
Consolidated gross margin for the year ended December 31, 2011 was 44.9% compared to 44.1% during the 2010.

·  
GAAP net earnings for the full year ended December 31, 2011 were $1.9 million compared to a loss of $381,000 in 2010. 2011 reflects $1.2 million in product related charges that are not expected to reoccur in 2012.

·  
GAAP net earnings adjusting for the impact of non-cash stock option compensation expenses were $3.1 million for the year ended December 31, 2011 compared to $557,000 in 2010.

·  
Non-GAAP net earnings before non-cash charges and litigation related legal fees were $6.5 million during the full year of 2011 compared to $7.0 million during 2010. A reconciliation of this measure to GAAP results has been provided in the financial table below.

·  
Numerex ended 2011 with cash and cash equivalents of $9.5 million and long-term debt of $4.5 million.



-continued-

 

The Company’s Operational Highlights Include:

·  
Launched Numerex FAST 3.0, the company’s cloud-based M2M platform that includes the following three service delivery options, which can be accessed independently or as a fully integrated solution: Network as a Service (NaaS), Platform as a Service (PaaS) and Software as a Service (SaaS).

·  
Announced a new satellite-based asset monitoring solution, which enables value added resellers to provide secure, configurable asset visibility to their customers seeking to monitor liquid tanks and doors.

·  
Announced the issuance of two new U.S. patents, further solidifying the company’s M2M innovation leadership.  One patent enables a digital/analog management system for wireless customer premise equipment and the other patent enables more efficient messaging over a data network.

·  
Received the 2011 North America Competitive Strategy Leadership award in the M2M communications market from Frost & Sullivan.

·  
Awarded, along with QinetiQ North America, renewal of the Federal Emergency Management Agency (FEMA) contract for asset tracking services.

·  
Led various M2M standardization activities, including organizing the international M2M conference at Georgia Institute of Technology in Atlanta, Georgia. In addition, the Company’s Chief Technology Officer was named chairman of the Global Standards Collaboration M2M Standardization Task Force.

·  
Won two Gold Value Chain Awards from Connected World magazine and recognized in the list of their 100 most innovative M2M technology and connected device providers.

Mr. Nicolaides concluded, “Throughout the year, we introduced new products, forged promising alliances in growing markets, and drove global M2M standardization while being recognized with prestigious awards for our leadership and innovation. As the third party M2M solution experts, we continue to leverage our infrastructure to deliver creative and successful solutions to a broad range of customers."

Quarterly Conference Call
Numerex will discuss its quarterly results via teleconference today at 9:00 a.m. Eastern Time. Please dial (866) 377-4015. Or if outside the U.S. and Canada, (904) 271-2003 to access the conference call at least five minutes prior to the 9:00 a.m. ET start time. A live webcast and replay of the call will also be available at http://www.numerex.com under the Investor Relations section.  An audio replay will be available via the Numerex web site beginning two hours after the call end.

About Numerex
Numerex Corp (NASDAQ: NMRX) is a leading provider of machine-to-machine (M2M) business services, technology, and products used in the development and support of M2M solutions for the enterprise and government markets worldwide. The Company offers Numerex DNA® that includes hardware and smart Devices, cellular and satellite Network services, and software Applications that are delivered through Numerex FAST® (Foundation Application Software Technology). Customers typically subscribe to device management, network, and application services through hosted platforms. Business services enable the development of efficient, reliable, and secure solutions while simplifying and speeding up deployment through streamlined processes and comprehensive integration services. Numerex is ISO 27001 information security-certified. "Machines Trust Us®" represents the Company's focus on M2M data security, service reliability, and round-the-clock support of its customers' M2M solutions. For additional information, please visit www.numerex.com.
 
This press release 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 press release, and Numerex assumes no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.
 
The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring subscription revenues; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets, and the inability to raise growth capital; 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. Numerex SEC reports identify additional factors that can affect forward-looking statement.




-continued-


 
 

The following information was filed by Numerex Corp (NMRX) on Tuesday, February 21, 2012 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.



 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
 
FORM 10-K
 
 
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2011
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
 
 
Commission File Number 0-22920
 
 
NUMEREX CORP.
 
(Name of Registrant as Specified in Its Charter)
 
 
 
     
Pennsylvania
 
11-2948749
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
   
1600 Parkwood Circle, Suite 500, Atlanta, GA
 
30339
(Address of Principal Executive Offices)
 
(Zip Code)
 
(770) 693-5950
 
(Registrant’s Telephone Number, Including Area Code)
 
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
 
     
Class A Common Stock, no par value
(Title of each class)
 
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
     
     
 
Securities Registered Pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o           No þ
 
     
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.     Yes o          No þ
 
 
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ         No o
 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     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     Accelerated filer þ     Non-accelerated filer     Smaller Reporting Company        
 
     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o           No þ
 
 
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was $111.3 million based on a closing price of $9.73 on June 30, 2011, as quoted on the NASDAQ Global Market.
 
    
The number of shares outstanding of the registrant’s Class A Common Stock as of March 08, 2012, was 15,163,662 shares.

 
 
DOCUMENTS INCORPORATED BY REFERENCE
 

 
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2011. The proxy statement is incorporated herein by reference into the following parts of the Form 10-K:
 

       Part III, Item 10, Directors, Executive Officers and Corporate Governance;
 
       Part III, Item 11, Executive Compensation;
 
       Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related
 
                                   Stockholder Matters;
 

       Part III, Item 13, Certain Relationships and Related Transactions, and Director Independence; and
 
       Part III, Item 14, Principal Accountant Fees and Services.
 



 
 

 
 
 
NUMEREX CORP.
 
                             ANNUAL REPORT ON FORM 10-K
 
                                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
 

                                  TABLE OF CONTENTS
 
   
Page
 
PART I
 
 Item 1.
Business
4
 Item 1A.
Risk Factors
11
 Item 1B.
Unresolved Staff Comments
21
 Item 2.
 Properties
21
 Item 3.
 Legal Proceedings
22
 Item 4.
 Mine Safety Disclosures
22
 
   
 
 PART II
 
  Item 5.
 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
 
 
Securities
22
 Item 6.
 Selected Consolidated Financial Data
24
 Item 7.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
 Item 7A.
 Quantitative and Qualitative Disclosures about Market Risk
37
 Item 8.
 Financial Statements and Supplementary Data
38
 Item 9.
 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
67
 Item 9A.
 Controls and Procedures
67
 Item 9B.
 Other Information
69
 
   
 
 PART III
 
 Item 10.
 Directors, Executive Officers and Corporate Governance
69
 Item 11.
 Executive Compensation
69
 Item 12.
 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
69
 Item 13.
 Certain Relationships and Related Transactions and Director Independence
69
 Item 14.
 Principal Accounting Fees and Services
69
     
 
 PART IV
 
Item 15.
Exhibits and Financial Statement Schedule
70
     
     

 
 

 

Forward-Looking Statements
 
 
This document may contain forward-looking statements with respect to Numerex future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. Numerex cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this press release, and Numerex assumes no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.
 
The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to continue to expand our subscription-based sales mode; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services, including a prolonged deterioration of the housing market; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets,  the inability to raise growth capital on favorable terms, if at all; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; unexpected costs associated with our continued investments and expansion in international markets; and extent and timing of technological changes. Numerex SEC reports identify additional factors that can affect forward-looking statement.

 
PART I. BUSINESS

Overview

Numerex Corp (“Numerex,” the “Company” or “we”) is headquartered in Atlanta, Georgia, and organized under the laws of the Commonwealth of Pennsylvania.   
 
 
Numerex long-term strategy has remained, at its core, the same: to generate long term and sustainable recurring revenue through the use of the Company’s integrated machine-to-machine ("M2M") horizontal platforms. These platforms incorporate the key M2M elements of Device (D), Network (N), and Application (A), and are offered, for the most part, on a subscription basis through a ‘service bureau’, simplifying and speeding the delivery of an M2M solution to any enterprise-based vertical market.

We provide a broad range of machine-to-machine (M2M) business services, technology, and products used in the development and support of M2M solutions for the enterprise and government markets worldwide. We have built innovative platforms that are cloud and service-centric to facilitate the development, deployment and use of our customers’ M2M solutions across a wide range of markets.  At the end of 2011, Numerex supported over 1.4 million M2M subscriptions covering over 50 vertical and sub-vertical markets.

M2M consists of using a device (D) (e.g., sensor, meter, etc.) to capture an “event” (e.g., inventory level, location, environment status, etc.) relayed through a network (N) (e.g., wireless, wired or hybrid) to an application (A) (software program), which translates the captured data into actionable information (e.g., there is a breach, vending machine needs to be restocked, pipe is corroded, lost vehicle is located, tank level is too low, etc.)

Our subscription-based platform services, which generate streams of long-term high-margin recurring revenues, are the cornerstone of our business model. We create value by helping our customers bring their M2M solutions to market through one single source, rapidly, efficiently, reliably and securely. We put a strong emphasis on data security. Beyond the use of authentication, encryption and virtual private network (VPN) technologies to protect customer data, Numerex‘s whole internal organization has undergone ISO/IEC 27001:2005 (international information security standard) scrutiny and certification.

 

 


We operate in the Business-to-Business (B2B) market, and our customers, in general, serve the final end users. Numerex’s products and services are primarily sold to enterprise and government organizations, some of them with global needs. Our targeted vertical markets include security, energy and utilities, transportation, government, financial services, healthcare and supply chain. 

We work with our customers to develop solutions that integrate Numerex DNA®, which is the necessary foundational components, i.e., smart device, cellular and satellite network and software application, of any M2M solution, which we offer through a single source, rather than requiring customers to utilize multiple vendors and partners. We also provide several enabling value-added services.

We accelerate the development process for our customers, through our cloud-based horizontal M2M platform Numerex FAST®, which can be accessed through three service delivery options, separately or combined: Network-as-a-Service (NaaS); Platform-as-a-Service (PaaS); and Software-as-a-Service (SaaS).

In addition to specifically configured business solutions, we sell unbranded, end-user ready (“white label”) solutions typically to channel partners who have well-defined markets that do not necessarily require a configured or customized solution. Examples of such “white label” platforms at Numerex include: security; Location-Based Services (LBS); and a number of additional fixed-wireless or “static” applications.

Our offerings use cellular, satellite, broadband and wireline networks worldwide. We handle all the aspects of international connectivity including any associated regulations, processes and data requirements.

We utilize a diverse range of manufacturing sources and telecommunications standards.  We believe that our ability to manage disparate networks and devices while providing customers with a consolidated view of their activity is a unique strength of Numerex. We have repositioned our business to de-emphasize hardware-only sales and to focus on solution and service-based activity and sell hardware that we believe will connect to our platforms in order to generate a subscription and, as a result, recurring revenue.
 
Besides our above-described core offerings, we offer digital multimedia products and services such as PowerPlay™ to certain customers. They are marketed through value added resellers or VARs and system integrators and managed as a single group. These products and services are not core to the Company’s M2M business and currently comprise about 2% of our annual revenues.


HISTORY

 We were first traded publicly in March 1994 on the Nasdaq stock market. At that time, the Company focused on “derived channel”, a wireline-based telemetry data communications solution (“telemetry” is eventually subsumed by the ‘M2M’ acronym) and served select vertical markets that included alarm security and line monitoring. In November 1999, we sold our wireline business to British Telecommunications PLC (“BT”) in order to focus on our nascent wireless data communications business.
 
In May 1998, Numerex Corp, BellSouth Corporation and BellSouth Wireless, (which became Cingular in 2001 and AT&T in January 2007, following the merger between BellSouth and ATT in December 2006), completed a transaction whereby Cellemetry LLC, a joint venture between Numerex and Cingular, was formed. Cellemetry LLC provided a cost-effective, two-way wireless data communications network throughout the United States, Canada, Mexico, Colombia, Argentina, Paraguay, the Dutch Antilles, and Puerto Rico. On March 28, 2003, we acquired Cingular’s interest in Cellemetry LLC.
 
During this period, we developed a Short Message Service Center (SMSC)-operated service bureau, “Data1Source,” providing SMS-related services to tier 2 and 3 carriers throughout the USA.  While the Data1Source revenue base was subsequently sold, the related technology infrastructure was retained and it helped advance our technical expertise in GSM and CDMA, providing a solid foundation on which to build our current network platforms. In parallel, we expanded our technical platform to serve the mobile tracking and alarm monitoring markets.
 
At the beginning of 2006, the Company further enhanced its portfolio of wireless products and services through the acquisition of the assets of Airdesk, Inc. Airdesk’s wireless data solutions, network access and technical support have been fully integrated into the Company’s operations.

 
 5

 

In 2007, Numerex acquired the assets of Orbit One Communications, Inc., which provides satellite data products and services to government agencies and the emergency service market.
 
In January 2008, Numerex was awarded the international ISO/IEC 27001:2005 Certification (ISO 27001) by BSI Management Systems. ISO 27001 is ISO’s highest security certification for information security that ensures data confidentiality, integrity and availability every step of the way. The ISO 27001 certification facilitates compliance with an array of information security-related legislation and regulations in Numerex’s target markets such as utilities (NERC CIP Cyber Security mandates), financial services (GLBA and PCI DSS), healthcare (HIPAA), government (FISMA), and across markets (state laws governing security breach notification and Sarbanes Oxley Act).  In January 2011, Numerex completed the three-year ISO 27001 standard re-certification.
 
In October 2008, Numerex acquired Ublip, a privately-held M2M software and service company headquartered in Dallas, Texas. With this acquisition, Numerex gained an infusion of technology and expertise, including middleware designed to simplify and jumpstart application development and deployment.


SERVICE DEVELOPMENT PLATFORM AND ENABLING SERVICES

v  
Numerex FAST®

Our broad cloud-based M2M horizontal service development platform (Numerex FAST) is an M2M solution foundation with three service delivery options, which can be delivered individually or together: Network-as-a-Service (NaaS); Platform-as-a-Service (PaaS); and Software-as-a-Service (SaaS).

Through Numerex NaaS,Numerex offers and integrates a variety of cellular, satellite, wired, Wi-Fi and short range wireless options together with critical add-on functionality such as automated activation and provisioning, policy and threshold management, and fraud detection. Numerex NaaS also enables customers to manage devices across multiple network technologies, centralizing account control as well as facilitating network migration strategies.

For M2M developers who want to avoid upfront capital expenditures, minimize risk and benefit from immediate availability of production capabilities, Numerex PaaS™ provides an environment through which they can easily and rapidly develop, run and test their applications. Central to Numerex PaaS, is the ability to have access to a wide range of Numerex-hosted web services such as device management, provisioning, location, mapping, geofencing, geocoding, data mining, and business intelligence.

Numerex SaaS™ gives customers access to specific Numerex-developed M2M applications with various hosting possibilities.

In addition, Numerex has developed a user-friendly customer portal within FAST 3.0, Numerex Passport™, which provides seamless access to critical solution management information as well as all Numerex M2M services including customer care. Numerex Passport is one of the SaaS applications built upon the web services in Numerex PaaS. Customers can use it as a graphical user interface (GUI) outright or incorporate these device management web services into their own application.
 
Numerex FAST enables multiple devices to be connected to multiple wireless networks through a single application.  We offer branding, hosting services, gateway development, extensive device management and application monitoring tools. The availability of Numerex’s application building blocks for “turnkey” use or assembly into more customer-specific solutions allows any developer to quickly build a branded web-based application. Our network features include international roaming service, granular fraud detection, low latency, and managed Quality-of-Service SMS delivery.


v  
Enabling Services

We offer an extensive range of products and services that work with our hosted platforms and make integration between smart device, network, and application a seamless process. From asset tracking on a global scale to stationary, or ‘static’, solutions that involve monitoring, measuring, and metering applications, our team of M2M on-boarding specialists and engineers work to optimize commercialization of a solution.  Examples of enabling services include: 24x7 customer support; flexible billing; integration services; automated provisioning; device management

 

 

 portal; network operations center; network redundancy; product certification and ancillary services such as but not limited to warehousing and fulfillment.


SALES, MARKETING AND DISTRIBUTION

We sell our configured solutions and related services to, with, and through our strategic partner channels such as system integrators, consultative groups, wireless networks operators, key supply chain partners and large end-user enterprises.

We primarily employ an indirect sales model for our unbranded (“white label”) products through VARs, vertically focused System Integrators (SIs) and Original Equipment Manufacturers (OEMs) who integrate our products and services into their own solutions. We also indirectly market and sell certain Numerex branded products and services through distribution and dealer channels, specifically the Uplink platform. Uplink alarm security products are sold “off the shelf” into distribution and dealers throughout North America.   
  

KEY CUSTOMERS
 
We have no single customer that accounts for more than 10% of our total revenue.


SUPPLIERS

We rely on third-party contract manufacturers and wireless network operators/ carriers, both in the United States and overseas, to manufacture most of the equipment used to provide our wireless M2M solutions, networking equipment and products, and to provide the underlying network service infrastructure that we use to support our M2M data network, respectively.
 

COMPETITION

The market for our technology and platforms remains characterized by rapid technological change. The principal competitive factors in this market continue to be product performance, ease of use, reliability, price, breadth of product lines, sales and distribution capability, technical support and service, customer relations, and general industry and economic conditions. 

Several businesses that share our M2M space can be viewed as competitors, such as application service providers, Mobile Virtual Network Operators (MVNOs), system integrators, and wireless operators/carriers that offer a variety of the components and services required for the delivery of complete M2M solutions.  We believe that we have a competitive advantage and are uniquely positioned since it provides all of the key components of the M2M value chain, including cloud-based enabling platforms, multiple wireless technologies, custom applications, and wireless network services through one single source. We market and sell complete network-enabled solutions, or individual components, based upon the specific needs of the customer. Some module manufacturers have started to market application development platforms while other M2M players offer airtime services, making available to their customers integration capabilities. In addition, there are also a limited number of companies offering end-to-end service delivery platforms.
 
We believe that our current M2M services, combined with the continuing development of our network offerings and technology, positions us to compete effectively with emerging providers of M2M solutions using Global System for Mobile Communications (GSM), Code Division Multiple Access (CDMA) and satellite technology. Other potentially competitive offerings may include “wireless fidelity” (Wifi), World Interoperability for Microwave Access (WiMAX) and other 3G and 4G (third and fourth generations of cellular wireless standards) technologies and networks.  We believe that principal competitive factors when selecting an M2M service or network-only provider are a single interface, network reliability, data security, and customer support.
  
Our Uplink security products and services have three primary competitors in the existing channels of distribution — Honeywell’s AlarmNet, Telular’s Teleguard and DSC, the security division of Tyco.  We believe that the principal competitive factors when making a product selection in the business and consumer security industry are hardware

 

 

 price, service price, reliability, industry certification status and feature requirements for specific security applications, for example fire, burglary, bank vault, etc.  Additional competitors have entered the market in the last several years with a focus on blending security monitoring and home automation.  These products and services are targeted for the do-it-yourself market as opposed to traditional security dealers.  Several companies offer OEM versions or include alarm monitoring technology and network services provided by Numerex. Regarding the transition to 3G, Numerex and its partners intend to continue supporting 2G well into this decade, providing reliable 2G network services while at the same time introducing 3G products for more advanced services. We remain committed to the security marketplace and will always work with our customers to provide the services required to meet their security customer’s needs.


M2M STANDARDIZATION INVOLVEMENT

We believe that sharing our M2M expertise with international groups and forums focused on standards and the industry’s growth is mutually beneficial.  Our Chief Technology Officer, Dr. Jeffrey O. Smith completed his term as Chair of Telecommunications Industry Association (TIA) TR-50 Standards Committee on Smart Device Communications, at the end of January 2012.  During his term, TIA TR-50 released its first Smart Device Communications Reference Architecture standard in December 2011.  Dr. Smith was also confirmed in November 2011 as Chair of the Global Standards Collaboration (GSC) M2M Standardization Task Force (MSTF), which is comprised of all major Standards Developing Organizations from around the world. GSC’s mandates include supporting the International Telecommunication Union (ITU), a specialized agency of the United Nations, as the preeminent global telecommunication and radiocommunication standards development organization. The goal of the GSC MSTF is to foster global coordination and harmonization in the area of M2M standardization. In addition, Numerex’s CEO, Mr. Stratton J. Nicolaides was elected to the board of directors of TIA, a leader in setting standards in the telecommunications arena.


ENGINEERING AND DEVELOPMENT

Our success depends, in part, on our ability to enhance our existing products and introduce new products and applications on a timely basis. We plan to continue to devote a portion of our resources to research and development.  Our engineering and development expenses were $2.7 million for the year ended December 31, 2011.
 
We continue to invest in new services and improvements to our various technologies, especially networks and digital fixed and mobile solutions. We primarily focus on the development of M2M services and enabling platforms, enhancement of our gateway and network services, reductions in the cost of delivery of our solutions, and enhancements and expansion of our application capabilities.    


PRODUCT WARRANTY AND SERVICES

Our M2M business typically provides a limited, one-year repair or replacement warranty on all hardware-based products. Our digital multimedia business typically provides a limited one-year warranty on parts and labor. To date, warranty costs and the cost of maintaining our warranty programs have not been material to our business.
 

INTELLECTUAL PROPERTY

We hold patents either directly (under Numerex Corp) or through our subsidiaries covering the technologies we have developed in support of our product and service offerings in the United States and various other countries.  United States Patents have a limited legal lifespan, typically 20 years from the filing date for a utility patent filed on or after June 8, 1995.  Our patents expire between March 11, 2014 and September 30, 2028. It is our practice to apply for patents as we develop new technologies, products, or processes suitable for patent protection.  No assurance can be given about the scope of the patent protection.
 
We also hold other intellectual property rights including, without limitation, copyrights, trademarks, and trade secret protections relating to our technology, products, and processes.   We believe that rapid technological developments in the telecommunications and locate-bases services industries may limit the protection afforded by patents.  

 

 


In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require all of our employees and consultants to sign confidentiality agreements. Employees and consultants involved in technical endeavors also sign invention assignment agreements.  


REGULATION
 
Federal, state, and local telecommunications laws and regulations have not posed any significant impediments to either the delivery of wireless data signals/messaging or services using our various platforms. However, we may be subject to certain governmentally imposed taxes, surcharges, fees, and other regulatory charges, as well as new laws and regulations governing fixed and mobile communications devices, associated services, our business and markets.   As we expand our international sales, we may be subject to telecommunications regulations in those foreign jurisdictions.


Employees
 
As of March 15, 2012, we had 133 employees in the U.S., consisting of 29 in sales, marketing and customer service, 71 in engineering and operations and 33 in management and administration. We have experienced no work stoppages and none of our employees are represented by collective bargaining arrangements.  We believe our relationship with our employees is good.
 

Available Information
 
We make available free of charge through our website at www.numerex.com our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto filed or furnished pursuant to 13(a) or 15(d) of the Securities and Exchange act of 1934, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.  Our filings are also available through the Securities and Exchange Commission via their website, http://www.sec.gov. You may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The information contained on our website is not incorporated by reference in this annual report on form 10-K and should not be considered a part of this report.
 

Executive Officers of the Registrant
 
Our executive officers, and all persons chosen to become executive officers, and their ages and positions as of March 15, 2012, are as follows:
 
 
Name
Age
Position
Stratton J. Nicolaides*
58
Chairman of the Board of Directors, Chief Executive Officer
Michael A. Marett
57
Chief Operating Officer
Alan B. Catherall
58
Chief Financial Officer
Louis Fienberg
57
Executive Vice President, Corporate Development
Jeff Smith, PhD
51
Chief Technology Officer

 
*Member of the Board of Directors
 
Mr. Nicolaides has served as Chief Executive Officer of the Company since April 2000, having served as Chief Operating Officer from April 1999 until March 2000 and as Chairman of the Board since December 1999.  Mr. Nicolaides is a member of the Board of Directors for the Telecommunications Industry (TIA) as well as the Taylor Hooten Foundation..
 

 

 

Mr. Marett has been an Officer of the Company since February 2001. In February 2005 he was named Chief Operating Officer.  From 1999 to 2001, Mr. Marett was Vice President, Sales and Marketing, of TManage, Inc., which provided planning, installation, and support services to companies with large remote workforces. From 1997 to 1999 Mr. Marett was Vice President, Business Development, of Mitel Business Communications Systems, a division of Mitel Corporation.  Prior to 1997, Mr. Marett held a number of executive positions at Bell Atlantic.
 
Mr. Catherall has been the Chief Financial Officer of the Company since June 2003.  From 1998 to 2002, Mr. Catherall served as Chief Financial Officer of AirGate PCS, a NASDAQ-listed wireless company.  From 1996 to 1998, Mr. Catherall was a partner in Tatum CFO LLP, a financial services consulting company.  Prior to 1996, he held a number of executive and management positions at MCI Communications.
 
Mr. Fienberg serves as the Company’s Executive Vice President for Corporate Development and has been with the Company since July 2004.  From August 2003 to July 2004, Mr. Fienberg served as Managing Director of an investment banking firm. From 1992 to 2003, Mr. Fienberg was a Senior Vice President and merger and acquisition specialist with Jefferies and Company, Inc.
 
Dr. Smith has served as the Chief Technology Officer since October 9, 2008.  From June 2007 to October 2008, he served as the President and Chief Executive Officer of Ublip, Inc. a provider of M2M and location based services that Dr. Smith founded.  From January 2002 until June 2007, Dr. Smith served as President and Chief Executive Officer of SensorLogics, Inc., an M2M application service provider that he also founded.  From June 1996 until January 2000, Dr. Smith served as regional President and director of NTT/Verio, an internet service provider and web hosting company.  From October 1993 until January 1997, he served as President and Chief Executive Officer of OnRamp Technologies, an internet service provider that he co-founded.
 

 
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Item 1A. Risk Factors

 
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks before buying shares of our common stock. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are unaware or we currently believe are not material could also adversely affect us. In any case, the value of our common stock could decline, and you could lose all or part of your investment. You should also refer to the other information contained in this Annual Report on Form 10-K for the year ended December 31, 2011 (the Annual Report) or incorporated herein by reference, including our consolidated financial statements and the notes to those statements. See also, “Special Note Regarding Forward-Looking Statements.”
 
We have a history of losses and are uncertain as to our future profitability.
 
We have had mixed success with regard to generating profits. While we were profitable in 2011, we incurred losses in 2008, 2009, and 2010.   As a holding company our primary material assets are our ownership interests in our subsidiaries and in certain intellectual property rights. Consequently, our earnings derive from our subsidiaries and we depend on accumulated cash flows, distributions, and other inter-affiliate transfers from our subsidiaries. In view of our history of losses, operating costs, and all other risk factors discussed in this Annual Report, we may not be profitable in the future.
 
Adverse macroeconomic conditions could magnify our customers’ current financial difficulties.
 
We provide solutions that are resold by our customers – primarily value-added resellers whose customers are end users of our solutions and distributors who sell to other resellers of our solutions. Many of our customers operate on narrow margins and have been adversely affected by current overall economic conditions. Current economic conditions, while improving by some measures, continue to negatively impact demand for our customers’ solutions, reducing their demand for our solutions. Our customers may also face higher financing and operating costs. If current economic conditions do not improve or worsen, we may experience reduced revenue growth or a decrease in revenues and an increase in expenses, particularly in the form of bad debt on the part of our customers. All of these and other macroeconomic factors could have a material adverse effect on demand for our solutions and on our financial condition and operating results.
 
We are also likely to experience greater pressure to reduce pricing and accept lower margins as we compete for customers subject to similar constraints on their pricing and margins. While our largest customers have been less affected by the current economy, if current adverse economic conditions persist or worsen, those customers could begin to be affected in a similar manner.
 
In particular, we anticipate that continued sluggishness in the new housing sector will impair sales of our residential alarm monitoring solutions, since customers may purchase our security systems in connection with the purchase of a new residence.. If overall conditions worsen significantly, residential and commercial consumers may also decide to cancel wireless monitoring services in an effort to eliminate expenses viewed as discretionary or non-critical. Similarly, a reversal of the current uptick in vehicle sales would negatively impact sales of our vehicle tracking solutions.
 
The markets in which we operate are highly competitive, and we may not be able to compete effectively.
 
We sell our products in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do. Existing or new products and services that provide alternatives to our products and services could materially impact our ability to compete in these markets. As the markets for our products and services continue to develop, additional companies, including companies with significant market presence in the M2M industry, could enter the markets in which we compete and further intensify competition. In addition, we believe price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.
 
As a further result of such competition, our new solutions could fail to gain market acceptance. Over the past several years, we have introduced a system enabling alarm signals to be transmitted digitally over cellular networks to central
 

 
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monitoring stations; a cellular and GPS-based vehicle tracking solution; a satellite-based mobile asset monitoring and tracking solution; enhanced “back end” services and application development platforms. If these solutions and services, or any of our other existing solutions and services, do not perform as expected, or if our sales fall short of expectations, our business may be adversely affected.
We operate in new and rapidly evolving markets where rapid technological change can quickly make hardware solutions and services, including those that we offer, obsolete.
 
The markets we operate in are subject to rapid advances in technology, continuously evolving industry standards and regulatory requirements, and ever-shifting customer requirements. The M2M industry, in particular, is currently undergoing profound and rapid technological change.  For example, most of the current subscribers we host connect to cellular networks using 2G-based devices. At least one major wireless carrier we utilize has signaled that it intends to fully transition to 3G-based architecture and therefore plans to cease supporting 2G-based devices in the near future. While we are beginning to market, sell, and support 3G-based devices and service, we may not be successful in transitioning all of our 2G-based subscribers to 3G and may lose customers as a result.  The introduction of unanticipated new technologies by carriers, or the development of unanticipated new end applications by our customers, could render our current solutions obsolete. In that regard, we must discern current trends and anticipate an uncertain future. We must engage in product development efforts in advance of events that we cannot be sure will happen and time our production cycles and marketing activities accordingly. If our projections are incorrect, or if our product development efforts are not properly directed and timed, or if the demands of the marketplace shift in directions that we failed to anticipate, we may lose market share and revenues as a result. To remain competitive, we continue to support engineering and development efforts intended to bring new hardware solutions and services to the markets that we serve. However, those efforts are capital intensive. If we are unable to adequately fund our engineering and development efforts, we may not be successful in keeping our product line current with advances in technology and evolving customer requirements. Even with adequate funding, our development efforts may not yield any appreciable short-term results and may never result in hardware solutions and services that produce revenues over and above our cumulative development costs or that gain traction in the marketplace, causing us to either lose market share or fail to increase and forego increased sales and revenues as a result.
 
We experience long sales cycles for some of our solutions.
 
Certain of our product offerings are subject to long sales cycles in view of the need for testing of our hardware solutions and services in combination with our customers’ applications and third parties’ technologies, the need for regulatory approvals and export clearances, and the need to resolve other complex operational and technical issues. For example, in the government contracting arena in particular, longer sales cycles are reflective of the fact that government contracts can take months or longer to progress from a “request for proposal” to a finalized contract document pursuant to which we are able to sell a finished product or service. Terms and conditions of sale unique to the government sector may also affect when we are able to recognize revenues. Delays in sales could cause significant variability in our revenue and operating results for any particular period. For that reason, quarter-over-quarter comparisons of our financial results may not always be meaningful.
 
We face substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
 
We record a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value and accrue necessary cancellation fee reserves for orders of excess products and components.  We also review our long-lived assets for impairment whenever events or changed circumstances indicate the carrying amount of an asset may not be recoverable. If we determine that impairment has occurred, it records a write-down equal to the amount by which the carrying value of the assets exceeds its fair market value. Although we believe its provisions related to inventory, other assets and purchase commitments are currently adequate, no assurance can be given that we will not incur additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which we compete. Such charges could materially adversely affect our financial condition and operating results.
 
We are contractually obligated to provide our manufacturers and network service providers with forecasts of our demand for components of our hardware solutions and network capacity. Specific terms and conditions vary by contract, however, if our forecasts do not result in the production of a quantity of units or network capacity sufficient to meet demand we may be subject to contractual penalties under some of our contracts with our customers. By contrast, overproduction of units based on forecasts that that overestimate demand could result in an accumulation of excess inventory that, under some of our contracts with our customers, would have to be managed at our expense thus adversely impacting our margins.
 

 
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Excess inventory that becomes obsolete or that we are otherwise unable to sell would also be subject to write-offs resulting in adverse affects on our margins.  Because our markets are volatile, competitive and subject to rapid technology and price changes, there is a risk that we will forecast incorrectly and order excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments.  Our financial condition and operating results could in the future be materially adversely affected by tour ability to manage our inventory levels and respond to short-term shifts in customer demand patterns.
 
If we achieve our growth goals, we may be unable to manage our resulting expansion.
 
To the extent that we are successful in implementing our business strategy, we may experience periods of rapid expansion. In order to effectively manage growth, whether organic or through acquisitions, we will need to maintain and improve our operations and effectively train and manage our employees. Our expansion through acquisitions is contingent on successful management of those acquisitions, which will require proper integration of new employees, processes and procedures, and information systems, which can be both difficult and demanding from an operational, managerial, cultural, and human resources perspective. We must also expand the capacity of our sales and distribution networks in order to achieve continued growth in our existing and future markets. The failure to manage growth effectively in any of these areas could have a material adverse effect on our financial condition and operating results.
 
We are dependent on third party telecommunications service providers and other suppliers, including domestic and international cellular and satellite carriers and hardware manufacturers, the loss of any one of which could adversely impact our ability to supply or service our customers.
 
Our long-term success depends on our ability to operate, manage, and maintain a reliable and cost effective network, as well as our ability to keep pace with changes in technology. The loss or disruption of key telecommunications infrastructure and key wireless and satellite-based network services supplied to us by carriers in the U.S., Canada, Mexico, Europe, and other locations overseas would unfavorably impact our ability to adequately service our customers. If we experience technical or logistical impediments to our ability to transfer traffic to third party facilities, or if our third party carriers experience technical or logistical difficulties of their own, such as disruptions to their supply chains caused by weather events, natural disasters, or terrorism, and are unable to carry our network
 
traffic, we may not achieve our revenue goals or otherwise be successful in growing our business. Given our dependence on cellular and satellite telecommunications service providers, risks specific or unique to their technologies, i.e., the loss or malfunction of a cell tower, a satellite, or a satellite ground station, should also be viewed as having the potential to impair our ability to provide services.
We outsource our hardware manufacture to independent companies and do not have internal manufacturing capabilities to meet the demands of our customers. Any delay, interruption, or termination of our hardware manufacture could harm our ability to provide our solutions to our customers and, consequently, could have a material adverse effect on our business and operations. Our hardware manufacture requires specialized know-how and capabilities possessed by a limited number of enterprises. Consequently, we are reliant on just a few manufacturers. If a key supplier experiences production problems, financial difficulties, or has difficulties with its supply chain as a result of severe weather, a natural disaster, terrorism, or other unforeseen event, we may not be able to obtain enough units to meet demand, which could result in failure to meet our contractual commitments to our customers, further causing us to lose sales and generate less revenue.
 
We may experience quality problems from time to time, resulting in decreased sales and operating margins and the loss of customers.
 
While we test our products and services, they may still have errors, defects, or bugs that we find only after commercial production has begun. In the past, we have experienced errors, defects, and bugs in connection with new solutions. Our customers may not make purchases from us, or may make fewer purchases, if they are concerned about such problems. Furthermore, correcting problems could require additional capital expenditures, result in increased design and development costs, and force us to divert resources from other efforts. Failure to remediate problems could result in lost revenue, harm our reputation, and lead to costly warranty or other legal claims against us by our customers, and could have a material adverse impact on our financial condition and operating results. Historically, the time required for us to correct problems has caused delays in product shipments and has resulted in lower than expected revenues.
 
Interruptions in service or performance problems, no matter what their ultimate cause, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new customers. In addition, because most of our customers are businesses, any significant interruption in service could result in lost profits or other losses to our customers. It may also be difficult to identify the source of the problem due to the overlay of our network with cellular, and/or satellite networks and our network’s reliance on those other networks. The occurrence of hardware or software errors, regardless of whether such errors are caused by our hardware solutions or services, or our internal facilities, may result in the delay or loss of market acceptance of our solutions, and any necessary revisions may result in significant and additional expenses. Although we attempt to disclaim or limit our liability for hardware, system, and software failures in our agreements with our customers, a court may not enforce a limitation of liability, which could expose us to substantial losses.
 
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If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
 
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.
 
A natural disaster, terrorist attack, or other catastrophic event could diminish our ability to provide service and hardware to our customers and our revenues may be impacted by weather patterns and climate change.
 
Events such as severe storms, tornadoes, earthquakes, floods, solar flares, industrial accidents, and terrorist attacks including, without limitation, the actions of computer hackers, could damage or destroy both our primary and redundant facilities as well as the facilities and operations of third party cellular and satellite carriers and hardware suppliers we are reliant on, which could result in a significant disruption of our operations. Further, in the event of an emergency, the telecommunications networks that we rely upon may become capacity constrained or preempted by governmental authorities. We may also be unable, due to loss of personnel or the inability of personnel to access our
 
facilities, to provide some services to our customers or maintain all of our operations for a period of time. With respect to our satellite-based mobile asset tracking solution in particular, sales may be influenced by weather patterns and climate change. For example, if government agencies and emergency responders anticipate relatively “mild” weather over one or more storm seasons on account of cyclical weather patterns or long-term climate change, they may buy fewer of our mobile asset tracking units for deployment in support of disaster response operations.
 
The loss of a few key personnel could have an adverse affect on us in the short-term.
 
Due to the specialized knowledge and skills each of our executive officers and other key employees possesses with respect to the development and maintenance and our operations, the loss of service of any of our officers. Any unplanned turnover could diminish our institutional knowledge base and erode our competitive advantage. We may need to hire additional personnel in the future, and we believe the success of the combined business depends, in large part, upon our ability to attract and retain key employees. The loss of the services of any key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenues and to operate our business.
 
We may require additional capital to fund further development, and our competitive position could decline if we are unable to obtain additional capital, or access the credit markets.
 
To address our long-term capital needs, we intend to continue to pursue strategic relationships that would provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we may seek to raise capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock.
 

 
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Our Loan and Security Agreement with Silicon Valley Bank, or SVB, contains financial and operating restrictions that may limit our access to credit. If we fail to comply with covenants in the SVB Credit Facility, we may be required to repay any potential indebtedness thereunder, which may have an adverse effect on our liquidity.
 
In  May 2011, we amended our Loan and Security Agreement (the “Agreement”) with SVB to increase the credit facility from $5 million to $10 million, among other changes.  Provisions in the  Agreement  impose restrictions on our ability to, among other things:
 
• incur additional indebtedness;
•create liens;
•enter into transactions with affiliates;
•transfer assets;
•pay dividends or make distributions on, or repurchase our stock; or
•merge or consolidate.
 
In addition, we are required to meet certain financial covenants and ratios customary with this type of credit facility. The SVB credit facility also contains other customary covenants.  We may not be able to comply with these covenants in the future.  Our failure to comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow under the SVB credit facility. In addition to preventing additional borrowings under the SVB credit facility, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the SVB credit facility, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.
 
We are subject to risks associated with laws, regulations and industry-imposed standards related to fixed and mobile communications devices and associated services.
 
Laws and regulations related to fixed and mobile communications devices and associated services and end applications are extensive, vary by jurisdiction, and are subject to change. Such changes, could include, without limitation, restrictions on the production, manufacture, distribution, and use of communications devices, restrictions on the ability to port devices and associated services to new carriers’ networks, requirements to make devices and associated services compatible with more than one carrier’s network, or restrictions on end use could, by preventing us from fully serving affected markets, have a material adverse effect on our financial condition and operating results.
 
In particular, communication devices we sell, or which our customer wish us to support, are subject to regulation or certification by governmental agencies such as the Federal Communications Commission (FCC), industry standardization bodies such as the PCS Type Certification Review Board (PTCRB), and particular carriers for use on their networks. The procedures for obtaining required regulatory approvals and certifications are extensive and time consuming, and can require us to conduct additional testing requirements, makes modifications to our hardware solutions and services, or delay in product launch and shipment dates, which could have a material adverse effect on our financial condition and operating results.
 
We may be subject to breaches of its information technology systems, which could damage our reputation, vendor, and customer relationships, and our customers’ access to our services.
 
Our business requires it to use and store customer, employee, and business partner personally identifiable information (PII). This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information.  We require user names and passwords in order to access its information technology systems. We also uses encryption and authentication technologies to secure the transmission and storage of data.
 
These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems.  If a computer security breach affects our systems or results in the unauthorized release of PII, tour reputation and brand could be materially damaged and use of our products and services could decrease.
 

 
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We would also be exposed to a risk of loss or litigation and possible liability, which could result in a material adverse effect on our business, results of operations and financial condition.
 
Our business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
 
We are subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and our subsidiaries, and among the Company, our subsidiaries and other parties with which we have commercial relations. Several jurisdictions have passed new laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause us to incur substantial costs or require us to change its business practices. Noncompliance could result in penalties or significant legal liability.
 
Our privacy policies and practices concerning the use and disclosure of data are posted on its website and its customer contracts. Any failure by the Company, our suppliers or other parties with whom we do business to comply with our posted privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others, which could have a material adverse effect on our business, results of operations and financial condition.
 
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for the cost of associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs
 
Changes in domestic tax regulations or unanticipated foreign tax liabilities could affect our results.
 
The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations could impose costs on us that we are unable to fully recover.
 
We are doing business in, and are expanding into, foreign tax jurisdictions. We believe that we have complied in all material respects with our obligations to pay taxes in these jurisdictions. If the applicable taxing authorities were to challenge successfully our current tax positions, or if there were changes in the manner in which we conduct our activities, we could become subject to material unanticipated tax liabilities. We may also become subject, prospectively or retrospectively, to additional tax liabilities following changes in tax laws. The application of existing, new or future laws could have adverse effects on our business, prospects and operating results. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
 
A portion of our future revenue, in particular the revenue deriving from our sale of satellite-based mobile asset tracking solutions, may be derived from contracts with the U.S. government, state governments, or government contractors Those contracts are subject to uncertain funding.
 
The funding of government programs is uncertain and, at the federal level, is dependent on continued congressional appropriations and administrative allotment of funds based on an annual budgeting process. We cannot assure you that current levels of congressional funding for programs supporting by our offerings will continue, particularly as result of the Budget Control Act and the mandated substantial automatic spending cuts beginning in 2013 and lasting for 10 years, unless Congress modifies these cuts. In particular, a significant portion of our revenues from the sale of satellite-based tracking solutions through our location-based services division has been derived from sales made by us indirectly as a subcontractor to a prime government contractor that has the direct relationship with the U.S. government.  In addition, these cuts could adversely affect the viability of the prime contractor of our program. If the prime contractor loses business with respect to which we serve as a subcontractor, our government business would be hurt. We also maintain a Federal Supply Schedule with the General Services Administration under which we do business directly with the U.S. government. If we, as the prime contractor, were to lose some or all of such business, our revenues derived from the sale of satellite-based tracking solutions would suffer as a result.
 

 
16 

 


Our operating results may be negatively affected by developments affecting government programs generally, including the following:
 
·  
changes in government programs that are related to our hardware solutions and services;
·  
adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations;
·  
changes in political or public support for programs;
·  
delays or changes in the government appropriations process; and
·  
delays in the payment of invoices by government payment offices and the prime contractors.
 
These developments and other factors could cause governmental agencies to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain from renewing contracts, any of which would cause our revenue to decline and could otherwise harm our business, financial condition and results of operations. For example, many of the ultimate consumers of our PowerPlay™ hardware and services are elementary and secondary schools that pay for their purchases with funding that they receive through the Schools and Libraries Program (commonly known as the “E-Rate Program”) of the Universal Service Fund, which is administered by the Universal Service Administrative Company (USAC) under the direction of the FCC. Demand for solutions and services under the E-Rate Program is very difficult to predict and changes in the program itself could also affect demand.
 
Government contracts contain provisions that are unfavorable to us.
 
Government contracts contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts. These provisions may allow the government to
 
·  
Terminate existing contracts for convenience, as well as for default;
 
·  
Reduce or modify contracts or subcontracts;
 
·  
Cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
 
·  
Decline to exercise an option to renew a multi-year contract;
 
·  
Claim rights in our hardware solutions and services;
 
·  
Suspend or debar us from doing business with the federal government or with a governmental agency; and
 
·  
Control or prohibit the export of our hardware solutions and services.
 
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. We may experience performance issues on some of our contracts. We may receive show cause or cure notices under contracts that, if not addressed to the government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts in the future.

 
Agreements with government agencies may lead to regulatory or other legal action against us including, without limitation, claims against us under the Federal False Claims Act or other federal statutes. These claims could result in substantial fines and other penalties.
 
We must comply with a complex set of rules and regulations applicable to government contractors and their subcontractors. Failure to comply with an applicable rule or regulation could result in our suspension of doing business with the government or with the prime government contractors that do business with or cause us to incur substantial penalties. Our agreements with the U.S. government are subject to substantial financial penalties under the Civil Monetary Penalties Act and the False Claims Act and, in particular, actions under the False Claims Act’s “whistleblower” provisions. Private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in large part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government. These whistleblower suits by private individuals, known as qui tam actions, may be filed by almost anyone, including present and former employees. The False Claims Act statute provides for treble damages and up to $11,000 per claim on the basis of the alleged claims. Prosecutions, investigations or qui tam actions could have a material adverse effect on our liquidity, financial condition and results of operations.
 

 
17 

 

Finally, various state false claim and anti-kickback laws also may apply to us. Violation of any of the foregoing statutes can result in criminal and/or civil penalties that could have a material adverse effect our business.
 
We operate internationally, which subjects us to international regulation and business uncertainties that create additional risk for us.
 
We have been doing business directly, or via our distributors, in Australia, Canada, Mexico, and Pakistan, and are expanding, directly or via our distributors, into additional countries in Latin America, Europe, the Middle East, and Asia. Accordingly, we or our distributors are subject to additional risks, such as:
 
   ·  
a continued international economic downturn;
· export control requirements, including restrictions on the export of critical technology;
· restrictions imposed by local laws and regulations;
· restrictions imposed by local product certification requirements;
· currency exchange rate fluctuations;
· generally longer receivable collection periods and difficulty in collecting accounts receivable;
· trade restrictions and changes in tariffs;
· difficulties in repatriating earnings;
· difficulties in staffing and managing international operations; and
· potential insolvency of channel partners.
 
We have only limited experience in marketing and operating our services in certain international markets. Moreover, we have in some cases experienced and expect to continue to experience in some cases higher costs as a percentage of revenues in connection with establishing and providing services in international markets versus the U.S. In addition, certain international markets may be slower than the U.S. in adopting the outsourced communications solutions and so our operations in international markets may not develop at a rate that supports our level of investments.
 
Furthermore, because regulatory schemes vary by country, we may also be subject to regulations in foreign countries of which we are not presently aware. If that were to be the case, we could be subject to sanctions by a foreign government that could materially and adversely affect our ability to operate in that country. We cannot assure you that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we wish to operate, or that applicable restrictions in those jurisdictions will not be unduly burdensome. The failure to obtain the authorizations necessary to operate satellites internationally could have a material adverse effect on our ability to generate revenue and our overall competitive position. We, our customers and companies with whom we do business may be required to have authority from each country in which we or they provide services or provide our customers use of our hardware solutions and services. Because regulations in each country are different, we may not be aware if some of our customers and/or companies with which we do business do not hold the requisite licenses and approvals.
 
Unfavorable results of legal proceedings could materially adversely affect us.
 
We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of its merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. In recognition of these considerations, we may enter into material settlements. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that would materially adversely affect a portion of our business and might materially affect our financial condition and operating results.
 
The loss of intellectual property protection both U.S. and international could have a material adverse effect on our operations.
 
Our future success and competitive position depend upon our ability to obtain and maintain intellectual property protection, especially with regard to our core business. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology. Our services are highly dependent upon our technology and the scope and limitations of our proprietary rights therein. If our assertion of proprietary rights is held to be invalid, or if another party’s use of our technology were to occur to any substantial degree, our business, financial condition and results of operations could be materially adversely affected. In order to protect our technology, we rely on a combination of patents, copyrights, and trade secret laws, as well as certain customer licensing agreements, employee and customer confidentiality and non-disclosure agreements, and other similar arrangements. Loss of such protection could compromise any advantage obtained and, therefore, impact our sales, market share, and results. To the extent that our licensees develop inventions or processes independently that may be applicable to our hardware solutions and services, disputes may arise as to the ownership of the proprietary rights to this information. These inventions or processes will not necessarily become our property, but may remain the property of these persons or their full-time employers. We could be required to make payments to the owners of these inventions or processes, in the form of either cash or equity, or a combination of both.
 
Furthermore, our future or pending patent applications may not be issued with the scope of the claims sought by us, if at all. In addition, others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned or licensed by us. Effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in foreign countries where we may need protection.
 
18

 
 
We rely on access to third-party patents and intellectual property, and our future results could be materially adversely affected if we are unable to secure such access in the future.
 
Many of our hardware solutions and services are designed to include third-party intellectual property, and in the future we may need to seek or renew licenses relating to such intellectual property. Although we believe that, based on past experience and industry practice, such licenses generally can be obtained on reasonable terms, there is no assurance that the necessary licenses would be available on acceptable terms or at all. Some licenses we obtain may be nonexclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our hardware solutions and services, and there can be no assurance that we would be able to design and incorporate alternative technologies, without a material adverse effect on our business, financial condition, and results of operations.
 
Our competitors have or may obtain patents that could restrict our ability to offer our hardware solutions and services, or subject us to additional costs, which could impede our ability to offer our hardware solutions and services and otherwise adversely affect us. We may, from time to time, also be subject to litigation over intellectual property rights or other commercial issues.
 
Several of our competitors have obtained and can be expected to obtain patents that cover hardware solutions and services directly or indirectly related to those offered by us. There can be no assurance that we are aware of all patents containing claims that may pose a risk of infringement by its hardware solutions and services. In addition, patent applications in the United States are confidential until a patent is issued and, accordingly, we cannot evaluate the extent to which our hardware solutions and services may infringe on future patent rights held by others.
 
Even with technology that we develop independently, a third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as engineering and development and the sale of any of our hardware solutions and services. Furthermore, because of technological changes in the M2M industry, current extensive patent coverage, and the rapid issuance of new patents, it is possible that certain components of our hardware solutions, services, and business methods may unknowingly infringe the patents or other intellectual property rights of third parties. From time to time, we have been notified that we may be infringing such rights.
 
In the highly competitive and technology-dependent telecommunications field in particular, litigation over intellectual property rights is significant business risk, and some entities are pursuing a litigation strategy the goal of which is to monetize otherwise unutilized intellectual property portfolios via licensing arrangements entered into under threat of continued litigation. Regardless of merit, responding to such litigation can consume significant time and expense. In certain cases, we may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. If we are found to be infringing such rights, we may be required to pay substantial damages. If there is a temporary or permanent injunction prohibiting us from marketing or selling certain hardware solutions and services or a successful claim of infringement against us requires us to pay royalties to a third party, our financial condition and operating results could be materially adversely affected, regardless of whether we can develop non-infringing technology. While in management’s opinion we do not have a potential liability for damages or royalties from any known current legal proceedings or claims related to the infringement of patent or other intellectual property rights that would individually or in the aggregate have a material adverse effect on our financial condition and operating results, the results of such legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others or should several of these matters be resolved against us in the same reporting period, our financial condition and operating results could be materially adversely affected.
 
 
19

 
 
Because our stock is held by a relatively small number of investors and is thinly traded, it may be more difficult for shareholders to sell our shares or buy additional shares when they desire and share prices may be volatile.
 
Our common stock is currently listed on the NASDAQ. Our stock is thinly traded and we cannot guarantee that an active trading market will develop, or that it will maintain its current market price. A large number of shares of our common stock are held by a small number of investors. An attempt to sell a large number of shares by a large holder could adversely affect the price of our stock. In addition, it may be difficult for a purchaser of our shares of our common stock to sell such shares without experiencing significant price volatility.
 
The exercise or conversion of outstanding options, stock appreciation rights and warrants into common stock will dilute the percentage ownership of our other shareholders and the sale of such shares may adversely affect the market price of our common stock.
 
 As of February 28, 2012, there are outstanding options, stock appreciation rights and warrants to purchase an aggregate of approximately 2.6 million shares of our common stock and more options and stock appreciation rights will likely be granted in the future to our officers, directors, employees and consultants. We may issue additional warrants in connection with acquisitions, borrowing arrangement or other strategic or financial transactions. The exercise of outstanding stock options will dilute the percentage ownership of our other shareholders. The exercise of these options and warrants and the subsequent sale of the underlying common stock could cause a decline in our stock price.
 
The structure of our company limits the voting power of our stockholders and certain factors may inhibit changes in control of our company.
 
The concentration of ownership of our common stock may have the effect of delaying, deferring, or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own approximately 28.5% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters. The interests of these stockholders may be different than those of our unaffiliated stockholders and our unaffiliated stockholders may be dissatisfied with the outcome of votes that may be controlled by our affiliated stockholders.
 
Our articles of incorporation generally limit holdings by persons of our common stock to no more than 10% without prior approval by our Board. Except as otherwise permitted by the Board, no stockholder has the right to cast more than 10% of the total votes regardless of the number of shares of common stock owned. In addition, if a person acquires holdings in excess of this ownership limit, our Board may terminate all voting rights of the person during the time that the ownership limit is violated, bring a lawsuit against the person seeking divestiture of amounts in excess of the limit, or take other actions as the Board deems appropriate. Our articles of incorporation also have a procedure that gives us the right to purchase shares of common stock held in excess of the ownership limit. In addition, our articles of incorporation permit our Board to authorize the issuance of preferred stock without stockholder approval. Any future series of preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our common stockholders.
 

 
20 

 


Item 1B.  Unresolved Staff Comments.
 
None.
 
 
Item 2.  Properties.
 
All of our facilities are leased.  Set forth below is certain information with respect to our leased facilities:
 

 
Location
Principal Business
Square Footage
Lease Term
Atlanta, Georgia
M2M Services and Principal Executive Office
34,566
2022
Warminster, Pennsylvania
M2M Services and Other Services
18,000
2012
Bozeman, Montana
M2M Services
3,640
2012
State College, Pennsylvania
Other Services
10,788
Month to Month
Dallas, Texas
M2M Services
8,889
2016
Reston, VA
M2M Services
3,416
January 2012

 
We conduct engineering, sales and marketing, and administrative activities at many of these locations. We believe that our existing facilities are adequate for our current needs. As we grow and expand into new markets and develop additional hardware, we may require additional space, which we believe will be available at reasonable rates.
 
We engage in limited manufacturing, equipment and hardware assembly and testing for certain hardware. We also use contract manufacturers for production, sub-assembly and final assembly of certain hardware.  We believe there are other manufacturers that could perform this work on comparable terms.
 
 

 
21 

 


Item 3.  Legal Proceedings.

The information with respect to “Item 3. Legal Proceedings” is contained in Note Q of the Notes to Consolidated Financial Statements in Item 8 herein.

 
Item 4.  Mine Safety Disclosures.
 
Not applicable.
 

 
PART II
 
 
Item 5.  Market for the Registrant's Common Stock and Related Shareholder Matters and Issuer Purchases of Equity Securities.
 
The Company’s Common Stock trades publicly on the NASDAQ Global Market System under the symbol” NMRX”.
 
The following table sets forth, for the fiscal quarters indicated, the high and low sales prices per share for the Common Stock on the NASDAQ Global Market for the applicable periods.
 
 
 
Fiscal 2011
 
High
   
Low
 
First Quarter (January 1, 2011  to March 31, 2011)
  $ 11.44     $ 8.03  
Second Quarter (April 1, 2011 to June 30, 2011)
    11.05       8.67  
Third Quarter (July 1, 2011 to September 30, 2011)
    9.94       5.20  
Fourth Quarter (October 1, 2011 to December 31, 2011)
    8.74       4.95  
                 
                 
Fiscal 2010
 
High
   
Low
 
First Quarter (January 1, 2010  to March 31, 2010)
  $ 4.69     $ 4.01  
Second Quarter (April 1, 2010 to June 30, 2010)
    5.08       4.18  
Third Quarter (July 1, 2010 to September 30, 2010)
    6.22       4.10  
Fourth Quarter (October 1, 2010 to December 31, 2010)
    9.77       5.75  
 
 
On March 08, 2012, the last reported sale price of our Class A common stock on The NASDAQ Global Market was $10.22 per share.
 
 
As of March 09, 2012, there were 60 holders of record of our Common Stock, approximately one beneficial shareholders and 15,163,662 shares of Common Stock outstanding.  Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.   
 
 
Dividend Policy
 
We currently do not pay any cash dividends.  In deciding whether or not to declare or pay dividends in the future, the Board of Directors will consider all relevant factors, including our earnings, financial condition and working capital, capital expenditure requirements, any restrictions contained in loan agreements and market factors and conditions.  We have no plans now or in the foreseeable future to declare or pay cash dividends on our common stock.
 
 
 
22

 
 
Performance Graph
 
 
The information included under the heading "Performance Graph" in this Item 5 of this Annual Report on Form 10-K is "furnished" and not "filed" and shall not be deemed to be "soliciting material" or subject to Regulation 14A or 14C, nor shall it be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into any such filing.
 
The following graph shows a comparison of the cumulative total return for Common Stock, the NASDAQ Composite Index and the NASDAQ Telecomm Index, assuming (i) an investment of $100 in each, on December 31, 2006, the last trading day before the beginning of the Company’s five preceding years, and, (ii) in the case of the Indices, the reinvestment of all dividends.

 
 

 
SHAREHOLDER VALUE AT YEAR END
 
2006
2007
2008
2009
2010
2011
NMRX
100.00
174.42
76.96
90.91
182.77
174.00
NASDAQ US Index
100.00
120.27
71.52
102.90
120.31
118.15
NASDAQ Telecom Index
100.00
139.71
79.37
117.97
122.52
107.06

 

 
23 

 

Item 6.  Selected Consolidated Financial Data.
 
The following selected financial data should be read in conjunction with the consolidated financial statements and the notes contained in “Item 8.  Financial Statements and Supplementary Data” and the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.  Historical results are not necessarily indicative of future results.
 
 
The following financial information was derived using the consolidated financial statements of Numerex Corp.  The table lists historical financial data of the Company for each of the five years in the period ended December 31, 2011.
 
 
   
December 31,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
 
(in thousands)
 
2011
   
2010
   
2009
   
2008
   
2007
 
Statement of Operations Data
                             
Revenues
  $ 58,360     $ 58,243     $ 50,836     $ 72,319     $ 68,004  
Gross profit
    26,202       25,657       22,348       25,420       23,407  
Litigation settlement and related expenses
    -       3,025       1,637       2,092       -  
Goodwill and long-lived asset impairment
    -       -       -       5,289       -  
Operating income (loss)
    1,996       (400 )     (1,656 )     (6,389 )     2,500  
Costs of early extinguishment of debt
    -       -       (2,936 )     -       -  
(Benefit) provision for income taxes
    (56 )     (144 )     285       3,047       728  
Net income (loss)
    1,854       (380 )     (5,829 )     (10,975 )     440  
Income (loss) per common share-diluted
    0.12       (0.03 )     (0.40 )     (0.78 )     0.03  
                                         
Balance Sheet Data
                                       
Cash, cash equivalents, restricted cash and short term investments
  $ 9,768     $ 10,516     $ 5,306     $ 8,917     $ 7,425  
Total assets
    61,428       57,146       52,747       62,506       74,098  
                                         
Total debt and capital lease obligations (short and long term)
    5,937       684       523       10,746       10,683  
Shareholders' equity
    44,197       42,718       42,037       40,394       46,865  
                                         
Cash Flow Data
                                       
Net cash (used in) provided by operations
  $ (1,171 )   $ 8,564     $ 5,089     $ 8,359     $ (3,305 )

 

 
24 

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
 
This Management’s Discussion and Analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Forward Looking Statements” on page 4 for a discussion of the uncertainties, risks and assumptions associated with these statements.  You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” in Section 1A of this Annual Report.
 
 
Overview
 
We are a machine-to-machine (M2M) data communications, technology and solutions business.  We combine our network services, hardware and applications development capabilities to create packaged and custom designed M2M solutions for customers across multiple market segments.
 
During 2011, revenues remained constant at $58.4 million, compared to $58.2 million during 2010.  Gross margin was 45.0% for 2011 and 44.1% for 2010.  
 
Fiscal year 2011 overhead, which includes selling, general and administrative costs (“SGA”), as well as engineering and development expenses, was $24.2 million as compared to $26.1 million in 2010.. The decrease of $1.9 million was primarily related to a litigation settlement, included in SGA, of $3.0 million during 2010 and a decrease in other SGA of $0.3 million and engineering and development of $0.4 million during 2011.  These decreases were partially offset by an increase in sales and marketing costs of $2.1 million.
 
While our overall business has grown and we believe that our pipeline of future sales opportunities is solid, general economic uncertainty remains and may reduce our future growth.  We have tightened our credit policies in response to the economic climate, in particular to our hardware-only sales.
 

 
Critical Accounting Policies
 
Note A of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of Numerex’s Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used.
 

General
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable and allowance for doubtful accounts, inventories and the adequacy of reserves for excess and obsolete inventories, accounting for income taxes and valuation of goodwill and other intangible assets. Actual amounts could differ significantly from these estimates.
 

Revenue Recognition

Revenue is recognized when persuasive evidence of an agreement exists, the hardware or service has been delivered, fees and prices are fixed and determinable, and collectability is probable and when all other significant obligations have been fulfilled.

 
25 

 

We recognize revenue from hardware sales at the time of shipment and passage of title. Provision for rebates, promotions, product returns and discounts to customers is recorded as a reduction in revenue in the same period that the revenue is recognized. We offer customers the right to return hardware that does not function properly within a limited time after delivery. We continuously monitor and track such hardware returns and record a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending returns. While such returns have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have experienced in the past. Any significant increase in hardware failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize. We recognize revenue from the provision of services at the time of the completion, delivery or performance of the service.
 
In the case of revenue derived from maintenance services we recognize revenue ratably over the contract term. In certain instances we may, under an appropriate agreement, advance charge for the service to be provided. In these instances we record the advance charge as deferred revenue and recognize the revenue ratably over future periods in accordance with the contract term as the service is completed, delivered or performed. The Company’s revenues in the consolidated statement of operations and comprehensive income (loss) are net of sales taxes.

We recognize revenue from the provision of data transportation services when we perform the services or processes transactions in accordance with contractual performance standards. Revenue is earned monthly on the basis of the contracted monthly fee and an excess message fee charge, should it apply, that is volume based. In certain instances we may, under an appropriate agreement, advance charge for the data transport service to be provided. In these instances we recognize the advance charge (even if nonrefundable) as deferred revenue and recognize the revenue over future periods in accordance with the contract term as the data transport service is delivered or performed.

For those arrangements that include multiple deliverables, we first determine whether each service, or deliverable, meets the separation criteria of ASC Subtopic 605-25, as amended by Accounting Standards Update (“ASU”) 2009-13.  For hardware elements that contain software, we determine whether the hardware and software function together to provide the element’s core functionality.  The majority of the Company’s elements meet this definition, and therefore we follow the guidance in ASC Subtopic 605-25 to determine the amount to allocate to each element.  The guidance in ASC Subtopic 605-25 provides a hierarchy of evidence to determine the selling price for each element in the order of (1) vendor-specific objective evidence (“VSOE”), (2) third-party evidence (“TPE”), and (3) management’s best estimate.  We currently determine the amount to allocate to each element based on VSOE, when available. When VSOE cannot be established, we attempt to establish the selling price of the elements based on TPE.

For transactions including multiple deliverables where software elements do not function together with hardware to provide an element’s core functionality, we follow the guidance in ASC Subtopic 985-605, as amended by ASU 2009-14, which requires the establishment of VSOE, to determine whether the transaction should be accounted for as separate elements and the amount to allocate to each element.

We may provide multiple services under the terms of an arrangement and we are required to assess whether one or more units of accounting are present. Service fees are typically accounted for as one unit of accounting as fair value evidence for individual tasks or milestones is not available. We follow the guidelines discussed above in determining revenues; however, certain judgments and estimates are made and used to determine revenues recognized in any accounting period. If estimates are revised, material differences may result in the amount and timing of revenues recognized for a given period.

Revenue from contracts for our professional services where we design or redesign, build and implement new or enhanced systems applications for clients are recognized on the percentage-of-completion method.  Percentage-of-completion accounting involves calculating the percentage of services provided during the reporting period compared to the total estimated services to be provided over the duration of the contract. Estimated revenues by applying the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable. This method is followed where reasonably dependable estimates of revenues and costs can be made.

We measure our progress for completion based on either the hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones as outlined per the terms of the agreement with the customer.  Contract revenue and costs are continuously monitored during the term of the contract, and recorded revenue and costs are subject to revision as the contract progresses. Such revisions may result in increases or decreases to revenue and income and are reflected in the financial statements in the periods in which they are first identified. If estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable.

 
26

 
 
Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Changes in the financial condition of our customers could result in upward or downward adjustments to the allowance for doubtful accounts.
 
 
Inventories and Reserves for Excess, Slow-Moving and Obsolete Inventory
 
We value our inventory at the lower of cost or market.  We continually evaluate the composition of our inventory and identify, with estimates, potential future excess, obsolete and slow-moving inventories. We specifically identify obsolete hardware for reserve purposes and analyze historical usage, forecasted production based on demand forecasts, current economic trends, and historical write-offs when evaluating the adequacy of the reserve for excess and slow-moving inventory. If we are not able to achieve our expectations of the net realizable value of the inventory at its current carrying value, we adjust our reserves accordingly.
 
 
Valuation of Goodwill and Long-lived Assets
 
Goodwill and  intangible assets with indefinite lives are not amortized but are subject to an annual impairment test, and more frequently, if events or circumstances occur that would indicate a potential decline in their fair value.  An impairment charge will be recognized only when the implied fair value of a reporting unit’s goodwill is less than its carrying amount.  We concluded that we had six reporting units at December 31, 2011, three of which had associated goodwill.  The reporting units with goodwill were Wireless (excluding Orbit One), Orbit One (Satellite), and BNI Service.  The reporting units not containing associated goodwill were BNI Product, Digilog and DCX.  For our 2011 annual review, we used discounted cash flow models to estimate fair market value of these reporting units.  We used historical information, our 2012 business plan and expected future development projects to prepare financial projections used in the discounted cash flow analysis for each of the reporting units.
 
The growth rate assumptions used in our most recent annual impairment test were consistent with operating results for the twelve months ended December 31, 2011.
 
A summary of the critical assumptions utilized for our impairment tests are outlined below. We believe this information provides relevant information to understand our goodwill impairment testing and evaluate our goodwill balances.
 
As of December 31, 2011, a breakdown of our goodwill balance by reporting unit is as follows:
 

 
(In thousands)
     
M2M Services excluding Orbit One Unit and BNI Service Unit
 
$
18,433
 
Orbit One Unit (part of  M2M Services)
   
4,428
 
BNI Service Unit (part of M2M Services)
   
926
 
Total Goodwill
 
$
23,787
 

 
During 2011, we did not record a goodwill impairment charge. 
 
Our annual assessment of goodwill for impairment includes comparing the fair value of each reporting unit to the carrying value, referred to as step one. We concluded that we had six reporting units at December 31, 2011, three of which had goodwill.  The reporting units with goodwill were Wireless (excluding Orbit One), Orbit One (Satellite), and BNI Service.  We estimate fair value using a combination of discounted cash flow models and market approaches. If the fair value of a reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is necessary. If the carrying value of a reporting unit exceeds its fair value, we perform a second test, referred to as step two, to measure the amount of impairment to goodwill, if any. To measure the amount of any impairment, we determine the implied fair value of goodwill in the same manner as if we were acquiring the affected reporting unit in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.
 
 
27

 
 
 
We base the impairment analysis of goodwill on estimated fair values. The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; projected revenues and costs; projected EBITDA for expected cash flows; market comparables and capital expenditures forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in additional non-cash impairment charges in the future.
 
We perform our annual goodwill impairment test as of December 31 absent any impairment indicators or other changes that may cause more frequent analysis. We did not identify an impairment as a result of our annual impairment test and none of our reporting units were at risk of failing step one. In addition, we assess on a quarterly basis whether any events have occurred or circumstances have changed that would indicate an impairment could exist.
 
Other intangible assets, including developed software, patents, acquired intellectual property and customer relationships, have finite lives and we record these assets at cost less accumulated amortization. We calculate amortization on a straight-line basis over the estimated economic useful life of the assets, which are three years for developed software, seven to 16 years for patents and acquired intellectual property and four years for customer relationships.  We assess other intangible assets and long-lived assets on a quarterly basis whenever any events have occurred or circumstances have changed that would indicate impairment could exist. Our assessment is based on estimated future cash flows directly associated with the asset or asset group. If we determine that the carrying value is not recoverable, we may record an impairment charge, reduce the estimated remaining useful life or both. We concluded that no impairment indicators existed to cause us to reassess our other intangible during the year ended December 31, 2011.
 

Deferred Tax Assets
 
Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain   deferred tax assets, which arise from net operating losses, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
 
Deferred tax assets are required to be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. In evaluating the ability to recover the deferred tax assets, in full or in part, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years and the forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for the assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates management is using to manage the underlying businesses. Actual operating results and the underlying amount and category of income in future years could differ materially from our current assumptions, judgments and estimates of recoverable net deferred taxes.
 
Cumulative losses incurred in recent years and the potential impact of the current economic environment on future taxable income represented sufficient negative evidence for management to conclude that the deferred tax assets require a full valuation allowance. As such, we established a full valuation allowance against the net deferred tax assets, which will remain until sufficient positive evidence exists to support reversal. Deferred tax assets generated
 

 
28 

 

during the current year were primarily offset by an increase to the valuation allowance.  The deferred tax benefit recognized in the year ended 2011 is due to the elimination of the deferred tax liability on the indefinite-lived intangibles.  Future reversals or increases to the valuation allowance could have a significant impact on our future earnings. Current tax expense resulted from federal alternative minimum tax and certain state taxes.

 
Results of Operations
 
The following table sets forth, for the periods indicated, certain revenue and expense items and the percentage increases and decreases for those items in the Company’s Consolidated Statements of Operations.
 
 
   
For the years ended December 31,
   
2011 vs. 2010
   
2010 vs. 2009
 
(in thousands, except per share amounts)
 
2011
   
2010
   
2009
   
% Change
   
% Change
 
Net sales:
                             
M2M services
  $ 57,212     $ 56,10     $ 49,182       0.9 %     15.3 %
Other services
    1,148       1,533       1,654       -25.2 %     -7.3 %
Total net sales
    58,360       58,243       50,836       0.2 %     14.6 %
Cost of sales, exclusive of depreciation shown below
                                       
Cost of M2M services
    31,423       31,837       27,735       -1.3 %     14.8 %
Cost of other services
    735       749       753       -1.9 %     -0.5 %
Gross profit
    26,202       25,657       22,348       2.1 %     14.8 %
Gross profit %
    45.0 %     44.1 %     44.0 %                
Sales and marketing
    9,169       7,018       6,652       30.6 %     5.5 %
General, administrative and legal
    9,197       9,485       9,896       -3.0 %     -4.2 %
Engineering and development
    2,726       3,148       2,421       -13.4 %     30.0 %
Depreciation and amortization
    3,114       3,381       3,398       -7.9 %     -0.5 %
Litigation and settlement related expenses
    -       3,025       1,637       -100.0 %     84.8 %
Operating income (loss)
    1,996       (400 )     (1,656 )     -599.0 %     -75.8 %
Costs of early extinguishment of debt
    -       -       (2,936 )     -       100.0 %
Interest expense, net
    (214 )     (93 )     (995 )     130.1 %     -90.7 %
Other income (expense), net
    16       (31 )     43    
nm
   
nm
 
(Benefit) provision for income tax
    (56 )     (144 )     285    
nm
   
nm
 
Net income (loss)
    1,854       (380 )     (5,829 )     587.9 %     93.5 %
Basic and diluted income (loss) per common share
  $ 0.12     $ (0.03 )   $ (0.40 )                
Basic shares
    15,055       15,084       14,429                  
Diluted shares
    15,710       15,084       14,429                  
 
 
  See notes to consolidated financial statements.
 

Comparison of Fiscal Years Ended December 31, 2011 and December 31, 2010
 
Net revenues remained fairly constant at $58.4 million for the year ended December 31, 2011, compared to $58.2 million for the year ended December 31, 2010.  
 
Gross profit, as a percentage of net revenue, increased to 45.0% for the year ended December 31, 2011, compared to 44.1% for the year ended December 31, 2010.  

Sales and marketing expenses increased 30.6% to $9.2 million for the year ended December 31, 2011, compared to $7.0 million for the year ended December 31, 2010. The increase is primarily the result of investing in additional sales and marketing personnel.
 

 
29 

 

General, administrative and legal expenses decreased 3.0% to $9.2 million for the year ended December 31, 2011, compared to $9.5 million for the year ended December 31, 2010.  The $300,000 decrease is primarily attributed to a reduction in employee compensation and related expenses.

Engineering and development expenses decreased 13.4% to $2.7 million for the year ended December 31, 2011, compared to $3.1 million for the year ended December 31, 2010.  The decrease in is primarily the result of the termination of several consulting contracts related to completed contracts.
 
Depreciation and amortization expense decreased 7.9% to $3.1 million for the year ended December 31, 2011, compared to $3.4 million for the year ended December 31, 2010.  The decrease is primarily due to certain tangible and intangible assets becoming fully depreciated.
 
Litigation and settlement expenses were $0 during the year ended December 31, 2011, compared to $3.0 million for the year ended December 31, 2010.   The 2010 amount was a result of a settlement of our legal proceedings (see Note Q of the notes to the financial statements included in this Annual Report).
 
Net interest expense increased to $214,000 for the year ended December 31, 2011, compared to $93,000 for the year ended December 31, 2010.    The increase is primarily the result of interest paid in accordance with our note payable, because we borrowed $6.0 million under our revolving credit facility in May 2011.

We recorded a tax benefit of $56,000 for the year ended December 31, 2011, compared to a tax benefit of $144,000 for the year ended December 31, 2010.  Our effective tax rates were (3.1%) and (27.5%) during 2011 and 2010, respectively. The change in our effective tax rate primarily related to the tax benefit recognized on the expiration of the statute of limitation of certain state exposures.

 
Comparison of Fiscal Years Ended December 31, 2010 and December 31, 2009
 
Net revenues increased 14.6% to $58.2 million for the year ended December 31, 2010, compared to $50.8 million for the year ended December 31, 2009.  This increase was primarily the result of a 17% increase in hardware revenue and a 13% increase in service revenue.
 
Gross profit as a percentage of net revenue, remained constant at 44.1% for the year ended December 31, 2010, compared to 44.0% for the year ended December 31, 2009.  
 
Sales and marketing expenses increased 5.5% to $7.0 million for the year ended December 31, 2010, compared to $6.7 million for the year ended December 31, 2009.  The increase is primarily the result of additional employees and an increase in promotional and marketing costs.

General, administrative and legal expenses decreased 4.2% to $9.5 million for the year ended December 31, 2010, compared to $9.9 million for the year ended December 31, 2009.  The decrease is primarily due to reduced employee related expenses of $174,000, a $143,000 decrease in supplies, telecommunications and facility related costs and a $106,000 reduction in professional service fees.
 
Engineering and development expenses increased 30.0% to $3.1 million for the year ended December 31, 2010, compared to $2.4 million for the year ended December 31, 2009.  The increase is primarily the result of a $275,000 increase in employee costs, a $229,000 increase in expenses related to new product testing and certifications and a $215,000 increase in professional service fees.
 
Depreciation and amortization expense remained constant at $3.4 million for the years ended December 31, 2010 and 2009.
 
Litigation and settlement expenses were $3.0 million during the year ended December 31, 2010, compared to $1.6 million for the year ended December 31, 2009.   The increase is the result of the settlement of our legal proceedings (see Note O of the notes to the financial statements included in this Annual Report).
 

 
30 

 

Cost of early extinguishment of debt during 2009 was $2.9 million for a non-recurring debt extinguishment.

Net interest expense decreased to $93,000 for the year ended December 31, 2010, compared to $1.0 million for the year ended December 31, 2009.    In 2009, we incurred interest expense associated with our existing debt.    This interest expense did not recur in 2010, due to the January 2010 repayment of all outstanding principle and interest.

We recorded a tax benefit of $144,000 for the year ended December 31, 2010, as compared to tax expense of $285,000 for the year ended December 31, 2009.  Our effective tax rates were (27.5%) and 5.1% during 2010 and 2009, respectively. The change in our effective tax rates is related to the reversal of a deferred tax liability related to indefinite-lived intangibles, the expiration of certain ASC 740-10 liabilities, and a foreign tax return to provision adjustment.  The difference between our effective tax rate and the 34% federal statutory rate in the current year resulted primarily from the existence of a valuation allowance against our net deferred tax assets, foreign taxes, state tax accruals, and uncertain tax position expense.

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

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

 
   
For the years ended December 31,
   
2011 vs. 2010
   
2010 vs. 2009
 
(In thousands)
 
2011
   
2010
   
2009
   
% Change
   
% Change
 
Net sales:
                             
M2M:
                             
  Recurring subscription revenue
  $ 38,649       33,425       29,427       15.6 %     13.6 %
  Embedded devices and hardware
    18,563       23,285       19,756       -20.3 %     17.9 %
  Total M2M revenue
    57,212       56,710       49,183       0.9 %     15.3 %
Other services
    1,148       1,533       1,653       -25.2 %     -7.3 %
Total net sales
    58,360       58,243       50,836       0.2 %     14.6 %
                                         
Cost of sales, exclusive of depreciation:
                                       
M2M:
                                       
  Recurring subscription revenue
    15,697       13,091       10,674       19.9 %     22.6 %
  Embedded devices and hardware
    15,726       18,746       17,061       -16.1 %     9.9 %
  Total M2M cost of sales
    31,423       31,837       27,735       -1.3 %     14.8 %
Other services
    735       749       753       -1.9 %     -0.5 %
Total cost of sales
    32,158       32,586       28,488       -1.3 %     14.4 %
Gross profit
  $ 26,202     $ 25,657       22,348       2.1 %     14.8 %
Gross profit %
    45.0 %     44.1 %     44.0 %                

 

 
31 

 



 
 
Percent of Total Sales
 
2011
2010
2009
Net sales:
     
M2M:
     
  Recurring subscription revenue
66.2%
57.4%
57.9%
  Embedded devices and hardware
31.8%
40.0%
38.9%
Other services
2.0%
2.6%
3.2%
Total net sales
100.0%
100.0%
100.0%
       

 
Fiscal Years Ended December 31, 2011 and December 31, 2010
 

 
M2M Segment
 
Recurring subscription revenue from M2M increased 15.6% to $38.6 million for the year ended December 31, 2011, compared to $33.4 million for the year ended December 31, 2010.  This increase was primarily due to the growth in M2M subscriptions to 1.44 million at December 31, 2011 compared to 1.17 million at December 31, 2010.
 
Embedded devices and hardware revenue from M2M decreased 20.3% to $18.6 million for the year ended December 31, 2011, compared to $23.3 million for the year ended December 31, 2010.  This decrease was primarily the result of the discontinuation of sales of certain hardware devices that do not lead to a subscription and recurring revenue, as we continue to focus on transitioning to a subscription-based model.
 
Cost of M2M recurring subscription revenue increased 19.9% to $15.7 million for the year ended December 31, 2011, compared to $13.1 million for the year ended December 31, 2010.  The increase is in direct correlation to the increase in M2M recurring subscription revenue.
 
Cost of M2M embedded devices and hardware revenue decreased 16.1% for the year ended December 31, 2011 to $15.7 million, compared to $18.7 million for the year ended December 31, 2010.  The decrease is in direct correlation to the decrease in sales of embedded devices and hardware.
 
 
Other Services Segment

Other services revenue decreased 25.2% to $1.1 million for the year ended December 31, 2011, compared to $1.5 million for the year ended December 31, 2010.  The decrease is primarily the result of a decrease in sales of our video conferencing hardware, which is sold directly and indirectly to distance-learning customers.  Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period. The decrease is also due to a decrease in demand for our installation and integration services. Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.
 
Cost of other services revenue remained fairly constant at $735,000 for the year ended December 31, 2011, compared to $749,000 for the year ended December 31, 2010.
 

Fiscal Years Ended December 31, 2010 and December 31, 2009
 

M2M Segment
 
Recurring subscription revenue from M2M increased 13.6% to $33.4 million for the year ended December 31, 2010, compared to $29.4 million for the year ended December 31, 2009.  This increase was primarily due to the growth of M2M subscriptions to 1.17 million at December 31, 2010, compared to 937,000 at December 31, 2009.
 

 
32 

 

Embedded devices and hardware revenue from M2M increased 17.9% to $23.3 million for the year ended December 31, 2010, compared to $19.8 million for the year ended December 31, 2009.  This increase was primarily the result of an increase in sales of our security hardware and sale of our cellular and satellite tracking units.

Cost of M2M recurring subscription revenue increased 22.6% to $13.1 million for the year ended December 31, 2010, compared to $10.7 million for the year ended December 31, 2009.  The increase is in direct correlation to the increase in M2M subscriptions, licensing and support sales.
 
Cost of M2M embedded devices and hardware revenue increased 9.9% for the year ended December 31, 2010 to $18.7 million, compared to $17.1 million for the year ended December 31, 2009.  The increase is in direct correlation to the increase in sales of our embedded devices and hardware.
 

Other Services Segment
 
Other services revenue decreased 7.3% to $1.5 million for the year ended December 31, 2010, compared to $1.7 million for the year ended December 31, 2009.  The decrease is primarily the result of a decrease in sales of our video conferencing hardware, which is sold directly and indirectly to distance-learning customers.  Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period. The decrease is also due to a decrease in demand for our installation and integration services. Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.
 
Cost of other services revenue remained fairly constant at $749,000 for the year ended December 31, 2010, compared to $753,000 for the year ended December 31, 2009.
 

Selected Quarterly Financial Data

The following tables detail certain unaudited financial data of Numerex for each quarter of the last two fiscal years ended December 31, 2011 and 2010, respectively.

Our financial results may fluctuate from quarter to quarter as a result of certain factors related to our business, including the timing of hardware shipments, new hardware introductions and equipment, and hardware and system sales that historically have been of a non-recurring nature.


 
33 

 


This information has been prepared from our books and records in accordance with accounting principles generally accepted in the United States of America for interim financial information.  In our opinion, all (including only normal, recurring) adjustments considered necessary for fair presentation have been included.  Interim results for any quarter are not necessarily indicative of the results that may be expected for any future period.


 
   
For the Three Months Ended
 
(in thousands)
 
March 31,
   
June 30,
   
September 30,
   
December 31,
 
   
2011
   
2011
   
2011
   
2011
 
Net sales
  $ 13,768     $ 14,374     $ 15,051     $ 15,167  
Gross profit
    6,086       6,300       6,835       6,981  
Operating income
    270       362       786       578  
Net income
    230       340       592       692  
Basic income per common share
    0.02       0.02       0.04       0.05  
Diluted income per common share
    0.01       0.02       0.04       0.04  

 

 
   
For the Three Months Ended
 
(in thousands)
 
March 31,
   
June 30,
   
September 30,
   
December 31,
 
   
2010
   
2010
   
2010
   
2010
 
Net sales
  $ 13,022     $ 14,898     $ 15,405     $ 14,918  
Gross profit
    5,753       6,407       6,866       6,631  
Operating income (loss)
    46       384       751       (1,581 )
Net income (loss)
    (30 )     387       657     $ (1,394 )
Basic and diluted income per common share
    (0.00 )     0.03       0.04     $ (0.09 )

 

 
Liquidity and Capital Resources
 
We had working capital of $12.4 million as of December 31, 2011, compared to working capital of $10.2 million as of December 31, 2010.  We had cash balances of $9.6 million and $10.3 million as of December 31, 2011 and 2010, respectively.  

Net cash used in operating activities during the year ended December 31, 2011 was $1.2 million. Our net income, after adjustments for non-cash items, generated cash from operations of $6.5 million, while changes in operating assets and liabilities used cash from operations of $7.7 million.  The primary non-cash adjustments to net income for the year ended December 31, 2011 were $3.1 million for depreciation and amortization and $1.2 million for share based compensation expense. The changes in operating assets and liabilities included a $0.9 million increase in accounts and notes receivable, a $2.2 million increase in inventory, a $2.1 million increase in prepaid expenses and other assets and a $2.5 million decrease in other liabilities.

Net cash used in investing activities during the year ended December 31, 2011 was $3.0 million due to purchases of property and equipment of $0.6 million, intangible and other assets of $2.1 million and investment of $0.3 million.
 
Net cash provided by financing activities during the year ended December 31, 2011 was $3.5 million due primarily to proceeds from debt of $6.0 million and the exercise of common stock options and warrants of $1.2 million, partially offset by the purchase of treasury stock of $2.9 million in connection with a legal settlement and payments on capital leases and debt of $0.7 million.
 
Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material.  To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.
 
During 2010, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”).   During 2011, we and the Bank entered into an Amended and Restated Loan and Security Agreement (the

 
34 

 

 “Amended Loan Agreement”) in order to, among other things, to increase the revolving line of credit from $5.0 million to $10.0 million (the “Credit Facility”). We may use the borrowings under the Credit Facility for working capital and general business requirements.

The amount available to us under the Credit Facility at any given time is the lesser of (a) $10.0 million or (b) the amount available under its borrowing base (two times adjusted EBITDA, measured on a 12 month trailing average, minus the principal amount of any term loan advances) minus (1) the dollar equivalent amount of all outstanding letters of credit plus an amount equal to the letter of credit reserve amount (as set forth in the Amended Loan Agreement), (2) 10% of each outstanding foreign exchange contract, (3) any amounts used for cash management services, (4) the outstanding principal balance of any advances and (5) the outstanding principal balance of any Term Loan Advances.  Under the Amended Loan Agreement, if the principal outstanding balance of any advance is equal or greater to $1 million for a period of time equal to or greater than 90 days from the funding date, then the principal balance becomes a “Term Loan Advance” and we must repay 5% of the original principal amount commencing on the first calendar day of the quarter following the conversion of the advance to a Term Loan Advance and on the first day of each fiscal quarter thereafter.

The Credit Facility also includes a sublimit of up to $2.0 million for letters of credit, cash management and foreign exchange services. The interest rate applicable to amounts drawn from the Credit Facility is, at our option, equal to either (i) the Prime Rate plus the Prime Rate Margin (as such terms are defined in the Amended Loan Agreement) or (ii) the LIBOR Rate plus the LIBOR Rate Margin (as defined in the Amended Loan Agreement). The Credit Facility includes an annual fee of 0.375% of the average unused portion of the credit facility.

All unpaid principal and accrued interest is due and payable in full on April 30, 2015, which is the maturity date.  Our obligations under the Credit Facility are secured by substantially all of our assets and the assets of our subsidiaries, including our intellectual property.  The Amended Loan Agreement contains customary terms and conditions for credit facilities of this type.  In addition, we are required to meet certain financial covenants customary with this type of facility, including maintaining a senior leverage ratio and a fixed charge coverage ratio.  The Amended Loan Agreement contains customary events of default.  If a default occurs and is not cured within any applicable cure period or is not waived, our obligations under the Credit Facility may be accelerated.
 
During 2011, we had an aggregate borrowing of $6.0 million outstanding which converted to a Term Loan Advance at an interest rate of 4%.  We made principal payments in the amount of $300,000 bringing the balance outstanding on the Term Loan Advance to $5.7 million at December 31, 2011.  We were in compliance with all financial covenants at December 31, 2011 and there were no letters of credit outstanding.

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

 
35 

 


Contractual Obligations
 
The table below sets forth our contractual obligations at December 31, 2011.  Additional details regarding these obligations are provided in the notes to our consolidated financial statements.
 

 
   
(in thousands)
 
   
Payments due by period
 
   
Total
   
Less than 1 Year
   
1 - 3 Years
   
3 - 5 Years
   
More than 5 Years
 
Term loan(1)
  $ 6,176     $ 1,401     $ 4,775     $ -     $ -  
Capital lease obligations(2)
    245       245       -       -       -  
Operating lease obligations(3)
    8,890       775       2,614       2,820       2,771  
              Total(4)
  $ 15,401     $ 2,421     $ 7,389     $ 2,820     $ 2,771  

 
(1)  
Amounts represent future principal and interest payments at a 4% interest rate.
 
(2)  
Amounts represent future minimum lease payments under non-cancelable capital leases for computer equipment.
 
(3)  
Amounts represent future minimum rental payments under non-cancelable operating leases for our facilities.
 
(4)  
Liabilities of approximately $244,000 related to ASC Subtopic 740-10, Income Taxes have not been included in the table above because we are uncertain as to if or when such amounts may be settled. See Note A to the consolidated financial statements contained in this report for further information.
 

 
Off-Balance Sheet Arrangements
 
As of December 31, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
 
 
Recent Accounting Pronouncements
 
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note A of the Notes to Consolidated Financial Statements.

 
Effect of Inflation

Inflation has not been a material factor affecting our business.  In recent years the cost of electronic components has remained relatively stable, due to competitive pressures within the industry, which has enabled us to contain our hardware costs.  Our general operating expenses, such as salaries, employee benefits, and facilities costs are subject to normal inflationary pressures, but to date inflation has not had a material effect on our operating results.
 
 

 
36 

 


Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
 
 
The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities.

Our credit agreement, as described above, provides us with a revolving Credit Facility of up to $10.0 million.  The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s option, equal to either (i) the Prime Rate plus the Prime Rate Margin (as such terms are defined in the credit agreement) or (ii) the LIBOR Rate plus the LIBOR Rate Margin (as such terms are defined in the Credit Agreement).  The Credit Facility includes an annual fee of 0.375% of the average unused portion. As of December 31, 2011 we had outstanding indebtedness of $5.7 million under the Credit Facility at 4% interest rate.  Accordingly, we could be exposed to market risk from changes in interest rates on our long-term debt.  We estimate that a one percent interest rate change would change our interest expense and payments by $57,000 per year, assuming we do not increase our amount outstanding.  
 
We also hold cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks outside the United States are denominated in the local currency and are minor.


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 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.  Foreign operations were not significant to us for the fiscal year ended December 31, 2011.
 
 

 

 
37 

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
Page
Consolidated Balance Sheets as of December 31, 2011 and 2010
39
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2011, 2010 and 2009
40
Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2011, 2010 and 2009
41
Consolidated Statements of Cash Flows for the Years ended December 31, 2011, 2010 and 2009
42
Notes to Consolidated Financial Statements
44
Report of Independent Registered Public Accounting Firm
66

 
 
38

 

 
Numerex Corp. and Subsidiaries
 
Consolidated Balance Sheets
 
(In thousands)
 
   
December 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 9,547     $ 10,251  
Restricted cash
    221       265  
Accounts receivable, less allowance for doubtful accounts of $236 at December 31, 2011 and $356 at December 31, 2010
    6,846       6,518  
Inventory, net of provision of $578 at December 31, 2011 and $624 at December 31, 2010
    7,057       4,820  
Prepaid expenses and other current assets
    1,122       1,926  
TOTAL CURRENT ASSETS
    24,793       23,780  
                 
Property and equipment, net
    1,252       1,392  
Software, net
    3,388       3,115  
Other intangibles, net
    4,901       4,741  
Other assets – long term
    3,307       331  
Goodwill, net
    23,787       23,787  
TOTAL ASSETS
  $ 61,428     $ 57,146  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 8,239     $ 7,507  
Other current liabilities
    1,392       3,765  
Current portion of term loan
    1,200       -  
Deferred revenues
    1,317       1,864  
Obligations under capital leases
    237       447  
TOTAL CURRENT LIABILITIES
    12,385       13,583  
                 
LONG TERM LIABILITIES
               
Term loan, net of current portion
    4,500       -  
Obligations under capital leases
    -       237  
Other long-term liabilities
    346       608  
TOTAL LIABILITIES
    17,231       14,428  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock - no par value; authorized 3,000; none issued
    -       -  
Class A common stock – no par value; authorized 30,000; issued 16,691 shares at December 31, 2011 and 16,363 shares at December 31, 2010; outstanding 15,143 shares at December 31, 2011 and 15,122 shares at December 31, 2010
    -       -  
Class B common stock – no par value; authorized 5,000; none issued
    -       -  
Additional paid-in-capital
    66,634       64,099  
Treasury stock, at cost, 1,562 shares at December 31, 2011 and 1,241 shares December 31, 2010
    (8,136 )     (5,239 )
Accumulated other comprehensive loss
    (13 )     -  
Accumulated deficit
    (14,288 )     (16,142 )
TOTAL SHAREHOLDERS' EQUITY
    44,197       42,718  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 61,428     $ 57,146  

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

 
39

 
 

 
Numerex Corp. and Subsidiaries
 
Consolidated Statements of Operation and Comprehensive Income (Loss)
 
(In thousands, except per share data)
 
   
For the Years
 
   
Ended December 31,
 
   
2011
   
2010
   
2009
 
Net sales:
                 
M2M Services
                 
Subscription revenue
  $ 38,649     $ 33,425     $ 29,427  
Embedded devices & hardware
    18,563       23,285       19,756  
Sub-total
    57,212       56,710       49,183  
Other Services
    1,148       1,533       1,653  
Total net sales:
    58,360       58,243       50,836  
Cost of sales, exclusive of depreciation shown below:
                       
Cost of subscription revenue
    15,697       13,067       10,674  
Cost of embedded devices & hardware
    15,726       18,770       17,061  
Cost of other services
    735       749       753  
Gross profit
    26,202       25,657       22,348  
 Sales and marketing
    9,169       7,030       6,652  
 General and administrative expenses
    9,197       9,473       9,896  
 Research and development expenses
    2,726       3,148       2,421  
 Depreciation and amortization
    3,114       3,381       3,398  
 Lititgation settlement and related expenses
    -       3,025       1,637  
Operating earnings (loss)
    1,996       (400 )     (1,656 )
 Debt extinguishment
    -       -       (2,936 )
 Net interest expense
    (214 )     (93 )     (995 )
 Net other (expense) income
    16       (31 )     43  
Earnings (loss) before income taxes
    1,798       (524 )     (5,544 )
 Provision (benefit) for income taxes
    (56 )     (144 )     285  
Net earnings (loss)
    1,854       (380 )     (5,829 )
 Other comprehensive income (loss), net of income tax:
                       
 Foreign currency translation adjustment
    (13 )     -       8  
Comprehensive income (loss)
  $ 1,841     $ (380 )   $ (5,821 )
                         
 Basic earnings (loss) per share
  $ 0.12     $ (0.03 )   $ (0.40 )
 Diluted earnings (loss) per share
  $ 0.12     $ (0.03 )   $ (0.40 )
 Weighted average common shares used in per share calculation
                       
 Basic
    15,055       15,084       14,429  
 Diluted
    15,710       15,084       14,429  

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

 
40 

 

 
 
NUMEREX CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' 0EQUITY
 
                     
Accumulated Other
             
   
Common
   
Additional paid
   
Treasury
   
Comprehensive
   
Accumulated
   
Total Shareholders’
 
DESCRIPTION:
 
Shares
   
in capital
   
Stock
   
Income (loss)
   
Deficit
   
Equity
 
Balance at January 1, 2009
    15,350     $ 55,388     $ (5,053 )   $ (8 )   $ (9,933 )   $ 40,394  
Issuance of shares under Directors Stock Plan
    25       103       -       -       -       103  
Issuance of shares in connection with employee stock option plan
    44       41       -       -       -       41  
Issuance of shares in lieu of debt payment
    889       6,485       -       -       -       6,485  
Retirement of Treasury shares
    -       -       (160 )     -       -       (160 )
Translation adjustment
    -       -       -       8       -       8  
Share based compensation
    -       995       -       -       0       995  
Net earnings
    -       -       -       -       (5,829 )     (5,829 )
Balance at December 31, 2009
    16,308       63,012       (5,213 )     -       (15,762 )     42,037  
                                                 
Issuance of shares under Directors Stock Plan
    16       77       -       -       -       77  
Issuance of shares in connection with employee stock option plan
    39       189       -       -       -       189  
Repurchase of warrants
    -       (117 )     -       -       -       (117 )
Retirement of Treasury shares
    -       -       (25 )     -       -       (25 )
Translation adjustment
    -       -       -       -       -       0  
Share based compensation
    -       938       -       -       -       938  
Net earnings
    -       -       -       -       (380 )     (380 )
Balance at December 31, 2010
    16,363       64,099       (5,238 )     -       (16,142 )     42,718  
                                                 
Issuance of shares under Directors Stock Plan
    7       59       -       -       -       83  
Issuance of shares in connection with employee stock option plan
    71       365       -       -       -       341  
Issuance of shares for restricted stock awards
    50       281       -       -       -       301  
Purchase of treasury shares
    -       -       (2,898 )     -       -       (2,898 )
Exercise of warrants
    200