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Numerex Corp (NMRX) SEC Filing 10-Q Quarterly report for the period ending Friday, June 30, 2017

Numerex Corp

CIK: 870753 Ticker: NMRX
 
 
Numerex Corp. Contact:
Ken Gayron (770) 615-1410
 
 
For Immediate Release
 
Numerex Reports Second Quarter 2017 Financial Results
Cost-Effective Business Model Results in Positive Impact
 
ATLANTA, GA, August 8, 2017—Numerex Corp (NASDAQ:NMRX),
a leading provider of managed enterprise solutions enabling the Internet of Things (IoT), today announced financial results for the second quarter ended June 30, 2017.
 
“Numerex demonstrated continued improvement in its cost-effective business model in the second quarter of 2017 resulting in a sequential increase in Adjusted EBITDA. The reductions in general and administrative expenses, a more focused R&D initiative and a more balanced sales and marketing effort drove Numerex’s financial results in the second quarter of 2017 and offset the declines in revenues. During the second quarter, the company also continued to advance its product roadmap in its key verticals. Numerex’s return to revenue growth will be tied to the launch of these new products which is targeted for the third quarter of 2017,” commented Kenneth Gayron Interim CEO and CFO.
 
Q2 of 2017 Comparisons to Q1 of 2017
 
Net revenues in Q2 of 2017 were $14.0 million compared to $16.4 million in Q1 of 2017 with the 15% sequential decline primarily due to a decrease in hardware revenue.
Subscription and Support revenues were $12.7 million in Q2 of 2017 compared to $13.5 million in Q1 of 2017.
Recurring Revenue as a percentage of Total Revenue of 90.7% in Q2 of 2017 compared to 82.2% in Q1 of 2017.
Gross Margin of 57.7% on Subscription and Support Revenue in Q2 of 2017 compared to 59.4% in Q1 of 2017.
Operating Expenses (excluding Impairment of Goodwill and Restructuring Charges) were $8.3 million in Q2 of 2017 compared to $9.8 million in Q1 of 2017.
Net loss was $3.1 million in Q2 of 2017 compared to a net loss of $4.0 million in Q1 of 2017.
Adjusted EBITDA in Q2 of 2017 was $1.4 million compared to $0.5 million in Q1 of 2017.
 
Q2 of 2017 Comparisons to Q2 of 2016
 
Net revenues in Q2 of 2017 were $14.0 million compared to $17.6 million in Q2 of 2016.
Subscription and Support revenues were $12.7 million in Q2 of 2017 compared to $14.8 million in Q2 of 2016.
Recurring Revenue as a percentage of Total Revenue of 90.7% in Q2 of 2017 compared to 84.1% in Q2 of 2016.
Gross Margin of 57.7% on Subscription and Support Revenue in Q2 of 2017 compared to 61.4% in Q2 of 2016.
Operating Expenses (excluding Impairment of Goodwill and Restructuring Charges) were $8.3 million in Q2 of 2017 compared to $11.3 million in Q2 of 2016.
Net loss was $3.1 million in Q2 of 2017 compared to net loss of $8.3 million in Q2 of 2016.
Adjusted EBITDA in Q2 of 2017 was $1.4 million compared to $0.6 million in Q2 of 2016.
 
 
 
 
Financial Metrics
 
 
 
Three Months Ended
 
GAAP Measures
 
June 30,
 
 
March 31,
 
 
June 30,
 
($ in millions, except per share data)
 
2017
 
 
2017
 
 
2016
 
Net revenues
 $14.0 
 $16.4 
 $17.6 
Subscription and support revenues
 $12.7 
 $13.5 
 $14.8 
Recurring revenue - subscription and support
    
    
    
revenues as a percentage of total revenue
  90.7%
  82.2%
  84.1%
Gross margin -- subscription and support revenues
  57.7%
  59.4%
  61.4%
Net loss
 $(3.1)
 $(4.0)
 $(8.3)
Basic and diluted (loss) earnings per share
 $(0.16)
 $(0.21)
 $(0.43)
 
    
    
    
Non-GAAP Measures*
    
    
    
 
    
    
    
Adjusted EBITDA
 $1.4 
 $0.5 
 $0.6 
Adjusted EBITDA as a percent of total revenue
  10.0%
  3.3%
  3.6%
______________
    
    
    
 
* Refer to the section of this press release entitled "Non-GAAP (Adjusted) Financial Measures" for
 
 
a discussion of these non-GAAP items and a reconciliation to the most comparable GAAP measure.
 
 
Quarterly Conference Call
Numerex will not host a conference call for its second quarter of 2017 financial results, consistent with market practice when a transaction is announced. Highlights of the transaction can be found in the press release dated August 3, 2017 on Numerex’s website. Investors may also obtain free copies of the registration statement, the proxy statement/prospectus and other relevant documents filed by Numerex and Sierra Wireless with the SEC (when they become available) through the website maintained by the SEC at www.sec.gov. Copies of the documents filed by Numerex with the SEC are available free of charge on Numerex’s website at www.investor.numerex.com or by contacting Numerex’s Investor Relations Department by telephone at 770-615-1410 or by e-mail to kgayron@numerex.com.
 
About Numerex
Numerex Corp. (NASDAQ:NMRX) is a leading provider of managed enterprise solutions enabling the Internet of Things (IoT). The Company's solutions produce new revenue streams or create operating efficiencies for its customers. Numerex provides its technology and services through its integrated platforms, which are generally sold on a subscription basis. The Company offers a portfolio of managed end-to-end IoT solutions including smart devices, network connectivity and service applications capable of addressing the needs of a wide spectrum of vertical markets and industrial customers. The Company's mission is to empower enterprise operations with world-class, managed IoT solutions that are simple, innovative, scalable, and secure. 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 capture greater recurring subscription revenues; our ability to efficiently utilize cloud computing to expand our services; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers and/ or wireless network operators materially change or disrupt the flow of products or services; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new products and services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances, partnerships and/or wireless network operators will not yield substantial revenues; changes in financial and capital markets and the inability to raise growth capital on favorable terms, if at all; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; our ability to meet financial and operating covenants in or otherwise service our debt, and the extent and timing of technological changes.
 
© 2017 Numerex Corp. All rights reserved. Numerex, the Numerex logo and all other marks contained herein are trademarks of Numerex Corp. and/or Numerex-affiliated companies. All other marks contained herein are the property of their respective owners.
 
 
 
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
June 30,
 
 
March 31,
 
 
June 30,
 
 
 
2017
 
 
2017
 
 
2016
 
Net revenues:
 
 
 
 
 
 
 
 
 
Subscription and support revenues
 $12,680 
 $13,470 
 $14,810 
Embedded devices and hardware
  1,300 
  2,915 
  2,796 
Total net revenues
  13,980 
  16,385 
  17,606 
Cost of sales
    
    
    
Subscription and support revenues
  5,364 
  5,464 
  5,713 
Embedded devices and hardware
  1,312 
  3,032 
  3,314 
Gross profit
  7,304 
  7,889 
  8,579 
Operating expenses:
    
    
    
Sales and marketing
  2,693 
  3,142 
  3,270 
General and administrative
  2,431 
  2,945 
  3,859 
Engineering and development
  1,704 
  2,215 
  2,444 
Depreciation and amortization
  1,443 
  1,523 
  1,677 
Impairment of goodwill and other intangible assets
  - 
  - 
  4,172 
Restructuring charges
  355 
  425 
  1,243 
Operating loss
  (1,322)
  (2,361)
  (8,086)
Interest expense
  742 
  621 
  460 
Loss on extinguishment of debt
  861 
  228 
  - 
Other expense (income), net
  70 
  730 
  (22)
Loss income before income taxes
  (2,995)
  (3,940)
  (8,524)
Income tax expense (benefit)
  81 
  84 
  (234)
Net loss
 $(3,076)
 $(4,024)
 $(8,290)
 
    
    
    
Basic and diluted (loss) earnings per share
 $(0.16)
 $(0.21)
 $(0.43)
Weighted average shares outstanding used
    
    
    
in computing diluted loss per share
  19,555 
  19,524 
  19,449 
 
 
 
 
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
June 30,
 
 
December 31,
 
 
 
2017
 
 
2016
 
ASSETS
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $5,354 
 $9,285 
Restricted cash
  221 
  221 
Accounts receivable, less allowance for doubtful accounts of $686 and $767
  8,141 
  9,436 
Financing receivables, current
  1,606 
  1,778 
Inventory, net of reserves
  8,566 
  9,011 
Prepaid expenses and other current assets
  1,329 
  1,421 
TOTAL CURRENT ASSETS
  25,217 
  31,152 
 
    
    
Financing receivables, less current portion
  1,785 
  2,227 
Property and equipment, net of accumulated depreciation
    
    
and amortization
  5,727 
  6,022 
Software, net of accumulated amortization
  5,818 
  6,530 
Other intangible assets, net of accumulated amortization
  11,121 
  11,519 
Goodwill
  33,554 
  33,554 
Other assets
  241 
  474 
TOTAL ASSETS
 $83,463 
 $91,478 
 
    
    
LIABILITIES AND SHAREHOLDERS’ EQUITY
    
    
CURRENT LIABILITIES
    
    
Accounts payable
 $13,775 
 $15,894 
Accrued expenses and other current liabilities
  2,524 
  3,209 
Deferred revenues
  1,411 
  1,882 
Current portion of long-term debt, net of debt issuance costs
  4,799 
  1,275 
Current obligations under capital lease
  309 
  291 
TOTAL CURRENT LIABILITIES
  22,818 
  22,551 
 
    
    
Long-term debt, net of debt issuance costs, less current portion
  10,266 
  14,885 
Obligations under capital lease, noncurrent
  671 
  797 
Deferred tax liabilities, noncurrent
  626 
  468 
Other liabilities
  1,346 
  1,512 
TOTAL LIABILITIES
  35,727 
  40,213 
 
    
    
SHAREHOLDERS’ EQUITY
    
    
Preferred stock, no par value; 3,000 authorized; none issued
  - 
  - 
Class A common stock, no par value; 30,000 authorized;
    
    
21,034 and 20,935 issued; 19,571 and 19,608 outstanding
  - 
  - 
Class B common stock, no par value; 5,000 authorized; none issued
  - 
  - 
Additional paid-in capital
  108,985 
  105,112 
Treasury stock, at cost, 1,463 and 1,327 shares
  (5,773)
  (5,466)
Accumulated other comprehensive loss
  (104)
  (110)
Accumulated deficit
  (55,372)
  (48,271)
TOTAL SHAREHOLDERS' EQUITY
  47,736 
  51,265 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 $83,463 
 $91,478 
 
 
 
 
NUMEREX CORP. AND SUBSIDIARIES
NON-GAAP (ADJUSTED) FINANCIAL MEASURES
 
Earnings before interest, taxes, depreciation and amortization expenses (EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe EBITDA and Adjusted EBITDA are useful to and used by investors and other users of the financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across periods.
 
We believe that:
 
EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest, income tax, and depreciation and amortization expenses, which can vary substantially from company-to-company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
Investors commonly adjust EBITDA information to eliminate the effect of equity-based compensation and other unusual or infrequently occurring items which vary widely from company-to-company and impair comparability.
 
We use EBITDA and Adjusted EBITDA:
 
as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis
as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and
in communications with the board of directors, analysts and investors concerning our financial performance.
 
Although we believe, for the foregoing reasons, that the presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, the non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.
 
Use of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement GAAP financial measures. The non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the same manner, as those used by other companies.
 
Adjusted EBITDA is calculated by excluding the effect of equity-based compensation and non-operational items from the calculation of EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.
 
We believe that excluding depreciation and amortization expenses of property, equipment and intangible assets to calculate EBITDA and Adjusted EBITDA provides supplemental information and an alternative presentation that is useful to investors’ understanding of our core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that may have little bearing on present or future replacement costs, but they are also based on our estimates of remaining useful lives.
 
Equity-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP income from continuing operations by providing income from continuing operations, excluding the effect of equity-based compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons.
 
Restructuring, non-cash and other charges, includes severance, one-time facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.
 
EBITDA and Adjusted EBITDA are not measures of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to – not a substitute for – results of operations presented on the basis of GAAP. EBITDA and Adjusted EBITDA do not purport to represent cash flow provided by operating activities as defined by GAAP. Furthermore, EBITDA and Adjusted EBITDA are not necessarily comparable to similarly-titled measures reported by other companies.
 
 
 
 
NUMEREX CORP. AND SUBSIDIARIES
RECONCILIATION OF NET LOSS TO EBITDA AND ADJUSTED
EBITDA, INCLUDING PER SHARE AMOUNTS
 
The following table reconciles the specific items excluded from GAAP in the calculation of EBITDA and Adjusted EBITDA for the periods indicated below (in thousands, except per share amounts):
 
 
 
Three Months Ended
 
 
 
June 30,
 
 
March 31,
 
 
June 30,
 
 
 
2017
 
 
2017
 
 
2016
 
EBITDA and Adjusted EBITDA (non-GAAP) (Unaudited)
 
 
 
 
 
 
 
 
 
Net loss
 $(3,076)
 $(4,024)
 $(8,290)
Depreciation and amortization expense
  1,835 
  1,973 
  2,005 
Impairment of goodwill and other intangible assets
  - 
  - 
  4,172 
Interest expense and other non-operating expense, net
  1,673 
  1,579 
  438 
Income tax (benefit) expense
  81 
  84 
  (234)
EBITDA (non-GAAP)
  513 
  (388)
  (1,909)
Equity-based compensation expense
  515 
  231 
  830 
Restructuring, non-cash and other charges
  375 
  693 
  1,706 
Adjusted EBITDA (non-GAAP)
 $1,403 
 $536 
 $627 
 
Restructuring, non-cash and other charges, includes severance, one-time facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.
 
 
###
 
 
 

The following information was filed by Numerex Corp (NMRX) on Tuesday, August 8, 2017 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-Q Quarterly 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-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2017
   
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from __________ to __________

 

Commission file number: 000-22920

 

NUMEREX CORP.

(Exact name of registrant as specified in its charter)

 

Pennsylvania 11-2948749
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

 

400 Interstate Parkway, Suite 1350
Atlanta, GA 30339-2119
(Address of principal executive offices) (Zip Code)

 

(770) 693-5950
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.

Yes þ     No ¨

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

 

As of August 7, 2017, 19,675,128 shares of the registrant's Class A common stock, no par value (being the registrant's only class of common stock outstanding) were outstanding.

 

 

 

 

 

 

NUMEREX CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 

    Page
  PART I—FINANCIAL INFORMATION  
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
     
  PART II—OTHER INFORMATION  
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures 26
Item 5. Other Information 26
Item 6. Exhibits 26
  SIGNATURES 27

 

 2 

 

 

NUMEREX CORP. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

Index to Financial Statements Page
   
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 4
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2017 and 2016 5
Unaudited Condensed Consolidated Statement of Shareholders' Equity for the six months ended June 30, 2017 6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 7
Unaudited Condensed Notes to Consolidated Financial Statements 8

 

 3 

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

   June 30,   December 31, 
   2017   2016 
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $5,354   $9,285 
Restricted cash   221    221 
Accounts receivable, less allowance for doubtful accounts of $686 and $767   8,141    9,436 
Financing receivables, current   1,606    1,778 
Inventory, net of reserves   8,566    9,011 
Prepaid expenses and other current assets   1,329    1,421 
TOTAL CURRENT ASSETS   25,217    31,152 
           
Financing receivables, less current portion   1,785    2,227 
Property and equipment, net of accumulated depreciation and amortization   5,727    6,022 
Software, net of accumulated amortization   5,818    6,530 
Other intangible assets, net of accumulated amortization   11,121    11,519 
Goodwill   33,554    33,554 
Other assets   241    474 
TOTAL ASSETS  $83,463   $91,478 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $13,775   $15,894 
Accrued expenses and other current liabilities   2,524    3,209 
Deferred revenues   1,411    1,882 
Current maturities of long-term debt, net of debt issuance costs   4,799    1,275 
Current obligations under capital lease   309    291 
TOTAL CURRENT LIABILITIES   22,818    22,551 
           
Long-term debt, net of debt issuance costs, less current maturities   10,266    14,885 
Obligations under capital lease, noncurrent   671    797 
Deferred tax liabilities, noncurrent   626    468 
Other liabilities   1,346    1,512 
TOTAL LIABILITIES   35,727    40,213 
           
SHAREHOLDERS’ EQUITY          
Preferred stock, no par value; 3,000 authorized; none issued   -    - 
Class A common stock, no par value; 30,000 authorized;
21,034 and 20,935 issued; 19,571 and 19,608 outstanding
 
 
 
 
 
-
 
 
 
 
 
 
 
-
 
 
Class B common stock, no par value; 5,000 authorized; none issued   -    - 
Additional paid-in capital   108,985    105,112 
Treasury stock, at cost, 1,463 and 1,327 shares   (5,773)   (5,466)
Accumulated other comprehensive loss   (104)   (110)
Accumulated deficit   (55,372)   (48,271)
TOTAL SHAREHOLDERS' EQUITY   47,736    51,265 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $83,463   $91,478 

 

The accompanying notes are an integral part of these financial statements

 

 4 

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS INCOME

(In thousands, except per share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
Net revenues:                    
Subscription and support revenues  $12,680   $14,810   $26,150   $29,794 
Embedded devices and hardware   1,300    2,796    4,216    5,862 
Total net revenues   13,980    17,606    30,366    35,656 
Cost of sales                    
Subscription and support revenues   5,364    5,713    10,828    11,414 
Embedded devices and hardware   1,312    3,314    4,344    6,432 
Gross profit   7,304    8,579    15,194    17,810 
Operating expenses:                    
Sales and marketing   2,693    3,270    5,835    6,215 
General and administrative   2,431    3,859    5,377    7,988 
Engineering and development   1,704    2,444    3,919    4,691 
Depreciation and amortization   1,443    1,677    2,966    3,335 
Impairment of goodwill and other intangible assets   -    4,172    -    4,172 
Restructuring charges   355    1,243    780    1,243 
Operating loss   (1,322)   (8,086)   (3,683)   (9,834)
Interest expense   742    460    1,363    727 
Loss on extinguishment of debt   861    -    1,089    290 
Other expense (income), net   70    (22)   801    (65)
Loss before income taxes   (2,995)   (8,524)   (6,936)   (10,786)
Income tax expense (benefit)   81    (234)   165    (170)
Net loss   (3,076)   (8,290)   (7,101)   (10,616)
Other items of comprehensive loss, net of income taxes:                    
Foreign currency translation adjustment   -    1    (6)   (14)
Comprehensive loss  $(3,076)  $(8,291)  $(7,095)  $(10,602)
                     
                     
Loss per share:                    
Basic  $(0.16)  $(0.43)  $(0.36)  $(0.55)
Diluted  $(0.16)  $(0.43)  $(0.36)  $(0.55)
Weighted average shares outstanding used in per share calculation:                    
Basic   19,555    19,449    19,539    19,413 
Diluted   19,555    19,449    19,539    19,413 

 

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

 

 5 

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands)

 

               Accumulated Other       Total 
   Common   Additional   Treasury   Comprehensive   Accumulated   Shareholders' 
   Shares   Paid-in Capital   Stock   Loss   Deficit   Equity 
Balance at January 1, 2017   20,935   $105,112   $(5,466)  $(110)  $(48,271)   51,265 
Equity-based compensation expense   -    1,034    -    -    -    1,033 
Exercises, vesting and other equity- based compensation plan activity, net   99         (289)   -    -    (289)
Value of shares retained to pay employee taxes   -    (184)   (18)   -    -    (202)
Warrants issued   -    3,023    -    -    -    3,023 
Translation adjustment   -    -    -    6    -    6 
Net loss   -    -    -    -    (7,101)   (7,101)
Balance at June 30, 2016   21,034   $108,985   $(5,773)  $(104)  $(55,372)  $47,736 

 

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

 

 6 

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   Six Months Ended 
   June 30, 
   2017   2016 
Cash flows from operating activities:          
Net loss  $(7,101)  $(10,616)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   3,874    3,968 
Impairment of goodwill and other intangible assets   -    4,172 
Non-cash restructuring charges   -    370 
Equity-based compensation expense   745    1,451 
Loss on extinguishment of debt   1,089    290 
Deferred income taxes   157    (179)
Bad debt expense   144    228 
Provision for inventory reserves   (96)   487 
Other non-cash expense   294    72 
Changes in assets and liabilities:          
Accounts and financing receivables   1,765    (1,004)
Inventory, net   (604)   (844)
Accounts payable   (2,124)   421 
Deferred revenue   (566)   (454)
Other   (429)   253 
Net cash used in operating activities   (2,852)   (1,385)
Cash flows from investing activities:          
Purchases of property and equipment   (213)   (509)
Capitalized software development and purchases of software   (1,101)   (1,280)
Net cash used in investing activities   (1,314)   (1,789)
Cash flows from financing activities:          
Proceeds from long-term debt   18,591    17,000 
Principal payments on debt   (17,000)   (19,349)
Principal payments on capital lease obligations   (108)   - 
Exercises, vesting and other equity- based compensation plan activity   -    386 
Payment of taxes on equity-based awards   (202)   (173)
Deferred financing costs paid   (1,046)   (1,038)
Net cash provided by (used in) financing activities   235    (3,174)
Net decrease in cash and cash equivalents   (3,931)   (6,348)
Cash and cash equivalents at beginning of period   9,285    16,237 
Cash and cash equivalents at end of period  $5,354   $9,889 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $1,147   $645 
Net cash paid for income taxes   16    6 
Disclosure of non-cash investing and financing activities:          
Capital expenditures in accounts payable   189    274 
Warrants issued to Kenneth Rainin Foundation   595    - 
Warrants issued to Hale Capital   2,428    - 
Transfer of inventory to monitoring equipment    1,143    1,454 

 

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

 

 7 

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Numerex Corp. (NASDAQ: NMRX) (the “Company”) is a holding company incorporated in Pennsylvania, and through its subsidiaries, is a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). An IoT solution is generally viewed as a combination of devices, software and services that operate with little or no human interaction. Our managed IoT solutions are simple, innovative, scalable and secure. Our solutions incorporate each of the four key IoT building blocks – Device, Network, Application and Platform. We provide our technology and service solutions through our integrated IoT horizontal platforms, which are generally sold on a subscription basis. Foreign operations were not significant to us for the three and six months ended June 30, 2017 or 2016.

 

Basis of Presentation

 

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and the Rules and Regulations issued by the Securities Exchange Commission, or SEC, as applicable. These financial statements include all of our accounts and those of our wholly-owned subsidiaries. We have eliminated intercompany transactions and balances in consolidation. Certain prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation.

 

Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying financial statements reflect all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, considered necessary for a fair presentation of our financial position as of June 30, 2017 and our operating results and cash flows for the interim periods presented. The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from our audited financial statements, but does not include all disclosures required by GAAP. The financial information presented herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 which includes information and disclosures not included in this quarterly report.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Estimates and Assumptions

 

The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ materially from these estimates. Operating results for the three or six months ended June 30, 2017 may not be indicative of the results that may be expected for the year ending December 31, 2017 or any future periods.

 

Liquidity

 

The Company incurred an operating loss totaling $3.7 million and cash used in operations was $2.9 million for the six months ended June 30, 2017. The Company also incurred an operating loss totaling $22.8 million and cash used in operations totaled $0.5 million for the year ended December 31, 2016. As of June 30, 2017, the Company has an accumulated deficit of $55.4 million, and cash and cash equivalents of $5.6 million. The Company’s cash flow requirements during the fiscal year 2016 and to date in 2017 were financed by cash on hand, cash generated by operations, and proceeds from the recent financing with Hale Capital Partners LP described in Note F below. The Company had total term debt (net of deferred financing costs), including current portion, of $15.1 million as of June 30, 2017. The Company’s ability to continue in business is dependent on its ability to continue to generate operating cash flows, to maintain sufficient cash on hand, to raise additional capital, and to control expenditures. Management believes that the Company will maintain sufficient liquidity through at least August 2018. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

 

Restricted Cash

 

As of June 30, 2017, and 2016, cash of $0.2 million was held in escrow related to certain vendor obligations.

 

NOTE B - INVENTORY

 

Inventory consisted of the following (in thousands):

 

   June 30,   December 31, 
   2017   2016 
Raw materials  $2,313   $2,953 
Finished goods   7,918    8,504 
Inventory reserves   (1,665)   (2,446)
   $8,566   $9,011 

 

During the three and six months ended June 30, 2017, we transferred $0.6 million and $1.1 million of inventory, respectively, to monitoring equipment within property and equipment, respectively, and disposed of $0.3 million of fully reserved inventory.

 

NOTE C – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following (in thousands):

 

   June 30,   December 31, 
   2017   2016 
Computer, network and other equipment  $8,840   $8,805 
Monitoring equipment   6,836    5,692 
Furniture and fixtures   486    486 
Leasehold improvements   254    264 
Total property and equipment   16,416    15,247 
Accumulated depreciation and amortization   (10,689)   (9,225)
   $5,727   $6,022 

 

During the three and six months ended June 30, 2017, we transferred $0.6 million and $1.1 million of inventory to monitoring equipment as part of our managed services business. Depreciation and amortization related to property and equipment was $0.3 million and $0.6 million for the three and six months ended June 30, 2017, respectively. Depreciation and amortization related to property and equipment was $0.4 million and $0.8 million for the three and six months ended June 30, 2016, respectively.

 

NOTE D – INTANGIBLE ASSETS

 

Impairment Charges

 

We recorded $4.2 million in impairment charges for trade names, technology and goodwill as of June 30, 2016. The Omnilink and Do-It-Yourself (DIY) product lines and reporting units had not generated results of operations consistent with our expectations and forecasts for the three months ended June 30, 2016. The lower operating results and future expectations for Omnilink were principally related to strategic changes and delays associated with the launch of a new personal tracking product line. We also continue to evaluate different strategic options for the DIY reporting unit. These factors were triggering events that indicated that it was more likely than not that the fair value of the Omnilink and DIY reporting units were less than their carrying amounts. As a result, we performed initial assessments of goodwill for impairment, along with other intangible assets of the reporting units, as of June 30, 2016. No triggering events were identified as of June 30, 2017.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

We estimated the fair value of the reporting units using a combination of market and income approaches and concluded that the estimated fair value of the Omnilink and DIY reporting units were less than their carrying values. We assessed the implied fair value of goodwill in the same manner as if we were acquiring the reporting units in a business combination. Specifically, we allocated the estimated fair value of the reporting units to all of the assets and liabilities of those units, including any unrecognized intangible assets, in a hypothetical calculation, referred to as Step Two. We assessed the amortizing long-lived assets for impairment based on undiscounted cash flows and concluded that, with the exception of DIY technology, the carrying values of other amortizing long-lived assets and intangible assets were recoverable.

 

Based on Step Two calculations, we recorded non-cash impairment charges as of June 30, 2016 of $1.6 million for indefinite-lived trade names and $2.3 million for goodwill of the Omnilink reporting unit, and $0.1 million for technology and $0.2 million for goodwill of the DIY reporting unit.

 

   Omnilink   DIY   Total 
   Trade Names   Goodwill   Technology   Goodwill   Impairment 
January 1, 2016  $2,972   $17,580   $245   $1,656      
Amortization   -    -    (18)   -      
Impairment   (1,612)   (2,264)   (81)   (215)  $(4,172)
June 30, 2016  $1,360   $15,316   $146   $1,441      

 

Intangible Assets Other Than Goodwill

 

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

 

   As of June 30, 2017   As of December 31, 2016 
   Remaining
Useful Lives
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net Book
Value
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net Book
Value
 
Purchased and developed software   1.9   $19,043   $(14,391)  $4,652   $18,205   $(12,806)  $5,399 
Software in development   n/a    1,166    -    1,166    1,131    -    1,131 
Total software        20,209    (14,391)   5,818    19,336    (12,806)   6,530 
Licenses   2.5    13,215    (12,787)   428    13,215    (12,534)   681 
Customer relationships   6.9    8,167    (3,416)   4,751    8,167    (3,039)   5,128 
Technologies   10.3    4,235    (899)   3,336    4,235    (822)   3,413 
Patents and trademarks   1.6    4,256    (2,568)   1,688    3,747    (2,368)   1,379 
Trade names   Indefinite    918    -    918    918    -    918 
Total other intangible assets        30,791    (19,670)   11,121    30,282    (18,763)   11,519 
        $51,000   $(34,061)  $16,939   $49,618   $(31,569)  $18,049 

 

Remaining useful lives in the preceding table were calculated on a weighted average basis as of June 30, 2017. We did not incur significant costs to renew or extend the term of acquired intangible assets during the three or six months ending June 30, 2017.

 

Amortization expense related to intangible assets was $1.2 million and $2.3 million for the three and six months ended June 30, 2017, respectively. Amortization expense related to intangible assets was $1.3 million and $2.6 million for the three and six months ended June 30, 2016, respectively. Amortization expense recorded in cost of subscription revenues was $0.4 million and $0.8 million, respectively, for the three and six months ended June 30, 2017, compared to $0.3 million and $0.6 million, respectively, for the three and six months ended June 30, 2016. Additionally, we have capitalized approximately $0.7 million and $1.3 million of internally generated software development costs for the three and six months ended June 30, 2017, respectively, and $0.3 million and $0.6 million for the three and six months ended June 30, 2016, respectively.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

NOTE E – INCOME TAXES

 

We calculate our interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, we make our best estimate of the annual expected effective tax rate and apply that rate to our ordinary year-to-date income or loss.  In addition, we calculate a year-to-date adjustment to increase or decrease our income tax provision to take into account our current expected effective tax rate.  The tax or benefit related to significant, unusual, or extraordinary items are individually computed and recognized in the interim period in which those items occur.

 

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

 

During 2015, we determined that we would not meet the criteria of “more likely than not” that our federal and state net operating losses and certain other deferred tax assets would be recoverable. This determination was based on our assessment of both positive and negative evidence regarding realization of our deferred tax assets, in particular, the strong negative evidence associated with our cumulative loss over the past three years. Accordingly, we recorded a valuation allowance against these items. The deferred tax assets consist of federal net operating losses, state net operating losses, tax credits, and other deferred tax assets, most of which expire between 2017 and 2036. We will maintain the valuation allowance against the net deferred tax assets until sufficient positive evidence outweighs any negative evidence to support reversal. Income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.

 

As a result of recording a valuation allowance, we recognized deferred tax expense of less than $0.1 million and $0.2 million, representing an effective tax rate of (2.2%), for the three months and six months ended June 30, 2017. The deferred tax expense recognized on a net loss before income taxes, and the difference in the effective tax rate from the federal statutory rate, is due primarily to the book and tax basis and accounting differences for certain long and indefinite lived intangible assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses. Income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.

 

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2012 through 2016 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from earlier years in which net operating losses have arisen are still open for examination by the tax authorities.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

NOTE F – DEBT

 

Debt consisted of the following (dollars in thousands):

 

   June 30,   December 31, 
   2017   2016 
         
Notes payable to Hale Capital  $13,595   $- 
Note payable to Kenneth Rainin Foundation (a related party)   5,000    - 
Note payable to Crystal Financial LLC, with interest at LIBOR plus margin   -    17,000 
Less deferred financing costs   (3,530)   (840)
    15,065    16,160 
Less current portion of long-term debt (net of deferred financing costs)   (4,799)   (1,275)
Noncurrent portion of long-term debt  $10,266   $14,885 

 

Hale Capital Note Purchase Agreement

 

On June 7, 2017 (the "Closing Date"), the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) by and among the Company, as borrower, certain subsidiaries of the Company, as guarantors, the purchasers from time to time party thereto, and HCP-FVF, LLC, an affiliate of Hale Capital Partners LP, as collateral agent and as purchaser ("Hale Capital"). Pursuant to the Note Purchase Agreement, the Company issued and sold to Hale Capital senior secured promissory notes in an aggregate original principal amount of $13.5 million (the "Notes"), the proceeds of which were used to repay the outstanding term loans and other obligations under the Term Loan Agreement, dated as of March 9, 2016, by and among the Company, certain subsidiaries of the Company, the lenders party thereto and Crystal Financial LLC (the “Crystal Loan Agreement”). We recorded a charge of $0.8 million to loss on extinguishment of debt, of which $0.5 million related to unamortized deferred financing costs related to the Crystal Loan Agreement, and $0.3 million related to prepayment penalties and other extinguishment related costs, which is recorded as a separate line item on the consolidated statement of operations and comprehensive loss for the three month period ended June 30, 2017.

 

The Notes are secured by a first priority security interest in substantially all assets of the Company and its subsidiaries. The Notes bear interest at a rate equal to the prime rate plus 700 (currently 11% per year), payable monthly in arrears. From June 7, 2017 until June 29, 2018, the monthly interest payment will be in the form of additional Notes. Thereafter, the interest will be payable monthly in cash in arrears. Interest on the Notes will be computed on the basis of a 360-day year comprising twelve 30-day months. The Notes will bear interest at a rate five percent (5%) above the otherwise applicable interest rate during the continuance of a default or event of default.

 

The maturity date of the Notes is March 31, 2021. Beginning June 30, 2018, the Company is required to prepay the Notes in principal installments of $250,000 per month. In addition, the Company will be required to redeem all of the Notes upon a change of control and will be required to make mandatory prepayments on the Notes with the net proceeds of (i) any voluntary or involuntary sale or disposition of assets (including casualty losses and condemnation awards, subject to certain exceptions) and (ii) the issuance or sale of any equity, except for a portion of which may be used to pay down the Company's existing subordinated note. The Company may also prepay to Notes in whole or in part at any time.

 

All prepayments of the Notes (whether mandatory, optional or as result of the acceleration of the Notes) are subject to a prepayment penalty as follows: (A) if prepayment is on or before the second anniversary of the Closing Date, 5% of the principal prepaid; (B) if prepayment is after the second anniversary but on or before the third anniversary of the Closing Date, 3% of the principal prepaid; and (C) if prepayment is after the third year anniversary but before the maturity date, 1% of the principal prepaid.

 

Pursuant to the terms of the Notes, the Company is required to meet certain financial and other restrictive covenants customary with this type of facility, including maintaining a minimum EBITDA, Minimum Total Liquidity, Minimum Liquidity and minimum Monthly Recurring Revenue, as defined in the Note Purchase Agreement. The Company was in compliance with these covenants as of June 30, 2017. Additionally, the Company is also prohibited from taking certain actions during the term of the Notes without consent of the purchasers, including, without limitation, incurring additional indebtedness, entering into certain mergers or other business combination transactions, disposing of or permitting liens or other encumbrances on the Company's assets and making restricted payments, including cash dividends on shares of the Company's common stock, except as expressly permitted under the Note Purchase Agreement.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

The Note Purchase Agreement contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the Note Purchase Agreement may be accelerated. The Note Purchase Agreement and related Note documents also contain additional representations and warranties, covenants, indemnities and conditions, in each case customary for transactions of this type.

 

In connection with the execution of the Note Purchase Agreement, the Company issued to Hale Capital detachable warrants to purchase up to 895,944 shares of common stock (subject to adjustment) at an exercise price equal to $4.14 per share. The exercise price of the warrants is subject to adjustment upon certain events, including a down round provision, and the term of the warrants is ten years from the Closing Date. The warrants were valued using a Monte Carlo valuation model and had a fair value at grant date of $2.4 million. The warrants have been recorded as deferred financing costs, and are being amortized over the term of the Notes.

 

Senior Subordinated Promissory Note

 

On March 31, 2017, the Kenneth Rainin Foundation, a California corporation, and the Company entered into a Senior Subordinated Promissory Note (the “KRF Note”) in the aggregate principal amount of $5.0 million, with a maturity date of April 1, 2018, and an annual interest rate of 12%, which was used to pay down a portion of the outstanding term loans under the Crystal Loan Agreement on March 31, 2017.

 

In connection with the KRF Note, the Company issued to Kenneth Rainin Foundation a warrant to purchase 125,000 shares of our common stock at a warrant price of $0.01 per share. The warrants had a fair value of $0.6 million at the grant date, have been recorded as deferred financing costs, and are being amortized over the term of the KRF Note. Brian Igoe, a director of the Company, is the Chief Investment Officer of the Kenneth Rainin Foundation.

 

Crystal Term Loan Agreement - Amendment, Waiver and Repayment

 

On March 31, 2017, we entered into an amendment to the Crystal Loan Agreement which, among other things, (i) required a $5.0 million prepayment of the term loans with the proceeds of the KRF Note, (ii) required the payment of an amendment fee in the amount of $2.0 million, half of which was paid upon execution of the amendment, with the remainder due only if certain events did not occur by June 1, 2017 (which date was subsequently extended to June 7, 2017), (iii) modified the covenants related to minimum adjusted EBITDA, minimum fixed charge coverage ratio, maximum net leverage, and maximum subscriber churn, (iv) waived certain specified events of default, including financial covenant defaults, (v) increased the interest rate payable on the term loans from 8.5% to 10.5%, and (vi) required a prepayment in the amount of $2.0 million if certain events did not occur by June 1, 2017 (which date was subsequently extended to June 7, 2017).

 

As a result of the $5.0 million prepayment of the term loans with the proceeds of the KRF Note, we recorded a $0.2 million loss on partial extinguishment of the Crystal Loan Agreement, which is recorded as a separate line item on the consolidated statement of operations for the three month period ending March 31, 2017.

 

One June 7, 2017, all outstanding term loans and other obligations under the Crystal Loan Agreement were repaid in full with the proceeds of the Notes issued pursuant to the Note Purchase Agreement. 

 

NOTE G – NET LOSS PER SHARE

 

Basic (loss) earnings per share attributable to common shareholders is based on the weighted-average number of common shares outstanding excluding the dilutive impact of common stock equivalents. Diluted (loss) earnings per share include the effect of all potentially dilutive securities on earnings per share. The dilutive effect of outstanding equity-based compensation awards is computed using the treasury stock method. The computation of diluted earnings per shares does not assume exercise of securities that would have an anti-dilutive effect on earnings. Diluted (loss) earnings per share is not presented separately because there are no adjustments to the numerator in calculating dilutive net loss per share and all potentially dilutive common stock equivalents would be antidilutive. The following table presents a reconciliation of the shares used in the calculation of basic and dilutive (loss) earnings per share and anti-dilutive equity based compensation awards (in thousands):

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
Weighted average common shares outstanding:                
Basic   19,555    19,449    19,539    19,413 
Dilutive effect of common stock equivalents   -    -    -    - 
Diluted   19,555    19,449    19,539    19,413 
                     
Anti-dilutive equity-based compensation awards   1,178    2,158    1,122    2,158 

 

NOTE H – RESTRUCTURING

 

We recorded a restructuring charge of $0.8 million, which included $0.4 million of severance costs for the six months ended June 30, 2017. The other costs recorded as restructuring are comprised of $0.2 million for the loss on sublease of our Dallas office, and $0.2 million in legal costs.

 

NOTE I – FAIR VALUE MEASUREMENTS

 

We account for certain assets at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1 – Valuations based on quoted prices for identical assets and liabilities in active markets.

 

Level 2 – Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 – Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

We have no assets measured at fair value on a recurring basis. We do not have any liabilities measured at fair value on a recurring basis.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

The following table summarizes assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2016 (in thousands):

 

   Fair       Total 
   Value   Level 3   Losses 
April 1, 2016               
Omnilink Reporting Unit               
Indefinite lived trade names  $1,360   $1,360   $1,612 
Goodwill   15,316    15,316    2,264 
DIY Reporting Unit               
Technology   146    146    81 
Goodwill   1,441    1,441    215 
Total nonrecurring fair value measurements  $18,263   $18,263   $4,172 

 

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2017, the Financial Accounting Standards Board (FASB) issued guidance simplifying the test for goodwill impairment. The guidance eliminates step two from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption, with early adoption permitted. The guidance is effective for the Company beginning in 2020. The Company is in the process of evaluating the effects of the provisions of this guidance on our financial statements.

 

In January 2017, the FASB issued guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires a prospective adoption. Early adoption is permitted. This update will be effective for the Company beginning in 2018. The Company does not expect the provisions of this guidance to have a material impact on our financial statements.

 

In November 2016, the FASB issued guidance impacting restricted cash presentation on the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard becomes effective for the Company during the first quarter of 2018 and will be applied using a retrospective approach for each period presented. The Company does not expect the provisions of this guidance to have a material impact on our financial statements.

 

In February 2016, the FASB issued guidance that requires lessees to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual and interim periods beginning after December 15, 2018. The updated standard mandates a modified retrospective transition method with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our financial statements.

 

In May 2014, the FASB issued guidance which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued additional guidance which delays the effective date by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued guidance which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. We currently anticipate adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting the standard using the modified retrospective method. We are concluding the assessment phase of implementing this guidance. We have evaluated each of the five steps in the new revenue recognition model, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied. Our preliminary conclusion is that the determination of what constitutes a contract with our customers (step 1), our performance obligations under the contract (step 2), and the determination and allocation of the transaction price (steps 3 and 4) and recognizing revenue when performance obligations are satisfied (step 5) under the new revenue recognition model will not result in material changes in comparison to our current revenue recognition for our contracts with customers entered into in the normal course of operations. However, we have not yet finalized our analysis.

 

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NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Effective January 1, 2017, the Company adopted guidance which simplifies the measurement of inventory. The guidance changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value and eliminates the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The provisions of this standard were adopted on a prospective basis and adoption of this standard did not have an impact on the Company's financial position, results of operations or cash flows.

 

In July 2017, the Company adopted guidance which changes the classification analysis of certain equity-linked instruments with down round features. The guidance changed the requirement that a down round feature precluded equity classification when assessing whether the instrument is indexed to an entity’s own stock. The provisions of this standard were early adopted as of June 30, 2017. As of June 30, 2017, the only equity linked instruments with down-round features for the Company were the warrants issued in connection with the Note Purchase Agreement (see Note F- Debt).

 

NOTE K - SUBSEQUENT EVENTS

 

On August 2, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sierra Wireless, Inc., a Canadian corporation (“Sierra”), and Wireless Acquisition Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Sierra (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Sierra (the “Merger”). The Merger Agreement was unanimously approved and adopted by the board of directors of each of the Company and Sierra.

 

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), the Company’s shareholders will have the right to receive 0.1800 common shares, no par value, of Sierra (“Sierra Common Stock”) for each share of Class A common stock, no par value, of the Company (“Company Common Stock”) (such consideration, the “Merger Consideration”). Additionally, each outstanding restricted stock unit, in-the-money option and in-the-money stock appreciation right will be cancelled in exchange for the right to receive the Merger Consideration in accordance with the terms of the Merger Agreement. Except as described below and specified in the Merger Agreement, if exercised following notice of the Merger, each outstanding warrant issued by the Company will be cancelled in exchange for the right to receive the Merger Consideration or, if not exercised, will be cancelled at the Effective Time.

 

The Merger Agreement contains customary representations and warranties from each of the Company and Sierra, and each party to the Merger Agreement has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of the Company’s and Sierra’s businesses during the interim period between the execution of the Merger Agreement and the Effective Time, (2) the obligation of the Company to call a meeting of its shareholders to adopt the Merger Agreement, and, subject to certain exceptions, to recommend that its shareholders adopt the Merger Agreement and (3) the Company’s non-solicitation obligations relating to alternative acquisition proposals. Each of the Company and Sierra has also agreed to apply for, or otherwise seek, and use its respective commercially reasonable efforts to obtain, all consents and approvals of governmental entities required to be obtained by it for the consummation of the transactions contemplated by the Merger Agreement.

 

The completion of the Merger is subject to customary conditions, including (1) the adoption of the Merger Agreement by the Company’s shareholders, (2) the receipt of conditional approval of the shares of Sierra Common Stock to be issued in the Merger for listing on the Toronto Stock Exchange, subject only to customary post-closing deliverables, and on The NASDAQ Global Market, subject only to official notice of issuance, (3) the expiration or early termination of all applicable waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (4) the effectiveness of the registration statement on Form F-4 by the Securities and Exchange Commission for the Sierra Common Stock to be issued in the Merger, (5) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the completion of the Merger illegal and (6) the absence of any pending legal proceeding instituted by any governmental entity seeking to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by the Merger Agreement. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respects by the other party of its obligations under the Merger Agreement, (3) the absence of a material adverse effect with respect to the other party and (4) receipt by such party of a tax opinion to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986.

 

The Merger Agreement also provides certain termination rights for each of the Company and Sierra and further provides that a termination fee equal to 3.75% of the aggregate equity value of the Merger as of the date of the Merger Agreement will be payable by the Company upon termination of the Merger Agreement under certain circumstances specified in the Merger Agreement. In addition, upon termination of the Merger Agreement by Sierra as a result of either Numerex’s shareholders not approving the transaction or Numerex’s fraud or willful and material breach of a representation, warranty or covenant, Numerex may be required to reimburse Sierra for its out-of-pocket costs and expenses incurred in connection with the Merger in an amount not to exceed $850,000 in the event of a no vote and $2 million in the event of fraud or a willful and material breach.

 

In connection with entering into the Merger Agreement, the Company agreed to repurchase the Hale Capital warrants for a purchase price of $4.0 million, immediately prior to, and contingent upon, the consummation of the Merger. In addition, Hale Capital has agreed to waive any event of default under the Note Purchase Agreement that may be caused by the execution of the Merger Agreement or the consummation of the Merger; provided that (i) the repurchase price for the warrant and all principal, interest and other amounts owed under the Notes are paid in full substantially concurrently with the Effective Time of the Merger and (ii) the Effective Time of the Merger occurs on or before August 1, 2018.

 

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

 

Forward Looking Statements

 

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

 

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring subscription revenues; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers materially change or disrupt the flow of products or services; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new products and services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances, partnerships and/or wireless network operators will not yield substantial revenues; changes in financial and capital markets, and the inability to raise growth capital; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; and extent and timing of technological changes.

 

Overview

 

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or “Numerex” refers to Numerex Corp. and subsidiaries.

 

The following Management’s Discussion and Analysis is intended to help the reader understand our results of operations and financial condition. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q for the period ended June 30, 2017.

 

Numerex Corp. (“Numerex,” the “Company” or “we”) is headquartered in Atlanta, Georgia, and is a corporation organized under the laws of the Commonwealth of Pennsylvania. We are a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). We empower enterprise operations with world-class, managed IoT solutions that are simple, innovative, scalable and secure.

 

During the quarter ended June 30, 2017, we had revenues of $14.0 million, and a net loss of $3.1 million; compared with revenues and a net loss of $17.6 million and $8.3 million, respectively for the quarter ended June 30, 2016.

 

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

 

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

 

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

 

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

 

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

 

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

 

Results of Operations

 

Three Months Ended June 30, 2017 and 2016

 

The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):

 

   Three Months Ended June 30,   Change from 
   2017   2016   2016 to 2017 
Net revenues:                              
Subscription and support revenues  $12,680    90.7%  $14,810    84.1%  $(2,130)   -14.4%
Embedded devices and hardware   1,300    9.3%   2,796    15.9%   (1,496)   -53.5%
Total net revenues   13,980    100.0%   17,606    100.0%   (3,626)   -20.6%
Cost of sales                              
Subscription and support revenues   5,364    38.4%   5,713    32.4%   (349)   -6.1%
Embedded devices and hardware   1,312    9.4%   3,314    18.8%   (2,002)   -60.4%
Gross profit   7,304    52.2%   8,579    48.7%   (1,275)   -14.9%
Operating expenses:                              
Sales and marketing   2,693    19.3%   3,270    18.6%   (577)   -17.6%
General and administrative   2,431    17.4%   3,859    21.9%   (1,428)   -37.0%
Engineering and development   1,704    12.2%   2,444    13.9%   (740)   -30.3%
Depreciation and amortization   1,443    10.3%   1,677    9.5%   (234)   -14.0%
Impairment of goodwill and other                              
other intangible assets   -    0.0%   4,172    23.7%   (4,172)   -100.0%
Restructuring charges   355    2.5%   1,243    7.1%   (888)   -71.4%
Operating loss   (1,322)   -9.5%   (8,086)   -45.9%   6,764    -83.7%
Interest expense   742    5.3%   460    2.6%   282    61.3%
Loss on extinguishment of debt   861    6.2%   -    0.0%   861    100.0%
Other income (expense), net   70    0.5%   (22)   -0.1%   92    -418.2%
Loss before income taxes   (2,995)   -21.4%   (8,524)   -48.4%   5,529    -64.9%
Income tax expense (benefit)   81    0.6%   (234)   -1.3%   315    -134.6%
Net loss  $(3,076)   -22.0%  $(8,290)   -47.1%  $5,214    -62.9%
Adjusted EBITDA(1)  $1,403    10.0%  $627    3.6%  $776    123.7%

 

 

(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.

 

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Total revenue decreased $3.6 million, or 20.6%, for the three months ended June 30, 2017 to $14.0 million from $17.6 million for the same period in 2016. The decrease in total revenue is related to the decrease in subscription and support revenue as well as embedded devices and hardware revenue, which is discussed below.


Subscription and support revenues decreased $2.1million, or 14.4%, to $12.7 million from $14.8 million in 2016. The decrease is driven by 2G disconnects associated with the AT&T 2G network sunset that occurred on December 31, 2016. Embedded devices and hardware revenue decreased $1.5 million, or 53.5%, to $1.3 million from $2.8 million in 2016. The decrease in revenue is driven by customer’s replacement of their 2G products in 2016 in anticipation of the AT&T 2G network sunset that occurred on December 31, 2016.

Total cost of sales for the three months ended June 30, 2017 decreased $2.4 million, or 26.0%, to $6.7 million compared to $9.0 million for the same period in 2016. Comprising that decrease, the cost of sales for subscription and support services decreased $0.3 million, or 6.12%, to $5.4 million for the three months ended June 30, 2017 compared to $5.7 million for the same period in 2016. Cost of sales for embedded devices and hardware decreased $2.0 million, or 60.4% to $1.3 million for the three months ended June 30, 2017 compared to $3.3 million for the same period in 2016.

 

Total gross profit for the period ended June 30, 2017 decreased $1.3 million, or 14.9% to $7.3 million compared to $8.6 million for the same period in 2016 for the reasons stated above. Gross profit margin percentage increased to 52.2% for the three months ended June 30, 2017 from 48.7% for the same period in 2016. The increase in gross margin was driven primarily by a reduction in carrier fees and the sale of fully reserved inventory during the three months ended June 30, 2017.

 

Sales and marketing expense decreased $0.6 million, or 17.6%, for the three months ended June 30, 2017 to $2.7 million compared to $3.3 million for the same period in 2016. The decrease is primarily attributable to a decline in promotional activities during the quarter and reduced travel costs.

 

General and administrative expense decreased $1.4 million, or 37.1%, to $2.4 million for the three months ended June 30, 2017, compared to $3.9 million for the same period in 2016. The decrease is driven primarily by reduced general and administrative salary cost resulting from a reduction in headcount and lower travel costs.

 

Engineering and development expenses decreased $0.7 million, or 30.3% to $1.7 million for the three months ended June 30, 2017, compared to $2.4 million for the same period in 2016. The decrease is primarily related to reduced headcount in engineering and development, and lower travel costs.

 

Depreciation and amortization expense decreased $0.2 million, or 14.0% to $1.4 million for the three months ended June 30, 2017, compared to $1.7 million for the same period in 2016.

 

Restructuring charges were $0.4 million for the three months ended June 30, 2017, compared to $1.2 million for the same period in 2016. The decrease is due to $0.8 million in facility charges recorded in June 2016 related to the relocation of our corporate headquarters.

 

Loss on the extinguishment of debt of $0.9 million for the three months ended June 30, 2017 was related to repayment of the outstanding term loans and other obligations under the Crystal Loan Agreement which took place on June 7, 2017.

 

Interest expense was $0.7 million in expense for the three months ended June 30, 2017 compared to $0.5 million in interest expense for the same period in 2016. The increase is due to interest expense on our subordinated debt.

 

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We recorded tax expense of $0.1 million and a tax benefit of $0.2 million for the three months ended June 30, 2017, and 2016 respectively. The effective tax rates were (2.2%) and 2.7% for the three months ended June 30, 2017 and 2016, respectively. For both periods, the difference in the effective tax rate compared to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income taxes, are due primarily to the book and tax basis and accounting difference for certain long and indefinite lived assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses.

 

Six Months Ended June 30, 2017 and 2016

 

The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):

 

   Six Months Ended June 30,   Change from 
   2017   2016   2016 to 2017 
Net revenues:                              
Subscription and support revenues  $26,150    86.1%  $29,794    83.6%  $(3,644)   -12.2%
Embedded devices and hardware   4,216    13.9%   5,862    16.4%   (1,646)   -28.1%
Total net revenues   30,366    100.0%   35,656    100.0%   (5,290)   -14.8%
Cost of sales                              
Subscription and support revenues   10,828    35.7%   11,414    32.0%   (586)   -5.1%
Embedded devices and hardware   4,344    14.3%   6,432    18.0%   (2,088)   -32.5%
Gross profit   15,194    50.0%   17,810    49.9%   (2,616)   -14.7%
Operating expenses:                              
Sales and marketing   5,835    19.2%   6,215    17.4%   (380)   -6.1%
General and administrative   5,377    17.7%   7,988    22.4%   (2,611)   -32.7%
Engineering and development   3,919    12.9%   4,691    13.2%   (772)   -16.5%
Depreciation and amortization   2,966    9.8%   3,335    9.4%   (369)   -11.1%
Impairment of goodwill and other                              
other intangible assets   -    0.0%   4,172    11.7%   (4,172)   -100.0%
Restructuring charges   780    2.6%   1,243    3.5%   (463)   -37.2%
Operating loss   (3,683)   -12.1%   (9,834)   -27.6%   6,151    -62.5%
Interest expense   1,363    4.5%   727    2.0%   636    87.5%
Loss on extinguishment of debt   1,089    3.6%   290    0.8%   799    75.5%
Other expense (income), net   801    2.6%   (65)   -0.2%   866    -1332.3%
Loss before income taxes   (6,936)   -22.8%   (10,786)   -30.3%   3,850    -35.7%
Income tax expense (benefit)   165    0.5%   (170)   -0.5%   335    -197.1%
Net loss  $(7,101)   -23.4%  $(10,616)   -29.8%  $3,515    -33.1%
Adjusted EBITDA(1)  $1,938    6.4%  $1,484    4.2%  $454    30.6%

 

 

(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.

 

Total revenue decreased $5.3 million, or 14.8%, for the six months ended June 30, 2017 to $30.4 million from $35.7 million for the same period in 2016. The decrease in total revenue is primarily related to the decreases in subscription and support revenue and embedded devices and hardware revenue, which is discussed below.

 

Subscription and support revenues decreased $3.6 million, or 12.2%, to $26.1 million from $29.8 million in 2016. The decrease is driven by 2G disconnects associated with the AT&T 2G network sunset that occurred on December 31, 2016. Embedded devices and hardware revenue decreased $1.7 million, or 28.1%, to $4.2 million from $5.9 million in 2016. The decrease is driven by customer’s replacement of their 2G products in 2016 in anticipation of the AT&T 2G network sunset that occurred on December 31, 2016.

 

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Total cost of sales for the six months ended June 30, 2017 decreased $2.6 million, or 14.7%, to $15.2 million compared to $17.9 million for the same period in 2016. Comprising that decrease, the cost of sales for subscription and support services decreased $0.6 million, or 5.1%, to $10.8 million for the six months ended June 30, 2017 compared to $11.4 million for the same period in 2016. Cost of sales for embedded devices and hardware decreased $2.1 million, or 32.5% to $4.4 million for the six months ended June 30, 2017 compared to $6.4 million for the same period in 2016. The total decrease in cost of sales is primarily related to a reduction of embedded devices and hardware sales in 2017 versus the comparable period in 2016.

 

Total gross profit for the period ended June 30, 2017 decreased $2.6 million, or 14.7% to $15.2 million compared to $17.8 million for the same period in 2016 for the reasons stated above. Gross profit margin percentage increased to 50.0% for the six months ended June 30, 2017 from 49.9% for the same period in 2016.

 

Sales and marketing expense decreased $0.4 million, or 6.1%, for the six months ended June 30, 2017 to $5.8 million compared to $6.2 million for the same period in 2016. The decrease is primarily attributable to a decline in promotional activities during the quarter, as well as reduced headcount and lower travel costs.

 

General and administrative expense decreased $2.6 million, or 32.7%, to $5.4 million for the six months ended June 30, 2017, compared to $8.0 million for the same period in 2016. The decrease is driven primarily by reduced general and administrative salary cost resulting from a reduction in headcount and lower travel costs.

 

Engineering and development expenses decreased $0.8 million, or 16.5% to $3.9 million for the six months ended June 30, 2017, compared to $4.7 million for the same period in 2016. The decrease is driven primarily by reduced engineering and development salary costs resulting from a reduction in headcount, and lower travel costs.

 

Depreciation and amortization expense decreased $0.4 million, or 11.1% to $3.0 million for the six months ended June 30, 2017, compared to $3.3 million for the same period in 2016.

 

Restructuring charges were $0.8 million for the six months ended June 30, 2017, compared to $1.2 million for the same period in 2016. The decrease is primarily related to severance and the sublease loss recorded in June 2016 for the relocation of our corporate headquarters.

 

Loss on the extinguishment of debt of $1.1 million for the six months ended June 30, 2017 was related to the refinancing of our debt with Crystal which took place on June 7, 2017. Loss on the extinguishment of debt of $0.3 million for the six months ended June 30, 2016 was related to the refinancing of our debt with Silicon Valley Bank which took place in March 2016.

 

Interest expense was $1.4 million in expense for the six months ended June 30, 2017 compared to $0.7 million in interest expense for the same period in 2016. The increase is due to interest expense on our subordinated debt, as well higher interest rates on our debt.

 

Other expense (income), net was $0.8 million in expense for the six months ended June 30, 2017, and was primarily due to non-capitalizable finance and legal charges related to our debt.

 

We recorded tax expense of $0.2 million and a tax benefit of $0.2 million for the six months ended June 30, 2017, and 2016 respectively. The effective tax rates were (2.2%) and 1.6% for the six months ended June 30, 2017 and 2016, respectively. For both periods, the difference in the effective tax rate compared to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income taxes, are due primarily to the book and tax basis and accounting difference for certain long and indefinite lived assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses.

 

Segment Information

 

We have one reportable segment, providing interactive and on-demand Machine to Machine (M2M) enterprise solutions enabling the Internet of Things (IoT).

 

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Non-GAAP Financial Measures

Earnings before interest, taxes, depreciation and amortization expenses (EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe EBITDA and Adjusted EBITDA are useful to and used by investors and other users of the financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across periods.

 

We believe that:

 

·EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest, income tax, and depreciation and amortization expenses, which can vary substantially from company-to-company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and

 

·Investors commonly adjust EBITDA information to eliminate the effect of equity-based compensation and other unusual or infrequently occurring items which vary widely from company-to-company and impair comparability.

 

We use EBITDA and Adjusted EBITDA:

 

·as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis;

 

·as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and

 

·in communications with the board of directors, analysts and investors concerning our financial performance.

 

Although we believe, for the foregoing reasons, that the presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, the non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.

 

Use of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement GAAP financial measures. The non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the same manner, as those used by other companies.

 

EBITDA is calculated by adding depreciation and amortization expense, impairment of non-current assets, interest expense, other net non-operating expense and income tax expense and subtracting other net non-operating income and income tax benefit to net (loss) income. Adjusted EBITDA is calculated by excluding the effect of equity-based compensation and additional non-cash and other charges from the calculation of EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data, including our lender, in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.

 

We believe that excluding depreciation and amortization expenses of property, equipment and intangible assets to calculate EBITDA and Adjusted EBITDA provides supplemental information and an alternative presentation that is useful to our lender and investors’ understanding of our core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that may have little bearing on present or future replacement costs, but also they are based on our estimates of remaining useful lives.

 

We believe that excluding the effects of equity-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors’ understanding of our core operating results and trends. Investors have indicated that they consider financial measures of our results of operations excluding equity-based compensation as important supplemental information useful to their understanding of our historical results and estimating our future results.

 

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Equity-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP income from continuing operations by providing income from continuing operations, excluding the effect of equity-based compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons.

 

Restructuring, non-cash and other charges, includes severance, one-time facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.

 

EBITDA and Adjusted EBITDA are not measures of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to – not a substitute for – results of operations presented on the basis of GAAP. EBITDA and Adjusted EBITDA do not purport to represent cash flow provided by operating activities as defined by GAAP. Furthermore, EBITDA and Adjusted EBITDA are not necessarily comparable to similarly-titled measures reported by other companies.

 

The following table reconciles the specific items excluded from GAAP in the calculation of EBITDA and Adjusted EBITDA for the periods indicated below (in thousands, except per share amounts):

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2017   2016   2017   2016 
Net loss  $(3,076)  $(8,290)  $(7,101)  $(10,616)
Depreciation and amortization expense   1,835    2,005    3,808    3,969 
Impairment of goodwill and other intangible assets   -    4,172    -    4,172 
Interest expense and other non- operating expense, net   1,673    438    3,253    952 
Income tax expense (benefit)   81    (234)   165    (170)
EBITDA (non-GAAP)   513    (1,909)   125    (1,693)
Equity-based compensation expense   515    830    745    1,451 
Restructuring, non-cash and other charges   375    1,706    1,068    1,726 
Adjusted EBITDA (non-GAAP)  $1,403   $627   $1,938   $1,484 

 

Restructuring, non-cash and other charges, includes severance, one-time facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.

 

Liquidity and Capital Resources

 

We use the net cash generated from our operations to fund new product development, upgrades to our technology and to invest in new businesses. Our sources of funds, principally from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operations and investing requirements through at least June 2018.

 

We had working capital of $2.4 million as of June 30, 2017, compared to $8.6 million as of December 31, 2016. We had cash balances of $5.6 million as of June 30, 2017 compared to $9.5 million at December 31, 2016. The Company does not have any additional borrowing capacity under the Note Purchase Agreement with Hale Capital.

 

 23 

 

 

Net cash used in operating activities for the six month period ended June 30, 2017 was $2.9 million and net cash used in operations was $1.4 million for the six month period ended June 30, 2016.

 

Net cash used in investing activities for the six month period ended June 30, was $1.3 million, representing expenditures of $0.2 million for tangible assets and $1.1 million for software and capitalization of internally developed software, compared to $1.8 million for the six month period ended June 30, 2016.

 

Net cash provided by financing activities for the six month period ended June 30, 2017 was $0.3 million, primarily due to the refinancing of our term debt under the Crystal Loan Agreement with the Notes issued under the Note Purchase Agreement. Net cash used in financing activities was $3.1million for the six month period ended June 30, 2016.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2017, compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, except for the early adoption of guidance which changes the classification analysis of certain equity-linked instruments with down round features., which is discussed in Note J – Recent Accounting Pronouncements.

 

 24 

 

 

Item 3.Quantitative and Qualitative Disclosures about Market Risks.

 

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

 

We also hold cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks outside the United States are denominated in the local currency and are minor. We held $0.3 million in foreign bank accounts as of June 30, 2017 and December 31, 2016, respectively.

 

Foreign Currency

 

The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates, and revenues and expenses are translated at the ending exchange rate from the prior period which materially approximates the average exchange rates for each period. Resulting translation adjustments are reflected as other comprehensive (loss) income within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Except for transactions with customers and vendors in Canada, substantially all other transactions are denominated in U.S. dollars. Foreign operations were not significant to us for the quarter or year to date ended June 30, 2017.

 

Interest Rate Risk

 

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

 

Item 4.Controls and Procedures.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act Rules 13a – 15(f). Our internal control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance as to the reliability of financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework, issued in 2013. Based on this assessment, management concludes that, as of June 30, 2017, our internal control over financial reporting is effective based on those criteria.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended June 30, 2017, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 25 

 

 

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

We currently are not involved in any pending material litigation.

 

Item 1A.Risk Factors.

 

For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

 

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

 

None - not applicable

 

Item 3.Defaults Upon Senior Securities.

 

None - not applicable.

 

Item 4.Mine Safety Disclosures.

 

None - not applicable.

 

Item 5.Other Information.

 

None - not applicable.

 

Item 6.Exhibits.

 

Exhibit
Number
  Description
     
4.1  

Warrant to Purchase Stock issued to HCP-FVF, LLC

     
10.1++   Note Purchase Agreement by and among Numerex Corp., as borrower, the other parties thereto designated as Borrowers and Guarantors, and HCP-FCF, LLC as Collateral Agent, dated as of June 7, 2017 (including the form of Note attached thereto as Exhibit A)
     
10.2   Guaranty and Collateral Agreement
     
31.1   Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)
     
31.2   Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a)
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101   The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income, (iii) Unaudited Consolidated Statements of Cash Flows, (iv) Unaudited Condensed Consolidated Statement of Shareholders Equity and (v) Unaudited Condensed Notes to Consolidated Financial Statements*

 

 

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

 

++ Confidential treatment has been requested as to certain portions of this exhibit, which portions have been omitted and submitted separately to the Securities and Exchange Commission.

 

 

 26 

 

 

SIGNATURES

 

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

 

  NUMEREX CORP.
  (Registrant)
   
August 8, 2017 /s/ Kenneth L. Gayron
  Kenneth L. Gayron
  Interim Chief Executive Officer, Chief Financial Officer and Principal Financial and Accounting Officer

 

 27 

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Ticker: NMRX
CIK: 870753
Form Type: 10-Q Quarterly Report
Accession Number: 0001571049-17-007294
Submitted to the SEC: Tue Aug 08 2017 4:53:12 PM EST
Accepted by the SEC: Tue Aug 08 2017
Period: Friday, June 30, 2017
Industry: Communications Equipment

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