Numerex 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Fiscal Year ended December 31, 2007
For the transition period from ___________ to ___________
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of voting and non-voting common stock held by nonaffiliates of the registrant (9,689,046 shares) based on the closing price of the registrant’s common stock as reported on the NASDAQ National Market on June 30, 2007, was $110,648,905. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.
The number of shares outstanding of the registrant’s Class A Common Stock as of March 10, 2008, was 13,525,905 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2007. The proxy statement is incorporated herein by reference into the following parts of the Form 10-K:
Part III, Item 10, Directors, Executive Officers and Corporate Governance;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related
Part III, Item 13, Certain Relationships and Related Transactions, and Director Independence; and
Part III, Item 14, Principal Accountant Fees and Services.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements regarding trends, strategies, plans, beliefs, intentions, expectations, goals and opportunities. 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. All statements and information herein and incorporated by reference herein, other than statements of historical fact, are forward-looking statements that are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Many phases of the Company’s operations are subject to influences outside its control. The Company 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 Annual Report, and the Company 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.
Any one or any combination of factors could have a material adverse effect on the Company’s results of operations or could cause actual results to differ materially from forward-looking statements or historical performance. These factors include: the pace of technological change; loss or disruption of key telecommunications infrastructure and related services supplied to the Company; loss or disruption of key wireless network services supplied to the Company; the inability to integrate the newly acquired satellite operations or market and sell its products and services; variations in quarterly operating results; delays in the development, introduction and marketing of new wireless products and services; customer acceptance of products and services; economic conditions; 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 extent and timing of technological changes; changes in customer spending; the loss of intellectual property protection; general economic conditions and conditions affecting the capital markets. Actual events, developments and results could differ materially from those anticipated or projected in the forward-looking statements as a result of certain uncertainties set forth below and elsewhere in this document. Subsequent written or oral statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this report and those in the Company’s reports previously and subsequently filed with the Securities and Exchange Commission.
Numerex Corp. (“Numerex” or “Company”) is a wireless machine-to-machine (M2M) communications, technology and solutions business. The Company offers its network services, technology, products, and application development capabilities in “turnkey” packages or custom-designed M2M offerings for customers across multiple market segments. Numerex makes possible real-time wireless data communications for monitoring, tracking, and service management tailored to the needs of diverse industries and applications, including wireless security, vehicle location and tracking, fleet management, intermodal transportation, emergency management services, telemedicine, meter reading, utilities, vending, remote device monitoring, and others.
M2M is defined as electronic (wireless) data communication between devices, systems, and people that turns data into useful information and addresses the needs of such industries as security, vending, real estate, healthcare, gas and oil, utilities and others. While the M2M industry emerged a few years ago, the underlying network and technology infrastructure has been a part of Numerex’s business for several years.
Numerex has established and maintained a leadership position in M2M through delivering end-to-end, single-source solutions as well as “white label” products that are available for distribution as branded offerings through Value Added Resellers (VARs), vertically focused System Integrators (SI’s) and Original Equipment Manufacturers (OEMs) who choose to integrate our products and services into their own offerings. Numerex customers can select from a menu of products and services that address their specific M2M needs. We market and sell these products and services through two business groupings: Numerex Networks and Technology, and Integrated Solutions.
We believe that Numerex has developed industry-specific expertise in providing wireless network services, back-office support services, wireless device technology, and network integration services to a number of vertical markets and industries, such as the security, mobile tracking and asset recovery, vending and bottling, as well as remote asset management. As a result, businesses with M2M requirements value Numerex for its extensive experience and demonstrated track record of supporting their applications through launch. We add value by assisting companies by removing the complexities associated with the design, development, deployment and support of M2M solutions so that our customers can better focus on their primary business objectives and speed time to market.
We continue to look for ways to expand our expertise by entering new vertical sectors conducive to our long-term recurring revenue model. We may choose to enter through industry partnerships, organically, or via acquisition. Our strategic vision is to be recognized as the “Partner of Choice” and leading provider of M2M networks, technology and end-to-end wireless solutions for customers in our target markets by:
Numerex Corp is headquartered in Atlanta, Georgia and organized under the laws of the Commonwealth of Pennsylvania, and began in July 1992 with the acquisition of technology referred to as “Derived Channel.” Derived Channel enables data transmission over an existing telephone line without interfering with voice communications over that same telephone line. We expanded our business primarily through the acquisition of complementary businesses, product lines, and proprietary technologies. In November 1999, we sold the Derived Channel technology and business to British Telecommunications PLC (“BT”).
In May 1998, Numerex Corp., BellSouth Corporation and BellSouth Wireless, which became Cingular in 2001 and AT&T in 2006, completed a transaction whereby Cellemetry LLC, a joint venture between Numerex and Cingular, was formed. Cellemetry LLC provided a cost-effective, two-way wireless data communications network throughout the United States, Canada, Mexico, Colombia, Argentina, Paraguay, the Dutch Antilles, and Puerto Rico. On March 28, 2003, we acquired Cingular’s interest in Cellemetry LLC.
At the beginning of 2006, the Company further enhanced it’s portfolio of wireless products and services through the acquisition of the assets of Airdesk, Inc. Airdesk’s wireless data solutions, network access and technical support have been fully integrated into the Company’s operations. In 2007, Numerex acquired the assets of Orbit One Communications, Inc which provides satellite data products and services to government agencies and the emergency service market.
NUMEREX BUSINESS GROUPS
Over the past ten years, Cellemetry’s business has evolved from primarily a proprietary network service into a comprehensive M2M business organized into two business groupings: Numerex Networks and Technology, and Integrated Solutions. Numerex Integrated Solutions are brought to market through three divisions: Uplink™, Orbit One, and FastTrack.
Numerex Networks and Technology
Numerex Networks and Technology provide customers and partners with access to an intelligent dedicated network services platform specifically honed to meet the demands of the M2M marketplace. Our network offerings extend to GSM, CDMA and Satellite services. This group delivers network services, technology, implementation and logistical expertise. It also provides advanced services, including intelligent device management services, integration and device certification expertise for use on GSM, CDMA and Satellite networks. In addition, our Network and Technology business includes the distribution of a variety of wireless radio modules that we primarily market and sell throughout North America.
Numerex Integrated Solutions Group
Numerex’s Integrated Solutions group provides flexible M2M market-ready solutions that are fully integrated with our M2M network platforms and radio technology, adaptable to applications deployed by our partners and customers across a wide range of industries. With individual applications and comprehensive end-to-end solution expertise, it serves the utilities, security, telematics, manufacturing, real estate and retail markets. The Integrated Solutions group supplies packaged and custom-designed M2M products and services for asset tracking, inventory control, point-of-sale systems and a host of emerging M2M applications.
Three dedicated divisions operate under the umbrella of the Company’s Integrated Solutions Group:
Branded Integrated Solutions>
Uplinkä: Wireless Security Solutions
Uplink is a dedicated wireless communications solution for security monitoring that reports alarm, status, and other messages generated by security systems. Uplink delivers this solution by providing a secure, dedicated cellular data link and network access module that transmits alarms to virtually any alarm-receiving center or monitoring service.
A stand-alone sensor, alarm panel output, or alarm panel serial connection provides the trigger to one of Uplink’s family of network access modules, which in turn transmits the alarm event over the Numerex Network. The Numerex gateway accepts the incoming signal and logs it for immediate viewing through the password-secured Web interface. Depending on the selected reporting options and alarm monitoring station receiver, the decoded signal can be forwarded via encrypted IP or the Public Switched Telephone Network (PSTN) to the alarm monitoring station. As an option, a customizable text message can be sent to any email-enabled device or to an alphanumeric pager. The Uplink Network Operations Center (NOC) in Atlanta, GA activates and manages the service for its dealers.
Uplink is distributed through master distributors to a network of over 5,000 certified Uplink alarm and security dealers in North America for both commercial and residential alarm security markets. Uplink private labeled and custom services are marketed through direct business development and partnering initiatives. The longevity of an uplink connection is significant -- on average connections remain active for 6 to 8 years, contributing a consistent source of recurring revenue to the Company.
Orbit One: Satellite Turnkey Solutions
Orbit One provides turnkey and customized satellite-based M2M solutions that include hardware, software, data management, installation and maintenance, coupled with a proprietary operational support platform. Primarily through integration partners and VARs, Orbit One currently supplies satellite-tracking solutions to a variety of federal and state agencies for disaster and emergency response operations.
In October 2007, Numerex introduced the Orbit One SX1 solution; a battery powered satellite-based asset monitoring and tracking technology. Operating on GlobalStar’s Low Earth Orbit (LEO) simplex satellite data network, the Orbit One SX1 provides GPS visibility, event monitoring and asset management on a near global basis.
FastTrack ™: Hosted, Turnkey Remote Monitoring Solution
In October 2007, Numerex launched FastTrack ™, designed to wirelessly monitor and control remote processes, events, conditions and devices. It serves a variety of industries with remote monitoring and control requirements -- including highway and transportation, utilities, security, SCADA and agriculture – and a host of wider area monitoring situations such as pipeline temperature sensors, pressure measuring points, flow monitoring, discrete level monitoring and pulse generating sensors. FastTrack ™ utilizes SMSXpress™ from Numerex Networks to deliver real-time data between remote devices and facilities.
Numerex Mobile Platform
Numerex Mobile (formerly known as Airdesk Mobile) provides advanced vehicle tracking features and functions. We believe that Numerex Mobile includes network-centric services and multiple technologies that suit a variety of needs in the automotive and security markets. Numerex Mobile vehicle location and recovery solutions combine the accuracy of GPS (Global Positioning System), Numerex Networks, and wireless communications technology to improve the prospect of vehicle recovery and the timeframe in which the recovery occurs.
Intelligent Networks Platform and Network Services
Analog to Digital Migration
On June 15, 2007, the FCC upheld its analog cellular sunset ruling, which allowed carriers to cease providing Advanced Mobile Phone System (AMPS) analog network service as of February 18, 2008. Throughout 2007, Numerex focused on moving Numerex Networks’ customers to digital services with our integrated digital migration strategy and solution. Currently, we have converted (through replacement) the majority of our existing analog subscriber base and we expect to capture a significant portion of our remaining analog base going forward.
In September 2007, Numerex extended its relationship with GE Security through an agreement to provide the technology, network solutions and expertise to convert GE Security’s residential and commercial wireless security base from analog connectivity to a complete digital platform. Key components of this platform include Numerex’s SMSXpress™ and plug-and-play hardware that is fully integrated with GE Security’s alarm panels.
In parallel, during the course of the year, Numerex completed a seamless transition from its old analog gateway to an intelligent digital gateway platform. This substantially increased the Company’s network and transport capacity and its ability to enable a variety of additional M2M applications, including higher message throughput.
Numerex Networks and Technology
Numerex brings to market M2M solutions and an array of products that support the M2M value chain. An essential component of these offerings and services is the Company’s wireless data network service, Numerex Networks. In a rapidly evolving marketplace, Numerex Networks provides carrier-grade network air-interface transport services. Numerex is an M2M Network Operator designed to serve a robust and dynamic M2M marketplace. Numerex Networks sells cellular-based network services without owning or deploying the physical network infrastructure or other equipment in the field over which data is transmitted. While Numerex owns and operates an open-source proprietary intelligent network gateway platform, we have not invested in wireless spectrum or cellular towers. Instead, we have entered into several agreements with a variety of wireless carriers that allows us to move information with our own identification numbers over their existing cellular infrastructure. As a result, we provide a multitude of wireless data network services.
Numerex Networks is dedicated to the M2M market and currently only offers data network services. These services include specific, vertically focused M2M applications combined with Numerex Networks and services. Numerex services offered through Numerex’s Integrated Solutions group are comprised of application engineering and development, customized billing, GPS mapping for mobile applications, network and application implementation management, back-end message delivery management, application and network support, and interactive Web services.
Our customers and industry partners look to us not only to help integrate our wireless platform and services with their devices and applications, but also to assist them through the certification, launch, and operation of their products in their respective markets.
Numerex Networks is capable of supporting a variety of remote applications that are either fixed or portable. From Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA) digital and Satellite network offerings, to premium 24x7x365 network support services, Numerex Networks supports continued expansive coverage, legacy network interoperability, and extended gateway capabilities for higher bandwidth M2M applications. Through various carrier agreements, Numerex Networks provides extensive digital and analog wireless network connectivity and services in the Continental U.S., Canada, the Caribbean, and Mexico.
Numerex offers multiple digital network services. Numerex Networks supports various wireless transport technologies, providing unique, value added services to fulfill diverse customer data and application requirements. As an example, in May 2007, Numerex and GE Security announced a strategic collaboration resulting in the provision of nationwide wireless services in support of GE’s industry-leading advanced technology real estate products, including its ActiveKey wireless key. Numerex services include SMSXpress™ and GPRS, real-time network activations, provisioning and configuration support, and 24x7x365 network support services.
Real-Time Delivery with SMSXpress™
Numerex offers a unique network architecture enabling Short Message Service (SMS) delivery with low latency. Numerex Networks delivers messages from our dedicated intelligent gateway to customer back-end applications. Acknowledgement of message delivery is provided within microseconds. Low latency, a dedicated SMS platform, and message acknowledgement – features that differentiate Numerex Networks and the SMSXpress service from its competitors in the market.
Flexible, Reliable GPRS Service
Numerex Networks GPRS (General Packet Radio Service) provides a secure, two-way network feature as an option, enabling private connectivity of packet routing to applications, as well as hosted applications services. The network offering allows management of dynamic device IPs, which facilitates true two-way communication between field devices and application servers. Numerex Networks GPRS provides dedicated frame relay connections to route packet data off the Internet across North America.
U.S. Coverage with 1xRTT
Numerex Networks provides coverage throughout the domestic United States with 1xRTT (CDMA-based single carrier (1x) Radio Transmission Technology) services. In addition, Numerex Networks delivers unique, location-based services (LBS) that provide an accurate, cost-effective way to track customers’ valuable assets. These two services have been combined for unique and specific private-labeled customer applications.
‘Beyond the Network’: Value-Added Services and Customer Support
Beyond the network technology, customer support is delivered through the following offerings:
Numerex Networks’ service is built upon on certain critical elements such as integrity and redundancy of its gateway infrastructure; reliable and secure network service; reliable and experienced network management; and network support capabilities:
Technology, Development, Distribution and Logistics
Numerex Network Access Technology
Numerex designs, develops, manufactures, and distributes a suite of network access modules (wireless data modems) that provide the physical and electrical interface between the customer’s application and Numerex Networks. Examples of the various Numerex-manufactured modules include, Uplink DigiCell AnyNET, and AnyNET (VAR version) for security applications, the Orbit One SX1 Tracker and ADM3500 family for mobile applications. The Network Modules are configurable as generic product offerings for VAR application development, as fully configured modules for OEM integration, or as a component of the Company’s end-to-end solutions.
Numerex also sources Network Access Technology from its industry partners in order to deliver a wider portfolio of products and services.
Numerex is a leading distributor of Wavecom radio modules. Wavecom, based in France, is one of the leading manufacturers of compact, rugged and reliable M2M radio modules. Numerex and Wavecom announced in October 2007 that Numerex will support the Wavecom StarService for customers in North America, expanding their relationship. The Wavecom StarService is delivered over Numerex’s wireless network allowing users to remotely manage their wireless devices securely over the air (OTA). The service enables users to remotely upgrade firmware and application software, configure devices, and implement remote diagnostics.
Numerex diversified its technology portfolio by offering Enfora radio modules beginning in 2006. Enfora, based in the United States, is another leading manufacturer of radio transmitters and modems.
The DigiCell AnyNET module supports a variety of communication services -- including SMS and GPRS. The module features real-time message delivery; maximum network coverage; simplified customization and integration into OEM applications; support for analog, digital, and hybrid networks; and automated provisioning.
Sales, Marketing, and Distribution
Numerex Networks and Technology and Integrated Solutions groups employ an indirect sales model through private label/OEM agreements, channel partners, system integrators, and VARs (collectively referred to in some cases as ‘industry partners’). We also indirectly market and sell certain Numerex branded products and services through distribution and dealer channels, specifically the Uplink product suite.
Our network products are integrated and bundled with Numerex technology and services to provide private-labeled solutions for both fixed and portable applications. Our network products are also sold and marketed to VARs, integrators, and application service providers who bundle and resell Numerex Networks with their end-to-end solutions. Network products are also sold as a data-only network offering for enterprise customers running M2M applications.
Our custom M2M solutions are typically marketed to Fortune 1000 companies, providing them the opportunity to deliver additional and complementary products and services to their customers, or next-generation solutions to their existing market channels.
Our private-label solutions are designed for and marketed to specific vertical markets. Typically, these customers are sales and marketing organizations without technical resources that are seeking rapid entry into a market. We currently offer both mobile solutions to a variety of asset tracking markets, including the automotive and emergency services markets and remote asset management solutions to VARs and integrators that are servicing a variety of M2M markets.
NON-CORE BUSINESS: DIGITAL MULTIMEDIA, NETWORKING AND WIRELINE DATA COMMUNICATIONS
Numerex’s primary focus is wireless M2M networks and solutions as described above. We continue to offer products and services to certain customers in digital Multimedia education, networking integration and Derived Channel wireline data communications. These products and services currently comprise about 8% of our revenue base and are managed as a single business group.
We design, develop, and market complete video conferencing and digital multimedia system products and services for high-quality communications networks. We manufacture both the products upon which the systems are based and incorporate third-party products where appropriate. The offerings include PowerPlay™, a digital multimedia solution for high-bandwidth private network applications. PowerPlay provides capability for interactive videoconferencing and is an integrated hardware-software system that supports user-friendly control over network devices. PowerPlay is supplemented by our desktop videoconferencing software version, IPContact™, which offers high-quality and high-performance video.
We provide products under the Digilog brand that assist both wireline and wireless carriers in the engineering, installation, and servicing of new telecommunications control networks. These telecommunications network operational support systems and services can be categorized as: Services, including system integration (rack and stack) and installation: Products, Test Access and Interconnecting Devices.
Wireline Data Communications (Derived Channel)
Our licensed technology creates a derived channel on an existing telephone line by using an inaudible frequency below the voice communications spectrum for data transmission. This creates a two-way communication system that continuously monitors the integrity of a user’s telephone line and security system.
Non-Core Products and Services: Sales and Marketing>
Our digital multimedia products and services are marketed through a combination of system integrators and VARs. Our networking products are sold and marketed under the Digilog brand. Distribution is focused on wireless and wireline telecommunications companies through system integration agreements with a number of suppliers of telecommunications and monitoring equipment and services. Our Wireline Data Communications service is marketed under the DCX brand directly to carriers primarily in the United States and Australia.
For the year ended December 31, 2007, revenue from our largest client, General Electric (GE), accounted for an aggregate of approximately 13% of our total revenue. For the year ended December 31, 2006, no single client accounted for more than 10% of our revenue.
We rely on third-party contract manufacturers and wireless network operators, both in the United States and overseas, to manufacture most of the equipment used to provide our wireless M2M solutions, networking equipment and products; and to provide the underlying network service infrastructure that we use to support our M2M data network, respectively. In addition, some of our technology products are obtained from sole-source suppliers. The loss of a contractor or supplier could cause a disruption in our business due to the short lead times demanded by certain customers. The loss of the wireless network connectivity provided by cellular or satellite (wireless) network operators and other telecommunications infrastructure providers could cause a disruption in our network services.
Various entities, such as M2M application service providers, MVNOs, and system integrators, offer a variety of the components and services required to deliver complete M2M solution. Numerex believes that it provides all of the key components of the M2M value chain, including enabling hardware, multiple wireless technologies and custom applications, and wireless network services. Numerex sells complete network-enabled solutions, or individual components, based upon the specific needs of the customer.
The Numerex wireless data network offering, Numerex Networks, competes with KORE Telematics, Aeris and Jasper Wireless as M2M network providers, and to some extent the major cellular operators/ carriers and satellite operators/ carriers. We believe that our current network services combined with the continuing development of our Numerex Network offerings and services positions us to compete effectively with emerging providers of M2M solutions using GSM, CDMA and Satellite technology. Other potentially competitive offerings may include “wireless fidelity” (Wi-Fi), World Interoperability for Microwave Access (WiMAX) and other emerging technologies and networks. We believe that principal competitive factors when selecting a network provider are network reliability and the ability of the carrier to support unique M2M requirements.
We believe that Numerex Networks network coverage extended through various agreements with wireless operators/carriers, together with competitive pricing, end-to-end solution offerings, a ‘single source’ approach to the M2M market, and its experience and track record in M2M, will allow Numerex to effectively maintain and increase its current market share. The addition of our Orbit One satellite-based solution brings the Company access to a new customer base that should provide additional opportunities for added Satellite network and service sales. Also, we expect that it will also interject Numerex into a wider potential customer base, specifically emergency services and government. However, some of our competitors who market and sell integrated solutions similar to our Orbit One, Uplink, or FastTrack product suites, whether satellite or cellular-based, may have greater financial and human resources than we do, which may provide them a competitive advantage in marketing and selling, as well as technological advantages obtained through greater outlays of resources for research and development.
Our Uplink security products and services have three primary competitors in the existing channels of distribution — Honeywell’s AlarmNet, Telular’s Teleguard and DSC, the security division of TYCO. The principal competitive factors when making a product selection in the business and consumer security industry are hardware price, service price, reliability, industry certification status and feature requirements for specific security applications, for example fire, burglary, bank vault, etc. Additional competitors have entered the market in the last several years with a focus on blending security monitoring and home automation. These products and services are targeted for the do-it-yourself market as opposed to traditional security dealers. Several companies, including GE Security, offer OEM versions or include Uplink technology with network services provided by Numerex Networks. We believe that Uplink’s products and services are competitively positioned and priced.
Our Numerex Mobile end-to-end product is offered to a variety of customers, primarily comprised of resellers and VARs. There are many competitors offering vehicle location and recovery services, but the principal direct competitor to our customer base in the new car after-market vehicle location and recovery business is LoJack Corporation, the industry’s market leader. OnStar Corp., a subsidiary of General Motors Corp., which offers a full suite of concierge services, markets and sells their services primarily through automobile manufacturers. Other manufacturers are also moving to provide factory direct “networked cars” including Ford and Microsoft, Jaguar, and others. There are also numerous other small companies that currently offer or are developing other wireless products and services for this market. The principal competitive factors are channel distribution, hardware price, network service price, features, and the ability to locate a vehicle at any time on demand. Our competitive challenge is the pressure to maintain our hardware margins with an on-going process of cost reduction associated with the in-vehicle hardware and the expansion of our distribution network. We believe our mobile hardware-based solution for this market will continue to undergo pricing pressure and will require hardware cost reduction in order to remain competitive. However, we believe that our Numerex Mobile network-only service is well positioned to capture market share, is competitively priced, and is our primary focus prospectively.
The market for our technology and platforms has been characterized by rapid technological change. The principal competitive factors in this market include product performance, ease of use, reliability, price, breadth of product lines, sales and distribution capability, technical support and service, customer relations, and general industry and economic conditions. The ability to provide wireless network service, wireless radios, device and modem technology, and end-to-end solutions -- including integration, network and service management -- has set Numerex apart from the competition. We believe that our distribution agreements with module manufacturers give us a competitive advantage in combining the sale of their radio modules with the marketing and selling of our network and technology services. Also, this provides our Network and Technology group the opportunity for cross-selling our network services and Integrated Solutions. Our primary competition for radio modules comes from Siemens and an assortment of smaller manufacturers.
Research and Development
Technology is subject to abrupt change. Therefore, the introduction of new products, technologies, and applications in our markets could adversely affect our business. Our success will depend, in part, on our ability to enhance existing products and introduce new products and applications on a timely basis. We plan to continue to devote a portion of our resources to research and development.
We continue to invest in new services and improvements to various Numerex technologies, especially networks and digital fixed and mobile solutions. We are focused primarily on the development and enhancement of our gateway and network services; reductions in the cost of delivery of our network services and solutions, and additional enhancements and expansion of our application capabilities.
We have concentrated on providing customers with industry-benchmark solutions that go beyond the network requirement. With digital network migration progressing and our current product offerings running on digital networks, we believe it is important to continue to communicate to the market and customers a clear migration path from legacy analog networks and services to the new digital networks and platforms. Prudent integration of new digital and Web technology into our wireless businesses is an active and ongoing process. We are committed to taking full advantage of such new technology whenever and wherever it makes sense for our customers.
Product Warranty and Service
Our M2M wireless communications business provides a one-year parts and labor warranty on all hardware-based products. Our wireline data communications (Derived Channel) business provides customers with limited one-year warranties on scanners and message switch software, while Subscriber Terminal Units (STUs) are typically sold with a one-year labor and materials warranty. Our digital multimedia business provides either a one-year warranty on parts and labor, depending on the scale and type of product provided. Our networking business provides a one- or two-year warranty on all telecommunications networking products. In addition, a help desk and training support is offered to users of telecommunications networking products. To date, warranty costs and the cost of our warranty programs have not been material to our business.
We hold patents through Cellemetry LLC, Numerex Corp., and Numerex Investment Corp. covering the technologies we have developed in support of our product and service offerings in the United States and various other countries. These patents are by law subject to expiration. Through Cellemetry, we license certain technologies related to Cellemetry under licenses with BellSouth Corporation (now AT&T). It is our practice to apply for patents as we develop new technologies, products, or processes suitable for patent protection. No assurance can be given about the scope of the patent protection.
We also hold other intellectual property rights including, without limitation, copyrights, trademarks, and trade secret protections relating to our technology, products, and processes. Patents have a limited legal lifespan. The patents we presently hold will, by law, begin expiring over the approximate period 2010 through 2022 depending upon the effective date of the subject patent. We believe that the rapid technological developments in the telecommunications industry may limit the protection afforded by patents. Accordingly, we believe that our success will also depend on our manufacturing, engineering, and marketing know-how and the quality and economic value of our products, services, and solutions.
Cellemetry is a registered trademark of Numerex Corp. We believe that no individual trademark or trade name is material to our competitive position in the industry.
Federal, state, and local telecommunications laws and regulations have not posed any significant impediments to either the delivery of wireless data signals/ messaging using our networks or the provision of alarm services by telephone companies using Derived Channel technology. However, we may be subject to certain governmentally imposed telecommunications taxes, surcharges, fees, and other regulatory charges.
As of March 3, 2008, we had 130 employees in the U.S., consisting 72 in sales, marketing and customer service, 30 in engineering and operations and 28 in management and administration. We have experienced no work stoppages and none of our employees are represented by collective bargaining arrangements. We believe our relationship with our employees is good.
We make available free of charge through our website at www.nmrx.com our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto filed or furnished pursuant to 13(a) or 15(d) of the Securities and Exchange act of 1934, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission. Our filings are also available through the Securities and Exchange Commission via their website, http://www.sec.gov. You may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The information contained on our website is not incorporated by reference in this annual report on form 10-K and should not be considered a part of this report.
Executive Officers of the Registrant
Our executive officers, and all persons chosen to become executive officers, and their ages and positions as of March 15, 2008, are as follows:
*Member of the Board of Directors
Mr. Nicolaides has served as Chief Executive Officer of the Company since April 2000, having served as Chief Operating Officer from April 1999 until March 2000 and as Chairman of the Board since December 1999. From July 1994 until April 1999, Mr. Nicolaides managed a closely held investment partnership.
Mr. Marett has been an Executive Vice President of the Company since February 2001. In February 2005 he was named Chief Operating Officer. From 1999 to 2001, Mr. Marett was Vice President, Sales and Marketing, of TManage, Inc., which provided planning, installation, and support services to companies with large remote workforces. From 1997 to 1999 Mr. Marett was Vice President, Business Development, of Mitel Business Communications Systems, a division of Mitel Corporation. Prior to this position Mr. Marett held a number of executive positions at Bell Atlantic.
Mr. Catherall has been the Executive Vice President and Chief Financial Officer of the Company since June 2003. From 1998 to 2002, Mr. Catherall served as Chief Financial Officer of AirGate PCS, a NASDAQ-listed wireless company. From 1996 to 1998, Mr. Catherall was a partner in Tatum CFO LLP, a financial services consulting company. Prior to this, he held a number of executive and management positions at MCI Communications.
Mr. Fienberg serves as the Company’s Executive Vice President for Corporate Development and has been with the Company since July 2004. From August 2003 to July 2004, Mr. Fienberg served as Managing Director of an investment banking firm. From 1992 to 2003, Mr. Fienberg was a Senior Vice President and merger and acquisition specialist with Jefferies and Company, Inc.
Mr. Lang has been an Executive Vice President of the Company since January 2008 and directs the focus and execution of sales and marketing. From January 2006 through December 2007 Mr. Lang served as Senior Vice President of Sales for the Company and President of Airdesk, LLC. Prior to joining the Company in January of 2006, Mr. Lang was founder and President of Airdesk, Inc. From 1988 to 1997, Mr. Lang founded and led a wireless voice and data services company and also co-founded an internet services company which was sold to Verio in 1997.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks before buying shares of our common stock. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are unaware or we currently believe are not material could also adversely affect us. In any case, the value of our common stock could decline, and you could lose all or part of your investment. You should also refer to the other information contained in this Form 10-K or incorporated herein by reference, including our consolidated financial statements and the notes to those statements. See also, “Special Note Regarding Forward-Looking Statements.”
Risks Related to Our Financial Condition and Ownership Structure
We have a history of losses and are uncertain as to our future profitability.
Although we earned a profit for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 we have otherwise had a net loss each year since 1998. We may not sustain operating income, net earnings, or positive cash flow from operations in the future.
In addition, we expect to continue to incur significant operating costs and, as a result, will need to generate significant additional revenues to maintain profitability, which may not occur. If our revenues do not grow as needed to offset these costs, our business may not succeed.
We are a holding company. Our only material assets are our ownership interests in our subsidiaries and in certain intellectual property rights. Consequently, we depend on distributions or other intercompany transfers from our subsidiaries to make payments on our debt. In addition, distributions and intercompany transfers to us from our subsidiaries will depend on:
We cannot assure you that the operating results of our subsidiaries or the distributions they make to us at any given time will be sufficient to make distributions or other payments to us or that any distribution and/or payments will be adequate to pay our debt, including interest payments, when due.
The structure of our company may limit the voting power of our stockholders and certain factors may inhibit changes in control of our company.
The concentration of ownership of our common stock may have the effect of delaying, deferring, or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own approximately 54% of our outstanding common stock. These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters. The interests of these stockholders may be different than those of our unaffiliated stockholders and our unaffiliated stockholders may be dissatisfied with the outcome of votes that may be controlled by our affiliated stockholders.
Our articles of incorporation generally limit holdings by persons of our common stock to no more than 10% without prior approval by our Board. Except as otherwise permitted by the Board, no stockholder has the right to cast more than 10% of the total votes regardless of the number of shares of common stock owned. In addition, if a person acquires holdings in excess of this ownership limit, our Board may terminate all voting rights of the person during the time that the ownership limit is violated, bring a lawsuit against the person seeking divestiture of amounts in excess of the limit, or take other actions as the Board deems appropriate. Our articles of incorporation also have a procedure that gives us the right to purchase shares of common stock held in excess of the ownership limit.
In addition, our articles of incorporation permit our Board to authorize the issuance of preferred stock without stockholder approval. Any future series of preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our common stockholders.
Our current business plan contemplates significant expansion, which we may be unable to manage.
To the extent that we are successful in implementing our business strategy, we may experience periods of rapid expansion in the future. In order to effectively manage growth, whether organic or through acquisitions, we will need to maintain and improve our operating systems and expand, train, and manage our employees. Our expansion through acquisitions is contingent on successful management of those acquisitions, which will require proper integration of new employees, processes and procedures and information systems, which can be both difficult and taxing from a human resources perspective. In addition, we must carefully manage product inventory levels to meet demand. Inaccuracies in expected demand could result in insufficient or excessive inventories and unexpected additional expenses. We must also expand the capacity of our sales, distribution and installation networks in order to achieve continued growth in our existing and future markets. The failure to manage growth effectively in any of these areas could have a material adverse effect on our business, financial condition, and results of operations.
We may require additional capital to fund further development, and our competitive position could decline if we are unable to obtain additional capital, or access the credit markets.
To address our long-term capital needs, we intend to continue to pursue strategic relationships that would provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we may continue to seek capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock. There can be no assurance that we will be successful in seeking additional capital.
The current credit environment has negatively affected the economy, and we have considered how it might affect our business. Events affecting credit market liquidity could increase borrowing costs or limit availability of funds. If we are not successful in obtaining sufficient capital because we are unable to access the capital markets at financially economical interest rates, it could reduce our product development efforts and may materially adversely affect our future growth, results of operations and financial results, and we may be required to curtail significantly, or eliminate at least temporarily, one or more of our research and development programs involving new products and technologies.
Sales of common stock issuable on the exercise of warrants may dilute the value of our common stock.
In 2006 we entered into a $10 million financing agreement with the Laurus Master Fund, Ltd ("Laurus"). The net proceeds from the transaction fund strategic initiatives that may include joint ventures, co- marketing programs, and acquisitions. The financing provided is a $10 million Convertible Note with a term of four years and a fixed interest rate of 9.5%. It is secured by the assets of Numerex. Pursuant to the transaction, we issued warrants to Laurus to purchase a total of 158,562 Numerex shares of our common stock at a price per share of $10.13. Both principal and interest on the Note are payable in cash or, subject to certain conditions, in shares of our common stock. Principal reductions in equal amounts began in July 2007 and will continue until the final payment is made in December 2010. If payments are made in common stock, the amount of principal and interest repaid will be converted into equity at the fixed conversion price of $10.37, a 10% premium over the average NASDAQ closing prices for the past ten trading days. (We have a put right to convert the Note into equity in tranches not to exceed $2.5 million, should the market price of the common stock exceed $11.40 or 110% of the fixed conversion price for twelve consecutive trading days.) As of December 31, 2007, Laurus has not exercised any warrants.
The issuance of shares of common stock issuable upon the exercise of options or warrants could result in dilution of our common stock. It also could adversely affect the terms on which we may be able to obtain equity financing in the future.
Risks Related to Our Business
A prolonged overall economic downturn, or one or more market-specific downturns, could individually or collectively have an adverse affect on our sales.
Sales of our fixed and mobile, cellular- and satellite-based asset tracking and monitoring solutions are dependant on growth in the overall market for M2M wireless data communications services. If adverse economic conditions impede the overall growth of the M2M market, it is likely that sales across each of the individual market segments that we serve will, to varying degrees, be adversely affected as well. Conversely, it is likely that adverse economic conditions that are initially specific to an individual market segment may, because of complex macro- and micro-economic interdependencies, adversely impact adjacent market segments.
In particular, the continued slowdown in the number of new housing starts or a prolonged overall economic downturn or recession could negatively impact our sales of alarm monitoring solutions. Growth in that segment is, in significant part, driven by new home buying and business starts. A continuation of the slowdown in new housing and business starts would likely be matched by a slowdown in the purchase and installation of new residential and commercial security systems. In response to an overall economic slowdown or recession, consumers and business owners may also decide to cancel wireless monitoring services in an effort to reduce or eliminate expenses they may view as “discretionary”.
Similarly, declining automobile sales associated with an overall economic downturn could result in fewer sales of our vehicle tracking solutions.
The markets in which we operate are highly competitive, and we may not be able to compete effectively.
We face competition from many companies with significantly greater financial resources, well-established brand names, and larger customer bases. Numerous companies also may try to enter our market and expose us to greater price competition for our services. We expect competition to intensify in the future. If our competitors successfully focus on the markets we serve, our business could be adversely affected.
We operate in new and rapidly evolving markets where rapid technological change can quickly make products, including those that we offer, obsolete.
The markets we operate in are subject to rapid advances in technology, continuously evolving industry standards and regulatory requirements, and ever-shifting customer requirements. The M2M wireless data communications field, in particular, is currently undergoing profound and rapid technological change. For example, cellular carriers that we rely upon in delivering our network services began dismantling their analog-based cellular networks on February 18, 2008. While we have developed a digital standard, we may not be successful in fully transitioning our existing customer base to the digital standard. Further, while we believe we are prepared to meet our customers’ demand for solutions that are compatible with the cellular carriers’ all-digital networks, the introduction of unanticipated new technologies by the carriers, or the development of unanticipated new end use applications by our customers, could render our then-existing solutions obsolete. In that regard, we must discern current trends and anticipate an uncertain future. We must engage in product development efforts in advance of events that we cannot be sure will happen and time our production cycles and marketing activities accordingly. If our projections are incorrect, or if our product development efforts are not properly directed and timed, or if the demands of the marketplace shift in directions that we failed to anticipate, we may lose market share and revenues as a result.
To remain competitive, we continue to support research and development efforts intended to bring new products to the markets that we serve. However, those efforts are capital intensive. If we are unable to adequately fund our research and development efforts, we may not be successful in keeping our product line current with advances in technology and evolving customer requirements. Even with adequate funding, our development efforts may not yield any appreciable short-term results and may never result in products that produce revenues over and above our cumulative development costs or that gain traction in the marketplace, causing us to either lose market share or fail to increase and forego increased sales and revenues as a result.
Failure of our products and services to gain market acceptance would adversely affect our financial condition.
Over the past three years, among many initiatives, we have introduced a system enabling alarm signals to be transmitted over the cellular network to central monitoring stations; a cellular and GPS-based vehicle tracking solution, solutions tailored to the security needs of the construction industry; a multimedia videoconferencing solution, direct-to-consumer services; enhanced “back end” services; and, most recently, with our acquisition of the assets of Orbit One Communications, Inc., satellite-based asset monitoring and tracking solutions. If these products and services, or any of our other existing products and services, do not perform as expected, or if our sales are less than expected, our business may be adversely affected.
We are dependent on a number of network service providers, manufacturers and suppliers of our products and product components, the loss of any one of which could adversely impact our ability to service or supply our customers.
The loss or disruption of key telecommunications infrastructure services and key wireless network services supplied to the Company would unfavorably impact our ability to adequately service our customers.
We outsource the manufacturing of our products to independent companies and do not have internal manufacturing capabilities to meet the demands of our customers. Any delay, interruption, or termination of the manufacture of our products could harm our ability to provide our products to our customers and, consequently, could have a material adverse effect on our business and operations. The manufacture of our products requires specialized know-how and capabilities possessed by a limited number of enterprises. Consequently, we are reliant on one or two suppliers for the manufacture of key products and product components. If a key supplier experiences production problems or financial difficulties, we may not be able to obtain enough units to meet demand, which could result in failure to meet our contractual commitments to our customers, further causing us to lose sales and generate less revenue. If any of our products or product components contain significant manufacturing defects that the existing manufacturer or supplier is unable to resolve, we could also have difficulty locating a suitable alternative manufacturer or supplier. Related efforts to design replacement products or product components could also take longer and prove costlier than planned, resulting in lost sales and reduced.
If we are unable to provide our suppliers with accurate forecasts of our product needs, margins could be adversely affected.
We are contractually obligated to provide our suppliers with forecasts of our demand for manufactured products. Specific terms and conditions vary by contract, however, if our forecasts do not result in the production of a quantity of units sufficient to meet demand we may be subject to contractual penalties under some of our contracts with our customers. By contrast, overproduction of units based on forecasts that that overestimate demand could result in an accumulation excess inventory that, under some of our contracts with our customers, would have to be managed at our expense thus adversely impacting our margins. Excess inventory that becomes obsolete or that we are otherwise unable to sell would also be subject to write-offs resulting in adverse affects on our margins.
If we experience product defects or failures, our costs could increase and delay product shipments.
Our products and services, and the applications they support, are complex. While we test our products, they may still have errors, defects, or bugs that we find only after commercial production has begun. In the past, we have experienced errors, defects, and bugs in connection with new products. Our customers may not purchase our products if the products have reliability, quality, or compatibility problems. Furthermore, product errors, defects, or bugs could result in additional development costs, diversion of resources from our other development efforts, claims by our customers or others against us, or the loss of credibility with our current and prospective customers. Historically, the time required for us to correct defects has caused delays in product shipments and resulted in lower than expected revenues. Significant capital and resources may be required to address and fix problems in new products. If our products do not function properly, we may have lower than expected revenues, and net income would likely be adversely affected.
A large portion of our revenues is derived from sales to distributors, and changes in the productivity of our distribution channels or any disruption of our distribution channel could adversely affect the sale of our products and services.
We primarily sell our products through distributors. Our sales could be affected by disruptions in the relationships between our distributors and us or between our distributors and end users of our products or services. Also, distributors may choose not to emphasize our products and services to their customers. Any of these actions or results could lead to decreased sales, and adversely affect our results of operations.
The loss of a significant customer could materially impact our revenues.
Purchases by a single customer may account for up to 13% of our anticipated revenues for 2008 as was the case for fiscal year 2007. The loss of such a customer could have a material adverse affect on our revenues, operating income and net earnings.
We may experience long sales cycles for our products, as a result of a variety of factors.
Certain of our product offerings, particularly those specific to our satellite-based asset tracking unit, are subject to long sales cycles in view of the need for testing of our products in combination with our customers’ applications and third party technologies, the need to obtain regulatory approvals and export clearances, and as a function of the need to negotiate other complex operational and technical issues. Particularly in the government contracting arena, it may take months or longer to finalize a contract. Terms and conditions of sale unique to the government sector may also affect when we are able to recognize revenues under our government contracts. For that reason, month-over-month comparisons of our financial results may not always be meaningful.
If we do not adapt to changing government regulations, our business will suffer.
Changing government regulations could make our existing hardware non-compliant or obsolete. For example, as previously discussed, as of February 18, 2008, cellular carriers in the United States were no longer required by the FCC to provide analog service pursuant to the Advanced Mobile Phone Service (AMPS) standard and, as a result, we had to convert our existing analog subscriber base to digital service. (No date has been set for ending analog service in Canada. However, cellular carriers in Canada are transitioning from analog to digital networks as well.)
Our expansion into government markets subjects us to increased regulation. We must comply with a complex set of rules and regulations applicable to government contractors. Failure to comply with an applicable rule or regulation could result in our suspension of doing business with the government or cause us to incur substantial penalties.
Many of the ultimate consumers of our PowerPlay hardware and services are elementary and secondary schools that pay for their purchases with funding that they receive through the Schools and Libraries Program (commonly known as the “E-Rate Program”) of the Universal Service Fund, which is administered by the Universal Service Administrative Company (USAC) under the direction of the FCC. Changes in this program could affect demand for our PowerPlay hardware and services.
We may be subject to telecommunications taxes, surcharges, and fees, and changes in these could affect our results of operations.
And, as we expand beyond the “business-to-business” market and begin providing some services directly to end user consumers, some of our sales could become subject to federal and state level consumer protection laws and other regulations that could prompt adverse legal action in the event of an alleged violation of those laws.
We operate internationally, which subjects us to international regulation and business uncertainties that create additional risk for us.
We are doing business in Australia, Canada, China, Mexico, and Japan. Accordingly, we are subject to additional risks, such as
In addition, the laws of certain countries do not protect our hardware as much as the laws of the United States, which may lead to the potential loss of our proprietary technology through theft, piracy or a failure to protect our rights. The combination of these factors may have a material adverse effect on our future international sales and, consequently, on our business and results of operations.
We may not be able to achieve our organic growth goals if we do not generate additional traffic and efficiently operate our network.
Our long-term success depends on our ability to operate, manage, and maintain a reliable and cost effective network, as well as our ability to keep pace with changes in technology.
Furthermore, our network operations are dependent on third parties. If we experience technical or logistical impediments to our ability to transfer traffic onto our network, fail to generate additional traffic on our network, or if we experience difficulties with our third party providers, we may not achieve our revenue goals or otherwise be successful in growing our business.
We may lose customers if we experience system failures that significantly disrupt the availability and quality of the service our network provides.
The operation of our network depends on our ability to avoid or limit any interruptions in service to our customers. Interruptions in service or performance problems, for whatever reason, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new customers. In addition, because most of our customers are businesses, any significant interruption in service could result in lost profits or other losses to our customers. Although we attempt to disclaim or limit liability in our agreements with these customers, a court may not enforce a limitation on liability, which could expose us to losses.
The failure of any equipment on our network, or that of a customer’s equipment, could result in the interruption of that customer’s service until necessary repairs are made or replacement equipment is installed. Network failures, delays, and errors may result from natural disasters, power losses, security breaches, viruses or terrorist acts. These failures or faults cause delays, service interruptions, expose us to customer liability, or require expensive modifications that could have a material adverse effect on our business and operating results.
We may have difficulty identifying the source of a problem in our network.
If a problem occurs on our network, it may be difficult to identify the source of the problem due to the overlay of our network with cellular, and/or satellite networks and our network’s reliance on those other networks. The occurrence of hardware or software errors, regardless of whether such errors are caused by our products or our network, may result in the delay or loss of market acceptance of our products and services, and any necessary revisions may result in significant and additional expenses. The occurrence of some of these types of problems may seriously harm our business, financial condition, or operations. Given our dependence on cellular, and satellite telecommunications service providers, risks specific or unique to their technologies, i.e., the loss or malfunction of a satellite or satellite ground station, should also be viewed as having the potential to impair our ability to provide services.
A natural disaster or other weather events could diminish our ability to provide service; our revenues may be impacted by weather patterns.
Although our internal platform is very robust and supported by redundant systems, natural disasters including, without limitation, hurricanes, tornadoes, earthquakes, or solar flares could damage or destroy our facilities resulting in a disruption of service to our customers. If a future natural disaster impairs or destroys any of our facilities, we may be unable to provide service to our customers in the affected area for a period of time. In addition, even if our facilities are not affected by natural disasters, our service could be disrupted if a natural disaster damages the third party cellular or satellite networks we are interconnected with. Further, in the event of an emergency, the telecommunications networks that we rely upon may become capacity constrained or preempted by governmental authorities.
With respect to our satellite-based asset tracking unit in particular, sales may be influenced by weather patterns. For example, if government agencies and emergency responders anticipate a relatively “mild” storm season, they buy fewer of our units for deployment in support of disaster response operations.
The loss of a few key technical personnel could have an adverse affect on us in the short-term.
We rely on a relatively small number of technical personnel who play key roles in maintaining the back-end technology and systems that enable us to provide network services to our customers and that is also central to our product development efforts. The loss of some staff could result, temporarily, in shortfalls in the knowledge base of our remaining technical staff concerning existing products and products that are under development.
The loss of intellectual property protection both U.S. and international, could have a material adverse effect on our operations.
Our future success and competitive position depend upon our ability to obtain and maintain intellectual property protection, especially with regard to patents on the technology used in our core business. Loss of such protection could compromise any advantage obtained and, therefore, impact our sales, market share, and results. Furthermore, our future or pending patent applications may not be issued with the scope of the claims sought by us, if at all. In addition, others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned or licensed by us. Effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in foreign countries where we may need protection. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology.
Our services are highly dependent upon our technology and the scope and limitations of our proprietary rights therein. In order to protect our technology, we rely on a combination of patents, copyrights, and trade secret laws, as well as certain customer licensing agreements, employee and third-party confidentiality and non-disclosure agreements, and other similar arrangements. If our assertion of proprietary rights is held to be invalid, or if another party’s use of our technology were to occur to any substantial degree, our business, financial condition and results of operations could be materially adversely affected.
Our competitors may obtain patents that could restrict our ability to offer our products and services, or subject us to additional costs, which could impede our ability to offer our products and services and otherwise adversely affect us. We may, from time to time, also be subject to litigation over intellectual property rights or other commercial issues.
Several of our competitors have obtained and can be expected to obtain patents that cover products or services directly or indirectly related to those offered by us. There can be no assurance that we are aware of all patents containing claims that may pose a risk of infringement by its products or services. In addition, patent applications in the United States are confidential until a patent is issued and, accordingly, we cannot evaluate the extent to which our products or services may infringe on future patent rights held by others.
Furthermore, even with technology that we develop independently, a third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as research and development and the sale of any of our products or services. These lawsuits are expensive and would consume time and other resources. The court could decide that we are infringing the third party’s patents and order us to stop the activities claimed by the patent and/or order us to pay the other party damages for having infringed its patents. There is no guarantee that the prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In the highly competitive and technology-dependent telecommunications field in particular, litigation over intellectual property rights is significant business risk, and some entities are pursuing a litigation strategy the goal of which is to monetize otherwise unutilized intellectual property portfolios via licensing arrangements entered into under threat of continued litigation.
Some licenses we obtain may be nonexclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, and there can be no assurance that we would be able to design and incorporate alternative technologies, without a material adverse effect on our business, financial condition, and results of operations.
Although we have taken, and will continue to take, steps to protect the confidential nature of our proprietary and trade secret information, we cannot control whether secrecy obligations will be honored or whether disputes will arise related to this information. There is a risk that the steps we have taken will not prevent misappropriation of our technology or that others might independently develop substantially equivalent products and processes or otherwise gain access to our technology. In addition, we cannot rule out that we will not be subjected to claims from others that we are misappropriating their trade secrets or confidential proprietary information.
We seek to protect our trade secrets and proprietary know-how, in part, through confidentiality agreements with our employees, customers, and licensees. We cannot guarantee that those parties will not violate these agreements, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently developed by competitors. We cannot be certain that we will, in connection with every relationship, be able to maintain the confidentiality of our technology, which if released could materially affect our business. To the extent that our licensees develop inventions or processes independently that may be applicable to our products, disputes may arise as to the ownership of the proprietary rights to this information. These inventions or processes will not necessarily become our property, but may remain the property of these persons or their full-time employers. We could be required to make payments to the owners of these inventions or processes, in the form of either cash or equity, or a combination of both.
From time to time we are engaged as a defendant and/or plaintiff in litigation in the ordinary course of business. Due to the uncertainty inherent in litigation, were a legal proceeding to be decided adversely against us and of a magnitude that reached a materiality threshold, such litigation could have a material adverse effect on our business, financial condition or results of operations.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
All of our facilities are leased. Set forth below is certain information with respect to our leased facilities:
We conduct engineering, sales and marketing, and administrative activities at many of these locations. We believe that our existing facilities are adequate for our current needs. As we grow and expand into new markets and develop additional hardware, we may require additional space, which we believe will be available at reasonable rates.
We engage in limited manufacturing, equipment and hardware assembly and testing for certain hardware. We also use contract manufacturers for production, sub-assembly and final assembly of certain hardware. We believe there are other manufacturers that could perform this work on comparable terms.
Item 3. Legal Proceedings.
On January 7, 2008 Orbit One Communications, Inc. (“Orbit One”) and David Ronsen (“Ronsen”) filed an action against Numerex in New York State Supreme Court, County of New York, alleging, inter alia, breach of contract in frustrating Orbit One’s ability to achieve earn out targets in the acquisition and employment agreements. Plaintiffs are claiming $20 million in damages. On January 25, 2008 Numerex removed the action to the United States District Court, Southern District of New York. On March 11, 2008 Numerex answered and counterclaimed asserting, inter alia, breach of fiduciary duty and declaratory relief. Numerex believes that the plaintiffs' claims are without merit and intends to defend against the allegations and to vigorously pursue its counterclaims.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters.
The Company’s Common Stock trades publicly on the NASDAQ Global Market System under the symbol NMRX.
The following table sets forth, for the fiscal quarters indicated, the high and low sales prices per share for the Common Stock on the NASDAQ National Market for the applicable periods.
On March 6, 2008, the last reported sale price of our Class A common stock on The NASDAQ Global Market was $7.67 per share.
We currently do not pay any cash dividends. In deciding whether or not to declare or pay dividends in the future, the Board of Directors will consider all relevant factors, including our earnings, financial condition and working capital, capital expenditure requirements, any restrictions contained in loan agreements and market factors and conditions. We have no plans now or in the foreseeable future to declare or pay cash dividends on our common stock.
The information included under the heading "Performance Graph" in this Item 5 of this Annual Report on Form 10-K is "furnished" and not "filed" and shall not be deemed to be "soliciting material" or subject to Regulation 14A or 14C, nor shall it be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into any such filing.
The following graph shows a comparison of the cumulative total return for Common Stock, the NASDAQ Composite Index and the NASDAQ Telecomm Index, assuming (i) an investment of $100 in each, on December 31, 2002, the last trading day before the beginning of the Company’s five preceding years, and, (ii) in the case of the Indices, the reinvestment of all dividends.
As of March 10, 2008, there were 52 holders of record of our Common Stock, approximately 8 beneficial shareholders and 13,525,905 shares of Common Stock outstanding. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the consolidated financial statements and the notes contained in “Item 8. Financial Statements and Supplementary Data” and the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results.
The following financial information was derived using the consolidated financial statements of Numerex Corp. The table lists historical financial data of the Company for the fiscal years ended December 31, 2007, 2006, 2005, 2004 and 2003.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations>.
We are a machine-to-machine data communications, technology and solutions business. We combine our network services, hardware and applications development capabilities to create innovative packaged and custom designed machine-to-machine solutions for customers across multiple market segments.
Fiscal year 2007 represented an improvement in revenues over prior periods. Full year revenues of $68.0 million increased $15.2 million or 28.8% from 2006. All of this increase came from our wireless division where 2007 revenues grew 35.6% compared to 2006.
Gross margins for 2007 were 34.4% compared with 35.8% in 2006. Gross margins were unfavorably affected by our decision to discount our hardware in order to effectively compete for new customers in the digital M2M market. Wireless data hardware sales typically earn a lower margin than that generated by service revenue. These hardware sales, however, should result in enhanced recurring service revenue in subsequent periods.
Fiscal year 2007 overhead, which includes selling, general and administrative (SG&A) costs as well as research and development expenses and bad debt costs, collectively were $20.9 million or $3.7 million higher than 2006. This increase in SG&A expenses is related to our acquisition of the assets of Orbit One Communications, Inc. as well as costs incurred with regard to Sarbanes Oxley compliance. SG&A expenses, which represented almost 26% of revenues in 2006, were 25% in 2007.
The following is a discussion of our consolidated financial condition and results of operations for the fiscal years ended December 31, 2007 and 2006 and 2005. This discussion should be read in conjunction with our consolidated financial statements, the related notes thereto, and other financial information included elsewhere in this report.
Critical Accounting Policies
Note A of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of Numerex’s Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable and allowance for doubtful accounts, inventories and the adequacy of reserves for excess and obsolete inventories, accounting for income taxes and valuation of goodwill and other intangible assets. Actual amounts could differ significantly from these estimates.
We primarily sell hardware, recurring services (most billed on a monthly basis) and on-demand services. Hardware revenues are recognized at the time title passes to the customer, which in most cases is at the time of shipment.
We bill most of our recurring service revenues on a monthly basis, which are generated by providing customers access to our wireless machine-to-machine communications network (the “Network”). We sell these services to retailers and wholesalers of the service. For services sold to retailers, monthly service fees are generally a fixed monthly amount billed at the beginning of each month. For services sold to wholesalers, the customers are billed a fixed base fee in advance and usage fees in arrears at the end of each month. We defer the advance billing of the base fee and recognize the revenues when the services are performed.
We also provide services on a demand basis. These types of services are generally completed in a short period of time (usually less than one month) and are billed and the revenue recognized when the services are completed.
Some of our customers prepay for services for up to a year in advance. These services include our satellite communication services, 24 hour a day access to our internet based mapping software and other support services. Additionally, these prepaid services expire after a specified period of time. We defer these revenues until the services have been performed or, for unused services, when the term expires.
Trade receivables are stated at gross invoiced amount less discounts, other allowances and provision for uncollectible accounts.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Changes in the financial condition of our customers could result in upward or downward adjustments to the allowance for doubtful accounts.
Inventories and Reserves for Excess, Slow-Moving and Obsolete Inventory
With our satellite communications business, we purchase satellite minutes in advance from our primary satellite communications carrier. These prepaid minutes expire after a specified period of time, usually one year, from the date of purchase. We classify these prepaid minutes as a prepaid expense then expense the minutes as they are used. Additionally, we evaluate the potential future minutes that will not be used by their expiration at each reporting period, taking into consideration any seasonality in our usage of our satellite communication minutes. Should we estimate that any amounts of minutes are not expected to be used by their expiration date, we expense the expected unused minutes at that time as cost of sales.
Valuation of Goodwill and Other Intangible Assets
In accordance with Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we do not amortize goodwill and other intangible assets with indefinite lives. Our intangible assets and goodwill are subject to annual impairment tests, which require us to estimate the fair value of our business compared to the carrying value. The impairment reviews require an analysis of future projections and assumptions about our operating performance. Should such review indicate the assets are impaired, we would record an expense for the impaired assets. Our long-lived assets are tested for impairment whenever events or changes in events or circumstances indicate their carrying amount may not be recoverable.
Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. For example, if we had reason to believe that our recorded goodwill and intangible assets had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill or intangible assets that we believed was impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.
We conducted our goodwill analysis and assessment for all of our reporting units as of December 31, 2007 and determined there was no impairment of goodwill.
Deferred Tax Valuation Allowance
In assessing the realizability of deferred tax assets, management considers 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. Management considers projections of future taxable income, tax planning strategies and the reversal of temporary differences in making this assessment. During the year ended December 31, 2007, management determined that certain deferred tax assets previously offset by a valuation allowance had become unrealizable. As such, both the deferred tax assets and the associated valuation allowance were reduced. These reductions did not impact net income.
Result of Operations
The following table sets forth, for the periods indicated, certain revenue and expense items and the percentage increases and decreases for those items in the Company’s Consolidated Statements of Operations.
See notes to consolidated financial statements
Fiscal Years Ended December 31, 2007 and December 31, 2006
Net revenues increased 28.8% to $68.0 million for the year ended December 31, 2007 as compared to $52.8 million for the year ended December 31, 2006. The increase in total net revenues for the year ended December 31, 2007 is attributable to a 25.7% increase in total hardware sales and a 34.7% increase in service revenue. The hardware sales and service revenue increase for the year ended December 31, 2007, compared to the same period in 2006, was in Wireless Data Communications in the amount of $16.5 million. These increases were partially offset by a decrease in Digital Multimedia, Networking & Wireline Security hardware sales and service revenue of $1.3 million, as compared to fiscal year 2006.
Cost of hardware sales increased 37.6% to $38.5 million for the year ended December 31, 2007 as compared to $28.0 million for the year ended December 31, 2006. The increase in cost of sales was primarily the result of higher hardware sales volume in Wireless Data Communications.
Cost of services was increased 3.5% to $6.1 million for the year ended December 31, 2007 as compared to $5.8 million for the year ended December 31, 2006. The increase in cost of services was primarily the result of higher service sales volume in Wireless Data Communications.
Gross profit, as a percentage of net revenue, was 34.4% for the year ended December 31, 2007 as compared to 35.8% for the year ended December 31, 2006. The total gross profit as a percentage of revenue decreased for the year ended December 31, 2007 compared to 2006 as a result of changing the pricing model in our wireless data communications segment. The pricing model was changed in order to secure additional network connections to support the associated long-term recurring service revenues.
Selling, general, administrative and other expenses increased 34.7% to $16.3 million for the year ended December 31, 2007 as compared to $12.1 million for the year ended December 31, 2006. As a percentage of revenue, selling, general, administrative and other expenses increased to 23.9% for the year ended December 31, 2007 as compared to 22.9% for the year ended December 31, 2006. The increase of $4.2 million was due to higher personnel related costs ($1.2 million), increased spending in sales and marketing to support hardware sales ($790,000), an increase in general & administrative spending as we responded to regulatory requirements such as Sarbanes-Oxley and the adoption of FIN 48 ($981,000), the acquisition of the assets of Orbit One, Inc. ($759,000) and share-based compensation expense ($480,000).
Research and development expenses increased for the year ended December 31, 2007 to $1.5 million as compared to $1.1 million for the year ended December 31, 2006. The increase in research and development expenses is primarily due to new projects related to new digital hardware that have not reached technical feasibility and therefore work on these projects was expensed as incurred.
Bad debt expense increased 221% to $635,000 for the year ended December 31, 2007 as compared to $198,000 for the year ended December 31, 2006. Bad debt increased over the prior year due to an increase in the bad debt allowance in the current year period as a result of reserving for specific customers based on our assessment of the likelihood of these customers defaulting.
Depreciation and amortization expense increased 42.1% to $2.5 million for the year ended December 31, 2007 as compared to $1.8 million for the year ended December 31, 2006. This increase is attributable to amortization beginning on completed research and development projects as well as the purchase of depreciable computer and office equipment.
We did not record any goodwill impairment for the year ended December 31, 2007. We recorded a pre-tax, non-cash charge of $2.1 million for the impairment of goodwill within the Digital Multimedia, Networking and Wireline segment for the year ended December 31, 2006. Key factors affecting the amount of the impairment charge included the Company’s assessment of the long term outlook for its Broadband Networks, Inc. within the Digital Multimedia, Networking and Wireline segment and a determination that a reduction in the goodwill balance in the amount of $2.1 million would be required to more properly reflect the current value of the business.
Interest expense net of interest income increased to $1.4 million in 2007 compared to $552,000 for the prior year. This increase was primarily the result of the transactions with the Laurus Master Fund (Laurus) that occurred on May 30, 2006 and December 29, 2006. Interest expense related to these transactions was $1.9 million for the year ended December 31, 2007 as compared to $638,000 for the year ended December 31, 2006. The increase in interest expense related to the Laurus transactions was partially offset by interest income of $566,000. Please see Note A (14) to our Consolidated Financial Statements for additional information about our transactions with Laurus.
A Foreign currency loss of $28,000 was recorded for the year ended December 31, 2007 down from a $10,000 gain for the year ended December 31, 2006. This decrease was the result of increased foreign currency losses on sales to Canadian and Australian customers.
The company recorded a tax provision of $728,000 for the year ended December 31, 2007 as compared to a tax benefit of $2,950,000 for the year ended December 31, 2006, representing effective tax rates of 65.74% and (256%), respectively. The difference between the company's effective tax rate and the 34% federal statutory rate in the current year resulted primarily from state tax accruals, stock option expenses, and changes in the Company’s uncertain tax positions. The overall increase in the effective tax rate from the year ended 2006 compared to the same period in 2007 can be attributed to the company's partial release of the valuation allowance which offset much of the company's net operating loss (NOL) deferred tax assets in 2006. The company is recognizing deferred tax expense in 2007 primarily related to the utilization of these NOLs.
Basic and diluted earnings per common share decreased to $.03 for year ended December 31, 2007 as compared to $.33 and $.32, respectively for the year ended December 31, 2006.
The weighted average basic shares outstanding increased to 13,137,000 for the year ended December 31, 2007 as compared to 12,502,000 for the year ended December 31, 2006. The increase in weighted average basic shares outstanding for year ended was due to the potential issuance of 321,000 common shares related to the acquisition of the assets of Orbit One Communications, Inc., 134,000 common shares related to the exercise of employee stock options and 100,000 common shares related to the acquisition of the assets of Airdesk, Inc.
Fiscal Years Ended December 31, 2006 and December 31, 2005
Net revenues increased 76.3% to $52.8 million for the year ended December 31, 2006 as compared to $29.9 million for the year ended December 31, 2005. The increase in total net revenues for the year ended December 31, 2006 is attributable to a 136.9% increase in total hardware sales and an 18.9% increase in service revenue. The hardware sales and service revenue increase for the year ended December 31, 2006, compared to the same period in 2005, was in Wireless M2M Data Communications in the amount of $24.0 million. These increases were partially offset by a decrease in Digital Multimedia, Networking & Wireline Security hardware sales and service revenue of $1.2 million, as compared to fiscal year 2005.
Cost of hardware sales increased 147% to $28.0 million for the year ended December 31, 2006 as compared to $11.3 million for the year ended December 31, 2005. The increase in cost of sales was primarily the result of higher hardware sales volume in Wireless M2M Data Communications.
Cost of services was flat at $5.9 million for the years ended December 31, 2006 and 2005.
Gross profit, as a percentage of net revenue, was 35.8% for the year ended December 31, 2006 as compared to 42.5% for the year ended December 31, 2005. The total gross profit as a percentage of revenue decreased for the year ended December 31, 2006 compared to the same period in 2005 because hardware sales were 65.2% of total revenue for the year ended December 31, 2006 versus 48.7% for the year ended December 31, 2005. Since, gross profit as a percentage of revenue is generally less on hardware sales than for service revenue, the increase in hardware sales versus service revenue decreased the total gross profit as a percentage of revenue.
Selling, general, administrative and other expenses increased 40.0% to $12.1 million for the year ended December 31, 2006 as compared to $8.7 million for the year ended December 31, 2005. The increase of $3.4 million in selling, general, administrative and other expenses was primarily due to the acquisition of the assets of Airdesk, Inc. ($2.0 million), higher personnel related costs ($685,000), share-based compensation expense ($462,000) and an increase in spending in sales and marketing to support hardware sales ($265,000) As a percentage of revenue, selling, general, administrative and other expenses decreased to 23.0% for the year ended December 31, 2006 as compared to 28.9% for the year ended December 31, 2005. Selling, general, administrative and other expenses decreased as a percentage of revenue for the year primarily due to control over these types of expenses.
Research and development expenses were relatively flat for the year ended December 31, 2006 at $1.1 million. We expense most of our research and development costs and expect such costs to continue at approximately these current levels.
Bad debt expense decreased 39.1% to $198,000 for the year ended December 31, 2006 as compared to $325,000 for the year ended December 31, 2005. Bad debt decreased during the period as a result of our continued stringent credit policies and collections processes.
Depreciation and amortization expense increased 5.4% to $1,755,000 for the year ended December 31, 2006 as compared to $1,662,000 for the year ended December 31, 2005. This increase was due to depreciation expense on purchases of new equipment during 2006.
We recorded a pre-tax, non-cash charge of $2.1 million for the impairment of goodwill within the Digital Multimedia, Networking and Wireline segment for the year ended December 31, 2006. Key factors driving the amount of the impairment charge include the Company’s assessment of the long term outlook for its Broadband Networks, Inc. unit within the Digital Multimedia, Networking and Wireline segment and a determination that a reduction in the goodwill balance in the amount of $2.1 million would be required to more properly reflect the current value of the business. We did not record any goodwill impairment for the year ended December 31, 2005.
Interest expense net of interest income increased to $552,000 in 2006 compared to $311,000 for the prior year. This increase was primarily the result of the transactions with the Laurus Master Fund (Laurus) that occurred on January 25, 2005 and May 30, 2006. Interest expense related to these transactions was $638,000 for the twelve months ended December 31, 2006. The increase in interest expense related to the Laurus transactions was partially offset by interest income of $86,000. Please see Note A (14) to our Consolidated Financial Statements for additional information about our transactions with Laurus.
A Foreign currency gain of $10,000 was recorded for the year ended December 31, 2006 up from a $5,000 loss for the year ended December 31, 2005. This increase was the result of decreased foreign currency losses on sales to Canadian customers. Other income of $21,000 was recorded for the year ended December 31, 2006 as a result of a refund at our Australian location.
We recorded a provision (benefit) for income taxes of ($2,950,000) and $52,000 for the years ended December 31, 2006 and 2005, respectively. The amount of income tax benefit recorded for reversal of valuation allowance was $4,572,000 and $241,000 for the years ended December 31, 2006 and 2005, respectively. The effective tax rate differs from the statutory U.S. federal income tax rate of 34% primarily due to permanent differences, foreign and state income tax differences, and the benefit of reversal of valuation allowance for the years ended December 31, 2006 and 2005.
We had provided a valuation allowance of $11,439,000 as of December 31, 2005, on 100% of our deferred tax assets as it had been determined that it was more likely than not that the deferred tax assets would not be realized. We reversed a portion of the valuation allowance related to certain net operating loss carryforward deferred tax assets expected to be utilized. For the remaining deferred tax assets, we intend to maintain a valuation allowance until sufficient positive evidence exists to support their reversal. As of December 31, 2006, the remaining valuation allowance is $6,867,000.
Basic and diluted earnings per common share increased to $.33 and $.32 respectively for year ended December 31, 2006 as compared to $.05 for the year ended December 31, 2005.
The weighted average basic shares outstanding increased to 12,502,000 for the year ended December 31, 2006 as compared to 11,231,000 for the year ended December 31, 2005. The increase in weighted average basic shares outstanding for the twelve-month period ended was due to the issuance of 885,000 common shares to Laurus in connection with the conversion of our debt, as discussed above as well as the issuance of 348,000 common shares related to the acquisition of the assets of Airdesk, Inc.
Fiscal Years Ended December 31, 2007 and December 31, 2006
Wireless M2M Data Communications Segment
Net revenues from Wireless M2M Data Communications increased 35.6% to $62.8 million for the year ended December 31, 2007 including our satellite solutions division as compared to $46.3 million for the year ended December 31, 2006. This increase was the result of a 28.7% increase in hardware sales and a 51.9% increase in service revenues compared to the same period last year. The increase in Wireless M2M Data Communications hardware sales of $9.3 million for the year ended December 31, 2007 versus the same period in 2006 was primarily the result of increased sales of wireless modules, and increased sales of our security devices used for wireless communications between alarm installations and central monitoring stations. The increase in the Wireless M2M Data Communication services revenue was primarily due to an increase in the number of connections to our wireless network. Connection increases were generated by sales of our security hardware as well as those generated by value added resellers who utilize our network to provide customer solutions. We continue to focus on increasing connections to our network due to the recurring nature of service revenues.
Digital Multimedia, Networking and Wireline Security Segment
Net revenue from Digital Multimedia, Networking and Wireline Security decreased 19.9% to $5.2 million for the year ended December 31, 2007 as compared to $6.5 million for the year ended December 31, 2006. This decrease was primarily due to an 18.4% decrease in hardware sales to $1.7 million, primarily due to decreased sales of our interactive videoconferencing hardware (PowerPlay™) to distance-learning customers. Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period. Digital Multimedia, Networking and Wireline Security service revenues, mainly installation and integration services, also decreased to $3.4 million for the year ended December 31, 2007 compared to $4.3 million during the same period in 2006. Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies. The decrease for the year ended December 31, 2007 is due to a decrease in demand for these services.
Fiscal Years Ended December 31, 2006 and December 31, 2005
Wireless M2M Data Communications Segment
Net revenues from Wireless M2M Data Communications increased 107.5% to $46.3 million for the year ended December 31, 2006 including our wireless module unit as compared to $22.3 million for the year ended December 31, 2005. This increase was the result of a 171.7% increase in hardware sales and a 34.0% increase in service revenues compared to the same period last year. The increase in Wireless M2M Data Communications hardware sales of $20.5 million for the year ended December 31, 2006 versus the same period in 2005 was primarily the result of increased sales of wireless modules, our vehicle security hardware and tracking services, and increased sales of our security devices used for wireless communications between alarm installations and central monitoring stations. The increase in the Wireless M2M Data Communication services revenue was primarily due to an increase in the number of connections to our wireless network. Connection increases were generated by sales of our security hardware as well as those generated by value added resellers who utilize our network to provide customer solutions. We continue to focus on increasing connections to our network due to the recurring nature of service revenues.
Digital Multimedia, Networking and Wireline Security Segment
Net revenue from Digital Multimedia, Networking and Wireline Security decreased 15.1% to $6.5 million for the year ended December 31, 2006 as compared to $7.6 million for the year ended December 31, 2005. This decrease was primarily due to a 19.3% decrease in hardware sales to $2.1 million, primarily due to decreased sales of our interactive videoconferencing hardware (PowerPlay™) to distance-learning customers. Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period. Digital Multimedia, Networking and Wireline Security service revenues, mainly installation and integration services, also decreased to $4.3 million for the year ended December 31, 2006 compared to $5.0 million during the same period in 2005. This decrease was due to lower hardware sales for the year ended December 31, 2006.
Selected Quarterly Financial Data
The following tables detail certain unaudited financial data of Numerex for each quarter of the last two fiscal years ended December 31, 2007, and 2006, respectively.
Our financial results may fluctuate from quarter to quarter as a result of certain factors related to our business, including the timing of hardware shipments, new hardware introductions and equipment, and hardware and system sales that historically have been of a non-recurring nature.
This information has been prepared from our books and records in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all (including only normal, recurring) adjustments considered necessary for fair presentation have been included. Interim results for any quarter are not necessarily indicative of the results that may be expected for any future period.
Selected Quarterly Financial Data (Unaudited)
Selected Quarterly Financial Data (Unaudited)
Liquidity and Capital Resources
We had working capital of $19.5 million as of December 31, 2007 compared to working capital of $25.9 million as of December 31, 2006. We had cash balances of $7.4 million and $20.3 million, respectively, as of December 31, 2007 and December 31, 2006. The decrease in cash balances is primarily related to the cash used for the purchase of the assets of Orbit One Communications, Inc., as well as an increase in inventory and accounts receivable.
The following table shows information about our cash flows and liquidity positions during the twelve months ended December 31, 2007 and 2006. You should read this table and the discussion that follows in conjunction with our consolidated statements of cash flows contained in “Item 8. Financial Statements” of this report.
We used cash from operating activities totaling $3.3 million for the year ended December 31, 2007 compared to providing cash of $2.7 million for the year ended December 31, 2006. The increase in cash used by operating activities for the twelve months ended December 31, 2007 versus the comparable period of 2006 was primarily due to an increase in inventory and an increase in accounts receivable. These were partially offset by an increase in accounts payable, deferred revenue and a decrease in prepaid expenses.
We used cash in investing activities totaling $8.7 million for the year ended December 31, 2007 compared to $4.1 million for the year ended December 31, 2006. The increase in cash used in investing activities was primarily due to the purchase of the assets of Orbit One Communications, Inc. and the purchase of intangible assets.
We used cash in financing activities totaling $947,000 for the year ended December 31, 2007 compared to generating cash from financing activities totaling $19.0 million for the year ended December 31, 2006. For the period ended December 31, 2007 cash used in financing activities was primarily due to the principal payments on Laurus Note C, which was partially offset by the proceeds from the exercise of stock options. For the period ended December 31, 2006, cash generated from financing activities was primarily related to the proceeds from Laurus Notes B and C, as well as the proceeds from the exercise of stock options, which was partially offset by payments on the notes and lease payable.
Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material. To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.
We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet our operating requirements through at least December 31, 2008. This belief could be affected by future results that differ from expectations, a material adverse change in our operating business or a default under the Company Notes.
The table below sets forth our contractual obligations at December 31, 2007. Additional details regarding these obligations are provided in the notes to our consolidated financial statements.
Off-Balance Sheet Arrangements
As of December 31, 2007, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities.
Effect of Inflation
As a result of our placement of $ 5.0 million and $10.0 million of notes due in 2010, at interest rates of 9.75% and 9.5%, respectively, substantially all of our debt as of December 31, 2007, is at fixed rates. The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Fair market values are determined based on estimates made by investment bankers. For fixed rate debt, interest rate changes do not impact book value, operations, or cash flows.
Inflation has not been a material factor affecting our business. In recent years the cost of electronic components has remained relatively stable, due to competitive pressures within the industry, which has enabled us to contain our hardware costs. Our general operating expenses, such as salaries, employee benefits, and facilities costs are subject to normal inflationary pressures, but to date inflation has not had a material effect on our operating results.
Our functional and reporting currency is the U.S. Dollar. Fluctuations in foreign currency exchange rates have not, and are not expected to have a material impact on our results of operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS