10-Q 1 nmrx10q033110.htm NUMEREX 10Q 033110 nmrx10q033110.htm






UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended March 31, 2010
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from          to          
 
Commission file number: 0-22920
 
 

 
Numerex Corp.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Pennsylvania
 
11-2948749
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
1600 Parkwood Circle, Suite 500
Atlanta, GA  30339-2119
(Address of Principal Executive Offices) (Zip Code)
 
(770) 693-5950
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
 



 
          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes o    No  o
 
 
 
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

             
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o

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

As of May 13, 2010, an aggregate of 15,074,051shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.


 
 



 

NUMEREX CORP. AND SUBSIDIARIES

INDEX

 
Page
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009
3
Condensed Consolidated Balance Sheets (Unaudited) March 31, 2010 and December 31, 2009
4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009
5
Condensed Consolidated Statement of Shareholders' Equity (Unaudited) for the Three Months Ended March 31, 2010
6
Notes to Condensed Consolidated Financial Statements - Unaudited
7
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
22
Item 4.  Controls and Procedures
22
 PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings
22
Item 1A.  Risk Factors
22
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
23
Item 3.  Defaults Upon Senior Securities
23
Item 4.  Reserved
23
Item 5.  Other Information
23
Item 6.  Exhibits
23
Signature Page
24
Certifications
26
Exhibits
26



 
 

 

PART I.  FINANCIAL INFORMATION

Item 1.
  Financial Statements.


Numerex Corp. and Subsidiaries
 
Condensed Consolidated Statements of Operations and Comprehensive Loss
 
(In thousands, except per share data)
 
(Unaudited)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
 Net sales:
 
 
       
   Hardware
  $ 4,818     $ 5,675  
   Service
    8,204       6,987  
 Total net sales
    13,022       12,662  
 Cost of hardware sales
    4,036       4,928  
 Cost of services
    3,233       2,434  
 Gross profit
    5,753       5,300  
 Sales and marketing expenses
    1,787       1,413  
 General, administrative and legal expenses
    2,399       3,771  
 Engineering and development expenses
    592       508  
 Bad debt expense
    57       155  
 Depreciation and amortization
    873       792  
 Operating earnings (loss)
    45       (1,339 )
 Interest expense
    (13 )     (347 )
 Other expense
    (41 )     -  
 Loss before income taxes
    (9 )     (1,686 )
 Provision for income taxes
    22       37  
 Net loss
    (31 )     (1,723 )
 Other comprehensive income (loss), net of income tax:
               
 Foreign currency translation adjustment
    7       (2 )
 Comprehensive loss
  $ (24 )   $ (1,725 )
                 
 Basic and diluted loss per common share
  $ (  -   )   $ (0.12 )
 Weighted average common shares outstanding:
               
   Basic and diluted
    15,079       14,169  


See accompanying notes to condensed consolidated financial statements – unaudited

 
  3

 


Numerex Corp. and Subsidiaries
 
Condensed Consolidated Balance Sheets
 
(In thousands, except share information)
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 6,382     $ 5,306  
Accounts receivable, less allowance for doubtful accounts of $535 at March 31, 2010 and $548 at December 31, 2009
    6,159       6,341  
Inventory
    5,703       6,290  
Prepaid expenses and other current assets
    2,072       1,569  
TOTAL CURRENT ASSETS
    20,316       19,506  
                 
Property and equipment, net
    1,782       1,603  
Goodwill, net
    23,787       23,787  
Other intangibles, net
    5,031       4,985  
Software, net
    2,659       2,747  
Other assets - long term
    151       119  
TOTAL ASSETS
  $ 53,726     $ 52,747  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 6,833     $ 5,888  
Other current liabilities
    2,529       2,555  
Note payable
    -       493  
Deferred revenues
    1,599       1,261  
Obligations under capital leases
    24       24  
TOTAL CURRENT LIABILITIES
    10,985       10,221  
                 
LONG TERM LIABILITIES
               
Obligations under capital leases and other long-term liabilities
    297       335  
Deferred income taxes
    180       154  
TOTAL LONG TERM LIABILITIES
    477       489  
                 
COMMITMENTS AND CONTIGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock - no par value; authorized 3,000,000; none issued
    -       -  
Class A common stock - no par value, authorized 30,000,000; issued 16,311,310
               
shares at March 31, 2010 and 16,307,963 shares at December 31, 2009;
               
outstanding 15,070,501 shares at March 31, 2010 and 15,082,154 shares
               
at December 31, 2009
    57,444       57,430  
Class B common stock – no par value; authorized 5,000,000; none issued
    -       -  
Additional paid-in-capital
    5,845       5,582  
Treasury stock, at cost, 1,240,809 shares on March 31, 2010 and
               
1,225,809 shares on December 31, 2009
    (5,239 )     (5,213 )
Accumulated other comprehensive earnings
    7       -  
Retained deficit
    (15,793 )     (15,762 )
TOTAL SHAREHOLDERS' EQUITY
    42,264       42,037  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 53,726     $ 52,747  

See accompanying notes to condensed consolidated financial statements – unaudited

 

 





NUMEREX CORP. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
(In thousands)
 
   
For the three month period
 
   
ended March 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
  Net loss
  $ (31 )   $ (1,723 )
Adjustments to reconcile net loss to net cash
               
provided by operating activities:
               
   Depreciation
    221       225  
   Amortization
    652       567  
   Allowance for doubtful accounts
    57       155  
   Inventory reserves
    47       20  
   Non-cash interest expense
    12       121  
   Stock options compensation expense
    263       294  
   Stock issued in lieu of directors fees
    14       19  
   Deferred income taxes
    26       -  
   Changes in assets and liabilities which provided/(used) cash:
               
     Accounts and notes receivable
    98       1,153  
     Inventory
    540       2,180  
     Prepaid expenses & interest receivable
    (481 )     (294 )
     Other assets
    (35 )     -  
     Accounts payable
    945       (1,229 )
     Other current liabilities
    (62 )     (72 )
     Deferred revenue
    313       773  
     Income taxes
    32       (20 )
       Net cash provided by operating activities:
    2,611       2,169  
Cash flows from investing activities:
               
   Purchase of property and equipment
    (401 )     (515 )
   Purchase of intangible and other assets
    (610 )     (380 )
       Net cash used in investing activities
    (1,011 )     (895 )
Cash flows from financing activities:
               
   Purchase of treasury stock
    (26 )     -  
   Principal payments on capital lease obligations
    (5 )     (12 )
   Principal payments on notes payable and debt
    (500 )     (714 )
       Net cash used in financing activities:
    (531 )     (726 )
   Effect of exchange differences on cash
    7       (2 )
      Net increase in cash and cash equivalents
    1,076       546  
Cash and cash equivalents at beginning of quarter
    5,306       8,917  
Cash and cash equivalents at end of quarter
  $ 6,382     $ 9,463  
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
   Interest
    2       226  
   Income taxes
    32       12  
Disclosure of non-cash activities:
               
   Non-cash interest
    12       121  

See accompanying notes to condensed consolidated financial statements – unaudited

 

 


NUMEREX CORP. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
 
(in thousands)
 
                                           
                           
Accumulated
             
               
Additional
         
Other
             
   
Common
   
Stock
   
Paid-In
   
Treasury
   
Comprehensive
   
Retained
       
   
Shares
   
Amount
   
Capital
   
Stock
   
Income
   
Deficit
   
Total
 
Balance, December 31, 2009
    16,308     $ 57,430     $ 5,582     $ (5,213 )   $ -     $ (15,762 )   $ 42,037  
Issuance of shares under Directors Stock Plan
    3       14       -       -       -       -       14  
Purchase of treasury stock
    -       -       -       (26 )     -       -       (26 )
Share-based compensation
    -       -       263       -       -       -       263  
Translation adjustment
    -       -       -       -       7       -       7  
Net loss
    -       -       -       -       -       (31 )     (31 )
                                                         
Balance, March 31, 2010
    16,311     $ 57,444     $ 5,845     $ (5,239 )   $ 7     $ (15,793 )   $ 42,264  

See accompanying notes to condensed consolidated financial statements – unaudited


 

 

NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)


NOTE A – BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010.  For further information, reference is also made to Numerex Corp.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2009 and the consolidated financial statements contained therein.

Numerex Corp. (NASDAQ: NMRX) is the single source machine-to-machine (M2M) product and service provider to some of the world's largest organizations delivering the foundational components of device, network, and application, used by its customers in the development of their M2M solutions. Customers typically subscribe to Numerex network and application services that are delivered through its hosted platforms. The Company's offerings and expertise enable its customers to efficiently build reliable and secure solutions that are used to monitor and manage assets remotely whenever and wherever needed, while simplifying and speeding up development and deployment. Numerex DNA(TM) offerings include hardware Devices, Network services, and software Applications that are delivered through its Numerex FAST(TM) (Foundation Application Software Technology) platform. Numerex is the first M2M service provider in North America to carry the ISO 27001 information security certification. "Machines Trust Us(R)" represents the Company's focus on M2M data security, service reliability, and round-the-clock support of its customers' M2M solutions.

The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries.  Intercompany accounts and transactions have been eliminated in consolidation.
 
 
NOTE B – REVENUE RECOGNITION

The Company’s revenue is generated from three sources:

·  
the supply of hardware, under non recurring agreements,
·  
the provision of services,
·  
the provision of data transportation services, under recurring or multi-year contractually based agreements.

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

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

 

 


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

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

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

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

For additional information regarding our critical accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2009 and the condensed consolidated financial statements contained therein.

NOTE C - INVENTORY

The components of inventory, net of reserves, consist of the following:

   
March 31,
   
December 31,
 
(In thousands)
 
2010
   
2009
 
Raw materials
  $ 1,353     $ 1,503  
Work-in-progress
    13       14  
Finished goods
    4,823       5,212  
Less reserve for obsolescence
    (486 )     (439 )
Inventory, net
  $ 5,703     $ 6,290  


 

 


NOTE D – GOODWILL, SOFTWARE AND OTHER INTANGIBLE ASSETS

The following table presents the changes in goodwill (in thousands):

   
For the three months ended March 31, 2010
   
For the three months ended March 31, 2009
 
M2M Services
           
Balance at the beginning of the period
           
Goodwill
  $ 25,921     $ 25,905  
Accumulated impairment losses
    (3,060 )     (3,060 )
      22,861       22,845  
                 
Acquisition of Ublip, Inc.
    -       16  
Balance at the end of the period
               
Goodwill
    25,921       25,921  
Accumulated impairment losses
    (3,060 )     (3,060 )
      22,861       22,861  
                 
Wireline Services
               
Balance at the beginning of the period
               
Goodwill
    4,015       4,015  
Accumulated impairment losses
    (3,089 )     (3,089 )
      926       926  
Balance at the end of the period
               
Goodwill
    4,015       4,015  
Accumulated impairment losses
    (3,089 )     (3,089 )
      926       926  
                 
Total at end of period
  $ 23,787     $ 23,787  


      The Company did not incur costs to renew or extend the term of software and acquired intangible assets during the three months ending March 31, 2010. Software and intangible assets, which will continue to be amortized, consisted of the following (in thousands):

   
March 31, 2010
   
December 31, 2009
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Book Value
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Book Value
 
Purchased and developed software
  $ 8,606     $ (5,947 )   $ 2,659     $ 8,344     $ (5,597 )   $ 2,747  
Patents, trade and service marks
    13,479       (9,366 )     4,113       13,397       (9,106 )     4,291  
Intangible and other assets
    1,788       (870 )     918       1,523       (829 )     694  
Total Intangible and other assets
  $ 23,873     $ (16,183 )   $ 7,690     $ 23,264     $ (15,532 )   $ 7,732  

Amortization expense of intangible assets and software totaled $652,000 and $567,000 for the three months ended March 31, 2010 and March 31, 2009, respectively.
 

 

 

 
As of March 31, 2010, the estimated remaining amortization expense associated with the Company’s intangible assets and software for the remainder of 2010 and in each of the next four fiscal years is as follows (in thousands):

Remainder of 2010
 $2.0 million
2011
1.7 million
2012
1.4 million
2013
1.0 million
2014
0.6 million
Thereafter
1.0 million

 NOTE E – NOTES PAYABLE

On May 30, 2006, the Company completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a convertible term note in the principal amount of $5,000,000 (“Note A”) (ii) a non-convertible term note in the principal amount of $5,000,000 (“Note B”), and (iii) a warrant  to purchase up to 241,379 shares of our common stock.  Interest accrued on each of the notes at a rate of 9.75% annually.  Both notes had four year terms and were secured by substantially all of our assets.  The fair value of the warrant associated with Note A and Note B on May 30, 2006 was $846,000 and was calculated using the Black-Scholes fair value pricing model.  
  
As of December 31, 2009, Note A had been fully repaid.  In January 2010, the Company fully repaid Note B.
Hence, notes payable has a zero balance at March 31, 2010.

In consideration of the above private placements and other private placements for term notes, the Company issued to Laurus warrants to purchase our common stock, the terms of which are summarized as follows:
  
Number of Securities
   
Common Stock Exercise Price
 
Expiration Date
 
150,000
   
$
4.75
 
January 13, 2011
 
100,000
     
5.17
 
January 13, 2011
 
116,000
     
5.99
 
January 13, 2011
 
50,000
     
5.51
 
January 28, 2012
 
50,000
     
5.72
 
January 28, 2012
 
241,379
     
7.73
 
May 30, 2013
 
158,562
     
10.13
 
December 29, 2013


NOTE F – INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, "Income Taxes" which requires the use of the liability method of accounting for deferred income taxes.  Effective January 1, 2007, the Company implemented ASC 740 Subtopic 10 "Accounting for Uncertainty in Income Taxes”. ASC 740 Subtopic 10 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

As of March 31, 2010 the Company anticipates it will have $423,000 of unrecognized tax benefits inclusive of interest and penalties of $140,000, which is included in other current liabilities, all of which would impact the Company's effective tax rate if recognized. The Company anticipates recording $14,000 of unrecognized tax benefits for the year ending December 31, 2010, consisting entirely of interest on uncertain tax positions existing at January 1, 2010 for state and local income taxes. This increase in liability would impact the company's effective tax rate if recognized. The Company anticipates recording a decrease in liability for unrecognized tax benefits due to expiration of the typical scope of examination under certain state administrative practices for the year ending December 31, 2010 of $67,000, inclusive of interest and penalties of $21,000 and $8,000 respectively. The decrease in liability will impact the Company's effective tax rate.

 
10 

 

 
The Company recorded a tax provision of $22,000 for the three months ended March 31, 2010 as compared to a tax provision of $37,000 for the three months ended March 31, 2009 representing effective tax rates of  (252.91)% and (2.17)%, respectively. The difference between the Company’s effective tax rate and the 34% federal statutory rate in both the current quarter and the quarter ending March 31, 2009 resulted primarily from the Company's valuation allowance against all net deferred tax assets, the amortization of goodwill and state tax accruals related to unrecognized tax benefits.

The IRS has been conducting an examination of the Company’s 2007 tax year. Finalization of this examination occurred during the current quarter and resulted in additional expense of $7,994 for AMT including $731 of interest. Settlement of the examination resulted in a decrease to the NOL and a corresponding decrease to the valuation allowance of $290,524.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2006 through 2008 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.

 
NOTE G – SHARE-BASED COMPENSATION                                                                                     
 
 
 
For the three months ended March 31, 2010 and 2009, share-based compensation was $263,000 and $294,000, respectively.  Total unrecognized compensation related to unvested stock-based awards granted to employees and members of our board of directors at March 31, 2010, net of estimated forfeitures, is $1.2 million and is expected to be recognized over a weighted-average period of 1.3 years.

A summary of the Company's stock option activity and related information for the three months ended March 31, 2010:

         
Weighted
   
Weighted
   
Weighted Avg.
   
Aggregate
 
         
Average
   
Average Remaining
   
Grant Date
   
Intrinsic
 
   
Shares
   
Ex. Price
   
Contractual Life (Yrs)
   
Fair Value
   
Value
 
Outstanding, at 12/31/09
    1,838,096     $ 5.86       5.17     $ 3.74     $ 632,057  
Options granted
    117,500     $ 5.50             $ 3.42     $ -  
Options exercised
    -     $ -             $ -     $ -  
Options cancelled
    -     $ -             $ -     $ -  
Options expired
    -     $ -             $ -     $ -  
Outstanding, at 03/31/10
    1,955,596     $ 5.84       5.19     $ 3.72     $ 690,298  
Exercisable, at 03/31/10
    1,475,344     $ 5.85       4.09     $ 3.77     $ 626,616  


The following table summarizes information related to stock options outstanding at March 31, 2010:

     
Options outstanding
   
Options exercisable
 
Range of exercise prices
   
Number outstanding at March 31, 2010
   
Weighted average remaining contractual life (years)
   
Weighted average exercise price
   
Number exercisable at March 31, 2010
   
Weighted average exercise price
 
$ 1.00 –  4.00       454,664       4.31     $ 2.93       398,415     $ 2.86  
  4.01 –  8.00       1,041,432       5.90     $ 5.56       683,307     $ 5.60  
  8.01 –  12.94       459,500       4.44     $ 9.32       393,622     $ 9.31  
          1,955,596       5.19     $ 5.84       1,475,344     $ 5.85  


 
11 

 


    The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards on the date of grant using the option-pricing model is affected by the Company’s stock price, as well as management’s assumptions. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.  The key assumptions used in the valuation model during the three months ended March 31, 2010 are provided below:

Valuation Assumptions:
 
Volatility
72.45%
Expected term (years)
                     4.8
Risk free interest rate
2.74%
Dividend yield
0.00%


NOTE H – LOSS PER SHARE

Basic net loss per common share available to common shareholders is based on the weighted-average number of common shares outstanding excluding the dilutive impact of common stock equivalents.  For periods in which we have net earnings, we base diluted net earnings per share on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive employee stock options.
 
The numerator in calculating both basic and diluted earnings per common share for each period is the same as net loss. The denominator is based on the number of common shares as shown in the following table:


 
 

   
Three Months Ended
 
   
March 31,
     
March 31,
 
(In thousands, except per share data)
 
2010
   
2009
 
Common Shares:
           
Weighted average common shares outstanding
    15,079       14,169  
Dilutive effect of common stock equivalents
    -       -  
Total
    15,079       14,169  
                 
Net loss:
  $ (31 )   $ (1,723 )
                 
Net loss per common share:
               
Basic
  $ (  -  )   $ (0.12 )
Diluted
  $ (  -  )   $ (0.12 )

For the three months ended March 31, 2010 and 2009, the effect of our 2,821,537 and 1,985,472 stock options and warrants, respectively, was not included in the computation of diluted earnings per share as their effect was anti-dilutive.

In connection with the acquisition of the assets of Orbit One Communications, the Company issued an additional 1,250,596 shares of the Company’s common stock.  These shares are currently held in escrow for the benefit of Orbit One or Numerex, as their interest may appear in the future, and are not included in the basic and diluted share calculation.  The shares could be released depending on the outcome of the litigation described in Note K below.

 
NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of their short maturity.  


 
12 

 

NOTE J – LIQUIDITY

The Company believes that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over at least the next twelve months.  This belief could be affected by future operating earnings that are lower than expectations or a material adverse change in the Company’s operating business.


 NOTE K - RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, we adopted the new accounting guidance related to the accounting and disclosure for revenue recognition.  This guidance, which is effective for fiscal years beginning on or after June 15, 2010  with early adoption permitted, modifies the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable.  Adoption of this new guidance did not have a material impact on our consolidated financial statements as there was no change in the units of accounting, the methods used to allocate arrangement consideration to each unit of accounting, or the pattern and timing of revenue recognition.  Additionally, there was no change to reported revenues or net income as a result of this early adoption.

In January 2010, we adopted new accounting guidance issued by the FASB which amends the evaluation criteria to identify the primary beneficiary of a variable interest entity, or VIE, and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly changes the consolidation rules for VIEs including the consolidation of common structures, such as joint ventures, equity method investments and collaboration arrangements and is applicable to all new and existing VIEs. Adoption of this new accounting guidance did not impact our consolidated financial statements.
 
In January 2010, we adopted new accounting guidance issued by the FASB which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers.  Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements), which will be effective during the first quarter of  2011. The adoption of this new guidance did not and will not have a material impact on our consolidated financial statements.


NOTE L – LEGAL PROCEEDINGS
 
As previously reported, 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 $11 million in damages, plus interest, attorney’s fees and punitive damages.   Numerex has filed counterclaims against the plaintiffs for fraud, theft of trade secrets and confidential information and breach of the Asset Purchase Agreement; and against Messrs. Ronsen, Naden and Rosenzweig for breach of their fiduciary duties and duty of loyalty to Numerex, as well as breach of their respective Severance Agreements.  Numerex is claiming $5 million in damages, plus interest, attorney’s fees and punitive damages. On March 12, 2010, the Court entered a decision on the cross-motions for summary judgment.  The Court dismissed Orbit One and Mr. Ronsen’s claims of breach of the APA for lack of corporate support, breach of the implied covenant of good faith and fair dealing and unjust enrichment, as well as Messrs. Rosenzweig and Naden’s claim of tortious interference with prospective economic advantage.  The Court held that Mr. Ronsen’s claim that he had “good reason” to resign presented material issues of fact requiring a trial.  Similarly, the Court held that Numerex’s claims against Orbit One and its principals for breach of contract, breach of representations and warranties, fraud, breach of fiduciary duty, setoff, misappropriation, conversion and indemnification presented material issues of fact requiring a trial, while dismissing Numerex’s claim for violation of the Computer Fraud and Abuse Act.  No trial date has been set.  Numerex believes that the plaintiffs' claims are without merit and intends to defend against the allegations and to vigorously pursue its counterclaims. 


NOTE M – SUBSEQUENT EVENT

On May 4, 2010, we entered into a Loan and Security Agreement (the "Agreement") with Silicon Valley Bank.  The Agreement provides us with a revolving credit facility up to $5.0 million (the "Credit Facility").  The Credit Facility has a maturity date of May 2013 and inlcudes a sublimit of up to $1.5 million for letters of credit, cash management and foreign exchange services.  The interest rate applicable to amounts drawn from the Credit Facility is, at our option, equal to either (i) the Prime Rate (as defined in the Agreement) or (ii) the sum of the LIBOR Rate (as defined in the Agreement) plus a LIBOR rate margin of 2.75%.  The Credit Facility includes an annual fee of 0.375% of the average unsused portion and is secured by all of the Company's personal property, other than its intellectual property.


 
13 

 
NOTE N – SEGMENT INFORMATION

Segment Information

The Company has two reportable operating segments.  These segments are M2M Services and Wireline Services.  The M2M Services segment is made up of all our cellular and satellite machine-to-machine communications hardware and services.  The Wireline Services segment includes our networking hardware and services, video conferencing hardware, and our wire-line security detection hardware.

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

Summarized below are the Company’s unaudited revenues and operating earnings (loss) by reportable segment:


 
 

     Three Months Ended
   
March 31,
      March 31,  
(In thousands)
 
2010
   
2009
 
Net Sales:
           
M2M Services
  $ 12,362     $ 11,806  
Wireline Services
    660       856  
    $ 13,022     $ 12,662  
Gross Profit:
               
M2M Services
  $ 5,382     $ 4,781  
Wireline Services
    371       519  
    $ 5,753     $ 5,300  
Operating earnings (loss) before taxes
               
M2M Services
  $ 1,455     $ 1,000  
Wireline Services
    53       289  
Unallocated Corporate
    (1,463 )     (2,628 )
    $ 45     $ (1,339 )
Depreciation and Amortization
               
M2M Services
  $ 725     $ 635  
Wireline Services
    17       3  
Unallocated Corporate
    131       154  
    $ 873     $ 792  

Certain corporate expenses are allocated to the segments based on segment revenues.

Summarized below are the Company’s unaudited identifiable assets:


(In thousands)
 
March 31,
   
December 31
 
Identifiable assets:
 
2010
   
2009
 
  M2M Services
  $ 43,323     $ 43,739  
  Wireline Services
    2,532       2,181  
  Unallocated Corporate
    7,871       6,827  
    $ 53,726     $ 52,747  


 
14 

 

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

Forward-looking Statements

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, forward-looking statements with respect to our future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities in the wireless data business. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. We caution that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and we assume no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.
 
The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring service revenues; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new wireless services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets, and the inability to raise growth capital; the inability to attain revenue and earnings growth in our wireless data business; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; and extent and timing of technological changes. Numerex SEC reports identify additional factors that can affect forward-looking statements.
 
Overview
 
 
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company.  This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the accompanying notes to the unaudited financial statements in this Quarterly Report on Form 10-Q for the period ended March 31, 2010.

Net sales increased 2.8% to $13.0 million for the three-month period ended March 31, 2010, as compared to $12.7 million for the three-month period ended March 31, 2009, primarily as a result of an increase in our service sales.

While our overall business has grown, general economic uncertainty and poor conditions in the housing and auto markets may reduce our future growth. We believe that our pipeline of future sales opportunities remains solid.  We are increasingly proposing complete M2M solutions to our customers that incorporate Numerex DNATM – Device, Network & Application.  We have tightened our credit policies in response to the economic climate, in particular to our hardware-only sales, which may impact revenues for the balance of the year but has also reduced our bad debt expense.

We recognized an operating income of $45,000 for the three-month period ended March 31, 2010, as compared to an operating loss of $1.3 million for the three-month period ended March 31, 2009.

We recognized a net loss of $31,000 for the three-month period ended March 31, 2010, or $0.00 per basic and diluted share, as compared to a net loss of $1.7 million, or ($0.12) per basic and diluted share for the three-month period ended March 31, 2009.

 
15 

 
Critical Accounting Policies and Estimates

The MD&A is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America.  The preparation of our unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets, and liabilities during the periods reported.  Estimates are used when accounting for certain items such as deferred revenue, allowance for doubtful accounts, depreciation or amortization periods, income taxes and valuation of intangible assets.  We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances.  There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

Goodwill and Intangible Assets
 
 
Goodwill and certain intangible assets with indefinite lives are not amortized but are subject to an annual impairment test, and more frequently, if events or circumstances occur that would indicate a potential decline in our fair value.  An impairment charge will be recognized only when the implied fair value of a reporting unit’s goodwill is less than its carrying amount.  As of December 31, 2009, we identified four reporting units, 3 of which had associated goodwill.  The four reporting units were M2M Services (which excludes Orbit One LLC), Orbit One LLC (“Orbit One”), BNI and Wireline Services.  The three reporting units with associated goodwill were M2M Services, Orbit One, LLC and Wireline Services.  Due to the consolidation of our hardware management and network platforms in late 2008, we no longer maintained separate reporting for Airdesk and M2M Services, and thus combined the Airdesk reporting unit with M2M Services (excluding Airdesk LLC and Orbit One LLC) reporting unit beginning January 1, 2009.  For our 2009 annual impairment test, we used standard modeling techniques to estimate a fair market value for each of the three reporting units containing goodwill.  This included a combination of discounted cash flow models and, where available, the use of public company market comparables in similar industries.  We used historical information, our 2010 business plan and expected future development projects to prepare nine year financial projections used in the discounted cash flow analysis for each of the reporting units.

The growth rate assumptions used in our most recent annual impairment test were consistent with operating results for the three months ended March 31, 2010, and no events or circumstances occurred that would require us to perform an interim impairment test for these same periods.

A summary of the critical assumptions utilized for our impairment tests are outlined below. We believe this information provides relevant information to understand our goodwill impairment testing and evaluate our goodwill balances.

As of March 31, 2010, a breakdown of our goodwill balance by reporting unit is as follows:


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

During 2009, we did not record a goodwill impairment charge.  In determining whether an impairment charge was necessary, we considered economic conditions, which we expect to improve in 2010 and subsequently return to more normal levels, as compared to general economic conditions of 2009.

For our M2M Services (excluding Orbit One) reporting unit, we use a discounted cash flow model to determine the fair value and a 21% discount rate, as this reporting unit’s risks mirror that of the Company as a whole.  Our historical revenue growth rate averaged 17% over the past four years.   We use a more conservative revenue growth rate than our historical growth rate in this reporting unit, as we expect the market to mature.  We expect our margins to remain at the historical four year average of 42% for this reporting unit for the forecast period.  The growth rates used for SG&A and R&D are expected lower than that of our historical growth rates as we built out a new internal service sales team which would not occur in future periods.  Depreciation and amortization and capital expenditures are kept at historic run rates.  We used historical accounts receivable as a percentage of sales, inventory as a percentage of cost of sales and accounts payable as a percentage of cost of sales to determine the projected changes in working capital requirements.  

 
16 

 
    Based upon our goodwill impairment analysis conducted in the fourth quarter of 2009, a hypothetical reduction in the fair value of  our M2M Services (excluding Orbit One) reporting unit of  14.2%, would have resulted in the carrying value of the reporting unit exceeding its fair value and thus require a Step 2 analysis and possible impairment.  Over the forecast period, this means that our cumulative projected revenues would have to decrease by 4% (representing a proportional decrease in our average growth rate of 7% over the forecast period), or our cumulative projected profitability would have to decrease by 12%.  A 1.9% increase to the discount rate that we applied also would have resulted in the carrying value of the reporting unit exceeding its fair value.
 
    We believe that our cash flow analysis was appropriate as our projections took the present challenging economic environment into account and are consistent with our current operating results.

            In our Orbit One reporting unit, we used a discounted cash flow model to determine the fair value as we cannot determine any market comparables for this unit.  We used a 21% discounted rate as this reporting unit’s risks mirrored that of the Company as a whole.  A combination of existing contractual agreements and targeting of specific industries is used to determine the first year’s revenue growth rate, the following years’ revenue growth rates are based on expected industry growth rates.  Margins are projected to decline as a combination of expected pricing pressures in the market and lower margin hardware sales are expected to make up a larger portion of total revenues versus higher margin service sales.  SG&A expenses are forecasted to increase in the first year as the result of a build out of necessary sales support to meet projected revenue targets then the SG&A growth are expected to moderate for the balance of the forecast period.  Depreciation and amortization and capital expenditures are kept at historic run rates.  We used historical accounts receivable as a percentage of sales, inventory as a percentage of cost of sales and accounts payable as a percentage of cost of sales to determine the projected changes in working capital requirements.  
 
    Based upon our goodwill impairment analysis conducted in the fourth quarter of 2009, a hypothetical reduction in the fair value of  our Orbit One reporting unit of  9.4%, would have resulted in the carrying value of the reporting unit exceeding its fair value and thus require a Step 2 analysis and possible impairment.  Over the forecast period, this means that our cumulative projected revenues would have to decrease by 3% (representing a proportional decrease in our average growth rate of 4% over the forecast period), or our cumulative projected profitability would have to decrease by 8%.  A 1.0% increase to the discount rate that we applied also would have resulted in the carrying value of the reporting unit exceeding its fair value.
 
    In our BNI reporting unit, we used a combination of a discounted cash flow analysis and use of public company market comparables to determine the fair value.  Since this reporting unit’s revenues mostly result from government related contracts, the revenue can fluctuate significantly from year to year and over our forecast period.  Taking this into consideration, we used two cash flow models for this reporting with two possible revenue streams over the forecast period.   We then applied a weighting to each outcome to determine the unit’s fair value on a discounted cash flow basis.   We used the company’s overall 21% discount rate as we accounted for this units fluctuating revenue by weighting two separate cash flow models.  We gave the combination of these cash flow models greater weighting totaling 90% with the balance on the market comparables since we only had a limited number of market comparables.  In the first year of the forecast combined weighted revenues increase over the forecast period over 2009, but do not grow over 2008 revenue levels until 2011 and for the balance of the forecast period.   This growth is the result of the completion of new product development projects currently in process, and new contracts.  Weighted combined margins were projected to decline due to changes in the mix of hardware and service sales and expected pricing pressures.  SG&A expenses are forecast to decrease in the first year as the result of cost reductions planned and returning to historical growth rates.  Depreciation and amortization and capital expenditures are kept at historic run rates.  We used historical accounts receivable as a percentage of sales, our sales growth rate for inventory and accounts payable as a percentage of cost of sales to determine the projected changes in working capital requirements.  The combination of all these factors determined our cash flow growth rates.   For the market comparables, we used a combination of EBITDA and sales ratio’s to determine fair value.
 
    Based upon our goodwill impairment analysis conducted in the fourth quarter of 2009, a hypothetical reduction in the fair value of  our BNI reporting unit of  63%, would have resulted in the carrying value of the reporting unit exceeding its fair value and thus require a Step 2 analysis and possible impairment.  Over the forecast period, this means that our cumulative projected revenues would have to decrease by 44%, or our cumulative projected profitability would have to decrease by 44%.  A 46% increase to the discount rate that we applied also would have resulted in the carrying value of the reporting unit exceeding its fair value.
 
    Additionally, the sum of the fair value of all our reporting units was less than our market capital at December 31, 2009, indicating that our projections were reasonable and not aggressive.

 
17

 
 
Revenue Recognition

In January 2010, we adopted the new accounting guidance related to the accounting and disclosure for revenue recognition.  This guidance, which is effective for fiscal years beginning on or after June 15, 2010  with early adoption permitted, modifies the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable.  Adoption of this new guidance did not have a material impact on our consolidated financial statements.

We summarize our revenue recognition policies in Note B to the accompanying financial statements.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009:

Net Sales

Net sales for our reportable segments for the three-month periods ended March 31, 2010 and 2009 are summarized in the following table:

   
Three Months Ended
             
   
March 31,
             
(In thousands)
 
2010
   
2009
   
change
   
% change
 
Net Sales:
                       
M2M Services
                       
Hardware
  $ 4,743     $ 5,572     $ (829 )     -14.9 %
Services
    7,619       6,235       1,384       22.2 %
Sub-Total
    12,362       11,807       555       0.5 %
Wireline Services
                               
Hardware
    75       103       (28 )     -27.2 %
Services
    585       752       (167 )     -22.2 %
Sub-Total
    660       855       (195 )     -22.8 %
Total net sales
  $ 13,022     $ 12,662     $ 360       2.8 %


Net sales from M2M Services segment increased 0.5% to $12.4 million for the three-month period ended March 31, 2010, as compared to $11.8 million for the three-month period ended March 31, 2009.

Hardware net sales from M2M Services decreased 14.9% to $4.7 million for the three-month period ended March 31, 2010, as compared to $5.6 million for the three-month period ended March 31, 2009.  The decrease in M2M Services hardware sales is primarily due to a decreased demand for our wireless modules due to economic uncertainty.

Service net sales from M2M Services increased 22.2% to $7.6 million for the three-month period ended March 31, 2010, as compared to $6.2 million for the three-month period ended March 31, 2009.  The increase in M2M Services service net sales is primarily due to subscription increases which were generated by sales of our security hardware, sales of our wireless modules used in the door entry control solutions used by real estate agents and brokers, as well as by end users and value added resellers who utilize our network to provide customer solutions. Our wireless subscriptions at March 31, 2010 increased 26.7% to 977,000, as compared to 771,000 for the period ended March 31, 2009.  We continue to focus on increasing subscriptions to our network due to the recurring nature of the service revenues.

Net sales from Wireline Services decreased 22.8% to $660,000 for the three-month period ended March 31, 2010, as compared to $855,000 for the three-month period ended March 31, 2009.
 
 
18


 
Hardware sales from Wireline Services decreased 27.2% to $75,000 for the three-month period ended March 31, 2010, as compared to $103,000 for the three-month period ended March 31, 2009.    The decrease in Wireline Services hardware sales is primarily the result of a decrease in sales of our interactive videoconferencing hardware (PowerPlay), which is sold directly and indirectly to distance-learning customers. Capital spending by targeted distance learning customers is largely funded by government entities and, as a result, is difficult to predict and can fluctuate significantly from period to period.  The budget reductions effected by state and local government entities have contributed to reduced demand for PowerPlay.

Service net sales from Wireline Services service revenues decreased 22.2% to $585,000 for the three months ended March 31, 2010, as compared to $752,000 for the three-month period ended March 31, 2009.  Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.  The decrease for the comparable three month periods is due to a decrease in demand for these services.


Cost of Sales

Cost of sales for our reportable segments for the three-month period ended March 31, 2010 and 2009 are summarized in the following table:

   
Three Months Ended
             
   
March 31,
             
(In thousands)
 
2010
   
2009
   
change
   
% change
 
Cost of Sales:
                       
M2M Services
                       
Cost of hardware sales
  $ 3,962     $ 4,851     $ (889 )     -18.3 %
Cost of service sales
    3,018       2,174       844       38.8 %
Sub-Total
    6,980       7,025       (45 )     -0.6 %
Wireline Services
                               
Cost of hardware sales
    74       77       (3 )     -3.9 %
Cost of service sales
    215       260       (45 )     -17.3 %
Sub-Total
    289       337       (48 )     -14.2 %
Total cost of sales
  $ 7,269     $ 7,362     $ (93 )     -1.3 %

Cost of hardware sales from M2M Services segment decreased 18.3% to $4.0 million for the three-month period ended March 31, 2010, as compared to $4.9 million for the three-month period ended March 31, 2009.  The decrease in cost of hardware sales from M2M Services segment is primarily the result of decreased hardware sales.

Cost of service sales from M2M Services segment increased 38.8% to $3.0 million for the three-month period ended March 31, 2010, as compared to $2.2 million for the three-month period ended March 31, 2009.  The increase in cost of service sales from the M2M Services segment is primarily the result of an increase in the number of subscriptions to our wireless M2M network during the three months ending March 31, 2010.  Subscription increases were generated by sales of our security hardware as well as by end users and value added resellers who utilize our network to provide customer solutions.  We continue to focus on increasing subscriptions to our network due to the recurring nature of the service net sales.

Cost of hardware sales from Wireline Services segment decreased 3.9% to $74,000 for the three-month period ended March 31, 2010, as compared to $77,000 for the three-month period ended March 31, 2008.  The decrease in cost of hardware sales is in direct correlation to the decrease in hardware sales.

Cost of service sales for our Wireline Services segment decreased 17.3% to $215,000 for the three-month period ended March 31, 2010, as compared to $260,000 for the three-month period ended March 31, 2009. The decrease in cost of service sales from Wireline Services is in direct correlation to the decrease in services net sales for this segment.


 
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Three Months Ended
 
   
March 31,
 
(In thousands)
 
2010
   
2009
 
Total net sales
  $ 13,022     $ 12,662  
Total cost of sales
    7,269       7,362  
Gross Profit:
  $ 5,753     $ 5,300  
Gross Profit %:
    44.2 %     41.9 %

Gross profit, as a percentage of net sales, was 44.2% for the three-month period ended March 31, 2010, as compared to 41.9% for the three-month period ended March 31, 2009.  The increase in gross profit, as a percentage of net sales, is primarily the result of a change in the overall revenue mix. In the three month period ended March 31, 2010, service revenues were 63.0% of total revenues, as compared to 55.2% for the three month period ended March 31, 2009. This causes an overall margin improvement since service revenues have a higher gross margin than those achieved through the sale of hardware.


Operating, Interest and Other Expenses

Operating, interest and other expenses for the Company for the three-month period ended March 31, 2010 and 2009 are summarized in the following table:
   
Three Months Ended
       
   
March 31,
       
   
2010
   
2009
   
% change
 
Sales and marketing expenses
  $ 1,787       1,413       26.5 %
General and administrative expenses
    2,399       3,771       -36.4 %
Research and development expenses
    592       508       16.5 %
Bad debt expense
    57       155       -63.2 %
Depreciation and amortization
    873       792       10.2 %
Operating earnings (loss)
    45       (1,339 )     -103.4 %
   Interest expense, net
    (13 )     (347 )     -96.3 %
   Other expense
    (41 )     -    
nm
 
Loss before income taxes
    (9 )     (1,686 )     -99.5 %
   Income taxes
    (22 )     (37 )     -40.5 %
Net loss
  $ (31 )   $ (1,723 )     -98.2 %

Sales and marketing expenses increased 26.5% to $1.8 million for the three-month period ended March 31, 2010, as compared to $1.4 million for the three-month period ended March 31, 2009.  The increase is primarily the result of a $144,000 increase in employee related costs, a $140,000 increase in certain corporate allocation costs, a $57,000 increase in promotional costs and an increase or $31,000 in travel related expenses.

General and administrative expenses decreased 36.4% to $2.4 million for the three-month period ended March 31, 2010, as compared to $3.8 million for the three-month period ended March 31, 2009.  The decrease is primarily the result of a $888,000 decrease in legal fees, a $166,000 decrease in employee related costs, a $193,000 decrease in professional service fees and a $175,000 increase in certain corporate costs that are allocated.

Research and development expenses increased 16.5% to $592,000 for the three-month period ended March 31, 2010, as compared to $508,000 for the three-month period ended March 31, 2009.  The increase is primarily the result of a $63,000 increase in professional fees and a $20,000 increase in expenses related to new product testing and certifications.

Bad debt expense decreased 63.2% to $57,000 for the three-month period ended March 31, 2010, as compared to $155,000 for the three-month period ended March 31, 2009.   The decrease is primarily due to the tighter credit controls implemented in late 2008, particularly with regard to our hardware-only customer sales.

Depreciation and amortization expense increased 10.2% to $873,000 for the three-month period ended March 31, 2010, as compared to $792,000 for the three-month period ended March 31, 2009.

Interest expense, net decreased 96.3% to $13,000 for the three-month period ended March 31, 2010, as compared to $347,000 for the three-month period ended March 31, 2009.  The reduced expense is the result of a lower amount of outstanding principle on the Company’s debt.  As of March 31, 2010, all outstanding principle and interest had been repaid on the Company’s outstanding debt.

We recorded tax expense of $22,000 for the three-month period ended March 31, 2010, as compared to $37,000 for the three-month period ended March 31, 2009.



 
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Liquidity and Capital Resources

We had working capital of $9.3 million as of March 31, 2010 and December 31, 2009.  We had cash balances of $6.4 million and $5.3 million as of March 31, 2010 and December 31, 2009, respectively.
 
The following table shows information about our cash flows and liquidity positions during the three months ended March 31, 2010 and 2009. You should read this table and the discussion that follows in conjunction with our consolidated statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
 

   
Three Months Ended
   
March 31,
   
2010
   
2009
Net cash provided by operating activities
  $ 2,611     $ 2,169  
Net cash used in investing activities
    (1,011 )     (895 )
Net cash used in financing activities
    (531 )     (726 )
Effect of exchange rate differences on cash
    7       (2 )
Net change in cash and cash equivalents
  $ 1,076     $ (546 )
 

We provided cash from operating activities totaling $2.6 million for the three-month period ended March 31, 2010, as compared to $2.2 million for the three-month period ended March 31, 2009.  For the three months ended March 31, 2010, the increase in cash provided by operating activities was primarily due to the decrease net loss, the decrease in inventory and increase in accounts payable and deferred revenues, partially offset by the increase in prepaid expenses and other current assets.

We used cash in investing activities totaling $1.0 million for the three-month period ended March 31, 2010, as compared to $895,000 million for the three-month period ended March 31, 2009.   The increase in cash used in investing activities was primarily due to the purchase of intangible and other assets.

We used cash in financing activities totaling $531,000 for the three-month period ended March 31, 2010, as compared to $726,000 for the three-month period ended March 31, 2009.  The decrease is primarily due to the decreased debt principal payments for the three months ended March 31, 2010.

           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.

As of March 31, 2010, the Company’s notes payable balance was zero.  

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


Off-Balance Sheet Arrangements

As of March 31, 2010, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
 
 
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Item 3.                        Quantitative and Qualitative Disclosures about Market Risks.

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

Item 4.                        Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2010.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2010, our chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting
 
During the period ended March 31, 2010, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

PART II.  OTHER INFORMATION

Item 1.
Legal Proceedings.
 
As previously reported, 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 $11 million in damages, plus interest, attorney’s fees and punitive damages.   Numerex has filed counterclaims against the plaintiffs for fraud, theft of trade secrets and confidential information and breach of the Asset Purchase Agreement; and against Messrs. Ronsen, Naden and Rosenzweig for breach of their fiduciary duties and duty of loyalty to Numerex, as well as breach of their respective Severance Agreements.  Numerex is claiming $5 million in damages, plus interest, attorney’s fees and punitive damages. On March 12, 2010, the Court entered a decision on the cross-motions for summary judgment.  The Court dismissed Orbit One and Mr. Ronsen’s claims of breach of the APA for lack of corporate support, breach of the implied covenant of good faith and fair dealing and unjust enrichment, as well as Messrs. Rosenzweig and Naden’s claim of tortious interference with prospective economic advantage.  The Court held that Mr. Ronsen’s claim that he had “good reason” to resign presented material issues of fact requiring a trial.  Similarly, the Court held that Numerex’s claims against Orbit One and its principals for breach of contract, breach of representations and warranties, fraud, breach of fiduciary duty, setoff, misappropriation, conversion and indemnification presented material issues of fact requiring a trial, while dismissing Numerex’s claim for violation of the Computer Fraud and Abuse Act.  No trial date has been set.  Numerex believes that the plaintiffs' claims are without merit and intends to defend against the allegations and to vigorously pursue its counterclaims. 
 
 
Item 1A.     Risk Factors.

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this report.  At March 31, 2010, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.


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

The following table provides information regarding the Company’s purchases of its Class A Common Stock, no par value per share, during the quarter ended March 31, 2010:

Month
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
January 1 through 31, 2010
    -     $ -       -    
February 1 through 28, 2010
    15,000  (1)    $ 4.42       -    
March 1 through March 31, 2010
    -     $ -       -    
Total
    15,000               -    


(1)   These shares were not repurchased through a publicly announced plan or program.  The Company purchased 15,000 shares, at a purchase price of $4.42 per share, in a private transaction from Michael Lang, the Company’s Executive Vice-President, Business Development.

Item 3.
Defaults Upon Senior Securities.

None - not applicable.

Item 4.              Reserved.


Item 5.              Other Information.                                        

None - not applicable.

Item 6.              Exhibits

 
Exhibit 31.1
Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
 
Exhibit 31.2
Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a).
 
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Through its website at www.nmrx.com, the Company makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.

 
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SIGNATURES


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


 
NUMEREX CORP.
 
(Registrant)
   
 
May 17, 2010
 
/s/ ­­­­Stratton J. Nicolaides
 
Stratton J. Nicolaides
 
Chief Executive Officer and Chairman
   
   
 
May 17, 2010
 
/s/ ­­­­Alan B. Catherall
 
Alan B. Catherall
 
Chief Financial Officer
 
Executive Vice President and
 
Principle Financial and Accounting Officer


 
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Exhibit Index

 
Exhibit 31.1
Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).

 
Exhibit 31.2
Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a).
 
 
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



 
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