Numerex form 10Q for the period ended 09/30/2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended
Commission File Number
SEPTEMBER 30, 2005
0-22920


NUMEREX CORP.
(Exact name of registrant as specified in its charter)

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

1600 Parkwood Circle, Suite 200
Atlanta, Georgia 30339-2119
(Address of principal executive offices)

(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.
 
[X ] Yes [ ] No
 


Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 
[ ] Yes [ X] No
 

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

As of November 07, 2005 an aggregate of 14,033,877 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.


NUMEREX CORP. AND SUBSIDIARIES

INDEX


Page

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements 
  
   
Condensed Consolidated Balance Sheets (Unaudited) September 30, 2005 and
December 31, 2004 
  
4
   
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months ended September 30, 2005 and September 30, 2004
  
5
   
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months ended September 30, 2005 and September 30, 2004 
  
6
   
Condensed Consolidated Statement of Shareholders’ Equity
7
   
Notes to Condensed Consolidated Financial Statements - Unaudited
8
   
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 
  
16
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
23
   
Item 4. Controls and Procedures
23
   
Part II. OTHER INFORMATION
  
   
Item 1. Legal Proceedings
24
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
24
   
Item 3. Defaults Upon Senior Securities
24
   
Item 4. Submission of Matters to a Vote of Security Holders
24
   
Item 5. Other Information
24
   
Item 6. Exhibits
24
   
Signature Page
25
   
Certifications
27
   
Exhibits
  




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, 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 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: competition; the pace of technological change; customer acceptance of products and services; inability to manage rapid expansion; the availability of capital to fund further development of products and services to meet technological or competitive changes; unforeseen product defects or failures; the introduction, withdrawal, success and timing of business initiatives and strategies; interruption in flow of products from our suppliers; changes in customer distribution channels; changes in telecommunications regulations; ability to maintain and operate our Cellemetry® network efficiently; network failures; international regulations; loss of intellectual property protection; inability to maintain secrecy and confidentiality obligations; product certification requirements; indirect regulations on our network; changes in customer spending patterns; variations in quarterly operating results; the inability to attain revenue and earnings growth; changes in interest rates; inflation; 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.




PART I. FINANCIAL INFORMATION


Item 1.  Financial Statements.


4


 
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(In thousands)
  
 
  
SEPTEMBER 30,
  
DECEMBER 31,
  
 
  
2005
  
2004
  
 
  
(Unaudited)
  
 
  
ASSETS
  
 
  
 
  
CURRENT ASSETS
          
Cash and cash equivalents
  
$
4,200
  
$
1,684
  
Accounts receivable, less allowance for doubtful accounts of
          
$1,434 at September 30, 2005 and $1,084 at December 31, 2004:
    
5,143
   
3,986
 
Notes Receivable
    
41
   
41
 
Inventory
    
1,819
   
1,561
 
Prepaid expenses and other current assets
    
272
   
736
 
TOTAL CURRENT ASSETS
    
11,475
   
8,008
 
Property and Equipment, Net
    
731
   
840
 
Goodwill, Net
    
15,014
   
15,014
 
Other Intangibles, Net
    
6,406
   
7,213
 
Software, Net
    
929
   
598
 
Other Assets
    
676
   
939
 
TOTAL ASSETS
  
$
35,231
  
$
32,612
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
          
CURRENT LIABILITIES
          
Accounts payable
  
$
4,009
  
$
2,601
  
Other current liabilities
    
1,286
   
1,603
 
Note payable, current
   
500
   
1,637
 
Deferred revenues
    
1,219
   
906
 
Obligations under capital leases, current portion
    
66
   
33
 
TOTAL CURRENT LIABILITIES
    
7,080
   
6,780
 
LONG TERM LIABILITIES
          
Obligations under capital leases and other long term liabilities
    
82
   
2
 
Note Payable
    
922
   
2,178
 
TOTAL LONG TERM LIABILITIES
    
1,004
   
2,180
 
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 14,030,108 shares at September 30, 2005 and 13,203,660
          
shares at December 31, 2004
    
40,031
   
36,872
 
Additional paid-in-capital
    
982
   
809
 
Treasury stock, at cost, 2,391,400 shares on September 30, 2005 and
         
December 31, 2004
    
(10,197
)
  
(10,197
)
Class B common stock - no par value; authorized 5,000,000; none issued
    
-
   
-
 
Accumulated other comprehensive income
    
5
   
13
 
Retained earnings
    
(3,674
)
  
(3,845
)
TOTAL SHAREHOLDERS' EQUITY
    
27,147
   
23,652
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
35,231
  
$
32,612
  


See accompanying notes to condensed consolidated financial statements - unaudited


5


 
Condensed Consolidated Statement of Operations
  
(In thousands, except per share data)
  
(Unaudited)
  
 
  
 
  
 
  
 
  
 
  
 
  
Three Months Ended
  
Nine Months Ended
  
 
  
September 30,
  
September 30,
  
 
    
2005
    
2004
    
2005
    
2004
  
Net sales:
                 
Product
 
$
4,021
  
$
2,852
  
$
10,168
  
$
7,015
  
Service
   
3,988
   
3,320
   
11,381
   
9,678
 
Total net sales
   
8,009
   
6,172
   
21,549
   
16,693
 
 
                  
Cost of product sales (excluding depreciation)
   
2,991
   
2,043
   
7,681
   
5,531
 
Cost of services (excluding depreciation and amortization)
   
1,533
   
1,395
   
4,335
   
3,593
 
Depreciation and amortization
   
41
   
87
   
132
   
297
 
Gross Profit
   
3,444
   
2,647
   
9,401
   
7,272
 
 
    
43.0
%
  
42.9
%
  
43.6
%
  
43.6
%
Selling, general, and administrative expenses
   
2,215
   
2,056
   
6,468
   
6,519
 
Research and development expenses
   
278
   
205
   
832
   
685
 
Bad debt expense
   
83
   
131
   
242
   
415
 
Depreciation and amortization
   
386
   
411
   
1,291
   
1,247
 
Operating earnings (loss)
   
482
   
(156
)
  
568
   
(1,594
)
Interest income and (expense), net
   
(59
)
  
(165
)
  
(338
)
  
(426
)
Other income and (expense), net
   
(3
)
  
(2
)
  
(7
)
  
(31
)
Gain on sale of business
   
-
   
-
   
-
   
250
 
Earnings (loss) before income taxes
   
420
   
(323
)
  
223
   
(1,801
)
 
                  
Provision for income taxes
   
9
   
18
   
52
   
18
 
Net earnings (loss)
 
$
411
  
$
(341
)
$
171
  
$
(1,819
)
Foreign currency translation adjustment
   
(1
)
  
(13
)
  
(8
)
  
(84
)
Comprehensive earnings (loss)
 
$
410
  
$
(354
)
$
163
  
$
(1,903
)
 
                  
Basic earnings (loss) per common share
 
$
0.04
  
$
(0.03
)
$
0.02
  
$
(0.17
)
Diluted earnings (loss) per common share
 
$
0.03
  
$
(0.03
)
$
0.01
  
$
(0.17
)
Number of shares used in per share calculation
                 
Basic
   
11,528
   
10,794
   
11,092
   
10,798
 
Diluted
   
12,023
   
10,794
   
11,456
   
10,798
 

See accompanying notes to condensed consolidated financial statements - unaudited

6

 
 
Unaudited
  
(In thousands)
  
 
      
 
  
 
  
For the nine month period
  
 
  
ended September 30,
  
 
  
2005
  
2004
  
Cash flows from operating activities:
          
Net earnings (loss)
  
$
171
  
$
(1,819
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
          
Depreciation
    
428
   
517
 
Amortization
    
987
   
1,040
 
Allowance for doubtful accounts
    
242
   
297
 
Non-cash interest expense
    
104
   
-
 
Gain on sale of subsidiary
    
-
   
(250
)
Changes in assets and liabilities which provided
          
(used) cash:
          
Accounts and notes receivable
    
(1,399
)
  
(1,520
)
Inventory
    
(268
)
  
1,383
 
Prepaid expenses & interest receivable
    
456
   
(14
)
Other assets
    
182
   
-
 
Accounts payable
    
1,409
   
920
 
Other accrued liabilities
    
(317
)
  
(25
)
Deferred revenue
    
312
   
-
 
Income taxes
    
-
   
-
 
Net cash provided by operating activities:
    
2,317
    
529
 
Cash flows from investing activities:
          
Purchase of property and equipment
    
(138
)
  
(152
)
Purchase of intangible and other assets
    
(502
)
  
(630
)
Proceeds the from sale of a business
    
-
   
200
 
Increase in deposits and long term receivables
    
-
   
89
 
Net cash used in investing activities
    
(640
)
  
(493
)
Cash flows from financing activities:
          
Proceeds from exercise of common stock options
    
-
   
16
 
Proceeds from note payable and debt
    
1,500
   
4,283
 
Principal payments on capital lease obligations
    
(70
)
  
(208
)
Principal payments on notes payable and debt
    
(582
)
  
(3,365
)
Net cash provided by financing activities:
    
848
   
726
 
Effect of exchange differences on cash
    
(8
)
  
(94
)
Net increase in cash and cash equivalents
    
2,516
   
668
 
Cash and cash equivalents at beginning of period
    
1,684
   
734
 
Cash and cash equivalents at end of period
  
$
4,200
  
$
1,402
  
 
          
Supplemental Disclosures of Cash Flow Information
          
Cash payments for:
          
Interest
    
248
   
158
 
Income taxes
    
52
   
-
 
Disclosure of non-cash activities:
          
Capital leases
    
182
   
27
 
Non-cash interest
    
104
   
-
 
Non-cash financing
    
3,329
   
-
 

See accompanying notes to condensed consolidated financial statements - unaudited



NUMEREX CORP. AND SUBSIDIARIES
  
 
(Unaudited)
  
(In thousands)
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Accumulated
  
 
  
 
  
   
 
  
 
  
Additional
  
 
  
Other
  
 
  
 
  
 
  
Common
  
Stock
  
Paid-In
  
Treasury
  
Comprehensive
  
Retained
  
 
  
 
  
Shares
  
Amount
  
Capital
  
Stock
  
Earnings
  
Earnings
  
Total
  
 
                              
Balance, December 31, 2004
    
13,205
 
$
36,872
  
$
809
  
$
(10,197
)
$
13
  
$
(3,845
)
$
23,652
  
Issuance of shares under Directors
                              
Stock Plan
    
3
   
9
   
-
   
-
   
-
   
-
   
9
 
Issuance of shares in connection with
                                     
employee stock purchase plan
    
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Issuance of common stock for
                              
debt repayment
    
822
   
3,151
   
-
   
-
   
-
   
-
   
3,150
 
Translation adjustment
    
-
   
-
   
-
   
-
   
(8
)
  
-
   
(8
)
Warrants
    
-
   
-
   
173
   
-
   
-
   
-
   
173
 
Net Income
    
-
   
-
   
-
   
-
   
-
   
171
   
171
 
 
                              
Balance, September 30, 2005
    
14,030
 
$
40,032
  
$
982
  
$
(10,197
)
$
5
  
$
(3,674
)
$
27,147
  


See accompanying notes to condensed consolidated financial statements - unaudited

7


NUMEREX, CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)


NOTE A - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying condensed consolidated financial statements are unaudited. Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), we have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. You should review these consolidated financial statements in conjunction with the consolidated financial statements and related notes contained in our Annual Report Form 10-K for fiscal year ended December 31, 2004, as filed with the SEC. The financial information that we present in the condensed consolidated financial statements reflects all normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of the period indicated. This information is not necessarily indicative of the results for the full year or for any other future period.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:

1. Nature of Business

Numerex Corp. is a technology company comprised of operating subsidiaries that develop and market a wide range of communications products and services. Our primary focus is wireless data communications utilizing proprietary network technologies. We primarily offer products and services in wireless data communications through Cellemetry, and digital multimedia networking through PowerPlay™ and IPContact™. Uplink Security, Inc., a wholly owned subsidiary of Cellemetry, provides cost effective, alarm security products, services, and related technical support utilizing Cellemetry® wireless data communications technology. In February 2003 we introduced MobileGuardian®, a Web-based vehicle location and recovery solution that combines the accuracy of GPS (Global Positioning System) and Cellemetry wireless data communications technology. We also introduced VendView®, a product and service offering that is a Web-based vending machine monitoring solution that also uses the Cellemetry wireless data communications technology. These services enable customers around the globe to monitor and move information for a variety of applications from home and business security to distance learning. In addition, we offer wireline alarm security products and services, as well as telecommunications network operational support systems.
 
2. Principles of Consolidation

The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
3. Cash and Cash Equivalents

For purposes of financial reporting, we consider all highly liquid investments purchased with original maturities of less than three months to be cash equivalents.

4. Intangible Assets

Intangible assets consist of developed software, patents and acquired intellectual property, and goodwill. These assets, except for goodwill, are amortized over their expected useful lives. Developed software is amortized using the straight-line method over 3 to 5 years. Patents and acquired intellectual property are amortized using the straight-line method over 7 to 16 years. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142), Goodwill and Other Intangibles. Under SFAS No. 142, goodwill is no longer amortized. Rather, SFAS No. 142 requires that intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142 and at least annually thereafter.

8

Intangible assets with determinable useful lives are amortized on a straight-line basis over their estimated useful lives. We capitalize software development costs when project technological feasibility is established and conclude capitalization when the product is ready for release. Software development costs incurred prior to the establishments of technological feasibility are expensed as incurred. The following table provides a summary of the components of our intangible assets.


(In thousands)
  
September 30,
  
December 31,
  
 
  
2005
  
2004
  
 
  
 
  
 
  
Goodwill
  
$
17,693
  
$
17,693
  
Purchased and developed software
    
3,017
    
2,664
  
Patents, trade and service marks
    
11,445
    
11,449
  
Intangible and other assets
    
514
    
361
  
Total intangible assets
    
32,669
    
32,167
  
Accumulated amortization
    
(10,320
)
  
(9,342
)
Intangible assets, net
  
$
22,349
  
$
22,825
  


 
4. Income Taxes  

We account for income taxes using the asset and liability method in accordance with SFAS 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of ²temporary differences² by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is provided for deferred tax assets when it is more likely than not that the assets will not be realized.

5. Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market.

The components of inventory, net of reserves are as follows:

 
  
 
  
 
  
 
  
September 30,
  
December 31,
  
(In thousands)
  
2005
  
2004
  
Raw materials
  
$
407
  
$
830
  
Work-in-progress
    
5
   
13
 
Finished goods
    
1,407
   
718
 
Inventory, net
  
$
1,819
  
$
1,561
  



9


7. Note Payable

On January 28, 2005, the Company completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a Convertible Term Note in the original principal amount of $1,500,000 (the “Second Company Note”), and (ii) a warrant to purchase up to 100,000 shares of our common stock (the “Second Warrant”). The Second Company Note bears interest at the rate of eight percent (8%) per annum, matures on January 28, 2008 and is secured by substantially all of our assets and our U.S. subsidiaries (except DCX Systems Australia Pty Limited). Each of our U.S. subsidiaries also has executed and delivered a guaranty to Laurus. The Second Company Note requires that interest and principal thereunder is to be paid monthly, and provides that such monthly principal and interest payments may be paid by us either in cash or in common stock, subject to certain limitations. If the monthly payment then due is paid by us using common stock, then the number of shares to be issued by us to Laurus will be determined based upon a fixed conversion price of $5.31 per share. Otherwise, if the monthly payment then due is paid by us using cash, then we are required to pay Laurus an amount equal to one hundred two percent (102%) of the amount then due and payable. The Second Company Note also provides that Laurus may convert all or any portion of the outstanding principal amount of the Second Company Note into shares of common stock, subject to certain limitations. The Second Warrant is exercisable by Laurus until January 28, 2012, and has two separate pricing tranches. The first pricing tranche is exercisable for up to 50,000 shares of common stock at a price of $5.51 per share. The second pricing tranche is exercisable for up to 50,000 shares of common stock at a price of $5.72 per share. We are required to register the common stock underlying the Second Company Warrant for resale by Laurus, and have such registration declared effective, by August 28, 2005. Such registration statement was declared effective June 17, 2005. The Second Company Note also contains a Beneficial Conversion Feature with a contingent conversion option. The value of the Beneficial Conversion Feature will be measured as of the commitment date and will be recognized ratably over the remaining period of the Note once the contingencies have been met.

On January 13, 2004, we completed our first private placement to Laurus of (i) a Convertible Term Note in the aggregate principal amount of $4,500,000 (the “First Company Note”), and (ii) a warrant to purchase up to 300,000 shares of the Company’s common stock (the “First Warrant”). The First Warrant is exercisable by Laurus until January 13, 2011, and has three separate tranches. The first tranche is exercisable for up to 150,000 shares of common stock at a price of $4.75 per share. The second tranche is exercisable for up to 100,000 shares of common stock at a price of $5.17 per share. The third tranche is exercisable for up to 50,000 shares of common stock at a price of $5.99 per share. We also agreed to register the common stock underlying the First Company Warrant for resale by Laurus, and have such registration declared effective, by August 13, 2004. Such registration statement was declared effective on November 22, 2004. Thus, under the terms of the First Company Warrant, we were required to increase the number of shares of common stock underlying the First Company Warrant by 15,000 additional shares per month (at an exercise price of $5.99 per share) during the period from August 13, 2004 through November 22, 2004. As a result, an additional 66,000 warrants were issued and are covered by the First Warrant Agreement. 

On July 6, 2005 we voluntarily converted $2,280,000 of the outstanding debt associated with the First Company Note into 500,000 shares of common stock. On August 1, 2005 we converted the $953,040 remaining outstanding portion of the debt associated with the First Company Note into 209,000 shares of common stock. As a result of these transactions, the only outstanding debt of the Company, excluding capital leases, is the Second Company Note of $1,500,000. However, the Warrants associated with the First Company Note remain outstanding.
 
Laurus is an "accredited investor" as defined in Rule 501(d) of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The Company issued the securities to Laurus in reliance on the exemption from registration provided by Section 4(2) under the Securities Act.

As a result of the July 6, 2005 and the August 1, 2005 transactions with the Laurus Master Fund, stockholders have experienced dilution and may experience future dilution based on transactions with the Laurus Master Fund, or the equity securities may have rights, preferences or privileges senior to those of the common stockholders. In addition, as a result of issuing debt, those securities have rights, preferences and privileges senior to those of the common stock holders. If we are unable to repay the Company Notes, Laurus has the right to demand full payment of all outstanding principal and interest due under the Company Notes and invoke its right to the collateral under the related security agreements.

10


8. Shareholders’ Equity

Shareholders’ Equity increased by $3.5 million for the nine-month period ending September 30, 2005. The increase in Shareholders’ Equity was attributable to the conversion of common shares for payments with regard to the First Company Note payable in the amount of $3.2 million. The increase was also attributable to an increase of $171,000 in retained earnings and an increase of $130,000 in additional paid in capital mostly due to the valuation of warrants issued with the second Company Note.


9. Net Earnings Per Common Share

Basic net earnings 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 common share available to common shareholders on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive common stock equivalents.

The numerator in calculating both basic and diluted net earnings per common share for each period is net earnings. The denominator is based on the following number of common shares:

 
  
Three Months Ended
  
Nine Months Ended
  
 
  
September 30,
  
September 30,
  
(In thousands, except per share data)
  
2005
  
2004
  
2005
  
2004
  
Common Shares:
                  
Weighted average common shares outstanding
    
11,528
   
10,794
   
11,092
   
10,798
 
Dilutive effect of common stock equivalents
    
495
   
-
   
364
   
-
 
Total
    
12,023
   
10,794
   
11,456
   
10,798
 
Net earnings (loss):
  
$
411
  
$
(341
)
$
171
  
$
(1,819
)
Net earnings (loss) per common share:
                  
Basic
  
$
0.04
  
$
(0.03
)
$
0.02
  
$
(0.17
)
Diluted
  
$
0.03
  
$
(0.03
)
$
0.01
  
$
(0.17
)

 
For the three months ended September 30, 2005, we excluded options to purchase 848,486 shares of common stock and common stock equivalents from the computation of diluted earnings per share. For the nine months ended September 30, 2005, we excluded options to purchase 998,486 shares of common stock and common stock equivalents from the computation of diluted earnings per share. We excluded these share amounts because the exercise prices of those shares were greater than the average market price of the common stock during the applicable period.

Because of the antidulitive effect of the net loss, potential common shares resulting from options, convertible debt and warrants were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2004. For the three months ended September 30, 2004, options to purchase 167,848 shares of common stock and common stock equivalents, and for the nine months ended options to purchase 181,403 shares of common stock and common stock equivalents would have been taken into account in calculating diluted earnings per share were it not for the antidilutive effect of the net loss.

As of September 30, 2005, we had a total of 1,334,515 options outstanding and as of September 30, 2004, we had a total of 1,567,015 options outstanding.


11

10.  Stock-Based Compensation

We account for employee options or share awards under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with pro forma disclosures of net earnings and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 "Accounting for Stock Based Compensation" had been applied. SFAS No. 123 establishes a fair value based method of accounting for stock based employee compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under SFAS No. 123, our net earnings (loss) and net earnings (loss) per share would have changed as reflected in the following pro forma amounts.   

 
  
Three Months Ended
  
Nine Months Ended
  
 
  
September 30,
  
September 30,
  
(In thousands, except per share data)
  
2005
  
2004
  
2005
  
2004
  
 
  
 
  
 
  
 
  
 
  
Net earnings (loss) - as reported
  
$
411
  
$
(341
)
$
171
  
$
(1,819
)
Add: stock-based compensation expense currently reflected in earnings (loss)
    
-
    
-
   
-
   
-
 
Less: total stock-based compensation expense determined under fair value based method for all awards
    
69
    
389
   
213
   
1,169
 
Pro forma net earnings (loss)
  
$
342
  
$
(730
)
$
(42
)
$
(2,988
)
Basic earnings (loss) per share:
                  
As reported
  
$
0.04
  
$
(0.03
)
$
0.02
  
$
(0.17
)
Pro forma
  
$
0.03
  
$
(0.07
)
$
0.00
  
$
(0.28
)
Diluted earnings (loss) per share:
                  
As reported
  
$
0.03
  
$
(0.03
)
$
0.01
  
$
(0.17
)
Pro forma
  
$
0.03
  
$
(0.07
)
$
0.00
  
$
(0.28
)



11.  Revenue Recognition

Our revenue is generated from three sources:
·  the supply of product, under non recurring agreements,
·  the provision of services, under non recurring agreements, and,
·  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 product or service has been delivered, fees and prices are fixed and determinable, collectibility is probable and when all other significant obligations have been fulfilled.

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

12

Our arrangements do not generally include acceptance clauses. However, arrangements involving multiple element service agreements include certain milestones and levels of certification, acceptance occurs upon our certification of our completion of each of the various elements.

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


12. Recent Accounting Pronouncements

 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments at the time of issuance. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The effect of the standard will be to require entities to measure the cost of employee services received in exchange for stock awards based on its grant-date fair value and to recognize the cost over the period the employee is required to provide services for the award.
 
 
We expect to adopt the provisions of SFAS No. 123(R) effective January 1, 2006, as required, and plan to use the modified prospective transition method for our existing stock-based compensation plans. Under the modified prospective transition method, the fair value-based accounting method will be used for all employee awards granted, modified, or settled after the adoption date. Compensation cost related to the nonvested portion of awards outstanding as of that date will be based on the grant-date fair value of those awards as calculated under the original provisions of SFAS No. 123.
 
 
In November 2004, the FASB released revised SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43” (“SFAS No. 151”). The new standard requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The requirements of the standard will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Although we are still evaluating the impact that the adoption of SFAS No. 151 will have on our Consolidated Financial Statements, we currently do not believe it will have a material impact as we have not historically had any abnormally low levels of production, unplanned downtime, labor or material shortages.
 
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United Sates of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

13.   Savings and Investment Plan

We sponsor a 401k savings and investment plan that covers all of the employees of Numerex Corp. and its subsidiaries who elect to participate. Employees are eligible for participation on the enrollment date following six months of service. The Company contributes an amount equal to 50% of the portion of the each participant’s elective deferral contribution that does not exceed 6% of such participant’s total compensation for each payroll period in which an elective deferral is made. The Company’s contribution is made in cash on a semi-monthly basis. The matching contributions made by the Company vest over a three-year period at a rate of 33% per year. Approximately $25,200 and $18,000 were expensed for the quarters ended September 30, 2005 and 2004, respectively. Approximately $72,900 and $53,000 were expensed for the nine month period ended September 30, 2005 and 2004, respectively.

14.  Reclassification

Certain prior year amounts have been reclassified to conform to the current period presentation.

13


NOTE C - INVESTMENTS AND DIVESTITURES

On September 15, 2003, we sold the Data1Source mobile messaging service through an entity Data1Source LLC. The selling price was approximately $3,400,000 with $3,200,000 paid in cash at closing and $200,000 due after the sale, if certain criteria were met. In March 2004, we received the contingent payment on the sale of Data1Source LLC because the criteria specified in the agreement had been met. Accordingly, we recognized an additional $250,000 gain on the sale during the nine months ended September 30, 2004.


NOTE D - GEOGRAPHIC INFORMATION

Segment Information

Numerex is a technology company comprised of operating subsidiaries that develop and market a wide range of communications products and services. Our primary focus is wireless data communications utilizing proprietary network technologies. The four reporting segments are Wireless Data Communications, which is made up of all of our wireless machine-to-machine communications products and services, Digital Multimedia and Networking, which includes our networking products and services and video conferencing products, Wireline, which are is our wire-line security detection products and services, and unallocated corporate expenses.

Wireless Data Segment

The Wireless Data segment is a solutions provider of wireless machine-to machine (M2M) communications, delivering comprehensive wireless solutions over the company’s proprietary wireless data network, CellemetryXG™. The Company’s wireless data network is dedicated to the delivery of M2M communications throughout the United States, Canada, Mexico, the Caribbean and parts of Latin America. M2M is defined as electronic data communications between people, devices, and systems that turnsturn data into information that companies can act upon.

The Wireless Data segment develops, operates, markets, and sells products and services CellemetryXG™, Cellemetry®, Uplink™, MobileGuardian®, and VendView® brands, as well as distribution through Value Added Resellers (VARs) who have integrated the CellemetryXG Network and components into their own offerings.

Digital Multimedia and Networking Segment

The Digital Multimedia and Networking segment systems permit network operators to provide a wide range of video and data services, including Internet access, high-speed data transfer, and interactive video conferencing and voice service. The use of fiber optics in the broadband transmission network provides improved signal quality for long-distance transmission, increased bandwidth, immunity to interfering signals, and significant cost savings and reliability over coaxial cable-based network technologies. The Company markets its digital multimedia products and services through a combination of system integrators and VARs.

In addition, Digital Multimedia and Networking segment provides products under the Digilog™ brand that assist both wireline and wireless carriers in the engineering, installation, and servicing of this new telecommunications control network. These telecommunications network operational support systems and services include system integration (rack and stack) and installation, Test Access, and Interconnecting Devices.

Wireline Data Communications Segment

The Wireline Data Communications segment’s 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. Derived Channel operates over a regular voice telephone line with no interference, whether or not the telephone is in use. The Company provides this service through its DCX Systems and DCX Australia subsidiaries.

Unallocated Corporate Expenses

The Corporate expenses that do not get allocated to the business segments are corporate depreciation and amortization expense as well as interest income and expense.

14


Below is segment information for our reportable segments.


Three Months Ended September 30, 2005
                  
   
Wireless Data Communications
  
Digital Multimedia & Networking
  
Wireline
  
Total
  
                   
Revenues from external customers
  
$
5,617
  
$
2,204
  
$
188
  
$
8,009
  
Interest income
    
-
   
-
   
-
   
0
 
Interest expense
    
2
   
2
   
1
   
5
 
Depreciation and amortization
    
289
   
66
   
30
   
385
 
Income tax expense
    
9
   
-
   
-
   
9
 
Segment earnings/(loss) before tax
    
265
   
265
   
(20
)
  
510
 


Three Months Ended September 30, 2004
                  
   
Wireless Data Communications
  
Digital Multimedia & Networking
  
Wireline
  
Total
  
                   
Revenues from external customers
  
$
3,636
  
$
2,350
  
$
186
  
$
6,172
  
Interest income
                      
0
 
Interest expense
    
1
   
10
   
-
   
11
 
Depreciation and amortization
    
326
   
127
   
30
   
483
 
Income tax expense
    
3
   
1
   
5
   
9
 
Segment earnings/(loss) before tax
    
(328
)
  
333
   
(31
)
  
(26
)


Nine Months Ended September 30, 2005
                  
   
Wireless Data Communications
  
Digital Multimedia & Networking
  
Wireline
  
Total
  
                   
Revenues from external customers
  
$
15,479
  
$
5,186
  
$
884
  
$
21,549
  
Interest income
    
2
   
0
   
1
   
3
 
Interest expense
    
4
   
-
   
1
   
5
 
Depreciation and amortization
    
921
   
264
   
91
   
1,276
 
Income tax expense
    
44
   
1
   
7
   
52
 
Segment earnings/(loss) before tax
    
525
   
55
   
62
   
642
 
 
 

Nine Months Ended September 30, 2004
                  
   
Wireless Data Communications
  
Digital Multimedia & Networking
  
Wireline
  
Total
  
                   
Revenues from external customers
  
$
10,498
  
$
5,351
  
$
844
  
$
16,693
  
Interest income
                      
0
 
Interest expense
    
1
   
22
   
3
   
26
 
Depreciation and amortization
    
648
   
265
   
59
   
972
 
Income tax expense
    
3
   
3
   
5
   
11
 
Segment earnings/(loss) before tax
    
(1,212
)
  
164
   
92
   
(956
)
 
 
Corporate expenses are allocated to the segments based on segment revenues.

15

Reconciliation of segment items to consolidated amounts:

 (in thousands)
 

Net earnings (loss)
  
Three Months Ended September 30,
  
Three Months Ended September 30, 
  
   
2005
  
2004
  
           
Total income (loss) for reportable segments
  
$
510
  
$
(26
)
Unallocated corporate expenses
    
(99
)
  
(315
)
Net earnings (loss)
  
$
411
  
$
(341
)


Net earnings (loss)
  
Nine Months Ended September 30,
  
Nine Months Ended September 30, 
  
   
2005
  
2004
  
           
Total loss for reportable segments
  
$
642
  
$
(956
)
Unallocated corporate expenses
    
(471
)
  
(863
)
Net earnings (loss)
  
$
171
  
$
(1,819
)



Assets
  
September 30,
  
December 31,
  
   
2005
  
2004
  
           
Total assets for Wireless Data Communications
  
$
22,828
  
$
21,152
  
Total assets for Digital Multimedia & Networking
    
6,836
   
6,815
 
Total assets for Wireline
    
923
   
1,153
 
Other unallocated assets
    
4,644
   
3,492
 
Consolidated total assets
  
$
35,231
  
$
32,612
  

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

Overview
 
Numerex Corp. (“we” or the “Company”) is a technology company comprised of operating subsidiaries that develop and market a wide range of communications products and services. Our primary focus is wireless data communications utilizing proprietary network technologies.

Revenues for the third quarter of 2005 increased 29.8% compared to the third quarter of 2004 and revenues increased 29.1% for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. We also continued to see growth in our wireless data products and services. Wireless data revenues increased over 54.5% compared to the third quarter last year and increased 47.4% for the nine months ended September 30, 2005 as compared to the prior year nine months.

Numerex provided cash from operations of $2.3 million for the nine months ended September 30, 2005 as a result of both increased operating earnings as well as continued working capital efficiencies. Our cash balances at September 30, 2005 were $4.2 million compared to $1.7 million at December 31, 2004. This increase was partly due to the second round of financing that we closed with Laurus as well as the cash provided from operations.

Our goals continue to include improving operating results and to further improve our liquidity position.

Critical Accounting Policies

For additional information regarding the Company’s critical accounting policies see Note B to the Condensed Consolidated Financial Statements included in Part 1, Item 1 above. Also, reference is made to the Company’s Annual Report on Form 10-K as amended for the year ended December 31, 2004 and the consolidated financial statements contained therein.

16

General

The following tables set forth, for the periods indicated, the amounts and percentages of net sales represented by selected items in the Company’s Condensed Consolidated Statements of Operations.


 
(in thousands, except per share data)
  
 
  
For the Three Months Ended
  
For the Nine Months Ended
  
 
  
September 30,
  
 
  
September 30,
  
 
  
 
  
2005
  
2004
  
% Change
  
2005
  
2004
  
% Change
  
Net sales:
                          
Wireless Data Communications
                         
Product
  
$
3,059
  
$
1,486
    
105.8
%
$
7,842
  
$
4,215
    
86.0
%
Service
    
2,558
   
2,150
   
19.0
%
  
7,637
   
6,283
   
21.6
%
Sub-Total
    
5,617
   
3,636
   
54.5
%
  
15,479
   
10,498
   
47.4
%
Digital Multimedia and Networking
                         
Product
    
953
   
1,322
   
-27.9
%
  
1,956
   
2,461
   
-20.5
%
Service
    
1,251
   
1,028
   
21.7
%
  
3,230
   
2,890
   
11.8
%
Sub-Total
    
2,204
   
2,350
   
-6.2
%
  
5,186
   
5,351
   
-3.1
%
Wireline Security
                          
Product
    
9
   
44
   
-79.5
%
  
370
   
339
   
9.1
%
Service
    
179
   
142
   
26.1
%
  
514
   
505
   
1.8
%
Sub-Total
    
188
   
186
   
1.1
%
  
884
   
844
   
4.7
%
Total net sales
                          
Product
    
4,021
   
2,852
   
41.0
%
  
10,168
   
7,015
   
44.9
%
Service
    
3,988
   
3,320
   
20.1
%
  
11,381
   
9,678
   
17.6
%
Total net sales
    
8,009
   
6,172
   
29.8
%
  
21,549
   
16,693
   
29.1
%
Cost of product sales (excluding depreciation)
   
2,991
   
2,043
   
46.4
%
  
7,681
   
5,531
   
38.9
%
Cost of services (excluding depreciation and amortization)
   
1,533
   
1,395
   
9.9
%
  
4,335
    
3,593
    
20.7
%
Depreciation and amortization
   
41
   
87
   
-52.9
%
  
132
   
297
   
-55.6
%
Gross Profit
   
3,444
    
2,647
    
30.1
%
  
9,401
    
7,272
    
29.3
%
Selling, general, and administrative expenses
   
2,215
   
2,056
   
7.7
%
  
6,468
   
6,519
   
-0.8
%
Research and development expenses
   
278
   
205
   
35.6
%
  
832
   
685
   
21.5
%
Bad debt expense
   
83
   
131
   
-36.6
%
  
242
   
415
   
-41.7
%
Depreciation and amortization
   
386
   
411
   
-6.1
%
  
1,291
   
1,247
   
3.5
%
Operating earnings (loss)
   
482
   
(156
)
  
408.8
%
  
568
   
(1,594
)
  
135.6
%
Interest income (expense)
   
(59
)
  
(165
)
  
64.2
%
  
(338
)
  
(426
)
  
20.7
%
Other income (expense)
   
(3
)
  
(2
)
  
-50.0
%
  
(7
)
  
(31
)
  
77.4
%
Gain on sale of business
   
-
   
-
   
na
    
-
   
250
   
-100.0
%
Earnings (loss) before income taxes
   
420
   
(323
)
  
230.0
%
  
223
   
(1,801
)
  
112.4
%
Income taxes
   
9
   
18
   
na
    
52
   
18
   
na
  
Net earnings (loss)
 
$
411
  
$
(341
)
  
220.5
%
$
171
  
$
(1,819
)
  
109.4
%
Basic income (loss) per common share
 
$
0.04
  
$
(0.03
)
    
$
0.02
  
$
(0.17
)
    
Diluted income (loss) per common share
 
$
0.03
  
$
(0.03
)
    
$
0.01
  
$
(0.17
)
    
Basic weighted average shares outstanding
   
11,528
   
10,794
       
11,092
   
10,798
     
Diluted weighted average shares outstanding
   
12,023
   
10,794
       
11,456
   
10,798
     




17


 
Percent of Total Sales
  
 
  
Three Month Period Ended
  
Nine Month Period Ended
  
 
  
September 30,
  
September 30,
  
 
  
2005
  
2004
  
2005
  
2004
  
 
  
 
  
 
  
 
  
 
  
Wireless Data Communications
                 
Product
    
38.2
%
  
24.1
%
  
36.4
%
  
25.3
%
Service
    
31.9
%
  
34.8
%
  
35.4
%
  
37.6
%
Sub-Total
    
70.1
%
  
58.9
%
  
71.8
%
  
62.9
%
Digital Multimedia and Networking
                 
Product
    
11.9
%
  
21.4
%
  
9.1
%
  
14.7
%
Service
    
15.6
%
  
16.7
%
  
15.0
%
  
17.3
%
Sub-Total
    
27.5
%
  
38.1
%
  
24.1
%
  
32.1
%
Wireline Security
                  
Product
    
0.1
%
  
0.7
%
  
1.7
%
  
2.0
%
Service
    
2.2
%
  
2.3
%
  
2.4
%
  
3.0
%
Sub-Total
    
2.3
%
  
3.0
%
  
4.1
%
  
5.1
%
Total net sales
                  
Product
    
50.2
%
  
46.2
%
  
47.2
%
  
42.0
%
Service
    
49.8
%
  
53.8
%
  
52.8
%
  
58.0
%
Total net sales
    
100.0
%
  
100.0
%
  
100.0
%
  
100.0
%
Cost of product sales (excluding depreciation)
   
37.3
%
  
33.1
%
  
35.6
%
  
33.1
%
Cost of services (excluding depreciation and amortization)
   
19.1
%
  
22.6
%
  
20.1
%
  
21.5
%
Depreciation and amortization
   
0.5
%
  
1.4
%
  
0.6
%
  
1.8
%
Gross Profit
   
43.0
%
  
42.9
%
  
43.6
%
  
43.6
%
Selling, general, and administrative expenses
   
27.7
%
  
33.3
%
  
30.0
%
  
39.1
%
Research and development expenses
   
3.5
%
  
3.3
%
  
3.9
%
  
4.1
%
Bad debt expense
   
1.0
%
  
2.1
%
  
1.1
%
  
2.5
%
Depreciation and amortization
   
4.8
%
  
6.7
%
  
6.0
%
  
7.5
%
Operating earnings (loss)
   
6.0
%
  
-2.5
%
  
2.6
%
  
-9.5
%
Interest income (expense)
   
-0.7
%
  
-2.7
%
  
-1.6
%
  
-2.6
%
Other income (expense)
   
0.0
%
  
0.0
%
  
0.0
%
  
-0.2
%
Gain on sale of business unit
   
0.0
%
  
0.0
%
  
0.0
%
  
1.5
%
Net earnings (loss) before income taxes
   
5.2
%
  
-5.2
%
  
1.0
%
  
-10.8
%
Income taxes
   
0.1
%
  
0.3
%
  
0.2
%
  
0.1
%
Net earnings (loss)
   
5.1
%
  
-5.5
%
  
0.8
%
  
-10.9
%




18


Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2005:


Net Sales

Net sales increased 29.8% to $8.0 million for the three-month period ended September 30, 2005 as compared to $6.2 million for the three-month period ended September 30, 2004. Most of the sales increase for the three months ended September 30, 2005, compared to the same period in 2004, was in Wireless Data Communications. The increase was partially offset by a decrease in Digital Multimedia and Networking. Net sales for the nine months ended September 30, 2005 increased 29.1% to $21.5 million as compared to $16.7 million for the nine months ended September 30, 2004. The increase for the nine month period is primarily a result of an increase in product and, to a lesser extent, service sales in the Wireless Data Communications division, which was partially offset by a decrease in sales by the Digital Multimedia and Networking division.

Wireless Data Communications. Net sales from Wireless Data Communications increased 54.5% to $5.6 million for the three-month period ended September 30, 2005 as compared to $3.6 million for the three-month period ended September 30, 2004. For the nine months ended September 30, 2005, net sales from Wireless Data Communications increased 47.4% to $15.5 million as compared to $10.5 million for the same prior year period. The increases in net sales were the result of increases in both product sales and service sales.

For the three-month period ended September 30, 2005, product sales in Wireless Data Communications increased 105.8% to $3.1 million from $1.5 million in the prior year period. For the nine-month period, product sales in Wireless Data Communications increased 86% to $7.8 million as compared to $4.2 million in the prior year period. These increases were primarily due to increased sales of our wireless vehicle security product and tracking services, MobileGuardian. Product sales also increased due to higher demand for Uplink Security devices used for wireless communications between alarm installations and central monitoring stations.

During the three-month period ended September 30, 2005, Wireless Data Communications service revenues increased 19% to $2.6 million as compared to $2.2 million for the three-month period ended September 30, 2004. For the nine months ended September 30, 2005, Wireless Data Communications service revenues increased 21.6% to $7.6 million as compared to $6.3 million for the same prior year period. These increases were primarily due to an increase in the number of connections to our Cellemetry wireless network during the three and nine-month periods ending September 30, 2005. Revenues from connections to our network increased $375,000 for the three-month period ended September 30, 2005 and $876,000 for the nine-month period ended September 30, 2005 compared to the same periods in 2004. Connection increases were generated by sales of our security products as well as by value added resellers who utilize the Cellemetry network to provide customer solutions. We continue to focus on increasing connections to our network due to the recurring nature of the service revenues.

Digital Multimedia and Networking. Net sales from Digital Multimedia and Networking decreased 6.2% to $2.2 million for the three-month period ended September 30, 2005 compared to $2.4 million for the three-month period ended September 30, 2004. This decrease was due to a 27.9% decrease in product revenues during the three months ended September 30, 2005 to $953,000, down from $1.3 million in the prior year period. The decrease in product revenues was partially offset by an increase in Service revenues for the Digital Multimedia and Networking division. Service revenues increased 21.7% to $1.3 million for the three months ended September 30, 2005 compared to $1.0 million for the three months ended September 30, 2004. Net sales from Digital Multimedia and Networking decreased 3.1% to $5.2 million for the nine months ended September 30, 2005 compared to $5.4 million of the nine months ended September 30, 2004. Product revenues for the nine months ended September 30, 2005 decreased by 20.5% to $2.0 million as compared to $2.5 million for the nine months ended September 30, 2004. This decrease was offset by an 11.8% increase in Digital Multimedia and Networking services, to $3.2 million compared to $2.9 million in the corresponding prior year period.

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For both the three and nine months ended September 30, 2005 the decrease in Digital Multimedia and Networking product revenues is the result of decreased sales of our interactive videoconferencing products (PowerPlay), which is sold directly or indirectly (as a subcontractor) 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 increase in Digital Multimedia and Networking services for both the three and nine months ended September 30, 2005 is due to an increase in the services that we provided, either directly or indirectly, to Agilent as well as some other wireless telecommunication companies.

Wireline Data Communications. Wireline Security net sales increased 1.1% to $188,000 for the three-month period ended September 30, 2005 as compared to $186,000 for the three-month period ended September 30, 2004. This increase is due to a 26.1% increase in Wireline Security service sales to $179,000 compared to $142,000 in the prior year period. This increase was offset by a 79.5% decrease in Wireline product sales, to $9,000 for the three-month period ended September 30, 2005 compared to $44,000 in the prior year period. The increase in service sales is due to additional maintenance agreements with a customer in Australia.

For the nine months ended September 30, 2005, Wireline Security net sales increased 4.7% to $884,000 as compared to $844,000 for the nine months ended September 30, 2004. This increase resulted from a 9.1% increase in Wireline Security product sales, and a slight increase of 1.1% in Wireless Security products.

Cost of Sales

Cost of product sales increased 46.4% to $3.0 million for the three-month period ended September 30, 2005 as compared to $2.0 million for the three-month period ended September 30, 2004. For the nine months ended September 30, 2005 cost of product sales increased 38.9% to $7.7 million up from $5.5 million for the nine months ended September 30, 2004. The increase in cost of product sales for both the three and nine months ended September 30, 2005 was primarily the result of higher product sales volume in the Wireless Data Communications, which corresponds to the increased revenues in Wireless Data Communications, as discussed previously. The increase in Wireless Data Communications product sales was partially offset by lower Digital Multimedia & Networking product sales.

Cost of services increased 9.9% to $1.5 million for the three-month period ended September 30, 2005 as compared to $1.4 million for the three-month period ended September 30, 2004. For the nine months ended September 30, 2005, cost of services increased 20.7% to $4.3 million, compared to $3.6 million for the corresponding prior year period. The increase in cost of services for both the three and nine months ended September 30, 2005 versus the same period in 2004 was primarily the result of higher service sales volume in both Wireless Data Communications and Digital Multimedia and Networking.

Cost of sales depreciation and amortization expense decreased 52.9% to $41,000 for the three-month period ended September 30, 2005 as compared to $87,000 for the three-month period ended September 30, 2004. For the nine months ended September 30, 2005 cost of sales depreciation and amortization expense decreased 55.6% to $132,000 as compared to $297,000 for the same prior year period. The decrease for both the three and nine months ended September 30, 2005 is due to certain assets becoming fully depreciated during the period.

Gross Profit

Gross profit, as a percentage of net sales, was 43% for the three-month period ended September 30, 2005 compared to 42.9% for the three-month period ended September 30, 2004. The slight increase in total gross profit as a percentage of sales was due to a slight decrease in cost of services and cost of sales depreciation and amortization as a percentage of net sales, partially offset by an increase in cost of product sales as a percentage of net sales. Gross profit, as a percentage of net sales, remained flat at 43.6% for the nine months ended September 30, 2005 and 2004.

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Operating Expenses

Selling, general and administrative expenses increased 7.7% to $2.2 million for the three-month period ended September 30, 2005 as compared to $2.1 million for the three months ended September 30, 2004. The increase for the period is related to an increase in personnel related costs such as travel and incentive compensation as well as an increase in advertising expenses. For the nine months ended September 30, 2005, selling, general and administrative expenses remained flat at $6.5 million.

Research and development expenses increased 35.6% to $278,000 for the three-month period ended September 30, 2005 as compared to $205,000 for the three-month period ended September 30, 2004. This increase is primarily due to an increase in personnel costs of $119,000, partially offset by an increase of $67,000 software capitalization to $104,000 versus $37,000 for the same period in 2004. For the nine months ended September 30, 2005, research and development expenses increased 21.5% to $832,000, up from $685,000 for the nine months ended September 30, 2004. This increase is also primarily due to an increase of $340,000 in personnel related costs. We have hired additional personnel and have used temporary personnel to complete certain projects. These increases were partially offset by increased capitalization of $194,000.

Bad debt expense decreased 36.6% to $83,000 for the quarter ended September 30, 2005 from $131,000 in the same quarter in 2004. For the nine months ended September 30, 2005, bad debt expense decreased 41.7% to $242,000 as compared to $415,000 for the nine months ended September 30, 2004. Bad debt expense decreased during these periods as a result of the implementation of more stringent credit policies and collections processes, as well as an improvement in the general economic conditions.

Depreciation and amortization expense decreased 6.1% to $386,000 for the three-month period ended September 30, 2005 as compared to $411,000 for the three-month period ended September 30, 2004. The decrease for the three months ended September 30, 2005 is due to some assets becoming fully depreciated. For the nine months ended September 30, 2005 depreciation and amortization expense increased 3.5% to $1.3 million as compared to $1.2 million in the prior year period. The increase for the nine months ended September 30, 2005 is primarily attributable to a new capital lease for the replacement and upgrade of computer server equipment.

Interest expense and other expense decreased for the three-month period ended September 30, 2005 to $62,000 as compared to $167,000 for the three-month period ended September 30, 2004. This decrease was primarily the result of our voluntarily converting shares of our common stock in order to pay off Company Note 1 with Laurus. For the nine months ended September 30, 2005, interest expense and other expense decreased to $345,000 as compared to $457,000 for the nine months ended September 30, 2004. The decrease is also primarily the result of paying off Note 1 with Laurus.

Gain on the sale of business of $250,000 for the nine-month period ended September 30, 2004 was due to the receipt of a contingent payment on the sale of Data1Source in September 2003 since the contingency was favorably met.

The $52,000 of income tax expense in the nine-month period ended September 30, 2005 is related to certain state and foreign income taxes.


21

Liquidity and Capital Resources 

We had working capital of $4.4 million as of September 30, 2005 compared to a working capital of $1.2 million at December 31, 2004. We had cash balances of $4.2 million and $1.7 million, respectively, as of September 30, 2005 and December 31, 2004.

We generated cash from operating activities totaling $2.3 million for the nine months ended September 30, 2005 compared to $529,000 for the nine months ended September 30, 2004. The increase in cash provided by operating activities for the nine months ended September 30, 2005 versus the comparable period of 2004 was primarily due to a net operating gain, and increases in accounts payable, deferred revenue and non-cash interest expense. These were partially offset by decreases in inventory reserves and other accrued liabilities.

We used cash in investing activities totaling $640,000 for the nine months ended September 30, 2005 compared to net cash used totaling $493,000 for the nine months ended September 30, 2004. The increase in cash used in investing activities was primarily due to the fact that during the nine-month period ending September 30, 2004 we received proceeds from the sale of Data1Souce of $200,000. These proceeds were contingent on certain criteria being met within six months following the original sale. We received this payment during the quarter ended March 31, 2004.

We generated cash from financing activities totaling $848,000 for the nine-month period ended September 30, 2005 compared to net cash provided from financing activities totaling $726,000 for the nine-month period ended September 30, 2004. The increase in cash provided by financing activities was primarily due to proceeds we received from the second Company Note during the nine months ended September 30, 2005 (see Note B-7 - Note Payable in the footnotes to the Company’s financial statements) partially offset by principal payments on the notes of $582,000 and principal payments on capital lease obligations of $70,000. During the nine months ended September 30, 2004 we also had proceeds from the first Company Note of $4.3 million, but this was partially offset by the payoff of the short-term debt payable to Cingular in the amount of $3.5 million during that same period.

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 paid principal and interest of approximately $494,000 on our notes during the nine months ended September 30, 2005. Laurus opted to convert 111,720 shares of the company stock at a price of $4.56 per share for principal payment on the Company Notes during the nine months ended September 30, 2005. We voluntarily converted 709,000 common shares into equity which equated to $3,233,040 of the outstanding debt associated with the First Company Note during the nine months ended September 30, 2005.

We believe that our existing cash and cash equivalents, together with cash generated from operations will be more than sufficient to meet our operating requirements for at least the next twelve months. This belief could be affected by unexpected operating losses, a material adverse change in our operating business or a default under the Company Notes. We continually consider other sources of funding, including the sale of certain non-core assets.



22

Item 3. Quantitative and Qualitative Disclosures about Market Risk

At September 30, 2005, we have not invested in any material balances of market risk sensitive instruments held for either trading purposes or for purposes other than trading. As a result, we are not subject to interest rate risk on our outstanding debt, commodity price risk, or other relevant market risks, such as equity price risk, other than risks created in the ordinary course of business through its operations.

At September 30, 2005, we have obligations under a note payable and under capital leases, both of which have fixed interest rates. We believe that the effect, if any, of reasonably possible near-term changes in interest rates or foreign currency exchange rates on our financial position, results of operations and cash flows should not be material.

Item 4.  Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of September 30, 2005. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are involved in litigation in the ordinary course of our business, both as a defendant and as a plaintiff. While we cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that any pending matter will have a material adverse effect on our cash flows, financial condition or results of operations.

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

None - not applicable.

Item 3. Defaults Upon Senior Securities.

None - not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

None - not applicable.


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.


Exhibit 31.2 Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14.


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.


24


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)


 
November 11, 2005
 
/s/ Stratton J. Nicolaides
 
Stratton J. Nicolaides
 
Chief Executive Officer and Chairman
 
November 11, 2005
 
/s/Alan B. Catherall
 
Alan B. Catherall
 
Chief Financial Officer, Executive Vice President,
and Principal Financial and Accounting Officer
 
25