nmrx10k123110.htm





 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
 

 
FORM 10-K
 
 
 

 
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2010
 
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
 
 
Commission File Number 0-22920
 
 
 
 
 

 
NUMEREX CORP.
 
(Name of Registrant as Specified in Its Charter)
 
 
 
     
Pennsylvania
 
11-2948749
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
   
1600 Parkwood Circle, Suite 500, Atlanta, GA
 
30339
(Address of Principal Executive Offices)
 
(Zip Code)
 
(770) 693-5950
 
(Registrant’s Telephone Number, Including Area Code)
 
 
 
 
 

 
Securities Registered Pursuant to Section 12(b) of the Act:
 
 

 
 
 
     
Class A Common Stock, no par value
(Title of each class)
 
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
     
     
 
Securities Registered Pursuant to Section 12(g) of the Act: None
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o           No þ
 
     
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.     Yes o          No þ
 

 
 

 

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

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o          No o
 


 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
 
      
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 

 
Large accelerated filer     Accelerated filer      Non-accelerated filer þ    Smaller Reporting Company        
 
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o           No þ
 

 
The aggregate market value of voting and non-voting common stock held by nonaffiliates of the registrant (11,083,077 shares) based on the closing price of the registrant’s common stock as reported on the NASDAQ Global Market on June 30, 2010, was $48,100,554.  For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.
 
     
 
The number of shares outstanding of the registrant’s Class A Common Stock as of March 28, 2011, was 15,042,028 shares.
 


 
DOCUMENTS INCORPORATED BY REFERENCE
 

 
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2010. The proxy statement is incorporated herein by reference into the following parts of the Form 10-K:
 

 

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

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

 
 

 
 
NUMEREX CORP.
 
ANNUAL REPORT ON FORM 10-K
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
 

 
TABLE OF CONTENTS
 
   
Page
   
Business
  4
Risk Factors
  15
Unresolved Staff Comments
  25
 Properties
  25
 Legal Proceedings
  26
 Removed and Reserved
  26
 
   
   
 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  27
 Selected Consolidated Financial Data
  29
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
  30
 Quantitative and Qualitative Disclosures about Market Risk
  47
 Financial Statements and Supplementary Data
  48
 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  77
 Controls and Procedures
  77
 Other Information
  77
 
   
   
 Directors, Executive Officers and Corporate Governance
  79
 Executive Compensation
  79
 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  79
 Certain Relationships and Related Transactions and Director Independence
  79
 Principal Accounting Fees and Services
  79
     
 
 
Exhibits and Financial Statement Schedule
  80
     
     

 
 

 

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

 
PART I.
 
ITEM 1.  BUSINESS
 

 
Overview
 

 
Numerex Corp. (“Numerex,” “Company” or “we”) is a provider of a broad spectrum of secure machine-to-machine (M2M) services.  Our subscription-based sales model emphasizes recurring revenues in order to increase our profitability and enhance shareholder value creation.  We have continuously developed technology, networks, and applications towards increasing subscriptions for our services and products.  We believe that simplifying the development and deployment process is an important key to promoting sustainable growth in the M2M industry. Numerex DNA® is our way of combining a device, a network and an application to bring a customer’s M2M solution to life rapidly and easily.  Our goal is to “jumpstart” the application process for our customers, through our foundation application software technology or Numerex FAST®, and to be a single source for M2M products and services, i.e., a “one stop shop.”
 

 
M2M is defined as electronic data communications between devices, systems, and people that turns data into useful information across many industries.  At Numerex, we concentrate our efforts on several critical vertical markets:  commercial and residential security, energy and utilities, healthcare, financial services, and government & transportation.  We endeavor to ensure data confidentiality, integrity and availability through the full range of our services.
 

 
We believe that Numerex has established a leadership position in M2M through delivering end-to-end, single-source solutions as well as “white label” products,  i.e., products that are available for distribution as branded offerings through Value Added Resellers (VARs), vertically focused System Integrators (SIs) and Original Equipment Manufacturers (OEMs) who choose to integrate our products and services into their own solutions. Numerex customers can select from a menu of products and services that address their specific M2M needs.
 

 

 

 


Numerex has developed industry-specific expertise in offering M2M solutions with a host of value added services. We provide value to our customers in removing much of the complexity associated with the design, development, deployment and support of their own M2M solutions so that they can better focus on their primary business objectives and speed time to market.   Generally, our customers serve the final end user such as, for example car and truck drivers or homeowners, as well as industrial users who want to better monitor and control their operational processes.

 
We continue to look for ways to expand our expertise by entering new vertical sectors conducive to our long-term recurring revenue model. We may choose to enter those sectors organically, through industry partnerships or acquisition.
 
Our offerings use cellular, satellite, broadband and wireline networks.  We are technology-neutral and utilize a diverse range of manufacturing sources and telecommunications standards.  We emphasize high-margin application-centered offerings, and have repositioned our business to de-emphasize hardware-only selling and focus on solution and service-based contracts.  Our strategy will continue to include the marketing and selling of hardware that results in long-term recurring service revenues.
 
 
We have developed an integrating platform resting on the data processing power of the internet (a.k.a “cloud computing”) to provide turnkey solutions, i.e., the complete Numerex DNA, to our customers.  We call this platform Numerex FAST (Foundation Application Software Technology), an open, configurable application development platform, which is akin to a traditional “service bureau” that shortens time to implementation and limits deployment risks.
 
 
Numerex Corp is headquartered in Atlanta, Georgia, and organized under the laws of the Commonwealth of Pennsylvania.   The Company was first traded publicly in March 1994 (NASDAQ: NMRX). At the time, the Company focused on “derived channel”, a wireline-based telemetry data communications solution (“telemetry” is eventually subsumed by the ‘M2M’ acronym) and served select vertical markets that included alarm security and line monitoring. In November 1999, we sold our wireline business to British Telecommunications PLC (“BT”) in order to focus on our nascent wireless data communications business.
 
 
In May 1998, Numerex Corp., BellSouth Corporation and BellSouth Wireless, (which became Cingular in 2001 and AT&T in January 2007, following the merger between BellSouth and ATT in December 2006), completed a transaction whereby Cellemetry LLC, a joint venture between Numerex and Cingular, was formed. Cellemetry LLC provided a cost-effective, two-way wireless data communications network throughout the United States, Canada, Mexico, Colombia, Argentina, Paraguay, the Dutch Antilles, and Puerto Rico. On March 28, 2003, we acquired Cingular’s interest in Cellemetry LLC.
 
 
During this period, we developed a Short Message Service Center (SMSC)-operated service bureau, “Data1Source,” providing SMS-related services to tier 2 and 3 carriers throughout the USA.  While Data1Source was subsequently sold, it helped advance our technical expertise in the digital GSM and CDMA realms, and provided a solid foundation on which to build our current network platforms. In parallel, we expanded our technical platform to serve the mobile tracking and alarm monitoring markets.
 
 
At the beginning of 2006, the Company further enhanced its portfolio of wireless products and services through the acquisition of the assets of Airdesk, Inc. Airdesk’s wireless data solutions, network access and technical support have been fully integrated into the Company’s operations.
 
 
In 2007, Numerex acquired the assets of Orbit One Communications, Inc., which provides satellite data products and services to government agencies and the emergency service market.
 

 

 


 
In January 2008, Numerex was awarded the international ISO/IEC 27001:2005 Certification (ISO 27001) by BSI Management Systems. ISO 27001 is ISO’s highest security certification for information security that ensures data confidentiality, integrity and availability every step of the way. The ISO 27001 certification facilitates compliance with an array of information security-related legislation and regulations in Numerex’s target markets such as utilities (NERC CIP Cyber Security mandates), financial services (GLBA and PCI DSS), healthcare (HIPAA), government (FISMA), and across markets (state laws governing security breach notification and Sarbanes Oxley Act).  In January 2011, Numerex completed the three-year ISO 27001 standard re-certification.
 
 
In October 2008, Numerex acquired Ublip, a privately-held M2M software and services company headquartered in Dallas, Texas. With this acquisition, Numerex gained an infusion of technology and expertise, including middleware designed to simplify and jumpstart application development and deployment.
 
 
Since our inception, we have moved from a product-centric to a solution-centric business.  Due to strong organic growth and strategic acquisitions that added to our core competencies in the M2M space, we have assembled the principal elements of Numerex DNA® (DNA = Device, Network, and Application) that address all critical (sometimes referred to as ‘foundational’) components of the M2M value chain.
 
 
NUMEREX’S CORE BUSINESS
 
Numerex’s products and services are primarily marketed to Fortune 1000 companies, some of them with global needs, and geared towards enterprise and commercial markets. Our vertical markets include security, energy and utilities, transportation, government, financial services, and healthcare. We have several specific sub-vertical market applications connected to our platforms that include real estate, home automation, remote patient monitoring, vehicle tracking and scoring, emergency response, fleet management, document management, logistics, amongst many others. We can address these disparate market needs by leveraging our horizontal platforms, enabling services, and business processes, which are designed to minimize configuration or customization regardless of application, making our business scalable with high operating leverage.
 
 
We support a wide range of remote devices and our Global Gateway to Secure M2M™ (GGSM) network platform offers a choice of cellular and satellite options.  With Numerex WorldPass™, which enables the management of M2M smart devices throughout the United States and in over 200 countries with a variety of flexible network plans and easy-to-use single SIM (Subscriber Identity Module) interface and introduced in 2010, all the aspects of international connectivity including any associated regulations, processes and data requirements are handled.
 

 
We work with our enterprise customers to develop solutions that meet their M2M business needs. Numerex is an early pioneer in the M2M space and has years of experience in bringing proven processes and tools that make building any M2M solution easier.
 
 
We offer an extensive range of products and services that work with our hosted platforms and make integration between smart device, network, and application a seamless process.  From stationary, or ‘static’, solutions that involve monitoring, measuring, and metering applications to asset tracking on a global scale, our team of M2M on-boarding specialists and engineers work to optimize commercialization of a solution.
 
 
Our emphasis is on providing secure, real-time device management, network and application platforms monitoring. Numerex’s platforms provide a sound nexus for serving new and emerging M2M markets.  Our extensive network coverage allows us to progressively make our M2M development and deployment capabilities available to a wide range of industries around the world.
 
 
Numerex has two primary routes to market: M2M Business Solutions and Distributed Products.  Both are supported by our differentiated infrastructure the main components of which are Numerex DNA® and Numerex FAST™.
 

 

 

 


Routes to Market
 

 
v  
M2M Business Solutions
 
Numerex’s M2M Business Solutions group, at the core of the Company’s business, provides services designed to help our clients use M2M to address core business problems and create competitive differentiation.  Business services enable the development of efficient, reliable, and secure solutions while simplifying and speeding up deployment through streamlined processes and comprehensive integration services.
 
Our turnkey and innovative approach to enabling our clients’ M2M solutions as well as the attention we give to specific requirements and circumstances are critical differentiators.
 
Listening, building and supporting are the guiding principles of our M2M Business Solutions group.  We are focused on enabling our clients’ solutions from end to end through a unique and easy-to-use “6D process”™, that ensures the delivery of an efficient M2M solution cost-effectively:
 

 
ü  
Discover: We understand the client’s business, challenges, priorities, objectives and requirements
ü  
Define: We articulate an efficient solution concept
ü  
Design: We transform the concept into a preliminary prototype and prepare quality control and test plans
ü  
Develop: We implement the solution and ensure that it is working properly through thorough testing
ü  
Deploy: We launch the pilot followed by commercial market roll-out
ü  
Defend:  We protect and improve the client’s market position and solution performance

 
v  
Distributed Products
 
In addition to the business services, we market and unbranded solutions through our M2M Distributed Products group typically to customers with well-defined markets that do not necessarily require a configured or customized solution. These end-user ready solutions are marketed and sold via dealer and distribution channels. Our distributed products have made their way into a myriad of markets, including primarily residential and commercial security, location-based services markets and a number of additional fixed-wireless or “static” applications.
 
 
ü  
Residential and Commercial Security
 
Our Uplink suite of ‘white box’ alarm security products are sold “off the shelf” into distribution and to dealers throughout North America. Our security subscriptions grew 22% in 2010. This product suite will continue to diversify into new vertical markets such as banking, tower monitoring, ATMs, and other monitored asset markets, leveraging our existing platforms. In addition, we continue introducing new asset tracking product lines into the same distribution/dealer channels that were traditionally exclusively geared to the alarm security industry.
 
We offer solutions for residential security, commercial security, home automation & control and offender monitoring.

 
 
ü  
Location-Based Services (LBS)
 
LBS is the domain of mobile or communication-on-the-move applications and relies on both cellular and satellite technologies.  Our location-based services are marketed and sold as white box solutions into distribution channels. We have several such asset tracking solutions that are cellular or satellite-based that are carving out market share with specific customers who private label our turn-key solutions for use in their own markets.
 

 

 


 
Our satellite-based product lines were typically marketed and sold into government markets, but we are now expanding into new commercial markets in emergency services and asset tracking worldwide.  Numerex provides LBS services, both satellite- and cellular-based, for emergency services, asset tracking, intermodal shipping, equipment rental, government contractor, and insurance companies.
 
ü  
Fixed Wireless or “Static” Applications
 
Numerex provides products and services for telehealth, the remote monitoring and controlling of oil and gas pipelines, liquid tanks, vending machines, sprinkler and drip irrigation, automatic meter reading, advertising billboards; and many other fixed applications and industries.


 
Differentiated Infrastructure
 

 
v  
Numerex DNA®
 
Numerex DNA integrates all the necessary foundational components, i.e., smart device, cellular and satellite network and software application, of any M2M solution through a single source, rather than requiring customers to utilize multiple vendors and partners.

 
§  
24x7 Customer Support:  An “around-the-clock” support center, or help desk, to provide assistance to customers;

 
§  
Flexible billing:  Accurate, timely invoices in flexible formats that detail usage per device, and various billing options.  This flexibility is a key differentiator for customers’ end-user billing requirements;
 

 
§  
Integration services:  Development support to ensure timely and efficient production, the glue which brings together Numerex DNA;
 

 
§  
Automated provisioning:  Automated, Web-based online provisioning of devices for immediate activation and account management;
 

 
§  
Device Management Portal: Designs and sets up customized portals specifically tailored to its customers’ needs;
 

 
§  
Network Operations Center:  Customers and industry partners receive 24x7x365 network support from our Network Operations Center in Atlanta, Georgia;
 

 
§  
Product Certification:   We have assisted numerous clients with the PCS Type Certification Review Board (PTCRB) certification process.  Our experience also includes FCC (Federal Communications Commission), CE (conformity marking for the European Economic Area) and Industry Canada type certifications.  We have efficient processes to provide accurate documentation to the certification testing labs. This expertise extends to the carrier’s certification process for devices using AT&T, Rogers (Canada), Telcel (Mexico), and other carrier networks.  Also, Numerex ‘s Chief Technology Officer is Chairman of the Telecommunications Industry Association (TIA) TR-50 Smart Devices Communications (SDC) engineering committee, which is responsible for developing interface standards for communicating with smart devices used in M2M applications; and
 

 
§  
Ancillary services provided at the customer’s discretion:  A host of services aimed at facilitating and enhancing the Company’s customers’ performance such as warehousing, fulfillment, logistics, web-based provisioning and quality assurance.
 

 

 

 


v  
Numerex FAST®
 
Numerex FAST® is an open and configurable application development platform.  It is an application stack that provides the customer with all the building blocks necessary for the rapid deployment of an M2M solution.  Numerex FAST enables multiple devices to be connected to multiple wireless networks through a single application.  We offer branding, hosting services, gateway development, extensive device management and application monitoring tools.


The availability of Numerex’s application building blocks for “tunrkey” use or assembly into more customer-specific solutions allows any developer to quickly build a branded web-based application.
 

 
Our network features include automatically detected international roaming service, granular fraud detection, low latency, and guaranteed SMS delivery.
 

 

 
Ø  
M2M-related Standards at Numerex
 

 
At the beginning of 2011, Numerex completed the three-year full ISO/IEC 27001:2005 information security standard re-certification. The original certification was registered on January 17, 2008.  The continuation of the registration was achieved after a thorough re-assessment of the existing certification by a leading global independent business services organization.  Our dedication to information security has been and continues to be a critical and strong driver of our growth.

In parallel, we believe that sharing our M2M expertise with international groups and forums focused on standards and the industry’s growth is mutually beneficial.  In this regard, our Chief Technology Officer, Dr. Jeffrey O. Smith, was elected Chair of Telecommunications Industry Association (TIA) TR-50 Standards Committee on Smart Device Communications in February 2010.  He also was appointed at a key international standardization meeting in Beijing China, in September 2010, Convenor of the Global Standards Collaboration (GSC) M2M Standardization Task Force (MSTF), which includes all major Standards Developing Organizations from around the world. The goal of the GSC MSTF is to foster global coordination and harmonization in the area of M2M standardization.

 

Ø  
Sales, Marketing and Distribution

 
Numerex primarily employs an indirect sales model for its distributed products through private label/OEM agreements, channel partners, system integrators, and VARs (collectively referred to in some cases as “industry partners”). We also indirectly market and sell certain Numerex branded products and services through distribution and dealer channels, specifically the Uplink product suite.
 

 
Our network is integrated and bundled with other Numerex products and services to provide private-labeled solutions for both fixed and portable applications. It is also sold and marketed to VARs, integrators, and application service providers who bundle and resell it with their end-to-end solutions.  In addition, the Numerex network is also sold as a data-only network offering for enterprise customers running M2M applications.
 

 
Our private-label solutions are designed for and marketed to specific vertical markets.  Typically, these customers are sales and marketing organizations with vertical market expertise without adequate technical resources that are seeking rapid entry into a market.  
 

 
Numerex’s M2M business solutions are marketed and developed to, with and through wireless carriers, professional service firms and large end-user enterprises.
 

 

 

 


NUMEREX’S NON-CORE BUSINESS: DIGITAL MULTIMEDIA AND NETWORKING
 

 
Numerex’s primary focus is the rapid development and deployment of M2M solutions, as described above.   We continue to offer products and services to certain customers in Digital Multimedia education, networking integration and wireline data communications.   These products and services currently comprise about 2% of our revenue base and are managed as a single business group.
 

 
Ø  
Digital Multimedia
 

 
We design, develop, and market complete video conferencing and digital multimedia system products and services for high-quality communications networks. We manufacture both the products upon which the systems are based and incorporate third-party products where appropriate.  The offerings include PowerPlay™, a digital multimedia solution for high-bandwidth private network applications. PowerPlay provides capability for interactive videoconferencing and is an integrated hardware-software system that supports user-friendly control over network devices. PowerPlay is supplemented by our desktop videoconferencing software version, IPContact™, which offers high-quality and high-performance video.
 

 
Ø  
Networking Integration (Digilog)
 

 
We provide products under the Digilog brand that assist both wireline and wireless carriers in the engineering, installation, and servicing of new telecommunications control networks. These telecommunications network operational support systems and services can be categorized as: Services, including system integration (rack and stack) and Installation: Products, Test Access and Interconnecting Devices.
 

 
Ø  
Sales and Marketing
 

 
Our digital multimedia products and services are marketed through a combination of system integrators and VARs.   Our networking products are sold and marketed under the Digilog brand. Distribution is focused on wireless and wireline telecommunications companies through system integration agreements with a number of suppliers of telecommunications and monitoring equipment and services.  
 

 
NUMEREX BUSINESS ENVIRONMENT
 

 
Ø  
Key Customers
 

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

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

 
10 

 


Ø  
Competition
 

 
We sell our products in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do.   As the markets for our products and services continue to develop, additional companies, including those with significant market presence in the wireless and security industries could enter the markets in which we compete and further intensify competition.   In addition, we believe price competition may become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.
 

 
Several businesses that share our M2M space can be viewed as competitors, such as application service providers, Mobile Virtual Network Operators (MVNOs), system integrators, and wireless operators/ carriers that offer a variety of the components and services required for the delivery of complete M2M solutions.  Numerex believes it has a competitive advantage and is uniquely positioned as an M2M service provider since it provides all of the key components of the M2M value chain, including enabling hardware, multiple wireless technologies and custom applications, and wireless network services.  We market and sell complete network-enabled solutions, or individual components, based upon the specific needs of the customer.  Most of the companies in the industry offer only one or several components of the M2M value chain.  Some module manufacturers have started to market application development platforms while other M2M players offer airtime services, making available to their customers integration capabilities.  In addition, there is also a limited number of companies offering end-to-end service delivery platforms.
 

 
We believe that our current M2M services, combined with the continuing development of our network offerings and technology, positions us to compete effectively with emerging providers of M2M solutions using Global System for Mobile Communications (GSM), Code Division Multiple Access (CDMA) and satellite technology. Other potentially competitive offerings may include “wireless fidelity” (Wi-Fi), World Interoperability for Microwave Access (WiMAX) and other 3G and 4G (third and fourth generations of cellular wireless standards) technologies and networks.  We believe that principal competitive factors when selecting an M2M service or network-only provider are a single interface, network reliability, data security, and customer support.
 

 
We believe that our M2M service platforms, our network gateways, together with competitive pricing, end-to-end solution offerings, a ‘single source’ approach to the M2M market, extensive experience and intellectual property, positions Numerex favorably versus its competition. However, education about the M2M possibilities still remains a hurdle to overcome, which has recently been lowered by the added awareness received from the renewed interest in M2M from wireless carriers and other industry leaders such as IBM and Cisco.
 

 
Our Uplink security products and services have three primary competitors in the existing channels of distribution — Honeywell’s AlarmNet, Telular’s Teleguard and DSC, the security division of TYCO.  We believe that the principal competitive factors when making a product selection in the business and consumer security industry are hardware price, service price, reliability, industry certification status and feature requirements for specific security applications, for example fire, burglary, bank vault, etc.   Additional competitors have entered the market in the last several years with a focus on blending security monitoring and home automation.  These products and services are targeted for the do-it-yourself market as opposed to traditional security dealers.  Several companies offer OEM versions or include alarm monitoring technology and network services provided by Numerex.
 
 
 
 
Our Numerex Mobile end-to-end product is offered to a variety of customers, primarily comprised of resellers and VARs. There are many competitors offering vehicle location and recovery services, but the principal direct competitor to our customer base in the new car after-market vehicle location and recovery business is LoJack Corporation, the industry’s market leader.   OnStar Corp., a subsidiary of General Motors Corp., which offers a full suite of concierge services, markets and sells their services primarily through automobile manufacturers.  Other manufacturers are also moving to provide factory direct “networked cars” including Ford and others.  There are also numerous other small companies that currently offer or are developing other wireless products and services for this market.   The principal competitive factors are channel distribution, hardware price, network service price, features, and the ability to locate a vehicle at any time on demand. 
 

 
11 

 


Our competitive challenge is the pressure to maintain our hardware margins with an on-going process of cost reduction associated with the in-vehicle hardware and the expansion of our distribution network.  We believe our mobile hardware-based solution for this market will continue to undergo pricing pressure and will require hardware cost reduction in order to remain competitive.
 

 
The market for our technology and platforms remains characterized by rapid technological change. The principal competitive factors in this market continue to be product performance, ease of use, reliability, price, breadth of product lines, sales and distribution capability, technical support and service, customer relations, and general industry and economic conditions. The ability to provide wireless network service, wireless radios, device and modem technology, and end-to-end solutions -- including integration, network and service management -- has set Numerex apart from the competition. We believe that our strategic agreements with quality technology partners will help us provide efficient and ready-to -implement M2M solutions.
 

 
Ø  
Engineering and Development
 

 
The accelerated introduction by competitors of new products, technologies, and applications in our markets could adversely affect our business. Our success will depend, in part, on our ability to enhance our existing products and introduce new products and applications on a timely basis. We plan to continue to devote a portion of our resources to research and development.  Our engineering and development expenses were $3.1 million for the year ended December 31, 2010, as compared to $2.4 million for the year ended December 31, 2009 and $2.2 million for the year ended December 31, 2008.
 

 
We continue to invest in new services and improvements to our various technologies, especially networks and digital fixed and mobile solutions. We primarily focus on the development of M2M services and enabling platforms, enhancement of our gateway and network services, reductions in the cost of delivery of our network services and solutions, and enhancements and expansion of our application capabilities.   We have concentrated on providing customers with industry-benchmark offerings that go beyond the network requirement. Prudent integration of new digital and Web technology into our businesses is an active and ongoing process.
 

 
Ø  
Product Warranty and Service
 

 
Our M2M communications business typically provides a limited, one-year repair or replacement warranty on all hardware-based products. Our digital multimedia business typically provides a limited one-year warranty on parts and labor. Our networking business provides a limited one- or two-year repair or replacement warranty on all telecommunications networking hardware products. In addition, a help desk and training support is offered to users of telecommunications networking products. To date, warranty costs and the cost of maintaining our warranty programs have not been material to our business.
 

 
Ø  
Intellectual Property
 

 
We hold patents either directly (under Numerex Corp.) or through our subsidiaries covering the technologies we have developed in support of our product and service offerings in the United States and various other countries.  Patents have a limited legal lifespan, typically 20 years from the filing date for a utility patent filed on or after June 8, 1995.  Our patents expire between June 11, 2013 and September 30, 2028.  It is our practice to apply for patents as we develop new technologies, products, or processes suitable for patent protection.  No assurance can be given about the scope of the patent protection.
 

 
We also hold other intellectual property rights including, without limitation, copyrights, trademarks, and trade secret protections relating to our technology, products, and processes.   We believe that rapid technological developments in the telecommunications and locate-bases services industries may limit the protection afforded by patents.  We believe that our success will also depend on our manufacturing, engineering, and marketing know-how and the quality and economic value of our products, services, and solutions.
 

 
12 

 


In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require all of our employees and consultants to sign confidentiality agreements. Employees and consultants involved in technical endeavors also sign invention assignment agreements.  We intend these confidentiality and assignment agreements to protect our proprietary information by controlling the disclosure and use of technology to which we have rights. These agreements also provide that we will own all the proprietary technology developed at Numerex or developed using our resources.
 

 
While our competitive position could be affected by our ability to protect our intellectual property and proprietary information, we believe that because of the rapid pace of technological change in the industry, factors such as the technical expertise, knowledge and innovative skill of our management and technical personnel, our technology relationships, name recognition, the timeliness and quality of support services provided by us and our ability to rapidly develop, enhance and market software products could be more significant in maintaining our competitive position.
 

 
Ø  
Regulation
 

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

 
Employees
 

 
As of March 15, 2011, we had 125 employees in the U.S., consisting of 29 in sales, marketing and customer service, 59 in engineering and operations and 37 in management and administration. We have experienced no work stoppages and none of our employees are represented by collective bargaining arrangements.  We believe our relationship with our employees is good.
 

 
Available Information
 

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

 
13 

 


Executive Officers of the Registrant
 
 
 
Our executive officers, and all persons chosen to become executive officers, and their ages and positions as of March 31, 2011, are as follows:
 

 
Name
Age
Position
Stratton J. Nicolaides*
57
Chairman of the Board of Directors, Chief Executive Officer
Michael A. Marett
56
Chief Operating Officer
Alan B. Catherall
57
Chief Financial Officer
Louis Fienberg
56
Executive Vice President, Corporate Development
Jeff Smith, PhD
50
Chief Technology Officer

 
*Member of the Board of Directors
 

 
Mr. Nicolaides has served as Chief Executive Officer of the Company since April 2000, having served as Chief Operating Officer from April 1999 until March 2000 and as Chairman of the Board since December 1999.  From July 1994 until April 1999, Mr. Nicolaides managed a closely held investment partnership.
 
 
 
Mr. Marett has been an Officer of the Company since February 2001. In February 2005 he was named Chief Operating Officer.  From 1999 to 2001, Mr. Marett was Vice President, Sales and Marketing, of TManage, Inc., which provided planning, installation, and support services to companies with large remote workforces. From 1997 to 1999 Mr. Marett was Vice President, Business Development, of Mitel Business Communications Systems, a division of Mitel Corporation.  Prior to 1997, Mr. Marett held a number of executive positions at Bell Atlantic.
 
 
 
Mr. Catherall has been the Chief Financial Officer of the Company since June 2003.  From 1998 to 2002, Mr. Catherall served as Chief Financial Officer of AirGate PCS, a NASDAQ-listed wireless company.  From 1996 to 1998, Mr. Catherall was a partner in Tatum CFO LLP, a financial services consulting company.  Prior to 1996, he held a number of executive and management positions at MCI Communications.
 
 
 
Mr. Fienberg serves as the Company’s Executive Vice President for Corporate Development and has been with the Company since July 2004.  From August 2003 to July 2004, Mr. Fienberg served as Managing Director of an investment banking firm. From 1992 to 2003, Mr. Fienberg was a Senior Vice President and merger and acquisition specialist with Jefferies and Company, Inc.
 
   
 
Dr. Smith has served as the Chief Technology Officer since October 9, 2008.  From June 2007 to October 2008, he served as the President and Chief Executive Officer of Ublip, Inc. a provider of M2M and location based services that Dr. Smith founded.  From January 2002 until June 2007, Dr. Smith served as President and Chief Executive Officer of SensorLogics, Inc., an M2M application service provider that he also founded.  From June 1996 until January 2000, Dr. Smith served as regional President and director of NTT/Verio, an internet service provider and web hosting company.  From October 1993 until January 1997, he served as President and Chief Executive Officer of OnRamp Technologies, an internet service provider that he co-founded.
 

 

 
14 

 


Item 1A.   Risk Factors
 

 
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks before buying shares of our common stock. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are unaware or we currently believe are not material could also adversely affect us. In any case, the value of our common stock could decline, and you could lose all or part of your investment. You should also refer to the other information contained in this Form 10-K or incorporated herein by reference, including our consolidated financial statements and the notes to those statements. See also, “Special Note Regarding Forward-Looking Statements.”
 

 
Risks Related to Our Business
 

 
We have a history of losses and are uncertain as to our future profitability.
 

 
We have had mixed success with regard to generating profits. We incurred losses in 2008, 2009, and 2010 after being profitable from 2005-2007. Prior to 2005, we had net operating losses in each year dating back to 1998. In view of our operating costs, and given all other risk factors discussed herein, we may not be profitable in the future.
 

 
Adverse macroeconomic conditions could magnify our customers’ and suppliers’ current financial difficulties.
 

 
We furnish hardware solutions and services that are resold by our customers – wholesalers, value-added resellers, and other distributors. Many of our customers operate on narrow margins and have been adversely affected by current overall economic conditions. Current economic conditions are negatively impacting demand for our customers’ solutions resulting in reduced demand on the part of our customers for our hardware solutions and services. Our customers are also facing higher financing and operating costs. If current economic conditions worsen, we may experience both a decrease in revenues and an increase in expenses, particularly expenses relating to bad debt on the part of our customers. In particular, we anticipate that a continued slowdown in the number of new housing starts will impair sales of our residential alarm monitoring solutions. If overall conditions worsen significantly, residential and commercial consumers may also decide to cancel wireless monitoring services in an effort to eliminate expenses viewed as discretionary or non-critical. Similarly, a decline in vehicle sales associated with an overall economic downturn would negatively impacts sales of our vehicle tracking solutions. All of these and other macroeconomic factors could have a material adverse effect on demand for our hardware solutions and services and on our financial condition and operating results. We also may have difficulty identifying financially secure suppliers, thereby affecting our ability to bring new hardware solutions and services to market. We are also likely to experience greater pressure to reduce pricing and accept lower margins as we compete for customers subject to similar constraints on their pricing and margins. While our largest customers have been less affected by the current economy, if current adverse economic conditions persist or worsen, those customers could begin to be affected in a similar manner.
 

 
We operate in new and rapidly evolving markets where rapid technological change can quickly make hardware solutions and services, including those that we offer, obsolete.
 

 
The markets we operate in are subject to rapid advances in technology, continuously evolving industry standards and regulatory requirements, and ever-shifting customer requirements. The M2M wireless data communications field, in particular, is currently undergoing profound and rapid technological change. The introduction of unanticipated new technologies by carriers, or the development of unanticipated new end use applications by our customers, could render our current solutions obsolete. In that regard, we must discern current trends and anticipate an uncertain future. We must engage in product development efforts in advance of events that we cannot be sure will happen and time our production cycles and marketing activities accordingly. If our projections are incorrect, or if our product development efforts are not properly directed and timed, or if the demands of the marketplace shift in directions that we failed to anticipate, we may lose market share and revenues as a result. To remain competitive, we continue to support engineering and development efforts intended to bring new hardware solutions and services to the markets that we serve. However, those efforts are capital intensive. If we are unable to adequately fund our engineering and development efforts, we may not be successful in keeping our product line current with advances in technology and evolving customer requirements.
 

 
15 

 


 
Even with adequate funding, our development efforts may not yield any appreciable short-term results and may never result in hardware solutions and services that produce revenues over and above our cumulative development costs or that gain traction in the marketplace, causing us to either lose market share or fail to increase and forego increased sales and revenues as a result.
 

 
The markets in which we operate are highly competitive, and we may not be able to compete effectively.
 
 
We sell our products in intensely competitive markets.  Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do.  Existing or new products and services that provide alternatives to our products and services could materially impact our ability to compete in these markets.  As the markets for our products and services continue to develop, additional companies, including companies with significant market presence in the M2M industry, could enter the markets in which we compete and further intensify competition.  In addition, we believe price competition could become a more significant competitive factor in the future.   As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.
 
Failure of our new hardware solutions and services to gain market acceptance would impede our growth.
 

 
Over the past several years, among many initiatives, we have introduced a system enabling alarm signals to be transmitted digitally over the cellular network to central monitoring stations; a cellular and GPS-based vehicle tracking solution; satellite-based asset monitoring and tracking solutions; a multimedia videoconferencing solution, enhanced “back end” services and enhanced application development capabilities. If these hardware solutions and services, or any of our other existing hardware solutions and services, do not perform as expected, or if our sales are less than expected, our business may be adversely affected.
 

 
We experience long sales cycles for some our hardware solutions and services.
 

 
 
Certain of our product offerings, are subject to long sales cycles in view of the need for testing of our hardware solutions and services in combination with our customers’ applications and third parties’ technologies, the need for regulatory approvals and export clearances, and the need to resolve other complex operational and technical issues. For example, in the government contracting arena in particular, longer sales cycles are reflective of the fact that government contracts can take months or longer to progress from a “request for proposal” to a finalized contract document pursuant to which we are able to sell a finished product or service. Terms and conditions of sale unique to the government sector may also affect when we are able to recognize revenues.  Delays in sales could cause significant variability in our revenue and operating results for any particular period. For that reason, quarter-over-quarter comparisons of our financial results may not always be meaningful..
 

 
If we are unable to provide our suppliers with accurate forecasts of our needs, our margins will be adversely impacted.
 

 
We are contractually obligated to provide our manufacturers and network service providers with forecasts of our demand for components of our hardware solutions and network capacity. Specific terms and conditions vary by contract, however, if our forecasts do not result in the production of a quantity of units or network capacity sufficient to meet demand we may be subject to contractual penalties under some of our contracts with our customers. By contrast, overproduction of units based on forecasts that that overestimate demand could result in an accumulation of excess inventory that, under some of our contracts with our customers, would have to be managed at our expense thus adversely impacting our margins. Excess inventory that becomes obsolete or that we are otherwise unable to sell would also be subject to write-offs resulting in adverse affects on our margins.
 

 

 
16 

 


We are dependent on a number of manufacturers and telecommunications carriers, the loss of any one of which could adversely impact our ability to supply or service our customers.
 

 
The loss or disruption of key telecommunications infrastructure services and key wireless network services supplied to the Company would unfavorably impact our ability to adequately service our customers. Our long-term success depends on our ability to operate, manage, and maintain a reliable and cost effective network, as well as our ability to keep pace with changes in technology. Furthermore, our network operations are dependent on third parties. If we experience technical or logistical impediments to our ability to transfer traffic onto our network, fail to generate additional traffic on our network, or if we experience difficulties with our third party providers, we may not achieve our revenue goals or otherwise be successful in growing our business. We outsource the manufacturing of our hardware solutions to independent companies located in the United States and overseas and do not have internal manufacturing capabilities to meet the demands of our customers. Any delay, interruption, or termination of the manufacture of our hardware solutions could harm our ability to provide our hardware solutions to our customers and, consequently, could have a material adverse effect on our business and operations. The manufacture of our hardware solutions requires specialized know-how and capabilities possessed by a limited number of enterprises. Consequently, we are reliant on just a few suppliers for the manufacture of key hardware solutions and product components. If a key supplier experiences production problems or financial difficulties, we may not be able to obtain enough units to meet demand, which could result in failure to meet our contractual commitments to our customers, further causing us to lose sales and generate less revenue. If any of our hardware solutions or product components contain significant manufacturing defects that the existing manufacturer or supplier is unable to resolve, we could also have difficulty locating a suitable alternative manufacturer or supplier. Related efforts to design replacement hardware solutions or product components could also take longer and prove costlier than planned, resulting in a material adverse impact on our financial condition and operating results.
 

 
The loss of a few key technical personnel could have an adverse affect on us in the short-term.
 
 
Due to the specialized knowledge and skills each of our executive officers and other key employees possesses with respect to the development and maintenance and our operations, the loss of service of any of our officers.  Any unplanned turnover could diminish our institutional knowledge base and erode our competitive advantage.  We may need to hire additional personnel in the future, and we believe the success of the combined business depends, in large part, upon our ability to attract and retain key employees. The loss of the services of any key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenues and to operate our business.
 
Our hardware solutions and services experience quality problems from time to time that can result in decreased sales and operating margin.
 

 
Our hardware solutions and services, and the applications they support, are complex. While we test our hardware solutions and services, they may still have errors, defects, or bugs that we find only after commercial production has begun. In the past, we have experienced errors, defects, and bugs in connection with new hardware solutions and services. Our customers may not purchase our hardware solutions and services if they have reliability, quality, or compatibility problems. Furthermore, product errors, defects, or bugs could result in additional development costs, diversion of resources from our other development efforts, claims by our customers or others against us, or the loss of credibility with our current and prospective customers. Historically, the time required for us to correct defects has caused delays in product shipments and resulted in lower than expected revenues. Significant capital and resources may be required to address and fix problems in new hardware solutions and services. Failure to do so could result in lost revenue, harm to reputation, and significant warranty and other expenses, and could have a material adverse impact on our financial condition and operating results.
 

 

 
17 

 


We may lose customers if we experience system failures that significantly disrupt the availability and quality of the service our network provides.
 

 
The operation of our network depends on our ability to avoid or limit any interruptions in service to our customers. Interruptions in service or performance problems, for whatever reason, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new customers. In addition, because most of our customers are businesses, any significant interruption in service could result in lost profits or other losses to our customers. Although we attempt to disclaim or limit liability in our agreements with these customers, a court may not enforce a limitation on liability, which could expose us to losses. The failure of any equipment on our network, or that of a customer’s or end user’s equipment, could result in the interruption of service until necessary repairs are made or replacement equipment is installed. Network failures, delays, and errors may result from natural disasters, power losses, security breaches, viruses or terrorist acts. These failures or faults cause delays, service interruptions, expose us to customer liability, or require expensive modifications that could have a material adverse effect on our business and operating results.
 

 
We may have difficulty identifying the source of a problem in our network.
 

 
If a problem occurs on our network, it may be difficult to identify the source of the problem due to the overlay of our network with cellular, and/or satellite networks and our network’s reliance on those other networks. The occurrence of hardware or software errors, regardless of whether such errors are caused by our hardware solutions or services, or our internal facilities, may result in the delay or loss of market acceptance of our solutions, and any necessary revisions may result in significant and additional expenses. The occurrence of some of these types of problems may seriously harm our business, financial condition, or operations. Given our dependence on cellular, and satellite telecommunications service providers, risks specific or unique to their technologies, i.e., the loss or malfunction of a satellite or satellite ground station, should also be viewed as having the potential to impair our ability to provide services.
 

 
A natural disaster or other weather events could diminish our ability to provide service and our revenues may be impacted by weather patterns.
 

 
Natural or other disasters including, without limitation, hurricanes, tornadoes, earthquakes, or solar flares could damage or destroy both our primary and secondary facilities , which may result  in a  significant  disruption of service to our customers. In particular, our Numerex FAST® architecture is, at present, not fully supported by redundant systems. We may also be unable, due to loss of personnel or the inability of personnel to access our facilities, to provide some services to our customers for a period of time. In addition, even if our facilities are not affected by natural disasters, our service could be disrupted if a natural disaster damages the third party cellular or satellite networks we are interconnected with. Further, in the event of an emergency, the telecommunications networks that we rely upon may become capacity constrained or preempted by governmental authorities. With respect to our satellite-based asset tracking unit in particular, sales may be influenced by weather patterns. For example, if government agencies and emergency responders anticipate a relatively “mild” storm season, they buy fewer of our units for deployment in support of disaster response operations.
 

 
We may require additional capital to fund further development, and our competitive position could decline if we are unable to obtain additional capital, or access the credit markets.
 

 
To address our long-term capital needs, we intend to continue to pursue strategic relationships that would provide resources for the further development of our product candidates. There can be no assurance, however, that these discussions will result in relationships or additional funding. In addition, we may seek to raise capital through the public or private sale of securities, if market conditions are favorable for doing so. If we are successful in raising additional funds through the issuance of equity securities, stockholders will likely experience dilution, or the equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If we raise funds through the issuance of debt securities, those securities would have rights, preferences, and privileges senior to those of our common stock.
 

 
18 

 


Our Loan and Security Agreement with Silicon Valley Bank, or SVB, contains financial and operating restrictions that may limit our access to credit.  If we fail to comply with covenants in the SVB Credit Facility, we may be required to repay any potential indebtedness thereunder, which may have an adverse effect on our liquidity.
 

Provisions in the Loan and Security Agreement (the “Agreement”) with SVB impose restrictions on our ability to, among other things:
 
• incur additional indebtedness;
•create liens;
•enter into transactions with affiliates;
•transfer assets;
•pay dividends or make distributions on, or repurchase our stock; or
•merge or consolidate.

In addition, we are required to meet certain financial covenants and ratios customary with this type of credit facility. The SVB Credit Facility also contains other customary covenants.  We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow under the SVB credit facility. In addition to preventing additional borrowings under the SVB Credit Facility, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the SVB Credit Facility, which would require us to pay all amounts outstanding.  If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all.  If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.

 
If we achieve our growth goals, we may be unable to manage our resulting expansion.
 

 
To the extent that we are successful in implementing our business strategy, we may experience periods of rapid expansion. In order to effectively manage growth, whether organic or through acquisitions, we will need to maintain and improve our operations and effectively train and manage our employees. Our expansion through acquisitions is contingent on successful management of those acquisitions, which will require proper integration of new employees, processes and procedures, and information systems, which can be both difficult and demanding from an operational, managerial, cultural, and human resources perspective. We must also expand the capacity of our sales and distribution networks in order to achieve continued growth in our existing and future markets. The failure to manage growth effectively in any of these areas could have a material adverse effect on our financial condition and operating results.
 
 
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
 
 
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.
 
We are subject to risks associated with laws, regulations and industry-imposed standards related to fixed and mobile communications devices and associated services.
 

 
Laws and regulations related to fixed and mobile communications devices and associated services are extensive, vary by jurisdiction, and are subject to change. Such changes, could include, without limitation, restrictions on the production, manufacture, distribution, and use of communications devices, restrictions on the ability to port devices and associated services to new carriers’ networks, requirements to make devices and associated services compatible with more than one carrier’s network, or restrictions on end use could, by preventing us from fully serving affected markets, have a material adverse effect on our financial condition and operating results.
 

 
19 

 

In particular, communication devices we sell, or which our customer wish us to support, are subject to regulation or certification by governmental agencies such as the Federal Communications Commission (FCC), industry standardization bodies such as the PCS Type Certification Review Board (PTCRB), and particular wireless network carriers for use on their networks. The procedures for obtaining required regulatory approvals and certifications are extensive and time consuming, and can  require us to conduct additional testing requirements, makes modifications to our hardware solutions and services, or delay in product launch and shipment dates, which could have a material adverse effect on our financial condition and operating results.

 
Changes in domestic tax regulations could affect our results.
 

 
The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations could impose costs on us that we are unable to fully recover.
 

 
If we become subject to unanticipated foreign tax liabilities, it could materially increase our costs.
 

 
We are doing business in, and are expanding into, foreign tax jurisdictions. We believe that we have complied in all material respects with our obligations to pay taxes in these jurisdictions. If the applicable taxing authorities were to challenge successfully our current tax positions, or if there were changes in the manner in which we conduct our activities, we could become subject to material unanticipated tax liabilities. We may also become subject, prospectively or retrospectively, to additional tax liabilities following changes in tax laws.   The application of existing, new or future laws could have adverse effects on our business, prospects and operating results. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
 

 
An increasing portion of our future revenue, in particular the revenue deriving from our sale of satellite-based tracking solutions, may be derived from contracts with the U.S. government, state governments, or government contractors  Those contracts are subject to uncertain funding.
 

 
The funding of government programs is uncertain and, at the federal level, is dependent on continued congressional appropriations and administrative allotment of funds based on an annual budgeting process. We cannot assure you that current levels of congressional funding for programs supporting by our offerings will continue. In particular, a significant portion of our revenues from the sale of satellite-based tracking solutions through our location-based services division has been derived from sales made by us indirectly as a subcontractor to a prime government contractor that has the direct relationship with the U.S. government.  If the prime contractor loses business with respect to which we serve as a subcontractor, our government business would be hurt. We also maintain a Federal Supply Schedule with the General Services Administration under which we do business directly with the U.S. government. If we, as the prime contractor, were to lose some or all of such business, our revenues derived from the sale of satellite-based tracking solutions would suffer as a result.
 

 
Our operating results may be negatively affected by developments affecting government programs generally, including the following:
 

 
·  
changes in government programs that are related to our hardware solutions and services;
·  
adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations;
·  
changes in political or public support for programs;
·  
delays or changes in the government appropriations process; and
·  
delays in the payment of invoices by government payment offices and the prime contractors.

 

 
20 

 


These developments and other factors could cause governmental agencies to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain from renewing contracts, any of which would cause our revenue to decline and could otherwise harm our business, financial condition and results of operations. For example, many of the ultimate consumers of our PowerPlay™ hardware and services are elementary and secondary schools that pay for their purchases with funding that they receive through the Schools and Libraries Program (commonly known as the “E-Rate Program”) of the Universal Service Fund, which is administered by the Universal Service Administrative Company (USAC) under the direction of the FCC. Demand for hardware solutions and services under the E-Rate Program is very difficult to predict and changes in the program itself could also affect demand.
 

 
Government contracts contain provisions that are unfavorable to us.
 

 
Government contracts contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts. These provisions may allow the government to
 

 
·  
Terminate existing contracts for convenience, as well as for default,
·  
Reduce or modify contracts or subcontracts,
·  
Cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable,
·  
Decline to exercise an option to renew a multi-year contract,
·  
Claim rights in our hardware solutions and services,
·  
Suspend or debar us from doing business with the federal government or with a governmental agency, and
·  
Control or prohibit the export of our hardware solutions and services.

 
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. We may experience performance issues on some of our contracts. We may receive show cause or cure notices under contracts that, if not addressed to the government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts in the future.
 

 
Agreements with government agencies may lead to regulatory or other legal action against us including, without limitation, claims against us under the Federal False Claims Act or other federal statutes. These claims could result in substantial fines and other penalties.
 

 
We must comply with a complex set of rules and regulations applicable to government contractors and their subcontractors. Failure to comply with an applicable rule or regulation could result in our suspension of doing business with the government or with the prime government contractors that do business with or cause us to incur substantial penalties. Our agreements with the U.S. government are subject to substantial financial penalties under the Civil Monetary Penalties Act and the False Claims Act and, in particular, actions under the False Claims Act’s “whistleblower” provisions.  Private enforcement of fraud claims against businesses on behalf of the U.S. government has increased due in large part to amendments to the False Claims Act that encourage private individuals to sue on behalf of the government.  These whistleblower suits by private individuals, known as qui tam actions, may be filed by almost anyone, including present and former employees. The False Claims Act statute provides for treble damages and up to $11,000 per claim on the basis of the alleged claims. Prosecutions, investigations or qui tam actions could have a material adverse effect on our liquidity, financial condition and results of operations. Finally, various state false claim and anti-kickback laws also may apply to us. Violation of any of the foregoing statutes can result in criminal and/or civil penalties that could have a material adverse effect our business.
 

 

 
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We may not be aware of certain foreign government regulations.
 

 
Because regulatory schemes vary by country, we may be subject to regulations in foreign countries of which we are not presently aware.  If that were to be the case, we could be subject to sanctions by a foreign government that could materially and adversely affect our ability to operate in that country. We cannot assure you that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we wish to operate, or that applicable restrictions in those jurisdictions will not be unduly burdensome. The failure to obtain the authorizations necessary to operate satellites internationally could have a material adverse effect on our ability to generate revenue and our overall competitive position.  We, our customers and companies with whom we do business may be required to have authority from each country in which we or they provide services or provide our customers use of our hardware solutions and services. Because regulations in each country are different, we may not be aware if some of our customers and/or companies with which we do business do not hold the requisite licenses and approvals.
 

 
We operate internationally, which subjects us to international regulation and business uncertainties that create additional risk for us.
 

 
We have been doing business directly, or via our distributors, in Australia, Canada, Mexico, and Pakistan, and are expanding, directly or via our distributors, into additional countries in Latin America, Europe, the Middle East, and Asia.   Accordingly, we or our distributors are subject to additional risks, such as:
 

 
    ·  
a continued international economic downturn,
· export control requirements, including restrictions on the export of critical technology,
· restrictions imposed by local laws and regulations,
· restrictions imposed by local product certification requirements;
· currency exchange rate fluctuations,
· generally longer receivable collection periods and difficulty in collecting accounts  receivable,
· trade restrictions and changes in tariffs,
· difficulties in repatriating earnings,
· difficulties in staffing and managing international operations, and
· potential insolvency of channel partners.

 
We have only limited experience in marketing and operating our services in certain international markets. Moreover, we have in some cases experienced and expect to continue to experience in some cases higher costs as a percentage of revenues in connection with establishing and providing services in international markets versus the U.S. In addition, certain international markets may be slower than the U.S. in adopting the outsourced communications solutions and so our operations in international markets may not develop at a rate that supports our level of investments.
 

 
Unfavorable results of legal proceedings could materially adversely affect us.
 

 
We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of its merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. In recognition of these considerations, we may enter into material settlements. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that would materially adversely affect a portion of our business and might materially affect our financial condition and operating results.
 

 

 
22 

 


Risks Related to Intellectual Property
 

 
The loss of intellectual property protection both U.S. and international could have a material adverse effect on our operations.
 

 
Our future success and competitive position depend upon our ability to obtain and maintain intellectual property protection, especially with regard to our core business. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology. Our services are highly dependent upon our technology and the scope and limitations of our proprietary rights therein. If our assertion of proprietary rights is held to be invalid, or if another party’s use of our technology were to occur to any substantial degree, our business, financial condition and results of operations could be materially adversely affected. In order to protect our technology, we rely on a combination of patents, copyrights, and trade secret laws, as well as certain customer licensing agreements, employee and customer confidentiality and non-disclosure agreements, and other similar arrangements. Loss of such protection could compromise any advantage obtained and, therefore, impact our sales, market share, and results. To the extent that our licensees develop inventions or processes independently that may be applicable to our hardware solutions and services, disputes may arise as to the ownership of the proprietary rights to this information. These inventions or processes will not necessarily become our property, but may remain the property of these persons or their full-time employers. We could be required to make payments to the owners of these inventions or processes, in the form of either cash or equity, or a combination of both.
 
Furthermore, our future or pending patent applications may not be issued with the scope of the claims sought by us, if at all. In addition, others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned or licensed by us. Effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in foreign countries where we may need protection.
 

 
We rely on access to third-party patents and intellectual property, and our future results could be materially adversely affected if we are unable to secure such access in the future.
 

 
Many of our hardware solutions and services are designed to include third-party intellectual property, and in the future we may need to seek or renew licenses relating to such intellectual property. Although we believe that, based on past experience and industry practice, such licenses generally can be obtained on reasonable terms, there is no assurance that the necessary licenses would be available on acceptable terms or at all. Some licenses we obtain may be nonexclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our hardware solutions and services, and there can be no assurance that we would be able to design and incorporate alternative technologies, without a material adverse effect on our business, financial condition, and results of operations.
 

 
Our competitors may obtain patents that could restrict our ability to offer our hardware solutions and services, or subject us to additional costs, which could impede our ability to offer our hardware solutions and services and otherwise adversely affect us. We may, from time to time, also be subject to litigation over intellectual property rights or other commercial issues.
 

 
Several of our competitors have obtained and can be expected to obtain patents that cover hardware solutions and services directly or indirectly related to those offered by us. There can be no assurance that we are aware of all patents containing claims that may pose a risk of infringement by its hardware solutions and services. In addition, patent applications in the United States are confidential until a patent is issued and, accordingly, we cannot evaluate the extent to which our hardware solutions and services may infringe on future patent rights held by others.
 

 
Even with technology that we develop independently, a third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as engineering and development and the sale of any of our hardware solutions and services. Furthermore, because of technological changes in the M2M industry, current extensive patent coverage, and the rapid issuance of new patents, it is possible that certain components of our hardware solutions, services, and business methods may unknowingly infringe the patents or other intellectual property rights of third parties. From time to time, we have been notified that we may be infringing such rights.
 

 
23 

 



 
In the highly competitive and technology-dependent telecommunications field in particular, litigation over intellectual property rights is significant business risk, and some entities are pursuing a litigation strategy the goal of which is to monetize otherwise unutilized intellectual property portfolios via licensing arrangements entered into under threat of continued litigation. Regardless of merit, responding to such litigation can consume significant time and expense. In certain cases, we may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. If we are found to be infringing such rights, we may be required to pay substantial damages. If there is a temporary or permanent injunction prohibiting us from marketing or selling certain hardware solutions and services or a successful claim of infringement against us requires us to pay royalties to a third party, our financial condition and operating results could be materially adversely affected, regardless of whether we can develop non-infringing technology. While in management’s opinion we do not have a potential liability for damages or royalties from any known current legal proceedings or claims related to the infringement of patent or other intellectual property rights that would individually or in the aggregate have a material adverse effect on our financial condition and operating results, the results of such legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others or should several of these matters be resolved against us in the same reporting period, our financial condition and operating results could be materially adversely affected.
 

 
Risks Related to Our Common Stock and Ownership Structure
 

 
Because our stock is held by a relatively small number of investors and is thinly traded, it may be more difficult for shareholders to sell our shares or buy additional shares when they desire and share prices may be volatile.
 

 
Our common stock is currently listed on the NASDAQ. Our stock is thinly traded and we cannot guarantee that an active trading market will develop, or that it will maintain its current market price. A large number of shares of our common stock are held by a small number of investors. An attempt to sell a large number of shares by a large holder could adversely affect the price of our stock. In addition, it may be difficult for a purchaser of our shares of our common stock to sell such shares without experiencing significant price volatility.
 

 
The exercise or conversion of outstanding options, stock appreciation rights and warrants into common stock will dilute the percentage ownership of our other shareholders and the sale of such shares may adversely affect the market price of our common stock.
 
 
 
As of February 28, 2011, there are outstanding options, stock appreciation rights and warrants to purchase an aggregate of approximately 2.5 million shares of our common stock and more options and stock appreciation rights will likely be granted in the future to our officers, directors, employees and consultants.  We may issue additional warrants in connection with acquisitions, borrowing arrangement or other strategic or financial transactions.  The exercise of outstanding stock options will dilute the percentage ownership of our other shareholders. The exercise of these options and warrants and the subsequent sale of the underlying common stock could cause a decline in our stock price.
 

 
The structure of our company limits the voting power of our stockholders and certain factors may inhibit changes in control of our company.
 

 
The concentration of ownership of our common stock may have the effect of delaying, deferring, or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock. Currently, our executive officers, directors and greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own approximately 28.5% of our outstanding common stock.  These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters. The interests of these stockholders may be different than those of our unaffiliated stockholders and our unaffiliated stockholders may be dissatisfied with the outcome of votes that may be controlled by our affiliated stockholders.
 

 
24 

 


Our articles of incorporation generally limit holdings by persons of our common stock to no more than 10% without prior approval by our Board. Except as otherwise permitted by the Board, no stockholder has the right to cast more than 10% of the total votes regardless of the number of shares of common stock owned. In addition, if a person acquires holdings in excess of this ownership limit, our Board may terminate all voting rights of the person during the time that the ownership limit is violated, bring a lawsuit against the person seeking divestiture of amounts in excess of the limit, or take other actions as the Board deems appropriate. Our articles of incorporation also have a procedure that gives us the right to purchase shares of common stock held in excess of the ownership limit.  In addition, our articles of incorporation permit our Board to authorize the issuance of preferred stock without stockholder approval. Any future series of preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our common stockholders.
 

 
Item 1B.  Unresolved Staff Comments.
 

 
None.
 

 
Item 2.  Properties.
 

 
All of our facilities are leased.  Set forth below is certain information with respect to our leased facilities:
 

 
Location
Principal Business
Square Footage
Lease Term
Atlanta, Georgia
M2M Services and Principal Executive Office
31,526
2012
Warminster, Pennsylvania
M2M Services and Other Services
18,000
2011
Bozeman, Montana
M2M Services
5,060
2011
State College, Pennsylvania
Other Services
10,788
Month to Month
Addison, Texas
M2M Services
3,000
2011
Reston, VA
M2M Services
3,416
2012

 
We conduct engineering, sales and marketing, and administrative activities at many of these locations. We believe that our existing facilities are adequate for our current needs. As we grow and expand into new markets and develop additional hardware, we may require additional space, which we believe will be available at reasonable rates.
 

 
We engage in limited manufacturing, equipment and hardware assembly and testing for certain hardware. We also use contract manufacturers for production, sub-assembly and final assembly of certain hardware.  We believe there are other manufacturers that could perform this work on comparable terms.
 

 

 
25 

 


Item 3.  Legal Proceedings.
 

 
As determined on December 31, 3010 and as previously reported in a Current Report on Form 8-K filed on January 13, 2011, on January 7, 2011, we amended that certain Asset Purchase Agreement by and among the Company, Orbit One Communications, LLC and Orbit One Communications, Inc., originally dated as of July 31, 2007 (the “Amendment”).  The Amendment addresses disputes (which disputes have been previously reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K) that arose among the parties, including former Orbit One stockholders David Ronsen, Scott Rosenzweig, and Gary Naden, regarding the proper measurement for a portion of the purchase price and agreeing to a final purchase price adjustment.   In connection with the Amendment, the parties to the Amendment agreed to dismiss, with prejudice, all lawsuits pending between them.  
 

The net adjustment to the final purchase price totaled approximately $1.7 million, after giving effect to the return of approximately $573,000 from the escrow to the Company.  In addition, we repurchased 320,833 shares of our common stock, held in escrow for the benefit of the sellers, for approximately $2.9 million based on a price per share equal to the closing trading price on the effective date of the Amendment.  The 320,833 shares had been deemed “earned” under the terms of the earn-out in the Asset Purchase Agreement and were considered outstanding for financial reporting purposes (See Note P for more information).
 

 

 
Item 4.  Removed and Reserved.
 

 

 
26 

 

PART II
 

 
Item 5.  Market for the Registrant's Common Stock and Related Shareholder Matters and Issuer Purchases of Equity Securities.
 

 
The Company’s Common Stock trades publicly on the NASDAQ Global Market System under the symbol NMRX.
 

 
The following table sets forth, for the fiscal quarters indicated, the high and low sales prices per share for the Common Stock on the NASDAQ Global Market for the applicable periods.
 

 

 
Fiscal 2010
 
High
   
Low
 
First Quarter (January 1, 2010  to March 31, 2010)
  $ 4.69     $ 4.01  
Second Quarter (April 1, 2010 to June 30, 2010)
    5.08       4.18  
Third Quarter (July 1, 2010 to September 30, 2010)
    6.22       4.10  
Fourth Quarter (October 1, 2010 to December 31, 2010)
    9.77       5.75  
                 
                 
Fiscal 2009
 
High
   
Low
 
First Quarter (January 1, 2009 to March 31, 2009)
  $ 4.00     $ 1.71  
Second Quarter (April 1, 2009 to June 30, 2009)
    5.60       2.91  
Third Quarter (July 1, 2009 to September 30, 2009)
    5.75       4.48  
Fourth Quarter (October 1, 2009 to December 31, 2009)
    5.10       3.95  
 
 
On March 28, 2011, the last reported sale price of our Class A common stock on The NASDAQ Global Market was $9.42 per share.
 

 
As of March 28, 2011, there were 55 holders of record of our Common Stock, approximately one beneficial shareholder and 15,042,028 shares of Common Stock outstanding.  Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.   
 

 
Dividend Policy
 
 
 
We currently do not pay any cash dividends.  In deciding whether or not to declare or pay dividends in the future, the Board of Directors will consider all relevant factors, including our earnings, financial condition and working capital, capital expenditure requirements, any restrictions contained in loan agreements and market factors and conditions.  We have no plans now or in the foreseeable future to declare or pay cash dividends on our common stock.
 
 
 
Performance Graph
 
 
 
The information included under the heading "Performance Graph" in this Item 5 of this Annual Report on Form 10-K is "furnished" and not "filed" and shall not be deemed to be "soliciting material" or subject to Regulation 14A or 14C, nor shall it be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into any such filing.
 
 
 

 
27 

 


The following graph shows a comparison of the cumulative total return for Common Stock, the NASDAQ Composite Index and the NASDAQ Telecomm Index, assuming (i) an investment of $100 in each, on December 31, 2005, the last trading day before the beginning of the Company’s five preceding years, and, (ii) in the case of the Indices, the reinvestment of all dividends.
 


 
 


 
 
SHAREHOLDER VALUE AT YEAR END
 
2005
2006
2007
2008
2009
2010
NMRX
100.00
199.15
174.42
76.96
90.91
182.77
NASDAQ US Index
100.00
109.52
120.27
71.52
102.90
120.31
NASDAQ Telecom Index
100.00
127.75
139.71
79.37
117.97
122.52

 

 
28 

 

Item 6.  Selected Consolidated Financial Data.
 

 
The following selected financial data should be read in conjunction with the consolidated financial statements and the notes contained in “Item 8.  Financial Statements and Supplementary Data” and the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.  Historical results are not necessarily indicative of future results.
 

 
The following financial information was derived using the consolidated financial statements of Numerex Corp.  The table lists historical financial data of the Company for the years ended December 31, 2010, 2009, 2008, 2007 and 2006.
 

 
   
December 31,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
   
2008
   
2007
   
2006
 
Statement of Operations Data
                             
Revenues
  $ 58,243     $ 50,836     $ 72,319     $ 68,004     $ 52,788  
Gross profit
    25,657       22,348       25,420       23,407       18,922  
Litigation settlement and related expenses
    3,025       1,637       2,092       -       -  
Goodwill and long-lived asset impairment
    -       -       5,289       -       2,140  
Operating income (loss)
    (400 )     (1,656 )     (6,389 )     2,500       1,674  
Provision (benefit) for income taxes
    (144 )     285       3,047       728       (2,950 )
Net income (loss)
    (380 )     (5,829 )     (10,975 )     440       4,103  
Earnings (loss) per common share (diluted)
    (0.03 )     (0.40 )     (0.78 )     0.03       0.32  
                                         
Balance Sheet Data
                                       
Cash, cash equivalents, restricted cash and short term investments
  $ 10,516     $ 5,306     $ 8,917     $ 7,425     $ 20,384  
Total Assets
    57,146       52,747       62,506       74,098       66,394  
                                         
Total Debt and capital lease obligations (short and long term)
    684       523       10,746       10,683       14,337  
Shareholders' equity
    42,718       42,037       40,394       46,865       41,420  
                                         
Cash Flow Data
                                       
Net cash provided by (used in) operations
  $ 8,564     $ 5,089     $ 8,359     $ (3,305 )   $ 2,663  

 

 
29 

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 

 
This Management’s Discussion and Analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Forward Looking Statements” on page 4 for a discussion of the uncertainties, risks and assumptions associated with these statements.  You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” in Section 1A of this Annual Report on Form 10-K.
 

 
Overview
 

 
We are a machine-to-machine (M2M) data communications, technology and solutions business.  We combine our network services, hardware and applications development capabilities to create packaged and custom designed M2M solutions for customers across multiple market segments.
 

 
Fiscal year 2010 represented an increase in revenues over 2009.  Full year revenues of $58.2 million increased $7.4 million, or 14.6%, from 2009.  This increase was primarily the result of a 17% increase in hardware revenue and a 13% increase in service revenue.
 

 
Gross margin was 44.1% for 2010 and 44.0% for 2009.  
 
 
 
 
Fiscal year 2010 overhead, excluding the litigation settlement and related expenses, includes selling, general and administrative (SG&A) costs, as well as engineering and development expenses and bad debt costs, was $23.0 million or $664,000 higher than 2009.  The increase was primarily related to a $545,000 increase in employee related expenses a $215,000 increase in professional fees and a $229,000 increase in expenses related to new product testing and certifications.  These increases were partially offset by a $325,000 decrease in bad debt expense.
 

 
While our overall business has grown and we believe that our pipeline of future sales opportunities is solid, general economic uncertainty remains and may reduce our future growth.  We have tightened our credit policies in response to the economic climate, in particular to our hardware-only sales, which may impact revenues but this has also reduced our bad debt expense.
 

 
The following is a discussion of our consolidated financial condition and results of operations for the fiscal years ended December 31, 2010, 2009 and 2008.  
 

 
Critical Accounting Policies
 

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

 
General
 

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

 
30 

 

Revenue Recognition

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

We recognize revenue from hardware sales at the time of shipment and passage of title. Provision for rebates, promotions, product returns and discounts to customers is recorded as a reduction in revenue in the same period that the revenue is recognized. We offer customers the right to return hardware that does not function properly within a limited time after delivery. We continuously monitor and track such hardware returns and record a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending returns. While such returns have historically been within expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have experienced in the past. Any significant increase in hardware failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize. We recognize revenue from the provision of services at the time of the completion, delivery or performance of the service.

In the case of revenue derived from maintenance services we recognize revenue ratably over the contract term. In certain instances we may, under an appropriate agreement, advance charge for the service to be provided. In these instances we 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. Our revenues in the consolidated statement of operations are net of sales taxes.

We recognize revenue from the provision of data transportation services when we perform the service 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.

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

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

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

 

 
31 

 


Allowance for Doubtful Accounts
 

 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Changes in the financial condition of our customers could result in upward or downward adjustments to the allowance for doubtful accounts.
 
 
Inventories and Reserves for Excess, Slow-Moving and Obsolete Inventory
 

 
We value our inventory at the lower of cost or market.  We continually evaluate the composition of our inventory and identify, with estimates, potential future excess, obsolete and slow-moving inventories. We specifically identify obsolete hardware for reserve purposes and analyze historical usage, forecasted production based on demand forecasts, current economic trends, and historical write-offs when evaluating the adequacy of the reserve for excess and slow-moving inventory. If we are not able to achieve our expectations of the net realizable value of the inventory at its current carrying value, we adjust our reserves accordingly.
 

 
Valuation of Goodwill and Long-lived Assets
 
 
 
 
Goodwill and 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.  We concluded that we had six reporting units at December 31, 2010, three of which had associated goodwill.  All of our goodwill was associated with these three reporting units.  The reporting units with goodwill were Wireless (excluding Orbit One), Orbit One (Satellite), and BNI Service.  The reporting units not containing associated goodwill were BNI Product, Digilog and DCX.  There was a change in the number of total reporting units from 2009 as the BNI reporting unit was split into two reporting units due to changes in management structure and reporting.  The BNI Services reporting unit is associated with the M2M Services segment and the BNI Product is associated with the Other Services segment.  All the goodwill previously associated with the BNI reporting unit was allocated to the BNI Services reporting unit as this is where we believe the benefit from the goodwill is received, as defined by ASC 350. Additionally, the majority of the old BNI reporting unit assets were associated with this reporting unit, thus leaving an immaterial amount of the old reporting unit’s assets with the BNI Product reporting unit.   For our 2010 annual review, we used discounted cash flow models to estimate fair market value of these reporting units.  We used historical information, our 2011 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 twelve months ended December 31, 2010.   We settled the litigation over the purchase of the Orbit One reporting unit in December which would be considered a triggering event requiring interim impairment tests, however, this event occurred when we perform our annual impairment test, thus only one impairment test was performed.
 

 
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.
 

 

 
32 

 


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

 

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

 
During 2010, we did not record a goodwill impairment charge. 
 

 
For our M2M Services (excluding Orbit One LLC) reporting unit, we use a discounted cash flow model to determine the fair value and an 18% discount rate, as this reporting unit’s risks mirror that of the Company as a whole.  Our historical revenue growth rate averaged 15% over the past five years.   We used this same growth rate through the forecast period as we expect the market to continue strong growth.  We expect our average margins over the forecast period to remain at the historical five year average of 43% for this reporting unit.  The growth rates used for SG&A and R&D are expected to be 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 higher than historic run rates as we expect it to be necessary to maintain the projected growth rates.  We used the projected revenue growth rates to project accounts receivable and inventory and used historical 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 2010, a hypothetical reduction in the fair value of  our M2M Services (excluding Orbit One LLC) reporting unit of  53.7% , 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 18%, or our cumulative projected profitability would have to decrease by 39%.  An 8.7% 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.  We used an 18% 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.  The average margins over the forecast period are projected to increase as higher margin service revenues are expected to make up a greater portion of the total revenues than lower margin hardware 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 the revenue growth rate to project accounts receivable, used historical 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 2010, a hypothetical reduction in the fair value of  our Orbit One LLC reporting unit of  39% , 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 11%, or our cumulative projected profitability would have to decrease by 31%.  A 4.5% increase to the discount rate that we applied also would have resulted in the carrying value of the reporting unit exceeding its fair value.
 
 
 

 
33 

 


In our BNI Service reporting unit, we used a discounted cash flow analysis to determine the fair value.  In September 2010 we won a new multi-year contract (EAGLE-net) to provide networking support and maintenance for Colorado’s new project to provide high-speed network services to school districts, libraries and community institutions across the state.   The projections for this reporting unit are heavily based on this contract along with the reporting unit’s traditional network services.   We used 18% discount rate as this reporting unit’s risks mirrored that of the Company as a whole.  Revenue growth rates averaged 23% over the forecast period which is primarily driven by the Eagle-net project.   Ongoing network service revenues were grown at 4% over the forecast period.  The average margins over the forecast period are projected to decline as lower margin hardware revenues are expected to make up a greater portion of the total revenues than higher margin service sales.  SG&A expenses are forecast to increase in order to support the Eagle-net project.  Depreciation and amortization and capital expenditures are kept at historic run rates as they are not expected to be impacted by the project.  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.  
 

 
Based upon our goodwill impairment analysis conducted in the fourth quarter of 2010, a hypothetical reduction in the fair value of  our BNI Services reporting unit of  61% , 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 23%, or our cumulative projected profitability would have to decrease by 47%.  A 22% 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, 2010, indicating that our projections were reasonable and not aggressive.
 

 
Deferred Tax Assets
 

 
Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain   deferred tax assets, which arise from net operating losses, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
 

 
ASC 740, "Accounting for Income Taxes",  requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. In evaluating the ability to recover the deferred tax assets, in full or in part, management considers all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years and the forecast of future taxable income on a jurisdiction by jurisdiction basis.  Management is responsible for the assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. Actual operating results and the underlying assumptions could differ materially from our current assumptions, judgments and estimates of recoverable net deferred taxes.
 

 
Cumulative losses incurred in recent years and the potential impact of the current economic environment on future taxable income represented sufficient negative evidence for management to conclude that the deferred tax assets require a full valuation allowance. As such, management established a full valuation allowance against the net deferred tax assets, which will remain until sufficient positive evidence exists to support reversal. Deferred tax assets generated during the current year primarily due to net operating losses were offset by an increase to the valuation allowance resulting in no net benefit recorded in the current year. Future reversals or increases to the valuation allowance could have a significant impact on our future earnings. Current tax expense resulted from foreign operations and certain state taxes.
 

 

 
34 

 

Result of Operations
 

 
The following table sets forth, for the periods indicated, certain revenue and expense items and the percentage increases and decreases for those items in the Company’s Consolidated Statements of Operations.
 

 
   
For the years ended December 31,
   
2010 vs. 2009
   
2009 vs. 2008
 
(in thousands, except per share amounts)
 
2010
   
2009
   
2008
   
% Change
   
% Change
 
Net sales:
                             
M2M Services
                             
Hardware
  $ 23,285     $ 19,756     $ 42,340       17.9 %     -53.3 %
Service
    33,423       29,427       27,764       13.6 %     6.0 %
Sub-total
    56,708       49,183       70,104       15.3 %     -29.8 %
Other Services
                                       
Hardware
    440       526       708       -16.3 %     -25.7 %
Service
    1,095       1,127       1,507       -2.8 %     -25.2 %
Sub-total
    1,535       1,653       2,215       -7.1 %     -25.4 %
Total net sales
                                       
Hardware
    23,725       20,282       43,048       17.0 %     -52.9 %
Service
    34,518       30,554       29,271       13.0 %     4.4 %
Sub-total
    58,243       50,836       72,319       14.6 %     -29.7 %
 Cost of hardware sales
    19,021       17,319       37,469       9.8 %     -53.8 %
 Cost of services
    13,565       11,169       9,430       21.5 %     18.4 %
 Gross Profit
    25,657       22,348       25,420       14.8 %     -12.1 %
 Gross Profit %
    44.1 %     44.0 %     35.1 %                
 Sales and marketing expenses
    6,819       6,116       6,511       11.5 %     -6.1 %
 General and administrative expenses
    9,473       9,896       11,510       -4.3 %     -14.0 %
 Engineering and development expenses
    3,148       2,421       2,198       30.0 %     10.1 %
 Bad debt expense
    211       536       1,102       -60.6 %     -51.4 %
 Depreciation and amortization
    3,381       3,398       3,107       -0.5 %     9.4 %
 Litigation and settlement related expenses
    3,025       1,637       2,092       84.8 %     -21.7 %
 Goodwill and long-lived asset impairment
    -       -       5,289    
nm
   
nm
 
 Operating loss
    (400 )     (1,656 )     (6,389 )     -75.8 %     -74.1 %
Costs of early extinguishment of debt
    -       (2,936 )     -       -97.6 %     154.0 %
 Interest expense, net
    (93 )     (995 )     (1,531 )     -97.6 %     154.0 %
 Other expense, net
    (31 )     43       (8 )  
nm
   
nm
 
 Provision (benefit) for income tax
    (144 )     285       3,047       -150.5 %     -90.6 %
 Net earnings
    (380 )     (5,829 )     (10,975 )     -93.5 %     -46.9 %
 Basic loss per common share
  $ (0.03 )   $ (0.40 )   $ (0.78 )                
 Diluted loss per common share
  $ (0.03 )   $ (0.40 )   $ (0.78 )                
 Basic
    15,084       14,429       14,144                  
 Diluted
    15,084       14,429       14,144                  
<TABLE><CAPTION>
 
 
 
 
 See notes to consolidated financial statements.
 

 

 

 
35 

 


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

 
Net revenues increased 14.6% to $58.2 million for the year ended December 31, 2010, as compared to $50.8 million for the year ended December 31, 2009.  The increase in total net revenues is attributable to a 17.0% increase to $23.7 million in hardware revenues and a 13% increase to $34.5 million in service sales.  The increase in hardware revenues is due primarily to an increase in sales of our security hardware and sales of our cellular and satellite tracking units.  The increase in service sales is due primarily to subscription increases which were generated by sales of our security hardware, as well as increased sales of our cellular and satellite tracking units.
 
 
 
 
Cost of hardware sales increased 9.8% to $19.0 million for the year ended December 31, 2010, as compared to $17.3 million for the year ended December 31, 2009.  The increase is in direct correlation to the increase in hardware sales.
 

 
Cost of services increased 21.5% to $13.6 million for the year ended December 31, 2010, as compared to $11.2 million for the year ended December 31, 2009.  The increase is in direct correlation to the increase in services sales.
 

 
Gross profit, as a percentage of net revenue, remained constant at 44.1% for the year ended December 31, 2010, as compared to 44.0% for the year ended December 31, 2009.  
 

 
Sales and marketing expenses increased 11.5% to $6.8 million for the year ended December 31, 2010, as compared to $6.1 million for the year ended December 31, 2009.  The increase is primarily the result of a $440,000 increase related to additional employees and $262,000 increase in promotional and marketing expenses.
 

 
General, administrative and legal expenses decreased 4.3% to $9.5 million for the year ended December 31, 2010, as compared to $9.9 million for the year ended December 31, 2009.  The decrease is primarily the result of a $174,000 decrease in employee related expenses, a $143,000 decrease in supplies, telecommunications and facility related costs and a $106,000 decrease in professional service fees.
 

 
Engineering and development expenses increased 30.0% to $3.1 million for the year ended December 31, 2010, as compared to $2.4 million for the year ended December 31, 2009.  The increase in engineering and development expenses is primarily the result of a $275,000 increase in employee costs, a $229,000 increase in expenses related to new product testing and certifications and a $215,000 increase in professional service fees.
 

 
Bad debt expense decreased to $211,000 for the year ended December 31, 2010, as compared to $536,000 for the year ended December 31, 2009.  We analyze accounts receivable and consider our historical bad debt experience, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  Bad debt expense decreased over the prior year as a result of our tighter credit controls particularly in regard to our hardware-only customer sales.
 

 
Depreciation and amortization expense remained constant at $3.4 million for the year ended December 31, 2010 and 2009.
 

 
Litigation and settlement expenses increased to $3.0 million for the year ended December 31, 2010, as compared to $1.6 million for the year ended December 31, 2009.   The increase is the result of the settlement of our legal proceedings (see Note P of the notes to the financial statements included in this Annual Report on Form 10-K).
 

 
Net interest expense decreased to $93,000 for the year ended December 31, 2010, as compared to $3.9 million for the year ended December 31, 2009.    In 2009 we incurred a $1.0 million in interest expense associated with our debt.  In 2009 we also incurred $2.9 million in expense associated with our debt conversion.  These expenses did not recur in 2010, due to the January 2010 repayment of all outstanding principle and interest on our outstanding debt, which resulted in the decrease in interest expense during 2010.
 

 

 
36 

 


We recorded a tax benefit of $144,000 for the year ended December 31, 2010, as compared to a tax provision of $285,000 for the year ended December 31, 2009, representing effective tax rates of 27.5% and (5.15%) respectively. The increase in our effective tax rate from (5.15%) to 27.5% between 2009 and 2010 respectively, is related to the reversal of a deferred tax liability related to indefinite-lived intangibles, the expiration of certain ASC 740-10 liabilities, and a foreign tax return to provision adjustment.  The difference between our effective tax rate and the 34% federal statutory rate in the current year resulted primarily from the existence of a valuation allowance against our net deferred tax assets, foreign taxes, state tax accruals, and uncertain tax position expense.
 

 
The weighted average basic shares outstanding increased to 15,084,000 for the year ended December 31, 2010, as compared to 14,429,000 for the year ended December 31, 2009.  The increase in weighted average basic shares outstanding for the year ended December 31, 2009 was primarily due to the issuance of 55,000 common shares related to the employee stock option plan.
 

 
Comparison of Fiscal Years Ended December 31, 2009 and December 31, 2008
 

 
Net revenues decreased 29.7% to $50.8 million for the year ended December 31, 2009, as compared to $72.3 million for the year ended December 31, 2008.  The decrease in total net revenues for the year ended December 31, 2009 is attributable to a 52.9% decrease to $20.3 million in hardware revenues as compared to $43.0 million for the year ended December 31, 2008.  The decrease in hardware revenues is due primarily to a decrease in demand for our wireless modules due to the end of the technology transition from analog to digital.  The decrease is also due to the effect of the economy on our customers, as well as a result of our tighter credit controls, which were implemented in the second half of 2008.
 
 
 
 
Cost of hardware sales decreased 53.8% to $17.3 million for the year ended December 31, 2009, as compared to $37.5 million for the year ended December 31, 2008.  The decrease was primarily due to the corresponding decrease in hardware sales.
 

 
Cost of services increased 18.4% to $11.2 million for the year ended December 31, 2009, as compared to $9.4 million for the year ended December 31, 2008.  The increase in cost of services was primarily the result of an increase in the number of subscriptions to our M2M network.  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.
 

 
Gross profit, as a percentage of net revenue, was 44.0% for the year ended December 31, 2009, as compared to 35.1% for the year ended December 31, 2008.  The increase for 2009, as compared to 2008, is primarily a result of a change in the overall revenue mix. For the year ended December 31, 2009, service revenues were 60.1% and of total revenues, as compared to 40.5% for the year ended December 31, 2008. This causes an overall margin improvement since service revenues have a significantly higher gross margin than those achieved through the sale of hardware.
 

 
Sales and marketing expenses decreased 6.1% to $6.1 million for the year ended December 31, 2009, as compared to $6.5 million for the year ended December 31, 2008.  The decrease is primarily the result of a $450,000 decrease in employee related expenses and a $165,000 decrease in promotional expenses which were partially offset by an increase of $205,000 in supplies, telecommunications and facility related costs.
 

 
General, administrative and legal expenses decreased 14% to $9.9 million for the year ended December 31, 2009, as compared to $11.5 million for the year ended December 31, 2008.  The decrease is primarily the result of a $835,000 decrease in employee related expenses, a $435,000 decrease in professional fees and a $330,000 decrease in supplies, telecommunications and facility related costs.
 

 
Engineering and development expenses increased 10.1% to $2.4 million for the year ended December 31, 2009, as compared to $2.2 million for the year ended December 31, 2008.  The increase in engineering and development expenses is primarily the result of increased employee compensation and expenses related to new product testing and certifications.
 

 
37 

 

Bad debt expense decreased to $536,000 for the year ended December 31, 2009, as compared to $1.1 million for the year ended December 31, 2008.  We analyze accounts receivable and consider our historical bad debt experience, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  Bad debt expense decreased over the prior year as a result of our tighter credit controls, particularly in regard to our hardware-only customer sales.

 
Depreciation and amortization expense increased 9.4% to $3.4 million for the year ended December 31, 2009, as compared to $3.1 million for the year ended December 31, 2008.  This increase is primarily the result of increased capital expenditures for computer and office equipment and for capitalized software projects that have been placed into service.
 

 
Litigation settlement decreased to $1.6 million for the year ended December 31, 2009, as compared to $2.1 million for the year ended December 31, 2008.
 

 
Net interest expense and costs of early extinguishment of debt increased to $3.9 million in 2009, as compared to $1.5 million in 2008.  The increase is primarily the result of the $2.9 million expense associated with the debt conversion.  In 2009, we repaid an aggregate of $5.7 million under our outstanding convertible promissory notes.  Under generally accepted accounted principles, specifically, ASC 470-20 (formerly FAS 84), an adjustment to the conversion price of the convertible note should be accounted for as an inducement to convert the note, even though there was no economic incentive offered. The increase in interest expense also includes $499,000, the non-cash expense associated with the expensing of the deferred fees associated with the early extinguishment of debt.
 

 
We recorded a tax provision of $285,000 for the year ended December 31, 2009, as compared to a tax provision of $3.0 million for the year ended December 31, 2008, representing effective tax rates of (5.15)% and  (38.44)%  respectively. The difference between our effective tax rate and the 34% federal statutory rate in the current year resulted primarily from the existence of a valuation allowance against our net deferred tax assets, foreign taxes, state tax accruals, and uncertain tax position.
 

 
The weighted average basic shares outstanding increased to 14,429,000 for the year ended December 31, 2009, as compared to 14,144,000 for the year ended December 31, 2008.  The increase in weighted average basic shares outstanding for the year ended December 31, 2009 was primarily due to the issuance of 44,000 common shares related to the employee stock option plan and 889,000 common shares issued in lieu of debt payments.
 

 

 
38 

 

Segment Information
 

 
During 2010, we changed our internal organization structure and internal management reporting to combine all M2M activity into one operating group.  As such, we have recast our reportable segments to conform with our internal reporting structure.  We have integrated our network services and our wire-line security detection hardware and services with our M2M Services segment as they are closely related to our cellular and satellite machine-to-machine communications hardware and services.  Other Services consists of our video conferencing hardware and installation of telecommunications equipment.  We have reclassified financial information for 2009 and 2008 to conform to the current period presentation.

 
   
For the years ended December 31,
   
2010 vs. 2009
   
2009 vs. 2008
 
(In thousands)
 
2010
   
2009
   
2008
   
% Change
   
% Change
 
Net sales:
                             
M2M Services
                         
  Hardware
  $ 23,285     $ 19,756     $ 42,340       17.9 %     -53.3 %
  Service
    33,423       29,427       27,764       13.6 %     6.0 %
Sub-total
    56,708       49,183       70,104       15.3 %     -29.8 %
Other Services
                                 
  Hardware
    440       526       708       -16.3 %     -25.7 %
  Service
    1,095       1,127       1,507       -2.8 %     -25.2 %
Sub-total
    1,535       1,653       2.215       -7.1 %     -25.4 %
Total net sales
                                       
  Hardware
    23,725       20,282       43,048       17.0 %     -52.9 %
  Service
    34,518       30,554       29,271       13.0 %     4.4 %
Total net sales
    58,243       50,836       72,319       14.6 %     -29.7 %
                                         
Cost of Sales:
                                       
M2M Services
                                 
    Cost of hardware sales
  $ 18,770     $ 17,061     $ 37,125       10.0 %     -54.0 %
    Cost of service sales
    13,091       10,674       8,742       22.6 %     22.1 %
Subtotal
    31,861       27,735       45,867       33.0 %     -32.0 %
Other Services
                                 
    Cost of hardware sales
    251       258       344       -2.7 %     -25.0 %
    Cost of service sales
    474       495       688       -4.2 %     -28.1 %
Subtotal
    725       753       1,032       -3.7 %     -27.0 %
Total cost of sales
  $ 32,586     $ 28,488     $ 46,899       14.4 %     -39.3 %
Gross Profit
  $ 25,657     $ 22,348     $ 25,420       14.8 %     -12.1 %
Gross Profit %
    44.1 %     44.0 %     35.1 %                

 
   
Percent of Total Sales
 
   
2010
   
2009
   
2008
 
Net sales:
                 
M2M Services
             
  Hardware
    40.0 %     38.9 %     58.5 %
  Service
    57.4 %     57.9 %     38.4 %
Sub-total
    97.4 %     96.7 %     91.5 %
Other Services
                 
  Hardware
    0.8 %     1.0 %     1.0 %
  Service
    1.9 %     2.2 %     2.1 %
Sub-total
    2.6 %     3.3 %     3.1 %
Total net sales
                       
  Hardware
    40.7 %     39.9 %     59.5 %
  Service
    59.3 %     60.1 %     40.5 %
Total net sales
    100.0 %     100.0 %     100.0 %
                         

 
39 

 

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

 
M2M Services Segment
 

 
Net revenues from M2M Services increased 15.3% to $56.7 million for the year ended December 31, 2010, as compared to $49.2 million for the year ended December 31, 2009.  This increase was the result a 17.9% increase in hardware revenue and a 13.6% increase in service revenue.  This hardware revenue increase was primarily the result of an increase in sales of our security hardware and an increase in sales of our cellular and satellite tracking units.  The service revenue increase was primarily due to an increase in network subscriptions which were generated by sales of our security hardware, as well as increased sales of our cellular and satellite tracking units. Our subscriptions at December 31, 2010 increased 25% to 1.2 million, as compared to 937,000 for the year ended December 31, 2009.  We continue to focus on increasing subscriptions to our network due to the recurring nature of the service revenues.
 

 
Cost of hardware sales for our M2M Services segment increased 10.0% to $18.8 million for the year ended December 31, 2010, as compared to $17.1 million for the year ended December 31, 2009.  The increase is in direct correlation to the increase in M2M Services hardware sales.
 

 
Cost of service sales for our M2M Services segment increased 22.6% for the year ended December 31, 2010 to $13.1 million, as compared to $10.7 million for the year ended December 31, 2009.  The increase is in direct correlation to the increase in M2M Services service sales.
 

 
Other Services Segment
 

 
Net revenue from Other Services decreased 7.1% to $1.5 million for the year ended December 31, 2010, as compared to $1.7 million for the year ended December 31, 2009.  The decrease was the result of a result of a 16.3% decrease in hardware revenue and a 2.8% decrease in service revenue.  The hardware revenue decrease 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.  Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.
 

 
Cost of sales for our Other Services segment decreased 3.7% to $725,000 for the year ended December 31, 2010, as compared to $753,000 for the year ended December 31, 2009.  The decrease in cost of sales for our Other Services segment is in direct correlation to the decrease in hardware sales.
 

 
40 

 


Fiscal Years Ended December 31, 2009 and December 31, 2008
 

 
M2M Services Segment
 

 
Net revenues from M2M Services decreased 29.8% to $49.2 million for the year ended December 31, 2009, as compared to $70.1 million for the year ended December 31, 2008.  This decrease was the result a 53.3% decrease in hardware revenue, partially offset by a 6.0% increase in service revenue.  The decrease in M2M Services hardware revenue was primarily the result of a decrease in demand for our wireless modules due to the effect of the prolonged economic slump on our customers, as well as a result of our tighter credit controls, which were implemented in January 2009. The increase in the M2M Services service revenue was primarily the result of connection increases that 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 December 31, 2009 were 937,000, as compared to 702,000 at December 31, 2008, a 34.0% increase in subscriptions over the year ended December 31, 2008.  We continue to focus on increasing subscriptions to our network due to the recurring nature of the service revenues.
 

 
Cost of hardware sales for our M2M Services segment decreased 54.0% to $17.1 million for the year ended December 31, 2009, as compared to $37.1 million for the year ended December 31, 2008.  The decrease in cost of hardware sales for our M2M Services segment is primarily the result of lower hardware sales.
 

 
Cost of service sales for our M2M Services segment increased 22.1% for the year ended December 31, 2009 to $10.7 million, as compared to $8.7 million for the year ended December 31, 2008.  M2M Services service net costs increased primarily due to the costs related to the increase in the number of subscriptions to our M2M Services network during the year ended December 31, 2009.
 

 
Other Services Segment
 

 
Net revenue from Other Services decreased 25.4% to 1.7 million for the year ended December 31, 2009, as compared to $2.2 million for the year ended December 31, 2008.  This decrease was 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 decrease in net revenue is also due to service revenues decreasing.  Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies.  The decrease in service revenues was due to a decrease in demand for these services.
 

 
Cost of sales for our Other Services segment decreased 27.0% to $753,000 for the year ended December 31, 2009, as compared to $1.0 million for the year ended December 31, 2008.  The decrease in cost of hardware sales for our Other Services segment is in direct correlation to the decrease in hardware sales.
 

 

 
41 

 


Selected Quarterly Financial Data
 

 
The following tables detail certain unaudited financial data of Numerex for each quarter of the last two fiscal years ended December 31, 2010 and 2009, respectively.

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

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

 
42 

 


Selected Quarterly Financial Data (Unaudited)
 

 
   
For the Three Months Ended
 
(in thousands)
 
March 31,
   
June 30,
   
September 30,
   
December 31,
 
   
2010
   
2010
   
2010
   
2010
 
Net sales:
                       
M2M Services
                       
Hardware
  $ 4,756     $ 6,305     $ 6,299     $ 5,925  
Service
    7,910       8,128       8,649       8,737  
Sub-total
    12,666       14,433       14,948       14,662  
Other Services
                               
Hardware
    62       162       194       22  
Service
    294       303       263       235  
Sub-total
    356       465       457       257  
Total net sales
                               
Hardware
    4,818       6,467       6,493       5,947  
Service
    8,204       8,431       8,912       8,972  
Sub-total
    13,022       14,898       15,405       14,919  
 Cost of hardware sales
    4,036       5,066       5,113       4,807  
 Cost of services
    3,233       3,425       3,426       3,479  
Gross Profit
    5,753       6,407       6,866       6,633  
 Sales and marketing expenses
    1,787       1,759       1,691       1,582  
 General and administrative expenses
    2,207       2,186       2,583       2,501  
 Engineering and development expenses
    592       780       888       888  
 Bad debt expense
    57       107       53       (8 )
 Depreciation and amortization
    872       860       810       839  
 Litigation settlement and related expenses
    192       331       90       2,412  
Operating earnings (loss)
    46       384       751       (1,581 )
 Interest expense
    (13 )     (5 )     (44 )     (31 )
 Net other income
    (41 )     -       9       1  
Net earnings (loss)
    (8 )     379       716       (1,611 )
 Provision (benefit) for income tax
    22       (8 )     59       (217 )
Net earnings (loss)
  $ (30 )   $ 387     $ 657     $ (1,394 )
 Foreign currency translation adjustment
    7       -       2       -  
Comprehensive earnings (loss)
  $ (23 )   $ 387     $ 659     $ (1,394 )
 Basic earnings (loss) per common share
  $ (0.00 )   $ 0.03     $ 0.04     $ (0.09 )
 Diluted earnings (loss) per common share
  $ (0.00 )   $ 0.03     $ 0.04     $ (0.09 )
Basic
    15,079       15,074       15,078       15,102  
Diluted
    15,079       15,234       15,363       15,102  

 
43 

 

Selected Quarterly Financial Data (Unaudited)
 

 
   
For the Three Months Ended
 
(in thousands)
 
March 31,
   
June 30,
   
September 30,
   
December 31,
 
   
2009
   
2009
   
2009
   
2009
 
Net sales:
                       
M2M Services
                       
Hardware
  $ 5,615     $ 4,743     $ 3,810     $ 5,588  
Service
    6,702       7,423       7,349       7,953  
Sub-total
    12,317       12,166       11,159       13,541  
Other Services
                               
Hardware
    60       161       167       138  
Service
    285       277       223       342  
Sub-total
    345       438       390       480  
Total net sales
                               
Hardware
    5,675       4,904       3,977       5,726  
Service
    6,987       7,700       7,572       8,295  
Sub-total
    12,662       12,604       11,549       14,021  
 Cost of hardware sales
    4,928       4,235       3,449       4,707  
 Cost of services
    2,434       2,687       2,995       3,054  
Gross Profit
    5,300       5,682       5,105       6,260  
 Sales and marketing expenses
    1,257       2,014       1,405       1,440  
 General and administrative expenses
    2,859       1,946       2,446       2,644  
 Engineering and development expenses
    508       651       584       678  
 Bad debt expense
    155       136       102       144  
 Depreciation and amortization
    792       844       879       882  
 Litigation settlement and related expenses
    1,068       513       56       -  
Operating earnings (loss)
    (1,339 )     (422 )     (367 )     472  
 Costs of early extinguishment of debt
    -       -       (1,577 )     (1,359 )
 Interest expense
    (347 )     (343 )     (204 )     (101 )
 Net other income
    -       1       -       42  
Net loss
    (1,686 )     (764 )     (2,148 )     (946 )
 Provision for income tax
    37       28       31       189  
Net loss
  $ (1,723 )   $ (792 )   $ (2,179 )   $ (1,135 )
 Foreign currency translation adjustment
    (2 )     4       6       -  
Comprehensive loss
  $ (1,725 )   $ (788 )   $ (2,173 )   $ (1,135 )
 Basic loss per common share
  $ (0.12 )   $ (0.06 )   $ (0.15 )   $ (0.08 )
 Diluted loss per common share
  $ (0.12 )   $ (0.06 )   $ (0.15 )   $ (0.08 )
Basic
    14,169       14,152       14,360       14,947  
Diluted
    14,169       14,152       14,360       14,947  

 
44 

 

Liquidity and capital resources
 

 
We had working capital of $10.2 million as of December 31, 2010 compared to working capital of $9.3 million as of December 31, 2009.  We had cash balances of $10.3 million and 5.3 million as of December 31, 2010 and 2009, respectively.  
 
 
 
The following table shows information about our cash flows and liquidity positions during the twelve months ended December 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 8. Financial Statements” of this report.
 

 
   
Year ended December 31,
 
   
2010
   
2009
 
  (in thousands)            
Net cash provided by operating activities
  $ 8,555     $ 5,089  
Net cash used in investing activities
    (2,612 )     (2,393 )
Net cash used in financing activities
    (998 )     (6,315 )
Effect of exchange differences on cash
    -       8  
    $ 4,945     $ (3,611 )

 

 
We provided cash from operating activities totaling $8.6 million for the year ended December 31, 2010 compared to $5.1 million for the year ended December 31, 2009.  The increase was primarily due to the decrease in net loss of $5.4 million and the increase in accounts payable and other current liabilities, partially offset by the increase in accounts receivable.
 

 
We used cash in investing activities totaling $2.6 million for the year ended December 31, 2010 compared to $2.4 million for the year ended December 31, 2009.   The increase was primarily due to the purchase of intangible assets and other assets during 2010.
 

 
We used cash in financing activities totaling $1.0 million for the year ended December 31, 2010 compared to $6.3 million for the year ended December 31, 2009.  The decrease was primarily due to the principal payments on notes payable and debt of $6.2 million during 2009.
 
 
 
 
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.
 

 
In January 2010, we repaid the remaining $500,000 of outstanding indebtedness due under our notes payable.
 

 
On May 4, 2010, we entered into that certain Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank (“SVB”).  The terms of the Agreement provide that SVB will, among other things, make revolving credit advances up to an aggregate of $5 million (the “Credit Facility”), subject to certain conditions as set forth in the Agreement.  The Credit Facility also includes 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 unused portion of the credit facility.
 

 

 
45 

 


During the year ended December 31, 2010, no borrowings were made under the Credit Facility and as of December 31, 2010 there were no amounts outstanding under the Credit Facility.   The Credit Facility contains customary default provisions, and we must comply with various financial and non-financial covenants. The financial covenants consist of a minimum quarterly EBITDA ratio and a minimum monthly adjusted quick ratio.   Additionally, the Credit Agreement includes certain negative covenants, subject to customary exceptions and limitations, restricting or limiting our ability,  without the prior written consent of  SVB, to, among other things: convey, sell, lease, transfer or otherwise dispose of assets; change its business; experience a change in control; merge or consolidate with any other entity; incur additional indebtedness; create liens on our property that is used as collateral for the credit facility; make certain investments and acquisitions; pay dividends, distributions or make other specified restricted payments or repurchases; and enter into certain transactions with affiliates.  As of December 31, 2010, we were in compliance with all covenants of the Credit Facility.
 

 
During 2010 and 2009, we incurred $1.1 million and $1.7 million, respectively, in legal expenses related to our litigation with Orbit One Communications, Inc.  For 2011, we expect no additional legal fees for this matter as it was settled during 2010 (see Item 3 – Legal Proceedings).
 

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

 
Contractual Obligations
 

 
The table below sets forth our contractual obligations at December 31, 2010.  Additional details regarding these obligations are provided in the notes to our consolidated financial statements.
 

 
   
(in thousands)
 
   
Payments due by period
 
   
Total
   
Less than 1 Year
   
1 - 3 Years
   
3 - 5 Years
   
More than 5 Years
 
Capital lease obligations(1)
  $ 741     $ 496     $ 245       -       -  
Operating lease obligations(2)
    1,562       975       600       -       -  
              Total(3)
  $ 2,303     $ 1,471     $ 845       -       -  

 
(1)  
Amounts represent future minimum lease payments under non-cancelable capital leases for computer equipment.  The value of the equipment recorded in property and equipment at the inception of the leases was $881,000.
 
(2)  
Amounts represent future minimum rental payments under non-cancelable operating leases for our facilities.
 
(3)  
Liabilities of approximately $415,000 related to ASC Subtopic 740-10, Income Taxes) have not been included in the table above because we are uncertain as to if or when such amounts may be settled. See Note A to the consolidated financial statements contained in this report for further information.
 

 
Off-Balance Sheet Arrangements
 

 
As of December 31, 2010, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
 
 
Recent Accounting Pronouncements
 
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 21 of the Notes to Consolidated Financial Statements.

 

 
46 

 


Effect of Inflation
 

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

 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
 

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

 
As of December 31, 2010, we had no long-term debt balance outstanding.  However, our Credit Agreement provides us with a revolving credit facility up to $5.0 million (the “Credit Facility”).  The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s 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 Credit Agreement) plus a LIBOR rate margin of 2.75%. The Credit Facility includes an annual fee of 0.375% of the average unused portion.  Accordingly we could be exposed to market risk from changes in interest rates on our long-term debt.  A hypothetical 1% interest rate change would not have any current impact on our results of operations as we had no amounts outstanding under the Credit Facility as of December 31, 2010 or any other outstanding indebtedness.

 
Foreign Currency
 

 
The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates, and revenues and expenses are translated at the ending exchange rate from the prior period which materially approximates the average exchange rates for each period. Resulting translation adjustments are reflected as other comprehensive income within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.  Foreign operations are not significant to the Company.
 
 

 

 
47 

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 

 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

 
 
 
Page
Consolidated Balance Sheets as of December 31, 2010 and 2009
  49
Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2010, 2009 and 2008
  50
Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2010, 2009 and 2008
  51
Consolidated Statements of Cash Flows for the Years ended December 31, 2010, 2009 and 2008
  52
Notes to Consolidated Financial Statements
  54
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
  76

 

 
48 

 


 
Numerex Corp. and Subsidiaries
 
Consolidated Balance Sheets
 
(In thousands, except share information)
 
   
December 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 10,251     $ 5,306  
Restricted cash
    265       -  
Accounts receivable, less allowance for doubtful accounts of $356 at December 31, 2009 and $548 at December 31, 2009
    6,518       6,341  
Inventory
    4,820       6,290  
Prepaid expenses and other current assets
    1,926       1,569  
TOTAL CURRENT ASSETS
    23,780       19,506  
                 
Property and equipment, net
    1,392       1,603  
Goodwill, net
    23,787       23,787  
Other intangibles, net
    4,741       4,985  
Software, net
    3,115       2,747  
Other assets
    331       119  
TOTAL ASSETS
  $ 57,146     $ 52,747  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY