nmrx10q033111.htm




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended March 31, 2011
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from          to          
 
Commission file number: 0-22920
 
 

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

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



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

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

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

As of May 11, 2011, an aggregate of 15,048,002 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.


 
 

 

NUMEREX CORP. AND SUBSIDIARIES

INDEX

 
Page
 
Item 1.  Financial Statements
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income  (Loss)
3
4
5
6
7
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
21
Item 4.  Controls and Procedures
21
 
Item 1.  Legal Proceedings
22
Item 1A.  Risk Factors
22
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
22
Item 3.  Defaults Upon Senior Securities
22
Item 4.  Removed and Reserved
23
Item 5.  Other Information
23
Item 6.  Exhibits
23
24
Certifications
25
Exhibits
  26



 
 

 

PART I.  FINANCIAL INFORMATION

  Financial Statements.

 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPRENHENSIVE INCOME (LOSS)
 
(In thousands, except per share data)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net sales:
           
Hardware
  $ 4,584     $ 4,818  
Service
    9,184       8,204  
Total net sales
    13,768       13,022  
Cost of hardware sales, exclusive of depreciation and   amortization shown separately below
    3,926       4,036  
Cost of services, exclusive of depreciation and amortization shown separately below
    3,756       3,233  
Gross profit
    6,086       5,753  
Sales and marketing
    2,168       1,787  
General, administrative and legal
    2,198       2,399  
Engineering and development
    594       592  
Bad debt expense
    81       57  
Depreciation and amortization
    775       873  
Operating income
    270       45  
Interest expense
    (26 )     (13 )
Net other expense
    -       (41 )
Income (loss) before income taxes
    244       (9 )
Provision for income taxes
    14       22  
Net income (loss)
    230       (31 )
Other comprehensive income (loss), net of income tax:
               
Foreign currency translation adjustment
    12       7  
Comprehensive income (loss)
  $ 242     $ (24 )
                 
Basic earnings (loss) per common share
  $ 0.02     $ ( - )
Diluted earnings (loss) per common share
  $ 0.01     $ ( - )
Weighted average common shares outstanding:
               
   Basic
    14,985       15,079  
   Diluted
    15,763       15,079  


See accompanying notes to unaudited condensed consolidated financial statements

 

 


 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share information)
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 4,115     $ 10,251  
Restricted cash
    265       265  
Accounts receivable, less allowance for doubtful accounts of $417 at March  31, 2011 and $356 at   December 31, 2010
    6,756       6,518  
Inventory
    4,479       4,820  
Prepaid expenses and other current assets
    1,663       1,926  
TOTAL CURRENT ASSETS
    17,278       23,780  
                 
Property and equipment, net
    1,337       1,392  
Goodwill, net
    23,787       23,787  
Other intangibles, net
    4,674       4,741  
Software, net
    3,005       3,115  
Other assets
    1,338       331  
TOTAL ASSETS
  $ 51,419     $ 57,146  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 5,726     $ 7,507  
Other current liabilities
    1,163       3,765  
Deferred revenues
    1,974       1,864  
Obligations under capital leases, current portion
    456       447  
TOTAL CURRENT LIABILITIES
    9,319       13,583  
                 
LONG TERM LIABILITIES
               
Obligations under capital leases and other long term liabilities
    120       237  
Other long-term liabilities
    569       608  
TOTAL  LIABILITIES
    10,008       14,428  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock - no par value; authorized 3,000,000; none issued
    -       -  
Class A common stock – no par value; authorized 30,000,000; issued 16,603,670 shares at March 31, 2011 and 16,362,937 shares at December 31, 2010; outstanding 15,122,128 shares at March 31, 2011 December 31, 2010
    58,851       57,696  
Class B common stock – no par value; authorized 5,000,000; none issued
    -       -  
Additional paid-in-capital
    6,596       6,403  
Treasury stock, at cost, 1,561,642 shares at March 31, 2011 and 1,240,809 shares at December 31, 2010
    (8,136 )     (5,239 )
Accumulated other comprehensive income
    12       -  
Accumulated deficit
    (15,912 )     (16,142 )
TOTAL SHAREHOLDERS' EQUITY
    41,411       42,718  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 51,419     $ 57,146  

See accompanying notes to unaudited condensed consolidated financial statements

 

 


 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
  Net income (loss)
  $ 230     $ (31 )
Adjustments to reconcile net income (loss) to net cash
               
provided by/(used in) operating activities:
               
   Depreciation and amortization
    775       873  
   Allowance for doubtful accounts
    81       57  
   Inventory reserves
    -       47  
   Non-cash interest expense
    4       12  
   Stock options compensation expense
    193       263  
   Stock issued in lieu of directors fees
    31       14  
   Deferred income taxes
    -       26  
   Changes in assets and liabilities which provided/(used) cash:
               
     Accounts and notes receivable
    (319 )     98  
     Inventory
    341       540  
     Prepaid expenses and other current assets
    (407 )     (481 )
     Other assets
    -       (35 )
     Accounts payable
    (1,781 )     945  
     Other liabilities
    (2,647 )     (62 )
     Deferred revenue
    110       313  
     Income taxes
    (7 )     32  
       Net cash (used in) provided by operating activities:
    (3,396 )     2,611  
Cash flows from investing activities:
               
   Purchase of property and equipment
    (139 )     (401 )
   Purchase of intangible and other assets
    (406 )     (610 )
   Investment
    (322 )     -  
       Net cash used in investing activities
    (867 )     (1,011 )
Cash flows from financing activities:
               
   Proceeds from exercise of common stock options and warrants
    1,124       -  
   Purchase of treasury stock
    (2,897 )     (26 )
   Principal payments on capital lease obligations
    (112 )     (5 )
   Principal payments on notes payable and debt
    -       (500 )
       Net cash used in financing activities:
    (1,885 )     (531 )
   Effect of exchange differences on cash
    12       7  
      Net increase in cash and cash equivalents
    (6,136 )     1,076  
Cash and cash equivalents at beginning of year
    10,251       5,306  
Cash and cash equivalents at end of year
  $ 4,115     $ 6,382  
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:
               
   Interest
  $ 22     $ 2  
   Income taxes
    21       32  
Disclosure of non-cash activities:
               
   Non-cash interest
    9       12  

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
         
(in thousands)
                               
                           
Accumulated
             
               
Additional
         
Other
             
   
Common
   
Stock
   
Paid-In
   
Treasury
   
Comprehensive
   
Retained
       
   
Shares
   
Amount
   
Capital
   
Stock
   
Income
   
Earnings
   
Total
 
Balance, December 31, 2010
    16,363     $ 57,696     $ 6,403     $ (5,239 )   $ -     $ (16,142 )   $ 42,718  
Issuance of shares under Directors Stock Plan
    4       31       -       -       -       -       31  
Issuance of shares in connection with employee stock option plan
    37       244       -       -       -       -       244  
Conversion of warrants
    200       880       -       -       -       -       880  
Repurchase of treasury shares
    -       -       -       (2,897 )     -       -       (2,897 )
Share-based compensation
    -       -       193       -       -       -       193  
Translation adjustment
    -       -       -       -       12       -       12  
Net income
    -       -       -       -       -       230       230  
Balance, March 31, 2011
    16,604     $ 58,851     $ 6,596     $ (8,136 )   $ 12     $ (15,912 )   $ 41,411  

See accompanying notes to unaudited condensed consolidated financial statements

 

 

NUMEREX CORP AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011


NOTE A – BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2011 may not be indicative of the results that may be expected for the year ending December 31, 2011.  For further information, reference is also made to Numerex Corp.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2010 and the consolidated financial statements contained therein.

Numerex Corp (NASDAQ: NMRX) is a leading provider of business services, technology, and products used in the development and support of machine-to-machine (M2M) solutions for the enterprise and government markets worldwide. The Company offers Numerex DNA(R) that includes hardware and smart Devices, cellular and satellite Network services, and software Applications that are delivered through Numerex FAST(TM) (Foundation Application Software Technology). Customers typically subscribe to device management, network, and application services through hosted platforms.  Numerex’s business services enable the development of secure solutions while simplifying and speeding up deployment through streamlined processes and comprehensive integration services. Numerex is ISO 27001 information security-certified. "Machines Trust Us(R)" represents the Company's focus on M2M data security, service reliability, and round-the-clock support of its customers' M2M solutions.

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

The Company’s revenue is generated from three sources:

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

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



 

 


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

In the case of revenue derived from maintenance services the Company recognizes revenue ratably over the contract term. In certain instances the Company may, under an appropriate agreement, advance charge for the service to be provided. In these instances the Company recognizes the advance charge as deferred revenue (classified as a liability) and releases the revenue ratably over future periods in accordance with the contract term as the service is completed, delivered or performed. The Company’s revenues in the consolidated statement of operations are net of sales taxes.

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

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

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

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

Revenue from contracts for our professional services where we design or redesign, build and implement new or enhanced systems applications for clients are recognized on the percentage-of-completion method in accordance with “FASB ASC 605-985-25-88 through 107.”  Percentage-of-completion accounting involves calculating the percentage of services provided during the reporting period compared to the total estimated services to be provided over the duration of the contract. Estimated revenues by applying the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable. This method is followed where reasonably dependable estimates of revenues and costs can be made.

 

 


We measure our progress for completion based on either the hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones as outlined per the terms of the agreement with the customer.  Contract revenue and costs are continuously monitored during the term of the contract, and recorded revenue and costs are subject to revision as the contract progresses. Such revisions may result in increases or decreases to revenue and income and are reflected in the financial statements in the periods in which they are first identified. If estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable.


For additional information regarding our critical accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2010 and the condensed consolidated financial statements contained therein.


NOTE C - INVENTORY

Inventory consisted of the following:

   
March 31,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
Raw materials
  $ 1,325     $ 1,241  
Work-in-progress
    10       13  
Finished goods
    3,759       4,190  
Less reserve for obsolescence
    (615 )     (624 )
Inventory, net
  $ 4,479     $ 4,820  


NOTE D – GOODWILL, SOFTWARE AND OTHER INTANGIBLE ASSETS

    We did not have any changes to goodwill during the three months ended March 31, 2011.
      
We did not incur costs to renew or extend the term of existing software and acquired intangible assets during the three months ending March 31, 2011. Software and intangible assets, which will continue to be amortized, consisted of the following (in thousands):



   
March 31, 2011
   
December 31, 2010
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Book Value
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Book Value
 
Purchased and developed software
  $ 10,171     $ (7,166 )   $ 3,005     $ 10,005     $ (6,890 )   $ 3,115  
Patents, trade and service marks
    13,860       (10,423 )     3,437       13,712       (10,155 )     3,557  
Intangible and other assets
    2,268       (1,031 )     1,237       2,176       (992 )     1,184  
Total intangible and other assets
  $ 26,299     $ (18,620 )   $ 7,679     $ 25,893     $ (18,037 )   $ 7,856  

Amortization expense of intangible assets and software totaled $583,000 and $652,000 for the three months ended March 31, 2011 and March 31, 2010, respectively.
 


 

 


As of March 31, 2011, the estimated remaining amortization expense associated with the Company’s intangible assets and software for the remainder of 2011 and in each of the next four fiscal years is as follows (in thousands):

Remainder of 2011
1.9
2012
2.1
2013
1.7
2014
0.8
Thereafter
1.2

 NOTE E – NOTES PAYABLE

In May 2010, we entered into a Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank. The Agreement provides the Company with a revolving credit facility up to $5.0 million (the “Credit Facility”).  The Credit Facility has a maturity date of May 2013 and 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 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 Agreement) plus a LIBOR rate margin of 2.75%. The Credit Facility includes an annual fee of 0.375% of the average unused portion and is secured by all of the Company’s personal property, other than its intellectual property.  

All unpaid principal and accrued interest is due and payable in full on May 4, 2013, which is the maturity date.  Our obligations under the SVB Credit Facility are secured by substantially all of our assets and the assets of our subsidiaries, excluding any intellectual property.  We also agreed not to encumber our intellectual property during the term of the Credit Facility without the prior written consent of SVB.  The Agreement contains customary terms and conditions for credit facilities of this type.  In addition, we are required to meet certain financial covenants customary with this type of facility, including maintaining a minimum EBITDA and a minimum adjusted quick ratio. The Agreement contains customary events of default.  If a default occurs and is not cured within any applicable cure period or is not waived, our obligations under the Credit Facility may be accelerated.

We were in compliance with all financial covenants under the Credit Facility at March 31, 2011 and, as of that date, we had no outstanding borrowings or letters of credit.

NOTE F – INCOME TAXES

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

We do not anticipate any material changes in its uncertain tax positions during the 2011 year.

We recorded a tax provision of $14,000 for the three months ended March 31, 2011, as compared to a tax provision of $22,000 for the three months ended March 31, 2010 representing effective tax rates of 5.79% and (252.91)%  respectively. The difference between our effective tax rate and the 34% federal statutory rate in both the current quarter and the quarter ending March 31, 2010 resulted primarily from the valuation allowance against all net deferred tax assets, the amortization of goodwill and state tax accruals related to unrecognized tax benefits.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2007 through 2009 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.


 
10 

 


NOTE G – SHARE-BASED COMPENSATION                                                                                                           
 
 
Share-based compensation was $193,000 and $263,000 for the three months ended March 31, 2011and 2010, respectively.  At March 31, 2011, there was approximately $1.3 million of total unrecognized compensation expense related to unvested share-based awards.  Generally, this expense will be recognized over the next 1.9 years and will be adjusted for any future changes in estimated forfeitures.

The Company has outstanding stock options granted pursuant to two stock option plans, the Long-Term Incentive Plan (the “1999 Plan”), which was adopted in 1999 and the 2006 Long Term Incentive Plan (the “2006 Plan”) which was adopted in 2006.  The 1999 Plan was terminated and replaced by the 2006 Plan. Options outstanding under the 1999 Plan remain in effect, but no new options may be granted under that plan.  Options issued under the 2006 Plan and the 1999 Plan typically vest ratably over a four-year period. 

On May 21, 2010 the Board of Directors approved an amendment to the 2006 Long-Term Incentive Plan (the “2006 Plan”), to (a) increase the maximum aggregate number of shares authorized for issuance under the 2006 Plan from 750,000 shares to 1,500,000 shares (in each case prior to taking into account provisions under the 2006 Plan allowing shares that were available under the Company’s predecessor stock incentive plan as of its termination date (and shares subject to options granted under the predecessor plan that expire or terminate without having been fully exercised) to be available again for issuance under the 2006 Plan) and (b) permit stock appreciation rights (SAR), settled in shares, to be issued under the 2006 Plan.
 

A summary of stock option activity and related information for the three months ended March 31, 2011:

         
Weighted
   
Weighted
   
Weighted Avg.
   
Aggregate
 
         
Average
   
Average Remaining
   
Grant Date
   
Intrinsic
 
Options
 
Shares
   
Ex. Price
   
Contractual Life (Yrs)
   
Fair Value
   
Value
 
Outstanding, at 01/01/2011
    1,722,273     $ 5.60       4.91     $ -     $ 5,533,212  
Granted
        $           $     $  
Exercised
    (40,739 )   $ 6.73       -     $ -     $ 186,586  
Cancelled
    (125 )   $ 1.06       -     $ -     $ -  
Expired
    (5,374 )   $ 8.10       -     $ -     $ -  
Outstanding, at 03/31/11
    1,676,035     $ 5.57       4.70     $ -     $ 7,228,323  
Exercisable, at 03/31/11
    1,436,971     $ 5.63       4.15     $ -     $ 6,109,469  

Under the 2006 Plan, a recipient of a stock appreciation right is generally entitled to receive, upon exercise and without payment to the Company (but subject to required tax withholdings), that number of Shares having an aggregate Fair Market Value as of the date of exercise not to exceed the number of Shares subject to the portion of the SAR exercised, multiplied by an amount equal to the excess of (i) the Fair Market Value per Share on the date of exercise of the SAR over (ii) the Fair Market Value per Share on the date of grant of the SAR (or such amount in excess of the Fair Market Value per Share as the Administrator may specify). The terms and conditions applicable to a SAR (including upon termination or change in the status of employment or service of the recipient with the Company and its subsidiaries) shall be determined by the Administrator and set forth in the Award Agreement applicable to the SAR.  


 
11 

 


A summary of SARs activity and related information for the three months ended March 31, 2011:

         
Weighted
   
Weighted
   
Weighted Avg.
   
Aggregate
 
         
Average
   
Average Remaining
   
Grant Date
   
Intrinsic
 
SARs
 
Shares
   
Ex. Price
   
Contractual Life (Yrs)
   
Fair Value
   
Value
 
Outstanding, at 01/01/2011
    364,296     $ 4.97       3.08     $ -     $ 1,344,495  
Granted
    47,500     $ 10.25       9.80     $ 7.55     $ -  
Exercised
    -     $ -       -     $ -     $ -  
Cancelled
    -     $ -       -     $ -     $ -  
Expired
    -     $ -       -     $ -     $ -  
Outstanding, at 03/31/11
    411,796     $ 5.58       3.63     $ -     $ 1,782,690  
Exercisable, at 03/31/11
    -     $ -       -     $ -     $ -  

During the three months ended March 31, 2011, the Company issued 588 shares of common stock in exchange for options to purchase 3,412 shares of common stock in connection with the cashless exercise of options with an exercise price of $7.50 per share and based on the market value of the Company’s common stock of $9.47 per share.

The following table summarizes information related to stock options and SARS outstanding at March 31, 2011:


     
Options outstanding
   
Options exercisable
 
Range of exercise prices
   
Number outstanding at March 31, 2011
   
Weighted average remaining contractual life (years)
   
Weighted average exercise price
   
Number exercisable at March 31, 2011
   
Weighted average exercise price
 
$ 1.00 –  4.00       440,863       3.31     $ 2.91       403,363     $ 2.85  
  4.01 –  8.00       928,672       5.10     $ 5.51       727,108     $ 5.52  
  8.01 –  10.60       306,500       5.48     $ 9.55       306,500     $ 9.55  
          1,676,035       4.70     $ 5.57       1,436,971     $ 5.63  



     
SARS outstanding
   
SARS exercisable
 
Range of exercise prices
   
Number outstanding at March 31, 2011
   
Weighted average remaining contractual life (years)
   
Weighted average exercise price
   
Number exercisable at March 31, 2011
   
Weighted average exercise price
 
$ 1.00 –  4.00       -       -     $ -       -     $ -  
  4.01 –  8.00       356,796       2.81     $ 4.88       -     $ -  
  8.01 –  10.60       55,000       8.95     $ 10.09       -     $ -  
          411,796       3.63     $ 5.58       -     $ -  

The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards on the date of grant using the option-pricing model is affected by the Company’s stock price, as well as management’s assumptions. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.  Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SAR) that will be settled in the Company’s stock.

 
12 

 


The key assumptions used in the valuation model during the three months ended March 31, 2011 are provided below:
Valuation Assumptions:
 
Volatility
           66.85%
Expected term (years)
6  years
Risk free interest rate
1.93%
Dividend yield
0.00%

NOTE H – EARNINGS (LOSS) PER SHARE

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

   
Three Months Ended
 
   
March 31,
 
(In thousands, except per share data)
 
2011
   
2010
 
Common Shares:
           
Weighted average common shares outstanding
    14,985       15,079  
Dilutive effect of common stock equivalents
    778       -  
Total
    15,763       15,079  
                 
Net income (loss):
  $ 230     $ (31 )
Net earnings (loss) per common share:
               
Basic
  $ 0.02     $ ( - )
Diluted
  $ 0.01     $ ( - )

For the three months ended March 31, 2011, the effect of our 295,125 outstanding stock options, 105,708 outstanding warrants, and 81,000 outstanding stock appreciation rights was not included in the computation of diluted earnings per share as their effect was anti-dilutive.  For the three months ended March 31, 2010, the effect of our 2,821,537 outstanding stock options and 1,985,472 outstanding warrants was not included in the computation of diluted earnings per share as their effect was anti-dilutive.


NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS

 
The hierarchy below lists three levels of fair value, which prioritizes the inputs used in the valuation methodologies, as follows:
 
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
 
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
 
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

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

 
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NOTE J – LIQUIDITY

The Company believes that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over the next twelve months.  This belief could be affected by future operating earnings that are lower than expectations or a material change in the Company’s operating business, including but not limited to, a significant change in the rate of growth of our services and products, the impact of any significant acquisitions or transactions or a change in strategy or product development plans.

 NOTE K – LEGAL PROCEEDINGS

As 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.  

We currently are not involved in any pending material litigation.
  
NOTE L – SEGMENT INFORMATION

Segment Information

The Company has two reportable operating segments.  These segments are M2M Services and Other Services.  The M2M Services segment is made up of all our cellular and satellite machine-to-machine communications hardware and services.  The Other Services segment includes our video conferencing hardware and installation of telecommunications equipment.

During the third quarter of 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 the three months ended March 31, 2010 to conform to the current period presentation.

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

 
14 

 



Summarized below are unaudited revenues and operating income by reportable segment:

   
Three Months Ended
 
   
March 31,
 
(In thousands)
 
2011
   
2010
 
Net sales:
           
  M2M Services
  $ 13,468     $ 12,666  
  Other Services
    300       356  
    $ 13,768     $ 13,022  
Gross profit, exclusive of depreciation and amortization shown separately below:
               
  M2M Services
  $ 5,964     $ 5,580  
  Other Services
    122       173  
    $ 6,086     $ 5,753  
Operating income:
               
  M2M Services
  $ 413     $ 1,506  
  Other Services
    (26 )     2  
  Unallocated Corporate
    (117 )     (1,463 )
    $ 270     $ 45  
Depreciation and amortization:
               
  M2M Services
  $ 633     $ 725  
  Other Services
    20       17  
  Unallocated Corporate
    122       131  
    $ 775     $ 873  

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

Summarized below are unaudited identifiable assets:

(In thousands)
 
March 31,
   
December31,
 
Identifiable assets:
 
2011
   
2010
 
  M2M Services
  $ 43,067     $ 43,159  
  Other Services
    2,001       2,018  
  Unallocated Corporate
    6,351       11,969  
    $ 51,419     $ 57,146  



NOTE M – SUBSEQUENT EVENTS

On April 25, 2011, we amended our Loan and Security Agreement (the “Credit Agreement”) with Silicon Valley Bank. The amendment increases our revolving credit facility by $5.0 million to a total of $10 million (the “Credit Facility”).  The amended Credit Facility has a maturity date of April 2015 and includes a sublimit of up to $2.0 million for letters of credit, cash management and foreign exchange services. The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s option, equal to either (i) the Prime Rate plus 1% (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 and is secured by all of the Company’s personal property, including its intellectual property.  There are no amounts outstanding under the Credit Facility.  


 
15 

 


On April 25, 2011, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”).  The registration statement allows us, from time to time, to offer and sell up to $30 million of equity securities as described in the registration statement.  The terms of any offering under the shelf registration statement will be determined at the time of offering.  Proceeds from the sale of any securities will be used for the purposes described in a prospectus supplement filed at the time of an offering.  The registration statement was declared effective by the SEC on May 3, 2011.


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

Forward-looking Statements

This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, forward-looking statements with respect to our future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. We caution that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and we assume no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring service revenues; the risks that a substantial portion of revenues derived from government contracts may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new services; whether and when products from our investments in the development of new products are realized; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances and partnerships will not yield substantial revenues; changes in financial and capital markets, and the inability to raise growth capital 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 and the presence of competitors that may have greater financial and technological resources than us; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; our ability to manage our costs by accurately forecasting our needs; and extent and timing of technological changes. Our SEC reports identify additional factors that can affect forward-looking statement.

Overview
 
 
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company.  This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the accompanying notes to the unaudited financial statements in this Quarterly Report on Form 10-Q for the period ended March 31, 2011.
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 for the balance of the year.

Net sales increased 6% to $13.8 million for the three-month period ended March 31, 2011, as compared to $13.0 million for the three-month period ended March 31, 2010.

We recognized operating income of $270,000 for the three-month period ended March 31, 2011, as compared to $45,000 for the three-month period ended March 31, 2010.

 
16 

 


We recognized net income of $230,000 for the three-month period ended March 31, 2011, or $0.02 per basic and diluted share, as compared to a net loss of $31,000, or ($0.00) per basic and diluted share for the three-month period ended March 31, 2010.

Critical Accounting Policies

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2011 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010, other than as disclosed herein.

Results of Operations

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010:


Net Sales

Net sales for our reportable segments for the three months ended March 31, 2011 and 2010 are summarized in the following table:
   
Three Months Ended
 
   
March 31,
 
(In thousands)
 
2011
   
2010
   
change
   
% change
 
Net Sales:
                       
M2M Services
                       
Hardware
  $ 4,472     $ 4,756     $ (284 )     -6 %
Services
    8,995       7,910       1,085       14 %
Sub-Total
    13,467       12,666       801       6 %
Other Services
                               
Hardware
    113       62       51       82 %
Services
    188       294       (106 )     -36 %
Sub-Total
    301       356       (55 )     -15 %
Total net sales
  $ 13,768     $ 13,022     $ 746       6 %


Hardware net sales from M2M Services decreased 6% to $4.5 million for the three-month period ended March 31, 2011, as compared to $4.8 million for the three-month period ended March 31, 2010.  The decrease is primarily the result of replacing our former wireless module distribution contract with a new wireless module distribution contractor.

Service net sales from M2M Services increased 14% to $9.0 million for the three-month period ended March 31, 2011, as compared to $7.9 million for the three-month period ended March 31, 2010.  The increase is primarily due to subscription increases which were generated by sales of our security hardware, as well as sales of our cellular and satellite tracking units.

Hardware sales from Other Services increased 82% to $113,000 for the three-month period ended March 31, 2011, as compared to $62,000 for the three-month period ended March 31, 2010.

Service net sales from Other Services service revenues decreased 36% to $188,000 for the three-month period ended March 31, 2011, as compared to $294,000 for the three-month period ended March 31, 2010.  Our installation and integration services are primarily, either directly or indirectly, provided to large wireline and wireless telecommunication companies. The decrease is primarily the result of a decrease in demand for these services.



 
17 

 


Cost of Sales

Cost of sales for our reportable segments for the three months ended March 31, 2011 and 2010 are summarized in the following table:

   
Three Months Ended
 
   
March 31,
 
(In thousands)
 
2011
   
2010
   
change
   
% change
 
Cost of Sales:
                       
M2M Services
                       
Cost of hardware sales
  $ 3,850     $ 3,966     $ (116 )     -3 %
Cost of service sales
    3,653       3,120       533       17 %
Sub-Total
    7,503       7,086       417       6 %
Other Services:
                               
Cost of hardware sales
    76       70       6       9 %
Cost of service sales
    103       113       (10 )     (9 %)
Sub-Total
    179       183       (4 )     (2 %)
Total cost of sales
  $ 7,682     $ 7,269     $ 413       6 %

Cost of hardware sales from M2M Services segment decreased 3% to $3.9 million for the three-month period ended March 31, 2011, as compared to $4.0 million for the three-month period ended March 31, 2010.  The decrease is in direct correlation to the decrease in M2M Services hardware sales.

Cost of service sales from M2M Services segment increased 17% to $3.7 million for the three-month period ended March 31, 2011, as compared to $3.1 million for the three-month period ended March 31, 2010.  The increase is in direct correlation to the increase in M2M Services service sales.

Gross Profit
   
Three Months Ended
 
   
March 31,
 
(In thousands)
 
2011
   
2010
 
Total net sales
  $ 13,768     $ 13,022  
Total cost of sales
    7,682       7,269  
Gross Profit:
  $ 6,086     $ 5,753  
Gross Profit %:
    44.2 %     44.2 %

Gross profit, as a percentage of net sales, remained constant at 44.2% for the three-month period ended March 31, 2011 and 2010.


 
18 

 


Operating, Interest and Other Expenses

Operating, interest and other expenses for the Company for the three months ended March 31, 2011 and 2010 are summarized in the following table:
   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2011
   
2010
   
change
   
% change
 
Sales and marketing
  $ 2,168     $ 1,787     $ 381       21 %
General and administrative
    2,198       2,399       (201 )     -8 %
Engineering and development
    594       592       2       0 %
Bad debt expense
    81       57       24       42 %
Depreciation and amortization
    775       873       (98 )     -11 %
Operating income
    270       45       225       500 %
Interest expense
    (26 )     (13 )     (13 )     50 %
Net other expense
    -       (41 )     41       100 %
Income (loss) before  income taxes
    244       (9 )     253       2811 %
Provision for income taxes
    14       22       (8 )     36 %
Net income (loss)
  $ 230     $ (31 )     261       -842 %

Sales and marketing expenses increased 21% to $2.2 million for the three-month period ended March 31, 2011, as compared to $1.8 million for the three-month period ended March 31, 2010.  The increase is primarily the result of investing in additional sales and marketing personnel.

General and administrative expenses decreased 8% to $2.2 million for the three-month period ended March 31, 2011, as compared to $2.4 million for the three-month period ended March 31, 2010.  The decrease is primarily the result of settling the Orbit One litigation and the elimination of any litigation related legal fees.
 
 
Engineering and development expenses remained constant at $0.6 million for the three-month period ended March 31, 2011 and 2010.

Depreciation and amortization expense decreased 11% to $0.8 million for the three-month period ended March 31, 2011, as compared to $0.9 million for the three-month period ended March 31, 2010.   The decrease is primarily due to certain tangible assets becoming fully depreciated.

Liquidity and Capital Resources

We had working capital of $8.0 million as of March 31, 2011 and $10.2 million as of December 31, 2010.  We had cash balances of $4.1 million and $10.3 million as of March 31, 2011 and December 31, 2010, respectively.  The decrease in cash and cash equivalents was primarily due to a litigation settlement of $5.5 million, which included a repurchase of 320,833 shares at $9.03.
 
The following table shows information about our cash flows and liquidity positions during the three months ended March 31, 2011 and 2010. You should read this table and the discussion that follows in conjunction with our consolidated statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
 

   
Three Months Ended
 
   
March 31,
 
    (in thousands)
 
2011
   
2010
 
Net cash (used in) provided by operating activities
  $ (3,396 )   $ 2,611  
Net cash used in investing activities
    (867 )     (1,011 )
Net cash used in financing activities
    (1,885 )     (531 )
Effect of exchange rate differences on cash
    12       7  
Net change in cash and cash equivalents
  $ (6,136 )   $ 1,076  
 
 
 
19

 
We used cash from operating activities totaling $3.4 million for the three-month period ended March 31, 2011, as compared to provided cash of $2.6 million for the three-month period ended March 31, 2010.  The change was primarily due to the decrease in accounts payable and other liabilities during the current period.

We used cash in investing activities totaling $0.9 million for the three-month period ended March 31, 2011, as compared to $1.0 million for the three-month period ended March 31, 2010.   The decrease was primarily due to the decrease in purchase of property and equipment and intangible and other assets, offset by the purchase of investment during the current period.

We used cash in financing activities totaling $1.9 million for the three-month period ended March 31, 2011, as compared to $0.5 million for the three-month period ended March 31, 2010.  The increase is primarily due to the repurchase of treasury stock which was partially offset by the proceeds received from the exercise of common stock and warrants.

On April 25, 2011, we amended our Loan and Security Agreement (the “Credit Agreement”) with Silicon Valley Bank. The amendment increases our revolving credit facility by $5.0 million to a total of $10 million (the “Credit Facility”).  The amended Credit Facility has a maturity date of April 2015 and includes a sublimit of up to $2.0 million for letters of credit, cash management and foreign exchange services. The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s option, equal to either (i) the Prime Rate plus 1% (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 and is secured by all of our personal property, including our intellectual property.  

We were in compliance with all financial covenants under the Credit Facility at March 31, 2011. During the three months ended March 31, 2011 we had no borrowings and there are no outstanding borrowings or letters of credit as of that date.

Also on April 25, 2011, we filed a universal shelf registration statement on Form S-3 with the SEC.  The registration statement allows us, from time to time, to offer and sell up to $30 million of equity securities as described in the registration statement.  The registration statement was declared effective by the SEC on May 3, 2011.   As of the date of this Quarterly Report on Form 10-Q, we had not issued or sold any securities pursuant to the shelf registration statement.

           Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material.  To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.

We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over at least the next twelve months.  This belief could be affected by future operating earnings that are lower than expectations or a material change in our operating business, including but not limited to, a significant change in the rate of growth of our services and products, the impact of any significant acquisitions or transactions or a change in strategy or product development plans.

Off-Balance Sheet Arrangements

As of March 31, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.


 
20 

 


Item 3.                        Quantitative and Qualitative Disclosures about Market Risks.

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

Our Credit Agreement, as described in this Quarterly Report on Form 10-Q and our Current Report on Form 8-K filed on April 29, 2011, provides us with a revolving Credit Facility up to $10.0 million.  The interest rate applicable to amounts drawn from the Credit Facility is, at the Company’s option, equal to either (i) the Prime Rate plus the Prime Rate Margin (as such terms are defined in the Credit Agreement) or (ii) the LIBOR Rate plus the LIBOR Rate Margin (as defined in the Credit Agreement).  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 March 31, 2011 or any other outstanding indebtedness.

 
Item 4.                        Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2011.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting
 
During the period ended March 31, 2011, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 
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PART II.  OTHER INFORMATION

Legal Proceedings.

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.

We currently are not involved in any pending material litigation.

Item 1A.   Risk Factors.

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this report.  At March 31, 2011, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.

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

The following table provides information regarding the Company’s purchases of its Class A Common Stock, no par value per share, during the quarter ended March 31, 2011:

Month
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
January 1 through 31, 2011
    320,833     $ 9.03       -    
February 1 through 28, 2011
    -     $ -       -    
March 1 through March 31, 2011
    -     $ -       -    
Total
    320,833               -    


(1)   These shares were not repurchased through a publicly announced plan or program.  The Company purchased 320,833 shares, at a purchase price of $9.03 per share, in connection with the settlement of certain litigation as described in Part II, Item 1 of this Quarterly Report on Form 10-Q.

Defaults Upon Senior Securities.

None - not applicable.

 
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Item 4.                      Removed and Reserved.


Item 5.                      Other Information.                                                      

None - not applicable.

Item 6.                        Exhibits

 
Exhibit 10.1
First Amendment to Asset Purchase Agreement, by and among Numerex Corp., Orbit One Communications, LLC, Orbit One Communications, Inc., Lava Lake Technologies, LLC, Delphini, LLC, David Ronsen, Scott Rosenzweig, and Gary Naden, dated as of January 7, 2011 (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 13, 2011 and incorporated by reference herein)

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

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


 
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

 
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SIGNATURES


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


 
NUMEREX CORP.
 
(Registrant)
   
 
May 16, 2011
 
/s/ ­­­­Stratton J. Nicolaides
 
Stratton J. Nicolaides
 
Chief Executive Officer and Chairman
   
   
 
May 16, 2011
 
/s/ ­­­­Alan B. Catherall
 
Alan B. Catherall
 
Chief Financial Officer
 
Executive Vice President and
 
Principle Financial and Accounting Officer


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