SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pennsylvania | | | 11-2948749 | | |
| (State or other jurisdiction of incorporation or | | | (I.R.S. Employer Identification No.) | |
| 400 Interstate Parkway, Suite 1350 Atlanta, GA | | | 30339-2119 | |
| (Address of principal executive offices) | | | (Zip Code) | |
400 Interstate North Parkway, Suite 1350
Atlanta, GA 30339-2119(Address of principal executive offices) (Zip Code)
Yes ☐ Yes ☐
(Registrant’s telephone number, including area code)þ☒ No ¨þ☒ No ¨ Large accelerated filer ¨☐ Accelerated filer þ☒ Non-accelerated filer ¨☐ (Do not check if a smaller reporting company) Smaller reporting company ¨☐ Emerging Growth Company ☐
Yes o☐ No þ
☒
TABLE OF CONTENTS
| | | Page | | ||||
PART | | | | | | | | |
| | | 1 | | | |||
| | | 13 | | | |||
| | | 18 | | | |||
| | | 19 | | | |||
PART II — OTHER INFORMATION | | | ||||||
| | | 20 | | | |||
| | 20 | | | ||||
| | | 20 | | | |||
| | | 20 | | | |||
| | | 20 | | | |||
| | | 20 | | | |||
| | 20 | | | ||||
SIGNATURES | | | | 22 | | |
PART I—I — FINANCIAL INFORMATION
| | Page | | ||||
| | | 2 | | | ||
| | | 3 | | | ||
| | | 4 | | | ||
| | | 5 | | | ||
| | | 6 | | |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 9,824 | $ | 16,237 | ||||
Restricted cash | 221 | - | ||||||
Accounts receivable, less allowance for doubtful accounts of $743 and $618 | 9,353 | 9,237 | ||||||
Financing receivables, current | 1,877 | 1,780 | ||||||
Inventory, net of reserves | 6,339 | 7,617 | ||||||
Prepaid expenses and other current assets | 1,838 | 1,887 | ||||||
Deferred tax assets, current | 603 | 603 | ||||||
TOTAL CURRENT ASSETS | 30,055 | 37,361 | ||||||
Financing receivables, less current portion | 2,090 | 2,330 | ||||||
Property and equipment, net of accumulated depreciation and amortization | 6,136 | 4,795 | ||||||
Software, net of accumulated amortization | 6,118 | 7,146 | ||||||
Other intangible assets, net of accumulated amortization | 12,879 | 15,722 | ||||||
Goodwill | 40,945 | 43,424 | ||||||
Other assets | 849 | 409 | ||||||
TOTAL ASSETS | $ | 99,072 | $ | 111,187 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 11,572 | $ | 11,390 | ||||
Accrued expenses and other current liabilities | 3,777 | 2,864 | ||||||
Deferred revenues | 1,563 | 1,942 | ||||||
Current maturities of long-term debt, net of debt issuance costs | 638 | 3,600 | ||||||
Current obligations under capital lease | 257 | - | ||||||
TOTAL CURRENT LIABILITIES | 17,807 | 19,796 | ||||||
Long-term debt, net of debt issuance costs, less current maturities | 15,456 | 15,309 | ||||||
Obligations under capital lease, noncurrent | 980 | - | ||||||
Deferred tax liabilities, noncurrent | 1,416 | 1,595 | ||||||
Other liabilities | 1,528 | 1,891 | ||||||
TOTAL LIABILITIES | 37,187 | 38,591 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE H) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Preferred stock, no par value; 3,000 authorized; none issued | - | - | ||||||
Class A common stock, no par value; 30,000 authorized; 20,910 and 20,652 issued; 19,583 and 19,177 outstanding | - | - | ||||||
Class B common stock, no par value; 5,000 authorized; none issued | - | - | ||||||
Additional paid-in capital | 104,568 | 102,108 | ||||||
Treasury stock, at cost, 1,326 and 1,316 shares | (5,466 | ) | (5,444 | ) | ||||
Accumulated other comprehensive loss | (105 | ) | (117 | ) | ||||
Accumulated deficit | (37,112 | ) | (23,951 | ) | ||||
TOTAL SHAREHOLDERS' EQUITY | 61,885 | 72,596 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 99,072 | $ | 111,187 |
| | | March 31, 2017 | | | December 31, 2016 | | ||||||
ASSETS | | | | ||||||||||
CURRENT ASSETS | | | | ||||||||||
Cash and cash equivalents | | | | $ | 8,682 | | | | | $ | 9,285 | | |
Restricted cash | | | | | 221 | | | | | | 221 | | |
Accounts receivable, less allowance for doubtful accounts of $795 and $767 | | | | | 8,853 | | | | | | 9,436 | | |
Financing receivables, current | | | | | 1,735 | | | | | | 1,778 | | |
Inventory, net of reserves | | | | | 8,287 | | | | | | 9,011 | | |
Prepaid expenses and other current assets | | | | | 1,370 | | | | | | 1,421 | | |
TOTAL CURRENT ASSETS | | | | | 29,148 | | | | | | 31,152 | | |
Financing receivables, less current portion | | | | | 1,941 | | | | | | 2,227 | | |
Property and equipment, net of accumulated depreciation and amortization of $9,984 and $9,225 | | | | | 5,836 | | | | | | 6,022 | | |
Software, net of accumulated amortization | | | | | 6,017 | | | | | | 6,530 | | |
Other intangible assets, net of accumulated amortization | | | | | 11,382 | | | | | | 11,519 | | |
Goodwill | | | | | 33,554 | | | | | | 33,554 | | |
Other assets | | | | | 243 | | | | | | 474 | | |
TOTAL ASSETS | | | | $ | 88,121 | | | | | $ | 91,478 | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | ||||||||||
CURRENT LIABILITIES | | | | ||||||||||
Accounts payable | | | | $ | 16,401 | | | | | $ | 15,894 | | |
Accrued expenses and other current liabilities | | | | | 3,225 | | | | | | 3,209 | | |
Deferred revenues | | | | | 1,666 | | | | | | 1,882 | | |
Current maturities of long-term debt, net of debt issuance costs | | | | | 3,912 | | | | | | 1,275 | | |
Current portion of capital lease | | | | | 306 | | | | | | 291 | | |
TOTAL CURRENT LIABILITIES | | | | | 25,510 | | | | | | 22,551 | | |
Long-term debt, net of debt issuance costs, less current maturities | | | | | 11,946 | | | | | | 14,885 | | |
Capital lease, less current portion | | | | | 735 | | | | | | 797 | | |
Deferred tax liabilities, noncurrent | | | | | 547 | | | | | | 468 | | |
Other liabilities | | | | | 1,422 | | | | | | 1,512 | | |
TOTAL LIABILITIES | | | | | 40,160 | | | | | | 40,213 | | |
SHAREHOLDERS’ EQUITY | | | | ||||||||||
Preferred stock, no par value; 3,000 authorized; none issued | | | | | — | | | | | | — | | |
Class A common stock, no par value; 30,000 authorized; 20,992 and 20,935 issued; 19,532 and 19,608 outstanding | | | | | — | | | | | | — | | |
Class B common stock, no par value; 5,000 authorized; none issued | | | | | — | | | | | | — | | |
Additional paid-in capital | | | | | 106,115 | | | | | | 105,112 | | |
Treasury stock, at cost, 1,459 and 1,327 shares | | | | | (5,755) | | | | | | (5,466) | | |
Accumulated other comprehensive loss | | | | | (104) | | | | | | (110) | | |
Accumulated deficit | | | | | (52,295) | | | | | | (48,271) | | |
TOTAL SHAREHOLDERS’ EQUITY | | | | | 47,961 | | | | | | 51,265 | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | $ | 88,121 | | | | | $ | 91,478 | | |
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net revenues: | ||||||||||||||||
Subscription and support revenues | $ | 14,388 | $ | 15,624 | $ | 44,183 | $ | 48,874 | ||||||||
Embedded devices and hardware | 3,024 | 7,710 | 8,886 | 21,791 | ||||||||||||
Total net revenues | 17,412 | 23,334 | 53,069 | 70,665 | ||||||||||||
Cost of sales, exclusive of a portion of depreciation and amortization shown below: | ||||||||||||||||
Subscription and support revenues | 5,828 | 6,538 | 17,242 | 19,728 | ||||||||||||
Embedded devices and hardware | 3,082 | 6,958 | 9,027 | 19,582 | ||||||||||||
Inventory reserves | 27 | 1,277 | 514 | 1,547 | ||||||||||||
Impairment of other asset | - | 1,275 | - | 1,275 | ||||||||||||
Gross profit | 8,475 | 7,286 | 26,286 | 28,533 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 3,229 | 3,047 | 9,444 | 9,136 | ||||||||||||
General and administrative | 3,280 | 4,507 | 11,269 | 12,108 | ||||||||||||
Engineering and development | 2,229 | 2,201 | 6,920 | 6,695 | ||||||||||||
Depreciation and amortization | 1,658 | 2,100 | 4,992 | 5,411 | ||||||||||||
Impairment of goodwill and other intangible assets | - | 1,250 | 4,172 | 1,250 | ||||||||||||
Restructuring charges | 276 | - | 1,520 | - | ||||||||||||
Operating loss | (2,197 | ) | (5,819 | ) | (12,031 | ) | (6,067 | ) | ||||||||
Interest expense | 469 | 188 | 1,196 | 604 | ||||||||||||
Loss on extinguishment of debt | - | - | 290 | - | ||||||||||||
Other income, net | (33 | ) | (31 | ) | (99 | ) | (100 | ) | ||||||||
Loss before income taxes | (2,633 | ) | (5,976 | ) | (13,418 | ) | (6,571 | ) | ||||||||
Income tax (benefit) expense | (87 | ) | 10,404 | (257 | ) | 10,159 | ||||||||||
Net loss | (2,546 | ) | (16,380 | ) | (13,161 | ) | (16,730 | ) | ||||||||
Other items of comprehensive income (loss), net of income taxes: | ||||||||||||||||
Foreign currency translation adjustment | 1 | 30 | 12 | 47 | ||||||||||||
Comprehensive loss | $ | (2,545 | ) | $ | (16,350 | ) | $ | (13,149 | ) | $ | (16,683 | ) | ||||
Loss per share: | ||||||||||||||||
Basic | $ | (0.13 | ) | $ | (0.86 | ) | $ | (0.68 | ) | $ | (0.88 | ) | ||||
Diluted | $ | (0.13 | ) | $ | (0.86 | ) | $ | (0.68 | ) | $ | (0.88 | ) | ||||
Weighted average shares outstanding used in per share calculation | ||||||||||||||||
Basic | 19,542 | 19,137 | 19,456 | 19,053 | ||||||||||||
Diluted | 19,542 | 19,137 | 19,456 | 19,053 |
| | | Three Months Ended March 31, | | |||||||||
| | | 2017 | | | 2016 | | ||||||
Net revenues: | | | | ||||||||||
Subscription and support revenues | | | | $ | 13,470 | | | | | $ | 14,984 | | |
Embedded devices and hardware | | | | | 2,915 | | | | | | 3,066 | | |
Total net revenues | | | | | 16,385 | | | | | | 18,050 | | |
Cost of sales | | | | ||||||||||
Subscription and support revenues | | | | | 5,464 | | | | | | 5,701 | | |
Embedded devices and hardware | | | | | 3,032 | | | | | | 3,118 | | |
Gross profit | | | | | 7,889 | | | | | | 9,231 | | |
Operating expenses: | | | | ||||||||||
Sales and marketing | | | | | 3,142 | | | | | | 2,945 | | |
General and administrative | | | | | 2,945 | | | | | | 4,129 | | |
Engineering and development | | | | | 2,215 | | | | | | 2,247 | | |
Depreciation and amortization | | | | | 1,523 | | | | | | 1,658 | | |
Restructuring charges | | | | | 425 | | | | | | — | | |
Operating loss | | | | | (2,361) | | | | | | (1,748) | | |
Interest expense | | | | | 621 | | | | | | 267 | | |
Loss on extinguishment of debt | | | | | 228 | | | | | | 290 | | |
Other expense (income), net | | | | | 730 | | | | | | (43) | | |
Loss before income taxes | | | | | (3,940) | | | | | | (2,262) | | |
Income tax expense | | | | | 84 | | | | | | 64 | | |
Net loss | | | | | (4,024) | | | | | | (2,326) | | |
Other items of comprehensive income, net of income taxes: | | | | ||||||||||
Foreign currency translation adjustment | | | | | 6 | | | | | | 15 | | |
Comprehensive loss | | | | $ | (4,018) | | | | | $ | (2,311) | | |
Basic and diluted loss per share | | | | $ | (0.21) | | | | | $ | (0.12) | | |
Weighted average shares outstanding used in computing basic and diluted loss per share | | | | | 19,524 | | | | | | 19,377 | | |
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS STATEMENT OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY
(Inin thousands)
Accumulated Other | Total | |||||||||||||||||||||||
Common | Additional | Treasury | Comprehensive | Accumulated | Shareholders' | |||||||||||||||||||
Shares | Paid-in Capital | Stock | Loss | Deficit | Equity | |||||||||||||||||||
Balance at January 1, 2016 | 20,652 | $ | 102,108 | $ | (5,444 | ) | $ | (117 | ) | $ | (23,951 | ) | $ | 72,596 | ||||||||||
Equity-based compensation expense | - | 2,202 | - | - | - | 2,202 | ||||||||||||||||||
Exercises, vesting and other equity-based compensation plan activity, net | 257 | 250 | (22 | ) | - | - | 228 | |||||||||||||||||
Issuance of common shares for services | 1 | 8 | - | - | - | 8 | ||||||||||||||||||
Translation adjustment | - | - | - | 12 | - | 12 | ||||||||||||||||||
Net loss | - | - | - | - | (13,161 | ) | (13,161 | ) | ||||||||||||||||
Balance at September 30, 2016 | 20,910 | $ | 104,568 | $ | (5,466 | ) | $ | (105 | ) | $ | (37,112 | ) | $ | 61,885 |
| | | Common Shares | | | Additional Paid-in Capital | | | Treasury Stock | | | Accumulated Other Comprehensive Loss | | | Accumulated Deficit | | | Total Shareholders’ Equity | | ||||||||||||||||||
Balance at January 1, 2017 | | | | | 20,935 | | | | | $ | 105,112 | | | | | $ | (5,466) | | | | | $ | (110) | | | | | $ | (48,271) | | | | | $ | 51,265 | | |
Equity-based compensation expense | | | | | — | | | | | | 519 | | | | | | — | | | | | | — | | | | | | | | | | | | 519 | | |
Exercises, vesting and other equity-based compensation plan activity, net | | | | | 57 | | | | | | — | | | | | | (289) | | | | | | — | | | | | | — | | | | | | (289) | | |
Value of shares retained to pay employee taxes | | | | | — | | | | | | (111) | | | | | | — | | | | | | — | | | | | | — | | | | | | (111) | | |
Warrants issued | | | | | — | | | | | | 595 | | | | | | — | | | | | | — | | | | | | — | | | | | | 595 | | |
Translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | 6 | | | | | | — | | | | | | 6 | | |
Net loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (4,024) | | | | | | (4,024) | | |
Balance at March 31, 2017 | | | | | 20,992 | | | | | $ | 106,115 | | | | | $ | (5,755) | | | | | $ | (104) | | | | | $ | (52,295) | | | | | $ | 47,961 | | |
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (13,161 | ) | $ | (16,730 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | 5,997 | 6,163 | ||||||
Impairment of goodwill and other assets | 4,172 | 2,525 | ||||||
Non-cash restructuring charges | 345 | - | ||||||
Equity-based compensation expense | 2,202 | 2,319 | ||||||
Loss on extinguishment of debt | 290 | - | ||||||
Deferred income taxes | (268 | ) | 10,147 | |||||
Bad debt expense | 327 | 400 | ||||||
Inventory reserves | 514 | 1,547 | ||||||
Other non-cash expense | 138 | 63 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts and financing receivables | (303 | ) | (1,898 | ) | ||||
Inventory, net | (1,323 | ) | (861 | ) | ||||
Accounts payable | 427 | (31 | ) | |||||
Deferred revenue | (554 | ) | 231 | |||||
Other | 394 | 249 | ||||||
Net cash (used in) provided by operating activities | (803 | ) | 4,124 | |||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (789 | ) | (1,984 | ) | ||||
Capitalized software development and purchases of software | (1,662 | ) | (3,314 | ) | ||||
Net cash used in investing activities | (2,451 | ) | (5,298 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from long-term debt | 17,000 | - | ||||||
Principal payments on debt | (19,349 | ) | (3,313 | ) | ||||
Principal payments on capital lease obligations | - | (148 | ) | |||||
Exercises, vesting and other equity-based compensation plan activity, net | 486 | 138 | ||||||
Payment of taxes on equity-based awards | (258 | ) | (291 | ) | ||||
Deferred financing costs paid | (1,038 | ) | - | |||||
Net cash used in financing activities | (3,159 | ) | (3,614 | ) | ||||
Net decrease in cash and cash equivalents | (6,413 | ) | (4,788 | ) | ||||
Cash and cash equivalents at beginning of period | 16,237 | 17,270 | ||||||
Cash and cash equivalents at end of period | $ | 9,824 | $ | 12,482 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 1,047 | $ | 513 | ||||
Net cash paid for income taxes | 6 | 70 | ||||||
Disclosure of non-cash operating, investing and financing activities: | ||||||||
Capital expenditures in accounts payable | 196 | 203 | ||||||
Fixed assets acquired under a capital lease | 1,237 | - | ||||||
Transfers of inventory to equipment for managed services | 2,087 | 1,064 | ||||||
| | | Three Months Ended March 31, | | |||||||||
| | | 2017 | | | 2016 | | ||||||
Cash flows from operating activities: | | | | ||||||||||
Net loss | | | | $ | (4,024) | | | | | $ | (2,326) | | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | ||||||||||
Depreciation and amortization | | | | | 1,973 | | | | | | 1,965 | | |
Equity-based compensation expense | | | | | 231 | | | | | | 621 | | |
Loss on extinguishment of debt | | | | | 228 | | | | | | 289 | | |
Deferred income taxes | | | | | 79 | | | | | | 60 | | |
Bad debt expense | | | | | 72 | | | | | | 120 | | |
Inventory reserves | | | | | (123) | | | | | | 27 | | |
Other non-cash expense | | | | | 65 | | | | | | 21 | | |
Changes in assets and liabilities: | | | | ||||||||||
Accounts and financing receivables | | | | | 840 | | | | | | 59 | | |
Inventory, net | | | | | 308 | | | | | | (953) | | |
Accounts payable | | | | | 661 | | | | | | (680) | | |
Deferred revenue | | | | | (253) | | | | | | (150) | | |
Other | | | | | 251 | | | | | | 107 | | |
Net cash provided by (used in) operating activities | | | | | 308 | | | | | | (840) | | |
Cash flows from investing activities: | | | | ||||||||||
Purchases of property and equipment | | | | | (187) | | | | | | (297) | | |
Capitalized software development and purchases of software | | | | | (565) | | | | | | (983) | | |
Net cash used in investing activities | | | | | (752) | | | | | | (1,280) | | |
Cash flows from financing activities: | | | | ||||||||||
Proceeds from long-term debt | | | | | 5,000 | | | | | | 17,000 | | |
Principal payments on debt | | | | | (5,000) | | | | | | (19,349) | | |
Principal payments on capital lease obligations | | | | | (48) | | | | | | — | | |
Exercises, vesting and other equity- based compensation plan activity, net | | | | | — | | | | | | 300 | | |
Payment of taxes on equity-based awards | | | | | (111) | | | | | | — | | |
Deferred financing costs paid | | | | | — | | | | | | (848) | | |
Net cash used in financing activities | | | | | (159) | | | | | | (2,897) | | |
Net decrease in cash and cash equivalents | | | | | (603) | | | | | | (5,017) | | |
Cash and cash equivalents at beginning of period | | | | | 9,285 | | | | | | 16,237 | | |
Cash and cash equivalents at end of period | | | | $ | 8,682 | | | | | $ | 11,220 | | |
Supplemental disclosures of cash flow information: | | | | ||||||||||
Cash paid for interest | | | | $ | 453 | | | | | $ | 251 | | |
Net cash paid (refunded) for income taxes | | | | | 2 | | | | | | (350) | | |
Disclosure of non-cash investing and financing activities: | | | | ||||||||||
Capital expenditures in accounts payable | | | | | 68 | | | | | | 286 | | |
Non-cash interest | | | | | 167 | | | | | | — | | |
Warrants issued to Kenneth Rainin Foundation | | | | | 595 | | | | | | — | | |
Deferred financing costs in accounts payable | | | | | — | | | | | | 213 | | |
SEPTEMBER 30, 2016
MARCH 31, 2017
2016.
Restricted Cash
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Reclassifications
As a result of the adoption of a recent accounting pronouncement, see Note K – Recent Accounting Pronouncements, the balance sheet as of December 31, 2015 reflects the following reclassifications (dollars in thousands):
Historical | Reclassi- | |||||||||||
Presentation | fication | As Adjusted | ||||||||||
Prepaid expenses and other current assets | $ | 2,037 | $ | (150 | ) | $ | 1,887 | |||||
Other assets | 699 | (290 | ) | 409 | ||||||||
Current portion of long-term debt | 3,750 | (150 | ) | 3,600 | ||||||||
Long-term debt, less current portion | 15,599 | (290 | ) | 15,309 |
NOTE B –— INVENTORY
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Raw materials | $ | 1,553 | $ | 1,903 | ||||
Finished goods | 7,206 | 8,420 | ||||||
Inventory reserves | (2,420 | ) | (2,706 | ) | ||||
$ | 6,339 | $ | 7,617 |
| | | March 31, 2017 | | | December 31, 2016 | | ||||||
Raw materials | | | | $ | 1,897 | | | | | $ | 2,953 | | |
Finished goods | | | | | 8,215 | | | | | | 8,504 | | |
Inventory reserves | | | | | (1,825) | | | | | | (2,446) | | |
| | | | $ | 8,287 | | | | | $ | 9,011 | | |
|
inventory as part of our managed services business.
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Computer, network and other equipment | $ | 8,759 | $ | 7,150 | ||||
Monitoring equipment | 5,102 | 3,015 | ||||||
Furniture and fixtures | 486 | 888 | ||||||
Leasehold improvements | 265 | 374 | ||||||
Total property and equipment | 14,612 | 11,427 | ||||||
Accumulated depreciation and amortization | (8,476 | ) | (6,632 | ) | ||||
$ | 6,136 | $ | 4,795 |
We entered into an agreement effective August 1, 2016 to sublease the office space formerly occupied by our corporate headquarters that included all furniture and fixtures. We recorded a $0.4 million non-cash charge for the estimated net book value of the furniture and fixtures as of August 1, 2016, the cease-use date. See Note F – Restructuring.
| | | March 31, 2017 | | | December 31, 2016 | | ||||||
Computer, network and other equipment | | | | $ | 8,839 | | | | | $ | 8,805 | | |
Monitoring equipment | | | | | 6,231 | | | | | | 5,692 | | |
Furniture and fixtures | | | | | 486 | | | | | | 486 | | |
Leasehold improvements | | | | | 264 | | | | | | 264 | | |
Total property and equipment | | | | | 15,820 | | | | | | 15,247 | | |
Accumulated depreciation and amortization | | | | | (9,984) | | | | | | (9,225) | | |
| | | | $ | 5,836 | | | | | $ | 6,022 | | |
|
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE D – GOODWILL AND OTHER— INTANGIBLE ASSETS
Impairment Charges
During the second quarter of 2016, management evaluated and determined that the Omnilink and Do-It-Yourself (DIY) product lines and reporting units should be tested for impairment as a result of lower operating results, which are related to strategic changes and delays associated with the launch of a new personal tracking product line. Management initiated a quantitative two-step goodwill impairment test by comparing the carrying value of the net assets of the respective units to its fair value based on a discounted cash flow analysis. Based on our assessment, we determined that the fair value of these reporting units were less than the respective carrying value and goodwill was impaired, and we recorded $4.2 million in impairment charges. Such charges related to trade names, technology and goodwill as of September 30, 2016, and are summarized as follows:
Changes in the effected carrying values are summarized as follows (in thousands):
Omnilink | DIY | Total | ||||||||||||||||||
Trade Names | Goodwill | Technology | Goodwill | Impairment | ||||||||||||||||
January 1, 2016 | $ | 2,972 | $ | 17,580 | $ | 245 | $ | 1,656 | ||||||||||||
Amortization | - | - | (27 | ) | - | |||||||||||||||
Impairment | (1,612 | ) | (2,264 | ) | (81 | ) | (215 | ) | $ | (4,172 | ) | |||||||||
September 30, 2016 | $ | 1,360 | $ | 15,316 | $ | 137 | $ | 1,441 |
There were no impairment charges recorded during the quarter ended September 30, 2016.
As of September 30, 2016 | As of December 31, 2015 | |||||||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||||||
Remaining | Carrying | Accumulated | Net Book | Carrying | Accumulated | Net Book | ||||||||||||||||||||||
Useful Lives | Amount | Amortization | Value | Amount | Amortization | Value | ||||||||||||||||||||||
Purchased and developed software | 1.8 | $ | 16,736 | $ | (12,051 | ) | $ | 4,685 | $ | 15,399 | $ | (9,503 | ) | $ | 5,896 | |||||||||||||
Software in development | n/a | 1,433 | - | 1,433 | 1,250 | - | 1,250 | |||||||||||||||||||||
Total software | 18,169 | (12,051 | ) | 6,118 | 16,649 | (9,503 | ) | 7,146 | ||||||||||||||||||||
Licenses | 2.9 | 13,215 | (12,442 | ) | 773 | 13,215 | (12,167 | ) | 1,048 | |||||||||||||||||||
Customer relationships | 7.7 | 8,167 | (2,852 | ) | 5,315 | 8,167 | (2,285 | ) | 5,882 | |||||||||||||||||||
Technologies | 11.2 | 4,316 | (829 | ) | 3,487 | 4,316 | (595 | ) | 3,721 | |||||||||||||||||||
Patents and trademarks | 1.9 | 4,296 | (2,352 | ) | 1,944 | 4,236 | (2,137 | ) | 2,099 | |||||||||||||||||||
Trade names | Indefinite | 1,360 | - | 1,360 | 2,972 | - | 2,972 | |||||||||||||||||||||
Total other intangible assets | 31,354 | (18,475 | ) | 12,879 | 32,906 | (17,184 | ) | 15,722 | ||||||||||||||||||||
$ | 49,523 | $ | (30,526 | ) | $ | 18,997 | $ | 49,555 | $ | (26,687 | ) | $ | 22,868 |
| | | As of March 31, 2017 | | | As of December 31, 2016 | | |||||||||||||||||||||||||||||||||
| | | Remaining Useful Lives | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Book Value | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Book Value | | ||||||||||||||||||
Purchased and developed software | | | 1.7 | | | | $ | 18,576 | | | | | $ | (13,610) | | | | | $ | 4,966 | | | | | $ | 18,205 | | | | | $ | (12,806) | | | | | $ | 5,399 | | |
Software in development | | | n/a | | | | | 1,051 | | | | | | — | | | | | | 1,051 | | | | | | 1,131 | | | | | | — | | | | | | 1,131 | | |
Total software | | | | | | | | 19,627 | | | | | | (13,610) | | | | | | 6,017 | | | | | | 19,336 | | | | | | (12,806) | | | | | | 6,530 | | |
Licenses | | | 2.4 | | | | | 13,215 | | | | | | (12,622) | | | | | | 593 | | | | | | 13,215 | | | | | | (12,534) | | | | | | 681 | | |
Customer relationships | | | 7.5 | | | | | 8,167 | | | | | | (3,228) | | | | | | 4,939 | | | | | | 8,167 | | | | | | (3,039) | | | | | | 5,128 | | |
Technologies | | | 11.0 | | | | | 4,235 | | | | | | (899) | | | | | | 3,336 | | | | | | 4,235 | | | | | | (822) | | | | | | 3,413 | | |
Patents and trademarks | | | 1.9 | | | | | 4,108 | | | | | | (2,512) | | | | | | 1,596 | | | | | | 3,747 | | | | | | (2,368) | | | | | | 1,379 | | |
Trade names | | | Indefinite | | | | | 918 | | | | | | — | | | | | | 918 | | | | | | 918 | | | | | | — | | | | | | 918 | | |
Total other intangible assets | | | | | | | | 30,643 | | | | | | (19,261) | | | | | | 11,382 | | | | | | 30,282 | | | | | | (18,763) | | | | | | 11,519 | | |
| | | | | | | $ | 50,270 | | | | | $ | (32,871) | | | | | $ | 17,399 | | | | | $ | 49,618 | | | | | $ | (31,569) | | | | | $ | 18,049 | | |
|
Intangible asset amortizationended March 31, 2017.
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE E –— INCOME TAXES
We Income tax expense recorded an incomein the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.
We recorded a provision for income tax expense of $10.4 million for the three months ended September 30, 2015 and income tax expense of $10.2 million for the nine months ended September 30, 2015. The effective tax rates were 174.1% and 154.6% for the three and nine months ended September 30, 2015, respectively. The effective tax rates for the three months and nine months ended September 30, 2015 differed from the federal statutory rate applied to income and losses before income taxes primarily as a result of the effect of expenses that are not deductible for income tax purposes and state income taxes, including the tax effect of changes in effective state income tax rates, partially offset by an income tax benefit on disqualifying dispositions of incentive stock options.
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE F – RESTRUCTURING
In 2016, we entered into agreements to relocate our corporate headquarters. One agreement is a sublease of the office space formerly occupied by our corporate headquarters and includes all furniture and fixtures. The sublease agreement is effective August 1, 2016 and is coterminous with the prime lease agreement expiring on September 29, 2022. We recorded a restructuring charge of $1.5 million, which includes $0.8 million related to facilities and $0.7 million in severance costs for the nine months ended September 30, 2016. Of this $1.5 million charge, $1.2 million was recorded during the three months ended June 30, 2016, related to severance and facility charges, and $0.3 million was recorded for the three months ended September 30, 2016, related to severance. The restructuring charge for facilities of $0.8 million is comprised of $0.4 million for broker and other related fees and $0.4 million non-cash charge for the estimated August 1, 2016 net book value of furniture, fixtures and leasehold improvements, as well as moving costs. Our temporary new corporate headquarters office space, effective July 15, 2016, is under a one-year lease agreement. We anticipate cash savings of $0.8 million under the new agreement over the next 12 months and are reviewing alternatives for longer-term office space.
NOTE G –— DEBT
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Note payable to Crystal Financial LLC, with interest at LIBOR plus margin | $ | 17,000 | $ | - | ||||
Note payable to Silicon Valley Bank, repaid in 2016 | - | 19,349 | ||||||
Less long-term deferred financing costs | (906 | ) | (440 | ) | ||||
16,094 | 18,909 | |||||||
Less current portion of long-term debt | (638 | ) | (3,600 | ) | ||||
Noncurrent portion of long-term debt | $ | 15,456 | $ | 15,309 |
| | | March 31, 2017 | | | December 31, 2016 | | ||||||
Note payable to Crystal Financial LLC, with interest at LIBOR plus margin | | | | $ | 12,000 | | | | | $ | 17,000 | | |
Note payable to Kenneth Rainin Foundation (a related party) | | | | | 5,000 | | | | | | — | | |
Less long-term deferred financing costs | | | | | (1,142) | | | | | | (840) | | |
| | | | | 15,858 | | | | | | 16,160 | | |
Less current portion of long-term debt | | | | | (3,912) | | | | | | (1,275) | | |
Noncurrent portion of long-term debt | | | | $ | 11,946 | | | | | $ | 14,885 | | |
|
Crystal Loan Agreement.
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
On July 29, 2016, and November 3, 2016, we entered into amendments to the Crystal Loan Agreement to modify the covenant relating to the Maximum Subscriber Churn and amend the definition of Adjusted EBITDA. On May 3, 2017, we entered into an amendment to the Crystal Loan Agreement to amend the definition of Adjusted EBITDA and changed the date from June 1, 2017 to June 7, 2017 with respect to the $2.0 million prepayment milestone and the retention of an investment banker for purposes of a refinancing transaction.
operations and comprehensive loss for the three month period ended March 31, 2017.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 19,542 | 19,137 | 19,456 | 19,053 | ||||||||||||
Dilutive effect of common stock equivalents | - | - | - | - | ||||||||||||
Total | 19,542 | 19,137 | 19,456 | 19,053 | ||||||||||||
Anti-dilutive equity-based compensation awards | 1,571 | 2,294 | 1,576 | 2,294 |
NOTE I – LEASES, COMMITMENTS AND CONTINGENCIES
Capital Lease
We record leases in which we have substantially all the benefits and risks of ownership as capital leases and all other leases as operating leases. For leases determined to be capital leases, we record the assets held under capital lease and related obligations at lesser of the present value of aggregate future minimum lease payments or the fair value of the assets held under capital lease. We amortize the underlying assets over the expected life of the assets if we will retain title to the assets at the end of the lease term; otherwise we amortize the asset over the term of the lease.
In March 2016, we entered into a 60-month lease arrangement for computer and network equipment, software and related costs having a value of $1.2 million. The lease commenced in April 2016 and is accounted for as a capital lease. Future minimum capital lease payments and the present value of the net minimum lease payments for the capital leases as of September 30, 2016 are as follows (in thousands):
Total minimum lease payments | $ | 1,384 | ||
Less amounts representing interest | (147 | ) | ||
Present value of future minimum lease payments | 1,237 | |||
Less current portion | (257 | ) | ||
Amounts due after one year | $ | 980 |
SEPTEMBER 30, 2016
Operating Leases
As disclosed in Note F – Restructuring, in June 2016, we entered into agreements to relocate our corporate headquarters. One agreement is
MARCH 31, 2017
| | | For the Three Months Ended March 31, | | |||||||||
| | | 2017 | | | 2016 | | ||||||
Weighted average common shares outstanding | | | | ||||||||||
Basic | | | | | 19,524 | | | | | | 19,377 | | |
Dilutive effect of common stock equivalents | | | | | — | | | | | | — | | |
Total | | | | | 19,524 | | | | | | 19,377 | | |
Anti-dilutive equity-based compensation awards | | | | | 1,634 | | | | | | 1,188 | | |
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NOTE J - FAIR VALUE MEASUREMENTS
We account for certain assets at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
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.
Assets measured at fair value on a recurring basis comprise only investments in short-term US Treasury Funds of $15.5 million as of December 31, 2015. The investments are classified as available for sale debt securities included in cash and cash equivalents in the consolidated balance sheets and are categorized as Level 1 measurements in the fair value hierarchy. We do not have any liabilities measured at fair value on a recurring basis.
The following table summarizes assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2016 (in thousands):
Fair | Total | |||||||||||
Value | Level 3 | Losses | ||||||||||
Omnilink Reporting Unit | ||||||||||||
Indefinite lived trade names | $ | 1,360 | $ | 1,360 | $ | 1,612 | ||||||
Goodwill | 15,316 | 15,316 | 2,264 | |||||||||
DIY Reporting Unit | ||||||||||||
Technology | 146 | 146 | 81 | |||||||||
Goodwill | 1,441 | 1,441 | 215 | |||||||||
Total nonrecurring fair value measurements | $ | 18,263 | $ | 18,263 | $ | 4,172 |
See Note D – Goodwill and Intangible Assets for additional information.
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE K –I — RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
In September 2015,2017, the FASB issued guidance to simplify the accountingassist entities in evaluating whether transactions should be accounted for measurement-period adjustments for an acquirer inas acquisitions (or disposals) of assets or businesses. The updated guidance requires a business combination. The update requires an acquirer to recognize any adjustments to provisional amounts of the initial accounting for a business combination with a corresponding adjustment to goodwill in the reporting period in which the adjustments are determined in the measurement period, as opposed to revising prior periods presented in financial statements. Thus, an acquirer shall adjust its financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date.prospective adoption. Early adoption is permitted. This update waswill be effective January 1, 2016 andfor the adoptionCompany beginning in 2018. The Company does not expect the provisions of this guidance did notto have a material impact on our financial statements.
Recently Issued Accounting Guidance
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payments transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationpresentation on the statement of cash flows. The guidance isrequires that a statement of cash flows explain the change during the period of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard becomes effective for annualthe Company during the first quarter of 2018 and interim periods beginning after December 31, 2016. Early adoption is permittedwill be applied using a retrospective approach for any entity in any interim or annual period. We are currently evaluatingeach period presented. The Company does not expect the effect that the updated standard willprovisions of this guidance to have a material impact on our financial statements, but expect the guidance will add modest volatility in our equity-based compensation expense, provision for income taxes, and net income (loss) due to recording award forfeitures as they occur instead of on the basis of assumed averages.
statements.
In November 2015, the FASB issued guidance requiring all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. This standard is effective for public companies for annual periods beginning after December 15, 2016. We do not expect the adoption of this guidance to have a material impact on our financial statements.
In July 2015, the FASB issued guidance intended to simplify the presentation of applicable inventory at the lower of cost or net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.
NUMEREX CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
In May 2014, the FASB issued newguidance which amends the existing accounting guidancestandards for revenue recognized from contracts with customers.recognition. In August 2015, the FASB issued additional guidance which delays the effective date by one year. The core principleFASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued guidance which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it
NOTE L – SUBSEQUENT EVENTS
Amended Debt Agreement
landlord.
During the quarter ended March 31, 2016."believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend,"“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,"“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 filing, 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 risk that we may not be able to remain in compliance with certain of our debt covenants; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers materially change or disrupt the flow of products or services; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new products and services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances, partnerships and/or wireless network operators will not yield substantial revenues; changes in financial and capital markets, and the inability to raise growth capital; the inability to attain revenuesrevenue 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; and extent and timing of technological changes.the “Company” or “Numerex” refers to Numerex Corp. and subsidiaries.September 30, 2016.The CompanyMarch 31, 2017.The Company's solutions produce new revenue streams or create operating efficiencies for its customers. Numerex provides its technology and services through its integrated platforms, which are generally sold on a subscription basis. The Company offers a portfolio of managed end-to-end IoT solutions including smart devices, network connectivity and service applications capable of addressing the needs of a wide spectrum of vertical markets and industrial customers. The Company's mission is toWe empower enterprise operations with world-class, managed IoT solutions that are simple, innovative, scalable and secure. Numerex is ISO 27001 information security-certified, highlighting the Company's focus on data security, service reliability and around-the-clock support of its customers.Our network services are provided through cellular, satellite, broadband and wireline networks. Cellular networks include national and regional carriers and consist of second (2G), third (3G) and fourth generation (4G and LTE) technology. Several wireless carriers have announced their intention to discontinue their 2G networks and fully deploy 3G and 4G networks between 2016 and 2020 while other carriers have announced their intention to discontinue 2G networks as early as 2020. We intend to continue support existing 2G customers through the transition to subsequent technology. Additionally, we have introduced 3G/4G and LTE products offering advanced services across our product lines.17Beginning in the third quarter of 2015, we began to concentrate on selling higher margin, integrated managed service subscriptions that include the full suite of our devices, networks, applications and platform while moving away from the sale of individual components – especially hardware only. We expect this strategic change to help us grow sustainable service revenues along with corresponding higher gross margins. However, we also anticipate hardware revenues will decline significantly in 2016 and remain relatively modest as compared to historical levels thereafter.September 30, 2016,March 31, 2017, we had revenues of $17.4$16.4 million, and a net loss of $2.5 million, compared with revenues and net loss of $23.3 million and $16.4 million, respectively, for the quarter ended September 30, 2015.For the nine months ended September 30, 2016, we had revenues of $53.1 million, and a net loss of $13.2$4.0 million; compared with revenues and a net loss of $70.7$18.1 million and $16.7$2.3 million, respectively, for the nine monthsquarter ended September 30, 2015.revenuesrevenue through a portfolio of managed, end-to-end IoT solutions which are generally sold on a subscription basis and built on our horizontal, integrated platform. Our solutions incorporate the key IoT building blocks –— Device, Network, Application and Platform. Our solutions also simplify the implementation and improve the speed to market for enterprise users in select, targeted verticals in the asset monitoring and optimization, asset tracking, and safety and security markets.
During
results.
Results of Operations
Three Months Ended September 30, | Change from | |||||||||||||||||||||||
2016 | 2015 | 2015 to 2016 | ||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Subscription and support revenues | $ | 14,388 | 82.6 | % | $ | 15,624 | 67.0 | % | $ | (1,236 | ) | -7.9 | % | |||||||||||
Embedded devices and hardware | 3,024 | 17.4 | % | 7,710 | 33.0 | % | (4,686 | ) | -60.8 | % | ||||||||||||||
Total net revenues | 17,412 | 100.0 | % | 23,334 | 100.0 | % | (5,922 | ) | -25.4 | % | ||||||||||||||
Cost of sales, exclusive of a portion of depreciation and amortization shown below: | ||||||||||||||||||||||||
Subscription and support revenues | 5,828 | 33.5 | % | 6,538 | 28.0 | % | (710 | ) | -10.9 | % | ||||||||||||||
Embedded devices and hardware | 3,082 | 17.7 | % | 6,958 | 29.8 | % | (3,876 | ) | -55.7 | % | ||||||||||||||
Inventory reserves | 27 | 0.2 | % | 1,277 | 5.5 | % | (1,250 | ) | -97.9 | % | ||||||||||||||
Impairment of other asset | - | 0.0 | % | 1,275 | 5.5 | % | (1,275 | ) | -100.0 | % | ||||||||||||||
Gross profit | 8,475 | 48.7 | % | 7,286 | 31.2 | % | 1,189 | 16.3 | % | |||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 3,229 | 18.5 | % | 3,047 | 13.1 | % | 182 | 6.0 | % | |||||||||||||||
General and administrative | 3,280 | 18.8 | % | 4,507 | 19.3 | % | (1,227 | ) | -27.2 | % | ||||||||||||||
Engineering and development | 2,229 | 12.8 | % | 2,201 | 9.4 | % | 28 | 1.3 | % | |||||||||||||||
Depreciation and amortization | 1,658 | 9.5 | % | 2,100 | 9.0 | % | (442 | ) | -21.0 | % | ||||||||||||||
Impairment of goodwill and | ||||||||||||||||||||||||
other intangible assets | - | 0.0 | % | 1,250 | 5.4 | % | (1,250 | ) | n/a | |||||||||||||||
Restructuring charges | 276 | 1.6 | % | - | 0.0 | % | 276 | n/a | ||||||||||||||||
Operating loss | (2,197 | ) | -12.6 | % | (5,819 | ) | -24.9 | % | 3,622 | -62.2 | % | |||||||||||||
Interest expense | 469 | 2.7 | % | 188 | 0.8 | % | 281 | 149.5 | % | |||||||||||||||
Other income, net | (33 | ) | -0.2 | % | (31 | ) | -0.1 | % | (2 | ) | 6.5 | % | ||||||||||||
Loss before income taxes | (2,633 | ) | -15.1 | % | (5,976 | ) | -25.6 | % | 3,343 | -55.9 | % | |||||||||||||
Income tax expense (benefit) | (87 | ) | -0.5 | % | 10,404 | 44.6 | % | (10,491 | ) | -100.8 | % | |||||||||||||
Net loss | $ | (2,546 | ) | -14.6 | % | $ | (16,380 | ) | -70.2 | % | $ | 13,834 | -84.5 | % | ||||||||||
Adjusted EBITDA(1) | $ | 859 | 4.9 | % | $ | 1,660 | 7.1 | % | $ | (801 | ) | -48.3 | % |
| | | Three Months Ended March 31, | | | Change from 2016 to 2017 | | ||||||||||||||||||||||||||||||
| | | 2017 | | | 2016 | | | |||||||||||||||||||||||||||||
Net revenues: | | | | | | | | ||||||||||||||||||||||||||||||
Subscription and support revenues | | | | $ | 13,470 | | | | | | 82.2% | | | | | $ | 14,984 | | | | | | 83.0% | | | | | $ | (1,514) | | | | | | -10.1% | | |
Embedded devices and hardware | | | | | 2,915 | | | | | | 17.8% | | | | | | 3,066 | | | | | | 17.0% | | | | | | (151) | | | | | | -4.9% | | |
Total net revenues | | | | | 16,385 | | | | | | 100.0% | | | | | | 18,050 | | | | | | 100.0% | | | | | | (1,665) | | | | | | -9.2% | | |
Cost of sales | | | | | | | | ||||||||||||||||||||||||||||||
Subscription and support revenues | | | | | 5,464 | | | | | | 33.3% | | | | | | 5,701 | | | | | | 31.6% | | | | | | (237) | | | | | | -4.2% | | |
Embedded devices and hardware | | | | | 3,032 | | | | | | 18.5% | | | | | | 3,118 | | | | | | 17.3% | | | | | | (86) | | | | | | -2.7% | | |
Gross profit | | | | | 7,889 | | | | | | 48.1% | | | | | | 9,231 | | | | | | 51.1% | | | | | | (1,342) | | | | | | -14.5% | | |
Operating expenses: | | | | | | | | ||||||||||||||||||||||||||||||
Sales and marketing | | | | | 3,142 | | | | | | 19.2% | | | | | | 2,945 | | | | | | 16.3% | | | | | | 197 | | | | | | 6.7% | | |
General and administrative | | | | | 2,945 | | | | | | 18.0% | | | | | | 4,129 | | | | | | 22.9% | | | | | | (1,184) | | | | | | -28.7% | | |
Engineering and development | | | | | 2,215 | | | | | | 13.5% | | | | | | 2,247 | | | | | | 12.4% | | | | | | (32) | | | | | | -1.4% | | |
Depreciation and amortization | | | | | 1,523 | | | | | | 9.3% | | | | | | 1,658 | | | | | | 9.2% | | | | | | (135) | | | | | | -8.1% | | |
Restructuring charges | | | | | 425 | | | | | | 2.6% | | | | | | - | | | | | | 0.0% | | | | | | 425 | | | | | | 100.0% | | |
Operating loss | | | | | (2,361) | | | | | | -14.4% | | | | | | (1,748) | | | | | | -9.7% | | | | | | (613) | | | | | | 35.1% | | |
Interest expense | | | | | 621 | | | | | | 3.8% | | | | | | 267 | | | | | | 1.5% | | | | | | 354 | | | | | | 132.6% | | |
Loss on extinguishment of debt | | | | | 228 | | | | | | 1.4% | | | | | | 290 | | | | | | 1.6% | | | | | | (62) | | | | | | -21.4% | | |
Other expense (income), net | | | | | 730 | | | | | | 4.5% | | | | | | (43) | | | | | | -0.2% | | | | | | 773 | | | | | | -1798.7% | | |
Loss before income taxes | | | | | (3,940) | | | | | | -24.0% | | | | | | (2,262) | | | | | | -12.5% | | | | | | (1,678) | | | | | | 74.2% | | |
Income tax expense (benefit) | | | | | 84 | | | | | | 0.5% | | | | | | 64 | | | | | | 0.4% | | | | | | 20 | | | | | | 31.3% | | |
Net loss | | | | $ | (4,024) | | | | | | -24.6% | | | | | $ | (2,326) | | | | | | -12.9% | | | | | $ | (1,698) | | | | | | 73.0% | | |
Adjusted EBITDA(1) | | | | $ | 536 | | | | | | 3.3% | | | | | $ | 858 | | | | | | 4.8% | | | | | $ | (322) | | | | | | -37.6% | | |
|
Subscription and support revenues decreased $1.2$1.5 million, or 7.9%10.1%, to $14.4$13.5 million from $15.6$15.0 million in 2015.2016. The decrease reflects lossesis driven by 2G disconnects associated with the AT&T 2G network customers’ 2G conversions stemming from asunset that occurred on December 31, 2016.
Direct cost2016. Cost of salesrevenue for embedded devices and hardware decreased $0.1 million, or 2.7% to $3.0 million for the three months ended September 30, 2016 decreased $7.1 million, or 44.3%, to $8.9 millionMarch 31, 2017 compared to $16.0$3.1 million for the same period in 2015. Direct cost of subscription and support revenues2016.
Direct cost of sales for embedded devices and hardware, excluding provision for inventory reserves, decreased $3.9 million, or 55.7%, to $3.1 million for the three months ended September 30, 2016 compared to $7.0 million for the three months ended September 30, 2015. Embedded devices and hardware revenue less direct costs was ($0.1) million, or (1.9)% of embedded devices and hardware revenue for the three months ended September 30, 2016, compared to $0.8 million, or 9.8% of embedded devices and hardware revenue for the three months ended September 30, 2015, resulting from the decrease in hardware only sales to our historically largest hardware only customer. The overall decrease in direct costs is due to lower corresponding revenues related to our strategic move away from hardware only sales.
The decrease in cost of sales in the comparable periods occurred because we entered into new and amended agreements with wireless carriers in September 2015. As a result of these agreements, we performed a lower of cost or market analysis leading to a significant increase in the inventory reserve of $1.3 million during the three months ended September 30, 2015 related to older, 2G cellular telecommunication devices and older satellite devices as well as an accrual for a purchase commitment related to raw materials for the older satellite devices that we will not fulfill. In addition, one of the amended carrier agreements led to settlement of a pre-existing relationship and a $1.3 million impairment of a prepaid expense during the three months ended September 30, 2015.
Total gross profit for the three months ended September 30, 2016 increased $1.2 million, or 16.3% to $8.5 million compared to $7.3 million for the same period in 2015, as a result of the changes discussedreasons stated above.
quarter.
administrative salary cost resulting from a reduction in headcount.
March 31, 2016.
During the second quarter of 2016, management evaluated and determined that the Omnilink and Do-It-Yourself (DIY) product lines and reporting units should be tested for impairment as a result of lower operating results, which are related to strategic changes and delays associated with the launch of a new personal tracking product line. Management initiated a quantitative two-step goodwill impairment test by comparing the carrying value of the net assets of the respective units to its fair value based on a discounted cash flow analysis. Based on our assessment, we have determined that the fair value of these reporting unitsRestructuring charges were less than the respective carrying value and goodwill was impaired, and have recorded $4.2 million in impairment charges for trade names, technology and goodwill as of June 30, 2016, comprised of impairments of $1.6 million for indefinite-lived trade names and $2.3 million for goodwill of the Omnilink reporting unit, and $0.1 million for technology and $0.2 million for goodwill of the DIY reporting unit.
We recorded a restructuring charge of $0.3 million during the quarter ended September 30, 2016, for severance costs incurred during the period.
Interest expense increased $0.3 million, or 149.5%, to $0.5$0.4 million for the three months ended September 30, 2016,March 31, 2017, compared to $0.2 million$0 for the same period in 20152016. The increase is due primarily to a higher interest rate on our loan agreement having deferred principal payments and imputed interestseverance charges.
We recorded an income tax benefit of $0.1 millionin expense for the three months ended September 30, 2016,March 31, 2017, due to financing charges related to our debt, compared to a provision for($0.1) million in interest income tax expense of $10.4 million for the same period in 2015.2016.
Nine Months Ended September 30, 2016 and 2015
The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):
Nine Months Ended September 30, | Change from | |||||||||||||||||||||||
2016 | 2015 | 2015 to 2016 | ||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Subscription and support revenues | $ | 44,183 | 83.3 | % | $ | 48,874 | 69.2 | % | $ | (4,691 | ) | -9.6 | % | |||||||||||
Embedded devices and hardware | 8,886 | 16.7 | % | 21,791 | 30.8 | % | (12,905 | ) | -59.2 | % | ||||||||||||||
Total net revenues | 53,069 | 100.0 | % | 70,665 | 100.0 | % | (17,596 | ) | -24.9 | % | ||||||||||||||
Cost of sales, exclusive of a portion of depreciation and amortization shown below: | ||||||||||||||||||||||||
Subscription and support revenues | 17,242 | 32.5 | % | 19,728 | 27.9 | % | (2,486 | ) | -12.6 | % | ||||||||||||||
Embedded devices and hardware | 9,027 | 17.0 | % | 19,582 | 27.7 | % | (10,555 | ) | -53.9 | % | ||||||||||||||
Inventory reserves | 514 | 1.0 | % | 1,547 | 2.2 | % | (1,033 | ) | -66.8 | % | ||||||||||||||
Impairment of other asset | - | 0.0 | % | 1,275 | 5.5 | % | (1,275 | ) | -100.0 | % | ||||||||||||||
Gross profit | 26,286 | 49.5 | % | 28,533 | 40.4 | % | (2,247 | ) | -7.9 | % | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 9,444 | 17.8 | % | 9,136 | 12.9 | % | 308 | 3.4 | % | |||||||||||||||
General and administrative | 11,269 | 21.2 | % | 12,108 | 17.1 | % | (839 | ) | -6.9 | % | ||||||||||||||
Engineering and development | 6,920 | 13.0 | % | 6,695 | 9.5 | % | 225 | 3.4 | % | |||||||||||||||
Depreciation and amortization | 4,992 | 9.4 | % | 5,411 | 7.7 | % | (419 | ) | -7.7 | % | ||||||||||||||
Impairment of goodwill and | ||||||||||||||||||||||||
other intangible assets | 4,172 | 7.9 | % | 1,250 | 1.8 | % | 2,922 | n/a | ||||||||||||||||
Restructuring charges | 1,520 | 2.9 | % | - | 0.0 | % | 1,520 | n/a | ||||||||||||||||
Operating loss | (12,031 | ) | -22.7 | % | (6,067 | ) | -8.6 | % | (5,964 | ) | 98.3 | % | ||||||||||||
Interest expense | 1,196 | 2.3 | % | 604 | 0.9 | % | 592 | 98.0 | % | |||||||||||||||
Loss on extinguishment of debt | 290 | 0.5 | % | - | 0.0 | % | - | n/a | ||||||||||||||||
Other income, net | (99 | ) | -0.2 | % | (100 | ) | -0.1 | % | 1 | -1.0 | % | |||||||||||||
Loss before income taxes | (13,418 | ) | -25.3 | % | (6,571 | ) | -9.3 | % | (6,847 | ) | 104.2 | % | ||||||||||||
Income tax expense (benefit) | (257 | ) | -0.5 | % | 10,159 | 14.4 | % | (10,416 | ) | -102.5 | % | |||||||||||||
Net loss | $ | (13,161 | ) | -24.8 | % | $ | (16,730 | ) | -23.7 | % | $ | 3,569 | -21.3 | % | ||||||||||
Adjusted EBITDA(1) | $ | 2,343 | 4.4 | % | $ | 7,358 | 10.4 | % | $ | (5,015 | ) | -68.2 | % |
(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.
Total revenues decreased $17.6 million, or 24.9%, for the nine months ended September 30, 2016 to $53.1 million from $70.7 million for the same period in 2015. The decrease is primarily attributable to a strategic shift in how we sell our products and services. During the third quarter of 2015, we began to concentrate on selling higher margin, integrated managed service subscriptions that include the full suite, or subsets, of our devices, networks, applications, and platform while moving away from the sale of individual components – especially hardware only.
Subscription and support revenues decreased $4.7 million, or 9.6%, to $44.2 million from $48.9 million in 2015. The decrease reflects losses associated with network customers’ 2G conversions stemming from a period of time in which we did not have a competitive offering. Pricing has remained consistent year over year for similar services, although current period revenues also include higher value services. The decrease in embedded devices and hardware revenues is attributed to the shift to the integrated managed service subscription offerings. In addition, sales to our historically largest hardware only customer decreased to $0.4 million for the nine months ended September 30, 2016 compared to $12.5 million for the same period in 2015.
Direct cost of sales for the nine months ended September 30, 2016 decreased $15.3 million, or 36.3%, to $26.8 million compared to $42.1 million for the same period in 2015. Direct cost of subscription and support revenues decreased $2.5 million, or 12.6%, to $17.2 million for the nine months ended September 30, 2016, compared to $19.7 million for the same period in 2015. Subscription and support revenues less direct costs were $26.9 million, or 60.9% of corresponding revenues for the nine months ended September 30, 2016 compared to $29.1 million, or 59.6% for the nine months ended September 30, 2015. In addition to lower direct costs associated with lost 2G conversions, we also had a larger proportional decrease in direct cost of subscription and support due in part to lower negotiated network and carrier costs and our strategic efforts to sell higher margin integrated managed services. Direct cost of subscription and support revenues include $1.0 million and $0.7 million of depreciation and amortization for the nine months ended September 30, 2016 and 2015, respectively.
Direct cost of sales for embedded devices and hardware, excluding provision for inventory reserves, decreased $10.6 million, or 53.9%, to $9.0 million for the nine months ended September 30, 2016 compared to $19.6 million for the nine months ended September 30, 2015. Embedded devices and hardware revenue less direct costs was $(0.1) million, or (1.6)% of embedded devices and hardware revenue for the nine months ended September 30, 2016, compared to $2.2 million, or 10.1% of embedded devices and hardware revenue for the nine months ended September 30, 2015, resulting from the decrease in hardware only sales to our historically largest hardware only customer. The overall decrease in direct costs is due to lower corresponding revenues related to our strategic move away from hardware only sales. Embedded devices and hardware revenue also declined as we focus on integrated managed services solutions.
Cost of sales for the nine months ended September 30, 2016 include a significant increase in the provision for inventory reserves of $0.5 million. As described above, we entered into new and amended agreements with wireless carriers in September 2015 that made adding 2G devices to wireless networks financially unfavorable under most circumstances. As a result of these agreements, we performed a lower of cost or market analysis leading to the increased reserve related to older 2G cellular telecommunication devices during the quarter ended September 30, 2015, net of what we believed was saleable in limited markets. At the time of filing our quarterly report for the quarter ended March 31, 2016, we anticipated subsequently completing a large sale of older 2G and other devices. The anticipated sale was not and is no longer expected to be completed, leading us to record the significant increase in the provision for inventory reserves.
Total gross profit for the nine months ended September 30, 2016 decreased $2.2 million, or 7.9% to $26.3 million compared to $28.5 million for the same period in 2015 as a result of the changes discussed above.
Sales and marketing expense of $9.4 million for the nine months ended September 30, 2016 increased by $0.3 million compared with $9.1 million in the same period in 2015. The year over year increase as a percentage of total net revenue is primarily attributable to higher sales commissions due to more sales personnel with guaranteed commissions during the nine months ended September 30, 2016.
General and administrative expense decreased $0.8 million, or 6.9%, to $11.3 million for the nine months ended September 30, 2016, compared to $12.1 million for the same period in 2015. The decrease is driven primarily by lower recruiting costs and equity-based compensation expense.
Engineering and development expenses increased $0.2 million, or 3.4%, to $6.9 million for the nine months ended September 30, 2016, compared to $6.7 million for the nine months ended September 30, 2015. The increase is primarily attributable to an increase in contract labor. We are increasing our use of more agile, off-shore resources and incurred some overlapping costs during the nine months ended September 30, 2016 compared to the same period in the prior year. We may experience additional volatility in contract labor and overall engineering and development costs in the future as our business and operating needs evolve.
Depreciation and amortization expense, not otherwise included in cost of sales, decreased to $5.0 million from $5.4 million for the nine months ended September 30, 2016 and 2015.
During the second quarter of 2016, management evaluated and determined that the Omnilink and Do-It-Yourself (DIY) product lines and reporting units should be tested for impairment as a result of lower operating results, which are related to strategic changes and delays associated with the launch of a new personal tracking product line. Management initiated a quantitative two-step goodwill impairment test by comparing the carrying value of the net assets of the respective units to its fair value based on a discounted cash flow analysis. Based on our assessment, we determined that the fair value of these reporting units were less than the respective carrying value and goodwill was impaired, and recorded $4.2 million in impairment charges for trade names, technology and goodwill as of September 30, 2016, comprised of impairments of $1.6 million for indefinite-lived trade names and $2.3 million for goodwill of the Omnilink reporting unit, and $0.1 million for technology and $0.2 million for goodwill of the DIY reporting unit.
Also as described above, during the quarter ended September 30, 2016, we recorded a restructuring charge of $1.5 million, which includes $0.8 million related to facilities and $0.7 million in severance costs. The restructuring charge for facilities is comprised of $0.4 million for broker and other related fees and $0.4 million non-cash charge for the estimated August 1, 2016 net book value of furniture, fixtures and leasehold improvements as well as moving expenses. Our temporary new corporate headquarters office space, effective July 15, 2016, is under a one-year lease agreement. We anticipate cash savings of $0.8 million under the new agreement over the next 12 months and are reviewing alternatives for longer-term office space. Severance costs of $0.7 million were incurred during the period.
Interest expense increased $0.6 million, or 98.0%, to $1.2 million for the nine months ended September 30, 2016, compared to $0.6 million for the same period in 2015 due to a higher interest rate on our loan agreement having deferred principal payments and imputed interest expense on a new $1.2 million capital lease for computer equipment, software and other related assets.
We recorded an income tax benefit of $0.3 million and $10.1 million in income tax expense for the nine month periods ended September 30, 2016 and 2015, respectively. The effective tax rates were (1.9)% and 154.6% for the nine months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016, the difference in the effective tax rate compared to the federal statutory rate is due primarily to the book and tax basis and accounting differences for certain long and indefinite lived intangible assets. We also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses. The effective tax rate for the nine months ended September 30, 2015 differed from the federal statutory rate primarily as a result of the effect of expenses that are not deductible for income tax purposes and state income taxes, including the tax effect of changes in effective state income tax rates, partially offset by an income tax benefit on disqualifying dispositions of incentive stock options. Income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.
Segment Information
Non-GAAP Financial Measures
Equity-based compensation is an important part of total compensation, especially from the perspective of employees. We believe however, that excluding the effects of equity-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors’ understanding of our core operating results and trends. Investors have indicated that they consider financial measures of our results of operations excluding equity-based compensation as important supplemental information useful to their understanding of our historical results and estimating our future results.
Adjusted EBITDA excludes restructuring, non-cash, impairmentmeaningful period-to-period comparisons.
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net loss | $ | (2,546 | ) | $ | (16,380 | ) | $ | (13,161 | ) | $ | (16,730 | ) | ||||
Depreciation and amortization expense | 2,029 | 2,381 | 5,997 | 6,163 | ||||||||||||
Impairment of goodwill and other intangible assets | - | - | 4,172 | - | ||||||||||||
Interest expense and other non-operating expense, net | 436 | 157 | 1,387 | 504 | ||||||||||||
Income tax (benefit) expense | (87 | ) | 10,404 | (257 | ) | 10,159 | ||||||||||
EBITDA (non-GAAP) | (168 | ) | (3,438 | ) | (1,862 | ) | 96 | |||||||||
Equity-based compensation expense | 751 | 738 | 2,202 | 2,319 | ||||||||||||
Non-cash and other items | 276 | 4,360 | 2,003 | 4,943 | ||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 859 | $ | 1,660 | $ | 2,343 | $ | 7,358 |
Depreciation and amortization expense in the table above includes $0.4 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $1.0 million and $0.7 million, for the nine months ended September 30, 2015, respectively, recorded in cost of revenue.
| | | Three Months Ended March 31, | | |||||||||
| | | 2017 | | | 2016 | | ||||||
Net loss | | | | $ | (4,024) | | | | | $ | (2,326) | | |
Depreciation and amortization expense | | | | | 1,973 | | | | | | 1,965 | | |
Interest expense and other non-operating expense (income), net | | | | | 1,579 | | | | | | 514 | | |
Income tax expense | | | | | 84 | | | | | | 64 | | |
EBITDA (non-GAAP) | | | | | (388) | | | | | | 217 | | |
Equity-based compensation expense | | | | | 231 | | | | | | 621 | | |
Non-cash and other items | | | | | 693 | | | | | | 20 | | |
Adjusted EBITDA (non-GAAP) | | | | $ | 536 | | | | | $ | 858 | | |
Net loss per diluted share (GAAP) | | | | $ | (0.21) | | | | | $ | (0.12) | | |
Weighted average shares outstanding used in computing diluted per share amounts | | | | | 19,524 | | | | | | 19,377 | | |
Liquidity and Capital Resources
least March 2018.
favorable terms or at all.
software, compared to $1.3 million for the three month period ended March 31, 2016.
Onthree month period ended March 9, 2016, we and certain of our wholly-owned, consolidated subsidiaries entered into a new term loan agreement with Crystal Financial LLC as Term Agent, and the term lenders party thereto (the “Crystal Loan Agreement”) pursuant to which the term lenders made a term loan to us in the amount of $17.0 million. The net proceeds from the term loan (after payment of the fees and expenses of the Term Agent), along with $2.9 million of cash on hand, were used to repay the $19.4 million outstanding debt under the SVB Loan Agreement and pay related transaction fees. We recorded a charge of $0.3 million to loss on extinguishment of debt for unamortized deferred financing costs related to the SVB Loan Agreement during the nine months ended September 30,31, 2016.
The maturity date of the term loan is March 9, 2020. We are required to make regular quarterly principal payments of $0.6 million beginning September 1, 2017 with the balance due on the maturity date, if not otherwise repaid earlier by way of voluntary prepayments, or upon the occurrence of certain Prepayment Events or Excess Cash Flow (as defined in the Crystal Loan Agreement), or as a result of acceleration of the loan as a result of an event of default. Prepayments of the loan are subject to a prepayment penalty of 3% of the amount prepaid if prepayment occurs prior to the first anniversary of the closing date and 2% of the amount prepaid if the prepayment occurs on or after the first anniversary of the closing date but prior to the second anniversary date of the closing date. There is no prepayment penalty for prepayments that occur on or after the second anniversary of the closing date. The interest rate payable on the outstanding loan amount is determined by reference to LIBOR plus a margin established in the agreement. At September 30, 2016, the applicable interest rate was 9.35%.
Our obligations under the Crystal Loan Agreement are secured by a first priority security interest in substantially all of our assets and the assets of our subsidiaries. In addition, we are required to meet certain financial and other restrictive covenants customary with this type of facility, including maintaining a minimum Adjusted EBITDA, minimum Consolidated Fixed Charge Coverage Ratio, maximum Consolidated Total Net Leverage, maximum subscriber Churn, and minimum Liquidity, all of which are defined in the Crystal Loan Agreement. We are also prohibited from incurring indebtedness, disposing of or permitting liens on our assets and making restricted payments, including cash dividends on shares of our common stock, except as expressly permitted under the Crystal Loan Agreement. The agreement contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the agreement may be accelerated.
On July 29, 2016 and November3, 2016, we entered into an amendment to the Crystal Loan Agreement to modify the covenant related to the maximum subscriber Churn and update the definition of Adjusted EBITDA. As a result of the amendments, we were in compliance with all covenants as of September 30, 2016.
In March 2016, we entered into a 60-month lease arrangement for computer and network equipment, software and related costs having a value of $1.2 million. The lease commenced in April 2016 and is accounted for as a capital lease, reflecting the corresponding assets and related obligations in our consolidated balance sheet.
In June 2016, we entered into agreements to relocate our corporate headquarters. One agreement is a sublease of the office space formerly occupied by our corporate headquarters and includes all furniture and fixtures. The sublease agreement is effective August 1, 2016 and coterminous with the prime lease agreement expiring on September 29, 2022. Rental income from the sublease will be $0.9 million annually plus 2.5% annual escalation, recorded as a reduction to rental expense in general and administrative expense. We also executed a one-year lease agreement for temporary new corporate headquarters office space effective July 15, 2016. Annual rent expense will be $0.1 million through July 2017, also recorded in general and administrative expense. We anticipate cash savings of $0.8 million under the new agreement over the next 12 months and are reviewing alternatives for longer-term and lower cost office space.
Off-Balance Sheet Arrangements
As a result of the adoption of a recent accounting pronouncement, certain balance sheet amounts as of December 31, 2015 have been reclassified to conform to the current period presentation. See Note A – Summary of Significant Accounting Policies.
Foreign Currency
2017.
Item 4. |
Evaluation of Disclosure Controls and Procedures
As of September 30, 2016, under the supervisionProcedures.
The Companyas such term is continuing to reinforce its processes to addressdefined in the previously reported material weaknesses. Management of the Company believes the steps being taken to remediate these weaknesses are appropriate and expects them to be fully remediated before the end of its fiscal year. Remediation efforts include:
The Company is committed to maintaining a strongSecurities Exchange Act Rules 13a-15(f). Our internal control environmentsystem is designed to provide reasonable assurance to our management and believes that these remediation efforts will represent significant improvements in our controls. The Company has started to implement these steps; however, somethe Board of these steps will take time to be fully integratedDirectors regarding the preparation and confirmedfair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance as to the reliability of financial statement preparation and sustainable. Additional controls may also be requiredpresentation. Our management assessed the effectiveness of our internal control over time. Untilfinancial reporting as of March 31, 2017. In making this assessment, our management used the remediation stepscriteria set forth above are fully implemented and tested,by the material weaknesses described above will continue to exist.
NotwithstandingCommittee of Sponsoring Organizations of the material weaknesses described above,Treadway Commission (“COSO”) in Internal Control — Integrated Framework, issued in 2013. Based on this assessment, management has concludedconcludes that, the Company’s unaudited condensed consolidatedas of March 31, 2017, our internal control over financial statements included in this report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Changes in Internal Control Over Financial Reporting
On November 3, 2016, we entered into an amendment to the Crystal Loan Agreement to modify the covenant related to the maximum subscriber Churn as defined in the Crystal Loan Agreement and update the definition of Adjusted EBITDA. See Note G – Debt.
The foregoing description of the Crystal Loan Agreement does
Exhibit Number | | | Description | |
| Warrant to Purchase Stock issued to Kenneth Rainin Foundation (incorporated by reference from Exhibit 4.1 to the Form 10-K filed on March 31, 2017) | | ||
10.1 | | |||
| ||||
| | Senior Subordinated Promissory Note dated March 31, 2017, issued by Numerex Corp. to Kenneth Rainin Foundation (incorporated by reference from Exhibit 10.26 to the Form 10-K filed on March 31, 2017) | | |
10.3 | | | Fourth Amendment to Term Loan Agreement dated May 2, 2017 by and among Numerex Corp., the other parties thereto designated as Borrowers and Guarantors, and Crystal Finance LLC, as Term Agent | |
31.1 | | | Certification of | |
| ||||
| | Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a) | ||
| ||||
| | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| ||||
| | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| ||||
| | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended | |
Exhibit Number | | | Description | |
| | | (i) | |
| | | | NUMEREX CORP. (Registrant) | |
| |||||
May 9, 2017 | |||||
| |||||
/s/ Kenneth L. Gayron | |||||
Kenneth L. Gayron | |||||
Interim Chief Executive Officer, Chief Financial Officer and | |||||
Principal Financial and Accounting Officer |
|