|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Forward Looking Statements
This document contains, and other statements may contain, forward-looking
statements with respect to Numerex future financial or business performance, conditions or strategies and other financial and business
matters, including expectations regarding growth trends and activities. Forward-looking statements are typically identified by
words or phrases such as "believe," "expect," "anticipate," "intend," "estimate,"
"assume," "strategy," "plan," "outlook," "outcome," "continue," "remain,"
"trend," and variations of such words and similar expressions, or future or conditional verbs such as "will,"
"would," "should," "could," "may," or similar expressions. Numerex cautions that these
forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking
statements speak only as of the date of this 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 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 subscription revenues; 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 revenue and earnings growth; changes in interest rates;
inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the
inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; and extent and timing
of technological changes.
Overview
As used herein, except as otherwise indicated by context, references
to “we,” “us,” “our,” or “Numerex” refers to Numerex Corp. and subsidiaries.
The following Management’s Discussion and Analysis is intended
to help the reader understand our results of operations and financial condition. This discussion and analysis is provided as a
supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying
notes included in this Quarterly Report on Form 10-Q for the period ended September 30, 2017.
Numerex Corp. (“Numerex,” the “Company”
or “we”) is headquartered in Atlanta, Georgia, and is a corporation organized under the laws of the Commonwealth of
Pennsylvania. We are a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). We
empower enterprise operations with world-class, managed IoT solutions that are simple, innovative, scalable and secure.
During the quarter ended September 30, 2017, we had revenues of
$15.3 million, and a net loss of $3.4 million; compared with revenues and a net loss of $17.4 million and $2.5 million, respectively
for the quarter ended September 30, 2016.
Our core strategy is to generate long term and sustainable recurring
revenue 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.
Our strategy requires significant capital investment to develop
and enhance our use of technology and to maintain our leadership position and competitive advantage in the markets we serve.
Subscription and support revenue is recognized monthly as services
are provided and sales of embedded devices and hardware are recognized when title passes. Other upfront payment revenue is deferred
and amortized on a straight line basis.
Due to fluctuations of the commencement of new contracts and renewal
of existing contracts, we expect variability of sequential quarterly trends in revenues, margins and cash flows. Other factors
contributing to sequential quarterly trends include usage, rate changes, and re-pricing of contract renewals and technology changes.
Historically, our revenues and expenses in the first quarter have
been modestly affected by slowing of customer purchase activities during the holidays. As a result, historical quarterly fluctuations
may not be indicative of future operating results.
As part of our effort to build and enhance our core business, we
conduct ongoing business strategy reviews. During our reviews, we consider opportunities for growth in existing and new markets
that may involve growth derived from both existing operations as well as from future acquisitions, if any. To the extent existing
business lines and service offerings are not considered to be compatible with delivery of our core business services or with meeting
our financial objectives, we may exit non-core lines of business or stop offering these services in part or in whole.
Results of Operations
Three Months Ended September 30, 2017 and 2016
The following table sets forth selected consolidated results of
operations for the periods indicated, including comparative information between the periods (dollars in thousands):
|
|
Three Months Ended September 30,
|
|
|
Change from
|
|
|
|
2017
|
|
|
2016
|
|
|
2016 to 2017
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support revenues
|
|
$
|
11,983
|
|
|
|
78.3
|
%
|
|
$
|
14,388
|
|
|
|
82.6
|
%
|
|
$
|
(2,405
|
)
|
|
|
-16.7
|
%
|
Embedded devices and hardware
|
|
|
3,320
|
|
|
|
21.7
|
%
|
|
|
3,024
|
|
|
|
17.4
|
%
|
|
|
296
|
|
|
|
9.8
|
%
|
Total net revenues
|
|
|
15,303
|
|
|
|
100.0
|
%
|
|
|
17,412
|
|
|
|
100.0
|
%
|
|
|
(2,109
|
)
|
|
|
-12.1
|
%
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support revenues
|
|
|
5,087
|
|
|
|
33.2
|
%
|
|
|
5,828
|
|
|
|
33.5
|
%
|
|
|
(741
|
)
|
|
|
-12.7
|
%
|
Embedded devices and hardware
|
|
|
3,458
|
|
|
|
22.6
|
%
|
|
|
3,082
|
|
|
|
17.7
|
%
|
|
|
376
|
|
|
|
12.2
|
%
|
Inventory reserves
|
|
|
1,301
|
|
|
|
8.5
|
%
|
|
|
27
|
|
|
|
0.2
|
%
|
|
|
1,274
|
|
|
|
4718.5
|
%
|
Gross profit
|
|
|
5,457
|
|
|
|
35.7
|
%
|
|
|
8,475
|
|
|
|
48.7
|
%
|
|
|
(3,018
|
)
|
|
|
-35.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,183
|
|
|
|
14.3
|
%
|
|
|
3,229
|
|
|
|
18.5
|
%
|
|
|
(1,046
|
)
|
|
|
-32.4
|
%
|
General and administrative
|
|
|
2,314
|
|
|
|
15.1
|
%
|
|
|
3,280
|
|
|
|
18.8
|
%
|
|
|
(966
|
)
|
|
|
-29.5
|
%
|
Engineering and development
|
|
|
1,341
|
|
|
|
8.8
|
%
|
|
|
2,229
|
|
|
|
12.8
|
%
|
|
|
(888
|
)
|
|
|
-39.8
|
%
|
Depreciation and amortization
|
|
|
1,426
|
|
|
|
9.3
|
%
|
|
|
1,658
|
|
|
|
9.5
|
%
|
|
|
(232
|
)
|
|
|
-14.0
|
%
|
Restructuring charges
|
|
|
655
|
|
|
|
4.3
|
%
|
|
|
276
|
|
|
|
1.6
|
%
|
|
|
379
|
|
|
|
137.3
|
%
|
Operating loss
|
|
|
(2,462
|
)
|
|
|
-16.1
|
%
|
|
|
(2,197
|
)
|
|
|
-12.6
|
%
|
|
|
(265
|
)
|
|
|
12.1
|
%
|
Interest expense
|
|
|
919
|
|
|
|
6.0
|
%
|
|
|
469
|
|
|
|
2.7
|
%
|
|
|
450
|
|
|
|
95.9
|
%
|
Other income, net
|
|
|
(34
|
)
|
|
|
-0.2
|
%
|
|
|
(33
|
)
|
|
|
-0.2
|
%
|
|
|
(1
|
)
|
|
|
3.0
|
%
|
Loss before income taxes
|
|
|
(3,347
|
)
|
|
|
-21.9
|
%
|
|
|
(2,633
|
)
|
|
|
-15.1
|
%
|
|
|
(714
|
)
|
|
|
27.1
|
%
|
Income tax expense (benefit)
|
|
|
79
|
|
|
|
0.5
|
%
|
|
|
(87
|
)
|
|
|
-0.5
|
%
|
|
|
166
|
|
|
|
-190.8
|
%
|
Net loss
|
|
$
|
(3,426
|
)
|
|
|
-22.4
|
%
|
|
$
|
(2,546
|
)
|
|
|
-14.6
|
%
|
|
$
|
(880
|
)
|
|
|
34.6
|
%
|
Adjusted EBITDA
(1)
|
|
$
|
1,716
|
|
|
|
11.2
|
%
|
|
$
|
859
|
|
|
|
4.9
|
%
|
|
$
|
857
|
|
|
|
99.7
|
%
|
(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 revenue decreased $2.1 million, or 12.1%, for the three months
ended September 30, 2017 to $15.3 million from $17.4 million for the same period in 2016. The decrease in total revenue is related
to the decrease in subscription and support revenue as well as embedded devices and hardware revenue, which is discussed below.
Subscription and support revenues decreased $2.4 million, or 16.7%,
to $12.0 million from $14.4 million in 2016. The decrease is driven by 2G disconnects associated with the AT&T 2G network sunset
that occurred on December 31, 2016. Embedded devices and hardware revenue increased $0.3 million, or 9.8%, to $3.3 million from
$3.0 million in 2016. The increase in embedded devices and hardware revenue is due to an increase in sales volume and product mix.
Total cost of sales for the three months ended September 30, 2017
increased $0.9 million, or 10.2%, to $9.8 million compared to $8.9 million for the same period in 2016. Comprising that increase,
the cost of revenue for subscription and support services decreased $0.7 million, or 12.7%, to $5.1 million for the three months
ended September 30, 2017 compared to $5.8 million for the same period in 2016. Cost of revenue for embedded devices and hardware
increased $0.4 million, or 12.2% to $3.5 million for the three months ended September 30, 2017 compared to $3.1 million for the
same period in 2016.
Inventory reserve expense for the three months ended September 30,
2017 increased to $1.3 million compared to $0.0 million for the same period in 2016. The increase in the reserve is related to
current inventory which will be impacted by the introduction of our LTE products.
Total gross profit for the period ended September 30, 2017 decreased
$3.0 million, or 35.6% to $5.5 million compared to $8.5 million for the same period in 2016 for the reasons stated above. Gross
profit margin percentage decreased to 35.7% for the three months ended September 30, 2017 from 48.7% for the same period in 2016.
The decrease in gross margin was driven primarily by an increase in the inventory reserve of $1.3 million for the three months
ended September 30, 2017.
Sales and marketing expense decreased $1.0 million, or 32.4%, for
the three months ended September 30, 2017 to $2.2 million compared to $3.2 million for the same period in 2016. The decrease is
primarily attributable to a decline in promotional activities during the quarter and reduced travel costs.
General and administrative expense decreased $1.0 million, or 29.5%,
to $2.3 million for the three months ended September 30, 2017, compared to $3.3 million for the same period in 2016. The decrease
is driven primarily by reduced general and administrative salary cost resulting from a reduction in headcount and lower travel
costs.
Engineering and development expenses decreased $0.9 million, or
39.8% to $1.3 million for the three months ended September 30, 2017, compared to $2.2 million for the same period in 2016. The
decrease is primarily related to reduced headcount in engineering and development, and lower travel costs.
Depreciation and amortization expense decreased $0.2 million, or
14.0% to $1.4 million for the three months ended September 30, 2017, compared to $1.7 million for the same period in 2016.
Restructuring charges were $0.7 million for the three months ended
September 30, 2017, compared to $0.3 million for the same period in 2016. The increase is due primarily to legal costs incurred
related to merger activity.
Interest expense was $0.9 million in expense for the three months
ended September 30, 2017 compared to $0.5 million in interest expense for the same period in 2016. The increase is due to interest
expense on our subordinated debt, as well as interest incurred on our senior debt.
We recorded tax expense of $0.1 million and a tax benefit of $0.1
million for the three months ended September 30, 2017, and 2016 respectively. The effective tax rates were (2.4%) and 3.3% for
the three months ended September 30, 2017 and 2016, respectively. For both periods, the difference in the effective tax rate compared
to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income
taxes, are due primarily to the book and tax basis and accounting difference for certain long and indefinite lived assets. We have
also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating
losses.
Nine Months Ended September 30, 2017 and 2016
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
|
|
|
|
2017
|
|
|
2016
|
|
|
2016 to 2017
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support revenues
|
|
$
|
38,133
|
|
|
|
83.5
|
%
|
|
$
|
44,183
|
|
|
|
83.3
|
%
|
|
$
|
(6,050
|
)
|
|
|
-13.7
|
%
|
Embedded devices and hardware
|
|
|
7,535
|
|
|
|
16.5
|
%
|
|
|
8,886
|
|
|
|
16.7
|
%
|
|
|
(1,351
|
)
|
|
|
-15.2
|
%
|
Total net revenues
|
|
|
45,668
|
|
|
|
100.0
|
%
|
|
|
53,069
|
|
|
|
100.0
|
%
|
|
|
(7,401
|
)
|
|
|
-13.9
|
%
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and support revenues
|
|
|
15,915
|
|
|
|
34.8
|
%
|
|
|
17,242
|
|
|
|
32.5
|
%
|
|
|
(1,327
|
)
|
|
|
-7.7
|
%
|
Embedded devices and hardware
|
|
|
7,748
|
|
|
|
17.0
|
%
|
|
|
9,027
|
|
|
|
17.0
|
%
|
|
|
(1,279
|
)
|
|
|
-14.2
|
%
|
Inventory reserves
|
|
|
1,355
|
|
|
|
3.0
|
%
|
|
|
514
|
|
|
|
1.0
|
%
|
|
|
841
|
|
|
|
163.6
|
%
|
Gross profit
|
|
|
20,650
|
|
|
|
45.2
|
%
|
|
|
26,286
|
|
|
|
49.5
|
%
|
|
|
(5,636
|
)
|
|
|
-21.4
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
8,019
|
|
|
|
17.6
|
%
|
|
|
9,444
|
|
|
|
17.8
|
%
|
|
|
(1,425
|
)
|
|
|
-15.1
|
%
|
General and administrative
|
|
|
7,691
|
|
|
|
16.8
|
%
|
|
|
11,269
|
|
|
|
21.2
|
%
|
|
|
(3,578
|
)
|
|
|
-31.8
|
%
|
Engineering and development
|
|
|
5,260
|
|
|
|
11.5
|
%
|
|
|
6,920
|
|
|
|
13.0
|
%
|
|
|
(1,660
|
)
|
|
|
-24.0
|
%
|
Depreciation and amortization
|
|
|
4,392
|
|
|
|
9.6
|
%
|
|
|
4,992
|
|
|
|
9.4
|
%
|
|
|
(600
|
)
|
|
|
-12.0
|
%
|
Impairment of goodwill and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other intangible assets
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
4,172
|
|
|
|
7.9
|
%
|
|
|
(4,172
|
)
|
|
|
-100.0
|
%
|
Restructuring charges
|
|
|
1,435
|
|
|
|
3.1
|
%
|
|
|
1,520
|
|
|
|
2.9
|
%
|
|
|
(85
|
)
|
|
|
-5.6
|
%
|
Operating loss
|
|
|
(6,147
|
)
|
|
|
-13.5
|
%
|
|
|
(12,031
|
)
|
|
|
-22.7
|
%
|
|
|
5,884
|
|
|
|
-48.9
|
%
|
Interest expense
|
|
|
2,282
|
|
|
|
5.0
|
%
|
|
|
1,196
|
|
|
|
2.3
|
%
|
|
|
1,086
|
|
|
|
90.8
|
%
|
Loss on extinguishment of debt
|
|
|
1,089
|
|
|
|
2.4
|
%
|
|
|
290
|
|
|
|
0.5
|
%
|
|
|
799
|
|
|
|
275.5
|
%
|
Other expense (income), net
|
|
|
767
|
|
|
|
1.7
|
%
|
|
|
(99
|
)
|
|
|
-0.2
|
%
|
|
|
866
|
|
|
|
-874.7
|
%
|
Loss before income taxes
|
|
|
(10,285
|
)
|
|
|
-22.5
|
%
|
|
|
(13,418
|
)
|
|
|
-25.3
|
%
|
|
|
3,133
|
|
|
|
-23.3
|
%
|
Income tax expense (benefit)
|
|
|
244
|
|
|
|
0.5
|
%
|
|
|
(257
|
)
|
|
|
-0.5
|
%
|
|
|
501
|
|
|
|
-194.9
|
%
|
Net loss
|
|
$
|
(10,529
|
)
|
|
|
-23.1
|
%
|
|
$
|
(13,161
|
)
|
|
|
-24.8
|
%
|
|
$
|
2,632
|
|
|
|
-20.0
|
%
|
Adjusted EBITDA
(1)
|
|
$
|
3,652
|
|
|
|
8.0
|
%
|
|
$
|
2,343
|
|
|
|
4.4
|
%
|
|
$
|
1,309
|
|
|
|
55.8
|
%
|
(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 revenue decreased $7.4 million, or 13.9%, for the nine months
ended September 30, 2017 to $45.7 million from $53.1 million for the same period in 2016. The decrease in total revenue is primarily
related to the decreases in subscription and support revenue and embedded devices and hardware revenue, which is discussed below.
Subscription and support revenues decreased $6.1 million, or 13.7%,
to $38.1 million from $44.2 million in 2016. The decrease is driven by 2G disconnects associated with the AT&T 2G network sunset
that occurred on December 31, 2016. Embedded devices and hardware revenue decreased $1.4 million, or 15.2%, to $7.5 million from
$8.9 million in 2016. The decrease is driven by customer’s replacement of their 2G products in 2016 in anticipation of the
AT&T 2G network sunset that occurred on December 31, 2016.
Total cost of revenue for the nine months ended September 30, 2017
decreased $1.8 million, or 6.6%, to $25.0 million compared to $26.8 million for the same period in 2016. Comprising that decrease,
the cost of revenue for subscription and support services decreased $1.3 million, or 7.7%, to $15.9 million for the nine months
ended September 30, 2017 compared to $17.2 million for the same period in 2016. Cost of revenue for embedded devices and hardware
decreased $1.3 million, or 14.2% to $7.7 million for the nine months ended September 30, 2017 compared to $9.0 million for the
same period in 2016. The total decrease in costs of sales is primarily related to a reduction of embedded devices and hardware
sales in 2017 versus the comparable period in 2016.
Inventory reserve expense for the nine months ended September 30,
2017 increased $0.8 million, or 163.6%, to $1.4 million compared to $0.5 million for the same period in 2016. The increase in the
reserve is related to current inventory which will be impacted by the introduction of our LTE products.
Total gross profit for the period ended September 30, 2017 decreased
$5.6 million, or 21.4% to $20.7 million compared to $26.3 million for the same period in 2016 for the reasons stated above. Excluding
the inventory reserve, gross profit margin percentage decreased to 48.2% for the nine months ended September 30, 2017 from 50.5%
for the same period in 2016.
Sales and marketing expense decreased $1.4 million, or 15.1%, for
the nine months ended September 30, 2017 to $8.0 million compared to $9.4 million for the same period in 2016. The decrease is
primarily attributable to a decline in promotional activities during the quarter, as well as reduced headcount and lower travel
costs.
General and administrative expense decreased $3.6 million, or 31.8%,
to $7.7 million for the nine months ended September 30, 2017, compared to $11.3 million for the same period in 2016. The decrease
is driven primarily by reduced general and administrative salary cost resulting from a reduction in headcount and lower travel
costs.
Engineering and development expenses decreased $1.7 million, or
24.0% to $5.3 million for the nine months ended September 30, 2017, compared to $6.9 million for the same period in 2016. The decrease
is driven primarily by reduced engineering and development salary costs resulting from a reduction in headcount, and lower travel
costs.
Depreciation and amortization expense decreased $0.6 million, or
12.0% to $4.4 million for the nine months ended September 30, 2017, compared to $5.0 million for the same period in 2016.
Restructuring charges were $1.4 million for the nine months ended
September 30, 2017, compared to $1.5 million for the same period in 2016. The decrease is primarily related to severance and the
sublease loss recorded in June 2016 for the relocation of our corporate headquarters offset by legal costs associated with merger
and debt activity.
Loss on the extinguishment of debt of $1.1 million for the nine
months ended September 30, 2017 was related to the refinancing of our debt with Crystal which took place on June 7, 2017. Loss
on the extinguishment of debt of $0.3 million for the nine months ended September 30, 2016 was related to the refinancing of our
debt with Silicon Valley Bank which took place in March 2016.
Interest expense was $2.3 million in expense for the nine months
ended September 30, 2017 compared to $1.2 million in interest expense for the same period in 2016. The increase is due to interest
expense on our subordinated debt, as well higher interest rates on our debt, as well as higher amortization of deferred financing
costs in 2017.
Other expense (income), net was $0.8 million in expense for the
nine months ended September 30, 2017, and was primarily due to non-capitalizable finance and legal charges related to our debt.
We recorded tax expense of $0.2 million and a tax benefit of $0.3
million for the nine months ended September 30, 2017, and 2016 respectively. The effective tax rates were (2.4%) and 1.9% for the
nine months ended September 30, 2017 and 2016, respectively. For both periods, the difference in the effective tax rate compared
to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income
taxes, are due primarily to the book and tax basis and accounting difference for certain long and indefinite lived assets. We have
also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating
losses.
Segment Information
We have one reportable segment, providing interactive and on-demand
Machine to Machine (M2M) enterprise solutions enabling the Internet of Things (IoT).
Non-GAAP Financial Measures
Earnings before interest, taxes, depreciation and amortization expenses
(EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating
income as a measure of operating performance. We believe EBITDA and Adjusted EBITDA are useful to and used by investors and other
users of the financial statements in evaluating our operating performance because it provides them with an additional tool to compare
business performance across periods.
We believe that:
|
·
|
EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest, income tax, and depreciation and amortization expenses, which can vary substantially from company-to-company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
|
|
·
|
Investors commonly adjust EBITDA information to eliminate the effect of equity-based compensation and other unusual or infrequently occurring items which vary widely from company-to-company and impair comparability.
|
We use EBITDA and Adjusted EBITDA:
|
·
|
as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis;
|
|
·
|
as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and
|
|
·
|
in communications with the board of directors, analysts and investors concerning our financial performance.
|
Although we believe,
for the foregoing reasons, that the presentation of non-GAAP financial measures provides useful supplemental information to investors
regarding our results of operations, the non-GAAP financial measures should only be considered in addition to, and not as a substitute
for, or superior to, any measure of financial performance prepared in accordance with GAAP.
Use of non-GAAP financial
measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because
they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management
accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement
GAAP financial measures. The non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the
same manner, as those used by other companies.
EBITDA is calculated
by adding depreciation and amortization expense, impairment of non-current assets, interest expense, other net non-operating expense
and income tax expense and subtracting other net non-operating income and income tax benefit to net (loss) income. Adjusted EBITDA
is calculated by excluding the effect of equity-based compensation and additional non-cash and other charges from the calculation
of EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users
of our financial data, including our lender, in evaluating the effectiveness of our operations and underlying business trends in
a manner that is consistent with management’s evaluation of business performance.
We believe that excluding
depreciation and amortization expenses of property, equipment and intangible assets to calculate EBITDA and Adjusted EBITDA provides
supplemental information and an alternative presentation that is useful to our lender and investors’ understanding of our
core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that
may have little bearing on present or future replacement costs, but also they are based on our estimates of remaining useful lives.
We believe 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.
Equity-based compensation is an important part of total compensation,
especially from the perspective of employees. We believe, however, that supplementing GAAP income from continuing operations by
providing income from continuing operations, excluding the effect of equity-based compensation in all periods, is useful to investors
because it enables additional and more meaningful period-to-period comparisons.
Restructuring, non-cash and other charges, includes severance, one-time
facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these
costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as
a component of ongoing operations.
EBITDA and Adjusted EBITDA are not measures of liquidity calculated
in accordance with GAAP, and should be viewed as a supplement to – not a substitute for – results of operations presented
on the basis of GAAP. EBITDA and Adjusted EBITDA do not purport to represent cash flow provided by operating activities as defined
by GAAP. Furthermore, EBITDA and Adjusted EBITDA are not necessarily comparable to similarly-titled measures reported by other
companies.
The following table reconciles the specific items excluded from
GAAP in the calculation of EBITDA and Adjusted EBITDA for the periods indicated below (in thousands, except per share amounts):
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(3,426
|
)
|
|
$
|
(2,546
|
)
|
|
$
|
(10,529
|
)
|
|
$
|
(13,161
|
)
|
Depreciation and amortization expense
|
|
|
1,883
|
|
|
|
2,029
|
|
|
|
5,691
|
|
|
|
5,997
|
|
Impairment of goodwill and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,172
|
|
Interest expense and other non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating expense, net
|
|
|
885
|
|
|
|
436
|
|
|
|
4,138
|
|
|
|
1,387
|
|
Income tax (benefit) expense
|
|
|
79
|
|
|
|
(87
|
)
|
|
|
244
|
|
|
|
(257
|
)
|
EBITDA (non-GAAP)
|
|
|
(579
|
)
|
|
|
(168
|
)
|
|
|
(456
|
)
|
|
|
(1,862
|
)
|
Equity-based compensation expense
|
|
|
366
|
|
|
|
751
|
|
|
|
1,111
|
|
|
|
2,202
|
|
Restructuring, non-cash and other items
|
|
|
1,929
|
|
|
|
276
|
|
|
|
2,997
|
|
|
|
2,003
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
1,716
|
|
|
$
|
859
|
|
|
$
|
3,652
|
|
|
$
|
2,343
|
|
Restructuring, non-cash and other charges, includes severance, one-time
facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these
costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as
a component of ongoing operations
Liquidity and Capital Resources
We use the net cash generated from our operations to fund new product
development, upgrades to our technology and to invest in new businesses. Our sources of funds, principally from operations and,
to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operations and investing requirements
through at least September 2018.
We had working capital of $0.0 million as of September 30, 2017,
compared to $8.6 million as of December 31, 2016. We had cash balances of $6.8 million as of September 30, 2017 compared to $9.5
million at December 31, 2016. The Company does not have any additional borrowing capacity under its loan agreement with Hale Capital.
Net cash used in operating activities for the nine month period
ended September 30, 2017 was $0.8 million and net cash used in operations was $0.8 million for the nine month period ended September
30, 2016.
Net cash used in investing activities for the nine month period
ended September 30, 2017 was $2.1 million, representing expenditures of $0.3 million for tangible assets and $1.8 million for software
and capitalization of internally developed software, compared to $2.5 million for the nine month period ended September 30, 2016.
Net cash provided by financing activities for the nine month period
ended September 30, 2017 was $0.2 million, primarily due to the refinancing of our term debt with Hale. Net cash used in financing
activities was $3.2 million for the nine month period ended September 30, 2016.
Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
There have been no material changes in our critical accounting policies,
estimates and judgments during the three months ended September 30, 2017, compared to the disclosures in Part II, Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2016.