NOTE B – ACQUISITIONS

2014 Acquisition

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the closing date of the Omnilink acquisition. We are in the process of finalizing the fair value purchase price allocations, but that process is not yet complete. The principal reasons that some of the initial fair value purchase price allocations are not yet complete are the time available after the closing date, scope of the operational integration and valuation efforts as well as the complexity presented in the valuation of the tax effects related to tax attributes and other deferred tax items. The primary areas that are not yet finalized relate to inventory, intangible assets, the calculation of deferred taxes and their effect on the residual value for goodwill. We have recorded deferred tax liabilities for indefinite lived assets which will not be netted against deferred tax assets. There have been no measurement period adjustments. The following table presents provisional measurements that are subject to change (dollars in thousands):

						Estimated
		Fair Value				Useful Lives
Cash		$	195				n/a
Accounts receivable			2,677				n/a
Inventory			963				n/a
Prepaid and other assets			377				n/a
Property and equipment			1,613				4(a)
Other non-current assets			2				n/a
Customer relationships			6,056				11
Technology			4,998				14
Trade names			3,632			Indefinite
Goodwill			21,351			Indefinite
Total identifiable assets acquired			41,864
Accounts payable			(1,756	)			n/a
Accrued expenses			(1,195	)			n/a
Deferred revenue			(64	)			n/a
Deferred tax liability			(1,326	)			n/a
Total liabilities assumed			(4,341	)
Net assets acquired		$	37,523

	(a)	The weighted average remaining useful life for all property and equipment is approximately four years.

The total purchase consideration for the acquisition was allocated to identifiable assets purchased and liabilities assumed based on fair value.

The gross amount of accounts receivable in the table above is $2.9 million. Based on the nature and financial strength of the customers, we expect to collect amounts due for the accounts receivable of $2.7 million. Our best estimate at the acquisition date of the contractual cash flows not expected to be collected is $0.2 million.

Acquired intangible assets are measured at fair value. The estimated fair value attributed to the customer relationships was determined based upon a discounted cash flow forecast. The fair value of the customer relationships will be amortized over a period of 11 years on a straight-line basis, which approximates the pattern in which the economic benefits of the customer relationships are expected to be realized. Amortization of customer relationships is expected to be $0.5 million annually and $0.1 million per quarter. The estimated fair values attributed to technology and trade names were determined using the relief-from-royalty method. This method assumes the technology and trade names have value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. The fair value of technology will be amortized over a period of 14 years on a straight-line basis, which approximates the pattern in which the economic benefits of the technology are expected to be realized. Amortization of technology is expected to be $0.4 million annually and $0.1 million per quarter. Trade names will not be amortized due to their indefinite life. Estimates of useful life are based upon the period within which cumulative cash flows attributable to the intangible asset exceeds 95% of the total discounted cash flows. The combined amortization for customer relationships and technology is expected to be $0.9 million annually and $0.2 million per quarter.

The residual allocation to goodwill results from such factors as an assembled workforce, expected significant synergies for market growth and profitability as well as Omnilink's service and product lines contributing to our becoming the market leader in select M2M vertical markets. The total amount of goodwill will not be deductible for tax purposes.

 

The condensed consolidated statement of operations for the six months ended June 30, 2014 include $2.2 million of net sales and $0.1 million of net income contributed by Omnilink for the period from the acquisition date of May 5, 2014 through June 30, 2014.

 

The following table presents the Company’s unaudited pro forma consolidated net sales, income (loss) from continuing operations before income taxes and net income (loss) for the six months ended June 30, 2014 and 2013, based on the historical statements of operations of Numerex and of Omnilink, giving effect to the Omnilink acquisition and related financing as if they had occurred on January 1, 2013.

 

		Unaudited Pro Forma Results
		Six Months Ended
		June 30,				June 30,
		2014				2013
Net sales		$	47,749			$	40,310
Income (loss) from continuing operations, before income tax			1,511				(3,784	)
Net income (loss)			1,460				(2,502	)
Basic and diluted income (loss) per common share		$	0.08			$	(0.13	)

The pro forma results, prepared in accordance with U.S. GAAP, include the following pro forma adjustments related to the Omnilink acquisition:

 

●

Adjust depreciation expense for a 2014 net reduction of $88,000 and a 2013 net reduction of $19,000 for the effect of recording property and equipment at estimated fair value.

●

Adjust amortization expense for a 2014 net increase of $0.3 million and a 2013 net increase of $0.5 million for the effect of recording intangible assets at estimated fair value.

●

Adjust interest expense for a 2014 net increase of $0.1 million and a 2013 net increase of $0.4 million due to the repayment of Omnilink’s debt balances in conjunction with the acquisition and the acquisition debt incurred by Numerex and related amortization of deferred financing costs.

●

Adjust expense by $1.0 million to reclassify expense recorded for acquisition-related costs in the six month period ended June 30, 2014, to the six month period ended June 30, 2013, to reflect the expenses as of the pro forma acquisition date of January 1, 2013.

  

The unaudited pro forma results do not include any revenue or cost reductions that may be achieved through the business combination, or the impact of non-recurring items directly related to the business combination.

 

The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Omnilink acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future condensed consolidated operating results of the combined company.

2013 Acquisitions

On February 1, 2013, we purchased substantially all of the assets and business of a small technology company that provides products and services for environmental monitoring, wireless remote control and monitoring, wireless sensor networks, and connected device consulting. We acquired the company’s assets to expand our technical capabilities and the market segments we serve. Total consideration was $1.1 million, comprised of $0.2 million in cash and 73,587 shares of our common stock having a fair value at the time of issuance of $0.9 million and the assumption of certain liabilities. No goodwill was recorded in connection with this acquisition. The shares of common stock are subject to various time-based selling restrictions. Pro forma results of operations were not presented as the acquisition was not material to our results of operations for the periods presented.

 

On December 2, 2013, we acquired substantially all the assets, products and technologies of a small technology company that provided remote monitoring and management of bulk storage tanks. The acquisition expands the scope and scale of our capabilities in supply chain and remote monitoring markets. Total consideration was $2.8 million in cash, of which $0.2 million will be paid on December 2, 2014. Goodwill of $1.5 million was recorded in connection with this acquisition. Pro forma results of operations were not presented as the acquisition was not material to our results of operations for the periods presented.