| NUMEREX CORP /PA/ Item 1A Risk Factors An investment in our common stock involves a high degree of risk |
| You should carefully consider the following information about these risks before buying shares of our common stock |
| The following risks and uncertainties are not the only ones facing us |
| Additional risks and uncertainties of which we are unaware or we currently believe are not material could also adversely affect us |
| In any case, the value of our common stock could decline, and you could lose all or part of your investment |
| You should also refer to the other information contained in this Form 10-K or incorporated herein by reference, including our consolidated financial statements and the notes to those statements |
| See also, “Special Note Regarding Forward-Looking Statements |
| ” Risks Related to Our Financial Condition Although we earned a profit in 2005, we have a history of losses and are uncertain as to our future profitability |
| Although we earned a profit for the year ended December 31, 2005, we have otherwise had a net loss each year since 1998 |
| We may not sustain operating income, net earnings or positive cash flow from operations in the future |
| In addition, we expect to continue to incur significant operating costs and, as a result, will need to generate significant additional revenues to achieve profitability, which profitability may not continue to occur |
| We are a holding company and therefore our ability to make payments on our debt depends on cash flow from our subsidiaries |
| Our only material assets are our ownership interests in our subsidiaries |
| Consequently, we depend on distributions or other intercompany transfers from our subsidiaries to make payments on our debt |
| Distributions and intercompany transfers to us from our subsidiaries will depend on: · the earnings of our subsidiaries; · covenants contained in agreements to which we or our subsidiaries are or may become subject; · business and tax considerations; and · applicable law, including laws regarding the payment of dividends and distributions |
| We cannot assure you that the operating results of our subsidiaries or the distributions they make to us at any given time will be sufficient to make distributions or other payments to us or that any distribution and/or payments will be adequate to pay our debt, including interest payments, when due |
| Risks Related to Our Business The businesses in which we operate are highly competitive, and we may not be able to compete effectively |
| We face competition from many companies with significantly greater financial resources, well-established brand names and larger customer bases |
| Numerous companies also may try to enter our market and expose us to greater price competition for our services |
| We expect competition to intensify in the future |
| If our competitors successfully focus on the markets we serve, our business could be adversely affected |
| 12 _________________________________________________________________ We operate in new and rapidly evolving markets where rapid technological change can quickly make products, including those that we offer, obsolete |
| We operate in industries that are subject to evolving industry standards, rapid technological changes and rapid changes in customer demands |
| These changes, individually or collectively, can adversely affect our business |
| If the demand for our products declines due to changes in technology, and we are unable to develop new products and services that successfully address market demand, our business will be adversely affected |
| In the event we keep pace with technological change, any delays in our development, introduction and marketing of new wireless or digital multimedia products and services, or those of our suppliers, could have an adverse effect on our business |
| Failure of our products and services to gain market acceptance would adversely affect our financial condition |
| Over the past three years we have introduced AnyNet, a wireless security system, MobileGuardian, a vehicle tracking solution, VendView, a vending management service, and IPContact, a desktop videoconferencing software package |
| If these products and services, or any of our other existing products and services, do not perform as expected, or if our sales are less than expected, our business may be adversely affected |
| Our current business plan contemplates significant expansion, which we may be unable to manage |
| To the extent that we are successful in implementing our business strategy, we may experience periods of rapid expansion in the future |
| In order to manage growth, whether organic or through acquisitions, effectively, we will need to maintain and improve our operating systems and expand, train and manage our employees |
| Expansion through acquisitions will require integration of new employees, processes and procedures and computer systems, which can be both difficult and taxing from a human resources perspective |
| In addition, we must carefully manage product inventory levels to meet demand |
| Inaccuracies in expected demand could result in insufficient or excessive inventories and unexpected additional expenses |
| We must also expand the capacity of our sales, distribution and installation networks in order to achieve continued growth in our existing and future markets |
| The failure to manage growth effectively in any of these areas could have a material adverse effect on our business, financial condition and results of operations |
| We may require additional capital to fund further development, and our competitive position could decline if we are unable to obtain additional capital |
| We may need to raise additional funds to support operations, respond to competitive pressures and changes in technology, or respond to unanticipated requirements |
| To do so, we may need to raise additional funds through public or private equity or debt financings |
| We cannot assure you that additional funding will be available to us at the time it is needed, or on terms acceptable to us |
| If we experience product defects or failures, our costs could increase and delay product shipments |
| While we test our products, they may still have errors, defects or bugs that we find only after commercial production has begun |
| In the past, we have experienced errors, defects and bugs in connection with new products |
| Our customers may not purchase our products if the products have reliability, quality or compatibility problems |
| Furthermore, product errors, defects or bugs could result in additional development costs, diversion of resources from our other development efforts, claims by our customers or others against us, or the loss of credibility with our current and prospective customers |
| Historically, the time required for us to correct defects has caused delays in product shipments and resulted in lower than expected revenues |
| Significant capital and resources may be required to address and fix problems in new products |
| If our products do not function properly, we may have lower than expected revenues, and net income would likely be adversely impacted |
| We depend on contract manufacturers to manufacture substantially all of our products, and any delay or interruption in manufacturing would result in delayed or reduced shipments to our customers |
| We outsource the manufacturing of our products to independent companies and do not have internal manufacturing capabilities to meet the demands of our customers |
| Any delay, interruption or termination of the manufacture of our products could harm our ability to provide our products to our customers and, consequently, could have a material adverse effect on our business and operations |
| A large portion of our revenues is derived from sales to distributors, and changes in the productivity of our distribution channels or any disruption of our distribution channel could adversely affect the sale of our products and services |
| We primarily sell our products through distributors |
| Our sales could be affected by disruptions in the relationships between our distributors or between our distributors and end users of our products or services |
| Also, distributors may choose not to emphasize our products and services to their customers |
| The structure of our company may limit the voting power of our stockholders, and certain Factors May Inhibit Changes in Control of our company |
| 13 _________________________________________________________________ The concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in control, merger, consolidation or tender offer that could involve a premium over the price of our common stock |
| Currently, our executive officers, directors and greater-than-five percent stockholders and their affiliates, in the aggregate, beneficially own approximately 47prca of our outstanding common stock |
| These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters |
| The interests of these stockholders may be different than those or our unaffiliated stockholders and our unaffiliated stockholders may be dissatisfied with the outcome of votes that may be controlled by our affiliated stockholders |
| Our articles of incorporation generally limit holdings by persons of our common stock to no more than 10prca without prior approval by our Board |
| Except as otherwise permitted by the Board, no stockholder has the right to cast more than 10prca of the total votes regardless of the number of shares of common stock owned |
| In addition, if a person acquires holdings in excess of this ownership limit, our Board may terminate all voting rights of the person during the time that the ownership limit is violated, bring a lawsuit against the person seeking divestiture of amounts in excess of the limit, or take other actions as the Board deems appropriate |
| Our articles of incorporation also have a procedure that gives us the right to purchase shares of common stock held in excess of the ownership limit |
| In addition, our articles of incorporation permit our Board to authorize the issuance of preferred stock without stockholder approval |
| Any future series of preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our common stockholders |
| If we do not adapt to changing regulations that affect us our business would suffer |
| We operate in a technological environment characterized by rapid change in products, capabilities, and both consumer and societal expectations |
| As a result, the regulatory environment in which we operate is continually changing as it adjusts to address new issues in a rapidly changing industry |
| Future regulations could make our products illegal or obsolete, or may require us to make substantial changes to our products in order to continue to market them |
| Cellular carriers may stop offering analog AMPS cellular service |
| Cellemetry, which currently operates using AMPS cellular service, would have to begin operating on other wireless service channels, and customers that use services that involve Cellemetry would have to replace incompatible equipment |
| Other products and services that we make and that depend on Cellemetry, such as Mobile Guardian, would be similarly affected |
| While we are currently developing a digital standard, we might not be successful in such development |
| Furthermore, even if such development is successful there can be no assurance that we will be successful in transitioning out existing customer base to our digital networks |
| Many of the ultimate consumers of our PowerPlay products and services are elementary and secondary schools that pay for their purchases with funding that they receive through the FCC’s e-rate program |
| Changes in this program could affect demand for our PowerPlay products and services |
| If we fail to adapt to regulatory changes, our product offerings would decrease, which would have a negative impact on our business, results of operations, and financial condition |
| We may not be able to achieve our operational growth goals if we do not operate our Cellemetry network efficiently and generate additional traffic |
| Our long-term success depends on our ability to operate, manage and maintain a reliable and cost effective network, as well as our ability to keep pace with changes in technology |
| Furthermore, our network operations are dependent on third parties |
| If we experience technical or logistical impediments to our ability to transfer traffic onto our network, fail to generate additional traffic on our network, or if we experience difficulties with our third party providers, we may not achieve our revenue goals or otherwise be successful in growing our business |
| We may lose customers if we experience system failures that significantly disrupt the availability and quality of the service our network provides |
| The operation of our Cellemetry network depends on our ability to avoid or limit any interruptions in service to our customers |
| Interruptions in service or performance problems, for whatever reason, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new customers |
| In addition, because most of our customers are businesses, any significant interruption in service could result in lost profits or other losses to our customers |
| Although we attempt to disclaim or limit liability in our agreements with these customers, a court may not enforce a disclaimer of or limitation on liability, which could expose us to losses |
| The failure of any equipment on our network, or those of our customers, could result in the interruption of that customer’s service until necessary repairs are made or replacement equipment is installed |
| Network failures, delays and errors may result from natural disasters, power losses, security breaches, viruses or terrorist acts |
| These failures or faults cause delays, service interruptions, expose 14 _________________________________________________________________ us to customer liability or require expensive modifications that could have a material adverse effect on our business and operating results |
| We may have difficulty identifying the source of a problem in our Cellemetry network |
| If and when a problem occurs on our Cellemetry network, it may be difficult to identify the source of the problem due to the overlay of our network with the cellular telephone network and our network’s reliance on the cellular network |
| The occurrence of hardware or software errors, regardless of whether such errors are caused by our products or our Cellemetry network, may result in the delay or loss of market acceptance of our products and services, and any necessary revisions may result in significant and additional expenses |
| The occurrence of some of these types of problems may seriously harm our business, financial condition or operations |
| We operate internationally, which subjects us to international regulation and business uncertainties that create additional risk for us |
| We have a subsidiary operating in Australia and are doing business in the Caribbean, South America, Canada and Japan |
| Accordingly, we are subject to international regulation and business uncertainties |
| International sales and operations may be subject to additional risks than those risks in the United States, such as the following: · imposition of government controls, · political instability, · export license requirements, · restrictions on the export of critical technology, · currency exchange rate fluctuations, · generally longer receivables collection periods and difficulty in collecting, accounts receivable, · trade restrictions and changes in tariffs, · difficulties in staffing and managing international operations, and · potential insolvency of international dealers |
| In addition, the laws of certain countries do not protect our products as much as the laws of the United States do, which may lead to the potential loss of our proprietary technology through theft, piracy or a failure to protect our rights |
| These factors may have a material adverse effect on our future international sales and, consequently, on our business and results of operations |
| The loss of intellectual property protection, specifically, our patents, both US and international, could have a material adverse effect on our operations |
| Our future success and competitive position depend upon our ability to obtain and maintain intellectual property protection, especially with regard to patents on the technology used in our core business |
| Furthermore, our future or pending patent applications may not be issued with the scope of the claims sought by us, if at all |
| In addition, others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned or licensed by us |
| Effective patent, trademark, copyright and trade secret protection may be unavailable or limited in foreign countries where we may need protection |
| We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology |
| Our services are highly dependent upon our technology and the scope and limitations of our proprietary rights therein |
| In order to protect our technology, we rely on a combination of patents, copyrights and trade secret laws, as well as certain customer licensing agreements, employee and third-party confidentiality and non-disclosure agreements, and other similar arrangements |
| If our assertion of proprietary rights is held to be invalid, or if another party’s use of our technology were to occur to any substantial degree, our business, financial condition and results of operations could be materially adversely affected |
| Our competitors may obtain patents that could restrict our ability to offer our products and services, or subject us to additional costs, which could impede out ability to offer our products and services and otherwise adversely affect us |
| Several of our competitors have obtained and can be expected to obtain patents that cover products or services directly or indirectly related to those offered by us |
| There can be no assurance that we are aware of all patents containing claims that may pose a risk of infringement by its products or services |
| In addition, patent applications in the United States are confidential until a patent is issued and, accordingly, we cannot evaluate the extent to which our products or services may infringe on future patent rights held by others |
| Furthermore, even with technology that we develop independently, a third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as research and development and the sale of any of our products or services |
| These lawsuits are expensive and would consume time and other resources |
| The court could decide that we are infringing the third party’s patents and would order us to stop the activities claimed by the patent and/or order us to pay the other party’s damages for having infringed their patents |
| There is no guarantee that the prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms |
| Some licenses we obtain may be nonexclusive and, therefore, our competitors may have access to the same technology licensed to us |
| If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, and 15 _________________________________________________________________ there can be no assurance that we would be able to design and incorporate alternative technologies, without a material adverse effect on our business, financial condition and results of operations |
| Our products and information are subject to secrecy and confidentiality obligations, violations of which may not be able to be remedied |
| Although we have taken, and will continue to take, steps to protect the confidential nature of our proprietary and trade secret information, we cannot control whether secrecy obligations will be honored or whether disputes will arise related to this information |
| There is a risk that the steps we have taken will not prevent misappropriation of our technology or that others might independently develop substantially equivalent products and processes or otherwise gain access to our technology |
| In addition, we cannot rule out that we will not be subjected to claims from others that we are infringing on their patents or are misappropriating their trade secrets or confidential proprietary information |
| We seek to protect our trade secrets and proprietary know-how, in part, through confidentiality agreements with our employees and licensees |
| We cannot guarantee that the other parties will not violate these agreements, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently developed by competitors |
| We cannot be certain that we will, in connection with every relationship, be able to maintain the confidentiality of our technology, which if released could materially affect our business |
| To the extent that our licensees develop inventions or processes independently that may be applicable to our products, disputes may arise as to the ownership of the proprietary rights to this information |
| These inventions or processes will not necessarily become our property, but may remain the property of these persons or their full-time employers |
| We could be required to make payments to the owners of these inventions or processes, either in the form of cash, equity or a combination thereof |