UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): July 31, 2017

 

I.D. SYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   001-15087   22-3270799
(State or Other Jurisdiction   (Commission   (IRS Employer
of Incorporation)   File Number)   Identification No.)

 

123 Tice Boulevard, Woodcliff Lake, New Jersey   07677
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code (201) 996-9000

 

____________________________________________________________

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

  [  ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
     
  [  ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
     
  [  ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
     
  [  ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

 

Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

 

 

 
 

 

EXPLANATORY NOTE

 

On August 1, 2017, I.D. Systems, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) reporting that on July 31, 2017, it, together with its wholly-owned subsidiary Keytroller, LLC, a Delaware limited liability company (the “Purchaser”), completed the acquisition of substantially all of the assets of Keytroller, LLC, a Florida limited liability company (“Keytroller”), pursuant to an asset purchase agreement by and among the Company, the Purchaser, Keytroller and the principals of Keytroller party thereto.

 

This Amendment No. 1 to the Original Form 8-K amends and supplements Item 9.01 of the Original Form 8-K to provide the financial statements and pro forma financial information required under Items 9.01(a) and (b) of Form 8-K, which were excluded from the Original Form 8-K in reliance on the instructions to such items.

 

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Businesses Acquired.

 

The audited financial statements of Keytroller for the year ended December 31, 2016 and the unaudited financial statements of Keytroller for the three months ended March 31, 2017 are attached as Exhibit 99.1 hereto. We have attached the consent of Warren Averett LLC, Keytroller’s independent auditors, as Exhibit 23.1 to this Form 8-K/A.

 

(b) Unaudited Pro Forma Financial Information.

 

The unaudited pro forma condensed combined financial information of the Company and Keytroller for the year ended December 31, 2016 and for the three months ended March 31, 2017 are attached as Exhibit 99.2 hereto.

 

(d) Exhibits.

 

Exhibit No.   Description
23.1   Consent of Warren Averett LLC.
99.1   Financial Statements of Keytroller, LLC For the Year Ended December 31, 2016 (Audited) and For the Three Months Ended March 31, 2017 (Unaudited).
99.2   Pro Forma Condensed Combined Financial Information of I.D. Systems, Inc. and Keytroller, LLC For the Year Ended December 31, 2016 and For the Three Months Ended March 31, 2017 (Unaudited).

 

 
 

 

SIGNATURE

 

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

 

  I.D. SYSTEMS, INC.
     
  By: /s/ Ned Mavrommatis 
  Name: Ned Mavrommatis
  Title: Chief Financial Officer

 

Date: October 13, 2017

 

 
 

 

Exhibit 23.1

 

CONSENT OF WARREN AVERETT, LLC

Independent Registered Certified Public Accountants

 

We hereby consent to the incorporation by reference in the Registration Statements of I.D. Systems, Inc. on Form S-8 (Nos. 333-87973, 333-134142, 333-134138, 333-144709, 333-185084, 333-185085 and 333-206080) and on Form S-3 (Nos. 333-116144, 333-187644 and 333-217968) of our report dated October 3, 2017 relating to the financial statements of Keytroller, LLC (the “Company”) for the interim periods ended March 31, 2017 and 2016, and of our report dated July 28, 2017 relating to the financial statements of the Company for the year ended December 31, 2016 which reports appear in this Current Report on Form 8-K/A of I.D. Systems, Inc.

 

/s/ Warren Averett, LLC  
Warren Averett, LLC  
Tampa, Florida  
October 13, 2017  

 

 
 

 

Exhibit 99.1

KEYTROLLER, LLC

 

FINANCIAL STATEMENTS

 

AS OF MARCH 31, 2017 AND 2016 AND THE

THREE-MONTH PERIODS ENDED mARCH 31, 2017 AND 2016

(UNAUDITED)

 

 

 

 
 

 

KEYTROLLER, LLC

TABLE OF CONTENTS

AS OF MARCH 31, 2017 AND 2016 AND THE

THREE-MONTH PERIODS ENDED MARCH 31, 2017 AND 2016

 

 

Independent ACCOUNTANT’S REVIEW Report 1
     
FINANCIAL STATEMENTS  
     
  Balance Sheets 2
     
  Statements of Operations 3
     
  Statements of Changes in Members’ Equity 4
     
  Statements of Cash flows 5
     
  Notes to the Financial Statements 6

 

 
 

 

 

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

 

To the Members

Keytroller, LLC

Tampa, Florida

 

We have reviewed the accompanying interim financial statements of Keytroller, LLC (the “Company”), which comprise the balance sheets as of March 31, 2017 and 2016 and the related statements of operations, changes in members’ equity, and cash flows for the three-month periods then ended, and the related notes to the interim financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these interim financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of interim financial statements that are free from material misstatement whether due to fraud or error.

 

Accountants’ Responsibility

 

Our responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the interim financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion.

 

Accountants’ Conclusion

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

Tampa, Florida

October 3, 2017

 

  1 
  

 

KEYTROLLER, LLC

BALANCE SHEETS

march 31, 2017 and 2016

 

 

ASSETS
   2017   2016 
CURRENT ASSETS          
Cash and cash equivalents  $537,052   $479,765 
Trading securities   340,315    322,750 
Accounts receivable   665,808    719,795 
Inventories   963,553    678,155 
Other current assets   21,273    74,599 
Total current assets   2,528,001    2,275,064 
           
PROPERTY AND EQUIPMENT, NET OF  ACCUMULATED DEPRECIATION   170,399    190,018 
           
   $2,698,400   $2,465,082 
           
LIABILITIES AND MEMBERS' EQUITY  
CURRENT LIABILITIES          
Accounts payable  $222,694   $240,081 
Margin loan payable   44,518    58,935 
Accrued payroll   20,515    14,525 
Accrued expenses   1,139    28,294 
Total current liabilities   288,866    341,835 
           
MEMBERS' EQUITY   2,409,534    2,123,247 
           
   $2,698,400   $2,465,082 

 

See accompanying notes and accountants’ review report.

 

  2 
  

 

KEYTROLLER, LLC

STATEMENTS OF OPERATIONS

FOR THE THREE-MONTH periods ended MARCH 31, 2017 AND 2016

 

 

   2017   2016 
         
REVENUES  $1,598,797   $1,457,629 
           
COST OF REVENUES   716,050    728,788 
           
GROSS PROFIT   882,747    728,841 
           
OPERATING EXPENSES          
Selling, general and administrative   448,429    443,171 
Depreciation   9,298    9,028 
Total operating expenses   457,727    452,199 
           
INCOME FROM OPERATIONS   425,020    276,642 
           
OTHER INCOME (LOSS)   14,220    (38,311)
           
NET INCOME  $439,240   $238,331 

 

See accompanying notes and accountants’ review report.

 

  3 
  

 

KEYTROLLER, LLC

STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR the three-month periods ended march 31, 2017 and 2016

 

     
BALANCE, JANUARY 1, 2016  $1,884,916 
      
Net income   238,331 
      
BALANCE, MARCH 31, 2016  $2,123,247 
      
BALANCE, JANUARY 1, 2017  $1,970,294 
      
Net income   439,240 
      
BALANCE, MARCH 31, 2017  $2,409,534 

 

See accompanying notes and accountants’ review report.

 

  4 
  

 

KEYTROLLER, LLC

STATEMENTS OF CASH FLOWS

for the three-month periods ended march 31, 2017 and 2016

 

 

   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $439,240   $238,331 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   9,298    9,028 
Loss on disposal of assets   (1,540)   - 
(Increase) decrease in:          
Accounts receivable   321,009    147,156 
Inventories   (235,344)   (166,821)
Other assets   (8,499)   (1,763)
Decrease in:          
Accounts payable   (313,029)   (75,595)
Accrued expenses   (16,987)   (61,474)
Total adjustments   (245,092)   (149,469)
Net cash provided by operating activities   194,148    88,862 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   -    (3,047)
Net cash used by investing activities   -    (3,047)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from margin loan to purchase trading securities   34,582    111,024 
Payments on margin loan from the sale and purchase of trading securities   (53,868)   (22,514)
Net cash (used) provided by financing activities   (19,286)   88,510 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   174,862    174,325 
           
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   362,190    305,440 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $537,052   $479,765 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid during the year for interest  $1,100   $- 
           
NON-CASH INVESTING AND FINANCING TRANSACTIONS          
Net unrealized (gain)/losses on trading securities  $12,270   $(29,575)

 

See accompanying notes and accountants’ review report.

 

  5 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

AS OF MARCH 31, 2017 AND 2016 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 2012 AND 2016

 

1. DESCRIPTION OF BUSINESS

 

Keytroller, LLC (the “Company”) is a Florida limited liability company formed in 2006 by its parent company, Keytroller, Inc., which owns 95% of Keytroller, LLC. The Company is engaged in the business of designing and supplying a full line of electronic safety devices for forklifts, construction equipment, aerial lifts, personal carriers, boats, and hazardous transport trucks. The Company sells its products primarily throughout the United States. The Company is headquartered in Tampa, Florida.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting

 

The financial statements of the Company are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

 

Marketable Equity Securities

 

The Company classifies its marketable securities in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 320, Investments - Debt and Equity Securities (“ASC Topic 320”). These principles require the classification of debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date.

 

The Company’s marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings. Trading gains and losses for the three-month periods ended March 31, 2017 and 2016 were immaterial.

 

Use of Management Estimates

 

Management uses estimates and assumptions in preparing the financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of March 31, 2017 and 2016. Actual results could vary from the estimates that were used.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000. The Company’s deposits in excess of federally insured limits at March 31, 2017 and 2016 approximated $256,100 and $348,200, respectively.

 

  6 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

AS OF MARCH 31, 2017 AND 2016 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 2012 AND 2016

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Accounts Receivable

 

Accounts receivable consist of receivables from the sales of goods. The Company records an allowance for doubtful accounts to allow for any amounts that may not be recoverable. This determination varies based upon the facts in each case. Based on management’s review of accounts receivable, no allowance for doubtful accounts is deemed necessary at March 31, 2017 and 2016. Receivables are determined to be past due based on the payment terms of original invoices.

 

Inventories

 

Inventories consist of equipment and parts and are stated at the lower of cost, determined by first-in, first-out method (FIFO), or market.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, ranging generally from 3 to 39 years. Maintenance and repairs are charged to operations when incurred. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are eliminated from the accounts and any gain or loss is recorded. For income tax purposes, the Company uses accelerated methods of depreciation for certain assets.

 

Long-Lived Assets

 

Long-lived assets that are subject to depreciation and amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. At March 31, 2017 and 2016, the Company determined that its long-lived assets were not impaired.

 

Income and Other Taxes

 

The Company is treated as a partnership and, accordingly, is not subject to federal income taxes. As a result, the Company’s members are personally taxed on their distributive share of the Company’s income, whether or not that income is actually distributed. Accordingly, the financial statements do not include any provision for income taxes for the three-month periods ended March 31, 2017 and 2016.

 

The Company follows ASC Topic 740, Income Taxes. This standard prescribes a recognition and measurement of tax positions to be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Based on management’s evaluation, there are no uncertain tax positions at March 31, 2017 and 2016.

 

Amounts collected on behalf of governmental authorities for sales taxes and other similar taxes are reported on a net basis.

 

  7 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

AS OF MARCH 31, 2017 AND 2016 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 2012 AND 2016

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Revenue

 

The Company’s revenue is generated from the sale of goods. The Company recognizes revenue at the time products are shipped. The Company offers discounts to certain customers on its products. The costs of these discounts are recognized at the date at which the related sales revenue is recognized and recorded as a reduction in sales revenue.

 

Amounts billed to customers for shipping and handling costs are included in revenues. Costs incurred by the Company for shipping and handling are included in cost of revenues.

 

Advertising Costs

 

Advertising costs are charged to expense as incurred and amounted to approximately $20,000 and $42,000 for the three-month periods ended March 31, 2017 and 2016, respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying statements of operations.

 

3. PROPERTY AND EQUIPMENT

 

Property and equipment at March 31, 2017 and 2016 consist of the following:

 

   2017  2016
Leasehold improvements    $100,883   $100,883 
Machinery and equipment     44,296    44,296 
Vehicles     268,772    268,772 
Office furniture and fixtures     22,232    22,232 
Computers and equipment     32,281    14,439 
    468,464    450,622 
Less accumulated depreciation     (298,065)   (260,604)
   $170,399   $190,018 

 

Depreciation expense amounted to approximately $9,300 and $9,000 for the three-month periods ended March 31, 2017 and 2016, respectively.

 

  8 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

AS OF MARCH 31, 2017 AND 2016 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 2012 AND 2016

 

4. MARGIN LOAN PAYABLE

 

During 2016, the Company opened a margin account with a brokerage firm. The margin account was used to buy additional trading securities. The loan accrues interest at a base rate of 8%, less .075% for assets the Company has in its brokerage account. The amount outstanding on this loan was $44,518 and $58,935 as of March 31, 2017 and 2016, respectively. Interest expense for the three-month periods ended March 31, 2017 and 2016 was approximately $1,100 and $0, respectively. The margin loan payable is collateralized by the Company’s trading securities.

 

5. RELATED PARTY TRANSACTIONS AND CONCENTRATIONS

 

The Company leases office space from a related party requiring monthly payments of approximately $4,000. The lease is on a monthly basis as no lease agreement exists between the Company and the related party. Total rent expense for the office space amounted to approximately $12,000 for the three-month periods ended March 31, 2017 and 2016.

 

The Company purchases certain inventory items from a company that is owned by one of its minority members. The purchases for the three-month periods ended March 31, 2017 and 2016 totaled approximately $321,000 and $208,000, respectively, which represents 45% and 28% of total purchases for the periods, respectively. Accounts payable to this supplier at March 31, 2017 and 2016 amounted to 0% and 43% of total accounts payable, respectively.

 

The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.

 

6. FAIR VALUE MEASUREMENTS

 

Financial instruments measured at fair value are classified and disclosed in the following categories:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

Level 2 – Valuations based on observable inputs, including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, yield curves, volatilities, and default rates, and inputs that are derived principally from or corroborated by observable market data.

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

  9 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

AS OF MARCH 31, 2017 AND 2016 AND THE THREE-MONTH PERIODS ENDED MARCH 31, 2012 AND 2016

 

6. FAIR VALUE MEASUREMENTS – CONTINUED

 

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The fair value of assets measured on a recurring basis at March 31, 2017 and 2016 is as follows:

 

   Fair Value Measurements at the
End of the Reporting Period Using
 
   Total   Level 1   Level 2   Level 3 
                 
2017 trading securities  $340,315   $340,315   $-   $- 
                     
2016 trading securities  $322,750   $322,750   $-   $- 

 

7. EMPLOYEE BENEFIT PLAN

 

The Company has an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code. The Plan covers substantially all employees of the Company. The Company’s match to the Plan is discretionary. During the three-month periods ended March 31, 2017 and 2016, the Company made no contributions to the Plan.

 

8. SUBSEQUENT EVENTS

 

During June 2017, the Company sold all of its trading securities resulting in a realized loss of approximately $30,000 in 2017. The Company also paid the remaining balance of the margin loan account upon selling its trading securities.

 

On July 31, 2017, the Company entered into an agreement to sell the Company to I.D. Systems, Inc., at which time, I.D. Systems, Inc. acquired substantially all of the assets of the Company.

 

The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through October 3, 2017, the date on which the financial statements were available to be issued.

 

  10 
  

 

KEYTROLLER, LLC

 

FINANCIAL STATEMENTS

 

DECEMBER 31, 2016

 

 

 

 

 

 

 

 
 

 

KEYTROLLER, LLC

TABLE OF CONTENTS

DECEMBER 31, 2016

 

Independent AUDITORS’ Report 1
     
FINANCIAL STATEMENTS  
     
  Balance Sheet 2
     
  Statement of Operations 3
     
  Statement of Changes in Members’ Equity 4
     
  Statement of Cash flows 5
     
  Notes to the Financial Statements 6

 

 
 

 

 

INDEPENDENT AUDITORS’ REPORT

 

To the Members

Keytroller, LLC

Tampa, Florida

 

Report on the Financial Statements

 

We have audited the accompanying balance sheet of Keytroller, LLC as of December 31, 2016 and the related statements of operations, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Keytroller, LLC as of December 31, 2016 and the results of its operations and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

Tampa, Florida

July 28, 2017

 

  1 
  

 

KEYTROLLER, LLC

BALANCE SHEET

DECEMBER 31, 2016

 

 

 

     
ASSETS     
CURRENT ASSETS     
Cash and cash equivalents  $362,190 
Trading securities   352,585 
Accounts receivable   986,817 
Inventories   728,209 
Other current assets   12,774 
Total current assets   2,442,575 
      
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION   178,157 
   $2,620,732 

 

LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES     
Accounts payable  $535,723 
Margin loan payable   76,074 
Accrued payroll   32,277 
Accrued expenses   6,364 
Total current liabilities   650,438 
MEMBERS' EQUITY   1,970,294 
   $2,620,732 

 

See notes to the financial statements.

 

  2 
  

 

KEYTROLLER, LLC

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2016

 

 

 

   2016 
     
REVENUES  $6,624,465 
      
COST OF REVENUES   2,923,300 
      
GROSS PROFIT   3,701,165 
      
OPERATING EXPENSES     
Selling, general and administrative   2,223,688 
Depreciation and amortization   37,191 
Total operating expenses   2,260,879 
      
INCOME FROM OPERATIONS   1,440,286 
      
OTHER INCOME   42,749 
      
NET INCOME  $1,483,035 

 

See notes to the financial statements. 

 

  3 
  

 

KEYTROLLER, LLC

STATEMENT OF CHANGES IN MEMBERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2016

 

 

 

BALANCE, JANUARY 1, 2016  $1,884,916 
      
Distributions to members   (1,397,657)
      
Net income   1,483,035 
      
BALANCE, DECEMBER 31, 2016  $1,970,294 

 

See notes to the financial statements. 

 

  4 
  

 

KEYTROLLER, LLC

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2016

 

 

CASH FLOWS FROM OPERATING ACTIVITIES    
Net income  $1,483,035 
Adjustments to reconcile net income to net cash provided by operating activities:     
     
Depreciation   37,191 
(Increase) decrease in:     
Accounts receivable   (119,866)
Inventories   (216,875)
Other assets   60,062 
Increase (decrease) in:     
Accounts payable   219,802 
Accrued payroll   (56,152)
Accrued expenses   (9,500)
Total adjustments   (85,338)
Net cash provided by operating activities   1,397,697 
      
CASH FLOWS FROM INVESTING ACTIVITIES     
Purchase of property and equipment   (19,349)
Net cash used by investing activities   (19,349)
      
CASH FLOWS FROM FINANCING ACTIVITIES     
Proceeds from margin loan to purchase trading securities   164,512 
Payments on margin loan from the sale of trading securities   (88,453)
Distributions paid   (1,397,657)
Net cash used by financing activities   (1,321,598)
      
NET INCREASE IN CASH AND CASH EQUIVALENTS   56,750 
      
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR   305,440 
      
CASH AND CASH EQUIVALENTS AT END OF YEAR  $362,190 
      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION     
Cash paid during the year for interest  $6,080 
      
NON-CASH INVESTING AND FINANCING TRANSACTIONS     
Net unrealized losses on trading securities  $(6,151)

 

See notes to the financial statements.

 

  5 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

1. DESCRIPTION OF BUSINESS

 

Keytroller, LLC (the “Company”) is a Florida limited liability company formed in 2006 by the parent company, Keytroller, Inc., which owns 95% of Keytroller, LLC. The Company is engaged in the business of designing and supplying a full line of electronic safety devices for forklifts, construction equipment, aerial lifts, personal carriers, boats, and hazardous transport trucks. The Company sells its products primarily throughout the United States. The Company is headquartered in Tampa, Florida.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting

 

The financial statements of the Company are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

 

Marketable Equity Securities

 

The Company classifies its marketable securities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 320, Investments - Debt and Equity Securities (“ASC Topic 320”). These principles require the classification of debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date.

 

The Company’s marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings. Trading gains and losses for the year ended December 31, 2016 were immaterial.

 

Use of Management Estimates

 

Management uses estimates and assumptions in preparing the financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of December 31, 2016. Actual results could vary from the estimates that were used.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000. No amounts on deposit were in excess of federal insured limits as of December 31, 2016.

 

  6 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Accounts Receivable

 

Accounts receivable consists of receivables from sales of goods. The Company records an allowance for doubtful accounts to allow for any amounts that may not be receivable. This determination varies based upon the facts in each case. Based on management’s review of accounts receivable, no allowance for doubtful accounts is deemed necessary at December 31, 2016. Receivables are determined to be past due based on the payment terms of original invoices.

 

Inventories

 

Inventories consist of equipment and parts and are stated at the lower of cost, determined by first-in, first-out method (FIFO), or market.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, ranging generally from 3 to 39 years. Maintenance and repairs are charged to operations when incurred. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are eliminated from the accounts and any gain or loss is recorded. For income tax purposes, the Company uses accelerated methods of depreciation for certain assets.

 

Long-Lived Assets

 

Long-lived assets that are subject to depreciation and amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. At December 31, 2016, the Company determined that its long-lived assets were not impaired.

 

Income and Other Taxes

 

The Company is treated as a partnership and, accordingly, is not subject to federal income taxes. As a result, the Company’s members are personally taxed on their distributive share of the Company’s income, whether or not that income is actually distributed. Accordingly, the financial statements do not include any provision for income taxes for the year ended December 31, 2016.

 

The Company follows ASC Topic 740, Income Taxes. This standard prescribes a recognition and measurement of tax positions to be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Based on management’s evaluation, there are no uncertain tax positions at December 31, 2016.

 

Amounts collected on behalf of governmental authorities for sales taxes and other similar taxes are reported on a net basis.

 

  7 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Revenue

 

The Company’s revenue is generated from the sale of goods. The Company recognizes revenue at the time products are shipped. The Company offers discounts to certain customers on its products. The costs of these discounts are recognized at the date at which the related sales revenue is recognized and recorded as a reduction in sales revenue.

 

Amounts billed to customers for shipping and handling costs are included in revenues. Costs incurred by the Company for shipping and handling are included in cost of revenues.

 

Shipping and Handling Costs

 

The costs incurred by the Company to ship products to customers, which primarily includes payments to third-party shippers, net of recoveries from customers, is included in cost of sales in the accompanying statement of operations.

 

Advertising Costs

 

Advertising costs are charged to expense as incurred and amounted to approximately $140,000 for the year ended December 31, 2016. Advertising costs are included in selling, general and administrative expenses in the accompanying statement of operations.

 

3. PROPERTY AND EQUIPMENT

 

Property and equipment at December 31, 2016 consist of the following:

 

Leasehold improvements    $100,883 
Machinery and equipment     44,296 
Vehicles     268,772 
Office furniture and fixtures     22,232 
Computers and equipment     30,741 
    466,924 
Less accumulated depreciation     (288,767)
   $178,157 

 

Depreciation expense amounted to approximately $37,000 for the year ended December 31, 2016.

 

  8 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

4. MARGIN LOAN PAYABLE

 

During 2016, the Company opened a margin account with a brokerage firm. The margin account was used to buy additional trading securities. The loan accrues interest at a base rate of 8%, less .075% for assets the Company has in its brokerage account. The amount outstanding on this loan was $76,074 as of December 31, 2016. Interest expense for the year ended December 31, 2016 was $5,177. The margin loan payable is collateralized by the Company’s trading securities.

 

5. RELATED PARTY TRANSACTIONS AND CONCENTRATIONS

 

The Company leases office space from a related party requiring monthly payments of approximately $4,000. The lease is on a monthly basis as no lease agreement exists between the Company and the related party. Total rent expense for the office space amounted to approximately $48,000 for the year ended December 31, 2016.

 

The Company purchases certain inventory items from a company that is owned by one of its minority members. The purchases for the year ended December 31, 2016 totaled approximately $1,400,000, which represents 44% of total purchases for the year. Accounts payable to this supplier at December 31, 2016 amounted to 49% of total accounts payable.

 

The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.

 

6. FAIR VALUE MEASUREMENTS

 

Financial instruments measured at fair value are classified and disclosed in the following categories:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

Level 2 – Valuations based on observable inputs, including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, yield curves, volatilities, and default rates, and inputs that are derived principally from or corroborated by observable market data.

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

  9 
  

 

KEYTROLLER, LLC

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

6. FAIR VALUE MEASUREMENTS – CONTINUED

 

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The fair value of assets measured on a recurring basis at December 31, 2016 is as follows:

 

   Fair Value Measurements at the
End of the Reporting Period Using
 
   Total   Level 1   Level 2   Level 3 
                 
Trading securities  $352,585   $352,585   $   -   $     - 
                     
Total assets at fair value  $352,585   $352,585   $-   $- 

 

7. EMPLOYEE BENEFIT PLAN

 

The Company has an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code. The Plan covers substantially all of employees of the Company. The Company’s match to the Plan is discretionary. During the year ended December 31, 2016, the Company made no contributions to the Plan.

 

8. SUBSEQUENT EVENTS

 

During June 2017, the Company sold all of its trading securities resulting in a realized loss of approximately $30,000 in 2017. The Company also paid the remaining balance of the margin loan account upon selling its trading securities.

 

The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through July 28, 2017, the date on which the financial statements were available to be issued.

 

  10 
  

 

 

Exhibit 99.2

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma condensed combined financial statements have been prepared to reflect the acquisition of substantially all of the assets of Keytroller, LLC, a Florida limited liability company (“Keytroller”) by I.D. Systems, Inc. (“ID Systems”), and the related financing transactions. We financed the acquisition, inclusive of related fees and expenses, with the net proceeds from an underwritten public offering.

 

The unaudited pro forma condensed combined balance sheet has been derived from the historical consolidated balance sheets of ID Systems and Keytroller as of March 31, 2017, to give effect to the Keytroller acquisition as if it had occurred on that date. The unaudited pro forma condensed combined statements of operations have been derived from the historical statements of operations of ID Systems and Keytroller for the three months ended March 31, 2017 and 2016, and the year ended December 31, 2016, and give effect to the consummation of the acquisition as if it had occurred on January 1, 2016.

 

The pro forma condensed combined financial statements have been prepared using the acquisition method of accounting for business combinations under accounting principles generally accepted in the United States, with ID Systems treated as the acquirer and Keytroller as the acquiree. The acquisition method of accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measure. Accordingly, the pro forma adjustments are preliminary, have been made solely for the purpose of providing pro forma financial statements, and are subject to revision based on a final determination of fair value as of the date of acquisition. Differences between these preliminary estimates and the final acquisition accounting may have a material impact on the accompanying pro forma condensed combined financial statements and ID Systems’ future results of operations and financial position.

 

Pro forma adjustments related to the balance sheet reflect the preliminary allocation of the purchase price to Keytroller’s assets and liabilities based on a preliminary estimate of their fair values and financing adjustments. Pro forma adjustments to the statements of operations reflect acquisition accounting adjustments and financing adjustments. The pro forma condensed combined financial statements do not give effect to the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any other synergies that may result from the Keytroller acquisition.

 

The pro forma condensed combined financial statements are provided for informational purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of ID Systems would have been had the acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. The pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the pro forma condensed combined financial statements and the audited and unaudited interim consolidated financial statements and accompanying notes of ID Systems and Keytroller incorporated by reference herein.

 

The unaudited pro forma condensed combined financial statements should be read in conjunction with the following information:

 

Notes to the unaudited pro forma condensed combined financial statements;

 

ID Systems’ Current Report on Form 8-K filed on August 1, 2017, including the related exhibit;

 

Audited consolidated financial statements of ID Systems for the year ended December 31, 2016, which are included in ID Systems’ Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC;

 

Unaudited interim condensed consolidated financial statements of ID Systems as of March 31, 2017 and the three months then ended, which are included in ID Systems’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC;

 

Audited financial statements of Keytroller for the year ended December 31, 2016, which are included in ID Systems’ Current Report on Form 8-K filed on October 13, 2017;

 

Unaudited interim condensed financial statements of Keytroller as of and for the three months ended March 31, 2017, which are included in ID Systems’ Current Report on Form 8-K filed on October 13, 2017.

 

See notes to the financial statements.

 

1
 

 

Unaudited Pro Forma Condensed Combined Balance Sheet

 

As of March 31, 2017

 

   ID Systems Historical  

Keytroller, LLC

Historical

  

Acquisition

adjustments

  

Note

reference

 

Financing

adjustments

(Note 3)

  

Pro forma

combined

 
     
ASSETS                            
Current Assets:                            
Cash and cash equivalents  $6,667,000   $537,000   $(7,635,000)  4a, 4c  $16,255,000   $15,824,000 
Restricted cash   305,000    -    -       -    305,000 
Investments - short term   136,000    340,000    (340,000)  4d   -    136,000 
Accounts receivable, net   9,453,000    666,000    -       -    10,119,000 
Financing receivables - current, net   1,738,000    -    -       -    1,738,000 
Inventories, net   3,096,000    964,000    -       -    4,060,000 
Deferred costs - current   4,542,000    -    -       -    4,542,000 
Prepaid expenses and other current assets   3,106,000    21,000    (21,000)  4e   -    3,106,000 
Total current assets   29,043,000    2,528,000    (7,996,000)      16,255,000    39,830,000 
Investments - long term   1,467,000    -    -       -    1,467,000 
Financing receivables - less current portion   2,101,000    -    -       -    2,101,000 
Deferred costs - less current portion   5,693,000    -    -       -    5,693,000 
Fixed assets, net   3,021,000    171,000    (132,000)  4f   -    3,060,000 
Goodwill   1,837,000    -    5,249,000   4k   -    7,086,000 
Intangible assets, net   673,000    -   5,086,000   4j   -    5,759,000 
Other assets   165,000    -    -       -    165,000 
Total assets  $44,000,000   $2,699,000   $2,207,000     $16,255,000   $65,161,000 
                             
LIABILITIES AND STOCKHOLDERS’
EQUITY
                            
Current Liabilities:                            
Short-term borrowings  $1,267,000   $45,000   $(45,000)  4g  $-   $1,267,000 
Accounts payable and accrued expenses   6,452,000    244,000    (21,000)  4h   -    6,675,000 
Deferred revenue - current   11,095,000    -    -       -    11,095,000 
Accrued contingent consideration             1,868,000   4a        1,868,000 
Total current liabilities   18,814,000    289,000    1,802,000      -    20,905,000 
Deferred rent   351,000    -    -       -    351,000 
Deferred revenue - less current portion   9,073,000    -    -       -    9,073,000 
Accrued contingent consideration             815,000   4a        815,000 
Total liabilities   28,238,000    289,000    2,617,000           31,144,000 
                             
Commitments and Contingencies                            
                             
Stockholders’ Equity:                            
Preferred stock   -         -       -    - 
Common stock   132,000         3,000   4a   30,000    165,000 
Additional paid-in-capital   113,719,000         1,997,000   4a   16,225,000    131,941,000 
Accumulated deficit   (93,384,000)        -       -    (93,384,000)
Accumulated other comprehensive loss   (119,000)        -       -    (119,000)
Treasury stock, at cost   (4,586,000)        -       -    (4,586,000)
Members’ equity   -    2,410,000    (2,410,000)  4i   -    - 
Total stockholders’ equity   15,762,000    2,410,000    (410,000)      16,255,000    34,017,000 
Total liabilities and stockholders’ equity  $44,000,000   $2,699,000   $2,207,000     $16,255,000   $65,161,000 

 

See notes to the financial statements.

 

2
 

 

Unaudited Pro Forma Condensed Combined Statement of Operations

 

For the Three Months Ended March 31, 2017

 

   ID Systems Historical   Keytroller, LLC Historical   Acquisition adjustments   Note reference   Financing Adjustments (Note 3)   Note reference   Pro forma combined 
                             
Net sales  $7,999,000   $1,599,000    -         -        $9,598,000 
Cost of sales   3,849,000    716,000    -         -         4,565,000 
Gross profit   4,150,000    883,000    -         -         5,033,000 
                                    
Selling, general and administrative expenses   4,782,000    458,000   $144,000    5a    -         5,384,000 
Research and development expenses   1,238,000    -    -         -         1,238,000 
(Loss) income from operations   (1,870,000)   425,000    (144,000)        -         (1,589,000)
Interest income   56,000    -    -         -         56,000 
Interest expense   (73,000)   -    -         -         (73,000)
Other income, net   1,000    14,000    -         -         15,000 
(Loss) income before provision for income taxes  (1,886,000)  439,000   (144,000)        -        (1,591,000)
Provision for income taxes   -    -    (39,000)   5b    -         (39,000 )
Net (loss) income  $(1,886,000)  $439,000   $(183,00)        -        $(1,630,000)
Net loss per share – basic and diluted   (0.14)                  -        $(0.10)
Weighted average common shares outstanding - basic and diluted   13,261,000         296,000    1    3,000,000         16,557,000 

 

See notes to the financial statements.

 

3
 

 

Unaudited Pro Forma Condensed Combined Statement of Operations

 

For the Year Ended December 31, 2016

 

   ID Systems Historical   Keytroller, LLC Historical   Acquisition adjustments  

Note

reference

  Financing Adjustments (Note 3)   Note reference  Pro forma combined 
                           
Net sales  $36,822,000   $6,624,000    -            -            $43,446,000 
Cost of sales   18,528,000    2,923,000    -       -       21,451,000 
Gross profit   18,294,000    3,701,000    -       -       21,995,000 
Selling, general and administrative expenses   20,126,000    2,261,000   $577,000   5a           22,964,000 
Research and development expenses   4,536,000    -    -       -       4,536,000 
(Loss) income from operations   (6,368,000)   1,440,000    (577,000 )       -       (5,505,000)
Interest income   285,000    -    -       -       285,000 
Interest expense   (293,000)   -    -       -       (293,000)
Other income, net   6,000    43,000            -   3   49,000 
(Loss) Income before provision for income taxes  (6,370,000)  1,483,000   (577,000 )       -      (5,464,000)
Provision for income taxes   -    -    (157,000)  5b   -       (157,000)
Net (loss) income  $(6,370,000)  $1,483,000   $(734,000)      -      $(5,621,000)
Net loss per share – basic and diluted   (0.49)   -            -       $(0.35)
Weighted average common shares outstanding - basic and diluted   12,984,000    -    296,000   1   3,000,000      $16,280,000 

 

See notes to the financial statements.

 

4
 

 

1. Description of the Transaction

 

On July 31, 2017, I.D. Systems, Inc. (the “Company”), together with its wholly-owned subsidiary Keytroller, LLC, a Delaware limited liability company (the “Purchaser”), completed the acquisition of substantially all of the assets Keytroller, LLC, a Florida limited liability company (“Keytroller”), pursuant to an asset purchase agreement (the “Purchase Agreement”) by and among the Company, the Purchaser, Keytroller and the principals of Keytroller party thereto (the “Acquisition”).

 

Consideration for the Acquisition included (i) $7,098,215.99 in cash paid at closing, (ii) 295,902 shares of our common stock issued at closing, (iii) up to a total of $3 million of shares of our common stock as earn-out payments, computed based on a per share price equal to the volume weighted average price of our common stock on the NASDAQ Global Market during the ten consecutive trading days ending on the third trading day prior to the closing date, based on the performance of the acquired business for the two years following closing, and (iv) the assumption of certain liabilities of Keytroller.

 

2. Basis of Presentation

 

The unaudited pro forma condensed combined balance sheet gives effect to the acquisition of Keytroller as if it occurred on March 31, 2017. The pro forma adjustments required to reflect the acquired assets and assumed liabilities of Keytroller are based on the estimated fair value of the assets and liabilities of Keytroller. The pro forma condensed combined statements of income for the three months ended March 31, 2017 and the year ended December 31, 2016 gives effect to the Keytroller acquisition as if it occurred on January 1, 2016.

 

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting and is based on the historical financial information of the Company and Keytroller. The acquisition method of accounting, in accordance with ASC 805, “Business Combinations” (ASC 805) requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date, using the fair value concepts defined in ASC 820, “Fair Value Measurement” (ASC 820). As the accounting acquirer, the Company will estimate the fair value of Keytroller’s assets acquired and liabilities assumed. The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma combined financial statements to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of income, are expected to have a continuing impact on the consolidated results.

 

Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of an asset or liability. Market participants are assumed to be buyers or sellers in the most advantageous market for the asset or liability. Fair value measurement for an asset assumes the highest and best use by these market participants. Fair value measurements can be highly subjective and it is possible the application of reasonable judgment could lead to different assumptions resulting in a range of alternative estimates using the same facts and circumstances.

 

3. Financing Transactions

 

The Company funded the cash portion of the transaction with a portion of the net proceeds from an underwritten public offering consisting of 2,608,695 shares of common stock at a price per share of $5.75 that closed on July 17, 2017. In addition, the underwriters of the public offering exercised in full their option to purchase an additional 391,304 shares of common stock. Including this option exercise, the aggregate gross proceeds from the offering of a total of 2,999,999 shares of common stock, before deducting discounts and commissions and offering expenses, were approximately $17.3 million. Net proceeds from the public offering were approximately $16.3 million. The Company intends to use the remaining portion of the net proceeds for general corporate purposes.

 

5
 

 

4. Preliminary Purchase Price Adjustments

 

The estimated pro forma adjustments as a result of recording assets acquired and liabilities assumed at their respective fair values in accordance with ASC 805 discussed below are preliminary. The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final valuation of Keytroller’s tangible and intangible assets acquired and liabilities assumed. The final valuation of assets acquired and liabilities assumed may be materially different than the value of assets acquired and liabilities assumed in the estimated pro forma adjustments.

 

The preliminary consideration and estimated fair value of assets acquired and liabilities assumed as if the acquisition date was January 1, 2017 is presented as follows:

 

    Amount     Note
            
Calculation of consideration estimated to be transferred          
Consideration to be paid to Keytroller stockholders and equity award holders   $ 11,781,000     (a)
Fair value of total consideration     11,781,000       
       
Recognized amounts of identifiable assets acquired and liabilities assumed            
Book value of Keytroller   $ 2,410,000     (b)
Less: Excluded assets and liabilities            
Cash and cash equivalents     (537,000 )   (c)
Investments     (340,000 )   (d)
Prepaid expenses and other current assets     (21,000 )   (e)
Fixed assets     (132,000 )   (f)
Short-term borrowings     45,000     (g)
Accounts payable and accrued expenses     21,000     (h)
    $ 1,446,000      

 

(a) Represents consideration transferred to Keytroller members. A summary is as follows:

 

   Shares  

Offering Price

per Share

   Amount 
         
Cash consideration paid to Keytroller members            $7,098,000 
Share consideration related to outstanding equity awards   295,902   $6.76    2,000,000 
Fair value of earn-out consideration             2,683,000  
Total Consideration            $11,781,000 

 

The Company recorded $2,683,000 of contingent consideration based on the estimated revenues and earnings during the earn-out periods discounted at the weighted-average interest rate. The impact of the potential shares to be issued for the contingent consideration is not included in the computation of pro forma net loss per share.

 

(i) Adjustment made to remove the historical members’ equity balance of Keytroller.

 

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(j) The adjustments reflect the amount necessary to record the estimated fair value of Keytroller’s intangible assets acquired. The valuation of the identifiable intangible assets acquired was based on management’s preliminary estimates, currently available information and reasonable and supportable assumptions. Identifiable intangible assets expected to be acquired consist of the following:

 

   Estimated Useful Lives (Years)   As of January 1, 2017 
      (millions) 
Identifiable intangible assets:          
Trademark and tradename   10-15   $1,367,000 
Customer list   10    3,123,000 
Favorable contract interest   4    388,000 
Non compete   5    208,000 
Pro forma adjustment for estimated fair value of identifiable intangible assets       $5,086,000 

 

Some of the more significant assumptions inherent in the development of intangible asset fair values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue, cost of sales, sales and marketing expenses, capital expenditures, and working capital requirements); the discount rate selected to measure inherent risk of future cash flows; the assumed royalty rate utilized; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors.

 

(k) Goodwill is calculated as the difference between the fair value of the consideration expected to be transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed.

 

Currently, no adjustment to the unaudited pro forma condensed combined financial statements has been made as it relates to limitations the combined company might incur under Section 382 of the Code or ASC 740. Furthermore, adjustments to established deferred tax assets and liabilities as well as the recognition of additional deferred tax assets and liabilities may occur in conjunction with the finalization of the purchase accounting and these items could be material.

 

5. Unaudited Pro Forma Condensed Combined Statements of Operations Adjustments

 

(a) The following adjustments have been made to SG&A expenses:

 

   Three Months Ended
March 31, 2017
   Year Ended
December 31, 2016
 
     
Adjustments to SG&A expenses/(income):          
Estimated transaction-related intangible asset amortization  $144,000   $577,000 
Total SG&A adjustments  $144,000   $577,000

 

(b) Provision for income taxes:

 

   Three Months Ended
March 31, 2017
   Year Ended
December 31, 2016
 
     
Adjustment to provision for income taxes:          
Estimated transaction-related goodwill tax amortization  $39,000   $157,000 
Total provision for income taxes adjustment  $39,000   $157,000 

 

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