UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
   
FORM 10-Q
 
(Mark One)

 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2011

or

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________
 
Commission File Number: 001-15087

I.D. SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
22-3270799
     
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
     
123 Tice Boulevard, Woodcliff Lake,
New Jersey
 
07677
     
(Address of principal executive offices)
 
(Zip Code)

(201) 996-9000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
         
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ
 
The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of the close of business on August 11, 2011, was 11,054,884.

 
 

 
 
INDEX
 
I.D. Systems, Inc. and Subsidiaries

 
Page
   
PART I — FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
 
   
Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2011 (unaudited)
1
   
Condensed Consolidated Statements of Operations (unaudited) — for the three and six months ended June 30, 2010 and 2011
2
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) — for the six months ended June 30, 2011
3
   
Condensed Consolidated Statements of Cash Flows (unaudited) — for the six months ended June 30, 2010 and 2011
4
   
Notes to Unaudited Condensed Consolidated Financial Statements
5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
32
   
Item 4. Controls and Procedures
33
   
PART II — OTHER INFORMATION
 
   
Item 1. Legal Proceedings
34
   
Item 1A. Risk Factors
34
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
34
   
Item 6. Exhibits
34
   
Signatures
35
   
Exhibit 10.1
 
Exhibit 10.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32
 
 
 
 

 

PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

   
December 31,
2010*
   
June 30,
2011
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 14,491,000     $ 8,688,000  
Investments – short term
    4,565,000       6,207,000  
Interest receivable
    53,000       50,000  
Accounts receivable, net of allowance for doubtful accounts of $161,000 and $287,000 in 2010 and 2011, respectively
    7,044,000       6,177,000  
Notes and sales-type lease receivable - current
    353,000       187,000  
Unbilled receivables
          135,000  
Inventory, net
    7,295,000       7,311,000  
Prepaid expenses and other current assets
    1,211,000       1,821,000  
Deferred costs – current
    1,159,000       2,087,000  
                 
Total current assets
    36,171,000       32,663,000  
                 
Investments – long term
    9,364,000       9,050,000  
Notes and sales-type lease receivable – less current portion
    839,000       943,000  
Deferred costs – less current portion
    2,978,000       2,774,000  
Fixed assets, net
    3,853,000       3,310,000  
Goodwill
    1,837,000       1,837,000  
Intangible assets, net
    5,571,000       4,984,000  
Other assets
    272,000       272,000  
                 
    $ 60,885,000     $ 55,833,000  
                 
LIABILITIES
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 9,141,000     $ 7,441,000  
Deferred revenue
    2,186,000       2,963,000  
                 
Total current liabilities
    11,327,000       10,404,000  
                 
Deferred rent
    199,000       284,000  
Deferred revenue
    4,614,000       4,172,000  
                 
      16,140,000       14,860,000  
Commitments and Contingencies (Note 23)
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock; authorized 5,000,000 shares, $0.01 par value; none issued
           
Common stock; authorized 50,000,000 shares, $0.01 par value; 12,491,000 and 12,546,000 shares issued at December 31, 2010 and June 30, 2011, respectively; shares outstanding, 11,242,000 and 11,124,000 at December 31, 2010 and June 30, 2011, respectively
    121,000       121,000  
Additional paid-in capital
    105,156,000       105,846,000  
Accumulated deficit
    (49,470,000 )     (53,278,000 )
Accumulated other comprehensive (loss) income
    (37,000 )      81,000  
                 
      55,770,000       52,770,000  
                 
Treasury stock; 1,249,000 shares and 1,422,000 shares at cost at December 31, 2010 and June 30, 2011, respectively
    (11,025,000 )      (11,797,000 )
                 
Total stockholders’ equity
    44,745,000       40,973,000  
                 
Total liabilities and stockholders’ equity
  $ 60,885,000     $ 55,833,000  
 
*Derived from audited balance sheet as of December 31, 2010
 
See accompanying notes to condensed consolidated financial statements.

 
1

 

I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Revenue:
                       
Products
  $ 1,829,000     $ 3,959,000     $ 3,852,000     $ 7,763,000  
Services
    4,184,000       4,374,000       8,285,000       8,404,000  
                                 
      6,013,000       8,333,000       12,137,000       16,167,000  
Cost of revenue:
                               
Cost of products
    865,000       2,345,000       1,840,000       4,526,000  
Cost of services
    1,532,000       1,510,000       3,296,000       3,002,000  
                                 
      2,397,000       3,855,000       5,136,000       7,528,000  
                                 
Gross profit
    3,616,000       4,478,000       7,001,000       8,639,000  
                                 
Selling, general and administrative expenses
    6,689,000       5,726,000       13,163,000       10,821,000  
Research and development expenses
    1,119,000       870,000       2,273,000       1,776,000  
                                 
Loss from operations
    (4,192,000 )     (2,118,000 )     (8,435,000 )     (3,958,000 )
Interest income
    187,000       53,000       396,000       100,000  
Interest expense
    (25,000 )     -       (55,000 )     -  
Other income, net
    4,000       22,000       5,000       50,000  
                                 
Net loss
  $ (4,026,000 )   $ (2,043,000 )   $ (8,089,000 )   $ (3,808,000 )
                                 
Net loss per share — basic and diluted
  $ (0.36 )   $ (0.19 )   $ (0.72 )   $ (0.35 )
                                 
Weighted average common shares outstanding — basic and diluted
    11,138,000       10,819,000       11,158,000       10,866,000  
 
See accompanying notes to condensed consolidated financial statements.

 
2

 


I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity

                     
Accumulated
             
   
Common Stock
   
Additional
         
Other
             
   
Number of
Shares
   
Amount
   
Paid-in
Capital
   
Accumulated
Deficit
   
Comprehensive
Loss
   
Treasury
Stock
   
Stockholders’
Equity
 
                                           
Balance at December 31, 2010
    12,491,000     $ 121,000     $ 105,156,000     $ (49,470,000 )   $ (37,000 )   $ (11,025,000 )   $ 44,745,000  
                                                         
Net loss
                            (3,808,000 )                     (3,808,000 )
Comprehensive gain— unrealized gain on investments
                            46,000             46,000  
Foreign currency translation adjustment
                            72,000             72,000  
                                                         
Total comprehensive loss
                                                    (3,690,000 )
                                                         
Shares repurchased
                                  (725,000 )     (725,000 )
Shares issued pursuant to exercise of stock options
    32,000             74,000                               74,000  
Issuance of restricted stock
    63,000                                      
Forfeiture of restricted shares
    (40,000 )                                    
Shares withheld pursuant to stock issuances
                                            (47,000 )     (47,000 )
Stock based compensation —restricted stock
                178,000                         178,000  
Stock based compensation — options and performance shares
                438,000                         438,000  
                                                         
Balance at June 30, 2011 (Unaudited)
    12,546,000     $ 121,000     $ 105,846,000     $ (53,278,000 )   $ 81,000     $ (11,797,000 )   $ 40,973,000  
 
See accompanying notes to condensed consolidated financial statements.

 
3

 
 
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 (Unaudited)

   
Six Months Ended
June 30,
 
   
2010
   
2011
 
             
Cash flows from operating activities:
           
             
Net loss
  $ (8,089,000 )   $ (3,808,000 )
Adjustments to reconcile net loss to cash used in operating activities:
               
Bad debt expense
    53,000       158,000  
Accrued interest income
    23,000       3,000  
Stock-based compensation expense
    893,000       616,000  
Depreciation and amortization
    970,000       1,212,000  
Deferred rent expense
    -       86,000  
Changes in:
               
Accounts receivable
    571,000       752,000  
Unbilled receivables
          (135,000 )
Note and lease receivable
    149,000       61,000  
Inventory
    1,131,000       (13,000 )
Prepaid expenses and other assets
    (625,000 )     (611,000 )
Deferred costs
    (1,104,000 )     (723,000 )
Deferred revenue
    919,000       336,000  
Accounts payable and accrued expenses
    (401,000 )     (1,623,000 )
                 
Net cash used in operating activities
    (5,510,000 )     (3,689,000 )
                 
Cash flows from investing activities:
               
Expenditures for fixed assets including website development costs
    (961,000 )     (82,000 )
Business acquisition
    (15,000,000 )      
Purchase of investments
    (2,751,000 )     (2,889,000 )
Proceeds from sales and maturities of investments
    22,017,000       1,606,000  
                 
Net cash provided by (used in) investing activities
    3,305,000       (1,365,000 )
                 
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    3,000       35,000  
Purchase of treasury shares
          (725,000 )
Principal payments on line of credit
    (10,477,000 )      
                 
Net cash used in financing activities
    (10,474,000 )     (690,000 )
                 
Effect of foreign exchange rate changes on cash and cash equivalents
    (34,000 )     (59,000 )
Net decrease in cash and cash equivalents
    (12,713,000 )     (5,803,000 )
Cash and cash equivalents — beginning of period
    19,481,000       14,491,000  
                 
Cash and cash equivalents — end of period
  $ 6,768,000       8,688,000  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Taxes
    -        
Interest
  $ 55,000        
                 
Noncash activities:
               
Unrealized gain on investments
  $ 88,000     $ 46,000  
                 
Shares withheld pursuant to stock issuance
  $ 10,000     $ 47,000  
                 
Acquisition:
               
Fair value of assets acquired
  $ 19,695,000          
Liabilities assumed
    (4,695,000 )        
                 
Net cash paid in 2010
  $ 15,000,000          
 
See accompanying notes to condensed consolidated financial statements.

 
4

 
 
I.D. Systems, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2011
 
NOTE 1 — THE COMPANY
 
I.D. Systems, Inc. and its subsidiaries (the “Company,” “we,” “our” or “us”) develop, market and sell wireless solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles, such as forklifts, airport ground support equipment, rental vehicles, and transportation assets, such as dry van trailers, refrigerated trailers, railcars and containers. Our patented systems utilize radio frequency identification (RFID), Wi-Fi, satellite or cellular communications, and sensor technology to address the needs of organizations to control, track, monitor and analyze their assets. The Company’s solutions enable customers to achieve tangible economic benefits by making timely, informed decisions that increase the security, productivity and efficiency of their operations. The Company outsources its hardware manufacturing operations to contract manufacturers.
 
On January 7, 2010, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with General Electric Capital Corporation (“GECC”) and GE Asset Intelligence, LLC (“GEAI”), pursuant to which the Company acquired GEAI’s telematics business (the “GEAI Business”) through the purchase of 100% of the membership interests of Asset Intelligence, LLC (“AI”), a newly formed, wholly owned subsidiary of GEAI into which substantially all of the assets, including intellectual property, and liabilities of the GEAI Business had been transferred immediately prior to the closing. Effective with the closing of the transaction, AI became a wholly owned subsidiary of the Company. See Note 12 to the Unaudited Condensed Consolidated Financial Statements.
 
Prior to the AI acquisition, the Company operated in a single reportable segment, which consisted of the historical operations of I.D. Systems (“IDS”). Subsequent thereto, the Company determined that it has two reportable segments organized by product line: IDS and AI. The IDS operating segment includes the Company’s core wireless asset management systems operations: I.D. Systems, Inc., I.D. Systems, GmbH, and Didbox Ltd. This core business develops, markets and sells wireless solutions for managing and securing high-value enterprise assets, such as industrial trucks. The AI operating segment, which consists of Asset Intelligence, LLC, provides data-driven telematics solutions for tracking and managing supply chain assets, such as trailers and containers. During the first quarter of 2011, the Company reorganized the manner in which it manages its business by merging the two segments while maintaining the IDS industrial and rental fleet management and the AI transportation asset management product lines. All previously reported financial information has been revised to conform to the current presentation.
 
I.D. Systems, Inc. was incorporated in Delaware in 1993 and commenced operations in January 1994.
 
NOTE 2 — ORGANIZATION AND CONSOLIDATION POLICY
 
The unaudited interim condensed consolidated financial statements include the accounts of I.D. Systems, Inc. and its wholly owned subsidiaries, Asset Intelligence, LLC (“AI”), I.D. Systems GmbH (“GmbH”) and Didbox Ltd. (“Didbox”) (collectively referred to as the “Company”). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial position of the Company as of June 30, 2011, the consolidated results of its operations for the three- and six- month periods ended June 30, 2010 and 2011, respectively, the consolidated change in stockholders’ equity for the six months ended June 30, 2011 and the consolidated cash flows for the six-month periods ended June 30, 2010 and 2011. The results of operations for the six-month period ended June 30, 2011 are not necessarily indicative of the operating results for the full year. We suggest that these financial statements be read in conjunction with the audited consolidated financial statements and related disclosures for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K for the year then ended.
 
NOTE 3 — 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 unless they are legally or contractually restricted. The Company’s cash and cash equivalent balances exceed FDIC limits.
 
NOTE 4 — USE OF ESTIMATES
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates estimates used in the preparation of the financial statements for reasonableness. The most significant estimates relate to stock-based compensation arrangements, acquisition accounting, contingent consideration, realization of deferred tax assets, the impairment of tangible and intangible assets, inventory reserves, bad debt and warranty reserves and deferred revenue and costs. Actual results could differ from those estimates. 

 
5

 
 
NOTE 5 — INVESTMENTS
 
The Company’s investments include debt securities, U.S. Treasury Notes, government and state agency bonds, mutual funds, corporate bonds and commercial paper, which are classified as either available for sale, held to maturity or trading, depending on management’s investment intentions relating to these securities. Available for sale securities are marked-to-market based on quoted market values of the securities, with the unrealized gain and (losses) reported as comprehensive income or (loss). For the three- and six-month periods ended June 30, 2010, the Company reported unrealized gains of $22,000 and $88,000, respectively, and for the three- and six-month periods ended June 30, 2011, the Company reported unrealized gain of $56,000 and $46,000, respectively, on available for sale securities in total comprehensive loss. Investments categorized as held to maturity are carried at amortized cost because the Company has both the intent and the ability to hold these investments until they mature. Realized gains and losses from the sale of available for sale securities are determined on a specific-identification basis. The Company has classified as short-term those securities that mature within one year and mutual funds, and all other securities are classified as long-term.
 
The following table summarizes the estimated fair value of investment securities designated as available for sale, excluding investment in mutual funds of $3,534,000, classified by the contractual maturity date of the security as of June 30, 2011:

   
Fair Value
 
       
Due within one year
  $ 2,673,000  
Due one year through three years
    8,656,000  
Due after three years
    394,000  
         
    $ 11,723,000  
 
 
6

 
 
The cost, gross unrealized gains (losses) and fair value of available for sale securities by major security types at June 30, 2011 are as follows:

   
Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Fair
Value
 
Investments — short term
                       
Available for sale
                       
U.S. Treasury Notes
  $ -     -     -     $ -  
Mutual funds
    3,562,000       -       (28,000 )     3,534,000  
Corporate bonds and commercial paper
    1,210,000       10,000       -       1,220,000  
Government agency bonds
    1,452,000       1,000       -       1,453,000  
                                 
Total available for sale — short term
    6,224,000       11,000       (28,000 )     6,207,000  
                                 
Marketable securities — long term
                               
Available for sale
                               
U.S. Treasury Notes
    5,707,000       18,000       -       5,725,000  
Government agency bonds
    766,000       4,000       -       770,000  
Corporate bonds and commercial paper
    2,529,000       26,000               2,555,000  
                                 
Total available for sale — long term
    9,002,000       48,000       -       9,050,000  
                                 
Total investments
  $ 15,226,000     $ 59,000     $ (28,000 )   $ 15,257,000  
 
The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels:

 
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

 
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
 
At June 30, 2011, the Company’s investments described above are classified as Level 1 for fair value measurements.

 
7

 
 
NOTE 6 — REVENUE RECOGNITION
 
The Company’s product revenue is derived from: (i) sales of our industrial and rental fleet wireless asset management systems and services, which includes training and technical support; (ii) sale of our transportation asset management systems and spare parts sold to customers (for which title transfers on the date of customer receipt) and from the related communication services under contracts that generally provide for service over periods ranging from one to five years; (iii) post-contract maintenance and support agreements; and (iv) periodically, from leasing arrangements.
 
Our industrial and rental fleet wireless asset management systems consist of on-asset hardware, communication infrastructure and software. Revenue derived from the sale of our industrial and rental fleet wireless asset management systems is allocated to each element based upon vendor specific objective evidence (VSOE) of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue is recognized as each element is earned based on the selling price of each element, and when there are no undelivered elements that are essential to the functionality of the delivered elements. The Company’s system is typically implemented by the customer or a third party and, as a result, revenue is recognized when title and risk of loss passes to the customer, which usually is upon delivery of the system, persuasive evidence of an arrangement exists, sales price is fixed and determinable, collectability is reasonably assured and contractual obligations have been satisfied. In some instances, we are also responsible for providing installation services. The additional installation services, which could be performed by third parties, are considered another element in a multi-element deliverable and revenue for installation services is recognized at the time the installation is provided. Training and technical support revenue are recognized at time of performance.
 
The Company recognizes revenues from the sale of remote transportation asset management systems and spare parts when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. These criteria include requirements that the delivery of future products or services under the arrangement is not required for the delivered items to serve their intended purpose. The Company has determined that the revenue derived from the sale of transportation asset management systems does not have stand alone value to the customer separate from the communication services provided and, therefore, the arrangements constitute a single unit of accounting. Under the applicable accounting guidance, all of the Company’s billings for equipment and the related cost are deferred, recorded, and classified as a current and long-term liability and a current and long-term asset, respectively. Deferred revenue and cost are recognized over the service contract life, beginning at the time that a customer acknowledges acceptance of the equipment and service. The customer service contracts typically range from one to five years. The Company amortized $150,000 and $230,000 of deferred equipment revenue during the three- and six-month periods ended June 30, 2010, respectively, and $511,000 and $990,000 during the three- and six- month periods ended June 30, 2011, respectively.
 
The service revenue for our remote asset monitoring equipment relates to charges for monthly messaging usage and value-added features charges. The usage fee is a monthly fixed charge based on the expected utilization according to the rate plan chosen by the customer. Service revenue generally commences upon equipment installation and customer acceptance, and is recognized over the period such services are provided.
 
Spare parts sales are reflected in product revenues and recognized on the date of customer receipt of the part. Revenue from remote asset monitoring equipment activation fees is deferred and amortized over the life of the contract.
 
The Company also derives revenue under leasing arrangements of remote asset monitoring equipment. Such arrangements provide for monthly payments covering the system sale, maintenance, support and interest. These arrangements meet the criteria to be accounted for as sales-type leases. Accordingly, an asset is established for the “sales-type lease receivable” and revenue is deferred and recognized over the service contract, as described above. Maintenance revenues and interest income are recognized monthly over the lease term.
 
The Company also enters into post-contract maintenance and support agreements for its wireless asset management systems. Revenue is recognized over the service period and the cost of providing these services is expensed as incurred. Deferred revenue also includes prepayment of extended maintenance and support contracts.
 
Deferred revenue as of December 31, 2010 and June 30, 2011 consists of the following:

   
December 31,
2010
   
June 30,
2011
 
             
Deferred activation fees
  $ 96,000     $ 173,000  
Deferred industrial equipment installation revenue
    367,000       105,000  
Deferred maintenance revenue
    798,000       1,263,000  
Deferred remote asset management product revenue
    5,539,000       5,594,000  
                 
      6,800,000       7, 135,000  
Less: Current portion
    2,186,000       2,963,000  
                 
Deferred revenue – less current portion
  $ 4,614,000     $ 4,172,000  
 
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the condensed consolidated statements of operations.
 
NOTE 7 — UNBILLED RECEIVABLES
 
Under certain customer contracts, the Company invoices progress billings once certain milestones are met. The milestone terms vary by customer and can include the receipt of the customer purchase order, delivery, installation and launch. As the systems are delivered, and services are performed, and all of the criteria for revenue recognition are satisfied, the Company recognizes revenue. If the amount of revenue recognized for financial reporting purposes is greater than the amount invoiced, an unbilled receivable is recorded. If the amount invoiced is greater than the amount of revenue recognized for financial reporting purposes, deferred revenue is recorded. As of December 31, 2010 and June 30, 2011, unbilled receivables were $-0- and $135,000, respectively.

 
8

 
 
NOTE 8 — NOTES RECEIVABLE AND SALES-TYPE LEASE RECEIVABLE
 
[A] Notes Receivable
 
Notes receivable of $330,000 and $281,000 at December 31, 2010 and June 30, 2011, respectively, relate to product financing arrangements that exceed one year and bear interest at approximately 8%. Interest is recognized over the life of the notes. The notes receivable are collateralized by the equipment being financed. Amounts collected on the notes receivable are included in net cash provided by operating activities in the condensed consolidated statements of cash flows. Unearned interest income is amortized to interest income over the life of the notes using the effective-interest method. The revenue derived from the sale of monitoring equipment and the related costs are deferred. Deferred revenue and cost are recognized over the service contract life, beginning at the time that a customer acknowledges acceptance of the equipment and service.

Notes receivable
  $ 281,000  
Less: Current portion
    67,000  
         
Notes receivable - less current portion
  $ 214,000  
 
[B] Sales-type lease receivable
 
Present value of net investment in sales-type lease receivable of $862,000 and $849,000 at December 31, 2010 and June 30, 2011, respectively, is for a five-year lease of the Company’s product and is reflected net of unearned income of $132,000 and $128,000 at December 31, 2010 and June 30, 2011, discounted at 8% – 14%.
 
Scheduled maturities of minimum lease payments outstanding as of June 30, 2011 are as follows:

Year ending December 31:
     
       
July - December 2011
  $ 120,000  
2012
    255,000  
2013
    276,000  
2014
    177,000  
2015
    16,000  
Thereafter
    5,000  
         
      849,000  
Less: Current portion
    120,000  
         
Sales-type lease receivable – less current portion
  $ 729,000  
 
NOTE 9 — DEFERRED COSTS
 
During 2009, the Company entered into a contract with a customer pursuant to which the Company’s rental fleet management system will be implemented on a portion of the customer’s fleet of vehicles. The term of the agreement is for five years. The customer is entitled to terminate the contract after 22 months, subject to a performance clause and early termination fees. The Company is entitled to issue sixty monthly invoices of up to $57,000 per month based on the number of active vehicle management systems installed in the customer’s fleet of vehicles. Costs directly attributable to this contract, consisting principally of engineering and manufacturing costs, are being deferred until implementation of the system is completed. The deferred costs are charged to cost of revenue in accordance with the cost recovery method, pursuant to which the deferred contract costs are reduced in each period by an amount equal to the revenue recognized until all the capitalized costs are recovered, at which time the Company will recognize a gross profit, if any. The Company capitalized  $416,000 of such contract costs during the three- and six-month periods ended June 30, 2010, respectively, and $220,000 and $810,000  during the three- and six- month periods ended June 30, 2011. The Company expects to incur additional costs until the installation is complete. The Company amortized $12,000 of such costs for the three- and six- month periods ended June 30, 2010 and $158,000 and $251,000 for the three- and six-month periods ended June 30, 2011, respectively.
 
Deferred product costs consist of transportation asset management equipment costs deferred in accordance with our revenue recognition policy (see Note 6).
 
Deferred costs consist of the following:

   
December 31,
2010
   
June 30,
2011
 
Deferred contract costs
  $ 694,000     $ 1,409,000  
Deferred product costs
    3,443,000       3,452,000  
                 
      4,137,000       4,861,000  
Less: Current portion
    1,159,000       2,087,000  
                 
    $ 2,978,000     $ 2,774,000  
 
The Company will continue to evaluate the realizability of the carrying amount of the deferred contract costs on a quarterly basis. To the extent the carrying value of the deferred contract costs exceeds the contract revenue expected to be realized, an impairment loss will be recognized.

 
9

 
 
NOTE 10 — INVENTORY
 
Inventory, which primarily consists of finished goods and components used in the Company’s products, is stated at the lower of cost or market using the first-in first-out (FIFO) method.
 
Inventories as of December 31, 2010 and June 30, 2011 consist of the following:

   
December 31,
2010
   
June 30,
2011
 
Components
  $ 4,244,000     $ 3,972,000  
Finished goods
    3,051,000       3,339,000  
                 
    $ 7,295,000     $ 7,311,000  
 
NOTE 11 — FIXED ASSETS
 
Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:

   
December 31,
2010
   
June 30,
2011
 
Equipment
  $ 1,026,000     $ 1,030,000  
Computer software
    2,982,000       3,082,000  
Computer hardware
    1,751,000       1,729,000  
Furniture and fixtures
    329,000       329,000  
Automobiles
    47,000       47,000  
Leasehold improvements
    246,000       246,000  
                 
      6,381,000       6,463,000  
Accumulated depreciation and amortization
    (2,528,000 )     (3,153,000 )
                 
    $ 3,853,000     $ 3,310,000  
 
Depreciation and amortization expense for the three- and six-month periods ended June 30, 2010 was $342,000 and $630,000, respectively, and for the three- and six- month periods ended June 30, 2011 was $314,000 and $625,000, respectively. This includes amortization of costs associated with computer software and website development for the three- and six- month periods ended June 30, 2010 of $150,000 and $282,000, respectively, and for the three- and six-month periods ended June 30, 2011 of $156,000 and $311,000, respectively.
 
The Company capitalizes in fixed assets the costs of software development and website development. Specifically, the assets comprise an implementation of Oracle Enterprise Resource Planning (ERP) software, enhancements to the Veriwise® systems, and a customer interface website (which is the primary tool used to provide data to our customers). The website employs updated web architecture and improved functionality and features, including, but not limited to, customization at the customer level, enhanced security features, custom virtual electronic geofencing of landmarks, global positioning system (“GPS”)-based remote mileage reporting, and richer mapping capabilities. The Company capitalized the costs incurred during the “development” and “enhancement” stages of the software and website development. Costs incurred during the “planning” and “post-implementation/operation” stages of development were expensed. The Company capitalized $659,000 and $55,000 for website enhancements for the six months ended June 30, 2010 and 2011, respectively.

 
10

 
 
NOTE 12 — ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
 
On January 7, 2010, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with General Electric Capital Corporation (“GECC”) and GE Asset Intelligence, LLC (“GEAI”), pursuant to which the Company acquired GEAI’s telematics business (the “GEAI Business”) through the purchase of 100% of the membership interests of Asset Intelligence, LLC (“AI”), a newly formed, wholly owned subsidiary of GEAI into which substantially all of the assets, including intellectual property, and liabilities of the GEAI Business had been transferred immediately prior to the closing. Effective with the closing of the transaction, AI became a wholly owned subsidiary of the Company. In connection with the transaction, AI offered employment to all of the former employees of the GEAI Business. The focus of AI’s business is in trucking, rail, marine and intermodal applications. The acquisition has provided the Company with access to a broader base of customers.
 
Under the terms of the Purchase Agreement, the Company paid consideration of $15 million in cash at closing. In addition, the Company would have been required to pay additional cash consideration of up to $2 million in or about February, 2011, contingent upon the number of new units of telematics equipment sold or subject to a binding order to be sold by AI during the year ended December 31, 2010. The Company originally recorded in the preliminary purchase price allocation $1,017,000 of contingent consideration based on the estimated number of new units of telematics equipment expected to be sold in 2010. The contingent consideration was estimated using a probability-weighted calculation of the number of new units of telematics equipment expected to be sold in 2010 discounted at 20.5%, which represents the Company’s weighted-average discount rate. The contingent consideration was reversed during the second quarter of 2010 based on revised forecasts which indicated AI would not meet the required number of new unit sales during the measurement period in order for the contingent consideration to become payable.
 
The Company incurred acquisition-related expenses of approximately $1,355,000, of which $1,241,000 and $114,000 were included in selling, general and administrative expenses in 2009 and for the six months ended June 30, 2010, respectively.
 
The transaction was accounted for using the acquisition method of accounting and the purchase price was assigned to the net assets acquired based on the fair value of such assets and liabilities at the date of acquisition. The following table summarizes the final allocation of the AI purchase price to the assets acquired and liabilities assumed at the date of acquisition:

Current assets, excluding inventory
  $ 4,709,000  
Inventory
    5,236,000  
Other assets, net
    3,218,000  
Current liabilities
    (5,746,000 )
Intangibles
    6,365,000  
Goodwill
    1,218,000  
         
Fair value of assets acquired
  $ 15,000,000  
 
The goodwill arising from the acquisition consists largely of the synergies and cost reductions through economies of scale expected from combining the operations of the Company and AI. The goodwill is expected to be fully deductible for tax purposes.
 
The fair value of the current assets acquired included trade accounts receivable with a fair value of $3,272,000. The gross amount due was $3,966,000, of which $694,000 is expected to be uncollectible.
 
The results of operations of AI have been included in the condensed consolidated statement of operations as of the effective date of the acquisition.

 
11

 
 
The following revenue and operating loss of AI were included in the Company’s condensed consolidated results of operations for the three- and six- month periods ended June 30, 2010:

   
Three Months
   
Six Months
 
   
Ended
   
Ended
 
   
June 30, 2010
   
June 30, 2010
 
             
Revenues
  $ 3,847,000     $ 7,772,000  
Operating loss
    (1,319,000 )     (2,121,000 )
 
The following table represents the combined pro forma revenue and earnings for the three- and six-month periods ended June 30, 2010:

         
Six Months
 
   
Six Months
   
Ended
 
   
Ended
   
June 30, 2010
 
   
June 30, 2010
   
Pro Forma
 
   
Historical
   
Combined
 
             
Revenue
  $ 12,137,000     $ 12,379,000  
Net loss
    (8,089,000 )     (8,020,000 )
Net loss per share — basic and diluted
    (0.72 )     (0.71 )

 
The change in the carrying amount of goodwill from January 1, 2011 to June 30, 2011 is as follows:

Balance of as January 1, 2011
  $ 1,837,000  
Acquisitions
     
Disposals
       
         
Balance as of June 30, 2011
  $ 1,837,000  
 
The following table summarizes intangible assets arising from the AI acquisition and previous acquisitions by the Company (namely, the acquisitions of PowerKey and Didbox Ltd.) as of December 31, 2010 and June 30, 2011:

 
12

 
June 30, 2011
 
Useful
Lives
(In Years)
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
 
                       
Amortized:
                     
Patents
 
11
  $ 1,489,000     $ (203,000 )   $ 1,286,000  
Tradename
 
5
    200,000       (60,000 )     140,000  
Non-competition agreement
 
3
    234,000       (117,000 )     117,000  
Technology
 
5
    50,000       (17,000 )     33,000  
Workforce
 
5
    33,000       (11,000 )     22,000  
Customer relationships
 
5
    4,499,000       (1,352,000 )     3,147,000  
                             
          6,505,000       (1,760,000 )     4,745,000  
                             
Unamortized:
                           
Customer list
        104,000             104,000  
Trademark and Tradename
        135,000             135,000  
                             
          239,000             239,000  
                             
Total
      $ 6,744,000     $ (1,760,000 )   $ 4,984,000  

December 31, 2010
 
Useful
Lives
(In Years)
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
 
                       
Amortized:
                     
Patents
 
11
  $ 1,489,000     $ (135,000 )   $ 1,354,000  
Tradename
 
5
    200,000       (40,000 )     160,000  
Non-competition agreement
 
3
    234,000       (78,000 )     156,000  
Technology
 
5
    50,000       (12,000 )     38,000  
Workforce
 
5
    33,000       (8,000 )     25,000  
Customer relationships
 
5
    4,499,000       (900,000 )     3,599,000  
                             
          6,505,000       (1,173,000 )     5,332,000  
Unamortized:
                           
Customer list
        104,000             104,000  
Trademark and Tradename
        135,000             135,000  
                             
          239,000     $       239,000  
                             
Total
      $ 6,744,000     (1,173,000 )   $ 5,571,000  
 
Amortization expense for the three and six months ended June 30, 2010 was $196,000 and $340,000, respectively, and for the three and six months ended June 30, 2011 was $293,000 and $587,000, respectively. Future amortization expense for each of the five succeeding fiscal years for these intangible assets is as follows:

Year ending December 31:
     
       
July – December 2011
  $ 583,000  
2012
    1,170,000  
2013
    1,091,000  
2014
    1,086,000  
2015
    135,000  
 
 
13

 
 
NOTE 13 — NET LOSS PER SHARE OF COMMON STOCK
 
Net loss per share for the three- and six-month periods ended June 30, 2010 and 2011 are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Basic and diluted loss per share
                       
Net loss
  $ (4,026,000 )   $ (2,043,000 )   $ (8,089,000 )   $ (3,808,000 )
                                 
Weighted-average shares outstanding
    11,138,000       10,819,000       11,158,000       10,866,000  
                                 
Basic and diluted net loss per share
  $ (0.36 )   $ (0.19 )   $ (0.72 )   $ (0.35 )
 
Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution assuming common shares were issued upon the exercise of outstanding options and the proceeds thereof were used to purchase outstanding common shares. The Company has revised the weighted-average shares to exclude the restricted shares. There was no impact on loss per share during the periods. For the three- and six-month periods ended June 30, 2010, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of outstanding stock options and restricted stock of 3,210,000 would have been anti-dilutive. For the three- and six-month periods ended June 30, 2011, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of outstanding stock options and restricted stock of 3,052,000 would have been anti-dilutive.

 
14

 
 
NOTE 14 — STOCK-BASED COMPENSATION
 
Stock Option Plans
 
The Company adopted the 1995 Stock Option Plan, pursuant to which the Company had the right to grant options to purchase up to an aggregate of 1,250,000 shares of common stock. The Company also adopted the 1999 Stock Option Plan, pursuant to which the Company had the right to grant stock awards and options to purchase up to 2,813,000 shares of common stock. The Company also adopted the 1999 Director Option Plan, pursuant to which the Company had the right to grant options to purchase up to an aggregate of 600,000 shares of common stock. The 1995 Stock Option Plan expired during 2005 and the 1999 Stock and Director Option Plans expired during 2009 and the Company cannot issue additional options under these plans.
 
The Company adopted the 2007 Equity Compensation Plan, pursuant to which the Company may grant options to purchase up to an aggregate of 2,000,000 shares of common stock. The Company also adopted the 2009 Non-Employee Director Equity Compensation Plan, pursuant to which the Company may grant options to purchase up to an aggregate of 600,000 shares of common stock. The plans are administered by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), which has the authority to determine, among other things, the term during which an option may be exercised (not more than 10 years), the exercise price of an option and the vesting provisions.
 
The Company recognizes all share-based payments in the statement of operations as an operating expense, based on their fair values on the applicable grant date. As a result, the Company recorded stock-based compensation expense of $350,000 and $720,000, respectively, for the three and six months ended June 30, 2010 and $203,000 and $420,000, respectively, for the three and six months ended June 30, 2011, in connection with awards made under the stock option plans.
 
The following table summarizes the activity relating to the Company’s stock options for the six months ended June 30, 2011:

   
Options
   
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at beginning of year
    2,666,000     $ 7.34          
Granted
    135,000       4.55          
Exercised
    (32,000 )     2.35          
Expired
    (17,000 )     5.60          
Forfeited
    (67,000 )     7.58          
                         
Outstanding at end of period
    2,685,000     $ 7.26  
6 years
  $ 1,372,000  
                           
Exercisable at end of period
    1,583,000     $ 9.63  
4 years
  $ 162,000  
 
 
15

 
 
The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing model reflecting the following weighted-average assumptions:

   
June 30,
 
   
2010
   
2011
 
             
Expected volatility
    53% - 59 %     54.1% - 57.2 %
Expected life of options
 
3 - 5 years
   
3 - 5 years
 
Risk free interest rate
    2 %     2 %
Dividend yield
    0 %     0 %
Weighted average fair value of options granted during the period
  $ 1.34     $ 1.91  
 
Expected volatility is based on historical volatility of the Company’s common stock and the expected life of options is based on historical data with respect to employee exercise periods.
 
The fair value of options vested during the six-month periods ended June 30, 2010 and 2011 was $1,333,000 and $537,000, respectively. The total intrinsic value of options exercised during the six-month periods ended June 30, 2010 and 2011 was $1,000 and $34,000, respectively.
 
As of June 30, 2011, there was approximately $1,474,000 of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 2.65 years.
 
The Company estimates forfeitures at the time of valuation and reduces expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
 
Restricted Stock
 
In 2006, the Company began granting restricted stock to employees, whereby the employees are contractually restricted from transferring the shares until they are vested. The stock is unvested stock at the time of grant and, upon vesting, there are no legal restrictions on the stock. The fair value of each share is based on the Company’s closing stock price on the date of the grant. A summary of all non-vested shares for the six months ended June 30, 2011 is as follows:

   
Non-vested
Shares
   
Weighted-
Average
Grant Date
Fair Value
 
             
Non-vested, beginning of year
    319,000     $ 3.07  
Granted
    63,000       4.55  
Vested
    (15,000 )     3.25  
Forfeited
           
                 
Non-vested, end of period
    367,000     $ 3.32  
 
The Company recorded stock-based compensation expense of $82,000 and $158,000, respectively, for the three- and six-month periods ended June 30, 2010 and $96,000 and $178,000, respectively, for the three- and six-month periods ended June 30, 2011, respectively, in connection with restricted stock grants. As of June 30, 2011, there was $755,000 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.56 years.

 
16

 

Performance Shares
 
In June 2009, the Compensation Committee granted 233,000 performance shares to key employees pursuant to the 2007 Equity Compensation Plan. The issuance of the shares of the Company’s common stock underlying the performance shares is subject to the achievement of stock price targets of the Company’s common stock at the end of a three-year measurement period ending in January 2012, with the ability to achieve prorated performance shares during interim annual measurement periods from January 31, 2009 to January 31, 2012. January of each year from 2009 to 2012 is used as the interim measurement date, since it is assumed that earnings announcements will take place in January with respect to the preceding year end. If the performance triggers are not met, the performance shares will not vest and will automatically be returned to the plan. If the performance triggers are met, then the shares will be issued to the employees. Under the applicable accounting guidance, stock compensation expense is recorded even if the aforementioned stock price targets are not met. Stock-based compensation expense related to these performance shares for the three- and six-month periods ended June 30, 2010 and 2011 was insignificant. As of June 30, 2011, there was $30,000 of total unrecognized compensation expense. That cost is expected to be recognized over a weighted-average period of 1.0 year.
 
In February 2010 and October 2010, the Compensation Committee granted 44,000 and 50,000 performance shares, respectively, to key employees pursuant to the 2007 Equity Compensation Plan. The issuance of the shares of the Company’s common stock underlying the performance shares is subject to the achievement of stock price targets of the Company’s common stock at the end of a three-year measurement period ending in October 2013, with the ability to achieve prorated performance shares during interim annual measurement periods from January 31, 2010 to January 31, 2013. January of each year from 2010 to 2013 is used as the interim measurement date, since it is assumed that earnings announcements will take place in January with respect to the preceding year end. If the performance triggers are not met, the performance shares will not vest and will automatically be returned to the plan. If the performance triggers are met, then the shares will be issued to the employees. Under the applicable accounting guidance, stock compensation expense is recorded even if the aforementioned stock price targets are not met. Stock-based compensation expense related to these performance shares for the three- and six-month periods ended June 30, 2010 and 2011 was insignificant. As of June 30, 2011, there was $16,000 of total unrecognized compensation expense. That cost is expected to be recognized over a weighted-average period of 1.9 years.
 
NOTE 15 — PRODUCT WARRANTIES
 
The Company warrants its transportation asset management products against defects in materials and workmanship for a period of 12 months from the date of acceptance of the product by the customer. The customers may purchase an extended warranty providing coverage up to a maximum of 60 months. A provision for estimated future warranty costs is recorded for expected or historical warranty matters related to equipment shipped and is included in accounts payable and accrued expenses in the condensed consolidated balance sheet as of December 31, 2010 and June 30, 2011.
 
The following table summarizes warranty activity for the six-month periods ended June 30, 2010 and 2011:

   
Six Months Ended
June 30,
 
   
2010
   
2011
 
             
Accrued warranty reserve, beginning of period
  $ 2,053,000     $ 2,069,000  
Additional warranty reserve based on final allocation of the purchase price
    604,000        
                 
      2,657,000       2,069,000  
Accrual for product warranties issued
    57,000       140,000  
Product replacements and other warranty expenditures
    (598,000 )     (422,000 )
Expiration of warranties
    (11,000 )     (147,000 )
                 
Accrued warranty reserve, end of period
  $ 2,105,000     $ 1,640,000  
 
 
17

 
 
NOTE 16 — INCOME TAXES
 
The Company accounts for income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As of June 30, 2011, the Company had provided a valuation allowance to fully reserve its net operating loss carry forwards, primarily as a result of anticipated net losses for income tax purposes.
 
NOTE 17 — FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The carrying amounts of cash equivalents, accounts receivable, and investments in securities are carried at fair value and accounts payable and other liabilities approximate their fair values due to the short period to maturity of these instruments.
 
NOTE 18 — CONCENTRATION OF CUSTOMERS
 
Two customers accounted for 21% and 10% of the Company’s revenue and 18% and 16%, respectively, of the Company’s accounts receivable during the six-month period ended and as of June 30, 2011.
 
One customer accounted for 30% of the Company’s revenue and 18% of the Company’s accounts receivable during the six-month period ended June 30, 2010.
 
NOTE 19 — STOCK REPURCHASE PROGRAM
 
On November 3, 2010, the Company’s Board of Directors authorized the repurchase of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $3,000,000 pursuant to a share repurchase program. The repurchases under the share repurchase program are made from time to time in the open market or in privately negotiated transactions and are funded from the Company’s working capital. The amount and timing of such repurchases will be dependent upon the price and availability of shares, general market conditions and the availability of cash, as determined at the discretion of the Company’s management. All shares of common stock repurchased under the Company’s share repurchase program are held as treasury stock. For the six-month period ended June 30, 2011, the Company purchased approximately 159,000 shares of its common stock in open market transactions under the stock repurchase program for an aggregate purchase price of $725,000. As of June 30, 2011, the Company has purchased approximately 195,000 shares of its common stock in open market transactions under the stock repurchase program for an aggregate purchase price of approximately $824,000, or an average cost of $4.22 per share.
 
In addition, on May 3, 2007, the Company previously had announced that its Board of Directors had authorized the repurchase of issued and outstanding shares of our common stock having an aggregate value of up to $10,000,000 pursuant to a share repurchase program (the “2007 Repurchase Program”). The Company did not purchase any shares of its common stock under the 2007 Repurchase Program during the six-month period ended June 30, 2011. As of June 30, 2011, the Company had purchased approximately 1,075,000 shares of its common stock in open market transactions under the 2007 Repurchase Program for an aggregate purchase price of approximately $9,970,000, or an average cost of $9.27 per share. The repurchases were funded from the Company’s working capital, and the amount and timing of such repurchases depended upon the price and availability of shares, general market conditions and the availability of cash, as determined at the discretion of our management. The 2007 Repurchase Program does not have an expiration date, and the Company may discontinue or suspend the 2007 Repurchase Program at any time. All shares of common stock repurchased under the 2007 Repurchase Program are held as treasury stock.
 
NOTE 20 — COMPREHENSIVE LOSS
 
Comprehensive loss includes net loss and unrealized gains or losses on available-for-sale investments and foreign currency translation gains and losses. Cumulative unrealized gains and losses on available-for-sale investments are reflected as accumulated other comprehensive loss in stockholders’ equity on the Company’s condensed consolidated balance sheet. The components of our comprehensive income are as follows:

   
For the three months ended
   
For the six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Net loss
   
(4,026,000
)
 
$
(2,043,000
)
 
$
(8,089,000
)
 
$
(3,808,000
)
Unrealized gain on available-for-sale marketable securities
   
22,000
     
56,000
     
88,000
     
46,000
 
Foreign currency translation
   
(64,000
   
10,000
     
(89,000
   
72,000
 
                                 
Total other comprehensive loss
 
$
(4,068,000
)
 
$
(1,977,000
)
 
$
(8,090,000
)
 
$
(3,690,000
)
 
The accumulated balances for each classification of other comprehensive loss are as follows:

   
Foreign
currency
translation
gains
(losses)
   
Unrealized
gain (losses)
on
investments
   
Accumulated
other
comprehensive
income
 
                   
Balance at January 1, 2011
  $ (22,000 )   $ (15,000 )   $ (37,000 )
Net current period change
    72,000       46,000       118,000  
Reclassification adjustments for gains (losses) reclassified into income
    -       -       -  
                         
Balance at June 30, 2011
  $ 50,000     $ 31,000     $ 81,000  

 
18

 
 
NOTE 21 — WHOLLY OWNED FOREIGN SUBSIDIARIES
 
In May 2009, the Company formed an entity in Germany called I.D. Systems, GmbH (the “GmbH”). This foreign entity is wholly owned by I.D. Systems, Inc. The GmbH financial statements are consolidated with the financial statements of I.D. Systems, Inc.

   
For the three months ended
   
For the six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Net revenue
 
$
31,000
   
$
320,000
   
$
388,000
   
$
569,000
 
                                 
Net loss
   
(192,000
   
(87,000
)
   
(199,000
   
(152,000
)
 
Total assets of GmbH were $1,051,000 and $1,145,000 as of December 31, 2010 and June 30, 2011, respectively. The GmbH operates in a local currency environment using the Euro as its functional currency.
 
In October 2009, the Company acquired Didbox Ltd. (“Didbox”). This foreign entity is wholly owned by I.D. Systems, Inc. and is headquartered in the United Kingdom. The Didbox financial statements are consolidated with the financial statements of I.D. Systems, Inc. as of the effective date of the acquisition.

   
For the three months ended
   
For the six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Net revenue
 
$
108,000
   
$
239,000
   
$
207,000
   
$
416,000
 
                                 
Net (loss) income
   
(23,000
)    
6,000
 
   
(48,000
   
4,000
 
 
Total assets of Didbox were $719,000 and $842,000 as of December 31, 2010 and June 30, 2011, respectively. Didbox operates in a local currency environment using the British Pound as its functional currency.
 
Income and expense accounts of foreign operations are translated at actual or weighted-average exchange rates during the period. Assets and liabilities of foreign operations that operate in a local currency environment are translated to U.S. dollars at the exchange rates in effect at the balance sheet date, with the related translation gains or losses reported as components of accumulated other comprehensive income/loss in consolidated stockholders’ equity. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature with the GmbH resulted in translation (loss) gain of $(89,000) and $72,000 for the six months ended June 30, 2010 and 2011, respectively, which is included in comprehensive loss in the consolidated statement of changes in stockholders’ equity.
 
Gains and losses resulting from foreign currency transactions are included in determining net income or loss. Foreign currency transactions (losses) gains for the three- and six- month periods ended June 30, 2010 of $(15,000)and $(33,000), respectively, and for the three and six months ended June 30,2011 of $9,000 and $28,000, respectively, are included as an offset to selling, general and administrative expenses in the condensed consolidated statement of operations.
 
 
19

 
 
NOTE 22 — RIGHTS AGREEMENT
 
In July 2009, the Company amended its Amended and Restated Certificate of Incorporation in order to create a new series of preferred stock, to be designated the “Series A Junior Participating Preferred Stock” (hereafter referred to as “Preferred Stock”). Shareholders of the Preferred Stock will be entitled to certain minimum quarterly dividend rights, voting rights, and liquidation preferences. Because of the nature of the Preferred Stock’s dividend, liquidation and voting rights, the value of a share of Preferred Stock is expected to approximate the value of one share of the Company’s common stock.
 
In July 2009, the Company also adopted a shareholder rights plan (the “Rights Plan”), which entitles the holders of the rights to purchase from the Company 1/1,000th (subject to prospective anti-dilution adjustments) of a share of Preferred Stock of the Company at a purchase price of $19.47 (a “Right”). The Rights Plan has a three-year term with the possibility of two separate three-year renewals. Until a Right is exercised or exchanged in accordance with the provisions of the rights agreement governing the Rights Plan, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote for the election of directors or upon any matter submitted to stockholders of the Company or to receive dividends or subscription rights. The Rights were registered with the Securities and Exchange Commission in July 2009.
 
On June 29, 2009, the Board of Directors of the Company declared a dividend of one Right for each outstanding share of common stock. The dividend was paid on July 13, 2009 to the stockholders of record on that date.
 
NOTE 23 — COMMITMENTS AND CONTINGENCIES
 
Except for normal operating leases, the Company is not currently subject to any material commitments.
 
Contingencies
 
The Company is not currently subject to any material commitments and legal proceedings, nor, to management’s knowledge, is any material legal proceeding threatened against the Company.
 
Severance agreements
 
The Company entered into severance agreements with five of its executive officers. The severance agreements, each of which is substantially identical in form, provide each executive with certain severance and change in control benefits upon the occurrence of a “Trigger Event,” as defined in the severance agreements. As a condition to the Company’s obligations under the severance agreements, each executive has executed and delivered to the Company a restrictive covenants agreement.
 
Under the terms of the severance agreements, each executive is entitled to the following: (i) a cash payment at the rate of the executive’s annual base salary as in effect immediately prior to the Trigger Event for a period of 12 or 18 months, depending on the executive, (ii) continued healthcare coverage during the severance period, (iii) partial accelerated vesting of the executive’s previously granted stock options and restricted stock awards, and (iv) as applicable, an award of “Performance Shares” under the Restricted Stock Unit Award Agreement previously entered into between the Company and the executive.
 
 
20

 
 
NOTE 24 — RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU addresses the presentation of comprehensive income and provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions of this ASU, which are effective for the first interim or annual period beginning on or after December 15, 2011, do not change the items that must be reported in other comprehensive income.
 
 
21

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of the consolidated financial condition and results of operations of I.D. Systems, Inc. and its subsidiaries (“I.D. Systems,” the “Company,” “we,” “our” or “us”) should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1, of this report. In the following discussions, most percentages and dollar amounts have been rounded to aid presentation, and, accordingly, all amounts are approximations.
 
Cautionary Note Regarding Forward-Looking Statements
 
This report contains various forward-looking statements made pursuant to the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 and information that is based on management’s beliefs as well as assumptions made by and information currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to be correct. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “predict,” “project,” and similar expressions or words, or the negatives of those words, are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and should be aware that the Company’s actual results could differ materially from those described in the forward-looking statements due to a number of factors, including, without limitation, business conditions and growth in the wireless tracking industries, general economic conditions, lower than expected customer orders or variations in customer order patterns, competitive factors including increased competition, changes in product and service mix, and resource constraints encountered in developing new products, and other factors described under “Risk Factors” set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and other filings with the Securities and Exchange Commission (the “SEC”). Any forward-looking statements should be considered in light of these factors. Unless otherwise required by law, the Company undertakes no obligation, and expressly disclaims any obligation, to update or publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, or otherwise.
 
The Company makes available through its internet website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports and other filings made by the Company with the SEC, as soon as practicable after the Company electronically files such reports and filings with the SEC. The Company’s website address is www.id-systems.com. The information contained in the Company’s website is not incorporated by reference in this report.
 
Overview
 
We develop, market and sell wireless solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles, such as forklifts, airport ground support equipment, rental vehicles, and transportation assets, such as dry van trailers, refrigerated trailers, railcars and containers. Our patented systems utilize radio frequency identification (RFID), Wi-Fi, satellite or cellular communications, and sensor technology to address the needs of organizations to control, track, monitor and analyze their assets. Our solutions enable customers to achieve tangible economic benefits by making timely, informed decisions that increase the security, productivity and efficiency of their operations.
 
We have focused our business activities on three primary applications: (i) industrial fleet management, (ii) transportation asset management, and (iii) rental fleet management. Our solution for industrial fleet management allows our customers to reduce operating costs and capital expenditures and to comply with certain safety regulations by accurately and reliably measuring and controlling fleet activity. This solution also enhances security at industrial facilities and areas of critical infrastructure, such as airports, by controlling access to, and restricting the use of, vehicles and equipment. Our solution for transportation asset management allows our customers to increase revenue per asset deployed, reduce fleet size, and improve the monitoring and control of sensitive cargo. Our solution for rental fleet management assists rental car companies in generating higher revenue by more accurately tracking vehicle data, such as fuel consumption and odometer readings, and improving customer service by expediting the rental and return processes. In addition, our wireless solution for “carsharing” enables rental car companies to establish a network of vehicles positioned strategically around cities, control vehicles remotely, manage member reservations by phone or Internet, and charge members for vehicle use by the hour.
 
In addition to focusing on these core applications, we adapt our systems to meet our customers’ broader asset management needs and seek opportunities to expand our solution offerings through strategic acquisitions. In 2009, for example, we acquired Didbox Ltd., a privately held, United Kingdom-based manufacturer and marketer of vehicle operator identification systems, which provides us with a wider range of industrial vehicle management solutions and expands our base of operations in Europe. On January 7, 2010, we acquired the Asset Intelligence business unit of the General Electric Company, which provides trailer, railcar, and container tracking solutions for manufacturers, retailers, shippers and freight transportation providers, through the acquisition of Asset Intelligence, LLC (“Asset Intelligence” or “AI”), which became our wholly owned subsidiary following the acquisition. We believe that the Asset Intelligence business complements the Company’s historical businesses, as the focus of Asset Intelligence on trucking, rail, and intermodal applications significantly expands the scope of assets addressed by the Company’s product solutions. The web and mobile communications technologies of Asset Intelligence also complement I.D. Systems’ portfolio of wireless asset management patents. In addition, the acquisition has provided the Company with access to a broader base of customers.
 
 
22

 
 
AI combines web-based software technologies with satellite and cellular communications to deliver data-driven telematics solutions for supply chain asset management. These solutions help secure and optimize the performance of trailers, railcars, containers, and the freight they carry, enabling shippers and carriers to maximize security and efficiency throughout their supply chains.
 
AI’s VeriWise™ product platform provides comprehensive real-time data for faster, more informed decision-making in multiple supply chain applications:

 
Asset Optimization—combining web-based asset visibility and advanced telemetry data to monitor the condition of fleet assets, streamline asset deployment, optimize utilization, and maximize return on investment.

 
Cold Chain Management—maintaining the condition and quality of temperature-sensitive cargo from point A to point B, and all the points in between.

 
Fleet Maintenance—utilizing sensor technologies, real-time data and a wealth of transportation maintenance knowledge to help control maintenance costs, improve preventative maintenance practices, increase asset up-time, extend asset life, and reduce overall cost of ownership.

 
Fuel Management—monitoring key factors in fuel consumption, such as tire pressure and engine idle time, to help optimize fuel performance and reduce transportation costs.

 
Security & Safety—protecting valuable assets and cargo throughout the supply chain.
 
We sell our solutions to both executive and division-level management. Typically, our initial system deployment serves as a basis for potential expansion across the customer’s organization. We work closely with customers to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments. Post-implementation, we consult with our customers to further extend and customize the benefits to the enterprise by delivering enhanced analytics capabilities.
 
We market and sell our solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as automotive manufacturing, heavy industry, retail and wholesale distribution, transportation, aviation, aerospace and defense, homeland security and vehicle rental.
 
 
23

 
 
Risks to Our Business
 
During the six months ended June 30, 2011, we generated revenues of $16.2 million, and the Wal-Mart Stores, Inc. and Ford Motor Company accounted for 21% and 10% of our revenues, respectively. During the six months ended June 30, 2010, we generated revenues of $12.1 million, and the Wal-Mart Stores, Inc. accounted for 30% of our revenues.
 
We are highly dependent upon sales of our system to a few customers. The loss of any of these key customers, or any material reduction in the amount of our products they purchase during a particular period, could materially and adversely affect our revenues for such period. Conversely, a material increase in the amount of our products purchased by a key customer (or customers) during a particular period could result in a significant increase in our revenues for such period, and such increased revenues may not recur in subsequent periods. Some of these key customers, as well as other customers of the Company, operate in markets that have suffered business downturns in the past few years or may so suffer in the future, particularly in light of the current global economic downturn, and any material adverse change in the financial condition of such customers could materially and adversely affect our financial condition and results of operations. If we are unable to replace such revenue from existing or new customers, the market price of our common stock could decline significantly.
 
We expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions.
 
The timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the complexity of the customer’s organization and the difficulty of such deployment. Customers with substantial or complex organizations may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that customers will tend to place large orders sporadically with short lead times, may cause our revenue and results of operations to vary significantly and unexpectedly from quarter to quarter. These variations could materially and adversely affect the market price of our common stock.
 
Our ability to increase our revenues and generate net income will depend on a number of factors, including, for example, our ability to:

 
increase sales of products and services to our existing customers;

 
convert our initial programs into larger or enterprise-wide purchases by our customers;

 
increase market acceptance and penetration of our products; and

 
develop and commercialize new products and technologies.
 
Additional risks and uncertainties to which we are subject are described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
Critical Accounting Policies
 
For the six months ended June 30, 2011, there were no significant changes to the Company’s critical accounting policies as identified in its Annual Report on Form 10-K for the year ended December 31, 2010.
 
 
24

 
Results of Operations
 
The following table sets forth, for the periods indicated, certain operating information expressed as a percentage of revenue:

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Revenue:
                               
Products
   
30.4
%
   
47.5
%
   
31.7
%
   
48.0
%
Services
   
69.6
     
52.5
     
68.3
     
52.0
 
                         
     
100.0
     
100.0
     
100.0
     
100.0
 
Cost of revenues:
                               
Cost of products
   
14.4
     
28.1
     
15.2
     
28.0
 
Cost of services
   
25.5
     
18.1
     
27.2
     
18.6
 
                                 
Total gross profit
   
60.1
     
53.8
     
57.6
     
53.4
 
                                 
Selling, general and administrative expenses
   
111.2
     
68.7
     
108.5
     
66.9
 
Research and development expenses
   
18.6
     
10.4
     
18.7
     
11.0
 
                                 
Loss from operations
   
(69.7
)
   
(25.3
)
   
(69.6
)
   
(24.5
)
Interest income, net
   
3.1
     
0.6
     
3.3
     
0.6
 
Interest expense
   
(0.4
)
   
-
     
(0.5
)
   
-
 
Other income
   
0.1
     
0.3
     
-
     
0.3
 
                                 
Net loss
   
(66.9
)%
   
(24.4
)%
   
(66.8
)%
   
(23.6
)%
 
 
25

 
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2011
 
The following table sets forth our revenues by product line for the periods indicated:

   
Three Months Ended
June 30,
 
   
2010
   
2011
 
Product revenue:
           
Industrial and rental fleet management
  $ 1,358,000     $ 3,148,000  
Transportation asset management
    471,000       811,000  
      1,829,000       3,959,000  
                 
Services revenue:
               
Industrial and rental fleet management
    808,000       1,137,000  
Transportation asset management
    3,376,000       3,237,000  
      4,184,000       4,374,000  
                 
    $ 6,013,000     $ 8,333,000  
 
REVENUES. Revenues increased by $2.3 million, or 38.6%, to $8.3 million in the three months ended June 30, 2011 from $6.0 million in the same period in 2010. The increase in revenue is principally attributable to an increase in industrial and rental fleet management revenue of $2.1 million to $4.3 million in 2011 from $2.2 million in 2010. Transportation asset management revenue increased $0.2 million to $4.0 million in 2011 from $3.8 million in 2010.
 
Revenues from products increased by $2.1 million, or 116.5%, to $4.0 million in the three months ended June 30, 2011 from $1.8 million in the same period in 2010. Industrial and rental fleet management product revenue increased by $1.8 million to $3.1 million in 2011 from $1.3 million in 2010. Transportation asset management product revenue increased by $0.3 million to $0.8 million in 2011 from $0.5 million in 2010. The increase in industrial and rental fleet management product revenue of $1.8 million resulted principally from increased product sales to Ford Motor Company of $0.8 million, The Raymond Corporation of $0.3 million, Avis Budget Group, Inc. of $0.2 million and the Wal-Mart Stores, Inc. of $0.3 million.
 
Revenues from services increased by $0.2 million, or 4.5%, to $4.4 million in the three months ended June 30, 2011 from $4.2 million in the same period in 2010. Industrial and rental fleet management service revenue increased $0.3 million to $1.1 million in 2011 from $0.8 million in 2010. Transportation asset management service revenue decreased $0.1 million to $3.2 million in 2011 from $3.3 million in 2010.
 
The following table sets forth our cost of revenues by product line for the periods indicated:

   
Three Months Ended
June 30,
 
   
2010
   
2011