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: September 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   ¨
 
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   þ  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 November 14, 2011, was 12,054,884.

 
 

 

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 September 30, 2011 (unaudited)
1
   
Condensed Consolidated Statements of Operations (unaudited) — for the three and nine months ended September 30, 2010 and 2011
2
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) — for the nine months ended September 30, 2011
3
   
Condensed Consolidated Statements of Cash Flows (unaudited) — for the nine months ended September 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
24
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
35
   
Item 4. Controls and Procedures
35
   
PART II — OTHER INFORMATION
 
   
Item 1. Legal Proceedings
36
   
Item 1A. Risk Factors
36
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
36
   
Item 5. Other Information
 
   
Item 6. Exhibits
37
   
Signatures
38
   
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,
   
September 30,
 
    2010*     2011  
           
(Unaudited)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 14,491,000     $ 12,803,000  
Investments – short term
    4,565,000       6,731,000  
Interest receivable
    53,000       70,000  
Accounts receivable, net of allowance for doubtful accounts of $161,000 and $264,000 in 2010 and 2011, respectively
    7,044,000       6,412,000  
Notes and sales-type lease receivable - current
    353,000       211,000  
Inventory, net
    7,295,000       8,420,000  
Prepaid expenses and other current assets
    1,211,000       1,110,000  
Deferred costs – current
    1,159,000       1,503,000  
                 
Total current assets
    36,171,000       37,260,000  
                 
Investments – long term
    9,364,000       8,486,000  
Notes and sales-type lease receivable – less current portion
    839,000       3,234,000  
Deferred costs – less current portion
    2,978,000       2,241,000  
Fixed assets, net
    3,853,000       3,147,000  
Goodwill
    1,837,000       1,837,000  
Intangible assets, net
    5,571,000       4,692,000  
Other assets
    272,000       307,000  
                 
    $ 60,885,000     $ 61,204,000  
                 
LIABILITIES
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 9,141,000     $ 8,224,000  
Deferred revenue
    2,186,000       3,235,000  
                 
Total current liabilities
    11,327,000       11,459,000  
                 
Deferred rent
    199,000       289,000  
Deferred revenue
    4,614,000       4,053,000  
                 
      16,140,000       15,801,000  
Commitments and Contingencies (Note 22)
               
                 
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 September 30, 2011, respectively; shares outstanding, 11,242,000 and 12,055,000 at December 31, 2010 and September 30, 2011, respectively
    121,000       121,000  
Additional paid-in capital
    105,156,000       101,489,000  
Accumulated deficit
    (49,470,000 )     (53,492,000 )
Accumulated other comprehensive (loss) income
    (37,000 )     13,000  
                 
      55,770,000       48,131,000  
                 
Treasury stock; 1,249,000 shares and 491,000 shares at cost at December 31, 2010 and September 30, 2011, respectively
    (11,025,000 )     (2,728,000 )
                 
Total stockholders’ equity
    44,745,000       45,403,000  
                 
Total liabilities and stockholders’ equity
  $ 60,885,000     $ 61,204,000  
 
*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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2011
   
2010
   
2011
 
Revenue:
                       
Products
 
$
2,542,000
   
$
6,912,000
   
$
6,394,000
   
$
14,675,000
 
Services
   
3,948,000
     
4,372,000
     
12,233,000
     
12,776,000
 
                                 
     
6,490,000
     
11,284,000
     
 18,627,000
     
27,451,000
 
Cost of revenue:
                               
Cost of products
   
1,507,000
     
3,833,000
     
3,347,000
     
8,359,000
 
Cost of services
   
1,595,000
     
1,529,000
     
4,891,000
     
4,531,000
 
                                 
     
3,102,000
     
5,362,000
     
8,238,000
     
12,890,000
 
                                 
Gross profit
   
3,388,000
     
5,922,000
     
 10,389,000
     
14,561,000
 
                                 
Selling, general and administrative expenses
   
4,424,000
     
5,669,000
     
17,587,000
     
16,490,000
 
Research and development expenses
   
1,089,000
     
827,000
     
 3,362,000
     
2,603,000
 
                                 
Loss from operations
   
(2,125,000
)
   
(574,000
)
   
 (10,560,000
)
   
(4,532,000
)
                                 
Interest income
   
179,000
     
60,000
     
575,000
     
160,000
 
Interest expense
   
(1,000
)
   
-
     
(56,000
)
   
-
 
Other income, net
   
89,000
     
300,000
     
94,000 
     
350,000
 
                                 
Net loss
 
$
(1,858,000
)
 
$
(214,000
)
 
$
(9,947,000
)
 
$
(4,022,000
)
                                 
Net loss per share — basic and diluted
 
$
(0.17
)
 
$
(0.02
)
 
$
(0.89
)
 
$
(0.37
)
                                 
Weighted average common shares outstanding — basic and diluted
   
11,138,000
     
11,173,000
     
11,170,000
     
10,969,000
 
 
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
               
Other
             
   
Number of
         
Additional
         
Comprehensive (Loss)
             
   
Shares
   
Amount
   
Paid-in Capital
   
Accumulated Deficit
   
Income
   
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
                            (4,022,000 )                     (4,022,000 )
Comprehensive gain— unrealized gain on investments
                            17,000             17,000  
Foreign currency translation adjustment
                            33,000             33,000  
                                                         
Total comprehensive loss
                                                    (3,972,000 )
                                                         
Shares repurchased
                                  (1,050,000 )     (1,050,000 )
Shares purchased by Avis – issued from treasury stock
                    (4,789,000                     9,394,000       4,605,000  
Warrants issued to Avis
                    137,000                               137,000  
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
                274,000                         274,000  
Stock based compensation — options and performance shares
                637,000                         637,000  
                                                         
Balance at September 30, 2011 (Unaudited)
    12,546,000     $ 121,000     $ 101,489,000     $ (53,492,000 )   $ 13,000     $ (2,728,000 )   $ 45,403,000  
 
See accompanying notes to condensed consolidated financial statements.
 
 
3

 

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

   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2011
 
             
Cash flows from operating activities:
           
             
Net loss
  $ (9,947,000 )   $ (4,022,000 )
Adjustments to reconcile net loss to cash used in operating activities:
               
Bad debt expense
    92,000       165,000  
Stock-based compensation expense
    1,182,000       911,000  
Depreciation and amortization
    1,447,000       1,796,000  
Other non-cash items
    (103,000 )     73,000  
Issuance of warrants
            137,000  
Changes in:
               
Accounts receivable
    1,548,000       498,000  
Note and lease receivable
    224,000       (2,254,000 )
Inventory
    1,720,000       (1,125,000 )
Prepaid expenses and other assets
    (336,000 )     66,000  
Deferred costs
    (2,027,000 )     393,000  
Deferred revenue
    1,959,000       488,000  
Accounts payable and accrued expenses
    265,000       (917,000 )
                 
Net cash used in operating activities
    (3,976,000 )     (3,791,000 )
                 
Cash flows from investing activities:
               
Expenditures for fixed assets including website development costs
    (1,406,000 )     (211,000 )
Business acquisition
    (15,000,000 )     -  
Purchase of investments
    (10,284,000 )     (2,889,000 )
Proceeds from sales and maturities of investments
    38,872,000       1,618,000  
                 
Net cash provided by (used in) investing activities
    12,182,000       (1,482,000 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of shares to Avis
    -       4,605,000  
Proceeds from exercise of stock options
    3,000       35,000  
Purchase of treasury shares
    -       (1,050,000 )
Principal payments on line of credit
    (11,638,000 )     -  
                 
Net cash (used in) provided by financing activities
    (11,635,000 )     3,590,000  
                 
Effect of foreign exchange rate changes on cash and cash equivalents
    (3,000 )     (5,000 )
Net decrease in cash and cash equivalents
    (3,432,000 )     (1,688,000 )
Cash and cash equivalents — beginning of period
    19,481,000       14,491,000  
                 
Cash and cash equivalents — end of period
  $ 16,049,000       12,803,000  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Taxes
    -       -  
Interest
  $ 56,000       -  
                 
Noncash activities:
               
Unrealized gain on investments
  $ 154,000     $ 17,000  
                 
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
September 30, 2011

NOTE 1 — BASIS OF PRESENTATION
 
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.

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 I.D. Systems (UK) Ltd (formerly 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 September 30, 2011, the consolidated results of its operations for the three- and nine-month periods ended September 30, 2010 and 2011, respectively, the consolidated change in stockholders’ equity for the nine months ended September 30, 2011 and the consolidated cash flows for the nine-month periods ended September 30, 2010 and 2011. The results of operations for the nine-month period ended September 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. Certain prior year amounts have been reclassified to conform to the 2011 presentation.

I.D. Systems, Inc. was incorporated in Delaware in 1993 and commenced operations in January 1994.

NOTE 2 — SIGNIFICANT TRANSACTIONS

Avis Budget Group, Inc. Transaction

In connection with the Master Agreement (as defined below), the Company entered into a Purchase Agreement (the “Purchase Agreement”), dated as of August 22, 2011 (the “Effective Date”), with Avis Budget Group, Inc. (“Avis Budget Group”), pursuant to which Avis Budget Group has agreed to purchase from the Company, for an aggregate purchase price of $4,604,500 (or $4.60 per share, which price was based on the average closing price of our common stock for the twenty trading days prior to the Effective Date), (i) 1,000,000 shares (the “Shares”) of the Company’s common stock, and (ii) a warrant (the “Warrant”) to purchase up to an aggregate of 600,000 shares of our common stock (the “Warrant Shares” and, collectively with the Shares and the Warrant, the “Securities”). The Company issued the Shares from treasury stock reflecting the cost of such shares on a specific identification basis.

The Warrant has an exercise price of $10.00 per share of common stock.  The Warrant is exercisable (i) with respect to 100,000 of the Warrant Shares, at any time after the Effective Date and on or before the fifth (5th) anniversary thereof, and (ii) with respect to 500,000 of the Warrant Shares, at any time on or after the date (if any) on which Avis Budget Car Rental, LLC (“ABCR”), a subsidiary of Avis Budget Group and the Avis entity that is the counterparty under the Master Agreement described below, executes and delivers to the Company SOW#2 (which is described below), and on or before the fifth (5th) anniversary of the Effective Date. The fair value of the warrant for 100,000 shares of approximately $137,000 was recorded as a sales incentive in the Condensed Consolidated Statement of Operations.  See Note 13 to the Unaudited Condensed Consolidated Financial Statements for additional information.

Also on the Effective Date, the Company and ABCR entered into a Master Software License, Information Technology Services and Equipment Purchase Agreement (the “Master Agreement”) for the Company’s system relating to radio frequency identification (RFID) enabled rental car management and virtual location rental (collectively, the “System”). The order was placed pursuant to a statement of work (“SOW”) issued under the Master Agreement and related agreements with ABCR.

The Master Agreement governs the terms and conditions of the sales and license, and orders for hardware and for other related services will be contained in SOWs issued pursuant to the Master Agreement.  The term of the Master Agreement continues until six (6) months after the termination or expiration of the last SOW under the Master Agreement.

 
5

 

ABCR will host the System. As part of the Master Agreement, the Company also will provide ABCR with services for ongoing maintenance and support of the System (the “Maintenance Services”) for a period of 60 months from installation of the equipment.  ABCR has the option to renew the period for twelve (12) months upon its expiry, and then after such 12-month period, the period can continue on a month-to-month basis (during which ABCR can terminate the period) for up to 48 additional months.

Under the terms of SOW#1, which was executed and delivered by ABCR on the Effective Date concurrent with the execution and delivery of the Master Agreement, ABCR has agreed to pay not less than $14,000,000 to the Company for the System and Maintenance Services, which covers 25,000 units, which relates to a limited subset of ABCR’s total fleet during this initial phase of the Master Agreement. ABCR also has an option to proceed with Statement of Work 2 (“SOW#2”), pursuant to which the Company would sell to ABCR additional units.  After ABCR purchases such additional units, then ABCR affiliates and franchisees will have the right to enter into agreements with the Company to purchase the System on substantially the same terms and conditions as are in the Master Agreement. The term of SOW#2 is sixty (60) months.

In 2009, the Company entered into a contract for a pilot agreement with ABCR pursuant to which the Company’s rental fleet management system was implemented on a portion of the customer’s fleet of vehicles. Concurrent with the execution of SOW#1, the contract for the pilot program was terminated and the payment terms for the vehicle management systems implemented under the pilot program were incorporated into SOW#1.  Under the terms of SOW#1, the Company is entitled to issue sixty (60) monthly invoices of up to $53,000 for active vehicle management systems installed under the former pilot program.  In the event that ABCR terminates SOW#1, then ABCR would be liable to the Company for the net present value of all future remaining charges under SOW#1 at a negotiated discount rate per annum, with the payment due on the effective date of termination. As discussed in Note 8 to the Unaudited Condensed Consolidated Financial Statements, the Company recognized the product revenue of approximately $2.0 million for these pilot units at the present value of the fixed product portion of the monthly fee and cost of product of approximately $1.1 million. The maintenance portion of the monthly invoices will be recognized as service income on a monthly basis.

The Master Agreement provides for a period of exclusivity (the “Exclusivity Period”) commencing on the Effective Date and ending twelve (12) months after delivery of the 5000th unit pursuant to SOW#1. Commencing on the effective date of SOW#2, the Exclusivity Period will continue (or resume, if the Exclusivity Period has elapsed by the effective date of SOW#2, provided that SOW#2 is executed within three (3) months of expiry, unless the Company has already entered into an agreement with another customer to sell the System) for a period of four (4) years. During the Exclusivity Period, the Company will not (i) sell the System to any ABCR Competitor (as defined in the Master Agreement) for the same purpose set forth in the Master Agreement, and/or (ii) market and/or engage in any sales discussions or negotiations regarding any sale of the System with any ABCR Competitor that is prohibited under clause (i) above.

The Master Agreement may be terminated by ABCR for cause (which is generally the Company’s material breach of its obligations under the Master Agreement), for convenience (subject to the termination fee detailed in the Master Agreement), upon a material adverse change to the Company (as defined in the Master Agreement), or for intellectual property infringement.  The Company does not have the right to unilaterally terminate the Master Agreement.

Asset Intelligence, LLC Acquisition

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 11 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 and rental fleets. 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.
  
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. 

 
6

 

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 nine-month periods ended September 30, 2010, the Company reported unrealized gains of $66,000 and $154,000, respectively, and for the three- and nine-month periods ended September 30, 2011, the Company reported unrealized (loss) gain of $29,000 and $17,000, 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 $3,510,000, classified by the contractual maturity date of the security as of September 30, 2011:

   
Fair Value
 
       
Due within one year
 
$
3,221,000
 
         
Due one year through three years
   
8,087,000
 
Due after three years
   
399,000
 
         
Long term
   
8,486,000
 
   
$
11,707,000
 

 
7

 

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

         
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gain
   
Loss
   
Value
 
Investments — short term
                       
Available for sale
                       
U.S. Treasury Notes
  $ 560,000     $ 1,000     $ -     $ 561,000  
Mutual funds
    3,586,000       -       (76,000 )     3,510,000  
Corporate bonds and commercial paper
    1,207,000       5,000       -       1,212,000  
Government agency bonds
    1,447,000       1,000       -       1,448,000  
                                 
Total available for sale — short term
    6,800,000       7,000       (76,000 )     6,731,000  
                                 
Marketable securities — long term
                               
Available for sale
                               
U.S. Treasury Notes
    5,139,000       33,000       -       5,172,000  
Government agency bonds
    761,000       3,000       -       764,000  
Corporate bonds and commercial paper
    2,515,000       35,000               2,550,000  
                                 
Total available for sale — long term
    8,415,000       71,000       -       8,486,000  
                                 
Total investments
  $ 15,215,000     $ 78,000     $ (76,000 )   $ 15,217,000  
 
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 September 30, 2011, the Company’s investments described above are classified as Level 1 for fair value measurements.

 
8

 

NOTE 6 — REVENUE RECOGNITION
 
The Company’s 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) sales 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 $196,000 and $426,000 of deferred equipment revenue during the three- and nine-month periods ended September 30, 2010, respectively, and $723,000 and $1,713,000 during the three- and nine-month periods ended September 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. 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 ratably 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.
 
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.

Deferred revenue as of December 31, 2010 and September 30, 2011 consists of the following:

   
December 31,
   
September 30,
 
   
2010
   
2011
 
             
Deferred activation fees
  $ 96,000     $ 218,000  
Deferred industrial equipment installation revenue
    367,000       105,000  
Deferred maintenance revenue
    798,000       894,000  
Deferred remote asset management product revenue
    5,539,000       6,071,000  
                 
      6,800,000       7, 288,000  
Less: Current portion
    2,186,000       3,235,000  
                 
Deferred revenue – less current portion
  $ 4,614,000     $ 4,053,000  
 
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 September 30, 2011, unbilled receivables were $-0- and $20,000, respectively, and are included in accounts receivable in the Condensed Consolidated Balance Sheets.

 
9

 

NOTE 7 — NOTES RECEIVABLE AND SALES-TYPE LEASE RECEIVABLE
 
Notes Receivable
 
Notes receivable of $330,000 and $250,000 at December 31, 2010 and September 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
 
$
250,000
 
Less: Current portion
   
35,000
 
         
Notes receivable - less current portion
 
$
215,000
 
 
Sales-type Lease Receivable
 
The present value of net investment in sales-type lease receivable of $862,000 and $3,195,000 at December 31, 2010 and September 30, 2011, respectively, is for principally five-year leases of the Company’s product including the Avis product pilot (see Notes 2 and 8 to the Unaudited Condensed Consolidated Financial Statements) and is reflected net of unearned income of $132,000 and $334,000 at December 31, 2010 and September 30, 2011, respectively, discounted at 4% – 14%.
 
Scheduled maturities of minimum lease payments outstanding as of September 30, 2011 are as follows:

Year ending December 31:
     
       
October - December 2011
 
$
176,000
 
2012
   
737,000
 
2013
   
776,000
 
2014
   
689,000
 
2015
   
515,000
 
Thereafter
   
302,000
 
         
     
3,195,000
 
Less: Current portion
   
176,000
 
         
Sales-type lease receivable – less current portion
 
$
3,019,000
 
 
NOTE 8 — DEFERRED COSTS
 
In 2009, the Company entered into a contract for a pilot program with ABCR, pursuant to which the Company’s rental fleet management system was implemented on a portion of ABCR’s fleet of vehicles. The term of the contract was for five years and ABCR was entitled to terminate the contract after 22 months, subject to a performance clause and early termination fees. As a result of the early termination clause, costs directly attributable to this contract, consisting principally of engineering and manufacturing costs, were being deferred until implementation of the system was completed. The deferred contract costs were charged to cost of product revenue in accordance with the cost recovery method, pursuant to which the deferred contract costs were reduced in each period by an amount equal to the product revenue recognized until all the capitalized costs were recovered, at which time the Company would recognize a gross profit, if any.

As described in Note 2 to the Unaudited Condensed Consolidated Financial Statements, concurrent with the execution of SOW#1 on August 22, 2011, the contract for the pilot program was terminated and payment terms for the vehicle management systems installed under the pilot program were incorporated into SOW#1.  Under the terms of SOW#1, the Company is entitled to issue sixty (60) monthly invoices of up to $53,000 for active vehicle management systems installed under the former pilot program. In the event that ABCR terminates SOW#1 then ABCR would be liable to the Company for the net present value of all future remaining charges under SOW#1 using the implicit rate in the lease, with the payment due on the effective date of termination. With the execution of SOW#1, the Company recognized the associated revenue since the sales price for the vehicle management systems implemented under the former pilot program is fixed and determinable and collectability is reasonably assured.  As a result of the change in contractual terms, which necessitated a new methodology of revenue recognition, during the third quarter of 2011, the Company recorded product revenue and a sales-type lease receivable for the net present value of the monthly product payments of approximately $2.0 million and recognized the remaining deferred contract costs of approximately $1.1 million to product cost of sales in the Condensed Consolidated Statement of Operations. The maintenance portion of the monthly invoices will be recognized as service income on a monthly basis.
 
The Company capitalized  $334,000  and $750,000 of such contract costs for the ABCR pilot program during the three- and nine-month periods ended September 30, 2010, respectively, and amortized $70,000 and $82,000 of such costs for the three- and nine-month periods ended September 30, 2010, respectively. As a result of the change in contractual terms on August 22, 2011, and the resultant change in the revenue recognition methodology, the unamortized deferred contract costs of approximately $1.1 million were charged to cost of product sales.
 
Deferred product costs consist of transportation asset management equipment costs deferred in accordance with our revenue recognition policy (see Note 6 to the Unaudited Condensed Consolidated Financial Statements).
 
Deferred costs consist of the following:

   
December 31,
2010
   
September 30,
2011
 
Deferred contract costs
 
$
694,000
   
$
-
 
Deferred product costs
   
3,443,000
     
3,744,000
 
                 
     
4,137,000
     
3,744,000
 
Less: Current portion
   
1,159,000
     
1,503,000
 
                 
   
$
2,978,000
   
$
2,241,000
 

 
10

 

NOTE 9 — 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 September 30, 2011 consist of the following:

   
December 31,
2010
   
September 30,
2011
 
Components
 
$
4,244,000
   
$
5,163,000
 
Finished goods
   
3,051,000
     
3,257,000
 
                 
   
$
7,295,000
   
$
8,420,000
 
 
NOTE 10 — FIXED ASSETS
 
Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:

   
December 31,
2010
   
September 30,
2011
 
Equipment
 
$
1,026,000
   
$
1,092,000
 
Computer software
   
2,982,000
     
3,103,000
 
Computer hardware
   
1,751,000
     
1,774,000
 
Furniture and fixtures
   
329,000
     
330,000
 
Automobiles
   
47,000
     
47,000
 
Leasehold improvements
   
246,000
     
246,000
 
                 
     
6,381,000
     
6,592,000
 
Accumulated depreciation and amortization
   
(2,528,000
)
   
(3,445,000
)
                 
   
$
3,853,000
   
$
3,147,000
 
 
Depreciation and amortization expense for the three- and nine-month periods ended September 30, 2010 was $308,000 and $938,000, respectively, and for the three- and nine-month periods ended September 30, 2011 was $292,000 and $917,000, respectively. This includes amortization of costs associated with computer software and website development for the three- and nine-month periods ended September 30, 2010 of $147,000 and $429,000, respectively, and for the three- and nine-month periods ended September 30, 2011 of $155,000 and $466,000, 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 $842,000 and $121,000 for website enhancements for the nine months ended September 30, 2010 and 2011, respectively.

 
11

 

NOTE 11 — 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 nine months ended September 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.

 
12

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

   
Three Months
   
Nine Months
 
   
Ended
   
Ended
 
   
September 30, 2010
   
September 30, 2010
 
             
Revenues
  $ 3,699,000     $ 11,471,000  
Operating loss
    (434,000 )     (2,555,000 )
 
The following table represents the combined pro forma revenue and earnings for the nine-month period ended September 30, 2010:

         
Nine Months
 
   
Nine Months
   
Ended
 
   
Ended
   
September 30, 2010
 
   
September 30, 2010
   
Pro Forma
 
   
Historical
   
Combined
 
             
Revenue
 
$
18,627,000
   
$
18,869,000
 
Net loss
   
(9,947,000
)
   
(9,878,000
)
Net loss per share — basic and diluted
   
(0.89
)
   
(0.88
)

There have been no changes in the carrying amount of goodwill from January 1, 2011 to September 30, 2011.

 
13

 
 
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 September 30, 2011:
 
September 30, 2011
 
Useful
Lives
(In Years)
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
 
                         
Amortized:
                       
Patents
 
11
   
$
1,489,000
   
$
(237,000
)
 
$
1,252,000
 
Tradename
 
5
     
200,000
     
(70,000
)
   
130,000
 
Non-competition agreement
 
3
     
234,000
     
(137,000
)
   
97,000
 
Technology
 
5
     
50,000
     
(19,000
)
   
31,000
 
Workforce
 
5
     
33,000
     
(12,000
)
   
21,000
 
Customer relationships
 
5
     
4,499,000
     
(1,577,000
)
   
2,922,000
 
                               
           
6,505,000
     
(2,052,000
)
   
4,453,000
 
                               
Unamortized:
                             
Customer list
         
104,000
     
     
104,000
 
Trademark and Tradename
         
135,000
     
     
135,000
 
                               
           
239,000
     
     
239,000
 
                               
Total
       
$
6,744,000
   
$
(2,052,000
)
 
$
4,692,000
 

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 nine-month periods ended September 30, 2010 was $169,000 and $509,000, respectively, and for the three- and nine-month periods ended September 30, 2011 was $292,000 and $879,000, respectively. Future amortization expense for each of the five succeeding fiscal years for these intangible assets is as follows:

Year ending December 31:
     
       
October – December 2011
 
$
291,000
 
2012
   
1,170,000
 
2013
   
1,091,000
 
2014
   
1,086,000
 
2015
   
135,000
 

 
14

 
 
NOTE 12 — NET LOSS PER SHARE OF COMMON STOCK
 
Net loss per share for the three- and nine-month periods ended September 30, 2010 and 2011 are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2011
   
2010
   
2011
 
Basic and diluted loss per share
                       
Net loss
 
$
(1,858,000
)
 
$
(214,000
)
 
$
(9,947,000
)
 
$
(4,022,000
)
                                 
Weighted-average shares outstanding
   
11,138,000
     
11,173,000
     
11,170,000
     
10,969,000
 
                                 
Basic and diluted net loss per share
 
$
(0.17
)
 
$
(0.02
)
 
$
(0.89
)
 
$
(0.37
)
 
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 nine-month periods ended September 30, 2010, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of an aggregate of 2,980,000 outstanding stock options and restricted stock awards would have been anti-dilutive. For the three- and nine-month periods ended September 30, 2011, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of an aggregate of 3,652,000 outstanding stock options, restricted stock and warrants would have been anti-dilutive.

 
15

 
 
NOTE 13 — 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 $241,000 and $961,000, respectively, for the three- and nine-month periods ended September 30, 2010 and $190,000 and $610,000, respectively, for the three- and nine-month periods ended September 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 nine months ended September 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
   
5 years
   
$
1,831,000
 
                               
Exercisable at end of period
   
1,599,000
   
$
9.65
   
4 years
   
$
231,000
 

 
16

 
 
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:

   
September 30,
 
   
2010
   
2011
 
             
Expected volatility
   
53% - 59
%
   
54% - 57
%
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 nine-month periods ended September 30, 2010 and 2011 was $1,512,000 and $634,000, respectively. The total intrinsic value of options exercised during the nine-month periods ended September 30, 2010 and 2011 was $1,000 and $34,000, respectively.
 
As of September 30, 2011, there was approximately $1,290,000 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 2.48 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 nine months ended September 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 $41,000 and $199,000, respectively, for the three- and nine-month periods ended September 30, 2010 and $96,000 and $274,000, respectively, for the three- and nine-month periods ended September 30, 2011, respectively, in connection with restricted stock grants. As of September 30, 2011, there was $659,000 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.38 years.

 
17

 
 
Performance Shares
 
In June 2009, the Compensation Committee granted an aggregate of 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 nine-month periods ended September 30, 2010 and 2011 was insignificant. As of September 30, 2011, there was $22,000 of total unrecognized compensation expense related to these awards. That cost is expected to be recognized over a weighted-average period of 0.8 year.
 
In February 2010 and October 2010, the Compensation Committee granted an aggregate of 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 nine-month periods ended September 30, 2010 and 2011 was insignificant. As of September 30, 2011, there was $13,000 of total unrecognized compensation expense. That cost is expected to be recognized over a weighted-average period of 1.7 years.

Warrants

In connection with the Purchase Agreement entered into on August 22, 2011 (the “Effective Date”), the Company issued and sold to Avis Budget Group a warrant (the “Warrant”) to purchase up to an aggregate of 600,000 shares of the Company’s common stock (collectively, the “Warrant Shares”) at an exercise price of $10 per share of common stock. The Warrant is exercisable (i) with respect to 100,000 shares of common stock, at any time after the Effective Date and on or before the fifth (5th ) anniversary thereof, and (ii) with respect to 500,000 shares of common stock, at any time on or after the date (if any) on which Avis Budget Car Rental, LLC, a Delaware limited liability company (“ABCR”) and the subsidiary of Avis Budget Group that is  the counterparty under the Master Agreement (described in Note 2 to the Unaudited Condensed Consolidated Financial Statements), executes and delivers to the Company SOW#2 (as defined in the Master Agreement) and on or before the fifth (5th) anniversary of the Effective Date.

The Warrant may be exercised by means of a “cashless exercise” solely in the event that on the later of (i) the one-year anniversary of the Effective Date and (ii) the date on which the Warrant is exercised by the holder, the Company is eligible to file a registration statement on Form S-3 to register the Warrant Shares for resale by the holder and a re-sale registration statement on Form S-3 registering the Warrant Shares for resale by the holder is not then declared effective by the Securities and Exchange Commission (the “SEC”) and available for use by the holder.  The Company has agreed to file such a registration statement (on Form S-3 only, or a successor thereto) within 30 days of the holder’s request therefor, and to have such registration statement declared effective within 90 days of such request, if there is no review by the Staff of the SEC, and within 120 days, if there has been a review by the Staff of the SEC. As of September 30, 2011, the Company has not yet been requested to file such a registration statement.

The exercise price of the Warrant and, in some cases, the number of shares of our common stock issuable upon exercise, are subject to adjustment in the case of stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to holders of common stock.  In the event of a fundamental transaction involving the Company, such as a merger, consolidation, sale of substantially all of the Company’s assets or similar reorganization or recapitalization, the holder will be entitled to receive, upon exercise of the Warrant, any securities or other consideration received by the holders of the Company’s common stock pursuant to the fundamental transaction.

The Company is required to reserve a sufficient number of shares of common stock for the purpose enabling the Company to issue the Shares pursuant to this Purchase Agreement and Warrant Shares pursuant to any exercise of the Warrants. As of September 30, 2011, the Company has sufficient shares reserved.

The 100,000 Warrant Shares which vested on the Effective Date were valued at $137,000 using a Black-Scholes pricing model using the following assumptions: risk-free interest rate of 0.941%, expected life of 5 years, expected volatility of 54.6% and an expected dividend yield of 0.0%.  The $137,000 fair value was recorded as reduction of product revenue pursuant to the applicable accounting guidance. The Company has determined that the warrants should be accounted for as an equity instrument.
 
 
18

 

The remaining 500,000 Warrant Shares underlying the Warrant, which vest upon the execution of SOW#2, have not been valued at this time since the Company has not determined that it is probable that SOW#2 will be executed and that the Warrant will become exercisable for these remaining 500,000 Warrant Shares.  Since there is no penalty for failure to execute SOW#2, there is no performance commitment date and, therefore, there is no measurement date for these 500,000 Warrant Shares underlying the Warrant until SOW#2 is executed.

NOTE 14 — 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 September 30, 2011.
 
The following table summarizes warranty activity for the nine-month periods ended September 30, 2010 and 2011:

   
Nine Months Ended
September 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
   
36,000
     
356,000
 
Product replacements and other warranty expenditures
   
(598,000
)
   
(438,000
)
Expiration of warranties
   
(44,000
)
   
(171,000
)
                 
Accrued warranty reserve, end of period
 
$
2,051,000
   
$
1,816,000
 

 
19

 

NOTE 15 — 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 September 30, 2011, the Company had provided a valuation allowance to fully reserve its net operating loss carry-forwards and other items giving rise to deferred tax assets, primarily as a result of anticipated net losses for income tax purposes.
 
NOTE 16 — 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 17 — CONCENTRATION OF CUSTOMERS
 
Two customers accounted for 18% and 10%, respectively, of the Company’s revenue and 15%, and 18% respectively, of the Company’s accounts receivable during the nine-month period ended and as of September 30, 2011.
 
One customer accounted for 28% of the Company’s revenue and 21% of the Company’s accounts receivable during the nine-month period ended September 30, 2010.
 
NOTE 18 — 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 nine-month period ended September 30, 2011, the Company purchased a total of approximately 229,000 shares of its common stock in open market transactions under the stock repurchase program for an aggregate purchase price of $1,050,000. As of September 30, 2011, the Company has purchased a total of approximately 265,000 shares of its common stock in open market transactions under the stock repurchase program for an aggregate purchase price of approximately $1,148,000, or an average cost of $4.33 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 nine-month period ended September 30, 2011. As of September 30, 2011, the Company had purchased a total of 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.
 
NOTE 19 — 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 Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2011
   
2010
   
2011
 
Net loss
   
(1,858,000
)
 
$
(214,000
)
 
$
(9,947,000
)
 
$
(4,022,000
)
Unrealized gain (loss) on available-for-sale marketable securities
   
66,000
     
(29,000
   
154,000
     
17,000
 
Foreign currency translation
   
54,000
     
(39,000
   
(35,000
   
33,000
 
                                 
Total other comprehensive loss
 
$
(1,738,000
)
 
$
(282,000
)
 
$
(9,828,000
)
 
$
(3,972,000
)
 
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
   
33,000
     
17,000
     
50,000
 
Reclassification adjustments for gains (losses) reclassified into income
   
-
     
-
     
-
 
                         
Balance at September 30, 2011
 
$
11,000
   
$
2,000
   
$
13,000
 

 
20

 

NOTE 20 — WHOLLY OWNED FOREIGN SUBSIDIARIES
 
In May 2009, the Company formed an entity in Germany called I.D. Systems, 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 Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2011
   
2010
   
2011
 
Net revenue
 
$
71,000
   
$
123,000
   
$
459,000
   
$
692,000
 
                                 
Net loss
   
(120,000
   
(154,000
)
   
(319,000
   
(306,000
)
 
Total assets of GmbH were $1,051,000 and $971,000 as of December 31, 2010 and September 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 Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2011
   
2010
   
2011
 
Net revenue
 
$
103,000
   
$
113,000
   
$
310,000
   
$
529,000
 
                                 
Net (loss) income
   
(14,000
)
   
(73,000
   
(62,000
   
(69,000
 
Total assets of Didbox were $719,000 and $741,000 as of December 31, 2010 and September 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 $(35,000) and $33,000 for the nine months ended September 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 gains (losses) for the three- and nine-month periods ended September 30, 2010 of $21,000 and $(12,000), respectively, and for the three- and nine-month periods ended September 30, 2011 of $(22,000) and $6,000, respectively, are included as an offset to selling, general and administrative expenses in the condensed consolidated statement of operations.

 
21

 

NOTE 21 — 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 22 — 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.

The Company sued a competitor for patent infringement in the United States District Court for the District of New Jersey.  The competitor countersued for breach of contract against the Company in the United States District Court for the Northern District of Texas.  On September 9, 2011, the parties entered into an agreement to settle the outstanding litigation for a $275,000 payment from the competitor to the Company. The Company recognized the $275,000 payment in other income in the Condensed Consolidated Statement of Operations.
 
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.

 
22

 


NOTE 23 — RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement.” This ASU clarifies the concepts related to highest and best use and valuation premise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instruments classified as a component of shareholders’ equity. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements, the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU are effective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. We do not expect the adoption of these provisions to have a significant impact on our financial statements.

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.

In September 2011, the FASB issued accounting pronouncement No. 2011-08, Intangibles—Goodwill and Other (FASB ASC Topic 350) that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The provisions for this pronouncement are effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. We will adopt this pronouncement for our fiscal year beginning January 1, 2012. We do not expect this pronouncement to have a material effect on our consolidated financial statements.

 
23

 

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 “believe,” “expect,” “estimate,” “project,” “predict,” “forecast,” “plan,” “anticipate,” “target,” “outlook,” “envision,” “intend,” “seek,” “may,” “will,” or “should,” 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.

 
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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.

 
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Risks to Our Business
 
During the nine-month period ended September 30, 2011, we generated revenues of $27.5 million, and the Wal-Mart Stores, Inc. and Ford Motor Company accounted for 18% and 10% of our revenues, respectively. During the nine-month period ended September 30, 2010, we generated revenues of $18.6 million, and the Wal-Mart Stores, Inc. accounted for 28% 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, and there can be no assurance that our solutions will be deployed on a wider scale by the customer.
 
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 nine months ended September 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.
 
 
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Results of Operations
 
The following table sets forth, for the periods indicated, certain operating information expressed as a percentage of revenue:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2011
   
2010
   
2011
 
Revenue:
                               
Products
   
39.2
%
   
61.3
%
   
34.3
%
   
53.5
%
Services
   
60.8
     
38.7
     
65.7
     
46.5
 
                         
     
100.0
     
100.0