UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2013
 
or
 
¨
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
 
(I.R.S. Employer Identification No.)
organization)
 
 
 
 
 
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      x   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    x    No      ¨
 
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  ¨
 
Accelerated filer  ¨
 
Non-accelerated filer x
 
Smaller reporting company  ¨
 
 
 
 
 
(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      ¨   No      x
 
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 8, 2013 was 12,192,986.
 
 
   
INDEX
 
I.D. Systems, Inc. and Subsidiaries
 
 
Page
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
 
Condensed Consolidated Balance Sheets as of December 31, 2012 and September 30, 2013 (unaudited)
1
 
 
Condensed Consolidated Statements of Operations (unaudited) - for the three and nine months ended September 30, 2012 and 2013
2
 
 
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - for the three and nine months ended September 30, 2012 and 2013
3
 
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - for the nine months ended September 30, 2013
4
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) - for the nine months ended September 30, 2012 and 2013
5
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
6
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
 
 
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 6. Exhibits
38
 
 
Signatures
39
 
 
Exhibit 10.1
 
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,
 
 
 
2012*
 
2013
 
 
 
 
 
 
(Unaudited)
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,614,000
 
$
4,243,000
 
Restricted cash
 
 
300,000
 
 
300,000
 
Investments - short term
 
 
4,794,000
 
 
3,246,000
 
Accounts receivable, net of allowance for doubtful accounts of $653,000 and $757,000 in 2012 and 2013, respectively
 
 
8,814,000
 
 
9,463,000
 
Financing receivables - current, net of allowance for doubtful accounts of $-0- in 2012 and 2013
 
 
3,143,000
 
 
4,016,000
 
Inventory, net
 
 
7,512,000
 
 
7,574,000
 
Deferred costs - current
 
 
2,380,000
 
 
1,937,000
 
Prepaid expenses and other current assets
 
 
1,043,000
 
 
1,168,000
 
Deferred tax asset - current
 
 
662,000
 
 
-
 
 
 
 
 
 
 
 
 
Total current assets
 
 
30,262,000
 
 
31,947,000
 
 
 
 
 
 
 
 
 
Investments - long term
 
 
9,064,000
 
 
5,818,000
 
Financing receivables - less current portion
 
 
10,814,000
 
 
10,807,000
 
Deferred costs - less current portion
 
 
2,651,000
 
 
3,189,000
 
Fixed assets, net
 
 
2,401,000
 
 
2,427,000
 
Goodwill
 
 
1,837,000
 
 
1,837,000
 
Intangible assets, net
 
 
3,230,000
 
 
2,411,000
 
Other assets
 
 
307,000
 
 
322,000
 
 
 
 
 
 
 
 
 
 
 
$
60,566,000
 
$
58,758,000
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
5,638,000
 
$
6,285,000
 
Capital lease obligation - current
 
 
-
 
 
143,000
 
Deferred revenue - current
 
 
4,689,000
 
 
4,470,000
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
10,327,000
 
 
10,898,000
 
 
 
 
 
 
 
 
 
Capital lease obligation – less current portion
 
 
-
 
 
162,000
 
Deferred rent
 
 
343,000
 
 
333,000
 
Deferred revenue - less current portion
 
 
5,869,000
 
 
7,073,000
 
 
 
 
 
 
 
 
 
 
 
 
16,539,000
 
 
18,466,000
 
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; 12,678,000 and
   12,831,000 shares issued at December 31, 2012 and September 30, 2013, respectively;
   shares outstanding, 12,088,000 and 12,195,000 at December 31, 2012 and September
   30, 2013, respectively
 
 
122,000
 
 
122,000
 
Additional paid-in capital
 
 
103,135,000
 
 
104,196,000
 
Accumulated deficit
 
 
(56,102,000)
 
 
(60,507,000)
 
Accumulated other comprehensive income (loss)
 
 
53,000
 
 
(93,000)
 
Treasury stock; 590,000 shares and 636,000 shares at cost at December 31, 2012 and
   September 30, 2013, respectively
 
 
(3,181,000)
 
 
(3,426,000)
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
 
 
44,027,000
 
 
40,292,000
 
Total liabilities and stockholders’ equity
 
$
60,566,000
 
$
58,758,000
 
 
*Derived from audited balance sheet as of December 31, 2012
 
See accompanying notes to unaudited 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,
 
 
 
2012
 
2013
 
2012
 
2013
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
11,273,000
 
$
6,966,000
 
$
21,745,000
 
$
16,044,000
 
Services
 
 
4,206,000
 
 
4,239,000
 
 
12,227,000
 
 
12,545,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15,479,000
 
 
11,205,000
 
 
33,972,000
 
 
28,589,000
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products
 
 
5,385,000
 
 
3,853,000
 
 
11,658,000
 
 
9,552,000
 
Cost of services
 
 
1,497,000
 
 
1,535,000
 
 
4,221,000
 
 
4,534,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,882,000
 
 
5,388,000
 
 
15,879,000
 
 
14,086,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
8,597,000
 
 
5,817,000
 
 
18,093,000
 
 
14,503,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 
5,467,000
 
 
4,981,000
 
 
16,727,000
 
 
16,092,000
 
Research and development expenses
 
 
1,098,000
 
 
1,082,000
 
 
3,297,000
 
 
3,345,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,565,000
 
 
6,063,000
 
 
20,024,000
 
 
19,437,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
 
2,032,000
 
 
(246,000)
 
 
(1,931,000)
 
 
(4,934,000)
 
Interest income
 
 
116,000
 
 
160,000
 
 
335,000
 
 
484,000
 
Other income, net
 
 
19,000
 
 
10,000
 
 
50,000
 
 
45,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
2,167,000
 
$
(76,000)
 
$
(1,546,000)
 
$
(4,405,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share - basic
 
$
0.18
 
$
(0.01)
 
$
(0.13)
 
$
(0.37)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share - diluted
 
$
0.18
 
$
(0.01)
 
$
(0.13)
 
$
(0.37)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares
    outstanding - basic
 
 
11,768,000
 
 
11,930,000
 
 
11,730,000
 
 
11,886,000
 
Weighted average common shares
    outstanding - diluted
 
 
12,141,000
 
 
11,930,000
 
 
11,730,000
 
 
11,886,000
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
2

 
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2012
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
2,167,000
 
$
(76,000)
 
$
(1,546,000)
 
$
(4,405,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
 
 
56,000
 
 
21,000
 
 
111,000
 
 
(77,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
63,000
 
 
17,000
 
 
(37,000)
 
 
(69,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
 
119,000
 
 
38,000
 
 
74,000
 
 
(146,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
2,286,000
 
$
(38,000)
 
$
(1,472,000)
 
$
(4,551,000)
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3

 
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,
   2012
 
 
12,678,000
 
$
122,000
 
$
103,135,000
 
$
(56,102,000)
 
$
53,000
 
$
(3,181,000)
 
$
44,027,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss for the nine months
   ended September 30, 2013
 
 
-
 
 
-
 
 
-
 
 
(4,405,000)
 
 
-
 
 
-
 
 
(4,405,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on
   investments
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(77,000)
 
 
-
 
 
(77,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
   adjustment
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(69,000)
 
 
-
 
 
(69,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued pursuant to
   exercise of stock options
 
 
63,000
 
 
-
 
 
213,000
 
 
-
 
 
-
 
 
-
 
 
213,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of restricted stock
 
 
101,000
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forfeiture of restricted stock
 
 
(11,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares withheld pursuant to
   exercise of stock options and
   restricted stock
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(245,000)
 
 
(245,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock based compensation -
   restricted stock
 
 
-
 
 
-
 
 
393,000
 
 
-
 
 
-
 
 
-
 
 
393,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock based compensation -
   options and performance
   shares
 
 
-
 
 
-
 
 
455,000
 
 
-
 
 
-
 
 
-
 
 
455,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30,
   2013 (Unaudited)
 
 
12,831,000
 
$
122,000
 
$
104,196,000
 
$
(60,507,000)
 
$
(93,000)
 
$
(3,426,000)
 
$
40,292,000
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

 
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Nine Months Ended
September 30,
 
 
 
2012
 
2013
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,546,000)
 
$
(4,405,000)
 
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
 
 
 
 
Bad debt expense
 
 
484,000
 
 
284,000
 
Proceeds from sale of New Jersey net operating loss carryforwards
 
 
390,000
 
 
662,000
 
Stock-based compensation expense
 
 
865,000
 
 
848,000
 
Depreciation and amortization
 
 
1,644,000
 
 
1,568,000
 
Other non-cash items
 
 
19,000
 
 
(10,000)
 
Changes in:
 
 
 
 
 
 
 
Accounts receivable
 
 
147,000
 
 
(898,000)
 
Financing receivables
 
 
(8,060,000)
 
 
(868,000)
 
Inventory
 
 
(590,000)
 
 
(62,000)
 
Prepaid expenses and other assets
 
 
611,000
 
 
(125,000)
 
Deferred costs
 
 
(1,361,000)
 
 
(95,000)
 
Deferred revenue
 
 
2,691,000
 
 
985,000
 
Accounts payable and accrued expenses
 
 
(1,359,000)
 
 
243,000
 
Net cash used in operating activities
 
 
(6,065,000)
 
 
(1,873,000)
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Expenditures for fixed assets including website development costs
 
 
(238,000)
 
 
(303,000)
 
Purchase of investments
 
 
(4,252,000)
 
 
(3,680,000)
 
Maturities of investments
 
 
7,087,000
 
 
8,397,000
 
Net cash provided by investing activities
 
 
2,597,000
 
 
4,414,000
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Purchase of treasury shares
 
 
(193,000)
 
 
-
 
Proceeds from exercise of stock options
 
 
101,000
 
 
190,000
 
Net cash (used in) provided by financing activities
 
 
(92,000)
 
 
190,000
 
Effect of foreign exchange rate changes on cash and cash equivalents
 
 
(195,000)
 
 
(102,000)
 
Net (decrease) increase in cash and cash equivalents
 
 
(3,755,000)
 
 
2,629,000
 
Cash and cash equivalents - beginning of period
 
 
8,386,000
 
 
1,614,000
 
Cash and cash equivalents - end of period
 
$
4,631,000
 
$
4,243,000
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Cash paid for:
 
 
 
 
 
 
 
Taxes
 
 
-
 
 
-
 
Interest
 
$
-
 
 
-
 
Noncash activities:
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
 
$
111,000
 
$
(77,000)
 
Shares withheld pursuant to stock issuance
 
$
247,000
 
$
245,000
 
Fixed assets acquired by capital lease
 
$
-
 
$
305,000
 
Acquisition of computer equipment included in accounts payable
 
$
-
 
$
182,000
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

 
I.D. Systems, Inc. and Subsidiaries
 
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2013
 
NOTE 1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
 
Description of the Company
 
I.D. Systems, Inc. and its subsidiaries (collectively, 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, including forklifts, airport ground support equipment, rental vehicles and transportation assets, such as dry van trailers, refrigerated trailers, railcars and containers. The Company’s patented wireless asset management system addresses 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.
 
I.D. Systems, Inc. was incorporated in Delaware in 1993 and commenced operations in January 1994.
 
Basis of Presentation
 
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 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, 2013, the consolidated results of its operations for the three- and nine-month periods ended September 30, 2012 and 2013, the consolidated change in stockholders’ equity for the nine-month period ended September 30, 2013 and the consolidated cash flows for the nine-month periods ended September 30, 2012 and 2013. The results of operations for the nine-month period ended September 30, 2013 are not necessarily indicative of the operating results for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K for the year then ended.

NOTE 2 - SIGNIFICANT TRANSACTION - AVIS BUDGET GROUP INC.
 
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 purchased 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”). The Company issued the Shares in 2011 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 in the third quarter of 2011.  The Company has not recognized the impact of the remaining 500,000 shares underlying the Warrant in the Condensed Consolidated Statement of Operations, as it is considered contingently issued as of September 30, 2013. See Note 11 to the Unaudited Condensed Consolidated Financial Statements for additional information.
 
 
6

 
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.
 
ABCR hosts 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. During the fourth quarter of 2011, the Company delivered the first 5,000 units under SOW#1 and recognized approximately $1.7 million in product revenue and a sales-type lease receivable. The Company delivered the remaining 20,000 units under SOW#1 during the third quarter of 2012 and recognized approximately $6.9 million in product revenue and a sales-type lease receivable.
 
Under the terms of SOW#1, the Company is entitled to issue sixty (60) monthly invoices of up to $286,100 for the 30,000 units delivered under SOW#1 and a pilot agreement entered into between the Company and ABCR in 2009. 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.
 
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.  In the event 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.
 
The Master Agreement provided for a period of exclusivity (the “Exclusivity Period”) commencing on the Effective Date and ending twelve (12) months after delivery of the 5000th new unit pursuant to SOW#1. The Company and ABCR amended the Master Agreement to extend the Exclusivity Period, which was then scheduled to expire on July 31, 2013, to September 30, 2013. Although the Exclusivity Period expired, the Company and ABCR continue to negotiate for the expansion of the deployment across a larger segment of ABCR’s global fleet; however, there can be no assurance that they will enter into a definitive agreement. Should ABCR proceed with SOW#2, the Exclusivity Period would resume on 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.
 
 
7

 
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. 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.

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 Federal Deposit Insurance Corporation (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, measurements of fair value, realization of deferred tax assets, the impairment of tangible and intangible assets, inventory reserves, allowance for doubtful accounts, warranty reserves and deferred revenue and costs. Actual results could differ from those estimates.

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 measured at fair value 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, 2012, the Company reported unrealized gain of $56,000 and $111,000, respectively, and for the three- and nine-month periods ended September 30, 2013, the Company reported unrealized gain (loss) of $21,000 and $(77,000), respectively, on available for sale securities in total comprehensive loss. As of December 31, 2012 and September 30, 2013, all investments were classified as available for sale securities. 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. 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 $1,377,000, classified by the contractual maturity date of the security as of September 30, 2013:
 
 
 
Fair Value
 
 
 
 
 
 
Due within one year
 
$
1,869,000
 
Due one year through three years
 
 
5,513,000
 
Due after three years
 
 
305,000
 
 
 
 
 
 
 
 
$
7,687,000
 
 
 
8

 
The cost, gross unrealized gains (losses) and fair value of available for sale securities by major security types as of December 31, 2012 and September 30, 2013 are as follows:
 
 
 
 
 
Unrealized
 
Unrealized
 
Fair
 
September 30, 2013
 
Cost
 
Gain
 
Loss
 
Value
 
Investments - short term
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Notes
 
$
861,000
 
$
2,000
 
$
-
 
$
863,000
 
Mutual funds
 
 
1,382,000
 
 
-
 
 
(5,000)
 
 
1,377,000
 
Corporate bonds and commercial paper
 
 
710,000
 
 
2,000
 
 
(1,000)
 
 
711,000
 
Government agency bonds
 
 
295,000
 
 
-
 
 
-
 
 
295,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments - short term
 
 
3,248,000
 
 
4,000
 
 
(6,000)
 
 
3,246,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities - long term
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Notes
 
 
2,673,000
 
 
-
 
 
(2,000)
 
 
2,671,000
 
Government agency bonds
 
 
1,239,000
 
 
-
 
 
(6,000)
 
 
1,233,000
 
Corporate bonds and commercial paper
 
 
1,908,000
 
 
8,000
 
 
(2,000)
 
 
1,914,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments - long term
 
 
5,820,000
 
 
8,000
 
 
(10,000)
 
 
5,818,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
9,068,000
 
$
12,000
 
$
(16,000)
 
$
9,064,000
 
 
December 31, 2012
 
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments - short term
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency bonds
 
$
855,000
 
$
1,000
 
$
-
 
$
856,000
 
Mutual funds
 
 
649,000
 
 
20,000
 
 
-
 
 
669,000
 
Corporate bonds and commercial paper
 
 
1,608,000
 
 
1,000
 
 
(24,000)
 
 
1,585,000
 
U.S. Treasury Notes
 
 
1,679,000
 
 
5,000
 
 
-
 
 
1,684,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available for sale - short term
 
 
4,791,000
 
 
27,000
 
 
(24,000)
 
 
4,794,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments - long term
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Notes
 
 
4,004,000
 
 
10,000
 
 
-
 
 
4,014,000
 
Government agency bonds
 
 
1,336,000
 
 
5,000
 
 
-
 
 
1,341,000
 
Corporate bonds and commercial paper
 
 
3,654,000
 
 
55,000
 
 
-
 
 
3,709,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available for sale - long term
 
 
8,994,000
 
 
70,000
 
 
-
 
 
9,064,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
13,785,000
 
$
97,000
 
$
(24,000)
 
$
13,858,000
 
 
 
9

 
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 estimates of market participants’ assumptions.
 
At September 30, 2013, all of the Company’s investments are classified as Level 1 for fair value measurements.
 
 
10

 
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 selling price of the element. VSOE of the selling price 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 based on VSOE, 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 $908,000 and $2,451,000 of deferred equipment revenue during the three- and nine-month periods ended September 30, 2012, respectively, and $815,000 and $2,289,000 during the three- and nine-month periods ended September 30, 2013, 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.
 
Revenue from remote asset monitoring equipment activation fees is deferred and amortized over the life of the contract.
 
Spare parts sales are reflected in product revenues and recognized on the date of customer receipt of the part.
 
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 at the present value of the expected lease payments 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.
 
 
11

 
Deferred revenue consists of the following:
 
 
 
December 31,
 
September 30,
 
 
 
2012
 
2013
 
 
 
 
 
 
 
 
 
Deferred activation fees
 
$
469,000
 
$
511,000
 
Deferred industrial equipment installation revenue
 
 
291,000
 
 
324,000
 
Deferred maintenance revenue
 
 
1,478,000
 
 
1,981,000
 
Deferred remote transportation asset management product revenue
 
 
8,320,000
 
 
8,727,000
 
 
 
 
 
 
 
 
 
 
 
 
10,558,000
 
 
11,543,000
 
Less: Current portion
 
 
4,689,000
 
 
4,470,000
 
 
 
 
 
 
 
 
 
Deferred revenue - less current portion
 
$
5,869,000
 
$
7,073,000
 

NOTE 7 - FINANCING RECEIVABLES
 
Financing receivables include notes and sales-type lease receivables from the sale of the Company’s products and services. Financing receivables consist of the following:
 
 
 
December 31,
 
September 30,
 
 
 
2012
 
2013
 
 
 
 
 
 
 
 
 
Notes receivable
 
$
76,000
 
$
58,000
 
Sales-type lease receivable
 
 
13,881,000
 
 
14,765,000
 
Less: Allowance for credit losses
 
 
-
 
 
-
 
 
 
 
13,957,000
 
 
14,823,000
 
 
 
 
 
 
 
 
 
Less: Current portion
 
 
 
 
 
 
 
Notes receivable
 
 
23,000
 
 
25,000
 
Sales-type lease receivable
 
 
3,120,000
 
 
3,991,000
 
 
 
 
3,143,000
 
 
4,016,000
 
 
 
 
 
 
 
 
 
Financing receivables - less current portion
 
$
10,814,000
 
$
10,807,000
 
 
Notes receivable relate to product financing arrangements that exceed one year and bear interest at approximately 8% - 10%. 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. There were no sales of notes receivable during the nine-month periods ended September 30, 2012 and 2013.
 
The present value of net investment in sales-type lease receivable is principally for three to five-year leases of the Company’s products and is reflected net of unearned income of $1,362,000 and $1,230,000 at December 31, 2012 and September 30, 2013, respectively, discounted at 2% - 26%.
 
 
12

 
The allowance for doubtful accounts is determined on an individual note and lease basis if it is probable that the Company will not collect all principal and interest contractually due. We consider our customers’ financial condition and historical payment patterns in determining the customers’ probability of default. The impairment is measured based on the present value of expected future cash flows discounted at the note’s effective interest rate. There were no impairment losses recognized for the three- and nine-month periods ended September 30, 2012 and 2013.
 
Scheduled maturities of sales-type lease minimum lease payments outstanding as of September 30, 2013 are as follows:
 
Year ending December 31:
 
 
 
 
 
 
 
 
 
October - December 2013
 
$
1,007,000
 
2014
 
 
3,940,000
 
2015
 
 
3,711,000
 
2016
 
 
3,482,000
 
2017
 
 
2,254,000
 
Thereafter
 
 
371,000
 
 
 
 
 
 
 
 
 
14,765,000
 
Less: Current portion
 
 
3,991,000
 
 
 
 
 
 
Sales-type lease receivable - less current portion
 
$
10,774,000
 
 
 
13

 
NOTE 8 - 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 consist of the following:
 
 
 
December 31,
2012
 
September 30,
2013
 
Components
 
$
4,386,000
 
$
4,711,000
 
Finished goods
 
 
3,126,000
 
 
2,863,000
 
 
 
 
 
 
 
 
 
 
 
$
7,512,000
 
$
7,574,000
 

NOTE 9 - FIXED ASSETS
 
Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:
 
 
 
December 31,
 
September 30,
 
 
 
2012
 
2013
 
Equipment
 
$
1,213,000
 
$
1,342,000
 
Computer software
 
 
3,303,000
 
 
3,310,000
 
Computer hardware
 
 
1,901,000
 
 
2,539,000
 
Furniture and fixtures
 
 
370,000
 
 
371,000
 
Automobiles
 
 
47,000
 
 
47,000
 
Leasehold improvements
 
 
181,000
 
 
181,000
 
 
 
 
 
 
 
 
 
 
 
 
7,015,000
 
 
7,790,000
 
Accumulated depreciation and amortization
 
 
(4,614,000)
 
 
(5,363,000)
 
 
 
 
 
 
 
 
 
 
 
$
2,401,000
 
$
2,427,000
 
 
The Company had expenditures of approximately $472,000 for computer equipment which had not been placed in service as of September 30, 2013.  Depreciation expense is not recorded for such assets until they are placed in service.
 
Depreciation and amortization expense for the three- and nine-month periods ended September 30, 2012 was $244,000 and $767,000, respectively, and for the three- and nine-month periods ended September 30, 2013 was $251,000 and $749,000, respectively. This includes amortization of costs associated with computer software and website development for the three- and nine-month periods ended September 30, 2012 of $142,000 and $434,000, respectively, and for the three- and nine-month periods ended September 30, 2013 of $142,000 and $425,000, 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  TM 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 $69,000 and $7,000 for such projects for the nine-month periods ended September 30, 2012 and 2013, respectively.
 
 
14

 
NOTE 10 - INTANGIBLE ASSETS AND GOODWILL
 
The following table summarizes identifiable intangible assets of the Company, which include identifiable intangible assets from the acquisition of Didbox Ltd., PowerKey (the industrial vehicle monitoring products division of International Electronics, Inc. acquired by the Company in 2008) and AI as of December 31, 2012 and September 30, 2013:
 
September 30, 2013
 
Useful
Lives
(In Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
 
 
11
 
$
1,489,000
 
$
(508,000)
 
$
981,000
 
Tradename
 
 
5
 
 
200,000
 
 
(150,000)
 
 
50,000
 
Non-competition agreement
 
 
3
 
 
234,000
 
 
(234,000)
 
 
-
 
Technology
 
 
5
 
 
50,000
 
 
(39,000)
 
 
11,000
 
Workforce
 
 
5
 
 
33,000
 
 
(26,000)
 
 
7,000
 
Customer relationships
 
 
5
 
 
4,499,000
 
 
(3,376,000)
 
 
1,123,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,505,000
 
 
(4,333,000)
 
 
2,172,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer list
 
 
 
 
 
104,000
 
 
-
 
 
104,000
 
Trademark and Tradename
 
 
 
 
 
135,000
 
 
-
 
 
135,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
239,000
 
 
-
 
 
239,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
$
6,744,000
 
$
(4,333,000)
 
$
2,411,000
 
 
December 31, 2012
 
Useful
Lives
(In Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
 
 
11
 
$
1,489,000
 
$
(406,000)
 
$
1,083,000
 
Tradename
 
 
5
 
 
200,000
 
 
(120,000)
 
 
80,000
 
Non-competition agreement
 
 
3
 
 
234,000
 
 
(234,000)
 
 
-
 
Technology
 
 
5
 
 
50,000
 
 
(32,000)
 
 
18,000
 
Workforce
 
 
5
 
 
33,000
 
 
(21,000)
 
 
12,000
 
Customer relationships
 
 
5
 
 
4,499,000
 
 
(2,701,000)
 
 
1,798,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,505,000
 
 
(3,514,000)
 
 
2,991,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer list
 
 
 
 
 
104,000
 
 
-
 
 
104,000
 
Trademark and Tradename
 
 
 
 
 
135,000
 
 
-
 
 
135,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
239,000
 
 
-
 
 
239,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
$
6,744,000
 
$
(3,514,000)
 
$
3,230,000
 
 
 
15

 
Amortization expense for the three- and nine-month periods ended September 30, 2012 was $293,000 and $877,000, respectively, and for the three- and nine-month periods ended September 30, 2013 was $273,000 and $819,000, 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 2013
 
$
273,000
 
2014
 
 
1,086,000
 
2015
 
 
135,000
 
2016
 
 
135,000
 
2017
 
 
135,000
 
 
There have been no changes in the carrying amount of goodwill from January 1, 2013 to September 30, 2013.

NOTE 11 - 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 and 1999 Stock and Director Option Plans expired and the Company cannot issue additional options under these plans.
 
The Company adopted the 2007 Equity Compensation Plan, pursuant to which, as amended, the Company may grant options to purchase up to an aggregate of 2,500,000 shares of common stock. The Company also adopted the 2009 Non-Employee Director Equity Compensation Plan, pursuant to which, as amended, 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, 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 employee 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 $155,000 and $457,000, respectively, for the three- and nine-month periods ended September 30, 2012 and $120,000 and $444,000, respectively, for the three- and nine-month periods ended September 30, 2013, in connection with awards made under the stock option plans.
 
 
16

 
The following table summarizes the activity relating to the Company’s stock options for the nine-month period ended September 30, 2013:
 
 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
Weighted-
 
Average
 
 
 
 
 
 
 
Average
 
Remaining
 
Aggregate
 
 
 
 
 
Exercise
 
Contractual
 
Intrinsic
 
 
 
Options
 
Price
 
Term
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at beginning of year
 
 
2,568,000
 
$
7.33
 
 
 
 
 
 
Granted
 
 
367,000
 
 
5.63
 
 
 
 
 
 
Exercised
 
 
(63,000)
 
 
3.41
 
 
 
 
 
 
Expired
 
 
(25,000)
 
 
5.89
 
 
 
 
 
 
Forfeited
 
 
(53,000)
 
 
5.13
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at end of period
 
 
2,794,000
 
$
7.24
 
5 years
 
$
2,942,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at end of period
 
 
1,925,000
 
$
8.19
 
3 years
 
$
2,062,000
 
 
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,
 
 
 
 
2012
 
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Expected volatility
 
 
44
%
 
 
44.4% - 54.8
%
 
Expected life of options
 
 
3.0 years
 
 
 
4.0 - 5.0 years
 
 
Risk free interest rate
 
 
1
%
 
 
1
%
 
Dividend yield
 
 
0
%
 
 
0
%
 
Weighted average fair value of options granted during the period
 
$
1.81
 
 
$
2.17