UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended December 31, 2015.
   
[  ] 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: 1-15087

 

I.D. SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3270799
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.01 per share   The NASDAQ Global Market
(Title of class)   (Name of exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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 [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The aggregate market value of the registrant’s common stock, par value $0.01 per share (“Common Stock”), held by non-affiliates, computed by reference to the price at which the Common Stock was last sold as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $73.8 million.

 

The number of shares of the registrant’s Common Stock outstanding as of March 25, 2016, was 13,849,363 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Document   Part of Form 10-K
     
Portions of the Proxy Statement For the Registrant’s 2016 Annual Meeting of Stockholders   Part III

 

 

 

  
  

 

I.D. SYSTEMS, INC.

 

TABLE OF CONTENTS

 

      Page
       
PART I.      
Item 1. Business   3
Item 1A. Risk Factors   20
Item 1B. Unresolved Staff Comments   31
Item 2. Properties   31
Item 3. Legal Proceedings   31
Item 4. Mine Safety Disclosures   31
       
PART II.      
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   32
Item 6. Selected Financial Data   35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   51
Item 8. Financial Statement and Supplementary Data   52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   89
Item 9A. Controls and Procedures   89
Item 9B. Other Information   89
       
PART III.      
Item 10. Directors, Executive Officers and Corporate Governance   90
Item 11. Executive Compensation   90
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   90
Item 13. Certain Relationships and Related Transactions, and Director Independence   91
Item 14. Principal Accounting Fees and Services   91
       
PART IV.      
Item 15. Exhibits, Financial Statement Schedules   92

 

 2 

 

 

PART I.

 

Cautionary Note Regarding Forward-Looking Statements

 

In addition to historical information, this Annual Report on Form 10-K of I.D. Systems, Inc. contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which may include information concerning our beliefs, plans, objectives, goals, expectations, strategies, anticipations, assumptions, estimates, intentions, future events, future revenues or performance, capital expenditures and other information that is not historical information. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Many of these statements appear, in particular, under the headings “Business,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. When used in this report, the words “seek,” “estimate,” “expect,” “anticipate,” “project,” “plan,” “contemplate,” “plan,” “continue,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but there can be no assurance that we will realize our expectations or that our beliefs will prove to be correct.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements herein include, but are not limited, to:

 

future economic and business conditions;
   
the loss of any of our key customers or reduction in the purchase of our products by any such customers;
   
the failure of the markets for our products to continue to develop;
   
our inability to adequately protect our intellectual property;
   
the possibility that we may not be able to integrate successfully the business, operations and employees of acquired businesses;
   
the effects of competition from a wide variety of local, regional, national and other providers of wireless solutions;
   
changes in laws and regulations or changes in generally accepted accounting policies, rules and practices;
   
changes in technology or products, which may be more difficult or costly, or less effective, than anticipated; and
   
those risks and uncertainties set forth under the heading “Risk Factors” in Item 1A of this report.

 

There may be other factors of which we are currently unaware or which we currently deem immaterial that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date they are made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events, or otherwise.

 

Note Regarding Trademarks

 

I.D. Systems has, or has applied for, trademark protection for I.D. SYSTEMS®, the I.D. SYSTEMS Logo®, VEHICLE ASSET COMMUNICATOR®, AVRAMP®, OPTI-KAN®, SECURESTREAM®, POWERFLEET®, SAFENAV®, POWERFLEET VISION®, POWERFLEET IQ™, INTELLIPOINT®, VERIWISE & Design®, VERIWISE™, VERIWISE IQ™, and ASSET INTELLIGENCE™.

 

Item 1. Business

 

Overview

 

I.D. Systems, Inc. was incorporated in the State of Delaware in 1993. I.D. Systems, Inc. (together with its subsidiaries, “I.D. Systems,” the “Company,” “we,” “our” or “us”) develops, markets and sells wireless machine-to-machine (“M2M”) solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles such as forklifts and 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 and software 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 safety, security, revenue, productivity and efficiency of their operations.

 

 3 

 

 

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 “car sharing” enables rental car companies to establish a network of vehicles positioned strategically around cities or on corporate campuses, control vehicles remotely, manage member reservations by smart phone or Internet, and charge members for vehicle use by the hour.

 

To provide an even deeper layer of insights into asset operations, we have developed a cloud-based software tool called I.D. Systems Analytics (“Analytics”), which is designed to provide a single, integrated view of asset activity across multiple locations, generating enterprise-wide benchmarks and peer-industry comparisons. Analytics determines key performance indicators (“KPIs”) relating to the performance of managed assets. Values for the KPIs may then be calculated and used to identify cost benefit measurements which translate the KPI values into monetized metrics. We expect that our growing database from monitored assets will allow us to create industry benchmarks that can be used to tell our customers how they are performing compared to their peers. We look for Analytics, as well as the data contained therein, to make a growing contribution to revenue, further differentiate and add value to our solutions, and help keep us at the forefront of the wireless asset management markets we serve.

 

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. Based on revenues for 2015, our top customers were Wal-Mart Stores, Inc. and the Raymond Corporation, a global provider of lift trucks, forklifts and material handling technology.

 

 4 

 

 

Our Solutions

 

We design and implement wireless M2M asset management solutions that deliver an enterprise-level return on investment for our customers. Our solutions can be categorized as either closed-loop systems for managing campus-based assets, or mobile systems for managing remote, “over-the-road” assets.

 

Industrial and Rental Fleet Asset Management Solutions

 

Our closed-loop campus-based asset management solutions incorporate short range wireless devices that provide on-board control, location tracking and data processing for enterprise assets, to provide real-time visibility of, and two-way communications with, such assets. These systems provide architectural and functional advantages that differentiate them from systems used for inventory and logistics tracking. For example, while inventory tracking systems rely on constant, continuous radio frequency (RF) connectivity to perform core functions, our systems require only periodic RF communications, and our on-asset devices perform their core functions autonomously.

 

Our campus-based asset management system consists of four principal elements:

 

miniature wireless programmable computers attached to assets;
   
fixed-position communication infrastructure consisting of network devices with two-way wireless communication capabilities and, optionally RF-based location-emitting beacons;
   
application-specific network servers, which may be hosted on the site’s local area network (LAN), on an enterprise wide area network (WAN), or at a remote data center; and
   
proprietary software, which is a user-friendly, browser- accessible graphical user interface that provides visibility and control of the system database, and which is hosted either at the local installation site or at a remote data center.

 

Each of these system elements can process and store information independently to create a unique, patented system of “distributed intelligence,” which mitigates the risk that a single point of failure could compromise system integrity or data and asset security. Our on-asset hardware stores and processes information locally so that it can autonomously and automatically control the asset and monitor asset activity regardless of the status or availability of other system components. Our on-asset hardware performs its functions even when outside the RF range of any other system component or if the facility computer network is unavailable. Our communication infrastructure independently processes data and executes programmable application logic, in addition to linking monitored mobile asset data automatically to our system’s database. The link to the system’s database may leverage secure cellular communication, thereby permitting remotely-hosted server software without access to local IT infrastructure. Our server software populates the database and is designed to mitigate the effects of any computer outages that could affect real-time availability of the database. Finally, our client software interfaces only with the database, not directly with our communication infrastructure or on-asset hardware, which restricts access to, and limits corruption of, system information and minimizes network bandwidth usage.

 

Our campus-based asset management solutions focus on two primary applications: (i) industrial fleet management and (ii) rental fleet management. In addition to focusing on these core applications, we have adapted, and intend to continue to adapt, our wireless solutions to meet our customers’ broader asset management needs.

 

Industrial Fleet Asset Management

 

Our PowerFleet® and didBOX solutions for industrial fleet management allow fleet operators to reduce operating costs and capital expenditures, comply with certain safety regulations and enhance security.

 

To help improve fleet safety and security, our PowerFleet® and didBOX systems provide vehicle operator access control to ensure that only trained and authorized personnel are able to use equipment, and impact sensing to assign responsibility for abusive driving.

 

PowerFleet® also provide: contactless operator identification; automatic wireless data communications; motion/idle detection, electronic vehicle inspection checklists for paperless compliance with governmental safety regulations; automatic reporting of emerging vehicle safety issues; automatic on-vehicle intervention, such as disabling equipment, in response to user-definable safety and security parameters; and remote vehicle deactivation capabilities, allowing a vehicle to be shut down manually or automatically under user-defined conditions.

 

 5 

 

 

In addition, our PowerFleet® system is compatible with a wide range of electronic driver identification technologies and can communicate using the customer’s Wi-Fi network. PowerFleet® also provides indoor and outdoor vehicle/operator visibility through a combination of global positioning system (GPS) and RFID technologies, and geo-fencing to restrict vehicles from operating in prohibited areas or issue alerts upon unauthorized entry to such areas. PowerFleet® also supports optional sensing elements to provide additional vehicle utilization data, including load detection data, battery data and activity meter data.

 

To analyze and benchmark vehicle utilization and operator productivity, our PowerFleet® systems automatically record a wide range of activity and enable detailed performance comparisons to help management make informed decisions about vehicle and manpower allocations. This can lead to fleet and personnel reductions as well as increases in productivity. The PowerFleet® system also provides real-time and historical visibility of vehicle movements and other advanced asset management options.

 

To help reduce fleet maintenance costs, our PowerFleet systems are able to automate and enforce preventative maintenance scheduling by:

 

wirelessly uploading usage data from each vehicle;
   
defining various intervals and criteria for performing preventative maintenance;
   
automatically prioritizing maintenance events based on weighted, user-defined variables;
   
reporting in advance on vehicles with impending preventative maintenance events coming due;
   
automatically sending reminders to individual vehicles or operators via the system’s text messaging module; and
   
enabling remote lock-out of vehicles overdue for maintenance.

 

The PowerFleet® system also enables maintenance personnel to locate and retrieve vehicles due for service via the system’s optional graphical viewer software, and can provide automatic data feeds to our customers’ existing enterprise maintenance software systems.

 

A specialized application of our solution in the industrial fleet management and security market is vehicle security, particularly at airports, seaports and other areas of critical infrastructure. The Aviation and Transportation Security Act of 2001 mandates security for aircraft servicing equipment, including aircraft tow tractors, baggage tugs, cargo loaders, catering vehicles and fuel trucks. The airport market-specific version of our system is called AvRamp®, referencing the aviation industry and the ramp area at airports in which aircraft servicing equipment operates. To date, the most significant commercial deployment of the AvRamp system has been on fleets of aircraft ground support equipment at Newark Liberty International Airport for United Airlines and Chicago O’Hare International Airport and Dallas-Fort Worth International Airport for AMR Corporation (American Airlines and American Eagle Airlines).

 

 6 

 

 

Transportation Asset Management Solutions

 

Our mobile systems for managing remote, “over-the-road” assets are provided by our Asset Intelligence subsidiary. These systems provide mobile-asset tracking and condition-monitoring solutions to meet the transportation market’s desire for greater visibility, safety, security, and productivity throughout global supply chains. By leveraging a combination of satellite and cellular wireless communications and Web data management technologies, the Asset Intelligence VeriWiseTM product family provides shippers and carriers with tools to better manage their trailer and container fleets, freight transport operations, and maintenance controls. VeriWise systems enable quick access to actionable intelligence that results in better utilization, control, and security of our customers’ freight-carrying assets.

 

Our remote asset management systems consist of five principal elements:

 

satellite or cellular communicators attached to assets;
   
GPS receivers that provide latitude/longitude location fixes that are transmitted based on logic resident in the communicator;
   
proprietary browser-based graphical user interface that provides visibility and two-way control of the system database (the data can also be transmitted to the customer via XML or web services data feed);
   
patented power management intelligence to ensure reliable system performance in a power-starved environment; and
   
several sensor types, including cargo, temperature, motion, light, tire inflation, and door, that provide additional status information for the remote asset.

 

To increase asset utilization, our VeriWiseTM system can reduce the number of assets needed and/or increase the revenue generated per asset by:

 

monitoring asset pool size based on user-defined requirements;
   
generating dormancy reports to flag under-utilized assets;
   
alerting the driver to the location of the closest empty asset, resulting in a more rapid pick-up; and
   
providing trailer detention alerts when an asset has exceeded the time allotted for unloading.

 

To better control remote assets, our VeriWiseTM system provides:

 

integration into refrigerated asset microcontrollers to provide temperature and set point data and alerts via our VeriWise Intelligent Portal (VIP) or by an e-mail notification directly to the customer when an alarm condition develops;
   
change in cargo status of an asset via our patented full-length cargo sensor;
   
on-device geo-fencing that alerts the customer when an asset is approaching or leaving its destination; and
   
on-board intelligence utilizing a motion sensor and proprietary logic that identifies the beginning of a drive and the end of a drive.

 

 7 

 

 

To help improve asset and cargo security, our VeriWiseTM system offers the following capabilities:

 

asset lockdown, which automatically sends an e-mail or text message to the customer when movement is detected outside of user-defined time periods;
   
door sensors, which detect an unauthorized open door either by time or location, resulting in a door breach alert;
   
emergency track functionality that can be enabled to track an asset at more frequent intervals if a theft condition is expected;
   
geo-fencing, which can alert our customer when an asset enters a prohibited geography or location; and
   
utilization of our Tractor ID product notification if the incorrect tractor connects to the asset.

 

Rental Fleet Asset Management

 

Our solution for traditional rental fleet management is designed both to enhance the consumer’s rental experience and benefit the rental company by providing information that can be used to increase revenues, reduce costs and improve customer service. Our rental fleet management system automatically uploads vehicle identification number, mileage and fuel data as a vehicle enters and exits the rental lot, which can significantly expedite the rental and return processes for travelers and provide the rental company with more timely inventory status, more accurate billing data that can generate higher fuel-related revenue, and an opportunity to utilize customer service personnel for more productive activities, such as inspecting vehicles for damage and helping customers with luggage.

 

In addition, we provide a wireless solution for “car sharing”, whereby a rental car company (i) positions vehicles strategically around cities, universities and corporate campuses for shared use by its members, (ii) remotely controls the vehicles, (iii) manages member reservations by smart phone or Internet, and (iv) charges members for vehicle use by the hour. The entire process - from remotely controlling the car door locks to tracking car mileage and fuel consumption to billing for the transaction - is automatically conducted by an integration of wireless vehicle management technology and the rental company’s fleet management software. We currently have units deployed across the Northeast U.S. rental fleet of the Avis Budget Group, Inc.

 

Analytics

 

We recently introduced a data reporting and analysis software tool platform called I.D. Systems Analytics PowerFleet IQ (for fleets of forklifts and other industrial trucks) and VeriWise IQ (for fleets of containers, trailers and other transportation assets).

 

PowerFleet IQ and VeriWise IQ provide a holistic view of asset activity across an enterprise supply chain.

 

This cloud-based cloud-hosted, web-based software platform provides a single, integrated view of industrial asset activity across multiple locations, generating enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. Analytics PowerFleet IQ and VeriWise IQ can enable management to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety.

 

Specifically, I.D. Systems Analytics PowerFleet IQ and VeriWise IQ allows user to:

 

Quantify best-practice enterprise benchmarks for industrial asset utilization and safety;

 

Reveal variations and inefficiencies in asset activity across both sites and geographic regions;

 

Identify opportunities to eliminate or reallocate assets, with full enterprise awareness, to reduce capital and operating costs;

 

Help balance asset mix and inform acquisition decisions;

 

Uncover activity trends over time to forecast asset requirements; and

 

Enable performance comparisons to broad, industry-specific benchmarks.

 

We look for Analytics and the data contained therein to make a growing contribution to revenue, further differentiate and add value to our solutions, and help keep us at the forefront of the wireless asset management markets we serve, although there can be no assurance if and to what extent Analytics will do so.

 

 8 

 

 

Growth Strategy

 

Our objective is to become a leading global provider of wireless solutions for managing and securing enterprise assets. To achieve this goal, we intend to:

 

Increase sales in existing markets to existing customers and pursue opportunities with new customers by:

 

maintaining a sales and marketing team that is focused on identifying, seizing and managing revenue opportunities, with the primary goal of expanding our customer base and achieving wider market penetration;
   
utilizing a performance services team and our Analytics software offering to (i) shorten our initial sales cycles by helping prospective customers identify and quantify benefits expected from our system, (ii) accelerate transitions from initial implementation to roll-out programs by helping customers achieve and prove expected system benefits, and (iii) build service revenue through long-term consultative engagements that help customers use our system to attain continuous improvements in their operations;
   
developing asset management-specific data analytics capabilities to differentiate our product offering, add value to our solutions for large enterprise customers, and produce incremental revenue at a high profit margin;
   
developing channel partners to provide new sales, marketing, distribution and support networks, especially for the basic version of our PowerFleet system, which is designed to be simple enough for industrial truck dealers to sell and install without relying on the Company’s technical resources, and easier for the Company to support by hosting in the Company’s data center; and
   
expanding our resources and activities internationally, especially in Europe and Asia, where we believe re-packaging, promoting and supporting our products represents a large growth opportunity.

 

Expand into new applications and markets for our technology by:

 

pursuing opportunities to integrate our system with computer hardware and software vendors, including original equipment manufacturers;
   
offering our solutions as a hosted service, with relatively low upfront capital investment and ongoing service contracts, which we believe will make our solutions easier to acquire for prospects in a broader segment of our target markets;
   
establishing relationships with global distributors to market and sell our system internationally; and
   
pursuing acquisitions of companies that we believe will enhance the functionality and broaden the applicability of our solutions.

 

 9 

 

 

Products and Services

 

We offer our customers integrated wireless solutions to control, monitor, track and analyze their enterprise assets. Our solutions are comprised of hardware and software, as well as hosting, maintenance, support and consulting services.

 

The following table sets forth our revenues by product line for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
             
Industrial and rental fleet management  $22,089,000   $26,894,000   $24,531,000 
Transportation asset management   17,857,000    18,739,000    17,253,000 
   $39,946,000   $45,633,000   $41,784,000 

 

Industrial Fleet Asset Management Products

 

On-Asset Hardware. With a variety of mounting and user-interface options, our on-asset hardware is designed to be installed quickly and easily and provide an autonomous means of asset control and monitoring. Our on-asset hardware:

 

contains an integrated computer, programmed with a product-specific application, and an advanced wireless transceiver with a communication range of up to approximately one-half mile;
   
controls equipment access with a variety of electronic interface options;
   
is compatible with most existing facility access security systems;
   
generates paperless electronic safety checklists via a built-in display and keypad;
   
wirelessly and automatically uploads and downloads data to and from other system components;
   
performs monitoring and control functions at all times, independent of RF or network connectivity; and
   
incorporates a multi-voltage power supply designed to mitigate electrical anomalies.

 

Wireless Asset Managers. Many of our system deployments require at least one fixed-position communication device, referred to as a Wireless Asset Manager, to link the mobile assets being monitored with the customer’s computer network or to a remotely hosted server. Our Wireless Asset Managers conduct two-way RF communications with the assets being monitored and can communicate on a local area network, on a wide area network, or via cellular communications. The use of Wireless Asset Managers enables flexible system configuration options and scalability. A single Wireless Asset Manager is sufficient to operate an entire asset management system. For expanded, real-time data communication and location tracking, Wireless Asset Managers can be added incrementally as needed. They also allow system settings and on-asset functionality to be changed without physically interfacing with on-asset hardware, which can save significant time and money.

 

Each of our Wireless Asset Managers:

 

incorporates an integrated computer, programmed with a product specific application, and an advanced wireless transceiver with a communication range of more than one-half mile;
   
accommodates an unlimited number of on-asset hardware devices;
   
automatically uploads and downloads data to and from other system components;
   
employs built-in self-diagnostic capabilities; and
   
is configurable to achieve a wide range of asset management goals.

 

 10 

 

 

Server Software. Each of our system deployments requires at least one installation of our server software, which automatically manages data communications between the system’s database and either the Wireless Asset Managers or on-asset hardware. Our server software:

 

is a set of Windows services;
   
automatically processes data between our devices and system databases;
   
communicates with Wireless Asset Managers to send and retrieve system data;
   
automates event scheduling, including database archiving and diagnostic notifications;
   
interfaces with certain existing external systems, including maintenance, timecard and training systems;
   
supports remote control/management of event processes;
   
automatically performs diagnostics on system components; and
   
automatically e-mails event alerts and customizable reports.

 

Client Software. Our client software provides an intuitive, easy-to-use, user interface. The software is deployed either as a standard client-server application or as a thin-client accessible via a web browser. The software interfaces only with the system database, and not directly with our communication infrastructure or on-asset hardware, which restricts access to, and limits corruption of, system information and minimizes network bandwidth usage. An unlimited number of clients can be used on a network at any given time.

 

Our client software:

 

is able to show the location, status and inventory of vehicles - in real time and historically - in each area of a facility;
   
allows real-time, two-way text communications, including broadcast text paging to all operators simultaneously;
   
searches, sorts and analyzes assets by usage/motion time, idle time, location, status, group, maintenance condition and other parameters;
   
displays and prints predefined and ad hoc reports; and
   
allows remote access by management, customers and vendors through any Internet browser application.

 

Our vehicle management systems are available as either Company- or customer-hosted solutions to meet a wide range of customer needs and information technology requirements. Our Company-hosted solutions utilize I.D. Systems’ commercial colocation center.

 

 11 

 

 

Transportation Asset Management Products

 

On-Asset Hardware. We offer several hardware configurations to address different remote asset types (e.g., dry van trailers, refrigerated trailers, domestic containers, chassis, and railcars), as well as customer-specific requirements. Our on-asset hardware options contain:

 

an integrated computer programmed with a product-specific application, a cellular or satellite transceiver, and a GPS receiver;
   
temperature, door, cargo, or tractor ID sensors mounted on the asset;
   
solar panels and circuitry to maintain the charge of the on-asset device’s battery pack;
   
either sealed lead acid or lithium battery packs to power the hardware when un-tethered from a power source; and
   
a wire harness to connect to an existing power source (e.g., on the tractor).

 

Client Website. The VeriWise Intelligence Portal (VIP) is a hosted website that provides Internet access to client asset information. Upon installation of the on-asset hardware, the customer is provided access to the VIP site where they can configure the hardware, establish user passwords, IDs, and access privileges. Our client website:

 

displays a user-configurable dashboard highlighting the enterprise’s critical asset information;
   
has the ability to e-mail the dashboard to a distribution list at a time interval established by the client;
   
provides asset status and history, including location, landmark, and sensor information;
   
provides latitude/longitude location information for each asset based on reverse geocodes;
   
displays asset location on a geographic map;
   
generates user configurable reports that can be accessed via the website or e-mailed to a distribution list at a time interval established by the client;
   
allows the client to “ping” an asset to receive an updated location report; and
   
allows the client to set a unit(s) to “Emergency Track”, which increases the reporting frequency for a specified time period.

 

Direct Data Feed. In addition to the asset information provided on the VIP website, we also offer a direct feed of the data to the customer via XML or web services. The feed complies with established industry conventions, such as TTIS (trailer tracking interface standard), to allow for easy integration into the client’s legacy system or into third-party software packages.

 

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Services

 

Hosting Services. We provide the use of our systems as a remotely hosted service, with the system server and application software residing in the Company’s colocation center. This approach helps the Company reduce support costs and improve quality control. It separates the system from the restrictions of the customers’ local IT networks, which helps reduce their system support efforts and makes it easier for them to receive the benefits of system enhancements and upgrades. Our hosting services are typically offered with extended maintenance and support services over a multi-year term of service, with automatic renewals following the end of the initial term.

 

Maintenance Services. We provide a warranty on all hardware and software components of our system. During the warranty period, we either replace or repair defective hardware. We also make extended maintenance contracts available to customers and offer ongoing maintenance and support on a time and materials basis. Pricing for our extended maintenance and support contracts is dependent upon the level of service we expect to provide. Our maintenance and support services typically include remote system monitoring, help desk technical support, escalation procedure development and routine diagnostic data analysis.

 

Rental Fleet Asset Management Products

 

On-Asset Hardware. Our next-generation on-asset hardware is installed quickly, easily and covertly into a vehicle’s diagnostic port and provides an autonomous means of asset control and monitoring. Our on-asset hardware:

 

contains an integrated computer programmed with a product-specific application, a cellular transceiver, and a GPS receiver;
   
performs monitoring functions, such as fuel level, odometer, speed and key status at all times, independent of network connectivity;
   
controls vehicle access and door locks;
   
is compatible with most new-model motor vehicles; and
   
wirelessly and automatically uploads and downloads data to and from other system components.

 

Server Software. Our system deployment requires at least one installation of our server software, which automatically manages data communications between the system’s databases and the on-asset hardware. Our server software:

 

is a set of Windows services;
   
automatically processes data between our devices and system databases;
   
communicates with on-asset hardware to send and retrieve system data;
   
interfaces with existing mobile applications, enabling end-customer vehicle control features;
   
interfaces with external systems, including billing, geo-location, maintenance, and fleet management systems;
   
automates event scheduling, including database archiving and diagnostic notifications;
   
automatically performs diagnostics on system components; and
   
automatically e-mails event alerts and customizable reports.

 

Our rental vehicle management systems are available as either Company- or customer-hosted solutions to meet our customers’ needs and information technology requirements. Our Company-hosted solutions utilize I.D. Systems’ commercial colocation center.

 

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Customer Support and Consulting Services. We have developed a framework for the various phases of system training and support that offers our customers both structure and flexibility. Major training phases include hardware installation and troubleshooting, software installation and troubleshooting, “train-the-trainer” training on asset hardware operation, preliminary software user training, system administrator training, information technology issue training, ad hoc training during system launch and advanced software user training. Increasingly, training services are provided through scalable online interactive training tools. Support and consulting services are priced based on the extent of training that the customer requests.

 

To help our customers derive the most benefit from our system, we supply a broad range of documentation and support including videos, interactive online tools, hardware user guides, software manuals, vehicle installation overviews, troubleshooting guides, and issue escalation procedures.

 

We provide our consulting services both as a stand-alone service to study the potential benefits of implementing a wireless fleet management system and as part of the system implementation itself.

 

In some instances, customers prepay us for extended maintenance, support and consulting services. In those instances, the payment amount is recorded as deferred revenue and revenue is recognized over the service period.

 

New product development

 

In 2015, we improved our next generation vehicle management system on-vehicle platform, improved our product line of over-the-road asset management solutions and developed a next-generation rental vehicle management system as described below:

 

we expect our fourth-generation of on-asset hardware for industrial vehicles, the VAC4, to provide benefits to both the Company (primarily through lower costs, easier installation, easier integration with our hosted service offering, and expanded functional capabilities) and end users (including a simpler, universal interface with all vehicle types, reduced installation time, compatibility with a wider range of driver ID cards, a larger display for vehicle operators, and enhancements to the content and style of the information displayed);
   
we expect our next generation of VeriWise intermodal container tracking systems to help our customers maximize container fleet utilization and minimize container idle time by providing more accurate visibility of loading/unloading events and generating real-time data on load status throughout the shipment cycle;
   
we expect our next generation of VeriWise intermodal chassis tracking systems to help our customers accurately bill for chassis rental and usage, and minimize chassis idle time by providing more accurate visibility of container loading/unloading events and by generating real-time data throughout the shipment cycle;
   
we expect our next generation of VeriWise cellular trailer tracking systems to provide our customers with a lower-cost option for dry van trailer tracking when satellite communication is not required; and
   
we expect our next generation of RentalFleet system to provide a more ubiquitous vehicle rental management solution to satisfy the needs of both car rental companies and shared vehicle fleets.

 

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Sales and Marketing

 

Our sales and marketing objective is to achieve broad market penetration, with an emphasis both on expanding business opportunities with existing customers and on securing new customers.

 

We market our systems directly to commercial and government organizations and through indirect sales channels, such as original equipment manufacturers and industrial equipment dealers. In addition, we are actively pursuing strategic relationships with key companies in our target markets - including complementary hardware and software vendors and service providers - to further penetrate these markets by embedding our products in the assets our systems monitor and integrating our solutions with other systems.

 

We sell our systems 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.

 

We offer our customers hosting services and lease financing to facilitate the acquisition of our equipment and services.

 

Customers

 

We market and sell our wireless solutions to a wide range of customers in the commercial and government sectors. Our customers operate in diverse markets, such as automotive manufacturing, retail, shipping, freight transportation, heavy industry, wholesale distribution, aerospace and defense, homeland security, and vehicle rental.

 

During the year ended December 31, 2015, we generated revenues of $41.8 million with Wal-Mart Stores, Inc. accounting for 23% of our revenues. During the year ended December 31, 2014, we generated revenues of $45.6 million with Wal-Mart Stores, Inc. and the Raymond Corporation, accounting for 16% and 14%, respectively, of our revenues. During the year ended December 31, 2013, we generated revenues of $39.9 million with Wal-Mart Stores, Inc. and the Raymond Corporation, accounting for 18% and 10%, respectively, of our revenues.

 

The Company enters into master agreements with its customers in the normal course of its business. These agreements define the terms of any sales of products and/or services by the Company to the applicable customer, including, but not limited to, terms regarding payment, support services, termination and assignment rights. These agreements generally obligate the Company only when products or services are actually sold to the customer thereunder.

 

We strive to establish long-term relationships with our customers in order to maximize opportunities for new application development and increased sales.

 

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Competition

 

The market for our solutions is rapidly evolving, highly competitive and fragmented. Our target markets are also subject to quickly changing product technologies, shifting customer needs, regulatory requirements and frequent introductions of new products and services. A significant number of companies have developed or are developing and marketing software and hardware for wireless products that currently compete or will compete directly with our solutions. We compete with organizations varying in size, including many small, start-up companies as well as large, well-capitalized organizations. While some of our competitors focus exclusively on providing wireless asset management solutions, many are involved in wireless technology as an extension of a broader business. Many of our larger competitors are able to dedicate extensive financial resources to the research and development and deployment of wireless solutions. As government and commercial entities expand the use of wireless technologies, we expect that competition will continue to increase within our target markets.

 

We attempt to distinguish ourselves from our competitors by focusing on three primary applications: (i) industrial fleet management, (ii) rental fleet management, and (iii) remote transportation asset management. This focus has enabled us to direct product development efforts specifically suited for our target markets. Our on-asset devices are designed to operate independently of other system components, allowing for continuous asset control and data gathering even when the asset is out of wireless communication range. We believe that our proprietary technology as well as our experience in designing and developing products for our target markets distinguishes us within these markets.

 

In each of our markets, we encounter different competitors due to the dynamics of each market. In the industrial fleet management market, we are not aware of any competitors that can provide the precise capabilities of our systems due to our intellectual property and proprietary solutions; however, competitors do provide similar solutions that seek to address the same customer needs that our products address. Those companies include both emerging companies with limited operating histories, such TotalTrax Inc., and SpeedShield, a unit of Automotion Control Systems Pty. Ltd., and companies with longer operating histories, greater name recognition and/or significantly greater financial, technical and marketing resources than ours, such as Crown Equipment Corp.

 

In the rental fleet management market, our solutions for traditional airport-based rental fleet management compete primarily against existing handheld devices, which are used widely by vehicle rental companies. Currently, the principal handheld device providers we compete against include Motorola and Intermec which was acquired by Honeywell International Inc. Our solutions for remote, decentralized rental fleet management compete primarily with companies in the car sharing market such as Hertz, Enterprise, Zipcar and City Car Share. Large system integrators and several of the national cellular wireless providers have started to offer solutions, which package third party hardware, firmware and software, that compete with our solutions. In the markets for both types of rental fleet solutions, our competitive position is differentiated by our patented product offering - a fully automated, readily installed, and cost-effective car rental system.

 

In the remote transportation asset management market, we compete against several established competitors, including Omnitracs, LLC, SkyBitz, Inc., and Par Technology Corporation, StarTrak Systems, LLC and Ameriscan, Inc. (which were acquired by Orbcomm Inc.) and Spireon, Inc. We attempt to differentiate our solutions in this segment by offering a choice of communication mode (satellite or cellular), patented battery management technology, sensor options (door, cargo, tractor ID), and installation configurations (dry van trailers, refrigerated trailers, domestic containers, flatbed trailers, covered hopper and tanker railcars, and chassis).

 

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Research and Development

 

Our research and development team has expertise in areas such as software and firmware development, database design and data analytics, wireless communications, mechanical and electrical engineering, and both product and project management. In addition, we utilize external contractors to supplement our team in the areas of software development, digital design, and product testing.

 

We spent $4.4 million, $6.6 million, and $4.6 million for research and development during the years ended December 31, 2013, 2014, and 2015, respectively.

 

Generally, our research and development efforts are focused on: simplifying the implementation, support and utilization of our systems; reducing the cost of our systems; increasing the reliability of our products; expanding the functionality of our systems to meet customer and market requirements; applying new advances in technology to enhance existing products; and building further competitive advantages through our intellectual property portfolio.

 

In 2015, we focused our research and development investments in several key areas:

 

improving the reliability and performance of our next-generation vehicle management system platform, the VAC4, which simplifies installation and support requirements, in order to stimulate more widespread use of our technology on a broader range of equipment;
   
improvement of business intelligence and data analytics tools to quantify and simplify customer benefit achievement, within a single deployed facility, across an enterprise and throughout an industry;
   
improving the reliability and performance of our product line of over-the-road asset management solutions, including products tailored towards dry van trailers, intermodal containers and chassis;
   
the development of our next-generation rental car management system, including a new in-vehicle hardware and firmware platform, and an improved, more scalable software solution;
   
the development of a new version of our end-user software designed to increase the performance, stability and user experience associated with each of our software solutions; and
   
the continued development of specific features and data interfaces for our solutions to meet the individual requirements of large customers.

 

Specifically in 2015, we transitioned to our next generation vehicle management system vehicle platform and improved our product line of over-the-road asset management solutions, as described below:

 

we increased the performance and reliability of our fourth-generation on-vehicle device, the VAC4, which we expect to provide benefits to both the Company (primarily through lower costs, easier installation, integration with our hosted service offering, and expanded functional capabilities) and end users (including a simpler, universal interface with multiple vehicle types, reduced installation time, compatibility with a wider range of driver ID cards, a larger display for vehicle operators, and enhancements to the content and style of the information displayed);
   
we increased the performance and reliability of three new transportation asset management products, the GSM-D400, an intermodal container tracking system, the GSM-D150, an intermodal chassis tracking device, and the GSM-D300, a dry van management system with an advanced cargo sensor, which enables customers to perform full-function asset monitoring with either satellite or cellular communications; and
   
we improved the enterprise analysis and data drill-down capabilities of our Analytics platform for multi-site, multi-region customers.

 

Intellectual Property

 

Patents

 

We attempt to protect our technology and products through a variety of intellectual property protections, including the pursuit of patent protection in the United States and certain foreign jurisdictions. Because of the differences in patent laws and laws concerning proprietary rights, the extent of protection provided by U.S. patents or proprietary rights owned by us may differ from that of their foreign counterparts. Where strategically appropriate, we will attempt to pursue suspected violators of our patents and, whenever possible, monetize our intellectual property.

 

I.D. Systems has built a portfolio of patents and patent applications relating to various aspects of its technology and products. As of March 9, 2016, I.D. Systems has 21 U.S. patents, 3 pending U.S. patent applications, 1 pending foreign patent application, and 1 foreign patent. With the timely payment of all maintenance fees, the U.S. patents have expiration dates falling between 2016 and 2033. I.D. Systems also has foreign patents and pending applications relating to its wireless asset management system, and pending applications relating to its mobile RFID portal. No single patent or patent family is considered material to the I.D. Systems business.

 

I.D. Systems’ AI subsidiary also utilizes patents to protect aspects of its intellectual property assets. The AI patent portfolio focuses on methods, systems, and devices for managing mobile assets and reducing power consumption in mobile assets. As of March 9, 2016, the AI patent portfolio includes 24 U.S. patents and 2 pending U.S. patent applications. With timely payments of all maintenance fees, the granted U.S. patents have expiration dates falling between 2017 and 2034. No single patent or family of patents is considered material to the AI business.

 

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Trademarks

 

We have, or have applied for, trademark protection for I.D. SYSTEMS®, the I.D. SYSTEMS Logo®, VEHICLE ASSET COMMUNICATOR®, AVRAMP®, OPTI-KAN®, SECURESTREAM®, POWERFLEET®, SAFENAV®, POWERFLEET VISION®, POWERFLEET IQ™, INTELLIPOINT®, VERIWISE & Design®, VERIWISE™, VERIWISE IQ™, and ASSET INTELLIGENCE™.

 

We attempt to avoid infringing known proprietary rights of third parties in our product development and sales efforts. However, it is difficult to proceed with certainty in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential at the time of the application filing, with regard to similar technologies. If we were to discover that our products violate third-party proprietary rights, we may not be able to:

 

obtain licenses to continue offering such products without substantial reengineering;
   
reengineer our products successfully to avoid infringement;
   
obtain licenses on commercially reasonable terms, if at all; or
   
litigate an alleged infringement successfully or settle without substantial expense and damage awards.

 

Any claims against us relating to the infringement of third-party proprietary rights, even if without merit, could result in the expenditure of significant financial and managerial resources or in injunctions preventing us from distributing certain products. Such claims could materially adversely affect our business, financial condition and results of operations.

 

Our software products are susceptible to unauthorized copying and uses that may go undetected, and policing such unauthorized use is difficult. In general, our efforts to protect our intellectual property rights through patent, copyright, trademark and trade secret laws and contractual safeguards may not be effective to prevent misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to, or competitive with, those developed by us. Our failure or inability to protect our proprietary rights could materially and adversely affect our business, financial condition and results of operations.

 

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Manufacturing

 

We outsource our hardware manufacturing operations to leading contract manufacturers. This strategy enables us to focus on our core competencies - designing hardware and software systems and delivering solutions to customers - and avoid investing in capital-intensive electronics manufacturing infrastructure. Outsourcing also provides us with the ability to ramp up deliveries to meet increases in demand without increasing fixed expenses.

 

Our manufacturers are responsible for obtaining the necessary components and supplies to manufacture our products. While components and supplies are generally available from a variety of sources, manufacturers generally depend on a limited number of suppliers. In the past, unexpected demand for communication products has caused worldwide shortages of certain electronic parts and allocation of such parts by suppliers that had an adverse impact on the ability of manufacturers to deliver products as well as on the cost of producing such products.

 

Due to the general availability of manufacturers for our products, we do not believe that the loss of any of our manufacturers would have a long-term material adverse effect on our business, although there could be a short-term adverse effect on our business.

 

We generally attempt to maintain sufficient inventory to meet customer demand for products, as well as to meet anticipated sales levels. If our product mix changes in unanticipated ways, or if sales for particular products do not materialize as anticipated, we may have excess inventory or inventory that becomes obsolete. In such cases, our operating results could be negatively affected.

 

Government Regulations

 

The use of radio emissions is subject to regulation in the United States by various federal agencies, including the Federal Communications Commission, or FCC, and the Occupational Safety and Health Administration, or OSHA. Various state agencies also have promulgated regulations which concern the use of lasers and radio/electromagnetic emissions standards.

 

Regulatory changes in the United States and other countries in which we may operate in the future could require modifications to some of our products in order for us to continue manufacturing and marketing our products in those areas.

 

Our products intentionally transmit radio signals, including narrow band and spread spectrum signals, as part of their normal operation. We have obtained certification from the FCC for our products that require certification. Users of these products in the United States do not require any license from the FCC to use or operate our products. To market and sell our integrated wireless solutions in the European Union, we also utilize unlicensed radio spectra, and have obtained the required European Norm (EN) certifications.

 

In addition, some of our operations use substances regulated under various federal, state and local laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain of our products are subject to various federal, state and local laws governing chemical substances in electronic products.

 

The adoption of unfavorable regulations, or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected markets to become impractical or otherwise adversely affect our ability to produce or market our products.

 

Employees

 

As of March 15, 2016, we had 101 full-time employees, including 10 employees based in Germany and the United Kingdom. Of our 101 total employees, 25 were engaged in customer service, 17 in product development (which includes engineering), 3 in new product management, 12 in operations, 27 in sales and marketing, 4 in information technology and 13 in executive, administration and finance. We believe that our relationships with our employees are good.

 

Available Information

 

Our primary website is www.id-systems.com. We make available on this website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such information to, the Securities and Exchange Commission (“SEC”). We also make available on this website, free of charge, our Code of Ethics for Senior Financial Officers, which applies to our principal executive officer, principal financial officer and principal accounting officer.

 

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Item 1A. Risk Factors

 

In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company’s business. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. Additional risks not presently known to the Company or that the Company currently deems immaterial may also adversely affect our business, financial condition or results of operations.

 

We have incurred significant losses and have a substantial accumulated deficit. If we cannot achieve profitability, the market price of our common stock could decline significantly.

 

As of December 31, 2015, we had cash, cash equivalents and marketable securities of $6.4 million, working capital of $14.1 million and no debt. Our primary sources of cash are cash flows from operating activities and our holdings of cash, cash equivalents and investments. To date, we have not generated sufficient revenue solely from operating activities to fund our operations. In July 2015, we completed a strategic review which resulted in detailed plans to refocus our go-to market strategy on large enterprise customers aimed at increasing sales and reduced our headcount by approximately 20%. If we are unable to successfully implement our refocused go-to-market strategy, we may not realize the additional operating income expected as a result of the implementation, which may have a negative effect on the Company’s business, financial condition and results of operations.

 

We incurred net losses of approximately $7.5 million, $11.6 million and $10.0 million for the years ended December 31, 2013, 2014 and 2015, respectively, and have incurred additional net losses since inception. At December 31, 2015, we had an accumulated deficit of approximately $85.1 million. Our ability to increase our revenues from the sale of our products will depend on our ability to successfully implement our growth strategy and the continued expansion of our markets. If our revenues do not grow or if our operating expenses continue to increase, we may not be able to become profitable and the market price of our common stock could decline.

 

Our ability to utilize net operating loss carry-forwards may be limited.

 

The Company has U.S. net operating loss carry-forwards (“NOLs”) that expire through 2033. Section 382 of the Internal Revenue Code imposes an annual limitation on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. Ownership changes in our stock, some of which are outside of our control, could result in a limitation in our ability to use our NOLs to offset future taxable income, could cause U.S. Federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause such NOLs to expire unused, reducing or eliminating the benefit of such NOLs.

 

We are highly dependent upon sales of our wireless asset management system to a few customers. The loss of any of these customers, or any material reduction in the amount of our products they purchase, could materially and adversely affect our financial condition and results of operations.

 

During the year ended December 31, 2015, we generated revenues of $41.8 million with Wal-Mart Stores, Inc. accounting for 23% of our revenues. During the year ended December 31, 2014, we generated revenues of $45.6 million with Wal-Mart Stores, Inc. and the Raymond Corporation, accounting for 16% and 14%, respectively, of our revenues. During the year ended December 31, 2013, we generated revenues of $39.9 million with Wal-Mart Stores, Inc. and the Raymond Corporation, accounting for 18% and 10%, respectively, of our revenues. The loss of these customers or any material reduction in the amount of our products that these customers purchase, or 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.

 

If the market for our technology does not develop or become sustainable, expands more slowly than we expect or becomes saturated, our revenues will decline and our financial condition and results of operations could be materially and adversely affected.

 

Our success is highly dependent on the continued market acceptance of our wireless asset management system. The market for our wireless products and services is new and rapidly evolving. If the market for our products and services does not become sustainable, or becomes saturated with competing products or services, our revenues will decline and our financial condition and results of operations could be materially and adversely affected.

 

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If we are unable to keep up with rapid technological change, we may be unable to meet the needs of our customers, which could materially and adversely affect our financial condition and results of operations and reduce our ability to grow our market share.

 

Our market is characterized by rapid technological change and frequent new product announcements. Significant technological changes could render our existing technology obsolete. We are active in the research and development of new products and technologies and in enhancing our current products. However, research and development in our industry is complex and filled with uncertainty. For example, it is common for research and development projects to encounter delays due to unforeseen problems, resulting in low initial volume production, fewer product features than originally considered desirable and higher production costs than initially budgeted, any of which may result in lost market opportunities. In addition, these new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If our efforts do not lead to the successful development, marketing and release of new products that respond to technological developments or changing customer needs and preferences, our revenues and market share could be materially and adversely affected. We may expend a significant amount of resources in unsuccessful research and development efforts. In addition, new products or enhancements by our competitors may cause customers to defer or forego purchases of our products. Any of the foregoing could materially and adversely affect our financial condition and results of operations and reduce our ability to grow our market share.

 

We may incur additional charges for excess and obsolete inventory, which could adversely affect our cost of sales and gross profit.

 

While we strive to effectively manage our inventory, due to rapidly changing technology, and uneven customer demand, product cycles tend to be short and the value of our inventory may be adversely affected by changes in technology that affect our ability to sell the products in our inventory. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which in turn, can adversely affect our cost of sales and gross profit.

 

We have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new product introductions. During 2013 we recorded a reserve for slow moving or obsolete inventory of $2,066,000 in connection with our strategic review and in anticipation of new product offerings. The reserves we have established for potential losses due to obsolete inventory may, however, prove to be inadequate and may give rise to additional charges for obsolete or excess inventory.

 

The long and variable sales cycles for our solutions may cause our revenues and operating results to vary significantly from quarter to quarter or year to year, which could adversely affect the market price of our common stock.

 

We expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions.

 

The timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the complexity of the customer’s organization and the difficulty of such deployment. Customers with substantial or complex organizations may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that customers will tend to place large orders sporadically with short lead times, may cause our revenue and results of operations to vary significantly and unexpectedly from quarter to quarter. These variations could materially and adversely affect the market price of our common stock.

 

 21 

 

 

If we are unable to protect our intellectual property rights, our financial condition and results of operations could be materially and adversely affected.

 

We rely on a combination of patents, copyrights, trademarks, trade secrets and contractual measures to protect our intellectual property rights. Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by us. If such challenges are successful, our business will be materially and adversely affected.

 

Our employees, consultants and advisors enter into confidentiality agreements with us that prohibit the disclosure or use of our confidential information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. Despite these efforts, we cannot assure you that we will be able to effectively enforce these agreements or our confidential information will not be disclosed, that others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect our confidential information.

 

Disputes may arise in the future with respect to the ownership of rights to any technology developed with advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our systems, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could materially and adversely affect our financial condition and results of operations.

 

Policing the unauthorized use of our intellectual property is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology or other intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Accordingly, we may not be able to protect our proprietary rights against unauthorized third party copying or use. If we are unsuccessful in protecting our intellectual property, we may lose any technological advantages we have over competitors and our financial condition and results of operations could be materially and adversely affected.

 

We may become involved in an intellectual property dispute that could subject us to significant liability, divert the time and attention of our management and prevent us from selling our products, any of which could materially and adversely affect our financial condition and results of operations.

 

In recent years, there has been significant litigation in the United States and internationally involving claims of alleged infringement of patents and other intellectual property rights. Litigation may be necessary to enforce our intellectual property rights, defend ourselves against alleged infringement and determine the scope and validity of our intellectual property rights.

 

Any such litigation, whether or not successful, could result in substantial costs, divert the time and attention of our management and prevent us from selling our products. If a claim of patent infringement was decided against us, we could be required to, among other things:

 

pay substantial damages to the party making such claim;
   
stop selling, making, having made or using products or services that incorporate the challenged intellectual property;
   
obtain from the holder of the infringed intellectual property right a license to sell, make or use the relevant technology, which license may not be available on commercially reasonable terms, or at all; or
   
redesign those products or services that incorporate such intellectual property.

 

The failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of our products and could materially and adversely affect our financial condition and results of operations.

 

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The U.S. government’s right to use technology developed by us with government funds could limit our intellectual property rights.

 

We have developed, and may in the future develop, improvements to our technology that are funded in part by the U.S. government. As a result, we do not have the right to prohibit the U.S. government from using certain technologies developed by us with such government funds or to prohibit third parties from using those technologies to provide products and services at the request of the U.S. government. Although such government rights do not affect our ownership of the technology developed using such funds, the U.S. government has the right to royalty-free use of technologies that we have developed under such contracts. We are free to commercially exploit those government-funded technologies and may assert our intellectual property rights to seek to block other non-government users thereof, but there is no assurance we can successfully do so.

 

We rely on subcontractors to manufacture and deliver our products. Any quality or performance failures by our subcontractors or changes in their financial condition could disrupt our ability to supply quality products to our customers in a timely manner, resulting in business interruptions, increased costs, claims for damages, reputation damage and reduced revenue.

 

In order to meet the requirements under our customer contracts, we rely on subcontractors to manufacture and deliver our products to our customers. Any quality or performance failures by our subcontractors or changes in their financial or business condition could disrupt our ability to supply quality products to our customers in a timely manner. If we are unable to fulfill orders from our customers in a timely manner, we could experience business interruptions, increased costs, damage to our reputation and loss of our customers. In addition, we may be subject to claims from our customers for failing to meet our contractual obligations. Although we have several sources for production, the inability to provide our products to our customers in a timely manner could result in the loss of customers and our revenues could be materially reduced. In addition, there is great competition for the most qualified and competent subcontractors. If we are unable to hire qualified subcontractors, the quality of our services and products could decline. Furthermore, third-party manufacturers in the electronic component industry are consolidating. The consolidation of third-party manufacturers may give remaining manufacturers greater leverage to increase the prices that they charge, thereby increasing our manufacturing costs. If this were to occur and we are unable to pass the increased costs onto our customers, our profitability could be materially and adversely affected.

 

Our manufacturers rely on a limited number of suppliers for several significant components and raw materials used in our products. If we or our manufacturers are unable to obtain these components or raw materials on a timely basis, we will be unable to meet our customers’ orders, which could reduce our revenues, subject us to claims for damages and adversely affect our relationships with our customers.

 

We rely on a limited number of suppliers for the components and raw materials used in our products, including Flextronics International Ltd. Although there are many suppliers for most of our component parts and raw materials, we are dependent on a limited number of suppliers for many of our significant components and raw materials. This reliance involves a number of significant risks, including:

 

unavailability of materials and interruptions in delivery of components and raw materials from our suppliers, which could result in manufacturing delays; and
   
fluctuations in the quality and price of components and raw materials.

 

We currently do not have any long-term or exclusive purchase commitments with any of our suppliers. In addition, our suppliers may enter into exclusive arrangements with our competitors, be acquired by our competitors, or stop selling their products or components to us on commercially reasonable terms or at all. We may not be able to develop alternative sources for the components and raw materials. Even if alternate suppliers are available to us or our manufacturers, identifying them is often difficult and time consuming. If we or our manufacturers are unable to obtain an ample supply of product or raw materials from our existing suppliers or alternative sources of supply, we may be unable to satisfy our customers’ orders, which could reduce our revenues, subject us to claims for damages and adversely affect our relationships with our customers.

 

We rely significantly on channel partners to sell our products, and disruptions to, or our failure to develop and manage our channel partners would harm our business.

 

Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in systems and training. Those processes and procedures may become increasingly complex and difficult to manage as we grow our organization. We have no minimum purchase commitments from any of our channel partners, and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours. Our competitors may provide incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our products. Our channel partners may choose not to offer our products exclusively or at all. Establishing relationships with channel partners who have a history of selling our competitors’ products may also prove to be difficult. Our failure to establish and maintain successful relationships with channel partners would harm our business and operating results.

 

If we lose our executive officers, or are unable to recruit additional personnel, our ability to manage our business could be materially and adversely affected.

 

We are dependent on the continued employment and performance of our executive officers. We currently do not have employment agreements with any of our executive officers. Like other companies in our industry, we face intense competition for qualified personnel. Many of our competitors have greater resources than we have to hire qualified personnel. Accordingly, if we are not successful in attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely affected.

 

 23 

 

 

The industry in which we operate is highly competitive, and competitive pressures from existing and new companies could have a material adverse effect on our financial condition and results of operations.

 

The industry in which we operate is highly competitive and influenced by the following:

 

advances in technology;
   
new product introductions;
   
evolving industry standards;
   
product improvements;
   
rapidly changing customer needs;
   
intellectual property invention and protection;
   
marketing and distribution capabilities;
   
ability to attract and retain highly skilled professionals;
   
competition from highly capitalized companies;
   
entrance of new competitors;
   
ability of customers to invest in information technology; and
   
price competition.

 

The products marketed by us and our competitors are becoming more complex. As the technological and functional capabilities of future products increase, these products may begin to compete with products being offered by traditional computer, network and communications industry participants that have substantially greater financial, technical, marketing and manufacturing resources than we do.

 

Although we are not aware of any current competitors that provide the precise capabilities of our systems, we are aware of competitors that offer similar approaches to address the customer needs that our products address. Those companies include both emerging companies with limited operating histories, such as TotalTrax, Inc., and SpeedShield, a unit of Automotion Control Systems Pty. Ltd., and companies with longer operating histories, greater name recognition and/or significantly greater financial, technical and marketing resources than ours, such as Crown Equipment Corp.

 

In the rental fleet management market, our solutions for traditional airport-based rental fleet management compete primarily against existing handheld devices, which are used widely by vehicle rental companies. Currently, the principal handheld device providers we compete against include Motorola and Intermec which was acquired by Honeywell International Inc. Our solutions for remote, decentralized rental fleet management compete primarily with companies in the car sharing market such as Hertz, Enterprise, Zipcar and City Car Share. Large system integrators and several of the national cellular wireless providers have started to offer solutions, which package third party hardware, firmware and software, that compete with our solutions. In the markets for both types of rental fleet solutions, our competitive position is differentiated by our patented car rental system.

 

In the remote transportation asset management market, we compete against several established competitors, including Omnitracs, LLC, SkyBitz, Inc., and Par Technology Corporation, StarTrack Systems, LLC, and Ameriscan, Inc. which were acquired by Orbcomm Inc. and Spireon, Inc. We attempt to differentiate our solutions in this segment by offering a choice of communication mode (satellite or cellular), patented battery management technology, sensor options (door, cargo, tractor ID), and installation configurations (dry van trailers, refrigerated trailers, domestic containers, flatbed trailers, covered hopper and tanker railcars, and chassis).

 

If we do not keep pace with product and technology advances, including the development of superior products by our competitors, or if we are unable to otherwise compete successfully against our competitors, there could be a material adverse effect on our competitive position, revenues and prospects for growth. As a result, our financial condition and results of operations could be materially and adversely affected.

 

 24 

 

 

The federal government or independent standards organizations may implement significant regulations or standards that could adversely affect our ability to produce or market our products.

 

Our products transmit radio frequency waves, the transmission of which is governed by the rules and regulations of the FCC, as well as other federal and state agencies. Our ability to design, develop and sell our products will continue to be subject to these rules and regulations for the foreseeable future. In addition, our products and services may become subject to independent industry standards. The implementation of unfavorable regulations or industry standards, or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected products to become impractical or otherwise adversely affect our ability to produce or market our products. The adoption of new industry standards applicable to our products may require us to engage in rapid product development efforts that would cause us to incur higher expenses than we anticipated. In some circumstances, we may not be able to comply with such standards, which could materially and adversely affect our ability to generate revenues through the sale of our products.

 

Because our products are complex, they may have undetected errors or failures when they are introduced, which could seriously harm our business, and our product liability insurance may not adequately protect us.

 

Technical products like ours often contain undetected errors or failures when first introduced. Despite our efforts to eliminate these flaws, there still may be errors or failures in our products, even after the commencement of commercial shipments. We provide a warranty reserve at the time of shipment, which may not be sufficient to cover actual repair costs. Because our products are used in business-critical applications, we could be subject to product liability claims if our systems fail to perform as intended. Even unsuccessful claims against us could result in costly litigation and the diversion of management’s time and resources and could damage our reputation and impair the marketability of our systems. Although we maintain insurance, there are no assurances that:

 

our insurance will provide adequate coverage against potential liabilities if our products cause harm or fail to perform as promised; or
   
adequate product liability insurance will continue to be available to us in the future on commercially reasonable terms or at all.

 

If our insurance is insufficient to pay any product liability claims, our financial condition and results of operations could be materially and adversely affected. In addition, any such claims could permanently injure our reputation and customer relationships.

 

We may need to obtain additional capital to fund our operations that could have negative consequences on our business.

 

We may require additional capital in the future to develop and commercialize additional products and technologies or take advantage of other opportunities that may arise, including potential acquisitions. We may seek to raise the necessary funds through public or private equity offerings, debt financings or strategic alliances and licensing arrangements. On May 2, 2013, the SEC declared effective a shelf registration statement on Form S-3 that allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred stock, debt securities, subscription rights, warrants and units or any combination of the foregoing. We have not yet drawn upon this shelf registration. To the extent we raise additional capital by issuing equity securities, our existing stockholders may experience substantial dilution. In addition, we may be required to relinquish rights to our technologies or systems, or grant licenses on terms that are not favorable to us in order to raise additional funds through strategic alliance, joint venture and licensing arrangements. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our development programs, and our business, financial condition, results of operations and stock price could be materially and adversely affected.

 

 25 

 

 

Our senior credit facility restricts our ability to engage in certain transactions and may impair our ability to respond to changing business and economic conditions.

 

On December 18, 2015, we entered into a loan and security agreement (the “Revolver”) with Siena Lending Group LLC (the “Lender”), which provides a senior revolving credit facility in an aggregate principal amount of up to $7.5 million and a maturity date of December 18, 2017 (which date may be accelerated in certain cases). As of December 31, 2015, there were no borrowings understanding under the Revolver.

 

The Revolver requires us to satisfy various covenants, including financial covenants regarding liquidity and negative covenants that restrict our ability to engage in certain transactions without the consent of the Lender. These restrictions include, among other things, limitations on our ability and the ability of our subsidiaries to:

 

incur additional debt;
   
create liens on assets to secure debt;
   
make certain investments;
   
pay or declare dividends or other restricted payments;
   
merge or consolidate with another company;
   
transfer, sell or otherwise dispose of assets; and
   
enter into transactions with affiliates.

 

If we do not adequately anticipate and respond to the risks inherent in growing our business internationally, our operating results and the market price of our common stock could be materially and adversely affected.

 

To date, we have not generated significant revenues outside of North America. As part of our growth strategy, we are seeking ways to expand our operations outside of North America by establishing offices in the United Kingdom and Germany and developing relationships with global distributors to market and sell our systems internationally. For example, as of March 15, 2016, we had six employees in Germany and four in the United Kingdom who market and sell our systems in Europe. There are a number of risks inherent in doing business in international markets, including:

 

unexpected legal or regulatory changes;
   
unfavorable political or economic factors;
   
less developed infrastructure;
   
difficulties in recruiting and retaining personnel, and managing international operations;
   
fluctuations in foreign currency exchange rates;
   
lack of sufficient protection for intellectual property rights; and
   
potentially adverse tax consequences.

 

If we do not adequately anticipate and respond to the risks inherent in international operations, our operating results and the market price of our common stock could be materially and adversely affected. In addition, although we intend to expand our business outside of North America, there are risks associated with conducting an international operation, including the risks listed above, and such expansion may not be successful or have a positive effect on, and could materially and adversely affect, our financial condition and results of operations.

 

We provide no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we have acquired or might acquire in the future.

 

We may, from time to time, continue to consider investments in or acquisitions of complementary companies, products or technologies. In the event of any future acquisitions, we could:

 

issue stock that would dilute our current stockholders’ percentage ownership;
   
incur debt;
   
assume liabilities;
   
incur expenses related to the impairment of goodwill; or
   
incur large and immediate write-offs.

 

We may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to make these acquisitions on acceptable terms, or at all.

 

 26 

 

 

Our operation of any acquired business will also involve numerous risks, including:

 

problems integrating the acquired operations, personnel, technologies or products;
   
unanticipated costs;
   
diversion of management’s time and attention from our core businesses;
   
adverse effects on existing business relationships with suppliers and customers;
   
risks associated with entering markets in which we have no or limited prior experience; and
   
potential loss of key employees, particularly those of acquired companies.

 

In addition, if we make changes to our business strategy or if external conditions adversely affect our business operations, we may be required to record an impairment charge for goodwill or intangibles, which would lead to decreased assets and reduced net operating performance.

 

The concentration of common stock ownership among our executive officers and directors could limit the ability of other stockholders of the Company to influence the outcome of corporate transactions or other matters submitted for stockholder approval.

 

As of March 25, 2016, our executive officers and directors beneficially owned, in the aggregate, 11% of our outstanding common stock, not including 757,000 shares of common stock that our executive officers and directors may acquire upon the exercise of outstanding options or if they otherwise acquire additional shares of common stock in the future. As a result, our officers and directors may have the ability to influence the outcome of all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:

 

the election of directors;
   
adoption of stock option or other equity incentive compensation plans;
   
the amendment of our organizational documents; and
   
the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets.

 

 27 

 

 

The unpredictability of our quarterly operating results could adversely affect the market price of our common stock.

 

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, and any of which could adversely affect the market price of our common stock. The main factors that may affect us include the following:

 

variations in the sales of our products to our significant customers;
   
variations in the mix of products and services provided by us;
   
the timing and completion of initial programs and larger or enterprise-wide purchases of our products by our customers;
   
the length and variability of the sales cycle for our products;
   
the timing and size of sales;
   
changes in market and economic conditions, including fluctuations in demand for our products; and
   
announcements of new products by our competitors.

 

As a result of these and other factors, revenues for any quarter are subject to significant variation that could adversely affect the market price for our common stock.

 

Future sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options, may cause the market price of our common stock to decline.

 

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or sales of our common stock acquired upon the exercise of outstanding options, or the perception that these sales could occur. These sales also may make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

 

We have 13,849,363 shares of common stock outstanding as of March 25, 2016, of which 12,386,291 shares are freely transferable without restriction, and 1,463,072 shares are held by our officers and directors and, as such, are subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144 under the Securities Act. In addition, as of December 31, 2015, options to purchase 1,212,000 shares of our common stock were issued and outstanding, of which 904,000 were vested. The remaining options will vest ratably over a five-year period measured from the date of grant. The weighted-average exercise price of the vested stock options is $7.40. We also may issue additional shares of stock in connection with our business, including in connection with acquisitions, and may grant additional stock options to our employees, officers, directors and consultants under our stock option plans or warrants to third parties. If a significant portion of these shares of common stock were sold in the public market, the market value of our common stock could be adversely affected.

 

The issuance of equity or debt securities under our shelf registration statement could have a negative impact on the price of our common stock.

 

We have filed a registration statement on Form S-3 that was declared effective by the SEC on May 2, 2013. This registration statement registered up to an aggregate offering price of $60 million in debt and equity securities, including shares of our common stock, preferred stock, debt securities, subscription rights, warrants and units, or any combination of the foregoing. If we issue all of the securities included in the shelf registration statement, there could be a substantial dilutive effect on our common stock and an adverse effect on the price of our common stock.

 

Interest rate fluctuations may adversely affect our income and results of operations.

 

As of December 31, 2015, we had cash, cash equivalents and investments of $6.4 million. In a declining interest rate environment, reinvestment typically occurs at less favorable market rates, negatively impacting future investment income. Accordingly, interest rate fluctuations may adversely affect our income and results of operations.

 

 28 

 

 

We provide financing to our customers for the purchase of our products, which may increase our credit risks in the event of a deterioration in a customer’s financial condition or in global credit conditions.

 

We sell our products to a wide range of customers in the commercial and governmental sectors. We provide financing to customers for a portion of such sales which could be in the form of notes or leases receivable over two to five years. Although these customers are extended credit terms which are approved by us internally, our business could be materially and adversely affected in the event of a deterioration of the financial condition of one or more of our customers that results in such customers’ inability to repay us. This risk may increase during a general economic downturn affecting a large number of our customers or a widespread deterioration in global credit conditions, and in the event our customers do not adequately manage their businesses or properly disclose their financial condition.

 

Our cash and cash equivalents could be adversely affected by a downturn in the financial and credit markets.

 

We maintain our cash and cash equivalents with major financial institutions; however, our cash and cash equivalent balances with these institutions exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor on a systematic basis the cash and cash equivalent balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our cash and cash equivalents fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions in which we hold our cash and cash equivalents fail or the financial and credit markets deteriorate.

 

Goodwill impairment or intangible impairment charges may affect our results of operations in the future.

 

We test goodwill for impairment on an annual basis and more often if events occur or circumstances change that would likely reduce the fair value of a reporting unit to an amount below its carrying value. We also test for other possible acquisition intangible impairments if events occur or circumstances change that would indicate that the carrying amount of such intangible may not be recoverable. Any resulting impairment loss would be a non-cash charge and may have a material adverse impact on our results of operations in any future period in which we record a charge.

 

Long-lived assets with determinable useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such charges could have a material adverse effect on our results of operations in the period in which they are recorded.

 

Declines in general economic conditions could result in decreased demand for our products and services, which would adversely affect our business, financial condition and results of operations.

 

Our results of operations are affected by the levels of business activities of our customers, which can be affected by economic conditions in the United States and globally. During periods of economic downturns, our customers may decrease their demand for wireless technology solutions, as well as the maintenance, support and consulting services we provide. This slowdown may have an adverse effect on the wireless solutions industry in general and on demand for our products and services, but the magnitude of that impact is uncertain. Our future growth is dependent, in part, upon the demand for our products and services. Prolonged weakness in the economy may cause business enterprises to delay or cancel wireless solutions projects, reduce their overall wireless solutions budgets and/or reduce or cancel orders for our services. This, in turn, may lead to longer sales cycles, delays in purchase decisions, and payment and collection issues, and may also result in price pressures, causing us to realize lower revenues and operating margins. Additionally, if our customers cancel or delay their wireless solutions initiatives, our business, financial condition and results of operations could be materially and adversely affected.

 

 29 

 

 

Provisions of Delaware law or our charter documents could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for our stockholders to change the Company’s management.

 

Section 203 of the Delaware General Corporation Law prohibits us from engaging in a business combination with any of our interested stockholders for three years after such stockholder became an interested stockholder unless certain specified conditions are met. As a result, these provisions and Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

 

In addition, provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management or members of our Board of Directors. These provisions, among other things:

 

permit our Board of Directors to issue, without further action by our stockholders, up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in control;
   
provide that special meetings of stockholders may be called only by (i) our Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors, either upon motion of a director or upon written request by the holders of at least 50% of the voting power of all the shares of our capital stock entitled to vote in the election of directors, voting as a single class, or (ii) our Chairman of the Board or our President; and
   
require the affirmative vote of at least 75% of the voting power of all the shares of our capital stock entitled to vote in the election of directors, voting as a single class, to amend or repeal the provisions outlined above dealing with meetings of stockholders.

 

 30 

 

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our executive and I.D. Systems administrative offices are located in Woodcliff Lake, New Jersey. In May 2010, we entered into a lease for this facility, consisting of approximately 21,400 square feet, which expires on February 28, 2021. The rent is approximately $37,000 per month.

 

Our Asset Intelligence administrative offices are located in Plano, Texas. In April 2015, we entered into a lease for this facility, consisting of approximately 11,482 square feet, which expires February 28, 2021. The rent is approximately $22,000 per month.

 

We believe that our existing facilities are adequate for our existing needs.

 

Item 3. Legal Proceedings

 

In the ordinary course of its business, the Company is at times subject to various legal proceedings. The Company is not currently a party to any material legal proceedings.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 31 

 

 

PART II.

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information.

 

Our common stock is traded on the NASDAQ Global Market under the symbol “IDSY.” The following table sets forth the high and low sales price for our common stock on the NASDAQ Global Market for each fiscal quarter during the years ended December 31, 2015 and 2014.

 

Quarter Ended  High   Low 
         
2015          
March 31, 2015  $7.48   $5.84 
June 30, 2015   7.25    5.87 
September 30, 2015   6.52    3.07 
December 31, 2015   4.70    3.01 
           
2014          
March 31, 2014  $6.79   $5.53 
June 30, 2014   6.09    3.88 
September 30, 2014   7.76    4.89 
December 31, 2014   7.88    5.89 

 

Performance Graph.

 

The following graph shows a five-year comparison of cumulative total shareholder return for (i) the Company, (ii) the NASDAQ Market Index, and (iii) the Morningstar Communication Equipment Index (the “Morningstar Index”).

 

The graph assumes that $100 was invested in each of the Company’s common stock, the NASDAQ Market Index and the Morningstar Index on December 31, 2010, and that any dividends were reinvested. Data points on the graph are annual. Note that historic stock price performance is not necessarily indicative of future stock price performance. The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

 

 32 

 

 

 

   Fiscal Year Ended 
COMPANY/INDEX/MARKET  12/31/2010   12/31/2011   12/31/2012   12/31/2013   12/31/2014   12/31/2015 
                         
I.D. Systems, Inc.   100.00    141.62    174.25    173.35    200.30    137.72 
NASDAQ Market Index   100.00    99.17    116.48    163.21    187.27    200.31 
Morningstar Industry Index(1)   100.00    82.74    90.15    114.96    125.07    112.91 

 

(1) Morningstar, Inc. reconstituted the Morningstar Communication Equipment Index in the second half of 2010. As a result of such reconstitution, historical returns have been recalculated to reflect the updated composition of that industry index.

 

Prepared by Zacks Investment Research, Inc.

Index Data: Copyright NASDAQ OMX, Inc. Copyright Morningstar, Inc.

 

 33 

 

 

Holders.

 

As of March 25, 2016, there were 18 holders of record of our common stock.

 

Dividends.

 

We have never paid a cash dividend on our common stock and do not expect to pay a cash dividend in the near future. We currently intend to retain future earnings, if any, to finance our operations and expand our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, capital requirements and any other factors our Board of Directors deems relevant. In addition, our senior credit facility (described in Item 7 of Part II of this Annual Report on Form 10-K under the caption “Capital Requirements”) restricts our ability to pay dividends.

 

Sales of Unregistered Securities.

 

None.

 

Purchases of Equity Securities by the Issuer.

 

On November 4, 2010, the Company announced that its 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 is 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 (until such time, if ever, that they are re-issued by the Company). The share repurchase program does not have an expiration date, and the Company may discontinue or suspend the share repurchase program at any time.

 

The following table provides information regarding our common stock repurchases under our publicly announced share repurchase program and shares withheld for taxes due upon vesting of restricted stock for each month of the quarterly period ended December 31, 2015. As the table indicates, the Company did not make any share repurchases during the quarterly period ended December 31, 2015.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

               Approximate Dollar Value 
           Total Number of   of 
   Total Number       Shares   Shares that May Yet Be 
   of       Purchased as Part of   Purchased Under the Plans 
   Shares   Average Price   Publicly Announced   or 
Period  Purchased   Paid per Share   Plans or Programs   Programs 
                 
October 1, 2015 - October 31, 2015   -   $-    -   $1,660,000 
November 1, 2015 - November 30, 2015   -    -    -    1,660,000 
December 1, 2015 - December 31, 2015   -    -    -    1,660,000 
                     
Total   -   $-    -   $1,660,000 

 

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 2007 Repurchase Program was terminated by the Board of Directors in March 2012. Prior to such termination, the Company had purchased approximately 1,075,000 shares of its common stock in open market transactions under the 2007 Repurchase Program for an aggregate purchase price of approximately $9,970,000, or an average cost of $9.27 per share. The repurchases were funded from the Company’s working capital, and the amount and timing of such repurchases depended upon the price and availability of shares, general market conditions and the availability of cash, as determined at the discretion of our management.

 

 34 

 

 

Item 6. Selected Financial Data

 

The following table sets forth selected financial data for each of the five years ended December 31, 2015 derived from our audited financial statements. You should read the information in the table below together with the section of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which discusses the 2013, 2014 and 2015 fiscal years, and our financial statements and related notes and the other financial data included elsewhere in this Annual Report on Form 10-K.

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015 
Statement of Operations Data:                         
Revenues  $39,292,000   $44,635,000   $39,946,000   $45,633,000   $41,784,000 
Cost of revenues   18,723,000    21,705,000    22,036,000    25,627,000    24,761,000 
                          
Gross profit   20,569,000    22,930,000    17,910,000    20,006,000    17,023,000 
Operating expenses:                         
Selling, general and administrative expenses   21,995,000    22,409,000    21,769,000    25,094,000    22,750,000 
Research and development expenses   3,534,000    4,341,000    4,389,000    6,649,000    4,556,000 
                          
Loss on settlement of finance receivable                  441,000    - 
                          
Loss from operations   (4,960,000)   (3,820,000)   (8,248,000)   (12,178,000)   (10,283,000)
Interest income   243,000    507,000    635,000    595,000    360,000 
Interest expense   -    -    -    (29,000)   (18,000)
Other income (loss), net   287,000    59,000    51,000    37,000    (11,000)
                          
Net loss before income taxes   (4.430,000)   (3,254,000)   (7,562,000)   (11,575,000)   (9,952,000)
Income tax benefit - sale of NJ net operating losses   390,000    662,000    63,000    -    - 
                          
Net loss  $(4,040,000)  $(2,592,000)  $(7,499,000)  $(11,575,000)  $(9,952,000)
                          
Net loss per share - basic and diluted  $(0.36)  $(0.22)  $(0.63)  $(0.96)  $(0.79)
                          
Weighted average common shares outstanding - basic and diluted   11,162,000    11,744,000    11,912,000    12,098,000    12,614,000 
                          
Balance Sheet Data (at end of period):                         
                          
Cash and cash equivalents  $8,686,000   $1,914,000   $6,882,000   $6,277,000   $4,793,000 
                          
Investments   16,683,000    13,858,000    7,190,000    7,315,000    1,598,000 
                          
Total assets   62,831,000    60,566,000    55,515,000    52,486,000    44,428,000 
                          
Long term debt   -    -    293,000    149,000    - 
                          
Total stockholders’ equity   45,600,000    44,027,000    37,449,000    27,255,000    20,570,000 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist you in understanding our financial condition and results of operations and should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Many of the amounts and percentages in this section have been rounded for convenience of presentation, but actual recorded amounts have been used in computations. Accordingly, some information may appear not to compute accurately.

 

Overview

 

I.D. Systems, Inc. (“IDS”, and together with its subsidiaries, “I.D. Systems,” the “Company,” “we,” “our,” or “us”) develops, markets and sells wireless machine-to-machine (“M2M”) solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles, such as forklifts and airport ground support equipment; rental vehicles; and transportation assets, such as dry van trailers, refrigerated trailers, railcars and containers. Our patented wireless asset management 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 our 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 allows rental car companies to generate higher revenue by more accurately tracking vehicle data, such as fuel consumption and odometer readings, and improve 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 for use by their members, control vehicles remotely, manage member reservations by phone or Internet, and charge members for vehicle use by the hour.

 

We sell our system 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, aerospace and defense, homeland security, and vehicle rental.

 

We have incurred net losses of approximately $7.5 million, $11.6 million and $10.0 million for the years ended December 31, 2013, 2014 and 2015, respectively, and have incurred additional net losses since inception. As of December 31, 2015, we had cash, cash equivalents and marketable securities of $6.4 million, working capital of $14.1 million, an accumulated deficit of $85.1 million and no debt outstanding. Our primary sources of cash are cash flows from operating activities and the Company’s holdings of cash, cash equivalents and investments. We have a revolving credit facility of up to $7.5 million of which we did not draw any amounts through December 31, 2015. To date, the Company has not generated sufficient revenue solely from operating activities to fund our operations.

 

During the year ended December 31, 2015, we generated revenues of $41.8 million with Wal-Mart Stores, Inc. accounting for 23% of our revenues. During the year ended December 31, 2014, we generated revenues of $45.6 million with Wal-Mart Stores, Inc. and the Raymond Corporation accounting for 16% and 14%, respectively, of our revenues. During the year ended December 31, 2013, we generated revenues of $39.9 million with Wal-Mart Stores, Inc. and the Raymond Corporation accounting for 18% and 10%, respectively, of our revenues.

 

In 2015, we improved our next generation vehicle management system on-vehicle platform, improved our product line of over-the-road asset management solutions and developed a next-generation rental vehicle management system as described below:

 

we expect our fourth-generation of on-asset hardware for industrial vehicles, the VAC4, to provide benefits to both the Company (primarily through lower costs, easier installation, easier integration with our hosted service offering, and expanded functional capabilities) and end users (including a simpler, universal interface with all vehicle types, reduced installation time, compatibility with a wider range of driver ID cards, a larger display for vehicle operators, and enhancements to the content and style of the information displayed);
   
we expect our next generation of VeriWise intermodal container tracking systems to help our customers maximize container fleet utilization and minimize container idle time by providing more accurate visibility of loading/unloading events and generating real-time data on load status throughout the shipment cycle;
   
we expect our next generation of VeriWise intermodal chassis tracking systems to help our customers accurately bill for chassis rental and usage, and minimize chassis idle time by providing more accurate visibility of container loading/unloading events and by generating real-time data throughout the shipment cycle;
   
we expect our next generation of VeriWise cellular trailer tracking systems to provide our customers with a lower-cost option for dry van trailer tracking when satellite communication is not required; and
   
we expect our next generation of RentalFleet system to provide a more ubiquitous vehicle rental management solution to satisfy the needs of both car rental companies and shared vehicle fleets.

 

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During the first quarter of 2014, we implemented a new growth strategy. Accordingly, we launched an initiative called ‘I.D. Systems 2.0’, which included: a detailed review of customer requirements to accelerate enterprise adoption of our solutions; a transformation of our implementation approach to create more scalable and higher-quality processes in support of multiple simultaneous customer rollouts; a Six Sigma analysis of our internal process controls and quality management aimed at continuous improvement; and an acceleration of the engineering projects already on our product roadmap to help expedite revenue growth. We have budgeted approximately $2.5 million in support of I.D. Systems 2.0 initiatives, the majority of which were substantially completed by the end of 2014. For the year ended December 31, 2014, we incurred approximately $1.8 million of expense in support of I.D. Systems 2.0. Examples of projects completed under the initiative are described below:

 

We launched our fourth-generation on-vehicle device, the VAC4, in 2014.
   
We launched three new transportation asset management products, the GSM-D400, an intermodal container tracking system, the GSM-D150, an intermodal chassis tracking device, and the GSM-D300, a dry van management system with an advanced cargo sensor, which enables customers to perform full-function asset monitoring with either satellite or cellular communications.
   
We improved the enterprise analysis and data drill-down capabilities of our Analytics platform for multi-site, multi-region customers.
   
We introduced new processes to reduce lead-time for on-site customer installation support.
   
We launched a suite of new computer-based training tools to improve customer access to both initial and ongoing system training, while streamlining utilization of the company’s training resources.

 

On March 21, 2014, we entered into a Separation and General Release Agreement (the “Separation Agreement”) with our former Chief Executive Officer (the “Former CEO”). Under the terms of the Separation Agreement, the vesting of the Former CEO’s unvested stock options and restricted stock were accelerated and the term to exercise the stock options was extended to fifteen (15) months. Due to the modification of the terms of the stock option and restricted stock agreements, the Company recognized $327,000 of additional stock-based compensation expense in the first quarter of 2014 which is included in the stock option and restricted stock stock-based compensation expense.

 

In December 2013, as part of a strategic review and in response to the then expected engineering releases of our new products and/or new components, the Company evaluated its product life cycle expectations as it related to inventory on hand as of December 31, 2013. With the then expected release of the Company’s next generation vehicle management systems vehicle platform, the VAC4, and expansion of the Company’s product line of over-the-road asset management solutions, the Company made the strategic decision to discontinue offering the Powerkey and prior models of the satellite intermodal and rail product lines for sale to new customers in 2014. As a result of the strategic review of its products line, the Company recorded a $2,066,000 inventory reserve in December 2013.

 

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We are highly dependent upon sales of our system to a few customers. The loss of any of these key customers, or any material reduction in the amount of our products they purchase during a particular period, could materially and adversely affect our revenues for such period. Conversely, a material increase in the amount of our products purchased by a key customer (or customers) during a particular period could result in a significant increase in our revenues for such period, and such increased revenues may not recur in subsequent periods. Some of these key customers, as well as other customers of the Company, operate in markets that have suffered business downturns in the past few years or may so suffer in the future, particularly in light of the current global economic downturn, and any material adverse change in the financial condition of such customers could materially and adversely affect our financial condition and results of operations. If we are unable to replace such revenue from existing or new customers, the market price of our common stock could decline significantly.

 

We expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions.

 

The timing of the deployment of our solutions may vary widely and will depend on the specific deployment plan of each customer, the complexity of the customer’s organization and the difficulty of such deployment. Customers with substantial or complex organizations may deploy our solutions in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict the timing or size of these sales and deployment cycles. Long sales cycles, as well as our expectation that customers will tend to place large orders sporadically with short lead times, may cause our revenues and results of operations to vary significantly and unexpectedly from quarter to quarter.

 

Our ability to increase our revenues and generate net income will depend on a number of factors, including 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.

 

Critical Accounting Policies and Estimates

 

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by our management that can have a material impact on the carrying value of certain assets and liabilities. We consider such accounting policies to be our critical accounting policies. The judgments and assumptions used by our management in these critical accounting policies are based on historical experience and other factors that our management believes to be reasonable under the circumstances. Because of the nature of these judgments and assumptions, actual results could differ significantly from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Our critical accounting policies are described below.

 

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Revenue Recognition

 

We derive revenue 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, software, and hosting infrastructure. 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 based upon 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 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.

 

We recognize 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 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 are deferred and amortized over the life of the contract.

 

We also enter into post-contract maintenance and support agreements for our wireless asset management systems. Revenue is recognized over the service period and the cost of providing these services is expensed as incurred. Deferred revenue also includes prepayment of extended maintenance and support contracts.

 

Under certain customer contracts, we invoice 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, we recognize 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.

 

Financing Receivables

 

Notes receivable relate to interest-bearing product financing arrangements that exceed one year and are recorded at face value. Interest income is recognized over the life of the note. Amounts collected on notes receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. Unearned income is amortized to interest income over the life of the notes using the effective-interest method.

 

We also derive revenue under leasing arrangements. The 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 future minimum lease payments. Revenue is deferred and recognized over the service contract, as described above. Maintenance revenue is recognized monthly over the lease term. Interest income is recognized monthly over the lease term using the effective-interest method.

 

The allowance for uncollectable minimum lease payments represents our best estimate of the amount of credit losses in the existing notes and sales-type lease receivable. The allowance 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 years ended December 31, 2013, 2014 and 2015. We do not accrue interest when a note or lease is considered impaired. When the ultimate collectability of the principal balance of the impaired note or lease is in doubt, all cash receipts on impaired notes or leases are applied to reduce the principal amount of such notes/leases until the principal has been recovered and are recognized as interest income thereafter. Impairment losses are charged against the allowance and increases in the allowance are charged to bad debt expense. Notes and leases are written off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote. We resume accrual of interest when it is probable that we will collect the remaining principal and interest of an impaired note/lease. Notes and leases become past due based on how recently payments have been received.

 

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.

 

Inventory valuation reserves are established in order to report inventories at the lower of cost or market value in the consolidated balance sheet. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for obsolete and slow-moving inventory are estimated based on assumptions of future sales forecasts, product life cycle expectations, the impact of new product introductions, production requirements, and specific identification of items, such as product discontinuance or engineering/material changes and by comparing the inventory levels to historical usage rates.

 

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Stock-Based Compensation

 

We account for stock-based employee compensation for all share-based payments, including grants of stock options, as an operating expense, based on their fair values on the grant date. The Company recorded stock-based compensation expense of $1,118,000, $1,334,000 and $1,609,000 for the years ended December 31, 2013, 2014 and 2015, respectively.

 

We estimate the fair value of share-based payment awards on the grant date using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our consolidated statement of operations. We estimate forfeitures at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The estimate is based on our historical rates of forfeitures. Estimated forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Long-lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and would be charged to earnings.

 

Goodwill and Other Intangible Assets

 

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized. Intangible assets are amortized over their estimated useful lives unless the lives are determined to be indefinite. Intangible assets are carried at cost, less accumulated amortization and impairment charges. Intangible assets consist of trademarks and trade names, patents, customer relationships and other intangible assets. We test goodwill and other intangible assets annually, or when a triggering event occurs between annual impairment tests, to determine if impairment exists and if the use of indefinite lives is currently applicable.

 

Product Warranties

 

We provide a one-year warranty on our products. Estimated future warranty costs are accrued in the period that the related revenue is recognized. These estimates are derived from historical data and trends of product reliability and costs of repairing and replacing defective products.

 

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Income taxes

 

We use the asset and liability method of accounting for deferred income taxes. Deferred income taxes are measured by applying enacted statutory rates to net operating loss carryforwards and to the differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2014 and 2015, we had a valuation allowance on all of our deferred tax assets.

 

Fair Value Measurements

 

In determining fair value of financial instruments, we utilize 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 participant assumptions.

 

Results of Operations

 

The following table sets forth certain items related to our statement of operations as a percentage of revenues for the periods indicated and should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. A detailed discussion of the material changes in our operating results is set forth below.

 

   Year Ended December 31, 
   2013   2014   2015 
Revenues:               
Products   57.9%   62.2%   58.7%
Services   42.1    37.8    41.3 
                
    100.0    100.0    100.0 
                
Cost of revenues:               
Cost of products   39.8    42.6    43.1 
Cost of services   15.3    13.5    16.1 
                
Total gross profit   44.9    43.9    40.8 
                
Selling, general and administrative expenses   54.5    55.0    54.4 
Research and development expenses   11.0    14.6    10.9 
Loss on settlement of finance receivable        1.0    - 
                
Loss from operations   (20.6)   (26.7)   (24.5)
Interest income   1.6    1.2    0.8 
Other income (loss), net   0.1    0.1    - 
                
Loss before income taxes   (18.9)   (25.4)   (23.7)
Income tax benefit - sale of NJ net operating losses   0.2    -    - 
                
Net loss   (18.7)%   (25.4)%   (23.7)%

 

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

The following table sets forth our revenues by product line for the periods indicated:

 

   Year Ended 
   December 31, 
   2014   2015 
Product revenue:          
Industrial and rental fleet management  $20,374,000   $13,201,000 
Transportation asset management   8,029,000    11,330,000 
    28,403,000    24,531,000 
           
Services revenue:          
Industrial and rental fleet management   6,520,000    7,372,000 
Transportation asset management   10,710,000    9,881,000 
    17,230,000    17,253,000 
           
   $45,633,000   $41,784,000 

 

REVENUES. Revenues decreased by approximately $3.8 million, 8.4%, to $41.8 million in 2015 from $45.6 million in in 2014. The decrease in revenue is attributable to decrease in total industrial and rental fleet management revenue of approximately $6.3 million to $20.6 million in 2015 from $26.9 million in 2014 partially offset by an increase in total transportation asset management revenue of approximately $2.5 million to $21.2 million in 2015 from $18.7 million in 2014.

 

Revenues from products decreased by approximately $3.9 million, or 13.6%, to $24.5 million in 2015 from $28.4 million in 2014. Industrial and rental fleet management product revenue decreased by approximately $7.2 million to $13.2 million in 2015 from $20.4 million in 2014. The decrease in industrial and rental fleet management product revenue resulted principally from decreased product sales of approximately $3.2 million to the Raymond Corporation, $0.8 million to the U.S. Postal Service $0.4 million to Ford Motor Company, $0.4 million to Procter & Gamble and $0.4 million to General Motors Company. Transportation asset management product revenue increased by approximately $3.3 million to $11.3 million in 2015 from $8.0 million in 2014. The increase in transportation asset management product revenue resulted principally from increased product revenue of approximately $0.5 million to U.S. Trailer Holdings LLC, $0.5 million to Ashley Distribution Services, Ltd. and spare parts sales of approximately $2.0 million to Wal-Mart Stores, Inc.

 

Revenues from services of $17.3 million in 2015 remained generally consistent with 2014 revenues of $17.2 million. Industrial and rental fleet management service revenue increased by approximately $0.9 million to $7.4 million in 2015 from $6.5 million in 2014, principally due to an increase in revenue of approximately $0.7 million from Avis Budget, Inc. from a new development project. Transportation asset management service revenue decreased by approximately $0.8 million to $9.9 million in 2015 from $10.7 million in 2014. The decrease in transportation asset management service revenue resulted principally from a decrease in the revenue per active unit.

 

The following table sets forth our cost of revenues by product line for the periods indicated:

 

   Year Ended 
   December 31, 
   2014   2015 
Cost of products:          
Industrial and rental fleet management  $12,861,000   $8,889,000 
Transportation asset management   6,597,000    9,129,000 
    19,458,000    18,018,000 
           
Cost of services:          
Industrial and rental fleet management   2,970,000    3,675,000 
Transportation asset management   3,199,000    3,068,000 
    6,169,000    6,743,000 
           
   $25,627,000   $24,761,000 

 

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COST OF REVENUES. Cost of revenues decreased by approximately $0.9 million, or 3.4%, to $24.8 million in 2015 from $25.6 million for the same period in 2014. The decrease is principally attributable to a decrease in cost of products partially offset by an increase in cost of services in 2015. Gross profit was $17.0 million in 2015 compared to $20.0 million for the same period in 2014. As a percentage of revenues, gross profit decreased to 40.7% in 2015 from 43.8% in 2014.

 

Cost of products decreased by approximately $1.4 million, or 7.4%, to $18.0 million in 2015 from $19.5 million in the same period in 2014. Gross profit for products was $6.5 million in 2015 compared to $8.9 million in 2014. The decrease in gross profit was attributable to a decrease of approximately $3.2 million in the industrial and rental fleet management gross profit to $4.3 million in 2015 from $7.5 million in 2014. The transportation asset management gross profit increased approximately $0.8 million to $2.2 million in 2015 from $1.4 in 2014. As a percentage of product revenues, gross profit decreased to 26.6% in 2015 from 31.5% in 2014. The decrease in gross profit as a percentage of product revenue was due to a decrease in the industrial and rental fleet management gross profit percentage to 32.7% in 2015 from 36.9% in 2014, which was principally due to an increase in the number of units sold with lower unit product margins, which was principally due to the Company’s transition to a new pricing model for VMS, that emphasizes multi-year service contracts and lower upfront hardware revenue and start-up costs for initial production of the Company’s new generation of VMS devices. The transportation asset management product revenue gross profit percentage increased to 19.4% in 2015 from 17.8% in 2014, which was principally due to a decrease in warranty expense, partially offset by lower gross margin on spare parts sales.

 

Cost of services increased by approximately $0.6 million, or 9.3%, to $6.7 million in 2015 from $6.2 million in 2014. Gross profit for services was $10.5 million in 2015 compared to $11.1 million in 2014. The transportation asset management gross profit decreased by approximately $0.7 million to $6.8 million in 2015 from $7.5 million in 2014. The industrial and rental fleet management gross profit increased approximately $0.1 million to $3.7 million in 2015 from $3.6 million in 2014. As a percentage of service revenues, gross profit decreased to 60.9% in 2015 from 64.2% in 2014. The decrease in gross profit as a percentage of service revenue was principally due to a decrease in the industrial and rental fleet management gross profit percentage to 50.1% in 2015 from 54.4% in 2014 and a decrease in the transportation asset management gross profit percentage to 69.0% in 2015 from 70.1% in 2014. The decrease in the industrial and rental fleet management gross profit margin was principally due to an increase in installation expenses. The decrease in transportation asset management gross profit margin was principally due to an increase in communication expenses.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by approximately $2.3 million, or 9.3%, to $22.8 million in 2015 compared to $25.1 million in the same period in 2014. The decrease was principally due to a decrease of approximate $1.1 million in expenses related to the Company’s executive management change that was incurred in 2014, a decrease of approximate $1.5 million in intangibles amortization expense as some intangible assets became fully amortized, a decrease of approximately $0.5 million in bad debt expense reserve from improved collections, partially offset by an increase of approximately $0.5 million in stock-based compensation expense which was due to grants of restricted stock, $0.3 million in severance costs from the reduction in work force, and $0.3 million increase in professional fees, which was principally from an unconsummated strategic initiative. As a percentage of revenues, selling, general and administrative expenses decreased to 54.4% in 2015 from 55.0% in the same period in 2014, primarily due to the decrease in expenses noted above partially offset by the decrease in revenue in 2015 in comparison to 2014.

 

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased by approximately $2.1 million, or 31.5%, to $4.6 million in 2015 compared to $6.6 million in the same period in 2014 primarily from a reduction of product development expenses incurred in 2014 as a result of our I.D. Systems 2.0 initiative. As a percentage of revenues, research and development expenses decreased to 10.9% in 2015 from 14.6% in the same period in 2014, primarily due to the decrease in expenses noted above partially offset by the decrease in revenue in 2015 in comparison to 2014.

 

INTEREST INCOME. Interest income decreased by $224,000, or 39.6%, to $342,000 in 2015 from $566,000 in the same period in 2014 principally due to a decrease in interest income from financing receivables from the early settlement of a finance receivable.

 

NET LOSS. Net loss was $10.0 million, or $(0.79) per basic and diluted share, for 2015 as compared to net loss of 11.6 million, or $(0.96) per basic and diluted share, for the same period in 2014. The increase in the net loss was due primarily to the reasons described above.

 

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

The following table sets forth our revenues by product line for the periods indicated:

 

   Year Ended 
   December 31, 
   2013   2014 
Product revenue:          
Industrial and rental fleet management  $16,751,000   $20,374,000 
Transportation asset management   6,389,000    8,029,000 
    23,140,000    28,403,000 
           
Services revenue:          
Industrial and rental fleet management   5,338,000    6,520,000 
Transportation asset management   11,468,000    10,710,000 
    16,806,000    17,230,000 
           
   $39,946,000   $45,633,000 

 

REVENUES. Revenues increased by approximately $5.7 million, or 14.2%, to $45.6 million in 2014 from $39.9 million in 2013. The increase in revenue is principally attributable to an increase in total industrial and rental fleet management revenue of approximately $4.8 million to $26.9 million in 2014 from $22.1 million in 2013 and an increase in transportation asset management revenue increase of approximately $0.9 million to $18.7 million in 2014 from $17.9 million in 2013.

 

Revenues from products increased by approximately $5.3 million, or 22.7%, to $28.4 million in 2014 from $23.1 million in 2013. Industrial and rental fleet management product revenue increased by approximately $3.6 million to $20.4 million in 2014 from $16.8 million in 2013. Transportation asset management product revenue increased by approximately $1.6 million to $8.0 million in 2014 from $6.4 million in 2013. The increase in industrial and rental fleet management product revenue resulted principally from increased product sales of approximately $2.1 million to the Raymond Corporation, $0.7 million to the U.S. Postal Service and $0.6 million to Procter & Gamble (China) Sales Co., Ltd. The increase in transportation asset management product revenue resulted principally from increased spare parts sales to Wal-Mart Stores, Inc.

 

Revenues from services increased by approximately $0.4 million, or 2.5%, to $17.2 million in 2014 from $16.8 million in 2013. Industrial and rental fleet management service revenue increased by approximately $1.2 million to $6.5 million in 2014 from $5.3 million in 2013 principally due to an increase in revenue of approximately $0.4 million the Raymond Corporation and $0.3 million to the U.S. Postal Service. Transportation asset management service revenue decreased approximately $0.8 million to $10.7 million in 2014 from $11.5 million in 2013 principally due to a decrease in the revenue per active unit.

 

The following table sets forth our cost of revenues by product line for the periods indicated:

 

   Year Ended 
   December 31, 
   2013   2014 
Cost of products:          
Industrial and rental fleet management  $10,068,000   $12,861,000 
Transportation asset management   5,846,000    6,597,000 
    15,914,000    19,458,000 
           
Cost of services:          
Industrial and rental fleet management   2,695,000    2,970,000 
Transportation asset management   3,427,000    3,199,000 
    6,122,000    6,169,000 
           
   $22,036,000   $25,627,000 

 

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COST OF REVENUES. Cost of revenues increased by approximately $3.6 million, or 16.3%, to $25.6 million in 2014 from $22.0 million in 2013. The increase is principally attributable to an increase in product revenue in 2014 and approximately $0.4 million increase in warranty expense partially offset by approximately $2.0 million decrease in the inventory reserve charge. Gross profit was approximately $20.0 million in 2014 compared to $17.9 million in 2013. As a percentage of revenues, gross profit was 43.8% in 2014 compared to 44.8% in 2013.

 

Cost of products increased by approximately $3.6 million, or 22.3%, to $19.5 million in 2014 from $15.9 million in 2013. Gross profit for products was approximately $8.9 million in 2014 compared to $7.2 million in 2013. The industrial and rental fleet management gross profit increased by approximately $0.8 million to $7.5 million in 2014 from $6.7 million in 2013. The transportation asset management gross profit increased by approximately $0.9 million to $1.4 million in 2014 from $0.5 million in 2013. As a percentage of product revenues, gross profit of approximately 31.5% in 2014 remained generally consistent with the gross profit of 31.2% in 2013. The industrial and rental fleet management gross profit percentage decreased to 36.9% in 2014 from 39.9% in 2013, principally due to an increase in revenue from our channel partners which have a lower gross margin partially offset by a $0.9 million decrease in the inventory reserve charge. Transportation asset management gross profit percentage increased to approximately17.8% in 2014 from 8.5% in 2013, principally due to a $1.0 million decrease in the inventory reserve charge partially offset by an increase of approximately $0.4 million in warranty expense principally from a customer extended warranty incentive and lower gross margin on spare parts sales.

 

Cost of services of approximately $6.2 million in 2014 remained generally consistent with the cost of services of $6.1 million in 2013. Gross profit for services was approximately $11.1 million in 2014 compared to $10.7 million in 2013. The industrial and rental fleet management gross profit increased by approximately $1.0 million to $3.6 million in 2014 from $2.6 million in 2013. The transportation asset management gross profit decreased by approximately $0.5 million to $7.5 million in 2014 from $8.0 million in 2013. As a percentage of service revenues, gross profit increased to approximately 64.2% in 2014 from 63.6% in 2013. The industrial and rental fleet management gross profit percentage increased to approximately 54.4% in 2014 from 49.5% in 2013 principally due to a reduction in rental fleet contractor expenses. The transportation asset management gross profit percentage of 70.1% in 2014 remained generally consistent with the gross profit percentage in 2013.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by approximately $3.3 million, or 15.3%, to $25.1 million in 2014 compared to $21.8 million in 2013. The increase was due primarily to approximately $1.1 million in expenses related to the Company’s executive management change in March 2014 and a $1.5 million increase in incentive compensation due to the increase in revenue. As a percentage of revenues, selling, general and administrative expenses increased to 55.0% in 2014 from 54.5% in 2013, primarily due to the increase in the expenses noted above.

 

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased approximately $2.3 million, or 51.5%, to $6.6 million in 2014 from $4.4 million in 2013, primarily due to product development expenses incurred under our I.D. Systems 2.0 initiative to accelerate the development of our next generation vehicle and transportation asset management systems. As a percentage of revenues, research and development expenses increased to 14.6% in 2014 from 11.0% in 2013, primarily due to the increase in the expenses noted above.

 

INTEREST INCOME, NET. Net Interest income decreased by approximately $69,000, or 10.9%, to $566,000 in 2014 from $635,000 in 2013 principally from the early settlement of a finance receivable and an increase in interest expense from the capital lease obligation.

 

NET LOSS. Net loss was $11.6 million, or $(0.96) per basic and diluted share, for 2014 as compared to net loss of $7.5 million, or $(0.63) per basic and diluted share, for 2013. The decrease in the net loss was due primarily to the reasons described above.

 

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Liquidity and Capital Resources

 

Historically, our capital requirements have been funded primarily from the net proceeds from the issuance of our securities, including any issuances of our common stock upon the exercise of options. As of December 31, 2015, we had cash, cash equivalents and marketable securities of $6.4 million and working capital of $14.1 million, compared to cash, cash equivalents and marketable securities of $13.6 million and working capital of $19.4 million as of December 31, 2014.

 

On April 1, 2013, the Company filed a shelf registration statement on Form S-3 with the SEC. Pursuant to the registration statement, which was declared effective by the SEC on May 2, 2013, the Company may offer to the public from time to time, in one or more offerings, up to $60 million of its securities, which may include common stock, preferred stock, debt securities, subscription rights, warrants and units, or any combination of the foregoing, at prices and on terms to be determined at the time of any offering. The specific terms of any future offering will be determined at the time of the offering and described in a prospectus supplement that will be filed with the SEC in connection with such offering.

 

On September 30, 2013, the Company entered into an equipment lease for computer equipment. The lease is payable in 24 monthly installments of approximately $14,000, including interest at an annual rate of 12.82%. The term of the lease commenced in December 2013 and expired in December 2015.

 

Capital Requirements

 

As of December 31, 2015, we had cash, cash equivalents and marketable securities of $6.4 million, working capital of $14.1 million and no debt outstanding. The Company’s primary sources of cash are cash flows from operating activities and the Company’s holdings of cash, cash equivalents and investments. To date, the Company has not generated sufficient revenue solely from operating activities to fund its operations.

 

In July 2015, we reduced our headcount by approximately 20%. With the expected cost savings from the decrease in headcount, expected collections on existing accounts receivable and refocused go-to market strategy focusing on large enterprise customers aimed at increasing sales and reducing inventory, we believe that with the cash and investments on hand and proceeds from the revolving credit facility, we will have sufficient funds available to cover our capital requirements for at least the next 12 months.

 

On December 18, 2015 (the “Closing Date”), I.D. Systems, Inc. (“I.D. Systems”), and its wholly-owned subsidiary, Asset Intelligence, LLC (“Asset Intelligence”) (collectively, the “Loan Parties”), entered into a loan and security agreement (the “Revolver”) with Siena Lending Group LLC. As of December 31, 2015, there were no borrowings outstanding under the Revolver.

 

The Revolver provides a revolving credit facility in an aggregate principal amount of up to $7.5 million and a maturity date of December 18, 2017 (which date may be accelerated in certain cases). Outstanding indebtedness under the Revolver may be voluntarily prepaid at any time, in whole or in part, subject to payment of an early termination premium equal to (i) 3% of the amount of such prepayment if prepayment occurs on or before December 18, 2016, or (ii) 1.5% of the amount of such prepayment if prepayment occurs after December 18, 2016 but on or before June 18, 2017, but no early termination premium is payable if prepayment occur after June 18, 2017. In addition, no early termination premium is payable if the Revolver is refinanced with Bank of America, N.A. I.D. Systems intends to use borrowings under the Revolver for a variety of purposes, including working capital and general corporate purposes.

 

The Company has an available borrowing base subject to reserves established at the lender’s discretion of 85% of Eligible Accounts (as defined in the Revolver) and 75% of Eligible Lease Receivables (as defined in the Revolver) up to $7.5 million under the Revolver. Eligible Accounts and Eligible Lease Receivables do not include certain receivables deemed ineligible by the lender.

 

Borrowings under the Revolver bear interest at a rate equal to the sum of 2.00% per annum plus the base rate as it is defined in the loan and security agreement governing the Revolver (the greater of (i) Prime Rate (ii) Federal Funds Rate plus 0.5%, or (iii) 3.25%). In addition, the Company is charged an unused line fee equal to 0.50% per annum on unused amounts of the revolving credit facility and a minimum borrowing fee equal to the excess, if any, of (i) interest which would have been payable in respect of each month if, at all time during such month, the principal balance of the Revolving Loans (as defined in the Revolver) was equal to $2,000,000 over (ii) the actual interest payable in respect of such month on the Revolving Loans.

 

The Loan Parties guarantee the payment obligations under the Revolver. Any borrowings are further secured by (i) certain equity interests owned or held by the Loan Parties and 65% of the voting stock of all present and future foreign subsidiaries of the Loan Parties and (ii) substantially all of the tangible and intangible personal property and assets of the Loan Parties.

 

The Revolver contains a financial covenant regarding liquidity which requires the Loan Parties to maintain a minimum liquidity of (a) $3,500,000 from the Closing Date through and including January 31, 2016 and (b) $4,000,000 on February 1, 2016 or at any time thereafter. The Revolver also includes customary affirmative and negative covenants for credit facilities of this type, including limitations on our indebtedness, liens, investments, restricted payments, mergers and acquisitions, dispositions of assets, transactions with affiliates, ability to amend our organizational documents. Any failure to comply with such covenants could lead to an acceleration of our obligations under the Revolver.

 

Our capital requirements depend on a variety of factors, including, but not limited to, the length of the sales cycle, the rate of increase or decrease in our existing business base, the success, timing, and amount of investment required to bring new products to market, revenue growth or decline and potential acquisitions. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations.

 

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Operating Activities

 

Net cash used in operating activities was $6.9 million for the year ended December 31, 2015, compared to net cash used in operating activities of $0.3 million for the same period in 2014, which included proceeds of $5.4 million from the early settlement of a finance receivable. The net cash used in operating activities for the year ended December 31, 2015 reflects a net loss of $10.0 million and includes non-cash charges of $1.6 million for stock-based compensation, $0.7 million for depreciation and amortization expense and $0.3 million for bad debt expense. Changes in working capital items included:

 

a decrease in accounts receivable of $3.4 million;
   
an increase in inventory of $1.1 million;
   
an increase in deferred costs of $1.2 million;
   
a decrease in accounts payable of $1.2 million; and
   
a decrease in financing receivables of $0.9 million.

 

Net cash used in operating activities was $0.3 million for the year ended December 31, 2014, compared to net cash used in operating activities of $1.1 million for the year ended December 31, 2013. The net cash used in operating activities for the year ended December 31, 2013 reflects a net loss of $11.6 million and includes non-cash charges of $1.3 million for stock-based compensation, $2.2 million for depreciation and amortization expense and $0.9 million for bad debt reserve. Changes in working capital items included:

 

Proceeds of $5.4 million from the early settlement of a finance receivable
   
an increase in accounts receivable of $6.3 million;
   
a decrease in finance receivables of $2.5 million;
   
an increase in inventory of $1.2 million;
   
an increase in deferred revenue of $3.5 million; and
   
an increase in accounts payable and accrued expenses of $3.7 million, principally due to an increase of $1.2 million in accrued incentive compensation and the timing of payments to our vendors.

 

Investing Activities

 

Net cash provided by investing activities was $3.5 million for the year ended December 31, 2015, compared to net cash used in investing activities of $0.6 million for the same period in 2014. The change from the same period in 2014 was primarily due to an increase in net proceeds from the sale and maturities of investments of $5.9 million, partially offset by an increase in expenditures for fixed assets and website development costs of $1.8 million in 2015.

 

Net cash used investing activities was $0.6 million for the year ended December 31, 2014, compared to net cash provided by investing activities of $6.0 million for the year ended December 31, 2013. The change from the same period in 2013 was primarily due to a decrease in net redemption of investments of approximately $6.6 million.

 

Financing Activities

 

Net cash provided by financing activities was $1.9 million for the year ended December 31, 2015, compared to net cash provided by financing activities of $0.3 million for the same period in 2014. The change from the same period in 2014 was primarily due to an increase in proceeds from the exercise of stock options of $1.5 million in 2015.

 

Net cash provided by financing activities was $0.3 million for the year ended December 31, 2014, compared to net cash provided by financing activities of $0.2 million for the same period in 2013. The change from net cash provided by financing activities in 2013 was primarily due to proceeds from exercise of stock options of approximately $0.3 million in 2014.

 

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Contractual Obligations and Commitments

 

The following table summarizes our significant contractual obligations and commitments as of December 31, 2015:

 

   Payment due by Period 
       Less than           After 5 
   Total   one year   1 to 3 years   3 to 5 years   Years 
                          
Operating leases  $4,469,000   $790,000   $2,636,000   $1,043,000   $- 

 

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Although we have entered into contracts for services, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

 

The expected timing or payment of obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on changes to agreed upon amounts for some obligations.

 

Inflation

 

We believe our operations have not been and, in the foreseeable future, will not be, materially and adversely affected by inflation or changing prices.

 

Business Acquisitions

 

In addition to focusing on our 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 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 we 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 our wholly owned subsidiary. In connection with the transaction, AI offered employment to all of the former employees of the GEAI Business. The AI business complements our existing businesses, as AI’s focus on trucking, rail, marine and intermodal applications significantly expands the scope of assets addressed by our product solutions. The web and mobile communications technologies of AI also complement I.D. Systems’ portfolio of wireless asset management patents. The acquisition has provided us with access to a broader base of customers.

 

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.

 

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Under the terms of the Purchase Agreement, we paid consideration of $15 million in cash at closing. In addition, we would have been required to pay additional cash consideration of up to $2 million on 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 ending December 31, 2010. However, the applicable units targets were not achieved and therefore none of the additional contingent consideration was paid.

 

We incurred acquisition-related expenses of approximately $1,355,000, of which $1,241,000 are included in selling, general and administrative expenses in 2009 and $114,000 in 2010.

 

We accounted for the AI transaction under the acquisition method of accounting and recorded at the assets and liabilities of the acquired business at their estimated fair values at the date of acquisition. We 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 to be sold in 2010. The fair value of 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. 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 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 results of operations of AI have been included in the consolidated statement of operations as of the effective date of the acquisition.

 

The goodwill arising from the acquisition consists largely of the synergies and cost reductions through economies of scale expected and realized from combining the operations of the Company and AI. The goodwill is expected to be fully deductible for tax purposes.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The revised guidance must be applied on a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The revised guidance is effective for the Company beginning in the quarter ending March 31, 2019. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” which provides guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software by the customer. If a cloud computing arrangement does not contain a software license, it should be accounted for as a service contract by the customer. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies and weaknesses in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. In July 2015, the FASB approved a deferral of the ASU effective date from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017, while allowing for early adoption for fiscal periods after December 15, 2016. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition, and apply existing guidance under the Stock Compensation Topic of the ASC as it relates to awards with performance conditions that affect vesting to account for such awards. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2015. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 also provides guidance for related footnote disclosures. ASU 2014-15 is effective for the Company beginning on January 1, 2016 with early adoption permitted. The Company does not believe the impact of its pending adoption of this ASU on the Company’s consolidated financial statements will be material.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to market risks in the form of changes in corporate income tax rates, which risks are currently immaterial to us.

 

We also are subject to market risk from changes in interest rates which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities. We also are subject to market risks from changes in equity prices of equity securities we hold in our investment portfolio, which risks currently are immaterial to us. As of December 31, 2015, we had cash, cash equivalents and investments of $6.4 million.

 

As of December 31, 2015, the carrying value of our cash and cash equivalents approximated fair value. In a declining interest rate environment, as short-term investments mature, reinvestment occurs at less favorable market rates, negatively impacting future investment income. We maintain our cash and cash equivalents with major financial institutions; however, our cash and cash equivalent balances with these institutions exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. While we monitor on a systematic basis the cash and cash equivalent balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our cash and cash equivalents fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions in which we hold our cash and cash equivalents fail or the financial and credit markets deteriorate.

 

 51 

 

 

Item 8. Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
Report of Independent Registered Public Accounting Firm   53
Consolidated Balance Sheets at December 31, 2014 and 2015   54
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2014 and 2015   55
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013, 2014 and 2015   56
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2013, 2014 and 2015   57
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2014 and 2015   58
Notes to the Consolidated Financial Statements   59

 

 52 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

I.D. Systems, Inc. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of I.D. Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2015, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. The financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of I.D. Systems, Inc. and subsidiaries as of December 31, 2014 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

 

In connection with our audits of the consolidated financial statements referred to above, we also audited Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2015. In our opinion, this financial schedule, when considered in relation to the consolidated financial statements, taken as a whole, presents fairly, in all material respects, the information stated therein.

 

/s/ EisnerAmper LLP  
   
Iselin, New Jersey  
   
March 29, 2016  

 

 53 

 

 

 

I.D. SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

   As of December 31, 
   2014   2015 
ASSETS          
Current assets:          
Cash and cash equivalents  $5,974,000   $4,489,000 
Restricted cash   303,000    304,000 
Investments - short term   3,249,000    259,000 
Accounts receivable, net of allowance for doubtful accounts of $1,434,000 and $1,512,000 in 2014 and 2015, respectively   14,783,000    10,901,000 
Financing receivables - current, net of allowance for doubtful accounts of $-0- in 2014 and 2015   1,898,000    1,950,000 
Inventory, net   6,252,000    7,152,000 
Deferred costs - current   2,183,000    3,310,000 
Prepaid expenses and other current assets   1,767,000    2,263,000 
           
Total current assets   36,409,000    30,628,000 
           
Investments - long term   4,066,000    1,339,000 
Financing receivables - less current portion   4,072,000    3,078,000 
Deferred costs - less current portion   3,281,000    3,320,000 
Fixed assets, net   1,520,000    3,119,000 
Goodwill   1,837,000    1,837,000 
Intangible assets, net   977,000    842,000 
Other assets   324,000    265,000 
           
   $52,486,000   $44,428,000 
           
LIABILITIES          
Current liabilities:          
Accounts payable and accrued expenses  $10,102,000   $9,173,000 
Capital lease obligation - current   149,000    - 
Deferred revenue - current   6,742,000    7,383,000 
           
Total current liabilities   16,993,000    16,556,000 
           
Deferred rent   309,000    361,000 
Deferred revenue - less current portion   7,929,000    6,941,000 
           
    25,231,000    23,858,000 
Commitments and Contingencies (Note 20)          
           
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; 13,476,000 and 14,211,000 shares issued at December 31, 2014 and 2015, respectively; shares outstanding, 12,812,000 and 13,467,000 at December 31, 2014 and 2015, respectively   124,000    129,000 
Additional paid-in capital   106,272,000    110,116,000 
Accumulated deficit   (75,176,000)   (85,128,000)
Accumulated other comprehensive loss   (375,000)   (500,000)
Treasury stock; 664,000 and 744,000 common shares at cost at December 31, 2014 and 2015 , respectively   (3,590,000)   (4,047,000)
           
Total stockholders’ equity   27,255,000    20,570,000 
Total liabilities and stockholders’ equity  $52,486,000   $44,428,000 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 54 

 

 

I.D. SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

 

   Year Ended December 31, 
   2013   2014   2015 
             
Revenues:               
Products  $23,140,000   $28,403,000   $24,531,000 
Services   16,806,000    17,230,000    17,253,000 
                
    39,946,000    45,633,000    41,784,000 
Cost of Revenues:               
Cost of products   15,914,000    19,458,000    18,018,000 
Cost of services   6,122,000    6,169,000    6,743,000 
                
    22,036,000    25,627,000    24,761,000 
                
Gross Profit   17,910,000    20,006,000    17,023,000 
                
Operating expenses:               
Selling, general and administrative expenses   21,769,000    25,094,000    22,750,000 
Research and development expenses   4,389,000    6,649,000    4,556,000 
Loss on settlement of finance receivable   -    441,000    - 
                
    26,158,000    32,184,000    27,306,000 
                
Loss from operations   (8,248,000)   (12,178,000)   (10,283,000)
Interest income, net   635,000    566,000    342,000 
Other income (expense), net   51,000    37,000    (11,000)
                
Net loss before income taxes   (7,562,000)   (11,575,000)   (9,952,000)
                
Income tax benefit - sale of NJ net operating losses   63,000    -    - 
                
Net loss  $(7,499,000)  $(11,575,000)  $(9,952,000)
                
Net loss per share - basic and diluted  $(0.63)  $(0.96)  $(0.79)
                
Weighted average common shares outstanding - basic and diluted   11,912,000    12,098,000    12,614,000 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 55 

 

 

I.D. SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

 

   Year Ended December 31, 
   2013   2014   2015 
             
Net loss  $(7,499,000)  $(11,575,000)  $(9,952,000)
                
Other comprehensive income (loss), net:               
                
Unrealized loss on investments   (55,000)   (13,000)   (28,000)
Reclassification of net realized investment (gains) losses included in net loss   (27,000)   7,000    43,000 
Foreign currency translation adjustment   (77,000)   (263,000)   (140,000)
                
Total other comprehensive income (loss)   (159,000)   (269,000)   (125,000)
                
Comprehensive loss  $(7,658,000)  $(11,844,000)  $(10,077,000)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 56 

 

 

I.D. SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

 

                   Accumulated         
   Common Stock   Additional       Other         
   Number of       Paid-in   Accumulated   Comprehensive   Treasury   Stockholders’ 
   Shares   Amount   Capital   Deficit   (Loss) Income   Stock   Equity 
                             
Balance at January 1, 2013   12,678,000   $122,000   $103,135,000   $(56,102,000)  $53,000   $(3,181,000)  $44,027,000 
                                    
Net loss   -    -    -    (7,499,000)   -    -    (7,499,000)
Foreign currency translation adjustment   -    -    -    -    (77,000)   -    (77,000)
Unrealized loss on investments   -    -    -    -    (82,000)   -    (82,000)
Shares issued pursuant to exercise of stock options   67,000    1,000    226,000    -    -    -    227,000 
Shares withheld pursuant to exercise of stock options and restricted stock   -    -    -    -    -    (265,000)   (265,000)
Issuance of restricted stock   101,000    -    -    -    -    -    - 
Forfeiture of restricted shares   (11,000)                              
Stock based compensation - restricted stock   -    -    527,000    -    -    -    527,000 
Stock based compensation - options and performance shares   -    -    591,000    -    -    -    591,000 
                                    
Balance at December 31, 2013   12,835,000   $123,000   $104,479,000   $(63,601,000)  $(106,000)  $(3,446,000)  $37,449,000 
                                    
Net loss   -    -    -    (11,575,000)   -    -    (11,575,000)
Foreign currency translation adjustment   -    -    -    -    (263,000)   -    (263,000)
Unrealized loss on investments   -    -    -    -    (6,000)   -    (6,000)
Shares issued pursuant to exercise of stock options   126,000    1,000    459,000    -    -    -    460,000 
Issuance of restricted stock   608,000    -    -    -    -    -    - 
Forfeiture of restricted shares   (93,000)   -    -    -    -    -    - 
Shares withheld pursuant to exercise of stock options and restricted stock   -    -    -    -    -    (144,000)   (144,000)
Stock based compensation - restricted stock   -    -    787,000    -    -    -    787,000 
Stock based compensation - options and performance shares   -    -    547,000    -    -    -    547,000 
                                    
Balance at December 31, 2014   13,476,000   $124,000   $106,272,000   $(75,176,000)  $(375,000)  $(3,590,000)  $27,255,000 
                                    
Net loss   -    -    -    (9,952,000)   -    -    (9,952,000)
Foreign currency translation adjustment   -    -    -    -    (140,000)   -    (140,000)
Unrealized loss on investments   -    -    -    -    15,000    -    15,000 
Shares issued pursuant to exercise of stock options   568,000    5,000    2,235,000    -    -    -    2,240,000 
Issuance of restricted stock   232,000    -    -    -    -    -    - 
Forfeiture of restricted shares   (65,000)   -    -    -    -    -    - 
Shares withheld pursuant to exercise of stock options and restricted stock   -    -    -    -    -    (457,000)   (457,000)
Stock based compensation - restricted stock   -    -    1,325,000    -    -    -    1,325,000 
Stock based compensation - options and performance shares   -    -    284,000    -    -    -    284,000 
                                    
Balance at December 31, 2015   14,211,000   $129,000   $110,116,000   $(85,128,000)  $(500,000)  $(4,047,000)  $20,570,000 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 57 

 

 

I.D. SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

   Year Ended December 31, 
   2013   2014   2015 
             
Cash flows from operating activities:               
Net loss  $(7,499,000)  $(11,575,000)  $(9,952,000)
Adjustments to reconcile net loss to cash used in operating activities:               
Inventory reserve   2,066,000    122,000    186,000 
Stock based compensation   1,118,000    1,334,000    1,609,000 
Depreciation and amortization   2,171,000    2,216,000    718,000 
Bad debt reserve   482,000    853,000    326,000 
Loss on settlement of finance receivable   -    441,000    - 
Deferred income taxes   (63,000)   -    - 
Proceeds from sale of New Jersey net operating loss carryforward   662,000    63,000    - 
Other non-cash items   (13,000)   18,000    106,000 
Changes in:               
                
Restricted cash   -    (3,000)   (1,000)
Accounts receivable   (1,186,000)   (6,293,000)   3,350,000 
Proceeds from settlement of finance receivable        5,371,000    - 
Financing receivables   (354,000)   2,535,000    943,000 
Inventory   290,000    (1,218,000)   (1,086,000)
Prepaid expenses and other assets   119,000    (860,000)   (437,000)
Deferred costs   58,000    (491,000)   (1,166,000)
Deferred revenue   621,000    3,492,000    (347,000)
Accounts payable and accrued expenses   385,000    3,694,000    (1,151,000)
                
Net cash used in operating activities   (1,143,000)   (301,000)   (6,902,000)
                
Cash flows from investing activities:               
Capital expenditures   (538,000)   (410,000)   (2,182,000)
Purchases of investments   (3,841,000)   (5,357,000)   (2,754,000)
Maturities of investments   10,427,000    5,187,000    8,434,000 
                
Net cash provided by (used in) investing activities   6,048,000    (580,000)   3,498,000 
                
Cash flows from financing activities:               
Principal payments of capital lease obligation   (12,000)   (144,000)   (149,000)
Proceeds from exercise of stock options   203,000    460,000    2,006,000 
                
Net cash provided by financing activities   191,000    316,000    1,857,000 
                
Effect of foreign exchange rate changes on cash and cash equivalents   (128,000)   (43,000)   62,000 
Net increase (decrease) in cash and cash equivalents   4,968,000    (608,000)   (1,485,000)
Cash and cash equivalents - beginning of period   1,614,000    6,582,000    5,974,000 
                
Cash and cash equivalents - end of period  $6,582,000   $5,974,000   $4,489,000 
                
Supplemental disclosure of cash flow information:               
Cash paid for:               
Interest  $-   $29,000   $18,000 
                
Non-cash investing and financing activities include:               
Shares withheld pursuant to stock issuance  $265,000   $144,000   $457,000 
Unrealized (loss) gain on investments  $(82,000)  $(6,000)  $15,000 
Fixed assets acquired by capital lease  $305,000   $-   $- 

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 58 

 

 

I.D. SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 and 2015

 

NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY

 

I.D. Systems, Inc. and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”) develop, market and sell wireless machine-to-machine (“M2M”) 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. The Company’s patented wireless asset management system addresses the needs of organizations to control, track, monitor and analyze their assets. Our cloud-based software tool called I.D. Systems Analytics (“Analytics”), is designed to provide a single, integrated view of asset activity across multiple locations, generating enterprise-wide benchmarks and peer-industry comparisons to provide an even deeper layer of insights into asset operations. Analytics determines key performance indicators (“KPIs”) relating to the performance of managed assets. The Company’s solutions enable customers to achieve tangible economic benefits by making timely, informed decisions that increase the safety, 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.

 

As of December 31, 2015, we had cash, cash equivalents and marketable securities of $6.4 million, working capital of $14.1 million and no debt outstanding. The Company’s primary sources of cash are cash flows from operating activities and the Company’s holdings of cash, cash equivalents and investments. To date, the Company has not generated sufficient revenue solely from operating activities to fund its operations.

 

In July 2015, we reduced our headcount by approximately 20%. With the expected cost savings from the decrease in headcount, expected collections on existing accounts receivable and refocused go-to market strategy focusing on large enterprise customers aimed at increasing sales and reducing inventory, we believe that with the cash and investments on hand and available borrowings under the revolving credit facility, we will have sufficient funds available to cover our capital requirements for at least the next 12 months.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

[A] Principles of consolidation:

 

The Consolidated financial statements include the accounts of I.D. Systems, Inc. and its wholly owned subsidiaries, Asset Intelligence, LLC (“AI”), I.D. Systems GmbH (“IDS GmbH”) and I.D. Systems (UK) Ltd (formerly Didbox Ltd.) (“IDS Ltd”) (which, as noted above, are collectively referred to herein as the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

 

[B] Use of estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.

 

[C] Cash and cash equivalents:

 

The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents unless they are legally or contractually restricted. The Company’s cash and cash equivalent balances generally exceed FDIC limits.

 

 59 

 

 

[D] Restricted cash:

 

Restricted cash at December 31, 2014 and 2015 consists of cash held in escrow for purchases from a vendor.

 

[E] Investments:

 

The Company’s investments include debt securities, U.S. Treasury Notes, government and state agency bonds, mutual funds, corporate bonds, common stock 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. All of the Company’s investments are currently classified as available for sale. 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). The Company has classified as short-term those securities that mature within one year, mutual funds and common stock, and all other securities are classified as long-term. Realized gains and losses from the sale of available for sale securities are determined on a specific-identification basis. Net realized gains and losses from the sale of investment securities available for sale are included in “other income” in the consolidated statement of operations. Dividend and interest income are recognized when earned.

 

[F] Accounts receivable:

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains reserves against its accounts receivable for potential losses. Allowances for uncollectible accounts are estimated based on the Company’s periodic review of accounts receivable balances. In establishing the required allowance, management considers our customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts receivable are net of an allowance for doubtful accounts in the amount of $1,434,000 and $1,512,000 in 2014 and 2015, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.

 

[G] Financing receivables:

 

Financing receivables include notes and sales-type lease receivables from the sale of the Company’s products and services. Notes receivable relate to interest-bearing product financing arrangements that exceed one year and are recorded at face value. Interest income is recognized over the life of the note. Amounts collected on notes receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. Unearned income is amortized to interest income over the life of the notes using the effective-interest method.

 

The Company also derives revenue under leasing arrangements. 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 future minimum lease payments. Interest income is recognized monthly over the lease term using the effective-interest method.

 

The allowance for uncollectable minimum lease payments represents the Company’s best estimate of the amount of credit losses in the Company’s existing notes and sales-type lease receivable. The allowance 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. The Company considers 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 years ended December 31, 2013, 2014 and 2015. The Company does not accrue interest when a note or lease is considered impaired. When the ultimate collectability of the principal balance of the impaired note or lease is in doubt, all cash receipts on impaired notes or leases are applied to reduce the principal amount of such notes/leases until the principal has been recovered and are recognized as interest income thereafter. Impairment losses are charged against the allowance and increases in the allowance are charged to bad debt expense. Notes and leases are written off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote. The Company resumes accrual of interest when it is probable that the Company will collect the remaining principal and interest of an impaired note/lease. Notes and leases become past due based on how recently payments have been received.

 

 60 

 

 

[H] 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, software, and hosting infrastructure. 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 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 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.

 

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.

 

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 consolidated statements of operations.

 

[I] Deferred costs:

 

Deferred product costs consist of transportation asset management equipment costs deferred in accordance with our revenue recognition policy. The Company will continue to evaluate the realizability of the carrying amount of the deferred contract costs on a quarterly basis. To the extent the carrying value of the deferred contract costs exceed the contract revenue, an impairment loss will be recognized.

 

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[J] 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.

 

Inventory valuation reserves are established in order to report inventories at the lower of cost or market value in the consolidated balance sheet. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for obsolete and slow-moving inventory are estimated based on assumptions of future sales forecasts, product life cycle expectations, the impact of new product introductions, production requirements, and specific identification of items, such as product discontinuance or engineering/material changes and by comparing the inventory levels to historical usage rates.

 

In December 2013, as part of a strategic review and in response to engineering releases of new products and/or new components, the Company evaluated its product life cycle expectations as it relates to inventory on hand as of December 31, 2013. With the release of the Company’s next generation vehicle management systems vehicle platform, the VAC4, and the expansion of the Company’s product line of over-the-road asset management solutions, the Company made the strategic decision to discontinue offering the Powerkey and prior models of the satellite intermodal and rail product lines for sale to new customers in 2014. As a result of this strategic review of its products line, the Company recorded a $2,066,000 inventory reserve in December 2013.

 

[K] Fixed assets and depreciation:

 

Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases, or their estimated useful lives, whichever is shorter. For website development costs, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three years.

 

[L] Long-lived assets:

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and would be charged to earnings. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

[M] Goodwill and other intangible assets:

 

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized. Intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. Intangible assets are carried at cost, less accumulated amortization. Intangible assets consist of trademarks and trade name, patents, customer relationships and other intangible assets. The Company tests goodwill and other intangible assets annually, or when a triggering event occurs between annual impairment tests, to determine if impairment exists and if the use of indefinite lives is currently applicable. For purposes of the goodwill impairment test, the Company’s product lines are aggregated within one reporting unit. For the years ended December 31, 2014 and 2015, the Company has not incurred an impairment charge. For the year ended December 31, 2013 the Company recorded a $74,000 impairment charge related to its PowerKey tradename and trademark intangible assets which is included in amortization expense. With the release of the Company’s next generation vehicle management systems platform, the VAC4, the Company made the strategic decision to discontinue offering the Powerkey product line for sale to new customers in 2014. As result, the Company wrote-off the PowerKey tradename and trademark intangible assets in 2013.

 

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[N] Product warranties:

 

The Company typically provides a one-year warranty on its products. Estimated future warranty costs are accrued in the period that the related revenue is recognized. These estimates are derived from historical data and trends of product reliability and costs of repairing and replacing defective products.

 

[O] Research and development:

 

Research and development costs are charged to expense as incurred and consists primarily of salaries and related expenses, supplies and contractor costs. Research and development costs were $4,389,000, $6,649,000 and $4,556,000 in 2013, 2014 and 2015, respectively.

 

[P] Patent costs:

 

Costs incurred in connection with acquiring patent rights are charged to expense as incurred.

 

[Q] Benefit plan:

 

The Company maintains a retirement plan under Section 401(k) of the Internal Revenue Code, which covers all eligible employees. All employees with U.S. source income are eligible to participate in the plan immediately upon employment. The Company did not make any contributions to the plan during the years ended December 31, 2013, 2014 and 2015.

 

[R] Rent expense:

 

Expense related to the Company’s facilities leases is recorded on a straight-line basis over the respective lease terms. The difference between rent expense incurred and the amounts required to be paid in accordance with the lease term is recorded as deferred rent and is amortized over the lease term.

 

[S] Stock-based compensation:

 

The Company accounts for stock-based employee compensation for all share-based payments, including grants of stock options and restricted stock, as an operating expense based on their fair values on grant date. The Company recorded stock-based compensation expense of $1,118,000, $1,334,000 and $1,609,000 for the years ended December 31, 2013, 2014 and 2015, respectively.

 

The Company estimates the fair value of share-based option awards on the grant date using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated statement of operations. The Company estimates forfeitures at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The estimate is based on the Company’s historical rates of forfeitures. Estimated forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

[T] Income taxes:

 

The Company uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes are measured by applying enacted statutory rates to net operating loss carryforwards and to the differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The Company recognizes uncertainty in income taxes in the financial statements using a recognition threshold and measurement attribute of a tax position taken or expected to be taken in a tax return. The Company applies the “more-likely-than-not” recognition threshold to all tax positions, commencing at the adoption date of the applicable accounting guidance, which resulted in no unrecognized tax benefits as of such date. Additionally, there have been no unrecognized tax benefits subsequent to adoption. The Company has opted to classify interest and penalties that would accrue according to the provisions of relevant tax law as selling, general, and administrative expenses, in the consolidated statement of operations. For the years ended December 31, 2013, 2014 and 2015, there was no such interest or penalty.

 

The Company files federal income tax returns and separate income tax returns in various states. For federal and certain states, the 2012 through 2015 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations. For certain other states, the 2011 through 2015 tax years remain open for examination by the tax authorities under a four-year statute of limitations.

 

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[U] Fair value of financial instruments:

 

Cash and cash equivalents and investments in securities are carried at fair value. The carrying value of financing receivables approximates fair value due to the interest rate implicit in the instruments approximating current market rates. The carrying value of accounts receivable, accounts payable and other liabilities approximates their fair values due to the short period to maturity of these instruments.

 

[V] Advertising and marketing expense:

 

Advertising and marketing costs are expensed as incurred. Advertising and marketing expense for the years ended December 31, 2013, 2014 and 2015 amounted to $305,000, $380,000 and $455,000, respectively.

 

[W] Commitments and contingencies:

 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

 

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[X] Recently issued accounting pronouncements:

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The revised guidance must be applied on a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The revised guidance is effective for the Company beginning in the quarter ending March 31, 2019. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” which provides guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software by the customer. If a cloud computing arrangement does not contain a software license, it should be accounted for as a service contract by the customer. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies and weaknesses in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. In July 2015, the FASB approved a deferral of the ASU effective date from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017, while allowing for early adoption for fiscal periods after December 15, 2016. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition, and apply existing guidance under the Stock Compensation Topic of the ASC as it relates to awards with performance conditions that affect vesting to account for such awards. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2015. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 also provides guidance for related footnote disclosures. ASU 2014-15 is effective for the Company beginning on January 1, 2016 with early adoption permitted. The Company does not believe the impact of its pending adoption of this ASU on the Company’s consolidated financial statements will be material.

 

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NOTE 3 - INVESTMENTS AND FAIR VALUE MEASUREMENTS

 

The Company’s investments include debt securities, U.S. Treasury Notes, government and state agency bonds, mutual funds, corporate bonds, common stock 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. As of December 31, 2014 and 2015, all of the Company’s investments are classified as available of sale. 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 years ended December 31, 2013, 2014 and 2015, the Company reported unrealized losses of $(55,000), $(13,000) and $(28,000), respectively, on available for sale securities in total comprehensive loss. 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, common stock 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 and common stock of $58,000, classified by the contractual maturity date of the security as of December 31, 2015:

 

   Fair Value 
     
Due within one year  $201,000 
Due one year through three years   1,206,000 
Due after three years   133,000 
      
   $1,540,000 

 

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The cost, gross unrealized gains (losses) and fair value of available for sale, held-to-maturity and trading by major security type at December 31, 2014 and 2015 were as follows:

 

       Unrealized   Unrealized   Fair 
December 31, 2015  Cost   Gain   Loss   Value 
Investments - short term                    
Available for sale                    
Corporate bonds and commercial paper  $101,000    -    -   $101,000 
U.S. Treasury Notes   100,000    -    -    100,000 
Common stock   49,000    9,000    -    58,000 
                     
Total investments - short term   250,000    9,000    -    259,000 
                     
Marketable securities - long term                    
Available for sale                    
U.S. Treasury Notes   915,000    -    (6,000)   909,000 
Government agency bonds   150,000    -    (1,000)   149,000 
Corporate bonds and commercial paper   283,000    -    (2,000)   281,000 
                     
Total investments - long term   1,348,000    -    (9,000)   1,339,000 
                     
Total investments  $1,598,000   $9,000   $(9,000)  $1,598,000 

 

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       Unrealized   Unrealized   Fair 
December 31, 2014  Cost   Gain   Loss   Value 
Investments - short term                    
Available for sale                    
Mutual funds  $1,706,000    -    (36,000)  $1,670,000 
Corporate bonds and commercial paper   824,000    1,000    -    825,000 
U.S. Treasury Notes   680,000    -    -    680,000 
Common stock   49,000    25,000    -    74,000 
                     
Total investments - short term   3,259,000    26,000    (36,000)   3,249,000 
                     
Marketable securities - long term                    
Available for sale                    
U.S. Treasury Notes   2,165,000    -    (3,000)   2,162,000 
Government agency bonds   751,000    -    (3,000)   748,000 
Corporate bonds and commercial paper   1,155,000    1,000    -    1,156,000 
                     
Total investments - long term   4,071,000    1,000    (6,000)   4,066,000 
                     
Total investments  $7,330,000   $27,000   $(42,000)  $7,315,000 

 

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 estimates of market participant assumptions.

 

At December 31, 2014 and 2015, the Company’s investments described above are classified as Level 1 for fair value measurement.

 

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NOTE 4 - 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. Amounts invoiced to customers which are not recognized as revenue are classified as deferred revenue, and classified as short-term or long-term based upon the terms of future services to be delivered.

 

Deferred revenue consists of the following:

 

   December 31, 
   2014   2015 
         
Deferred activation fees  $532,000   $466,000 
Deferred revenue   1,985,000    489,000 
Deferred maintenance and hosting revenue   3,211,000    3,377,000 
Deferred remote asset management product revenue   8,943,000    9,992,000 
           
    14,671,000    14,324,000 
Less: Current portion   6,742,000    7,383,000 
           
Deferred revenue - less current portion  $7,929,000   $6,941,000 

 

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, 2014 and 2015, unbilled receivables were $170,000 and $-0-, respectively.

 

During the years ended December 31, 2013, 2014 and 2015, the Company amortized deferred equipment revenue of $3,169,000, $3,720,000 and $5,373,000, respectively, to product revenue.

 

In April 2015, we entered into a development project with Avis Budget Car Rental, LLC (“ABCR”), a subsidiary of Avis Budget Group. The Company recognized milestone revenue of $750,000 for year ended December 31, 2015 from the completion of milestones in accordance with the milestone method of revenue recognition. Milestone payments are recognized as revenue upon achievement of the milestone only if the following conditions are met: (i) there is substantive uncertainty at the date of entering into the arrangement that the milestone would be achieved; (ii) the milestone is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item by the vendor; (iii) the milestone relates solely to past performance; and (iv) be reasonable in relation to the effort expended to achieve the milestone.

 

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NOTE 5 - 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, 
   2014   2015 
         
Notes receivable  $27,000   $1,000 
Sales-type lease receivable   5,943,000    5,027,000 
Less: Allowance for uncollectable minimum lease payments   -    - 
    5,970,000    5,028,000 
           
Less: Current portion          
Notes receivable   25,000    1,000 
Sales-type lease receivable   1,873,000    1,949,000 
    1,898,000    1,950,000 
           
Financing receivables - less current portion  $4,072,000   $3,078,000 

 

Notes receivable relate to product financing arrangements that exceed one year and bear interest at approximately 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 Consolidated Statements of Cash Flows. Unearned interest income is amortized to interest income over the life of the notes using the effective-interest method. For the years ended December 31, 2014 and 2015, there were no sales of notes receivable.

 

On December 9, 2014, the Company entered into an agreement pursuant to which a finance receivable was converted into a one-time payment to the Company of approximately $5.4 million in cash. The Company recognized a loss of approximately $441,000 in the fourth quarter of 2014, reflecting a discount rate on the settlement of the finance receivable.

 

The present value of net investment in sales-type lease receivable is principally for three to five-year leases of the Company’s product and is reflected net of unearned income of $565,000 and $442,000 at December 31, 2014 and 2015, respectively, discounted at 1% - 26%.

 

Scheduled maturities of minimum lease payments outstanding as of December 31, 2015 are as follows:

 

Year ending December 31:     
      
2016  $1,949,000 
2017   1,589,000 
2018   968,000 
2019   382,000 
2020   139,000 
      
    5,027,000 
Less: Current portion   1,949,000 
Total  $3,078,000 

 

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NOTE 6 - INVENTORIES

 

Inventories consist of the following:

 

   December 31, 
   2014   2015 
         
Components  $3,029,000   $2,762,000 
Finished goods   3,223,000    4,390,000 
           
   $6,252,000   $7,152,000 

 

NOTE 7 - FIXED ASSETS

 

Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:

 

   December 31, 
   2014   2015 
         
Equipment  $1,480,000   $1,659,000 
Computer software and website development   3,470,000    5,398,000 
Computer hardware   2,717,000    2,751,000 
Furniture and fixtures   373,000    401,000 
Automobiles   47,000    60,000 
Leasehold improvements   181,000    181,000 
           
    8,268,000    10,450,000 
Accumulated depreciation and amortization   (6,748,000)   (7,331,000)
           
   $1,520,000   $3,119,000 

 

The Company had expenditures of approximately $63,000 and $1,909,000 for computer equipment and software which had not been placed in service as of December 31, 2014 and 2015, respectively. Depreciation and amortization expense is not recorded for such assets until they are placed in service.

 

Depreciation and amortization expense for the years ended December 31, 2013, 2014 and 2015 was $1,005,000, $1,129,000 and $583,000, respectively. This includes amortization of costs associated with computer software and website development for the years ended December 31, 2013, 2014 and 2015 of $566,000, $577,000 and $156,000, respectively.

 

The Company capitalizes in fixed assets the costs of software development and website development. Specifically, the assets comprise an implementation of Enterprise Resource Planning (ERP) software, enhancements to the VeriWiseTM 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 $151,000 and $1,909,000 for such projects for the years ended December 31, 2014 and 2015, respectively.

 

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NOTE 8 - 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, 2014 and December 31, 2015:

 

December 31, 2015 

Useful

Lives

(In Years)

  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

 
                 
Amortized:                    
Patents   11   $1,489,000   $(812,000)  $677,000 
Tradename   5    200,000    (200,000)   - 
Non-competition agreement   3    234,000    (234,000)   - 
Technology   5    50,000    (50,000)   - 
Workforce   5    33,000    (33,000)   - 
Customer relationships   5    4,499,000    (4,499,000)   - 
                     
         6,505,000    (5,828,000)   677,000 
                     
Unamortized:                    
Customer list        104,000    -    104,000 
Trademark and Tradename        61,000    -    61,000 
                     
         165,000    -    165,000 
                     
Total       $6,670,000   $(5,828,000)  $842,000 

 

December 31, 2014 

Useful

Lives

(In Years)

  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

 
                 
Amortized:                    
Patents   11   $1,489,000   $(677,000)  $812,000 
Tradename   5    200,000    (200,000)   - 
Non-competition agreement   3    234,000    (234,000)   - 
Technology   5    50,000    (50,000)   - 
Workforce   5    33,000    (33,000)   - 
Customer relationships   5    4,499,000    (4,499,000)   - 
                     
         6,505,000    (5,693,000)   812,000 
                     
Unamortized:                    
Customer list        104,000    -    104,000 
Trademark and Tradename        61,000    -    61,000 
                     
         165,000    -    165,000 
                     
Total       $6,670,000   $(5,693,000)  $977,000 

 

 72 

 

 

The Company tests the goodwill and other intangible assets on an annual basis in the fourth quarter or more frequently if the Company believes indicators of impairment exist. As of December 31, 2014 and 2015, the Company determined that no impairment existed to the goodwill, customer list and trademark and trade name of its acquired intangibles. For the year ended December 31, 2013 the Company recorded a $74,000 impairment charge related to its PowerKey tradename and trademark intangible assets which is included in amortization expense. With the release of the Company’s next generation vehicle management systems platform, the VAC4, the Company made the strategic decision to discontinue offering the Powerkey product line for sale to new customers in 2014. As result, the Company wrote-off the PowerKey tradename and trademark intangible assets.

 

The Company also determined that the use of indefinite lives for the customer list and remaining trademark and trade name remains applicable at December 31, 2014 and 2015, as the Company expects to continue to derive future benefits from these intangible assets.

 

Amortization expense for the years ended December 31, 2013, 2014 and 2015 was $1,166,000, $1,087,000 and $135,000 (including $74,000 impairment charge for the PowerKey tradename and trademark in 2013), respectively. Estimated future amortization expense for the succeeding five years for the intangible assets at December 31, 2015 is as follows:

 

Year ending December 31:     
      
2016   135,000 
2017   135,000 
2018   135,000 
2019   135,000 
2020   135,000 

 

There have been no changes in the carrying amount of goodwill from January 1, 2014 to December 31, 2015.

 

 73 

 

 

NOTE 9 - NET LOSS PER SHARE

 

   December 31, 
Basic and diluted loss per share  2013   2014   2015 
             
Net loss  $(7,499,000)  $(11,575,000)  $(9,952,000)
                
Weighted-average common shares outstanding - basic and diluted   11,912,000    12,098,000    12,614,000 
                
Net loss per share - basic and diluted  $(0.63)  $(0.96)  $(0.79)

 

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. Dilutive potential common shares include outstanding stock options, warrants and restricted stock and performance share awards. For the years ended December 31, 2013, 2014 and 2015, the basic and diluted weighted-average shares outstanding are the same, since the effect from the potential exercise of outstanding stock options, warrants and vesting of restricted stock and performance shares of 3,124,000, 2,943,000 and 1,887,000, respectively, would have been anti-dilutive. The SOW#2 warrants also have no impact on diluted loss per share since they are considered unissued as of December 31, 2015 (See Note 10[D]).

 

NOTE 10 - STOCK-BASED COMPENSATION

 

[A] Stock options:

 

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, 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. In June 2015, the Company adopted the 2015 Equity Compensation Plan (the “2015 Plan”) pursuant to which the Company may grant stock options, restricted stock and other equity-based awards with respect to up to an aggregate of 1,200,000 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.

 

On March 21, 2014, the Company and its former Chief Executive Officer (the “Former CEO”) entered into a Separation and General Release Agreement (the “Separation Agreement”). Under the terms of the Separation Agreement, the vesting of the Former CEO’s unvested stock options and restricted stock were accelerated and the term to exercise the stock options was extended to fifteen (15) months from March 2, 2014, the date of the Former CEO’s separation. Due to the modification of the terms of the