UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended: June 30, 2016

 

or

 

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

 

For the transition period from _________ to __________

 

Commission File Number: 001-15087

 

I.D. SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3270799
(State or other jurisdiction of   (I.R.S. 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)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
       
  (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [  ] No [X]

 

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of the close of business on August 9, 2016 was 13,807,433.

 

 

 

   
   

 

INDEX

 

I.D. Systems, Inc. and Subsidiaries

 

    Page
     
PART I - FINANCIAL INFORMATION    
     
Item 1. Financial Statements   3
     
Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2016 (unaudited)   3
     
Condensed Consolidated Statements of Operations (unaudited) - for the three and six months ended June 30, 2015 and 2016   4
     
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - for the three and six months ended June 30, 2015 and 2016   5
     
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - for the six months ended June 30, 2016   6
     
Condensed Consolidated Statements of Cash Flows (unaudited) - for the six months ended June 30, 2015 and 2016   7
     
Notes to Unaudited Condensed Consolidated Financial Statements   8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   41
     
Item 4. Controls and Procedures   41
     
PART II - OTHER INFORMATION   42
     
Item 1. Legal Proceedings   42
     
Item 1A. Risk Factors   42
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   42
     
Item 6. Exhibits   44
     
Signatures   45
     
Exhibit 31.1    
Exhibit 31.2    
Exhibit 32    

 

2 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   December 31, 2015*   June 30, 2016 
       (Unaudited) 
ASSETS          
Current assets:          
Cash and cash equivalents  $4,489,000   $4,231,000 
Restricted cash   304,000    304,000 
Investments - short term   259,000    347,000 
Accounts receivable, net of allowance for doubtful accounts of $1,512,000 and $858,000 in 2015 and 2016, respectively   10,901,000    10,213,000 
Financing receivables - current, net of allowance for doubtful accounts of $-0- in 2015 and 2016   1,950,000    2,021,000 
Inventory, net   7,152,000    5,403,000 
Deferred costs - current   3,310,000    3,132,000 
Prepaid expenses and other current assets   2,263,000    2,426,000 
           
Total current assets   30,628,000    28,077,000 
           
Investments - long term   1,339,000    1,259,000 
Financing receivables - less current portion   3,078,000    2,935,000 
Deferred costs - less current portion   3,320,000    4,944,000 
Fixed assets, net   3,119,000    3,111,000 
Goodwill   1,837,000    1,837,000 
Intangible assets, net   842,000    774,000 
Other assets   265,000    229,000 
           
   $44,428,000   $43,166,000 
           
LIABILITIES          
Current liabilities:          
Accounts payable and accrued expenses  $9,173,000   $7,760,000 
Deferred revenue - current   7,383,000    6,996,000 
           
Total current liabilities   16,556,000    14,756,000 
           
Deferred rent   361,000    395,000 
Deferred revenue - less current portion   6,941,000    8,560,000 
           
    23,858,000    23,711,000 
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; 14,211,000 and 14,586,000 shares issued at December 31, 2015 and June 30, 2016, respectively; shares outstanding, 13,467,000 and 13,807,000 at December 31, 2015 and June 30, 2016, respectively   129,000    129,000 
Additional paid-in capital   110,116,000    111,162,000 
Accumulated deficit   (85,128,000)   (87,323,000)
Accumulated other comprehensive loss   (500,000)   (303,000)
Treasury stock; 744,000 and 779,000 common shares at cost at December 31, 2015 and June 30, 2016, respectively   (4,047,000)   (4,210,000)
           
Total stockholders’ equity   20,570,000    19,455,000 
Total liabilities and stockholders’ equity  $44,428,000   $43,166,000 

 

*Derived from audited balance sheet as of December 31, 2015.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  3 
   

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2016   2015   2016 
Revenue:                    
Products  $4,993,000   $4,918,000   $11,864,000   $11,200,000 
Services   4,933,000    3,986,000    9,182,000    8,181,000 
                     
    9,926,000    8,904,000    21,046,000    19,381,000 
Cost of revenue:                    
Cost of products   3,491,000    3,142,000    8,714,000    7,328,000 
Cost of services   2,309,000    1,037,000    4,258,000    2,130,000 
                     
    5,800,000    4,179,000    12,972,000    9,458,000 
                     
Gross profit   4,126,000    4,725,000    8,074,000    9,923,000 
                     
Operating expenses:                    
Selling, general and administrative expenses   6,225,000    5,019,000    12,994,000    9,805,000 
Research and development expenses   1,120,000    1,192,000    2,349,000    2,322,000 
                     
    7,345,000    6,211,000    15,343,000    12,127,000 
                     
Loss from operations   (3,219,000)   (1,486,000)   (7,269,000)   (2,204,000)
Interest income   92,000    76,000    179,000    153,000 
Interest expense        (87,000)        (144,000)
Other income, net   (15,000)   -    3,000    - 
                     
Net loss  $(3,142,000)  $(1,497,000)  $(7,087,000)  $(2,195,000)
                     
Net loss per share - basic and diluted  $(0.25)  $(0.12)  $(0.57)  $(0.17)
                     
Weighted average common shares outstanding - basic and diluted   12,575,000    12,939,000    12,398,000    12,917,000 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  4 
   

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2016   2015   2016 
                 
Net loss  $(3,142,000)  $(1,497,000)  $(7,087,000)  $(2,195,000)
                     
Other comprehensive (loss) income, net:                    
                     
Unrealized (loss) gain on investments   (31,000)   (11,000)   (15,000)   4,000 
                     
Reclassification of net realized investment (gains) losses included in net loss   28,000    -    27,000    - 
                     
Foreign currency translation adjustment   191,000    145,000    (141,000)   193,000 
                     
Total other comprehensive loss   188,000    134,000    (129,000)   197,000 
                     
Comprehensive loss  $(2,954,000)  $(1,363,000)  $(7,216,000)  $(1,998,000)

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

  5 
   

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

                   Accumulated         
   Common Stock   Additional       Other         
   Number of       Paid-in   Accumulated   Comprehensive   Treasury   Stockholders’ 
   Shares   Amount   Capital   Deficit   (Loss) Income   Stock   Equity 
                             
Balance at December 31, 2015   14,211,000   $129,000   $110,116,000   $(85,128,000)  $(500,000)  $(4,047,000)  $20,570,000 
                                    
Net loss   -    -    -    (2,195,000)   -    -    (2,195,000)
Foreign currency translation adjustment   -    -    -    -    193,000    -    193,000 
Unrealized gain on investments   -    -    -    -    4,000    -    4,000 
                                    
Shares issued pursuant to exercise of stock options   5,000    -    19,000                   19,000 
Issuance of restricted stock   383,000    -    -    -    -    -    - 
                                    
Shares withheld pursuant to exercise of stock options and restricted stock   -    -    -    -    -    (163,000)   (163,000)
Forfeiture of restricted shares   (13,000)                              
Stock based compensation - restricted stock   -    -    616,000    -    -    -    616,000 
                                    
Stock based compensation - options and performance shares   -    -    411,000    -    -    -    411,000 
                                    
Balance at June 30, 2016   14,586,000   $129,000   $111,162,000   $(87,323,000)  $(303,000)  $(4,210,000)  $19,455,000 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  6 
   

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

  

Six Months Ended

June 30,

 
   2015   2016 
Cash flows from operating activities:          
           
Net loss  $(7,087,000)  $(2,195,000)
Adjustments to reconcile net loss to cash used in operating activities:          
Bad debt expense (recovery)   350,000    (103,000)
Stock-based compensation expense   767,000    1,027,000 
Depreciation and amortization   394,000    354,000 
Inventory reserve   154,000    120,000 
Other non-cash items   20,000    36,000 
Changes in:          
Accounts receivable   1,809,000    797,000 
Financing receivables   609,000    72,000 
Inventory   (2,638,000)   1,629,000 
Prepaid expenses and other assets   (226,000)   (127,000)
Deferred costs   (243,000)   (1,446,000)
Deferred revenue   (752,000)   1,232,000 
Accounts payable and accrued expenses   (212,000)   (1,413,000)
Net cash used in operating activities   (7,055,000)   (17,000)
Cash flows from investing activities:          
Expenditures for fixed assets including website development costs   (1,477,000)   (278,000)
Purchase of investments   (2,064,000)   (377,000)
Proceeds from the sale and maturities of investments   6,110,000    371,000 
Net cash provided by (used in) investing activities   2,569,000    (284,000)
Cash flows from financing activities:          
Principal payments of capital lease obligation   (79,000)   - 
Proceeds from exercise of stock options   1,896,000    19,000 
Net cash provided by financing activities   1,817,000    19,000 
Effect of foreign exchange rate changes on cash and cash equivalents   38,000    24,000 
Net decrease in cash and cash equivalents   (2,631,000)   (258,000)
Cash and cash equivalents - beginning of period   5,974,000    4,489,000 
Cash and cash equivalents - end of period  $3,343,000   $4,231,000 
Supplemental disclosure of cash flow information:          
Cash paid for:          
Taxes   -    - 
Interest   9,000    85,000 
Noncash activities:          
Unrealized gain on investments  $12,000   $4,000 
Shares withheld pursuant to stock issuance  $351,000   $163,000 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  7 
   

 

I.D. Systems, Inc. and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2016

 

NOTE 1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION

 

Description of the Company

 

I.D. Systems, Inc. and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”) develop, market and sell wireless 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. The Company’s 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 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. 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, revenue, productivity and efficiency of their operations. The Company outsources its hardware manufacturing operations to contract manufacturers.

 

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

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements include the accounts of I.D. Systems, Inc. and its wholly owned subsidiaries, Asset Intelligence, LLC (“AI”), I.D. Systems GmbH (“IDS GmbH”) and I.D. Systems (UK) Ltd (formerly Didbox Ltd.) (“IDS Ltd”) (collectively referred to as the “Company”). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial position of the Company as of June 30, 2016, the consolidated results of its operations for the three-month and six-month periods ended June 30, 2015 and 2016, the consolidated change in stockholders’ equity for the six-month period ended June 30, 2016 and the consolidated cash flows for the six-month periods ended June 30, 2015 and 2016. The results of operations for the six-month period ended June 30, 2016 are not necessarily indicative of the operating results for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for the year then ended.

 

As of June 30, 2016, the Company had cash, cash equivalents and marketable securities of $6.1 million, working capital of $13.3 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 cash flow solely from operating activities to fund its operations.

 

We believe our available working capital, anticipated level of future revenues from the revised direct sales strategy which focuses on large enterprise customers and reducing inventory, cost savings from the July 2015 decrease in headcount, the expected cash flows from operations and available borrowings under the revolving credit facility will provide sufficient funds to cover our capital requirements for at least the next twelve months.

 

  8 
   

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

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

 

NOTE 3 - USE OF ESTIMATES

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates estimates used in the preparation of the financial statements for reasonableness. The most significant estimates relate to stock-based compensation arrangements, measurements of fair value, realization of deferred tax assets, the impairment of tangible and intangible assets, inventory reserves, allowance for doubtful accounts, warranty reserves and deferred revenue and costs. Actual results could differ from those estimates.

 

NOTE 4 - INVESTMENTS

 

The Company’s investments include debt securities, U.S. Treasury Notes, government and state agency bonds, 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 June 30, 2015 and 2016, all of the Company’s investments are 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). For the three- and six-month periods ended June 30, 2015, the Company reported unrealized loss of $(31,000) and $(15,000), respectively, and for the three- and six-month periods ended June 30, 2016, the Company reported unrealized (loss) gain of $(11,000) and $4,000, 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 and common stock. All other securities are classified as long-term.

 

The following table summarizes the estimated fair value of investment in debt securities designated as available for sale classified by the contractual maturity date of the security as of June 30, 2016:

 

   Fair Value 
     
Due within one year  $308,000 
Due one year through three years   962,000 
Due after three years   297,000 
      
   $1,567,000 

 

  9 
   

 

The cost, gross unrealized gains (losses) and fair value of available for sale securities by major security types as of December 31, 2015 and June 30, 2016 are as follows:

 

       Unrealized   Unrealized   Fair 
June 30, 2016  Cost   Gain   Loss   Value 
Investments - short term                    
Available for sale                    
U.S. Treasury Notes  $232,000    -    -   $232,000 
Government agency bonds   51,000    -    -    51,000 
Corporate bonds and commercial paper   25,000    -    -    25,000 
Common stock   49,000    -    (10,000)   39,000 
                     
Total investments - short term   357,000    -    (10,000)   347,000 
                     
Investments - long term                    
Available for sale                    
U.S. Treasury Notes   816,000    10,000    -    826,000 
Government agency bonds   100,000    -    -    100,000 
Corporate bonds and commercial paper   329,000    4,000    -    333,000 
                     
Total investments - long term   1,245,000    14,000    -    1,259,000 
                     
Total investments  $1,602,000   $14,000   $(10,000)  $1,606,000 

 

       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 

 

  10 
   

 

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels:

 

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
   
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
   
Level 3: Unobservable inputs that reflect the reporting entity’s estimates of market participants’ assumptions.

 

As of December 31, 2015 and June 30, 2016, all of the Company’s investments are classified as Level 1 fair value measurements.

 

  11 
   

 

NOTE 5 - 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 Company amortized and recognized $1,099,000 and $2,128,000 during the three- and six-month periods ended June 30, 2015, respectively, and $1,201,000 and $2,605,000 during the three- and six-month periods ended June 30, 2016, respectively.

 

The service revenue for our remote asset monitoring equipment relates to charges for monthly messaging usage and value-added features charges. The usage fee is a monthly fixed charge based on the expected utilization according to the rate plan chosen by the customer. Service revenue generally commences upon equipment installation and customer acceptance, and is recognized over the period such services are provided.

 

Revenue from remote asset monitoring equipment activation fees is deferred and amortized over the life of the contract.

 

Spare parts sales are reflected in product revenues and recognized on the date of customer receipt of the part.

 

The Company also derives revenue under leasing arrangements. Such arrangements provide for monthly payments covering the system sale, maintenance, support and interest. These arrangements meet the criteria to be accounted for as sales-type leases. Accordingly, an asset is established for the sales-type lease receivable at the present value of the expected lease payments and revenue is deferred and recognized over the service contract, as described above. Maintenance revenues and interest income are recognized monthly over the lease term.

 

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

 

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, 2015 and June 30, 2016, unbilled receivables were $-0-.

 

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the Condensed Consolidated Statements of Operations.

 

In April 2015, the Company entered into a development project with Avis Budget Car Rental, LLC (“ABCR”), a subsidiary of Avis Budget Group. The Company recognized revenue of $750,000 and $750,000 during the three- and six-month periods ended June 30, 2015, respectively, and $-0- and $255,000 during the three- and six-month periods ended June 30, 2016, respectively, 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.

 

  12 
   

 

Deferred revenue consists of the following:

 

   December 31, 2015   June 30, 2016 
       (Unaudited) 
         
Deferred activation fees  $466,000   $429,000 
Deferred revenue   489,000    85,000 
Deferred maintenance and hosting revenue   3,377,000    3,709,000 
Deferred remote asset management product revenue   9,992,000    11,333,000 
           
    14,324,000    15,556,000 
Less: Current portion   7,383,000    6,996,000 
           
Deferred revenue - less current portion  $6,941,000   $8,560,000 

 

NOTE 6 - 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, 2015   June 30, 2016 
       (Unaudited) 
         
Notes receivable  $1,000   $- 
Present value of sales-type lease receivable   5,027,000    4,956,000 
    5,028,000    4,956,000 
           
Less: Current portion          
Notes receivable   1,000    - 
Present value of sales-type lease receivable   1,949,000    2,021,000 
    1,950,000    2,021,000 
           
Financing receivables - less current portion  $3,078,000   $2,935,000 

 

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 Condensed Consolidated Statements of Cash Flows. Unearned interest income is amortized to interest income over the life of the notes using the effective-interest method. There were no sales of notes receivable during the three- and six-month periods ended June 30, 2015 and 2016.

 

The present value of net investment in sales-type lease receivable is principally for three to five-year leases of the Company’s products and is reflected net of unearned income of $442,000 and $411,000 at December 31, 2015 and June 30, 2016, respectively, discounted at 1% - 26%.

 

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Scheduled maturities of sales-type lease minimum lease payments outstanding as of June 30, 2016 are as follows:

 

Year ending December 31:     
      
July - December 2016   $1,087,000 
2017    1,745,000 
2018    1,169,000 
2019    607,000 
2020    297,000 
Thereafter    51,000 
       
     4,956,000 
Less: Current portion    2,021,000 
       
Sales-type lease receivable - less current portion   $2,935,000 

 

The allowance for doubtful accounts 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 for doubtful accounts is determined on an individual note and lease basis if it is probable that the Company will not collect all principal and interest contractually due. The Company considers its customers’ financial condition and historical payment patterns in determining the customers’ probability of default. The impairment is measured based on the present value of expected future cash flows discounted at the note’s effective interest rate. There were no impairment losses recognized for the three- and six-month-periods ended June 30, 2015 and 2016. 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 or 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 or lease. Notes and leases become past due based on how recently payments have been received.

 

NOTE 7 - 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 is shown net of a valuation reserve of $374,000 at December 31, 2015, and $493,000 at June 30, 2016.

 

Inventories consist of the following:

 

   December 31, 2015   June 30, 2016 
       (Unaudited) 
         
Components  $2,762,000   $2,024,000 
Finished goods   4,390,000    3,379,000 
           
   $7,152,000   $5,403,000 

 

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NOTE 8 - FIXED ASSETS

 

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

 

   December 31, 2015   June 30, 2016 
       (Unaudited) 
         
Equipment  $1,659,000   $1,659,000 
Computer software and website development   5,398,000    5,676,000 
Computer hardware   2,751,000    2,751,000 
Furniture and fixtures   401,000    401,000 
Automobiles   60,000    60,000 
Leasehold improvements   181,000    181,000 
           
    10,450,000    10,728,000 
Accumulated depreciation and amortization   (7,331,000)   (7,617,000)
           
   $3,119,000   $3,111,000 

 

As of December 31, 2015 and June 30, 2016, the Company had expenditures of approximately $1,909,000 and $1,736,000, respectively, for computer software and website development which had not been placed in service. Depreciation expense is not recorded for such assets until they are placed in service.

 

Depreciation and amortization expense for the three- and six-month periods ended June 30, 2015 was $142,000 and $326,000, respectively, and for the three- and six-month periods ended June 30, 2016 was $143,000 and $286,000, respectively. This includes amortization of costs associated with computer software and website development for the three- and six-month periods ended June 30, 2015 of $41,000 and $100,000, respectively, and for the three- and six-month periods ended June 30, 2016 of $44,000 and $87,000, 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 $1,320,000 and $278,000 for such projects for the six-month periods ended June 30, 2015 and 2016, respectively.

 

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NOTE 9 - INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes identifiable intangible assets of the Company, which include identifiable intangible assets from the acquisition of IDS Ltd, PowerKey (the industrial vehicle monitoring products division of International Electronics, Inc. acquired by the Company in 2008) and AI as of December 31, 2015 and June 30, 2016:

 

June 30, 2016 

Useful

Lives

(In Years)

  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net

Carrying

Amount

 
                 
Amortized:                
Patents   11   $1,489,000   $(880,000)  $609,000 
                     
Unamortized:                    
Customer list        104,000    -    104,000 
Trademark and Tradename        61,000    -    61,000 
                     
         165,000    -    165,000 
                     
Total       $1,654,000   $(880,000)  $774,000 

 

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 
                     
Unamortized:                    
Customer list        104,000    -    104,000 
Trademark and Tradename        61,000    -    61,000 
                     
         165,000    -    165,000 
                     
Total       $1,654,000   $(812,000)  $842,000 

 

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Amortization expense for the three- and six-month periods ended June 30, 2015 was $34,000 and $68,000, respectively, and for the three- and six-month periods ended June 30, 2016 was $34,000 and $68,000, respectively. Estimated future amortization expense for each of the five succeeding fiscal years for these intangible assets is as follows:

 

Year ending December 31:     
      
July - December 2016   $69,000 
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, 2016 to June 30, 2016.

 

NOTE 10 - STOCK-BASED COMPENSATION

 

Stock Option Plans

 

The Company adopted the 1995 Stock Option Plan, pursuant to which the Company had the right to grant options to purchase up to an aggregate of 1,250,000 shares of common stock. The Company also adopted the 1999 Stock Option Plan, pursuant to which the Company had the right to grant stock awards and options to purchase up to 2,813,000 shares of common stock. The Company also adopted the 1999 Director Option Plan, pursuant to which the Company had the right to grant options to purchase up to an aggregate of 600,000 shares of common stock. The 1995 Stock Option Plan and 1999 Stock and Director Option Plans expired and the Company cannot issue additional options under these plans.

 

The Company adopted the 2007 Equity Compensation Plan, pursuant to which, as amended, the Company may grant stock options, restricted stock and other equity-based awards with respect to 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 “2009 Director Plan”), 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, which has the authority to determine, among other things, the term during which an option may be exercised (not more than 10 years), the exercise price of an option and the vesting provisions.

 

The Company recognizes all employee share-based payments in the statement of operations as an operating expense, based on their fair values on the applicable grant date. As a result, the Company recorded stock-based compensation expense of $69,000 and $156,000, respectively, for the three- and six-month periods ended June 30, 2015 and $83,000 and $161,000, respectively, for the three- and six-month periods ended June 30, 2016, in connection with awards made under the stock option plans.

 

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The following table summarizes the activity relating to the Company’s stock options for the six-month period ended June 30, 2016:

 

           Weighted-     
       Weighted-   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
    Options    Price    Term    Value 
                     
Outstanding at beginning of year   1,212,000   $6.94           
Granted   150,000    4.37           
Exercised   (5,000)   3.29           
Forfeited or expired   (140,000)   20.10           
                     
Outstanding at end of period   1,217,000   $5.13     6 years   $455,000 
                     
Exercisable at end of period   804,000   $5.12     5 years   $389,000 

 

There were no stock options issued during the six-month period ended June 30, 2015. The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing model reflecting the following weighted-average assumptions:

 

   June 30, 
   2015   2016 
         
Expected volatility   -    45.5%
Expected life of options (in years)   -    4 
Risk free interest rate   -    1.2 
Dividend yield   -    0%
Weighted average fair value of options granted during the period  $-   $1.60 

 

Expected volatility is based on historical volatility of the Company’s common stock and the expected life of options is based on historical data with respect to employee exercise periods.

 

The fair value of options vested during the six-month periods ended June 30, 2015 and 2016 was $349,000 and $113,000, respectively. The total intrinsic value of options exercised during the three-month periods ended June 30, 2015 and 2016 was $1,504,000 and $10,000, respectively.

 

As of June 30, 2016, there was approximately $597,000 of unrecognized compensation cost related to non-vested options granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 2.44 years.

 

The Company estimates forfeitures at the time of valuation and reduces expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

 

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Restricted Stock

 

The Company grants restricted stock to employees, whereby the employees are contractually restricted from transferring the shares until they are vested. The stock is unvested stock at the time of grant and, upon vesting, there are no contractual restrictions on the stock. The fair value of each share is based on the Company’s closing stock price on the date of the grant. A summary of all non-vested restricted stock for the six-month period ended June 30, 2016 is as follows:

 

       Weighted- 
   Number of   Average 
   Non-vested   Grant Date 
   Shares   Fair Value 
           
Restricted stock, non-vested, beginning of year   575,000   $5.79 
Granted   88,000    4.30 
Vested   (102,000)   6.08 
Forfeited   (6,000)   5.69 
           
Restricted stock, non-vested, end of period   555,000   $5.50 

 

The Company recorded stock-based compensation expense of $310,000 and $609,000, respectively, for the three- and six-month periods ended June 30, 2015 and $285,000 and $616,000, respectively, for the three- and six-month periods ended June 30, 2016, in connection with restricted stock grants. As of June 30, 2016, there was $2,197,000 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.59 years.

 

Performance Shares

 

In January 2016, the Company granted performance shares to employees pursuant to the 2015 Equity Compensation Plan. The shares are unvested at the time of grant and, upon vesting, there are no contractual restrictions on the shares. The vesting of the shares is subject to the achievement of performance goals during a two-year period from the date of issuance, with the ability to achieve prorated vesting of the shares during interim annual measurement periods. If the performance goals are not met, the performance shares will not vest and will automatically be returned to the plan. If the performance goals are met, then the shares will be issued to the employees. The fair value of each share is based on the Company’s closing stock price on the date of the grant. A summary of all non-vested performance shares for the six-month period ended June 30, 2016 is as follows:

 

        Weighted- 
    Number of   Average 
    Non-vested   Grant Date 
    Shares   Fair Value 
            
Performance shares, non-vested, beginning of year    -    - 
Granted    295,000   $4.07 
Vested    -    - 
Forfeited    (7,000)   4.07 
            
Performance shares, non-vested, end of period    288,000   $4.07 

 

Stock-based compensation expense related to performance shares for the three-and six-month periods ended June 30, 2015 was insignificant. The Company recorded stock-based compensation expense of $137,000 and $250,000, respectively, for the three- and six-month periods ended June 30, 2016, in connection with the performance share grants. As of June 30, 2016, there was $862,000 of total unrecognized compensation cost related to non-vested performance shares. That cost is expected to be recognized over a weighted-average period of 1.55 years.

 

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NOTE 11 - STOCKHOLDERS’ EQUITY

 

Warrants

 

On August 22, 2011 (the “Effective Date”), the Company and Avis Budget Car Rental, LLC (“ABCR”), a subsidiary of Avis Budget Group, entered into a Master Software License, Information Technology Services and Equipment Purchase Agreement (the “Master Agreement”) for the Company’s system relating to radio frequency identification (RFID) enabled rental car management and virtual location rental (collectively, the “System”). The order which covered 25,000 units (“SOW #1) was placed pursuant to a statement of work (“SOW”) issued under the Master Agreement and related agreements with ABCR. In connection with the Master Agreement, the Company also entered into a Purchase Agreement (the “Purchase Agreement”), dated as of August 22, 2011, with Avis Budget Group, Inc. (“Avis Budget Group”), pursuant to which Avis Budget Group purchased from the Company, for an aggregate purchase price of $4,604,500 (or $4.60 per share, which price was based on the average closing price of our common stock for the twenty trading days prior to the Effective Date), (i) 1,000,000 shares (the “Shares”) of the Company’s common stock, and (ii) a warrant (the “Warrant”) to purchase up to an aggregate of 600,000 shares of our common stock (the “Warrant Shares”) at an exercise price of $10.00 per share of common stock. The Company issued the Shares in 2011 from treasury stock, reflecting the cost of such shares on a specific identification basis.

 

The Warrant is exercisable (i) with respect to 100,000 of the Warrant Shares, at any time after the Effective Date and on or before the fifth (5th) anniversary thereof, and (ii) with respect to 500,000 of the Warrant Shares, at any time on or after the date (if any) on which ABCR, the Avis entity that is the counterparty under the Master Agreement, executes and delivers to the Company a second SOW (“SOW#2”) for the purchase of additional units, and on or before the fifth (5th) anniversary of the Effective Date.

 

The Warrant may be exercised by means of a “cashless exercise” solely in the event that on the later of (i) the one-year anniversary of the Effective Date and (ii) the date on which the Warrant is exercised by the holder, the Company is eligible to file a registration statement on Form S-3 to register the Warrant Shares for resale by the holder and a re-sale registration statement on Form S-3 registering the Warrant Shares for resale by the holder is not then declared effective by the Securities and Exchange Commission (the “SEC”) and available for use by the holder. The Company has agreed to file such a registration statement (on Form S-3 only, or a successor thereto) within 30 days of the holder’s request therefor, and to have such registration statement declared effective within 90 days of such request, if there is no review by the Staff of the SEC, and within 120 days, if there has been a review by the Staff of the SEC. As of June 30, 2016, the Company has not yet been requested to file such a registration statement.

 

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

 

The Company is required to reserve a sufficient number of shares of common stock for the purpose enabling the Company to issue the Warrant Shares pursuant to any exercise of the Warrants. As of June 30, 2016, the Company has sufficient shares reserved.

 

The fair value of the 100,000 Warrant Shares which vested on the Effective Date was recorded as reduction of product revenue during the third quarter of 2011. The remaining 500,000 Warrant Shares underlying the Warrant, which vest upon the execution of SOW#2, have not been valued at this time since the Company has not determined that it is probable that SOW#2 will be executed and that the Warrant will become exercisable for these remaining 500,000 Warrant Shares. Since there is no penalty for failure to execute SOW#2, there is no performance commitment date and, therefore, there is no measurement date for these 500,000 Warrant Shares underlying the Warrant until SOW#2 is executed.

 

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Accumulated Other Comprehensive Loss

 

Comprehensive loss includes net loss and unrealized gains or losses on available-for-sale investments and foreign currency translation gains and losses. Cumulative unrealized gains and losses on available-for-sale investments are reflected as accumulated other comprehensive loss in stockholders’ equity on the Company’s Condensed Consolidated Balance Sheets.

 

The accumulated balances for each classification of other comprehensive loss for the six-month period ended June 30, 2016 are as follows:

 

       Unrealized   Accumulated 
   Foreign   gain (losses)   other 
   currency   on   comprehensive 
   items   investments   income 
                
Balance at January 1, 2016  $(500,000)  $-   $(500,000)
Net current period change   193,000    4,000    197,000 
                
Balance at June 30, 2016  $(307,000)  $4,000   $(303,000)

 

The accumulated balances for each classification of other comprehensive loss for the six-month period ended June 30, 2015 are as follows:

 

       Unrealized   Accumulated 
   Foreign   gain (losses)   other 
   currency   on   comprehensive 
   items   investments   income 
                
Balance at January 1, 2015  $(360,000)  $(15,000)  $(375,000)
Net current period change   (141,000)   12,000    (129,000)
                
Balance at June 30, 2015  $(501,000)  $(3,000)  $(504,000)

 

Income and expense accounts of foreign operations are translated at actual or weighted-average exchange rates during the period. Assets and liabilities of foreign operations that operate in a local currency environment are translated to U.S. dollars at the exchange rates in effect at the balance sheet date. Translation gains or losses are reported as components of accumulated other comprehensive income or loss in consolidated stockholders’ equity. Net translation gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature with IDS GmbH resulted in translation (losses) gains of $(141,000) and $193,000 for the six-month periods ended June 30, 2015 and 2016, respectively, which are included in comprehensive loss in the Consolidated Statement of Changes in Stockholders’ Equity. Effective December 1, 2015, the intercompany transactions with IDS GmbH are not considered of a long-term investment nature and the effect of the exchange rate changes on the intercompany transactions are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

 

Gains and losses resulting from foreign currency transactions are included in determining net income or loss. Foreign currency transactions gains (losses) for the three- and six-month periods ended June 30, 2015 of $(36,000) and $(54,000), respectively, and for the three- and six-month periods ended June 30, 2016 of $(192,000) and $(123,000) respectively, are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

 

Shares Withheld

 

During the six-month periods ended June 30, 2015 and 2016, 52,000 and 35,000 shares, respectively, of the Company’s common stock were withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted shares and to pay the exercise price of stock options in the aggregate amount of $352,000 and $163,000, respectively.

 

  21 
   

 

 

NOTE 12 - NET LOSS PER SHARE OF COMMON STOCK

 

Net loss per share for the three- and six-month periods ended June 30, 2015 and 2016 are as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2016   2015   2016 
Basic and diluted loss per share                
Net loss  $(3,142,000)  $(1,497,000)  $(7,087,000)  $(2,195,000)
                     
Weighted-average shares outstanding   12,575,000    12,939,000    12,398,000    12,917,000 
                     
Basic and diluted net loss per share  $(0.25)  $(0.12)  $(0.57)  $(0.17)

 

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 unvested restricted stock and performance shares awards. For the three- and six-month periods ended June 30, 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 2,128,000 would have been anti-dilutive. For the three- and six-month periods ended June 30, 2016, 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 2,160,000 would have been anti-dilutive. The warrants exercisable by Avis Budget Group upon ABCR’s execution and delivery of SOW#2 also have no impact on diluted loss per share since they are considered unissued as of June 30, 2016.

 

NOTE 13 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

   December 31, 2015   June 30, 2016 
       (Unaudited) 
         
Accounts payable  $8,026,000   $6,768,000 
Accrued warranty   614,000    539,000 
Accrued compensation   418,000    302,000 
Other current liabilities   115,000    151,000 
           
   $9,173,000   $7,760,000 

 

The Company’s products are warranted against defects in materials and workmanship for a period of 12 months from the date of acceptance of the product by the customer. The customers may purchase an extended warranty providing coverage up to a maximum of 60 months. A provision for estimated future warranty costs is recorded for expected or historical warranty matters related to equipment shipped and is included in accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2016.

 

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The following table summarizes warranty activity for the six-month periods ended June 30, 2015 and 2016:

 

  

Six Months Ended

June 30,

 
   2015   2016 
         
Accrued warranty reserve, beginning of period  $942,000   $614,000 
Accrual for product warranties issued   196,000    306,000 
Product replacements and other warranty expenditures   (72,000)   (206,000)
Expiration of warranties   (470,000)   (175,000)
           
Accrued warranty reserve, end of period  $596,000   $539,000 

 

NOTE 14 - REVOLVING CREDIT FACILITY

 

On December 18, 2015 (the “Closing Date”), the Company and AI (collectively, the “Loan Parties”) entered into a loan and security agreement (the “Revolver”) with Siena Lending Group LLC. As of June 30, 2016, 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. The Company 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) the Prime Rate, (ii) the 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. The Company is in compliance with the covenants under the Revolver as of June 30, 2016.

 

NOTE 15 - INCOME TAXES

 

The Company accounts for income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As of June 30, 2016, the Company had provided a valuation allowance to fully reserve its net operating loss carryforwards and other items giving rise to deferred tax assets, primarily as a result of anticipated net losses for income tax purposes.

 

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NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Cash and cash equivalents and investments in securities are carried at fair value. Financing receivables and capital lease obligation are carried at cost, which is not materially different than fair value. Accounts receivable, accounts payable and other liabilities approximate their fair values due to the short period to maturity of these instruments.

 

NOTE 17 - CONCENTRATION OF CUSTOMERS

 

For the six-month period ended June 30, 2016 and as of June 30, 2016, one customer accounted for 17% of the Company’s revenue and 10% of the Company’s accounts receivable, respectively.

 

One customer accounted for 22% of the Company’s revenue during the six-month period ended June 30, 2015. No customer accounted for greater than 10% of the Company’s accounts receivable as of June 30, 2015. One customer accounted for 12% of financing receivables as of June 30, 2015.

 

NOTE 18 - STOCK REPURCHASE PROGRAM

 

On November 3, 2010, the Company’s Board of Directors authorized the repurchase of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $3,000,000 pursuant to a share repurchase program. The repurchases under the share repurchase program are made from time to time in the open market or in privately negotiated transactions and are funded from the Company’s working capital. The amount and timing of such repurchases 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. The Company did not purchase any shares of its common stock under the share repurchase program during the six-month period ended June 30, 2016. As of June 30, 2016, the Company has purchased a total of approximately 310,000 shares of its common stock in open market transactions under the share repurchase program for an aggregate purchase price of approximately $1,340,000, or an average cost of $4.33 per share.

 

NOTE 19 - WHOLLY OWNED FOREIGN SUBSIDIARIES

 

The financial statements of the Company’s wholly owned German subsidiary, IDS GmbH, and United Kingdom subsidiary, IDS Ltd, are consolidated with the financial statements of I.D. Systems, Inc.

 

The net revenue and net loss for IDS GmbH included in the Condensed Consolidated Statement of Operations are as follows:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2015   2016   2015   2016 
Net revenue  $584,000   $661,000   $875,000   $1,468,000 
                     
Net income (loss)   60,000    165,000    (36,000)   549,000 

 

 

Total assets of IDS GmbH were $2,549,000 and $2,577,000 as of December 31, 2015 and June 30, 2016, respectively. IDS GmbH operates in a local currency environment using the Euro as its functional currency.

 

The net revenue and net loss for IDS Ltd included in the Condensed Consolidated Statement of Operations are as follows:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2015   2016   2015   2016 
Net revenue  $49,000   $75,000   $285,000   $141,000 
                     
Net loss   (16,000)   (161,000)   (79,000)   (264,000)

 

Total assets of IDS Ltd were $1,317,000 and $1,172,000 as of December 31, 2015 and June 30, 2016, respectively. IDS Ltd operates in a local currency environment using the British Pound as its functional currency.

 

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NOTE 20 - COMMITMENTS AND CONTINGENCIES

 

Except for normal operating leases, the Company is not currently subject to any material commitments.

 

Contingencies

 

The Company is not currently subject to any material commitments or contingencies and legal proceedings, nor, to management’s knowledge, is any material legal proceeding threatened against the Company.

 

Severance agreements

 

The Company entered into severance agreements with three of its executive officers. The severance agreements, each of which is substantially identical in form, provide each executive with certain severance and change in control benefits upon the occurrence of a “Trigger Event,” as defined in the severance agreements. As a condition to the Company’s obligations under the severance agreements, each executive has executed and delivered to the Company a restrictive covenants agreement.

 

Under the terms of the severance agreements, in general, each executive is entitled to the following: (i) a cash payment at the rate of the executive’s annual base salary as in effect immediately prior to the Trigger Event for a period of 12 or 15 months, depending on the executive, (ii) continued healthcare coverage during the severance period, (iii) partial accelerated vesting of the executive’s previously granted stock options and restricted stock awards, and (iv) as applicable, an award of “Performance Shares” under the Restricted Stock Unit Award Agreement previously entered into between the Company and the executive.

 

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NOTE 21 - RECENT 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 adoption of this guidance did not have a material impact on the Company’s financial results.

 

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 adoption of this guidance did not have a material impact on the Company’s financial results.

 

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 adoption of this guidance did not have a material impact on the Company’s financial results.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the consolidated financial condition and results of operations of I.D. Systems, Inc. and its subsidiaries (“I.D. Systems”, the “Company”, “we”, “our” or “us”) should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1, of this report. In the following discussions, most percentages and dollar amounts have been rounded to aid presentation, and, accordingly, all amounts are approximations.

 

Cautionary Note Regarding Forward-Looking Statements

 

This report contains various forward-looking statements made pursuant to the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 and information that is based on management’s beliefs as well as assumptions made by, and information currently available to, management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to be correct. When used in this report, the words “believe”, “expect”, “estimate”, “project”, “predict”, “forecast”, “plan”, “anticipate”, “target”, “outlook”, “envision”, “intend”, “seek”, “may”, “will”, or “should”, and similar expressions or words, or the negatives of those words, are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and should be aware that the Company’s actual results could differ materially from those described in the forward-looking statements due to a number of factors, including, without limitation, business conditions and growth in the wireless tracking industries, general economic conditions, lower than expected customer orders or variations in customer order patterns, competitive factors including increased competition, changes in product and service mix, and resource constraints encountered in developing new products, and other factors described under “Risk Factors” set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and other filings with the Securities and Exchange Commission (the “SEC”). Any forward-looking statements should be considered in light of these factors. Unless otherwise required by law, the Company undertakes no obligation, and expressly disclaims any obligation, to update or publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, or otherwise.

 

The Company makes available through its Internet website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports and other filings made by the Company with the SEC, as soon as practicable after the Company electronically files such reports and filings with the SEC. The Company’s website address is www.id-systems.com. The information contained in the Company’s website is not incorporated by reference into this report.

 

Overview

 

We 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 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 to address the needs of organizations to control, track, monitor and analyze their assets. Our solutions enable customers to achieve tangible economic benefits by providing them with information to make timely, informed decisions that increase the safety, security, revenue, productivity and efficiency of their operations.

 

We have focused our business activities on three primary applications: (i) industrial fleet management, (ii) transportation asset management, and (iii) rental fleet management. Our solution for industrial fleet management allows our customers to reduce operating costs and capital expenditures and to comply with certain safety regulations by accurately and reliably measuring and controlling fleet activity. This solution also enhances security at industrial facilities and areas of critical infrastructure, such as airports, by controlling access to, and restricting the use of, vehicles and equipment. Our solution for transportation asset management allows our customers to increase revenue per asset deployed, reduce fleet size, and improve the monitoring and control of sensitive cargo. Our solution for rental fleet management assists rental car companies in generating higher revenue by more accurately tracking vehicle data, such as fuel consumption and odometer readings, and improving customer service by expediting the rental and return processes. In addition, our wireless solution for “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.

 

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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. We have made a strategic decision to refocus our sales and marketing efforts primarily on large enterprise customers and opportunities while working in concert with our channel partners to better serve customers with smaller implementations.

 

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.

 

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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.

 

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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.

 

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).

 

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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.

 

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.

 

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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.

 

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.

 

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.

 

  32 
   

 

Risks to Our Business

 

During the six-month period ended June 30, 2016, we generated revenues of $19.4 million, and Wal-Mart Stores, Inc. accounted for 17% of our revenues. During the six-month period ended June 30, 2015, we generated revenues of $21.0 million, and Wal-Mart Stores, Inc. accounted for 22% of our revenues.

 

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

 

We expect that many customers who utilize our solutions will do so as part of a large-scale deployment of these solutions across multiple or all divisions of their organizations. A customer’s decision to deploy our solutions throughout its organization will involve a significant commitment of its resources. Accordingly, initial implementations may precede any decision to deploy our solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense educating and providing information to prospective customers about the benefits of our solutions, and there can be no assurance that our solutions will be deployed on a wider scale by the customer.

 

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

 

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

 

increase sales of products and services to our existing customers;
   
convert our initial programs into larger or enterprise-wide purchases by our customers;
   
increase market acceptance and penetration of our products; and
   
develop and commercialize new products and technologies.

 

As of June 30, 2016, we had cash, cash equivalents and marketable securities of $6.1 million, working capital of $13.3 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 cash flow solely from operating activities to fund its operations.

 

We believe our available working capital, anticipated level of future revenues from the revised direct sales strategy which focuses on large enterprise customers and reducing inventory, cost savings from the July 2015 decrease in headcount, the expected cash flows from operations and available borrowings under the revolving credit facility will provide sufficient funds to cover our capital requirements for at least the next twelve months. As of June 30, 2016, there were no borrowings outstanding under the Revolver.

 

Additional risks and uncertainties to which we are subject are described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Critical Accounting Policies

 

For the six-month period ended June 30, 2016, there were no significant changes to the Company’s critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

  33 
   

 

Results of Operations

 

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2015     2016     2015     2016  
Revenue:                                
Products     50.3 %     55.2 %     56.4 %     57.8 %
Services     49.7       44.8       43.6       42.2  
                                 
      100.0       100.0       100.0       100.0  
Cost of revenues:                                
Cost of products     35.2       35.3       41.4       37.8  
Cost of services     23.3       11.6       20.2       11.0  
                                 
Total gross profit     41.5       53.1       38.4       51.2  
                                 
Operating expenses:                                
Selling, general and administrative expenses     62.7       56.4       61.7       50.6  
Research and development expenses     11.3       13.4       11.2       12.0  
      74.0       69.8       72.9       62.6  
                                 
Loss from operations     (32.5 )     (16.7 )     (34.5 )     (11.4 )
Interest income     0.9       0.9       0.9       0.8  
Interest expense             (1.0 )             (0.7 )
Other income     (0.2 )     -       -       -  
                                 
Net loss     (31.8 )%     (16.8 )%     (33.6 )%     (11.3 )%

 

  34 
   

 

 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

 

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

 

    Three Months Ended June 30,  
    2015     2016  
Product revenue:                
Industrial and rental fleet management   $ 3,081,000     $ 3,123,000  
Transportation asset management     1,912,000       1,795,000  
      4,993,000       4,918,000  
                 
Services revenue:                
Industrial and rental fleet management     2,412,000       1,832,000  
Transportation asset management     2,521,000       2,154,000  
      4,933,000       3,986,000  
                 
    $ 9,926,000     $ 8,904,000  

 

REVENUES. Revenues decreased by approximately $1.0 million, or 10.3%, to $8.9 million in the three months ended June 30, 2016 from $9.9 million in the same period in 2015. The decrease in revenue is attributable to a decrease in total transportation asset management revenue of approximately $0.5 million to $3.9 million in 2016 from $4.4 million in 2015 and a decrease in total industrial and rental fleet management revenue of approximately $0.5 million to $5.0 million in 2016 from $5.5 million in 2015.

 

Revenues from products of approximately $4.9 million in the three months ended June 30, 2016 remained generally consistent with product revenue of $5.0 million in the same period in 2015. Transportation asset management product revenue of approximately $1.8 million in 2016 remained generally consistent with product revenue of $1.9 million in 2015. Industrial and rental fleet management product revenue of approximately $3.1 million in 2016 remained generally consistent with product revenue in 2015.

 

Revenues from services decreased by approximately $0.9 million, or 19.2%, to $4.0 million in the three months ended June 30, 2016 from $4.9 million in the same period in 2015. Industrial and rental fleet management service revenue decreased by approximately $0.6 million to $1.8 million in 2016 from $2.4 million in 2015 principally due to decreased service revenue of approximately $0.8 million from Avis Budget, Inc. Transportation asset management service revenue decreased by approximately $0.4 million to $2.2 million in 2016 from $2.5 million in principally due to a decrease in the number of active units and the revenue per active unit from contract renewals.

 

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

 

    Three Months Ended June 30,  
    2015     2016  
Cost of products:                
Industrial and rental fleet management   $ 1,960,000     $ 1,738,000  
Transportation asset management     1,531,000       1,404,000  
      3,491,000       3,142,000  
                 
Cost of services:                
Industrial and rental fleet management     1,542,000       428,000  
Transportation asset management     767,000       609,000  
      2,309,000       1,037,000  
                 
    $ 5,800,000     $ 4,179,000  

 

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COST OF REVENUES. Cost of revenues decreased by approximately $1.6 million, or 27.9%, to $4.2 million in the three months ended June 30, 2016 from $5.8 million for the same period in 2015. The decrease is principally attributable to decreases in cost of products and services in 2016. Gross profit was $4.7 million in three months ended June 30, 2016 compared to $4.1 million for the same period in 2015. As a percentage of revenues, gross profit increased to 53.1% in 2016 from 41.5% in 2015.

 

Cost of products decreased by approximately $0.3 million, or 10.0%, to $3.1 million in the three months ended June 30, 2016 from $3.5 million in the same period in 2015. Gross profit for products was $1.8 million in 2016 compared to $1.5 million in 2015. The increase in gross profit was attributable to an increase of approximately $0.3 million in the industrial and rental fleet management gross profit to $1.4 million in 2016 from $1.1 million in 2015. The transportation asset management gross profit of approximately $0.4 million in 2016 remained generally consistent with the product gross margin in 2015. As a percentage of product revenues, gross profit increased to 36.1% in 2016 from 30.1% in 2015. The increase in gross profit as a percentage of product revenue was due to an increase in the industrial and rental fleet management gross profit percentage to 44.3% in 2016 from 36.4% in 2015, which was principally due to improved customer pricing. The transportation asset management product revenue gross profit percentage increased to 21.8% in 2016 from 19.9% in 2015 principally from a decrease in spare parts sales which have a lower gross margin.

 

Cost of services decreased by approximately $1.3 million, or 55.1%, to $1.0 million in the three months ended June 30, 2016 from $2.3 million in the same period in 2015. Gross profit for services was $2.9 million in 2016 compared to $2.6 million in 2015. The increase in gross profit was attributable to an increase of approximately $0.5 million in the industrial and rental fleet management gross profit to $1.4 million in 2016 from $0.9 million in 2015, partially offset by a decrease in the transportation asset management gross profit of approximately $0.2 million to $1.6 million in 2016 from $1.8 million in 2015. As a percentage of service revenues, gross profit increased to 74.0% in 2016 from 53.2% in 2015. The increase in gross profit as a percentage of service revenue was principally due to an increase in the industrial and rental fleet management gross profit percentage to 76.6% in 2016 from 36.1% in 2015 and an increase in the transportation asset management gross profit percentage to 71.7% in 2016 from 69.6% in 2015. The increase in the industrial and rental fleet management gross profit margin was principally due to a decrease in installation expenses. The increase in transportation asset management gross profit margin was principally due to a decrease in communication expenses.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by approximately $1.2 million, or 19.4%, to approximately $5.0 million in the three months ended June 30, 2016 compared to $6.2 million in the same period in 2015, principally from the reduction in workforce and other cost-cutting measures implemented in the second half of 2015. As a percentage of revenues, selling, general and administrative expenses decreased to 56.4% in the three months ended June 30, 2016 from 62.7% in the same period in 2015, primarily due to the decrease in expenses noted above.

 

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by approximately $0.1 million, or 6.4%, to approximately $1.2 million in the three months ended June 30, 2016 compared to $1.1 million in the same period in 2015 principally from an increase in materials purchased for new product development and testing. As a percentage of revenues, research and development expenses increased to 13.4% in the three months ended June 30, 2016 from 11.3% in the same period in 2015, primarily due to the increase in expenses noted above.

 

INTEREST EXPENSE, Interest expense increased to approximately $87,000 in the three months ended June 30, 2016 from $-0- in the same period in 2015, principally due to an increase in interest expense from the revolving credit facility.

 

NET LOSS. Net loss was $1.5 million, or $(0.12) per basic and diluted share, for the three months ended June 30, 2016 as compared to net loss of $3.1 million, or $(0.25) per basic and diluted share, for the same period in 2015. The decrease in the net loss was due primarily to the reasons described above.

 

  36 
   

 

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

 

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

 

    Six Months Ended June 30,  
    2015     2016  
Product revenue:                
Industrial and rental fleet management   $ 6,649,000     $ 7,567,000  
Transportation asset management     5,215,000       3,633,000  
      11,864,000       11,200,000  
                 
Services revenue:                
Industrial and rental fleet management     3,989,000       3,718,000  
Transportation asset management     5,193,000       4,463,000  
      9,182,000       8,181,000  
                 
    $ 21,046,000     $ 19,381,000  

 

REVENUES. Revenues decreased by approximately $1.7 million, or 7.9%, to $19.4 million in the six months ended June 30, 2016 from $21.0 million in the same period in 2015. The decrease in revenue is attributable to a decrease in total transportation asset management revenue of approximately $2.3 million to $8.1 million in 2016 from $10.4 million in 2015 partially offset by an increase in total industrial and rental fleet management revenue of approximately $0.6 million to $11.3 million in 2016 from $10.6 million in 2015.

 

Revenues from products decreased by approximately $0.7 million, or 5.6%, to $11.2 million in the six months ended June 30, 2016 from $11.9 million in the same period in 2015. Transportation asset management product revenue decreased by approximately $1.6 million to $3.6 million in 2016 from $5.2 million in 2015. The decrease in transportation asset management product revenue resulted principally from decreased spare parts sales of approximately $1.3 million to Wal-Mart Stores, Inc. and $0.7 million to Knight Transportation Inc. Industrial and rental fleet management product revenue increased by approximately $0.9 million to $7.6 million in 2016 from $6.6 million in 2015. The increase in industrial and rental fleet management product revenue resulted principally from increased product sales of approximately $0.7 million to the Ford Motor Company.

 

Revenues from services decreased by approximately $1.0 million, or 10.9%, to $8.2 million in the six months ended June 30, 2016 from $9.2 million in the same period in 2015. Industrial and rental fleet management service revenue decreased by approximately $0.3 million to $3.7 million in 2016 from $4.0 million in 2015 principally due to decreased service revenue of approximately $0.5 million from Avis Budget, Inc. Transportation asset management service revenue decreased by approximately $0.7 million to $4.5 million in 2016 from $5.2 million in 2015 principally due to a decrease in the number of active units and the revenue per active unit from contract renewals.

 

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

 

    Six Months Ended June 30,  
    2015     2016  
Cost of products:                
Industrial and rental fleet management   $ 4,447,000     $ 4,563,000  
Transportation asset management     4,267,000       2,765,000  
      8,714,000       7,328,000  
                 
Cost of services:                
Industrial and rental fleet management     2,548,000       874,000  
Transportation asset management     1,710,000       1,256,000  
      4,258,000       2,130,000  
                 
    $ 12,972,000     $ 9,458,000  

 

  37 
   

 

COST OF REVENUES. Cost of revenues decreased by approximately $3.5 million, or 27.1%, to $9.5 million in the six months ended June 30, 2016 from $13.0 million for the same period in 2015. The decrease is principally attributable to decreases in cost of products and services in 2016. Gross profit was $9.9 million in six months ended June 30, 2016 compared to $8.1 million for the same period in 2015. As a percentage of revenues, gross profit increased to 51.2% in 2016 from 38.4% in 2015.

 

Cost of products decreased by approximately $1.4 million, or 15.9%, to $7.3 million in the six months ended June 30, 2016 from $8.7 million in the same period in 2015. Gross profit for products was $3.9 million in 2016 compared to $3.2 million in 2015. The increase in gross profit was attributable to an increase of approximately $0.8 million in the industrial and rental fleet management gross profit to $3.0 million in 2016 from $2.2 million in 2015. The transportation asset management gross profit of approximately $0.9 million in 2016 remained generally consistent with the product gross profit in 2015. As a percentage of product revenues, gross profit increased to 34.6% in 2016 from 26.6% in 2015. The increase in gross profit as a percentage of product revenue was due to an increase in the industrial and rental fleet management gross profit percentage to 39.7% in 2016 from 33.1% in 2015, which was principally due to improved customer pricing. The transportation asset management product revenue gross profit percentage increased to 23.9% in 2016 from 18.2% in 2015 principally from a decrease in spare parts sales which have a lower gross margin.

 

Cost of services decreased by approximately $2.1 million, or 50.0%, to $2.1 million in the six months ended June 30, 2016 from $4.3 million in the same period in 2015. Gross profit for services was $6.1 million in 2016 compared to $4.9 million in 2015. The increase in gross profit was attributable to an increase of approximately $1.4 million in the industrial and rental fleet management gross profit to $2.8 million in 2016 from $1.4 million in 2015, partially offset by a decrease in the transportation asset management gross profit of approximately $0.3 million to $3.2 million in 2016 from $3.5 million in 2015. As a percentage of service revenues, gross profit increased to 74.0% in 2016 from 53.6% in 2015 The increase in gross profit as a percentage of service revenue was principally due to an increase in the industrial and rental fleet management gross profit percentage to 76.5% in 2016 from 36.1% in 2015 and an increase in the transportation asset management gross profit percentage to 71.9% in 2016 from 67.1% in 2015. The increase in the industrial and rental fleet management gross profit margin was principally due to a decrease in installation expenses. The increase in transportation asset management gross profit margin was principally due to a decrease in communication expenses.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by approximately $3.2 million, or 24.5%, to approximately $9.8 million in the six months ended June 30, 2016 compared to $13.0 million in the same period in 2015, principally from the reduction in workforce and other cost-cutting measures implemented in the second half of 2015 and a $0.6 million decrease in professional fees from an unconsummated strategic initiative in 2015. As a percentage of revenues, selling, general and administrative expenses decreased to 50.6% in the six months ended June 30, 2016 from 61.7% in the same period in 2015, primarily due to the decrease in expenses noted above.

 

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of approximately $2.3 million in the six months ended June 30, 2016 remained generally consistent with research and development expenses in the same period in 2015. As a percentage of revenues, research and development expenses increased to 12.0% in the six months ended June 30, 2016 from 11.2% in the same period in 2015, primarily due to the decrease in revenue from 2015 to 2016.

 

INTEREST EXPENSE. Interest expense increased to approximately $144,000 in the six months ended June 30, 2016 from $-0- in the same period in 2015, principally due to an increase in interest expense from the revolving credit facility.

 

NET LOSS. Net loss was $2.2 million, or $(0.17) per basic and diluted share, for the six months ended June 30, 2016 as compared to net loss of $7.1 million, or $(0.57) per basic and diluted share, for the same period in 2015. The decrease in the net loss was due primarily to the reasons described above.

 

  38 
   

 

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 June 30, 2016, we had cash, cash equivalents and marketable securities of $6.1 million and working capital of $13.3 million, compared to cash, cash equivalents and marketable securities of $6.4 million and working capital of $14.1 million as of December 31, 2015.

 

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.

 

Capital Requirements

 

As of June 30, 2016, we had cash, cash equivalents and marketable securities of $6.1 million, working capital of $13.3 million and no debt. 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 cash flow solely from operating activities to fund its operations.

 

We believe our available working capital, anticipated level of future revenues from the revised direct sales strategy which focuses on large enterprise customers and reducing inventory, cost savings from the July 2015 decrease in headcount, the expected cash flows from operations and available borrowings under the revolving credit facility will provide sufficient funds to cover our capital requirements for at least the next twelve months.

 

On December 18, 2015 (the “Closing Date”), the Company and AI (collectively, the “Loan Parties”) entered into a loan and security agreement (the “Revolver”) with Siena Lending Group LLC. As of June 30, 2016, 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. The Company 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) the Prime Rate, (ii) the 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. The Company is in compliance with the covenants under the Revolver as of June 30, 2016.

 

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.

 

  39 
   

 

Operating Activities

 

Net cash used in operating activities was $17,000 for the six-month period ended June 30, 2016, compared to net cash used in operating activities of $7.1 million for the same period in 2015. The net cash used in operating activities for the six-month period ended June 30, 2016 reflects a net loss of $2.2 million and includes non-cash charges of $1.0 million for stock-based compensation and $0.4 million for depreciation and amortization expense. Changes in working capital items included:

 

a decrease in accounts receivable of $0.8 million;
   
a decrease in inventory of $1.6 million;
   
an increase in deferred costs of $1.4 million;
   
an increase in deferred revenue of $1.2 million; and
   
a decrease in accounts payable and accrued expenses of $1.4 million, primarily due to the timing of payments to our vendors.

 

Investing Activities

 

Net cash used in investing activities was $0.3 million for the six-month period ended June 30, 2016, compared to net cash provided by investing activities of $2.6 million for the same period in 2015. The change from the same period in 2015 was primarily due to a decrease in net proceeds from the sale and maturities of investments of $4.1 million and a decrease in expenditures for fixed assets and website development costs of $1.2 million from 2015.

 

Financing Activities

 

Net cash provided by financing activities was $19,000 for the six-month period ended June 30, 2016, compared to net cash provided by financing activities of $1.8 million for the same period in 2015. The change from the same period in 2015 was primarily due to a decrease in proceeds from the exercise of stock options of $1.9 million from 2015.

 

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, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Contractual Obligations

 

As of June 30, 2016, there have been no material changes in contractual obligations as disclosed under the caption “Contractual Obligations and Commitments” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

Inflation

 

Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results.

 

Impact of Recently Issued Accounting Pronouncements

 

The Company is subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, see Note 21 (entitled “RECENT ACCOUNTING PRONOUNCEMENTS”) of the Notes to our Unaudited Condensed Consolidated Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We 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. As of June 30, 2016, we had cash, cash equivalents and marketable securities of $6.1 million.

 

Our cash and cash equivalents consist of cash, money market funds, and short-term investments with original maturities of three months or less. As of June 30, 2016, 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 funds 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 continue to deteriorate.

 

Item 4. Controls and Procedures

 

a. Disclosure controls and procedures.

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

 

As of June 30, 2016, we carried out an evaluation, with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

b. Changes in internal control over financial reporting.

 

We reviewed our internal control over financial reporting at June 30, 2016. There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In the ordinary course of its business, the Company is at times subject to various legal proceedings. As of August 12, 2016, the Company was not a party to any material legal proceedings.

 

Additional information on the Company’s commitments and contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 1A. Risk Factors

 

In addition to the other information set forth under the heading “Risks to Our Business” in Part 1, Item 2 of this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as such factors could materially affect the Company’s business, financial condition, and future results. In the three months ended June 30, 2016, there were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K. The risks described in the Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition, or results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

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.

 

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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 June 30, 2016. As the table indicates, the Company did not make any share repurchases under the share repurchase program during the quarterly period ended June 30, 2016.

 

Period    

Total Number

of

Shares

Purchased

   

Average Price

Paid per Share

   

Total Number of

Shares

Purchased as Part of

Publicly Announced

Plans or Programs

   

Approximate Dollar Value

of

Shares that May Yet Be

Purchased Under the Plans

or Programs

 
                           
April 1, 2016 – April 30, 2016       7,000 (1)   $ 4.65       -     $ 1,660,000  
May 1, 2016 - May 31, 2016       -       -       -       1,660,000  
June 1, 2016 - June 30, 2016       13,000 (2)   $ 5.03       -       1,660,000  
                                   
Total       20,000     $ 4.90       -     $ 1,660,000  

 

(1) Includes 7,000 shares of common stock withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock during April 2016.

 

(2) Includes 13,000 shares of common stock withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock during June 2016.

 

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Item 6. Exhibits

 

The following exhibits are filed with this Quarterly Report on Form 10-Q:

 

Exhibits:

 

Exhibit

Number

  Description
     
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. §1305 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
101.INS   XBRL Instance Document.