UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended: September 30, 2019

 

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: 001-39080

 

POWERFLEET, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   83-4366463
(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)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share   PWFL   The Nasdaq Global Market

 

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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

 

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

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company [X]
       
Emerging growth company [  ]      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of the close of business on November 12, 2019 was 29,686,727.

 

 

 

 

 

 

INDEX

 

I.D. Systems, Inc. and Subsidiaries

 

  Page
   
PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
   
Condensed Consolidated Balance Sheets as of December 31, 2018 and September 30, 2019 (unaudited) 3
   
Condensed Consolidated Statements of Operations (unaudited) - for the three and nine months ended September 30, 2018 and 2019 4
   
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - for the three and nine months ended September 30, 2018 and 2019 5
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - for the periods January 1, 2019 through September 30, 2019 and January 1, 2018 through September 30, 2018 6-7
   
Condensed Consolidated Statements of Cash Flows (unaudited) - for the nine months ended September 30, 2018 and 2019 8
   
Notes to Unaudited Condensed Consolidated Financial Statements 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
   
Item 4. Controls and Procedures 44
   
PART II - OTHER INFORMATION 45
   
Item 1. Legal Proceedings 45
   
Item 1A. Risk Factors 45
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
   
Item 6. Exhibits 61
   
Signatures 62
   
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, 2018   September 30, 2019 
ASSETS          
Current assets:          
Cash and cash equivalents  $10,159,000   $5,560,000 
Restricted cash   307,000    307,000 
Investments - short term   394,000    - 
Accounts receivable, net of allowance for doubtful accounts of $67,000 and $160,000 in 2018 and 2019, respectively   9,247,000    13,821,000 
Financing receivables - current, net of allowance for doubtful accounts of $-0- in 2018 and 2019   1,036,000    950,000 
Inventory, net   4,649,000    9,761,000 
Deferred costs - current   3,660,000    3,868,000 
Prepaid expenses and other current assets   3,208,000    2,822,000 
           
Total current assets   32,660,000    37,089,000 
           
Investments - long term   4,131,000    - 
Financing receivables - less current portion   1,254,000    972,000 
Deferred costs - less current portion   5,409,000    5,467,000 
Fixed assets, net   2,149,000    2,070,000 
Goodwill   7,318,000    9,362,000 
Intangible assets, net   4,705,000    6,292,000 
Right of use asset   -    1,822,000 
Other assets   177,000    204,000 
   $57,803,000   $63,278,000 
           
LIABILITIES          
Current liabilities:          
Accounts payable and accrued expenses  $8,027,000   $16,583,000 
Deferred revenue - current   7,902,000    8,095,000 
Acquisition related contingent consideration payable   946,000    - 
Lease liability - current   -    849,000 
           
Total current liabilities   16,875,000    25,527,000 
           
Deferred revenue - less current portion   9,186,000    9,019,000 
Lease liability - less current portion   -    1,122,000 
Deferred rent   208,000    - 
           
    26,269,000    35,668,000 
Commitments and Contingencies (Note 21)          
           
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; 19,178,000 and 19,653,000 shares issued at December 31, 2018 and September 30, 2019, respectively; shares outstanding, 18,166,000 and 18,597,000 at December 31, 2018 and September 30, 2019, respectively   192,000    197,000 
Additional paid-in capital   138,693,000    141,753,000 
Accumulated deficit   (101,180,000)   (108,058,000)
Accumulated other comprehensive loss   (435,000)   (255,000)
Treasury stock; 1,012,000 and 1,056,000 common shares at cost at December 31, 2018 and September 30, 2019, respectively   (5,736,000)   (6,027,000)
           
Total stockholders’ equity   31,534,000    27,610,000 
Total liabilities and stockholders’ equity  $57,803,000   $63,278,000 

 

*Derived from audited balance sheet as of December 31, 2018.

 

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   Nine Months Ended 
   September 30,   September 30, 
   2018   2019   2018   2019 
Revenue:                
Products  $9,044,000   $11,062,000   $29,726,000   $28,954,000 
Services   4,341,000    5,822,000    11,847,000    17,815,000 
                     
    13,385,000    16,884,000    41,573,000    46,769,000 
Cost of revenue:                    
Cost of products   5,287,000    7,227,000    18,537,000    18,528,000 
Cost of services   1,301,000    2,027,000    3,362,000    6,522,000 
                     
    6,588,000    9,254,000    21,899,000    25,050,000 
                     
Gross profit   6,797,000    7,630,000    19,674,000    21,719,000 
                     
Operating expenses:                    
Selling, general and administrative expenses   5,870,000    6,321,000    17,231,000    18,424,000 
Research and development expenses   1,696,000    1,824,000    4,981,000    5,508,000 
Acquisition-related expenses   51,000    1,611,000    379,000    4,673,000 
                     
    7,617,000    9,756,000    22,591,000    28,605,000 
                     
Loss from operations   (820,000)   (2,126,000)   (2,917,000)   (6,886,000)
Interest income   66,000    37,000    217,000    110,000 
Interest expense   (34,000)   (10,000)   (150,000)   (56,000)
Other expense, net   (109,000)   -    (153,000)   (46,000)
                     
Net loss  $(897,000)  $(2,099,000)  $(3,003,000)  $(6,878,000)
                     
Net loss per share - basic and diluted  $(0.05)  $(0.12)  $(0.18)  $(0.39)
                     
Weighted average common shares outstanding -basic and diluted   17,312,000    17,929,000    17,121,000    17,744,000 

 

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   Nine Months Ended 
   September 30,   September 30, 
   2018   2019   2018   2019 
                 
Net loss  $(897,000)  $(2,099,000)  $(3,003,000)  $(6,878,000)
                     
Other comprehensive (loss) income, net:                    
                     
Unrealized gain (loss) gain on investments   (22,000)   -    (137,000)   9,000 
                     
Reclassification of net realized investment (gain) loss included in net loss   110,000    -    153,000    38,000 
                     
Foreign currency translation adjustment   55,000    191,000    107,000    133,000 
                     
Total other comprehensive income   143,000    191,000    123,000    180,000 
                     
Comprehensive loss  $(754,000)  $(1,908,000)  $(2,880,000)  $(6,698,000)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the period from January 1, 2019 through September 30, 2019

(Unaudited)

 

                   Accumulated         
   Common Stock   Additional       Other         
   Number of       Paid-in   Accumulated   Comprehensive   Treasury   Stockholders’ 
   Shares   Amount   Capital   Deficit   Loss   Stock   Equity 
                             
Balance at December 31, 2018   19,178,000   $192,000   $138,693,000   $(101,180,000)  $(435,000)  $(5,736,000)  $31,534,000 
                                    
Net loss   -    -    -    (2,194,000)   -    -    (2,194,000)
                                    
Foreign currency translation adjustment   -    -    -    -    (12,000)   -    (12,000)
                                    
Reclassification of unrealized losses on investments, net of realized amounts   -    -    -    -    47,000    -    47,000 
                                    
Shares issued pursuant to exercise of stock options   -    -    -                   - 
                                    
Issuance of restricted stock   81,000    1,000    (1,000)   -    -    -    - 
                                    
Shares repurchased pursuant to vesting of restricted stock   -    -    -    -    -    (226,000)   (226,000)
                                    
Stock based compensation - restricted stock   -    -    447,000    -    -    -    447,000 
                                    
Stock based compensation - options   -    -    136,000    -    -    -    136,000 
                                    
Balance at March 31, 2019   19,259,000   $193,000   $139,275,000   $(103,374,000)  $(400,000)  $(5,962,000)  $29,732,000 
                                    
Net loss   -    -    -    (2,585,000)   -    -    (2,585,000)
                                    
Foreign currency translation adjustment   -    -    -    -    (46,000)   -    (46,000)
                                    
Reclassification of unrealized losses on investments, net of realized amounts   -    -    -    -    -    -    - 
                                    
Shares issued pursuant to exercise of stock options   50,000    -    177,000                   177,000 
                                    
Issuance of restricted stock   164,000    2,000    (2,000)   -    -    -    - 
                                    
Shares repurchased pursuant to vesting of restricted stock   -    -    -    -    -    (19,000)   (19,000)
                                    
Stock based compensation - restricted stock   -    -    440,000    -    -    -    449,000 
                                    
Stock based compensation - options   -    -    161,000    -    -    -    152,000 
                                    
Balance at June 30, 2019   19,473,000   $195,000   $140,051,000   $(105,959,000)  $(446,000)  $(5,981,000)  $27,860,000 
                                    
Net loss   -    -    -    (2,099,000)   -    -    (2,099,000)
                                    
Foreign currency translation adjustment   -    -    -    -    191,000    -    191,000 
                                    
Shares issued relating to Keytroller acquisition consideration   148,000    1,000    999,000    -    -    -    1,000,000 
                                    
Shares issued pursuant to acquisition   27,000    -    156,000    -    -    -    156,000 
                                    
Issuance of restricted stock   10,000    1,000    (1,000)   -    -    -    - 
                                    
Forfeiture of restricted shares   (5,000)                              
                                    
Shares repurchased pursuant to vesting of restricted stock   -    -    -    -    -    (46,000)   (46,000)
                                    
Stock based compensation - restricted stock   -    -    387,000    -    -    -    387,000 
                                    
Stock based compensation - options   -    -    161,000    -    -    -    161,000 
                                    
Balance at September 30, 2019   19,653,000   $197,000   $141,753,000   $(108,058,000)  $(255,000)  $(6,027,000)  $27,610,000 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the period from January 1, 2018 through September 30, 2018

(Unaudited)

 

                   Accumulated         
   Common Stock   Additional       Other         
   Number of       Paid-in   Accumulated   Comprehensive   Treasury   Stockholders’ 
   Shares   Amount   Capital   Deficit   Loss   Stock   Equity 
                             
Balance at December 31, 2017   18,327,000   $183,000   $133,569,000   $(95,368,000)  $(578,000)  $(4,835,000)  $32,971,000 
                                    
Net loss   -    -    -    (990,000)   -    -    (990,000)
                                    
Foreign currency translation adjustment   -    -    -    -    (137,000)   -    (137,000)
                                    
Unrealized loss on investments, net of realized amounts   -    -    -    -    (60,000)   -    (60,000)
                                    
Shares issued pursuant to exercise of stock options   65,000    1,000    424,000    -    -    -    425,000 
                                    
Issuance of restricted stock   235,000    2,000    (2,000)   -    -    -    - 
                                    
Shares withheld pursuant to vesting of restricted stock   -    -    -    -    -    (408,000)   (408,000)
                                    
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (238,000)   (238,000)
                                    
Forfeiture of restricted shares   (20,000)   -    -    -    -    -    - 
                                    
Stock based compensation - restricted stock   -    -    431,000    -    -    -    431,000 
                                    
Stock based compensation - options and performance shares   -    -    63,000    -    -    -    63,000 
                                    
Balance at March 31, 2018   18,607,000   $186,000   $134,485,000   $(96,358,000)  $(775,000)  $(5,481,000)  $32,057,000 
                                    
Net loss   -    -    -    (1,116,000)   -    -    (1,116,000)
                                    
Foreign currency translation adjustment   -    -    -    -    189,000    -    189,000 
                                    
Unrealized loss on investments, net of realized amounts   -    -    -    -    (12,000)   -    (12,000)
                                    
Shares issued pursuant to exercise of stock options   1,000    -    3,000    -    -    -    3,000 
                                    
Issuance of restricted stock   121,000    2,000    (2,000)   -    -    -    - 
                                    
Shares repurchased pursuant to vesting of restricted stock   -    -    -    -    -    (48,000)   (48,000)
                                    
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    -    - 
                                    
Forfeiture of restricted shares   -    -    -    -    -    -    - 
                                    
Stock based compensation - restricted stock   -    -    500,000    -    -    -    500,000 
                                    
Stock based compensation - options and performance shares   -    -    95,000    -    -    -    95,000 
                                    
Balance at June 30, 2018   18,729,000   $188,000   $135,081,000   $(97,474,000)  $(598,000)  $(5,529,000)  $31,668,000 
                                    
Net loss   -    -    -    (897,000)   -    -    (897,000)
                                    
Foreign currency translation adjustment   -    -    -    -    55,000    -    55,000 
                                    
Unrealized loss on investments, net of realized amounts   -    -    -    -    88,000    -    88,000 
                                    
Shares issued relating to acquisition contingent consideration   296,000    3,000    1,997,000                   2,000,000 
                                    
Shares issued pursuant to exercise of stock options   37,000    -    182,000    -    -    -    182,000 
                                    
Issuance of restricted stock   78,000    -    -    -    -    -    - 
                                    
Shares repurchased pursuant to vesting of restricted stock   -    -    -    -    -    (165,000)   (165,000)
                                    
Shares withheld pursuant to exercise of stock options   -    -    -    -    -    (11,000)   (11,000)
                                    
Forfeiture of restricted shares   (28,000)   -    -    -    -    -    - 
                                    
Stock based compensation - restricted stock   -    -    465,000    -    -    -    465,000 
                                    
Stock based compensation - options and performance shares   -    -    104,000    -    -    -    104,000 
                                    
Balance at September 30, 2018   19,112,000   $191,000   $137,829,000   $(98,371,000)  $(455,000)  $(5,705,000)  $33,489,000 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

 

 

I.D. Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended September 30, 
   2018   2019 
Cash flows from operating activities: (net of assets acquired)          
           
Net loss  $(3,003,000)  $(6,878,000)
Adjustments to reconcile net loss to cash used in operating activities:          
Bad debt expense   15,000    155,000 
Stock-based compensation expense   1,658,000    1,732,000 
Depreciation and amortization   1,174,000    1,299,000 
Inventory reserve   260,000    156,000 
Change in contingent consideration   146,000    54,000 
Other non-cash items   93,000    (37,000)
Changes in:          
Accounts receivable   (835,000)   (4,537,000)
Financing receivables   511,000    368,000 
Inventory   372,000    (5,069,000)
Prepaid expenses and other assets   (1,152,000)   386,000 
Deferred costs   (17,000)   (266,000)
Deferred revenue   (567,000)   26,000 
Accounts payable and accrued expenses   1,168,000    8,306,000 
Net cash used in operating activities   (177,000)   (4,305,000)
Cash flows from investing activities:          
Acquisitions   -    (4,350,000)
Capital expenditures   (155,000)   (501,000)
Purchase of investments   (2,415,000)   (99,000)
Proceeds from the sale and maturities of investments   9,308,000    4,638,000 
Net cash provided by (used in) investing activities   6,738,000    (312,000)
Cash flows from financing activities:          
Proceeds from exercise of stock options   361,000    177,000 
Shares repurchased pursuant to vesting of restricted stock   (621,000)   (291,000)
Net cash used in financing activities   (260,000)   (114,000)
Effect of foreign exchange rate changes on cash and cash equivalents   130,000    132,000 
Net increase (decrease) in cash, cash equivalents and restricted cash   6,431,000    (4,599,000)
Cash, cash equivalents and restricted cash - beginning of period   5,403,000    10,466,000 
Cash, cash equivalents and restricted cash - end of period  $11,834,000   $5,867,000 
Reconciliation of cash, cash equivalents, and restricted cash, beginning of period          
Cash and cash equivalents  $5,097,000   $10,159,000 
Restricted cash   306,000    307,000 
Cash, cash equivalents, and restricted cash, beginning of period  $5,403,000   $10,466,000 
           
Reconciliation of cash, cash equivalents, and restricted cash, end of period          
Cash and cash equivalents  $11,528,000   $5,560,000 
Restricted cash   306,000    307,000 
Cash, cash equivalents, and restricted cash, end of beginning of period  $11,834,000   $5,867,000 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Taxes   -    - 
Interest  $-   $56,000 
Noncash investing and financing activities:          
Unrealized (loss) gain on investments  $16,000   $47,000 
Value of shares withheld pursuant to stock issuance  $249,000   $- 
Value of shares issued relating to acquisition contingent consideration  $2,000,000   $- 

Value of shares issued relating to Keytroller acquisition consideration

       $

1,000,000

 
Value of shares issued pursuant to CarrierWeb Ireland acquisition  $-   $156,000 

CarrierWeb Ireland acquisition related holdback

  $-   $

250,000

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8

 

 

I.D. Systems, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

 

NOTE 1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION

 

Description of the Company

 

On October 3, 2019, pursuant to the transactions (the “Transactions”) contemplated by (i) the Agreement and Plan of Merger, dated as of March 13, 2019 (the “Merger Agreement”), by and among I.D. Systems, Inc., a Delaware corporation (“I.D. Systems”), PowerFleet, Inc., a Delaware corporation and a wholly-owned subsidiary of I.D. Systems prior to the Transactions (“PowerFleet” or the “Company”), Pointer Telocation Ltd., a public company limited by shares formed under the laws of the State of Israel (“Pointer”), Powerfleet Israel Holding Company Ltd., a private company limited by shares formed under the laws of the State of Israel and a wholly-owned subsidiary of PowerFleet (“Pointer Holdco”), and Powerfleet Israel Acquisition Company Ltd., a private company limited by shares formed under the laws of the State of Israel and a wholly-owned subsidiary of Pointer Holdco prior to the Transactions (“Pointer Merger Sub”), and (ii) the Investment and Transaction Agreement, dated as of March 13, 2019, as amended by Amendment No. 1 thereto dated as of May 16, 2019, Amendment No. 2 thereto dated as of June 27, 2019 and Amendment No. 3 thereto dated as of October 3, 2019 (the “Investment Agreement,” and together with the Merger Agreement, the “Agreements”), by and among I.D. Systems, PowerFleet, PowerFleet US Acquisition Inc., a Delaware corporation and a wholly-owned subsidiary of PowerFleet prior to the Transactions (“I.D. Systems Merger Sub”), and ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P. and ABRY Investment Partnership, L.P. (the “Investors”), I.D. Systems reorganized into a new holding company structure by merging I.D. Systems Merger Sub with and into I.D. Systems, with I.D. Systems surviving as a direct, wholly-owned subsidiary of PowerFleet, and Pointer Merger Sub merged with and into Pointer, with Pointer surviving as a direct, wholly owned subsidiary of Pointer Holdco and an indirect, wholly-owned subsidiary of PowerFleet. Prior to the Transactions, PowerFleet had no material assets, did not operate any business and did not conduct any activities, other than those incidental to its formation and matters contemplated by the Agreements. I.D. Systems was determined to be the accounting acquirer in the Transactions. As a result, the historical financial statements of I.D. Systems for the periods prior to the Transactions are considered to be the historical financial statements of PowerFleet and the Condensed Consolidated Financial Statements only include the financial results for I.D. Systems as of and for the three- and nine-month periods ended September 30, 2019. See Note 23 for additional information regarding the Transactions.

 

I.D. Systems and its subsidiaries (collectively, “I.D. Systems,” “we,” “our” or “us”) develop, market and sell wireless machine-to-machine 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 trucks, semi-tractors, dry van trailers, refrigerated trailers, railcars and containers. I.D. Systems’ patented wireless asset management systems utilize radio frequency identification (RFID), Wi-Fi, Bluetooth, 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 analytics software application for both industrial trucks and logistics assets is designed to provide a single, integrated view of asset activity across multiple locations, generating enterprise-wide benchmarks and peer-industry comparisons to provide an even deeper layer of insights into asset operations. Analytics determines key performance indicators relating to the performance of managed assets. I.D. Systems’ 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. I.D. Systems outsources its hardware manufacturing operations to contract manufacturers.

 

I.D. Systems, Inc. was incorporated in Delaware in 1993 and commenced operations in January 1994. PowerFleet, Inc. was incorporated in Delaware in 2019 and commenced operations in October 2019.

 

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”), I.D. Systems (UK) Ltd (formerly Didbox Ltd.) (“IDS Ltd”) and Keytroller, LLC (collectively referred to as “I.D. Systems”). 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 I.D. Systems as of September 30, 2019, the consolidated results of its operations for the three- and nine-month periods ended September 30, 2018 and 2019, the consolidated change in stockholders’ equity for the three-month periods ended March 31, June 30, and September 30, 2018 and 2019 and the consolidated cash flows for the nine-month periods ended September 30, 2018 and 2019. The results of operations for the three- and nine-month periods ended September 30, 2019 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, 2018 included in I.D. Systems’ Annual Report on Form 10-K for the year then ended.

 

Certain amounts included in selling, general and administrative expenses in the prior period’s consolidated financial statements have been reclassified to acquisition-related expenses to conform to the current period presentation for comparative purposes.

 

Acquisition

 

On January 30, 2019, I.D. Systems completed the acquisition (the “CarrierWeb US Acquisition”) of substantially all of the assets of CarrierWeb, L.L.C. (“CarrierWeb”), an Atlanta-based provider of real-time in-cab mobile communications technology, electronic logging devices, two-way refrigerated command and control, and trailer tracking. On July 30, 2019, I.D. Systems completed the acquisition (the “CarrierWeb Ireland Acquisition” and together with the CarrierWeb US Acquisition, the “CarrierWeb Acquisitions”) of substantially all of the assets of CarrierWeb Services Ltd. (“CarrierWeb Ireland”), an affiliate of CarrierWeb, from e*freightrac Holding B.V., the owner of the outstanding equity of CarrierWeb Ireland. The assets I.D. Systems acquired in the CarrierWeb Acquisitions will be integrated into the Company’s logistics visibility solutions and product line. The CarrierWeb Acquisitions allow the Company to offer a full complement of highly-integrated logistics technology solutions to its current customers and prospects and immediately add customers and subscriber units.

 

9

 

 

Liquidity

 

As of September 30, 2019, I.D. Systems had cash (including restricted cash) and cash equivalents of $5.9 million and working capital of $11.6 million. The Company’s primary sources of cash are cash flows from operating activities and the Company’s holdings of cash and cash equivalents from the sale of common stock. To date, the Company has not generated sufficient cash flows solely from operating activities to fund its operations.

 

The Company believes that its available working capital, anticipated level of future revenues, expected cash flows from operations and available borrowings under its revolving credit facility with Bank Hapoalim B.M. (see Note 23) will provide sufficient funds to cover capital requirements through at least November 14, 2020.

 

NOTE 2 - CASH AND CASH EQUIVALENTS

 

I.D. Systems 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. I.D. Systems’ 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 of assets acquired and liabilities assumed and acquisition-related contingent consideration, 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

 

I.D. Systems’ investments as of December 31, 2018 include debt securities, U.S. Treasury Notes, government and state agency bonds and corporate bonds, which are classified as either available for sale, held to maturity or trading, depending on management’s investment intentions relating to these securities. As of December 31, 2018, all of I.D. Systems’ 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 gains and (losses) reported as comprehensive income or (loss). For the three- and nine-month periods ended September 30, 2018, I.D. Systems reported unrealized loss, net of realized amounts of $(22,000) and $(137,000), respectively, and for the three- and nine-month periods ended September 30, 2019, I.D. Systems reported unrealized gain, net of realized amounts of $-0- and $9,000, 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. I.D. Systems has classified as short-term those securities that mature within one year. All other securities are classified as long-term.

 

10

 

 

The cost, gross unrealized gains (losses) and fair value of available for sale securities by major security types as of December 31, 2018 are as follows:

 

       Unrealized   Unrealized   Fair 
December 31, 2018  Cost   Gain   Loss   Value 
Investments - short term                    
U.S. Treasury Notes  $302,000   $1,000    -   $303,000 
Corporate bonds and commercial paper   91,000    -    -    91,000 
Total investments - short term   393,000    1,000         394,000 
                     
Investments - long term                    
U.S. Treasury Notes   1,569,000    -    (2,000)   1,567,000 
Government agency bonds   1,548,000    -    (23,000)   1,525,000 
Corporate bonds   1,062,000    -    (23,000)   1,039,000 
                     
Total investments - long term   4,179,000    -    (48,000)   4,131,000 
                     
Total investments - available for sale  $4,572,000   $1,000   $(48,000)  $4,525,000 

 

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

 

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

 

As of December 31, 2018, all of I.D. Systems’ investments are classified as Level 1 fair value measurements.

 

11

 

 

NOTE 5 - REVENUE RECOGNITION

 

Our revenue is derived from: (i) sales of our wireless asset management systems and spare parts; (ii) remotely hosted SaaS agreements and post-contract maintenance and support agreements; (iii) services, which includes training and technical support; and (iv) periodically, leasing arrangements. Amounts invoiced to customers which are not recognized as revenue are classified as deferred revenue and classified as short-term or long-term based upon the terms of future services to be delivered.

 

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our wireless asset management systems, spare parts, or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with our base warranties continue to be recognized as expense when the products are sold (see Note 15). We recognize revenue for remotely hosted SaaS agreements and post-contract maintenance and support agreements beyond our standard warranties over the life of the contract.

 

The following table sets forth our revenues by product line for the three- and nine-month periods ended September 30, 2019 and 2018:

 

   Three Months Ended September 30, 2019 
   Product   Service   Total 
             
Industrial truck management  $5,743,000   $2,007,000   $7,750,000 
Connected vehicles   2,985,000    1,518,000    4,503,000 
Logistics visibility   2,334,000    2,297,000    4,631,000 
Total Revenue  $11,062,000   $5,822,000   $16,884,000 

 

   Three Months Ended September 30, 2018 
   Product   Service   Total 
             
Industrial truck management  $6,172,000   $2,027,000   $8,199,000 
Connected vehicles   1,462,000    399,000    1,861,000 
Logistics visibility   1,410,000    1,915,000    3,325,000 
Total Revenue  $9,044,000   $4,341,000   $13,385,000 

 

   Nine Months Ended September 30, 2019 
   Product   Service   Total 
             
Industrial truck management  $16,751,000   $5,671,000   $22,422,000 
Connected vehicles   6,106,000    5,415,000    11,521,000 
Logistics visibility   6,097,000    6,729,000    12,826,000 
Total Revenue  $28,954,000   $17,815,000   $46,769,000 

 

 

   Nine Months Ended September 30, 2018 
   Product   Service   Total 
             
Industrial truck management  $16,866,000   $5,333,000   $22,199,000 
Connected vehicles   8,491,000    616,000    9,107,000 
Logistics visibility   4,369,000    5,898,000    10,267,000 
Total Revenue  $29,726,000   $11,847,000   $41,573,000 

 

Our wireless asset management systems consist of on-asset hardware, communication infrastructure, SaaS, and hosting infrastructure. I.D. Systems’ system is typically implemented by the customer or a third party and, as a result, revenue related to the on-asset hardware is recognized when control of the hardware is transferred to the customer, which usually is upon delivery of the system and contractual obligations have been satisfied. For systems which do not have stand-alone value to the customer separate from the SaaS services provided, I.D. Systems considers both hardware and SaaS services a bundled performance obligation. Under the applicable accounting guidance, all of I.D. Systems’ billings for equipment and the related cost for these systems are deferred, recorded, and classified as a current and long-term liability and a current and long-term asset, respectively. The deferred revenue and cost are recognized over the service contract life, ranging from one to five years, beginning at the time that a customer acknowledges acceptance of the equipment and service.

 

Revenue related to the SaaS and hosting infrastructure performance obligation is recognized over time as access to the SaaS and hosting infrastructure is provided to the customer. In some instances, we are also responsible for providing installation services, training and technical support services which are short-term in nature and revenue for these services are recognized at the time of performance or right to invoice.

 

I.D. Systems also enters into post-contract maintenance and support agreements for its wireless asset management systems. Revenue is recognized ratably over the service periods and the cost of providing these services is expensed as incurred. Deferred revenue includes prepayment of extended maintenance, SaaS, hosting and support contracts.

 

12

 

 

I.D. Systems 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.

 

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.

 

The balances of contract assets, and contract liabilities from contracts with customers are as follows as of December 31, 2018 and September 30, 2019:

 

   December 31, 2018   September 30, 2019 
         (Unaudited) 
Current assets:          
Deferred sales commissions to employees  $585,000   $748,000 
Deferred costs  $9,069,000   $9,335,000 
           
Current liabilities:          
Deferred revenue -other (1)  $305,000   $272,000 
Deferred maintenance and SaaS revenue (1)   4,607,000    4,815,000 
Deferred logistics visibility solutions product revenue (1)   12,176,000    12,027,000 
           
    17,088,000    17,114,000 
Less: Current portion   7,902,000    8,095,000 
           
Deferred revenue - less current portion  $9,186,000   $9,019,000 

 

(1) We record deferred revenues when cash payments are received or due in advance of our performance. For the three- and nine-month periods ended September 30, 2018 and 2019, we recognized revenue of $2,434,000 and $9,325,000, respectively, and $3,306,000 and $9,544,000, respectively, that was included in the deferred revenue balance at the beginning of each reporting period. We expect to recognize deferred revenue as revenue before year 2024, when we transfer those goods and services and, therefore, satisfies our performance obligation to the customers. We do not separately account for activation fees since no good or service is transferred to the customer. Therefore, the activation fee is included in the transaction price and allocated to the performance obligations in the contract and deferred/amortized over the life of the contract.

 

13

 

 

Arrangements with multiple performance obligations

 

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on observable prices charged to customers or adjusted market assessment or using expected cost-plus margin when one is available. Adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditions and entity specific factors.

 

Practical expedients and exemptions

 

We recognize an asset for the incremental costs of obtaining the contract arising from the sales commissions to employees because we expect to recover those costs through future fees from the customers. We amortize the asset over three to five years because the asset relates to the services transferred to the customer during the contract term of three to five years.

 

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

Development projects with Avis Budget Car Rental, LLC

 

On December 3, 2018 (the “SOW#5 Effective Date”), I.D. Systems entered into a statement of work (the “SOW#5”) with Avis Budget Car Rental, LLC (“ABCR”), a subsidiary of Avis Budget Group, Inc. (“Avis”), for 75,000 units of I.D. Systems’ cellular-enabled rental fleet car management system (the “System”) and maintenance and support of the System (“Maintenance Services”) for sixty months from installation of the equipment and the non-recurring engineering (“NRE”) services for development of additional features and functionality for the consideration of approximately $33,000,000. ABCR has an option to purchase additional units and has the option to renew the Maintenance Services period for an additional twelve months upon its expiry, and then after such 12-month period, ABCR can purchase additional Maintenance Services on a month-to-month basis (during which ABCR can terminate the Maintenance Services) for up to forty-eight additional months.

 

14

 

 

I.D. Systems recognizes revenue on the non-recurring engineering services over time, on an input-cost method performance basis, as determined by the relationship of actual labor and material costs incurred to date compared to the estimated total project costs. Estimates of total project costs are reviewed and revised during the term of the project. Revisions to project costs estimates, where applicable, are recorded in the period in which the facts that give rise to such changes become known. For the three- and nine-month periods ended September 30, 2019, I.D. Systems recognized SOW#5 NRE revenue of $841,000 and $3,687,000, respectively.

 

The SOW#5 may be terminated by ABCR for cause (which is generally I.D. Systems’ material breach of its obligations under the SOW#5), for convenience (subject to a termination fee), upon a material adverse change to I.D. Systems, or for intellectual property infringement. I.D. Systems does not have the right to unilaterally terminate the SOW#5. In the event that ABCR terminates the SOW#4, then ABCR would be liable to I.D. Systems for the net present value of all future remaining charges under the SOW#5 at a negotiated discount rate per annum, with the payment due on the effective date of termination.

 

The SOW#5 provides for a period of exclusivity commencing on the SOW#5 Effective Date and ending twelve months after the SOW#5 Effective Date, which may be extended in six-month increments by Avis under certain conditions.

 

Approximately $188,000 of the SOW#5 NRE transaction price that has not yet been recognized as revenue as of September 30, 2019 is expected to be recognized in 2019.

 

Part of the performance credit earnbacks and incentive payments (“performance bonus”) have been excluded from the disclosure table above because it was not included in the transaction price. That part of the performance bonus was excluded from the transaction price in accordance with the accounting guidance in Topic 606 on constraining estimates of variable consideration, including the following factors:

 

the susceptibility of the consideration amount to factors outside I.D. Systems’ influence, including weather conditions and the risk of obsolescence of the promised goods and services;
     
whether the uncertainty about the consideration amount is not expected to be resolved for a long period of time;
     
I.D. Systems’ experience with similar types of contracts;
     
whether I.D. Systems expects to offer price concessions or change the payment terms; and
     
the range of possible consideration amounts.

 

15

 

 

NOTE 6 - FINANCING RECEIVABLES

 

Financing receivables consist of sales-type lease receivables from the sale of the Company’s products and services. The present value of net investment in sales-type lease receivable is principally for three- to five-year leases of I.D. Systems’ products and is reflected net of unearned interest income of $114,000 and $83,000 at December 31, 2018 and September 30, 2019, respectively, at a weighted-average discount rate of 3%.

 

Scheduled maturities of sales-type lease minimum lease payments outstanding as of September 30, 2019 are as follows:

 

Year ending December 31:    
     
October - December 2019  $253,000 
2020   876,000 
2021   471,000 
2022   213,000 
2023   91,000 
Thereafter   18,000 
      
    1,922,000 
Less: Current portion   950,000 
      
Sales-type lease receivable - less current portion  $972,000 

 

The allowance for doubtful accounts represents I.D. Systems’ best estimate of the amount of credit losses in I.D. Systems’ existing sales-type lease receivables. The allowance for doubtful accounts is determined on an individual lease basis if it is probable that I.D. Systems will not collect all principal and interest contractually due. I.D. Systems 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 lease’s effective interest rate. There were no impairment losses recognized for the three- and nine-month periods ended September 30, 2018 and 2019. I.D. Systems does not accrue interest when a lease is considered impaired. When the ultimate collectability of the principal balance of the impaired lease is in doubt, all cash receipts on impaired leases are applied to reduce the principal amount of such 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. Leases are written off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote. I.D. Systems resumes accrual of interest income when it is probable that I.D. Systems will collect the remaining principal and interest of an impaired lease. 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 I.D. Systems’ products, is stated at the lower of cost or net realizable value using the first-in first-out (FIFO) method. Inventory is shown net of a valuation reserve of $119,000 at December 31, 2018, and $159,000 at September 30, 2019.

 

Inventories consist of the following:

 

   December 31, 2018   September 30, 2019 
         (Unaudited) 
Components  $2,218,000   $1,518,000 
Finished goods   2,431,000    8,243,000 
           
   $4,649,000   $9,761,000 

 

16

 

 

NOTE 8 - FIXED ASSETS

 

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

 

   December 31, 2018   September 30, 2019 
         (Unaudited) 
Equipment  $1,114,000   $1,236,000 
Computer software and web application development   5,633,000    5,636,000 
Computer hardware   2,664,000    2,578,000 
Furniture and fixtures   466,000    505,000 
Automobiles   60,000    60,000 
Leasehold improvements   181,000    238,000 
           
    10,118,000    10,253,000 
Accumulated depreciation and amortization   (7,969,000)   (8,183,000)
           
   $2,149,000   $2,070,000 

 

Depreciation and amortization expense of fixed assets for the three- and nine-month periods ended September 30, 2018 was $214,000 and $640,000, respectively, and for the three- and nine-month periods ended September 30, 2019 was $194,000 and $573,000, respectively. This includes amortization of costs associated with computer software and web application development for the three- and nine-month periods ended September 30, 2018 of $133,000 and $395,000, respectively, and for the three- and nine-month periods ended September 30, 2019 of $131,000 and $397,000,

 

I.D. Systems capitalizes in fixed assets the costs of software development and web application development. Specifically, the assets comprise an implementation and enhancements 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. I.D. Systems 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. I.D. Systems capitalized $5,000 and $-0- for such projects for the nine-month periods ended September 30, 2018 and 2019, respectively.

 

17

 

 

NOTE 9 - ACQUISITION

 

On January 30, 2019, I.D. Systems completed the CarrierWeb US Acquisition. Aggregate consideration for the CarrierWeb US Acquisition was $3,500,000, consisting of (i) closing cash payment of $2,800,000, which consisted of cash of $2,150,000 and a credit bid by I.D. Systems in the amount of the aggregate principal amount plus accrued and unpaid interest outstanding under a $650,000 debtor-in-possession loan made by I.D. Systems to CarrierWeb on January 11, 2019, and (ii) $700,000 payment in April 2019, when CarrierWeb Ireland was restored to the Register of Companies in Ireland. The CarrierWeb US Acquisition was subject to the entry of a sale order by the United States Bankruptcy Court for the Northern District of Georgia approving such acquisition. The sale order was entered on January 28, 2019. In connection with the restoration of CarrierWeb Ireland to the Register of Companies in Ireland, I.D. Systems also made certain loans to CarrierWeb Ireland in the aggregate principal amount of $300,000.

 

On July 30, 2019, I.D. Systems, completed the CarrierWeb Ireland Acquisition. Consideration for the CarrierWeb Ireland Acquisition included (i) $550,000 in cash paid at closing, and (ii) 126,748 shares of I.D. Systems’ common stock, less (1) 55,783 shares for the satisfaction of aggregate principal amount plus accrued and unpaid interest outstanding under $300,000 loans, less (2) 43,706 shares held back with an estimated fair value of $250,000 which is included in accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.

 

The assets I.D. Systems acquired in the CarrierWeb Acquisitions will be integrated into the Company’s logistics visibility solutions and products. In connection with the CarrierWeb Acquisitions, I.D. Systems offered employment to all of the former employees of CarrierWeb and CarrierWeb Ireland. The CarrierWeb Acquisitions allow the Company to offer a full complement of highly-integrated logistics technology solutions to its current customers and prospects and immediately add customers and subscriber units. For the three- and nine-month periods ended September 30, 2019, I.D. Systems incurred acquisition-related expenses of approximately $(15,000) and $145,000, respectively, which are included in acquisition-related fees.

 

The purchase method of accounting in accordance with ASC805, Business Combinations, was applied for the CarrierWeb Acquisitions. This requires the total cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected product and sales synergies from combining the operations of the acquired business with those of the Company.

 

The following table summarizes the approximate preliminary purchase price allocation of CarrierWeb and CarrierWeb Ireland based on estimated fair values of the net assets acquired at the acquisition date:

 

Accounts receivable  $192,000 
Inventory   200,000 
Other assets   26,000 
Customer relationships   1,080,000 
Trademark and tradename   112,000 
Patents   1,121,000 
Goodwill (a)   2,044,000 
Net assets acquired  $4,775,000 

 

   (a) The goodwill is fully deductible for tax purposes.

 

The Company will finalize the purchase price allocation as soon as all the required information is available.

 

The results of operations of CarrierWeb and CarrierWeb Ireland have been included in the condensed consolidated statement of operations as of the effective date of acquisitions. For the three- and nine-month periods ended September 30, 2019, the CarrierWeb and CarrierWeb Ireland acquisitions contributed approximately $1,111,000 and $3,087,000, respectively, to I.D. Systems’ revenues. Operating income contributed by the CarrierWeb and CarrierWeb Ireland acquisitions was not separately identifiable due to Company’s integration activities and is impracticable to provide.

 

On July 31, 2017, I.D. Systems, together with its wholly-owned subsidiary Keytroller, acquired substantially all of the assets of Keytroller, LLC, a Florida limited liability company (the “Keytroller Acquisition”), pursuant to an asset purchase agreement (as amended, the “Keytroller Purchase Agreement”) by and among I.D. Systems, Keytroller, Keytroller, LLC, a Florida limited liability company (n/k/a Sparkey, LLC) (“Sparkey”) and the principals of Sparkey party thereto. Consideration for the Keytroller Acquisition included (i) $7,098,000 in cash paid at closing, (ii) 295,902 shares of I.D. Systems’ common stock issued at closing with a fair value of $2,000,000 and (iii) up to $3,000,000 of shares of I.D. Systems’ common stock as potential earn-out payments to be made on the first and second anniversaries of the closing date of the Keytroller Acquisition, computed in accordance with the terms of the Keytroller Purchase Agreement. The potential earn-out payments were estimated at a fair value of $2,683,000. During the fourth quarter of 2017, I.D. Systems paid a post-closing working capital adjustment of $275,000. On September 14, 2018, I.D. Systems issued 296,000 shares of its common stock for the earn-out payment for the twelve-month period ending on the first anniversary of the closing date of the Keytroller Acquisition. On August 17, 2019, I.D. Systems issued 147,951 shares of its common stock for the earn-out payment for the twelve-month period ending on the second anniversary of the closing date of the Keytroller Acquisition.

 

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NOTE 10 - INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes identifiable intangible assets of I.D. Systems as of December 31, 2018 and September 30, 2019:

 

September 30, 2019 (Unaudited) 

Useful Lives

(In Years)

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
                 
Amortized:                    
Customer relationships   9 - 10   $4,203,000    (749,000)   3.454,000 
Trademark and tradename   3 - 15    1,479,000    (296,000)   1,183,000 
Patents   7 - 13    2,610,000    (1,416,000)   1,194,000 
Favorable contract interest   5    388,000    (210,000)   178,000 
Covenant not to compete   4    208,000    (90,000)   118,000 
         8,888,000    (2,761,000)   6,127,000 
                     
Unamortized:                    
Customer list        104,000    -    104,000 
Trademark and Tradename        61,000    -    61,000 
                     
         165,000    -    165,000 
                     
Total       $9,053,000   $(2,761,000)  $6,292,000 

 

December 31, 2018  Useful Lives (In Years)   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
                 
Amortized:                    
Customer relationships   10   $3,123,000    (442,000)   2,681,000 
Trademark and tradename   10 - 15    1,367,000    (178,000)   1,189,000 
Patents   11    1,489,000    (1,218,000)   271,000 
Favorable contract interest   5    388,000    (137,000)   251,000 
Covenant not to compete   4    208,000    (60,000)   148,000 
         6,575,000    (2,035,000)   4,540,000 
                     
Unamortized:                    
Customer list        104,000    -    104,000 
Trademark and Tradename        61,000    -    61,000 
                     
         165,000    -    165,000 
                     
Total       $6,740,000   $(2,035,000)  $4,705,000 

 

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Amortization expense for the three- and nine-month periods ended September 30, 2018 was $178,000 and $534,000, respectively, and for the three- and nine-month periods ended September 30, 2019 was $253,000 and $726,000, respectively. Estimated future amortization expense for each of the five succeeding fiscal years for these intangible assets is as follows:

 

Year ending December 31:    
     
October - December 2019  $257,000 
2020   1,029,000 
2021   853,000 
2022   745,000 
2023   718,000 
Thereafter   2,525,000 
    6,127,000 

 

The change in goodwill from January 1, 2019 to September 30, 2019 is as follows:

 

Balance of as January 1, 2019  $7,318,000 
CarrierWeb acquisition   2,044,000 
Balance as of September 30, 2019  $9,362,000 

 

NOTE 11 - STOCK-BASED COMPENSATION

 

Stock Option Plans

 

In June 2018, I.D. Systems’ stockholders approved the I.D. Systems, Inc. 2018 Incentive Plan (as amended the “2018 Plan”) pursuant to which I.D. Systems may grant stock options, restricted stock and other equity-based awards with respect to up to an aggregate of 1,500,000 shares of I.D. Systems’ common stock with a vesting period of approximately four to five years. There were 58,000 shares available for future issuance under the 2018 Plan at September 30, 2019. Upon the adoption of the 2018 Plan, I.D. Systems’ 2009 Non-Employee Director Equity Compensation Plan and the 2015 Equity Compensation Plan were frozen, and no new awards can be issued pursuant to such plans. In connection with the completion of the Transactions, I.D. Systems assigned to PowerFleet and PowerFleet assumed all obligations of I.D. Systems pursuant to the 2018 Plan, which was amended to, among other things, increase the number of shares available for issuance thereunder by 3,000,000 shares and to rename the plan to the PowerFleet, Inc. 2018 Incentive Plan.

 

The 2018 Plan is 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.

 

Performance Shares - Transaction-Related Awards

 

In connection with the Transactions, on March 13, 2019, I.D. Systems’ Board of Directors approved the grant of options to purchase 350,000 shares of I.D. Systems’ common stock to Chris Wolfe, I.D. Systems’ Chief Executive Officer, and the grant of options to purchase 150,000 shares of I.D. Systems’ common stock to Ned Mavrommatis, I.D. Systems’ Chief Financial Officer. The options are subject to the terms of the 2018 Plan, have an exercise price of $6.28 per share, vest upon the attainment of adjusted EBITDA targets for the fiscal years ending December 31, 2020 and December 31, 2021 and become exercisable 180 days after vesting. Vesting of the options will accelerate in the event of certain change of control transactions, provided that the options will not accelerate upon the completion of the Transactions.

 

20

 

 

The following table summarizes the activity relating to I.D. Systems’ stock options for the nine-month period ended September 30, 2019:

 

           Weighted-     
       Weighted-   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Options   Price   Term   Value 
                 
Outstanding at beginning of year   1,220,000   $5.37           
Granted   894,000    6.20           
Exercised   (50,000)   3.54           
Forfeited or expired   (4,000)   5.34           
                     
Outstanding at end of period   2,060,000   $5.77    7 years   $404,000 
                     
Exercisable at end of period   1,298,000   $5.68    7 years   $8,000 

 

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

 

   September 30, 
   2018   2019 
         
Expected volatility   42.8%   24.2%
Expected life of options (in years)   4    3 
Risk free interest rate   2.72%   1.41%
Dividend yield   0%   0%
Weighted average fair value of options granted during the period  $2.46   $2.72 

 

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

 

I.D. Systems recorded stock-based compensation expense of $104,000 and $299,000 for the three- and nine-month periods ended September 30, 2018, respectively and $161,000 and $458,000 for the three- and nine-month periods ended September 30, 2019, respectively, in connection with awards made under the stock option plans.

 

The fair value of options vested during the nine-month periods ended September 30, 2018 and 2019 was $352,000 and $363,000, respectively. The total intrinsic value of options exercised during the nine-month periods ended September 30, 2018 and 2019 was $117,000 and $112,000, respectively.

 

As of September 30, 2019, there was approximately $1,381,000 of unrecognized compensation cost related to non-vested options granted under I.D. Systems’ stock option plans. That cost is expected to be recognized over a weighted-average period of 2.68 years.

 

I.D. Systems 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

 

I.D. Systems 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 I.D. Systems’ closing stock price on the date of the grant. A summary of all non-vested restricted stock for the nine-month period ended September 30, 2019 is as follows:

 

       Weighted- 
   Number of   Average 
   Non-vested   Grant Date 
   Shares   Fair Value 
         
Restricted stock, non-vested, beginning of year   568,000   $6.65 
Granted   255,000    5.74 
Vested   (246,000)   6.52 
Forfeited   (5,000)   6.91 
           
Restricted stock, non-vested, end of period   572,000   $6.30 

 

I.D. Systems recorded stock-based compensation expense of $465,000 and $1,396,000, respectively, for the three- and nine-month periods ended September 30, 2018 and $387,000 and $1,274,000, respectively, for the three- and nine-month periods ended September 30, 2019, in connection with restricted stock grants. As of September 30, 2019, there was $2,947,000 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.17 years.

 

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NOTE 12 - STOCKHOLDERS’ EQUITY

 

Preferred stock

 

As of September 30, 2019, I.D. Systems was authorized to issue 5,000,000 shares of preferred stock, par value $0.01 per share. I.D. Systems’ Board of Directors had the authority to issue shares of preferred stock and to determine the price and terms of those shares. No shares of preferred stock of I.D. Systems are issued and outstanding (See Note 23).

 

Stock repurchase program

 

On November 3, 2010, I.D. Systems’ Board of Directors authorized the repurchase of issued and outstanding shares of I.D. Systems’ 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 I.D. Systems’ 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 I.D. Systems’ management. All shares of common stock repurchased under I.D. Systems’ share repurchase program are held as treasury stock. I.D. Systems did not purchase any shares of its common stock under the share repurchase program during the nine-month period ended September 30, 2019. As of September 30, 2019, I.D. Systems 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.

 

Shares Withheld or Repurchased

 

During the nine-month periods ended September 30, 2018 and 2019, 120,000 and 44,000 shares, respectively, of I.D. Systems’ 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 $870,000 and $291,000, respectively.

 

NOTE 13 - 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 I.D. Systems’ Condensed Consolidated Balance Sheets.

 

The accumulated balances for each classification of other comprehensive loss for the nine-month period ended September 30, 2019 are as follows:

 

       Unrealized   Accumulated 
   Foreign   gain (losses)   other 
   currency   on   comprehensive 
   items   investments   loss 
             
Balance at January 1, 2019  $(388,000)  $(47,000)  $(435,000)
Net current period change   133,000    47,000    180,000 
                
Balance at September 30, 2019  $(255,000)  $-   $(255,000)

 

23

 

 

The accumulated balances for each classification of other comprehensive loss for the nine-month period ended September 30, 2018 are as follows:

 

       Unrealized   Accumulated 
   Foreign   gain (losses)   other 
   currency   on   comprehensive 
   items   investments   loss 
             
Balance at January 1, 2018  $(465,000)  $(113,000)  $(578,000)
Net current period change   107,000    16,000    123,000 
                
Balance at September 30, 2018  $(358,000)  $(97,000)  $(455,000)

 

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 currency financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature with IDS GmbH resulted in translation gains (losses) of $107,000 and $133,000 for the nine-month periods ended September 30, 2018 and 2019, 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 subsequent to December 1, 2015 on the intercompany transactions are included 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 (losses) for the three- and nine-month periods ended September 30, 2018 of $(50,000) and $(146,000), respectively, and for the three- and nine-month periods ended September 30, 2019 of $(258,000) and $(288,000), respectively, are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

 

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NOTE 14 - NET LOSS PER SHARE OF COMMON STOCK

 

Net loss per share for the three- and nine-month periods ended September 30, 2018 and 2019 are as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2018   2019   2018   2019 
Basic and diluted loss per share                    
Net loss  $(897,000)  $(2,099,000)  $(3,003,000)  $(6,878,000)
                     
Weighted-average shares outstanding   17,312,000    17,929,000    17,121,000    17,744,000 
                     
Basic and diluted net loss per share  $(0.05)  $(0.12)  $(0.18)  $(0.39)

 

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 nine-month periods ended September 30, 2018, 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 1,874,000 would have been anti-dilutive. For the three- and nine-month periods ended September 30, 2019, 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 2,632,000 would have been anti-dilutive due to the net loss.

 

NOTE 15 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

   December 31, 2018   September 30, 2019 
         (Unaudited) 
Accounts payable  $6,644,000   $15,513,000 
Accrued warranty   422,000    337,000 
Accrued compensation   870,000    488,000 
Other current liabilities   91,000    245,000 
           
   $8,027,000   $16,583,000 

 

I.D. Systems’ products are warranted against defects in materials and workmanship for a period of one to three years 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, 2018 and September 30, 2019.

 

The following table summarizes warranty activity for the nine-month periods ended September 30, 2018 and 2019:

 

   Nine Months Ended September 30, 
   2018   2019 
         
Accrued warranty reserve, beginning of period  $535,000   $422,000 
Accrual for product warranties issued   70,000    204,000 
Product replacements and other warranty expenditures   

(124,000

)   (165,000)
Expiration of warranties   

(90,000

)   (124,000)
           
Accrued warranty reserve, end of period  $

391,000

   $337,000 

 

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NOTE 16 - LEASES

 

I.D. Systems determines whether an arrangement is a lease at inception. I.D. Systems has operating leases for office space and office equipment. I.D. Systems’ leases have remaining lease terms of one year to seven years, some of which include options to extend the lease term for up to five years. I.D. Systems considered these options to extend in determining the lease term used to establish I.D. Systems’ right-of use assets and lease liabilities once reasonably certain of exercise. I.D. Systems’ lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

Right-of-use (“ROU”) assets represent I.D. Systems’ right to use an underlying asset for the lease term and lease liabilities represent I.D. Systems’ obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The operating lease ROU asset also includes any lease payments made in advance of lease commencement and excludes lease incentives. The lease terms used in the calculations of the operating ROU assets and operating lease liabilities include options to extend or terminate the lease when I.D. Systems is reasonably certain that it will exercise those options. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

As I.D. Systems’ leases do not provide an implicit rate, I.D. Systems uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

 

I.D. Systems has lease agreements with lease and non-lease components, which are generally not accounted for separately.

 

Components of lease expense are as follows:

 

   Three Months Ended September 30, 2019   Nine Months Ended September 30, 2019 
         
Operating lease cost  $233,000   $622,000 
Short term lease cost   87,000    231,000 
           
   $320,000   $853,000 

 

I.D. Systems has lease arrangements which are classified as short-term in nature. I.D. Systems has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, I.D. Systems will not recognize ROU assets or lease liabilities.

 

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

 

   Nine Months Ended
September 30, 2019
 
     
Operating cash flow information:     
Cash paid for amounts included in the measurement of lease liabilities  $586,000 
Non-cash activity:     
Right-of-use assets obtained in exchange for lease obligations  $2,556,000 

 

Weighted-average remaining lease term and discount rate for our operating leases are as follows:

 

   September 30, 2019 
     
Weighted-average remaining lease term (in years)   3.7 
Weighted-average discount rate   7.5%

 

Scheduled maturities of operating lease liabilities outstanding as of September 30, 2019 are as follows:

 

Year ending December 31,    
October - December 2019  $240,000 
2020   971,000 
2021   302,000 
2022   172,000 
2023   177,000 
Thereafter   416,000 
Total lease payments   2,278,000 
Less: Imputed interest   (307,000)
Present value of lease liabilities  $1,971,000 

 

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NOTE 17 - INCOME TAXES

 

I.D. Systems accounts for income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As of September 30, 2019, I.D. Systems 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.

 

NOTE 18 - 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 19 - CONCENTRATION OF CUSTOMERS

 

For the nine-month period ended September 30, 2019 and as of September 30, 2019, one customer accounted for 25% of I.D. Systems’ revenue and 20% of I.D. Systems’ accounts receivable. Two customers accounted for 23% and 21% of finance receivables as of September 30, 2019.

 

For the nine-month period ended September 30, 2018 and as of September 30, 2018, three customers accounted for 22%, 10% and 10% of I.D. Systems’ revenue and two customers accounted for 15% and 12% of I.D. Systems’ accounts receivable. Two customers accounted for 19% and 11% of finance receivables as of September 30, 2018.

 

NOTE 20 - WHOLLY OWNED FOREIGN SUBSIDIARIES

 

The financial statements of I.D. Systems’ 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 Nine Months Ended 
   September 30,   September 30, 
   2018   2019   2018   2019 
Net revenue  $423,000   $957,000   $945,000   $2,178,000 
                     
Net loss   (17,000)   (231,000)   (247,000)   (162,000)

 

Total assets of IDS GmbH were $1,430,000 and $2,172,000 as of December 31, 2018 and September 30, 2019, 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 Nine Months Ended 
   September 30,   September 30, 
   2018   2019   2018   2019 
Net revenue  $23,000   $47,000   $155,000   $276,000 
                     
Net loss   (84,000)   (83,000)   (214,000)   (54,000)

 

Total assets of IDS Ltd were $1,054,000 and $1,076,000 as of December 31, 2018 and September 30, 2019, respectively. IDS Ltd operates in a local currency environment using the British Pound as its functional currency.

 

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NOTE 21 - COMMITMENTS AND CONTINGENCIES

 

Except for normal operating leases, I.D. Systems is not currently subject to any material commitments.

 

Severance agreements

 

I.D. Systems has entered into severance agreements with two executive officers. The severance agreement for Ned Mavrommatis, I.D. Systems’ Chief Financial Officer, provides Mr. Mavrommatis with certain severance and change in control benefits upon the occurrence of a “Trigger Event,” which will have occurred if I.D. Systems terminates the executive without cause or the executive resigns for good reason within six months following a change in control event. The severance agreement for Chris Wolfe, I.D. Systems’ Chief Executive Officer, provides Mr. Wolfe with certain severance and change in control benefits upon the occurrence of a “Trigger Event,” which will have occurred if I.D. Systems terminates Mr. Wolfe without cause, or upon the occurrence of a “Change in Control Trigger Event,” which will have occurred if I.D. Systems terminates Mr. Wolfe without cause or Mr. Wolfe resigns for good reason, each within six months following a change in control event. As a condition to I.D. Systems’ obligations under the severance agreements, each executive has executed and delivered to I.D. Systems a restrictive covenants agreement.

 

Under the terms of the severance agreement with Mr. Mavrommatis, Mr. Mavrommatis 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 months, (ii) a waiver of any remaining portion of the executive’s healthcare continuation payments under COBRA for the twelve-month severance period, provided that the executive timely elects COBRA coverage and continues to make contributions for such coverage equal to his contribution amount in effect immediately preceding the date of his termination of employment, and (iii) partial accelerated vesting of the executive’s previously granted stock options and restricted stock awards. Under the terms of the severance agreement with Mr. Wolfe, Mr. Wolfe is entitled to the following: (i) a cash payment either (A) in the event of a Trigger Event, at the rate of his annual base salary, or (B) in the event of a Change in Control Trigger Event, at twice the rate of his annual base salary, in each case as in effect immediately prior to the Trigger Event or Change in Control Trigger Event, as the case may be, for a period of 12 months, (ii) a waiver of any remaining portion of Mr. Wolfe’s healthcare continuation payments under COBRA for the twelve-month severance period, provided that he timely elects COBRA coverage and continues to make contributions for such coverage equal to his contribution amount in effect immediately preceding the date of his termination of employment, (iii) partial accelerated vesting of Mr. Wolfe’s previous granted stock options and restricted stock awards, and (iv) in the event of a Change in Control Trigger Event, a pro-rata portion of any bonus that would have been payable to Mr. Wolfe with respect to the year of termination based on the achievement of predetermined Company objectives used to determine the Company’s performance. In connection with the completion of the Transactions, on October 3, 2019, I.D. Systems assigned to the Company all of its rights and obligations under the severance agreements with each of Mr. Wolfe and Mr. Mavrommatis.

 

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NOTE 22 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments,” which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity’s ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This update standard is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this ASU on the consolidated financial statements.

 

In August 2018, the Securities and Exchange Commission (the “SEC”) issued a final rule that amends certain of the SEC’s disclosure requirements, including requirements relating to disclosures about changes in stockholders’ equity. For Quarterly Reports on Form 10-Q, the final rule extends to interim periods the annual requirement in Rule 3-04 of Regulation S-X, to disclose (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares (as opposed to common stock only, as previously required). Pursuant to the final rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date [interim] periods, with subtotals for each interim period,” i.e., a reconciliation covering each period for which an income statement is presented. Rule 3-04 of Regulation S-X permits the disclosure of changes in stockholders’ equity (including dividend-per-share amounts) to be made either in a separate financial statement or in the notes to the financial statements. The final rule is effective for all filings made on or after November 5, 2018. SEC staff has indicated it would not object if a registrant’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. Therefore, I.D. Systems conformed to this rule in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Accounting”. This guidance aligns the accounting for share-based payment transactions with non-employees to accounting for share-based payment transactions with employees. Companies are required to record a cumulative-effect adjustment (net of tax) to retained earnings as of the beginning of the fiscal year of the adoption. Upon transition, non-employee awards are required to be measured at fair value as of the adoption date. This standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on I.D. Systems’ financial results.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220)”. The objective of the ASU is to allow a reclassification from accumulated comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. This ASU was effective for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance did not have a material impact on I.D. Systems’ financial results.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires a prospective adoption. The guidance is effective beginning fiscal year 2020. Early adoption is permitted. The adoption of this guidance did not have a material impact on I.D. Systems’ financial results.

 

In February 2016, the FASB issued 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. For leases with a term of 12 months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Also, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): “Targeted Improvements,” which provides an optional transition method to allow entities, on adoption of ASU 2016-02, to report prior periods under previous lease accounting guidance. 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 after December 15, 2018, including interim periods within those fiscal years. The Company adopted Topic 842; refer to “Note 16 - Leases” for more information.

 

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NOTE 23 – SUBSEQUENT EVENTS

 

On October 3, 2019 (the “Closing Date”), in connection with the completion of the Transactions and pursuant to the terms of the Investment Agreement, I.D. Systems reorganized into a new holding company structure by merging I.D. Systems Merger Sub with and into I.D. Systems (the “I.D. Systems Merger”), with I.D. Systems surviving as a direct, wholly-owned subsidiary of PowerFleet. Also on October 3, 2019, pursuant to the terms of the Merger Agreement, Pointer Merger Sub merged with and into Pointer (the “Pointer Merger”), with Pointer surviving as a direct, wholly-owned subsidiary of Pointer Holdco and an indirect, wholly-owned subsidiary of PowerFleet. As a result of the Transactions, I.D. Systems and Pointer Holdco each became direct, wholly-owned subsidiaries of PowerFleet and Pointer became an indirect, wholly-owned subsidiary of PowerFleet. In addition, as a result of the Transactions, PowerFleet became a publicly traded corporation and former I.D. Systems stockholders and former Pointer shareholders received common stock of PowerFleet. I.D. Systems common stock ceased trading on the Nasdaq Global Market and Pointer ordinary shares ceased trading on the Nasdaq Capital Market and the Tel Aviv Stock Exchange (“TASE”), following the close of trading on October 2, 2019 and at the effectiveness of the Pointer Merger on October 3, 2019, respectively, and PowerFleet common stock commenced trading on the Nasdaq Global Market on October 3, 2019 and on the TASE on October 6, 2019, in each case under the symbol “PWFL”.

 

At the effective time of the I.D. Systems Merger (the “I.D. Systems Merger Effective Time”), each share of I.D. Systems common stock outstanding immediately prior to such time (other than any I.D. Systems common stock owned by I.D. Systems immediately prior to the I.D. Systems Merger Effective Time) was converted automatically into the right to receive one share of PowerFleet common stock. At the effective time of the Pointer Merger (the “Pointer Merger Effective Time”), each Pointer ordinary share outstanding immediately prior to such time (other than Pointer ordinary shares owned, directly or indirectly, by I.D. Systems, PowerFleet or any of their subsidiaries or Pointer or any of its wholly-owned subsidiaries immediately prior to the Pointer Merger Effective Time) was cancelled in exchange for $8.50 in cash, without interest (the “Cash Consideration”), and 1.272 shares of PowerFleet common stock (the “Stock Consideration,” and together with the Cash Consideration, the “Pointer Merger Consideration”).

 

I.D. Systems stock options and restricted stock awards that were outstanding immediately prior to the I.D. Systems Merger Effective Time were converted automatically into equivalent PowerFleet awards on the same terms and conditions applicable to such I.D. Systems stock options and restricted stock awards prior to the I.D. Systems Merger Effective Time.

At the Pointer Merger Effective Time, each award of options to purchase Pointer ordinary shares that was outstanding and unvested immediately prior to such time was cancelled and substituted with options to purchase shares of PowerFleet common stock under the 2018 Plan on the same material terms and conditions as were applicable to the corresponding option immediately prior to the Pointer Merger Effective Time, except that (i) the number of shares of PowerFleet common stock underlying such substituted option is equal to the product of (A) the number of Pointer ordinary shares underlying such option immediately prior to the Pointer Merger Effective Time multiplied by (B) 2.544, with any fractional shares rounded down to the nearest whole number of shares of PowerFleet common stock, and (ii) the per-share exercise price is equal to the quotient obtained by dividing (A) the exercise price per Pointer ordinary share subject to such option immediately prior to the Pointer Merger Effective Time by (B) 2.544 (rounded up to the nearest whole cent).

At the Pointer Merger Effective Time, each award of options to purchase Pointer ordinary shares that was outstanding and vested immediately prior to such time was cancelled in exchange for the right to receive the product of (i) the excess, if any, of (A) the Pointer Merger Consideration (allocated between the Cash Consideration and the Stock Consideration in the same proportion as for holders of Pointer ordinary shares), over (B) the exercise price per Pointer ordinary share subject to such option, multiplied by (ii) the total number of Pointer ordinary shares underlying such option. If the exercise price of a vested option was equal to or greater than the consideration payable in respect of a vested option, such option was cancelled without payment.

At the Pointer Merger Effective Time, each award of restricted stock units of Pointer (a “Pointer RSU”) that was outstanding and vested immediately prior to such time was cancelled in exchange for the right to receive the Pointer Merger Consideration (allocated between the Cash Consideration and the Stock Consideration in the same proportion as for holders of Pointer ordinary shares). Each Pointer RSU that was outstanding and unvested immediately prior to such time was cancelled and substituted with restricted stock units under the 2018 Plan representing the right to receive, on the same material terms and conditions as were applicable under such Pointer RSU immediately prior to the Pointer Merger Effective Time, that number of shares of PowerFleet common stock equal to the product of (i) the number of Pointer ordinary shares underlying such Pointer RSU immediately prior to the Pointer Merger Effective Time multiplied by (ii) 2.544, with any fractional shares rounded down to the nearest lower whole number of shares of PowerFleet common stock.

 

The Cash Consideration was financed using (i) net proceeds of the issuance and sale by PowerFleet of 50,000 shares of PowerFleet’s Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), to the Investors for an aggregate purchase price of $50,000,000 pursuant to the terms of the Investment Agreement, and (ii) term loan borrowings by Pointer Holdco on the Closing Date of $30,000,000 under a credit agreement, dated August 19, 2019 (the “Credit Agreement”), with Bank Hapoalim B.M., pursuant to which Bank Hapoalim B.M. agreed to provide Pointer Holdco with two senior secured term loan facilities in an aggregate principal amount of $30,000,000 (comprised of two facilities in the aggregate principal amount of $20,000,000 and $10,000,000) and a five-year revolving credit facility to Pointer in an aggregate principal amount of $10,000,000.

 

Pointer is a provider of telematics and mobile IoT solutions to the automotive, insurance and logistics (cargo, assets and containers) industries. Pointer’s cloud-based software-as-a-service (SaaS) platform extracts and captures data from an organization’s mobility points, including drivers, routes, points-of-interest, logistics network, vehicles, trailers, containers and cargo. The Transactions are expected to provide the Company with operational synergies and access to a broader base of customers.

 

The Transactions will be accounted for as a business combination and I.D. Systems has been determined to be the accounting acquirer in the Transactions.

 

In addition, on October 3, 2019, PowerFleet, I.D. Systems, I.D. Systems Merger Sub and the Investors entered into Amendment No. 3 to the Investment Agreement (the “Investment Agreement Third Amendment”), pursuant to which PowerFleet agreed to issue and sell to the Investors in a private placement convertible unsecured promissory notes in the aggregate principal amount of $5,000,000 (the “Notes”) at the closing of the Transactions. The principal amount of, and accrued interest through the maturity date on, the Notes will convert automatically into Series A Preferred Stock (at the original issuance price thereof) upon receipt of the approval by PowerFleet’s stockholders in accordance with Nasdaq rules. The Notes will bear interest at 10% per annum, will mature on the third business day before the first anniversary of their issuance date (unless earlier converted) and may be prepaid in full subject to a prepayment premium.

 

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

 

On October 3, 2019, pursuant to the transactions (the “Transactions”) contemplated by (i) the Agreement and Plan of Merger, dated as of March 13, 2019 (the “Merger Agreement”), by and among I.D. Systems, Inc., a Delaware corporation (“I.D. Systems”), PowerFleet, Inc., a Delaware corporation and a wholly-owned subsidiary of I.D. Systems prior to the Transactions (“PowerFleet” or the “Company”), Pointer Telocation Ltd., a public company limited by shares formed under the laws of the State of Israel (“Pointer”), Powerfleet Israel Holding Company Ltd., a private company limited by shares formed under the laws of the State of Israel and a wholly-owned subsidiary of PowerFleet (“Pointer Holdco”), and Powerfleet Israel Acquisition Company Ltd., a private company limited by shares formed under the laws of the State of Israel and a wholly-owned subsidiary of Pointer Holdco prior to the Transactions (“Pointer Merger Sub”), and (ii) the Investment and Transaction Agreement, dated as of March 13, 2019, as amended by Amendment No. 1 thereto dated as of May 16, 2019, Amendment No. 2 thereto dated as of June 27, 2019 and Amendment No. 3 thereto dated as of October 3, 2019 (the “Investment Agreement,” and together with the Merger Agreement, the “Agreements”), by and among I.D. Systems, PowerFleet, PowerFleet US Acquisition Inc., a Delaware corporation and a wholly-owned subsidiary of PowerFleet prior to the Transactions (“I.D. Systems Merger Sub”), and ABRY Senior Equity V, L.P., ABRY Senior Equity Co-Investment Fund V, L.P. and ABRY Investment Partnership, L.P. (the “Investors”), I.D. Systems reorganized into a new holding company structure by merging I.D. Systems Merger Sub with and into I.D. Systems, with I.D. Systems surviving as a direct, wholly-owned subsidiary of PowerFleet, and Pointer Merger Sub merged with and into Pointer (the “Pointer Merger”), with Pointer surviving as a direct, wholly owned subsidiary of Pointer Holdco and an indirect, wholly-owned subsidiary of PowerFleet. Prior to the Transactions, PowerFleet had no material assets, did not operate any business and did not conduct any activities, other than those incidental to its formation and matters contemplated by the Agreements. I.D. Systems was determined to be the accounting acquirer in the Transactions. As a result, the historical financial statements of I.D. Systems for the periods prior to the Transactions are considered to be the historical financial statements of PowerFleet and the consolidated financial statements only include the financial results for I.D. Systems as of and for the three- and nine-month periods ended September 30, 2019. See Note 23 to the consolidated financial statements for additional information regarding the Transactions.

 

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”, “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, resource constraints encountered in developing new products, the ability to recognize the anticipated benefits of the Transactions and other factors described under “Risk Factors” set forth in I.D. Systems’ Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and other filings of the Company and I.D. Systems 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.powerfleet.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 trucks, semi-tractors, dry van trailers, refrigerated trailers, railcars and containers. Our patented systems utilize radio frequency identification (RFID), Wi-Fi, Bluetooth, satellite or cellular communications, and sensor technology and software to address the needs of organizations to control, track, monitor and analyze their assets. Our solutions enable customers to achieve tangible economic benefits by making timely, informed decisions that increase the safety, security, revenue, productivity and efficiency of their operations.

 

On January 30, 2019, we completed the acquisition (the “CarrierWeb US Acquisition”) of substantially all of the assets of CarrierWeb, L.L.C. (“CarrierWeb”), an Atlanta-based provider of real-time in-cab mobile communications technology, electronic logging devices, two-way refrigerated command and control, and trailer tracking. On July 30, 2019, we completed the acquisition (the “CarrierWeb Ireland Acquisition” and together with the CarrierWeb US Acquisition, the “CarrierWeb Acquisitions”) of substantially all of the assets of CarrierWeb Services Ltd. (“CarrierWeb Ireland”), an affiliate of CarrierWeb, from e*freightrac Holding B.V., the owner of the outstanding equity of CarrierWeb Ireland. The assets we acquired in the CarrierWeb Acquisitions will be integrated into the Company’s logistics visibility solutions and products. The CarrierWeb Acquisitions allow the Company to offer a full complement of highly-integrated logistics technology solutions to its current customers and prospects and immediately add customers and subscriber units.

 

On July 31, 2017, we, together with our wholly-owned subsidiary Keytroller, LLC, a Delaware limited liability company (“Keytroller”), acquired substantially all of the assets of Keytroller, LLC, a Florida limited liability company (the “Keytroller Acquisition”). The business we acquired in the Keytroller Acquisition develops and markets electronic products for managing forklifts and construction vehicles. The Keytroller Acquisition gives us a full suite of industrial fleet management product offerings capable of covering any sized fleet and budget and provides our industrial truck business more scale, both from a product and revenue standpoint and markets its line of forklift management devices mainly through a network of lift truck dealers, offering solutions for different fleet sizes at a wide range of price points.

 

We have focused our business activities on three primary business solutions: (i) Industrial Truck Management Solutions (“PowerFleet for Industrial”), (ii) Logistics Visibility (LV) Solutions (“PowerFleet for Logistics”) (formerly “Transportation Asset Management”), and (iii) Connected Vehicle Solutions (“PowerFleet for Vehicles”). Our solutions for industrial truck management allow our customers to reduce operating risks and improve operating efficiency including monitoring for unsafe activity, identifying facility equipment and goods damage, lowering operational costs and capital expenditures and ensuring compliance 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 solutions for logistics visibility allow our customers to increase revenue per asset deployed, optimize fleet size, and improve the monitoring and control of sensitive cargo. Our solutions for connected vehicles include unique Internet-of-Things (“IoT”) projects similar to projects we have delivered to Avis Budget Group, Inc. (“Avis”). These engineering programs help our customers transform their operations. For Avis, our rental fleet management platform assists 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 with secure lock and unlock capability, 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 application called I.D. Systems Analytics (“Analytics”), which is designed to provide a single, integrated view of asset activity across multiple locations, that provides enterprise-wide benchmarks and peer-industry comparisons for key performance indicators (“KPIs”) relating to the performance of managed assets. Analytics enables values for the KPIs to be calculated and used to identify cost benefit measurements which translate the KPI values into monetized metrics. On top of our Analytics and software-as-a-service platforms, we launched “Lucy” a deep learning, voice integrated virtual assistant. We expect that our growing database of operational data from monitored assets and operational workflows coupled with Lucy’s contextual learnings 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, division and site-level management within the enterprise. We also utilize channel partners such as independent dealers and Original Equipment Manufacturers (OEMs) who may opt for us to white label our product. 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.

 

Our Solutions

 

We design and implement wireless IoT and M2M asset management solutions that deliver both site-level and enterprise-level return on investment for our customers. Our solutions can be targeted to either campus-based assets or “over-the-road” assets.

 

Industrial Truck Management Solutions (“PowerFleet for Industrial”)

 

Our asset management solutions for campus-type and wide area-based assets incorporate 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 technological advantages that differentiate them from systems used for inventory, warehouse management and logistics tracking. For example, while inventory tracking systems rely on constant, continuous wireless connectivity to perform core functions, our systems require only periodic wireless communications and, our on-asset devices are designed to perform their core functions autonomously. Our enterprise-class software Analytics and Lucy can run in the cloud or behind our customer’s firewall.

 

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

 

miniature wireless programmable computers attached to assets; these wireless devices may communicate via Wi-Fi, Bluetooth, via the company’s proprietary IRF protocol, or via cellular link;
     
optional, IRF-based, fixed-position communication infrastructure consisting of network devices with two-way wireless communication capabilities and, optional IRF-based location-emitting beacons for enhanced indoor location calculation;
     
application-specific middleware servers, which are typically hosted in our data center, but may also be hosted on the customers’ local area network (LAN) or enterprise wide area network (WAN); and
     
proprietary end-user software, which is a user-friendly web application that provides visibility and control of the system database, and which is hosted at the same data center as the middleware. As stated above, our enterprise software is flexible enough to run thousands of customers, sites or assets in either a customer hosted or in the cloud configuration.

 

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 wireless range of any other system component or if the middleware is unavailable.

 

Our optional IRF infrastructure devices also independently process data and execute programmable application logic, in addition to linking monitored mobile asset data automatically to our system’s middleware. The link to the system’s middleware may leverage secure cellular communication, thereby permitting remotely-hosted server software without access to local IT infrastructure.

 

Our cellular “Hotspot” option allows our products to be outfitted on assets that go beyond campus boundaries such as aviation and construction equipment.

 

Our middleware applications populate the system’s 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 solutions for industrial truck 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 solutions provide vehicle operator access control to ensure that only trained and authorized personnel are able to use material handling equipment, and impact sensing to assign responsibility for abusive driving.

 

Our solutions 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 solutions are compatible with a wide range of electronic driver identification technologies and provide 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. Our solutions also support 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 solutions 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 operating cost savings through fleet and personnel reductions as well as increases in productivity. Our solutions also provide real-time and historical visibility of vehicle movements and other advanced asset management options.

 

To help reduce fleet maintenance costs, our solutions can 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.

 

Our solutions also enable 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 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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Logistics Visibility Solutions (“PowerFleet for Logistics”)

 

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 cellular and satellite communications and web-based data management technologies, the Logistics Visibility (LV) product family provides shippers and carriers with tools to better manage their tractors, drivers, trucks, refrigerated (Reefer) trailers, dry van trailers, chassis and container fleets. Our LV solutions enable quick access to actionable intelligence that results in better utilization, control, and security of our customers’ freight-carrying assets.

 

Our LV solutions consist of five principal elements:

 

cellular or satellite communicators and Bluetooth 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, motion, light, and tire inflation, that provide additional status information for the remote asset.

 

To increase asset utilization, our LV solutions can improve overall operating efficiency, increase revenue miles and reduce the number of assets needed by:

 

full two-way integrated workflow of control assignments and work changes to the truck tractor and driver;
     
Electronic Driver Logging (ELD) and inspection reports for regulatory compliance
     
monitoring asset pool size based on user-defined requirements;
     
generating dormancy reports to flag under-utilized assets;
     
alerting the driver to the location of the closest empty asset, resulting in a more rapid pick-up; and
     
providing trailer detention alerts when an asset has exceeded the time allotted for unloading.

 

To better control remote assets, our LV solutions provides:

 

change in cargo status of an asset via our patented full-length cargo sensor;
     
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 LV solutions 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;
     
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
     
near real-time sensors that can alert based on upon changes to shock (vibe) sound, light, barometric pressure, temperature and humidity.

 

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Connected Vehicle Solutions (“PowerFleet for Vehicles”)

 

In our connected vehicle solutions, we engage customers on unique IoT, M2M challenges that enable them to have considerable competitive advantage or to improve revenue or decrease their costs of operations.

 

For traditional rental fleet management, our system 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.

 

Our solution for “car sharing” permits a rental car company to remotely control, track and monitor their rental vehicles wherever they are parked. Whether for traditional ‘pod-based’ rental or for the emerging rent-anywhere model, the system also (i) manages member reservations by smart phone or Internet, and (ii) 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.

 

Analytics, Image Deep Learning and Lucy

 

Our analytics platforms for both industrial trucks and logistics assets provide our customers with a holistic view of their asset activity across an enterprise supply chain. Our image deep learning system allows us to process images from FreightCAM and other sources and identify key aspects of operations and geospatial information such as location, work being accomplished, type of cargo, how cargo is loaded and if there are any visible issues such as damage. Lucy, our deep learning voice integrated virtual analyst can help make the data and alerts actionable and can assist our customers by giving them a tireless virtual assistant.

 

These cloud-based software applications provide a single, integrated view of industrial asset activity across multiple locations, generating enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. Our analytics platforms can enable management to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety.

 

Specifically, our analytics platforms allow users 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;
     
Enable performance comparisons to broad, industry-specific benchmarks; and
     
Keeps track of actions and follow up items and communicates to appropriate persons to address problems or to escalate issues.

 

We look for analytics, image deep learning and Lucy 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.

 

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Risks to Our Business

 

During the nine-month period ended September 30, 2019, we generated revenues of $46.8 million, and Avis accounted for 25% of our revenues. During the nine-month period ended September 30, 2018, we generated revenues of $41.6 million, and Avis, Wal-Mart Stores, Inc. and Toyota Industries Corporation accounted for 22%, 10% and 10% of our revenues, respectively.

 

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 September 30, 2019, we had cash (including restricted cash) and cash equivalents of $5.9 million and working capital of $11.6 million. The Company’s primary sources of cash are cash flows from operating activities and the Company’s holdings of cash and cash equivalents from the sale of common stock. To date, we have not generated sufficient cash flow solely from operating activities to fund our operations.

 

The Company believes that its available working capital, anticipated level of future revenues, expected cash flows from operations and available borrowings under its revolving credit facility with Bank Hapoalim B.M. will provide sufficient funds to cover capital requirements for at least the next twelve months.

 

Additional risks and uncertainties to which the Company is subject are described under the heading “Risk Factors” in Part II, Item 1A of this report and in I.D. Systems’ Annual Report on Form 10-K for the year ended December 31, 2018.

 

Critical Accounting Policies

 

For the three-month period ended September 30, 2019, there were no significant changes to I.D. Systems’ critical accounting policies as identified in its Annual Report on Form 10-K for the year ended December 31, 2018, except, as noted in Note 22 of the Notes to our Unaudited Condensed Consolidated Financial Statements, we adopted the new leasing accounting standard ASU No. 2016-02, “Leases” (Topic 842), which became effective on January 1, 2019.

 

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Results of Operations

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2018   2019   2018   2019 
Revenue:                
Products   67.6%   65.5%   71.5%   61.9%
Services   32.4    34.5    28.5    38.1 
                     
    100.0    100.0    100.0    100.0 
Cost of revenues:                    
Cost of products   39.5    42.8    44.6    39.6 
Cost of services   9.7    12.0    8.1    13.9 
                     
Total gross profit   50.8    45.2    47.3    46.5 
                     
Operating expenses:                    
Selling, general and administrative expenses   43.9    37.4    41.4    39.4 
Research and development expenses   12.7    10.8    12.0    11.8 
Acquisition-related expenses   0.4    9.5    0.9    10.0 
    57.0    57.7    54.3    61.2 
                     
Loss from operations   (6.2)   (12.5)   (7.0)   (14.7)
Interest income   0.5    0.2    0.5    0.2 
Interest expense   (0.3)   (0.1)   (0.4)   (0.1)
Other expense   (0.8)   -    (0.4)   (0.1)
                     
Net loss   (6.8)%   (12.4)%   (7.3)%   (14.7)%

 

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