Notes
to Unaudited Condensed Consolidated Financial Statements
June
30, 2019
NOTE
1 - DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Description
of the Company
I.D.
Systems, Inc. and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”)
develop, market and sell wireless machine-to-machine 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. The Company’s 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. The Company’s solutions enable customers to achieve tangible economic benefits by making
timely, informed decisions that increase the safety, security, revenue, productivity and efficiency of their operations. The Company
outsources its hardware manufacturing operations to contract manufacturers.
I.D.
Systems, Inc. was incorporated in Delaware in 1993 and commenced operations in January 1994.
Basis
of Presentation
The
unaudited interim condensed consolidated financial statements include the accounts of I.D. Systems, Inc. and its wholly-owned
subsidiaries, Asset Intelligence, LLC (“AI”), I.D. Systems GmbH (“IDS GmbH”), I.D. Systems (UK) Ltd (formerly
Didbox Ltd.) (“IDS Ltd”) and Keytroller (collectively referred to as the “Company”). All material intercompany
balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial
position of the Company as of June 30, 2019, the consolidated results of its operations for the three- and six-month periods ended
June 30, 2018 and 2019, the consolidated change in stockholders’ equity for the three-month periods ended March
31, and June 30, 2018 and 2019 and the consolidated cash flows for the six-month periods ended June 30, 2018 and 2019. The
results of operations for the three- and six-month periods ended June 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 the Company’s 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, the Company completed the acquisition (the “CarrierWeb Acquisition”) of substantially all of the
assets of telematics provider CarrierWeb, L.L.C. (“CarrierWeb”), an Atlanta-based provider of real-time in-cab mobile
communications technology, electronic logging devices (ELDs), two-way refrigerated command and control, and trailer tracking.
The assets the Company acquired in the CarrierWeb Acquisition will be integrated into the Company’s logistics visibility
solutions and products. The CarrierWeb Acquisition allows 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.
Merger
Transactions
On
March 13, 2019, the Company entered into an Agreement and Plan of Merger (the “Pointer Merger Agreement”), with PowerFleet,
Inc., a wholly-owned subsidiary of the Company (“Parent”), Pointer Telocation Ltd. (“Pointer”), Powerfleet
Israel Holding Company Ltd., a wholly-owned subsidiary of Parent (“Pointer Holdco”), and Powerfleet Israel Acquisition
Company Ltd., a wholly-owned subsidiary of Pointer Holdco (“Pointer Merger Sub”), pursuant to which Pointer Merger
Sub will merge with and into Pointer, with Pointer surviving as a direct, wholly-owned subsidiary of Pointer Holdco (the “Pointer
Merger”) in exchange for consideration consisting of $8.50 in cash and 1.272 shares of common stock of Parent per ordinary
share of Pointer. Also on March 13, 2019, and in connection with the Pointer Merger Agreement, the Company entered into an Investment
and Transaction Agreement (the “Investment Agreement”) with Parent, PowerFleet US Acquisition Inc., a wholly-owned
subsidiary of Parent (“IDS Merger Sub”), and ABRY Senior Equity V, L.P. and ABRY Senior Equity Co-Investment Fund
V, L.P., pursuant to which the Company will reorganize into a new holding company structure by merging IDS Merger Sub with and
into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the “IDS Merger”), and pursuant
to which Parent will issue and sell in a private placement shares of Parent’s newly created Series A Convertible Preferred
Stock, to finance a portion of the cash consideration payable in the Pointer Merger. As a result of the transactions contemplated
by the Pointer Merger Agreement and the Investment Agreement (the “Merger Transactions”), the Company and Pointer
will each become wholly-owned subsidiaries of Parent. The Merger Transactions have been unanimously approved by the boards of
directors of both companies, are subject to customary closing conditions, including approval by our stockholders and Pointer’s
shareholders. The Merger Transactions are expected to close on or prior to October 31, 2019.
At
the closing of the Merger Transactions, the combined company will be named PowerFleet and the shares of PowerFleet common stock
are expected to be listed on the Nasdaq Global Market and the Tel Aviv Stock Exchange under the symbol “PWFL.”
Additionally,
on March 13, 2019, the Company entered into a commitment letter with Bank Hapoalim B.M. providing for two five-year senior secured
term loan facilities to Pointer Holdco in an aggregate principal amount of $30 million and a five-year revolving credit facility
to Pointer in an aggregate principal amount of $10 million. The term loan facilities will be used to finance a portion of the
cash consideration payable in the Pointer Merger and the revolving credit facility will be used by Pointer for general working
capital purposes, or, at Pointer’s discretion, to finance a portion of the cash consideration payable in the Pointer Merger.
The term loan facilities and the revolving credit facility are subject to customary closing conditions.
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
pending Merger Transactions are expected to provide the Company with operational synergies and access to a broader base of customers.
The
pending Merger Transactions will be accounted for as a business combination and the Company has been identified as the accounting
acquirer.
Liquidity
As
of June 30, 2019, we had cash (including restricted cash) and cash equivalents of $8.4 million and working capital of $12.1 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.
We
believe our available working capital, anticipated level of future revenues and expected cash flows from operations will provide
sufficient funds to cover capital requirements through at least August 14, 2020.
NOTE
2 - CASH AND CASH EQUIVALENTS
The
Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents
unless they are legally or contractually restricted. The Company’s cash and cash equivalent balances exceed Federal Deposit
Insurance Corporation (FDIC) limits.
NOTE
3 - USE OF ESTIMATES
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates estimates
used in the preparation of the financial statements for reasonableness. The most significant estimates relate to stock-based compensation
arrangements, measurements of fair value 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
The
Company’s 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 the Company’s investments are classified
as available for sale. Available for sale securities are measured at fair value based on quoted market values of the securities,
with the unrealized gains and (losses) reported as comprehensive income or (loss). For the three- and six-month periods ended
June 30, 2018, the Company reported unrealized loss, net of realized amounts, of $22,000 and $115,000, respectively, and for the
three- and six-month periods ended June 30, 2019, the Company 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. The Company has classified as short-term those securities
that mature within one year. All other securities are classified as long-term.
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 the Company’s investments are classified as Level 1 fair value measurements.
NOTE
5 - REVENUE RECOGNITION
The
Company’s 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 six-month periods ended June 30, 2019 and 2018:
|
|
Three Months Ended June 30, 2019
|
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Industrial truck management
|
|
$
|
5,423,000
|
|
|
$
|
1,850,000
|
|
|
$
|
7,273,000
|
|
Connected vehicles
|
|
|
3,121,000
|
|
|
|
1,569,000
|
|
|
|
4,690,000
|
|
Logistics visibility
|
|
|
2,099,000
|
|
|
|
2,212,000
|
|
|
|
4,311,000
|
|
Total Revenue
|
|
$
|
10,643,000
|
|
|
$
|
5,631,000
|
|
|
$
|
16,274,000
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Industrial truck asset management
|
|
$
|
4,518,000
|
|
|
$
|
1,862,000
|
|
|
$
|
6,380,000
|
|
Connected vehicles
|
|
|
4,773,000
|
|
|
|
184,000
|
|
|
|
4,957,000
|
|
Logistics visibility
|
|
|
1,493,000
|
|
|
|
1,979,000
|
|
|
|
3,472,000
|
|
Total Revenue
|
|
$
|
10,784,000
|
|
|
$
|
4,025,000
|
|
|
$
|
14,809,000
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Industrial truck management
|
|
$
|
11,008,000
|
|
|
$
|
3,664,000
|
|
|
$
|
14,672,000
|
|
Connected vehicles
|
|
|
3,121,000
|
|
|
|
3,897,000
|
|
|
|
7,018,000
|
|
Logistics visibility
|
|
|
3,763,000
|
|
|
|
4,432,000
|
|
|
|
8,195,000
|
|
Total Revenue
|
|
$
|
17,892,000
|
|
|
$
|
11,993,000
|
|
|
$
|
29,885,000
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Industrial truck management
|
|
$
|
10,694,000
|
|
|
$
|
3,306,000
|
|
|
$
|
14,000,000
|
|
Connected vehicles
|
|
|
7,029,000
|
|
|
|
217,000
|
|
|
|
7,246,000
|
|
Logistics visibility
|
|
|
2,959,000
|
|
|
|
3,983,000
|
|
|
|
6,942,000
|
|
Total Revenue
|
|
$
|
20,682,000
|
|
|
$
|
7,506,000
|
|
|
$
|
28,188,000
|
|
Industrial
truck management and connected vehicles solutions
Our
industrial truck and connected vehicle wireless asset management systems consist of on-asset hardware, communication infrastructure,
SaaS, and hosting infrastructure. The Company’s 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. 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.
Logistics
visibility solutions
Our
logistics visibility solutions systems (formerly “transportation asset management”) consist of on-asset hardware,
communications and SaaS services. The logistics visibility solutions system does not have stand-alone value to the customer separate
from the SaaS services provided and, therefore, we consider both hardware and SaaS services a bundled performance obligation.
Under the applicable accounting guidance, all of the Company’s billings for equipment and the related cost are deferred,
recorded, and classified as a current and long-term liability and a current and long-term asset, respectively. Deferred revenue
and cost are recognized over the service contract life, ranging from one to five years, beginning at the time that a customer
acknowledges acceptance of the equipment and service. The customer service contracts typically range from one to five years.
In
addition, the service revenue for our logistics visibility monitoring equipment relates to charges for monthly messaging usage
and value-added features charges. The usage fee is a monthly fixed charge based on the expected utilization according to the rate
plan chosen by the customer. Service revenue generally commences upon equipment installation and customer acceptance and is recognized
over the period such services are provided.
The
Company also enters into remotely hosted SaaS agreements and 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 also includes prepayment of extended maintenance, hosting and support contracts.
The
Company also derives revenue under leasing arrangements. Such arrangements provide for monthly payments covering the system sale,
maintenance, support and interest. These arrangements meet the criteria to be accounted for as sales-type leases. Accordingly,
an asset is established for the “sales-type lease receivable” at the present value of the expected lease payments
and revenue is deferred and recognized over the service contract, as described above. Maintenance revenues and interest income
are recognized monthly over the lease term.
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
June 30, 2019:
|
|
December 31, 2018
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Deferred sales commissions to employees
|
|
$
|
585,000
|
|
|
$
|
724,000
|
|
Deferred costs
|
|
$
|
9,069,000
|
|
|
$
|
9,678,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Deferred revenue -other (1)
|
|
$
|
305,000
|
|
|
$
|
311,000
|
|
Deferred maintenance and SaaS revenue (1)
|
|
|
4,607,000
|
|
|
|
4,901,000
|
|
Deferred logistics visibility solutions product revenue (1)
|
|
|
12,176,000
|
|
|
|
12,570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,088,000
|
|
|
|
17,782,000
|
|
Less: Current portion
|
|
|
7,902,000
|
|
|
|
8,366,000
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue - less current portion
|
|
$
|
9,186,000
|
|
|
$
|
9,416,000
|
|
(1)
|
We record
deferred revenues when cash payments are received or due in advance of our performance. For the three- and six-month periods
ended June 30, 2018 and 2019, the Company recognized revenue of $2,643,000 and $6,891,000, respectively, and $3,738,000 and
$6,238,000, respectively, that was included in the deferred revenue balance at the beginning of each reporting period. The
Company expects to recognize deferred revenue as revenue before year 2024, when it transfers those goods and services and,
therefore, satisfies its 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.
|
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
The
Company recognizes an asset for the incremental costs of obtaining the contract arising from the sales commissions to employees
because the Company expects to recover those costs through future fees from the customers. The Company amortizes 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
March 18, 2017 (the “SOW#4 Effective Date”), the Company entered into a statement of work (the “SOW#4”)
with Avis Budget Car Rental, LLC (“ABCR”), a subsidiary of Avis Budget Group, Inc. (“Avis”), for 50,000
units of the Company’s 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 for the consideration
of approximately $21,270,000. 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.
The
SOW#4 may be terminated by ABCR for cause (which is generally the Company’s material breach of its obligations under the
SOW#4), for convenience (subject to a termination fee), upon a material adverse change to the Company, or for intellectual property
infringement. The Company does not have the right to unilaterally terminate the SOW#4. In the event that ABCR terminates the SOW#4,
then ABCR would be liable to the Company for the net present value of all future remaining charges under the SOW#4 at a negotiated
discount rate per annum, with the payment due on the effective date of termination.
On
December 3, 2018 (the “SOW#5 Effective Date”), the Company entered into a statement of work (the “SOW#5”)
with ABCR for 75,000 units of the Company’s 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.
The
Company 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
six-month periods ended June 30, 2019, the Company recognized SOW#5 NRE revenue of $1,048,000 and $2,846,000.
The
SOW#5 may be terminated by ABCR for cause (which is generally the Company’s material breach of its obligations under the
SOW#5), for convenience (subject to a termination fee), upon a material adverse change to the Company, or for intellectual property
infringement. The Company 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 the Company 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
$1.0 million of the SOW#5 NRE transaction price that has not yet been recognized as revenue as of June 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 the Company’s 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;
|
|
|
●
|
the
Company’s experience with similar types of contracts;
|
|
|
●
|
whether
the Company expects to offer price concessions or change the payment terms; and
|
|
|
●
|
the
range of possible consideration amounts.
|
NOTE
6 - FINANCING RECEIVABLES
Financing
receivables consists 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 the Company’s products
and is reflected net of unearned interest income of $114,000 and $93,000 at December 31, 2018 and June 30, 2019, respectively,
at a weighted-average discount rate of 3%.
Scheduled
maturities of sales-type lease minimum lease payments outstanding as of June 30, 2019 are as follows:
Year ending December 31:
|
|
|
|
|
|
|
|
July - December 2019
|
|
$
|
505,000
|
|
2020
|
|
|
850,000
|
|
2021
|
|
|
445,000
|
|
2022
|
|
|
188,000
|
|
2023
|
|
|
74,000
|
|
Thereafter
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
2,073,000
|
|
Less: Current portion
|
|
|
782,000
|
|
|
|
|
|
|
Sales-type lease receivable - less current portion
|
|
$
|
1,291,000
|
|
The
allowance for doubtful accounts represents the Company’s best estimate of the amount of credit losses in the Company’s
existing sales-type lease receivables. The allowance for doubtful accounts is determined on an individual lease basis if it is
probable that the Company will not collect all principal and interest contractually due. The Company considers its customers’
financial condition and historical payment patterns in determining the customers’ probability of default. The impairment
is measured based on the present value of expected future cash flows discounted at the lease’s effective interest rate.
There were no impairment losses recognized for the three- and six-month periods ended June 30, 2018 and 2019. The Company 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. The Company resumes accrual of interest income when it
is probable that the Company 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 the Company’s 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 $166,000 at June 30, 2019.
Inventories
consist of the following:
|
|
December 31, 2018
|
|
|
June 30, 2019
|
|
|
|
|
|
|
(Unaudited)
|
|
Components
|
|
$
|
2,218,000
|
|
|
$
|
1,145,000
|
|
Finished goods
|
|
|
2,431,000
|
|
|
|
5,841,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,649,000
|
|
|
$
|
6.986,000
|
|
NOTE
8 - FIXED ASSETS
Fixed
assets are stated at cost, less accumulated depreciation and amortization, and are summarized as follows:
|
|
December 31, 2018
|
|
|
June 30, 2019
|
|
|
|
|
|
|
(Unaudited)
|
|
Equipment
|
|
$
|
1,114,000
|
|
|
$
|
1,185,000
|
|
Computer software and web application development
|
|
|
5,633,000
|
|
|
|
5,636,000
|
|
Computer hardware
|
|
|
2,664,000
|
|
|
|
2,534,000
|
|
Furniture and fixtures
|
|
|
466,000
|
|
|
|
504,000
|
|
Automobiles
|
|
|
60,000
|
|
|
|
60,000
|
|
Leasehold improvements
|
|
|
181,000
|
|
|
|
238,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,118,000
|
|
|
|
10,157,000
|
|
Accumulated depreciation and amortization
|
|
|
(7,969,000
|
)
|
|
|
(7,991,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,149,000
|
|
|
$
|
2,166,000
|
|
Depreciation
and amortization expense of fixed assets for the three- and six-month periods ended June 30, 2018 was $211,000 and $426,000, respectively,
and for the three- and six-month periods ended June 30, 2019 was $190,000 and $379,000, respectively. This includes amortization
of costs associated with computer software and web application development for the three- and six-month periods ended June 30,
2018 of $131,000 and $262,000, respectively, and for the three- and six-month periods ended June 30, 2019 of $133,000 and $266,000,
The
Company 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 VeriWise
TM
systems, and a customer interface website (which is the primary tool used to provide data to our customers). The website
employs updated web architecture and improved functionality and features, including, but not limited to, customization at the
customer level, enhanced security features, custom virtual electronic geofencing of landmarks, global positioning system (GPS)-based
remote mileage reporting, and richer mapping capabilities. The Company capitalized the costs incurred during the “development”
and “enhancement” stages of the software and website development. Costs incurred during the “planning”
and “post-implementation/operation” stages of development were expensed. The Company capitalized $5,000 and $-0- for
such projects for the six-month periods ended June 30, 2018 and 2019, respectively.
NOTE
9 - ACQUISITION
On
January 30, 2019, the Company completed the CarrierWeb Acquisition. Aggregate consideration for the CarrierWeb Acquisition was
$3,500,000, consisting of (i) closing cash payment of $2,800,000, less a credit bid by the Company in the amount
of the aggregate principal amount plus accrued and unpaid interest outstanding under a $650,000 debtor-in-possession loan made
by the Company to CarrierWeb on January 11, 2019, and (ii) $700,000 payment in April 2019, when CarrierWeb
Services Ltd. (“CarrierWeb Ireland”), an affiliate of CarrierWeb, was restored to the Register of Companies in Ireland.
The CarrierWeb 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, the Company also made certain loans to CarrierWeb Ireland in the aggregate principal
amount of $300,000 which is included in other assets in the Condensed Consolidated Balance Sheets. See Note 23 - Subsequent
Events.
The
assets the Company acquired in the CarrierWeb Acquisition will be integrated into the Company’s logistics visibility solutions
and products. In connection with the transaction, the Company offered employment to all of the former employees of CarrierWeb.
The CarrierWeb Acquisition allows 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 six-month periods
ended June 30, 2019, the Company incurred acquisition-related expenses of approximately $30,000 and $160,000, respectively, which
are included in acquisition-related fees.
The
purchase method of accounting in accordance with ASC805,
Business Combinations
, was applied for the CarrierWeb Acquisition.
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 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
|
|
|
945,000
|
|
Trademark and tradename
|
|
|
104,000
|
|
Patents
|
|
|
978,000
|
|
Goodwill (a)
|
|
|
1,055,000
|
|
Net assets acquired
|
|
$
|
3,500,000
|
|
|
(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 have been included in the condensed consolidated statement of operations as of the effective
date of acquisition. For the three- and six-month periods ended June 30, 2019, the CarrierWeb acquisition contributed approximately
$1,348,000 and $1,976,000, respectively, to the Company’s revenues. Operating income contributed by the CarrierWeb acquisition
was not separately identifiable due to Company’s integration activities and is impracticable to provide.
On
July 31, 2017, the Company, together with its 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”),
pursuant to an asset purchase agreement (the “Purchase Agreement”) by and among the Company, 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 our common
stock issued at closing with a fair value of $2,000,000 and (iii) up to $3,000,000 of shares of our 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 Purchase Agreement. The potential earn-out payments were estimated at a fair value of $2,683,000.
During the fourth quarter of 2017, the Company paid a post-closing working capital adjustment of $275,000. On September 14, 2018,
the Company issued 296,000 shares for the earn-out payment for the twelve-month period ending on the first anniversary of the
closing date of the Keytroller Acquisition. On September 14, 2018, the Company entered into an amendment to the Purchase Agreement
effective as of August 1, 2018, which, among other things, fixed the second anniversary earn-out payment that Sparkey will be
entitled to receive at 147,951 shares of the Company’s common stock and removes certain restrictions on the operations of
the Company during such twelve-month period. Because the amendment fixed the second anniversary earn-out payment by removing the
performance criteria associated with such earn-out payment, the second anniversary earn-out payment is no longer considered contingent
consideration.
NOTE
10 - INTANGIBLE ASSETS AND GOODWILL
The
following table summarizes identifiable intangible assets of the Company as of December 31, 2018 and June 30, 2019:
June 30, 2019 (Unaudited)
|
|
Useful Lives
(In Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
9 - 10
|
|
|
$
|
4,068,000
|
|
|
|
(642,000
|
)
|
|
|
3.426,000
|
|
Trademark and tradename
|
|
|
3 - 15
|
|
|
|
1,471,000
|
|
|
|
(255,000
|
)
|
|
|
1,216,000
|
|
Patents
|
|
|
7 - 13
|
|
|
|
2,467,000
|
|
|
|
(1,344,000
|
)
|
|
|
1,123,000
|
|
Favorable contract interest
|
|
|
5
|
|
|
|
388,000
|
|
|
|
(186,000
|
)
|
|
|
202,000
|
|
Covenant not to compete
|
|
|
4
|
|
|
|
208,000
|
|
|
|
(81,000
|
)
|
|
|
127,000
|
|
|
|
|
|
|
|
|
8,602,000
|
|
|
|
(2,508,000
|
)
|
|
|
6,094,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list
|
|
|
|
|
|
|
104,000
|
|
|
|
-
|
|
|
|
104,000
|
|
Trademark and Tradename
|
|
|
|
|
|
|
61,000
|
|
|
|
-
|
|
|
|
61,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,000
|
|
|
|
-
|
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
8,767,000
|
|
|
$
|
(2,508,000
|
)
|
|
$
|
6,259,000
|
|
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
|
|
Amortization
expense for the three- and six-month periods ended June 30, 2018 was $178,000 and $356,000, respectively, and for the three- and
six-month periods ended June 30, 2019 was $280,000 and $473,000, respectively. Estimated future amortization expense for each
of the five succeeding fiscal years for these intangible assets is as follows:
Year ending December 31:
|
|
|
|
|
|
|
|
July - December 2019
|
|
$
|
495,000
|
|
2020
|
|
|
991,000
|
|
2021
|
|
|
815,000
|
|
2022
|
|
|
710,000
|
|
2023
|
|
|
683,000
|
|
Thereafter
|
|
|
2,400,000
|
|
|
|
|
6,094,000
|
|
The
change in goodwill from January 1, 2019 to June 30, 2019 is as follows:
Balance of as January 1, 2019
|
|
$
|
7,318,000
|
|
CarrierWeb acquisition
|
|
|
1,055,000
|
|
Balance as of June 30, 2019
|
|
$
|
8,373,000
|
|
NOTE
11 - STOCK-BASED COMPENSATION
Stock
Option Plans
In
June 2018, the Company’s stockholders approved the 2018 Incentive Plan (the “2018 Plan”) pursuant to which the
Company may grant stock options, restricted stock and other equity-based awards with respect to up to an aggregate of 1,500,000
shares of common stock with a vesting period of approximately four to five years. There were 92,000 shares available for future
issuance under the 2018 Plan at June 30, 2019. Upon the adoption of the 2018 Plan, the Company’s 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.
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 Merger Transactions, on March 13, 2019, the Company’s Board of Directors approved the grant of options
to purchase 350,000 shares of the Company’s common stock to Chris Wolfe, the Company’s Chief Executive Officer, and
the grant of options to purchase 150,000 shares of the Company’s common stock to Ned Mavrommatis, the Company’s 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 consummation of the Pointer Merger Agreement. The options will automatically expire
upon the termination of the Investment Agreement and the Pointer Merger Agreement.
The
Company’s Board of Directors also approved the grant of options to purchase an aggregate of 500,000 shares of the
Company’s common stock, which will consist of grants to Chris Wolfe and Ned Mavrommatis in amounts to be determined
and approved by the Company’s Board of Directors or the Compensation Committee of the Company’s Board of Directors.
The options will be subject to the terms of the 2018 Plan, will have an exercise price equal to the higher of $6.00 per share
or the closing price of the Company’s common stock on the closing date of the Merger Transactions, 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 consummation of the Merger Transactions. The options will automatically expire upon the failure
to obtain stockholder approval of an amendment to the 2018 Plan to increase the number of shares available under such plan within
one year.
The
following table summarizes the activity relating to the Company’s stock options for the six-month period ended June 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
|
|
|
869,000
|
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,000
|
)
|
|
|
3.54
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,000
|
)
|
|
|
3.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,038,000
|
|
|
$
|
5.77
|
|
|
|
8 years
|
|
|
$
|
610,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,254,000
|
|
|
$
|
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:
|
|
June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
43.0
|
%
|
|
|
24.2
|
%
|
Expected life of options (in years)
|
|
|
4
|
|
|
|
3
|
|
Risk free interest rate
|
|
|
2.73
|
%
|
|
|
1.41
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average fair value of options granted during the period
|
|
$
|
2.37
|
|
|
$
|
2.72
|
|
Expected
volatility is based on historical volatility of the Company’s common stock and the expected life of options is based on
historical data with respect to employee exercise periods.
The
Company recorded stock-based compensation expense of $95,000 and $195,000 for the three- and six-month periods ended June 30,
2018, respectively and $161,000 and $297,000 for the three- and six-month periods ended June 30, 2019, respectively, in connection
with awards made under the stock option plans.
The
fair value of options vested during the six-month periods ended June 30, 2018 and 2019 was $239,000 and $271,000, respectively.
The total intrinsic value of options exercised during the six-month periods ended June 30, 2018 and 2019 was $65,000 and $112,000,
respectively.
As
of June 30, 2019, there was approximately $1,548,000 of unrecognized compensation cost related to non-vested options granted under
the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 2.91 years.
The
Company estimates forfeitures at the time of valuation and reduces expense ratably over the vesting period. This estimate is adjusted
periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Restricted
Stock
The
Company grants restricted stock to employees, whereby the employees are contractually restricted from transferring the shares
until they are vested. The stock is unvested stock at the time of grant and, upon vesting, there are no contractual restrictions
on the stock. The fair value of each share is based on the Company’s closing stock price on the date of the grant. A summary
of all non-vested restricted stock for the six-month period ended June 30, 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
|
|
|
245,000
|
|
|
|
5.74
|
|
Vested
|
|
|
(199,000
|
)
|
|
|
6.62
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted stock, non-vested, end of period
|
|
|
614,000
|
|
|
$
|
6.30
|
|
The
Company recorded stock-based compensation expense of $500,000 and $931,000, respectively, for the three- and six-month periods
ended June 30, 2018 and $440,000 and $887,000, respectively, for the three- and six-month periods ended June 30, 2019,
in connection with restricted stock grants. As of June 30, 2019, there was $3,304,000 of total unrecognized compensation cost
related to non-vested shares. That cost is expected to be recognized over a weighted-average period of 2.37 years.
NOTE
12 - STOCKHOLDERS’ EQUITY
Preferred
stock
The
Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.01 per share. The Company’s Board of Directors
has the authority to issue shares of preferred stock and to determine the price and terms of those shares. No shares of preferred
stock are issued and outstanding.
Stock
repurchase program
On
November 3, 2010, the Company’s Board of Directors authorized the repurchase of issued and outstanding shares of the Company’s
common stock having an aggregate value of up to $3,000,000 pursuant to a share repurchase program. The repurchases under the share
repurchase program are made from time to time in the open market or in privately negotiated transactions and are funded from the
Company’s working capital. The amount and timing of such repurchases is dependent upon the price and availability of shares,
general market conditions and the availability of cash, as determined at the discretion of the Company’s management. All
shares of common stock repurchased under the Company’s share repurchase program are held as treasury stock. The Company
did not purchase any shares of its common stock under the share repurchase program during the six-month period ended June 30,
2019. As of June 30, 2019, the Company has purchased a total of approximately 310,000 shares of its common stock in open market
transactions under the share repurchase program for an aggregate purchase price of approximately $1,340,000, or an average cost
of $4.33 per share.
Shares
Withheld or Repurchased
During
the six-month periods ended June 30, 2018 and 2019, 92,000 and 36,000 shares, respectively, of the Company’s common stock
were withheld to satisfy minimum tax withholding obligations in connection with the vesting of restricted shares and to pay the
exercise price of stock options in the aggregate amount of $694,000 and $245,000, 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 the Company’s Condensed Consolidated Balance Sheets.
The
accumulated balances for each classification of other comprehensive loss for the six-month period ended June 30, 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
|
|
|
(58,000
|
)
|
|
|
47,000
|
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
$
|
(446,000
|
)
|
|
$
|
-
|
|
|
$
|
(446,000
|
)
|
The
accumulated balances for each classification of other comprehensive loss for the six-month period ended June 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
|
|
|
52,000
|
|
|
|
(72,000
|
)
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
(413,000
|
)
|
|
$
|
(185,000
|
)
|
|
$
|
(598,000
|
)
|
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 $52,000 and $(58,000) for the six-month periods ended June 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 six-month periods ended June 30, 2018 of $(277,000) and $(96,000), respectively, and for the three-
and six-month periods ended June 30, 2019 of $(4,000) and $(30,000), respectively, are included in selling, general and administrative
expenses in the Condensed Consolidated Statement of Operations.
NOTE
14 - NET LOSS PER SHARE OF COMMON STOCK
Net
loss per share for the three- and six-month periods ended June 30, 2018 and 2019 are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,116,000
|
)
|
|
$
|
(2,585,000
|
)
|
|
$
|
(2,106,000
|
)
|
|
$
|
(4,779,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
17,066,000
|
|
|
|
17,678,000
|
|
|
|
17,024,000
|
|
|
|
17,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.27
|
)
|
Basic
loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period.
Diluted loss per share reflects the potential dilution assuming common shares were issued upon the exercise of outstanding options
and the proceeds thereof were used to purchase outstanding common shares. Dilutive potential common shares include outstanding
stock options, warrants and unvested restricted stock and performance shares awards. For the three- and six-month periods ended
June 30, 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 1,871,000 would have been anti-dilutive.
For the three- and six-month periods ended June 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 2,652,000 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
|
|
|
June 30, 2019
|
|
|
|
|
|
|
(Unaudited)
|
|
Accounts payable
|
|
$
|
6,644,000
|
|
|
$
|
10,631,000
|
|
Accrued warranty
|
|
|
422,000
|
|
|
|
335,000
|
|
Accrued compensation
|
|
|
870,000
|
|
|
|
451,000
|
|
Other current liabilities
|
|
|
91,000
|
|
|
|
188,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,027,000
|
|
|
$
|
11,605,000
|
|
The
Company’s 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 June 30, 2019.
The
following table summarizes warranty activity for the six-month periods ended June 30, 2018 and 2019:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accrued warranty reserve, beginning of period
|
|
$
|
535,000
|
|
|
$
|
422,000
|
|
Accrual for product warranties issued
|
|
|
67,000
|
|
|
|
152,000
|
|
Product replacements and other warranty expenditures
|
|
|
(75,000
|
)
|
|
|
(139,000
|
)
|
Expiration of warranties
|
|
|
(78,000
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Accrued warranty reserve, end of period
|
|
$
|
449,000
|
|
|
$
|
335,000
|
|
NOTE
16 - LEASES
The
Company determines whether an arrangement is a lease at inception. The Company has operating leases for office space and office
equipment. The Company’s 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. The Company considered these options to extend in determining the lease term used
to establish the Company’s right-of use assets and lease liabilities once reasonably certain of exercise. The Company’s
lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use
(“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent the Company’s 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 the Company 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
the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments.
The
Company 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 June 30, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
210,000
|
|
|
$
|
389,000
|
|
Short term lease cost
|
|
|
100,000
|
|
|
|
144,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310,000
|
|
|
$
|
533,000
|
|
The
Company has lease arrangements which are classified as short-term in nature. The Company has elected the short-term lease recognition
exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or
lease liabilities.
Supplemental
cash flow information and non-cash activity related to our operating leases are as follows:
|
|
Six Months Ended
June 30, 2019
|
|
|
|
|
|
Operating cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
384,000
|
|
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:
|
|
June 30, 2019
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
3.8
|
|
Weighted-average discount rate
|
|
|
7.5
|
%
|
Scheduled
maturities of operating lease liabilities outstanding as of June 30, 2019 are as follows:
Year ending December 31,
|
|
|
|
July - December 2019
|
|
$
|
481,000
|
|
2020
|
|
|
971,000
|
|
2021
|
|
|
302,000
|
|
2022
|
|
|
172,000
|
|
2023
|
|
|
177,000
|
|
Thereafter
|
|
|
416,000
|
|
Total lease payments
|
|
|
2,519,000
|
|
Less: Imputed interest
|
|
|
(347,000
|
)
|
Present value of lease liabilities
|
|
$
|
2,172,000
|
|
NOTE
17 - INCOME TAXES
The
Company accounts for income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for
the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to reverse. As of June 30, 2019, the
Company had provided a valuation allowance to fully reserve its net operating loss carryforwards and other items giving rise to
deferred tax assets, primarily as a result of anticipated net losses for income tax purposes.
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 six-month period ended June 30, 2019 and as of June 30, 2019, one customer accounted for 23% of the Company’s revenue
and two customers accounted for 34% and 10% of the Company’s accounts receivable. Two customers accounted for 22% and 20%
of finance receivables as of June 30, 2019.
For
the six-month period ended June 30, 2018 and as of June 30, 2018, three customers accounted for 26%, 11% and 11% of the Company’s
revenue and one customer accounted for 32% of the Company’s accounts receivable. One customer accounted for 18% of finance
receivables as of June 30, 2018.
NOTE
20 - WHOLLY OWNED FOREIGN SUBSIDIARIES
The
financial statements of the Company’s wholly owned German subsidiary, IDS GmbH, and United Kingdom subsidiary, IDS Ltd,
are consolidated with the financial statements of I.D. Systems, Inc.
The
net revenue and net loss for IDS GmbH included in the Condensed Consolidated Statement of Operations are as follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
Net revenue
|
|
$
|
328,000
|
|
|
$
|
750,000
|
|
|
$
|
522,000
|
|
|
$
|
1,221,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(186,000
|
)
|
|
|
126,000
|
|
|
|
(230,000
|
)
|
|
|
69,000
|
|
Total
assets of IDS GmbH were $1,430,000 and $2,251,000 as of December 31, 2018 and June 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 Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
Net revenue
|
|
$
|
35,000
|
|
|
$
|
49,000
|
|
|
$
|
132,000
|
|
|
$
|
229,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(176,000
|
)
|
|
|
(72,000
|
)
|
|
|
(130,000
|
)
|
|
|
29,000
|
|
Total
assets of IDS Ltd were $1,054,000 and $1,106,000 as of December 31, 2018 and June 30, 2019, respectively. IDS Ltd operates in
a local currency environment using the British Pound as its functional currency.
NOTE
21 - COMMITMENTS AND CONTINGENCIES
Except
for normal operating leases, the Company is not currently subject to any material commitments.
Severance
agreements
The
Company has entered into severance agreements with two executive officers. The severance agreement for Ned Mavrommatis, the Company’s
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 the Company 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, the Company’s
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 the Company terminates Mr. Wolfe without cause, or upon the occurrence of a “Change
in Control Trigger Event,” which will have occurred if the Company 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 the Company’s obligations
under the severance agreements, each executive has executed and delivered to the Company a restrictive covenants agreement.
Under
the terms of the severance 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.
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 the Company beginning in the first fiscal quarter of 2022, 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, the Company 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 will be effective for fiscal years beginning December 15,
2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not
have a material impact on the Company’s 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 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted.
The adoption of this guidance did not have a material impact on the Company’s 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 2021. Early adoption is permitted. The adoption of this guidance did not have a material
impact on the Company’s 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.
NOTE
23 – SUBSEQUENT EVENTS
On
July 30, 2019, the Company, completed the acquisition 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. Consideration for the CarrierWeb Ireland acquisition included (i) $500,000 in cash paid at closing, and (ii) 126,748
shares of the Company’s common stock, less (1) 55,783 shares for the payment of aggregate principal amount plus accrued
and unpaid interest outstanding under $300,000 loans, less (2) 43,706 shares held back.
The
CarrierWeb Ireland acquisition will be accounted for by using the acquisition method of accounting and the purchase price paid
will be assigned to the net assets acquired based on the fair value of such assets and liabilities at the date of the acquisition.