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IDSY > SEC Filings for IDSY > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for ID SYSTEMS INC


14-May-2013

Quarterly Report


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

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

Cautionary Note Regarding Forward-Looking Statements

This report contains various forward-looking statements made pursuant to the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 and information that is based on management's beliefs as well as assumptions made by, and information currently available to, management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to be correct. When used in this report, the words "believe", "expect", "estimate", "project", "predict", "forecast", "plan", "anticipate", "target", "outlook", "envision", "intend", "seek", "may", "will", or "should", and similar expressions or words, or the negatives of those words, are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and should be aware that the Company's actual results could differ materially from those described in the forward-looking statements due to a number of factors, including, without limitation, business conditions and growth in the wireless tracking industries, general economic conditions, lower than expected customer orders or variations in customer order patterns, competitive factors including increased competition, changes in product and service mix, and resource constraints encountered in developing new products, and other factors described under "Risk Factors" set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and other filings with the Securities and Exchange Commission (the "SEC"). Any forward-looking statements should be considered in light of these factors. Unless otherwise required by law, the Company undertakes no obligation, and expressly disclaims any obligation, to update or publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, or otherwise.

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

Overview

We develop, market and sell wireless solutions for managing and securing high-value enterprise assets. These assets include industrial vehicles, such as forklifts, airport ground support equipment, rental vehicles, and transportation assets, such as dry van trailers, refrigerated trailers, railcars and containers. Our patented systems utilize radio frequency identification (RFID), Wi-Fi, satellite or cellular communications, and sensor technology to address the needs of organizations to control, track, monitor and analyze their assets. Our solutions enable customers to achieve tangible economic benefits by making timely, informed decisions that increase the safety, security, productivity and efficiency of their operations.

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

During the third quarter of 2012, we delivered the remaining 20,000 rental fleet management units to Avis Budget Group for deployment across the Northeast U.S. and Canada under SOW#1. This increases the number of total units deployed to approximately 30,000, which is expected to generate approximately $270,000 in recurring service revenue per quarter over the next five years.

In addition to focusing on these core applications, we adapt our systems to meet our customers' broader asset management needs and seek opportunities to expand our solution offerings through strategic acquisitions. The acquisition of Didbox Ltd., a privately held, United Kingdom-based manufacturer and marketer of vehicle operator identification systems, provided us with a wider range of industrial vehicle management solutions and expanded our base of operations in Europe. The acquisition of Asset Intelligence LLC ("Asset Intelligence" or "AI"), which provides trailer, railcar, and container tracking solutions for manufacturers, retailers, shippers and freight transportation providers, complemented the Company's existing businesses, as the focus of Asset Intelligence on trucking, rail, and intermodal applications significantly expanded the scope of assets addressed by the Company's product solutions. The web and mobile communications technologies of Asset Intelligence also complemented I.D. Systems' portfolio of wireless asset management patents and provided the Company with access to a broader base of customers.

AI combines web-based software technologies with satellite and cellular communications to deliver data-driven telematics solutions for supply chain asset management. These solutions help secure and optimize the performance of trailers, railcars, containers, and the freight they carry, enabling shippers and carriers to maximize security and efficiency throughout their supply chains.

AI's VeriWiseTMproduct platform provides comprehensive real-time data for faster, more informed decision-making in multiple supply chain applications:

Asset Optimization-combining web-based asset visibility and advanced telemetry data to monitor the condition of fleet assets, streamline asset deployment, optimize utilization, and maximize return on investment.

Cold Chain Management-maintaining the condition and quality of temperature-sensitive cargo from point A to point B, and all the points in between.

Fleet Maintenance-utilizing sensor technologies, real-time data and a wealth of transportation maintenance knowledge to help control maintenance costs, improve preventative maintenance practices, increase asset up-time, extend asset life, and reduce overall cost of ownership.

Fuel Management-monitoring key factors in fuel consumption, such as tire pressure and engine idle time, to help optimize fuel performance and reduce transportation costs.

Security & Safety-protecting valuable assets and cargo throughout the supply chain.

We introduced a new data analysis software tool called I.D. Systems Analytics. This cloud-based software provides a single, integrated view of industrial asset activity across multiple locations, generating enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. Analytics can enable management to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety. Specifically, I.D. Systems Analytics (1) quantifies best-practice enterprise benchmarks for industrial asset utilization and safety; (2) reveals variations and inefficiencies in asset activity across both sites and geographic regions;
(3) identifies opportunities to eliminate or reallocate assets, with full enterprise awareness, to reduce capital and operating costs; (4) helps balance asset mix and inform acquisition decisions; (5) uncovers activity trends over time to forecast asset requirements; and (6) enables performance comparisons to broad, industry-specific benchmarks. We anticipate that Analytics will make a growing contribution to revenue, further differentiate and add value to our solutions, and help keep us at the forefront of the wireless asset management markets we serve.

We sell our solutions to both executive and division-level management. Typically, our initial system deployment serves as a basis for potential expansion across the customer's organization. We work closely with customers to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments. Post-implementation, we consult with our customers to further extend and customize the benefits to the enterprise by delivering enhanced analytics capabilities.

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

Risks to Our Business

During the three-month period ended March 31, 2013, we generated revenues of $8.0 million, and Wal-Mart Stores, Inc. and the Raymond Corporation accounted for 22% and 11% of our revenues, respectively. During the three-month period ended March 31, 2012, we generated revenues of $9.8 million, and Wal-Mart Stores, Inc. and Toyota Engineering & Manufacturing North America, Inc. accounted for 19% 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.

Additional risks and uncertainties to which we are subject are described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012.

Critical Accounting Policies

For the three months ended March 31, 2013, there were no significant changes to the Company's critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations



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



                                                 Three Months Ended
                                                      March 31,
                                                 2012           2013
Revenue:
Products                                            58.2 %        47.1 %
Services                                            41.8          52.9
                                                   100.0         100.0
Cost of revenue:
Cost of products                                    35.3          33.6
Cost of services                                    14.3          18.5
                                                    49.6          52.1
Gross profit                                        50.4          47.9
Operating expenses:
Selling, general and administrative expenses        57.0          68.8
Research and development expenses                   11.4          14.2
                                                    68.4          83.0
Loss from operations                               (18.0 )       (35.1 )
Interest income, net                                 0.9           2.1
Other income                                         0.2           0.4
Net loss                                           (16.9 )%      (32.6 )%

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012



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



                                             Three Months Ended
                                                  March 31,
                                            2012            2013
Product revenue:
Industrial and rental fleet management   $ 4,113,000     $ 2,439,000
Transportation asset management            1,598,000       1,336,000
                                           5,711,000       3,775,000

Services revenue:
Industrial and rental fleet management     1,192,000       1,365,000
Transportation asset management            2,909,000       2,874,000
                                           4,101,000       4,239,000

                                         $ 9,812,000     $ 8,014,000

REVENUES. Revenues decreased by approximately $1.8 million, or 18.3%, to $8.0 million in the three months ended March 31, 2013 from $9.8 million in the same period in 2012. The decrease in revenue is attributable to a decrease in total industrial and rental fleet management revenue of approximately $1.5 million to $3.8 million in 2013 from $5.3 million in 2012 and a decrease in total transportation asset management revenue of approximately $0.3 million to $4.2 million in 2013 from $4.5 million in 2012.

Revenues from products decreased by approximately $1.9 million, or 33.9%, to $3.8 million in the three months ended March 31, 2013 from $5.7 million in the same period in 2012. Industrial and rental fleet management product revenue decreased by approximately $1.7 million to $2.4 million in 2013 from $4.1 million in 2012. Transportation asset management product revenue decreased by approximately $0.3 million to $1.3 million in 2013 from $1.6 million in 2012. The decrease in product revenue resulted principally from a decrease in the number of units sold during the quarter.

Revenues from services increased by $0.1 million, or 3.4%, to $4.2 million in the three months ended March 31, 2013 from $4.1 million in the same period in 2012. Industrial and rental fleet management service revenue increased approximately $0.2 million to $1.4 million in 2013 from $1.2 million in 2012 principally due to an increase in revenue from Avis Budget Group, Inc. Transportation asset management service revenue of approximately $2.9 million in 2013 remained generally consistent with 2012 revenue.

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

                                             Three Months Ended
                                                  March 31,
                                            2012            2013
Cost of products:
Industrial and rental fleet management   $ 1,996,000     $ 1,496,000
Transportation asset management            1,467,000       1,198,000
                                           3,463,000       2,694,000

Cost of services:
Industrial and rental fleet management       452,000         609,000
Transportation asset management              951,000         875,000
                                           1,403,000       1,484,000

                                         $ 4,866,000     $ 4,178,000

COST OF REVENUES. Cost of revenues decreased by $0.7 million, or 14.1%, to $4.2 million in the three months ended March 31, 2013 from $4.9 million for the same period in 2012. The decrease is principally attributable to a decrease in product revenue in 2013. Gross profit was $3.8 million in 2013 compared to $4.9 million in 2012. As a percentage of revenues, gross profit decreased to 47.9% in 2013 from 50.4% in 2012.

Cost of products decreased by $0.8 million, or 22.2%, to $2.7 million in the three months ended March 31, 2013 from $3.5 million in the same period in 2012. Gross profit for products was $1.1 million in 2013 compared to $2.2 million in 2012. The decrease in gross profit was attributable to a $1.2 million decrease in the industrial and rental fleet management gross profit to $0.9 million in 2013 from $2.1 million in 2012. The transportation asset management gross profit of $0.1 million in 2013 remained generally consistent with 2012 gross margin. As a percentage of product revenues, gross profit decreased to 28.6% in 2013 from 39.4% in 2012. The decrease in gross profit as a percentage of product revenue was due to a decrease in the industrial and rental fleet management gross profit percentage to 38.7% in 2013 from 51.5% in 2012, which was principally due to a decrease in the number of units sold and lower product margins with fixed costs remaining constant. This decrease in the margin in the first quarter of 2013 was partially offset by an increase in the transportation asset management product revenue gross profit percentage to 10.3% in 2013 from 8.2% in 2012.

Cost of services increased by $0.1 million, or 5.8%, to $1.5 million in the three months ended March 31, 2013 from $1.4 million in the same period in 2012. Gross profit for services of $2.8 million in 2013 remained generally consistent with 2012 gross profit of $2.7 million. The industrial and rental fleet management gross profit increased approximately $0.1 million to $0.8 million in 2013 from $0.7 million in 2012. The transportation asset management gross profit of approximately $2.0 million in 2013 remained consistent with the 2012 gross profit of $2.0 million. As a percentage of service revenues, gross profit decreased to 65.0% in 2013 from 65.8% in 2012. The decrease in gross profit as a percentage of service revenue was due to a decrease in the industrial and rental fleet management gross profit percentage to 55.4% in 2013 from 62.1% in 2012 and an increase in the transportation asset management gross profit percentage to 69.6% in 2013 from 67.3% in 2012. The decrease in the industrial and rental fleet management gross profit margin was principally due to an increase in communication expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.Selling, general and administrative expenses decreased by approximately $0.1 million, or 1.3%, to $5.5 million in the three months ended March 31, 2013 compared to $5.6 million in the same period in 2012, due primarily to a decrease in payroll-related and stock-based compensation expense of $0.2 million partially offset by accrued severance of $0.2 million. As a percentage of revenues, selling, general and administrative expenses increased to 68.8% in the three months ended March 31, 2013 from 57.0% in the same period in 2012, primarily due to the decrease in revenues in 2013.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of approximately $1.1 million in the three months ended March 31, 2013 remained consistent with research and development expenses of approximately $1.1 million in the same period in 2012. A decrease in payroll-related and stock-based compensation expense of $0.2 million was offset by an increase in new product development expenses of approximately $0.2 million. As a percentage of revenues, research and development expenses increased to 14.2% in the three months ended March 31, 2013 from 11.4% in the same period in 2012, primarily due to the decrease in revenues in 2013.

INTEREST INCOME. Interest income increased by $76,000, or 85.4%, to $165,000 in the three months ended March 31, 2013 from $89,000 in the same period in 2012. This increase was attributable primarily to increased interest income from notes and lease receivables.

OTHER INCOME/EXPENSE. Other income of $33,000 in the three months ended March 31, 2013 increased $12,000 from other income of $21,000 in the same period in 2012. Other income for the three months ended March 31, 2013 consists principally of investment income.

NET LOSS. Net loss was $2.6 million, or $(0.22) per basic and diluted share, for the three months ended March 31, 2013 as compared to net loss of $1.6 million, or $(0.14) per basic and diluted share, for the same period in 2012. The decrease in the net loss was due primarily to the reasons described above.

Capital Requirements

We believe that with the cash and investments on hand, we will have sufficient funds available to cover our working capital requirements for at least the next 12 months.

Our capital requirements depend on a variety of factors, including, but not limited to, the length of the sales cycle, the rate of increase or decrease in our existing business base, the success, timing, and amount of investment required to bring new products to market, revenue growth or decline and potential acquisitions. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations. We may determine in the future that we require additional funds to meet our long-term strategic objectives, including for the completion of potential acquisitions. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve significant restrictive covenants, and we cannot assure you that such financing will be extended on terms acceptable to us, or at all.

Operating Activities

Net cash used in operating activities was $0.2 million for the three-month period ended March 31, 2013, compared to net cash used in operating activities of $4.1 million for the same period in 2012. The net cash used in operating activities for the three-month period ended March 31, 2013 reflects a net loss of $2.6 million and includes non-cash charges of $0.3 million for stock-based compensation and $0.5 million for depreciation and amortization expense. Changes in working capital items included:

proceeds of $0.7 million from the sale of NJ NOLs;

a decrease in accounts receivable of $0.2 million;

a decrease in notes and lease receivables of $0.3 million;

an increase in inventory of $0.3 million;

a decrease in prepaid expenses and other assets of $0.4 million;

an increase in deferred revenue of $0.8 million; and

a decrease in accounts payable and accrued expenses of $0.5 million, primarily due to the timing of payments to our vendors and accrued compensation.

Investing Activities

Net cash provided by investing activities was $2.5 million for three-month period ended March 31, 2013, compared to net cash provided investing activities of $0.5 million for the same period in 2012. The change from the same period in 2012 was primarily due to an increase in net maturities of investments of $2.0 million in 2013.

Financing Activities

Net cash provided by financing activities was $7,000 for the three-month periods ended March 31, 2012 and 2013.

Liquidity and Capital Resources

Historically, except for our line of credit borrowing of $12.9 million in the first quarter of 2009 (which was repaid in full in July 2010), our capital requirements have been funded primarily from the net proceeds from the issuance of our securities, including any issuances of our common stock upon the exercise of options. In addition, on August 22, 2011, we received approximately $4.6 million from Avis Budget Group from the sale of 1,000,000 shares of the Company's common stock, and a warrant to purchase up to 600,000 shares of our common stock. The warrant is immediately exercisable with respect to 100,000 shares and will become exercisable for the remaining 500,000 shares upon execution of SOW#2 under the Master Agreement entered into by the Company and Avis Budget Car Rental, LLC, a subsidiary of Avis Budget Group. As of March 31, 2013, we had cash, cash equivalents and marketable securities of $15.2 million and working capital of $19.7 million, compared to cash, cash equivalents and marketable securities of $15.8 million and working capital of $19.9 million as of December 31, 2012.

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

Off-Balance Sheet Arrangements

. . .

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