U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 1-15087
I.D. SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3270799
-------- ----------
(State or other jurisdiction or (I.R.S. Employer Identification No)
incorporation or organization)
ONE UNIVERSITY PLAZA, HACKENSACK, NEW JERSEY 07601
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(Address of principal executive offices) (Zip Code)
(201) 996-9000
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period) that the issuer was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Issuer's Common Stock, $0.01 par value,
as of the close of business on November 1, 2004 was 7,675,105.
INDEX
I.D. SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS. Page
----
Condensed Balance Sheets as of December 31, 2003
and September 30, 2004 (unaudited) 1
Condensed Statements of Operations (unaudited)
for the three months and nine months ended September 30, 2003
and 2004 2
Condensed Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2003 and 2004 3
Notes to Condensed Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. CONTROLS AND PROCEDURES 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
I.D. SYSTEMS, INC.
CONDENSED BALANCE SHEETS
December 31, SEPTEMBER 30, 2004
2003 (UNAUDITED)
------------ ------------
ASSETS
Cash and cash equivalents $ 3,179,000 $ 4,924,000
Short-term investments 3,339,000 3,724,000
Accounts receivable 2,204,000 3,304,000
Unbilled receivables -- 788,000
Inventory 676,000 1,109,000
Investment in sales type leases 37,000 39,000
Interest receivable 75,000 60,000
Officer loan 10,000 10,000
Prepaid expenses and other current assets 129,000 189,000
------------ ------------
Total current assets 9,649,000 14,147,000
Long-term investments 2,100,000 --
Fixed assets, net 845,000 878,000
Investment in sales type leases 73,000 44,000
Officer loan 31,000 23,000
Deferred contract costs 675,000 577,000
Other assets 97,000 88,000
------------ ------------
$ 13,470,000 $ 15,757,000
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 1,055,000 $ 1,174,000
Long term debt - current portion 188,000 196,000
Line of credit 137,000 --
Deferred revenue 89,000 93,000
------------ ------------
Total current liabilities 1,469,000 1,463,000
Long term debt 648,000 500,000
Deferred revenue 285,000 215,000
Deferred rent 89,000 106,000
------------ ------------
2,491,000 2,284,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock; authorized 5,000,000 shares, $.01 par value;
none issued
Common stock; authorized 15,000,000 shares, $.01 par value;
issued and outstanding 7,097,000 shares and 7,675,000 shares 71,000 77,000
Additional paid-in capital 22,804,000 24,912,000
Treasury stock; 40,000 shares at cost (113,000) (113,000)
Accumulated deficit (11,783,000) (11,403,000)
------------ ------------
10,979,000 13,473,000
------------ ------------
$ 13,470,000 $ 15,757,000
============ ============
See accompanying notes
1
I.D. SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2004 2003 2004
----------- ----------- ----------- -----------
Revenues $ 1,743,000 $ 3,289,000 $ 5,477,000 $ 9,758,000
Cost of Revenues 812,000 1,467,000 2,643,000 4,589,000
----------- ----------- ----------- -----------
Gross Profit 931,000 1,822,000 2,834,000 5,169,000
Selling, general and administrative expenses 1,087,000 1,470,000 3,275,000 4,177,000
Research and development expenses 243,000 372,000 694,000 810,000
----------- ----------- ----------- -----------
Income (loss) from operations (399,000) (20,000) (1,135,000) 182,000
Interest income 79,000 44,000 244,000 138,000
Interest expense (16,000) (16,000) (41,000) (49,000)
Other income -- 37,000 -- 111,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (336,000) $ 45,000 $ (932,000) $ 382,000
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.05) $ 0.01 $ (0.14) $ 0.05
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.05) $ 0.01 $ (0.14) $ 0.05
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC 6,898,000 7,629,000 6,845,000 7,380,000
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
DILUTED 6,898,000 8,976,000 6,845,000 8,477,000
=========== =========== =========== ===========
See accompanying notes
2
I.D. SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (932,000) $ 382,000
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization 118,000 184,000
Deferred rent expense 17,000 17,000
Deferred revenue 196,000 (66,000)
Bad debt expense 15,000 --
Deferred contract costs (187,000) 98,000
Changes in:
Accounts receivable (677,000) (1,100,000)
Unbilled receivables (105,000) (788,000)
Inventory 317,000 (435,000)
Prepaid expenses and other assets (23,000) (51,000)
Investment in sales type leases 580,000 27,000
Installment receivable 131,000 --
Other liabilities (50,000) --
Accounts payable and accrued expenses (217,000) 119,000
----------- -----------
Net cash used in operating activities (817,000) (1,613,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (251,000) (217,000)
Purchase of investments (3,723,000) (487,000)
Maturities of investments 2,174,000 2,054,000
Increase (decrease) in interest receivable (34,000) 15,000
Amortization of premium on investments 128,000 148,000
Collection of officer loan 7,000 8,000
----------- -----------
Net cash (used in) provided by investing activities (1,699,000) 1,521,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loan 1,000,000 --
Repayment of term loan (118,000) (140,000)
Repayment of line of credit -- (137,000)
Proceeds from exercise of stock options 523,000 1,089,000
Proceeds from exercise of warrants -- 1,025,000
----------- -----------
Net cash provided by financing activities 1,405,000 1,837,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,111,000 1,745,000
Cash and cash equivalents - beginning of period 3,758,000 3,179,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,647,000 $ 4,924,000
=========== ===========
See accompanying notes
3
I.D. SYSTEMS, INC.
Notes to Condensed Financial Statements
September 30, 2004
NOTE A - BASIS OF REPORTING
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America 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 financial position
of I.D. Systems, Inc. (the "Company") as of September 30, 2004, the results of
its operations for the three-month and nine-month periods ended September 30,
2003 and 2004 and cash flows for the nine-month periods ended September 30, 2003
and 2004. The results of operations for the three - month and nine - month
periods ended September 30, 2004 are not necessarily indicative of the operating
results for the full year. It is suggested that these financial statements be
read in conjunction with the financial statements and related disclosures for
the year ended December 31, 2003 included in the Company's Annual Report to
Stockholders.
NOTE B - EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings (loss) per share for the three months and nine months ended September
30, 2004 and 2003 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2003 2004 2003 2004
------------- ------------ ------------- ------------
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $ (336,000) $ 45,000 $ (932,000) $ 382,000
------------- ------------ ------------- ------------
Weighted average shares outstanding 6,898,000 7,629,000 6,845,000 7,380,000
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ (0.05) $ 0.01 $ (0.14) $ 0.05
============= ============ ============= ============
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) $ (336,000) $ 45,000 $ (932,000) $ 382,000
------------- ------------ ------------- ------------
Weighted average shares outstanding 6,898,000 7,629,000 6,845,000 7,380,000
------------ ------------ ------------ ------------
Dilutive effect of stock options 0 1,347,000 0 1,097,000
------------ ------------ ------------ ------------
Weighted average shares outstanding, diluted 6,898,000 8,976,000 6,845,000 8,477,000
------------ ------------ ------------ ------------
Diluted earnings (loss) per share $ (0.05) $ 0.01 $ (0.14) $ 0.05
============= ============ ============ ============
Basic income (loss) per share is based on the weighted average number of common
shares outstanding during each period. Diluted income (loss) per share reflects
the potential dilution assuming common shares were issued upon the exercise of
outstanding options and warrants and the proceeds thereof were used to purchase
outstanding common shares. For the three-month and nine -month periods ended
September 30, 2003, the basic and diluted weighted average shares outstanding
4
are the same since the effect from the potential exercise of outstanding stock
options would have been anti-dilutive.
NOTE C - REVENUE RECOGNITION
The Company's revenues are derived from contracts with multiple element
arrangements, which include the Company's system, training and technical
support. Revenues are recognized as each element is earned based on the relative
fair value of each element and when there are no undelivered elements that are
essential to the functionality of the delivered elements. The Company's system
is typically implemented by the customer or a third party and, as a result,
revenue is recognized when title passes to the customer, which usually is upon
delivery of the system, provided all other revenue recognition criteria are met.
Training and technical support revenues are generally recognized at time of
performance.
The Company also enters into post-contract maintenance and support agreements.
Revenue is recognized over the service period and the cost of providing these
services is expensed as incurred.
The Company also derives revenues under leasing arrangements. Such arrangements
provide for monthly payments covering the system sale, maintenance and interest.
These arrangements meet the criteria to be accounted for as sales-type leases
pursuant to Statement of Financial Accounting Standards No. 13, "Accounting for
Leases". Accordingly, the system sale is recognized upon delivery of the system,
provided all other revenue recognition criteria are met. Upon the recognition of
revenue, an asset is established for the "investment in sales-type leases".
Maintenance revenue and interest income are recognized monthly over the lease
term.
NOTE D - STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure", which was
released in December 2002 as an amendment of SFAS No. 123. The following table
illustrates the effect on net income (loss) and earnings (loss) per share if the
fair value based method had been applied to all awards.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
2003 2004 2003 2004
------------- -------------- -------------- --------------
Reported net income (loss) $ (336,000) $ 45,000 $ (932,000) $ 382,000
Stock-based employee compensation determined under the
fair value based method, net of related tax effects (216,000) (327,000) (659,000) (929,000)
------------- -------------- -------------- --------------
Pro forma net loss $ (552,000) $ (282,000) $ (1,591,000) $ (547,000)
============== ============== ============== ==============
Income (loss) per share -basic
As reported $(0.05) $0.01 $(0.14) $0.05
============== ============== ============== ==============
Pro forma $(0.08) $(0.04) $(0.23) $(0.07)
============== ============== ============== ==============
Income (loss) per share - diluted
As reported $(0.05) $0.01 $(0.14) $0.05
============== ============== ============== ==============
Pro forma $(0.08) $(0.04) $(0.23) $(0.07)
============== ============== ============== ==============
5
NOTE E - LONG TERM DEBT
In January 2003, the Company closed on a five-year term loan for $1,000,000 with
a financial institution. Interest at the 30 day LIBOR plus 1.75% and principal
are payable monthly. To hedge the loan's floating interest expense, the Company
entered into an interest rate swap contemporaneously with the closing of the
loan and fixed the rate of interest at 5.28% for the five year term. The loan is
secured by all the assets of the Company. The fair value of the interest rate
swap is not material to the financial statements or results of operations. At
September 30, 2004, there was approximately $696,000 outstanding under the term
loan and the Company was in compliance with the covenants under the term loan.
The fair value of the interest rate swap is not material to the financial
statements or results of operations.
NOTE F- LINE OF CREDIT
The Company has a working capital line of credit, with maximum borrowings of
$500,000. Interest at the 30 day LIBOR Market Index Rate plus 1.75% is payable
monthly. At September 30, 2004, the Company did not owe anything under the line
of credit.
NOTE G - DEFERRED CONTRACT COSTS
During 2003, the Company entered into a contract with a customer pursuant to
which the Company's system will be implemented on a portion of the customer's
fleet of vehicles. The Company will be entitled to issue sixty monthly invoices
of up to $40,000 per month, each of which is contingent upon certain conditions
being met. Costs directly attributable to this contract, consisting principally
of engineering and manufacturing costs, are being deferred until implementation
of the system is completed. The capitalized costs will be charged to cost of
revenue in accordance with the cost recovery method, pursuant to which the
capitalized contract costs will be reduced in each period by an amount equal to
the revenue recognized until all of the capitalized costs are written off. As of
September 30, 2004, the Company capitalized $857,000 of such contract costs and
amortized $280,000 of such costs. The implementation of the system is
substantially completed and additional contract costs are not anticipated to be
significant. The Company will continue to evaluate the carrying amount of the
capitalized contract costs for potential impairment.
NOTE H - CONCENTRATION OF CUSTOMERS
Four customers accounted for 42%, 21% , 12% and 10%, respectively, of the
Company's revenue during the nine month period ended September 30, 2004. The
same customers accounted for 56%, 9%, 8% and 10%, respectively, of the Company's
accounts and unbilled receivable as of September 30, 2004.
NOTE I - UNBILLED RECEIVABLES
In accordance with a contractual arrangement with one customer, the Company is
not able to invoice for systems delivered until the entire number of systems
covered under the purchase ordered are delivered. As the systems are delivered
and all of the criteria for revenue recognition are satisfied, the Company
recognizes revenue and records an unbilled receivable for the delivered systems.
Once all the systems covered under the specific purchase order are delivered,
the Company invoices the customer for the entire amount. At September 30, 2004
unbilled receivables were $788,000.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the condensed financial
statements and notes thereto appearing elsewhere herein.
This report contains various forward-looking statements made pursuant to the
safe harbor provisions under the Private Securities Litigation Reform Act of
1995 (the "Reform Act") 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 "anticipate", "believe", "estimate", "expect", "predict", "project", and
similar expressions 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 contained in the forward-looking
statements due to a number of factors, including 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 statements
under "Risk Factors" set forth in our Form 10-KSB for the fiscal year ended
December 31, 2003 and other filings with the Securities and Exchange Commission
(the "SEC"). The forward-looking statements regarding industry trends, product
development and liquidity and future business activities should be considered in
light of these factors. The Company undertakes no obligation to publicly release
the results on 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.
The Company makes available through its internet website free of charge
its annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current
reports on Form 8-K, amendments to such reports and other filings made by us
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 this website is not
incorporated by reference in this report.
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation, accordingly, all amounts are approximations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
information expressed as a percentage of revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ----------------------------
2003 2004 2003 2004
--------------- -------------- ----------- ------------
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Revenues 46.6 44.6 48.2 47.0
--------------- -------------- ----------- ------------
Gross Profit 53.4 55.4 51.8 53.0
Selling, general and administrative expenses 62.4 44.7 59.8 42.8
Research and development expenses 13.9 11.3 12.7 8.3
--------------- -------------- ----------- ------------
Income (loss) from operations (22.9) (0.6) (20.7) 1.9
Net interest income 3.6 0.8 3.7 0.9
Other income -- 1.2 -- 1.1
--------------- -------------- ----------- ------------
NET INCOME (LOSS) (19.3) % 1.4 % (17.0) % 3.9 %
--------------- -------------- ----------- ------------
7
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
REVENUES. Revenues were $3,289,000 in the three months ended September 30, 2004
as compared to $1,743,000 in the three months ended September 30, 2003. The
increase in revenues in the three-month period was attributable to increased
sales of the Company's Wireless Asset Net system for tracking and managing
fleets of industrial equipment. Included in revenues in the three months ended
September 30, 2004 is $120,000 of revenues related to the contract described in
Note G. The revenue was offset by $120,000 of amortized capital costs included
in costs of revenues.
COST OF REVENUES. Cost of revenues were $1,467,000 in the three months ended
September 30, 2004 as compared to $812,000 in the three months ended September
30, 2003. As a percentage of revenues, cost of revenues were 44.6% in the three
months ended September 30, 2004 as compared to 46.6% in the three months ended
September 30, 2003. This percentage decrease was primarily attributable to the
increased sale of higher margin services during the three-month period ended
September 30, 2004, as well as from cost reductions to the hardware components
of the Company's system. Gross profit was $1,822,000 in the three months ended
September 30, 2004 compared to $931,000 in the three months ended September 30,
2003. As a percentage of revenues, gross profit increased to 55.4% in the three
months ended September 30, 2004 from 53.4% in the three months ended September
30, 2003. Included in costs of revenues in the three months ended September 30,
2004 is $120,000 of amortized capitalized costs associated with the contract
described in Note G. In accordance, with the cost recovery method, the
capitalized contract costs were reduced by the same amount equal to the revenue
recognized in the period. Excluding the amortization of the deferred contract
costs of $120,000 for the three months ended September 30, 2004, gross profit as
a percentage of revenues was 57.4% in comparison to 53.4% in the three months
ended September 30, 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,470,000 in the three months ended September 30,
2004 as compared to $1,087,000 in the three months ended September 30, 2003.
This increase was primarily attributable to increased expenses associated with
hiring additional sales, marketing and customer service personnel. As a
percentage of revenues, however, selling, general and administrative expenses
decreased to 44.7% in the three months ended September 30, 2004 from 62.4% in
the three months ended September 30, 2003 as a result of an increase in
revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$372,000 in the three months ended September 30, 2004 as compared to $243,000 in
the three months ended September 30, 2003. This increase was attributable to
furthering our efforts to reduce costs, increase flexibility and enhance the
functionality of the Company's systems. As a percentage of revenues, however,
research and development expenses decreased to 11.3% in the three months ended
September 30, 2004 from 13.9% in the three months ended September 30, 2003 as a
result of an increase in revenues.
8
NET INTEREST INCOME AND EXPENSE.
Interest income was $44,000 in the three months ended September 30, 2004 as
compared to $79,000 in the three months ended September 30, 2003. This decrease
was attributable to the assignment of certain sales type leases to a third party
leasing company. During the three month period ended September 30, 2003, the
Company earned interest income in connection with sales type lease arrangements.
The Company invests in investment grade commercial paper and corporate bonds,
which are classified as held to maturity.
Interest expense was $16,000 in the three months ended September 30, 2004 and
2003.
OTHER INCOME. Other income of $37,000 in the three-month period ended September
30, 2004 reflects rental income from a sublease arrangement.
NET INCOME (LOSS). Net income was $45,000 or $0.01 per basic and diluted share,
in the three months ended September 30, 2004 compared to a net loss of $336,000,
or $(0.05) per basic and diluted share, in the three months ended September 30,
2003. This was due primarily to the reasons described above.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
REVENUES. Revenues were $9,758,000 in the nine months ended September 30, 2004
as compared to $5,477,000 in the nine months ended September 30, 2003. The
increase in revenues in the nine-month period is attributable to increased sales
of the Company's Wireless Asset Net system for tracking and managing fleets of
industrial equipment. Included in revenues in the nine months ended September
30, 2004 is $280,000 of revenues related to the contract described in Note G.
The revenue is offset by $280,000 of amortized capital costs included in costs
of revenues.
COST OF REVENUES. Cost of revenues were $4,589,000 in the nine months ended
September 30, 2004 as compared to $2,643,000 in the nine months ended September
30, 2003. As a percentage of revenues, cost of revenues were 47.0% in the nine
months ended September 30, 2004 as compared to 48.2% in the nine months ended
September 30, 2003. This percentage decrease was primarily attributable to the
increased sale of higher margin services during the nine-month period ended
September 30, 2004, as well as from cost reductions to the hardware components
of the Company's system. Gross profit was $5,169,000 in the nine months ended
September 30, 2004 compared to $2,834,000 in the nine months ended September 30,
2003. As a percentage of revenues, gross profit increased to 53.0% in the nine
months ended September 30, 2004 from 51.8% in the nine months ended September
30, 2003. Included in costs of revenues in the nine months ended September 30,
2004 is $280,000 of amortized capitalized costs associated with the contract
described in Note G. In accordance, with the cost recovery method, the
capitalized contract costs were reduced by the same amount equal to the revenue
recognized in the period. Excluding the amortization of the deferred contract
costs of $280,000 for the nine months ended September 30, 2004, gross profit as
a percentage of revenues was 54.5% in comparison to 51.8% in the nine months
ended September 30, 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4,177,000 in the nine months ended September 30,
2004 as compared to $3,275,000 in the nine months ended September 30, 2003. This
increase was primarily attributable to increased expenses associated with hiring
additional sales, marketing and customer service personnel. As a percentage of
revenues, however, selling, general and administrative expenses decreased to
42.8% in the nine months ended September 30, 2004 from 59.8% in the nine months
ended September 30, 2003 as a result of an increase in revenue.
9
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$810,000 in the nine months ended September 30, 2004 as compared to $694,000 in
the nine months, ended September 30, 2003. This increase was attributable to
furthering our efforts to reduce costs, increase flexibility and enhance the
functionality of the Company's systems. As a percentage of revenues, however,
research and development expenses decreased to 8.3% in the nine months ended
September 30, 2004 from 12.7% in the nine months ended September 30, 2003 as a
result of an increase in revenue.
NET INTEREST INCOME AND EXPENSE.
Interest income was $138,000 in the nine months ended September 30, 2004 as
compared to $244,000 in the nine months ended September 30, 2003. This decrease
was attributable to the assignment of certain sales type leases to a third party
leasing company. During the nine month period ended September 30, 2003, the
Company earned interest income in connection with sales type lease arrangements.
The Company invests in investment grade commercial paper and corporate bonds,
which are classified as held to maturity.
Interest expense was $49,000 in the nine months ended September 30, 2004
compared to $41,000 in the nine months ended September 30, 2003.
OTHER INCOME. Other income of $111,000 in the nine-month period ended September
30, 2004 reflects rental income from a sublease arrangement.
NET INCOME (LOSS). Net income was $382,000 or $0.05 per basic and diluted share,
in the nine months ended September 30, 2004 compared to a net loss of $932,000
or $(0.14) per basic and diluted share, in the nine months ended September 30,
2003. This was due primarily to the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had $8,648,000 of cash, cash equivalents
and investments and $12,684,000 of working capital as compared to $8,618,000 and
$8,180,000, respectively, at December 31, 2003.
Net cash used in operating activities was $1,613,000 for the nine months ended
September 30, 2004 as compared to net cash used in operating activities of
$817,000 for the nine months ended September 30, 2003. Net cash used in
operating activities in the nine months ended September 30, 2004 was primarily
due to an increase in accounts receivable of $1,100,000, an increase in unbilled
receivables of $788,000, and an increase in inventory of $435,000, partially
offset by net income of $382,000, depreciation and amortization of $184,000 and
an increase in accounts payable and accrued expenses of $119,000. Net cash used
in operating activities in the nine months ended September 30, 2003 was
primarily due to the net loss of $932,000, an increase in accounts receivable of
$677,000, an increase in unbilled receivables of $105,000, an increase in
deferred contract costs of $187,000 and a decrease in accounts payable and
accrued expenses of $217,000, partially offset by a decrease in investment in
sales type leases of $580,000, a decrease in inventory of $317,000, depreciation
ands amortization of $118,000, a decrease in installment receivable of $131,000,
and an increase in deferred revenue of $196,000.
Net cash provided by investing activities for the nine months ended September
30, 2004 was $1,521,000 as compared to net cash used in investing activities of
$1,699,000 for the nine months ended September 30, 2003. Net cash provided by
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investing activities in the nine months ended September 30, 2004 was
attributable to maturities of investments of $2,054,000, partially offset by
purchases of investments of $246,000 and the purchase of fixed assets of
$217,000. Net cash used in investing activities in the nine months ended
September 30, 2003 was attributable to the purchase of investments of $3,723,000
and the purchase of fixed assets of $246,000, offset by maturities of
investments of $2,174,000.
Net cash provided by financing activities for the nine months ended September
30, 2004 was $1,837,000 as compared to cash provided by financing activities of
$1,405,000 for the nine months ended September 30, 2003. Net cash provided by
financing activities for the nine months ended September 30, 2004, resulted from
$1,089,000 of proceeds received from exercise of employee stock options and
$1,025,000 of proceeds received in connection with the exercise of warrants,
partially offset by $277,000 of debt repayments. Net cash provided by financing
activities for the nine months ended September 30, 2003, resulted from the
proceeds, of $1,000,000, received in connection with obtaining a five year term
loan and $523,000 of proceeds received from exercise of employee stock options
partially offset by $118,000 of repayments of the term loan.
The Company believes that cash flow from operations, together with its cash,
cash equivalents and investments will be sufficient to fund its operations for
the next twelve months.
The Company believes its operations have not been and, in the foreseeable
future, will not be materially adversely affected by inflation or changing
prices.
RECENTLY ISSUED FINANCIAL STANDARDS
The Company believes that recently issued financial standards will not have a
significant impact on our results of operations, financial position or cash
flows.
CRITICAL ACCOUNTING POLICIES
For the nine month period ended September 30, 2004, there were no significant
changes to our accounting policies from those reported in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our principal executive officer and the principal financial officer,
the Company conducted an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end
of the period covered by this report (the "Evaluation Date"). Based on this
evaluation, the Company's principal executive officer and principal financial
officer concluded as of the Evaluation Date that the Company's disclosure
controls and procedures were effective such that the material information
required to be included in our Securities and Exchange Commission ("SEC")
reports is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms relating to the Company, including our
consolidating subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being prepared.
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There were no significant changes in the Company's internal control over
financial reporting that occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting. We have not identified any
significant deficiencies or material weaknesses in our internal controls, and
therefore there were no corrective actions taken.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 1, 2004, I.D. Systems, Inc. filed a complaint against Access
Control Group L.L.C. ("Access") in the United States District Court in the
District of New Jersey asserting patent infringement (the "Action").
The Action seeks an injunction against continued infringement, treble damages
resulting from the infringement and the defendant's conduct, interest on the
damages, and such further relief as the Court deems just and appropriate. On
October 20, 2004, Access filed an answer and counterclaims in the Action,
seeking declaratory judgments for non-infringement, invalidity and
unenforceability of the patent asserted by I.D. Systems, Inc. I.D. Systems
considers these counterclaims to be meritless and intends to defend against
these claims vigorously. The parties are in discovery.
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS:
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 2004.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
I.D. Systems, Inc.
Dated: November 12, 2004 By: /s/ Jeffrey M. Jagid
---------------------------------
Jeffrey M. Jagid
Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 2004 By: /s/ Ned Mavrommatis
---------------------------------
Ned Mavrommatis
Chief Financial Officer
(Principal Financial Officer)
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