U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2005
------------------
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 registrant as specified in its charter)
Delaware 22-3270799
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One University Plaza, Hackensack, New Jersey 07601
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(201) 996-9000
--------------
(Issuer's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) 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 registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
The number of shares outstanding of the registrant's Common Stock, $0.01 par
value, as of the close of business on November 1, 2005 was 7,845,000.
INDEX
I.D. Systems, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
----
Condensed Balance Sheets as of December 31, 2004
and September 30, 2005 (unaudited) 1
Condensed Statement of Operations (unaudited) -
for the three months and nine months ended
September 30, 2004 and 2005 2
Condensed Statement of Cash Flows (unaudited) -
for the nine months ended September 30, 2004 and 2005 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 6. Exhibits 14
Signatures 15
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
I.D. Systems, Inc.
Condensed Balance Sheets
December 31, 2004 September 30, 2005
(Unaudited)
------------ ------------
ASSETS
Cash and cash equivalents $ 8,440,000 $ 5,282,000
Short-term investments 3,195,000 750,000
Accounts receivable, net 1,432,000 5,939,000
Unbilled receivables 402,000 2,757,000
Inventory 1,739,000 2,067,000
Investment in sales type leases 39,000 44,000
Interest receivable 50,000 7,000
Officer loan 10,000 11,000
Prepaid expenses and other current assets 225,000 174,000
------------ ------------
Total current assets 15,532,000 17,031,000
Fixed assets, net 1,009,000 1,167,000
Investment in sales type leases 34,000 --
Officer loan 20,000 11,000
Deferred contract costs 476,000 172,000
Other assets 88,000 88,000
------------ ------------
$ 17,159,000 $ 18,469,000
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 2,541,000 $ 2,885,000
Long term debt - current portion 199,000 207,000
Deferred revenue 95,000 177,000
------------ ------------
Total current liabilities 2,835,000 3,269,000
Long term debt 449,000 293,000
Deferred revenue 191,000 115,000
Deferred rent 112,000 105,000
------------ ------------
3,587,000 3,782,000
------------ ------------
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 7,690,000 shares and 7,839,000 shares 77,000 78,000
Additional paid-in capital 24,994,000 25,691,000
Treasury stock; 40,000 shares at cost (113,000) (113,000)
Accumulated deficit (11,386,000) (10,969,000)
------------ ------------
------------ ------------
13,572,000 14,687,000
------------ ------------
------------ ------------
$ 17,159,000 $ 18,469,000
============ ============
1
I.D. Systems, Inc.
Condensed Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2004 2005 2004 2005
------------ ------------ ------------ ------------
Revenues $ 3,289,000 $ 5,742,000 $ 9,758,000 $ 12,974,000
Cost of Revenues 1,467,000 3,154,000 4,589,000 6,741,000
------------ ------------ ------------ ------------
Gross Profit 1,822,000 2,588,000 5,169,000 6,233,000
Selling, general and administrative expenses 1,470,000 1,624,000 4,177,000 4,928,000
Research and development expenses 372,000 398,000 810,000 1,135,000
------------ ------------ ------------ ------------
Income (loss) from operations (20,000) 566,000 182,000 170,000
Interest income 44,000 51,000 138,000 179,000
Interest expense (16,000) (14,000) (49,000) (43,000)
Other income 37,000 38,000 111,000 113,000
------------ ------------ ------------ ------------
Net income $ 45,000 $ 641,000 $ 382,000 $ 419,000
============ ============ ============ ============
Net income per share - basic $ 0.01 $ 0.08 $ 0.05 $ 0.05
============ ============ ============ ============
Net income per share - diluted $ 0.01 $ 0.07 $ 0.05 $ 0.05
============ ============ ============ ============
Weighted average common shares outstanding - basic 7,629,000 7,800,000 7,380,000 7,745,000
============ ============ ============ ============
Weighted average common shares outstanding - diluted 8,976,000 9,448,000 8,477,000 9,246,000
============ ============ ============ ============
2
I.D. Systems, Inc.
Condensed Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
----------------------------
2004 2005
----------- -----------
Cash flows from operating activities:
Net income $ 382,000 $ 419,000
Adjustments to reconcile net loss to cash used in operating
activities:
Inventory reserve -- 75,000
Depreciation and amortization 184,000 266,000
Deferred rent expense 17,000 (7,000)
Deferred revenue (66,000) 6,000
Deferred contract costs 98,000 303,000
Changes in:
Accounts receivable (1,100,000) (4,507,000)
Unbilled receivables (788,000) (2,355,000)
Inventory (435,000) (403,000)
Prepaid expenses and other assets (51,000) 52,000
Investment in sales type leases 27,000 29,000
Accounts payable and accrued expenses 119,000 342,000
----------- -----------
Net cash used in operating activities (1,613,000) (5,780,000)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (217,000) (424,000)
Purchase of investments (487,000) (500,000)
Decrease in interest receivable 15,000 43,000
Maturities of investments 2,054,000 2,953,000
Amortization of premium on investments 148,000 (8,000)
Collection of officer loan 8,000 8,000
----------- -----------
Net cash provided by investing activities 1,521,000 2,072,000
----------- -----------
Cash flows from financing activities:
Repayment of term loan (140,000) (148,000)
Repayment of line of credit (137,000)
Proceeds from exercise of stock options 1,089,000 698,000
Proceeds from exercise of warrants 1,025,000
----------- -----------
Net cash provided by financing activities 1,837,000 550,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,745,000 (3,158,000)
Cash and cash equivalents - beginning of period 3,179,000 8,440,000
----------- -----------
Cash and cash equivalents - end of period $ 4,924,000 $ 5,282,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 49,000 $ 43,000
=========== ===========
3
I.D. Systems, Inc.
Notes to Condensed Financial Statements
September 30, 2005
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-Q. 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, 2005, the results of
its operations for the three-month and nine-month periods ended September 30,
2005 and 2004 and cash flows for the nine-month periods ended September 30, 2005
and 2004. The results of operations for the three-month and nine month periods
ended September 30, 2005 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, 2004 included in the Company's Annual Report on Form 10-KSB.
NOTE B - Earnings Per Share of Common Stock
Earnings per share for the three months and nine months ended September 30, 2005
and 2004 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2005 2004 2005
---------- ---------- ---------- ----------
Basic earnings per share
- ------------------------
Net income $ 45,000 $ 641,000 $ 382,000 $ 419,000
---------- ---------- ---------- ----------
Weighted average shares outstanding 7,629,000 7,800,000 7,380,000 7,745,000
---------- ---------- ---------- ----------
Basic earnings per share $ 0.01 $ 0.08 $ 0.05 $ 0.05
========== ========== ========== ==========
Diluted earnings per share
- --------------------------
Net income $ 45,000 $ 641,000 $ 382,000 $ 419,000
---------- ---------- ---------- ----------
Weighted average shares outstanding 7,629,000 7,800,000 7,380,000 7,745,000
---------- ---------- ---------- ----------
Dilutive effect of stock options 1,347,000 1,648,000 1,097,000 1,501,000
---------- ---------- ---------- ----------
Weighted average shares outstanding, diluted 8,976,000 9,448,000 8,477,000 9,246,000
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.01 $ 0.07 $ 0.05 $ 0.05
========== ========== ========== ==========
Basic income per share is based on the weighted average number of common shares
outstanding during each period. Diluted income 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.
4
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 and risk of loss passes to the customer, which
usually is upon delivery of the system, pervasive evidence of an arrangement
exists, sales price is fixed and determinable, collectibility is reasonably
assured and contractual obligations have been satisfied. Training and technical
support revenue 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 as described above. 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 and earnings per share if the fair value
based method had been applied to all awards.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2004 2005 2004 2005
--------------- -------------- --------------- -------------
Reported net income $ 45,000 $ 641,000 $ 382,000 $ 419,000
Stock-based employee compensation determined
under the fair value based method, net of
related tax effects (327,000) (392,000) (929,000) (1,164,000)
--------------- -------------- --------------- -------------
Pro forma net income (loss) $ (282,000) $ 249,000 $ (547,000) $ (745,000)
=============== ============== =============== =============
Income (loss) per share - basic
As reported $ 0.01 $ 0.08 $ 0.05 $ 0.05
=============== ============== =============== =============
Pro forma $ (0.04) $ 0.03 $ (0.07) $ (0.10)
=============== ============== =============== =============
Income (loss) per share - diluted
As reported $ 0.01 $ 0.07 $ 0.05 $ 0.05
=============== ============== =============== =============
Pro forma $ (0.04) $ 0.03 $ (0.07) $ (0.10)
=============== ============== =============== =============
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 and the Company is 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 - Deferred contract costs
During 2003, the Company entered into a contract with a customer pursuant to
which the Company's system are being implemented on a portion of the customer's
fleet of vehicles. The Company will 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 deferred costs will be charged to cost of revenue
in accordance with the cost recovery method, pursuant to which the deferred
contract costs will be reduced in each period by an amount equal to the revenue
recognized until all of the deferred costs are written off at which time the
Company will recognize a gross profit, if any. As of September 30, 2005, the
Company deferred $932,000 of such contract costs and amortized $760,000 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 deferred contract costs for
potential impairment.
NOTE G - Concentration of customers and vendor
Four customers accounted for 37%, 24%, 11% and 10% respectively, of the
Company's revenue during the nine month period ended September 30, 2005. The
same customers accounted for 50%, 19%, 5% and 12%, respectively, of the
Company's accounts receivable and unbilled receivables as of September 30, 2005.
One vendor accounted for 54% of the Company's purchases during the nine month
period ended September 30, 2005. The same vendor accounted for 40% of the
Company's accounts payable as of September 30, 2005.
NOTE H - Unbilled Receivables
Unbilled receivables represent the difference between revenue recognized for
financial reporting purposes and amounts invoiced. These amounts will be
invoiced in subsequent periods as progress billings. As the systems are
delivered, and services are performed and all of the criteria's for revenue
recognition are satisfied, the company recognizes revenue and records an
unbilled receivable. At September 30, 2005 unbilled receivables were $2,757,000,
all of which relates to one customer. Subsequent to September 30, 2005 the
Company invoiced $2,172,000 of the unbilled receivables.
NOTE I - Reclassifications:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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, 2004 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-Q, 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,
----------------- ----------------
2004 2005 2004 2005
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Revenues 44.6 54.9 47.0 52.0
----- ----- ----- -----
Gross Profit 55.4 45.1 53.0 48.0
Selling, general and administrative expenses 44.7 28.3 42.8 37.9
Research and development expenses 11.3 6.9 8.3 8.7
----- ----- ----- -----
Income (loss) from operations (0.6) 9.9 1.9 1.4
Net interest income 0.8 0.6 0.9 1.0
Other income 1.2 0.7 1.1 0.8
----- ----- ----- -----
Net income 1.4% 11.2% 3.9% 3.2%
----- ----- ----- -----
7
Three Months Ended September 30, 2005 Compared to Three Months Ended September
30, 2004
REVENUES. Revenues were $5,742,000 in the three months ended September 30, 2005
compared to $3,289,000 in the three months ended September 30, 2004, an increase
of $2,453,000, or 75%. The increase in revenues in the three-month period ended
September 30, 2005 was attributable primarily to continued penetration of the
Company's patented Wireless Asset Net(TM) system for tracking and managing
fleets of industrial equipment from customers such as the United States Postal
Service, Ford Motor Company, Walgreens and the U.S. Transportation Security
Administration. Included in revenues in each of the three months ended September
30, 2005 and September 30, 2004 was $120,000 of revenues related to the cost
recovery method as described in Note F of the financial statements included
herein. The revenue was offset by $120,000 of amortized capital costs included
in costs of revenues as described in Note F of the financial statements included
herein.
COST OF REVENUES. Cost of revenues were $3,154,000 in the three months ended
September 30, 2005 compared to $1,467,000 in the three months ended September
30, 2004, an increase of $1,687,000, or 115%. As a percentage of revenues, cost
of revenues was 54.9% in the three months ended September 30, 2005 as compared
to 44.6% in the three months ended September 30, 2004. Gross profit was
$2,588,000 in the three months ended September 30, 2005 compared to $1,822,000
in the three months ended September 30, 2004. As a percentage of revenues, gross
profit decreased to 45.1% in the three months ended September 30, 2005 from
55.4% in the three months ended September 30, 2004. The decrease in gross profit
for the three months ended September 30, 2005 is attributable to lower margins
on services performed on starting up a new company in the three month period
ended September 30, 2005 as compared to the three month period ended September
30, 2004. In addition, there was an increase to the inventory reserve of $75,000
during the three month period ended September 30, 2005. Included in costs of
revenues in the three months ended September 30, 2005 and September 30, 2004 is
$120,000 of amortized capitalized costs associated with the cost recovery method
as described in Note F of the financial statements included herein. 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, 2005 gross profit as a percentage of revenues
was 46.0% and for the three months ended September 30, 2004 gross profit as a
percentage of revenues was 57.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,624,000 in the three months ended September 30,
2005 compared to $1,470,000 in the three months ended September 30, 2004, an
increase of $154,000, or 10.5%. Included in selling general and administrative
expenses in the three months ended September 30, 2005 was $67,000, or 1.2% of
revenues, related to compliance with Section 404 of the Sarbanes-Oxley Act. As a
percentage of revenues, however, selling, general and administrative expenses
decreased to 28.3% in the three months ended September 30, 2005 from 44.7% in
the three months ended September 30, 2004 as a result of an increase in revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$398,000 in the three months ended September 30, 2005 compared to $372,000 in
the three months ended September 30, 2004, an increase of $26,000, or 7%. As a
percentage of revenues, however, research and development expenses decreased to
6.9% in the three months ended September 30, 2005 from 11.3% in the three months
ended September 30, 2004 as a result of an increase in revenue.
NET INTEREST INCOME AND EXPENSE. Interest income was $51,000 in the three months
ended September 30, 2005 as compared to $44,000 in the three months ended
September 30, 2004, an increase of $7,000, or 16%. This increase was
attributable to an increase in interest rates during the period. The Company
invests in investment grade commercial paper and corporate bonds, which are
classified as held to maturity.
8
Interest expense was $14,000 in the three months ended September 30, 2005 as
compared to $16,000 in the three months ended September 30, 2004, a decrease of
$2,000, or 13%.
OTHER INCOME. Other income of $38,000 in the three-month ended September 30,
2005 and $37,000 in the three months ended September 30, 2004 reflects rental
income from a sublease arrangement.
NET INCOME. Net income was $641,000 in the three months ended September 30,
2005, or $0.08 per basic share and $0.07 per diluted share, as compared to net
income of $45,000, or $0.01 per basic and diluted share in the three-month
period ended September 30, 2004. This was due primarily to the reasons described
above.
9
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
REVENUES. Revenues were $12,974,000 in the nine months ended September 30, 2005
compared to $9,758,000 in the nine months ended September 30, 2004, an increase
of $3,216,000, or 32.9%. The increase in revenues in the nine-month period ended
September 30, 2005 was attributable primarily to continued penetration of the
Company's patented Wireless Asset Net(TM) system for tracking and managing
fleets of industrial equipment from customers such as the United States Postal
Service, Ford Motor Company, Walgreens and the U.S. Transportation Security
Administration. Included in revenues is $360,000 for the nine months ended
September 30, 2005 and $280,000 for the nine months ended September 30, 2004
related to the cost recovery method as described in Note F of the financial
statements included herein. The revenue was partially offset by $360,000 and
$280,000 for the nine months ended September 30, 2005 and 2004, respectively, of
amortized capital costs included in costs of revenues as described in Note F of
the financial statements included herein.
COST OF REVENUES. Cost of revenues were $6,741,000 in the nine months ended
September 30, 2005 compared to $4,589,000 in the nine months ended September 30,
2004, an increase of $2,152,000, or 46.9%. As a percentage of revenues, cost of
revenues was 52.0% in the nine months ended September 30, 2005 as compared to
47.0% in the nine months ended September 30, 2004. Gross profit was $6,233,000
in the nine months ended September 30, 2005 compared to $5,169,000 in the nine
months ended September 30, 2004. As a percentage of revenues, gross profit
decreased to 48.0% in the nine months ended September 30, 2005 from 53.0% in the
nine months ended September 30, 2004. The decrease in gross profit for the nine
months ended September 30, 2005 was attributable to lower margins on services
performed in the nine month period ended September 30, 2005 as compared to the
nine month period ended September 30, 2004. In addition, there was an increase
to the inventory reserve of $75,000 during the nine month period ended September
30, 2005. Included in costs of revenues in the nine months ended September 30,
2005 is $360,000 and $280,000 for the nine months ended September 30, 2004 of
amortized capitalized costs associated with the cost recovery method as
described in Note F of the financial statements included herein. 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 $360,000 for the nine months
ended September 30, 2005 and $280,000 for the nine months ended September 30,
2004 gross profit as a percentage of revenues was 49.4% in the nine months ended
September 30, 2005 and for the nine months ended September 30, 2004 gross profit
as a percentage of revenues was 54.5%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4,928,000 in the nine months ended September 30,
2005 compared to $4,177,000 in the nine months ended September 30, 2004, an
increase of $751,000, or 18.0%. This increase was primarily attributable to an
increased payroll and related expenses as well as travel expenses due to the
hiring of additional personnel to support the continued growth of the business.
Also included in selling general and administrative expenses in the nine months
ended September 30, 2005 was $187,000, or 1.4% of revenues, related to
compliance with Section 404 of the Sarbanes-Oxley Act. As a percentage of
revenues, however, selling, general and administrative expenses decreased to
37.9% in the nine months ended September 30, 2005 from 42.8% in the nine months
ended September 30, 2004 as a result of an increase in revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1,135,000 in the nine months ended September 30, 2005 compared to $810,000 in
the nine months ended September 30, 2004, an increase of $325,000, or 40%. This
increase was attributable to the fact that during the nine months ended
September 30, 2004, a portion of the Company's research and development expenses
for the period was funded by customer projects. That portion was included in
cost of sales for the period ended September 30, 2004. As a percentage of
revenues, research and development expenses increased to 8.7% in the nine months
ended September 30, 2005 from 8.3% in the nine months ended September 30, 2004.
10
NET INTEREST INCOME AND EXPENSE. Interest income was $179,000 in the nine months
ended September 30, 2005 as compared to $138,000 in the nine months ended
September 30, 2004, an increase of $41,000, or 30%. This increase was
attributable to an increase in interest rates. The Company invests in investment
grade commercial paper and corporate bonds, which are classified as held to
maturity.
Interest expense was $43,000 in the nine months ended September 30, 2005 as
compared to $49,000 in the nine months ended September 30, 2004, a decrease of
$6,000, or 12%.
OTHER INCOME. Other income of $113,000 in the nine month ended September 30,
2005 and $111,000 in the nine months ended September 30, 2004 reflects rental
income from a sublease arrangement.
NET INCOME. Net income was $419,000 in the nine months ended September 30, 2005,
or $0.05 per basic and diluted shares as compared to net income of $382,000, or
$0.05 per basic and diluted share in the nine months period ended September 30,
2004. This was due primarily to the reasons described above.
11
Liquidity and Capital Resources
As of September 30, 2005, the Company had $6,032,000 of cash, cash equivalents
and short-term investments and $13,762,000 of working capital as compared to
$11,635,000 and $12,697,000, respectively, at December 31, 2004.
Net cash used in operating activities for the nine months ended September 30,
2005 was $5,780,000 as compared to net cash used in operating activities of
$1,613,000 for the nine months ended September 30, 2004. Net cash used in
operating activities in the nine months ended September 30, 2005 was primarily
due to an increase in accounts receivable of $4,507,000, an increase of unbilled
receivables of $2,355,000, and an increase in inventory of $403,000, partially
offset by net income of $419,000, depreciation and amortization of $266,000 and
an increase in accounts payable and accrued expenses of $342,000. 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 provided by investing activities for the nine months ended September
30, 2005 was $2,072,000 as compared to net cash provided by investing activities
for the nine months ended September 30, 2004 of $1,521,000. Net cash provided by
investing activities in the nine months ended September 30, 2005 was primarily
from maturities of investments of $2,953,000 partially offset by purchases of
investments of $500,000 and purchases of fixed assets of $424,000. Net cash
provided by 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 $487,000 and the purchase of fixed assets of
$217,000.
Net cash provided by financing activities for the nine months ended September
30, 2005 was $550,000 as compared to net cash provided by financing activities
of $1,837,000 for the nine months ended September 30, 2004. Net cash provided by
financing activities in the nine months ended September 30, 2005 was from the
proceeds received in connection with the exercise of employee stock options of
$698,000, partially offset by repayments of the five-year term loan of $148,000.
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.
The Company's working capital line of credit has maximum borrowings of $500,000,
with interest at the 30 day LIBOR Market Index Rate plus 1.75%, payable monthly.
At September 30, 2005, the Company was in compliance with the terms of this line
of credit.
The Company believes it has sufficient cash, cash equivalents and investments
for the next twelve months of operations.
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.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risks in the form of interest rate changes and
changes in corporate tax rates. Both risks are currently immaterial to the
Company.
Item 4. Controls And Procedures
Under the supervision and with the participation of the Company's management,
including its 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 its 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 its
consolidating subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being prepared.
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. The Company has not identified any
significant deficiencies or material weaknesses in its internal controls, and
therefore there were no corrective actions taken.
13
PART II - OTHER INFORMATION
Item 6. Exhibits
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.
14
Signature
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 4, 2005 By: /s/ Jeffrey M. Jagid
--------------------------------------
Jeffrey M. Jagid
Chief Executive Officer
(Principal Executive Officer)
Dated: November 4, 2005 By: /s/ Ned Mavrommatis
--------------------------------------
Ned Mavrommatis
Chief Financial Officer
(Principal Financial Officer)
15