Item
1. Business
Overview
I.D.
Systems, Inc. was incorporated in the State of Delaware in 1993. I.D. Systems, Inc. (together with its subsidiaries, “I.D.
Systems,” the “Company,” “we,” “our” or “us”) develops, markets and sells
wireless machine-to-machine (“M2M”) solutions for managing and securing high-value enterprise assets. These assets
include industrial vehicles such as forklifts and airport ground support equipment, rental vehicles, and transportation assets
such as dry van trailers, refrigerated trailers, railcars and containers. Our patented systems utilize radio frequency identification
(RFID), Wi-Fi, Bluetooth, satellite or cellular communications, and sensor technology and software to address the needs of organizations
to control, track, monitor and analyze their assets. Our solutions enable customers to achieve tangible economic benefits by making
timely, informed decisions that increase the safety, security, revenue, productivity and efficiency of their operations.
On
March 13, 2019, we entered into an Agreement and Plan of Merger (the “Pointer Merger Agreement”), with PowerFleet,
Inc., a wholly-owned subsidiary of the Company (“Parent”), Pointer Telocation Ltd. (“Pointer”), Powerfleet
Israel Holding Company Ltd., a wholly-owned subsidiary of Parent (“Pointer Holdco”), and Powerfleet Israel Acquisition
Company Ltd., a wholly-owned subsidiary of Pointer Holdco (“Pointer Merger Sub”), pursuant to which Pointer Merger
Sub will merge with and into Pointer, with Pointer surviving as a direct, wholly-owned subsidiary of Pointer Holdco (the “Pointer
Merger”) in exchange for consideration consisting of cash and shares of common stock of Parent. Also on March 13, 2019,
and in connection with the Pointer Merger Agreement, we entered into an Investment and Transaction Agreement (the “Investment
Agreement”) with Parent, PowerFleet US Acquisition Inc., a wholly-owned subsidiary of Parent (“IDS Merger Sub”),
and ABRY Senior Equity V, L.P. and ABRY Senior Equity Co-Investment Fund V, L.P., pursuant to which we will reorganize into a
new holding company structure by merging IDS Merger Sub with and into the Company, with the Company surviving as a wholly-owned
subsidiary of Parent (the “IDS Merger”), and pursuant to which Parent will issue and sell in a private placement shares
of Parent’s newly created Series A Convertible Preferred Stock to finance a portion of the cash consideration payable in
the Pointer Merger. As a result of the transactions contemplated by the Pointer Merger Agreement and the Investment Agreement
(the “Merger Transactions”), we and Pointer will each become wholly-owned subsidiaries of Parent. The Merger Transactions
have been unanimously approved by the boards of directors of both companies, are subject to customary closing conditions, including
approval by our stockholders and Pointer’s shareholders, and are expected to close in the summer of 2019. For further discussion
on the Merger Transactions and related transactions, see “Item 1A. Risk Factors,” “Item 8. Financial Statements
and Supplementary Data – Note 21 - Subsequent Events.”
On
January 30, 2019, we completed the acquisition (the “CarrierWeb Acquisition”) of substantially all of the assets of
CarrierWeb, L.L.C., an Atlanta-based provider of real-time in-cab mobile communications technology, electronic logging devices,
two-way refrigerated command and control, and trailer tracking. The assets we acquired in the CarrierWeb Acquisition will be integrated
into our logistics visibility solutions and products. The CarrierWeb Acquisition allows us to offer a full complement of highly-integrated
logistics technology solutions to its current customers and prospects and immediately adds more than 70 customers and over 9,000
monthly subscriber units.
On
July 31, 2017, we, together with our wholly-owned subsidiary Keytroller, LLC, a Delaware limited liability company (“Keytroller”),
acquired substantially all of the assets of Keytroller, LLC, a Florida limited liability company (the “Keytroller Acquisition”).
The business we acquired in the Keytroller Acquisition develops and markets electronic products for managing forklifts and construction
vehicles. The Keytroller Acquisition gives us a full suite of industrial fleet management product offerings capable of covering
any sized fleet and budget and provides our industrial truck business more scale, both from a product and revenue standpoint and
markets its line of forklift management devices mainly through a network of lift truck dealers, offering solutions for different
fleet sizes at a wide range of price points.
We
have focused our business activities on three primary business solutions: (i) Industrial Truck Management Solutions (“PowerFleet
for Industrial”), (ii) Logistics Visibility (LV) Solutions (“PowerFleet for Logistics”) (formerly “Transportation
Asset Management”), and (iii) Connected Vehicle Solutions (“PowerFleet for Automotive”). Our solutions
for industrial truck management allow our customers to reduce operating risks and improve operating efficiency including
monitoring for unsafe activity, identifying facility equipment and goods damage, lowering operational costs
and capital expenditures and ensuring compliance with certain safety regulations by accurately and reliably measuring and
controlling fleet activity. This solution also enhances security at industrial facilities and areas of critical infrastructure,
such as airports, by controlling access to, and restricting the use of, vehicles and equipment. Our solutions for logistics
visibility allow our customers to increase revenue per asset deployed, optimize fleet size, and improve the monitoring
and control of sensitive cargo. Our solutions for connected vehicles include unique Internet-of-Things (“IoT”) projects
similar to projects we have delivered to Avis Budget Group Inc. (“Avis”). These engineering programs help our
customers transform their operations. For Avis, our rental fleet management platform assists in generating higher revenue by more
accurately tracking vehicle data, such as fuel consumption and odometer readings, and improving customer service by expediting
the rental and return processes. In addition, our wireless solution for “car sharing” enables rental car companies
to establish a network of vehicles positioned strategically around cities or on corporate campuses, control vehicles remotely
with secure lock and unlock capability, manage member reservations by smart phone or Internet, and charge members for vehicle
use by the hour.
To
provide an even deeper layer of insights into asset operations, we have developed a cloud-based software application called I.D.
Systems Analytics (“Analytics”), which is designed to provide a single, integrated view of asset activity across multiple
locations, that provides enterprise-wide benchmarks and peer-industry comparisons for key performance indicators (“KPIs”)
relating to the performance of managed assets. Analytics enables values for the KPIs to be calculated and used to identify cost
benefit measurements which translate the KPI values into monetized metrics. On top of our Analytics and software-as-a-service
platforms, we launched “Lucy” a deep learning, voice integrated virtual assistant. We expect that our growing
database of operational data from monitored assets and operational workflows coupled with Lucy’s contextual learnings
will allow us to create industry benchmarks that can be used to tell our customers how they are performing compared to their
peers. We look for Analytics, as well as the data contained therein, to make a growing contribution to revenue, further differentiate
and add value to our solutions, and help keep us at the forefront of the wireless asset management markets we serve.
We
sell our solutions to both executive, division and site-level management within the enterprise. We also utilize channel partners
such as independent dealers and Original Equipment Manufacturers (OEMs) who may opt for us to white label our product. Typically,
our initial system deployment serves as a basis for potential expansion across the customer’s organization. We work closely
with customers to help maximize the utilization and benefits of our system and demonstrate the value of enterprise-wide deployments.
Post-implementation, we consult with our customers to further extend and customize the benefits to the enterprise by delivering
enhanced analytics capabilities.
We
market and sell our solutions to a wide range of customers in the commercial and government sectors. Our customers operate in
diverse markets, such as automotive manufacturing, heavy industry, retail and wholesale distribution, transportation, aviation,
aerospace and defense, homeland security and vehicle rental. Based on revenues for 2018, our top customers were Avis and Wal-Mart
Stores, Inc.
Our
Solutions
We
design and implement wireless IoT and M2M asset management solutions that deliver both site-level and enterprise-level
return on investment for our customers. Our solutions can be targeted to either campus-based assets or “over-the-road”
assets.
Industrial
Truck Management Solutions (“PowerFleet for Industrial”)
Our
asset management solutions for campus-type and wide area-based assets incorporate wireless devices that provide on-board control,
location tracking and data processing for enterprise assets, to provide real-time visibility of, and two-way communications with,
such assets. These systems provide technological advantages that differentiate them from systems used for inventory, warehouse
management and logistics tracking. For example, while inventory tracking systems rely on constant, continuous wireless connectivity
to perform core functions, our systems require only periodic wireless communications and, our on-asset devices are designed to
perform their core functions autonomously. Our enterprise-class software Analytics and Lucy can run in the cloud or behind
our customer’s firewall.
Our
campus-based asset management system consists of four principal elements:
●
|
miniature
wireless programmable computers attached to assets; these wireless devices may communicate via Wi-Fi, Bluetooth, via
the company’s proprietary IRF protocol, or via cellular link;
|
|
|
●
|
optional,
IRF-based, fixed-position communication infrastructure consisting of network devices with two-way wireless communication capabilities
and, optional IRF-based location-emitting beacons for enhanced indoor location calculation;
|
|
|
●
|
application-specific
middleware servers, which are typically hosted in our data center, but may also be hosted on the customers’ local area
network (LAN) or enterprise wide area network (WAN); and
|
|
|
●
|
proprietary
end-user software, which is a user-friendly web application that provides visibility and control of the system database, and
which is hosted at the same data center as the middleware. As stated above, our enterprise software is flexible enough to
run thousands of customers, sites or assets in either a customer hosted or in the cloud configuration.
|
Each
of these system elements can process and store information independently to create a unique, patented system of “distributed
intelligence,” which mitigates the risk that a single point of failure could compromise system integrity or data and asset
security. Our on-asset hardware stores and processes information locally so that it can autonomously and automatically control
the asset and monitor asset activity regardless of the status or availability of other system components. Our on-asset hardware
performs its functions even when outside the wireless range of any other system component or if the middleware is unavailable.
Our
optional IRF infrastructure devices also independently process data and execute programmable application logic, in addition to
linking monitored mobile asset data automatically to our system’s middleware. The link to the system’s middleware
may leverage secure cellular communication, thereby permitting remotely-hosted server software without access to local IT infrastructure.
Our
cellular “Hotspot” option allows our products to be outfitted on assets that go beyond campus boundaries such as aviation
and construction equipment.
Our
middleware applications populate the system’s database and is designed to mitigate the effects of any computer outages that
could affect real-time availability of the database.
Finally,
our client software interfaces only with the database, not directly with our communication infrastructure or on-asset hardware,
which restricts access to, and limits corruption of, system information and minimizes network bandwidth usage.
Our
solutions for industrial truck management allow fleet operators to reduce operating costs and capital expenditures, comply with
certain safety regulations and enhance security.
To
help improve fleet safety and security, our solutions provide vehicle operator access control to ensure that only trained and
authorized personnel are able to use material handling equipment, and impact sensing to assign responsibility for abusive
driving.
Our
solutions also provide: contactless operator identification; automatic wireless data communications; motion/idle detection, electronic
vehicle inspection checklists for paperless compliance with governmental safety regulations; automatic reporting of emerging vehicle
safety issues; automatic on-vehicle intervention, such as disabling equipment, in response to user-definable safety and security
parameters; and remote vehicle deactivation capabilities, allowing a vehicle to be shut down manually or automatically under user-defined
conditions.
In
addition, our solutions are compatible with a wide range of electronic driver identification technologies and provide indoor and
outdoor vehicle/operator visibility through a combination of global positioning system (GPS) and RFID technologies, and geo-fencing
to restrict vehicles from operating in prohibited areas or issue alerts upon unauthorized entry to such areas. Our solutions also
support optional sensing elements to provide additional vehicle utilization data, including load detection data, battery data
and activity meter data.
To
analyze and benchmark vehicle utilization and operator productivity, our solutions automatically record a wide range of activity
and enable detailed performance comparisons to help management make informed decisions about vehicle and manpower allocations.
This can lead to operating cost savings through fleet and personnel reductions as well as increases in productivity. Our solutions
also provide real-time and historical visibility of vehicle movements and other advanced asset management options.
To
help reduce fleet maintenance costs, our solutions can automate and enforce preventative maintenance scheduling by:
●
|
wirelessly
uploading usage data from each vehicle;
|
|
|
●
|
defining
various intervals and criteria for performing preventative maintenance;
|
|
|
●
|
automatically
prioritizing maintenance events based on weighted, user-defined variables;
|
|
|
●
|
reporting
in advance on vehicles with impending preventative maintenance events coming due;
|
|
|
●
|
automatically
sending reminders to individual vehicles or operators via the system’s text messaging module; and
|
|
|
●
|
enabling
remote lock-out of vehicles overdue for maintenance.
|
Our
solutions also enable maintenance personnel to locate and retrieve vehicles due for service via the system’s optional graphical
viewer software and can provide automatic data feeds to our customers’ existing enterprise maintenance software systems.
A
specialized application of our solution in the industrial fleet management and security market is vehicle security, particularly
at airports, seaports and other areas of critical infrastructure. The airport market-specific version of our system is called
AvRamp®, referencing the aviation industry and the ramp area at airports in which aircraft servicing equipment operates. To
date, the most significant commercial deployment of the AvRamp system has been on fleets of aircraft ground support equipment
at Newark Liberty International Airport for United Airlines and Chicago O’Hare International Airport and Dallas-Fort Worth
International Airport for AMR Corporation (American Airlines and American Eagle Airlines).
Logistics
Visibility Solutions (“PowerFleet for Logistics”) (Formerly “Transportation Asset Management Solutions”)
Our
mobile systems for managing remote, “over-the-road” assets are provided by our Asset Intelligence subsidiary. These
systems provide mobile-asset tracking and condition-monitoring solutions to meet the transportation market’s desire for
greater visibility, safety, security, and productivity throughout global supply chains. By leveraging a combination of cellular
and satellite communications and web-based data management technologies, the Logistics Visibility (LV) product family provides
shippers and carriers with tools to better manage their tractors, drivers, trucks, refrigerated (Reefer) trailers, dry van
trailers, chassis and container fleets. Our LV solutions enable quick access to actionable intelligence that results
in better utilization, control, and security of our customers’ freight-carrying assets.
Our
LV solutions consist of five principal elements:
●
|
cellular
or satellite communicators and Bluetooth attached to assets;
|
|
|
●
|
GPS
receivers that provide latitude/longitude location fixes that are transmitted based on logic resident in the communicator;
|
|
|
●
|
proprietary
browser-based graphical user interface that provides visibility and two-way control of the system database (the data can also
be transmitted to the customer via XML or web services data feed);
|
|
|
●
|
patented
power management intelligence to ensure reliable system performance in a power-starved environment; and
|
|
|
●
|
several
sensor types, including cargo, motion, light, and tire inflation, that provide additional status information for the remote
asset.
|
To
increase asset utilization, our LV solutions can improve overall operating efficiency, increase revenue niles and reduce
the number of assets needed by:
●
|
full
two-way integrated workflow of control assignments and work changes to the truck tractor and driver;
|
|
|
●
|
Electronic
Driver Logging (ELD) and inspection reports for regulatory compliance
|
|
|
●
|
monitoring
asset pool size based on user-defined requirements;
|
|
|
●
|
generating
dormancy reports to flag under-utilized assets;
|
|
|
●
|
alerting
the driver to the location of the closest empty asset, resulting in a more rapid pick-up; and
|
|
|
●
|
providing
trailer detention alerts when an asset has exceeded the time allotted for unloading.
|
To
better control remote assets, our LV solutions provides:
●
|
change
in cargo status of an asset via our patented full-length cargo sensor;
|
|
|
●
|
geo-fencing
that alerts the customer when an asset is approaching or leaving its destination; and
|
|
|
●
|
on-board
intelligence utilizing a motion sensor and proprietary logic that identifies the beginning of a drive and the end of a drive.
|
To
help improve asset and cargo security, our LV solutions offers the following capabilities:
●
|
asset
lockdown, which automatically sends an e-mail or text message to the customer when movement is detected outside of user-defined
time periods;
|
|
|
●
|
emergency
track functionality that can be enabled to track an asset at more frequent intervals if a theft condition is expected;
|
|
|
●
|
geo-fencing,
which can alert our customer when an asset enters a prohibited geography or location; and
|
|
|
●
|
near
real.time sensors that can alert based on upon changes to shock (vibe) sound, light, barometric pressure, temperature and
humidity.
|
Connected
Vehicle Solutions
(“PowerFleet for Automotive”)
In
our connected vehicle solutions, we engage customers on unique IoT, M2M challenges that enable them to have considerable competitive
advantage or to improve revenue or decrease their costs of operations.
For
traditional rental fleet management, our system is designed both to enhance the consumer’s rental experience and benefit
the rental company by providing information that can be used to increase revenues, reduce costs and improve customer service.
Our rental fleet management system automatically uploads vehicle identification number, mileage and fuel data as a vehicle enters
and exits the rental lot, which can significantly expedite the rental and return processes for travelers and provide the rental
company with more timely inventory status, more accurate billing data that can generate higher fuel-related revenue, and an opportunity
to utilize customer service personnel for more productive activities, such as inspecting vehicles for damage and helping customers
with luggage.
Our
solution for “car sharing” permits a rental car company to remotely control, track and monitor their rental vehicles
wherever they are parked. Whether for traditional ‘pod-based’ rental or for the emerging rent-anywhere model, the
system also (i) manages member reservations by smart phone or Internet, and (ii) charges members for vehicle use by the hour.
The entire process - from remotely controlling the car door locks to tracking car mileage and fuel consumption to billing for
the transaction - is automatically conducted by an integration of wireless vehicle management technology and the rental company’s
fleet management software.
Analytics,
Image Deep Learning and Lucy
Our
analytics platforms for both industrial trucks and logistics assets provide our customers with a holistic view of their asset
activity across an enterprise supply chain. Our image deep learning system allow us to process images from FreightCAM and other
sources and identify key aspects of operations and geospatial information such as location, work being accomplished, type of cargo,
how cargo is loaded and if there are any visible issues such as damage. Lucy, our deep learning voice integrated virtual analyst
can help make the data and alerts actionable and can assist our customers by giving them a tireless virtual assistant.
These
cloud-based software applications provide a single, integrated view of industrial asset activity across multiple locations, generating
enterprise-wide benchmarks, peer-industry comparisons, and deeper insights into asset operations. Our analytics platforms can
enable management to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce
costs, and enhance safety.
Specifically,
our analytics platforms allow users to:
●
|
Quantify
best-practice enterprise benchmarks for industrial asset utilization and safety;
|
|
|
●
|
Reveal
variations and inefficiencies in asset activity across both sites and geographic regions;
|
|
|
●
|
Identify
opportunities to eliminate or reallocate assets, with full enterprise awareness, to reduce capital and operating costs;
|
|
|
●
|
Help
balance asset mix and inform acquisition decisions;
|
|
|
●
|
Uncover
activity trends over time to forecast asset requirements;
|
|
|
●
|
Enable
performance comparisons to broad, industry-specific benchmarks; and
|
|
|
●
|
Keeps
track of actions and follow up items and communicates to appropriate persons to address problems or to escalate issues.
|
We
look for analytics, image deep learning and Lucy and the data contained therein to make a growing contribution to revenue,
further differentiate and add value to our solutions, and help keep us at the forefront of the wireless asset management markets
we serve, although there can be no assurance if and to what extent analytics will do so.
Growth
Strategy
Our
objective is to become a leading global provider of wireless solutions for managing and securing enterprise assets. To achieve
this goal, we intend to:
Increase
sales in existing markets to existing customers and pursue opportunities with new customers by:
●
|
focusing
our business solutions by vertical markets to position ourselves as the innovative thought leader;
|
|
|
●
|
maintaining
a sales and marketing team that is focused on identifying, seizing and managing revenue opportunities, with the primary goal
of expanding our customer base and achieving wider market penetration;
|
|
|
●
|
Implementing
improved marketing, sales and support strategies;
|
|
|
●
|
utilizing
our Analytics software offering to (i) shorten our initial sales cycles by helping prospective customers identify and quantify
benefits expected from our solutions, (ii) accelerate transitions from initial implementation to roll-out programs by helping
customers achieve and prove expected benefits, and (iii) build service revenue through long-term SaaS contracts;
|
|
|
●
|
developing
asset management-specific data analytics and image deep learning capabilities to differentiate our product offering,
add value to our solutions for large enterprise customers, and produce incremental revenue at a high profit margin; and
|
|
|
●
|
developing
channel partners to provide new sales, marketing, distribution and support networks.
|
Expand
into new applications and markets for our technology by:
●
|
pursuing
opportunities to integrate our system with computer hardware and software vendors, including original equipment manufacturers
(OEMs), Transportation Management Systems (TMS), Warehouse management Systems (WMS), Enterprise Resource Planning (ERP)
and Yard Management Systems (YMS);
|
|
|
●
|
establishing
relationships with global distributors to market and sell our system internationally; and
|
|
|
●
|
pursuing
acquisitions of companies that we believe will enhance the functionality and broaden the applicability of our solutions.
|
Products
and Services
We
offer our customers integrated wireless solutions to control, monitor, track and analyze their enterprise assets. Our solutions
are comprised of hardware and software, as well as hosting, maintenance, support and consulting services.
The
following table sets forth our revenues by product line for the periods indicated:
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
truck management solutions
|
|
$
|
19,842,000
|
|
|
$
|
23,705,000
|
|
|
$
|
30,001,000
|
|
Logistics
visibility solutions
|
|
|
15,838,000
|
|
|
|
14,280,000
|
|
|
|
13,486,000
|
|
Connected
vehicle solutions
|
|
|
1,142,000
|
|
|
|
2,973,000
|
|
|
|
9,577,000
|
|
|
|
$
|
36,822,000
|
|
|
$
|
40,958,000
|
|
|
$
|
53,064,000
|
|
Industrial
Truck Management
Hardware
.
With a variety of mounting and user-interface options, our on-asset hardware is designed to be installed quickly and easily and
provide an autonomous means of asset control and monitoring. Our hardware:
●
|
contains
an integrated computer, programmed with a product-specific application, and an advanced wireless transceiver with a communication
range of up to approximately one-half mile;
|
|
|
●
|
controls
equipment access with a variety of electronic interface options;
|
|
|
●
|
is
compatible with most existing facility access security systems;
|
|
|
●
|
generates
paperless electronic safety checklists via a built-in display and keypad;
|
|
|
●
|
wirelessly
and automatically uploads and downloads data to and from other system components;
|
|
|
●
|
performs
monitoring and control functions at all times, independent of RF or network connectivity; and
|
|
|
●
|
incorporates
a multi-voltage power supply designed to mitigate electrical anomalies.
|
Wireless
Communication.
Many of our system deployments leverage an existing Wi-Fi network for real-time wireless data communication
and location tracking. For areas where Wi-Fi is not practical, the system requires at least one fixed-position communication device,
referred to as a Wireless Asset Manager, to link the mobile assets being monitored with the customer’s computer network
or to a remotely hosted server. Our Wireless Asset Managers conduct two-way RF communications with the assets being monitored
and can communicate on a local area network, on a wide area network, or via cellular communications. The use of Wireless Asset
Managers enables flexible system configuration options and scalability. A single Wireless Asset Manager is sufficient to operate
an entire asset management system. For expanded, real-time data communication and location tracking, Wireless Asset Managers can
be added incrementally as needed. Each of the wireless communication offerings also allows system settings and on-asset functionality
to be changed without physically interfacing with on-asset hardware, which can save significant time and money.
Each
of our Wireless Asset Managers:
●
|
incorporates
an integrated computer, programmed with a product specific application, and an advanced wireless transceiver with a communication
range of more than one-half mile;
|
|
|
●
|
accommodates
an unlimited number of on-asset hardware devices;
|
|
|
●
|
automatically
uploads and downloads data to and from other system components;
|
|
|
●
|
employs
built-in self-diagnostic capabilities; and
|
|
|
●
|
is
configurable to achieve a wide range of asset management goals.
|
Private
Cloud Services Software.
Each of our system deployments requires at least one of our hosted allocation of our server software,
which automatically manages data communications between our hosted system database and either the on-asset hardware via Wi-Fi
or Wireless Asset Managers. Our private cloud services software:
●
|
is
a set of Windows services;
|
|
|
●
|
automatically
processes data between our devices and our hosted system databases;
|
|
|
●
|
communicates
with Wireless Asset Managers to send and retrieve system data;
|
|
|
●
|
automates
event scheduling, including database archiving and diagnostic notifications;
|
|
|
●
|
interfaces
with certain existing external systems, including maintenance, timecard and training systems;
|
|
|
●
|
supports
remote control/management of event processes;
|
|
|
●
|
automatically
performs diagnostics on system components; and
|
|
|
●
|
automatically
e-mails event alerts and customizable reports.
|
Private
Cloud Web-Client Software
. Our private cloud web-client software provides an intuitive, easy-to-use, user interface. The software
is deployed as an I.D. Systems’ hosted web application. The software interfaces only with the system database, and not directly
with our communication infrastructure or on-asset hardware, which restricts access to, and limits corruption of, system information
and minimizes network bandwidth usage. An unlimited number of clients can be used on a network at any given time.
Our
private cloud web-client software:
●
|
is
able to show the location, status and inventory of vehicles - in real time and historically - in each area of a facility;
|
|
|
●
|
allows
real-time, two-way text communications, including broadcast text paging to all operators simultaneously;
|
|
|
●
|
searches,
sorts and analyzes assets by usage/motion time, idle time, location, status, group, maintenance condition and other parameters;
|
|
|
●
|
displays
and prints predefined and ad hoc reports; and
|
|
|
●
|
allows
remote access by management, customers and vendors through any Internet based browser application.
|
Our
vehicle management systems are available as to meet a wide range of customer needs and information technology requirements. Our
Company-hosted solutions utilize our private commercial colocation center.
We
also offer a public Cloud-based service for small to medium accounts.
Logistics
Visibility Products
Hardware
.
We offer several hardware configurations to address different remote asset types (e.g., dry van trailers, refrigerated trailers,
domestic containers, chassis, and railcars), as well as customer-specific requirements. Our hardware options contain:
●
|
an
integrated color mobile data terminal that integrates into the tractor/truck CAN bus and includes an integrated cellular,
Bluetooth communications capability with integrated GPS;
|
|
|
●
|
an
integrated M2M computer programmed with a product-specific application, a cellular or satellite transceiver, Bluetooth
and a GPS receiver;
|
|
|
●
|
solar
panels and circuitry to maintain the charge of the on-asset device’s power pack;
|
|
|
●
|
sealed
lead acid, lithium battery or supercap power packs to power the hardware when un-tethered from a power source; and
|
|
|
●
|
some
products have
a wire harness
to connect to an existing power source (e.g., on the tractor).
|
Client
Website
. We have a hosted website that provides Internet access to client asset information. Upon installation of the on-asset
hardware, the customer is provided access to the VIP site where they can configure the hardware, establish user passwords, IDs,
and access privileges. Our client website:
●
|
displays
a user-configurable dashboard highlighting the enterprise’s critical asset information;
|
|
|
●
|
has
the ability to e-mail the dashboard to a distribution list at a time interval established by the client;
|
|
|
●
|
provides
asset status, alerts and history, including location, landmark, and sensor information;
|
|
|
●
|
provides
latitude/longitude location information for each asset based on reverse geocodes;
|
|
|
●
|
displays
asset location on a geographic map;
|
|
|
●
|
generates
user configurable reports that can be accessed via the website or e-mailed to a distribution list at a time interval established
by the client;
|
|
|
●
|
allows
the client to “ping” an asset to receive an updated location report; and
|
|
|
●
|
allows
the client to set a unit(s) to “Emergency Track”, which increases the reporting frequency for a specified time
period.
|
Direct
Data Feed
. In addition to the asset information provided on the website, we also offer a direct feed of the data to the customer
via XML or web services. The feed complies with established industry conventions, such as TTIS (trailer tracking interface standard),
to allow for easy integration into the client’s legacy system or into third-party software packages.
Connected
Vehicle Solutions
Hardware
.
Our next-generation hardware is installed quickly, easily and covertly into a vehicle’s diagnostic port and provides an
autonomous means of asset control and monitoring. Our on-asset hardware:
●
|
contains
an integrated computer programmed with a product-specific application, a cellular transceiver, and a GPS receiver;
|
|
|
●
|
performs
monitoring functions, such as fuel level, odometer, speed and key status at all times, independent of network connectivity;
|
|
|
●
|
controls
vehicle access and door locks;
|
|
|
●
|
is
compatible with most new-model motor vehicles; and
|
|
|
●
|
wirelessly
and automatically uploads and downloads data to and from other system components.
|
Server
Software.
Our system deployment requires at least one installation of our server software, which automatically manages data
communications between the system’s databases and the on-asset hardware. Our server software:
●
|
is
a set of Windows services;
|
|
|
●
|
automatically
processes data between our devices and system databases;
|
|
|
●
|
communicates
with on-asset hardware to send and retrieve system data;
|
|
|
●
|
exposes
interfaces for integrating with existing mobile applications, enabling end-customer vehicle control features;
|
|
|
●
|
interfaces
with external systems, including billing, geo-location, maintenance, and fleet management systems;
|
|
|
●
|
automates
event scheduling, including database archiving, performance monitoring and diagnostic notifications;
|
|
|
●
|
automatically
performs diagnostics on system components and manages firmware over the air upgrades;
and
|
|
|
●
|
automatically
sends event alerts over an API and emails customizable reports.
|
Our
connected vehicle management systems are available as either Company- or customer-hosted solutions to meet our customers’
needs and information technology requirements. Our Company-hosted solutions utilize our commercial colocation center.
Services
Hosting
Services
. We provide the use of our systems as a remotely hosted service, with the system server and application software
residing in the Company’s colocation center. This approach helps the Company reduce support costs and improve quality control.
It separates the system from the restrictions of the customers’ local IT networks, which helps reduce their system support
efforts and makes it easier for them to receive the benefits of system enhancements and upgrades. Our hosting services are typically
offered with extended maintenance and support services over a multi-year term of service, with automatic renewals following the
end of the initial term.
Software
as a Service (“SaaS”).
We provide system monitoring, help desk technical support, escalation procedure development,
routine diagnostic data analysis and software updates services as part of the ongoing contract term. These services ensure deployed
systems remain in optimal performance condition throughout the contract term and provide access to newly developed features and
functions on an annual basis.
Maintenance
Services
. We provide a warranty on the hardware components of our system. During the warranty period, we either replace or
repair defective hardware. We also make extended maintenance contracts available to customers and offer ongoing maintenance and
support on a time and materials basis.
Customer
Support and Consulting Services
. We have developed a framework for the various phases of system training and support that
offers our customers both structure and flexibility. Major training phases include hardware installation and troubleshooting,
software installation and troubleshooting, “train-the-trainer” training on asset hardware operation, preliminary software
user training, system administrator training, information technology issue training, ad hoc training during system launch and
advanced software user training. Increasingly, training services are provided through scalable online interactive training tools.
Support and consulting services are priced based on the extent of training that the customer requests.
To
help our customers derive the most benefit from our system, we supply a broad range of documentation and support including videos,
interactive online tools, hardware user guides, software manuals, vehicle installation overviews, troubleshooting guides, and
issue escalation procedures.
We
provide our consulting services both as a stand-alone service to study the potential benefits of implementing a wireless fleet
management system and as part of the system implementation itself.
In
some instances, customers prepay us for extended maintenance, support and consulting services. In those instances, the payment
amount is recorded as deferred revenue and revenue is recognized over the service period.
New
product development
In
2018, we continued to invest in research and development and released the following notable products:
●
|
we
initiated and largely developed our new line of Logistics Visibility platform products, including a new series of LTE- and
Bluetooth-enabled tracking devices; a camera-based, wireless freight monitoring sensor; and several additional Bluetooth-enabled
sensors;
|
|
|
●
|
we
completed the development and commercialization of the Unified Telematics Platform for Avis which is integrated into the Avis
connected car rental management system. This is solution includes specialized hardware device, middleware for security and
connectivity, cellular network utilization, server-side asset management and monitoring and full application programming interface
support into Avis’s rental management system; and
|
|
|
●
|
we
introduced the OC53, a simplified Industrial Truck Management operator control system. This new product utilizes Bluetooth
for data communication and a portable tablet and Android App as the software management platform, to create a fully-disconnected,
IT-free control and management system, targeted at small customer sites.
|
Sales
and Marketing
Our
sales and marketing objective is to achieve broad market penetration, with an emphasis both on expanding business opportunities
with existing customers and on securing new customers.
We
market our systems directly to commercial and government organizations and through indirect sales channels, such as original equipment
manufacturers and industrial equipment dealers. In addition, we are actively pursuing strategic relationships with key companies
in our target markets - including complementary hardware and software vendors and service providers - to further penetrate these
markets by embedding our products in the assets our systems monitor and integrating our solutions with other systems.
We
sell our systems to executive, division and site-level management within the enterprise. 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.
Customers
We
market and sell our wireless solutions to a wide range of customers in the commercial and government sectors. Our customers operate
in diverse markets, such as automotive manufacturing, retail, shipping, freight transportation, heavy industry, wholesale distribution,
aerospace and defense, homeland security, and vehicle rental.
During
the year ended December 31, 2018, we generated revenues of $53.1 million with Avis and Wal-Mart Stores, Inc. accounting for 18%
and 10% of our revenues, respectively. During the year ended December 31, 2017, we generated revenues of $41.0 million with Wal-Mart
Stores, Inc. accounting for 16% of our revenues. During the year ended December 31, 2016, we generated revenues of $36.8 million
with Wal-Mart Stores, Inc. accounting for 18% of our revenues.
The
Company enters into master agreements with its customers in the normal course of its business. These agreements define the terms
of any sales of products and/or services by the Company to the applicable customer, including, but not limited to, terms regarding
payment, support services, termination and assignment rights. These agreements generally obligate the Company only when products
or services are actually sold to the customer thereunder.
We
strive to establish long-term relationships with our customers in order to maximize opportunities for new application development
and increased sales.
Competition
The
market for our solutions is rapidly evolving, highly competitive and fragmented. Our target markets are also subject to quickly
changing product technologies, shifting customer needs, regulatory requirements and frequent introductions of new products and
services. A significant number of companies have developed or are developing and marketing software and hardware for wireless
products that currently compete or will compete directly with our solutions. We compete with organizations varying in size, including
many small, start-up companies as well as large, well-capitalized organizations. While some of our competitors focus exclusively
on providing wireless asset management solutions, many are involved in wireless technology as an extension of a broader business.
Many of our larger competitors are able to dedicate extensive financial resources to the research and development and deployment
of wireless solutions. As government and commercial entities expand the use of wireless technologies, we expect that competition
will continue to increase within our target markets.
We
attempt to distinguish ourselves from our competitors by focusing on three primary business solutions: (i) industrial truck management
solutions, (ii) logistics visibility solutions, and (iii) connected vehicle solutions. This focus has enabled us to direct
product development efforts specifically suited for our target markets. Our on-asset devices are designed to operate independently
of other system components, allowing for continuous asset control and data gathering even when the asset is out of wireless communication
range. We believe that our proprietary technology as well as our experience in designing and developing products for our target
markets distinguishes us within these markets.
In
each of our markets, we encounter different competitors due to the dynamics of each market. In the industrial truck asset management
market, we are not aware of any competitors that can provide the precise capabilities of our systems due to our intellectual property
and proprietary solutions; however, competitors do provide similar solutions that seek to address the same customer needs that
our products address. Those companies include both emerging companies with limited operating histories, such as Gem One Corp.,
TotalTrax Inc., and SpeedShield Technologies and companies with longer operating histories, greater name recognition and/or
significantly greater financial, technical and marketing resources than ours, such as Crown Equipment Corp.
In
the logistics visibility solutions market, we compete against several established competitors, including Omnitracs, LLC, SkyBitz,
Inc., Orbcomm Inc. and Spireon, Inc. We attempt to differentiate our solutions in this market by offering a choice of communication
mode (satellite or cellular), patented battery management technology, sensor options, and installation configurations (tractors,
trucks, refrigerated trailers, dry van trailers, domestic containers, flatbed trailers, covered hopper and tanker railcars,
and chassis).
In
the connected vehicles solutions market, our solutions for traditional airport-based rental fleet management compete primarily
against OEM connected vehicle offerings, after-market connected vehicle technology providers, and existing handheld devices which
are used widely by vehicle rental companies. Currently, the principal OEMs we compete against are OnStar Corporation a subsidiary
of General Motors, Ford Sync, and Toyota Connected; the primary after-market connected vehicle technology provider we compete
against is Continental AG; and principal handheld device providers we compete against include Motorola and Intermec which was
acquired by Honeywell International Inc. Our solutions for remote, decentralized rental fleet management compete primarily with
companies in the traditional car sharing market such as Hertz, Enterprise, and car2go and peer-to-peer car sharing services such
as Turo. Large system integrators and several of the national cellular wireless providers have started to offer solutions, which
package third party hardware, firmware and software, that compete with our solutions. In the markets for both types of rental
fleet solutions, our competitive position is differentiated by our patented product offering - a fully automated, readily installed,
secure, and cost-effective car rental system.
Research
and Development
Our
research and development team has expertise in areas such as software and firmware development, database design and data analytics,
wireless communications, mechanical and electrical engineering, and both product and project management. In addition, we utilize
external contractors to supplement our team in the areas of software and firmware development, digital design, test development
and product-level testing.
Generally,
our research and development efforts are focused on: simplifying the implementation, support and utilization of our systems; reducing
the cost of our systems; increasing the reliability of our products; expanding the functionality of our systems to meet customer
and market requirements; applying new advances in technology to enhance existing products; and building further competitive advantages
through our intellectual property portfolio.
In
2018, we also focused our research and development investments in several key areas:
●
|
improving
the reliability and performance of our legacy product line of over-the-road asset management solutions, including products
tailored towards dry van trailers, intermodal containers and chassis;
|
|
|
●
|
initiated
new product functionality for Avis in preparation for the expansion of our program, to include key new features that enable
expanded car rental capabilities;
|
|
|
●
|
the
optimization of our impact algorithm for industrial trucks, whereby the solution is fully self-calibrating and self-installing,
and capable of distinguishing critical from non-critical impact events for safety and accountability purposes;
|
|
|
●
|
Improving
the performance and expanding features for our software for both industrial truck asset management and over-the-road asset
management, designed to improve the customer experience and reduce support requirements; and
|
|
|
●
|
improving
business intelligence and data analytics tools to quantify and simplify customer benefit achievement, within a single deployed
facility, across an enterprise, and compared to peers within the same industry.
|
Intellectual
Property
Patents
We
attempt to protect our technology and products through a variety of intellectual property protections, including the pursuit of
patent protection in the United States and certain foreign jurisdictions. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by U.S. patents or proprietary rights owned by us may differ from that of
their foreign counterparts. Where strategically appropriate, we will attempt to pursue suspected violators of our patents and,
whenever possible, monetize our intellectual property.
I.D.
Systems has built a portfolio of patents and patent applications relating to various aspects of its technology and products. As
of March 21, 2019, the I.D. Systems patent portfolio includes 24 U.S. patents, 4 pending U.S. patent applications, 1 pending foreign
patent application, and 1 foreign patent. With the timely payment of all maintenance fees, the U.S. patents have expiration dates
falling between 2019 and 2038. I.D. Systems also has foreign patents and pending applications relating to its wireless asset management
system, connected car product, and new features added to our vehicle management system. No single patent or patent family is considered
material to the I.D. Systems business.
I.D.
Systems’ subsidiary, Asset Intelligence LLC (“AI”), also utilizes patents to protect aspects of its intellectual
property assets. The AI patent portfolio focuses on methods, systems, and devices for managing mobile assets and reducing power
consumption in mobile assets. As of March 18, 2019, the AI patent portfolio includes 24 U.S. patents. With timely payments of
all maintenance fees, the granted U.S. patents have expiration dates falling between 2021 and 2034. No single patent or family
of patents is considered material to the AI business.
Trademarks
We
have, or have applied for, trademark protection for
I.D. SYSTEMS®
and Design, the I.D. SYSTEMS Logo®, VEHICLE ASSET COMMUNICATOR®, AVRAMP® and Design, POWERFLEET®, POWERFLEET VISION®,
POWERFLEET IQ®, VERIWISE IQ®, ASSET INTELLIGENCE®, didBOX®, FREIGHTCAM®, and KEYTROLLER®.
We
attempt to avoid infringing known proprietary rights of third parties in our product development and sales efforts. However, it
is difficult to proceed with certainty in a rapidly evolving technological environment in which there may be numerous patent applications
pending, many of which are confidential at the time of the application filing, with regard to similar technologies. If we were
to discover that our products violate third-party proprietary rights, we may not be able to:
●
|
obtain
licenses to continue offering such products without substantial reengineering;
|
|
|
●
|
reengineer
our products successfully to avoid infringement;
|
|
|
●
|
obtain
licenses on commercially reasonable terms, if at all; or
|
|
|
●
|
litigate
an alleged infringement successfully or settle without substantial expense and damage awards.
|
Any
claims against us relating to the infringement of third-party proprietary rights, even if without merit, could result in the expenditure
of significant financial and managerial resources or in injunctions preventing us from distributing certain products. Such claims
could materially adversely affect our business, financial condition and results of operations.
Our
software products are susceptible to unauthorized copying and uses that may go undetected, and policing such unauthorized use
is difficult. In general, our efforts to protect our intellectual property rights through patent, copyright, trademark and trade
secret laws and contractual safeguards may not be effective to prevent misappropriation of our technology, or to prevent the development
and design by others of products or technologies similar to, or competitive with, those developed by us. Our failure or inability
to protect our proprietary rights could materially and adversely affect our business, financial condition and results of operations.
Manufacturing
We
outsource our hardware manufacturing operations to contract manufacturers. This strategy enables us to focus on our core competencies
- designing hardware and software systems and delivering solutions to customers - and avoid investing in capital-intensive electronics
manufacturing infrastructure. Outsourcing also provides us with the ability to ramp up deliveries to meet increases in demand
without increasing fixed expenses.
Our
manufacturers are responsible for obtaining the necessary components and supplies to manufacture our products. While components
and supplies are generally available from a variety of sources, manufacturers generally depend on a limited number of suppliers.
In the past, unexpected demand for communication products has caused worldwide shortages of certain electronic parts and allocation
of such parts by suppliers that had an adverse impact on the ability of manufacturers to deliver products as well as on the cost
of producing such products.
Due
to the general availability of manufacturers for our products, we do not believe that the loss of any of our manufacturers would
have a long-term material adverse effect on our business, although there could be a short-term adverse effect on our business.
We
generally attempt to maintain sufficient inventory to meet customer demand for products, as well as to meet anticipated sales
levels. If our product mix changes in unanticipated ways, or if sales for particular products do not materialize as anticipated,
we may have excess inventory or inventory that becomes obsolete. In such cases, our operating results could be negatively affected.
Government
Regulations
The
use of radio emissions is subject to regulation in the United States by various federal agencies, including the Federal Communications
Commission, or FCC, and the Occupational Safety and Health Administration, or OSHA. Various state agencies also have promulgated
regulations which concern the use of lasers and radio/electromagnetic emissions standards.
Regulatory
changes in the United States and other countries in which we may operate in the future could require modifications to some of
our products in order for us to continue manufacturing and marketing our products in those areas.
Our
products intentionally transmit radio signals, including narrow band and spread spectrum signals, as part of their normal operation.
We have obtained certification from the FCC for our products that require certification. Users of these products in the United
States do not require any license from the FCC to use or operate our products. To market and sell our integrated wireless solutions
in the European Union, we also utilize unlicensed radio spectra, and have obtained the required European Norm (EN) certifications.
In
addition, some of our operations use substances regulated under various federal, state and local laws governing the environment
and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management
and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Certain of our products are subject to
various federal, state and local laws governing chemical substances in electronic products.
The
adoption of unfavorable regulations, or unfavorable interpretations of existing regulations by courts or regulatory bodies, could
require us to incur significant compliance costs, cause the development of the affected markets to become impractical or otherwise
adversely affect our ability to produce or market our products.
Employees
As
of March 15, 2019, we had 138 full-time employees, including 8 employees based in Germany and the United Kingdom. Of our 138 total
employees, 31 were engaged in customer service, 30 in product development (which includes engineering), 5 in new product management,
20 in operations, 31 in sales and marketing, 5 in information technology and 16 in executive, administration and finance. We believe
that our relationships with our employees are good.
Available
Information
Our
primary website is
www.id-systems.com
. We make available on this website, free of charge, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d)
of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such information
to, the Securities and Exchange Commission (“SEC”). We also make available on this website, free of charge, our Code
of Ethics for Senior Financial Officers, which applies to our principal executive officer, principal financial officer and principal
accounting officer.
Item
1A. Risk Factors
In
addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered
carefully in evaluating the Company’s business. Our business, financial condition or results of operations could be materially
and adversely affected by any of these risks. Additional risks not presently known to the Company or that the Company currently
deems immaterial may also adversely affect our business, financial condition or results of operations.
We
have incurred significant losses and have a substantial accumulated deficit. If we cannot achieve profitability, the market price
of our common stock could decline significantly.
As
of December 31, 2018, we had cash (including restricted cash), cash equivalents and marketable securities of $15.0 million and
working capital of $15.8 million. Our primary sources of cash are cash flows from operating activities and our holdings of cash,
cash equivalents and investments from the sale of common stock. To date, we have not generated sufficient cash flow solely from
operating activities to fund our operations.
We
incurred net losses of approximately $6.4 million, $3.9 million and $5.8 million for the years ended December 31, 2016, 2017 and
2018, respectively, and have incurred additional net losses since inception. At December 31, 2018, we had an accumulated deficit
of approximately $101.2 million. Our ability to increase our revenues from the sale of our products will depend on our ability
to successfully implement our growth strategy and the continued expansion of our markets. If our revenues do not grow or if our
operating expenses continue to increase, we may not be able to become profitable and the market price of our common stock could
decline.
We
may not be able to successfully execute our strategic initiatives or meet our long-term financial goals.
We
have been engaged in strategic initiatives to refocus on our core business to maximize long-term stockholder value, to improve
our cost structure and efficiency and to increase our selling efforts and developing new business. We cannot provide any assurance
that we will be able to successfully execute these or other strategic initiatives or that we will be able to execute these initiatives
on our expected timetable. We may not be successful in refocusing our core business and obtaining operational efficiencies or
replacing revenues lost as a result of these strategic initiatives.
We
may need to obtain additional capital to fund our operations that could have negative consequences on our business.
We
may require additional capital in the future to develop and commercialize additional products and technologies or take advantage
of other opportunities that may arise, including potential acquisitions. We may seek to raise the necessary funds through public
or private equity offerings, debt financings, additional operating improvements, asset sales or strategic alliances and licensing
arrangements. We have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on May 18, 2017.
The shelf registration statement allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred
stock, warrants, debt securities and units or any combination of the foregoing. On July 17, 2017, we closed an underwritten public
offering of approximately $17.3 million in aggregate gross proceeds, which was conducted pursuant to a prospectus supplement to
our shelf registration statement. To the extent we raise additional capital by issuing equity securities, including pursuant to
our shelf registration statement, our existing stockholders may experience substantial dilution. In addition, we may be required
to relinquish rights to our technologies or systems, or grant licenses on terms that are not favorable to us in order to raise
additional funds through strategic alliance, joint venture and licensing arrangements. We cannot provide assurance that the additional
sources of funds will be available, or if available, would have reasonable terms. If adequate funds are not available, we may
be required to delay, reduce the scope of or eliminate one or more of our development programs, and our business, financial condition,
results of operations and stock price could be materially and adversely affected.
We
are highly dependent upon sales of our wireless asset management systems to a few customers. The loss of any of these customers,
or any material reduction in the amount of our products they purchase, could materially and adversely affect our financial condition
and results of operations.
During
the year ended December 31, 2018, we generated revenues of $53.1 million with Avis Budget Group Inc. and Wal-Mart Stores,
Inc. accounting for 18% and 10% of our revenues, respectively. During the year ended December 31, 2017, we generated revenues
of $41.0 million with Wal-Mart Stores, Inc. accounting for 16% of our revenues. During the year ended December 31, 2016, we generated
revenues of $36.8 million with Wal-Mart Stores, Inc. accounting for 18% of our revenues. The loss of these customers or any material
reduction in the amount of our products that these customers purchase, or 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.
If
the market for our technology does not develop or become sustainable, expands more slowly than we expect or becomes saturated,
our revenues will decline and our financial condition and results of operations could be materially and adversely affected.
Our
success is highly dependent on the continued market acceptance of our wireless asset management system. The market for our wireless
products and services is new and rapidly evolving. If the market for our products and services does not become sustainable, or
becomes saturated with competing products or services, our revenues will decline and our financial condition and results of operations
could be materially and adversely affected.
If
we are unable to keep up with rapid technological change, we may be unable to meet the needs of our customers, which could materially
and adversely affect our financial condition and results of operations and reduce our ability to grow our market share.
Our
market is characterized by rapid technological change and frequent new product announcements. Significant technological changes
could render our existing technology obsolete. We are active in the research and development of new products and technologies
and in enhancing our current products. However, research and development in our industry is complex and filled with uncertainty.
For example, it is common for research and development projects to encounter delays due to unforeseen problems, resulting in low
initial volume production, fewer product features than originally considered desirable and higher production costs than initially
budgeted, any of which may result in lost market opportunities. In addition, these new products may not adequately meet the requirements
of the marketplace and may not achieve any significant degree of market acceptance. If our efforts do not lead to the successful
development, marketing and release of new products that respond to technological developments or changing customer needs and preferences,
our revenues and market share could be materially and adversely affected. We may expend a significant amount of resources in unsuccessful
research and development efforts. In addition, new products or enhancements by our competitors may cause customers to defer or
forego purchases of our products. Any of the foregoing could materially and adversely affect our financial condition and results
of operations and reduce our ability to grow our market share.
We
may incur additional charges for excess and obsolete inventory, which could adversely affect our cost of sales and gross profit.
While
we strive to effectively manage our inventory, due to rapidly changing technology, and uneven customer demand, product cycles
tend to be short and the value of our inventory may be adversely affected by changes in technology that affect our ability to
sell the products in our inventory. If we do not effectively forecast and manage our inventory, we may need to write off inventory
as excess or obsolete, which in turn, can adversely affect our cost of sales and gross profit.
We
have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay
or defer purchases in anticipation of new product introductions. The reserves we have established for potential losses due to
obsolete inventory may, however, prove to be inadequate and may give rise to additional charges for obsolete or excess inventory.
The
long and variable sales cycles for our solutions may cause our revenues and operating results to vary significantly from quarter
to quarter or year to year, which could adversely affect the market price of our common stock.
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.
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.
We
rely significantly on channel partners to sell our products, and disruptions to, or our failure to develop and manage our channel
partners would harm our business.
Recruiting
and retaining qualified channel partners and training them in our technology and product offerings requires significant time and
resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures
that support our channel, including investment in systems and training. Those processes and procedures may become increasingly
complex and difficult to manage as we grow our organization. We have no minimum purchase commitments from any of our channel partners,
and our contracts with these channel partners do not prohibit them from offering products or services that compete with ours.
Our competitors may provide incentives to existing and potential channel partners to favor their products or to prevent or reduce
sales of our products. Our channel partners may choose not to offer our products exclusively or at all. Establishing relationships
with channel partners who have a history of selling our competitors’ products may also prove to be difficult. Our failure
to establish and maintain successful relationships with channel partners would harm our business and operating results.
If
we are unable to protect our intellectual property rights, our financial condition and results of operations could be materially
and adversely affected.
We
rely on a combination of patents, copyrights, trademarks, trade secrets and contractual measures to protect our intellectual property
rights. Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights
owned by us. If such challenges are successful, our business will be materially and adversely affected.
Our
employees, consultants and advisors enter into confidentiality agreements with us that prohibit the disclosure or use of our confidential
information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties
for research and other purposes. Despite these efforts, we cannot assure you that we will be able to effectively enforce these
agreements or our confidential information will not be disclosed, that others will not independently develop substantially equivalent
confidential information and techniques or otherwise gain access to our confidential information or that we can meaningfully protect
our confidential information.
Disputes
may arise in the future with respect to the ownership of rights to any technology developed with advisors or collaborators. These
and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our systems,
or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could
materially and adversely affect our financial condition and results of operations.
Policing
the unauthorized use of our intellectual property is difficult, and we cannot assure you that the steps we have taken will prevent
unauthorized use of our technology or other intellectual property, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. Accordingly, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. If we are unsuccessful in protecting our intellectual property, we may lose any technological
advantages we have over competitors and our financial condition and results of operations could be materially and adversely affected.
We
may become involved in an intellectual property dispute that could subject us to significant liability, divert the time and attention
of our management and prevent us from selling our products, any of which could materially and adversely affect our financial condition
and results of operations.
In
recent years, there has been significant litigation in the United States and internationally involving claims of alleged infringement
of patents and other intellectual property rights. Litigation may be necessary to enforce our intellectual property rights, defend
ourselves against alleged infringement and determine the scope and validity of our intellectual property rights.
Any
such litigation, whether or not successful, could result in substantial costs, divert the time and attention of our management
and prevent us from selling our products. If a claim of patent infringement was decided against us, we could be required to, among
other things:
●
|
pay
substantial damages to the party making such claim;
|
|
|
●
|
stop
selling, making, having made or using products or services that incorporate the challenged intellectual property;
|
|
|
●
|
obtain
from the holder of the infringed intellectual property right a license to sell, make or use the relevant technology, which
license may not be available on commercially reasonable terms, or at all; or
|
|
|
●
|
redesign
those products or services that incorporate such intellectual property.
|
The
failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of our products
and could materially and adversely affect our financial condition and results of operations.
The
U.S. government’s right to use technology developed by us with government funds could limit our intellectual property rights.
We
have developed, and may in the future develop, improvements to our technology that are funded in part by the U.S. government.
As a result, we do not have the right to prohibit the U.S. government from using certain technologies developed by us with such
government funds or to prohibit third parties from using those technologies to provide products and services at the request of
the U.S. government. Although such government rights do not affect our ownership of the technology developed using such funds,
the U.S. government has the right to royalty-free use of technologies that we have developed under such contracts. We are free
to commercially exploit those government-funded technologies and may assert our intellectual property rights to seek to block
other non-government users thereof, but there is no assurance we can successfully do so.
We
rely on subcontractors to manufacture and deliver our products. Any quality or performance failures by our subcontractors or changes
in their financial condition could disrupt our ability to supply quality products to our customers in a timely manner, resulting
in business interruptions, increased costs, claims for damages, reputation damage and reduced revenue.
In
order to meet the requirements under our customer contracts, we rely on subcontractors to manufacture and deliver our products
to our customers. Any quality or performance failures by our subcontractors or changes in their financial or business condition
could disrupt our ability to supply quality products to our customers in a timely manner. If we are unable to fulfill orders from
our customers in a timely manner, we could experience business interruptions, increased costs, damage to our reputation and loss
of our customers. In addition, we may be subject to claims from our customers for failing to meet our contractual obligations.
Although we have several sources for production, the inability to provide our products to our customers in a timely manner could
result in the loss of customers and our revenues could be materially reduced. In addition, there is great competition for the
most qualified and competent subcontractors. If we are unable to hire qualified subcontractors, the quality of our services and
products could decline. Furthermore, third-party manufacturers in the electronic component industry are consolidating. The consolidation
of third-party manufacturers may give remaining manufacturers greater leverage to increase the prices that they charge, thereby
increasing our manufacturing costs. If this were to occur and we are unable to pass the increased costs onto our customers, our
profitability could be materially and adversely affected.
Our
manufacturers rely on a limited number of suppliers for several significant components and raw materials used in our products.
If we or our manufacturers are unable to obtain these components or raw materials on a timely basis, we will be unable to meet
our customers’ orders, which could reduce our revenues, subject us to claims for damages and adversely affect our relationships
with our customers.
We
rely on a limited number of suppliers for the components and raw materials used in our products. Although there are many suppliers
for most of our component parts and raw materials, we are dependent on a limited number of suppliers for many of our significant
components and raw materials. This reliance involves a number of significant risks, including:
●
|
unavailability
of materials and interruptions in delivery of components and raw materials from our suppliers, which could result in manufacturing
delays; and
|
|
|
●
|
fluctuations
in the quality and price of components and raw materials.
|
We
currently do not have any long-term or exclusive purchase commitments with any of our suppliers. In addition, our suppliers may
enter into exclusive arrangements with our competitors, be acquired by our competitors, or stop selling their products or components
to us on commercially reasonable terms or at all. We may not be able to develop alternative sources for the components and raw
materials. Even if alternate suppliers are available to us or our manufacturers, identifying them is often difficult and time
consuming. If we or our manufacturers are unable to obtain an ample supply of product or raw materials from our existing suppliers
or alternative sources of supply, we may be unable to satisfy our customers’ orders, which could reduce our revenues, subject
us to claims for damages and adversely affect our relationships with our customers.
The
industry in which we operate is highly competitive, and competitive pressures from existing and new companies could have a material
adverse effect on our financial condition and results of operations.
The
industry in which we operate is highly competitive and influenced by the following:
●
|
advances
in technology;
|
|
|
●
|
new
product introductions;
|
|
|
●
|
evolving
industry standards;
|
|
|
●
|
product
improvements;
|
|
|
●
|
rapidly
changing customer needs;
|
|
|
●
|
intellectual
property invention and protection;
|
|
|
●
|
marketing
and distribution capabilities;
|
|
|
●
|
ability
to attract and retain highly skilled professionals;
|
|
|
●
|
competition
from highly capitalized companies;
|
|
|
●
|
entrance
of new competitors;
|
|
|
●
|
ability
of customers to invest in information technology; and
|
|
|
●
|
price
competition.
|
The
products marketed by us and our competitors are becoming more complex. As the technological and functional capabilities of future
products increase, these products may begin to compete with products being offered by traditional computer, network and communications
industry participants that have substantially greater financial, technical, marketing and manufacturing resources than we do.
Although
we are not aware of any current competitors that provide the precise capabilities of our systems, we are aware of competitors
that offer similar approaches to address the customer needs that our products address. Those companies include both emerging companies
with limited operating histories, such as Gem One Corp., TotalTrax, Inc., and SpeedShield Technologies and companies with
longer operating histories, greater name recognition and/or significantly greater financial, technical and marketing resources
than ours, such as Crown Equipment Corp.
In
the logistics visibility market, we compete against several established competitors, including Omnitracs, LLC, SkyBitz, Inc.,
Orbcomm Inc. and Spireon, Inc. We attempt to differentiate our solutions in this market by offering a choice of communication
mode (satellite or cellular), patented battery management technology, sensor options, and installation configurations (tractors,
trucks, refrigerated trailers, dry van trailers, domestic containers, flatbed trailers, covered hopper and tanker railcars,
and chassis).
In
the connected vehicles solutions market, our solutions for traditional airport-based rental fleet management compete primarily
against OEM connected vehicle offerings, after-market connected vehicle technology providers, and existing handheld devices which
are used widely by vehicle rental companies. Currently, the principal OEMs we compete against are OnStar Corporation a subsidiary
of General Motors, Ford Sync, and Toyota Connected; the primary after-market connected vehicle technology provider we compete
against is Continental AG; and principal handheld device providers we compete against include Motorola and Intermec which was
acquired by Honeywell International Inc. Our solutions for remote, decentralized rental fleet management compete primarily with
companies in the traditional car sharing market such as Hertz, Enterprise, and car2go and peer-to-peer car sharing services such
as Turo. Large system integrators and several of the national cellular wireless providers have started to offer solutions, which
package third party hardware, firmware and software, that compete with our solutions. In the markets for both types of rental
fleet solutions, our competitive position is differentiated by our patented product offering - a fully automated, readily installed,
secure, and cost-effective car rental system.
If
we do not keep pace with product and technology advances, including the development of superior products by our competitors, or
if we are unable to otherwise compete successfully against our competitors, there could be a material adverse effect on our competitive
position, revenues and prospects for growth. As a result, our financial condition and results of operations could be materially
and adversely affected.
The
federal government or independent standards organizations may implement significant regulations or standards that could adversely
affect our ability to produce or market our products.
Our
products transmit radio frequency waves, the transmission of which is governed by the rules and regulations of the FCC, as well
as other federal and state agencies. Our ability to design, develop and sell our products will continue to be subject to these
rules and regulations for the foreseeable future. In addition, our products and services may become subject to independent industry
standards. The implementation of unfavorable regulations or industry standards, or unfavorable interpretations of existing regulations
by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected
products to become impractical or otherwise adversely affect our ability to produce or market our products. The adoption of new
industry standards applicable to our products may require us to engage in rapid product development efforts that would cause us
to incur higher expenses than we anticipated. In some circumstances, we may not be able to comply with such standards, which could
materially and adversely affect our ability to generate revenues through the sale of our products.
Because
our products are complex, they may have undetected errors or failures when they are introduced, which could seriously harm our
business, and our product liability insurance may not adequately protect us.
Technical
products like ours often contain undetected errors or failures when first introduced. Despite our efforts to eliminate these flaws,
there still may be errors or failures in our products, even after the commencement of commercial shipments. We provide a warranty
reserve at the time of shipment, which may not be sufficient to cover actual repair costs. Because our products are used in business-critical
applications, we could be subject to product liability claims if our systems fail to perform as intended. Even unsuccessful claims
against us could result in costly litigation and the diversion of management’s time and resources and could damage our reputation
and impair the marketability of our systems. Although we maintain insurance, there are no assurances that:
●
|
our
insurance will provide adequate coverage against potential liabilities if our products cause harm or fail to perform as promised;
or
|
|
|
●
|
adequate
product liability insurance will continue to be available to us in the future on commercially reasonable terms or at all.
|
If
our insurance is insufficient to pay any product liability claims, our financial condition and results of operations could be
materially and adversely affected. In addition, any such claims could permanently injure our reputation and customer relationships.
We
may be subject to breaches of our information technology systems, which could damage our reputation, vendor, and customer relationships,
and our customers’ access to our services.
Our
business operations require that we use and store sensitive data, including intellectual property and proprietary business information
in our secure data centers and on our networks. We face a number of threats to our data centers and networks in the form of unauthorized
access, security breaches and other system disruptions. It is critical to our business strategy that our infrastructure remains
secure and is perceived by customers and partners to be secure. We require user names and passwords in order to access our information
technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. Despite
our security measures, our information technology systems may be vulnerable to attacks by hackers or other disruptive problems.
Any such security breach may compromise information used or stored on our networks and may result in significant data losses or
theft of our, our customers’, or our business partners’ intellectual property or proprietary business information.
A cybersecurity breach could negatively affect our reputation by adversely affecting the market’s perception of the security
or reliability of our products or services. In addition, a cyber-attack could result in other negative consequences, including
remediation costs, disruption of internal operations, increased cybersecurity protection costs, lost revenues or litigation, which
could have a material adverse effect on our business, results of operations and financial condition.
Our
ability to utilize net operating loss carry-forwards may be limited.
The
Company has U.S. net operating loss carry-forwards (“NOLs”) that expire through 2037. Section 382 of the Internal
Revenue Code imposes an annual limitation on a corporation’s ability to utilize NOLs if it experiences an “ownership
change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders
in the stock of a corporation by more than 50% over a three-year period. Ownership changes in our stock, some of which are outside
of our control, could result in a limitation in our ability to use our NOLs to offset future taxable income, could cause U.S.
Federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause such
pre-2018 NOLs to expire unused, reducing or eliminating the benefit of such NOLs. We expect that, as a result of the Merger
Transactions, the use of the Company’s NOLs will become limited under Section 382 of the Internal Revenue Code and under
similar provisions of state and local law. In addition to the effects discussed above, any reduction in value of the tax
benefits from the NOLs will also impact the Company’s tax assets and earnings as reported in its financial statements.
If
we lose our executive officers, or are unable to recruit additional personnel, our ability to manage our business could be materially
and adversely affected.
We
are dependent on the continued employment and performance of our executive officers. We currently do not have employment agreements
with any of our executive officers. Like other companies in our industry, we face intense competition for qualified personnel.
Many of our competitors have greater resources than we have to hire qualified personnel. Accordingly, if we are not successful
in attracting or retaining qualified personnel in the future, our ability to manage our business could be materially and adversely
affected.
If
we do not adequately anticipate and respond to the risks inherent in growing our business internationally, our operating results
and the market price of our common stock could be materially and adversely affected.
To
date, we have not generated significant revenues outside of North America. As part of our growth strategy, we are seeking ways
to expand our operations outside of North America by establishing offices in the United Kingdom and Germany and developing relationships
with global distributors to market and sell our systems internationally. For example, as of March 15, 2019, we had five employees
in Germany and three in the United Kingdom who market and sell our systems in Europe. There are a number of risks inherent in
doing business in international markets, including:
●
|
unexpected
legal or regulatory changes;
|
|
|
●
|
unfavorable
political or economic factors;
|
|
|
●
|
less
developed infrastructure;
|
|
|
●
|
difficulties
in recruiting and retaining personnel, and managing international operations;
|
|
|
●
|
fluctuations
in foreign currency exchange rates;
|
|
|
●
|
lack
of sufficient protection for intellectual property rights; and
|
|
|
●
|
potentially
adverse tax consequences.
|
If
we do not adequately anticipate and respond to the risks inherent in international operations, our operating results and the market
price of our common stock could be materially and adversely affected. In addition, although we intend to expand our business outside
of North America, there are risks associated with conducting an international operation, including the risks listed above, and
such expansion may not be successful or have a positive effect on, and could materially and adversely affect, our financial condition
and results of operations.
We
provide no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we
have acquired or might acquire in the future.
We
may, from time to time, continue to consider investments in or acquisitions of complementary companies, products or technologies.
In the event of any future acquisitions, we could:
●
|
issue
stock that would dilute our current stockholders’ percentage ownership;
|
|
|
●
|
incur
debt;
|
|
|
●
|
assume
liabilities;
|
|
|
●
|
incur
expenses related to the impairment of goodwill; or
|
|
|
●
|
incur
large and immediate write-offs.
|
We
may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to
make these acquisitions on acceptable terms, or at all.
Our
operation of any acquired business will also involve numerous risks, including:
●
|
problems
integrating the acquired operations, personnel, technologies or products;
|
|
|
●
|
unanticipated
costs;
|
|
|
●
|
diversion
of management’s time and attention from our core businesses;
|
|
|
●
|
adverse
effects on existing business relationships with suppliers and customers;
|
|
|
●
|
risks
associated with entering markets in which we have no or limited prior experience; and
|
|
|
●
|
potential
loss of key employees, particularly those of acquired companies.
|
In
addition, if we make changes to our business strategy or if external conditions adversely affect our business operations, we may
be required to record an impairment charge for goodwill or intangibles, which would lead to decreased assets and reduced net operating
performance.
The
concentration of common stock ownership among our executive officers and directors could limit the ability of other stockholders
of the Company to influence the outcome of corporate transactions or other matters submitted for stockholder approval.
As
of March 28, 2019, our executive officers and directors beneficially owned, in the aggregate, 14% of our
outstanding common stock, not including 533,000 shares of common stock that our executive officers and directors may acquire
upon the exercise of outstanding options or if they otherwise acquire additional shares of common stock in the future. As a result,
our officers and directors may have the ability to influence the outcome of all corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote, including the following actions:
●
|
the
election of directors;
|
|
|
●
|
adoption
of stock option or other equity incentive compensation plans;
|
|
|
●
|
the
amendment of our organizational documents; and
|
|
|
●
|
the
approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets.
|
The
unpredictability of our quarterly operating results could adversely affect the market price of our common stock.
Our
revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside
of our control, and any of which could adversely affect the market price of our common stock. The main factors that may affect
us include the following:
●
|
variations
in the sales of our products to our significant customers;
|
|
|
●
|
variations
in the mix of products and services provided by us;
|
|
|
●
|
the
timing and completion of initial programs and larger or enterprise-wide purchases of our products by our customers;
|
|
|
●
|
the
length and variability of the sales cycle for our products;
|
|
|
●
|
the
timing and size of sales;
|
|
|
●
|
changes
in market and economic conditions, including fluctuations in demand for our products; and
|
|
|
●
|
announcements
of new products by our competitors.
|
As
a result of these and other factors, revenues for any quarter are subject to significant variation that could adversely affect
the market price for our common stock.
Future
sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options, may cause the
market price of our common stock to decline.
The
market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in
the market, or sales of our common stock acquired upon the exercise of outstanding options, or the perception that these sales
could occur. These sales also may make it more difficult for us to sell equity securities at a time and price that we deem appropriate.
We
have 18,213,978 shares of common stock outstanding as of March 28, 2019, of which 15,695,978 shares are freely
transferable without restriction, and 2,518,000 shares are held by our officers and directors and, as such, are subject
to the applicable volume, manner of sale, holding period and other limitations of Rule 144 under the Securities Act. In addition,
as of December 31, 2018, options to purchase 1,220,000 shares of our common stock were issued and outstanding, of which 695,000
were vested. The remaining options will vest ratably over a five-year period measured from the date of grant. The weighted-average
exercise price of the vested stock options is $5.07. We also may issue additional shares of stock in connection with our business,
including in connection with acquisitions, and may grant additional stock options to our employees, officers, directors and consultants
under our stock option plans or warrants to third parties. If a significant portion of these shares of common stock were sold
in the public market, the market value of our common stock could be adversely affected.
The
issuance of equity or debt securities under our shelf registration statement could have a negative impact on the price of our
common stock.
We
have on file a shelf registration statement on Form S-3 that was declared effective by the SEC on May 18, 2017. The shelf registration
statement allows us to raise up to an aggregate of $60.0 million from the sale of common stock, preferred stock, warrants, debt
securities, and units, or any combination of the foregoing. If we issue all of the securities included in the shelf registration
statement, there could be a substantial dilutive effect on our common stock and an adverse effect on the price of our common stock.
On
July 17, 2017, we closed an underwritten public offering of approximately $17.3 million in aggregate gross proceeds, which was
conducted pursuant to a prospectus supplement to our shelf registration statement.
We
provide financing to our customers for the purchase of our products, which may increase our credit risks in the event of a deterioration
in a customer’s financial condition or in global credit conditions.
We
sell our products to a wide range of customers in the commercial and governmental sectors. We provide financing to customers for
a portion of such sales which could be in the form of notes or leases receivable over two to five years. Although these customers
are extended credit terms which are approved by us internally, our business could be materially and adversely affected in the
event of a deterioration of the financial condition of one or more of our customers that results in such customers’ inability
to repay us. This risk may increase during a general economic downturn affecting a large number of our customers or a widespread
deterioration in global credit conditions, and in the event our customers do not adequately manage their businesses or properly
disclose their financial condition.
Interest
rate fluctuations may adversely affect our income and results of operations.
As
of December 31, 2018, we had cash (including restricted cash), cash equivalents and investments of $15.0 million. In a declining
interest rate environment, reinvestment typically occurs at less favorable market rates, negatively impacting future investment
income. Accordingly, interest rate fluctuations may adversely affect our income and results of operations.
Our
cash and cash equivalents could be adversely affected by a downturn in the financial and credit markets.
We
maintain our cash and cash equivalents with major financial institutions; however, our cash and cash equivalent balances with
these institutions exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor on a systematic basis the
cash and cash equivalent balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted
if one or more of the financial institutions with which we deposit our cash and cash equivalents fails or is subject to other
adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to
our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents
will not be affected if the financial institutions in which we hold our cash and cash equivalents fail or the financial and credit
markets deteriorate.
Goodwill
impairment or intangible impairment charges may affect our results of operations in the future.
We
test goodwill for impairment on an annual basis and more often if events occur or circumstances change that would likely reduce
the fair value of a reporting unit to an amount below its carrying value. We also test for other possible acquisition intangible
impairments if events occur or circumstances change that would indicate that the carrying amount of such intangible may not be
recoverable. Any resulting impairment loss would be a non-cash charge and may have a material adverse impact on our results of
operations in any future period in which we record a charge.
Long-lived
assets with determinable useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such charges could have a material adverse effect on our results of operations
in the period in which they are recorded.
Declines
in general economic conditions could result in decreased demand for our products and services, which would adversely affect our
business, financial condition and results of operations.
Our
results of operations are affected by the levels of business activities of our customers, which can be affected by economic conditions
in the United States and globally. During periods of economic downturns, our customers may decrease their demand for wireless
technology solutions, as well as the maintenance, support and consulting services we provide. This slowdown may have an adverse
effect on the wireless solutions industry in general and on demand for our products and services, but the magnitude of that impact
is uncertain. Our future growth is dependent, in part, upon the demand for our products and services. Prolonged weakness in the
economy may cause business enterprises to delay or cancel wireless solutions projects, reduce their overall wireless solutions
budgets and/or reduce or cancel orders for our services. This, in turn, may lead to longer sales cycles, delays in purchase decisions,
and payment and collection issues, and may also result in price pressures, causing us to realize lower revenues and operating
margins. Additionally, if our customers cancel or delay their wireless solutions initiatives, our business, financial condition
and results of operations could be materially and adversely affected.
Provisions
of Delaware law or our charter documents could delay or prevent an acquisition of the Company, even if the acquisition would be
beneficial to our stockholders, and could make it more difficult for our stockholders to change the Company’s management.
Section
203 of the Delaware General Corporation Law prohibits us from engaging in a business combination with any of our interested stockholders
for three years after such stockholder became an interested stockholder unless certain specified conditions are met. As a result,
these provisions and Delaware law could limit the price that investors are willing to pay in the future for shares of our common
stock.
In
addition, provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or
other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise
receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace
or remove our current management or members of our Board of Directors. These provisions, among other things:
●
|
permit
our Board of Directors to issue, without further action by our stockholders, up to 5,000,000 shares of preferred stock, with
any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change
in control;
|
|
|
●
|
provide
that special meetings of stockholders may be called only by (i) our Board of Directors pursuant to a resolution adopted by
a majority of the entire Board of Directors, either upon motion of a director or upon written request by the holders of at
least 50% of the voting power of all the shares of our capital stock entitled to vote in the election of directors, voting
as a single class, or (ii) our Chairman of the Board or our President; and
|
|
|
●
|
require
the affirmative vote of at least 75% of the voting power of all the shares of our capital stock entitled to vote in the election
of directors, voting as a single class, to amend or repeal the provisions outlined above dealing with meetings of stockholders.
|
Risk
Factors Relating to the Merger Transactions
The
risk factors below should be read in conjunction with the risk factors related to our operations set forth herein and other information
contained in this report. In connection with the Merger Transactions, Parent will file a registration statement on Form S-4 with
the SEC that will include a joint proxy statement/prospectus relating to the Merger Transactions. We urge you to read the registration
statement on Form S-4 once it becomes available because it will contain important information about the Merger Transactions, including
relevant risk factors.
We
may not realize the anticipated benefits and cost savings of the Merger Transactions.
On
March 13, 2019, we entered into the Pointer Merger Agreement and the Investment Agreement, pursuant to which, if the Merger Transactions
are consummated, we and Pointer will each become wholly-owned subsidiaries of a new holding company. While we and Pointer will
continue to operate independently until the completion of the Merger Transactions, the success of the Merger Transactions will
depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our and Pointer’s businesses.
Our ability to realize these anticipated benefits and cost savings is subject to certain risks, including, among others:
|
●
|
our
ability to successfully combine our and Pointer’s businesses;
|
|
●
|
the
risk that the combined businesses will not perform as expected;
|
|
●
|
the
extent to which we will be able to realize the expected synergies, which include realizing potential savings from re-assessing
priority assets and aligning investments, eliminating duplication and redundancy, adopting an optimized operating model between
both companies and leveraging scale, and creating value resulting from the combination of our and Pointer’s businesses;
|
|
●
|
the
possibility that the aggregate consideration being paid for Pointer is greater than the value we will derive from the Merger
Transactions;
|
|
●
|
the
possibility that we will not achieve the free cash flow that we have projected;
|
|
●
|
the
reduction of our cash available for operations and other uses and the incurrence of indebtedness to finance the Merger Transactions;
|
|
●
|
the
assumption of known and unknown liabilities of Pointer, including potential tax and employee-related liabilities; and
|
|
●
|
the
possibility of costly litigation challenging the Merger Transactions.
|
If
we are not able to successfully combine our and Pointer’s businesses within the anticipated time frame, or at all, the anticipated
cost savings and other benefits of the Merger Transactions may not be realized fully or may take longer to realize than expected,
and the combined businesses may not perform as expected.
Integrating
our and Pointer’s businesses may be more difficult, time-consuming or costly than expected.
We
and Pointer have operated and, until completion of the Merger Transactions will continue to operate, independently, and there
can be no assurances that our and Pointer’s businesses can be integrated successfully. It is possible that the integration
process could result in the loss of key employees, the disruption of either company’s or both companies’ ongoing businesses
or unexpected integration issues, such as higher than expected integration costs and an overall post-completion integration process
that takes longer than originally anticipated. Specifically, issues that must be addressed in integrating our and Pointer’s
operations in order to realize the anticipated benefits of the Merger Transactions so the combined business performs as expected
include, among others:
|
●
|
combining
the companies’ separate operational, financial, reporting and corporate functions;
|
|
●
|
integrating
the companies’ technologies, products and services;
|
|
●
|
identifying
and eliminating redundant and underperforming operations and assets;
|
|
●
|
harmonizing
the companies’ operating practices, employee development, compensation and benefit programs, internal controls and other
policies, procedures and processes;
|
|
●
|
addressing
possible differences in corporate cultures and management philosophies;
|
|
●
|
maintaining
employee morale and retaining key management and other employees;
|
|
●
|
attracting
and recruiting prospective employees;
|
|
●
|
consolidating
the companies’ corporate, administrative and information technology infrastructure;
|
|
●
|
coordinating
sales, distribution and marketing efforts;
|
|
●
|
managing
the movement of certain businesses and positions to different locations;
|
|
●
|
maintaining
existing agreements with customers and vendors and avoiding delays in entering into new agreements with prospective customers
and vendors;
|
|
●
|
coordinating
geographically dispersed organizations; and
|
|
●
|
effecting
potential actions that may be required in connection with obtaining regulatory approvals.
|
In
addition, at times, the attention of certain members of each company’s management and each company’s resources may
be focused on completion of the Merger Transactions and the integration of the businesses of the two companies and diverted from
day-to-day business operations, which may disrupt each company’s ongoing business and, consequently, the business of the
combined company.
Failure
to complete the Merger Transactions could negatively impact our stock price and our future business and financial results.
Our
obligations and the obligations of Pointer to complete the Merger Transactions are subject to the satisfaction or waiver of a
number of conditions. There can be no assurance that the conditions to completion of the Merger Transactions will be satisfied
or waived or that the Merger Transactions will be completed. If the Merger Transactions are not completed for any reason, our
ongoing business may be materially and adversely affected and, without realizing any of the benefits of having completed the Merger
Transactions, we would be subject to a number of risks, including the following:
|
●
|
we
may experience negative reactions from the financial markets, including negative impacts on trading prices of our common stock
and from our customers, vendors, regulators and employees;
|
|
●
|
we
may be required to pay Pointer a termination fee of $2,000,000 if we fail to consummate the Pointer Merger under specified
circumstances;
|
|
●
|
we
will be required to pay certain transactions expenses incurred in connection with the Merger Transactions, whether or not
the Merger Transactions are completed;
|
|
●
|
the
Pointer Merger Agreement and Investment Agreement place certain restrictions on the operation of our business prior to the
closing of the Merger Transactions, and such restrictions, the waiver of which is subject to the consent of the other parties,
may prevent us from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities
during the pendency of the Merger Transactions that we would have made, taken or pursued if these restrictions were not in
place; and
|
|
●
|
matters
relating to the Merger Transactions (including integration planning) will require substantial commitments of time and resources
by our management and the expenditure of significant funds in the form of fees and expenses, which would otherwise have been
devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.
|
In
addition, we could be subject to litigation related to any failure to complete the Merger Transactions or related to any proceeding
to specifically enforce our obligations under the Pointer Merger Agreement and the Investment Agreement.
If
any of these risks materialize, they may materially and adversely affect our business, financial condition, financial results
and stock price.
We
will be subject to business uncertainties and contractual restrictions while the Merger Transactions are pending.
Uncertainty
about the effect of the Merger Transactions on employees, vendors and customers may have an adverse effect on us and consequently
on the combined company after the closing of the Merger Transactions. These uncertainties may impair our ability to retain and
motivate key personnel and could cause customers and others that deal with us to defer or decline entering into contracts with
us or making other decisions concerning us or seek to change existing business relationships with us. In addition, if key employees
depart because of uncertainty about their future roles and the potential complexities of the Merger Transactions, our business
could be harmed. Furthermore, the Pointer Merger Agreement and the Investment Agreement place certain restrictions on the operation
of our business prior to the closing of the Merger Transactions, which may delay or prevent us from undertaking certain actions
or business opportunities that may arise prior to the consummation of the Merger Transactions.
Third
parties may terminate or alter existing contracts or relationships with us.
We
have contracts with customers, vendors and other business partners which may require us to obtain consents from these other parties
in connection with the Merger Transactions. If these consents cannot be obtained, the counterparties to these contracts and other
third parties with which we currently have relationships may have the ability to terminate, reduce the scope of or otherwise materially
adversely alter their relationships with us in anticipation of the Merger Transactions, or with the combined company following
the Merger Transactions. The pursuit of such rights may result in our suffering a loss of potential future revenue, incurring
liabilities in connection with a breach of such agreements or losing rights that are material to our business. Any such disruptions
could limit the combined company’s ability to achieve the anticipated benefits of the Merger Transactions. The adverse effect
of such disruptions could also be exacerbated by a delay in the completion of the Merger Transactions or the termination of the
Merger Transactions.
In
order to complete the Merger Transactions, we and Pointer must obtain certain governmental approvals, and if such approvals are
not granted or are granted with conditions that become applicable to the parties, completion of the Merger Transactions may be
jeopardized or prevented or the anticipated benefits of the Merger Transactions could be reduced.
Consummation
of the Merger Transactions is conditioned upon, among other things, the receipt of certain governmental approvals, including approvals
required under Israeli law. Although the parties have agreed in the Pointer Merger Agreement to use their reasonable best efforts
to make certain governmental filings and obtain the required governmental approvals, there can be no assurance that the required
approvals will be obtained and no assurance that the Merger Transactions will be completed.
In
addition, the governmental authorities from which these approvals are required have broad discretion in administering the governing
laws and regulations, and may take into account various facts and circumstances in their consideration of the Merger Transactions.
These governmental authorities may initiate proceedings seeking to prevent, or otherwise seek to prevent, the Merger Transactions.
As a condition to the approval of the Merger Transactions, these governmental authorities also may impose requirements, limitations
or costs, require divestitures or place restrictions on the conduct of our business or Pointer’s business after completion
of the Merger Transactions.
The
Merger Transactions are subject to a number of closing conditions and, if these conditions are not satisfied, the Pointer Merger
Agreement and the Investment Agreement may be terminated in accordance with their respective terms and the Merger Transactions
may not be completed. In addition, the parties have the right to terminate the Pointer Merger Agreement and Investment Agreement
under other specified circumstances, in which case the Merger Transactions would not be completed.
The
Merger Transactions are subject to a number of closing conditions and, if these conditions are not satisfied or waived (to the
extent permitted by law), the Merger Transactions will not be completed. These conditions include, among others: (i) the absence
of certain legal impediments, (ii) effectiveness of the registration statement on Form S-4 relating to the Merger Transactions,
(iii) obtaining all governmental authorizations, including the lapse of any applicable waiting period, (iv) approval by Pointer’s
shareholders of the Pointer Merger Agreement and the transactions contemplated thereunder, (v) approval by our stockholders of
the Investment Agreement, the issuance of Parent common stock and Parent preferred stock in connection with the Merger Transactions
and certain matters related to Parent’s new certificate of incorporation, (vi) the listing of the common stock of Parent
on Nasdaq and (vii) the consummations of the transactions contemplated in the Investment Agreement. In addition, each party’s
obligation to complete the Merger Transactions is subject to the accuracy of the other parties’ representations and warranties
in the Pointer Merger Agreement and the Investment Agreement (subject in most cases to “material adverse effect” qualifications),
the other parties’ compliance with their respective covenants and agreements in the Pointer Merger Agreement and the Investment
Agreement in all material respects, and the maintenance of certain minimum cash levels.
The
conditions to the closing may not be fulfilled and, accordingly, the Merger Transactions may not be completed. In addition, if
the Merger is not completed by September 30, 2019, any party may choose not to proceed with the Merger Transactions. Moreover,
the parties can mutually decide to terminate the Pointer Merger Agreement or the Investment Agreement at any time prior to the
consummation of the Merger Transactions, before or after receipt of the required approval of our stockholders and Pointer shareholders.
In addition, each party may elect to terminate the Pointer Merger Agreement or Investment Agreement in certain other circumstances.
If either agreement is terminated, we may incur substantial fees and expenses in connection with termination of such agreement
and we will not realize the anticipated benefits of the Merger Transactions.
We
may waive one or more of the closing conditions to the Merger Transactions.
We
have the right to waive certain of the closing conditions to the Merger Transactions. Any such waiver may not require re-solicitation
of stockholders, in which case stockholders will not have the chance to change their votes as a result of any such waiver and
we will have the ability to complete the Merger Transactions without seeking further stockholder approval. Any determination whether
to waive any condition to the Merger Transactions, whether stockholder approval would be re-solicited as a result of any such
waiver or whether the joint proxy statement/prospectus relating to the Merger Transactions would be amended as a result of any
waiver will be made by us at the time of such waiver based on the facts and circumstances as they exist at that time, and any
such waiver could have an adverse effect on Parent.
Both
our stockholders and Pointer’s shareholders will have a reduced ownership and voting interest after the Merger Transactions
and will exercise less influence over management.
After
the completion of the Merger Transactions, our stockholders and Pointer’s shareholders will own a smaller percentage of
Parent than they currently own of us and Pointer, respectively. Based on the trading price of our common stock as of the date
of the Merger Agreement, the estimated number of shares of our common stock and Pointer ordinary shares that are currently expected
to be outstanding immediately prior to the Merger Transactions on a fully-diluted basis, and after giving effect to the issuance
of the Parent convertible preferred stock in the Merger Transactions, it is expected that our stockholders will own approximately
55.6%, and Pointer shareholders will own approximately 29.2%, of Parent immediately after consummation of the Merger Transactions
on a fully-diluted basis. Consequently, our stockholders, as a group, and Pointer shareholders, as a group, will each have reduced
ownership and voting power in the combined company compared to their ownership and voting power in us and Pointer, respectively.
In
connection with the Merger Transactions, the combined company will incur significant indebtedness to finance the Pointer Merger
as well as other transaction-related costs.
On
March 13, 2019, we entered into a commitment letter with Bank Hapoalim B.M. (the “Debt Commitment Letter”) providing
for two five-year senior secured term loan facilities to Pointer Holdco in an aggregate principal amount of $30 million and a
five-year revolving credit facility to Pointer in an aggregate principal amount of $10 million. The term loan facilities will
be used to finance a portion of the cash consideration payable in the Pointer Merger and the revolving credit facility will be
used by Pointer for general working capital purposes, or, at Pointer’s discretion, to finance a portion of the cash consideration
payable in the Pointer Merger. Such indebtedness will have the effect, among other things, of reducing the combined company’s
flexibility to respond to changing business and economic conditions, will increase the combined company’s borrowing costs
and, to the extent that such indebtedness is subject to floating interest rates, may increase the combined company’s vulnerability
to fluctuations in market interest rates. The definitive documents relating to such indebtedness may also require us to satisfy
various covenants, including negative covenants that restrict our or the combined company’s ability to engage in certain
transactions without the consent of the lender. The increased levels of indebtedness could also reduce funds available to fund
our efforts to combine our business with Pointer and realize expected benefits of the Merger Transactions and/or engage in investments
in product development, capital expenditures and other activities and may create competitive disadvantages for us relative to
other companies with lower debt levels. We may be required to raise additional financing for working capital, capital expenditures,
acquisitions or other general corporate purposes. Our ability to arrange additional financing will depend on, among other factors,
our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot
assure you that we will be able to obtain additional financing on terms acceptable to us or at all.
There
can be no assurance that we will be able to secure the funds necessary to pay the cash consideration payable in the Pointer Merger.
We
intend to fund the cash consideration payable in the Pointer Merger with a combination of the net proceeds we receive from the
sale of Parent’s newly created Series A Convertible Preferred Stock pursuant to the terms of the Investment Agreement and
debt financing contemplated by the Debt Commitment Letter. The obligations of the lender to provide the loans contemplated by
the Debt Commitment Letter are subject to a number of conditions and there can be no assurance that we will be able to secure
the debt financing pursuant to the Debt Commitment Letter.
In
the event that the debt financing contemplated by the Debt Commitment Letter is not available, other financing may not be available
on acceptable terms, in a timely manner or at all. If we are unable to secure debt financing, the Merger Transactions may be delayed
or not be completed. In addition, we may be required, pursuant to the terms of the Pointer Merger Agreement, to pay Pointer a
termination fee of $2 million if we fail to consummate the Pointer Merger related to a failure by us to obtain financing.
We
and Pointer may have difficulty attracting, motivating and retaining executives and other key employees in light of the proposed
Merger Transactions.
Our
success after the Merger Transactions will depend in part on our ability to retain key executives and other employees. Uncertainty
about the effect of the Merger Transactions on our and Pointer’s employees may have an adverse effect on each company separately
and consequently the combined business. This uncertainty may impair our and/or Pointer’s ability to attract, retain and
motivate key personnel. Employee retention may be particularly challenging during the pendency of the Merger Transactions, as
our and Pointer’s employees may experience uncertainty about their future roles in the combined business.
Additionally,
Pointer’s officers and employees may hold ordinary shares and vested options to purchase ordinary shares of Pointer, and,
if the Merger Transactions are completed, these officers and employees may be entitled to the merger consideration in respect
of such ordinary shares and vested options. Certain officers may also hold options and restricted stock units of Pointer that
are subject to accelerated vesting upon completion of the Merger Transactions. These factors, individually or in the aggregate,
could make retention of Pointer officers and employees more difficult.
Furthermore,
if any of our or Pointer’s key employees depart or are at risk of departing, including because of issues relating to the
uncertainty and difficulty of integration, financial security or a desire not to become employees of the combined business, we
may have to incur significant costs in retaining such individuals or in identifying, hiring and retaining replacements for departing
employees and may lose significant expertise and talent, and the combined company’s ability to realize the anticipated benefits
of the Merger Transactions may be materially and adversely affected. No assurance can be given that the combined company will
be able to attract or retain key employees to the same extent that we or Pointer has been able to attract or retain employees
in the past.
The
Investment Agreement limits our ability to pursue alternatives to the Merger Transactions.
The
Investment Agreement contains provisions that make it more difficult for us to enter into alternative transactions. The Investment
Agreement contains certain provisions that restrict our ability to solicit or facilitate proposals from third parties with respect
to transactions involving the financing or sale of the Company, or provide non-public information to, or otherwise participate
or engage in discussions or negotiations with, third parties or take certain other actions that would reasonably be expected to
lead to a third-party acquisition proposal. Further, there are only limited exceptions to our agreement that our Board of Directors
will not change its recommendation in favor of the adoption of the Investment Agreement and certain other stockholder approvals
required in connection with the Merger Transactions. However, at any time prior to the receipt of the required stockholder approvals,
our Board of Directors may make an adverse recommendation change if it concludes in good faith, based on the advice of our outside
financial advisors and outside legal counsel, that the failure to take such action would result in a violation of the fiduciary
duties of our Board of Directors under applicable law. Regardless of whether our Board of Directors has made an adverse recommendation
change, we may still be compelled to hold a special meeting of our stockholders relating to the Merger Transactions.
While
we believe these provisions are reasonable, customary and not preclusive of other offers, the provisions might discourage a third
party that has an interest in acquiring all or a significant part of the Company from considering or proposing such acquisition,
even if such party were prepared to enter into an agreement that may be more favorable to us and/or our stockholders.
We
will incur significant transaction and merger-related transition costs in connection with the Merger Transactions. If the Pointer
Merger Agreement is terminated, we may, under certain circumstances, be required to pay a termination fee to Pointer.
We
expect that we will incur significant, non-recurring costs in connection with consummating the Merger Transactions and integrating
the operations of the two companies post-closing. We may incur additional costs to maintain employee morale and to retain key
employees. We will also incur significant fees and expenses relating to financing arrangements and legal, accounting and other
transaction fees and other costs associated with the Merger Transactions. Some of these costs are payable regardless of whether
the Merger Transactions are completed. In addition, we may be required to pay Pointer a termination fee of $2,000,000 if we fail
to consummate the Pointer Merger under specified circumstances. Though we continue to assess the magnitude of these costs, additional
unanticipated costs may be incurred in the Merger Transactions and the integration of our and Pointer’s businesses.
We
may be the target of securities class action and derivative lawsuits which could result in substantial costs and may delay or
prevent the Merger Transactions from being completed.
Securities
class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements.
Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time
and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial
condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger Transactions,
then that injunction may delay or prevent the Merger Transactions from being completed, which may adversely affect our or, if
the Merger Transactions are completed but delayed, the combined company’s business, financial position and results of operations.
The
combined company will be subject to the risks that we face, in addition to the risks faced by Pointer.
Following
completion of the Merger Transactions, the combined company will be subject to numerous risks and uncertainties, including the
risks that we face and the risks faced by Pointer, which are described in the documents that Pointer has filed with the SEC. If
any such risks actually occur, the business, financial condition, results of operations or cash flows of the combined company
could be materially adversely affected.