Company Quick10K Filing
Quick10K
Iteris
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$5.15 33 $172
10-Q 2019-06-30 Quarter: 2019-06-30
10-K 2019-03-31 Annual: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2018-03-31 Annual: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-09-12 Shareholder Vote
8-K 2019-08-26 Officers, Exhibits
8-K 2019-08-06 Earnings, Exhibits
8-K 2019-07-02 M&A, Sale of Shares, Regulation FD, Exhibits
8-K 2019-06-13 Other Events, Exhibits
8-K 2019-06-10 Enter Agreement, Exhibits
8-K 2019-06-03 Earnings, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-11 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-09-28 Amend Bylaw, Exhibits
8-K 2018-09-27 Enter Agreement, Leave Agreement, Shareholder Rights, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-06-07 Earnings, Exhibits
8-K 2018-05-11 Officers, Amend Bylaw, Exhibits
8-K 2018-03-29 Officers
GLW Corning 21,487
TDS Telephone & Data Systems 2,806
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ESE ESCO 1,947
FN Fabrinet 1,787
PTNR Partner Communications 646
NSSC Napco Security Technologies 597
WIFI Boingo Wireless 530
CEL Cellcom Israel 270
AMX America Movil 0
ITI 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a19-11539_1ex31d1.htm
EX-31.2 a19-11539_1ex31d2.htm
EX-32.1 a19-11539_1ex32d1.htm
EX-32.2 a19-11539_1ex32d2.htm

Iteris Earnings 2019-06-30

ITI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-11539_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

 

Commission file number: 001-08762

 

 

ITERIS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2588496

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1700 Carnegie Avenue, Suite 100

 

 

Santa Ana, California

 

92705

(Address of principal executive office)

 

(Zip Code)

 

(949) 270-9400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.10 par value

 

ITI

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act. None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company x

 

 

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of July 29, 2019, there were 40,490,358 shares of our common stock outstanding.

 

 

 


Table of Contents

 

ITERIS, INC.

Quarterly Report on Form 10-Q

 

Table of Contents

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2019 AND MARCH 31, 2019

1

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

2

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

3

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

4

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

20

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

26

 

 

 

PART II.

OTHER INFORMATION

27

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

27

 

 

 

ITEM 1A.

RISK FACTORS

27

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

37

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

37

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

37

 

 

 

ITEM 5.

OTHER INFORMATION

37

 

 

 

ITEM 6.

EXHIBITS

37

 

Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and its wholly-owned subsidiary, ClearAg, Inc. CheckPoint™, ClearAg®, ClearGuide™, ClearPath Weather®, CVIEW-Plus™, Edge®, EdgeConnect™, EMPower®, EvapoSmart®, IMFocus™, inspect™, iPeMS®, Iteris®, Iteris SPM™, Next®, P10™, P100™, PedTrax®, SmartCycle®, SmartCycle Bike Indicator™, SmartSpan®, SPM™ (logo), UCRLink™, Vantage®, VantageLive!™, Vantage Next®, VantagePegasus®, VantageRadius™, Vantage Vector®, Velocity®, VersiCam™ and WeatherPlot® are among, but not all of, the trademarks of Iteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners.

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

Iteris, Inc.

Unaudited Consolidated Balance Sheets

(In thousands, except par values)

 

 

 

June 30,

 

March 31,

 

 

 

2019

 

2019

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

15,234

 

$

7,071

 

Short-term investments

 

20,189

 

1,935

 

Trade accounts receivable, net of allowance for doubtful accounts of $546 and $539 at June 30, 2019 and March 31, 2019, respectively

 

16,479

 

16,929

 

Unbilled accounts receivable

 

6,755

 

6,487

 

Inventories

 

2,389

 

2,916

 

Prepaid expenses and other current assets

 

1,675

 

1,367

 

Total current assets

 

62,721

 

36,705

 

Property and equipment, net

 

1,883

 

1,965

 

Right-of-use assets, net

 

12,992

 

 

Intangible assets, net

 

3,255

 

3,286

 

Goodwill

 

15,150

 

15,150

 

Other assets

 

954

 

849

 

Total assets

 

$

96,955

 

$

57,955

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

8,518

 

$

9,441

 

Accrued payroll and related expenses

 

8,023

 

6,536

 

Accrued liabilities

 

3,540

 

2,370

 

Deferred revenue

 

4,491

 

4,883

 

Total current liabilities

 

24,572

 

23,230

 

Deferred rent

 

 

455

 

Lease liabilities

 

12,144

 

 

Deferred income taxes

 

65

 

65

 

Unrecognized tax benefits

 

152

 

150

 

Total liabilities

 

36,933

 

23,900

 

Commitments and contingencies (Note 5)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $1.00 par value:

 

 

 

 

 

Authorized shares - 2,000

 

 

 

 

 

Issued and outstanding shares - none

 

 

 

Common stock, $0.10 par value:

 

 

 

 

 

Authorized shares - 70,000 at June 30, 2019 and March 31, 2019

 

 

 

 

 

Issued and outstanding shares - 39,620 at June 30, 2019 and 33,377 at March 31, 2019

 

3,962

 

3,338

 

Additional paid-in capital

 

169,175

 

142,260

 

Accumulated deficit

 

(113,115

)

(111,543

)

Total stockholders’ equity

 

60,022

 

34,055

 

Total liabilities and stockholders’ equity

 

$

96,955

 

$

57,955

 

 

See accompanying notes.

 

1


Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Product revenues

 

$

14,517

 

$

11,918

 

Service revenues

 

12,090

 

13,557

 

Total revenues

 

26,607

 

25,475

 

Cost of product revenues

 

8,495

 

6,494

 

Cost of service revenues

 

7,705

 

8,789

 

Total cost of revenues

 

16,200

 

15,283

 

Gross profit

 

10,407

 

10,192

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

10,068

 

9,630

 

Research and development

 

1,844

 

2,089

 

Amortization of intangible assets

 

66

 

65

 

Total operating expenses

 

11,978

 

11,784

 

Operating loss

 

(1,571

)

(1,592

)

Non-operating income (expense):

 

 

 

 

 

Other income (expense), net

 

(10

)

15

 

Interest income, net

 

33

 

39

 

Loss from operations before income taxes

 

(1,548

)

(1,538

)

Provision for income taxes

 

(24

)

(41

)

Net loss

 

$

(1,572

)

$

(1,579

)

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.05

)

$

(0.05

)

 

 

 

 

 

 

Shares used in basic per share calculations

 

34,268

 

33,201

 

Shares used in diluted per share calculations

 

34,268

 

33,201

 

 

See accompanying notes.

 

2


Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(1,572

)

$

(1,579

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Right-of-use assets non-cash expense

 

423

 

 

Deferred income taxes

 

2

 

2

 

Depreciation of property and equipment

 

198

 

265

 

Stock-based compensation

 

602

 

522

 

Amortization of intangible assets

 

247

 

265

 

Changes in operating assets and liabilities, net of effects of discontinued operation:

 

 

 

 

 

Accounts receivable

 

450

 

(3,662

)

Unbilled accounts receivable and deferred revenue, net

 

(660

)

(944

)

Inventories

 

527

 

125

 

Prepaid expenses and other assets

 

(413

)

(35

)

Accounts payable, accrued expenses, and other liabilities

 

8

 

3,015

 

Net cash used in operating activities

 

(188

)

(2,026

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(116

)

(229

)

Purchases of investments

 

(20,179

)

(3,705

)

Maturities of investments

 

1,925

 

357

 

Capitalized software development costs

 

(216

)

(82

)

Net proceeds from sale of discontinued operation

 

 

107

 

Net cash used in investing activities

 

(18,586

)

(3,552

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from stock option exercises

 

14

 

41

 

Proceeds from ESPP purchases

 

172

 

165

 

Proceeds from issuance of common stock, net of costs

 

26,751

 

 

Net cash provided by financing activities

 

26,937

 

206

 

Increase (decrease) in cash and cash equivalents

 

8,163

 

(5,372

)

Cash and cash equivalents at beginning of period

 

7,071

 

10,152

 

Cash and cash equivalents at end of period

 

$

15,234

 

$

4,780

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

42

 

$

49

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Lease liabilities arising from obtaining right-of-use assets

 

$

43

 

$

 

 

See accompanying notes.

 

3


Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(In thousands)

 

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity

 

Balance at March 31, 2018

 

33,186

 

$

3,318

 

$

139,722

 

$

(103,519

)

$

39,521

 

Adoption of ASU 2014-09 (see Note 1)

 

 

 

 

(208

)

(208

)

Stock option exercises

 

17

 

2

 

39

 

 

41

 

Issuance of shares pursuant to Employee Stock Purchase Plan

 

36

 

4

 

161

 

 

 

165

 

Stock-based compensation

 

 

 

522

 

 

522

 

Net loss

 

 

 

 

 

 

 

(1,579

)

(1,579

)

Balance at June 30, 2018

 

33,239

 

$

3,324

 

$

140,444

 

$

(105,306

)

$

38,462

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

33,377

 

$

3,338

 

$

142,260

 

$

(111,543

)

$

34,055

 

Stock option exercises

 

10

 

1

 

13

 

 

14

 

Issuance of shares pursuant to Employee Stock Purchase Plan

 

48

 

5

 

167

 

 

 

172

 

Stock-based compensation

 

 

 

602

 

 

602

 

Issuance of shares pursuant to vesting of restricted stock units, net of payroll withholding taxes

 

2

 

 

 

 

 

Issuance of common stock in connection with public offering

 

6,183

 

618

 

26,133

 

 

26,751

 

Net loss

 

 

 

 

 

 

 

(1,572

)

(1,572

)

Balance at June 30, 2019

 

39,620

 

$

3,962

 

$

169,175

 

$

(113,115

)

$

60,022

 

 

4


Table of Contents

 

Iteris, Inc.

Notes to Unaudited Consolidated Financial Statements

June 30, 2019

 

1.                                    Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Iteris, Inc. (referred to collectively with its wholly-owned subsidiary, ClearAg, Inc., in this report as “Iteris”, the “Company”, “we”, “our”, and “us”) is a provider of essential applied informatics that enable smart transportation and digital agriculture. Municipalities, government agencies, crop science companies, agriculture service providers and other agribusinesses use our solutions to make roads safer and travel more efficient, as well as farmlands more sustainable, healthy and productive. As a pioneer in intelligent transportation systems (‘‘ITS’’) technology for more than two decades, our intellectual property, products, software-as-a-service (‘‘SaaS’’) offerings and weather forecasting systems offer a comprehensive range of ITS solutions to our customers throughout the U.S. and internationally. In the digital agriculture market, we have combined our intellectual property with enhanced atmospheric, land surface and agronomic modeling techniques to offer smart content and analytic solutions that provide analytical support to large enterprises in the agriculture industry, such as seed and crop protection companies, integrated food companies, and agricultural equipment manufacturers and service providers. We believe our products, solutions and services improve and safely optimize mobility within our communities, while minimizing environmental impact on roads and lands. We continue to make significant investments to leverage our existing technologies and further expand both our advanced detection sensors and performance analytics systems in the transportation infrastructure market, while supporting the agriculture market with our smart content and digital agriculture platform, and always exploring strategic alternatives intended to optimize the value of all of our businesses. Iteris was incorporated in Delaware in 1987 and has operated in its current form since 2004.

 

Recent Developments

 

On June 13, 2019, the Company completed an underwritten public offering of 6,182,797 shares of the Company’s common stock for net proceeds to the Company of approximately $26.8 million, after deducting underwriting discounts and estimated offering expenses payable by the Company.  The Company used approximately $6,185,000 of the net proceeds of this offering to pay the cash portion of the purchase price in the acquisition of Albeck Gerken, Inc. (“AGI”), a privately-held professional transportation engineering services firm headquartered in Tampa, Florida (see Note 11, Subsequent Event), and plans to use the balance of the net proceeds for general corporate purposes and possibly for other future acquisitions.

 

Basis of Presentation

 

Our unaudited consolidated financial statements include the accounts of Iteris, Inc. and its subsidiary, and have been prepared in accordance with the rules of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting, which permit certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“GAAP”) to be condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (“Fiscal 2019”), filed with the SEC on June 6, 2019. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three month period ended June 30, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2020 (“Fiscal 2020”) or any other periods.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in the preparation of the consolidated financial statements include revenue recognition, the collectability of accounts receivable and related allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, warranty reserves and other contingencies, costs to complete long-term contracts, indirect cost rates used in cost plus contracts, the valuation of inventories, the valuation of purchased intangible assets and goodwill, the valuation of investments, estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill, and fair value of our stock option awards used to calculate stock-based compensation.

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services are transferred to our customers, in a gross amount that reflects the consideration that we expect to be entitled to in exchange for those goods or services. We generate all of our revenue from contracts with customers.

 

5


Table of Contents

 

Product revenue related contracts with customers begin when we acknowledge a purchase order for a specific customer order of product to be delivered in the near term. These purchase orders are short-term in nature. Product revenue is recognized at a point in time upon shipment or upon customer receipt of the product, depending on shipping terms. The Company determined that this method best represents the transfer of goods as transfer of control typically occurs upon shipment or upon customer receipt of the product.

 

Service revenues, primarily derived from the Transportation Systems and Agriculture and Weather Analytics segments, are primarily from long-term engineering and consulting service contracts with governmental agencies. These contracts generally include performance obligations in which control is transferred over time. We recognize revenue on fixed fee contracts, over time, using the proportion of actual costs incurred to the total costs expected to complete the contract performance obligation. The Company determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed fee contract performance obligation. Time & Materials (“T&M”) and Cost Plus Fixed Fee (“CPFF”) contracts are considered variable consideration. However, performance obligations with these fee types qualify for the “Right to Invoice” Practical Expedient. Under this practical expedient, the Company is allowed to recognize revenue, over time, in the amount to which the Company has a right to invoice. In addition, the Company is not required to estimate such variable consideration upon inception of the contract and reassess the estimate each reporting period. The Company determined that this method best represents the transfer of services as, upon billing, the Company has a right to consideration from a customer in an amount that directly corresponds with the value to the customer of the Company’s performance completed to date.

 

Service revenues also consist of revenues derived from maintenance support and the use of the Company’s service platforms and APIs on a subscription basis. We generate this revenue from fees for maintenance support, monthly active user fees, SaaS fees, and hosting and storage fees. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a time-based measure of progress to the total transaction price, which results in ratable recognition over the term of the contract. The Company determined that this method best represents the transfer of services as the customer obtains equal benefit from the service throughout the service period.

 

The Company accounts for individual goods and services separately if they are distinct performance obligations, which often requires significant judgment based upon knowledge of the products and/or services, the solution provided and the structure of the sales contract. In SaaS agreements, we provide a service to the customer which combines the software functionality, maintenance and hosting into a single performance obligation. In product related contracts, a purchase order may contain different products, each constituting a separate performance obligation.

 

We generally estimate variable consideration at the most likely amount to which we expect to be entitled and in certain cases based on the expected value, which requires judgment. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We review and update these estimates on a quarterly basis.

 

The Company’s typical performance obligations include the following:

 

Performance Obligation

 

When Performance
Obligation is Typically
Satisfied

 

When Payment is
Typically Due

 

How Standalone
Selling Price is
Typically Estimated

Product Revenues

 

 

 

 

 

 

Standard purchase orders for delivery of a tangible product

 

Upon shipment (point in time)

 

Within 30 days of delivery

 

Observable transactions

Engineering services where the deliverable is considered a product

 

As work is performed (over time)

 

Within 30 days of services being invoiced

 

Estimated using a cost-plus margin approach

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

Engineering and consulting services

 

As work is performed (over time)

 

Within 30 days of services being invoiced

 

Estimated using a cost-plus margin approach

SaaS

 

Over the course of the SaaS service once the system is available for use (over time)

 

At the beginning of the contract period

 

Estimated using a cost-plus margin approach

 

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Disaggregation of Revenue

 

The Company disaggregates revenue from contracts with customers into reportable segments and the nature of the products and services. See Note 10, Business Segment Information, for our revenue by reportable segment.

 

Trade Accounts Receivable and Contract Balances

 

We classify our right to consideration in exchange for goods and services as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in trade accounts receivable, net in our unaudited consolidated balance sheet at their net estimated realizable value.

 

The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. If warranted, the allowance is increased by the Company’s provision for doubtful accounts, which is charged against income. All recoveries on receivables previously charged off are included in income, while direct charge-offs of receivables are deducted from the allowance.

 

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented as unbilled accounts receivable on the accompanying balance sheet. For example, we would record a contract asset if we record revenue on a professional services engagement, but are not entitled to bill until we achieve specified milestones.

 

Our contract assets and refund liabilities are reported in a net position on a contract basis at the end of each reporting period. Refund liabilities are consideration received in advance of the satisfaction of performance obligations.

 

Transaction Price Allocated to the Remaining Performance Obligations

 

As of June 30, 2019, the aggregate amount of transaction price allocated to remaining performance obligations was immaterial primarily as a result of termination provisions within our contracts which make the duration of the accounting term of the contract one year or less.

 

Deferred Revenue

 

Deferred revenue in the accompanying unaudited consolidated balance sheets is comprised of refund liabilities related to billings and consideration received in advance of the satisfaction of performance obligations.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

 

Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high quality financial institutions, and therefore are believed to have minimal credit risk.

 

Our accounts receivable are primarily derived from billings with customers located throughout North America, as well as in Europe and South America. We generally do not require collateral or other security from our domestic customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

 

We currently have, and historically have had, a diverse customer base. For the three months ended June 30, 2019, no individual customer represented greater than 10% of our total revenues, and for the three months ended June 30, 2018, one individual customer represented approximately 29% of our total revenues. As of June 30, 2019, and March 31, 2019, no individual customer represented greater than 10% of our total accounts receivable.

 

Fair Values of Financial Instruments

 

The fair value of cash equivalents, receivables, accounts payable and accrued expenses approximate carrying value because of the short period of time to maturity. Our investments are measured at fair value on a recurring basis.

 

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The framework for measuring fair value and related disclosure requirements about fair value measurements are provided in Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (“ASC 820”). This pronouncement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by ASC 820 contains three levels as follows:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash and short-term investments with initial maturities of 90 days or less.

 

Investments

 

The Company’s investments are classified as either held-to-maturity, available-for-sale or trading, in accordance with FASB ASC 320 — Investments — Debt and Equity Securities. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity. Trading securities are those securities that the Company intends to sell in the near term. All other securities not included in the held-to-maturity or trading category are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, which approximates fair market value. Trading securities are carried at fair value with unrealized gains and losses charged to earnings. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive loss as a separate component of stockholders’ equity. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available (see Note 3 — Fair Value Measurements). As of June 30, 2019, all of our investments are available-for-sale. Under FASB ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of Credit Loss if the investor does not intend to sell the security, and will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive loss, net of applicable taxes. The Company evaluates whether the decline in fair value of its investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer’s financial condition and, if applicable, information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and the Company’s intent and ability to retain the investment for a reasonable period of time sufficient to allow for any anticipated recovery of fair value.

 

Allowance for Doubtful Accounts

 

The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing credit evaluations of our customers’ financial condition. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized accounts receivable to the amount we reasonably believe will be collected. We also maintain an allowance based on our historical collections experience. When we determine that collection is not likely, we write off accounts receivable against the allowance for doubtful accounts

 

Inventories

 

Inventories consist of finished goods, work-in-process and raw materials and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.

 

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Table of Contents

 

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful life ranging from three to eight years. Leasehold improvements are depreciated over the term of the related lease or the estimated useful life of the improvement, whichever is shorter.

 

Goodwill and Long-Lived Assets

 

We perform an annual qualitative assessment of our goodwill during the fourth fiscal quarter, or more frequently, to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required; if otherwise, we compare the fair value of our reporting unit to its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. As of June 30, 2019, we determined that there were no impairment indicators for goodwill.

 

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset or asset group is expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets. As of June 30, 2019, there was no impairment to our long-lived and intangible assets.

 

Income Taxes

 

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made. As such, as of June 30, 2019, we determined it was appropriate to record a full valuation allowance against our deferred tax assets. We will continuously reassess the appropriateness of maintaining a valuation allowance.

 

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

Stock-Based Compensation

 

We record stock-based compensation in our unaudited consolidated statements of operations as an expense, based on the estimated grant date fair value of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of common stock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements, as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

 

Research and Development Expenditures

 

Research and development expenditures are charged to expense in the period incurred.

 

Shipping and Handling Costs

 

Shipping and handling costs are included as cost of revenues in the period during which the products ship.

 

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Table of Contents

 

Sales Taxes

 

Sales taxes are presented on a net basis (excluded from revenues) in the unaudited consolidated statements of operations.

 

Warranty

 

We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold to various original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited consolidated balance sheets. We do not provide any service-type warranties.

 

Repair and Maintenance Costs

 

We incur repair and maintenance costs in the normal course of business. Should the repair or maintenance result in a permanent improvement to one of our leased facilities, the cost is capitalized as a leasehold improvement and amortized over its useful life or the remainder of the lease period, whichever is shorter. Non-permanent repair and maintenance costs are charged to expense as incurred.

 

Comprehensive Loss

 

The difference between net loss and comprehensive loss was de minimis for the three months ended June 30, 2019 and 2018.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU No. 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either “finance” or “operating,” with classification affecting the pattern of expense recognition in the income statement. This update was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. As a result of the adoption of ASU 2016-02, on April 1, 2019, the Company recognized (a) an operating lease liability of $14.2 million, which represents the present value of our remaining lease payments and (b) a related right-of-use asset of $13.4 million. In addition, the Company derecognized approximately $827,000 of deferred rent liability. The adoption of ASU 2016-02 did not have a material impact on the Company’s statement of operations, cash flows, or stockholders’ equity. Due to the adoption of the standard using the retrospective cumulative-effect adjustment method, there are no changes to our previously reported results prior to April 1, 2019. See Note 6, Right-of-Use Assets and Lease Liabilities, for additional details.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirement for Fair Value Measurements (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the impact of ASU 2018-13 on our unaudited consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal Use Software (subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the impact of ASU 2018-15 on our unaudited consolidated financial statements.

 

2.                                      Supplemental Financial Information

 

Inventories

 

The following table presents details of our inventories:

 

 

 

June 30,

 

March 31,

 

 

 

2019

 

2019

 

 

 

(In thousands)

 

Materials and supplies

 

$

1,431

 

$

1,517

 

Work in process

 

104

 

356

 

Finished goods

 

854

 

1,043

 

 

 

$

2,389

 

$

2,916

 

 

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Table of Contents

 

Property and Equipment, net

 

The following table presents details of our property and equipment, net:

 

 

 

June 30,

 

March 31,

 

 

 

2019

 

2019

 

 

 

(In thousands)

 

Equipment

 

$

6,537

 

$

6,444

 

Leasehold improvements

 

2,939

 

2,939

 

Accumulated depreciation

 

(7,593

)

(7,418

)

 

 

$

1,883

 

$

1,965

 

 

Depreciation expense was approximately $198,000 and $265,000 for the three months ended June 30, 2019 and 2018, respectively.

 

Intangible Assets

 

There are no indefinite lived intangible assets on our unaudited consolidated balance sheets. The following table presents details of our net intangible assets:

 

 

 

June 30, 2019

 

March 31, 2019

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

$

1,856

 

$

(1,856

)

$

 

$

1,856

 

$

(1,856

)

$

 

Customer contracts / relationships

 

750

 

(750

)

 

750

 

(750

)

 

Trade names and non-compete agreements

 

1,110

 

(1,110

)

 

1,110

 

(1,110

)

 

Capitalized software development costs

 

5,984

 

(2,729

)

3,255

 

5,768

 

(2,482

)

3,286

 

Total

 

$

9,700

 

$

(6,445

)

$

3,255

 

$

9,484

 

$

(6,198

)

$

3,286

 

 

Amortization expense for intangible assets subject to amortization was approximately $247,000 and $265,000 for the three months ended June 30, 2019 and 2018, respectively. Approximately $181,000 and $200,000 of the intangible asset amortization was recorded to cost of revenues, and approximately $66,000 and $65,000 was recorded to amortization expense for the three months ended June 30, 2019 and 2018, respectively, in the unaudited consolidated statements of operations.

 

As of June 30, 2019, future estimated amortization expense is as follows:

 

Fiscal Year Ending March 31,

 

 

 

(In thousands)

 

 

 

Remainder of 2020

 

$

730

 

2021

 

657

 

2022

 

442

 

2023

 

295

 

2024

 

266

 

Thereafter

 

865

 

 

 

$

3,255

 

 

Warranty Reserve Activity

 

Warranty reserve is recorded as accrued liabilities in the accompanying unaudited consolidated balance sheets. The following table presents activity related to the warranty reserve:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Balance at beginning of fiscal year

 

$

461

 

$

403

 

Additions charged to cost of sales

 

265

 

335

 

Warranty claims

 

(223

)

(210

)

Balance at end of period

 

$

503

 

$

528

 

 

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Earnings Per Share

 

The following table sets forth the computation of basic and diluted net loss per share:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Numerator:

 

 

 

 

 

Net loss

 

$

(1,572

)

$

(1,579

)

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares used in basic computation

 

34,268

 

33,201

 

Dilutive stock options

 

 

 

Dilutive restricted stock units

 

 

 

Weighted average common shares used in diluted computation

 

34,268

 

33,201

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

Basic

 

$

(0.05

)

$

(0.05

)

Diluted

 

$

(0.05

)

$

(0.05

)

 

The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted loss from continuing operations per share as their effect would have been anti-dilutive:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

Stock options

 

5,061

 

4,169

 

Restricted stock units

 

125

 

148

 

 

3.                                    Fair Value Measurements

 

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a three tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities or prices quoted in inactive markets; and Level 3, defined as unobservable inputs that are significant to the fair value of the asset or liability, and for which little or no market data exists, therefore requiring management to utilize its own assumptions to provide its best estimate of what market participants would use in valuing the asset or liability.

 

We did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of June 30, 2019 or March 31, 2019. Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a nonrecurring basis, generally when there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. No non-financial assets were measured at fair value at June 30, 2019 and March 31, 2019. The following tables present the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy:

 

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Table of Contents

 

 

 

As of June 30, 2019

 

 

 

Amortized Cost

 

Gross
Unrealized Loss

 

Gross
Unrealized Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,106

 

$

 

$

 

$

4,106

 

Subtotal

 

4,106

 

 

 

4,106

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

Commercial paper

 

8,429

 

(7

)

 

8,422

 

Corporate notes and bonds

 

2,325

 

(1

)

 

2,324

 

US Treasuries

 

4,500

 

(2

)

 

4,498

 

US Government agencies

 

4,948

 

(3

)

 

4,945

 

Subtotal

 

20,202

 

(13

)

 

20,189

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

24,308

 

$

(13

)

$

 

$

24,295

 

 

 

 

As of March 31, 2019

 

 

 

Amortized Cost

 

Gross
Unrealized Loss

 

Gross

Unrealized Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,338

 

$

 

$

 

$

3,338

 

Subtotal

 

3,338

 

 

 

3,338

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

1,434

 

(1

)

 

1,433

 

US Treasuries

 

502

 

 

 

502

 

Subtotal

 

1,936

 

(1

)

 

1,935

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,274

 

$

(1

)

$

 

$

5,273

 

 

4.                                      Income Taxes

 

The effective tax rate used for interim periods is the estimated annual effective tax rate, based on current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur.

 

Income tax expense for the three months ended June 30, 2019 was approximately $24,000, or (1.2%) of pre-tax loss as compared with an expense of approximately $41,000, or (2.7%) of pre-tax loss for the three months ended June 30, 2018.

 

In assessing the realizability of our deferred tax assets, we review all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance. As we have experienced a cumulative pre-tax loss over the trailing three years, we continue to maintain a valuation allowance against our deferred tax assets.

 

5.                                      Commitments and Contingencies

 

Litigation and Other Contingencies

 

As a provider of traffic engineering services, hardware products, software and other various solutions for the traffic and agricultural industries, the Company is, and may in the future from time to time, be involved in litigation relating to claims arising out of its operations in the normal course of business. While the Company cannot accurately predict the outcome of any such litigation, the Company is not a party to any legal proceeding, the outcome of which, in management’s opinion, individually or in the aggregate, would have a material effect on the Company’s unaudited consolidated results of operations, financial position or cash flows.

 

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Related Party Transaction

 

We previously subleased office space to Maxxess Systems, Inc. (“Maxxess”), one of our former subsidiaries that we sold in September 2003. The sublease terminated in September 2007, at which time Maxxess owed us an aggregate of $274,000. Maxxess executed a promissory note for such amount, which was subsequently amended and restated on July 23, 2013, August 11, 2016 and on August 11, 2018. The amended and restated note bears interest at a rate of 6% per annum, compounded annually, with accrued interest payable annually on the first business day of each calendar year. When authorized by the Company, Maxxess may pay down the balance of this note by providing consulting services to Iteris. We have previously fully reserved for amounts owed to us by Maxxess and the outstanding principal balance remains fully reserved. As of June 30, 2019, approximately $146,000 of the original principal balance was outstanding and payable to Iteris. Maxxess is currently owned by an investor group that includes, among others, one former Iteris director, who has not been a director of Iteris since September 2013, and one existing director of Iteris, who currently owns less than 2% of Maxxess’ capital stock.

 

6.                                      Right-of-Use Assets and Lease Liabilities

 

We have various operating leases for our offices, office equipment and vehicles in the United States. These leases expire at various times through 2027. Certain lease agreements contain renewal options from 1 to 5 years, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate.

 

We determine if an arrangement contains a lease at inception and determine the classification of the lease, as either operating or finance, at commencement.

 

Right-of-use assets and lease liabilities are recorded based on the present value of future lease payments which factors in certain qualifying initial direct costs incurred as well as any lease incentives received. If an implicit rate is not readily determinable, we utilize inputs from third-party lenders to determine the appropriate discount rate. Lease expense for operating lease payments are recognized on a straight-line basis over the lease term. Finance leases incur interest expense using the effective interest method in addition to amortization of the leased asset on straight-line basis, both over the applicable lease term. Lease terms may factor in options to extend or terminate the lease.

 

We adhere to the short-term lease recognition exemption for all classes of assets (i.e. facilities and equipment). As a result, leases with an initial term of twelve months or less are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. In addition, for certain equipment leases, we account for lease and non-lease components, such as services, as a single lease component as permitted.

 

Through March 31, 2019, we recognized rent expense related to operating leases on a straight-line basis over the lease term and, accordingly, recorded the difference between rent payments and rent expense as a deferred rent liability. Effective April 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases, or ASC 842.

 

The table below presents lease-related assets and liabilities recorded on the unaudited consolidated balance sheet as follows:

 

 

 

Classification

 

June 30, 2019

 

 

 

 

 

(In thousands)

 

Assets

 

 

 

 

 

Operating lease right-of-use-assets

 

Right-of-use assets, net

 

$

12,992

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Operating lease liabilities (short-term)

 

Accrued liabilities

 

$

1,686

 

Operating lease liabilities (long-term)

 

Lease liabilities

 

12,144

 

Total lease liabilities

 

 

 

$

13,830

 

 

Lease Costs

 

We recorded approximately $598,000 of lease costs in on our unaudited consolidated statements of operations for the three months ended June 30, 2019. The Company currently has no variable lease costs.

 

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Supplemental Information

 

The table below presents supplemental information related to operating leases during the three months ended June 30, 2019 (in thousands, except weighted average information):

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

587

Right-of-use assets obtained in exchange for new operating lease liabilities

 

43

Weighted average remaining lease term

 

7.8 years

Weighted average discount rate 

 

5.0%

 

Undiscounted Cash Flows

 

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of June 30, 2019:

 

Fiscal Year Ending March 31,

 

 

 

(In thousands)

 

 

 

Remainder of 2020

 

$

1,761

 

2021

 

2,277

 

2022

 

2,070

 

2023

 

1,974

 

2024

 

1,941

 

Thereafter

 

6,726

 

Total lease payments

 

16,749

 

Less imputed interest

 

(2,919

)

Present value of future lease payments

 

13,830

 

Less current obligations under leases

 

(1,686

)

Long-term lease obligations

 

$

12,144

 

 

Disclosure Related to Periods Prior to Adoption of New Lease Standard

 

Minimum lease payments under operating leases with non-cancelable terms in excess of one year as of March 31, 2019, were as follows:

 

Fiscal Year Ending March 31,

 

 

 

(In thousands)

 

 

 

2020

 

$

2,408

 

2021

 

2,150

 

2022

 

1,981

 

2023

 

548

 

2024

 

177

 

Thereafter

 

 

Total minimum lease payments

 

$

7,264

 

 

7.                                      Stock-Based Compensation

 

We currently maintain two stock incentive plans, the 2007 Omnibus Incentive Plan and the 2016 Omnibus Incentive Plan (the “2016 Plan”). Of these plans, we may only grant future awards from the 2016 Plan. The 2016 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), cash incentive awards and other stock-based awards. At June 30, 2019, there were approximately 2.7 million shares of common stock available for grant or issuance under the 2016 Plan. Total stock options vested and expected to vest were approximately 5.0 million as of June 30, 2019.

 

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Stock Options

 

A summary of activity with respect to our stock options for the three months ended June 30, 2019 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price Per
Share

 

 

 

(In thousands)

 

 

 

Options outstanding at March 31, 2019

 

5,035

 

$

3.70

 

Granted

 

 

 

Exercised

 

(10

)

1.41

 

Forfeited

 

(9

)

4.54

 

Expired

 

 

 

Options outstanding at June 30, 2019

 

5,016

 

$

3.70

 

 

Restricted Stock Units

 

A summary of activity with respect to our RSUs, which entitle the holder to receive one share of our common stock for each RSU upon vesting, for the three months ended June 30, 2019 is as follows:

 

 

 

Number of
Shares

 

 

 

(In thousands)

 

RSUs outstanding at March 31, 2019

 

112

 

Granted

 

 

Vested

 

 

Forfeited

 

(2

)

RSUs outstanding at June 30, 2019

 

110

 

 

Stock-Based Compensation Expense

 

The following table presents stock-based compensation expense that is included in each line item on our unaudited consolidated statements of operations:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Cost of revenues

 

$

41

 

$

35

 

Selling, general and administrative expense

 

503

 

427

 

Research and development expense

 

58

 

60

 

Total stock-based compensation expense

 

$

602

 

$

522

 

 

At June 30, 2019, there was approximately $4.3 million and $277,000 of unrecognized compensation expense related to unvested stock options and RSUs, respectively. This expense is currently expected to be recognized over a weighted average period of approximately 1.9 years for stock options and 1.3 years for RSUs. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or other stock-based awards.

 

Other Stock-Based Compensation Plans

 

We currently maintain an Employee Stock Purchase Plan (“ESPP”) which allows employees to have a percentage of their base compensation withheld to purchase the Company’s common stock at 95% of the lower of the fair market at the beginning of the offering period and on the last trading day of the offering period. There are two offering periods during a calendar year, which consist of the six months beginning each January 1 and July 1. Employees may contribute 1-15% of their eligible gross pay up to a $25,000

 

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annual stock value limit. In June 2019 and June 2018, in the first offering period of Fiscal 2020 and 2019, 48,439 and 35,808 shares were purchased, respectively.  The ESPP is considered a non-compensatory plan and accordingly, no compensation expense is recorded in connection with this benefit.

 

8.                                      Stock Repurchase Program

 

On August 9, 2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3.0 million of our outstanding common stock for an unspecified length of time. Under the program, we may repurchase shares from time to time in the open market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows, to the extent such a 10b5-1 plan is in place. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. On November 6, 2014, our Board of Directors approved a $3.0 million increase to the Company’s existing stock repurchase program, pursuant to which the Company may continue to acquire shares of its outstanding common stock from time to time for an unspecified length of time. For the three months ended June 30, 2019 and 2018, we did not repurchase any shares. From inception of the program in August 2011 through June 30, 2019, we repurchased approximately 3,422,000 shares of our common stock for an aggregate price of approximately $5.6 million, at an average price per share of $1.63. As of June 30, 2019, all repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock. As of June 30, 2019, approximately $1.7 million remains available for the repurchase of our common stock under our current program.

 

9.                                      Investments

 

Our investments consisted of the following:

 

 

 

As of June 30, 2019

 

 

 

Amortized Cost

 

Gross
Unrealized Loss

 

Gross
Unrealized Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

4,106

 

$

 

$

 

$

4,106

 

Short-term investments

 

20,202

 

(13

)

 

20,189

 

Total

 

$

24,308

 

$

(13

)

$

 

$

24,295

 

 

 

 

As of March 31, 2019

 

 

 

Amortized Cost

 

Gross
Unrealized Loss

 

Gross
Unrealized Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

3,338

 

$

 

$

 

$

3,338

 

Short-term investments

 

1,936

 

(1

)

 

1,935

 

Total

 

$

5,274

 

$

(1

)

$

 

$

5,273

 

 

Unrealized losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell, and it is not more likely than not that, we would be required to sell, these investments before recovery of their cost basis. As a result, there is no other-than-temporary impairment for these investments as of June 30, 2019.

 

10.                               Business Segment Information

 

We currently operate in three reportable segments: Roadway Sensors, Transportation Systems, and Agriculture and Weather Analytics.

 

The Roadway Sensors segment provides various advanced detection sensors and systems for traffic intersection management, communication systems and roadway traffic data collection applications. The Roadway Sensors product line uses advanced image processing technology and other techniques to capture and analyze sensor data through sophisticated algorithms, enabling vehicle, bicycle and pedestrian detection, as well as the transmission of both video images and data using various communication technologies. Our Roadway Sensors products include, among others, Vantage, VantageLive!, Vantage Next, VantagePegasus, VantageRadius, Vantage Vector, Velocity, SmartCycle, SmartCycle Bike Indicator, SmartSpan, VersiCam, PedTrax and P-Series products. Our Roadway Sensors segment also includes the sale of original equipment manufacturer (“OEM”) products for the traffic intersection markets, which include, among other things, traffic signal controllers and traffic signal equipment cabinets.

 

The Transportation Systems segment provides engineering and consulting services, performance measurement and traffic analytics solutions, as well as the development of transportation management and traveler information systems for the ITS industry. Our Transportation Systems services include planning, design, implementation, operation and management of surface transportation

 

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infrastructure systems. We perform analysis and study goods movement, commercial vehicle operations, provide travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. Our Transportation Systems product line includes: Iteris Signal Performance Measures (“SPM”), ClearGuide, and iPeMS, our performance measurement and information management solution as well as our commercial vehicle operations and vehicle safety compliance platforms known as CVIEW Plus, CheckPoint, UCRLink and inspect.

 

The Agriculture and Weather Analytics segment includes ClearPath Weather, our road maintenance applications, and ClearAg, our digital agriculture platform. Our ClearPath Weather is a web-based solution, that includes a suite of tools that applies data assimilation and modeling technologies for assessing historical weather conditions for both short-term and long-range weather forecasts and customizable route/site weather and pavement forecasting, and providing winter road maintenance recommendations for state agencies, municipalities and for commercial companies that allow such users to create solutions to meet roadway maintenance decision needs. Our ClearAg solutions combine weather and agronomic data with proprietary land-surface modeling and analytics to solve complex agricultural problems and to increase the efficiency and sustainability of farmlands. We currently offer our ClearAg solutions to companies in the agriculture industry, such as seed and crop protection companies, integrated food companies, and agricultural equipment manufacturers and service providers. Our ClearAg solutions provide weather, environment, soil and plant growth modeling to deliver smart content through ClearAg APIs and components, IMFocus APIs and ClearAg web applications.

 

The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1 — Description of Business and Summary of Significant Accounting Policies). Certain corporate general and administrative expenses, including general overhead functions such as information systems, accounting, human resources, marketing, compliance costs and certain administrative expenses, as well as interest and amortization of intangible assets, are not allocated to the segments. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers. Our Chief Executive Officer, who is our chief operating decision maker (“CODM”), reviews financial information at the operating segment level. Our CODM does not review assets by segment in his resource allocation, and therefore, assets by segment are not disclosed below.

 

The following table sets forth selected unaudited consolidated financial information for our reportable segments for the three months ended June 30, 2019 and 2018:

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture and
Weather
Analytics

 

Total

 

 

 

(In thousands)

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

Product revenues

 

$

12,771

 

$

1,746

 

$

 

$

14,517

 

Service revenues

 

37

 

10,613

 

1,440

 

12,090

 

Total revenues

 

$

12,808

 

$

12,359

 

$

1,440

 

$

26,607

 

Segment income (loss)

 

2,332

 

1,566

 

(1,035

)

2,863

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

Product revenues

 

$

10,801

 

$

1,117

 

$

 

$

11,918

 

Service revenues

 

59

 

12,067

 

1,431

 

13,557

 

Total revenues

 

$

10,860

 

$

13,184

 

$

1,431

 

$

25,475

 

Segment income (loss)

 

1,833

 

1,358

 

(1,142

)

2,049

 

 

The following table reconciles total segment income (loss) to unaudited consolidated loss from continuing operations before income taxes:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

(In thousands)

 

Segment income (loss):

 

 

 

 

 

Total income from reportable segments

 

$

2,863

 

$

2,049

 

Unallocated amounts:

 

 

 

 

 

Corporate and other expenses

 

(4,368

)

(3,576

)

Amortization of intangible assets

 

(66

)

(65

)

Other income (expense), net

 

(10

)

15

 

Interest income, net

 

33

 

39

 

Loss from operations before income taxes

 

$

(1,548

)

$

(1,538

)

 

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11.                               Subsequent Event

 

On July 2, 2019, the Company completed the acquisition of Albeck Gerken, Inc., a privately-held professional transportation engineering services firm headquartered in Tampa, Florida, with offices in Orlando (FL), Virginia Beach (VA) and Chadds Ford (PA). Pursuant to a Stock Purchase Agreement dated June 10, 2019 among the Company, AGI and the stockholders of AGI (the “Selling Shareholders”), the Company acquired all of the outstanding capital stock of AGI from the selling Shareholders for an aggregate purchase price of $10,720,000, payable in cash and stock, of which 114,943 shares are being held in escrow for 18 months to secure performance of indemnification and other post-closing obligations of the Selling Shareholders. The Company has agreed to grant up to $1,744,200 in retention bonuses to the Selling Shareholders payable in the form of restricted stock (valued at $5.22 per share), and up to $570,000 in retention cash bonuses to other employees, provided such employees remain in our service on the first, second and third anniversary of the closing of the acquisition.

 

AGI is expected to operate as a wholly-owned subsidiary of the Company as part of the Transportation Systems business.  AGI assists municipalities in maximizing the effectiveness of their existing transportation networks through a collection of traffic management services to cost effectively improve the performance of roadway systems and address increased traffic demands, traffic congestion and delay.  With a foundation of arterial timing plan development, AGI has expanded its services into active arterial monitoring and management with multiple public sector clients. AGI is expected to expand the Company’s geographic footprint for ITS services in Florida, as well as in the Midwest and Mid-Atlantic region.

 

Given the timing of the completion of the acquisition, we are currently in the process of valuing the assets acquired and liabilities assumed in the acquisition. As a result, we are unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed and other disclosures.

 

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ITEM 2.                                                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management’s beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words “expect(s),” “feel(s),” “believe(s),” “intend(s),” “plans,” “should,” “will,” “may,” “anticipate(s),” “estimate(s),” “could,” “should,” and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profitability, capital needs, backlog, manufacturing capabilities, the market acceptance of our products and services, competition, the impact of any current or future litigation, the impact of recent accounting pronouncements, the applications for and acceptance of our products and services, the status of our facilities and product development, and the impact of the recent federal government shutdown. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. We encourage you to carefully review and consider the various disclosures made by us which describe certain factors which could affect our business, including in “Risk Factors” set forth in Part II. Item 1A of this report, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Overview

 

Albeck Gerken Acquisition

 

On July 2, 2019, the Company completed the acquisition of Albeck Gerken, Inc. (“AGI”), a privately-held professional transportation engineering services firm headquartered in Tampa, Florida, with offices in Orlando (FL), Virginia Beach (VA) and Chadds Ford (PA).  Pursuant to a Stock Purchase Agreement dated June 10, 2019 among the Company, AGI and the stockholders of AGI (the “Selling Shareholders”), the Company acquired all of the outstanding capital stock of AGI from the selling Shareholders for an aggregate purchase price of $10,720,000, payable in cash and stock, of which 114,943 shares are being held in escrow for 18 months to secure performance of indemnification and other post-closing obligations of the Selling Shareholders. The Company has agreed to grant up to $1,710,000 in retention bonuses to the Selling Shareholders payable in the form of restricted stock (valued at $5.22 per share), and up to $570,000 in retention cash bonuses to other employees, provided such employees remain in our service on the first, second and third anniversary of the closing of the acquisition.

 

AGI is expected to operate as a wholly-owned subsidiary of the Company as part of the Transportation Systems business.  AGI assists municipalities in maximizing the effectiveness of their existing transportation networks through a collection of traffic management services to cost effectively improve the performance of roadway systems and address increased traffic demands, traffic congestion and delay.  With a foundation of arterial timing plan development, AGI has expanded its services into active arterial monitoring and management with multiple public sector clients.  AGI’s revenues for the year ended December 31, 2018 was $8.1 million. AGI is expected to expand the Company’s geographic footprint for ITS services in Florida, as well as in the Midwest and Mid-Atlantic region. AGI’s typical contracts are fixed fee for traffic operations professional engineering services focused on transportation systems management and operations. See Note 11, Subsequent Event, of the Notes to Unaudited Consolidated Financial Statements for additional information regarding the AGI acquisition.

 

Underwritten Public Offering

 

On June 13, 2019, the Company completed an underwritten public offering of 6,182,797 shares of the Company’s common stock for net proceeds to the Company of approximately $26.8 million, after deducting underwriting discounts and estimated offering expenses payable by the Company.  The Company used approximately $6,185,000 of the net proceeds of this offering to pay the cash portion of the purchase price in the acquisition of AGI, and plans to use the balance of the net proceeds for general corporate purposes and possibly for other future acquisitions.

 

Operating Segments

 

We currently operate in three reportable segments: Roadway Sensors, Transportation Systems and Agriculture and Weather Analytics.

 

The Roadway Sensors segment provides various advanced detection sensors and systems for traffic intersection management, communication systems and roadway traffic data collection applications. The Roadways Sensors product line uses advanced image

 

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processing technology and other techniques to capture and analyze sensor data through sophisticated algorithms, enabling vehicle, bicycle and pedestrian detection, as well as the transmission of both video images and data using various communication technologies. Our Roadway Sensors products include, among others, Vantage, VantageLive!, VantagePegasus, Vantage Next, VantageRadius, Vantage Vector, Velocity, SmartCycle, SmartCycle Bike Indicator, SmartSpan, VersiCam, PedTrax and P-Series products. In select territories, our Roadway Sensors segment also resells OEM products for the traffic intersection markets, which include, among other things, traffic signal controllers and traffic signal equipment cabinets.

 

The Transportation Systems segment includes traffic engineering and consulting services focused on the planning, design, development and implementation of software and hardware-based ITS systems that integrate sensors, video surveillance, computers and advanced communications equipment to enable public agencies to monitor, control and direct traffic flow, assist in the quick dispatch of emergency crews, and distribute real-time information about traffic conditions. Our services include planning, design, implementation, operation and management of surface transportation infrastructure systems. We perform analysis and study goods movement, commercial vehicle operations, provide travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. The Transportations Systems segment also includes our performance measurement and management solutions, Iteris Signal Performance Measures (“SPM”), Iteris ClearGuide and iPeMS—a state-of-the-art information management software suite that provides prescriptive data insights to help determine current and future traffic patterns, permitting the effective performance analysis and management of traffic infrastructure resources. This segment also includes our advanced traveler information system solutions, as well as our commercial vehicle operations and vehicle safety compliance platforms, known as ‘‘CVIEW-Plus,’’ ‘‘CheckPoint,’’ ‘‘UCRLink’’ and ‘‘inspect.’’ These platforms support state-based commercial vehicle operations by storing and distributing intrastate and interstate commercial vehicle information for local, state and federal agencies’ roadside and enforcement operations.

 

The Agriculture and Weather Analytics segment includes ClearPath Weather, our road maintenance application, and ClearAg, our digital agriculture platform. ClearPath Weather is a web-based solution, which includes a suite of tools that apply data assimilation and modeling technologies to assess weather conditions for customizable route/site weather and pavement forecasting, and render winter road maintenance recommendations for state agencies, municipalities and commercial companies to improve roadway maintenance decisions. Our ClearAg solutions combine weather and agronomic data with proprietary land-surface modeling and analytics to solve complex agricultural problems and to increase the efficiency and sustainability of farmlands. The ClearAg Platform delivers validation tools for ag inputs, irrigation, field readiness, and harvest solutions giving growers, researchers and other agribusinesses access to a comprehensive database of historical, real-time and forecasted weather, soil and plant health information, as well as other information on crop growth. Companies use the ClearAg Platform to simulate field conditions and determine how new products may perform on a crop given certain weather and soil conditions. Growers and agribusinesses leverage the ClearAg Platform to determine the best times to plant, spray, fertilize, irrigate, and harvest crops.

 

See Note 10, Business Segment Information, of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report, for further details on our reportable segments.

 

Critical Accounting Policies and Estimates

 

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our unaudited consolidated financial statements included herein, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and assumptions, include those related to revenue recognition, the collectability of accounts receivable and related allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, warranty reserves and other contingencies, costs to complete long-term contracts, indirect cost rates used in cost plus contracts, the valuation of inventories, the valuation of purchased intangible assets and goodwill, the valuation of investments, estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill, and fair value of our stock option awards used to calculate stock-based compensation. We base these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

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Recent Accounting Pronouncements

 

Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report for a discussion of applicable recent accounting pronouncements.

 

Results of Operations

 

The following table sets forth unaudited statement of operations data as a percentage of total revenues for the periods indicated:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Product revenues

 

54.6

%

46.8

%

Service revenues

 

45.4

 

53.2

 

Total revenues

 

100.0

 

100.0

 

Cost of product revenues

 

31.9

 

25.5

 

Cost of service revenues

 

29.0

 

34.5

 

Total cost of revenues

 

60.9

 

60.0

 

Gross margin

 

39.1

 

40.0

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

37.8

 

37.8

 

Research and development

 

6.9

 

8.2

 

Amortization of intangible assets

 

0.2

 

0.3

 

Total operating expenses

 

44.9

 

46.3

 

Operating loss

 

(5.8

)

(6.3

)

Non-operating income (expense):

 

 

 

 

 

Other income (expense), net

 

(0.0

)

0.1

 

Interest income, net

 

0.1

 

0.2

 

Loss from operations before income taxes

 

(5.7

)

(6.0

)

Provision for income taxes

 

(0.1

)

(0.2

)

Net loss

 

(5.8

)%

(6.2

)%

 

Analysis of Quarterly Results of Operations

 

Total Revenues. Total revenues are comprised of sales from our Roadway Sensors, Transportation Systems and Agriculture and Weather Analytics segments.

 

The following tables present our total revenues for the three months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended

 

$

 

 

 

 

 

June 30,

 

Increase

 

%

 

 

 

2019

 

2018

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Product revenues

 

$

14,517

 

$

11,918

 

$

2,599

 

21.8

%

Service revenues

 

12,090

 

13,557

 

(1,467

)

-10.8

%

Total revenues

 

$

26,607

 

$

25,475

 

$

1,132

 

4.4

%

 

Product revenues for the three months ended June 30, 2019 increased 21.8% to $14.5 million, compared to $11.9 million in the corresponding period in the prior year, primarily due to an increase in Roadway Sensors sales from our distribution of certain

 

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OEM products for the traffic intersection market. Service revenues for the three months ended June 30, 2019 decreased 10.8% to $12.1 million, compared to $13.6 million in the corresponding period in the prior year, primarily due to lower Transportation Systems traffic engineering service revenues as a result of the transition from being the prime contractor on certain large contracts awarded in Fiscal 2016, to the sub-contracting party, coupled with the timing of backlog fulfilment on certain other projects. Total revenues for the three months ended June 30, 2019 increased 4.4% to $26.6 million, compared to $25.5 million in the corresponding period in the prior year. The increase in total revenues was primarily due to an approximate 17.9% increase in Roadway Sensors, offset by a 6.3% decrease in Transportation Systems revenues. Agriculture and Weather Analytics revenues were relatively flat compared to the prior period.

 

Roadway Sensors revenues for the three months ended June 30, 2019 included approximately $12.8 million in product revenues and approximately $37,000 of service revenues, reflecting an increase in total revenues of approximately $1.9 million or 17.9%, compared to the corresponding prior year period. The increase in Roadway Sensors revenues during the three months ended June 30, 2019 was primarily due to higher unit sales from our distribution of certain OEM products for the traffic intersection market, which increased approximately $1.5 million or 227% to approximately $2.2 million in the current quarter. While OEM products generally have lower gross margins than our core video detection products, we believe the offering of OEM products can benefit sales of our core products by providing a more comprehensive suite of traffic solutions for our customers.  Going forward, we plan to grow revenues by focusing on our core domestic intersection market, and refine and deliver products that address the needs of this market, primarily our Vantage processors and camera systems and our Vantage Vector video/radar hybrid sensor, as well as our SmartCycle, Velocity, PedTrax and SmartSpan products.

 

Transportation Systems revenues for the three months ended June 30, 2019 included approximately $10.6 million of service revenues, and approximately $1.7 million of sales of third-party products purchased for installation under certain construction-type contracts. Total revenues for the three months ended June 30, 2019 were approximately $12.4 million, which reflected a decrease of approximately $825,000 or 6.3%, compared to the corresponding period in the prior year. The decreases during the three months ended June 30, 2019 was primarily due to the transition from being the prime contractor to a sub-contractor on certain large contracts awarded in Fiscal 2016, and the timing of backlog fulfilment on certain other projects. Transportation Systems added approximately $17.4 million of new backlog during the first quarter of Fiscal 2020. Transportation Systems backlog increased to approximately $49.5 million as of June 30, 2019, compared to approximately $40.7 million as of June 30, 2018. We plan to continue to focus on securing new contracts and to extend and/or continue our existing relationships with key agencies related to projects in their final project phases. While we believe our ability to obtain additional large contracts will contribute to overall revenue growth, the mix of sub-consulting content and third-party product sales will likely affect the related total gross profit from period to period, as total revenues derived from sub-consultants and third-party product sales generally have lower gross margins than revenues generated by our professional services.

 

Agriculture and Weather Analytics revenues for the three months ended June 30, 2019 included no product revenue and approximately $1.4 million of service revenues, largely consisting of subscription revenues, reflecting an increase of approximately $9,000 or 0.7%, compared to the corresponding period in the prior year. We plan to continue to focus on commercial opportunities in the digital agriculture technology markets by offering APIs, software applications, content, and modeling services to provide analytics and decision support services that leverage our digital weather, soil and agronomic content and applications.

 

Gross Profit.  The following tables present details of our gross profit for the three months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended

 

$

 

 

 

 

 

June 30,

 

Increase

 

%

 

 

 

2019

 

2018

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Product gross profit

 

$

6,022

 

$

5,424

 

$

598

 

11.0

%

Service gross profit

 

4,385

 

4,768

 

(383

)

(8.0

)%

Total gross profit

 

$

10,407

 

$

10,192

 

$

215

 

2.1

%

 

 

 

 

 

 

 

 

 

 

Product gross margin

 

41.5

%

45.5

%

 

 

 

 

Service gross margin

 

36.3

%

35.2

%

 

 

 

 

Total gross margin

 

39.1

%

40.0

%

 

 

 

 

 

Our product gross margin for the three months ended June 30, 2019 decreased approximately 400 basis points, as compared to the corresponding period in the prior year, primarily due to an increase in our Roadway Sensors OEM sales in the current quarter, which typically yields lower gross margins than our Roadway Sensors core video detection products. Our service gross margin for the three months ended June 30, 2019 increased approximately 110 basis points, as compared to the corresponding periods in the prior year, primarily due to the timing of certain extension contracts, the contract mix and a decrease in the amount of related sub-consulting content of such contracts. Sub-consulting content generally results in lower gross margins than our workforce.

 

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Our total gross margin for the three months ended June 30, 2019 decreased approximately 90 basis points as compared to the corresponding period in the prior year, primarily as a result of the revenue mix between the Roadway Sensors and Transportation Systems segments, as Roadway Sensors OEM sales generally yield lower total gross margins than our other segments. As such, the decrease in our Transportation Systems total revenues from approximately 51.8% of total revenues for the three months ended June 30, 2018 to approximately 46.5% of total revenues for the three months ended June 30, 2019 was a primary contributor to our increase in total gross margin.

 

Roadway Sensors gross profit can fluctuate in any specific quarter or year based on, among other factors, customer and product mix between core products and third party OEM products, competitive pricing requirements, product warranty costs and provisions for excess and obsolete inventories, as well as shifts of engineering resources from development activities to sustaining activities, which we record as cost of goods sold.

 

The underlying mix of our Transportation Systems revenues contract activity affects the related gross profit recognized in any given period. For the Transportation Systems segment, we expect to experience gross profit variability in future periods due to our contract mix and the amount of related sub-consulting content of such contracts, as well as factors such as our ability to efficiently utilize our internal workforce, which could cause fluctuations in our margins from period to period.

 

Selling, General and Administrative Expense. Selling, general and administration expense for the three months ended June 30, 2019 increased approximately 4.5% to $10.1 million, compared to $9.6 million for the three months ended June 30, 2018. The overall increase was primarily due to expenses related to the acquisition of AGI, as well as increased bid/proposal activities in Transportations Systems in the current period. In connection with the AGI acquisition completed in July 2019, we added more than 40 employees, which is expected to increase our selling, general and administrative expense in Fiscal 2020.

 

Research and Development Expense.  Research and development expense for the three months ended June 30, 2019 decreased approximately 11.7% to $1.8 million, compared to $2.1 million for the three months ended June 30, 2018. The overall decrease was primarily due to certain development costs for our Iteris ClearGuide offering that were capitalized into intangible assets in the current period.

 

We plan to continue to invest in the development of our ClearAg and ClearPath Weather solutions, our ClearGuide software offering. In addition, we intend to continue to invest in further enhancements and functionality in our Vantage products family.

 

During Fiscal 2020, we successfully released Iteris ClearGuide, our state-of-the-art mobility intelligence platform, designed to help transportation agencies achieve safer, more efficient mobility for their networks. During Fiscal 2018, we successfully released Iteris SPM, our cloud-based signal performance measures application. In Fiscal 2017, we released our VantageLive! platform as well as a number of generally available advisory applications, including our Harvest Advisory and Nitrogen Advisory. Certain development costs were capitalized into intangible assets in the unaudited consolidated balance sheets; in both the current and prior year periods; however, certain costs did not meet the criteria for capitalization under GAAP and are included in research and development expense. Going forward, we expect to continue to invest in our solutions. This continued investment may result in increases in research and development costs, as well as additional capitalized software in future periods.

 

Amortization of Intangible Assets

 

Amortization of intangible assets was approximately $66,000 and $65,000 for the three months ended June 30, 2019 and 2018, respectively.

 

Interest Income, Net

 

Net interest income was approximately $33,000 and $39,000 for the three months ended June 30, 2019 and 2018, respectively.

 

Income Taxes.

 

The effective tax rate used for interim periods is the estimated annual effective tax rate, based on current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur.

 

Income tax expense for the three months ended June 30, 2019 was approximately $24,000, or (1.2%) of pre-tax loss as compared with an expense of approximately $41,000, or (2.7%) of pre-tax loss for the three months ended June 30, 2018.

 

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In assessing the realizability of our deferred tax assets, we review all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance. As we have experienced a cumulative pre-tax loss over the trailing three years, we continue to maintain a valuation allowance against our deferred tax assets.

 

Liquidity and Capital Resources

 

Cash Flows

 

We have historically financed our operations with a combination of cash flows from operations and the sale of equity securities. We expect to continue to rely on cash flows from operations and our cash reserves to fund our operations, which we believe to be sufficient to fund our operations for at least the next twelve months. However, we may need or choose to raise additional capital to fund potential future acquisitions and our future growth. We may raise such funds by selling equity or debt securities to the public or to selected investors or by borrowing money from financial institutions. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders may experience significant dilution, and any equity securities that may be issued may have rights senior to our existing stockholders. There is no assurance that we will be able to secure additional funding on a timely basis, on terms acceptable to us, or at all.

 

At June 30, 2019, we had $38.1 million in working capital, which included $15.2 million in cash and cash equivalents, as well as $20.2 million in short-term investments. This compares to working capital of $13.5 million at March 31, 2019, which included $7.1 million in cash and cash equivalents as well as $1.9 million in short-term investments.

 

The following table summarizes our cash flows for the three months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended
June 30,

 

 Net cash provided by (used in):

 

2019

 

2018

 

 

 

(In thousands)

 

Operating activities

 

$

(188

)

$

(2,026

)

Investing activities

 

(18,586

)

(3,552

)

Financing activities

 

26,937

 

206

 

 

Operating Activities.  Cash used in our operations for the three months ended June 30, 2019 was primarily the result of approximately $1.5 million in non-cash items for noncash lease expense, deferred income taxes, depreciation, stock-based compensation, and amortization, offset by a decrease of approximately $88,000 from changes in working capital and our net loss of approximately $1.6 million.

 

Cash used in our operations for the three months ended June 30, 2018 was primarily the result of approximately $1.1 million in non-cash items for deferred income taxes, depreciation, stock-based compensation, and amortization, offset by a decrease of approximately $1.5 million from changes in working capital coupled with our net loss of approximately $1.6 million.

 

Investing Activities.  Net cash used in our investing activities during the three months ended June 30, 2019 was primarily the result of purchases of approximately $20.2 million of short-term investments and approximately $116,000 of property and equipment, as well as approximately $216,000 of capitalized software development, primarily in the Roadway Sensors and Transportation Systems business segments related to VantageLive! and ClearGuide, respectively. These investments were partially offset by approximately $1.9 million in proceeds from the sale and maturity of short-term investment.

 

Net cash used in our investing activities during the three months ended June 30, 2018 was primarily the result of purchases of approximately $3.7 million of short-term investments and approximately $229,000 of property and equipment, as well as approximately $82,000 of capitalized software development, primarily in the Roadway Sensors business segments related to VantageLive! developments. These investments were partially offset by approximately $357,000 in proceeds from the sale and maturity of short-term investment and approximately $107,000 in proceeds from the last earn out payment related to the sale of the assets of the Vehicle Sensors segment in 2011.

 

Financing Activities.  Net cash provided by financing activities during the three months ended June 30, 2019 was the result of approximately $26.8 million of proceeds from the issuance of common stock in connection with the public offering, net of costs, described in the Overview section above.  In addition, there was $172,000 of cash proceeds from the purchase of ESPP shares and approximately $14,000 of cash proceeds from the exercises of stock options. Net cash provided by financing activities during the three

 

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months ended June 30, 2018 was the result of approximately $165,000 of cash proceeds from the purchase of ESPP shares and approximately $41,000 of cash proceeds from the exercises of stock options.

 

Off Balance Sheet Arrangements

 

We did not have any material off balance sheet arrangements at June 30, 2019.

 

Seasonality

 

We have historically experienced seasonality, particularly with respect to our Roadway Sensors segment, which adversely affects such sales in our third and fourth fiscal quarters due to a reduction in intersection construction and repairs during the winter months due to inclement weather conditions, with the third fiscal quarter generally affected the most by inclement weather. We have also experienced seasonality, particularly with respect to our Transportation Systems segment, which adversely impacts our third fiscal quarter due to the increased number of holidays, causing a reduction in available billable hours. In addition, we have experienced some seasonality related to certain ClearPath Weather services, which adversely impacts such sales in our first and second fiscal quarters, mainly because these services are generally not required during Spring and Summer months when weather conditions are comparatively milder.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulations S-K.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management was required to apply its judgment in evaluating the cost-benefit relationship of such controls and procedures.

 

Changes in Internal Controls

 

During the fiscal quarter covered by this report, there has been no significant change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

Inherent Limitations on Internal Controls

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override, error or improper acts may occur and not be

 

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detected. Any resulting misstatement or loss may have an adverse and material effect on our business, financial condition and results of operations.

 

PART II. OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The information set forth in Note 5, Commitments and Contingencies, under the heading “Litigation and Other Contingencies” of the Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference. For additional discussion of risks associated with any legal proceedings, see “Risk Factors” below.

 

ITEM 1A.  RISK FACTORS

 

Our business is subject to a number of risks, some of which are discussed below. Other risks are presented elsewhere in this report and in the information incorporated by reference into this report. You should consider the following risks carefully in addition to the other information contained in this report and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K, before deciding to buy, sell or hold our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occurs, our business, financial condition, or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

 

Because we depend on government contracts and subcontracts, we face additional risks related to contracting with federal, state and local governments, including budgetary issues and fixed price contracts, that could adversely impact our future revenues and profitability.

 

A significant portion of our revenues is derived from contracts with governmental agencies, either as a general contractor, sub-contractor or supplier. We anticipate that revenue from government contracts will continue to remain a significant portion of our revenues. Government business is, in general, subject to special risks and challenges, including:

 

·                  delays in funding and uncertainty regarding the allocation of funds to state and local agencies from the U.S. federal government, delays in the expenditures from the federal highway bill and delays or reductions in other state and local funding dedicated for transportation and ITS projects;

 

·                  other government budgetary constraints, cut-backs, delays or reallocation of government funding, including without limitation, changes in the administration and repeal of government purchasing programs;

 

·                  long purchase cycles or approval processes;

 

·                  competitive bidding and qualification requirements, as well as our ability to replace large contracts once they have been completed;

 

·                  changes in government policies and political agendas;

 

·                  maintenance of relationships with key government entities from whom a substantial portion of our revenue is derived;

 

·                  milestone deliverable requirements and liquidated damage and/or contract termination provisions for failure to meet contract milestone requirements;

 

·                  performance bond requirements;

 

·                  adverse weather conditions may cause delays, such as, evacuations and flooding due to hurricanes can result in our inability to perform work in affected areas; and

 

·                  international relations and international conflicts or other military operations that could cause the temporary or permanent diversion of government funding from transportation or other infrastructure projects.

 

Governmental budgets and plans are subject to change without warning. Certain risks of selling to governmental entities include dependence on appropriations and administrative allocation of funds, changes in governmental procurement legislation and regulations and other policies that may reflect political developments or agendas, significant changes in contract scheduling, intense competition for government business and termination of purchase decisions for the convenience of the governmental entity. Substantial delays in purchase decisions by governmental entities, and the current constraints on government budgets at the federal,

 

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state and local level, and the ongoing uncertainty as to the timing and accessibility to government funding could cause our revenues and income to drop substantially or to fluctuate significantly between fiscal periods.

 

In addition, a number of our government contracts are fixed price contracts. As a result, we may not be able to recover any cost overruns we may incur. These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project’s requirements. The financial viability of any given project depends in large part on our ability to estimate these costs accurately and complete the project on a timely basis. In the event our costs on these projects exceed the fixed contractual amount, we will be required to bear the excess costs. Such additional costs could adversely affect our financial condition and results of operations. Moreover, certain of our government contracts are subject to termination or renegotiation at the convenience of the government, which could result in a large decline in our revenues in any given period. Our inability to address any of the foregoing concerns or the loss or renegotiation of any material government contract could seriously harm our business, financial condition and results of operations.

 

Our Agriculture and Weather Analytics technologies may not be broadly accepted in the agricultural market segment.

 

The application of data analytics to the agricultural market is relatively new and has required us to invest, and is expected to continue to require us to invest, in additional research and development, and sales and marketing without any guarantee of a commensurate increase in revenues. The offering of our Agriculture and Weather Analytics products and services and introduction of any new capabilities of our Agriculture and Weather Analytics products and services could have longer than expected sales cycles, which could adversely impact our operating results. We cannot assure you that seed and crop protection companies or other agribusinesses in this market will appreciate the value proposition of our offering or that our Agriculture and Weather Analytics products and services (as well as any new capabilities for such products and services) for this market will achieve broad market acceptance in the near future or at all. If the agricultural market fails to understand and appreciate the benefit of our offering or chooses not to adopt our technologies, the financial results of our Agriculture and Weather Analytics segment will be adversely affected.

 

We may not be able to achieve profitability on a quarterly or annual basis in the future.

 

For Fiscal 2019. Fiscal 2018, and Fiscal 2017, we had net losses of approximately $7.8 million, $3.5 million and $4.8 million, respectively, and we cannot assure you that we will be profitable in the future. Our ability to become profitable in future periods could be impacted by governmental budgetary constraints, government and political agendas, economic instability and other items that are not in our control. Furthermore, we rely on operating profits from certain of our business segments to fund investments in sales and marketing and research and development initiatives. We cannot assure you that our financial performance will sustain a sufficient level to completely support those investments. Most of our expenses are fixed in advance. As such, we generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues or increases in planned investments. As a result, we may continue to experience operating losses and net losses in the future, which would make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock to decline.

 

Our profitability could be adversely affected if we are not able to maintain adequate utilization of our Transportation Systems workforce.

 

The cost of providing our Transportation Systems engineering and consulting services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:

 

·                  our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;

 

·                  our ability to forecast demand for our services and thereby maintain an appropriate headcount in our various regions;

 

·                  the timing of new contract awards or the completion of large contract;

 

·                  availability of funding or other budget issues;

 

·                  our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and

 

·                  our ability to match the skill sets of our employees to the needs of the marketplace.

 

An inability to properly and fully utilize our Transportation Systems workforce would reduce our profitability and could have an adverse effect on our results of operations.

 

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We may engage in acquisitions of companies or technologies that may require us to undertake significant capital infusions and could result in disruptions of our business and diversion of resources and management attention.

 

We recently completed the acquisition of AGI and plan to continue to explore acquiring additional complementary businesses, products, services, and technologies. Acquisitions may require significant capital infusions and, in general, acquisitions also involve a number of special risks, including:

 

·                  potential disruption of our ongoing business and the diversion of our resources and management’s attention;

 

·                  the failure to retain or integrate key acquired personnel;

 

·                  the challenge of assimilating diverse business cultures, and the difficulties in integrating the operations, technologies and information system of the acquired companies;

 

·                  increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services;

 

·                  the incurrence of unforeseen obligations or liabilities;

 

·                  potential impairment of relationships with employees or customers as a result of changes in management; and

 

·                  increased interest expense and amortization of acquired intangible assets, as well as unanticipated accounting charges.

 

Our competitors are also soliciting potential acquisition candidates, which could both increase the price of any acquisition targets and decrease the number of attractive companies available for acquisition. Acquisitions may also materially and adversely affect our operating results due to large write-offs, contingent liabilities, substantial depreciation, deferred compensation charges or intangible asset amortization, or other adverse tax or accounting consequences. We cannot assure you that we will be able to identify or consummate any additional acquisitions, successfully integrate any acquisitions or realize the benefits anticipated from any acquisition.

 

We participate in the software development market which may be subject to various technical and commercial challenges.

 

We have only been in the business of software development for a few years and have in the past and may in the future experience development and technical challenges. Our business and results of operations could also be seriously harmed by any significant delays in our software development activities. Despite testing and quality control, we cannot be certain that errors will not be found in our software after its release. Any faults or errors in our existing products or in any new products may cause delays in product introduction and shipments, require design modifications, or harm customer relationships or our reputation, any of which could adversely affect our business and competitive position. In addition, software companies are subject to litigation concerning intellectual property disputes, which could be costly and distract our management.

 

If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive, and the demand for our products will likely decline.

 

Our markets are in general characterized by the following factors:

 

·                  rapid technological advances;

 

·                  downward price pressures in our target markets as technologies mature;

 

·                  changes in customer requirements;

 

·                  additional qualification requirements related to new products or components;

 

·                  frequent new product introductions and enhancements;

 

·                  obsolescence of certain parts and components from time to time that may require re-engineering or certain portions of our product;

 

·                  inventory issues related to transition to new or enhanced models; and

 

·                  evolving industry standards and changes in the regulatory environment.

 

Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards, and to effectively develop, introduce, market and gain broad acceptance of new products and product enhancements incorporating the latest technological advancements.

 

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If we are unable to develop and introduce new products and product enhancements in a cost-effective and timely manner, or are unable to achieve market acceptance of our new products, our operating results would be adversely affected.

 

We believe our revenue growth and future operating results will depend on our ability to complete development of new products and enhancements, introduce these products in a timely, cost-effective manner, achieve broad market acceptance of these products and enhancements, and reduce our production costs. During the past two fiscal years, we have introduced both new and enhanced products across all segments. We cannot guarantee the success of these products, and we may not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our existing products.

 

We believe that we must continue to make substantial investments to support ongoing research and development in order to develop new or enhanced products and software to remain competitive. We need to continue to develop and introduce new products that incorporate the latest technological advancements in outdoor image processing hardware, camera technologies, software and analysis in response to evolving customer requirements. We cannot assure you that we will be able to adequately manage product transition issues. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technological developments or changing customer requirements or if we cannot adequately manage inventory issues typically related to new product transitions and introductions. We cannot assure you that any such investments in research and development will lead to any corresponding increase in revenue.

 

We may need to raise additional capital in the future, which may not be available on terms acceptable to us, or at all.

 

We have historically experienced volatility in our earnings and cash flows from operations from year to year. We have filed a registration statement on a Form S-3, utilizing a “shelf” registration process, and may consider a new equity financing in the future. Should the credit markets further tighten or our business declines, we may need or choose to raise additional capital to fund our operations, to repay indebtedness, pursue acquisitions or expand our operations. Such additional capital may be raised through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders.

 

Our capital requirements will depend on many factors, including, but not limited to:

 

·                  market acceptance of our products and product enhancements, and the overall level of sales of our products;

 

·                  our ability to control costs and achieve profitability;

 

·                  the supply of key components for our products;

 

·                  our ability to increase revenue and net income;

 

·                  increased research and development expenses and sales and marketing expenses;

 

·                  our need to respond to technological advancements and our competitors’ introductions of new products or technologies;

 

·                  capital improvements to new and existing facilities and enhancements to our infrastructure and systems;

 

·                  any acquisitions of businesses, technologies, product lines, or possible strategic transactions or dispositions;

 

·                  our relationships with customers and suppliers;

 

·                  government budgets, political agendas and other funding issues, including potential delays in government contract awards;

 

·                  our ability to successfully negotiate credit arrangements with our bank and the state of the financial markets in general; and

 

·                  general economic conditions, including the effects of the economic slowdowns and international conflicts.

 

If our capital requirements are materially different from those currently planned, we may need additional capital sooner than anticipated. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and such securities may have rights, preferences and privileges senior to our common stock. Additional equity or debt financing may not be available on favorable terms, on a timely basis, or at all. If adequate funds are not available or are not available on acceptable terms when needed, we may be unable to continue our operations as planned, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.

 

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If our security measures are breached and unauthorized access is obtained to our customer’s personal and/or proprietary data in connection with our web-based and mobile application solutions and services, we may suffer various negative impacts, including a loss of customer and market confidence, loss of customer loyalty, and significant liability to our customers and to individuals or businesses whose information was being stored.

 

Because techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.

 

The markets in which we operate are highly competitive with many companies more established than Iteris.

 

We compete with numerous other companies in our target markets including, but not limited to, large, multi-national corporations and many smaller regional engineering firms.

 

We compete with existing, well-established companies and technologies in our Roadway Sensors segment, both domestically and abroad. Only a portion of the traffic intersection market has adopted advanced above-ground detection technologies, and our future success will depend in part upon gaining broader market acceptance for such technologies. Certain technological barriers to entry make it difficult for new competitors to enter the market with competing video or other technologies; however, we are aware of new market entrants from time to time. Increased competition could result in loss of market share, price reductions and reduced gross margins, any of which could seriously harm our business, financial condition and results of operations.

 

The Transportation Systems market is highly fragmented and is subject to evolving national and regional quality and safety standards. Our competitors vary in size, number, scope and breadth of the products and services they offer, and include large multi-national engineering firms and smaller local or regional firms.

 

The markets in which our Agriculture and Weather Analytics segment operates vary from public sector customers who focus on snow and ice management for state and county roadways, to commercial sector customers who employ our environmental content and agronomic models. Our competitors include divisions of large, international weather companies, as well as a variety of small providers in the road weather market. In the commercial agriculture sector, we compete with a variety of public and private entities that currently market software, agronomic analytics and weather forecast capabilities to agribusinesses.

 

In each of our operating segments, many of our competitors have far greater name recognition and greater financial, technological, marketing and customer service resources than we do. This may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development, promotion, sale and support of their products and services than we can. Consolidations of end users, distributors and manufacturers in our target markets exacerbate this problem. As a result of the foregoing factors, we may not be able to compete effectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations.

 

We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position.

 

If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors may be able to access our proprietary technology and our business, financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies or systems. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. As a result, we may not be able to protect our proprietary rights adequately in the U.S. or internationally.

 

Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. We have in the past, and may in the future, be subject to litigation regarding our intellectual property rights. An adverse outcome in litigation or any similar proceedings could subject us to significant liabilities to third parties, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies. We may not be able to obtain any licenses on terms acceptable to us, or at all. We also may have to indemnify certain customers or strategic partners if it is determined that we have infringed upon or misappropriated another party’s intellectual property. Our recent expansion into software development activities may subject us to increased possibility of litigation. Any of the foregoing could adversely affect our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, including legal fees and expenses,

 

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and the diversion of management’s attention and resources, regardless of whether the claim is valid, could be significant and could seriously harm our business, financial condition and results of operations.

 

Our failure to successfully secure new contracts and renew existing contracts could reduce our revenues and profitability.

 

Our business depends on our ability to successfully bid on new contracts and renew existing contracts with private and public sector customers. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which are affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. For example, a customer may require us to provide a surety bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions materialize, or if we fail to secure adequate financing arrangements or the required governmental approval or fail to meet other required conditions, we may not be able to pursue particular projects, which could reduce or eliminate our profitability

 

We may continue to be subject to traffic related litigation.

 

The traffic industry in general is subject to frequent litigation claims due to the nature of personal injuries that can result from traffic accidents. As a provider of traffic engineering services, products and solutions, we are, and could from time to time in the future continue to be, subject to litigation for traffic related accidents, even if our products or services did not cause the particular accident. While we generally carry insurance against these types of claims, some claims may not be covered by insurance or the damages resulting from such litigation could exceed our insurance coverage limits. In the event that we are required to pay significant damages as a result of one or more lawsuits that are not covered by insurance or exceed our coverage limits, it could materially harm our business, financial condition or cash flows. Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management’s attention.

 

We may be unable to attract and retain key personnel, including senior management, which could seriously harm our business.

 

Due to the specialized nature of our business, we are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel. We believe that our success will depend on the continued employment of a highly qualified and experienced senior management team to retain existing business and generate new business. The loss of any of our officers, or any of our other executives or key members of management could adversely affect our business, financial condition, or results of operations (e.g., loss of customers or loss of new business opportunities). Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel. Particularly in highly specialized areas, it has become more difficult to retain employees and meet all of our needs for employees in a timely manner, which may adversely affect our growth in the current fiscal year and in future years. This situation is exacerbated by pressure from agency customers to contain our costs, while salaries for highly skilled employees are on the rise. Although we intend to continue to devote significant resources to recruit, train and retain qualified skilled personnel, we may not be able to attract and retain such employees, that could impair our ability to perform our contractual obligations, meet our customers’ needs, win new business, and adversely affect our future results. Likewise, the future success of our Transportation Systems segment will depend on our ability to hire additional qualified engineers, planners and technical personnel. The future success of our Agriculture and Weather Analytics segment will depend on our ability to hire additional software developers, qualified engineers and technical personnel. Competition for qualified employees, particularly development engineers and software developers, is intense. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.

 

Our management information systems and databases could be disrupted by system security failures, cyber threats or by the failure of, or lack of access to, our Enterprise Resource Planning (“ERP”) system. These disruptions could negatively impact our sales, increase our expenses and/or significantly harm our reputation.

 

Internal users and computer programmers may be able to penetrate, aka “hack”, our network security and create system disruptions, cause shutdowns and/or misappropriate our confidential information or that of our employees and third parties. Therefore, we could incur significant expenses addressing problems created by security breaches to our network. We must, and do, take precautions to secure customer information and prevent unauthorized access to our databases and systems containing confidential information. Any data loss or information security lapses resulting in the compromise of personal information or the improper use or disclosure of confidential, sensitive or classified information could result in claims, remediation costs, regulatory sanctions against us, loss of current and future contracts and serious harm to our reputation. We operate our Enterprise Resource Planning system on a SaaS platform, and we use this system for reporting, planning, sales, audit, inventory control, loss prevention, purchase order management and business intelligence. Accordingly, we depend on this system, and the third-party provider of this service, for a number of aspects of our operations. If this service provider or this system fails, or if we are unable to continue to have access to this system on

 

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commercially reasonable terms, or at all, operations would be severely disrupted until an equivalent system could be identified, licensed or developed, and integrated into our operations. This disruption would have a material adverse effect on our business.

 

If we experience declining or flat revenues and we fail to manage such declines effectively, we may be unable to execute our business plan and may experience future weaknesses in our operating results.

 

Based on our business objectives, and in order to achieve future growth, we will need to continue to add additional qualified personnel, and invest in additional research and development and sales and marketing activities, which could lead to increases in our expenses and future declines in our operating results. In addition, our past expansion has placed, and future expansion is expected to place, a significant strain on our managerial, administrative, operational, financial and other resources. If we are unable to manage these activities or any revenue declines successfully, our growth, our business, our financial condition and our results of operations could continue to be adversely affected.

 

Our use of estimates in conjunction with the input method of measuring progress to completion of performance obligations for our Transportation Systems revenues could result in a reduction or reversal of previously recorded revenues and profits.

 

A portion of Transportation Systems revenues are measured and recognized over time using the input method of measuring progress to completion. Our use of this accounting method results in recognition of revenues and profits proportionally over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenues and estimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term engineering, program management, construction management or construction contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenues and profits.

 

Declines in the value of securities held in our investment portfolio can affect us negatively.

 

As of June 30, 2019, the value of securities available for sale within our investment portfolio was $20.2 million, which is generally determined based upon market values available from third-party sources. The value of our investment portfolio may fluctuate as a result of market volatility and economic or financial market conditions. Declines in the value of securities held in our investment portfolio negatively impact our levels of capital and liquidity. Further, to the extent that we experience unrealized losses in our portfolio of investment securities from declines in securities values that management determines to be other than temporary, the book value of those securities will be adjusted to their estimated recovery value and we will recognize a charge to earnings in the quarter during which we make that determination. Although we have policies and procedures in place to assess and mitigate potential impacts of market risks, including hedging-related strategies, those policies and procedures are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Accordingly, we could suffer adverse effects as a result of our failure to anticipate and manage these risks properly.

 

If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected.

 

Section 404 of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate the effectiveness of our internal controls over financial reporting at the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports. We are required to obtain our auditors’ attestation pursuant to Section 404(b) of the Sarbanes-Oxley Act. Going forward, we may not be able to complete the work required for such attestation on a timely basis and, even if we timely complete such requirements, our independent registered public accounting firm may still conclude that our internal controls over financial reporting are not effective.

 

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Iteris have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control

 

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system, misstatements due to error or fraud may occur and not be detected. If we are not able to maintain effective internal controls over financial reporting, we may lose the confidence of investors and analysts and our stock price could decline.

 

Our quarterly operating results fluctuate as a result of many factors. Therefore, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

 

Our quarterly revenues and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, the following:

 

·                  delays in government contracts and funding from time to time and budgetary constraints at the federal, state and local levels;

 

·                  our ability to access stimulus funding, funding from the federal highway bill or other government funding;

 

·                  declines in new home and commercial real estate construction and related road and other infrastructure construction;

 

·                  changes in our pricing policies and the pricing policies of our suppliers and competitors, pricing concessions on volume sales, as well as increased price competition in general;

 

·                  the long lead times associated with government contracts;

 

·                  the size, timing, rescheduling or cancellation of significant customer orders;

 

·                  our ability to control costs;

 

·                  the mix of our products and services sold in a quarter, which has varied and is expected to continue to vary from time to time;

 

·                  seasonality due to winter weather conditions (as well as the adverse impact on revenues in certain regions impacted from time to time by hurricanes and other extreme conditions);

 

·                  seasonality with respect to revenues from our ClearPath Weather and related weather forecasting services due to the decrease in revenues generated for such services during the spring and summer time periods;

 

·                  our ability to develop, introduce, patent, market and gain market acceptance of new products, applications and product enhancements in a timely manner, or at all;

 

·                  market acceptance of the products incorporating our technologies and products;

 

·                  the introduction of new products by competitors;

 

·                  the availability and cost of components used in the manufacture of our products;

 

·                  our success in expanding and implementing our sales and marketing programs;

 

·                  the effects of technological changes in our target markets;

 

·                  the amount of our backlog at any given time;

 

·                  timing of backlog fulfillment;

 

·                  the nature of our government contracts;

 

·                  decrease in revenues derived from key or significant customers;

 

·                  deferrals of customer orders in anticipation of new products, applications or product enhancements;

 

·                  risks and uncertainties associated with our international business;

 

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·                  market condition changes such as industry structure consolidations that could slow down our ability to procure new business;

 

·                  general economic and political conditions;

 

·                  our ability to raise additional capital;

 

·