Company Quick10K Filing
Quick10K
Iteris
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$4.23 33 $141
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 2019-02-06 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
BMY Bristol Myers Squibb 75,190
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EZPW EZCorp 594
URG UR-Energy 133
CPHC Canterbury Park Holding 68
SPCB Supercom 22
CYAN Cyanotech 18
GBLX GB Sciences 0
JANL Janel 0
ITI 2018-12-31
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 a18-40976_1ex31d1.htm
EX-31.2 a18-40976_1ex31d2.htm
EX-32.1 a18-40976_1ex32d1.htm
EX-32.2 a18-40976_1ex32d2.htm

Iteris Earnings 2018-12-31

ITI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a18-40976_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 December 31, 2018

 

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)

 

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 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 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. (Check one):

 

Large accelerated filer

o

Accelerated filer

o

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 February 4, 2019, there were 33,352,741 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 DECEMBER 31, 2018 AND MARCH 31, 2018

1

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2018 AND 2017

2

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2018 AND 2017

3

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4

 

 

 

ITEM 2.

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

18

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

25

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

25

 

 

 

PART II.

OTHER INFORMATION

26

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

26

 

 

 

ITEM 1A.

RISK FACTORS

26

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

36

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

36

 

 

 

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®, ClearPath Weather®, CVIEW-Plus™, Edge®, EdgeConnect™, EMPower®, EvapoSmart™, IMFocus™, inspect™, iPeMS®, Iteris®, Iteris SPM™, Next®, P10™, P100™, PedTrax®, Pegasus™, SmartCycle®, SmartCycle Bike Indicator™, SmartSpan®, SPM™ (logo), TransitHelper®, UCRLink™, Vantage®, VantageLive!™, 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)

 

 

 

December 31,

 

March 31,

 

 

 

2018

 

2018

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,173

 

$

10,152

 

Short-term investments

 

3,730

 

5,319

 

Trade accounts receivable, net of allowance for doubtful accounts of $451 and $333 at December 31, 2018 and March 31, 2018, respectively

 

14,305

 

12,866

 

Unbilled accounts receivable

 

5,602

 

7,473

 

Inventories

 

3,823

 

2,921

 

Prepaid expenses and other current assets

 

747

 

1,165

 

Total current assets

 

35,380

 

39,896

 

Property and equipment, net

 

2,283

 

2,333

 

Intangible assets, net

 

3,254

 

3,751

 

Goodwill

 

15,150

 

15,150

 

Other assets

 

1,756

 

1,756

 

Total assets

 

$

57,823

 

$

62,886

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

8,694

 

$

7,838

 

Accrued payroll and related expenses

 

6,222

 

7,398

 

Accrued liabilities

 

2,379

 

2,358

 

Deferred revenue

 

3,920

 

4,900

 

Total current liabilities

 

21,215

 

22,494

 

Deferred rent

 

501

 

638

 

Deferred income taxes

 

65

 

65

 

Unrecognized tax benefits

 

148

 

168

 

Total liabilities

 

21,929

 

23,365

 

Commitments and contingencies (Note 6)

 

 

 

 

 

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 December 31, 2018 and March 31, 2018

 

 

 

 

 

Issued and outstanding shares - 33,297 at December 31, 2018 and 33,186 at March 31, 2018

 

3,334

 

3,318

 

Additional paid-in capital

 

141,671

 

139,722

 

Accumulated deficit

 

(109,111

)

(103,519

)

Total stockholders’ equity

 

35,894

 

39,521

 

Total liabilities and stockholders’ equity

 

$

57,823

 

$

62,886

 

 

See accompanying notes.

 

1


Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

11,088

 

$

11,995

 

$

35,418

 

$

35,620

 

Service revenues

 

12,052

 

14,031

 

37,614

 

42,837

 

Total revenues

 

$

23,140

 

$

26,026

 

$

73,032

 

$

78,457

 

Cost of product revenues

 

6,814

 

7,299

 

20,210

 

20,438

 

Cost of service revenues

 

7,434

 

8,784

 

24,077

 

28,203

 

Total cost of revenues

 

14,248

 

16,083

 

44,287

 

48,641

 

Gross profit

 

8,892

 

9,943

 

28,745

 

29,816

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

9,450

 

9,098

 

28,160

 

26,948

 

Research and development

 

1,887

 

1,946

 

5,888

 

5,554

 

Amortization of intangible assets

 

61

 

18

 

191

 

84

 

Total operating expenses

 

11,398

 

11,062

 

34,239

 

32,586

 

Operating loss

 

(2,506

)

(1,119

)

(5,494

)

(2,770

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

8

 

(9

)

41

 

(14

)

Interest income, net

 

10

 

3

 

90

 

8

 

Loss from continuing operations before income taxes

 

(2,488

)

(1,125

)

(5,363

)

(2,776

)

Benefit (provision) for income taxes

 

24

 

1,373

 

(21

)

1,407

 

Income (loss) from continuing operations

 

(2,464

)

248

 

(5,384

)

(1,369

)

Gain on sale of discontinued operation, net of tax

 

 

95

 

 

258

 

Net income (loss)

 

$

(2,464

)

$

343

 

$

(5,384

)

$

(1,111

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - basic and diluted

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.04

)

Gain per share from sale of discontinued operation - basic and diluted

 

$

 

$

0.00

 

$

 

$

0.01

 

Net income (loss) per share - basic and diluted

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

Shares used in basic per share calculations

 

33,297

 

32,877

 

33,247

 

32,670

 

Shares used in diluted per share calculations

 

33,297

 

34,258

 

33,247

 

32,670

 

 

See accompanying notes.

 

2


Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(5,384

)

$

(1,111

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Deferred income taxes

 

(20

)

(1,381

)

Depreciation of property and equipment

 

661

 

593

 

Stock-based compensation

 

1,555

 

1,325

 

Amortization of intangible assets

 

823

 

525

 

Gain on sale of discontinued operation, net of tax

 

 

(258

)

Loss on disposal of equipment

 

 

15

 

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

 

 

 

 

 

Accounts receivable

 

(1,439

)

654

 

Unbilled accounts receivable and deferred revenue, net

 

379

 

(114

)

Inventories

 

(902

)

(722

)

Prepaid expenses and other assets

 

615

 

491

 

Accounts payable and accrued expenses

 

(436

)

98

 

Net cash provided by operating activities

 

(4,148

)

115

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(611

)

(988

)

Purchases of investments

 

(4,079

)

 

Sales and maturities of investments

 

5,668

 

 

Capitalized software development costs

 

(326

)

(1,834

)

Net proceeds from sale of discontinued operation

 

107

 

402

 

Net cash provided by investing activities

 

759

 

(2,420

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from stock option exercises

 

62

 

986

 

Proceeds from ESPP purchases

 

353

 

 

Tax withholding payments for net share settlements of restricted stock units

 

(5

)

(79

)

Net cash provided by financing activities

 

410

 

907

 

Decrease in cash and cash equivalents

 

(2,979

)

(1,398

)

Cash and cash equivalents at beginning of period

 

10,152

 

18,201

 

Cash and cash equivalents at end of period

 

$

7,173

 

$

16,803

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid during the period for: Income taxes

 

$

1

 

$

128

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Capitalized software development costs included in accounts payable and accrued expenses

 

$

 

$

227

 

 

See accompanying notes.

 

3


Table of Contents

 

Iteris, Inc.

Notes to Unaudited Consolidated Financial Statements

December 31, 2018

 

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, farmers and agronomists 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 offerings and weather forecasting systems offer a comprehensive range of ITS solutions to customers throughout the U.S. and internationally. In the agribusiness markets, 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 the roads we travel and the lands we farm. 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 farming platform. Iteris was incorporated in Delaware in 1987.

 

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, as amended, for the fiscal year ended March 31, 2018 (“Fiscal 2018”). All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine month periods ended December 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2019 (“Fiscal 2019”) or any other periods.

 

The results of continuing operations for all periods presented in the unaudited consolidated financial statements exclude our former Vehicle Sensors segment, which has been classified as a discontinued operation. See Note 3, “Sale of Vehicle Sensors,” for further discussion related to the discontinued operation presentation.

 

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 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 inventores, the valuation of purchased intangible assets and goodwill, the valuation of equity instruments, 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 the stock-based compensation.

 

Revenue Recognition

 

Adoption of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”)

 

On April 1, 2018, the Company adopted ASU 2014-09, including its subsequent amendments as codified under ASC Topic 606 (“ASC 606”), using the modified retrospective approach to apply ASC 606 to all contracts that were not completed as of the beginning of Fiscal Year 2019. ASC 606 is a comprehensive new revenue recognition principle that requires a company to recognize revenue to depict the transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. Results for reporting periods beginning after March 31, 2018 are presented under ASC 606, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period. As a result, the Company recognized the cumulative effect of initially applying ASC 606 as an increase to the opening balance of accumulated deficit in the amount of approximately $0.2 million as of April 1, 2018. The impact of the adoption of the new standard is immaterial to the Company’s consolidated balance sheet, statement of operations, and cash flows.

 

4


Table of Contents

 

The following table represents the impact of adopting ASC 606 on our opening Consolidated Balance sheet as of April 1, 2018:

 

 

 

March 31, 2018

 

Cumulative-Effect

 

April 1, 2018

 

 

 

As Reported

 

Adjustments

 

As Adjusted

 

 

 

 

 

(In thousands)

 

 

 

Prepaid expenses and other current assets

 

$

1,165

 

$

304

 

$

1,469

 

Total assets

 

$

62,886

 

$

304

 

$

63,190

 

 

 

 

 

 

 

 

 

Deferred revenue

 

4,900

 

512

 

5,412

 

Total liabilities

 

$

23,365

 

$

512

 

$

23,877

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

(103,519

)

208

 

(103,727

)

Total liabilities and stockholders’ equity

 

$

62,886

 

$

304

 

$

63,190

 

 

Changes in Accounting Policies as a Result of Adopting ASC 606 and Nature of Goods and Services

 

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.

 

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, software as a service (“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.

 

5


Table of Contents

 

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

 

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 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 liabilities are reported in a net position on a contract basis at the end of each reporting period.

 

Contract Fulfillment Costs

 

The Company evaluates whether or not we should capitalize the costs of fulfilling a contract. Such costs would be capitalized when they are not within the scope of other standards and: (1) are directly related to a contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered. As of December 31, 2018, we capitalized approximately $224,000 of contract fulfillment costs which are presented in the accompanying unaudited consolidated balance sheet as prepaid and other current assets. These costs primarily relate to the satisfaction of performance obligations related to the set up of SaaS platforms. These costs are amortized on a straight-line basis over the estimated useful life of the SaaS platform.

 

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Transaction Price Allocated to the Remaining Performance Obligations

 

As of December 31, 2018, 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.

 

Practical Expedients and Exemptions

 

T&M and CPFF contracts are considered variable consideration. However, performance obligations with an underlying fee type of T&M or CPFF qualify for the “Right to Invoice” Practical Expedient under ASC 606-10-55-18. Under this practical expedient, the Company is not required to estimate such variable consideration upon inception of the contract and reassess the estimate each reporting period.

 

The Company utilizes the practical expedient under ASC 606-10-50-14 of not disclosing information about its remaining performance obligations for contracts with an original expected duration (i.e., contract term, determined based on the analysis of termination provisions described above) of 12 months or less.

 

The Company pays sales commissions on certain sales contracts.  These costs are accrued in the same period that the revenues are recorded. Using the practical expedient under ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining a contract as an expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less.

 

The Company utilizes the practical expedient under ASC 606-10-25-18B to account for shipping and handling as fulfillment costs, and not a promised service (a revenue element). Shipping and handling costs are included as cost of revenues in the period during which the products ship.

 

The Company excludes from the transaction price all sales taxes that are assessed by a governmental authority and that are imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (for example, sales, use, value added, and some excise taxes). This employs the practical expedient under ASC 606-10-32-2A. Sales taxes are presented on a net basis (excluded from revenues) in the Company’s unaudited consolidated statements of operations.

 

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 customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

 

We have historically had a diverse customer base. For the three and nine months ended December 31, 2018, one individual customer represented approximately 11% and 14%, respectively, of our total revenues and no other individual customer represented greater than 10% of our total revenues. For the three and nine months ended December 31, 2017, one individual customer represented approximately 20% and 22%, respectively, of our total revenues and no other individual customer represented greater than 10% of our total revenues. As of December 31, 2018, no individual customer represented greater than 10% our total accounts receivable. As of March 31, 2018, one customer represented approximately 13% of our total accounts receivable, and no other individual customer represented greater than 10% of our total accounts receivable.

 

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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.

 

The framework for measuring fair value and related disclosure requirements about fair value measurements are provided in FASB 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, Capital Investments Capital Debt and Capital Equity Capital Securities (“ASC 320”). 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 4). 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.

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets were approximately $747,000 as of December 31, 2018.  Prepaid expenses and other current assets were $1.2 million as of March 31, 2018 and included approximately $130,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds required us to maintain 100% cash value of the bonds as collateral in a bank that is local to the purchasing agency. The performance bond collateral was required throughout the delivery of our services and was maintained in the local bank until the contract was closed by the purchasing agency. The requirements on the remaining performance bonds, and the related cash collateral restrictions, were released during the quarter ended June 30, 2018.

 

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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.

 

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 further testing is required, we perform a two-step process. The first step involves comparing the fair value of our reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies.

 

In Fiscal 2017, we adopted the provisions issued by the FASB that were intended to simplify goodwill impairment testing. This guidance permits us to eliminate the second step of the goodwill impairment test, and eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. 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 December 31, 2018, we determined that no adjustments to the carrying value of goodwill were required.

 

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 December 31, 2018, 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, 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.

 

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Stock-Based Compensation

 

We record stock-based compensation in our 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.

 

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 consolidated balance sheets. We do not provide any service-type warranties.

 

Comprehensive Loss

 

The difference between net loss and comprehensive loss was de minimis for the three and nine months ended December 31, 2018. Comprehensive loss equaled net loss for three and nine months ended December 31, 2017.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The pronouncement requires an entity to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. ASU 2016-02 requires entities to adopt the new standard using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). In issuing ASU 2018-11, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Therefore, the Company expects this adoption will result in a material increase in the long-term assets and long-term liabilities on its consolidated balance sheets. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The Company plans to adopt the standard in the first quarter of fiscal year ended March 31, 2020 and is currently continuing its assessment, which may identify other impacts the revised standard will have on the consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740), and Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). ASU 2018-05 adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin (“SAB”) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Act under the guidance of SAB 118, on a provisional basis. The Company’s accounting for certain income tax effects is incomplete, but the Company has determined what it believes are reasonable estimates for those effects and has recorded provisional amounts in its consolidated financial statements as of December 31, 2018 and March 31, 2018.

 

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In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting(“ASU 2018-07”), which expand the scope of Topic 718, Compensation — Stock Compensation to include share-based payment transaction for acquiring goods and services from nonemployees. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The adoption of ASU 2018-07 is not expected to have a material impact on our consolidated financial statements.

 

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 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 consolidated financial statements.

 

2.                                      Supplemental Financial Information

 

Inventories

 

The following table presents details of our inventories:

 

 

 

December 31,

 

March 31,

 

 

 

2018

 

2018

 

 

 

(In thousands)

 

Materials and supplies

 

$

1,562

 

$

1,745

 

Work in process

 

1,334

 

232

 

Finished goods

 

927

 

944

 

 

 

$

3,823

 

$

2,921

 

 

Property and Equipment, net

 

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

 

 

 

December 31

 

March 31,

 

 

 

2018

 

2018

 

 

 

(In thousands)

 

Equipment

 

$

6,568

 

$

6,053

 

Leasehold improvements

 

2,939

 

2,880

 

Accumulated depreciation

 

(7,224

)

(6,600

)

 

 

$

2,283

 

$

2,333

 

 

Depreciation expense was approximately $198,000 and $661,000 for the three and nine months ended December 31, 2018, respectively. Depreciation expense was approximately $205,000 and $593,000 for the three and nine months ended December 31, 2017, 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:

 

 

 

December 31, 2018

 

March 31, 2018

 

 

 

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

 

(1,102

)

8

 

Capitalized software development costs

 

5,433

 

(2,179

)

3,254

 

5,108

 

(1,365

)

3,743

 

Total

 

$

9,149

 

$

(5,895

)

$

3,254

 

$

8,824

 

$

(5,073

)

$

3,751

 

 

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Amortization expense for intangible assets subject to amortization was approximately $273,000 and $823,000 for the three and nine months ended December 31, 2018, respectively. Amortization expense for intangible assets subject to amortization was approximately $202,000 and $525,000 for the three and nine months ended December 31, 2017, respectively. Approximately $212,000 and $632,000 of the intangible asset amortization was recorded to cost of revenues, and approximately $61,000 and $191,000 was recorded to amortization expense for the three and nine months ended December 31, 2018, respectively, in the consolidated statements of operations. Approximately $184,000 and $441,000 of the intangible asset amortization was recorded to cost of revenues, and approximately $18,000 and $84,000 was recorded to amortization expense for the three and nine months ended December 31, 2017, respectively, in the consolidated statements of operations.

 

As of December 31, 2018, our net capitalized software development costs of approximately $3.3 million is primarily associated with our Oracle Enterprise Resource Planning (“ERP”) system design and implementation of approximately $2.1 million, which has a useful life of 10 years beginning Fiscal 2019.

 

As of December 31, 2018, future estimated amortization expense is as follows:

 

Fiscal Year Ending March 31,

 

 

 

(In thousands)

 

 

 

Remainder of 2019

 

$

280

 

2020

 

870

 

2021

 

521

 

2022

 

302

 

2023

 

244

 

Thereafter

 

1,037

 

 

 

$

3,254

 

 

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:

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2018

 

2017

 

 

 

(In thousands)

 

Balance at beginning of fiscal year

 

$

403

 

$

278

 

Additions charged to cost of sales

 

509

 

512

 

Warranty claims

 

(361

)

(400

)

Balance at end of period

 

$

551

 

$

390

 

 

Earnings Per Share

 

The following table sets forth the computation of basic and diluted loss from continuing operations per share:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands, except par values)

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(2,464

)

$

248

 

$

(5,384

)

$

(1,369

)

Gain on sale of discontinued operation, net of tax

 

 

95

 

 

258

 

Net income (loss)

 

$

(2,464

)

$

343

 

$

(5,384

)

$

(1,111

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares used in basic computation

 

33,297

 

32,877

 

33,247

 

32,670

 

Dilutive stock options

 

 

1,274

 

 

 

Dilutive restricted stock units

 

 

107

 

 

 

Weighted average common shares used in diluted computation

 

33,297

 

34,258

 

33,247

 

32,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.03

)

Diluted

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.03

)

 

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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

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands)

 

Stock options

 

5,225

 

3,607

 

4,515

 

3,770

 

Restricted stock units

 

181

 

246

 

155

 

256

 

 

3.                                    Sale of Vehicle Sensors

 

On July 29, 2011, we completed the sale (the “Asset Sale”) of substantially all of our assets used in connection with our prior Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr Bremse Group. In connection with the Asset Sale, we are entitled to additional consideration in the form of the following performance and royalty related earn-outs: Bendix was obligated to pay us an amount in cash equal to 85% of revenue associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation and Valeo Schalter and Sensoren GmbH through December 31, 2017, subject to certain reductions and limitations set forth in the asset purchase agreement. From the date of the Asset Sale, through December 31, 2018, we received approximately $2.7 million in connection with royalty-related earn-outs provisions for a total of $18 million in cash received from the Asset Sale.

 

In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operating segments, qualified as a discontinued operation. For the nine months ended December 31, 2018 and 2017, we recorded a gain on sale of discontinued operation of approximately $0 and $258,000, respectively, net of tax, related to the earn-out provisions of the asset purchase agreement for the Asset Sale.

 

4.                                    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.

 

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 December 31, 2018 and March 31, 2018. 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:

 

 

 

As of December 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,008

 

$

 

$

 

$

2,008

 

Subtotal

 

2,008

 

 

 

2,008

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

Commercial paper

 

 

 

 

 

Corporate notes and bonds

 

2,180

 

(4

)

 

2,176

 

US Treasuries

 

799

 

(0

)

 

799

 

US Government agencies

 

754

 

 

 

754

 

Subtotal

 

3,733

 

(4

)

 

3,729

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,741

 

$

(4

)

$

 

$

5,737

 

 

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Table of Contents

 

 

 

As of March 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

666

 

$

 

$

 

$

666

 

Subtotal

 

666

 

 

 

666

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

Commercial paper

 

1,891

 

 

 

1,891

 

Corporate notes and bonds

 

2,008

 

(2

)

 

2,006

 

US Treasuries

 

1,500

 

(1

)

 

1,499

 

US Government agencies

 

2,950

 

(1

)

 

2,949

 

Subtotal

 

8,349

 

(4

)

 

8,345

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

9,015

 

$

(4

)

$

 

$

9,011

 

 

5.                                      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 benefit for the three months ended December 31, 2018 was approximately $24,000, or 1.0% of the pre-tax loss as compared with a benefit of approximately $1.4 million, or 122.0% of pre-tax loss for the three months ended December 31, 2017. Income tax expense for the nine months ended December 31, 2018 was approximately $21,000, or (0.4%) of the pre-tax loss as compared with a benefit of approximately $1.4 million, or 50.7% of pre-tax loss for the nine months ended December 31, 2017.

 

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.

 

The Tax Act was enacted on December 22, 2017 and the Company accounted for the effects of the Tax Act in the period of enactment. Also, on December 22, 2017, the SEC issued guidance under SAB 118 directing taxpayers to consider the impact of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the income tax effects of the Tax Act represent the Company’s best estimate based on its current interpretation of the enacted legislation. The Company is accumulating data to finalize the underlying calculations and evaluate other aspects of this Tax Act, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the Tax Act. In accordance with SAB 118, the income tax effects of the Tax Act discussed above are considered provisional and will be finalized in the current fiscal year.

 

6.                                      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 consolidated results of operations, financial position or cash flows.

 

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 December 31, 2018, 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.

 

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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 December 31, 2018, there were approximately 2.5 million shares of common stock available for grant or issuance under the 2016 Plan. Total stock options vested and expected to vest were approximately 5.1 million as of December 31, 2018.

 

Stock Options

 

A summary of activity with respect to our stock options for the nine months ended December 31, 2018 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price Per
Share

 

 

 

(In thousands)

 

 

 

Options outstanding at March 31, 2018

 

4,124

 

$

3.58

 

Granted

 

1,038

 

4.20

 

Exercised

 

(25

)

2.27

 

Forfeited

 

(76

)

4.93

 

Expired

 

(1

)

4.91

 

Options outstanding at December 31, 2018

 

5,060

 

3.69

 

 

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 nine months ended December 31, 2018 is as follows:

 

 

 

Number of
Shares

 

 

 

(In thousands)

 

RSUs outstanding at March 31, 2018

 

144

 

Granted

 

62

 

Vested

 

(59

)

Forfeited

 

(24

)

RSUs outstanding at December 31, 2018

 

123

 

 

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

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands)

 

Cost of revenues

 

$

35

 

$

16

 

$

104

 

$

47

 

Selling, general and administrative expense

 

444

 

398

 

1,303

 

1,167

 

Research and development expense

 

51

 

33

 

148

 

111

 

Total stock-based compensation expense

 

$

530

 

$

447

 

$

1,555

 

$

1,325

 

 

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At December 31, 2018, there was approximately $5.2 million and $461,000 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 2.9 years for stock options and 1.4 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

 

Beginning January 1, 2018, the Company adopted 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 annual stock value limit. 35,808 shares were purchased related to the first offering period of Fiscal 2019 in June 2018.  52,760 shares were purchased related to the second offering period of Fiscal 2019 in December 2018. There were no share purchases in Fiscal 2018. 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 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 nine months ended December 31, 2018 and 2017, we did not repurchase any shares. As of December 31, 2018, approximately $1.7 million remained available for the repurchase of our common stock under our current stock repurchase program. From inception of the program in August 2011 through December 31, 2018, 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 December 31, 2018, all repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock.

 

9.                                      Investments

 

Our investments consisted of the following:

 

 

 

As of December 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

2,008

 

$

 

$

 

$

2,008

 

Short-term investments

 

3,733

 

(4

)

 

3,729

 

Long-term investments

 

 

 

 

 

Total

 

$

5,741

 

$

(4

)

$

 

$

5,737

 

 

 

 

As of March 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

3,692

 

$

 

$

 

$

3,692

 

Short-term investments

 

5,323

 

(4

)

 

5,319

 

Long-term investments

 

 

 

 

 

Total

 

$

9,015

 

$

(4

)

$

 

$

9,011

 

 

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 December 31, 2018.

 

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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 Roadways 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!, 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 infrastructure systems. We perform analysis and study goods movement, provide commercial vehicle safety solutions, provide travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. Our Transportation Systems product line includes Iteris SPM and iPeMS, our performance measurement and information management solutions 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, ClearAg applications, WeatherPlot mobile applications, and ClearAg Insights applications.

 

The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1). 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 and nine months ended December 31, 2018 and 2017:

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture
and Weather
Analytics

 

Total

 

 

 

(In thousands)

 

Three Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

Product revenues

 

$

10,165

 

$

923

 

$

 

$

11,088

 

Service revenues

 

69

 

10,410

 

1,573

 

12,052

 

Total revenues

 

$

10,234

 

$

11,333

 

$

1,573

 

$

23,140

 

Segment income (loss)

 

1,153

 

1,147

 

(1,138

)

1,162

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

Product revenues

 

$

11,008

 

$

987

 

$

 

$

11,995

 

Service revenues

 

34

 

12,584

 

1,413

 

14,031

 

Total revenues

 

$

11,042

 

$

13,571

 

$

1,413

 

$

26,026

 

Segment income (loss)

 

2,048

 

2,207

 

(1,815

)

2,440

 

 

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Table of Contents

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture
and Weather
Analytics

 

Total

 

 

 

(In thousands)

 

Nine Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

Product revenues

 

$

31,926

 

$

3,492

 

$

 

$

35,418

 

Service revenues

 

145

 

33,384

 

4,085

 

37,614

 

Total revenues

 

$

32,071

 

$

36,876

 

$

4,085

 

$

73,032

 

Segment income (loss)

 

5,463

 

4,276

 

(3,869

)

5,870

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

Product revenues

 

$

33,438

 

$

2,182

 

$

 

$

35,620

 

Service revenues

 

145

 

39,210

 

3,482

 

42,837

 

Total revenues

 

$

33,583

 

$

41,392

 

$

3,482

 

$

78,457

 

Segment income (loss)

 

7,384

 

6,472

 

(5,882

)

7,974

 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands)

 

Segment income (loss):

 

 

 

 

 

 

 

 

 

Total income from reportable segments

 

$

1,162

 

$

2,440

 

$

5,870

 

$

7,974

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate and other expenses

 

(3,607

)

(3,541

)

(11,173

)

(10,660

)

Amortization of intangible assets

 

(61

)

(18

)

(191

)

(84

)

Other expense, net

 

8

 

(9

)

41

 

(14

)

Interest income, net

 

10

 

3

 

90

 

8

 

Loss from continuing operations before income taxes

 

$

(2,488

)

$

(1,125

)

$

(5,363

)

$

(2,776

)

 

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

 

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 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, 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. A substantial portion of our OEM sales are generated in Texas.

 

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

 

We recently launched our intersection-as-a-service comprehensive signal performance measures solution offering, which provides Iteris SPM, a cloud-based application that provides proactive operations and signal maintenance with business process outsourcing and managed services.  This offering is expected to be priced on a per intersection per month basis.

 

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, ClearAg applications, WeatherPlot mobile applications, and ClearAg Insights applications.

 

See Note 10 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 inventores, the valuation of purchased intangible assets and goodwill, the valuation of equity instruments, 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 the 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.

 

See Note 1 for a discussion of changes to our accounting policies as a result of adopting ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) during the quarter ended December 31, 2018.

 

Recent Accounting Pronouncements

 

Refer to Note 1 of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report for a discussion of applicable recent accounting pronouncements.

 

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Table of Contents

 

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

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

47.9

%

46.1

%

48.5

%

45.4

%

Service revenues

 

52.1

 

53.9

 

51.5

 

54.6

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of product revenues

 

29.4

 

28.0

 

27.7

 

26.1

 

Cost of service revenues

 

32.2

 

33.8

 

33.0

 

35.9

 

Total cost of revenues

 

61.6

 

61.8

 

60.7

 

62.0

 

Gross profit

 

38.4

%

38.2

%

39.3

%

38.0

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

40.8

 

35.0

 

38.6

 

34.3

 

Research and development

 

8.2

 

7.5

 

8.1

 

7.1

 

Amortization of intangible assets

 

0.3

 

0.1

 

0.3

 

0.1

 

Total operating expenses

 

49.3

 

42.6

 

47.0

 

41.5

 

Operating loss

 

(10.9

)

(4.4

)

(7.7

)

(3.5

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

0.0

 

(0.0

)

0.1

 

(0.0

)

Interest income, net

 

0.0

 

0.0

 

0.1

 

0.0

 

Loss from continuing operations before income taxes

 

(10.9

)

(4.4

)

(7.5

)

(3.5

)

Benefit (provision) for income taxes

 

0.1

 

5.3

 

(0.0

)

1.9

 

Income (loss) from continuing operations

 

(10.8

)

0.9

 

(7.5

)

(1.6

)

Gain on sale of discontinued operation, net of tax

 

 

0.3

 

 

0.3

 

Net income (loss)

 

(10.8

)%

1.2

%

(7.5

)%

(1.3

)%

 

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 and nine months ended December 31, 2018 and 2017:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2018

 

2017

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product revenues

 

$

11,088

 

$

11,995

 

$

(907

)

-7.6

%

Service revenues

 

12,052

 

14,031

 

(1,979

)

-14.1

%

Total revenues

 

$

23,140

 

$

26,026

 

$

(2,886

)

-11.1

%

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2018

 

2017

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product revenues

 

$

35,418

 

$

35,620

 

$

(202

)

-0.6

%

Service revenues

 

37,614

 

42,837

 

(5,223

)

-12.2

%

Total revenues

 

$

73,032

 

$

78,457

 

$

(5,425

)

-6.9

%

 

20


Table of Contents

 

Product revenues primarily consist of Roadway Sensors product sales, but also include OEM products for the traffic signal markets, as well as Transportation Systems third-party product sales for installation under certain construction-type contracts. Product revenues for the three months ended December 31, 2018 decreased 7.6% to $11.1 million, as compared to $12.0 million in the corresponding period in the prior year, primarily due to a decrease in unit sales from our distribution of certain OEM products for the traffic intersection market, largely in our Texas markets, as a result of the delayed finalization of certain statewide purchase programs.

 

Service revenues primarily consist of Transportation Systems engineering services, but also includes service revenues generated by our Roadway Sensors segment, and our Agriculture and Weather Analytics segment. Service revenues for the three months ended December 31, 2018 decreased 14.1% to $12.1 million, compared to $14.0 million in the corresponding period in the prior year, primarily due to lower Transportation Systems traffic engineering service revenues. The decline in Transportation Systems revenues was largely the result of the transition from being the prime contractor on certain large contracts during Fiscal 2018, to the sub-contracting party with a reduced scope, and to a lesser extent, due to reduced billable hours by our engineers in the current year period primarily due to increased bid/proposal activities in the current period. Total revenues for the three months ended December 31, 2018 decreased 11.1% to $23.1 million, compared to $26.0 million in the corresponding period in the prior year. The decrease in total revenues was primarily due to an approximate 16.5% decrease in Transportation Systems revenues, an approximate 7.3% decrease in Roadway Sensors revenues, which were offset in part by an approximate 11.3% increase in Agriculture and Weather Analytics revenues.

 

Product revenues for the nine months ended December 31, 2018 decreased 0.6% to $35.4 million, compared to $35.6 million in the corresponding period in the prior year, primarily due to a decrease in both our sales of our core Roadway Sensors video detection products, as well as unit sales from our distribution of certain OEM products for the traffic intersection market, both of which largely reflect continued underperformance in our Texas markets. This decrease in product revenues was offset in part by an increase in Transportation Systems third-party product sales for installation under certain construction-type contracts that we classify as product revenues.

 

Service revenues for the nine months ended December 31, 2018 decreased 12.2% to $37.6 million, compared to $42.8 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 the fiscal year ended March 31, 2016 (“Fiscal 2016”), to the sub-contracting party. Total revenues for the nine months ended December 31, 2018 decreased 6.9% to $73.0 million, compared to $78.5 million in the corresponding period in the prior year. The decrease in total revenues was primarily due to an approximate 10.9% decrease in Transportation Systems revenues, an approximate 4.5% decrease in Roadway Sensors revenues, offset in part by an approximate 17.3% increase in Agriculture and Weather Analytics revenues.

 

Roadway Sensors revenues for the three months ended December 31, 2018 included approximately $10.2 million in product revenues and approximately $69,000 of service revenues, reflecting a decrease in total revenues of approximately $808,000 or 7.3%, compared to the corresponding prior year period. Roadway Sensors revenues for the nine months ended December 31, 2018 included approximately $31.9 million in product revenues and $145,000 of service revenues, reflecting a decrease in total revenues of approximately $1.5 million or 4.5%, compared to the corresponding prior year period. The decrease in Roadway Sensors revenues during the three months ended December 31, 2018 was primarily due to lower unit sales from our distribution of certain OEM products for the traffic intersection market, which declined approximately $724,000 or 43.8% to approximately $928,000 in the current period, primarily resulting from the aforementioned delayed finalization of certain statewide purchase programs. The decrease in Roadway Sensors revenues during the nine months ended December 31, 2018 was also impacted by lower unit sales from our distribution of certain OEM products for the traffic intersection market, which declined approximately $1.1 million or 31.3% to approximately $2.4 million in the current period, as well as a decrease of approximately $409,000 or 1.4% in our core Roadway Sensors video detection products.  Both decreases were primarily due to the aforementioned delayed finalization of certain statewide purchase programs. 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 December 31, 2018 included approximately $10.4 million of service revenues, and approximately $923,000 of sales of third-party products purchased for installation under certain construction-type contracts, reflecting a decrease in total revenues of approximately $2.2 million or 16.5%, compared to the corresponding prior year period. Revenues for the nine months ended December 31, 2018 included approximately $33.4 million of service revenues, and approximately $3.5 million of third-party product sales and revenues derived under certain construction-type contracts that we classify as product revenues, reflecting a decrease in total revenues of approximately $4.5 million or 10.9%, compared to the corresponding prior year period. The decreases during the three and nine month periods ended December 31, 2018 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

 

21


Table of Contents

 

fulfilment on certain other projects. Transportation Systems added approximately $8.2 million of new backlog during the third quarter of Fiscal 2019. Transportation Systems backlog decreased to approximately $45.3 million as of December 31, 2018, compared to approximately $46.0 million as of December 31, 2017. 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 December 31, 2018 included no product revenue and approximately $1.6 million of service revenues, largely consisting of subscription revenues, reflecting an increase of approximately $160,000 or 11.3%, compared to the corresponding period in the prior year. Revenues for the nine months ended December 31, 2018 included no product revenue and  approximately $4.1 million of service revenues, reflecting an increase of approximately $603,000 or 17.3%, 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 and nine months ended December 31, 2018 and 2017:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2018

 

2017

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

4,274

 

$

4,696

 

$

(422

)

-9.0

%

Service gross margin

 

4,618

 

5,247

 

(629

)

(12.0

)%

Total gross margin

 

$

8,892

 

$

9,943

 

$

(1,051

)

-10.6

%

 

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

38.5

%

39.1

%

 

 

 

 

Service gross profit as a % of service revenues

 

38.3

%

37.4

%

 

 

 

 

Total gross margin as a % of total revenues

 

38.4

%

38.2

%

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2018

 

2017

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

15,208

 

$

15,182

 

$

26

 

0.2

%

Service gross margin

 

13,537

 

14,634

 

(1,097

)

(7.5

)%

Total gross margin

 

$

28,745

 

$

29,816

 

$

(1,071

)

-3.6

%

 

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

42.9

%

42.6

%

 

 

 

 

Service gross profit as a % of service revenues

 

36.0

%

34.2

%

 

 

 

 

Total gross margin as a % of total revenues

 

39.4

%

38.0

%

 

 

 

 

 

Our product gross profit as a percentage of product revenues for the three months ended December 31, 2018 decreased 60 basis points, as compared to the corresponding period in the prior year, primarily due to one time inventory charges that were experienced in the current period. Product gross profit as a percentage of product revenues for the nine months ended December 31, 2018 was relatively consistent with the corresponding prior period in the prior year. Our service gross profit as a percentage of service revenues for the three months and nine months ended December 31, 2018 increased 92 and 183 basis points, respectively, 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 in the current periods. Sub-consulting content generally results in lower gross margins than our workforce.

 

Our total gross profit as a percentage of total revenues for the three months ended December 31, 2018 was relatively consistent with the corresponding period in the prior year. Our total gross profit as a percentage of total revenues increased approximately 136 basis points for the nine months ended December 31, 2018 as compared to the corresponding period 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 in the current periods .

 

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Table of Contents

 

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 December 31, 2018 increased approximately 3.9% to $9.5 million, compared to $9.1 million for the three months ended December 31, 2017. The overall increase was primarily due to increased bid/proposal activities in Transportations Systems in the current period.

 

Selling, general and administration expense for the nine months ended December 31, 2018 increased approximately 4.5% to $28.2 million, compared to $26.9 million for the nine months ended December 31, 2017. The overall increase was primarily due to planned headcount increases in general and administrative positions, as well as increases in the Transportations Systems and Roadway Sensors salesforce headcount, all of which resulted in higher salary and personnel-related costs.

 

Research and Development Expense

 

Research and development expense for the three months ended December 31, 2018 was relatively consistent with the three months ended December 31, 2017, at $1.9 million for both periods.

 

Research and development expense for the nine months ended December 31, 2018 increased approximately 6.0% to $5.9 million, compared to $5.6 million for the nine months ended December 31, 2017. The overall increase was primarily due to continued investment in research, discovery and development activities largely focused on our software related product offerings.

 

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

 

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 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 $61,000 and $18,000 for the three months ended December 31, 2018 and 2017, respectively. Amortization of intangible assets was approximately $191,000 and $84,000 for the nine months ended December 31, 2018 and 2017, respectively. The increase in amortization in the current periods was primarily due to amortization related to our Oracle ERP system design and development, which was placed in service in April 2018.

 

Interest Income, Net

 

Net interest income was approximately $10,000 and $3,000 for the three months ended December 31, 2018 and 2017, respectively. Net interest income was approximately $90,000 and $8,000 for the nine months ended December 31, 2018 and 2017, respectively. The increase in net interest income in the current periods was primarily due to interest earned on investments purchased and held during the current periods.

 

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.

 

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Table of Contents

 

Income tax benefit for the three months ended December 31, 2018 was approximately $24,000, or 1.0% percent of the pre-tax loss as compared with a benefit of approximately $1.4 million, or 122.0% of pre-tax loss for the three months ended December 31, 2017. Income tax expense for the nine months ended December 31, 2018 was approximately $21,000, or (0.4%) of the pre-tax loss as compared with a benefit of approximately $1.4 million, or 50.7% of pre-tax loss for the nine months ended December 31, 2017.

 

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.

 

The Tax Act was enacted on December 22, 2017 and the Company accounted for the effects of the Tax Act in the period of enactment. Also, on December 22, 2017, the SEC issued guidance under SAB 118 directing taxpayers to consider the impact of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the income tax effects of the Tax Act represent the Company’s best estimate based on its current interpretation of the enacted legislation. The Company is accumulating data to finalize the underlying calculations and evaluate other aspects of this Tax Act, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the Tax Act. In accordance with SAB 118, the income tax effects of the Tax Act discussed above are considered provisional and will be finalized in the current fiscal year.

 

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 have historically relied, and 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 December 31, 2018, we had $14.2 million in working capital, which included $7.2 million in cash and cash equivalents, as well as $3.7 million in short-term investments. This compares to working capital of $17.4 million at March 31, 2018, which included $10.2 million in cash and cash equivalents as well as $5.3 million in short-term investments.

 

The following table summarizes our cash flows for the nine months ended December 31, 2018 and 2017:

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2018

 

2017