Attached files

file filename
EX-32.2 - EX-32.2 - ITERIS, INC.a17-20672_1ex32d2.htm
EX-32.1 - EX-32.1 - ITERIS, INC.a17-20672_1ex32d1.htm
EX-31.2 - EX-31.2 - ITERIS, INC.a17-20672_1ex31d2.htm
EX-31.1 - EX-31.1 - ITERIS, INC.a17-20672_1ex31d1.htm

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 September 30, 2017

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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

x

 

 

 

 

 

 

Non accelerated filer      

o

Smaller reporting company

o

 

(Do not check if a smaller reporting company)

 

 

 

 

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 October 30, 2017, there were 32,787,202 shares of 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 SEPTEMBER 30, 2017 AND MARCH 31, 2017

1

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

2

 

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

3

 

 

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4

 

 

 

 

ITEM 2.

 

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

16

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

23

 

 

 

 

PART II.

 

OTHER INFORMATION

23

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

23

 

 

 

 

ITEM 1A.

 

RISK FACTORS

24

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

33

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

33

 

 

 

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

33

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

33

 

 

 

 

ITEM 6.

 

EXHIBITS

33

 

Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and its wholly-owned subsidiary. ClearAg®, ClearPath Weather®, CVIEW-Plus™, Edge®, EdgeConnect™, EMPower®, EvapoSmart™, IMFocus™, iPeMS®, Iteris®, Next®, P10™, P100™, PedTrax™, Pegasus™, Radius™, SmartCycle®, SmartSpan®, TransitHelper®, Vantage®, VantageNext®, VantagePegasus®, VantageRadius™, Vantage Vector®, VantageLive!™, VantageView™, 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)

 

 

 

September 30,

 

March 31,

 

 

 

2017

 

2017

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

14,922

 

$

18,201

 

Trade accounts receivable, net of allowance for doubtful accounts of $414 and $389 at September 30, 2017 and March 31, 2017, respectively

 

15,076

 

14,299

 

Unbilled accounts receivable

 

6,812

 

6,456

 

Inventories

 

2,783

 

2,250

 

Prepaid expenses and other current assets

 

2,499

 

2,108

 

Total current assets

 

42,092

 

43,314

 

Property and equipment, net

 

2,474

 

2,064

 

Intangible assets, net

 

2,320

 

1,498

 

Goodwill

 

15,150

 

15,150

 

Other assets

 

359

 

319

 

Total assets

 

$

62,395

 

$

62,345

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

8,279

 

$

7,886

 

Accrued payroll and related expenses

 

5,446

 

6,443

 

Accrued liabilities

 

2,245

 

2,201

 

Deferred revenue

 

4,662

 

4,049

 

Total current liabilities

 

20,632

 

20,579

 

Deferred rent

 

715

 

649

 

Deferred income taxes

 

707

 

707

 

Unrecognized tax benefits

 

159

 

186

 

Total liabilities

 

22,213

 

22,121

 

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 September 30, 2017 and March 31, 2017
Issued and outstanding shares - 32,787 at September 30, 2017

and 32,488 at March 31, 2017

 

3,279

 

3,249

 

Additional paid-in capital

 

138,351

 

136,968

 

Accumulated deficit

 

(101,448

)

(99,993

)

Total stockholders’ equity

 

40,182

 

40,224

 

Total liabilities and stockholders’ equity

 

$

62,395

 

$

62,345

 

 

See accompanying notes.

 

1



Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

11,702

 

$

11,086

 

$

23,625

 

$

22,093

 

Service revenues

 

13,546

 

12,974

 

28,806

 

25,893

 

Total revenues

 

$

25,248

 

24,060

 

$

52,431

 

47,986

 

Cost of product revenues

 

6,278

 

6,196

 

13,141

 

12,150

 

Cost of service revenues

 

9,002

 

8,409

 

19,417

 

16,972

 

Total cost of revenues

 

15,280

 

14,605

 

32,558

 

29,122

 

Gross profit

 

9,968

 

9,455

 

19,873

 

18,864

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

9,153

 

7,858

 

17,850

 

15,663

 

Research and development

 

1,881

 

1,698

 

3,608

 

3,308

 

Amortization of intangible assets

 

33

 

84

 

66

 

169

 

Total operating expenses

 

11,067

 

9,640

 

21,524

 

19,140

 

Operating loss

 

(1,099

)

(185

)

(1,651

)

(276

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

2

 

(2

)

(5

)

(6

)

Interest income, net

 

3

 

4

 

5

 

5

 

Loss from continuing operations before income taxes

 

(1,094

)

(183

)

(1,651

)

(277

)

Benefit for income taxes

 

33

 

8

 

34

 

7

 

Loss from continuing operations

 

(1,061

)

(175

)

(1,617

)

(270

)

Gain on sale of discontinued operation, net of tax

 

77

 

135

 

163

 

191

 

Net loss

 

$

(984

)

$

(40

)

$

(1,454

)

$

(79

)

 

 

 

 

 

 

 

 

 

 

Loss per share from continuing operations - basic and diluted

 

$

(0.03

)

$

(0.01

)

$

(0.05

)

$

(0.01

)

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

 

$

0.00

 

$

0.01

 

$

0.01

 

$

0.01

 

Net loss per share - basic and diluted

 

$

(0.03

)

$

(0.00

)

$

(0.04

)

$

(0.00

)

 

 

 

 

 

 

 

 

 

 

Shares used in basic and diluted per share calculations

 

32,628

 

32,117

 

32,567

 

32,085

 

 

See accompanying notes.

 

2



Table of Contents

 

Iteris, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(1,454

)

$

(79

)

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

 

 

 

 

 

Deferred income taxes

 

(27

)

13

 

Depreciation of property and equipment

 

388

 

361

 

Stock-based compensation

 

877

 

486

 

Amortization of intangible assets

 

323

 

354

 

Gain on sale of discontinued operation, net of tax

 

(163

)

(191

)

Loss on disposal of equipment

 

6

 

12

 

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

 

 

 

 

 

Accounts receivable

 

(777

)

782

 

Unbilled accounts receivable and deferred revenue, net

 

257

 

(1,624

)

Inventories

 

(533

)

379

 

Prepaid expenses and other assets

 

(529

)

(190

)

Accounts payable and accrued expenses

 

(889

)

(24

)

Net cash (used in) provided by operating activities

 

(2,521

)

279

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(804

)

(401

)

Capitalized software development costs

 

(750

)

(461

)

Net proceeds from sale of discontinued operation

 

260

 

88

 

Net cash used in investing activities

 

(1,294

)

(774

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from stock option exercises

 

566

 

214

 

Tax withholding payments for net share settlements of restricted stock units

 

(30

)

(35

)

Net cash provided by financing activities

 

536

 

179

 

Decrease in cash and cash equivalents

 

(3,279

)

(316

)

Cash and cash equivalents at beginning of period

 

18,201

 

16,029

 

Cash and cash equivalents at end of period

 

$

14,922

 

$

15,713

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid during the quarter for:

 

 

 

 

 

Interest

 

$

 

$

9

 

Income taxes

 

88

 

47

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing activities:

 

 

 

 

 

Capitalized software development costs included in accounts payable and accrued expenses

 

$

395

 

$

 

 

See accompanying notes.

 

3



Table of Contents

 

Iteris, Inc.

Notes to Unaudited Consolidated Financial Statements

September 30, 2017

 

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 applied informatics for both the traffic management and global agribusiness markets. We are focused on the development and application of advanced technologies and software-based information systems that make roads safer and travel more efficient, as well as farmlands more sustainable, healthy and productive. By combining our unique intellectual property, products, decades of experience in traffic management, weather forecasting solutions and information technologies, we offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers throughout the U.S. and internationally. We believe our products, services and solutions, in conjunction with sound traffic and land management, minimize the environmental impact to the roads we travel and the lands we farm. In the agribusiness markets, we have combined our unique intellectual property with enhanced soil, land surface and agronomy modeling techniques to create a set of ClearAg solutions that provide analytical support to large enterprises in the agriculture market, such as seed and crop protection companies, as well as field-specific advisories to individual producers. We continue to make significant investments to leverage our existing technologies and further expand our software-based information systems to offer digital analytics solutions to the agriculture markets. Iteris was incorporated in Delaware in 1987.

 

Recent Developments

 

ClearAg Inc.

 

In April 2017, Iteris, Inc. formed a wholly-owned subsidiary, ClearAg, Inc., a Delaware corporation, to provide ClearAg solutions in the global agribusiness markets.

 

Basis of Presentation

 

Our unaudited consolidated financial statements include the accounts of Iteris, Inc. and its subsidiary, and have been prepared in accordance with the rules of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting, which permit certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“GAAP”) to be condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended March 31, 2017 (“Fiscal 2017”), filed with the SEC on June 13, 2017. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2018 (“Fiscal 2018”) 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 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, costs to complete long-term contracts, indirect cost rates used in cost plus contracts, the valuation of purchased intangible assets and goodwill, the valuation of equity instruments and 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.

 

4



Table of Contents

 

Revenue Recognition

 

Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery under the terms of the arrangement has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the time of product shipment but, in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.

 

Transportation Systems revenues are derived primarily from long-term contracts with governmental agencies. Certain Agriculture and Weather Analytics revenues are also derived from long-term contracts with governmental agencies, as well as contracts with commercial companies. Agriculture and Weather Analytics revenues that are derived from contracts with commercial companies are generally from subscription revenue that we typically invoice our customers at the beginning of the term, in multiyear, annual, semi-annual or quarterly installments, and revenue is recognized ratably over the period of the subscription beginning once all requirements for revenue recognition have been met, including provisioning the service so that it is available to our customers. When appropriate, revenues are recognized using the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and is determined based on the relationship of costs incurred to total estimated costs. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues, and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues, when their realization is reasonably assured. Certain of our revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Revenues accounted for in this manner generally relate to certain fixed fee professional services, cost plus fixed fee or time and materials contracts. Revenues for ongoing operations and maintenance services contracts are generally accounted for ratably as the services are performed throughout the term of the contract. Payments received in advance of services performed are deferred and recognized when the related services are performed.

 

We recognize revenue from the sale of deliverables that are part of a multiple element arrangement in accordance with applicable accounting guidance that establishes a relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither vendor specific objective evidence (“VSOE”) nor third party evidence (“TPE”) of fair value is available for that deliverable. In the absence of VSOE or TPE of the stand-alone selling price for one or more delivered or undelivered elements in a multiple element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on our estimated selling prices.

 

Unbilled Accounts Receivable

 

Unbilled accounts receivable in the accompanying unaudited consolidated balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements, including approximately $426,000 of costs and estimated earnings in excess of billings on uncompleted contracts accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-35, Construction-Type and Production-Type Contracts (“ASC 605-35”). At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, which usually require the consideration of the passage of time, achievement of milestones or completion of the project.

 

Deferred Revenue

 

Deferred revenue in the accompanying unaudited consolidated balance sheets is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves, including approximately $1.1 million of billings in excess of costs and estimated earnings on uncompleted contracts accounted for under FASB ASC 605-35. The unearned amounts are expected to be earned within the next twelve months.

 

The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties and adjustments for contract closeout settlements.

 

5



Table of Contents

 

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 the Middle East, Europe, South America and Asia. 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 six months ended September 30, 2017, one individual customer represented greater than 10% of our total revenues. For the three and six months ended September 30, 2016, one individual customer represented more than 10% of our total revenues. As of September 30, 2017, one individual customer represented more than 10% of our total accounts receivable. As of March 31, 2017, no individual customer represented more than 10% of our total accounts receivable.

 

Fair Values of Financial Instruments

 

The fair value of cash equivalents, receivables, accounts payable and accrued expenses approximate carrying value because of the short period of time to maturity.

 

Cash and Cash Equivalents

 

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

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets were $2.5 million as of September 30, 2017 and $2.1 million as of March 31, 2017, and included approximately $535,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds require 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 is required throughout the delivery of our services and is maintained in the local bank until the contract is closed by the purchasing agency. We expect these requirements, and the related cash collateral restrictions, to be released in the second half of our Fiscal 2018.

 

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.

 

6



Table of Contents

 

Goodwill and Long-Lived Assets

 

We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We have determined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a goodwill impairment test. The impairment test involves comparing the fair values of the applicable reporting units with their carrying values. 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 September 30, 2017, 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 September 30, 2017, 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 valuation allowance of approximately $10.1 million in the third quarter of our Fiscal 2016 against our deferred tax assets. We will frequently reassess the appropriateness of maintaining a valuation allowance.

 

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

 

Stock-Based Compensation

 

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

 

Research and Development Expenditures

 

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

 

Shipping and Handling Costs

 

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

 

7



Table of Contents

 

Sales Taxes

 

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

 

Warranty

 

We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold to various original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited consolidated balance sheets.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which establishes principles for reporting revenue and cash flows arising from an entity’s contracts with customers. This new revenue recognition standard will replace most of the recognition guidance within GAAP. This guidance was deferred by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, issued by the FASB in August 2015, and is now effective for fiscal years beginning on or after December 15, 2017, with early adoption permitted as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which further clarifies the implementation guidance in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which amends the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. We are currently executing a plan to evaluate the full impact of the adoption on our consolidated financial statements, as well as any changes to our accounting policies. We have preliminarily elected to adopt Topic 606 using the modified retrospective transition method.

 

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. Companies are required 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. We are currently evaluating the impact of ASU 2016-02 on our consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact of ASU 2016-15 on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), requiring restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU 2016-18 on our consolidated financial statements.

 

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”), which allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU 2016-20 on our consolidated financial statements.

 

8



Table of Contents

 

2.                                      Supplemental Financial Information

 

Inventories

 

The following table presents details of our inventories:

 

 

 

September 30,

 

March 31,

 

 

 

2017

 

2017

 

 

 

(In thousands)

 

Materials and supplies

 

$

1,159

 

$

887

 

Work in process

 

295

 

298

 

Finished goods

 

1,329

 

1,065

 

 

 

$

2,783

 

$

2,250

 

 

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:

 

 

 

September 30, 2017

 

March 31, 2017

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

$

1,856

 

$

(1,852

)

$

4

 

$

1,856

 

$

(1,828

)

$

28

 

Customer contracts / relationships

 

750

 

(746

)

4

 

750

 

(726

)

24

 

Trade names and non-compete agreements

 

1,110

 

(1,087

)

23

 

1,110

 

(1,066

)

44

 

Capitalized software development costs

 

3,302

 

(1,013

)

2,289

 

2,158

 

(756

)

1,402

 

Total

 

$

7,018

 

$

(4,698

)

$

2,320

 

$

5,874

 

$

(4,376

)

$

1,498

 

 

As of September 30, 2017, future estimated amortization expense is as follows:

 

Fiscal Year Ending March 31,

 

 

 

(In thousands)

 

 

 

Remainder of 2018

 

$

384

 

2019

 

863

 

2020

 

578

 

2021

 

233

 

2022

 

131

 

Thereafter

 

131

 

 

 

$

2,320

 

 

Warranty Reserve Activity

 

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

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2017

 

2016

 

 

 

(In thousands)

 

Balance at beginning of fiscal year

 

$

278

 

$

193

 

Additions charged to cost of sales

 

359

 

88

 

Warranty claims

 

(294

)

(78

)

Balance at end of period

 

$

343

 

$

203

 

 

9



Table of Contents

 

Comprehensive Income

 

Comprehensive income is equal to net income for all periods presented in the accompanying unaudited consolidated statements of operations.

 

Loss Per Share

 

The following table sets forth the reconciliation of weighted average common shares used in basic per share computations and weighted average common shares used in diluted per share computations in the unaudited consolidated financial statements:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares used in basic computation

 

32,628

 

32,117

 

32,567

 

32,085

 

Dilutive stock options

 

 

 

 

 

Dilutive restricted stock units

 

 

 

 

 

Weighted average common shares used in diluted computation

 

32,628

 

32,117

 

32,567

 

32,085

 

 

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

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

3,927

 

3,367

 

3,852

 

3,339

 

Restricted stock units

 

289

 

175

 

261

 

174

 

 

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 is 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 September 30, 2017, we received approximately $2.4 million in connection with the royalty related earn-out provisions for a total of $17.7 million in cash received from the asset sale as of September 30, 2017.

 

In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operating segments at the time of the Asset Sale, qualified as a discontinued operation. For the six months ended September 30, 2017 and 2016, we recorded a gain on sale of discontinued operation of approximately $163,000 and $191,000, 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

 

10



Table of Contents

 

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 non-recurring 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 during the six months ended September 30, 2017 and 2016.

 

5.                                      Income Taxes

 

The following table sets forth our benefit for income taxes, along with the corresponding effective tax rates:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

 

$

650

 

$

92

 

$

899

 

$

141

 

Change in valuation allowance

 

(617

)

(84

)

(865

)

(134

)

Total benefit for income taxes

 

$

33

 

$

8

 

$

34

 

$

7

 

Effective tax rate

 

3.0

%

4.3

%

2.0

%

2.5

%

 

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimates based on actual events and financial results during the year. This process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter.

 

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. We have experienced a cumulative pre-tax loss over the trailing three years. As such, we consider it appropriate to continue to maintain a valuation allowance against our deferred tax assets. We will continuously reassess the appropriateness of maintaining a valuation allowance.

 

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 has in the past been, and may in the future be from time to time, 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, except as described below, 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.

 

On September 15, 2016, a stockholder class action and derivative action (captioned Ionni v. Bergera, et al., Case No. 16-cv00807-RGA) was filed in the United States District Court for the District of Delaware (the “Court”) against certain of the Company’s current and former directors and officers (the “Individual Defendants”) and the Company as a nominal defendant (together with the Individual Defendants, the “Defendants”). The complaint asserted claims for breach of fiduciary duty and unjust enrichment. Plaintiff contended that, in 2014 and 2015, the Individual Defendants caused the Company to issue purportedly false and misleading proxy statements in connection with the Company’s annual meeting of stockholders in 2014 and 2015 (collectively, the “Proxy Statements”). In those Proxy Statements, the Company’s stockholders were asked to approve amendments (the “Amendments”) to increase the number of shares of the Company’s common stock reserved for issuance under the Iteris, Inc. 2007 Omnibus Incentive Plan (the “2007 Plan”). Among other things, Plaintiff alleged that the Proxy Statements were materially false and misleading because they affirmatively represented that no person could receive more than 500,000 stock options or SARs under the 2007 Plan in any fiscal

 

11



Table of Contents

 

year (the “Share Limit”) and failed to disclose that the Compensation Committee had the discretion to approve an annual grant to a 2007 Plan participant in excess of that amount. Plaintiff contended that, in voting to approve the Amendments, the Company’s stockholders were not fully informed and, therefore, the Amendments were not valid. Plaintiff sought rescission of any stock options granted pursuant to the Amendments, including the option to purchase up to 1,350,000 shares of the Company’s common stock that was granted in September 2015 to Mr. Bergera (the “CEO Option”) in connection with his appointment to serve as President and Chief Executive Officer of the Company.

 

The Individual Defendants denied that they breached their fiduciary duties and the Company believed (and still believes) the Amendments were properly approved and that all of the options granted pursuant to the Amendments, including the CEO Option, were valid. Nonetheless, to eliminate the burden, expense and uncertainty of the litigation, on November 8, 2016, the parties entered into a Memorandum of Understanding (“MOU”) setting forth their agreement in principle to resolve the litigation. In consideration for a release of claims and dismissal of this litigation with prejudice, the Company agreed to submit a proposal at its 2016 Annual Meeting of Stockholders seeking stockholder approval for that portion of the CEO Option that exceeds the Share Limit (i.e., the 850,000 options above the Share Limit (the “Excess Shares”)). The Company submitted a proposal of the Excess Shares for approval by the Company stockholders at the 2016 Annual Meeting of Stockholders. On December 15, 2016, the Company’s stockholders approved the Excess Shares.

 

On April 28, 2017, the parties entered into a Stipulation of Settlement and Compromise (the “Stipulation”) that provides for, among other things, a release of claims against Defendants. Under the Stipulation, Defendants agreed not to oppose any award of attorneys’ fees and expenses to Plaintiff up to $215,000. On May 2, 2017, the parties filed a motion for preliminary approval of the settlement. On May 11, 2017, the Court issued an order requesting briefing from the parties regarding the scope of the proposed release in the settlement, and on May 22, 2017, Defendants and Plaintiff each filed a letter brief to the Court in response to the order. On June 2, 2017, the Court issued an order granting the motion for preliminary approval, approving notice of the settlement, and scheduling a settlement approval hearing for September 8, 2017.  At the settlement hearing on September 8, 2017, the Court approved the settlement and entered a final judgment dismissing the action with prejudice.  No stockholder objected to either the settlement or the proposed fee award.  The settlement became effective on October 10, 2017, because as of that date, the dismissal of the action is no longer subject to appeal.  Pursuant to the settlement terms, Defendants have caused to be paid via wire the above award amount on or about October 27, 2017.  An immaterial accrued liability for the settlement is included in the accompanying consolidated balance sheet as of September 30, 2017 and March 31, 2017.

 

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 and on August 11, 2016. 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 September 30, 2017, approximately $146,000 of the original principal balance was outstanding and payable to Iteris. Maxxess is currently owned by an investor group that includes 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.

 

7.                                      Stock-Based Compensation

 

We currently maintain two stock incentive plans, the 2007 Plan and the 2016 Omnibus Incentive Plan (the “2016 Plan”). Of these plans, we may only grant future awards from the 2016 Plan. As of 2016 Annual Meeting of Stockholders, no future shares could be granted under the 2007 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 September 30, 2017, there were approximately 2.3 million shares of common stock available for grant or issuance under the 2016 Plan. Total stock options vested and expected to vest were approximately 3.6 million as of September 30, 2017.

 

12



Table of Contents

 

Stock Options

 

A summary of activity with respect to our stock options for the six months ended September 30, 2017 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price Per
Share

 

 

 

(In thousands)

 

 

 

 

Options outstanding at March 31, 2017

 

3,776

 

$

2.76

 

Granted

 

150

 

6.07

 

Exercised

 

(289

)

1.96

 

Forfeited

 

(31

)

3.98

 

Expired

 

 

 

Options outstanding at September 30, 2017

 

3,606

 

$

2.95

 

 

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 six months ended September 30, 2017 is as follows:

 

 

 

Number of
Shares

 

 

 

(In thousands)

 

RSUs outstanding at March 31, 2017

 

232

 

Granted

 

10

 

Vested

 

(15

)

Forfeited

 

(2

)

RSUs outstanding at September 30, 2017

 

225

 

 

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

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

Cost of revenues

 

$

16

 

$

12

 

$

31

 

$

22

 

Selling, general and administrative expense

 

376

 

233

 

768

 

433

 

Research and development expense

 

36

 

17

 

78

 

31

 

Total stock-based compensation expense

 

$

428

 

$

262

 

$

877

 

$

486

 

 

At September 30, 2017, there was approximately $3.0 million and $574,000 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 2.6 years for stock options and 1.5 years for RSUs.

 

8.                                      Stock Repurchase Program

 

In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3 million of our outstanding common stock from time to time through August 2012. We repurchased approximately 964,000 shares under this original program for a total purchase price of $1.3 million. On August 9, 2012, our Board of Directors cancelled the initial stock repurchase program and the approximate $1.7 million of remaining funds, and 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 new program, we may repurchase shares from time to time in the open market and privately negotiated transactions

 

13



Table of Contents

 

and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. On November 6, 2014, our Board of Directors approved a $3.0 million increase to the Company’s existing stock repurchase program, pursuant to which the Company may continue to acquire shares of its outstanding common stock from time to time for an unspecified length of time. For the three and six months ended September 30, 2017, we did not repurchase any shares. As of September 30, 2017, approximately $1.7 million remained available for the repurchase of our common stock under our current stock purchase program. From inception of the program in August 2011 through September 30, 2017, 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 September 30, 2017, all repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock.

 

9.                                      Business Segment Information

 

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

 

The Roadway Sensors segment provides hardware and software products to multiple segments of the ITS market that use advanced image processing technology and other techniques to capture and analyze sensor data through sophisticated algorithms, enabling vehicle, bicycle, and pedestrian detection and transmission of both video images and data using various communication technologies. These products primarily consist of various vehicle detection and information systems and products for traffic intersection control, communication, incident detection, and roadway traffic data collection applications. These include, among other products, our Vantage, VantageNext, VersiCam, Vantage Vector, SmartCycle, PedTrax, SmartSpan, Pegasus, Velocity, and P-series products. In May 2017, we announced the release of VantageLive!, a cloud-based intersection data analytics service that allows users to view intersection activity by collecting and analyzing vehicle, bicycle and pedestrian data through our Vantage platform in order to maximize traffic signal efficiency and improve intersection safety conditions. Our Roadway Sensors segment also includes the sale of certain complementary original equipment manufacturer (“OEM”) products for the traffic intersection market, which include, among other things, intersection controllers and component cabinets.

 

The Transportation Systems segment provides transportation engineering and consulting services related to the planning, design, implementation, operation and management of surface transportation infrastructure systems, and the development of transportation management and traveler information systems for the ITS industry. This segment also includes our performance measurement and information management solution, known as “iPeMS”, and related traffic analytic consulting services, as well as our commercial vehicle goods movement compliance and inspection platform, known as “CVIEW-Plus”. Both iPeMS and CVIEW-Plus are considered software-as-a-service solutions.

 

The Agriculture and Weather Analytics segment includes ClearPath Weather, our road-maintenance applications, and ClearAg, our digital analytics solutions. ClearPath Weather provides winter road maintenance recommendations for state agencies, municipalities and for commercial companies. Our ClearAg solutions leverage our EMPower platform, which is an adaptive learning engine that provides a comprehensive database of weather, soil and agronomic information combined with proprietary land-surface modeling, essential to making informed agricultural decisions and solving complex agricultural problems. Our ClearAg solutions include our ClearAg applications, ClearAg application program interfaces (“APIs”) and components, WeatherPlot mobile application, and ClearAg Insights applications.  In July 2017, we launched our ClearAg irrigation APIs, including the EvapoSmart and IMFocus APIs, to enable users to optimize irrigation scheduling, water conservation and plant uptake while reducing watering costs.

 

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.

 

14



Table of Contents

 

The following table sets forth selected unaudited consolidated financial information for our reportable segments for the three and six months ended September 30, 2017 and 2016:

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture
and Weather
Analytics

 

Total

 

 

 

(In thousands)

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Product revenues

 

$

11,150

 

$

552

 

$

 

$

11,702

 

Service revenues

 

111

 

12,542

 

893

 

13,546

 

Total revenues

 

$

11,261

 

$

13,094

 

$

893

 

$

25,248

 

Segment income (loss)

 

2,790

 

1,933

 

(2,236

)

2,487

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Product revenues

 

$

10,833

 

$

253

 

$

 

$

11,086

 

Service revenues

 

62

 

12,074

 

838

 

12,974

 

Total revenues

 

$

10,895

 

$

12,327

 

$

838

 

$

24,060

 

Segment income (loss)

 

2,647

 

2,549

 

(2,077

)

3,119

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Product revenues

 

$

22,430

 

$

1,195

 

$

 

$

23,625

 

Service revenues

 

111

 

26,626

 

2,069

 

28,806

 

Total revenues

 

$

22,541

 

$

27,821

 

$

2,069

 

$

52,431

 

Segment income (loss)

 

5,337

 

4,265

 

(4,068

)

5,534

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Product revenues

 

$

21,437

 

$

656

 

$

 

$

22,093

 

Service revenues

 

62

 

24,070

 

1,761

 

25,893

 

Total revenues

 

$

21,499

 

$

24,726

 

$

1,761

 

$

47,986

 

Segment income (loss)

 

4,956

 

4,894

 

(3,690

)

6,160

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

Segment income (loss):

 

 

 

 

 

 

 

 

 

Total income from reportable segments

 

$

2,487

 

$

3,119

 

$

5,534

 

$

6,160

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate and other expenses

 

(3,553

)

(3,220

)

(7,119

)

(6,267

)

Amortization of intangible assets

 

(33

)

(84

)

(66

)

(169

)

Other expense, net

 

2

 

(2

)

(5

)

(6

)

Interest income, net

 

3

 

4

 

5

 

5

 

Loss from continuing operations before income taxes

 

$

(1,094

)

$

(183

)

$

(1,651

)

$

(277

)

 

15



Table of Contents

 

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, and the status of our facilities and product development. 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

 

Business Outlook. Given the current ongoing uncertainties regarding global economic conditions, as well as the macroeconomic dynamics in the U.S., we continue to remain cautious about our overall business. We believe an economic slowdown, or a reduction in various funding sources for transportation infrastructure projects and initiatives, would adversely impact our financial results and may impair our ability to accurately forecast our future financial performance and other business trends. In addition, since the end users of a majority of our products and services are currently governmental entities, we have been, and may continue to be, negatively affected by budgetary issues and delays in purchasing decisions that many municipalities and other state and local agencies continue to face. Spending for new roadways, new systems to address traffic congestion and other transportation infrastructure improvements has been delayed or eliminated in some instances. However, we believe the need to rebuild and modernize aging transportation infrastructure will continue, and various funding mechanisms exist to support transportation infrastructure and related projects. These include the federal highway bill, bonds, dedicated sales and gas tax measures and other alternative funding sources. Furthermore, through investments in research and development, and sales and marketing, we are entering into new commercial markets, in particular the agriculture industry, offering our ClearAg digital analytics solutions, and we expect positive market acceptance to continue in upcoming quarters.

 

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, including those related to revenue recognition, the collectability of accounts receivable, the valuation of inventories, the recoverability of long-lived assets and goodwill, the realizability of deferred tax assets, accounting for stock-based compensation, the valuation of equity instruments, warranty reserves and other contingencies. 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.

 

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.

 

16



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

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

46.3

%

46.1

%

45.1

%

46.0

%

Service revenues

 

53.7

 

53.9

 

54.9

 

54.0

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of product revenues

 

24.8

 

25.7

 

25.1

 

25.3

 

Cost of service revenues

 

35.7

 

35.0

 

37.0

 

35.4

 

Total cost of revenues

 

60.5

 

60.7

 

62.1

 

60.7

 

Gross profit

 

39.5

%

39.3

%

37.9

%

39.3

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

36.3

 

32.7

 

34.0

 

32.6

 

Research and development

 

7.5

 

7.1

 

6.9

 

6.9

 

Amortization of intangible assets

 

0.1

 

0.3

 

0.1

 

0.4

 

Total operating expenses

 

43.9

 

40.1

 

41.0

 

39.9

 

Operating loss

 

(4.4

)

(0.8

)

(3.1

)

(0.6

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

0.0

 

(0.0

)

(0.0

)

(0.0

)

Interest income, net

 

0.0

 

0.0

 

0.0

 

0.0

 

Loss from continuing operations before income taxes

 

(4.4

)

(0.8

)

(3.1

)

(0.6

)

Benefit for income taxes

 

0.1

 

0.0

 

0.1

 

0.0

 

Loss from continuing operations

 

(4.3

)

(0.8

)

(3.0

)

(0.6

)

Gain on sale of discontinued operation, net of tax

 

0.3

 

0.6

 

0.3

 

0.4

 

Net loss

 

(4.0

)%

(0.2

)%

(2.7

)%

(0.2

)%

 

Analysis of Quarterly Results of Operations

 

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

 

The following tables present our total revenues for the three and six months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product revenues

 

$

11,702

 

$

11,086

 

$

616

 

5.6

%

Service revenues

 

13,546

 

12,974

 

572

 

4.4

%

Total revenues

 

$

25,248

 

$

24,060

 

$

1,188

 

4.9

%

 

 

 

Six Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product revenues

 

$

23,625

 

$

22,093

 

$

1,532

 

6.9

%

Service revenues

 

28,806

 

25,893

 

2,913

 

11.3

%

Total revenues

 

$

52,431

 

$

47,986

 

$

4,445

 

9.3

%

 

17



Table of Contents

 

Product revenues for the three months ended September 30, 2017 increased 5.6% to $11.7 million, compared to $11.1 million in the corresponding period in the prior year, primarily due to an increase in our core Roadway Sensors equipment sales. Service revenues for the three months ended September 30, 2017 increased 4.4% to $13.5 million, compared to $13.0 million in the corresponding period in the prior year, primarily due to higher Transportation Systems traffic engineering service revenues. Total revenues for the three months ended September 30, 2017 increased 4.9% to $25.2 million, compared to $24.1 million in the corresponding period in the prior year. The increase in revenues was primarily due to an approximate 6% increase in Transportation Systems revenues, an approximate 3% increase in Roadway Sensors revenues, and an approximate 7% increase in Agriculture and Weather Analytics revenues.

 

Product revenues for the six months ended September 30, 2017 increased 6.9% to $23.6 million, compared to $22.1 million in the corresponding period in the prior year, primarily due to an increase in our core Roadway Sensors equipment sales. Service revenues for the six months ended September 30, 2017 increased 11.3% to $28.8 million, compared to $25.9 million in the corresponding period in the prior year, primarily due to Transportation Systems traffic engineering service revenues. Total revenues for the six months ended September 30, 2017 increased 9.3% to $52.4 million, compared to $48.0 million in the corresponding period in the prior year. The increase in revenues was primarily due to an approximate 13% increase in Transportation Systems revenues, an approximate 5% increase in Roadway Sensors revenues, and an approximate 18% increase in Agriculture and Weather Analytics revenues.

 

Roadway Sensors revenues for the three months ended September 30, 2017 included approximately $11.2 million in product revenues and approximately $111,000 of service revenues, reflecting an increase in total revenues of approximately $366,000 or 3%, compared to the corresponding prior year period. Revenues for the six months ended September 30, 2017 included approximately $22.4 million in product revenues and $111,000 of service revenues, reflecting an increase in total revenues of approximately $1.0 million or 5%, compared to the corresponding prior year period. The increase in Roadway Sensors revenues during the three months ended September 30, 2017 was primarily due to higher unit sales of our core Roadway Sensors video detection products, which was slightly offset by a decrease in our distribution of certain OEM products for the traffic intersection market of approximately $492,000 or 36%, to approximately $867,000, compared to the corresponding prior year period. A factor for the decrease of our OEM products sales were due to the catastrophic effect of hurricanes during the current period in certain key markets.  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 September 30, 2017 included approximately $12.5 million of service revenues, and approximately $552,000 of third-party product sales and revenues derived under certain construction-type contracts that we classify as product revenues. Revenues for the six months ended September 30, 2017 included approximately $26.7 million of service revenues, and approximately $1.2 million of third-party product sales and revenues derived under certain construction-type contracts that we classify as product revenues. Total revenues for the three months ended September 30, 2017 of approximately $13.1 million, reflected an increase of approximately $768,000 or 6%, compared to the corresponding period in the prior year. Total revenues for the six months ended September 30, 2017 of approximately $27.8 million, reflected an increase of approximately $3.1 million or 13%, compared to the corresponding period in the prior year. These increases during the three and six month periods ended September 30, 2017 were primarily a result of new contract awards, extensions granted on certain large contracts and the timing of backlog fulfilment on certain other projects. Transportation Systems added approximately $10.8 million of new backlog during the second quarter of Fiscal 2018. Transportation Systems backlog was approximately $50.5 million as of September 30, 2017, compared to approximately $54.3 million as of September 30, 2016. 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 its 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 equipment will likely affect the related total gross profit from period to period, as total revenues derived from sub-consultants and third-party equipment generally have lower gross margins than revenues generated by our professional services.

 

Agriculture and Weather Analytics revenues for the three months ended September 30, 2017 included no product revenue and approximately $893,000 of service revenues, largely consisting of subscription revenues, reflecting an increase of approximately $55,000 or 7%, compared to the corresponding period in the prior year. Revenues for the six months ended September 30, 2017 included no product revenue and  approximately $2.1 million of service revenues, reflecting an increase of approximately $308,000 or 18%, compared to the corresponding period in the prior year. The increase was primarily due to increases in both ClearPath Weather and ClearAg solutions under newly signed contracts during Fiscal 2017. Going forward, we plan to continue investing in this segment, particularly in the research and development and sales and marketing of the ClearAg and ClearPath Weather solutions. We also plan to pursue commercial opportunities in the  agriculture markets, particularly with seed and crop protection companies, ag retailers, growers, and allied providers, by offering our applications, content, and modeling services that provide analytics and decision support services that leverage our EMPower platform.

 

18



Table of Contents

 

Gross Profit.  The following tables present details of our gross profit for the three and six months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

5,424

 

$

4,890

 

$

534

 

10.9

%

Service gross margin

 

4,544

 

4,565

 

(21

)

(0.5

)%

Total gross margin

 

$

9,968

 

$

9,455

 

$

513

 

5.4

%

 

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

46.4

%

44.1

%

 

 

 

 

Service gross profit as a % of service revenues

 

33.5

%

35.2

%

 

 

 

 

Total gross margin as a % of total revenues

 

39.5

%

39.3

%

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

10,484

 

$

9,943

 

$

541

 

5.4

%

Service gross margin

 

9,389

 

8,921

 

468

 

5.2

%

Total gross margin

 

$

19,873

 

$

18,864

 

$

1,009

 

5.3

%

 

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

44.4

%

45.0

%

 

 

 

 

Service gross profit as a % of service revenues

 

32.6

%

34.5

%

 

 

 

 

Total gross margin as a % of total revenues

 

37.9

%

39.3

%

 

 

 

 

 

Our product gross profit as a percentage of product revenues increased approximately 224 basis points for the three months ended September 30, 2017 as compared to the corresponding period in the prior year, primarily due to an increase in Roadway Sensors core video detection products, which typically yield higher gross margins than our Roadway Sensors distribution sales, as well as our Transportation Systems third-party product sales.  Product gross profit as a percentage of product revenues decreased approximately 63 basis points for the six months ended September 30, 2017 as compared to the corresponding period in the prior year, primarily due to an increase in Transportation Systems third-party product sales, which generally yield lower gross margins than our core Roadway Sensors products. Our service gross profit as a percentage of service revenues for the three and six months ended September 30, 2017 decreased 164 and 186 basis points, respectively, as compared to the corresponding periods in the prior year, primarily due to the contract mix and the amount of related sub-consulting content of such contracts. 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 September 30, 2017 was relatively consistent with the corresponding period in the prior year. Our total gross profit as a percentage of total revenues decreased approximately 141 basis points for the six months ended September 30, 2017 as compared to the corresponding period in the prior year, primarily as a result of the revenue mix between the Roadway Sensors and Transportation Systems segments, as Roadway Sensors revenues generally yield higher total gross margins than our other segments. As such, the increase in our Transportation Systems total revenues from approximately 52% of total Company revenues for the six months ended September 30, 2016 to approximately 53% of total revenues for the six months ended September 30, 2017 was a primary contributor to our decline in total gross margin. Roadway Sensors revenue decreased as a percentage of total Company revenues from approximately 45% for the six months ended September 30, 2016 to approximately 43% for the six months ended September 30, 2017.

 

Roadway Sensors gross profit can fluctuate in any specific quarter or year based on, among other factors, customer and product mix, 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.

 

We recognize a portion of our Transportation Systems and Agriculture and Weather Analytics revenues and related gross profit using percentage of completion contract accounting, and the underlying mix of 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 and sub-consulting mix, as well as factors such as our ability to efficiently utilize our internal workforce, which also could cause fluctuations in our margins from period to period.

 

19



Table of Contents

 

Selling, General and Administrative Expense.  The following tables present selling, general and administrative expense for the three and six months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

6,238

 

24.7

%

$

5,769

 

24.0

%

$

469

 

8.1

%

Facilities, insurance and supplies

 

1,066

 

4.2

 

760

 

3.2

 

306

 

40.3

 

Travel and conferences

 

642

 

2.5

 

609

 

2.5

 

33

 

5.4

 

Professional and outside services

 

1,046

 

4.1

 

919

 

3.8

 

127

 

13.8

 

Other

 

161

 

0.6

 

(199

)

(0.8

)

360

 

(180.9

)

Selling, general and administrative

 

$

9,153

 

36.1

%

$

7,858

 

32.7

%

$

1,295

 

16.5

%

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

12,342

 

23.5

%

$

11,209

 

23.3

%

$

1,133

 

10.1

%

Facilities, insurance and supplies

 

1,995

 

3.8

 

1,450

 

3.0

 

545

 

37.6

 

Travel and conferences

 

1,219

 

2.3

 

1,258

 

2.6

 

(39

)

(3.1

)

Professional and outside services

 

2,011

 

3.8

 

1,805

 

3.8

 

206

 

11.4

 

Other

 

283

 

0.5

 

(59

)

-0.1

 

342

 

(579.7

)

Selling, general and administrative

 

$

17,850

 

33.9

%

$

15,663

 

32.6

%

$

2,187

 

14.0

 

 

The overall increase in selling, general and administrative expense for the three and six months ended September 30, 2017, as compared to the corresponding periods in the prior year, 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.  The overall increase was also attributable to an increase in other selling, general and administrative expenses, primarily due to a reversal of certain bad debt reserves on specific accounts receivable that were subsequently collected during the six month period ended September 30, 2016, which did not reoccur in the six month period ended September 30, 2017.

 

Research and Development Expense.  The following tables present research and development expense for the three and six months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

1,197

 

4.7

%

$

971

 

4.0

%

$

226

 

23.3

%

Facilities, development and supplies

 

499

 

2.0

 

557

 

2.3

 

(58

)

(10.4

)

Other

 

185

 

0.7

 

170

 

0.8

 

15

 

8.8

 

Research and development

 

$

1,881

 

7.4

%

$

1,698

 

7.1

%

$

183

 

10.8

%

 

20



Table of Contents

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

September 30, 2017

 

September 30, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

2,263

 

4.3

%

$

1,737

 

3.7

%

$

526

 

30.3

%

Facilities, development and supplies

 

1,019

 

1.9

 

1,219

 

2.5

 

(200

)

(16.4

)

Other

 

326

 

0.6

 

352

 

0.7

 

(26

)

(7.4

)

Research and development

 

$

3,608

 

6.8

%

$

3,308

 

6.9

%

$

300

 

9.1

 

 

The increase in research and development expense for the three and six months ended September 30, 2017, compared to the corresponding period in the prior year, was primarily due to the Company’s continued investment in the development of ClearAg and ClearPath Weather solutions, and Roadway Sensors products. ClearAg products include historical, real-time and forecast weather content, soil and crop growth information, and other useful crop health information to provide solutions in the agriculture markets. We successfully released a number of grower advisory applications during Fiscal 2017 and 2018, including our Harvest Advisor, Nitrogen Advisor, and Irrigation Advisor. Certain development costs were capitalized into intangible assets in the consolidated balance sheets; 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 Agriculture and Weather Analytics segment to enhance the ClearAg and ClearPath Weather solutions. This continued investment may result in higher research and development costs in future periods.

 

Income Taxes.  The following table presents our benefit for income taxes for the three and six months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

 

$

650

 

$

92

 

$

558

 

 

 

Change in valuation allowance

 

(617

)

(84

)

(533

)

 

 

Total benefit for income taxes

 

$

33

 

$

8

 

$

25

 

312.5

%

Effective tax rate

 

3.0

%

4.3

%

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

 

$

899

 

$

141

 

$

758

 

 

 

Change in valuation allowance

 

(865

)

(134

)

(731

)

 

 

Total benefit for income taxes

 

$

34

 

$

7

 

$

27

 

385.7

%

Effective tax rate

 

2.0

%

2.5

%

 

 

 

 

 

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimates based on actual events and financial results during the year. This process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter.

 

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. We have experienced a cumulative pre-tax loss over the trailing three years. As such, we consider it appropriate to continue to maintain a valuation allowance against our deferred tax assets. We will continuously reassess the appropriateness of maintaining a valuation allowance.

 

21



Table of Contents

 

Liquidity and Capital Resources

 

Cash Flows

 

We have historically financed our operations with a combination of cash flows from operations, borrowings under credit facilities and the sale of equity securities. We currently 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 September 30, 2017, we had $21.5 million in working capital, which included $14.9 million in cash and cash equivalents. This compares to working capital of $22.7 million at March 31, 2017, which included $18.2 million in cash and cash equivalents.

 

The following table summarizes our cash flows for the six months ended September 30, 2017 and 2016:

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2017

 

2016

 

 

 

(In thousands)

 

Net cash provided by (used in):

 

 

 

Operating activities

 

$

(2,521

)

$

279

 

Investing activities

 

(1,294

)

(774

)

Financing activities

 

536

 

179

 

 

Operating Activities.  Cash used in our operations for the six months ended September 30, 2017 was primarily the result of approximately $2.4 million of working capital used, our net loss of approximately $1.5 million, partially offset by approximately $1.4 million in non-cash items for deferred income taxes, depreciation, stock-based compensation, amortization, gain on sales of discontinued operations and loss on disposal of equipment.

 

Cash used in our operations for the six months ended September 30, 2016 was primarily the result of approximately $677,000 of working capital used and our net loss of approximately $79,000, adjusted by approximately $1.0 million in non-cash items for deferred income taxes, depreciation, stock-based compensation, amortization, gain on sale of discontinued operation and loss on disposal of equipment.

 

Investing Activities.  Net cash used in our investing activities during the six months ended September 30, 2017 was primarily the result of approximately $804,000 for purchases of property and equipment primarily related to leasehold improvement to our corporate headquarters, and approximately $750,000 of capitalized software development in the Agriculture and Weather Analytics and Roadway Sensors business segments related to ClearAg assets and VantageLive! development, as well as the capitalized software development of our Oracle ERP system. These investments were partially offset by approximately $260,000 in proceeds from the earn-out provision included in the sale of the Vehicle Sensors segment. Net cash used in our investing activities during the six months ended September 30, 2016 was primarily the result of approximately $401,000 for purchases of property and equipment and approximately $461,000 of capitalized software development in the Agriculture and Weather Analytics business segment related to ClearAg assets, which was offset by approximately $88,000 in proceeds from the earn-out provision included in the sale of the Vehicle Sensors segment.

 

Financing Activities.  Net cash provided by financing activities during the six months ended September 30, 2017 was the result of approximately $566,000 of cash proceeds from the exercises of stock options, partially offset by approximately $30,000 of tax withholding payments for net share settlements of restricted stock units. Net cash provided by financing activities during the six months ended September 30, 2016 was the result of approximately $214,000 of cash proceeds from the exercises of stock options.

 

Off Balance Sheet Arrangements

 

Other than our operating leases, we do not have any other material off balance sheet arrangements at September 30, 2017.

 

22



Table of Contents

 

Seasonality

 

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

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to interest rate risk was limited to our line of credit, which expired on October 1, 2016 and was not renewed.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Controls

 

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

 

Inherent Limitations on Internal Controls

 

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

 

PART II. OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The information set forth under the heading “Litigation and Other Contingencies” in Note 6 of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference. For additional discussion of risks associated with any legal proceedings, see “Risk Factors” below.

 

23



Table of Contents

 

ITEM 1A.  RISK FACTORS

 

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

 

Because we depend on government contracts and subcontracts, we face additional risks related to contracting with federal, state and local governments, including budgetary issues and fixed price contracts.  A significant portion of our revenues are derived from contracts with governmental agencies, either as a general contractor, subcontractor or supplier. We anticipate that revenue from government contracts will continue to remain a significant portion of our revenues. Government business is, in general, subject to special risks and challenges, including:

 

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

 

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

 

·                  performance bond requirements;

 

·                  long purchase cycles or approval processes;

 

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

 

·                  changes in government policies and political agendas;

 

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

 

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

 

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

 

Governmental budgets and plans are subject to change without warning. Certain risks of selling to governmental entities include dependence on appropriations and administrative allocation of funds, changes in governmental procurement legislation and regulations and other policies that may reflect political developments or agendas, significant changes in contract scheduling, intense competition for government business and termination of purchase decisions for the convenience of the governmental entity. Substantial delays in purchase decisions by governmental entities, and the current constraints on government budgets at the federal, state and local level, and the ongoing uncertainty as to the timing and accessibility to government funding could cause our revenues and income to drop substantially or to fluctuate significantly between fiscal periods.

 

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

 

24



Table of Contents

 

We recently expanded our Agriculture and Weather Analytics capabilities to address a new market segment, the agricultural market, which may not broadly accept our technologies and new products.  The application of digital analytics to the agricultural market is a relatively new development that has required us to invest, and is expected to continue to require us to invest, in additional research and development, and sales and marketing without any guarantee of a commensurate increase in revenues. The introduction of any new Agriculture and Weather Analytics products and services could have longer than expected sales cycles, which could adversely impact our operating results. We cannot assure you that growers or other companies in this market will perceive the value proposition of our Agriculture and Weather Analytics or that our new ClearAg products for this market will achieve broad market acceptance in the near future or at all. If the agricultural market fails to understand and appreciate the benefit of our Agriculture and Weather Analytics products or chooses not to adopt our technologies, our business, financial condition and results of operations will be adversely affected.

 

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

 

If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive, and the demand for our products will likely decline.  Our markets are in general characterized by the following factors:

 

·                  rapid technological advances;

 

·                  downward price pressures in the marketplace as technologies mature;

 

·                  changes in customer requirements;

 

·                  additional qualification requirements related to new products or