Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended December 31, 20172018

 

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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

o

Accelerated filer

x

o

Non accelerated filer

o

Smaller reporting company

o

x

(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 January 30, 2018,February 4, 2019, there were 33,073,14933,352,741 shares of our common stock outstanding.

 

 

 



Table of Contents

 

ITERIS, INC.

Quarterly Report on Form 10-Q

 

Table of Contents

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

 

 

 

 

UNAUDITED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 20172018 AND MARCH 31, 20172018

1

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 20172018 AND 20162017

2

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 20172018 AND 20162017

3

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4

 

 

 

ITEM 2.

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

1618

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

2425

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

2425

 

 

 

PART II.

OTHER INFORMATION

2526

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

2526

 

 

 

ITEM 1A.

RISK FACTORS

2526

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

3436

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

3436

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

3437

 

 

 

ITEM 5.

OTHER INFORMATION

3437

 

 

 

ITEM 6.

EXHIBITS

3537

 

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

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

Iteris, Inc.

Unaudited Consolidated Balance Sheets

(In thousands, except par values)

 

 

December 31,

 

March 31,

 

 

December 31,

 

March 31,

 

 

2017

 

2017

 

 

2018

 

2018

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,803

 

$

18,201

 

 

$

7,173

 

$

10,152

 

Trade accounts receivable, net of allowance for doubtful accounts of $408 and $389 at December 31, 2017 and March 31, 2017, respectively

 

13,645

 

14,299

 

Short-term investments

 

3,730

 

5,319

 

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

 

14,305

 

12,866

 

Unbilled accounts receivable

 

7,175

 

6,456

 

 

5,602

 

7,473

 

Inventories

 

2,972

 

2,250

 

 

3,823

 

2,921

 

Prepaid expenses and other current assets

 

1,452

 

2,108

 

 

747

 

1,165

 

Total current assets

 

42,047

 

43,314

 

 

35,380

 

39,896

 

Property and equipment, net

 

2,444

 

2,064

 

 

2,283

 

2,333

 

Deferred income taxes

 

652

 

 

Intangible assets, net

 

3,034

 

1,498

 

 

3,254

 

3,751

 

Goodwill

 

15,150

 

15,150

 

 

15,150

 

15,150

 

Other assets

 

340

 

319

 

 

1,756

 

1,756

 

Total assets

 

$

63,667

 

$

62,345

 

 

$

57,823

 

$

62,886

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

7,904

 

$

7,886

 

 

$

8,694

 

$

7,838

 

Accrued payroll and related expenses

 

7,043

 

6,443

 

 

6,222

 

7,398

 

Accrued liabilities

 

1,880

 

2,201

 

 

2,379

 

2,358

 

Deferred revenue

 

4,654

 

4,049

 

 

3,920

 

4,900

 

Total current liabilities

 

21,481

 

20,579

 

 

21,215

 

22,494

 

Deferred rent

 

677

 

649

 

 

501

 

638

 

Deferred income taxes

 

 

707

 

 

65

 

65

 

Unrecognized tax benefits

 

164

 

186

 

 

148

 

168

 

Total liabilities

 

22,322

 

22,121

 

 

21,929

 

23,365

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value:

 

 

 

 

 

 

 

 

 

 

Authorized shares - 2,000

 

 

 

 

 

 

 

 

 

 

Issued and outstanding shares - none

 

 

 

 

 

 

Common stock, $0.10 par value:

 

 

 

 

 

 

 

 

 

 

Authorized shares - 70,000 at December 31, 2017 and March 31, 2017

 

 

 

 

 

Issued and outstanding shares - 33,055 at December 31, 2017 and 32,488 at March 31, 2017

 

3,306

 

3,249

 

Authorized shares - 70,000 at December 31, 2018 and March 31, 2018

 

 

 

 

 

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

 

3,334

 

3,318

 

Additional paid-in capital

 

139,143

 

136,968

 

 

141,671

 

139,722

 

Accumulated deficit

 

(101,104

)

(99,993

)

 

(109,111

)

(103,519

)

Total stockholders’ equity

 

41,345

 

40,224

 

 

35,894

 

39,521

 

Total liabilities and stockholders’ equity

 

$

63,667

 

$

62,345

 

 

$

57,823

 

$

62,886

 

 

See accompanying notes.

Iteris, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

Three Months Ended

 

Nine Months Ended

 

 

Three Months Ended

 

Nine Months Ended

 

 

December 31,

 

December 31,

 

 

December 31,

 

December 31,

 

 

2017

 

2016

 

2017

 

2016

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

11,995

 

$

10,046

 

$

35,620

 

$

32,139

 

 

$

11,088

 

$

11,995

 

$

35,418

 

$

35,620

 

Service revenues

 

14,031

 

12,645

 

42,837

 

38,539

 

 

12,052

 

14,031

 

37,614

 

42,837

 

Total revenues

 

$

26,026

 

$

22,691

 

$

78,457

 

$

70,678

 

 

$

23,140

 

$

26,026

 

$

73,032

 

$

78,457

 

Cost of product revenues

 

7,299

 

5,581

 

20,438

 

17,731

 

 

6,814

 

7,299

 

20,210

 

20,438

 

Cost of service revenues

 

8,784

 

8,490

 

28,203

 

25,463

 

 

7,434

 

8,784

 

24,077

 

28,203

 

Total cost of revenues

 

16,083

 

14,071

 

48,641

 

43,194

 

 

14,248

 

16,083

 

44,287

 

48,641

 

Gross profit

 

9,943

 

8,620

 

29,816

 

27,484

 

 

8,892

 

9,943

 

28,745

 

29,816

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

9,098

 

8,035

 

26,948

 

23,698

 

 

9,450

 

9,098

 

28,160

 

26,948

 

Research and development

 

1,946

 

1,979

 

5,554

 

5,287

 

 

1,887

 

1,946

 

5,888

 

5,554

 

Amortization of intangible assets

 

18

 

80

 

84

 

248

 

 

61

 

18

 

191

 

84

 

Total operating expenses

 

11,062

 

10,094

 

32,586

 

29,233

 

 

11,398

 

11,062

 

34,239

 

32,586

 

Operating loss

 

(1,119

)

(1,474

)

(2,770

)

(1,749

)

 

(2,506

)

(1,119

)

(5,494

)

(2,770

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

(9

)

(1

)

(14

)

(7

)

Other income (expense), net

 

8

 

(9

)

41

 

(14

)

Interest income, net

 

3

 

4

 

8

 

9

 

 

10

 

3

 

90

 

8

 

Loss from continuing operations before income taxes

 

(1,125

)

(1,471

)

(2,776

)

(1,747

)

 

(2,488

)

(1,125

)

(5,363

)

(2,776

)

Benefit for income taxes

 

1,373

 

4

 

1,407

 

11

 

Benefit (provision) for income taxes

 

24

 

1,373

 

(21

)

1,407

 

Income (loss) from continuing operations

 

248

 

(1,467

)

(1,369

)

(1,736

)

 

(2,464

)

248

 

(5,384

)

(1,369

)

Gain on sale of discontinued operation, net of tax

 

95

 

87

 

258

 

278

 

 

 

95

 

 

258

 

Net income (loss)

 

$

343

 

$

(1,380

)

$

(1,111

)

$

(1,458

)

 

$

(2,464

)

$

343

 

$

(5,384

)

$

(1,111

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.01

 

$

(0.05

)

$

(0.04

)

$

(0.05

)

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.04

)

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

 

$

0.00

 

$

0.01

 

$

0.01

 

$

0.01

 

 

$

 

$

0.00

 

$

 

$

0.01

 

Net income (loss) per share - basic and diluted

 

$

0.01

 

$

(0.04

)

$

(0.03

)

$

(0.04

)

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in basic per share calculations

 

32,877

 

32,205

 

32,670

 

32,125

 

 

33,297

 

32,877

 

33,247

 

32,670

 

Shares used in diluted per share calculations

 

34,258

 

32,205

 

32,670

 

32,125

 

 

33,297

 

34,258

 

33,247

 

32,670

 

 

See accompanying notes.

Iteris, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

December 31,

 

 

December 31,

 

 

2017

 

2016

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,111

)

$

(1,458

)

 

$

(5,384

)

$

(1,111

)

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

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

(1,381

)

24

 

 

(20

)

(1,381

)

Depreciation of property and equipment

 

593

 

544

 

 

661

 

593

 

Stock-based compensation

 

1,325

 

718

 

 

1,555

 

1,325

 

Amortization of intangible assets

 

525

 

512

 

 

823

 

525

 

Gain on sale of discontinued operation, net of tax

 

(258

)

(278

)

 

 

(258

)

Loss on disposal of equipment

 

15

 

14

 

 

 

15

 

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

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

654

 

798

 

 

(1,439

)

654

 

Unbilled accounts receivable and deferred revenue, net

 

(114

)

(125

)

 

379

 

(114

)

Inventories

 

(722

)

400

 

 

(902

)

(722

)

Prepaid expenses and other assets

 

491

 

(275

)

 

615

 

491

 

Accounts payable and accrued expenses

 

98

 

1,500

 

 

(436

)

98

 

Net cash provided by operating activities

 

115

 

2,374

 

 

(4,148

)

115

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(988

)

(497

)

 

(611

)

(988

)

Purchases of investments

 

(4,079

)

 

Sales and maturities of investments

 

5,668

 

 

Capitalized software development costs

 

(1,834

)

(572

)

 

(326

)

(1,834

)

Net proceeds from sale of discontinued operation

 

402

 

364

 

 

107

 

402

 

Net cash used in investing activities

 

(2,420

)

(705

)

Net cash provided by investing activities

 

759

 

(2,420

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

986

 

238

 

 

62

 

986

 

Proceeds from ESPP purchases

 

353

 

 

Tax withholding payments for net share settlements of restricted stock units

 

(79

)

(55

)

 

(5

)

(79

)

Net cash provided by financing activities

 

907

 

183

 

 

410

 

907

 

Increase (decrease) in cash and cash equivalents

 

(1,398

)

1,852

 

Decrease in cash and cash equivalents

 

(2,979

)

(1,398

)

Cash and cash equivalents at beginning of period

 

18,201

 

16,029

 

 

10,152

 

18,201

 

Cash and cash equivalents at end of period

 

$

16,803

 

$

17,881

 

 

$

7,173

 

$

16,803

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

 

$

14

 

Income taxes

 

128

 

52

 

Cash paid during the period for: Income taxes

 

$

1

 

$

128

 

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

Capitalized software development costs included in accounts payable and accrued expenses

 

$

227

 

$

 

 

$

 

$

227

 

 

See accompanying notes.

Iteris, Inc.

Notes to Unaudited Consolidated Financial Statements

December 31, 20172018

 

1.                                    Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Iteris, Inc. (referred to collectively with its wholly-owned subsidiary, ClearAg, Inc., in this report as “Iteris,” the “Company,” “we,” “our” and “us”) is a provider of essential applied informatics for both the traffic managementthat enable smart transportation and global agribusiness markets. We are focused on the developmentdigital agriculture. Municipalities, government agencies, crop science companies, farmers and application of advanced technologies and software-based information systems thatagronomists use our solutions to make roads safer and travel more efficient, as well as farmlands more sustainable, healthy and productive. By combiningAs a pioneer in intelligent transportation systems (“ITS”) technology for more than two decades, our unique intellectual property, products, decades of experience in traffic management,software-as-a-service offerings and weather forecasting solutions and information technologies, wesystems offer a broadcomprehensive range of Intelligent Transportation Systems (“ITS”)ITS solutions to customers throughout the U.S. and internationally. In the agribusiness markets, we have combined our unique intellectual property with enhanced soil,atmospheric, land surface and agronomyagronomic modeling techniques to create a set of ClearAgoffer smart content and analytic solutions that provide analytical support to large enterprises in the agriculture market,industry, such as seed and crop protection companies, as well as field-specific advisories to individual producers.integrated food companies, and agricultural equipment manufacturers and service providers. We believe our products, servicessolutions and solutions, in conjunction with sound traffic and land management,services improve and safely optimize mobility within our communities, and ready our roadways for smart cities and minimize thewhile minimizing environmental impact toon the roads we travel and the lands we farm. We continue to make significant investments to leverage our existing technologies and further expand both our software-based informationadvanced detection sensors and performance analytics systems to offer digital analytics solutions toin the transportation infrastructure market, while supporting the agriculture markets.market with our smart content and digital farming platform. 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, as amended, for the fiscal year ended March 31, 20172018 (“Fiscal 2017”2018”), 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 nine month periods ended December 31, 20172018 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 20182019 (“Fiscal 2018”2019”) or any other periods.

 

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

 

Use of Estimates

 

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

Revenue Recognition

 

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

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

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

 

 

March 31, 2018

 

Cumulative-Effect

 

April 1, 2018

 

 

 

As Reported

 

Adjustments

 

As Adjusted

 

 

 

 

 

(In thousands)

 

 

 

Prepaid expenses and other current assets

 

$

1,165

 

$

304

 

$

1,469

 

Total assets

 

$

62,886

 

$

304

 

$

63,190

 

 

 

 

 

 

 

 

 

Deferred revenue

 

4,900

 

512

 

5,412

 

Total liabilities

 

$

23,365

 

$

512

 

$

23,877

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

(103,519

)

208

 

(103,727

)

Total liabilities and stockholders’ equity

 

$

62,886

 

$

304

 

$

63,190

 

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

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

Product revenue related contracts with customers begin when we acknowledge a purchase order for a specific customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the timeorder of product shipment but,to be delivered in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the datenear term. These purchase orders are short-term in nature. Product revenue is recognized at a point in time upon shipment or upon customer receipt of the significant obligationsproduct, depending on shipping terms.  The Company determined that this method best represents the transfer of goods as transfer of control typically occurs upon shipment or uncertainties concerningupon customer receipt of the sale have been resolved.product.

 

Service revenues, primarily derived from the Transportation Systems revenuesand Agriculture and Weather Analytics segments, are derived primarily from long-term engineering and consulting service contracts with governmental agencies. Certain Agriculture and Weather Analytics revenues are also derived from long-termThese contracts with governmental agencies, as well asgenerally include performance obligations in which control is transferred over time. We recognize revenue on fixed fee 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 recognizedtime, using the percentageproportion of completion method of accounting, whereby revenue is recognized as contract performance progresses and is determined based on the relationship ofactual costs incurred to the total estimated costs. Changes in jobcosts expected to complete the contract performance obligation.  The Company determined that this method best represents the transfer of services as the proportion closely depicts the efforts or inputs completed towards the satisfaction of a fixed fee contract performance obligation. Time & Materials (“T&M”) and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisionsCost Plus Fixed Fee (“CPFF”) contracts are considered variable consideration. However, performance obligations with these fee types qualify for the “Right to costs and revenues, and are recognizedInvoice” Practical Expedient. Under this practical expedient, the Company is allowed to recognize revenue, over time, in the period inamount to which the revisionsCompany has a right to invoice.  In addition, the Company is not required to estimate such variable consideration upon inception of the contract and reassess the estimate each reporting period. The Company determined that this method best represents the transfer of services as, upon billing, the Company has a right to consideration from a customer in an amount that directly corresponds with the value to the customer of the Company’s performance completed to date.

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

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

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

The Company’s typical performance obligations include the following:

Performance Obligation

When Performance
Obligation is Typically
Satisfied

When Payment is
Typically Due

How Standalone Selling Price is
Typically Estimated

Product Revenues

Standard purchase orders for delivery of a tangible product

Upon shipment (point in time)

Within 30 days of delivery

Observable transactions

Engineering services where the deliverable is considered a product

As work is performed (over time)

Within 30 days of services being invoiced

Estimated using a cost-plus margin approach

Service Revenues

Engineering and consulting services

As work is performed (over time)

Within 30 days of services being invoiced

Estimated using a cost-plus margin approach

SaaS

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

At the beginning of the contract period

Estimated using a cost-plus margin approach

Disaggregation of Revenue

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

Trade Accounts Receivable and Contract Balances

 

We recognize revenueclassify our right to consideration in exchange for goods and services as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in trade accounts receivable, net in our unaudited consolidated balance sheet at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. If warranted, the allowance is increased by the Company’s provision for doubtful accounts, which is charged against income. All recoveries on receivables previously charged off are included in income, while direct charge-offs of receivables are deducted from the saleallowance.

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

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

Contract Fulfillment Costs

The Company evaluates whether or not we should capitalize the costs of fulfilling a multiple element arrangement in accordance with applicable accounting guidance that establishes a relative selling price hierarchy permittingcontract. Such costs would be capitalized when they are not within the usescope of an estimated selling price to determine the allocation of arrangement considerationother standards and: (1) are directly related to a deliverable in a multiple element arrangement where neither vendor specific objective evidence (“VSOE”) nor third party evidence (“TPE”)contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered. As of fair value is available for that deliverable. In the absenceDecember 31, 2018, we capitalized approximately $224,000 of VSOE or TPE of the stand-alone selling price for one or more delivered or undelivered elements in a multiple element arrangement, wecontract fulfillment costs which 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 receivablepresented in the accompanying unaudited consolidated balance sheets represent unbilled amounts earnedsheet as prepaid and reimbursable under services sales arrangements, including approximately $722,000other current assets. These costs primarily relate to the satisfaction of performance obligations related to the set up of SaaS platforms. These costs andare amortized on a straight-line basis over the estimated earnings in excessuseful life of billings on uncompleted contracts asthe SaaS platform.

Transaction Price Allocated to the Remaining Performance Obligations

As of December 31, 2017, 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,2018, the aggregate amount of transaction price allocated to remaining performance obligations was immaterial primarily as a large portionresult of termination provisions within our contracts which make the duration of the balanceaccounting term of the contract one year or less.

Practical Expedients and Exemptions

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

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

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

The Company utilizes the practical expedient under ASC 606-10-25-18B to account represents the accumulation of labor, materialsfor shipping and other costs that have not been billed due to timing, whereby the accumulation of each month’shandling as fulfillment costs, and earningsnot a promised service (a revenue element). Shipping and handling costs are not administratively billed untilincluded as cost of revenues in the subsequent month. Also includedperiod during which the products ship.

The Company excludes from the transaction price all sales taxes that are assessed by a governmental authority and that are imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (for example, sales, use, value added, and some excise taxes). This employs the practical expedient under ASC 606-10-32-2A. Sales taxes are presented on a net basis (excluded from revenues) in this account are amounts that will become billable according to contract terms, which usually require the considerationCompany’s unaudited consolidated statements of the passage of time, achievement of milestones or completion of the project.operations.

 

Deferred Revenue

 

Deferred revenue in the accompanying unaudited consolidated balance sheets is comprised of cash collected from customersrefund liabilities related to billings and billings to customers on contractsconsideration received 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 $1.3 millionthe satisfaction of billings in excess of costs and estimated earnings on uncompleted contracts as of December 31, 2017, accounted for under FASB ASC 605-35. The unearned amounts are expected to be earned within the next twelve months.performance obligations.

 

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.

Concentration of Credit Risk

 

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high quality financial institutions, and therefore are believed to have minimal credit risk.

 

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

 

We have historically had a diverse customer base. For the three and nine months ended December 31, 2017,2018, one individual customer represented approximately 11% and 14%, respectively, of our total revenues and no other individual customer represented greater than 10% of our total revenues. For the three and nine months ended December 31, 2016,2017, one individual customer represented moreapproximately 20% and 22%, respectively, of our total revenues and no other individual customer represented greater than 10% of our total revenues. As of December 31, 2017, one2018, no individual customer represented moregreater than 10% of our total accounts receivable. As of March 31, 2017,2018, one customer represented approximately 13% of our total accounts receivable, and no other individual customer represented moregreater than 10% of our total accounts receivable.

Fair Values of Financial Instruments

 

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

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

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

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

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

 

Cash and Cash Equivalents

 

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

 

Investments

The Company’s investments are classified as either held-to-maturity, available-for-sale or trading, in accordance with FASB ASC 320, Capital Investments Capital Debt and Capital Equity Capital Securities (“ASC 320”). Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity. Trading securities are those securities that the Company intends to sell in the near term. All other securities not included in the held-to-maturity or trading category are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost which approximates fair market value. Trading securities are carried at fair value with unrealized gains and losses charged to earnings. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive loss as a separate component of stockholders’ equity. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available (see Note 4). Under FASB ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of Credit Loss if the investor does not intend to sell the security, and will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive loss, net of applicable taxes. The Company evaluates whether the decline in fair value of its investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer’s financial condition and, if applicable, information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and the Company’s intent and ability to retain the investment for a reasonable period of time sufficient to allow for any anticipated recovery of fair value.

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets were $1.5 millionapproximately $747,000 as of December 31, 20172018.  Prepaid expenses and $2.1other current assets were $1.2 million as of March 31, 2017,2018 and included approximately $160,000 and approximately $535,000, respectively,$130,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds requirerequired 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 iswas required throughout the delivery of our services and iswas maintained in the local bank until the contract iswas closed by the purchasing agency. We expect theThe requirements on the remaining performance bonds, and the related cash collateral restrictions, to bewere released induring the fourth quarter of Fiscalended June 30, 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 linestraight-line method over the estimated useful life ranging from three to eight years. Leasehold improvements are depreciated over the term of the related lease or the estimated useful life of the improvement, whichever is shorter.

Goodwill and Long-Lived Assets

 

We evaluate goodwill onperform an annual basis inqualitative assessment of our goodwill during the 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 whetherif any events or circumstances exist, such as an adverse change in business climate or a decline in overall industry demand, that would indicate that it iswould more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is less thanbelow its carrying amount.amount, then goodwill is not considered to be impaired and no further testing is required. If further testing is required, we conclude that it is more likely than not thatperform a two-step process. The first step involves comparing the fair value of aour reporting unit is less thanto its carrying amount, we conduct a goodwill impairment test. The impairmentvalue, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test involvesis performed by comparing the fair valuescarrying value of the applicablegoodwill in the reporting units with theirunit to its implied fair value. An impairment charge is recognized for the excess of the carrying values.value of goodwill over its implied fair value. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies.

 

In Fiscal 2017, we adopted the provisions issued by the FASB ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,that were intended to simplify goodwill impairment testing. This guidance permits us to eliminate the second step of the goodwill impairment test, and eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. As of December 31, 2017,2018, we determined that no adjustments to the carrying value of goodwill were required.

 

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset or asset group is expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets. As of December 31, 2017,2018, there was no impairment to our long-lived and intangible assets.

 

Income Taxes

 

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made. As such, we determined it was appropriate to record a full valuation allowance against our deferred tax assets. We will frequentlycontinuously 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.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 pricingBlack-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- basedstock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.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.

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

Comprehensive Loss

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

 

Recent Accounting Pronouncements

In 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 evaluating 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. We will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.  We plan to quantify and disclose the impact to our financial statement information in our Annual Report on Form 10-K for the year ending March 31, 2018.

 

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 requiredASU 2016-02 requires entities to adopt the new standard using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. We are currently evaluating the impact of ASU 2016-02 on our consolidated financial statements.

In August 2016,July 2018, the FASB issued ASU No. 2016-15, 2018-11,Statement of Cash Flows Leases (Topic 230)842): Classification of Certain Cash Receipts and Cash PaymentsTargeted Improvements (“ASU 2016-15”2018-11”). In issuing ASU 2018-11, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Therefore, the Company expects this adoption will result in a material increase in the long-term assets and long-term liabilities on its consolidated balance sheets. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The Company plans to adopt the standard in the first quarter of fiscal year ended March 31, 2020 and is currently continuing its assessment, which may identify other impacts the revised standard will have on the consolidated financial statements.

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

In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting(“ASU 2018-07”), which expand the scope of Topic 718, Compensation — Stock Compensation to include share-based payment transaction for acquiring goods and services from nonemployees. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,2018, and early adoption is permitted. We are currently evaluating the impactThe adoption of ASU 2016-152018-07 is not expected to have a material impact on our consolidated financial statements.

 

In November 2016,August 2018, the FASB issued ASU No. 2016-18, Statement of Cash Flows2018-13, Fair Value Measurement (Topic 230)820): Restricted CashDisclosure Framework — Changes to the Disclosure Requirement for Fair Value Measurements (“ASU 2016-18”2018-13”), requiring restricted cash and cash equivalents to be included with cash and cash equivalentswhich modifies the disclosure requirements on the statement of cash flows. The new standardfair value measurements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with2019, and early adoption is permitted. We are currently evaluating the impact of ASU 2016-182018-13 on our consolidated financial statements.

 

In December 2016,August 2018, the FASB issued ASU No. 2016-20, Technical Corrections2018-15, Intangibles — Goodwill and Improvements to Topic 606, Revenue from Contracts with CustomersOther — Internal Use Software (subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2016-20”2018-15”), which allows entities not to make quantitative disclosures about remaining performance obligationsclarifies the accounting for implementation costs in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standardcloud computing arrangements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with2019, and early adoption is permitted. We are currently evaluating the impact of ASU 2016-202018-15 on our consolidated financial statements.

2.                                      Supplemental Financial Information

 

Inventories

 

The following table presents details of our inventories:

 

 

December 31,

 

March 31,

 

 

December 31,

 

March 31,

 

 

2017

 

2017

 

 

2018

 

2018

 

 

(In thousands)

 

 

(In thousands)

 

Materials and supplies

 

$

1,615

 

$

887

 

 

$

1,562

 

$

1,745

 

Work in process

 

219

 

298

 

 

1,334

 

232

 

Finished goods

 

1,138

 

1,065

 

 

927

 

944

 

 

$

2,972

 

$

2,250

 

 

$

3,823

 

$

2,921

 

Property and Equipment, net

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

 

 

December 31

 

March 31,

 

 

 

2018

 

2018

 

 

 

(In thousands)

 

Equipment

 

$

6,568

 

$

6,053

 

Leasehold improvements

 

2,939

 

2,880

 

Accumulated depreciation

 

(7,224

)

(6,600

)

 

 

$

2,283

 

$

2,333

 

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

 

Intangible Assets

 

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

 

 

December 31, 2017

 

March 31, 2017

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

 

December 31, 2018

 

March 31, 2018

 

 

(In thousands)

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Technology

 

$

1,856

 

$

(1,856

)

$

 

$

1,856

 

$

(1,828

)

$

28

 

 

$

1,856

 

$

(1,856

)

$

 

$

1,856

 

$

(1,856

)

$

 

Customer contracts / relationships

 

750

 

(750

)

 

750

 

(726

)

24

 

 

750

 

(750

)

 

750

 

(750

)

 

Trade names and non-compete agreements

 

1,110

 

(1,098

)

12

 

1,110

 

(1,066

)

44

 

 

1,110

 

(1,110

)

 

1,110

 

(1,102

)

8

 

Capitalized software development costs

 

4,219

 

(1,197

)

3,022

 

2,158

 

(756

)

1,402

 

 

5,433

 

(2,179

)

3,254

 

5,108

 

(1,365

)

3,743

 

Total

 

$

7,935

 

$

(4,901

)

$

3,034

 

$

5,874

 

$

(4,376

)

$

1,498

 

 

$

9,149

 

$

(5,895

)

$

3,254

 

$

8,824

 

$

(5,073

)

$

3,751

 

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

 

As of December 31, 2017,2018, our net capitalized software development costs of approximately $3.3 million is primarily associated with our Oracle Enterprise Resource Planning (“ERP”) system design and implementation of approximately $2.1 million, which has a useful life of 10 years beginning Fiscal 2019.

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

 

Fiscal Year Ending March 31,

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

Remainder of 2018

 

$

200

 

2019

 

1,136

 

Remainder of 2019

 

$

280

 

2020

 

855

 

 

870

 

2021

 

427

 

 

521

 

2022

 

333

 

 

302

 

2023

 

244

 

Thereafter

 

83

 

 

1,037

 

 

$

3,034

 

 

$

3,254

 

 

Warranty Reserve Activity

 

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

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2017

 

2016

 

 

 

(In thousands)

 

Balance at beginning of fiscal year

 

$

278

 

$

193

 

Additions charged to cost of sales

 

512

 

218

 

Warranty claims

 

(400

)

(138

)

Balance at end of period

 

$

390

 

$

273

 

Comprehensive Income

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

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2018

 

2017

 

 

 

(In thousands)

 

Balance at beginning of fiscal year

 

$

403

 

$

278

 

Additions charged to cost of sales

 

509

 

512

 

Warranty claims

 

(361

)

(400

)

Balance at end of period

 

$

551

 

$

390

 

 

Earnings (loss) Per Share

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

248

 

$

(1,467

)

$

(1,369

)

$

(1,736

)

Gain on sale of discontinued operation, net of tax

 

95

 

87

 

258

 

278

 

Net income (loss)

 

$

343

 

$

(1,380

)

$

(1,111

)

$

(1,458

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares used in basic computation

 

32,877

 

32,205

 

32,670

 

32,125

 

Dilutive stock options

 

1,274

 

 

 

 

Dilutive restricted stock units

 

107

 

 

 

 

Weighted average common shares used in diluted computation

 

34,258

 

32,205

 

32,670

 

32,125

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands, except par values)

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(2,464

)

$

248

 

$

(5,384

)

$

(1,369

)

Gain on sale of discontinued operation, net of tax

 

 

95

 

 

258

 

Net income (loss)

 

$

(2,464

)

$

343

 

$

(5,384

)

$

(1,111

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares used in basic computation

 

33,297

 

32,877

 

33,247

 

32,670

 

Dilutive stock options

 

 

1,274

 

 

 

Dilutive restricted stock units

 

 

107

 

 

 

Weighted average common shares used in diluted computation

 

33,297

 

34,258

 

33,247

 

32,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.03

)

Diluted

 

$

(0.07

)

$

0.01

 

$

(0.16

)

$

(0.03

)

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

 

 

Three Months Ended

 

Nine Months Ended

 

 

December 31,

 

December 31,

 

 

Three Months Ended

 

Nine Months Ended

 

 

2017

 

2016

 

2017

 

2016

 

 

December 31,

 

December 31,

 

 

(In thousands)

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Stock options

 

3,607

 

3,237

 

3,770

 

3,305

 

 

5,225

 

3,607

 

4,515

 

3,770

 

Restricted stock units

 

246

 

136

 

256

 

161

 

 

181

 

246

 

155

 

256

 

 

3.                                    Sale of Vehicle Sensors

 

On July 29, 2011, we completed the sale (the “Asset Sale”) of substantially all of our assets used in connection with our prior Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr Bremse Group. In connection with the Asset Sale, we are entitled to additional consideration in the form of the following performance and royalty related earn-outs: Bendix iswas obligated to pay us an amount in cash equal to 85% of revenue associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation and Valeo Schalter and Sensoren GmbH through December 31, 2017, subject to certain reductions and limitations set forth in the asset purchase agreement. From the date of the Asset Sale, through December 31, 2017,2018, we received approximately $2.5$2.7 million in connection with the royalty related earn-outroyalty-related earn-outs provisions for a total of $17.8$18 million in cash received from the Asset Sale as of December 31, 2017.Sale.

 

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 nine months ended December 31, 20172018 and 2016,2017, we recorded a gain on sale of discontinued operation of approximately $258,000$0 and $278,000,$258,000, respectively, net of tax, related to the earn-out provisions of the asset purchase agreement for the Asset Sale.

4.                                    Fair Value Measurements

 

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

 

Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurringnonrecurring 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 nine months endedat December 31, 20172018 and 2016.March 31, 2018. The following tables present the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy:

 

 

As of December 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,008

 

$

 

$

 

$

2,008

 

Subtotal

 

2,008

 

 

 

2,008

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

Commercial paper

 

 

 

 

 

Corporate notes and bonds

 

2,180

 

(4

)

 

2,176

 

US Treasuries

 

799

 

(0

)

 

799

 

US Government agencies

 

754

 

 

 

754

 

Subtotal

 

3,733

 

(4

)

 

3,729

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,741

 

$

(4

)

$

 

$

5,737

 

 

 

As of March 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

666

 

$

 

$

 

$

666

 

Subtotal

 

666

 

 

 

666

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

Commercial paper

 

1,891

 

 

 

1,891

 

Corporate notes and bonds

 

2,008

 

(2

)

 

2,006

 

US Treasuries

 

1,500

 

(1

)

 

1,499

 

US Government agencies

 

2,950

 

(1

)

 

2,949

 

Subtotal

 

8,349

 

(4

)

 

8,345

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

9,015

 

$

(4

)

$

 

$

9,011

 

 

5.                                      Income Taxes

 

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

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

$

(2,471

)

$

530

 

$

(1,572

)

$

652

 

Change in valuation allowance

 

3,844

 

(526

)

2,979

 

(641

)

Total benefit for income taxes

 

$

1,373

 

$

4

 

$

1,407

 

$

11

 

Effective tax rate

 

122.1

%

0.3

%

50.7

%

0.6

%

On anrate used for interim basis, we estimate what our anticipatedperiods is the estimated 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 actualcurrent estimate of full year results, except that taxes related to specific events, and financial results duringif any, are recorded in 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 quarterinterim period 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.they occur.

 

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

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

 

The Tax Cuts and Jobs (“tax legislation”) Act was enacted on December 22, 2017 and lowers U.S. corporate income tax rates as of January 1, 2018 to 21%. The rate change is administratively effective for our fiscal year using a blended ratethe Company accounted for the annual period. As a result, the blended statutory tax rate for Fiscal 2018 is 30.8%. In our third fiscal quarter, we revised our estimated annual effective tax rate to reflect this change.

The estimated impacteffects of the tax legislation was an increase in income tax benefit of $1.4 million during the three and nine month periods ended December 31, 2017, of which $1.1 million was due to the release of valuation allowance that had been maintained against Alternative Minimum Tax credit carryforwards, which were made refundable by the tax legislation. Approximately $240,000 was due to the remeasurement of a deferred tax liability related to indefinite-lived assets at the lower enacted corporate tax rate. The impact of the remeasurement of other net deferred tax assets was $3.6 million, which was offset by a corresponding changeAct in the related valuation allowance.

Onperiod of enactment. Also, on December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No.SAB 118 Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the tax legislationTax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the income tax effects discussed aboveof the Tax Act represent ourthe Company’s best estimate based on its current interpretation of the tax legislation as we are stillenacted legislation. The Company is accumulating data to finalize the underlying calculations and evaluate other aspects of this Tax Act, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the tax legislation.Tax Act. In accordance with SAB 118, the income tax effects of the tax legislationTax Act discussed above are considered provisional and will be finalized before December 22, 2018.in the current fiscal year.

6.                                      Commitments and Contingencies

 

Litigation and Other Contingencies

 

As a provider of traffic engineering services, hardware products, software and other various solutions for the traffic and agricultural industries, the Company is, and may in the future from time to time, be involved in litigation relating to claims arising out of its operations in the normal course of business. While the Company cannot accurately predict the outcome of any such litigation, 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 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, the Amendments were not valid and 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. The Court approved the settlement and entered a final judgment dismissing the action with prejudice on September 8, 2017, and the settlement became effective on October 10, 2017.  Pursuant to the settlement terms, Defendants paid $215,000 in October 2017.  An immaterial accrued liability for the settlement was included in the accompanying consolidated balance sheet as of March 31, 2017, which was sufficient to cover the settlement payment.

Related Party Transaction

 

We previously subleased office space to Maxxess Systems, Inc. (“Maxxess”), one of our former subsidiaries that we sold in September 2003. The sublease terminated in September 2007, at which time Maxxess owed us an aggregate of $274,000. Maxxess executed a promissory note for such amount, which was subsequently amended and restated on July 23, 2013, August 11, 2016 and on August 11, 2016.2018. The amended and restated note bears interest at a rate of 6% per annum, compounded annually, with accrued interest payable annually on the first business day of each calendar year. When authorized by the Company, Maxxess may pay down the balance of this note by providing consulting services to Iteris. We have previously fully reserved for amounts owed to us by Maxxess and the outstanding principal balance remains fully reserved. As of December 31, 2017,2018, approximately $146,000 of the original principal balance was outstanding and payable to Iteris. Maxxess is currently owned by an investor group that includes, among others, one former Iteris director, who has not been a director of Iteris since September 2013, and one existing director of Iteris, who currently owns less than 2% of Maxxess’ capital stock.

7.                                      Stock-Based Compensation

 

We currently maintain two stock incentive plans, the 2007 Omnibus Incentive Plan and the 2016 Omnibus Incentive Plan (the “2016 Plan”). Of these plans, we may only grant future awards from the 2016 Plan. The 2016 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), cash incentive awards and other stock-based awards. At December 31, 2017,2018, there were approximately 2.32.5 million shares of common stock available for grant or issuance under the 2016 Plan. Total stock options vested and expected to vest were approximately 3.45.1 million as of December 31, 2017.2018.

 

Stock Options

 

A summary of activity with respect to our stock options for the nine months ended December 31, 20172018 is as follows:

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price Per
Share

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price Per
Share

 

 

(In thousands)

 

 

 

 

(In thousands)

 

 

 

Options outstanding at March 31, 2017

 

3,776

 

$

2.76

 

Options outstanding at March 31, 2018

 

4,124

 

$

3.58

 

Granted

 

150

 

6.07

 

 

1,038

 

4.20

 

Exercised

 

(494

)

2.00

 

 

(25

)

2.27

 

Forfeited

 

(31

)

3.98

 

 

(76

)

4.93

 

Expired

 

 

 

 

(1

)

4.91

 

Options outstanding at December 31, 2017

 

3,401

 

$

3.01

 

Options outstanding at December 31, 2018

 

5,060

 

3.69

 

 

Restricted Stock Units

 

A summary of activity with respect to our RSUs, which entitle the holder to receive one share of our common stock for each RSU upon vesting, for the nine months ended December 31, 20172018 is as follows:

 

 

 

Number of
Shares

 

 

 

(In thousands)

 

RSUs outstanding at March 31, 20172018

 

232

144

 

Granted

 

39

62

 

Vested

 

(9459

)

Forfeited

 

(224

)

RSUs outstanding at December 31, 20172018

 

175

123

 

 

Stock-Based Compensation Expense

 

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

 

 

 Three Months Ended

 

 Nine Months Ended

 

 

Three Months Ended

 

Nine Months Ended

 

 

December 31, 

 

 December 31,

 

 

December 31,

 

December 31,

 

 

2017

 

2016

 

2017

 

2016

 

 

2018

 

2017

 

2018

 

2017

 

 

(In thousands)

 

 

(In thousands)

 

Cost of revenues

 

$

16

 

$

15

 

$

47

 

$

37

 

 

$

35

 

$

16

 

$

104

 

$

47

 

Selling, general and administrative expense

 

398

 

198

 

1,167

 

631

 

 

444

 

398

 

1,303

 

1,167

 

Research and development expense

 

33

 

19

 

111

 

50

 

 

51

 

33

 

148

 

111

 

Total stock-based compensation expense

 

$

447

 

$

232

 

$

1,325

 

$

718

 

 

$

530

 

$

447

 

$

1,555

 

$

1,325

 

At December 31, 2017,2018, there was approximately $2.7$5.2 million and $643,000$461,000 of unrecognized compensation expense related to unvested stock options and RSUs, respectively. This expense is currently expected to be recognized over a weighted average period of approximately 2.42.9 years for stock options and 1.61.4 years for RSUs.If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or other stock-based awards.

Other Stock-Based Compensation Plans

Beginning January 1, 2018, the Company adopted an Employee Stock Purchase Plan (“ESPP”) which allows employees to have a percentage of their base compensation withheld to purchase the Company’s common stock at 95% of the lower of the fair market at the beginning of the offering period and on the last trading day of the offering period. There are two offering periods during a calendar year, which consist of the six months beginning each January 1 and July 1. Employees may contribute 1-15% of their eligible gross pay up to a $25,000 annual stock value limit. 35,808 shares were purchased related to the first offering period of Fiscal 2019 in June 2018.  52,760 shares were purchased related to the second offering period of Fiscal 2019 in December 2018. There were no share purchases in Fiscal 2018. The ESPP is considered a non-compensatory plan and accordingly no compensation expense is recorded in connection with this benefit.

8.                                      Stock Repurchase Program

 

On August 9, 2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3 million of our outstanding common stock for an unspecified length of time. Under the program, we may repurchase shares from time to time in the open market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows, to the extent such a 10b5-1 plan is in place. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. On November 6, 2014, our Board of Directors approved a $3.0 million increase to the Company’s existing stock repurchase program, pursuant to which the Company may continue to acquire shares of its outstanding common stock from time to time for an unspecified length of time. For the three and nine months ended December 31, 2018 and 2017, we did not repurchase any shares. As of December 31, 2017,2018, approximately $1.7 million remained available for the repurchase of our common stock under our current stock purchaserepurchase program. From inception of the program in August 2011 through December 31, 2017,2018, we repurchased approximately 3,422,000 shares of our common stock for an aggregate price of approximately $5.6 million, at an average price per share of $1.63. As of December 31, 2017,2018, all repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock.

 

9.Investments

Our investments consisted of the following:

 

 

As of December 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

2,008

 

$

 

$

 

$

2,008

 

Short-term investments

 

3,733

 

(4

)

 

3,729

 

Long-term investments

 

 

 

 

 

Total

 

$

5,741

 

$

(4

)

$

 

$

5,737

 

 

 

As of March 31, 2018

 

 

 

Amortized Cost

 

Gross Unrealized
Loss

 

Gross Unrealized
Gain

 

Estimated Fair
Value

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

3,692

 

$

 

$

 

$

3,692

 

Short-term investments

 

5,323

 

(4

)

 

5,319

 

Long-term investments

 

 

 

 

 

Total

 

$

9,015

 

$

(4

)

$

 

$

9,011

 

Unrealized losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell, and it is not more likely than not that, we would be required to sell, these investments before recovery of their cost basis. As a result, there is no other-than-temporary impairment for these investments as of December 31, 2018.

10.                               Business Segment Information

 

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

 

The Roadway Sensors segment provides hardwarevarious advanced detection sensors and software products to multiple segments of the ITS market that usesystems for traffic intersection management, communication systems and roadway traffic data collection applications. The Roadways Sensors product line uses advanced image processing technology and other techniques to capture and analyze sensor data through sophisticated algorithms, enabling vehicle, bicycle and pedestrian detection, andas well as the transmission of both video images and data using various communication technologies. TheseOur Roadway Sensors 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, ourothers, Vantage, VantageNext, VersiCam,VantageLive!, VantagePegasus, VantageRadius, Vantage Vector, Velocity, SmartCycle, SmartCycle Bike Indicator, SmartSpan, VersiCam, PedTrax SmartSpan, Pegasus, Velocity, and P-seriesP-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,markets, which include, among other things, intersectiontraffic signal controllers and componenttraffic signal equipment cabinets.

 

The Transportation Systems segment provides transportation engineering and consulting services, related to the planning, design, implementation, operationperformance measurement and management of surface transportation infrastructure systems, andtraffic analytics solutions, as well as the development of transportation management and traveler information systems for the ITS industry. This segment alsoOur Transportation Systems services include planning, design, implementation, operation and management of surface transportation infrastructure systems. We perform analysis and study goods movement, provide commercial vehicle safety solutions, provide travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. Our Transportation Systems product line includes Iteris SPM and iPeMS, our performance measurement and information management solution to address transportation mobility and safety challenges, known as “iPeMS”, and related traffic analytic consulting services,solutions as well as our commercial vehicle operations and vehicle safety compliance platforms known as “CVIEW-Plus,” “CheckPoint,” “UCRLink,”CVIEW-Plus, CheckPoint, UCRLink, and “Inspect”. Both iPeMS and CVIEW-Plus are considered software-as-a-service solutions.  In October 2017, we announced the release of added new features to iPeMS, including: financial and economic impact of congestion and delay; real-time bottleneck detection for linear and branching bottlenecks; animation tools for historical data analysis; support for incident analysis; and implementation of a dynamic dashboard to support required federal performance measurement.inspect.

 

The Agriculture and Weather Analytics segment includes ClearPath Weather, our road-maintenanceroad maintenance applications, and ClearAg, our digital analytics solutions. Bothagriculture platform. Our ClearPath Weather is a web-based solution, that includes a suite of tools that applies data assimilation and ClearAg are considered software-as-a-service solutions. ClearPath Weather providesmodeling technologies for assessing historical weather conditions for both short-term and long-range weather forecasts and customizable route/site weather and pavement forecasting, and providing winter road maintenance recommendations for state agencies, municipalities and for commercial companies.companies that allow such users to create solutions to meet roadway maintenance decision needs. Our ClearAg solutions leverage our EMPower platform, which is an adaptive learning engine that provides a comprehensive database ofcombine weather soil and agronomic information combineddata with proprietary land-surface modeling essentialand analytics to making informed agricultural decisions and solvingsolve complex agricultural problems.problems and to increase the efficiency and sustainability of farmlands. We currently offer our ClearAg solutions to companies in the agriculture industry, such as seed and crop protection companies, integrated food companies, and agricultural equipment manufacturers and service providers.  Our ClearAg solutions include ourprovide weather, environment, soil and plant growth modeling to deliver smart content through ClearAg APIs and components, IMFocus APIs, ClearAg applications, ClearAg application program interfaces (“APIs”) and components, WeatherPlot mobile application,applications, 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.

The following table sets forth selected unaudited consolidated financial information for our reportable segments for the three and nine months ended December 31, 20172018 and 2016:2017:

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture
and Weather
Analytics

 

Total

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture
and Weather
Analytics

 

Total

 

 

(In thousands)

 

Three Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

Product revenues

 

$

10,165

 

$

923

 

$

 

$

11,088

 

Service revenues

 

69

 

10,410

 

1,573

 

12,052

 

Total revenues

 

$

10,234

 

$

11,333

 

$

1,573

 

$

23,140

 

Segment income (loss)

 

1,153

 

1,147

 

(1,138

)

1,162

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

11,008

 

$

987

 

$

 

$

11,995

 

 

$

11,008

 

$

987

 

$

 

$

11,995

 

Service revenues

 

34

 

12,584

 

1,413

 

14,031

 

 

34

 

12,584

 

1,413

 

14,031

 

Total revenues

 

$

11,042

 

$

13,571

 

$

1,413

 

$

26,026

 

 

$

11,042

 

$

13,571

 

$

1,413

 

$

26,026

 

Segment income (loss)

 

2,048

 

2,207

 

(1,815

)

2,440

 

 

2,048

 

2,207

 

(1,815

)

2,440

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

Product revenues

 

$

9,377

 

$

669

 

$

 

$

10,046

 

Service revenues

 

20

 

11,244

 

1,381

 

12,645

 

Total revenues

 

$

9,397

 

$

11,913

 

$

1,381

 

$

22,691

 

Segment income (loss)

 

1,940

 

1,920

 

(1,892

)

1,968

 

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

Product revenues

 

$

33,438

 

$

2,182

 

$

 

$

35,620

 

Service revenues

 

145

 

39,210

 

3,482

 

42,837

 

Total revenues

 

$

33,583

 

$

41,392

 

$

3,482

 

$

78,457

 

Segment income (loss)

 

7,384

 

6,472

 

(5,882

)

7,974

 

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

Product revenues

 

$

30,815

 

$

1,324

 

$

 

$

32,139

 

Service revenues

 

82

 

35,314

 

3,143

 

38,539

 

Total revenues

 

$

30,897

 

$

36,638

 

$

3,143

 

$

70,678

 

Segment income (loss)

 

6,897

 

6,813

 

(5,582

)

8,128

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Agriculture
and Weather
Analytics

 

Total

 

 

 

(In thousands)

 

Nine Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

Product revenues

 

$

31,926

 

$

3,492

 

$

 

$

35,418

 

Service revenues

 

145

 

33,384

 

4,085

 

37,614

 

Total revenues

 

$

32,071

 

$

36,876

 

$

4,085

 

$

73,032

 

Segment income (loss)

 

5,463

 

4,276

 

(3,869

)

5,870

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

Product revenues

 

$

33,438

 

$

2,182

 

$

 

$

35,620

 

Service revenues

 

145

 

39,210

 

3,482

 

42,837

 

Total revenues

 

$

33,583

 

$

41,392

 

$

3,482

 

$

78,457

 

Segment income (loss)

 

7,384

 

6,472

 

(5,882

)

7,974

 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 December 31,

 

December 31,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(In thousands)

 

Segment income (loss):

 

 

 

 

 

 

 

 

 

Total income from reportable segments

 

$

2,440

 

$

1,968

 

$

7,974

 

$

8,128

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate and other expenses

 

(3,541

)

(3,362

)

(10,660

)

(9,629

)

Amortization of intangible assets

 

(18

)

(80

)

(84

)

(248

)

Other expense, net

 

(9

)

(1

)

(14

)

(7

)

Interest income, net

 

3

 

4

 

8

 

9

 

Loss from continuing operations before income taxes

 

$

(1,125

)

$

(1,471

)

$

(2,776

)

$

(1,747

)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands)

 

Segment income (loss):

 

 

 

 

 

 

 

 

 

Total income from reportable segments

 

$

1,162

 

$

2,440

 

$

5,870

 

$

7,974

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate and other expenses

 

(3,607

)

(3,541

)

(11,173

)

(10,660

)

Amortization of intangible assets

 

(61

)

(18

)

(191

)

(84

)

Other expense, net

 

8

 

(9

)

41

 

(14

)

Interest income, net

 

10

 

3

 

90

 

8

 

Loss from continuing operations before income taxes

 

$

(2,488

)

$

(1,125

)

$

(5,363

)

$

(2,776

)

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

 

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

 

Overview

 

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

 

The Roadway Sensors segment provides various vehicleadvanced detection sensors and information systems and products for traffic intersection control, incident detectionmanagement, communication systems and roadway traffic data collection applications. We currently sell our coreThe Roadways Sensors product line uses advanced image processing technology and other techniques to capture and analyze sensor data through sophisticated algorithms, enabling vehicle, bicycle and pedestrian detection, as well as the transmission of both video images and data using various communication technologies. Our Roadway SensorSensors products both directlyinclude, among others, Vantage, VantageLive!, VantagePegasus, VantageRadius, Vantage Vector, Velocity, SmartCycle, SmartCycle Bike Indicator, SmartSpan, VersiCam, PedTrax and through reseller channels.  TheP-Series products. Our Roadway Sensors segment also includes the sale of certain complementary OEMoriginal equipment manufacturer (“OEM”) products for the traffic intersection market,markets, which include, among other things, intersectiontraffic signal controllers and component cabinets, and typically carry lower margins thattraffic signal equipment cabinets. A substantial portion of our core Roadway Sensors products.OEM sales are generated in Texas.

The Transportation Systems segment provides transportation engineering and consulting services, related to the planning, design, implementation, operationperformance measurement and management of surface transportation infrastructure systems, andtraffic analytics solutions, as well as the development of transportation management and traveler information systems for the ITS industry. This segment alsoOur Transportation Systems services include planning, design, implementation, operation and management of surface transportation infrastructure systems. We perform analysis and study goods movement, provide commercial vehicle safety solutions, provide travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. Our Transportation Systems product line includes Iteris SPM and iPeMS, which is our specialized transportation performance measurement and traffic analyticsinformation management solutions, as well as our commercial vehicle operations and vehicle safety compliance platforms known as CVIEW-Plus, CheckPoint, UCRLink, and inspect.

We recently launched our intersection-as-a-service comprehensive signal performance measures solution offering, which provides Iteris SPM, a cloud-based application that provides proactive operations and our related traffic analytic consultingsignal maintenance with business process outsourcing and managed services.  Transportation Systems revenues are derived primarily from long-term, contracts with governmental agencies.  Our Transportation Systems segmentThis offering is largely dependent upon state and local governmental funding, andexpected to be priced on a lesser extent, on federal governmental funding.  Such contracts generally relate to certain fixed fee professional services or are time and material contracts; however, a small portion of this segment’s revenues are derived from cost plus fixed fee contracts.per intersection per month basis.

 

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

See Note 910 of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report, for further details on our reportable segments.

 

Critical Accounting Policies and Estimates

 

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

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

Recent Accounting Pronouncements

 

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

Results of Operations

 

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

 

 

Three Months Ended

 

Nine Months Ended

 

 

Three Months Ended

 

Nine Months Ended

 

 

December 31,

 

December 31,

 

 

December 31,

 

December 31,

 

 

2017

 

2016

 

2017

 

2016

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

46.1

%

44.3

%

45.4

%

45.5

%

 

47.9

%

46.1

%

48.5

%

45.4

%

Service revenues

 

53.9

 

55.7

 

54.6

 

54.5

 

 

52.1

 

53.9

 

51.5

 

54.6

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of product revenues

 

28.0

 

24.6

 

26.1

 

25.1

 

 

29.4

 

28.0

 

27.7

 

26.1

 

Cost of service revenues

 

33.8

 

37.4

 

35.9

 

36.0

 

 

32.2

 

33.8

 

33.0

 

35.9

 

Total cost of revenues

 

61.8

 

62.0

 

62.0

 

61.1

 

 

61.6

 

61.8

 

60.7

 

62.0

 

Gross profit

 

38.2

%

38.0

%

38.0

%

38.9

%

 

38.4

%

38.2

%

39.3

%

38.0

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

35.0

 

35.4

 

34.3

 

33.5

 

 

40.8

 

35.0

 

38.6

 

34.3

 

Research and development

 

7.5

 

8.7

 

7.1

 

7.5

 

 

8.2

 

7.5

 

8.1

 

7.1

 

Amortization of intangible assets

 

0.1

 

0.4

 

0.1

 

0.4

 

 

0.3

 

0.1

 

0.3

 

0.1

 

Total operating expenses

 

42.6

 

44.5

 

41.5

 

41.4

 

 

49.3

 

42.6

 

47.0

 

41.5

 

Operating loss

 

(4.4

)

(6.5

)

(3.5

)

(2.5

)

 

(10.9

)

(4.4

)

(7.7

)

(3.5

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

(0.0

)

(0.0

)

(0.0

)

(0.0

)

Other income (expense), net

 

0.0

 

(0.0

)

0.1

 

(0.0

)

Interest income, net

 

0.0

 

0.0

 

0.0

 

0.0

 

 

0.0

 

0.0

 

0.1

 

0.0

 

Loss from continuing operations before income taxes

 

(4.4

)

(6.5

)

(3.5

)

(2.5

)

 

(10.9

)

(4.4

)

(7.5

)

(3.5

)

Benefit for income taxes

 

5.3

 

0.0

 

1.9

 

0.0

 

Benefit (provision) for income taxes

 

0.1

 

5.3

 

(0.0

)

1.9

 

Income (loss) from continuing operations

 

0.9

 

(6.5

)

(1.6

)

(2.5

)

 

(10.8

)

0.9

 

(7.5

)

(1.6

)

Gain on sale of discontinued operation, net of tax

 

0.3

 

0.4

 

0.3

 

0.4

 

 

 

0.3

 

 

0.3

 

Net income (loss)

 

1.2

%

(6.1

)%

(1.3

)%

(2.1

)%

 

(10.8

)%

1.2

%

(7.5

)%

(1.3

)%

 

Analysis of Quarterly Results of Operations

 

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

The following tables present our total revenues for the three and nine months ended December 31, 20172018 and 2016:2017:

 

 

Three Months Ended

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

December 31,

 

$

 

%

 

 

2017

 

2016

 

Increase

 

Change

 

 

2018

 

2017

 

Increase

 

Change

 

 

(In thousands, except percentages)

 

 

(In thousands, except percentages)

 

Product revenues

 

$

11,995

 

$

10,046

 

$

1,949

 

19.4

%

 

$

11,088

 

$

11,995

 

$

(907

)

-7.6

%

Service revenues

 

14,031

 

12,645

 

1,386

 

11.0

%

 

12,052

 

14,031

 

(1,979

)

-14.1

%

Total revenues

 

$

26,026

 

$

22,691

 

$

3,335

 

14.7

%

 

$

23,140

 

$

26,026

 

$

(2,886

)

-11.1

%

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

2017

 

2016

 

Increase

 

Change

 

 

(In thousands, except percentages)

 

Product revenues

 

$

35,620

 

$

32,139

 

$

3,481

 

10.8

%

Service revenues

 

42,837

 

38,539

 

4,298

 

11.2

%

Total revenues

 

$

78,457

 

$

70,678

 

$

7,779

 

11.0

%

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2018

 

2017

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product revenues

 

$

35,418

 

$

35,620

 

$

(202

)

-0.6

%

Service revenues

 

37,614

 

42,837

 

(5,223

)

-12.2

%

Total revenues

 

$

73,032

 

$

78,457

 

$

(5,425

)

-6.9

%

Product revenues primarily consist of Roadway Sensors product sales, but also include OEM products for the traffic signal markets, as well as Transportation Systems third-party product sales for installation under certain construction-type contracts. Product revenues for the three months ended December 31, 2017 increased 19.4%2018 decreased 7.6% to $12.0$11.1 million, as compared to $10.0$12.0 million in the corresponding period in the prior year, primarily due to an increasea decrease in unit sales from our distribution of our Roadway Sensors third partycertain OEM products for the traffic intersection market.market, largely in our Texas markets, as a result of the delayed finalization of certain statewide purchase programs.

Service revenues primarily consist of Transportation Systems engineering services, but also includes service revenues generated by our Roadway Sensors segment, and our Agriculture and Weather Analytics segment. Service revenues for the three months ended December 31, 2017 increased 11.0%2018 decreased 14.1% to $14.0$12.1 million, compared to $12.6$14.0 million in the corresponding period in the prior year, primarily due to higherlower Transportation Systems traffic engineering service revenues. The decline in Transportation Systems revenues was largely the result of the transition from being the prime contractor on certain large contracts during Fiscal 2018, to the sub-contracting party with a reduced scope, and to a lesser extent, due to reduced billable hours by our engineers in the current year period primarily due to increased bid/proposal activities in the current period. Total revenues for the three months ended December 31, 2017 increased 14.7%2018 decreased 11.1% to $26.0$23.1 million, compared to $22.7$26.0 million in the corresponding period in the prior year. The increasedecrease in total revenues was primarily due to an approximate 18% increase16.5% decrease in Transportation Systems revenues, an approximate 7.3% decrease in Roadway Sensors revenues, which were offset in part by an approximate 14% increase in Transportation Systems revenues, and an approximate 2%11.3% increase in Agriculture and Weather Analytics revenues.

 

Product revenues for the nine months ended December 31, 2017 increased 10.8%2018 decreased 0.6% to $35.6$35.4 million, compared to $32.1$35.6 million in the corresponding period in the prior year, primarily due to an increasea decrease in unitboth our sales of our core Roadway Sensors products. video detection products, as well as unit sales from our distribution of certain OEM products for the traffic intersection market, both of which largely reflect continued underperformance in our Texas markets. This decrease in product revenues was offset in part by an increase in Transportation Systems third-party product sales for installation under certain construction-type contracts that we classify as product revenues.

Service revenues for the nine months ended December 31, 2017 increased 11.2%2018 decreased 12.2% to $42.8$37.6 million, compared to $38.5$42.8 million in the corresponding period in the prior year, primarily due to lower Transportation Systems traffic engineering service revenue for government agencies.revenues as a result of the transition from being the prime contractor on certain large contracts awarded in the fiscal year ended March 31, 2016 (“Fiscal 2016”), to the sub-contracting party. Total revenues for the nine months ended December 31, 2017 increased 11.0%2018 decreased 6.9% to $78.5$73.0 million, compared to $70.7$78.5 million in the corresponding period in the prior year. The increasedecrease in total revenues was primarily due to an approximate 13% increase10.9% decrease in Transportation Systems revenues, an approximate 9% increase4.5% decrease in Roadway Sensors revenues, andoffset in part by an approximate 11%17.3% increase in Agriculture and Weather Analytics revenues.

 

Roadway Sensors revenues for the three months ended December 31, 20172018 included approximately $11.0$10.2 million in product revenues and approximately $34,000$69,000 of service revenues, reflecting an increasea decrease in total revenues of approximately $1.6 million$808,000 or 18%7.3%, compared to the corresponding prior year period. RevenuesRoadway Sensors revenues for the nine months ended December 31, 20172018 included approximately $33.4$31.9 million in product revenues and $145,000 of service revenues, reflecting an increasea decrease in total revenues of approximately $2.7$1.5 million or 9%4.5%, compared to the corresponding prior year period. The increasedecrease in Roadway Sensors revenues during the three months ended December 31, 20172018 was primarily due to higherlower unit sales from our distribution of certain OEM products for the traffic intersection market, which declined approximately $724,000 or 43.8% to approximately $928,000 in the current period, primarily resulting from the aforementioned delayed finalization of certain statewide purchase programs. The decrease in Roadway Sensors revenues during the nine months ended December 31, 2018 was also impacted by lower unit sales from our distribution of certain OEM products for the traffic intersection market, which declined approximately $1.1 million or 31.3% to approximately $2.4 million in the current period, as well as a decrease of approximately $945,000$409,000 or 134%, to approximately $1.7 million, coupled with an increase1.4% in our core Roadway Sensors video detection products of approximately $698,000 or 8%. The increase in our OEM product sales in the current quarter was due in part to the additional products sold to repair damaged intersection equipment after the catastrophic effect of the hurricanes in certain of our key markets in the second fiscal quarter of 2018, as well as the shipment delays experienced in the second quarter of Fiscal 2018products.  Both decreases were primarily due to the hurricanes, which shipments were not fulfilled untilaforementioned delayed finalization of certain statewide purchase programs. While OEM products generally have lower gross margins than our core video detection products, we believe the current quarter.offering of OEM products can benefit sales of our core products by providing a more comprehensive suite of traffic solutions for our customers.  Going forward, we plan to grow revenues by focusing on our core domestic intersection market, and refine and deliver products that address the needs of this market, primarily our Vantage processors and camera systems and our Vantage Vector video/radar hybrid sensor, as well as our SmartCycle, Velocity, PedTrax and SmartSpan products.

 

Transportation Systems revenues for the three months ended December 31, 20172018 included approximately $12.6$10.4 million of service revenues, and approximately $987,000$923,000 of sales of third-party products purchased for installation under certain construction-type contracts, that we classify as product revenues.reflecting a decrease in total revenues of approximately $2.2 million or 16.5%, compared to the corresponding prior year period. Revenues for the nine months ended December 31, 20172018 included approximately $39.2$33.4 million of service revenues, and approximately $2.2$3.5 million of third-party product sales of third-party products purchased for installationand revenues derived under certain construction-type contracts that we classify as product revenues. Total revenues, for the three months ended December 31, 2017reflecting a decrease in total revenues of approximately $13.6 million, reflected an increase of approximately $1.7$4.5 million or 14%10.9%, compared to the corresponding period in the prior year. Total revenues for the nine months ended December 31, 2017 of approximately $41.4 million, reflected an increase of approximately $4.8 million or 13%, compared to the corresponding period in the prior year. These increasesyear period. The decreases during the three and nine month periods ended December 31, 2017 were2018 was primarily due to the transition from being the prime contractor to a result of extensions grantedsub-contractor on certain large contracts new contract awards,

awarded in Fiscal 2016, and the timing of backlog

fulfilment on certain other projects. Transportation Systems added approximately $9.0$8.2 million of new backlog during the third quarter of Fiscal 2018.2019. Transportation Systems backlog decreased to approximately $45.3 million as of December 31, 2018, compared to approximately $46.0 million as of December 31, 2017, compared to approximately $54.1 million as of December 31, 2016.2017. We plan to continue to focus on securing new contracts and to extend and/or continue our existing relationships with key agencies related to projects in itstheir 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 equipmentproduct sales will likely affect the related total gross profit from period to period, as total revenues derived from sub-consultants and third-party equipmentproduct sales generally have lower gross margins than revenues generated by our professional services.

 

Agriculture and Weather Analytics revenues for the three months ended December 31, 20172018 included no product revenue and approximately $1.4$1.6 million of service revenues, largely consisting of subscription revenues, reflecting an increase of approximately $32,000$160,000 or 2%11.3%, compared to the corresponding period in the prior year. Revenues for the nine months ended December 31, 20172018 included no product revenue and  approximately $3.5$4.1 million of service revenues, reflecting an increase of approximately $341,000$603,000 or 11%17.3%, 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, weWe 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 focus on commercial opportunities in the digital agriculture technology markets particularly with seed and crop protection companies, ag retailers, allied providers, and to a lesser extent, to growers, by offering ourAPIs, software applications, content, and modeling services thatto provide analytics and decision support services that leverage our EMPower adaptive forecasting engine, an advanced learning platform.digital weather, soil and agronomic content and applications

 

Gross Profit.  The following tables present details of our gross profit for the three and nine months ended December 31, 20172018 and 2016:2017:

 

 

Three Months Ended

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

December 31,

 

$

 

%

 

 

2017

 

2016

 

Increase

 

Change

 

 

2018

 

2017

 

Increase

 

Change

 

 

(In thousands, except percentages)

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

4,696

 

$

4,465

 

$

231

 

5.2

%

 

$

4,274

 

$

4,696

 

$

(422

)

-9.0

%

Service gross margin

 

5,247

 

4,155

 

1,092

 

26.3

%

 

4,618

 

5,247

 

(629

)

(12.0

)%

Total gross margin

 

$

9,943

 

$

8,620

 

$

1,323

 

15.3

%

 

$

8,892

 

$

9,943

 

$

(1,051

)

-10.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

39.1

%

44.4

%

 

 

 

 

 

38.5

%

39.1

%

 

 

 

 

Service gross profit as a % of service revenues

 

37.4

%

32.9

%

 

 

 

 

 

38.3

%

37.4

%

 

 

 

 

Total gross margin as a % of total revenues

 

38.2

%

38.0

%

 

 

 

 

 

38.4

%

38.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

2017

 

2016

 

Increase

 

Change

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

15,182

 

$

14,408

 

$

774

 

5.4

%

Service gross margin

 

14,634

 

13,076

 

1,558

 

11.9

%

Total gross margin

 

$

29,816

 

$

27,484

 

$

2,332

 

8.5

%

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

42.6

%

44.8

%

 

 

 

 

Service gross profit as a % of service revenues

 

34.2

%

33.9

%

 

 

 

 

Total gross margin as a % of total revenues

 

38.0

%

38.9

%

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2018

 

2017

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Product gross margin

 

$

15,208

 

$

15,182

 

$

26

 

0.2

%

Service gross margin

 

13,537

 

14,634

 

(1,097

)

(7.5

)%

Total gross margin

 

$

28,745

 

$

29,816

 

$

(1,071

)

-3.6

%

 

 

 

 

 

 

 

 

 

 

Product gross profit as a % of product revenues

 

42.9

%

42.6

%

 

 

 

 

Service gross profit as a % of service revenues

 

36.0

%

34.2

%

 

 

 

 

Total gross margin as a % of total revenues

 

39.4

%

38.0

%

 

 

 

 

 

Our product gross profit as a percentage of product revenues for the three and nine months ended December 31, 20172018 decreased approximately 530 and 22160 basis points, respectively, as compared to the corresponding period in the prior year, primarily due to an increaseone time inventory charges that were experienced in our Roadway Sensors OEM sales,the current period. Product gross profit as well as our Transportation Systems third-partya percentage of product sales, both of which typically yield lower gross margins than our Roadway Sensors core video detection products.revenues for the nine months ended December 31, 2018 was relatively consistent with the corresponding prior period in the prior year. Our service gross profit as a percentage of service revenues for the three months and nine months ended December 31, 20172018 increased 45492 and 23183 basis points, respectively, as compared to the corresponding periods in the prior year, primarily due to the timing of certain extension contracts, the contract mix and a decrease in the amount of related sub-consulting content of such contracts.contracts in the current periods. Sub-consulting content generally results in lower gross margins than our workforce.

Our total gross profit as a percentage of total revenues for the three months ended December 31, 20172018 was relatively consistent with the corresponding period in the prior year. Our total gross profit as a percentage of total revenues decreasedincreased approximately 88136 basis points for the nine months ended December 31, 20172018 as compared to the corresponding period in

the prior year, primarily asdue to the timing of certain extension contracts, the contract mix and a resultdecrease in the amount of related sub-consulting content of such contracts in 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 revenues for the nine months ended December 31, 2016 to approximately 53% of total revenues for the nine months ended December 31, 2017 was a primary contributor to our decline in total gross margin. Roadway Sensors revenue decreased as a percentage of total revenues from approximately 44% for the nine months ended December 31, 2016 to approximately 43% for the nine months ended December 31, 2017.current periods .

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

 

We recognize a portionThe underlying mix 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 mix and the amount of related sub-consulting mix,content of such contracts, 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.

 

Selling, General and Administrative Expense.  The following tables present selling,

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

Selling, general and administration expense for the nine months ended December 31, 2017 and 2016:

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

6,361

 

24.4

%

$

5,322

 

23.5

%

$

1,039

 

19.5

%

Facilities, insurance and supplies

 

1,112

 

4.3

 

925

 

4.1

 

187

 

20.2

 

Travel and conferences

 

626

 

2.4

 

537

 

2.4

 

89

 

16.6

 

Professional and outside services

 

826

 

3.2

 

1,197

 

5.3

 

(371

)

(31.0

)

Other

 

173

 

0.7

 

54

 

0.2

 

119

 

220.4

 

Selling, general and administrative

 

$

9,098

 

35.0

%

$

8,035

 

35.5

%

$

1,063

 

13.2

%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

18,703

 

23.8

%

$

16,531

 

23.4

%

$

2,172

 

13.1

%

Facilities, insurance and supplies

 

3,106

 

4.0

 

2,375

 

3.4

 

731

 

30.8

 

Travel and conferences

 

1,845

 

2.4

 

1,795

 

2.5

 

50

 

2.8

 

Professional and outside services

 

2,837

 

3.6

 

3,002

 

4.2

 

(165

)

(5.5

)

Other

 

457

 

0.6

 

(5

)

0.0

 

462

 

(9,240.0

)

Selling, general and administrative

 

$

26,948

 

34.4

%

$

23,698

 

33.5

%

$

3,250

 

13.7

 

The overall increase in selling, general and administrative expense2018 increased approximately 4.5% to $28.2 million, compared to $26.9 million for the three and nine months ended December 31, 2017, as compared to the corresponding periods in the prior year,2017. The overall increase was primarily due to higher compensation costs driven by higher revenuesplanned headcount increases in general and an increase in business development costs aimed at the pursuit of large contractsadministrative positions, as well as increases in the Transportations Systems segment.  The overall increase was also attributable to an increaseand Roadway Sensors salesforce headcount, all of which resulted in other selling, generalhigher salary and administrative expenses, primarily due to a reversal of certain bad debt reserves on specific accounts receivable that were subsequently collected during the nine month period ended December 31, 2016, which did not reoccur in the nine month period ended December 31, 2017.personnel-related costs.

Research and Development Expense.  The following tables present research and development expense for the three and nine months ended December 31, 2017 and 2016:

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

1,342

 

5.2

%

$

1,323

 

5.8

%

$

19

 

1.4

%

Facilities, development and supplies

 

467

 

1.8

 

517

 

2.3

 

(50

)

(9.7

)

Other

 

137

 

0.5

 

139

 

0.6

 

(2

)

(1.4

)

Research and development

 

$

1,946

 

7.5

%

$

1,979

 

8.7

%

$

(33

)

(1.7

)%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

$

 

 

 

 

 

 

 

% of

 

 

 

% of

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

3,605

 

4.6

%

$

3,060

 

4.3

%

$

545

 

17.8

%

Facilities, development and supplies

 

1,485

 

1.9

 

1,736

 

2.5

 

(251

)

(14.5

)

Other

 

464

 

0.6

 

491

 

0.7

 

(27

)

(5.5

)

Research and development

 

$

5,554

 

7.1

%

$

5,287

 

7.5

%

$

267

 

5.1

 

 

Research and development expense for the three months ended December 31, 2018 was relatively consistent with the three months ended December 31, 2017, was relatively consistent with the corresponding period in the prior year. The increase in researchat $1.9 million for both periods.

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

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

During Fiscal 2018, we successfully released Iteris SPM, our cloud-based signal performance measures application. In Fiscal 2017, we released our VantageLive! platform as well as a number of growergenerally available advisory applications, during Fiscal 2017 and Fiscal 2018, including our Harvest Advisor,Advisory and Nitrogen Advisor, and Irrigation Advisor. DevelopmentAdvisory. Certain development costs were capitalized into intangible assets in the consolidated balance sheets; in both the current and prior year periods; however, certain costs did not meet the criteria for capitalization under GAAP and continue to beare 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 higherincreases in research and development costs, as well as additional capitalized software in future periods.

Amortization of Intangible Assets

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

Interest Income, Net

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

 

Income Taxes.

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

Income tax benefit for income taxes for the three andmonths ended December 31, 2018 was approximately $24,000, or 1.0% percent of the pre-tax loss as compared with a benefit of approximately $1.4 million, or 122.0% of pre-tax loss for the three months ended December 31, 2017. Income tax expense for the nine months ended December 31, 2017 and 2016:

 

 

Three Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

$

(2,471

)

$

530

 

$

(3,001

)

 

 

Change in valuation allowance

 

3,844

 

(526

)

4,370

 

 

 

Total benefit for income taxes

 

$

1,373

 

$

4

 

$

1,369

 

34,225.0

%

Effective tax rate

 

122.1

%

0.3

%

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

$

 

%

 

 

 

2017

 

2016

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

Benefit (provision) for income taxes

 

$

(1,572

)

$

652

 

$

(2,224

)

 

 

Change in valuation allowance

 

2,979

 

(641

)

3,620

 

 

 

Total benefit for income taxes

 

$

1,407

 

$

11

 

$

1,396

 

12,690.9

%

Effective tax rate

 

50.7

%

0.6

%

 

 

 

 

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 record2018 was approximately $21,000, or (0.4%) of the pre-tax loss as compared with a quarterly income tax provision in accordance withbenefit of approximately $1.4 million, or 50.7% of pre-tax loss for 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.nine months ended December 31, 2017.

 

In assessing the realizability of our deferred tax assets, we review all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance. WeAs we have experienced a cumulative pre-tax loss over the trailing three years. As such,years, 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 considering the Company’s projections of future income and cumulative income (loss) in the Company’s trailing three years, among other factors.

 

The Tax Cuts and Jobs Act (“tax legislation”) was enacted on December 22, 2017 and lowers U.S. corporate income tax rates as of January 1, 2018 to 21%. The rate change is administratively effective for our Fiscal 2018 using a blended ratethe Company accounted for the annual period. As a result, the blended statutory tax rate for Fiscal 2018 is 30.8%. In the third quarter of Fiscal 2018, we revised our estimated annual effective tax rate to reflect this change.

The estimated impacteffects of the tax legislation was an increaseTax Act in income tax benefit of $1.4 million during the period ended December 31, 2017, of which $1.1 million was due to the release of valuation allowance that had been maintained against Alternative Minimum Tax credit carryforwards, which were made refundable by the tax legislation in December 2017. Approximately $240,000 was due to the remeasurement of a deferred tax liability related to indefinite-lived assets at the lower enacted corporate tax rate. The impact of the remeasurement of other net deferred tax assets was $3.6 million, which was offset by a corresponding change in the related valuation allowance.

Onenactment. Also, on December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No.SAB 118 Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the tax legislationTax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the income tax effects discussed aboveof the Tax Act represent ourthe Company’s best estimate based on its current interpretation of the tax legislation as we are stillenacted legislation. The Company is accumulating data to finalize the underlying calculations and evaluate other aspects of this Tax Act, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the tax legislation.Tax Act. In accordance with SAB 118, the income tax effects of the tax legislationTax Act discussed above are considered provisional and will be finalized before December 22, 2018.in the current fiscal year.

Liquidity and Capital Resources

 

Cash Flows

 

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

 

At December 31, 2017,2018, we had $20.6$14.2 million in working capital, which included $16.8$7.2 million in cash and cash equivalents.equivalents, as well as $3.7 million in short-term investments. This compares to working capital of $22.7$17.4 million at March 31, 2017,2018, which included $18.2$10.2 million in cash and cash equivalents.equivalents as well as $5.3 million in short-term investments.

 

The following table summarizes our cash flows for the nine months ended December 31, 20172018 and 2016:2017:

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

December 31,

 

 

December 31,

 

 

2017

 

2016

 

 

2018

 

2017

 

 

(In thousands)

 

 

(In thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

115

 

$

2,374

 

 

$

(4,148

)

$

115

 

Investing activities

 

(2,420

)

(705

)

 

759

 

(2,420

)

Financing activities

 

907

 

183

 

 

410

 

907

 

 

Operating Activities.  Cash used in our operations for the nine months ended December 31, 2018 was primarily the result of approximately $3.0 million in non-cash items for deferred income taxes, depreciation, stock-based compensation, and amortization, offset by a decrease of approximately $1.8 million from changes in working capital coupled with our net loss of approximately $5.4 million.

Cash provided by our operations for the nine months ended December 31, 2017 was primarily the result of approximately $819,000 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, coupled with an increase of approximately $408,000 from changes in working capital, partially offset by our net loss of approximately $1.1 million.

CashInvesting Activities.  Net cash provided by our operations forinvesting activities during the nine months ended December 31, 20162018 was primarily the result of approximately $2.3$5.7 million in proceeds from the sale and maturity of short-term investment and approximately $107,000 in proceeds from the last earn-out payment related to the sale of the assets of the Vehicle Sensors segment in 2011.  These investments were partially offset by purchases of approximately $4.1 million of working capital providedshort-term investments and offset by our net lossapproximately $611,000 of property and equipment, as well as approximately $1.5 million, adjusted by approximately $1.5 million$326,000 of capitalized software development, primarily 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.the Roadway Sensors business segments related to VantageLive! developments.

 

Investing Activities.Net cash used in our investing activities during the nine months ended December 31, 2017 was primarily the result of approximately $988,000 for purchases of property and equipment primarily related to leasehold improvement to our corporate headquarters, and approximately $1.8 million of capitalized software development, primarlyprimarily related to the development of our new Oracle ERP system, and to a lesser extent, in the Agriculture and Weather Analytics and Roadway Sensors business segments related to ClearAg assets and VantageLive! developments. These investments were partially offset by approximately $402,000 in proceeds from the earn-out provision included in the sale of the Vehicle Sensors segment.

Financing Activities.  Net cash used in our investingprovided by financing activities during the nine months ended December 31, 20162018 was primarily the result of approximately $497,000 for purchases$353,000 of property and equipment and approximately $572,000 of capitalized software development in the Agriculture and Weather Analytics business segment related to ClearAg assets, which was offset by approximately $364,000 incash proceeds from the earn-out provision included inpurchase of ESPP shares and approximately $62,000 of cash proceeds from the saleexercise of the Vehicle Sensors segment.

Financing Activities.stock options. Net cash provided by financing activities during the nine months ended December 31, 2017 was the result of approximately $986,000 of cash proceeds from the exercises of stock options, partially offset by approximately $79,000 of tax withholding payments for net share settlements of RSUs. Net cash provided by financing activities during the nine months ended December 31, 2016 was the result of approximately $238,000 of cash proceeds from the exercises of stock options, partially offset by approximately $55,000 of tax withholding payments for net share settlements of RSUs.

 

Off Balance Sheet Arrangements

 

Other than our operating leases, we dodid not have any other material off balance sheet arrangements at December 31, 2017.2018.

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.hours. In addition, we have experienced some seasonality related to certain ClearPath Weather services, which adversely impacts such sales in our first and second fiscal quarters, mainly because these services are generally not required during Spring and Summer months when weather conditions are comparatively milder.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our investments portfolio in a variety of available-for-sale fixed debt securities, including both government and corporate obligations and money market funds. Investments in fixed rate interest bearing instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in prevailing interest rates. Due in part to these factors, we may suffer losses in principal if we need the funds prior to maturity and choose to sell securities that have declined in market value due to changes in interest rates or perceived credit risk was limitedrelated to our line of credit, which expired on October 1, 2016 and was not renewed.the securities’ issuers.

 

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.

 

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;administration, repeal of government purchasing programs and the possible repeal of Proposition Six in California;

·                  delays related to possible and actual shutdown of the federal government for any reason, such as due to lack of funding;

 

·                  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;

 

·                  maintenance of 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;

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

 

·                  international 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 purchasepurchasing 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.

 

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

Our profitability could be adversely affected if we are not able to maintain adequate utilization of our Transportation Systems workforce.  The cost of providing our Transportation Systems engineering and consulting services, including the extent to which we utilize our workforce, affect our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:

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

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

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

·                  availability of funding, shutdowns of the federal government or any other budgetary issues;

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

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

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

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 have experienced, 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.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 components;

 

·                  frequent new product introductions and enhancements;

 

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

 

·                  evolving industry standards and changes in the regulatory environment.

 

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

 

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

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

 

Our profitability could be adversely affected if we are not able to maintain adequate utilization of our Transportation Systems workforce.  The cost of providing our Transportation Systems engineering and consulting services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:

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

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

·                  the timing of new contract awards and availability of funding;

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

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

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

If our security measures are breached and unauthorized access is obtained to our customer’s personal and/or proprietary data in connection with our web-based and mobile application services, we may incur significant liabilities, our services may be perceived as not being secure and customers may curtail or stop using our services, we could incur significant liability to our customers and to individuals or businesses whose information was being stored, our business may suffer and our reputation will be damaged.  Because techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.

 

The markets in which we operate are highly competitive and have many more established competitors, than us, which could adversely affect our revenues or the market acceptance of our products.  We compete with numerous other companies in our target markets including, but not limited to, large, multi-national corporations and many smaller regional engineering firms.

 

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

 

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

 

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

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

 

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

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

 

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

Declines in the value of securities held in our investment portfolio can affect us negatively.  As of December 31, 2018, the value of securities available for sale and held to maturity within our investment portfolio was $5.7 million, which is generally determined based upon market values available from third-party sources. The value of our investment portfolio may fluctuate as a result of market volatility and economic or financial market conditions. Declines in the value of securities held in our investment portfolio negatively impact our levels of capital and liquidity. Further, to the extent that we experience unrealized losses in our portfolio of investment securities from declines in securities values that management determines to be other than temporary, the book value of those securities will be adjusted to their estimated recovery value and we will recognize a charge to earnings in the quarter during which we make that determination. Although we have policies and procedures in place to assess and mitigate potential impacts of market risks, including hedging-related strategies, those policies and procedures are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Accordingly, we could suffer adverse effects as a result of our failure to anticipate and manage these risks properly.

 

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

 

We may be unable to attract and retain key personnel, including senior management, which could seriously harm our business.Due to the specialized nature of our business, we are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel. We believe that our success will depend on the continued employment of a highly qualified and experienced senior management team and our ability to retain existing business and generate new business. The loss of any of our officers, or any of our other executives or key members of management could adversely affect our business, financial condition, or results of operations.operations (e.g., loss of customers or loss of new business opportunities). Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel.

Particularly in highly specialized areas, it has become more difficult to retain employees and meet all of our needs for employees in a timely manner, or at acceptable wages, which may adversely affect our growth in the current fiscal year and in future years. The fixed cost nature of many of our Transportation Systems contracts may limit our ability to recover any increases in wages. Although we intend to continue to devote significant resources to recruit, train and retain qualified skilled personnel, we may not be able to attract and retain these employees and therefore could impair our ability to perform our contractual obligations efficiently and timely meet our customers’ needs and win new business, which could adversely affect our future results. The future success of our Transportation Systems segment will depend on our ability to hire additional qualified engineers, planners and technical personnel. The future success of our Agriculture and Weather Analytics segment will depend on our ability to hire additional software developers, qualified engineers and technical personnel. Competition for qualified employees, particularly development engineers and software developers, is intense. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.operations

Our management information systems and databases could be disrupted by system security failures, cyber threats or by the failure of, or lack of access to, our Enterprise Resource Planning system. These disruptions could negatively impact our sales, increase our expenses and/or harm our reputation.  Internal users and computer programmers may be able to penetrate, aka “hack”, our network security and create system disruptions, cause shutdowns and/or misappropriate our confidential information or that of our employees and third parties. Therefore, we could incur significant expenses addressing problems created by security breaches to our network. We must, and do, take precautions to secure customer information and prevent unauthorized access to our databases and systems containing confidential information. Any data loss or information security lapses resulting in the compromise of personal information or the improper use or disclosure of confidential, sensitive or classified information could result in claims, remediation costs, regulatory sanctions against us, loss of current and future contracts and serious harm to our reputation. We operate our Enterprise Resource Planning system on a software-as-a-service platform, and we use this system for reporting, planning, sales, audit, customer relationship management, inventory control, loss prevention, purchase order management and business intelligence. Accordingly, we depend on this system, and the third-party provide of this service, for a number of aspects of our operations. If this service provider or this system fails, or if we are unable to continue to have access to this system on commercially reasonable terms, or at all, operations would be severely disrupted until an equivalent system could be identified, licensed or developed, and integrated into our operations. This disruption would have a material adverse effect on our business.

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

 

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

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

Uncertainties in the interpretation and application of the new revenue recognition standard ASC 606 could materially affect our revenue recognition.  We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. These principles are subject to interpretation by the SEC and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a material effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results. As discussed in Note 1 to the Consolidated Financial Statements (Description of Business and Summary of Significant Accounting Policies—Recent Accounting Pronouncements), effective April 1, 2018, FASB issued ASU 2014-09, Revenue from Contracts with Customers. We believe that ASC 606 and related revenue recognition policies will not result in a material change to our consolidated financial statements, and will not cause any significant changes to the amount and timing of our recognition of future revenue and cost. However, uncertainties in future guidance of the interpretation and application of ASC 606 could materially affect our revenue and cost recognition. We are continuing to evaluate the effect that ASC 606 will have on our financial statements and related disclosures, and preliminary assessments are subject to change.

SEC rules require that when we release our quarterly financial results, we must provide year-over-year comparisons to results for the corresponding quarter of the previous fiscal year. Accordingly, following each quarter of Fiscal 2019, we will present quarterly results for the corresponding period of Fiscal 2018 that retrospectively apply ASC 606 to our Fiscal 2018 results which were originally prepared utilizing the prior accounting guidance. These retrospective Fiscal 2018 presentations are considered to be preliminary, and are subject to the final retrospective presentations of Fiscal 2018 results that we will provide with our annual report on Form 10-K for Fiscal 2019. If the final retrospective presentation of our financial statements for Fiscal 2018 is perceived by investors to differ significantly from our previously provided preliminary presentations, it may result in fluctuations in our stock price.

Uncertainties in the interpretation and application of the Tax Act could materially affect our tax obligations and effective tax rate.  The Tax Act was enacted on December 22, 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. The Tax Act requires complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of information not previously required or regularly produced. As a result, we have provided a provision on the effect of the Tax Act in our financial statements. As additional regulatory guidance is issued by the applicable taxing authorities, and the accounting treatment is clarified, we plan to perform additional analysis on the application of the law, and may need to refine our estimates in calculating the impact of such further guidance. As such, our final analysis may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate.

 

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

 

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

 

Our quarterly operating results fluctuate as a result of many factors. Therefore, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.  Our quarterly revenues and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, the following:

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

 

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

 

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

 

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

 

·                  the long lead times associated with government contracts;contracts or contracts with large enterprise customers;

 

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

 

·                  our ability to control costs;

 

·                  our ability to raise additional capital;

 

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

 

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

 

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

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

 

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

 

·                  the introduction of new products by competitors;

 

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

 

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

 

·                  the effects of technological changes in our target markets;

 

·                  the amount of our backlog at any given time;

 

·                  the nature of our government contracts;

 

·                  decrease in revenues derived from key or significant customers;

 

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

 

·                  risks and uncertainties associated with our international business;

 

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

 

·                  general economic and political conditions;

 

·                  international conflicts and acts of terrorism; and

 

·                  other factors beyond our control, including but not limited to, natural disasters.

 

Due to all of the factors listed above as well as other unforeseen factors, our future operating results could be below the expectations of securities analysts or investors. If that happens, the trading price of our common stock could decline. As a result of these quarterly variations, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.

We rely on outside suppliers that could experience supplySupply shortages or may experience production gaps that could materially and adversely impact our sales and financial results.  It is possible that we couldWe have in the past experienced, and may from time to time in the future continue to experience parts shortages or unforeseen quality control issues or part shortages as we adjust productionby our suppliers that may impact our ability to meet current demand for our products. We have historically used and continue to use single suppliers for certain significant components in our products, and have had to reengineer products from time to time to address obsolete components, especially in our Roadway Sensors products. Our Roadway Sensors products are also included with other traffic intersection products that also could experience supply issues for their products, which in turn could result in delays in orders for our products. Should any such supply delay or disruption occur, or should a key supplier discontinue operations, our future sales will likely be materially and adversely affected. Additionally, we rely heavily on select contract manufacturers to produce many of our products and do not have any long-term contracts to guarantee supply of such products. Although we believe our contract manufacturers have sufficient capacity to meet our production schedules for the foreseeable future and we believe we could find alternative contract manufacturing sources for many of our products, if necessary, we could experience a production gap if for any reason our contract manufacturers were unable to meet our production requirements and our cost of goods sold could increase, adversely affecting our margins. Further, the federal government has created the potential for significant changes in trade policies, including tariffs and government regulations affecting trade between the U.S. and other countres where we source components for our Roadway Sensors products.  Any such actions could increase the cost to us of such products and cause increases in the prices at which we sell such products, which could adversely affect the financial performance of our Roadway Sensors business.

 

We may engage in acquisitions of companies or technologies that may require us to undertake significant capital infusions and could result in disruptions of our business and diversion of resources and management attention.  We have completed two acquisitions since November 2011 and, in the future, we may acquire additional complementary businesses, products, and technologies. Acquisitions may require significant capital infusions and, in general, acquisitions also involve a number of special risks, including:

 

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

·                  the failure to retain or integrate key acquired personnel;

 

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

 

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

 

·                  the incurrence of unforeseen obligations or liabilities;

 

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

 

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

 

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

 

Our international business operations may be threatened by many factors that are outside of our control.  While we historically have had limited international sales, revenues and operationsoperational experience, we previously had Transportation Systems contracts in the United Arab Emirates (“UAE”), for which approximately $160,000 in performance bonds are yet to be released by the UAE Department of Transportation. We also have been expanding our distribution capabilities for our Roadway Sensors segment internationally, particularly in Canada, Australia, New Zealand, Europe and in South America. We plan to continue to expand our international efforts, but we cannot assure you that we will be successful in such efforts. International operations subject us to various inherent risks including, among others:

 

·                  political, social and economic instability, as well as international conflicts and acts of terrorism;

 

·                  bonding requirements for certain international projects;

 

·                  longer accounts receivable payment cycles;

 

·                  import and export license requirements and restrictions of the U.S. and each other country in which we operate;

·                  currency fluctuations and restrictions, and our ability to repatriate currency from certain foreign regions;

 

·                  unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions;

 

·                  required compliance with existing and new foreign regulatory requirements and laws, more restrictive labor laws and obligations, including but not limited to, the U.S. Foreign Corrupt Practices Act;

 

·                  difficulties in managing and staffing international operations;

 

·                  potentially adverse tax, duty and tariff consequences; and

 

·                  reduced protection for intellectual property rights in some countries.

 

Substantially all of our international product sales are denominated in U.S. dollars. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets. We do not currently engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations.

 

Any of the factors mentioned above may adversely affect our future international revenues and, consequently, affect our business, financial condition and operating results. Additionally, as we pursue the expansion of our international business, certain fixed and other overhead costs could outpace our revenues, thus adversely affecting our results of operations. We may likewise face local competitors in certain international markets who are more established, have greater economies of scale and stronger customer relationships. Furthermore, as we increase our international sales, our total revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and certain other parts of the world.

We may need to raise additional capital in the future, which may not be available on terms acceptable to us, or at all.  We have historically experienced volatility in our earnings and cash flows from operations from year to year and incurred net loss of approximately $1.1 million for the nine months ended December 31, 2017.year. On September 1, 2017, we filed a registration statement on a Form S-3, utilizing a “shelf” registration process, and may consider a new equity financing in the future. Should the credit markets further tighten or our business declines, we may need or choose to raise additional capital to fund our operations, to repay indebtedness, pursue acquisitions or expand our operations. Such additional capital may be raised through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders.

 

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

 

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

 

·                  our ability to control costs;

 

·                  the supply of key components for our products;

 

·                  our ability to increase revenue and net income;

 

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

 

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

 

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

 

·                  potential acquisitions of businesses and product lines;

 

·                  our relationships with customers and suppliers;

 

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

 

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

 

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

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

 

The trading price of our common stock is highly volatile.  The trading price of our common stock has been subject to wide fluctuations in the past. From August 1,December 31, 2015 through January 30,December 31, 2018, our common stock has traded at prices as low as $1.77$1.89 per share and as high as $8.17 per share. The market price of our common stock could continue to fluctuate in the future in response to various factors, including, but not limited to:

 

·                  quarterly variations in operating results;

 

·                  our ability to control costs, improve cash flow and sustain profitability;

 

·                  our ability to raise additional capital;

 

·                  shortages announced by suppliers;

·                  announcements of technological innovations or new products or applications by our competitors, customers or us;

 

·                  transitions to new products or product enhancements;

 

·                  acquisitions of businesses, products or technologies;

 

·                  the impact of any litigation;

 

·                  changes in investor perceptions;

 

·                  government funding, political agendas and other budgetary constraints;

 

·                  changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry in general;

 

·                  changes in earnings estimates or investment recommendations by securities analysts; and

 

·                  international conflicts, political unrest and acts of terrorism.

 

The stock market has from time to time experienced volatility, which has often affected and may continue to affect the market prices of equity securities of many technology companies. This volatility has often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were to become the subject of a class action lawsuit, it could result in substantial losses and divert management’s attention and resources from other matters.

 

Certain provisions of our charter documents may hinder stockholders’ ability to influence our company or discourage a third party from acquiring us and may adversely affect the price of our common stock.  Certain provisions of our certificate of incorporation could make it difficult for a third party to influence or acquire us, even though an acquisitionthat might be beneficial to our stockholders. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. UnderFor example, under the terms of our certificate of incorporation, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior to those of our common stock. In August 2009,addition, our bylaws contain provisions governing the ability of stockholders to submit proposals or make nominations for directors, and we adopted a new stockholder rights planrecently eliminated cumulative voting for directors and declared a dividend of preferred stock purchase rights to our stockholders. Generally, the stockholder rights plan provides that if a person or group acquires 15% or more of our common stock, subject to certain exceptions and under certain circumstances, the rights may be exchanged by us for common stock or the holdersimplemented majority voting directors of the rights, other than the acquiring person or group, could acquire additional shares of our capital stock at a discount off of the then current market price. Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuing our company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or other acquisition of the company more difficult.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3.0 million of our outstanding common stock from time to time through August 2012. On August 9, 2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3.0 million of our outstanding common stock for an unspecified length of time. Under the new program, we may repurchase shares from time to time in open-market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to an existing or future 10b5-1 trading plan to facilitate repurchases 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 our existing stock repurchase program, pursuant to which we may continue to acquire shares of our outstanding common stock from time to time for an unspecified length of time.

 

For the three and nine months ended December 31, 2017,2018, we did not repurchase any shares. As of December 31, 2017,2018, there was approximately $1.7 million of remaining funds available under the stock repurchase program. From inception of the program in August 2011 through December 31, 2018, we repurchased approximately 3,422,000 shares of our common stock for an aggregate price of approximately $5.6 million, at an average price per share of $1.63. As of December 31, 2018, all repurchased shares have been retired and returned to their status as authorized and unissued shares of our common stock. As of December 31, 2018, approximately $1.7 million remains available for the repurchase of our common stock under our current program.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

On February 5, 2018, pursuant to the authority granted by the Board of Directors, the Compensation Committee (the “Committee”) of Iteris, Inc. (the “Company”) adopted the Iteris, Inc. Executive Severance Plan (the “Plan”).  Each individual employed by the Company or its subsidiary, who is an officer subject to Section 16 of the Securities Exchange Act of 1934, as amended, and who is not otherwise covered by an employment agreement that includes severance terms, is eligible to receive severance payments under the Plan upon certain qualifying terminations of employment (the “Eligible Employees”).  Eligible Employees for the purposes of the Plan shall be limited to a select group of management or highly compensated employees within the meaning of the Employee Retirement Income Security Act of 1974, as amended.None.

The Plan provides Eligible Employees with severance payments in the event that an Eligible Employee’s employment with the Company or its subsidiaries is terminated either (a) by the Company without Cause not in connection with a Change of Control (“Non-CIC Qualifying Termination”) or (b) if in connection with or within 12 months following a Change of Control, by the Eligible Employee for Good Reason (as such terms are defined in the Plan) or by the Company without Cause (a “CIC Qualifying Termination”).

Non-CIC Qualifying Termination

Upon a Non-CIC Qualifying Termination, an Eligible Employee will be eligible to receive the following:

·      A cash payment equal to the Eligible Employee’s annual base salary, payable in substantially equal installment payments over the one-year period following termination, in accordance with the Company’s normal payroll practices; and

·      Reimbursement for the Eligible Employee’s monthly COBRA premiums for the 12-month period following termination, or until the Eligible Employee receives substantially similar medical coverage from another employer.

CIC Qualifying Termination

Upon a CIC Qualifying Termination, an Eligible Employee will be eligible to receive the following:

·      A cash payment equal to the Eligible Employee’s annual base salary, payable in a lump sum on the next payroll date after the 61st day following termination; and

·      Reimbursement for the Eligible Employee’s monthly COBRA premiums for the 12-month period following, or until the Eligible Employee receives substantially similar medical coverage from another employer.

The severance payments are subject to the Eligible Employee’s execution of a severance agreement within 60 days following termination that includes a release of claims and certain non-solicitation, confidentiality, and non-disparagement restrictions.

The Company may amend or terminate the Plan at any time by providing at least 90 days’ advance written notice to each participant, provided that no such amendment or termination that has the effect of reducing or diminishing the right of any participant will be effective unless one year’s advance written notice is provided to participants, and such amendment or termination will not be effective if a Change of Control occurs during the one-year notice period.

The information set forth above is included herewith for the purpose of providing the disclosure required under “Item 5.02(e) — Compensatory Arrangements of Certain Officers” of Form 8-K.  The foregoing description of the Plan is only a summary and is qualified in its entirety by reference to the full text of the Plan, which is filed as Exhibit 10.34, to this Quarterly Report on Form 10-Q and incorporated by reference herein.

 

ITEM 6.  EXHIBITS

 

The following exhibits are filed or furnished herewith or are incorporated by reference to the location indicated.

 

Exhibit
Number

 

Description

 

Where Located

 

 

 

 

 

10.34

Iteris, Inc. Executive Severance Plan

Filed herewith

31.1

Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

31.2

Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

32.1

Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

32.2

Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

101.INS

XBRL Instance Document

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

Exhibit Index

Exhibit
Number

Description

Where Located

10.34

Iteris, Inc. Executive Severance Plan

Filed herewith

31.1

 

Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

 

 

 

 

 

31.2

 

Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith

 

 

 

 

 

32.2

 

Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Furnished herewith

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

Filed herewith

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

Filed herewith

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

Filed herewith

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: February 7, 20182019

ITERIS, INC.

 

(Registrant)

 

 

 

 

By

/s/ JOE BERGERA

 

 

Joe Bergera

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By

/s/ ANDREW C. SCHMIDT

 

 

Andrew C. Schmidt

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

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