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)

(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):

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

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Iteris, Inc.

Unaudited Consolidated Balance Sheets

(In thousands, except par values)

See accompanying notes.

Iteris, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

See accompanying notes.

Iteris, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

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:

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:

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.

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:

Property and Equipment, net

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

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:

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:

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:

Comprehensive Income

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

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:

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:

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: