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, 20172019

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)

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

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, 2018,24, 2020, there were 33,073,14940,623,221 shares of our common stock outstanding.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Iteris, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par values)

See accompanying notes.

Iteris, Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

See accompanying notes.

Iteris, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes.

Iteris, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

See accompanying notes.

Iteris, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

See accompanying notes.

Iteris, Inc.

Notes to Unaudited Consolidatedcondensed consolidated Financial Statements

December 31, 20172019

1.                                    Description of Business and Summary of Significant Accounting Policies

Description of Business

Iteris, Inc. (referred to collectively with its wholly-owned subsidiary,subsidiaries, ClearAg, Inc. and Albeck Gerken, Inc. (“AGI”), in this report as “Iteris,”“Iteris”, the “Company,” “we,”“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, agriculture service providers and application of advanced technologies and software-based information systems thatother agribusinesses 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 (“SaaS”) offerings and weather forecasting solutions and information technologies, wesystems offer a broadcomprehensive range of Intelligent Transportation Systems (“ITS”)ITS solutions to our customers throughout the U.S. and internationally. In the agribusiness markets,digital agriculture market, 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 readywhile minimizing environmental impact on our roadways for smart cities and minimize the environmental impact to the roads we travel and the lands we farm.land. 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 agriculture platform, and always exploring strategic alternatives intended to optimize the value of our Company. Iteris was incorporated in Delaware in 1987.1987 and has operated in its current form since 2004.

Recent Developments

ClearAg, Inc.

In April 2017, Iteris, Inc. formed a wholly-owned subsidiary, ClearAg, Inc., a Delaware corporation,On June 13, 2019, the Company completed an underwritten public offering of 6,182,797 shares of the Company’s common stock for net proceeds to provide ClearAg solutionsthe Company of approximately $26.8 million, after deducting underwriting discounts and estimated offering expenses payable by the Company.  The Company used approximately $6.2 million of the net proceeds of this offering to pay the cash portion of the purchase price in the global agribusiness markets.acquisition of AGI, a privately-held professional transportation engineering services firm headquartered in Tampa, Florida (see Note 9, Acquisition), and plans to use the balance of the net proceeds for general corporate purposes and possibly for other future acquisitions.

Basis of Presentation

Our unaudited condensedconsolidated financial statements include the accounts of Iteris, Inc. and its subsidiary,subsidiaries, 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 condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended March 31, 20172019 (“Fiscal 2017”2019”), filed with the SEC on June 13, 2017.6, 2019. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the threethree- and nine monthnine-month periods ended December 31, 20172019 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 20182020 (“Fiscal 2018”2020”) 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 revenue recognition, the collectability of accounts receivable and related allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, warranty reserves and other contingencies, costs to complete long-term contracts, indirect cost rates used in cost plus contracts, the valuation of inventories, the valuation of purchased intangible assets and goodwill, the valuation of equity instruments,investments, estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill, and fair value of our stock option awards used to calculate the stock-based compensation.

Revenue Recognition

Product revenuesOn April 1, 2018, the Company adopted ASU 2014-09, including its subsequent amendments as codified under ASC Topic 606 (“ASC 606”) and related costsASC Topic 340-40 (“ASC 340”), using the modified retrospective approach to apply ASC 606 and ASC 340 to all contracts that were not completed as of salesthe beginning of Fiscal Year 2019. As a result, the Company recognized the

cumulative effect of initially applying ASC 606 and ASC 340 as an increase to the opening balance of accumulated deficit in the amount of approximately $208,000 as of April 1, 2018.

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 include revenues derived from maintenance support and the use of the Company’s service platforms and APIs on a subscription basis. We generate this revenue from fees for maintenance support, monthly active user fees, SaaS fees, and hosting and storage fees. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are 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. PaymentsThe Company determined that this method best represents the transfer of services as the customer obtains equal benefit from the service throughout the service period.

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

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

The Company’s typical performance obligations include the following:

Disaggregation of Revenue

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

Trade Accounts Receivable and Contract Balances

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

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

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

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

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

Unbilled Accounts Receivable

Unbilled accounts receivable in the accompanying unaudited consolidated balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements, including approximately $722,000 of costs and estimated earnings in excess of billings on uncompleted contracts asAs 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,2019, the aggregate amount of transaction price allocated to remaining performance obligations was immaterial, primarily as a large portionresult of the balance in this account representstermination provisions within our contracts, which make the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, which usually require the considerationduration of the passage of time, achievement of milestones or completionaccounting term of the project.contract one year or less.

Deferred Revenue

Deferred revenue in the accompanying unaudited condensed 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 domestic customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.expectations.

We currently have, and historically have had, a diverse customer base. For the three and nine months ended December 31, 2017, one2019, no individual customer represented greater than 10% of our total revenues.revenue. For the three and nine months ended December 31, 2016,2018, one individual customer represented more than 10%approximately 11% and 14%, respectively, of our total revenues. As of December 31, 2017, one2019, and March 31, 2019, no individual customer represented moregreater than 10% of our total accounts receivable. As of March 31, 2017, no individual customer represented more than 10% of our total accounts receivable.

Fair Values of Financial Instruments

The fair value of cash equivalents, receivables, accounts payable and accrued expenses approximate carrying value because of the short period of time to maturity. 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 Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (“ASC 820”). This pronouncement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by ASC 820 contains three levels as follows:

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

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

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

Cash and Cash Equivalents

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

Prepaid Expenses and Other Current AssetsInvestments

Prepaid expensesThe Company’s investments are classified as either held-to-maturity, available-for-sale or trading, in accordance with FASB ASC 320 — Investments — Debt and Equity Securities. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity. Trading securities are those securities that the Company intends to sell in the near term. All other current assets were $1.5 millionsecurities not included in the held-to-maturity or trading category are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, which approximates fair market value. Trading securities are carried at fair value with unrealized gains and losses charged to earnings. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive loss as a separate component of stockholders’ equity. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available (see Note 3 — Fair Value Measurements). As of December 31, 2017 and $2.1 million as2019, all of March 31, 2017, and included approximately $160,000 and approximately $535,000, respectively,our investments are available-for-sale. Under FASB ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash designatedflows expected to be collected are less than the security’s amortized cost basis (the difference being defined as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds require us to maintain 100% cash“Credit Loss”) or if the fair value of the bonds as collateral in a bank thatsecurity is localless 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 purchasing agency.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 performance bond collateralCompany evaluates whether the decline in fair value of its investments is required throughoutother-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the delivery of our servicessecurities held, market and is maintainedeconomic trends in the local bank until the contract is closed by the purchasing agency. We expect the requirementsindustry and information on the remaining performance bonds,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 related cash collateral restrictions,Company’s intent and ability to be released inretain the fourth quarterinvestment for a reasonable period of Fiscal 2018.time sufficient to allow for any anticipated recovery of fair value.

Allowance for Doubtful Accounts

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

Inventories

Inventories consist of finished goods, work in processwork-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.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. Ifamount, then goodwill is not considered to be impaired and no further testing is required; if otherwise, we conclude that it is more likely than not thatcompare the fair value of aour reporting unit is less thanto its carrying amount, we conduct a goodwill impairment test. The impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies.

In Fiscal 2017, we adopted FASB ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, 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.value, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. As of December 31, 2017, we determined that2019, there was no adjustments to the carrying value of goodwill were required.impairment for goodwill.

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset or asset group is expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long livedlong-lived assets and purchased intangible assets. As of December 31, 2017,2019, there was no impairment to our long-lived and intangible assets.

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made. As such, as of December 31, 2019, 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 condensed 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 condensed consolidated balance sheets. We do not provide any service-type warranties.

Repair and Maintenance Costs

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

Comprehensive Loss

The difference between net loss and comprehensive loss was de minimis for the three and nine months ended December 31, 2019 and 2018.

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 pronouncementASU No. 2016-02 establishes a right-of-use model that requires an entitya lessee to recognize assetsrecord a right-of-use asset and liabilities for the rights and obligations created by leasesa lease liability on the entity’s balance sheet for both finance and operating leases. Forall leases with a termterms longer than 12 months. Leases will be classified as either “finance” or “operating,” with classification affecting the pattern of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense recognition in the lease over a straight-line basisincome statement. This update was effective for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. Companies are required to adopt the new standard using a modified retrospective approach for annual and interim periodsfiscal years beginning after December 15, 2018. Early2018, and interim periods within those fiscal years. As a result of the adoption of ASU 2016-02, is permitted. We are currently evaluatingon April 1, 2019, the impactCompany recognized (a) an operating lease liability of $14.2 million, which represents the present value of our remaining lease payments and (b) a related right-of-use asset of $13.4 million. In addition, the Company derecognized approximately $827,000 of deferred rent liability. The adoption of ASU 2016-02 did not have a material impact on the Company’s statement of operations, cash flows, or stockholders’ equity. Due to the adoption of the standard using the modified retrospective cumulative-effect adjustment method, there are no changes to our consolidated financial statements.previously reported results prior to April 1, 2019. See Note 6, Right-of-Use Assets and Lease Liabilities, for additional details.

In August 2016,2018, the FASB issued ASUAccounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows2018-13, Fair Value Measurement (Topic 230)820): Classification of Certain Cash Receipts and Cash PaymentsDisclosure Framework—Changes to the Disclosure Requirement for Fair Value Measurements (“ASU 2016-15”2018-13”), which clarifies how certain cash receipts and cash payments are presented and classified inmodifies the statement of cash flows. The new standarddisclosure requirements on fair value measurements. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,2019, and early adoption is permitted. We are currently evaluating the impact of ASU 2016-152018-13 on our unaudited condensed consolidated financial statements.

In November 2016,August 2018, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)2018-15, Intangibles—Goodwill and Other—Internal Use Software (subtopic 350-40): Restricted CashCustomer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2016-18”2018-15”), requiring restricted cash and cash equivalents to be included with cash and cash equivalents onwhich clarifies the statement of cash flows. The new standardaccounting for implementation costs in cloud 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 2016-182018-15 on our unaudited condensed consolidated financial statements.statements.

In DecemberJune 2016, the FASB issued ASU No. 2016-20, 2016-13, Financial Instruments—Credit Losses (Topic 326)Technical Corrections, Measurement of Credit Losses on Financial Instruments. This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and Improvements to Topic 606, Revenue from Contracts with Customers (“reasonable and supportable forecasts that affect the collectability of the amounts. In November 2019, the FASB issued ASU 2016-20”)2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which allows entities notdefers the effective date of ASU 2016-13 to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standard is effective for fiscal years, and interim periods within those years beginning after December 15, 2017, with2022 for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, ASU 2016-13 will now be effective for our fiscal year 2024 beginning April 1, 2023; however, early adoption is permitted. We are currently evaluating the timing and impact of adopting ASU 2016-202016-13 on our unaudited condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the impact of this ASU, but does not expect a material impact to the financial statements upon adoption.

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 $214,000 and $634,000 for the three and nine months ended December 31, 2019, respectively.  Depreciation expense was approximately $198,000 and $661,000 for the three and nine months ended December 31, 2018, respectively.

Intangible Assets, net

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

Amortization expense for intangible assets subject to amortization was approximately $424,000 and $1.1 million for the three and nine months ended December 31, 2019, respectively. 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. Approximately $194,000 and $531,000 of the intangible asset amortization was recorded to cost of revenues, and approximately $230,000 and $527,000 was recorded to amortization expense for the three and nine months ended December 31, 2019, respectively, in the consolidated statements of operations.  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.

As of December 31, 2017,2019, future estimated amortization expense is as follows:

Warranty Reserve Activity

Warranty reserve wasis recorded as accrued liabilities in the accompanying unaudited condensed 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 net loss per share computations and weighted average common shares used in diluted per share computations in the unaudited consolidated financial statements:share: