ITERIS, INC. Forward-Looking Statements This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management's beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words "expect(s)," "feel(s)," "believe(s)," "intend(s)," "plan(s)," "should," "will," "may," "anticipate(s)," "estimate(s)," "could," "should," and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profitability, capital needs, backlog, manufacturing capabilities, the market acceptance of our products and services, competition, the impact of any current or future litigation, the impact of recent accounting pronouncements, the applications for and acceptance of our products and services, the status of our facilities and product development, the impact of the acquisition ofAlbeck Gerken, Inc. , the impact of the sale of our Agriculture and Weather Analytics business, and the impact of the acquisition of substantially all of the assets ofTrafficCast International, Inc. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. We encourage you to carefully review and consider the various disclosures made by us which describe certain factors which could affect our business, including in "Risk Factors" set forth in Part II. Item 1A of this report, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview General We are a provider of smart mobility infrastructure management solutions. Municipalities, government agencies, and other transportation infrastructure providers use our solutions to monitor, visualize, and optimize mobility infrastructure to help ensure roads are safe, travel is efficient, and communities thrive. Additionally, we provide mobility data to automobile OEMs, media companies, insurance companies, and other commercial entities, whose products and services have a high dependency on the performance and/or condition of mobility infrastructure. Recent Developments Impact of COVID-19 on Our Business The COVID-19 pandemic (the "Pandemic") has materially adversely impacted global economic conditions. More than eighteen months into the Pandemic, COVID-19 continues to have an unpredictable and unprecedented impact on theU.S. economy as federal, state and local governments react to this public health crisis with travel restrictions, quarantines and "stay-at-home" orders. The uncertainties caused by the Pandemic include, but are not limited to, supply chain disruptions, workplace dislocations, economic contraction, and downward pressure on some customer budgets and customer sentiment in general. While there has been no material impact to our business, nor any facility closures, we have experienced some supply chain and work delays due to the Pandemic. Should such delays become protracted or worsen or should longer term budgets or priorities of our clients be impacted, the Pandemic could materially impact our business, results of operations and financial condition. The extent of the impact of the Pandemic on our business and financial results, and the volatility of our stock price will depend largely on future developments, including the duration of the spread of the outbreak, new and potentially more contagious variants, such as the Delta variant, the impact on capital and financial markets, the distribution, rate of adoption and efficacy of vaccines, and the related impact on the budgets and financial circumstances of our customers, all of which are highly uncertain and cannot be reasonably estimated as of the date of this report. Given the uncertainties surrounding the impacts of the Pandemic on our future financial condition and results of operations, we have taken certain actions to preserve our liquidity, manage cash flow and strengthen our financial flexibility. Such actions included, reducing our discretionary spending, reducing capital expenditures, implementing restructuring activities with the goal of reducing payroll costs, including employee furloughs, pay freezes and pay cuts. 27
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Our products require specialized parts which have become more difficult to source and have become subject to substantially increased prices as a result of the supply chain interruptions caused by the Pandemic. In anticipation of these shipment lead times as well as the fluctuation in prices, we may build inventory for anticipated periods of growth which do not occur, may build inventory anticipating demand that does not materialize, or may build inventory to serve what we believe is pent-up demand. We may remain supply-constrained beyond the end of the second half of Fiscal 2022. We have placed non-cancellable inventory orders for certain products in advance of our normal lead times to secure normal and incremental future supply and capacity and may need to continue to do so in the future. OnMarch 27, 2020 , the CARES Act was signed into law inthe United States . The CARES Act provides relief toU.S. corporations through financial assistance programs and modifications to certain income tax provisions. The Company is applying certain beneficial provisions of the CARES Act, including the payroll tax deferral and the alternative minimum tax acceleration. For more information, refer to Note 6, Income Taxes, to our Unaudited Condensed Consolidated Financial Statements, including in Part I, Item 1 of this report. The Pandemic has had an impact on the Company's human capital. While our Santa Ana facility has remained open, easing of pandemic restrictions imposed by local and state authorities have allowed a portion of our workforce to return to our various facilities while others continue to work remotely. The Company's information technology infrastructure has proven sufficiently flexible to minimize disruptions in required duties and responsibilities. We believe that our system of internal control over financial reporting has not been fundamentally altered and that the effectiveness of the design and operation of internal controls remained materially consistent during the three and six month periods endedSeptember 30, 2021 . Additionally, we have been able to timely file financial reports. We believe we have the infrastructure to efficiently work remotely during the Pandemic. We do not expect to incur significant costs to safely reopen our facilities to all our employees. Despite the Pandemic, we believe that the ITS industry in the US should continue to provide new opportunities for the Company although, in the near term, the pace of new opportunities emerging may be restrained and the start dates of awarded projects may be delayed. We believe that our expectations are valid and that our plans for the future continue to be based on reasonable assumptions. Sale of Agriculture and Weather Analytics Business OnMay 5, 2020 , the Company completed the sale of substantially all of our assets used in connection with our Agriculture and Weather Analytics business toDTN, LLC ("DTN"), an operating company ofTBG AG , a Swiss-based holding company, pursuant to the Purchase Agreement signed onMay 2, 2020 (the "DTN Purchase Agreement"), in exchange for a total purchase consideration of$12.0 million in cash, subject to working capital adjustments. Upon closing, the Company received$10.5 million and$1.5 million of payment was deferred. DTN paid the Company$1.45 million on the 12-month anniversary of the closing date, and$0.05 million will be paid by DTN at the 18-month anniversary of the closing date, subject to satisfaction of the conditions set forth in the DTN Purchase Agreement relating to the transition of certain customers to DTN and the collection of certain receivables by DTN. The DTN Purchase Agreement also provides for customary post-closing adjustments to the purchase price related to working capital at closing. The parties also entered into certain ancillary agreements at the closing of the transaction that will provideIteris with ongoing access to weather and pavement data that it integrates into its transportation software products, and a joint development agreement under which the parties agreed to pursue future joint opportunities in the global transportation market. The sale of the Agriculture and Weather Analytics business was a result of the Company's shift in strategy to focus on its mobility infrastructure management solutions and to capitalize on the potential for a future partnership upon the sale of this business component to DTN. We have determined that the Agriculture and Weather Analytics business, which constituted one of our operating segments prior to first quarter in Fiscal 2021, qualifies as a discontinued operation in accordance with the criteria set forth in ASC 205-20, Presentation of Financial Statements - Discontinued Operations. OnMay 5, 2020 , the Company also entered into a transition services agreement ("TSA") with DTN, pursuant to which the Company agreed to support the information technology and accounting functions of the Agriculture and Weather Analytics business for a period up to 12 months and DTN agreed to provide the contract administration/account management services for certain contracts of the Company and other transition services. Either party may make any reasonable request to extend the period of time the other party shall provide a transition service beyond the initial service period or access to additional services that are necessary for the transition of the business operations. The income and costs associated with theTSA for the three and six months endedSeptember 30, 2021 , were de minimis, which were included in income (loss) from discontinued operations on the unaudited condensed consolidated statement of operations. 28 -------------------------------------------------------------------------------- Table of Contents Acquisition of the Assets ofTrafficCast International, Inc. OnDecember 6, 2020 , the Company entered into an Asset Purchase Agreement (the "TCI Purchase Agreement") withTrafficCast International, Inc. ("TrafficCast"), a privately held company headquartered inMadison, Wisconsin that provides travel information technology, applications and content to customers throughoutNorth America in the media, mobile technology, automotive and public sectors. Under the TCI Purchase Agreement, the Company agreed to purchase fromTrafficCast substantially all of its assets, composed of its travel information technology, applications and content (the "Business"). The transaction closed onDecember 7, 2020 . Under the TCI Purchase Agreement,Iteris purchased fromTrafficCast substantially all of the assets used in the conduct of the Business and assumed certain specified liabilities of the Business in exchange for a total purchase price of up to$17.7 million , with$15 million paid in cash on the closing date,$1 million held back as security for certain post-closing adjustments and post-closing indemnity obligations ofTrafficCast , and a$1 million earn out, that if earned, will be paid over two years based on the Business' achievement of certain revenue targets. The TCI Purchase Agreement also provides for customary post-closing adjustments to the purchase price tied to working capital balances of the Business at closing (see Note 11, Acquisitions). The parties also entered into certain ancillary agreements that will provideIteris with ongoing access to mapping and monitoring services that the Business uses to support its real-time and predictive travel data and associated content.TrafficCast operates two lines of business - commercial and public sector - each of which contributes about 50% of total revenue. Its commercial line of business develops software that collects, filters, and models real-time traveler information and traffic incident data for global media companies and other commercial customers. Its public sector line of business provides sensors and related software that help state and local agencies measure, visualize, and manage traffic flow. Since its integration in early Fiscal 2022,TrafficCast's market-leading software and IoT devices, as well as its data ingestion, data science and analytics solutions, has enhancedIteris' suite of smart mobility infrastructure management solutions. Non-GAAP Financial Measures Adjusted income (loss) from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, and project loss reserves ("Adjusted EBITDA") was approximately$2.3 million and$5.4 million for the three and six months endedSeptember 30, 2021 as compared to approximately$2.0 million and$4.2 million for the three and six months endedSeptember 30, 2020 , respectively. When viewed with our financial results prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP") and accompanying reconciliations, we believe Adjusted EBITDA provides additional useful information to clarify and enhance the understanding of the factors and trends affecting our past performance and future prospects. We define these measures, explain how they are calculated and provide reconciliations of these measures to the most comparable GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this Quarterly Report on Form 10-Q ("Form 10-Q"), are supplemental measures of our performance that are not required by or presented in accordance with GAAP. They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net cash provided by operating activities as measures of our liquidity. The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items. We use Adjusted EBITDA non-GAAP operating performance measures internally as complementary financial measures to evaluate the performance and trends of our businesses. We present Adjusted EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our operating commitments. Adjusted EBITDA and the related financial ratios have limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include: •They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments; •They do not reflect changes in, or cash requirements for, our working capital needs; •Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; •They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; 29 -------------------------------------------------------------------------------- Table of Contents •They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and •Other companies in our industry may calculate Adjusted EBITDA differently than we do, whereby limiting its usefulness as comparative measures. Because of these limitations, Adjusted EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See our unaudited condensed consolidated financial statements contained in this Form 10-Q. However, in spite of the above limitations, we believe that Adjusted EBITDA and the related financial ratios are useful to an investor in evaluating our results of operations because these measures: •Are widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; •Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and •Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting. The following financial items have been added back to or subtracted from our net income when calculating Adjusted EBITDA: •Interest expense.Iteris excludes interest expense because it does not believe this item is reflective of ongoing business and operating results. This amount may be useful to investors for determining current cash flow. •Income tax. This amount may be useful to investors because it represents the taxes which may be payable for the period and the change in deferred taxes during the period, and may reduce cash flow available for use in our business. •Depreciation.Iteris excludes depreciation expense primarily because it is a non-cash expense. These amounts may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations. •Amortization.Iteris incurs amortization of intangible assets in connection with acquisitions.Iteris also incurs amortization related to capitalized software development costs.Iteris excludes these items because it does not believe that these expenses are reflective of ongoing operating results in the period incurred. These amounts may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights. •Stock-based compensation. These expenses consist primarily of expenses from employee and director equity based compensation plansIteris excludes stock-based compensation primarily because they are non-cash expenses andIteris believes that it is useful to investors to understand the impact of stock-based compensation to its results of operations and current cash flow. •Restructuring charges. These expenses consist primarily of employee separation expenses, facility termination costs, and other expenses associated with Company restructuring activities.Iteris excludes these expenses as it does not believe that these expenses are reflective of ongoing operating results in the period incurred. These amounts may be useful to our investors in evaluating our core operating performance. •Project loss reserves. These expenses consist primarily of expenses incurred to complete a software development contract that will not be recoverable and are largely related to previously incurred and capitalized costs for non-recurring engineering activity.Iteris excludes these expenses as it does not believe that these expenses are reflective of ongoing operating results in the period incurred. These amounts may be useful to our investors in evaluating our core operating performance. 30 -------------------------------------------------------------------------------- Table of Contents Reconciliations of net income (loss) from continuing operations to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of total revenues were as follows: Three Months Ended Six Months Ended September 30, September 30, 2021 2020 2021 2020 (In Thousands) (In Thousands)
Net income (loss) from continuing operations
719 $ (1,460)$ 1,137 Income tax expense (benefit) (249) 28 (174) 62 Depreciation expense 194 182 426 367 Amortization expense 815 363 1,618 724 Stock-based compensation 834 667 1,628 1,331 Other adjustments: Restructuring charges - - - 619 Project loss 2,805 - 3,394 - Adjusted EBITDA $ 2,310$ 1,959 $ 5,432$ 4,240 Percentage of total revenues 6.9 % 6.7 % 8.1 % 7.4 % Critical Accounting Policies and Estimates "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on our unaudited condensed consolidated financial statements included herein, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition, the collectability of accounts receivable 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 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 stock-based compensation. We base these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Recent Accounting Pronouncements Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, to our Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for a discussion of applicable recent accounting pronouncements. Analysis of Quarterly Results from Continuing Operations The following table presents our total revenues for the three and six month endedSeptember 30, 2021 and 2020: Three Months Ended September 30, $ Increase % 2021 2020 (decrease) Change (In thousands, except percentages) Product revenues $ 17,736$ 16,265 $ 1,471 9.0 % Service revenues 15,511 12,991 2,520 19.4 % Total revenues $ 33,247$ 29,256 $ 3,991 13.6 % 31
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Six Months Ended September 30,
$
Increase %
2021 2020 (decrease) Change
(In thousands, except percentages)
Product revenues $ 35,762 $ 30,659 $ 5,103 16.6 %
Service revenues $ 31,570 $ 26,597 4,973 18.7 %
Total revenues $ 67,332 $ 57,256 $ 10,076 17.6 %
Product revenues primarily consist of product sales, but also includes OEM
products for the traffic signal markets, as well as third-party product sales
for installation under certain construction-type contracts. Product revenues for
the three months ended September 30, 2021 increased 9% to $17.7 million , as
compared to $16.3 million in the corresponding period in the prior year,
primarily due to the addition of approximately $1.4 million of TrafficCast
product sales.
Service revenues primarily consist of traffic study, design, engineering, and
management services, but also includes service revenues generated from advanced
sensor technologies product installation services and cloud-based application
installation and support services. Service revenues for the three months ended
September 30, 2021 increased 19.4% to $15.5 million , compared to $13.0 million
in the corresponding period in the prior year. This increase was primarily due
to the addition of $2.0 million of TrafficCast SaaS revenue. Total annual
recurring revenue, which we define as all software and managed services revenue
was 26% of total revenue for the three months ended September 30, 2021 and 19%
of total revenue for the three months ended September 30, 2020 .
Total revenues for the three months ended September 30, 2021 increased 13.6% to
$33.2 million , compared to $29.3 million in the corresponding period in the
prior year. The increase in total revenues was primarily due to an approximate
9% increase in product revenues, and approximately 19% increase in services
revenues.
Product revenues for the six months ended September 30, 2021 increased 16.6% to
$35.8 million , as compared to $30.7 million in the corresponding period in the
prior year, primarily due to continued strong demand for our hardware solutions,
further augmented by the addition of approximately $3.0 million of TrafficCast
product sales.
Service revenues for the six months ended September 30, 2021 increased 18.7% to
$31.6 million , compared to $26.6 million in the corresponding period in the
prior year. This increase was primarily due to the addition of $3.9 million of
TrafficCast SaaS revenue. Total annual recurring revenue, which we define as all
software and managed services revenue was 25% of total revenue for the six
months ended September 30, 2021 and 19% of total revenue for the six months
ended September 30, 2020 .
Total revenues for the six months ended September 30, 2021 increased 17.6% to
$67.3 million , compared to $57.3 million in the corresponding period in the
prior year. The increase in total revenues was primarily due to an approximate
16.6% increase in product revenues, and approximately 18.7% increase in services
revenues.
Backlog is an operational measure representing future unearned revenue amounts
believed to be firm that are to be earned under our existing agreements and are
not included in deferred revenue on our unaudited condensed consolidated balance
sheets. Backlog includes new bookings but does not include awarded orders for
which definitive contracts have not been executed. We believe backlog is a
useful metric for investors, given its relevance to total orders, but there can
be no assurances we will recognize revenue from bookings or backlog timely or
ever. Total backlog was $83.4 million as of September 30, 2021 compared to
approximately $73.1 million as of September 30, 2020 .
Gross Profit
The following tables present details of our gross profit for the three and six
months ended September 30, 2021 and 2020:
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Three Months Ended September 30, $ %
2021 2020 Increase Change
(In thousands, except percentages)
Product gross profit $ 8,753 $ 6,933 $ 1,820 26.3 %
Service gross profit 2,377 4,425 (2,048) (46.3) %
Total gross profit $ 11,130 $ 11,358 $ (228) (2.0) %
Product gross margin as a % of product
revenues 49.4 % 42.6 %
Service gross margin as a % of service
revenues 15.3 % 34.1 %
Total gross margin as a % of total
revenues 33.5 % 38.8 %
Six Months Ended September 30, $ %
2021 2020 Increase Change
(In thousands, except percentages)
Product gross profit $ 17,222 $ 13,246 $ 3,976 30.0 %
Service gross profit 8,001 8,980 (979) (10.9) %
Total gross profit $ 25,223 $ 22,226 $ 2,997 13.5 %
Product gross margin as a % of product
revenues 48.2 % 43.2 %
Service gross margin as a % of service
revenues 25.3 % 33.8 %
Total gross margin as a % of total
revenues 37.5 % 38.8 %
Our product gross margin for the three and six months endedSeptember 30, 2021 increased approximately 680 and 500 basis points, respectively, as compared to the corresponding periods in the prior year. The increase in product gross margin was mainly due to favorable product mix and manufacturing volume. Our core product sales yield higher margins compared to our third party products sales which typically yield lower gross margins. Our service gross margin for the three and six months endedSeptember 30, 2021 decreased approximately 1,880 and 850 basis points, respectively as compared to the corresponding periods in the prior year. The decrease is due to recognition of an estimated contractual loss on a project with customer, for which approximately$2.8 million and$3.4 million were recorded for the three and six months endedSeptember 30, 2021 , respectively. Our total gross margin for the three and six months endedSeptember 30, 2021 decreased approximately 530 and 130 basis points, respectively, as compared to the corresponding prior year periods due to aforementioned reasons. General and Administrative Expense General and administrative expense for the three months endedSeptember 30, 2021 increased approximately 4.0% to$6.1 million , compared to$5.9 million for the three months endedSeptember 30, 2020 . General and administrative expense for the six months endedSeptember 30, 2021 increased approximately 11.2% to$12.5 million , compared to$11.2 million for the six months endedSeptember 30, 2020 . The increase is primarily due to the addition ofTrafficCast , and additional professional services fees related to the Company's review of strategic alternatives. Sales and Marketing Sales and marketing expense for the three months endedSeptember 30, 2021 increased approximately 45.1% to$4.9 million compared to$3.4 million for the three months endedSeptember 30, 2020 . Sales and marketing expense for the six months endedSeptember 30, 2021 increased approximately 40.9% to$9.5 million compared to$6.7 million for the six months endedSeptember 30, 2020 . The increase is primarily due to the addition ofTrafficCast , and higher sales commissions based on higher sales. Research and Development Expense Research and development expense for the three months endedSeptember 30, 2021 increased approximately 61% to$1.8 million , compared to$1.1 million for the three months endedSeptember 30, 2020 . Research and development expense for 33 -------------------------------------------------------------------------------- Table of Contents the six months endedSeptember 30, 2021 increased approximately 75.5% to$3.6 million , compared to$2.0 million for the six months endedSeptember 30, 2020 . The overall increase was primarily due to the addition ofTrafficCast and continued investment in research and development activities largely focused on improving our existing software related offerings. We plan to continue to invest in the development of further enhancements and functionality of our Iteris ClearMobility Platform as well as our Vantage products family. Certain development costs were capitalized into intangible assets in the unaudited condensed consolidated balance sheets; in both the current and prior year periods; however, certain costs did not meet the criteria for capitalization under GAAP and are included in research and development expense. Going forward, we expect to continue to invest in our software solutions. This continued investment may result in increases in research and development costs, as well as additional capitalized software in future periods. Amortization of Intangible Assets Amortization of intangible assets was approximately$0.8 million and$0.4 million for the three months endedSeptember 30, 2021 and 2020, respectively. Amortization of intangible assets was approximately$1.6 million and$0.7 million for the six months endedSeptember 30, 2021 and 2020, respectively. The increase was primarily due to amortization related to intangible assets acquired as part of theTrafficCast acquisition. Income Taxes The effective tax rate used for interim periods is the estimated annual effective tax rate, based on current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. Income tax benefit for the three and six months endedSeptember 30, 2021 was approximately$0.2 million and$0.2 million , or 11.2% and 11.4%, respectively, of pre-tax loss, as compared with an expense of approximately$0.0 million and$0.1 million , or 3.4% and 4.8%, respectively, of pre-tax income for the three and six months endedSeptember 30, 2020 . In assessing the realizability of our deferred tax assets, we review all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance. As we have experienced a cumulative pre-tax loss over the trailing three years, we continue to maintain a valuation allowance against our deferred tax assets. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, and potentially in the next few quarters, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. OnMarch 27, 2020 , the CARES Act was enacted in response to the Pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning afterDecember 31, 2017 . The income tax provisions of the CARES Act had an immaterial impact on our current taxes, deferred taxes, and uncertain tax positions of the Company in the year endedMarch 31, 2021 . The CARES Act also allows for the deferral of payroll taxes, as well as the immediate refund of federal Alternative Minimum Tax credits, which had previously been made refundable over a period of four years by the Tax Cuts and Jobs Act of 2017. The Company is utilizing the provision of the CARES Act allowing for the deferral of payroll taxes as ofSeptember 30, 2021 . Liquidity and Capital Resources Liquidity Outlook We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. As ofSeptember 30, 2021 , we had cash and cash equivalents totaling approximately$28.2 million . We do not have a revolving credit facility. Our cash position will also be impacted by any capital expenditures or acquisitions we complete in the future. 34 -------------------------------------------------------------------------------- Table of Contents As a result of the Pandemic, we have taken and will continue to take action to reduce costs, preserve liquidity and manage our cash flow. Such actions include, but are not limited to reducing our discretionary spending, reducing capital expenditures, and reducing payroll costs, including employee furloughs, pay freezes and pay cuts as needed. While the impact and duration of the Pandemic on our business is currently uncertain, the situation is expected to be temporary. In the longer term, we remain committed to increasing total shareholder returns through our investments in opportunities and initiatives to grow our business organically and through acquisitions that support our current strategies. Cash Flows We have historically financed our operations with a combination of cash flows from operations and the sale of equity securities. We expect to continue to rely on cash flows from operations and our cash reserves to fund our operations, which we believe to be sufficient to fund our operations for at least the next twelve months. However, we may need or choose to raise additional capital to fund potential future acquisitions and our future growth. We may raise such funds by selling equity or debt securities to the public or to selected investors or by borrowing money from financial institutions. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders may experience significant dilution, and any equity securities that may be issued may have rights senior to our existing stockholders. There is no assurance that we will be able to secure additional funding on a timely basis, on terms acceptable to us, or at all. AtSeptember 30, 2021 , we had$38.5 million in working capital, excluding current assets and liabilities of discontinued operations, which included$28.2 million in cash and cash equivalents. This compares to working capital of$36.4 million atMarch 31, 2021 , excluding current assets and liabilities of discontinued operations, which included$25.2 million in cash and cash equivalents as well as$3.1 million in short-term investments. Operating Activities. Net cash used by operating activities of our continuing operations for the six months endedSeptember 30, 2021 of approximately$1.4 million was primarily the result of approximately$8.0 million from non-cash items, primarily for noncash lease expense, deferred income taxes, depreciation, stock-based compensation, and amortization. This was offset by our net loss from continuing operations of approximately$1.5 million coupled with approximately$8.0 million of outflows due to changes in working capital. Net cash used in operating activities from discontinued operations was approximately$0.0 million . Net cash provided by operating activities of our continuing operations for the six months endedSeptember 30, 2020 of$4.2 million was primarily the result of our net income of approximately$1.1 million and$3.0 million in non-cash items, primarily for noncash lease expense, deferred income taxes, depreciation, stock-based compensation, and amortization, offset by approximately$0.05 million from changes in working capital. Net cash used in operating activities from discontinued operations was approximately$2.0 million . Investing Activities. Net cash provided by investing activities of our continuing operations during the six months endedSeptember 30, 2021 was primarily the result of approximately$3.1 million in proceeds from the maturity of short-term investments offset by approximately$0.3 million of property and equipment purchases, and approximately$1.3 million of capitalized software development costs. Net cash provided by investing activities from discontinued operations was approximately$1.5 million . Net cash used in investing activities of our continuing operations during the six months endedSeptember 30, 2020 was primarily the result of approximately$23.7 million in purchases of short-term investments and approximately$0.3 million of property and equipment purchases, approximately$0.4 million of capitalized software development costs, related to VantageLive! and ClearGuide. These investments were partially offset by approximately$9.7 million in net proceeds from the sale of the Agriculture and Weather Analytics business and approximately$13.0 million in proceeds from the sale and maturity of short-term investments. Financing Activities. Net cash provided by financing activities of our continuing operations during the six months endedSeptember 30, 2021 was the result of approximately$1.4 million and$0.2 million of cash proceeds from the exercises of stock options and purchase of ESPP shares, respectively. Net cash provided by financing activities of our continuing operations during the six months endedSeptember 30, 2020 was the result of approximately$0.7 million and$0.2 million of cash proceeds from the exercises of stock options and purchase of ESPP shares, respectively. 35
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Table of Contents Off Balance Sheet Arrangements We did not have any material off balance sheet arrangements atSeptember 30, 2021 . Seasonality We have historically experienced seasonality, which adversely affects product sales in our third and fourth fiscal quarters due to a reduction in intersection construction and repairs during the winter months due to inclement weather conditions, with the third fiscal quarter generally affected the most by inclement weather. We have also experienced seasonality, particularly with respect to our service revenues, especially in the third fiscal quarter due to the increased number of holidays, causing a reduction in available billable hours.
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