ITERIS, INC.
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and related Notes thereto included in Part II,
Item 8 of this report and the "Risk Factors" section in Part I, Item 1A, as well
as the
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other cautionary statements and risks described elsewhere in this report before deciding to purchase, hold or sell our common stock.
Overview
General
We are a provider of smart mobility infrastructure management solutions. Our cloud-enabled solutions help public transportation agencies, municipalities, commercial entities and other transportation infrastructure providers monitor, visualize, and optimize mobility infrastructure to make mobility safe, efficient, and sustainable for everyone.
Recent Developments
Impact of COVID-19 on Our Business
The Pandemic has materially adversely impacted global economic conditions. More than 24 months into the Pandemic, COVID-19 continues to have an unpredictable and unprecedented impact on the global economy. Though there has been a trend in increasing availability of COVID-19 vaccines, as well as an easing of restrictions on social, business, travel and government activities and functions, infection rates continue to fluctuate and federal, state and local government regulations continue to rapidly change. 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. We have not had any facility closures due to the Pandemic, but we have experienced supply chain and work delays on certain projects. Should such delays become protracted or worsen or should longer term budgets or priorities of our clients be impacted, the Pandemic could 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 Pandemic, new and potentially more contagious variants, such as the Delta and Omicron variants, 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 and suppliers, 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 the Company's 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, but are not limited to, 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. Our products require specialized parts which have become more difficult to source. In some cases, we have had to purchase such parts from third-party brokers at substantially higher prices. Additionally, to mitigate for component shortages, we have begun to increase inventory levels and may continue to do so for an extended period. In the event demand doesn't materialize, we may need to hold excess inventory for several quarters. Alternatively, we may be unable to source sufficient components, even from third-party brokers, to meet customer demand, resulting in high levels of unshippable backlog. 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. Still, we may remain supply-constrained beyond our Fiscal 2022. 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 the Consolidated Financial Statements, including in Part II, Item 8 of this report. The Pandemic has had an impact on the Company's human capital. While our Santa Ana product and commercial operations facility has remained open throughout the Pandemic, the 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 fiscal year endedMarch 31, 2022 . Additionally, we have been able to timely file financial reports. We believe we have the right infrastructure to efficiently work remotely for the balance of the Pandemic. We do not expect to incur significant costs to safely reopen our facilities to all our employees. 26
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Despite the Pandemic, we believe that the ITS ("Intelligent Traffic Systems")
industry in the U.S. 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.
Acquisition of the Assets of
OnDecember 6, 2020 , the Company entered into the TrafficCast Purchase Agreement withTrafficCast , 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 TrafficCast Purchase Agreement,Iteris purchased fromTrafficCast substantially all of the assets used in the conduct of the TrafficCast Business and assumed certain specified liabilities of the TrafficCast Business in exchange for a total purchase price of up to$17.7 million . The$17.7 million in total consideration was comprised of$15.0 million paid in cash on the closing date,$1.0 million held back as security for certain post-closing adjustments and post-closing indemnity obligations ofTrafficCast ,$1.1 million acquisition-related liability, and a$1.0 million earn out, fair valued at$0.6 million as ofMarch 31, 2021 , that if earned, will be paid over two years based on the TrafficCast Business' achievement of certain revenue targets. The TrafficCast Purchase Agreement also provides for customary post-closing adjustments to the purchase price tied to working capital balances of the TrafficCast Business at closing (see Note 12, Acquisitions, to the Consolidated Financial Statements). The transaction closed onDecember 7, 2020 . Simultaneous with closing the transaction, the parties entered into certain ancillary agreements that will provideIteris with ongoing access to mapping and monitoring services that the TrafficCast 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 internet of things, or IoT, devices, as well as its data ingestion, data science and analytics solutions, has enhancedIteris' suite of smart mobility infrastructure management solutions.
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 former Agriculture and Weather Analytics business to DTN, an operating company ofTBG AG , a Swiss-based holding company, pursuant to the AWA Purchase Agreement signed onMay 2, 2020 , 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 in cash and$1.5 million of payment was deferred. DTN paid the Company$1.45 million at the 12-month anniversary of the closing date, and$0.05 million at the 18-month anniversary of the closing date. The AWA 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, 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 function 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 Company earned less than$0.1 million in income and incurred less than$0.1 million in costs associated with theTSA for the fiscal year endedMarch 31, 2022 , which was included in loss from discontinued 27
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operations before gain on sale, net of tax on the consolidated statement of operations (see Note 3, Discontinued Operations, to the Consolidated Financial Statements).
Non-GAAP Financial Measures Adjusted income (loss) from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, project loss reserves, acquisition costs, executive severance and transition costs, and fair value adjustment related toTrafficCast's opening balance inventory ("Adjusted EBITDA") was approximately$4.5 million ,$7.5 million and$4.2 million for the fiscal years endedMarch 31, 2022 , 2021 and 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 Annual Report on Form 10-K ("Form 10-K"), 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 analytical tools, and you should not consider them 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; •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 audited consolidated financial statements contained in this Form 10-K. 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 (loss) 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. 28 -------------------------------------------------------------------------------- Table of Contents •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 expense.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. •Acquisition costs. In connection with its business combinations,Iteris incurs professional service fees, changes to the fair value of contingent consideration, and other direct expenses.Iteris excludes such items as they are related to acquisitions and have no direct correlation to the operation ofIteris' business. These amounts may be useful to our investors in evaluating our core operating performance. •Executive severance and transition costs.Iteris excludes executive severance and transition costs because 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. •Fair value adjustment related to acquired opening balance inventories.Iteris excludes fair value adjustment related to the opening inventory balance acquired as part of its business combination because it does not believe that these costs are reflective of operating results in the period incurred. These amounts may be useful to our investors in evaluating our core operating performance.
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:
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Year Ended March 31,
2022 2021 2020
(In thousands)
Net income (loss) from continuing operations $ (6,900) $ 491 $ (1,758)
Income tax expense 174 115 160
Depreciation expense 820 734 770
Amortization expense 3,240 2,036 1,255
Stock-based compensation 3,401 2,902 2,495
Other adjustments:
Restructuring charges - 619 -
Project loss reserve 3,394 - -
Acquisition costs - 417 689
Executive severance and transition costs 340 - 553
Fair value adjustment - opening balance inventories - 136 -
Total adjustments 11,369 6,959 5,922
Adjusted EBITDA $ 4,469 $ 7,450 $ 4,164
Percentage of total revenues 3.3 %
6.4 % 3.9 %
Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is based on our 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. Our
significant accounting policies are summarized in Note 1 to the Consolidated
Financial Statements. In preparing our consolidated financial statements in
accordance with GAAP and pursuant to the rules and regulations of the SEC , we
make estimates, assumptions and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosures of contingent
assets and liabilities. We base our estimates, assumptions and judgments on
historical experience and other factors that we believe are reasonable. We
evaluate our estimates, assumptions and judgments on a regular basis and apply
our accounting policies on a consistent basis. We believe that the estimates,
assumptions and judgments involved in the accounting for revenue recognition,
goodwill, and income taxes have the most potential impact on our consolidated
financial statements. Historically, our estimates, assumptions and judgments
relative to our critical accounting policies have not differed materially from
actual results.
The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. Our revenue arrangements are complex in nature and require
significant judgement in determining the performance obligation structure. Each
contract is unique in nature and therefore is assessed individually for
appropriate accounting treatment.
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 our revenue from contracts with customers.
Product revenue related contracts with customers begin when we acknowledge a
purchase order for a specific customer order of product to be delivered in the
near term and 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
product, 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 upon customer receipt of the product.
Service revenues, primarily derived from long-term engineering and consulting
service contracts with governmental agencies. These contracts generally include
performance obligations in which control is transferred over time. We recognize
revenue on fixed fee contracts, over time, using the proportion of actual costs
incurred to the total costs expected to complete
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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 Cost Plus Fixed Fee
("CPFF") contracts are considered variable consideration. However, performance
obligations with these fee types qualify for the "Right to Invoice" Practical
Expedient. Under this practical expedient, the Company is allowed to recognize
revenue, over time, in the amount to which the Company 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 and support,
extended warranty, and the use of the Company's service platforms and APIs on a
subscription basis. We generate this revenue from fees for maintenance and
support, extended warranty, 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 substantially 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 ratable recognition
over the term of the contract. The Company determined that this method best
represents the transfer of services as the customer obtains equal benefit from
the service throughout the service period.
Goodwill . Goodwill represents the excess of the purchase price over the fair
value of net assets acquired in a business combination. We test goodwill for
impairment in accordance with the provisions of ASC 350, Intangibles - Goodwill
and Other, ("ASC 350"). Goodwill is tested for impairment at least annually at
the reporting unit level or whenever events or changes in circumstances indicate
that goodwill might be impaired. ASC 350 provides that an entity has the option
to first assess qualitative factors to determine whether the existence of events
or circumstances leads to a determination that it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, an entity determines it is
not more likely than not that the fair value of a reporting unit is less than
its carrying amount, then additional impairment testing is not required.
However, if an entity concludes otherwise, then it is required to perform an
impairment test. The impairment test involves comparing the estimated fair value
of a reporting unit with its book value, including goodwill. If the estimated
fair value exceeds book value, goodwill is considered not to be impaired. If,
however, the fair value of the reporting unit is less than book value, then an
impairment loss is recognized in an amount equal to the amount that the book
value of the reporting unit exceeds its fair value, not to exceed the total
amount of goodwill allocated to the reporting unit.
The estimates of fair value of the reporting units are computed using either an
income approach, a market approach, or a combination of both. Under the income
approach, we utilize the discounted cash flow method to estimate the fair value
of the reporting units. Significant assumptions inherent in estimating the fair
values include the estimated future cash flows, growth assumptions for future
revenues (including future gross margin rates, expense rates, capital
expenditures and other estimates), and a rate used to discount estimated future
cash flow projections to their present value (or estimated fair value) based on
estimated weighted average cost of capital (i.e., the selected discount rate).
We select assumptions used in the financial forecasts by using historical data,
supplemented by current and anticipated market conditions, estimated growth
rates, and management's plans. Under the market approach, fair value is derived
from metrics of publicly traded companies or historically completed transactions
of comparable businesses (i.e. guideline companies). The selection of comparable
businesses is based on the markets in which the reporting units operate giving
consideration to risk profiles, size, geography, and diversity of products and
services.
Income Taxes. Significant judgment is required in determining any valuation
allowance recorded against deferred tax assets. 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 the Company has sustained a cumulative pre-tax loss over the
trailing three fiscal years, we considered it appropriate to maintain valuation
allowances of $14.6 million and $12.3 million against our deferred tax assets at
March 31, 2022 and 2021, respectively. 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.
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.
Recent Accounting Pronouncements
Refer to Note 1, Description of Business and Summary of Significant Accounting
Policies, to the Consolidated Financial Statements, included in Part II, Item 8
of this report for a discussion of recent accounting pronouncements.
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Analysis of Fiscal 2022 and Fiscal 2021 Results of Operations
For a comparison of the 2021 to 2020 fiscal years, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Form 10-K for the fiscal year endedMarch 31, 2021 . Note that the filings of the 2020 and 2019 fiscal years do not reflect results of discontinued operation related activities, which are reflected in this report.
Total Revenues. The following table presents details of total revenues for Fiscal 2022 as compared to Fiscal 2021:
Year Ended March 31,
2022 2021 $ Increase % Change
(In thousands, except percentage)
Product revenues $ 68,729 $ 62,933 $ 5,796 9.2 %
Service revenues 64,843 54,205 10,638 19.6 %
Total revenues $ 133,572 $ 117,138 $ 16,434 14.0 %
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
Fiscal 2022 increased approximately 9.2% to $68.7 million , compared to
$62.9 million in Fiscal 2021, primarily due to continued strong demand for our
hardware solutions, further augmented by approximately $6.0 million of
TrafficCast product sales in Fiscal 2022 as compared to approximately $1.4
million of TrafficCast product sales in Fiscal 2021, or a net increase of
approximately $4.6 million .
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 Fiscal 2022 increased
approximately 19.6% to $64.8 million , compared to $54.2 million in Fiscal 2021.
This increase was primarily due to continued adoption of Iteris' ClearMobility
Platform and the addition of $7.9 million of TrafficCast SaaS revenue in Fiscal
2022 as compared to approximately $2.7 million of TrafficCast service sales in
Fiscal 2021, or a net increase of approximately $5.2 million . Total annual
recurring revenue, which we define as revenues from software and managed
services contracts, was approximately 25% of total revenue for Fiscal 2022 and
approximately 22% of total revenue for Fiscal 2021.
The Company added approximately
We plan to continue to focus on securing new contracts and to extend and/or continue our existing relationships with both key public-sector and private-sector customers related to projects in their final project phases. While we believe our ability to obtain additional large contracts will contribute to overall revenue growth, the mix of subcontractor revenue and third-party product sales to our public-sector customers will likely affect the related total gross profit from period to period, as total revenues derived from subcontractors and third-party product sales generally have lower gross margins than revenues generated by our professional services. 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 consolidated balance sheets. Backlog includes new bookings but does not include announced 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.
Gross Profit. The following tables present details of our gross profit for Fiscal 2022 compared to Fiscal 2021:
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Year Ended March 31,
$ Increase
2022 2021 (decrease) % Change
(In thousands, except percentage)
Product gross profit $ 28,228 $ 28,000 $ 228 0.8 %
Service gross profit 19,165 18,856 309 1.6 %
Total gross profit $ 47,393 $ 46,856 $ 537 1.1 %
Product gross margin as a % of product
revenues 41.1 % 44.4 %
Service gross margin as a % of service revenues 29.6 % 34.9
%
Total gross margin as a % of total revenues 35.5 % 40.0
%
Our product gross margin as a percentage of product revenues for Fiscal 2022 decreased approximately 330 basis points compared to Fiscal 2021 primarily due to an increase in raw material costs as a result of global supply chain constraints. Our service gross margin as a percentage of service revenues for Fiscal 2022 decreased 530 basis points compared to Fiscal 2021 primarily due to the completion of previously awarded contracts, the timing of certain extension contracts, the contract mix, an increase in the number of subcontractors of such contracts, and recognition of an estimated contractual loss on a project with a customer, for which approximately$3.4 million was recorded in Fiscal 2022. Subcontractor revenue generally results in lower gross margins than our direct labor revenue.
Our total gross margin as a percentage of total revenues for Fiscal 2022 decreased 450 basis points compared to Fiscal 2021 primarily as a result of the aforementioned reasons.
General and Administrative Expense
General and administration expense for Fiscal 2022 increased approximately 4% to$25.1 million , compared to$24.2 million in Fiscal 2021 primarily due to the addition ofTrafficCast , and additional professional services fees related to the Company's review of strategic alternatives.
Sales and Marketing Expense
Sales and marketing expense for Fiscal 2022 increased approximately 27% to$18.9 million , compared to$15.0 million in Fiscal 2021 primarily due to the addition ofTrafficCast , and higher sales commissions based on higher sales for Fiscal 2022.
Research and Development Expense
Research and development expense for Fiscal 2022 increased approximately 43% to$7.4 million , compared to$5.1 million in Fiscal 2021. The overall increase was primarily due to continued investment in research and development activities largely focused on improving our existing software related product offerings. We plan to continue to invest in the development of further enhancements and functionality of our Iteris ClearMobility Platform which includes among other things our software portfolio and our Vantage sensors. Certain development costs were capitalized into intangible assets in the consolidated balance sheets in both the current and prior year periods; however, certain costs did not meet the criteria for capitalization under GAAP and 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.
Impairment of
Based on our goodwill impairment testing for Fiscal 2022, we believe the carrying value of our goodwill was not impaired, as the estimated fair values of our reporting units exceeded their carrying values at the end of Fiscal 2022. If our actual financial results, or the plans and estimates used in future goodwill impairment analyses, are lower than our original estimates used to assess impairment of our goodwill, we could incur goodwill impairment charges in the future.
Amortization of Intangible Assets
Amortization expense for intangible assets subject to amortization was
approximately
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recorded to cost of revenues, and approximately$2.7 million and$1.5 million was recorded to amortization expense for Fiscal 2022 and Fiscal 2021, respectively, in the consolidated statements of operations. The increase in amortization was primarily due to amortization expenses related to intangible assets acquired as part of theTrafficCast acquisition.
Interest Income (Expense), Net
Net interest expense was approximately$0.0 million and net interest income was approximately$0.1 million in Fiscal 2022 and Fiscal 2021, respectively. The decrease in net interest income in the current year was primarily due to the decrease in interest earned on investments purchased and held during the current fiscal year. Income Taxes The following table presents our provision for income taxes for Fiscal 2022 and Fiscal 2021: Year Ended March 31, 2022 2021 (In thousands, except percentage) Provision for income taxes$ 174 $ 115 Effective tax rate (2.5) % 1.8 % For Fiscal 2022 and 2021, the difference between the statutory and the effective tax rate was primarily attributable to the valuation allowance recorded against our deferred tax assets. 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 the Company has sustained a cumulative pre-tax loss over the trailing three fiscal years, we considered it appropriate to maintain valuation allowances of$14.6 million and$12.3 million against our deferred tax assets atMarch 31, 2022 and 2021, respectively. We will continue to reassess the appropriateness of maintaining a valuation allowance. As we update our estimates in future periods, adjustments to our deferred tax asset and valuation allowance may be necessary. We anticipate this will cause our future overall effective tax rate in any given period to fluctuate from prior effective tax rates and statutory tax rates. We utilize the liability method of accounting for income taxes. We record net deferred tax assets to the extent that we believe these assets will more likely than not be realized. AtMarch 31, 2022 , we had$16.0 million of federal net operating loss carryforwards that do not expire as a result of recent tax law changes. We also had$9.9 million of state net operating loss carryforwards that begin to expire in 2031. Although the impact cannot be precisely determined at this time, we believe that our net operating loss carryforwards will provide reductions in our future income tax payments, that would otherwise be higher using statutory tax rates.
Liquidity and Capital Resources
For a comparison of the 2021 to 2020 fiscal years, see Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company's Form 10-K for the fiscal year ended
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. AtMarch 31, 2022 , we had$36.8 million in working capital, excluding current liabilities of discontinued operations, which included$23.8 million in cash and cash equivalents. This compares to working capital of$36.7 million atMarch 31, 2021 , which included$25.5 million in cash and cash equivalents and$3.1 million in short-term investments. 34
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The following table summarizes our cash flows from continuing operations for
Fiscal 2022 and Fiscal 2021:
Year Ended
March 31,
2022 2021
(In thousands)
Net cash provided by (used in):
Operating activities $ (5,593) $ 8,888
Investing activities 999 (7,998)
Financing activities 1,563 2,873
Operating Activities. Net cash used by operating activities of our continuing
operations for Fiscal 2022 of $5.6 million was primarily the result of noncash
lease expense, depreciation expenses, stock-based compensation, and amortization
coupled with our net loss from continuing operations of approximately $6.9
million , as well as approximately $11.8 million of outflows from changes in
working capital offset by $13.1 million in non-cash items. Net cash used in
operating activities due to discontinued operations was $0.1 million .
Net cash provided by operating activities of our continuing operations for
Fiscal 2021 of $8.9 million was primarily the result of $7.8 million in non-cash
items, primarily for noncash lease expense, depreciation expenses, stock-based
compensation, and amortization coupled with our net income from continuing
operations of approximately $0.5 million , as well as approximately $0.6 million
of inflows due to changes in working capital. Net cash used in operating
activities from discontinued operations was $2.4 million .
Investing Activities. Net cash provided by investing activities of our
continuing operations during Fiscal 2022 was primarily the result of
approximately $3.1 million in proceeds from the sale and maturity of short-term
investments which were partially offset by approximately $0.5 million of
property and equipment purchases, and approximately $1.6 million of capitalized
software development costs, primarily in VantageLive! and ClearGuide,
respectively. Net cash provided by investing activities from discontinued
operations was $1.5 million .
Net cash used in investing activities of our continuing operations during Fiscal
2021 was primarily the result of purchases of approximately $23.7 million of
short-term investments, approximately $15.0 million in cash paid for the
TrafficCast acquisition, approximately $0.6 million of property and equipment
purchases, and approximately $0.8 million of capitalized software development
costs, related to VantageLive! and ClearGuide. These investments were partially
offset by approximately $32.0 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 Fiscal 2022 was primarily the result of
approximately $1.3 million and $0.4 million of cash proceeds from the exercise
of stock options and purchases of Employee Stock Purchase Plan ("ESPP") shares,
respectively.
Net cash provided by financing activities of our continuing operations during
Fiscal 2021 was primarily the result of approximately $2.6 million and $0.4
million of cash proceeds from the exercise of stock options and purchases of
ESPP shares, respectively.
Off-Balance Sheet Arrangements
We do not have any other material off-balance sheet arrangements at
Seasonality We have historically experienced seasonality, particularly with respect to our products, which adversely affects such sales in our third and fourth fiscal quarters due to a reduction in intersection construction and repairs during the winter months due to inclement weather conditions, with the third fiscal quarter generally impacted the most by inclement weather. We have also experienced seasonality, which adversely impacts our third fiscal quarter due to the increased number of holidays, causing a reduction in available billable hours.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and is not required to provide the information required by this Item.
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