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Revenue
for the Autoscope segment increased in the three-month period ended September
30, 2012 to $5.0 million from $4.5 million in 2011 and in the first nine months
of 2012 to $12.0 million from $11.2 million in 2011 and is reflective of higher
sales volume internationally partially offset by lower royalties. Revenue for
the RTMS segment decreased in the three-month period ended September 30, 2012
to $1.1 million in 2012 from $1.7 million in 2011 and decreased in the first
nine months of 2012 to $2.4 million from $5.8 million in 2011. RTMS product
sales and royalties were $799,000 and $258,000, respectively, in the three
months ended September 30, 2012 and $1.8 million and $621,000, respectively, in
the nine month period ended September 30, 2012. The decrease in revenue for the
RTMS segment is mainly due to the transition of this product line to a royalty
model in North America and lower unit volume in North America offset by an increase
in the volume of RTMS products sold internationally. The three month period
ended March 31, 2012 was the first period in which RTMS revenues included
royalty income. Revenue for the CitySync segment decreased in the three-month
period ended September 30, 2012 to $1.1 million in 2012 from $1.3 million in
2011 and decreased in the first nine months of 2012 to $3.7 million from $4.7
million in 2011. The decreases in 2012 are due to lower sales volume and are
reflective of a difficult environment for selling security applications to
government customers in Europe that we believe was caused by constrained
government budgets.
Gross
margins for product sales decreased to 45.3% in the three months ended
September 30, 2012 from 56.5% in the same period in 2011, and decreased to
50.0% in the first nine months of 2012 from 55.6% in the same period in 2011.
Gross margins for the CitySync product line have historically been lower than
gross margins for the Autoscope and RTMS product lines and, therefore, the mix
of the product lines in any given period can result in varying margins.
Generally, lower sales volumes of CitySync products will reduce gross margins
because of fixed manufacturing costs for these products. In the three months
ended September 30, 2012, we recorded a lower of cost or market adjustment of
$150,000 to inventory procured for a subsequently cancelled order. Gross
margins on royalty income remained consistent at 100% in each of the three and
nine month periods ended September 30, 2012 and 2011. We anticipate that gross
margins for our product sales will be higher in the remainder of 2012 as
compared to the first nine months, while we expect royalty gross margins will
remain 100%.
Selling,
marketing and product support expense decreased to $1.6 million, or 21.8% of
total revenue, in the three months ended September 30, 2012 from $2.6 million,
or 35.2% of total revenue, in the third quarter of 2011, and to $5.2 million,
or 28.9% of total revenue, in the first nine months of 2012 from $7.9 million,
or 36.3% of total revenue, in the first nine months of 2011. Our selling,
marketing and product support expense decreased mainly due to the workforce
reduction resulting from restructuring activities. We anticipate that selling,
marketing and product support expense will decrease both in terms of dollar
amount and as a percentage of revenue in the remainder of 2012 as compared to
2011 as we realize the impact of restructuring initiatives and the RTMS
business model change.
General
and administrative expense decreased to $1.5 million, or 21.3% of total
revenue, in the three months ended September 30, 2012, from $1.7 million, or
23.5% of total revenue, in the same period in 2011, and to $4.1 million, or
22.4% of total revenue, in the first nine months of 2012, from $4.7 million, or
21.9% of total revenue, in the same period in 2011. General and administrative
expenses decreased in 2012 mainly due to the workforce reduction resulting from
restructuring activities, partially offset by severance for the separation from
our former President and Chief Executive Officer. We anticipate that general
and administrative expense will decrease both in terms of dollar amount and as
a percentage of revenue in the remainder of 2012 as compared to 2011 as we
realize the impact of restructuring initiatives and the RTMS business model
change.
Research
and development expense decreased to $1.0 million, or 13.3% of total revenue,
in the three months ended September 30, 2012, from $1.1 million, or 14.7% of
total revenue, in the same period in 2011, and increased to $3.2 million, or
17.9% of total revenue, in the first nine months of 2012, from $3.1 million, or
14.4% of total revenue, in the same period in 2011. The increase was mainly
related to the increased expenditures on our hybrid and other product
developments. We anticipate that research and development expense will remain
similar or decrease slightly in terms of dollar amount in 2012 as compared to
2011.
Amortization
of intangibles expense was $409,000 and $417,000 in the third quarters of 2012
and 2011, respectively, and $1.2 million in the first nine months of 2012 and
2011 and reflects the amortization of intangible assets acquired in
acquisitions. Assuming there are no changes to our intangible assets, we
anticipate amortization expense will be $1.6 million for all of 2012.
As
discussed above, in December 2011, we announced a change to our North American
business model for the RTMS product line and certain restructuring initiatives.
In June 2012, we expanded the restructuring initiative to include our Hong Kong
facility and personnel as well as aspects of our Europe-based CitySync
business. The majority of restructuring expense recognized in 2012 related to
employee severance.
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We
recognized a goodwill impairment in the second quarter of 2012 of $3.2 million
that was triggered by a significant decline in our market capitalization as of
June 30, 2012.
Other
income was $3,000 and $27,000 in the third quarter and first nine months of
2012, respectively, as compared to $1,000 and $7,000, respectively, in the same
periods in 2011. Other income consists primarily of interest income on cash and
short-term investments.
Our
effective income tax rate for the first nine months of 2012 was significantly
below historic levels for multiple reasons, including the impacts of a
non-deductible portion of the goodwill impairment charge and our tax credit
situation in multiple jurisdictions. As our rate is derived from estimates of
full year results, the year-end rate could vary widely from the current rate.
Liquidity and Capital Resources
At
September 30, 2012, we had $7.5 million in cash and cash equivalents and $3.2
million in short-term investments, compared to $5.2 million in cash and cash
equivalents and $2.1 million in short-term investments at December 31, 2011.
Our investment objectives are to preserve principal, maintain liquidity, and
achieve the best available return consistent with our primary objectives of
safety and liquidity.
Net
cash provided by operating activities was $3.2 million in the first nine months
of 2012, compared to cash used for operating activities of $2.3 million in the
same period in 2011. The primary reasons for the increase in cash were
collections of outstanding receivables and conversions of inventory, offset by
reductions in payables, and the generation of operating income after taking
into account non-cash charges for goodwill impairment, depreciation and
amortization. We anticipate that average receivable collection days in 2012
will improve compared to 2011 but will not have a material impact on our
liquidity.
Net
cash used for investing activities was $1.4 million for the first nine months
of 2012, compared to cash used for investing activities of $1.6 million in the
first half of 2011. We purchased, on a net basis, $1.1 million of marketable
securities in the first nine months of 2012. Our planned additions of property
and equipment are discretionary, and we do not expect them to exceed historical
levels in 2012.
We
have a revolving line of credit agreement with Associated Bank, National
Association. The revolving line of credit provides for up to $5.0 million at an
annual interest rate equal to the greater of 4.5% or LIBOR plus 2.75%, as reset
from time to time by the bank. Advances on the line of credit cannot exceed a
borrowing base determined under a formula, which is a percentage of the amounts
of eligible receivables. The line of credit currently has no borrowings
outstanding and matures on May 1, 2013. We believe that on an ongoing basis, we
will have regular availability to draw a minimum of $2.0 million on our line of
credit based on our qualifying assets.
We
believe that cash and cash equivalents on hand at September 30, 2012, along
with the availability of funds under our $5.0 million revolving line of credit
and cash provided by operating activities, will satisfy our projected working
capital needs, investing activities, and other cash requirements for the
foreseeable future.
Off-Balance Sheet Arrangements
We
do not participate in transactions or have relationships or other arrangements
with an unconsolidated entity, including special purpose and similar entities,
or other off-balance sheet arrangements.
Critical Accounting Policies
Our
significant accounting policies are described in Note 1 to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2011. The accounting policies used in preparing our interim 2012
Condensed Consolidated Financial Statements set forth elsewhere in this
Quarterly Report on Form 10-Q are the same as those described in our Annual
Report on Form 10-K.
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Cautionary
Statement
:
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent our expectations or beliefs concerning future events and
can be identified by the use of forward-looking words such as expects,
believes, may, will, should, intends, plans, estimates, or
anticipates or other comparable terminology. Forward-looking statements are
subject to risks and uncertainties that may cause our actual results to differ
materially from the results described in the forward-looking statements.
Factors that might cause such differences include, but are not limited to:
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our
historical dependence on a single product for most of our revenue;
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budget
constraints by governmental entities that purchase our products, including
constraints caused by declining tax revenue;
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the
continuing ability of our licensee to pay royalties owed;
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the
mix of and margin on the products we sell;
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our
dependence on third parties for manufacturing and marketing our products;
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our
dependence on single-source suppliers to meet manufacturing needs;
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our
increased international presence;
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our
failure to secure adequate protection for our intellectual property rights;
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the
development of a competing product by another business using the underlying
technology included in the patent we had licensed from the University of
Minnesota, which expired in 2006;
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our
inability to develop new applications and product enhancements;
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unanticipated
delays, costs and expenses inherent in the development and marketing of new
products, including ANPR products;
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our
inability to respond to low-cost local competitors in Asia and elsewhere;
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our
inability to properly manage a growth in revenue and/or production
requirements;
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the
influence over our voting stock by affiliates;
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our
inability to hire and retain key scientific and technical personnel;
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our
inability to achieve and maintain effective internal controls;
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our
inability to successfully integrate acquisitions;
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political
and economic instability, including recent volatility in the economic
environment of the European Union caused by the ongoing sovereign debt crisis
in Europe;
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our
inability to comply with international regulatory restrictions over hazardous
substances and electronic waste; and
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conditions
beyond our control such as war, terrorist attacks, health epidemics and
economic recession.
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We
caution that the forward-looking statements made in this report or in other
announcements made by us are further qualified by the risk factors set forth in
Item 1A. to our Annual Report on Form 10-K for the fiscal year ended December
31, 2011.
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