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Total revenue increased to $7.7 million in the three-month period ended
September 30, 2013 from $7.2 million in the same period in 2012, an increase of
7.9%, and to $19.8 million in the first nine months of 2013 from $18.1 million
in the same period in 2012, an increase of 9.3%. Royalties decreased to $3.4
million in the third quarter of 2013 from $3.8 million in the third quarter of
2012, a decrease of 9.9%. Royalties were $9.2 million in the first nine months
of both 2013 and 2012. Product sales increased to $4.3 million in the third
quarter of 2013 from $3.4 million in the same period in 2012, an increase of 27.6%,
and they increased to $10.7 million in the first nine months of 2013 from $9.0
million in the same period in 2012, an increase of 18.6%. The decrease in
royalty income from the same quarter in the prior year was mainly due to a decrease
in sales volume. The increases in product sales in both the third quarter and
first nine months of 2013 were mainly due to higher sales volume in Europe and Asia.
Revenue for the Intersection segment decreased in the three-month
period ended September 30, 2013 to $3.6 million from $5.0 million in the
three-month period ended September 30, 2012 and in the first nine months of
2013 to $10.3 million from $12.0 million in the first nine months of 2012 and
is reflective of lower sales volume internationally combined with lower
royalties.
Revenue for the Highway segment increased in the three-month period
ended September 30, 2013 to $2.8 million in 2012 from $1.1 million in the same
period in 2012 and increased in the first nine months of 2013 to $4.4 million
from $2.4 million in the first nine months of 2012. Autoscope radar product
sales and royalties were $2.5 million and $309,000, respectively, in the three
month period ended September 30, 2013 and $3.4 million and $981,000,
respectively, in the nine-month period ended September 30, 2013. The increase
in revenue for the Highway segment is primarily due to the higher volume of
radar products sold to end customers in Europe.
Revenue for the LPR segment increased in the three-month period ended September
30, 2013 to $1.4 million from $1.1 million in the three-month period ended September
30, 2012 and increased in the first nine months of 2013 to $5.1 million from $3.7
million in the same period in 2012. The increase in revenue for the LPR segment
over the same quarter in the prior year is due to higher sales volumes in
Europe.
Gross margins for product sales decreased to 32.2% in the three months
ended September 30, 2013 from 45.3% in the same period in 2012 and decreased to
38.9% in the first nine months of 2013 from 50.0% in the same period in 2012.
Margins were lower as a result of product mix and product pricing. Gross margins
on royalty income remained consistent at 100% in each of the periods ended
September 30, 2013 and 2012. We anticipate that gross margins for our product
sales will be higher in the remainder of 2013 as compared to the first nine
months of the year, while we expect royalty gross margins will remain at 100%.
Selling, marketing and product support expense increased to $2.8
million, or 36.1% of total revenue, in the three months ended September 30,
2013 from $1.6 million, or 21.8% of total revenue, in the third quarter of
2012, and to $7.5 million, or 38.1% of total revenue, in the first nine months
of 2013 from $5.2 million, or 28.9% of total revenue, in the first nine months
of 2012. Our selling, marketing and product support expense increased mainly due
to our investments in additional sales and marketing resources. We anticipate
that annual selling, marketing and product support expense will increase in
both terms of dollar amount and a percentage of revenue in 2013 as compared to
2012.
General and administrative expenses were $1.5 million in the three
months ended September 30, 2013 and 2012. General and administrative expenses
as a percentage of revenue decreased to 18.9% in the third quarter of 2013 from
21.3% in the third quarter of 2012. General and administrative expenses
increased to $4.4 million, or 22.3% of total revenue, in the first nine months
of 2013 from $4.1 million, or 22.4% of total revenue, in the first nine months
of 2012. General and administrative expenses increased in 2013 mainly due to
severance costs related to the separation from former employees. We anticipate
that annual general and administrative expenses will increase in dollar amount
and decrease as a percentage of revenue in 2013 as compared to 2012.
Research and development expense increased to $1.7 million, or 21.3% of
total revenue, in the three months ended September 30, 2013 from $1.0 million,
or 13.3% of total revenue, in the third quarter of 2012, and to $4.1 million,
or 20.9% of total revenue, in the first nine months of 2013 from $3.2 million,
or 17.9% of total revenue, in the first nine months of 2012. The increase was
mainly related to the increased expenditures on new projects, acceleration of
previously existing projects and other product developments. We anticipate that
annual research and development expense will increase in terms of dollar amount
in 2013 as compared to 2012.
The Company has incurred legal and other professional fees related to
the investigation and remediation actions described in Note K of our Notes to
the Condensed Consolidated Financial Statements set forth elsewhere in this
Quarterly Report on Form 10-Q. The Companys direct costs related to the
investigation were approximately $328,000 for the three months ended September
30, 2013 and $3.2 million for the nine months ended September 30, 2013. The
Company is unable to determine the likely outcome or range of loss, if any,
from the investigation, or predict with certainty the timeline for resolution
of the investigation.
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Amortization of intangibles expense was $328,000 in the third quarter
of 2013 and $1.0 million in the first nine months of 2013 and reflects the
amortization of intangible assets obtained in acquisitions. Assuming there are
no changes to our intangible assets, we anticipate amortization expense will be
$1.4 million for all of 2013.
We recognized 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 September 30, 2012.
Other income was $1,000 in the third quarter of 2013, and we recorded
other expense of $1,000 in first nine months of 2013, as compared to other
income of $3,000 and $27,000, respectively, in the same periods in 2012.
Income tax expense of $22,000, or 1.2% of our pretax loss, was recorded
for the three months ended September 30, 2013, compared to an income tax
benefit of $132,000, or 15.4% of pretax income, for the three months ended September
30, 2012. An income tax benefit of $1.9 million, or 26.9% of our pretax loss,
was recorded for the nine months ended September 30, 2013, compared to an
income tax benefit of $369,000, or 10.0% of our pretax loss, for the nine
months ended September 30, 2012. The income tax rate increased in 2013 mainly
due to the impact the investigation costs had on the results of the first three
quarters of 2013. We expect the effective rate in 2013 to be below 36%.
Liquidity
and Capital Resources
At September 30, 2013, we had $3.7 million in cash and cash equivalents
and $3.9 million in short-term investments, compared to $8.3 million in cash
and cash equivalents and $4.8 million in short-term investments at December 31,
2012. 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 used in operating activities was $4.4 million in the first nine
months of 2013, compared to cash provided by operating activities of $3.2
million in the same period in 2012. The primary reason for the decrease in cash
was the loss for the year offset in part by the collection of outstanding
receivables and the conversion of inventory. We anticipate that average
receivable collection days in 2013 will improve from 2012 but that the
improvement will not have a material impact on our liquidity.
Net cash used in investing activities was $382,000 for the first nine
months of 2013, compared to cash used in investing activities of $1.4 million
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 2013.
We have a revolving line of credit and had term loans with Associated
Bank, National Association (Associated Bank), that were initially entered
into as of May 1, 2008. Our current revolving line of credit agreement (Credit
Agreement) with Associated Bank provides up to $5.0 million of credit. The
Credit Agreement expires in May 2014 and bears interest at an annual rate equal
to the greater of (a) 4.5% or (b) LIBOR plus 2.75%. Any advances are secured by
inventories, accounts receivable and equipment. We are subject to certain
financial covenants under the Credit Agreement, including minimum debt service
coverage ratios, minimum cash flow coverage ratios and financial measures. At September
30, 2013, we had no borrowings under the Credit Agreement, and we were in
compliance with all financial covenants.
We believe that cash and cash equivalents on hand at September 30,
2013, along with the availability of funds under our 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, 2012. The accounting policies used in preparing our
interim Condensed Consolidated Financial Statements as of and for the three
months and nine months ended September 30, 2013 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 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 Econolite 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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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;
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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 any 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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the effects of
legal matters in which we may become involved;
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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 continuing volatility in the economic
environment of the European Union;
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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, 2012.
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