Overview
General
.
We are a leading provider of above-ground detection products and solutions for the intelligent transportation systems (“ITS”) industry. Our family of products, which we market as Autoscope® video or video products (“Autoscope”), RTMS® radar or radar products (“RTMS”), and IntellitraffiQ® or iQ products, provides end users with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals from sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our products provide end users with complete solutions for the intersection and transportation markets.
Our technology is a process in which software, rather than humans, examines outputs from various types of sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and highways quickly enough to accommodate the increasing congestion levels. On average, United States commuters lose
97
hours a year in congestion, which costs motorists $
87
billion a year in time, which is an average of $
1,348
per driver. We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install, have lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our solutions well suited for use in ITS markets.
We believe the strength of our distribution channels positions us to increase the penetration of our technology
‑
driven solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the Caribbean through an exclusive agreement with Econolite Control Products, Inc. ("Econolite"), which we believe is the leading distributor of ITS intersection control products in these markets.
We market the RTMS radar systems to a network of distributors globally. On a limited basis, we may sell directly to the end user.
We market our Autoscope video products outside of the United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels, through our office in Spain. Our end users primarily consist of governmental agencies and municipalities.
The following discussion of period-to-period changes and trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation discussed above.
Trends and Challenges in Our Business
We believe the expected growth in our business can be attributed primarily to the following global trends:
-
worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of road infrastructure and the need to automate safety, security and access applications for automobiles and trucks, which has increased demand for our products;
-
advances in information technology, which have made our products easier to market, implement and integrate;
-
the continued funding allocations for centralized traffic management services and automated enforcement schemes, which have increased the ability of our primary end users to implement our products; and
-
general increases in the cost effectiveness of electronics, which make our products more affordable for end users.
We believe our continued growth primarily depends upon:
-
continued adoption and governmental funding of ITS and other automated applications for traffic control, safety and enforcement in developed countries;
-
a propensity by traffic engineers to implement lower cost technology-based solutions rather than civil engineering solutions such as widening roadways;
-
countries in the developing world adopting above-ground detection technology, such as video or radar, instead of in-pavement loop technology to manage traffic; and
-
our ability to develop new products that provide increasingly accurate information and enhance the end users' ability to cost-effectively manage traffic and environmental issues.
Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchase decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue among periods. The ongoing economic environment in Europe and the United States is further adding to the unpredictability of purchase decisions, creating more delays than usual and decreasing governmental budgets, and it is likely to continue to affect our revenue.
Key Financial Terms and Metrics
Revenue
. We derive revenue from
two
sources: (
1
) royalties received from Econolite for sales of the Autoscope video systems in the United States, Mexico, Canada and the Caribbean and (
2
) revenue received from the direct sales of our RTMS radar systems and our Autoscope video systems in Europe and Asia.
Autoscope video royalties are calculated using a profit sharing model in which the gross profits on sales of product made through Econolite are shared equally with Econolite.
This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is exclusive under a long-term agreement.
Cost of Revenue
.
Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to manufacture hardware products, whose costs are influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, and inventory obsolescence. The key metric that we follow is achieving certain gross margin percentages on product sales by operating segment.
Operating Expenses
. Our operating expenses fall into
three
categories: (
1
) selling, marketing and product support; (
2
) general and administrative; and (
3
) research and development. Selling, marketing and product support expenses consist of various costs related to sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; second-tier technical support for Econolite; and general product support, where applicable. General and administrative expenses consist of certain corporate and administrative functions that support the development and sales of our products and provide an infrastructure to support future growth. These expenses include management, supervisory and staff salaries and benefits; legal and auditing fees; travel; rent; and costs associated with being a public company, such as board of director fees, listing fees and annual reporting expenses. Research and development expenses consist mainly of salaries and benefits for our engineers and third party costs for consulting and prototyping. We measure all operating expenses against our annually approved budget, which is developed with achieving a certain operating margin as a key focus. We also include any restructuring costs in operating expenses.
Non-GAAP Operating Measure.
We provide certain non-GAAP financial information as supplemental information to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles in the United States). This non-GAAP information excludes the impact of depreciating fixed assets and amortizing intangible assets, and may exclude other non-recurring items.
Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may
not be computed the same as similarly titled measures used by other companies.
Reconciliations of GAAP income from operations to non-GAAP income from operations are as follows (in thousands):
|
|
Three-Month
Periods Ended
June 30,
|
|
Six-Month
Periods Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
647
|
|
|
$
|
511
|
|
|
$
|
955
|
|
|
$
|
494
|
|
|
Adjustments to reconcile to non-GAAP income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
149
|
|
|
|
120
|
|
|
|
299
|
|
|
|
231
|
|
|
Depreciation
|
|
|
48
|
|
|
|
63
|
|
|
|
99
|
|
|
|
126
|
|
|
Restructuring
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
Non-GAAP income from continuing operations
|
|
$
|
844
|
|
|
$
|
694
|
|
|
$
|
1,355
|
|
|
$
|
851
|
|
Seasonality
. Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our business. Our first quarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North America, Europe and northern Asia. We expect such seasonality to continue for the foreseeable future. Additionally, our international revenues regularly contain individually significant sales. This can result in significant variations of revenue between periods. Accordingly, we believe that quarter-to-quarter comparisons of our financial results should not be relied upon as an indication of our future performance. No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in the future.
Segments
.
We currently operate in
two
reportable segments: Intersection and Highway. Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. The RTMS is our radar product line, and revenue consists of sales to external customers. Radar products are normally sold in the Highway segment
.
As a result of business model changes and modifications in how we manage our business, we may reevaluate our segment definitions in the future.
The following table sets forth selected unaudited financial information for each of our reportable segments (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Intersection
|
|
Highway
|
|
Total
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,512
|
|
$
|
2,842
|
|
$
|
1,713
|
|
$
|
1,051
|
|
$
|
4,225
|
|
$
|
3,893
|
|
Gross profit
|
|
|
2,239
|
|
|
2,596
|
|
|
787
|
|
|
596
|
|
|
3,026
|
|
|
3,192
|
|
Amortization of intangible assets
|
|
|
91
|
|
|
92
|
|
|
58
|
|
|
28
|
|
|
149
|
|
|
120
|
|
Intangible assets
|
|
|
1,926
|
|
|
2,293
|
|
|
1,854
|
|
|
1,063
|
|
|
3,780
|
|
|
3,356
|
|
|
Six Months Ended June 30,
|
|
|
Intersection
|
|
Highway
|
|
Total
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,584
|
|
$
|
5,259
|
|
$
|
3,013
|
|
$
|
1,644
|
|
$
|
7,597
|
|
$
|
6,903
|
|
Gross profit
|
|
|
4,031
|
|
|
4,782
|
|
|
1,590
|
|
|
973
|
|
|
5,621
|
|
|
5,755
|
|
Amortization of intangible assets
|
|
|
183
|
|
|
184
|
|
|
116
|
|
|
47
|
|
|
299
|
|
|
231
|
|
Intangible assets
|
|
|
1,926
|
|
|
2,293
|
|
|
1,854
|
|
|
1,063
|
|
|
3,780
|
|
|
3,356
|
The following table sets forth, for the periods indicated, certain statements of operations data as a percent of total revenue and gross profit on product sales and royalties as a percentage of product sales and royalties, respectively.
|
|
Three-Month
Periods Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
|
Product sales
|
47.8
|
%
|
|
35.3
|
%
|
|
|
Royalties
|
52.2
|
|
|
64.7
|
|
|
|
Total revenue
|
100.0
|
|
|
100.0
|
|
|
|
Gross profit - product sales
|
45.1
|
|
|
55.7
|
|
|
|
Gross profit - royalties
|
95.9
|
|
|
96.3
|
|
|
|
Selling, general and administrative
|
39.8
|
|
|
45.3
|
|
|
|
Research and development
|
16.5
|
|
|
23.5
|
|
|
|
Income from operations
|
15.3
|
|
|
13.1
|
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
|
Net income
|
15.3
|
|
|
13.1
|
|
|
|
|
Six-Month
Periods Ended
June 30,
|
|
|
2019
|
|
2018
|
|
|
Product sales
|
47.9
|
%
|
|
32.2
|
%
|
|
|
Royalties
|
52.1
|
|
|
67.8
|
|
|
|
Total revenue
|
100.0
|
|
|
100.0
|
|
|
|
Gross profit - product sales
|
50.8
|
|
|
56.6
|
|
|
|
Gross profit - royalties
|
95.4
|
|
|
96.1
|
|
|
|
Selling, general and administrative
|
44.1
|
|
|
51.1
|
|
|
|
Research and development
|
17.3
|
|
|
25.1
|
|
|
|
Income from operations
|
12.6
|
|
|
7.2
|
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
|
Net income
|
12.6
|
|
|
7.2
|
|
|
Total revenue
increased
to $
4.2
million in the
three-month
period ended
June 30, 2019
from $
3.9
million in the same period in
2018
,
an increase
of
8.5%
,
and
increased
to $
7.6
million in the first
six
months
of
2019
, from $
6.9
million in the same period in
2018
,
an increase
of
10.1%
.
Royalty income
decreased
to $
2.2
million in the
second quarter
of
2019
from $
2.5
million in the
second quarter
of
2018
,
a decrease
of
12.4%
,
and
decreased
to $
4.0
million in the first
six
months
of
2019
from $
4.7
million in the first
six
months
of
2018
,
a decrease
of
15.5%
.
The decrease in royalties was due to a particularly harsh winter in the first quarter, and slower than anticipated market adoption of a new Vision Product. Conversely, product sales
increased
to $
2.0
million in the
second quarter
of
2019
from $
1.4
million in the
second quarter
of
2018
,
an increase
of
46.8%
,
and
increased
to $
3.6
million in the first
six
months
of
2019
from $
2.2
million in the first
six
months
of
2018
,
an increase
of
64.0%
. The product sales growth was driven by the Highway segment through an increased focus on improving sales tactics and an individually significant sale in the second quarter of
2019
.
Revenue for the Intersection segment
decreased
to $
2.5
million in the
three-month
period ended
June 30, 2019
from $
2.8
million in the
three-month
period ended
June 30, 2018
,
a decrease
of
11.6%
.
Revenue for the Intersection segment
de
creased
to $
4.6
million in the first
six
months
of
2019
from $
5.3
million in the first
six
months
of
2018
,
a decrease
of
12.8%
.
Revenue for the Highway segment
increased
to $
1.7
million in the
three-month
period ended
June 30, 2019
from $
1.1
million in the
three-month
period ended
June 30, 2018
,
an increase
of
63.0%
.
Revenue for the Highway segment
in
creased
to $
3.0
million in the first
six
months
of
2019
from $
1.6
million in the first
six
months
of
2018
,
an increase
of
83.3%
.
The increase in revenue in the Highway segment was attributable to an individually significant sale of third-party sourced product in the second quarter of
2019
and no comparable sale occurring in the same period in
2018
.
Gross profit for product sales
decreased
to
45.1%
in the
three months ended June 30, 2019
from
55.7%
in the
three months ended June 30, 2018
.
The dollar amount of product sales gross profit increased $
145,000
, or
18.9
%, in the
three months ended June 30, 2019
compared to the prior year period. Gross profit for product sales
decreased
to
50.8%
in the first
six
months
of
2019
from
56.6%
in the first
six
months
of
2018
. Product sales gross profit increased $
322,000
or
21.1%
in the
six
months
ended
June 30, 2019
compared to the prior year period. The decrease in product gross margin percent was primarily due to the aforementioned sale of third-party sourced product which tend to have lower margins than those of our own products.
Gross profit for royalty sales for the
three months ended June 30, 2019
decreased
to
95.9%
from
96.3%
in the same period in
2018
. The dollar amount of gross profit from royalties decreased $
311,000
, or
12.8
%, in the
three months ended June 30, 2019
compared to the prior year period. G
ross profit for royalty sales for the
six
months ended
June 30, 2019
decreased to
95.4%
from
96.1%
in the same period in
2018
. Gross profit from royalties decreased $
726,000
,
or
16.1
%
, in the
six
months ended
June 30, 2019
compared to the prior year period.
The decrease in royalty gross margin percent was due to lower royalty revenues while software amortization expense remained substantially the same.
Selling, general and administrative expense was $
1.7
million, or
39.8%
of total revenue, in the
second quarter
of
2019
compared to $
1.8
million, or
45.3%
of total revenue, in the
second quarter
of
2018
,
and decreased to $
3.3
million, or
44.1%
of total revenue, in the first
six
months
of
2019
compared to $
3.5
million, or
51.1%
of total revenue, in the first
six
months
of
2018
.
The decrease in expense in the first
six
months of
2019
was primarily a result of decreased expenses related to salaries and benefits due to fewer headcount when compared to the prior year period.
Research and development expense
decreased
to $
697,000
, or
16.5%
of total revenue, in the
three-month
period ended
June 30, 2019
from $
916,000
, or
23.5%
of total revenue, in the
three-month
period ended
June 30, 2018
, and
decreased
to $
1.3
million, or
17.3%
of total revenue, in the
six
-month
period ended
June 30, 2019
, from $
1.7
million, or
25.1%
of total revenue, in the
six
-month period ended
June 30, 2018
.
The decrease was partially due to increased capitalized software development costs in the
six
-month period ended
June 30, 2019
of $
762,000
compared to capitalized software costs of $
102,000
in the comparable prior year period. After normalizing for software development costs, overall research and development expenditures increased in the
six
-month period ended
June 30, 2019
compared to the same period in the prior year. This increase was due to increased salary expenses due to headcount and outside consultant professional fees.
There was no income tax expense recorded in the first
six
months of
2019
or
2018
as we have deferred tax assets which would offset tax expense in that period.
Consolidated net income was $
647,000
, or $
0.12
per basic and diluted share, in the
three-month
period ended
June 30, 2019
compared to a net
income
of $
511,000
, or $
0.10
per basic and diluted share, in the comparable prior year period.
Consolidated net income was $
955,000
, or $
0.18
per basic and diluted share, in the
six-month
period ended
June 30, 2019
compared to a net income of $
494,000
, or $
0.10
per basic and diluted share, in the comparable prior year period.
Liquidity and Capital Resources
At
June 30, 2019
, we had $
4.2
million in cash and cash equivalents compared to $
4.2
million in cash and cash equivalents at
December 31, 2018
.
Net cash provided by operating activities was $
944,000
in the first
six
months of
2019
compared to net cash provided by operating activities of $
701,000
in the same period in
2018
.
The increase in net cash provided by operating activities in the first
six
months of
2019
compared to the prior year period can be primarily attributed to the timing of inventory depletion, which was offset by the timing of payments related to outstanding accruals and accounts payable balances in the first
six
months of
2019
compared to the prior year period.
Net cash used for investing activities was $
922,000
for the first
six
months of
2019
compared to net cash used for investing activities of $
181,000
in the same period in
2018
.
The increase of the amount of net cash used for investing activities in the first
six
months of
2019
compared to the prior year period was primarily the result of increased capitalized internal software development costs compared to the prior year period.
We believe that cash and cash equivalents on hand at
June 30, 2019
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, 2018
. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the
three and six
months ended
June 30, 2019
are set forth elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction with those described in our Annual Report on Form 10-K.
Cautionary Statement
:
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section
27
A of the Securities Act of
1933
, as amended, and Section
21
E 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:
-
our historical dependence on a single product for most of our revenue;
-
budget constraints by governmental entities that purchase our products, including constraints caused by declining tax revenue;
-
the continuing ability of Econolite to pay royalties owed;
-
the mix of and margin on the products we sell;
-
our dependence on third parties for manufacturing and marketing our products;
-
our dependence on single-source suppliers to meet manufacturing needs;
-
our failure to secure adequate protection for our intellectual property rights;
-
our inability to develop new applications and product enhancements;
-
the potential disruptive effect on the markets we serve of new and emerging technologies and applications, including vehicle-to-vehicle communications and autonomous vehicles;
-
unanticipated delays, costs and expenses inherent in the development and marketing of new products;
-
our inability to respond to low-cost local competitors;
-
our inability to properly manage any growth in revenue and/or production requirements;
-
the influence over our voting stock by affiliates;
-
our inability to hire and retain key scientific and technical personnel;
-
the effects of legal matters in which we may become involved;
-
our inability to achieve and maintain effective internal controls;
-
our inability to successfully integrate any acquisitions;
-
tariffs and other trade barriers;
-
political and economic instability, including continuing volatility in the economic and politacal environment of the European Union;
-
our inability to comply with international regulatory restrictions over hazardous substances and electronic waste; and
-
conditions beyond our control such as war, terrorist attacks, health epidemics and economic recession.
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
1
A. to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
.