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”), and RTMS®
radar or radar products ("RTMS"), 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 spend
42
hours a year stuck in traffic, and congestion costs motorists $
160
billion a year. 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 with 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 in North America, the Caribbean and Latin America. On a limited basis, we sell directly to the end user in these geographic areas.
We market our Autoscope video and RTMS radar products outside of the United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels, through our offices in Spain and Romania. Our end users primarily include 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 and implement;
-
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 between 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 where 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 platforms, which is influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, restructuring costs and inventory reserves. The key metric that we follow is achieving certain gross margin percentages on product sales by geographic region and to a lesser extent by product line.
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. Also included in operating expenses are any restructuring costs.
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,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
$
|
511
|
|
|
$
|
293
|
|
|
$
|
494
|
|
|
$
|
491
|
|
|
Adjustments to reconcile to non-GAAP income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
120
|
|
|
|
90
|
|
|
|
231
|
|
|
|
180
|
|
|
Depreciation
|
|
63
|
|
|
|
62
|
|
|
|
126
|
|
|
|
127
|
|
|
Non-GAAP income from continuing operations
|
$
|
694
|
|
|
$
|
445
|
|
|
$
|
851
|
|
|
$
|
798
|
|
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 tables set forth selected unaudited financial information for each of our reportable segments (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
|
Intersection
|
|
Highway
|
|
Total
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,842
|
|
$
|
2,214
|
|
$
|
1,051
|
|
$
|
1,261
|
|
$
|
3,893
|
|
$
|
3,475
|
|
Gross profit
|
|
|
2,596
|
|
|
1,954
|
|
|
596
|
|
|
723
|
|
|
3,192
|
|
|
2,677
|
|
Amortization of intangible assets
|
|
|
92
|
|
|
90
|
|
|
28
|
|
|
—
|
|
|
120
|
|
|
90
|
|
Intangible assets
|
|
|
2,293
|
|
|
2,635
|
|
|
1,063
|
|
|
546
|
|
|
3,356
|
|
|
3,181
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Intersection
|
|
Highway
|
|
Total
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,259
|
|
$
|
4,118
|
|
$
|
1,644
|
|
$
|
2,441
|
|
$
|
6,903
|
|
$
|
6,559
|
|
Gross profit
|
|
|
4,782
|
|
|
3,689
|
|
|
973
|
|
|
1,438
|
|
|
5,755
|
|
|
5,127
|
|
Amortization of intangible assets
|
|
|
184
|
|
|
180
|
|
|
47
|
|
|
—
|
|
|
231
|
|
|
180
|
|
Intangible assets
|
|
|
2,293
|
|
|
2,635
|
|
|
1,063
|
|
|
546
|
|
|
3,356
|
|
|
3,181
|
Results of Operations
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,
|
|
|
|
2018
|
|
2017
|
|
|
Product sales
|
35.3
|
%
|
|
46.9
|
%
|
|
|
Royalties
|
64.7
|
|
|
53.1
|
|
|
|
Total revenue
|
100.0
|
|
|
100.0
|
|
|
|
Gross profit - product sales
|
55.7
|
|
|
56.5
|
|
|
|
Gross profit - royalties
|
96.3
|
|
|
95.1
|
|
|
|
Selling, general and administrative
|
45.3
|
|
|
47.7
|
|
|
|
Research and development
|
23.5
|
|
|
20.9
|
|
|
|
Income from operations
|
13.1
|
|
|
9.3
|
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
|
Net income
|
13.1
|
|
|
9.3
|
|
|
|
|
Six-Month
Periods Ended
June 30,
|
|
|
|
2018
|
|
2017
|
|
|
Product sales
|
32.2
|
%
|
|
46.8
|
%
|
|
|
Royalties
|
67.8
|
|
|
53.2
|
|
|
|
Total revenue
|
100.0
|
|
|
100.0
|
|
|
|
Gross profit - product sales
|
56.6
|
|
|
59.2
|
|
|
|
Gross profit - royalties
|
96.1
|
|
|
94.8
|
|
|
|
Selling, general and administrative
|
51.1
|
|
|
47.1
|
|
|
|
Research and development
|
25.1
|
|
|
23.5
|
|
|
|
Income from operations
|
7.2
|
|
|
8.0
|
|
|
|
Income tax expense
|
—
|
|
|
0.1
|
|
|
|
Net income
|
7.2
|
|
|
7.9
|
|
|
Total revenue
increased
to $
3.9
million in the
three-month
period ended
June 30, 2018
, from $
3.5
million in the same period in
2017
,
an increase
of
12.0%
, and
increased
to $
6.9
million in the first
six months
of 2018, from $
6.6
million in the same period in
2017
,
an increase
of
5.2%
. Royalty income
increased
to $
2.5
million in the
second quarter
of
2018
from $
1.8
million in the
second quarter
of
2017
,
an increase
of
36.3%
, and
increased
to $
4.7
million in the first
six months
of
2018
from $
3.5
million in the first
six months
of
2017
,
an increase
of
34.2%
. Product sales
decreased
to $1.4 million in the
second quarter
of
2018
from $
1.6
million in the
second quarter
of
2017
,
a decrease
of
15.5%
, and
decreased
to $2.2 million in the first
six months
of
2018
from $
3.1
million in the first
six months
of
2017
,
a decrease
of
27.7%
. The decrease in product sales resulted from lower volumes in all jurisdictions.
Revenue for the Intersection segment increased to $
2.8
million in the
three-month
period ended
June 30, 2018
from $
2.2
million in the
three-month
period ended
June 30, 2017
, an increase of 28.4%. Revenue for the Intersection segment
increased
to $
5.3
million in the first
six months
of
2018
from $
4.1
million in the first
six months
of
2017
,
an increase
of
27.7%
. The increase can be primarily attributed to higher sales volumes by our partner, Econolite.
Revenue for the Highway segment
decreased
to $
1.1
million in the
three-month
period ended
June 30, 2018
from $
1.3
million in the
three-month
period ended
June 30, 2017
,
a decrease
of
16.7%
.
Revenue for the Highway segment
decreased
to $
1.6
million in the first
six months
of
2018
from $
2.4
million in the first
six months
of
2017
,
a decrease
of
32.7%
. The decrease in revenue in the Highway segment is attributable to reduced product sales into all jurisdictions. Product sales gross profit for the Intersection product lines has historically been lower than gross profit for the Highway product lines and therefore the mix of the product lines sold in any given period can result in varying gross profit. Additionally, the geographic sales mix of our product sales can influence margins, as products sold in some jurisdictions have lower margins.
Gross profit for product sales
decreased
to 55.7% in the
three months ended June 30, 2018
from
56.5%
in the
three months ended June 30, 2017
. Product sales gross profit decreased $154,000, or 16.7%, in the
three months ended June 30, 2018
compared to the prior year period. Gross profit for product sales
decreased
to 56.6% in the first
six months
of
2018
from
59.2%
in the first
six months
of
2017
. Product sales gross profit decreased $561,000 or 30.9% in the
six months
ended
June 30, 2018
compared to the prior year period. The decrease in product gross margin percent in the
six months
ended
June 30, 2018
is
primarily due
to a higher percentage of Autoscope video product sold during the period compared to the same period in the prior year.
Additionally, the geographic sales mix of our product sales can influence margins, as product sold in some jurisdictions has higher margins.
Gross profit for royalty sales for the
three months ended June 30, 2018
increased to 96.3% from 95.1% in the same period in
2017
. Gross profit from royalties increased $669,000, or 38.1%, in the
three months ended June 30, 2018
compared to the prior year period. Gross profit for royalty sales for the
six months ended June 30, 2018
increased to 96.1% from 94.8% in the same period in
2017
. Gross profit from royalties increased $1.2 million,
or 35.9
%, in the
six months ended June 30, 2018
compared to the prior year period. The increase in royalty gross margin percent is due to the higher volume of royalty sales in the
second
quarter of
2018
compared to the prior year period.
Selling, general and administrative expense was $
1.8
million, or
45.3%
of total revenue, in the
second quarter
of
2018
compared to $
1.7
million, or
47.7%
of total revenue, in the
second quarter
of
2017
, and increased to $
3.5
million, or 51.1% of total revenue, in the first
six months
of
2018
compared to $
3.1
million, or
47.1%
of total revenue, in the first
six months
of
2017
. The increase in expense in the second quarter of 2018 compared to the prior year period is primarily the result of increased sales and marketing costs related to a one-time severance accrual and recruiting fees for a new Vice President of Global Sales and Marketing that took place in the second quarter of
2018
. The increase in expense in the first six months of 2018 is primarily a result of the severance and placement fees incurred in the second quarter 2018 as well as costs related to a semi-annual trade show, Intertraffic, that took place in the first quarter of 2018.
Research and development expense
increased
to $
916,000
, or
23.5%
of total revenue, in the
three-month
period ended
June 30, 2018
from $
728,000
, or
20.9%
of total revenue ,in the
three-month
period ended
June 30, 2017
, and
increased
to $1.7 million or
25.1%
of total revenue in the
six months
period ended
June 30, 2018
from $1.5 million, or
23.5%
of total revenue, in the
six months
period ended
June 30, 2017
. We capitalized $102,000 of costs associated with software development projects in the six-
month
period ended
June 30, 2018
compared to capitalized software costs of $
566,000
in the comparable prior year period.
Income
tax expense of $4,000, or 0.1% of revenue, was recorded in the first
six
months of 2017. There was no income tax expense recorded in the first six months of 2018.
Consolidated net income was $511,000 and $494,000 in the three and six-month periods ended June 30, 2018, respectively, compared to net income of $323,000 and $520,000, respectively, in the comparable prior year periods.
Consolidated net income per basic and diluted share was $
0.10
and $
0.10
for the
three and six
months
ended
June 30, 2018
, respectively, compared to a net income per basic and diluted share of $
0.06
and $
0.10
for the
three and six
months ended
June 30, 2017
, respectively.
Liquidity and Capital Resources
At
June 30, 2018
, we had $
3.7
million in cash and cash equivalents compared to $
3.2
million in cash and cash equivalents at
December 31, 2017
.
Net cash provided by operating activities was $
701,000
in the first
six
months of
2018
compared to net cash provided by operating activities of $1.6 million in the same period in
2017
.
The decrease in net cash provided by operating activities in the first
six
months of
2018
compared to the prior year period can be primarily attributed to the timing of paying outstanding accruals, the timing of collections for outstanding receivable balances, and an increase in inventory purchases in the first six months of 2018 compared to the prior year period.
Net cash used for investing activities was $
181,000
for the first
six
months of
2018
compared to net cash used for investing activities of $
542,000
in the same period in
2017
.
The decrease of the amount of net cash used for investing activities in the first
six
months of
2018
compared to the prior year period is primarily the result of capitalized internal software development costs decreasing compared to the prior year period.
In May 2014, the Company entered into a credit agreement and related documents with Alliance Bank which provided for a revolving line of credit for the Company.
The credit agreement and related documents with Alliance Bank (collectively, the "Alliance Credit Agreement") provided up to a $
5.0
million revolving line of credit bearing interest at a fixed annual rate of
3.95
%.
Any advances would have been secured by the Company's inventories, accounts receivable, cash, marketable securities, and equipment.
We were subject to certain covenants under the Alliance Credit Agreement. In April 2016, we entered into an agreement with Alliance Bank amending the Alliance Credit Agreement to extend the maturity date from April 1, 2016 to May 12, 2017.
We chose not to renew the Alliance Credit Agreement.
We believe that cash and cash equivalents on hand at
June 30, 2018
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, 2017
. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the
three and six
months ended
June 30, 2018
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 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, 2017
.