iti-20230630

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________

Form 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-08762

ITERIS, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

1250 S. Capital of Texas Hwy., Building 1, Suite 330

Austin, Texas

(Address of principal executive office)

95-2588496

(I.R.S. Employer

Identification No.)

78746

(Zip Code)

(512) 716-0808

(Registrant’s telephone number, including area code)

(Former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.10 par value

ITI

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of August 4, 2023, there were 42,741,744 shares of our common stock outstanding.

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ITERIS, INC.

Quarterly Report on Form 10-Q

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PART I.	FINANCIAL INFORMATION	1

ITEM 1.	FINANCIAL STATEMENTS	1

	UNAUDITED CONDENSED BALANCE SHEETS AT JUNE 30, 2023 AND MARCH 31, 2023	1

	UNAUDITED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2023 AND 2022	2

	UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND 2022	3

	UNAUDITED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2023 AND 2022	4

	NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34

ITEM 4.	CONTROLS AND PROCEDURES	34

PART II.	OTHER INFORMATION	36

ITEM 1.	LEGAL PROCEEDINGS	36

ITEM 1A.	RISK FACTORS	36

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	37

ITEM 4.	MINE SAFETY DISCLOSURES	38

ITEM 5.	OTHER INFORMATION	38

ITEM 6.	EXHIBITS	38

Unless otherwise indicated in this report, the "Company," "we," "us" and "our" refer to Iteris, Inc., ClearMobility®, Iteris®, and Vantage® are among, but not all of, the trademarks of Iteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Iteris, Inc.

Unaudited Condensed Balance Sheets

(In thousands, except par values)


	June 30, 2023		March 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	19,994	$	16,587
Restricted cash	274		140
Trade accounts receivable, net of allowance for doubtful accounts of $295 and $357 at June 30, 2023 and March 31, 2023, respectively	25,429		23,809
Unbilled accounts receivable	8,471		8,349
Inventories	11,534		10,841
Prepaid expenses and other current assets	4,644		3,128
Total current assets	70,346		62,854
Property and equipment, net	1,315		1,297
Right-of-use assets	7,955		8,345
Intangible assets, net	9,986		10,190
Goodwill	28,340		28,340
Other assets	434		768
Total assets	$	118,376	$	111,794
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	15,581	$	12,943
Accrued payroll and related expenses	12,653		12,923
Accrued liabilities	6,454		5,453
Deferred revenue	7,356		6,720
Total current liabilities	42,044		38,039
Lease liabilities	7,122		7,641
Deferred income taxes	442		422
Unrecognized tax benefits	81		79
Other long-term liabilities	2,880		2,707
Total liabilities	$	52,569	$	48,888
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $1.00 par value:
Authorized shares — 2,000
Issued and outstanding shares — none	—		—
Common stock, $0.10 par value:
Authorized shares - 70,000 at June 30, 2023 and March 31, 2023
Issued and outstanding shares — 42,869 and 42,569, respectively, at June 30, 2023 and 42,808 and 42,808, respectively, at March 31, 2023	4,288		4,282
Treasury stock	(891)		(891)
Additional paid-in capital	190,852		190,082
Accumulated deficit	(128,442)		(130,567)
Total stockholders' equity	65,807		62,906
Total liabilities and stockholders' equity	$	118,376	$	111,794

See accompanying Notes to Unaudited Condensed Financial Statements

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Iteris, Inc.

Unaudited Condensed Statements of Operations

(In thousands, except per share amounts)


	Three Months Ended June 30,
	2023		2022

Product revenues	$	23,658	$	16,381
Service revenues	19,887		17,286
Total revenues	43,545		33,667
Cost of product revenues	12,104		11,657
Cost of service revenues	14,638		11,851
Cost of revenues	26,742		23,508
Gross profit	16,803		10,159
Operating expenses:
General and administrative	5,801		6,412
Sales and marketing	6,290		5,198
Research and development	2,108		2,136
Amortization of intangible assets	651		668
Restructuring charges	—		707
Total operating expenses	14,850		15,121
Operating income (loss)	1,953		(4,962)
Non-operating income (expense):
Other income (expense), net	199		(23)
Interest income (expense), net	68		(32)
Income (loss) from continuing operations before income taxes	2,220		(5,017)
(Provision) benefit for income taxes	(95)		167
Net income (loss) from continuing operations	2,125		(4,850)
Loss from discontinued operations before gain on sale, net of tax	—		(15)
Net loss from discontinued operations, net of tax	—		(15)
Net income (loss)	$	2,125	$	(4,865)

Income (loss) per share - basic and diluted
Income (loss) per share from continuing operations	$	0.05	$	(0.11)
Loss per share from discontinued operations	—		—
Net income (loss) per share	$	0.05	$	(0.11)

Shares used in basic per share calculations	42,567		42,380
Shares used in diluted per share calculations	43,640		42,380

See accompanying Notes to Unaudited Condensed Financial Statements

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Iteris, Inc.

Unaudited Condensed Statements of Cash Flows

(In thousands)


	Three Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net income (loss)	$	2,125	$	(4,865)
Less: Net loss from discontinued operations	—		(15)
Net income (loss) from continuing operations	2,125		(4,850)

Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities:
Right-of-use asset non-cash expense	511		538
Deferred income taxes	22		19
Depreciation of property and equipment	150		159
Stock-based compensation	525		848
Amortization of intangible assets	783		822

Changes in operating assets and liabilities, net of effects of discontinued operations and acquisition:
Trade accounts receivable	(1,620)		734
Unbilled accounts receivable and deferred revenue	687		212
Inventories	(693)		(5,346)
Prepaid expenses and other assets	(1,182)		(1,330)
Trade accounts payable and accrued expenses	3,354		1,137
Operating lease liabilities	(616)		(189)
Net cash provided by (used in) operating activities - continuing operations	4,046		(7,246)
Net cash used in operating activities - discontinued operations	—		(98)
Net cash provided by (used in) operating activities	4,046		(7,344)
Cash flows from investing activities
Purchases of property and equipment	(168)		(188)
Capitalized software development costs	(588)		(333)
Net cash used in investing activities - continuing operations	(756)		(521)

Net cash used in investing activities	(756)		(521)
Cash flows from financing activities
Proceeds from stock option exercises	257		1

Tax withholding payments for net share settlements of restricted stock units	(6)		24
Repurchases of common stock	—		(884)
Net cash provided by (used in) financing activities	251		(859)
Increase (decrease) in cash, cash equivalents and restricted cash	3,541		(8,724)
Cash, cash equivalents and restricted cash at beginning of period	16,727		23,809
Cash, cash equivalents and restricted cash at end of period	$	20,268	$	15,085
Supplemental cash flow information:


Supplemental schedule of non-cash investing and financing activities:
Lease liabilities arising from obtaining right-of-use assets	$	121	$	106
Capitalized software development costs	$	234	$	—

See accompanying Notes to Unaudited Condensed Financial Statements

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Iteris, Inc.

Unaudited Condensed Statements of Stockholders’ Equity

(In thousands)


	THREE MONTH PERIODS ENDED JUNE 30, 2023
	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at March 31, 2023	42,808	$	4,282	369	$	(891)	$	190,082	$	(130,567)	$	62,906
Stock option exercises	60	6		—	—		251		—		257
Issuance of shares pursuant to vesting of restricted stock units, net of payroll withholding taxes	1	—		—	—		(6)		—		(6)
Stock-based compensation	—	—		—	—		525		—		525
Treasury stock purchases	—	—		—	—		—		—		—
Net income	—	—		—	—		—		2,125		2,125
Balance at June 30, 2023	42,869	$	4,288	369	(891)		$	190,852	$	(128,442)	$	65,807


	THREE MONTH PERIODS ENDED JUNE 30, 2022
	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount		Shares	Amount


Balance at March 31, 2022	42,416	$	4,242	—	$	—	$	186,720	$	(115,712)	$	75,250
Stock option exercises	1	—		—	—		1		—		1
Issuance of shares pursuant to vesting of restricted stock units, net of payroll witholding taxes	4	—		—	—		24		—		24
Stock-based compensation	—	—		—	—		848		—		848
Treasury stock purchases	—	—		300	(884)		—		—		(884)
Net loss	—	—		—	—		—		(4,865)		(4,865)
Balance at June 30, 2022	42,421	$	4,242	300	(884)		$	187,593	$	(120,577)	$	70,374

See accompanying Notes to Unaudited Condensed Financial Statements

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Iteris, Inc.

Notes to Unaudited Condensed Financial Statements

June 30, 2023

1.Description of Business and Summary of Significant Accounting Policies

Description of Business

Iteris, Inc. (referred to collectively in this report as "Iteris", the "Company", "we", "our", and "us") is a provider of smart mobility infrastructure 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.

As a pioneer in intelligent transportation systems ("ITS") technology, our intellectual property, advanced detection sensors, mobility and traffic data, software-as-a-service ("SaaS") offerings, mobility consulting services, and cloud-enabled managed services represent a comprehensive range of smart mobility infrastructure management solutions that we distribute to customers throughout the United States ("U.S.") and internationally.

We believe our products, solutions and services increase vehicle and pedestrian safety and decrease congestion within our communities, while also reducing environmental impact, including vehicle carbon emissions.

We continue to make significant investments to leverage our existing technologies and further enhance our advanced detection sensors, mobility intelligence software, mobility data sets, mobility consulting services, and cloud-enabled managed services. As we are always mindful of capital allocation, we apply significant effort to evaluate and prioritize these investments. Likewise, we are always exploring strategic alternatives intended to optimize the value of our Company.

Iteris was incorporated in Delaware in 1987 and has operated in its current form since 2004. Our principal executive offices are located at 1250 S Capital of Texas Hwy, Bldg. 1, Suite 330, Austin TX 78746, and our telephone number at that location is (512) 716-0808. Our website address is www.iteris.com. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on, or accessible through, our website. Each of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, together with amendments to these reports, are available on the "Investor Relations" section of our website, free of charge, as soon as reasonably practicable after such material is filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC").

Recent Developments

COVID-19 Update

The COVID-19 pandemic (the "Pandemic") materially adversely impacted global economic conditions. Although the Pandemic has entered an endemic stage, COVID-19 or other future pandemics might continue to have an unpredictable and unprecedented impact on the global economy, including possible additional supply chain disruptions, workplace dislocations, economic contraction, and negative pressure on customer budgets and customer sentiment.

Given the uncertainties surrounding the impacts of COVID-19 on the Company's future financial condition and results of operations, we have and may continue to identify and execute various actions to preserve our liquidity, manage cash flow and strengthen our financial flexibility. Such actions include, but are not limited to, reducing our discretionary spending, reducing capital expenditures, and implementing restructuring activities (see Note 3, Restructuring Activities, to the Financial Statements for more information).

Our products require specialized parts, some of which became more difficult to source during the Pandemic. In some cases, we had to purchase such parts from third-party brokers at substantially higher prices. The Company's tactics to mitigate the current global supply chain issues included re-designing certain circuit boards to accommodate computer chips that are more readily available in the market at more reasonable prices, and accumulating inventory in the first two quarters of the fiscal year ended March 31, 2023 ("Fiscal 2023"). We also placed non-cancellable inventory orders for certain products in advance of our normal lead times to secure normal and incremental future supply and capacity.

The increase in inventory purchases and in particular components purchased in the secondary markets was curtailed in the second half of Fiscal 2023, and the Company currently does not expect to continue to accumulate inventory, in the same magnitude, in future periods. However, if the Company encounters additional supply chain constraints again in the future, it may need to further adjust its operations to have sufficient liquidity.

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The Pandemic also had an impact on the Company’s human capital. While our Santa Ana product and commercial operations facility remained open throughout the Pandemic, many of our employees worked remotely during the past three years. With the easing of the Pandemic related restrictions imposed by local and state authorities, a larger portion of our workforce has returned to our various facilities, although 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 we have the infrastructure to efficiently work remotely during the COVID-19 current endemic stage and well into the future, although there can be no assurance in this regard.

Restructuring Activities

To help offset recent increases in supply chain costs, on May 12, 2022, the Board of Directors of Iteris, Inc. approved additional restructuring activities to better position the Company for increased profitability and growth. The Company incurred employee separation costs in relation to these activities, which were included in restructuring charges on the unaudited condensed statement of operations. Refer to Note 3, Restructuring Activities, for more information.

Basis of Presentation

Our unaudited condensed financial statements have been prepared in accordance with the rules of the SEC for interim reporting, which permit certain footnotes or other financial information that are normally required by generally accepted accounting principles in the U.S. (“GAAP”) to be condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (“Fiscal 2023”), filed with the SEC on June 29, 2023. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended June 30, 2023 are not necessarily indicative of the results to be expected for Fiscal 2024 or any other periods.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Significant estimates made in the preparation of the financial statements include, but are not limited to, recoverability of long-lived and intangible assets; estimates of future cash flows used to assess the recoverability of the impairment of goodwill; collectability of accounts receivable and related allowance for doubtful accounts; projections of taxable income used to assess realizability of deferred tax assets; warranty reserves; costs to complete long-term contracts; indirect cost rates used in cost plus contracts; fair value of stock option awards and equity instruments; capitalization and estimated useful life of the Company's internal-use software development costs. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments, therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such evaluation.

Revenue Recognition

The Company recognizes revenues when control of the promised goods or services are transferred to our customers, in an 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, ranging from multi-year agreements to purchase orders.

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. These purchase orders are generally 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 consist of revenues derived from maintenance support and the use of the Company’s service platforms and Application Programming Interfaces ("API's") on a subscription basis. We generate this revenue from fees for maintenance and support, 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

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determined that this method best represents the transfer of services as the customer obtains equal benefit from the service throughout the service period.

Service revenues are also 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 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 to involve variable consideration. However, contractual 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.

The Company accounts for individual goods and services separately if they are distinct performance obligations, which often requires significant judgment based upon knowledge of the products and/or services, the solution provided and the structure of the sales contract. In SaaS agreements, we provide a service to the customer that combines the software functionality, maintenance and hosting into a single performance obligation. In product-related contracts, a purchase order may cover different products, each constituting a separate performance obligation.

We generally estimate variable consideration at the most likely amount to which we expect to be entitled and in certain cases based on the expected value, which requires judgment. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We review and update these estimates on a quarterly basis.

The Company’s typical performance obligations include the following:

Performance Obligation

When Performance

Obligation is Typically

Satisfied

When Payment is

Typically Due

How Standalone

Selling Price is

Typically Estimated

Product Revenues

Standard purchase orders for delivery of a tangible product

Upon shipment (point in time)

Within 30 days of delivery

Observable transactions

Engineering services where the deliverable is considered a product

As work is performed (over time)

Within 30 days of services being invoiced

Estimated using a cost-plus margin approach

Service Revenues

Engineering, managed services, and consulting services

As work is performed (over time)

Within 30 days of services being invoiced

Estimated using a cost-plus margin approach

SaaS

Over the course of the SaaS service once the system is available for use (over time)

At the beginning of the contract period

Estimated using a cost-plus margin approach

Extended warranty service

Over the course of the extended warranty period (over time)

At the beginning of the contract period

Estimated using a cost-plus margin approach

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into product revenues and service revenues.

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Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for goods and services as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e., only the passage of time is required before payment is due). We present such receivables in trade accounts receivable, net, in our unaudited condensed balance sheets at their net estimated realizable value.

The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The Company estimates allowances for expected credit losses on trade accounts receivable and contract assets as required by the Current Expected Credit Loss (CECL) model, as per Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326). If warranted, the allowance is increased by the Company’s provision for doubtful accounts, which is charged against income. All recoveries on receivables previously charged off are included in income, while direct charge-offs of receivables are deducted from the allowance.

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented as unbilled accounts receivable on the accompanying unaudited condensed balance sheets. For example, we would record a contract asset if we record revenue on a professional services engagement, but are not entitled to bill until we achieve specified milestones.

Our contract assets and refund liabilities are reported in a net position on a contract basis at the end of each reporting period. Refund liabilities are consideration received in advance of the satisfaction of performance obligations.

Contract Fulfillment Costs

The Company evaluates whether or not we should capitalize the costs of fulfilling a contract. Such costs would be capitalized when they are not within the scope of other standards and: (1) are directly related to a contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered. There were approximately $0.3 million and $0.5 million of contract fulfillment costs as of June 30, 2023 and March 31, 2023, respectively, which are presented in the accompanying unaudited condensed balance sheets as prepaid expense. These costs primarily relate to the satisfaction of performance obligations related to the set-up of SaaS platforms. These costs are amortized on a straight-line basis over the estimated useful life of the SaaS platform.

Transaction Price Allocated to the Remaining Performance Obligations

As of June 30, 2023 and March 31, 2023, the aggregate amount of transaction price allocated to remaining performance obligations was immaterial, primarily as a result of the termination provisions within our contracts, which make the duration of the accounting term of the contract one year or less.

Practical Expedients and Exemptions

T&M and CPFF contracts are considered variable consideration. However, performance obligations with an underlying fee type of T&M or CPFF qualify for the "Right to Invoice" Practical Expedient under Accounting Standards Codification ("ASC") 606-10-55-18. Under this practical expedient, the Company is not required to estimate such variable consideration upon inception of the contract or reassess the estimate each reporting period.

The Company utilizes the practical expedient under ASC 606-10-50-14 of not disclosing information about its remaining performance obligations for contracts with an original expected duration (i.e., contract term, determined based on the analysis of termination provisions described above) of 12 months or less.

The Company pays sales commissions on certain sales contracts. These costs are accrued in the same period that the revenues are recorded. Using the practical expedient under ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining a contract as an expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less.

The Company utilizes the practical expedient under ASC 606-10-25-18B to account for shipping and handling as fulfillment costs, and not a promised service (a revenue element). Shipping and handling costs are included as cost of revenues in the period during which the products ship.

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The Company excludes from the transaction price all sales taxes that are assessed by a governmental authority and that are imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (for example, sales, use, value added, and some excise taxes). This employs the practical expedient under ASC 606-10-32-2A. Sales taxes are presented on a net basis (excluded from revenues) in the accompanying statements of operations.

Deferred Revenue

Deferred revenue in the accompanying unaudited condensed balance sheets is comprised of refund liabilities related to billings and consideration received in advance of the satisfaction of performance obligations.

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with two financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high quality financial institutions, and therefore are believed to have minimal credit risk. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of June 30, 2023, the Company had approximately $19.8 million of deposits at financial institutions in excess of the FDIC insured limit.

Our accounts receivable are primarily derived from billings with customers located throughout North America, as well as in Europe, the Middle East and South America. We generally do not require collateral or other security from our domestic customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

We currently have, and historically have had, a diverse customer base. For the three months ended June 30, 2023 and 2022, no individual customer represented greater than 10% of our total revenues. As of June 30, 2023 and March 31, 2023, no individual customer represented greater than 10% of our total accounts receivable.

Fair Values of Financial Instruments

The accounting guidance provided in ASC 820, Fair Value Measurements ("ASC 820") for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2—Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the assets or liabilities.

The Company applies fair value accounting for all financial instruments on a recurring basis. The Company's financial instruments, which include cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash and short-term investments with initial maturities of 90 days or less.

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As of June 30, 2023 and March 31, 2023, restricted cash was $0.3 million and $0.1 million, respectively, consisting of cash restricted for shares purchased under the Employee Stock Purchase Plan ("ESPP") (see Note 8, Stock-Based Compensation, for further details on the ESPP).

Cash, cash equivalents and restricted cash presented in the accompanying unaudited condensed statements of cash flows consisted of the following (in thousands):


	June 30, 2023		March 31, 2023
Cash and cash equivalents	$	19,994	$	16,587
Restricted cash	274		140
	$	20,268	$	16,727

Allowance for Doubtful Accounts

We record accounts receivable net of the allowance for doubtful accounts. The allowance is established in accordance with the Current Expected Credit Loss (CECL) model, as prescribed by Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326). We estimate the allowance for doubtful accounts based on the Company's assessment of its ability to collect on customer accounts receivable. The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing credit evaluations of our customers' financial condition. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized accounts receivable to the amount we reasonably believe will be collected. The Company writes-off accounts receivable against the allowance when it determines that the balance is uncollectible and collection of the receivable is no longer being actively pursued.

Inventories

Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful life ranging from three to eight years. Leasehold improvements are depreciated over the term of the related lease or the estimated useful life of the improvement, whichever is shorter.

Intangible Assets

Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. When determining useful life, the Company considers the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions.

Goodwill

Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company's business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets.

The Company has the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. However, the Company may elect to bypass the qualitative assessment and proceed directly to the quantitative impairment tests. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. We

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perform an annual quantitative assessment of our goodwill during the fourth fiscal quarter, or more frequently, to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. As of June 30, 2023, there were no indicators of goodwill impairment.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, including property, equipment and intangible assets (other than goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset or asset group is expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. During the fiscal periods ended June 30, 2023 and 2022, there was no impairment to our long-lived and intangible assets.

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made. As such, as of June 30, 2023, we determined it was appropriate to record a full valuation allowance against our deferred tax assets. We will continuously reassess the appropriateness of maintaining a valuation allowance.

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Stock-Based Compensation

We record stock-based compensation in our unaudited condensed statements of operations as an expense, based on the estimated grant date fair value of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of common stock options, restricted stock units and performance stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton option-pricing formula. The fair value of our performance stock unit awards is estimated on the grant date using a Monte Carlo simulation model. While the use of these models meets established requirements, the estimated fair values generated by the models may not be indicative of the actual fair values of our awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements, as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

Research and Development Expenditures

Research and development expenditures are charged to expense in the period incurred.

Shipping and Handling Costs

Shipping and handling costs are included as cost of revenues in the period during which the products ship.

Sales Taxes

We present sales taxes on a net basis (in other words, they are excluded from revenues) in the statements of operations.

Warranty

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We generally provide a one- to three-year warranty from the original invoice date on all products, materials and workmanship. Products sold to various original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited condensed balance sheets. We do not provide any service-type warranties.

Repair and Maintenance Costs

We incur repair and maintenance costs in the normal course of business. Should the repair or maintenance result in a permanent improvement to one of our leased facilities, the cost is capitalized as a leasehold improvement and amortized over its useful life or the remainder of the lease period, whichever is shorter. Non-permanent repair and maintenance costs are charged to expense as incurred.

Loss Contingencies

We are subject to legal actions that arise in the ordinary course of business. The Company recognizes a liability for a contingency when it is probable that liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, the Company accrues the most likely amount of such loss at no less than the minimum of the range.

Comprehensive Income (Loss)

The difference between net income (loss) and comprehensive income (loss) was de minimis for the three months ended June 30, 2023 and June 30, 2022.

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, ASU 2016-13 is now effective for our fiscal year 2024 beginning April 1, 2023. The Company adopted the standard with an immaterial expected credit loss and no adjustment to the opening balance.

Immaterial Correction of Prior Period Financial Statements

Subsequent to the issuance of the financial statements for the three months ended June 30, 2022 and as similarly disclosed in the Company’s annual financial statements for the fiscal year ended March 31, 2023, we identified misstatements in Unbilled accounts receivable and Deferred revenue related to contract activity prior to the fiscal year ended March 31, 2021. Such misstatements relate to balances for contract assets and refund liabilities we determined should have previously been eliminated based on a combination of contract age and cessation of activity associated with certain contracts.

The Company determined the effect of the misstatements were not material to the previously issued financial statements. We determined to restate the accompanying condensed statement of stockholders’ equity for the three months ended June 30, 2022 to correct for this matter, which resulted in an increase to accumulated deficit of $1,613 and decrease in total stockholders’ equity of $1,613 as of June 30, 2022 from amounts previously reported of $(118,964) and 71,987, respectively.

Because these corrections occurred at a time preceding the periods presented herein, all corrections were limited to the condensed statement of stockholders’ equity.

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2.Supplemental Financial Information

Inventories

The following table presents details of our inventories, net of reserves:


	June 30, 2023		March 31, 2023
	(In thousands)
Raw materials	$	7,833	$	7,840
Work in process	387		315
Finished goods	3,314		2,686
	$	11,534	$	10,841

Property and Equipment

The following table presents details of our property and equipment, net:


	June 30, 2023		March 31, 2023
	(In thousands)
Equipment	$	6,524	$	6,359
Leasehold improvements	824		824
Accumulated depreciation	(6,033)		(5,886)
	$	1,315	$	1,297

Depreciation expense was approximately $0.2 million and $0.2 million for the three months ended June 30, 2023 and June 30, 2022, respectively. In each of those periods, approximately $0.1 million of the depreciation expense was recorded to cost of revenues, and approximately $0.1 million was recorded to operating expenses.

Intangible Assets

The following table presents details of our net intangible assets:


	June 30, 2023						March 31, 2023
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(In thousands)
Technology	$	4,986	$	(3,676)	$	1,310	$	4,986	$	(3,444)	$	1,542
Customer contracts / relationships	9,550		(4,724)		4,826		9,550		(4,371)		5,179
Trade names and non-compete agreements	782		(770)		12		782		(770)		12
Capitalized software development costs	8,068		(4,230)		3,838		7,489		(4,032)		3,457
Total	$	23,386	$	(13,400)	$	9,986	$	22,807	$	(12,617)	$	10,190

Amortization expense for intangible assets subject to amortization was approximately $0.8 million for each of the three- month periods ended June 30, 2023 and 2022. For each of those periods, approximately $0.1 million of the intangible asset amortization was recorded to cost of revenues and approximately $0.7 million was recorded to amortization expense.

We have one indefinite useful life intangible asset, with de minimis carrying value, which was included in trade names and non-compete agreements.

As of June 30, 2023, future estimated amortization expense was as follows:

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Year Ending March 31,
(In thousands)
2024	$	2,789
2025	3,263
2026	2,038
2027	1,266
2028	618
Thereafter	—
	$	9,974

The future estimated amortization expense does not include the indefinite useful life intangible asset described above.

Warranty Reserve Activity

Warranty reserve is recorded as accrued liabilities in the accompanying unaudited condensed balance sheets. The following table presents activity related to the warranty reserve:


Warranty Reserve Activity	Three Months Ended June 30,
	2023		2022
	(In thousands)
Balance at beginning of fiscal year	$	758	$	616
Additions charged to cost of sales	193		51
Warranty claims	(96)		(44)
Balance at end of reporting period	$	855	$	623

Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share:


	Three Months Ended June 30,
	2023		2022
	(In thousands, except per share amounts)
Numerator:
Net income (loss) from continuing operations	$	2,125	$	(4,850)
Net loss from discontinued operations, net of tax	—		(15)
Net income (loss)	$	2,125	$	(4,865)
Denominator:
Weighted average common shares used in basic computation	$	42,567	42,380
Stock options and other dilutive awards	1,073		—
Weighted average common shares used in diluted computation	$	43,640	42,380
Basic and diluted:
Net income (loss) per share from continuing operations:	$	0.05	$	(0.11)
Net loss per share from discontinued operations:	$	—	$	—
Net income (loss) per share	$	0.05	$	(0.11)

The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive:

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	Three Months Ended June 30,
	2023	2022
	(In thousands)
Stock options	3,362	5,718
Restricted stock units	280	446

3.Restructuring Activities

On May 12, 2022, the Board of Directors of Iteris, Inc. approved restructuring activities to better position the Company for increased profitability and growth. During the three months ended June 30, 2023, the Company incurred approximately $0.2 million of payments in relation to these activities.

As of June 30, 2023, we had accrued approximately $0.05 million for severance and benefits related to the restructuring activities in accrued payroll and related expenses on the unaudited condensed balance sheet. The restructuring activities during the three months ended June 30, 2023 were as follows (in thousands):


Balance at March 31, 2023	$	242
Charged to expenses	—
Cash payments	(197)
Balance at June 30, 2023	$	45

4.Fair Value Measurements

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As described in more detail in Note 1, Description of Business and Summary of Significant Accounting Policies, fair value measurements are based on a three tier hierarchy that prioritizes the inputs used to measure fair value.

We did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of June 30, 2023 or March 31, 2023. Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a nonrecurring basis, generally when there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. As a result of the re-organization completed in April 2021, the Company reallocated goodwill to the three new reporting units. No non-financial assets were measured at fair value at June 30, 2023 and March 31, 2023.

The following tables present the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy:


	As of June 30, 2023
	(In thousands)
	Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Estimated Fair Value
Assets:
Level 1:
Securities held in deferred compensation plan (1)	$	1,337	$	(434)	$	354	$	1,257
Total	$	1,337	$	(434)	$	354	$	1,257

Liabilities:
Level 1:
Deferred compensation plan liabilities (2)	$	1,356	$	(296)	$	552	$	1,612
Total	$	1,356	$	(296)	$	552	$	1,612

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	As of March 31, 2023
	(In thousands)
	Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Estimated Fair Value
Assets:
Level 1:

Securities held in deferred compensation plan (1)	1,426		(437)		321		1,310






Total	$	1,426	$	(437)	$	321	$	1,310

Liabilities:
Level 1:
Deferred compensation plan liabilities (2)	$	1,201	$	(296)	$	563	$	1,468

Level 3:
Contingent consideration (3)	$	600	$	—	$	—	$	600
Transfer out	(600)						(600)
Subtotal	—		—		—		—
Total	$	1,201	$	(296)	$	563	$	1,468

(1) Included in prepaid expenses and other current assets on the Company’s balance sheet.

(2) Included in accrued payroll and related expenses on the Company’s balance sheet.

(3) As of March 31, 2023, the short-term portion of the balance of contingent consideration was included in accrued liabilities and the long-term portion was included in other long-term liabilities on the Company’s balance sheet. As of June 30, 2023, the balance of contingent consideration was all short-term and included in accrued liabilities on the Company's balance sheet.

Unrealized losses related to investments are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell, and it is not more likely than not that, we would be required to sell, any of our investments before recovery of their cost basis. As a result, there was no other-than-temporary impairment for these investments as of June 30, 2023.

5.Income Taxes

The effective tax rate used for interim periods is the estimated annual effective tax rate, based on the current estimate of full year results, except for those taxes related to specific events, if any, which are recorded in the interim period in which they occur.

Income tax expense for the three months ended June 30, 2023 was approximately $0.1 million, or 4.3%, of pre-tax income, as compared with an expense of approximately $0.2 million, or 3.3%, of pre-tax loss for the three months ended June 30, 2022.

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 we have experienced a cumulative pre-tax loss over the trailing three years, we continue to maintain a valuation allowance against our deferred tax assets. 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.

6.Commitments and Contingencies

Litigation and Other Contingencies

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the matter described below, the Company is not a party to any legal dispute, proceeding or litigation, the outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s business, unaudited condensed results of operations, financial position or cash flows.

The Company has agreed to accept a $1.0 million return of inventory sold by the Company during the prior fiscal period ended March 31, 2023, at the request of a prime contractor and related to a project that has been delayed. The Company is a subcontractor to the prime contractor on the delayed project, and there currently are no known issues with the product, nor is there currently any contention that there are issues with the product. Up to mid-July 2023 the Company believed the probability of the occurrence of a loss associated with this matter was remote. After meeting with the prime contractor beginning in mid-July 2023, the Company agreed to reassess the situation and agreed on August 7, 2023 to accept the inventory return. We have recognized a pretax loss contingency of $0.2 million, comprised of $1.0 million in Accrued Liabilities representing the sales value of the good sold, and $0.8 million in Prepaid Expenses and Other Current Assets representing the estimated value for the goods to be returned in the future.

7.Right-of-Use Assets and Lease Liabilities

We have various operating leases for our offices, office equipment and vehicles in the United States. These leases expire at various times through 2029. Certain lease agreements contain renewal options from 1 year to 5 years, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate.

The table below presents lease-related assets and liabilities recorded on the unaudited condensed balance sheet as follows:


	Classification	June 30, 2023		March 31, 2023
		(In thousands)		(In thousands)
Assets
Operating lease right-of-use-assets	Right-of-use assets	$	7,955	$	8,345
Total operating lease right-of-use-assets		$	7,955	$	8,345

Liabilities
Operating lease liabilities (short-term)	Accrued liabilities	$	2,253	$	2,339
Operating lease liabilities (long-term)	Lease liabilities	7,122		7,641
Total lease liabilities		$	9,375	$	9,980

Lease Costs

We recorded approximately $0.6 million of lease costs in our unaudited condensed statements of operations for the three months ended June 30, 2023 as compared to approximately $0.7 million for the three months ended June 30, 2022. The Company currently has no variable lease costs. The Company recorded a de minimis amount of sublease income for the three months ended June 30, 2023 and June 30, 2022, which was included in loss from discontinued operations on the unaudited condensed statement of operations.

Supplemental Information

The table below presents supplemental information related to operating leases during the three months ended June 30, 2023 (in thousands, except weighted average information):


Cash paid for amounts included in the measurement of operating lease liabilities	$	673
Weighted average remaining lease term (in years)	3.9
Weighted average discount rate	4.7		%

Maturities of Lease Liabilities

Maturities of lease liabilities as of June 30, 2023 were as follows:

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Fiscal Year Ending March 31,	Operating Leases
(In thousands)
2024	$	1,972
2025	2,459
2025	2,178
2027	2,207
2028	1,315
Thereafter	204
Total lease payments	10,335
Less imputed interest	(960)
Present value of future lease payments	9,375
Less current obligations under leases	(2,253)
Long-term lease obligations	$	7,122

8.Stock-Based Compensation

We currently maintain two stock incentive plans, the 2007 Omnibus Incentive Plan and the 2016 Omnibus Incentive Plan (the “2016 Plan”). Of these plans, we may only grant future awards from the 2016 Plan. The 2016 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock, time-restricted stock units (“RSUs"), performance-based restricted stock units ("PSUs”), cash incentive awards and other stock-based awards. At June 30, 2023, there were approximately 2.2 million shares of common stock available for grant or issuance under the 2016 Plan. Total stock options vested and expected to vest were approximately 6.0 million as of June 30, 2023.

Stock Options

A summary of activity with respect to our stock options for the three months ended June 30, 2023 is as follows:


	Options	Weighted Average Exercise Price Per Share
	(In thousands)
Options outstanding at March 31, 2023	6,287	$	4.11
Granted	—	—
Exercised	(60)	2.93
Forfeited	(195)	4.20
Expired	—	—
Options outstanding at June 30, 2023	6,032	4.11

Restricted Stock Units

A summary of activity with respect to our RSUs, which entitle the holder to receive one share of our common stock for each RSU upon vesting, for the three months ended June 30, 2023 is as follows:

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	# of Shares	Weighted Average Price Per Share
	(In thousands)
RSUs outstanding at March 31, 2023	497	$	4.12
Granted	—	—
Vested and released	(1)	6.22
Forfeited	(43)	3.95
RSUs outstanding at June 30, 2023	453	4.13

Performance Stock Units

The Company has approved a total "target" number of 212,216 PSUs to our executive officers. Between 0% and 160% of the PSUs will be eligible to vest based on average annual performance during the three-year performance period relative to the revenues per share and cash flow from operations objectives to be established by the Compensation Committee at the beginning of each year. In addition, the final PSU vesting based on the revenues per share and cash flow from operations performance will be subject to a modifier between .75x-1.25x based on the Company's total shareholder return relative to the Russell 2000 for the span of the full three-year performance period, for a maximum achievement percentage of 200% of the "target" number of PSUs. The PSUs are amortized over a derived service period of 3 years. The value and the derived service period of the PSUs were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance stock units:


	# of Shares	Weighted Average Price Per Share
	(In thousands)
PSUs outstanding at March 31, 2023	83	$	4.45
Granted	—	—
Vested and released	—
Forfeited	(9)	3.83
PSUs outstanding at June 30, 2023	74	4.53

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Stock-Based Compensation Expense

The following table presents stock-based compensation expense that is included in each line item on our unaudited condensed statements of operations:


	Three Months Ended June 30,
	2023		2022
	(In thousands)
Cost of revenues	$	85	$	64
General and administrative expense	202		618
Sales and marketing	134		78
Research and development expense	104		88
Total stock-based compensation	$	525	$	848

As of June 30, 2023, there was approximately $3.3 million, $0.8 million and $0.1 million of unrecognized compensation expense related to unvested stock options, RSUs and PSUs, respectively. This expense is currently expected to be recognized over a weighted average period of approximately 2.5 years for stock options, 1.4 years for RSUs and 1.3 years for PSUs. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or other stock-based awards.

Other Stock-Based Compensation Plans

We currently maintain an Employee Stock Purchase Plan (“ESPP”) which allows employees to have a percentage of their base compensation withheld to purchase the Company’s common stock at 95% of the lower of the fair market at the beginning of the offering period and on the last trading day of the offering period. There are two offering periods during a calendar year, which consist of the six months beginning each January 1 and July 1. Employees may contribute 1-15% of their eligible gross pay up to a $0.03 million annual stock value limit. No shares were purchased during the three months ended June 30, 2023 and 2022 for the first offering periods of Fiscal 2024 and 2023, respectively.

Deferred Compensation Plan

Effective October 1, 2020, the Company adopted the Iteris, Inc. Deferred Compensation Plan (the "DC Plan"). The DC Plan consists of two plans, one that is intended to be an unfunded arrangement for eligible employees who are part of a select group of management or highly compensated employees of the Company within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, and one for the benefit of non-employee members of our board of directors. Key employees, including our executive officers, and our non-employee directors who are notified regarding their eligibility to participate and delivered the DC Plan enrollment materials are eligible to participate in the DC Plan. Under the DC Plan, we provide participants with the opportunity to make annual elections to defer a percentage of their eligible cash compensation and equity awards. A participant is always 100% vested in his or her own elective cash deferrals and any earnings thereon. Elective deferrals of equity awards are credited to a bookkeeping account established in the name of the participant with respect to an equivalent number of shares of our common stock, and such credited shares are subject to the same vesting conditions as are applicable to the equity award subject to the election. The Company established a rabbi trust to finance our obligations under the DC Plan with corporate-owned life insurance policies on participants, and the assets held within this trust are subject to the claims of the Company's creditors. The assets and liabilities are recorded at their fair value, which represents their respective amortized cost values plus any unrealized gains or losses. Refer to Note 4, Fair Value Measurements, for further detail on the DC plan.

9.Stock Repurchase Program

On August 9, 2012, the Board approved a stock repurchase program pursuant to which we could acquire up to $3.0 million of our outstanding common stock for an unspecified length of time. Under the program, we could repurchase shares from time to time in the open market and privately negotiated transactions and block trades, and could also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There was no guarantee as to the exact number of shares that would be repurchased. We reserved the right to modify or terminate the repurchase program at any time without prior notice.

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On November 6, 2014, the Board approved a $3.0 million increase to the Company’s 2012 stock repurchase program, pursuant to which the Company could continue to acquire shares of its outstanding common stock from time to time for an unspecified length of time. From the inception of the 2012 stock repurchase program on through its termination on May 12, 2022, we repurchased approximately 2,458,000 shares of our common stock for an aggregate price of approximately $4.3 million, at an average price per share of $1.73. As of June 30, 2023, these repurchased shares had been retired and resumed their status as authorized and unissued shares of our common stock.

On May 12, 2022 the Board of Directors terminated the 2012 stock repurchase program and approved a new plan for the company to acquire up to $10.0 million of our outstanding common stock for an unspecified length of time. Under the program, we may repurchase shares from time to time in the open market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. No shares were repurchased during the three months ended June 30, 2023. As of June 30, 2023 approximately $9.1 million remained available for the repurchase of our common stock under our current program.

10.Business Segments

The Company's Chief Operating Decision Maker ("CODM"), who is our Chief Executive Officer, reviews the Company's results on a consolidated basis and our financial results are presented under a single reporting segment in order to provide the most accurate representation of Company's performance.

11.Long-Term Debt

On January 25, 2022, Iteris, Inc., entered into a Credit Agreement (the “Credit Agreement”) with Capital One, National Association, as agent.

The Credit Agreement provided for a $20 million revolving credit facility with a maturity date of January 24, 2026. In addition, the Company had the ability from time to time to increase the revolving commitments up to an additional aggregate amount not to exceed $40 million, subject to receipt of lender commitments and certain conditions precedent. The Credit Agreement that evidenced the facility contained customary representations, warranties, covenants, and events of default. The Credit Agreement was collateralized by substantially all of our property and assets, including intellectual property. The Credit Agreement also contained certain restrictions and covenants that required the Company to maintain, on an ongoing basis, (i) a leverage ratio of no greater than 3.00 to 1.00 and (ii) a fixed charge coverage ratio of not less than 1.25 to 1.00. The leverage ratio also determined the applicable interest rate under the Credit Agreement. Borrowings under the revolving credit facility accrued interest at a rate equal to either Secured Overnight Financing Rate ("SOFR") or a specified base rate, at the Company’s option, plus an applicable margin. The applicable margins ranged from 2.00% to 2.80% per annum for SOFR loans and 1.00% to 1.80% per annum for base rate loans. The revolving credit facility was subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, that was dependent on the Company’s leverage ratio.

On September 12, 2022, the Company voluntarily terminated the Credit Agreement and expensed the remaining capitalized deferred financing costs. The Company had not borrowed against the Credit Agreement since its inception, but the Company continued to incur customary fees thereunder prior to this termination. In connection with the termination of the Credit Agreement, all liens securing such obligations and guarantees of such obligations were released. Amortization of the deferred financing costs and commitment fees on the unused revolving credit facility commitments of $0.3 million are included in Interest Income (Expense), net on the unaudited condensed statement of operations. As of June 30, 2023, no amounts of capitalized deferred financing costs remained.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management’s beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words “expect,” “believe,” “intend,” “plan,” “should,” “will,” “may,” "might," “anticipate,” “estimate,” “could,” “should,” and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profitability, capital needs, backlog, manufacturing capabilities, and the market acceptance of our products and services, competition, the impact of any current or future litigation, the impact of recent accounting pronouncements, the impacts of ongoing and new supply chain constraints, the status of our facilities and product development, reliance on key personnel, general economic conditions, including rising interest rates and federal government deadlock over the debt ceiling, future responses to and effects of COVID-19, and other characterizations of future events or circumstances are forward-looking statements. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause our actual results to differ materially and adversely from those projected. We encourage you to carefully read this report in conjunction with our annual report on Form 10-K in its entirety, including the various disclosures made by us which describe certain factors which could affect our business, such as those set forth in the “Risk Factors” of in Part II. Item 1A of this report, before deciding to invest in our Company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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

COVID-19 Update

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magnitude, in future periods. However, if the Company encounters additional supply chain constraints again in the future, it may need to further adjust its operations to have sufficient liquidity.

Climate Change

We take climate change and the risks associated with climate change seriously. Increased frequency of severe and extreme weather events associated with climate change could adversely impact our facilities, interfere with intersection construction projects, and have a material impact on our financial condition, cash flows and results of operations. More extreme and volatile temperatures, increased storm intensity and flooding, and more volatile precipitation are among the weather events that are most likely to impact our business. We are unable to predict the timing or magnitude of these events. However, we perform ongoing assessments of physical risk, including physical climate risk, to our business and efforts to mitigate these physical risks continue to be implemented on an ongoing basis.

As a global leader in smart mobility infrastructure management, we are committed to a cleaner, healthier and more sustainable future. Our core business aims to reduce climate impact through our work with public and private-sector partners to improve the efficiency of mobility, which, among other things has the benefit of reducing vehicle carbon emissions. For example, by reducing vehicle delays and stops through traffic signal timing projects, improving the efficiency and fuel consumption of public transit via signal priority programs, and reducing time spent roadside for heavy-emitting commercial freight vehicles during inspection, our industry-leading portfolio of smart mobility infrastructure management solutions is currently helping cities and states to reduce their carbon footprint. Additionally, we continue to enhance the design of our sensors to withstand increasingly extreme weather conditions.

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, acquisition fair value adjustments, and executive severance and transition costs (“Adjusted EBITDA”) was approximately $3.7 million for the three months ended June 30, 2023 as compared to approximately $(2.4) million for the three months ended June 30, 2022, respectively.

When viewed with our financial results prepared in accordance with accounting principles generally accepted in the U.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 Quarterly Report on Form 10-Q (“Form 10-Q”), 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 unaudited condensed financial statements contained in this Form 10-Q. 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 including 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 when calculating Adjusted EBITDA:

•Income tax. This amount may be useful to investors because it represents the taxes that might be payable for the period and the change in deferred taxes during the period, and therefore could 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 they represent the estimated attrition of our acquired customer base and the diminishing value of product rights.

•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. For the three months ended June 30, 2023, interest expense includes amortization of the remaining capitalized deferred financing costs due to the termination of the Credit Agreement (see Note 11, Long-Term Debt, to the Financial Statements for more information).

•Stock-based compensation. These expenses consist primarily of expenses from employee and director equity-based compensation plans. Iteris excludes stock-based compensation primarily because they are non-cash expenses and Iteris 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.

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:


	Three Months Ended June 30,
	2023			2022
	(In Thousands)
Net income (loss) from continuing operations	$	2,125		$	(4,850)
Income tax expense	95			(167)
Depreciation expense	150			159
Amortization expense	783			822
Interest expense	—			32
Stock-based compensation	525			848
Other adjustments:
Restructuring charges	—			707


Adjusted EBITDA	$	3,678		$	(2,449)
Percentage of total revenues	8.4		%	(7.3)		%

Critical Accounting Policies and Estimates

"Management's Discussion and Analysis of Financial Condition and Results of Operations" is based on our unaudited condensed 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 (see Note 1, Description of Business and Summary of Significant Accounting Policies, to the Financial Statements for more information). In preparing our 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 financial statements. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results.

Recent Accounting Pronouncements

Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, to our Unaudited Condensed Financial Statements, included in Part I, Item 1 of this report for a discussion of applicable recent accounting pronouncements.

Analysis of Quarterly Results from Continuing Operations

Total Revenues. The following table presents details of total revenues for the three months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				$ Increase (decrease)		% Change
	2023		2022
	(In thousands, except percentages)
Product revenues	$	23,658	$	16,381	$	7,277	44.4	%
Service revenues	19,887		17,286		2,601		15.0	%
Total revenues	$	43,545	$	33,667	$	9,878	29.3	%

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 the three months ended June 30, 2023 increased 44.4% to $23.7 million, as compared to $16.4 million in the corresponding period in the prior

year, primarily due to continued strong demand for our hardware solutions and our circuit board redesign efforts allowing us to ship more product.

Service revenues consist of software, managed services, systems integration, and consulting services revenues. In certain instances, the lack of third-party product availability can impact the timing of systems integration projects and associated revenue recognition. Service revenues for the three months ended June 30, 2023 increased 15% to $19.9 million, compared to $17.3 million in the corresponding period in the prior year. This increase was due to continued adoption of Iteris' ClearMobility Platform and increased software and managed services revenue. Total annual recurring revenue, which we define as revenues from software and managed services contracts, was approximately 25% of total revenue for the three months ended June 30, 2023 and 28% of total revenue for the three months ended June 30, 2022. The decrease is primarily due to the significant increase in product revenue.

Backlog is an operational measure representing future unearned revenue amounts believed to be firm that are to be earned under our existing agreements, but it does not represent the total contract award if a firm purchase order or task order has not yet been issued under the contract, and are not included in deferred revenue on our balance sheets. Backlog includes new bookings but does not include announced orders for which definitive contracts have not been executed. We typically expect to recognize revenue in the range of approximately two-thirds to three-quarters of our backlog as of the end of a fiscal year in the subsequent fiscal year. We believe backlog is a useful metric for investors, given its relevance to total orders, although there can be no assurances we will recognize revenue from bookings or backlog timely.

The Company added approximately $53.1 million of new bookings, or potential revenue under binding agreements, during the first quarter of Fiscal 2024. The Company's total ending backlog increased 14% to approximately $123.8 million as of June 30, 2023, as compared to approximately $108.9 million as of June 30, 2022.

Gross Profit. The following tables present details of our gross profit for the three months ended June 30, 2023 and 2022:


	Three Months Ended June 30,						$ Increase (decrease)		% Change
	2023			2022
	(In thousands, except percentages)
Product gross profit	$	11,554		$	4,724		$	6,830	144.6	%
Service gross profit	5,249			5,435			(186)		(3.4)	%
Total gross profit	$	16,803		$	10,159		$	6,644	65.4	%

Product gross margin as a % of product revenues	48.8		%	28.8		%
Service gross margin as a % of service revenues	26.4		%	31.4		%
Total gross margin as a % of total revenues	38.6		%	30.2		%

Our product gross margin as a percentage of product revenues for the three months ended June 30, 2023 increased approximately 2,000 basis points, compared to the corresponding period in the prior year. The increase was primarily due to continued improvement in the Company's supply chain, demonstrating we are realizing the anticipated gross margin benefits from the introduction of our alternative circuit boards and other elements of our supply chain improvement plan.

Our service gross margin as a percentage of service revenues for June 30, 2023 decreased approximately 500 basis points compared to the corresponding period in the prior year, primarily due to a higher proportion of cost of revenue related to subcontractors and higher costs for data we purchased during the three months ended June 30, 2023.

Our total gross margin as a percentage of total revenues for the three months ended June 30, 2023 increased approximately 840 basis points, as compared to the corresponding prior year periods due to the aforementioned reasons.

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. 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 own products and professional services.

General and Administrative Expense

General and administrative expense for the three months ended June 30, 2023 decreased approximately 9.5% to $5.8 million, compared to $6.4 million for the three months ended June 30, 2022. The decrease for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 was due to cost savings associated with the prior restructuring activities as well as actions to decrease rent and outside services expenses.

Sales and Marketing

Sales and marketing expense for the three months ended June 30, 2023 increased approximately 21.0% to $6.3 million compared to $5.2 million for the three months ended June 30, 2022. The increase was primarily due to the planned addition of sales and sales support representatives to drive revenue growth, resulting in higher compensation and benefit costs.

Research and Development Expense

Research and development expense for the three months ended June 30, 2023 decreased approximately 1.3% to $2.1 million, compared to $2.1 million for the three months ended June 30, 2022. The overall decrease was primarily due to the non-recurring re-design of certain circuit boards as part of the Company's supply chain management program during the three months ended June 30, 2022.

We plan to continue to invest in the development of further enhancements and new 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 Company's unaudited condensed balance sheets in both the current and prior year periods; however, certain development 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 assets in future periods.

Amortization of Intangible Assets

Amortization expense for intangible assets subject to amortization was approximately $0.8 million and $0.7 million for the three months ended June 30, 2023 and 2022, respectively.

Income Taxes

The effective tax rate used for interim periods is the estimated annual effective tax rate, based on our current estimate of full year results, except taxes related to specific events, if any, are recorded in the interim period in which they occur.

Litigation and Other Contingencies

As a provider of traffic engineering services, hardware products, software and other various solutions for the traffic industry, the Company is, and may in the future from time to time, be involved in disputes, proceedings, or litigation relating to claims arising out of its operations in the normal course of business, such as intellectual property infringement and contractual matters. While the Company cannot accurately predict the outcome of any such disputes, proceedings, or litigation, including the matter described below, the Company is not a party to any legal dispute, proceeding or litigation, the outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s business, unaudited condensed results of operations, financial position or cash flows.

Liquidity and Capital Resources

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.

At June 30, 2023, we had $28.3 million in working capital, which included $20.0 million in cash and cash equivalents. This compares to working capital of $24.8 million at March 31, 2023, which included $16.7 million in cash and cash equivalents.

Operating Activities. Net cash provided from operating activities of our continuing operations for the three months ended June 30, 2023 was approximately $4.0 million, which compares to net cash used in operating activities of approximately $7.2 million for the same period in the prior year. The year-over-year improvement primarily reflects $7.0 million higher net income from continuing operations, coupled with lower cash consumed by inventory and prepaid expense, partially offset by growth in accounts receivable resulting from a higher rate of revenue growth. Net cash used in operating activities from discontinued operations was de minimis.

Investing Activities. Net cash used in investing activities of our continuing operations during the three months ended June 30, 2023 of approximately $0.8 million was largely unchanged from the same period in the prior year, and primarily the result of approximately $0.2 million of property and equipment purchases, and approximately $0.6 million of capitalized software development costs. Net cash provided by investing activities from discontinued operations was de minimis.

Financing Activities. Net cash provided from financing activities of our continuing operations during the three months ended June 30, 2023 was the result of approximately $0.3 million of cash proceeds from the exercises of stock options. This compares to net cash used in financing activities of $0.9 million for the same period last year, which resulted from repurchases of common stock.

Off Balance Sheet Arrangements

We did not have any material off balance sheet arrangements as of June 30, 2023.

Seasonality

We have historically experienced seasonality, which adversely affects product 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 affected the most by inclement weather. We have also experienced seasonality, particularly with respect to our service revenues, especially in the third fiscal quarter due to the increased number of holidays, causing a reduction in available billable hours.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by Item 305 of Regulations S-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management was required to apply its judgment in evaluating the cost-benefit relationship of such controls and procedures.

Changes in Internal Controls

During the fiscal quarter covered by this report, there has been no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitations on Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or loss may have an adverse and material effect on our business, financial condition and results of operations.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 6, Commitments and Contingencies, under the heading “Litigation and Other Contingencies” to our Unaudited Condensed Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K from the year ended March 31, 2023, filed with the SEC on June 29, 2023. Refer to Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2023, filed with the SEC on June 29, 2023, for a discussion of factors that could materially affect our business, financial condition, results of operations, or future results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

Not applicable.

Use of Proceeds from Registered Securities

Not applicable.

Purchases of Equity Securities by the Issuer

On August 9, 2012, our Board of Directors approved a stock repurchase program pursuant to which we could acquire up to $3 million of our outstanding common stock for an unspecified length of time. Under the program, we could repurchase shares from time to time in the open market and privately negotiated transactions and block trades, and could also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There was no guarantee as to the exact number of shares that would be repurchased. We reserved the right to modify or terminate the repurchase program at any time without prior notice.

On November 6, 2014, our Board of Directors approved a $3.0 million increase to the Company’s 2012 stock repurchase program, pursuant to which the Company could continue to acquire shares of its outstanding common stock from time to time for an unspecified length of time. From inception of the 2012 stock repurchase program through its termination on May 12, 2022, we repurchased approximately 2,458,000 shares of our common stock for an aggregate price of approximately $4.3 million, at an average price per share of $1.73. As of June 30, 2023, these repurchased shares had been retired and returned to their status as authorized and unissued shares of our common stock.

On May 12, 2022 the Board of Directors terminated the 2012 stock repurchase program and approved a new plan for the company to acquire up to $10.0 million of our outstanding common stock for an unspecified length of time. Under the program, we may repurchase shares from time to time in the open market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. As of June 30, 2023, we have repurchased 0.3 million shares for an aggregate price of approximately $0.9 million, at an average price of $2.90 per share. As of June 30, 2023, approximately $9.1 million remained available for the repurchase of our common stock under our current program. No shares were repurchased during the three months ended June 30, 2023.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed or furnished herewith or are incorporated by reference to the location indicated.

Exhibit
Number

Description

Where Located

31.1

Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

31.2

Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

32.1

Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

32.2

Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

101.INS

Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

Filed herewith

101.SCH

Inline XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

Filed herewith

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

104.1

Cover Page Interactive Data File – The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document

Filed herewith

___________________________________

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: August 8, 2023	ITERIS, INC.
	(Registrant)

	By	/s/ JOE BERGERA
		Joe Bergera
		Chief Executive Officer
		(Principal Executive Officer)


	By	/s/ KERRY A. SHIBA
		Kerry A. Shiba
		Chief Financial Officer, Treasurer and Secretary
		(Principal Financial and Accounting Officer)