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AATC Autoscope Technologies

Filed: 3 May 21, 4:20pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2021

or

¨           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: 0-26056

Image Sensing Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

Minnesota

 

41-1519168

State or Other Jurisdiction of

Incorporation or Organization

 

I.R.S. Employer Identification No.

 

 

 

Spruce Tree Centre, Suite 400

 

 

1600 University Avenue West

 

 

St. Paul, MN

 

55104

Address of Principal Executive Offices

 

Zip Code

 

(651) 603-7700

Registrant’s Telephone Number, Including Area Code

 

Not Applicable

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report


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

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueISNSThe Nasdaq Capital Market
Preferred Stock Purchase RightsISNSThe Nasdaq Capital Market

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 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 x 

Smaller reporting company x
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.    ¨


1



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

 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at April 30, 2021

Common Stock, $0.01 par value per share

 

5,354,337 shares


2


 

IMAGE SENSING SYSTEMS, INC.

TABLE OF CONTENTS 

 

3


 

 

Image Sensing Systems, Inc.

(in thousands)



March 31,

2021

 

December 31,



(Unaudited)

 

2020

ASSETS









Current assets:









Cash and cash equivalents


$

8,212

 


$

8,605

 

Accounts receivable, net of allowance for doubtful accounts of $5 and $2 respectively 



2,850

 



2,261

 

Inventories



829

 



770

 

Prepaid expenses and other current assets



434

 



480

 

Total current assets


12,325

 



12,116

 





 





Property and equipment:




 





Furniture and fixtures



    154

 



154

 

Leasehold improvements



  6




6

 

Equipment



1,222

 



1,215





   1,382

 



1,375


Accumulated depreciation



   1,114

 



1,072





268

 



303

 










Operating lease assets, net



82




136


Intangible assets, net 



3,097

 



3,161

 

Deferred income taxes



5,507




5,708

 

TOTAL ASSETS


$

21,279



$

21,424











LIABILITIES AND SHAREHOLDERS' EQUITY









Current liabilities:









Accounts payable


$

      301

 


$

547

 

Deferred revenue

38


37

Warranty



   130

 



141

 

Accrued compensation



     128

 



 148

 

Operating lease obligations

75


126


Short-term debt

0


349

Other current liabilities


 

124

 



124

 

Total current liabilities



796

 



 1,472











Operating lease obligations

6




8
Long-term debt

0


574

TOTAL LIABILITIES



802




 2,054

 





 




 

Shareholders' equity:









Preferred stock, $0.01 par value; 5,000,000 shares authorized, NaN issued or outstanding



0




0


Common stock, $0.01 par value; 20,000,000 shares authorized, 5,354,337 and 5,352,626


 




  

 issued and outstanding at March 31, 2021 and December 31, 2020, respectively



54

 



   54

 

Additional paid-in capital



 24,997




24,968


Accumulated other comprehensive loss



(203)



(150

)

Accumulated deficit



(4,371)



(5,502

)

Total shareholders' equity



20,477

 



19,370

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY


$

21,279



$

21,424


 









See accompanying notes to the condensed consolidated financial statements.                            


 


 



 

 

 

4


Image Sensing Systems, Inc.

(Unaudited)

(in thousands, except per share data)

 
Three-Month
Periods Ended
March 31,
 
2021
2020

Revenue:









Product sales


$1,163

$1,050

Royalties



1,816


2,109
 

2,979


3,159

Cost of revenue:









Product sales



613


531
  Royalties

93


92
 

706


623

Gross profit



2,273


2,536
 







Operating expenses:









 Selling, general and administrative



1,366


1,909

 Research and development



496


902
 

1,862


2,811

Income (loss) from operations



411


(275)
Other income, net

925


 0
Income (loss) from operations before income taxes

1,336


(275)
Income tax expense (benefit)

205


(164)

Net income (loss)


$1,131

$(111)

Net income (loss) per share:









Basic


$0.21

$(0.02)

Diluted


$0.21

$
(0.02)
 







Weighted average number of common shares outstanding:









Basic



5,322


5,267

Diluted



5,342


5,267

 









See accompanying notes to the condensed consolidated financial statements.








 

5


Image Sensing Systems, Inc.

(Unaudited)

(in thousands)

  



Three-Month Periods Ended

March 31,



2021
2020

Net income (loss)


$1,131

$(111)

Other comprehensive income (loss):









Foreign currency translation adjustment



(53)

(106)

Comprehensive income (loss)


$1,078
$(217)










See accompanying notes to the condensed consolidated financial statements.                         






 

6


Image Sensing Systems, Inc.

(Unaudited)

(in thousands)

 

 

Three-Month Periods Ended
March 31,

 

2021

 

2020

Operating activities:

 

 

 


 

 

 

Net income (loss)

$

1,131

 


$

(111

)




 




 

Adjustments to reconcile net income to net cash provided by operating activities:



 




 

Depreciation

 

40

 


 

50

 

Software amortization

 

187

 


 

174

 

Stock-based compensation

 

53

 


 

59

 

Deferred income tax expense
201


0
Forgiveness income from PPP Loan (Note L)
(931)

0

Changes in operating assets and liabilities:

 

 

 


 

 

 

Accounts receivable, net

 

(590

)


 

228

Inventories


(59

)


 

95

 

Prepaid expenses and other current assets

 

46


 

(108

)

Accounts payable

 

(242

)


 

186

Accrued expenses and other current liabilities

 

(22

)


 

(79

)

Net cash provided by (used for) operating activities

 

(186


 

494

 




 




 

Investing activities:

 

 

 


 

 

 

Capitalized software development costs

 

(123

)


 

(22

Purchases of property and equipment

 

(10

)


 

(75

Net cash used for investing activities 

 

(133

) 

 

(97

)

 

 

 

 


 

 

 

Financing activities:

 

 

 

 

 

 

 

         Stock for tax withholding

 

(24

) 

 

0

Net cash used for financing activities

 

(24

) 

 

0

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(50

)


 

(90

)

Change in cash and cash equivalents

 

(393

)


 

307

 

 

 

 


 

 

 

Cash and cash equivalents at beginning of period

 

8,605

 


 

5,118

 

Cash and cash equivalents at end of period

$

8,212

 


$

5,425

 




 




 




 




 

Non-Cash investing and financing activities:

 

 

 


 

 

 

Purchase of property and equipment in accounts payable

$

3

 


$

25

 









See accompanying notes to the condensed consolidated financial statements.

 

7



IMAGE SENSING SYSTEMS, INC.

(in thousands, except share data)


Three-Month Period Ended March 31, 2020

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total
 





















Balance, December 31, 20195,322,849

$53

$24,751

$(306)
$(6,565)
$17,933























Stock-based compensation  8,950





59








59
Comprehensive income (loss):





















Foreign currency translation adjustment








(106)




(106)
Net income (loss)










(111)

(111)
Balance, March 31, 20205,331,799

$53

$24,810

$(412)
$(6,676)
$17,775
























Three-Month Period Ended March 31, 2021

 

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total
























Balance, December 31, 20205,352,626

$54

$24,968

$(150)
$(5,502)
$19,370























Stock-based compensation7,035





53








53
Stock for tax withholding(5,324)




(24)







(24)
Comprehensive income:





















Foreign currency translation adjustment








(53)




(53)
Net income 











1,131

1,131
Balance, March 31, 20215,354,337

$54

$24,997

$(203)
$(4,371)
$20,477























See accompanying notes to the condensed consolidated financial statements 

8


IMAGE SENSING SYSTEMS, INC.

(Unaudited) 

March 31, 2021

 

Note A: Basis of Presentation

 

Image Sensing Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as "we," "us," "our" and the "Company") develops and markets video and radar processing products for use in applications such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. We sell our products primarily to distributors and also receive royalties under a license agreement with a manufacturer/distributor for certain of our products. Our products are used primarily by governmental entities.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q, which require the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals considered necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated.

 

Operating results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC.


Corporate Reorganization

On April 28, 2021, the Board of Directors of the Company approved proceeding with the implementation of a reorganization (the “Reorganization”) of the Company's corporate structure into a holding company structure. When implemented, the Company will become a wholly-owned subsidiary of a new holding company, Autoscope Technologies Corporation (“Autoscope”), which will replace the Company as the public company trading on the Nasdaq Stock Market. Outstanding shares of the Company will be automatically converted into shares of common stock of Autoscope. The holding company reorganization is not expected to result in a change in the directors, executive officers, management or business of the Company.


The Reorganization is intended to be a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders and, subject to obtaining required approvals or any other intervening developments, is expected to be completed in the second quarter of 2021. 


Cash Dividend

On April 28, 2021, the Board of Directors of the Company approved a cash dividend of $0.12 per share to shareholders of record on the close of business on May 10, 2021, which is payable to shareholders on May 20, 2021.

 

Summary of Significant Accounting Policies

The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position and may require the application of a higher level of judgment by the Company's management and, as a result, are subject to an inherent degree of uncertainty.

 

Revenue Recognition  

We recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.


We determine revenue recognition through the following steps:
Identification of a contract, or contracts, with a customer;
Identification of performance obligations in the contract;

Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.

 

9


 

Revenue disaggregated by revenue source for the three months ended March 31, 2021 and 2020 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

 



Three Months Ended March 31,



2021
2020
Product sales
$1,163
$1,050
Royalties

1,816

2,109
Total revenue
$2,979
$3,159

 

Product Sales:

Product revenue is generated primarily from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the amount we expect to receive in exchange for those goods or services.

 

Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple performance obligations may include hardware, software, installation services, training, support, and extended warranties.  In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. For performance obligations without observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.

 

Revenue for services such as maintenance, repair, and technical support is recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. From time to time, our payment terms may vary by the type and location of our customer and the products or services offered. Revenue for extended warranties are deferred until the coverage period and then recognized ratably over the extended warranty term.

 

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

 

We record provisions against sales revenue for estimated returns and allowances in the period when the related revenue is recorded based on historical sales returns and changes in end user demand.

 

Royalties:

Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean.  The royalty of approximately 50% of the gross profit on licensed products is recognized when the products are shipped or delivered by Econolite to its customers.

 

Practical Expedients and Exemptions:


We generally expense sales commissions when incurred because the amortization periods would have been one year or less.  These costs are recorded within sales and marketing expense.

 

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

10


Inventories

Inventories are primarily electronic components and finished goods and are valued at the lower of cost or net realizable value determined under the first-in, first-out accounting method.

 

Income Taxes

We record a tax provision for the anticipated tax consequences of our reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.

 

Intangible Assets

We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.

Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value have been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately $123,000 and  $22,000 of software development costs during the quarters ended March 31, 2021 and 2020, respectively.

Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows and reviewed for impairment. At both March 31, 2021 and 2020, we determined there was 0 impairment of intangible assets. At both March 31, 2021 and 2020, there were 0 indefinite-lived intangible assets.

 

11


Note B: Recent Accounting Pronouncements 

 

Accounting pronouncements recently adopted

 

In August 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-13, "Fair Value Measurements (Topic 820)." ASU 2018-13 eliminates, amends and adds disclosure requirements for fair value measurements. ASU 2018-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2020. We adopted these changes as of January 1, 2020; however, there are no required changes that apply to our fair value measurements disclosures. 

 

Note C: Fair Value Measurements

 

The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell 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 at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:


Level 1:

observable inputs such as quoted prices in active markets;


Level 2:

inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and


Level 3: 

unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.


Financial Instruments not Measured at Fair Value

Certain of our financial instruments are not measured at fair value and are recorded at carrying amounts approximating fair value, based on their short-term nature or variable interest rate. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and other current financial assets and liabilities.

 

12


Note D: Inventories

 

Inventories consisted of the following (in thousands):


 March 31, 2021 
 December 31, 2020 

Finished goods

$736
$661
Components 93
 109

Total

 $ 829
 $ 770

Note E: Operating Leases


The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through November 2022. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

  

Most of these leases include an option to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use ("ROU") assets and lease liabilities because they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.

 

Because most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.

 

The cost components of our operating leases were as follows (in thousands):  

 



Three-Month

Periods Ended March 31,



2021
2020
Operating lease costs
$55
$66
Variable lease cost

43

76
Total
$98
$142

Variable lease costs consist primarily of property taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment, which are paid based on actual costs incurred by the lessor.

 

13



Maturities for our lease liabilities for all operating leases are as follows (in thousands) as of March 31, 2021:



Total
2021$74
2022
8
2023 and thereafter
0
Total lease payments
82
Less: Interest
(1)
Present value of lease liabilities$81


The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2021:

 


March 31, 2021
Remaining lease term and discount rate:

Weighted average remaining lease term (years)0.59
Weighted average discount rate4.75%


Cash paid for amounts included in the measurement of operating lease liabilities was $55,000 and $67,000 for the three months ended March 31, 2021 and 2020, respectively, and these amounts are included in operating activities in the condensed consolidated statements of cash flows. There were no operating lease assets obtained in exchange for new operating lease liabilities for the three months ended March 31, 2021 and 2020.


14



Note F: Intangible Assets

 

Intangible assets consisted of the following (dollars in thousands):            

 

 

March 31, 2021

 

 

 








 



Weighted

 

 

Gross


 




Net


Average

 

 

Carrying


Accumulated


Carrying


Useful Life

 

 

 Amount


 Amortization


 Value


(in Years)

 

Wrong Way development costs

$

228



$

(228)


$

0



 

Vision development costs


3,052




(1,645)


 

1,407



8.0

 

Echo development costs   


1,852




(308)


 

1,544



7.0

 

IntellitraffiQ development costs

 

468

  

 

(322)

 

 

146

  

4.0

 

Total

$

5,600



$

(2,503)


$

3,097



7.0

 

 

 

December 31, 2020

 


 





 



 



Weighted

 

 

Gross






Net


Average

 

 

Carrying


Accumulated


Carrying


Useful Life

 

 

 Amount


 Amortization


 Value


(in Years)

 

Wrong Way development costs

$

228



$

(228

)


$

0

 


 

Vision development costs         


2,929




(1,553

)



1,376

 


8.0

 

Echo development costs           

 

1,852

  

 

(242

) 

 

1,610

 

 

7.0

 

IntellitraffiQ development costs
468


(293)

175

4.0

Total

$

5,477



$

(2,316

)


$

3,161

 


7.3

 

 

Note G: Warranties 

 

We generally provide a two to three year warranty on product sales. Reserves to honor warranty claims are estimated and recorded at the time of sale based on historical claim information and are analyzed and adjusted periodically based on actual claim trends.

 

Warranty liability and related activity consisted of the following (in thousands):

 

 

Three-Month Periods Ended
March 31,

 

2021


2020

 

 

 



 

 

 

Beginning balance

$

141



$

313

 

Warranty provisions

 

12



 

  7

 

Warranty claims


(7

)


 

(23

)

Adjustments to preexisting warranties


(13

)


 

(75

Currency


(3

)


 

(2

)

Ending balance

$

130



$

220

 

 

15



Note H: Stock-Based Compensation

 

We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), which was approved by our shareholders and is administered under the supervision of our Board of Directors. Stock option awards are granted at exercise prices equal to the closing price of our stock on the day before the date of grant. Generally, options vest ratably over periods of three to five years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of nine to 10 years.

 

Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period. Stock-based compensation expense included in general and administrative expense for the three-month periods ended March 31, 2021 and 2020 was $53,000 and $59,000, respectively. At March 31, 2021, 148,024 shares were available for grant under the Company's 2014 Plan.

 

Stock Options

 

A summary of the stock option activity for the first three months of 2021 is as follows:

 

  

Number of

Shares

 Weighted
Average
Exercise
Price per
Share
 Weighted
Average
Remaining
Contractual
Term (in years)
 Aggregate
Intrinsic
Value
Options outstanding at December 31, 2020
  15,000  $4.76   2.94  $2,700 
Granted
  0  $0     $0 
Exercised
  0 $0     $0 
Expired
  0$0     $0 
Forfeited
  (1,000)
$4.22     $320 




 


         
Options outstanding at March 31, 2021  14,000 
$4.80
  2.66
 $2,611
Options exercisable at March 31, 2021  14,000  $4.80   2.66
 $2,611 

 

16



There were 0 stock options exercised or expired and options to purchase 1,000 shares were forfeited during the three-month period ended March 31, 2021, and there were 0 options exercised, expired, or forfeited during the three-month period ended March 31, 2020. During each of the three-month periods ended March 31, 2021 and 2020, we recognized 0 stock-based compensation expense related to stock options. As of March 31, 2021, there was 0 unrecognized compensation cost related to non-vested stock options.

 

Restricted Stock Awards and Stock Awards

 

Restricted stock awards are granted under the 2014 Plan at the discretion of the Compensation Committee of our Board of Directors. We issue restricted stock awards to executive officers and key consultants. These awards may contain certain performance conditions or time-based vesting criteria. The restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant date through the end of the vesting period. At the time of vesting of the restricted stock awards, the recipients of common stock may request to receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the relevant jurisdiction's maximum statutory rate. Compensation expense related to any stock awards issued to employees is determined on the grant date based on the publicly-quoted fair market value of our common stock and is charged to earnings on the grant date. 

 

We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance. 

 

The following table summarizes restricted stock award activity for the first three months of 2021:

 


 

Number of
Shares

 

 

Weighted
Average
Grant Date
Fair Value

Awards outstanding December 31, 2020

 

33,330



$

4.52

 

Granted

 

7,035




4.44

 

Vested

 

(21,555

)



4.20

 

Forfeited

 

0




0

 

Awards outstanding at March 31, 2021

 

18,810



$

4.86

 

 

As of March 31, 2021, the total stock-based compensation expense related to non-vested awards not yet recognized was $59,000, which is expected to be recognized over a weighted average period of 0.98 years. During the three-month periods ended March 31, 2021 and March 31, 2020, we recognized $53,000 and $59,000, respectively, of stock-based compensation expense related to restricted stock awards.

 

Note I: Income (loss) per Common Share

 

Net income (loss) per share is computed by dividing net income (loss) by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income (loss) per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding because the exercise of those options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding. As a result, stock options and restricted stock awards to acquire 5,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended March 31, 2021 and 2020.

 

17


 

A reconciliation of net income per share is as follows (in thousands, except per share data): 

 

 

Three-Month 

Periods Ended

March 31,

 
2021
2020
 







Numerator:








Net income (loss)

$1,131

$(111)
Denominator:








Weighted average common shares outstanding


5,322


5,267
Dilutive potential common shares


20


0
Shares used in diluted net income (loss) per common share calculations


5,342


5,267
Basic net income (loss) per common share

$0.21

$(0.02)
Diluted net income (loss) per common share

$0.21

$(0.02)

 

Note J: Segment Information

 

The Company's Chief Executive Officer and management regularly review financial information for the Company's discrete operating segments. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating segments have been aggregated for financial statement purposes and categorized into 2 reportable segments:  Intersection and Highway.

 

Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. RTMS is our radar product line, and revenue consists of international and North American product sales. Radar products are normally sold in the Highway segment. All segment revenues are derived from external customers.   

 

Operating expenses and total assets are not allocated to the segments for internal reporting purposes. Due to the changes in how we manage our business, we may reevaluate our segment definitions in the future.   

 

The following table sets forth selected unaudited financial information for each of our reportable segments (in thousands):

 



Three Months Ended March 31,


Intersection
Highway
Total


2021
2020
2021
2020
2021
2020



















Revenue 

$1,892
$2,250
$1,087
$909
$2,979
$3,159
Gross profit

1,724

2,069

549

467

2,273

2,536
Amortization of intangible assets

92

92

95

82

187

174
Intangible assets

1,407

1,651

1,690

2,071

3,097

3,722

 

18


Note K: Restructuring and Exit Activities


In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) in China; Image Sensing Systems Europe Limited (ISS Europe) in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O (ISS Poland) in Poland; and Image Sensing Systems Germany, GmbH (ISS Germany) in Germany. At December 31, 2018, Image Sensing Systems Europe Limited and Image Sensing Systems Europe Limited SP.Z.O.O were fully closed. At December 31, 2019, Image Sensing Systems Germany, GmbH was fully closed. During 2020, we initiated the closure of Image Sensing Systems EMEA Limited (ISS UK) and Image Sensing Systems Holdings Limited (ISS Holdings). At March 31, 2021, Image Sensing Systems (Shenzhen) Limited was fully closed. We incurred $16,000 and $30,000 for these entities' closure costs in the three-month periods ended March 31, 2021 and March 31, 2020, respectively.

 

Note L: Commitments and Contingencies

 

Debt


Under the Paycheck Protection Program ("PPP"), the United States Small Business Administration ("SBA") approved the Company's application to receive a loan in the amount of $923,700 (the "PPP Loan").  The PPP was established under the congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.  The PPP Loan to the Company was made through BMO Harris Bank N.A. (the "Lender"). On April 21, 2020, the Company's Board of Directors approved the PPP Loan, and the Company signed the promissory note (the "Note") evidencing the PPP Loan, which was dated as of April 17, 2020.  The Lender distributed the $923,700 of proceeds of the PPP Loan to the Company on April 22, 2020.

 

The term of the PPP loan was 24 months after the date of the Note (the "Maturity Date").  The annual interest rate on the PPP Loan was 1.00%.  No payments of principal or interest were due during the six months beginning on the date of the Note (the "Deferred Period").  The Company's obligations under the Note were not secured by a security interest in the Company's assets.  The Note required the Lender's consent if the Company wanted to reorganize, merge, consolidate, or otherwise change its ownership or structure.  The Note contained customary events of default by the Company relating to, among other things, payment defaults and the breach of representations and warranties or other provisions of the Note.  Upon a default by the Company under the Note, the Lender could have accelerated the Company's obligations under the Note and pursued its rights against the Company under applicable law, including by filing suit and obtaining a judgment against the Company.

 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans made under the PPP after 24 weeks if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. On February 2, 2021, the Company was notified by the Lender that the Lender had received payment in full of the PPP Loan from the United States government, and the Company's PPP Loan had been forgiven.  The Company recognized the amount of the loan and accrued interest forgiven totaling approximately $931,000 as other non-operating income in the first quarter of 2021.  

 

The foregoing description of the Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Note filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2020 and incorporated herein by reference.


19



Litigation

 

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with GAAP, we record a liability in our Consolidated Financial Statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to any currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our results of operations, financial position or cash flows. We expense legal costs as incurred.

 

Note M: Risks and Uncertainties

   

In December 2019, the outbreak of a novel strain of coronavirus, called COVID-19, originated in Wuhan, China, and has since spread worldwide, including to the U.S. To date, the COVID-19 pandemic has caused widespread disruptions to the U.S. and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the U.S., have reacted by instituting quarantines, restrictions on travel, and mandatory closures of businesses. Certain states and cities, including where we or the third parties with whom we engage operate, have also reacted by instituting quarantines, restrictions on travel, “stay at home” rules, restrictions on types of business that may continue to operate, and restrictions on the types of construction projects that may be undertaken.

The extent to which the COVID-19 pandemic impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with any confidence, including the scope, severity and duration of the pandemic; the actions taken to contain the pandemic or mitigate its impact, including the adoption, effectiveness, and availability of COVID-19 vaccines; the effect of any relaxation of current restrictions in the community and regions in which we, our customers and end users do business; and the direct and indirect economic effects of the pandemic and containment measures, among others. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic has affected, and may continue to adversely affect, our business, financial condition and results of operations, and it has had, and probably will continue to have, the effect of exacerbating many of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2020 including, but not limited to, the following:

  • We currently rely on third parties to, among other things, manufacture, supply and market our products and supply other goods and services to run our business. If any such third party is adversely impacted by restrictions resulting from the COVID-19 pandemic, including staffing shortages, production slowdowns, the closure of facilities, and disruptions in delivery systems, our supply chain may be disrupted, which could limit our ability to manufacture our products and conduct research and development.
  • We have established a work-from-home policy for all employees, other than those who are performing or supporting business-critical operations or other essential activities. Our increased reliance on personnel working from home may negatively impact productivity or disrupt, delay or otherwise adversely impact our business. In addition, this could increase our cyber security risks, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with governmental authorities, third party manufacturers and manufacturing sites, customers and end users, and other important agencies and third parties.
  • The trading prices for our common stock have been highly volatile as a result of the COVID-19 pandemic. As a result, we may face difficulties raising capital through any sales of our common stock, or such sales may be on unfavorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the COVID-19 pandemic could materially and adversely affect our business and the value of our common stock.

 

20


Overview

GeneralWe are a leading provider of above-ground detection products and solutions for the intelligent transportation systems (“ITS”) industry. Our family of products, which we market as Autoscope® video or video products (“Autoscope”), RTMS® radar or radar products (“RTMS”), and IntellitraffiQ® or iQ products, provides end users with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals from sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our products provide end users with complete solutions for the intersection and transportation markets.

Our technology is a process in which software, rather than humans, examines outputs from various types of sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and highways quickly enough to accommodate the increasing congestion levels. On average, United States commuters lose 99 hours a year in congestion, which costs motorists $88 billion a year in time, an average of $1,377 per driver (per INRIX 2019 Global Traffic scorecard).  We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.

We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install with lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our solutions well suited for use in ITS markets.

We believe the strength of our distribution channels positions us to increase the penetration of our technology‑driven solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the Caribbean through exclusive agreements with Econolite Control Products, Inc. (“Econolite”), which we believe is the leading distributor of ITS intersection control products in these markets.

We market the RTMS radar systems to a network of distributors globally.  On a limited basis, we may sell directly to the end user.  We market our Autoscope video products outside the United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels through our office in Spain.  Our end users primarily include governmental agencies and municipalities.

The following discussion of period-to-period changes and trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation discussed above. 

 

Trends and Challenges in Our Business

We believe the expected growth in our business can be attributed primarily to the following global trends:

  • worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of road infrastructure and the need to automate safety, security and access applications for automobiles and trucks, which has increased demand for our products;
  • advances in information technology, which have made our products easier to market, implement and integrate;
  • the continued funding allocations for centralized traffic management services and automated enforcement schemes, which have increased the ability of our primary end users to implement our products; and 
  • general increases in the cost effectiveness of electronics, which make our products more affordable for end users.

We believe our continued growth primarily depends upon:

  • continued adoption and governmental funding of ITS and other automated applications for traffic control, safety and enforcement in developed countries;
  • a propensity by traffic engineers to implement lower cost technology-based solutions rather than civil engineering solutions such as widening roadways;
  • countries in the developing world adopting above-ground detection technology, such as video or radar, instead of in-pavement loop technology to manage traffic; and 
  • our ability to develop new products that provide increasingly accurate information and enhance the end users' ability to cost-effectively manage traffic and environmental issues.
21


Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchasing decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue among periods. The ongoing economic environment in Europe and the United States and the COVID-19 pandemic declared in March 2020 are further adding to the unpredictability of purchasing decisions, creating more delays than usual and decreasing governmental budgets, and they are likely to continue to affect our revenue.

Key Financial Terms and Metrics

Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope video systems in the United States, Mexico, Canada and the Caribbean and (2) revenue received from the direct sales of our RTMS radar systems and our Autoscope video systems in Europe and Asia. Autoscope video royalties are calculated using a profit sharing model in which the gross profits on sales of product made through Econolite are shared equally with Econolite. This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is exclusive under the long-term Manufacturing, Distributing and Technology Agreement dated as of June 11, 1991, as amended (the “Econolite Agreement”), between the Company and Econolite.

Cost of Revenue. Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to manufacture hardware products, whose costs are influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, and inventory obsolescence. The key metric that we follow is achieving certain gross margin percentages on product sales by operating segment.

Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support; (2) general and administrative; and (3) research and development. Selling, marketing and product support expenses consist of various costs related to sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; second-tier technical support for Econolite; and general product support, where applicable. General and administrative expenses consist of certain corporate and administrative functions that support the development and sales of our products and provide an infrastructure to support future growth. These expenses include management, supervisory and staff salaries and benefits; legal and auditing fees; travel; rent; and costs associated with being a public company, such as board of director fees, listing fees and annual reporting expenses. Research and development expenses consist mainly of salaries and benefits for our engineers and third party costs for consulting and prototyping. We measure all operating expenses against our annually approved budget, which is developed with achieving a certain operating margin as a key focus. We also include any restructuring costs in operating expenses.

22


Non-GAAP Operating Measures. We provide certain non-GAAP financial information as supplemental information to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles in the United States). This non-GAAP information excludes the impact of depreciating fixed assets and amortizing intangible assets, and it may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.

Reconciliations of GAAP income from operations to non-GAAP income from operations are as follows (in thousands):  



Three-Month Period Ended

March 31,

 
2021
2020
 







Income (loss) from operations


$411

$(275)

Adjustments to reconcile to non-GAAP income









Amortization of intangible assets



187


174

Depreciation



40


50

Non-GAAP income (loss) from operations


$638

$(51)

 

Seasonality. Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our business. Our first quarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North America, Europe and northern Asia. We expect such seasonality to continue for the foreseeable future. Additionally, our international revenues regularly contain individually significant sales. This can result in significant variations of revenue between periods. Accordingly, we believe that quarter-to-quarter comparisons of our financial results should not be relied upon as an indication of our future performance. No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in the future. 

SegmentsWe currently operate in two reportable segments: Intersection and Highway. Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. RTMS and IntellitraffiQ are our radar product lines, and revenue consists of sales to external customers. Radar products are normally sold in the Highway segment. As a result of business model changes and modifications in how we manage our business, we may reevaluate our segment definitions in the future.

The following table sets forth selected unaudited financial information for each of our reportable segments (in thousands):   



Three Months Ended March 31,


Intersection
Highway
Total


2021
2020
2021
2020
2021
2020



















Revenue
$1,892
$2,250
$1,087
$909
$2,979
$3,159
Gross profit

1,724

2,069

549

467

2,273

2,536
Amortization of intangible assets

92

92

95

82

187

174
Intangible assets

1,407

1,651

1,690

2,071

3,097

3,722


23


 

Results of Operations  

The following table sets forth, for the periods indicated, certain statements of operations data as a percent of total revenue and gross profit on product sales and royalties as a percentage of product sales and royalties, respectively.

 Three-Month Periods Ended
March 31,


2021

2020

Product sales39.0%
33.2%
Royalties61.0

66.8

Total revenue100.0

100.0

Gross profit - product sales47.3

49.4

Gross profit - royalties94.9

95.6

Selling, general and administrative45.9

60.4

Research and development16.6

28.6

Income (loss) from operations13.8

(8.7)
Other income, net31.1



Income tax expense (benefit)6.9

(5.2)
Net income (loss)38.0

(3.5)

Total revenue decreased to $3.0 million in the first three months of 2021, from $3.2 million in the same period in 2020, a decrease of 5.7%. Royalty income decreased to $1.8 million in the first three months of 2021 from $2.1 million in the first three months of 2020, a decrease of 13.9%. Product sales increased to $1.2 million in the first three months of 2021 from $1.1 million in the first three months of 2020, an increase of 10.8%. 

Revenue for the Intersection segment decreased to $1.9 million in the first three months of 2021 from $2.3 million in the first three months of 2020, a decrease of 15.9%.  Revenue for the Highway segment increased to $1.1 million in the first three months of 2021 from $0.9 million in the first three months of 2020, an increase of 19.6%

Gross margin percent for product sales decreased to 47.3% in the first three months of 2021 from 49.4% in the first three months of 2020. Product sales gross profit increased $31,000, or 6.0%, in the three months ended March 31, 2021 compared to the prior year period. The decrease in product gross margin percent was primarily the result of a reduction in the warranty reserve in the first quarter of 2020.

Gross margin percent for royalty sales for the three months ended March 31, 2021 decreased to 94.9% from 95.6% in the same period in 2020. Gross profit from royalties decreased $294,000, or 14.6%, in the first quarter of 2021 compared to the prior year period. The decrease in royalty gross margin percent was due to lower royalty revenues while software amortization expense remained substantially the same.

Selling, general and administrative expense was $1.4 million, or 45.9% of total revenue, in the first three months of 2021 compared to $1.9 million, or 60.4% of total revenue, in the first three months of 2020. A portion of the expense in the first three months of 2020 consisted of expenses for legal and outside consulting costs related to the efforts around exploring strategic alternatives to maximize shareholder value that we announced in January 2020.  In light of current market conditions, including the effects of the COVID-19 pandemic, the strategic review process has been terminated. 

Research and development expense decreased to $496,000, or 16.6% of total revenue, in the three-month period ended March 31, 2021, from $902,000, or 28.6% of total revenue, in the three-month period ended March 31, 2020. The decrease was due to higher capitalized software development costs in the three-month period ended March 31, 2021 of $123,000 compared to capitalized software costs of $22,000 for the same period in 2020.  After normalizing for software development costs, overall research and development expenditures decreased in the three-month period ended March 31, 2021 compared to the same period in the prior year due to lower headcount. 

The Company recognized other income of $931,000 for the forgiveness of the Paycheck Protection Program loan and accrued interest during the first quarter.

There was $205,000 of income tax expense and $164,000 of income tax benefit recorded in the three-months ended March 31, 2021 and 2020, respectively.   

Consolidated net income was $1.1 million, or $0.21 per basic and diluted share, in the three-month period ended March 31, 2021 compared to a net loss of $(111,000), or $(0.02) per basic and diluted share, in the comparable prior year period. 

24


Liquidity and Capital Resources

 

At March 31, 2021, we had $8.2 million in cash and cash equivalents compared to $8.6 million in cash and cash equivalents at December 31, 2020.

 

Net cash used for operating activities was $186,000 in the first three months of 2021 compared to net cash provided by operating activities of $494,000 in the same period in 2020. The decrease in net cash provided by operating activities in the first three months of 2021 compared to the prior year period is primarily attributed to an increase in accounts receivable and a decrease in accounts payable.


Net cash used for investing activities was $133,000 for the first three months of 2021 compared to net cash used for investing activities of $97,000 in the same period in 2020. The increase of the amount of net cash used for investing activities in the first three months of 2021 compared to the prior year period was primarily the result of higher capitalized internal software development costs compared to the prior year period.


Net cash used for financing activities was $24,000 in the first three months of 2021 compared to $0 in the same period in 2020, due to shares withheld for taxes on the vesting of restricted stock units. 

 

We believe that cash and cash equivalents on hand at March 31, 2021 and cash provided by operating activities will satisfy our projected working capital needs, investing activities, and other cash requirements for at least one year from the date of these financial statements.

 

Off-Balance Sheet Arrangements

We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity, including special purpose and similar entities, or other off-balance sheet arrangements.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2021 are set forth elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction with those described in our Annual Report on Form 10-K and the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.


25


Cautionary Statement:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events and can be identified by the use of forward-looking words such as "expects," "believes," "may," "will," "should," "intends," "plans," "estimates," or "anticipates" or other comparable terminology. Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results described in the forward-looking statements. Factors that might cause such differences include, but are not limited to:

  • our historical dependence on a single product for most of our revenue;
  • budget constraints by governmental entities that purchase our products, including constraints caused by declining tax revenue;
  • the continuing ability of Econolite to pay royalties owed;
  • the mix of and margin on the products we sell;
  • our dependence on third parties for manufacturing and marketing our products;
  • our dependence on single-source suppliers to meet manufacturing needs;
  • our failure to secure adequate protection for our intellectual property rights;
  • our inability to develop new applications and product enhancements;
  • the potential disruptive effect on the markets we serve of new and emerging technologies and applications, including vehicle-to-vehicle communications and autonomous vehicles;
  • unanticipated delays, costs and expenses inherent in the development and marketing of new products;
  • our inability to respond to low-cost local competitors;
  • our inability to properly manage any growth in revenue and/or production requirements;
  • the influence over our voting stock by affiliates;
  • our inability to hire and retain key scientific and technical personnel;
  • the effects of legal matters in which we may become involved;
  • our inability to achieve and maintain effective internal controls;
  • our inability to successfully integrate any acquisitions;
  • tariffs and other trade barriers;
  • political and economic instability, including continuing volatility in the economic and political environment of the European Union;
  • our inability to comply with international regulatory restrictions over hazardous substances and electronic waste; and
  • conditions beyond our control such as war, terrorist attacks, health epidemics (including the COVID-19 pandemic caused by the coronavirus) and economic recession.

We caution that the forward-looking statements made in this report or in other announcements made by us are further qualified by the risk factors set forth in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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Approximately 20% of our revenue has historically been derived from shipments to customers outside the United States, and a large portion of this revenue is denominated in currencies other than the U.S. dollar.  Our international subsidiaries have functional currencies other than our U.S. dollar reporting currency and, occasionally, transact business in currencies other than their functional currencies.  These non-functional currency transactions expose us to market risk on assets, liabilities and cash flows recognized on these transactions.

The strengthening of the U.S. dollar relative to foreign currencies decreases the value of foreign currency-denominated revenue and earnings when translated into U.S. dollars.  Conversely, a weakening of the U.S. dollar increases the value of foreign currency-denominated revenue and earnings.  A 10% adverse change in foreign currency rates could have a material effect on our results of operations or financial position.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2021, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter covered by this Quarterly Report on Form 10-Q, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

27


 

 

None.


Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended December 31 2020, filed on March 11, 2021. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of May 3, 2021, there had been no material changes to the disclosures made in the above-referenced Form 10-K.


None.

None.

None.

 

None.

 

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The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021:



 

Exhibit
Number

 

Description




3.1


Certificate of Designation amending the Articles of Incorporation of Image Sensing Systems, Inc. as filed with the Minnesota Secretary of State on June 6, 2013, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).




4.1


Third Amendment to Rights Agreement dated as of June 4, 2020, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 4, 2020 (File No. 0-26056).




4.2


Second Amendment to Rights Agreement dated as of March 12, 2018, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 12, 2018 (File No. 0-26056).




4.3


First Amendment to Rights Agreement dated as of August 23, 2016, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 23, 2016 (File No. 026056).




4.4


Rights Agreement dated as of June 6, 2013, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).




10.1


Promissory Note, between BMO Harris Bank N.A. and Image Sensing Systems, Inc., dated as of April 17, 2020, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 23, 2020 (File No. 0-26056).




10.2


Amendment XIV to Office Lease Agreement by and between Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc., dated as of June 17, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2020 (File No. 0-26056).



31.1


Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 

31.2


Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 

32.1


Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


  

32.2


Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 

101


The following financial information from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements (filed herewith). 

 

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In accordance with 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.

   


Image Sensing Systems, Inc.

   

Dated: May 3, 2021

By:

/s/ Chad A. Stelzig



Chad A. Stelzig



President and Chief Executive Officer



 (Principal Executive Officer)







Dated: May 3, 2021

By:

/s/ Frank G. Hallowell



Frank G. Hallowell



Chief Financial Officer

  

(Principal Financial Officer and Principal Accounting Officer)

 

30


 


 


Exhibit No.


Description


 


3.1
Certificate of Designation amending the Articles of Incorporation of Image Sensing Systems, Inc. as filed with the Minnesota Secretary of State on June 6, 2013, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).



4.1
Third Amendment to Rights Agreement dated as of June 4, 2020, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 4, 2020 (File No. 0-26056).



4.2
Second Amendment to Rights Agreement dated as of March 12, 2018, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 12, 2018 (File No. 0-26056).



4.3
First Amendment to Rights Agreement dated as of August 23, 2016, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 23, 2016 (File No. 026056).



4.4
Rights Agreement dated as of June 6, 2013, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).



10.1
Promissory Note, between BMO Harris Bank N.A. and Image Sensing Systems, Inc., dated as of April 17, 2020, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 23, 2020 (File No. 0-26056).



10.2
Amendment XIV to Office Lease Agreement by and between Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc., dated as of June 17, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2020 (File No. 0-26056).



31.1


Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 


31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 


32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 


32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 


101

 

The following financial information from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements (filed herewith). 


31