Annual Report 2015
To Our Shareholders:
To Our Shareholders:
We are encouraged by Image Sensing Systems’ performance
in 2015. We met, or exceeded, our internal expectations for
several of our key operating metrics, including operating expense
management and margin levels. We achieved these results while
we continued to invest in our future and enhance our product and
service offering. We believe that the steps we have taken in 2015
will help position the company for sustainable growth.
Last year we concentrated on profitability metrics such as
product gross margins as well as spending on sales, general and
administrative costs. Simultaneously, we continue to judiciously
invest in research and development to insure we are positioned for
the future. Since last year, our operating expenses, as compared
to revenue, improved approximately 28 percentage points and
our gross margin from continuing operations for the year was
77 percent, an increase of 200 basis points from the prior year.
We expect to continue to improve and align operations to meet
world-wide demand levels and for a more profitable future.
2015 - A Year of Transition and Focus
We remain focused on the future of our business and restoring
profitability levels, in 2015 we made the decision to sell our license
plate recognition (LPR) business to TagMaster AB. We decided
to shift our strategic direction on the Intelligent Transportation
Systems (ITS) market by investing in our Autoscope video and
RTMS radar products and solutions. We are concentrating on
leveraging these core competencies. We believe the ITS market
will continue to grow. As agencies accelerate transition from
in-ground technologies, we believe our products are the best
alternative.
With the sale of our LPR business, we gained a renewed energy for
our video and radar products and solutions. We believe that our
combination of technology solutions remain a key component to
providing cities the infrastructure needed to reduce congestion.
We remain dedicated to a number of key initiatives including the
development and quality of our products and partnerships.
This year we celebrate our 25th Anniversary of Autoscope video
detection. Over the last twenty-five years, Autoscope products
have been improving traffic information, systems performance
and cost efficiencies and ultimately, helping traffic managers
improve safety and mitigate traffic congestion. Autoscope has
continued to evolve over the years to meet the market demands.
This tradition of innovation continues today, as we develop our
next generation products and solutions. During 2015, we invested
$4.3 million in Autoscope video detection products and solutions
and anticipate new product announcements throughout the year.
In December, we introduced the latest in radar technology,
the RTMS Sx-300 HDCAM. The combination of the state of
the art Sx-300 and this new High Definition camera provides a
one of a kind, all in one radar sensor for superior detection on
roadways. The RTMS Sx-300 HDCAM allows the user the ability
to verify the zone setup across all lanes and facilitate real-time
visual traffic surveillance anywhere, anytime. This high definition
camera produces clear crisp images; and has dual streaming
video channels. The Sx-300 provides the best lane detection
capabilities available on the market and the accuracy needed to
help keep the daily commute free of congestion.
We continue to identify strategic partnerships around the world
to help increase our global footprint. We believe this strategy
will position us as the market leader. In North America, we have
added additional radar product line partners in the western region
of the country. In Europe, Middle East and Africa (EMEA) region,
we’ve worked diligently to identify new partners and nurture the
existing partnerships. We are continually reviewing our markets
and partnerships and look to improve our market synergy.
Looking Ahead
We believe that the steps we took in 2015 have set the stage
for enhanced performance in 2016. As we continue to position
Image Sensing Systems for sustained growth, we remain focused
on:
• Maintaining profitability and positive cash flow;
Investing in our new technology pipeline; and
•
• Creating the scale and leverage necessary to be
successful in any business environment.
Our company continues to build an industry-leading reputation.
As we look into 2016 and beyond, we are extremely excited
about the future for Image Sensing Systems. We have some
exciting new products that will be deployed throughout 2016.
We remain persistent on being market and customer-led and
have a renewed energy and momentum to achieve these goals.
We have gone back to our roots, the foundation on which our
company was founded.
I want to take this opportunity to thank our talented team of
associates and our loyal customers and strategic partners.
Together, we made enormous progress last year. We also want
to thank our shareholders for your continued support, as we take
this journey together. We look forward to updating you on our
progress.
Sincerely,
Dale Parker
Interim Chief Executive Officer
We have passionate employees dedicated to
developing innovative best in class products that will
position us for sustained growth.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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
(State or other jurisdiction of incorporation or organization)
500 Spruce Tree Centre, 1600 University Avenue West,
St. Paul, MN
(Address of principal executive offices)
41-1519168
(I.R.S. Employer Identification No.)
55104
(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 class
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
Name of each exchange on which registered
The NASDAQ Capital Market
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company.)
Accelerated filer ☐
Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $15,672,088 based on
the closing sale price as reported on The NASDAQ Capital Market. The number of shares outstanding of the registrant’s $0.01 par value common stock as of
February 29, 2016 was 5,028,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into Which Incorporated
Proxy Statement for the 2016 Annual Meeting of Shareholders (Proxy
Statement)
Part III
TABLE OF CONTENTS
PART I ........................................................................................................................................................................................................1
Item 1. Business .......................................................................................................................................................................... 1
Item 1A. Risk Factors .................................................................................................................................................................... 7
Item 1B. Unresolved Staff Comments ......................................................................................................................................... 16
Item 2. Properties ...................................................................................................................................................................... 16
Item 3. Legal Proceedings ........................................................................................................................................................ 16
Item 4. Mine Safety Disclosures ............................................................................................................................................... 16
PART II ....................................................................................................................................................................................................17
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .. 17
Item 6. Selected Financial Data ................................................................................................................................................ 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................................................... 26
Item 8. Financial Statements and Supplementary Data ............................................................................................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................... 46
Item 9A. Controls and Procedures ............................................................................................................................................... 46
Item 9B. Other Information ......................................................................................................................................................... 46
PART III ...................................................................................................................................................................................................47
Item 10. Directors, Executive Officers and Corporate Governance ........................................................................................... 47
Item 11. Executive Compensation .............................................................................................................................................. 47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................... 47
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................................. 47
Item 14. Principal Accountant Fees and Services ....................................................................................................................... 47
PART IV ...................................................................................................................................................................................................48
Item 15. Exhibits and Financial Statement Schedules ................................................................................................................ 48
Signatures .................................................................................................................................................................................................52
Exhibit Index ............................................................................................................................................................................................53
i
PART I
Item 1. Business
General
Image Sensing Systems, Inc. (referred to in this Annual Report on Form 10-K as “we,” “us,” “our” and the “Company”) develops and
markets video and radar processing products for use in traffic, security, police and parking applications such as intersection control,
highway, bridge and tunnel traffic management, venue security, entry control and traffic data collection.
We are a leading provider of software-based products and solutions for the intelligent transportation systems (“ITS”) industry. Our
family of products, which we market as Autoscope® video or video products (“AutoScope”), and RTMS® radar or radar products
(“RTMS”), provides end users with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals
from sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our computer
enabled detection (“CED”) software-based products provide end users with complete solutions for the intersection and transportation
markets.
Our technology is a process in which software rather than humans examines outputs from various types of sophisticated sensors to
determine what is happening in a field of view. In the ITS industry, this process is a critical component of managing congestion and
traffic flow. In many cities, it is not possible to build roads, bridges and highways quickly enough to accommodate the increasing
congestion levels. On average, United States commuters spend 42 hours a year stuck in traffic, and congestion costs motorists $160
billion a year. We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing and
new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the
occurrence of false detection, are generally easier to install with lower costs of ownership, work effectively in a multitude of light and
weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view
that the technical advantages of our products make our solutions well suited for use in ITS as well as adjacent security and parking
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 in North America, the Caribbean and Latin America. On a limited basis,
we sell directly to the end user in these geographic areas. We market our Autoscope video and RTMS radar products outside of the
United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels, including our
wholly-owned subsidiaries in the United Kingdom. Our end users primarily include governmental agencies and municipalities.
On July 9, 2015, the Company entered into a share and asset sales purchase agreement (the “SAPA”) with TagMaster AB (the
“Buyer”). Under the terms of the SAPA, the Company and Image Sensing Systems EMEA Limited, a wholly-owned subsidiary of the
Company (“ISS EMEA”), sold to the Buyer the entire issued share capital of Image Sensing Systems UK Limited, a wholly-owned
subsidiary of ISS EMEA, as well as certain other assets owned by the Company primarily used or primarily held for use in connection
with its license plate recognition (LPR) business. The Buyer also agreed to assume on the closing date certain agreements and liabilities
relating to the LPR business and the acquired assets. Additionally, the Company and the Buyer entered into a transitional services
agreement.
Industry Overview
The Intelligent Transportation Systems Market. ITS encompasses a broad range of information processing and control electronics
technologies that, when integrated into roadway infrastructure, help monitor and manage traffic flow, reduce congestion and enhance
driver safety. The ITS market has been built around the detection of conditions that impact the proper operation of roadway
infrastructure. ITS applications include a wide array of traffic management systems, such as traffic signal control, tolling and variable
messaging signs. ITS technologies include video vehicle detection, inductive loop detection, sensing technologies (such as radar),
floating cellular data, computational technologies and wireless communications.
In traffic management applications, vehicle detection products are used for automated vehicle detection and are a primary data source
upon which ITS solutions are built. Traditionally, automated vehicle detection is performed using inductive wire loops buried in the
1
pavement. However, in-pavement loop detectors are costly to install, difficult to maintain, expensive to repair and not capable of either
wide-area vehicle detection without installations of multiple loops or recognizing license plate numbers.
Above-ground detection solutions for ITS offer several advantages to in-pavement loop detectors. Above-ground detection solutions
tend to have a lower total cost of ownership than in-pavement loop detectors because above-ground solutions are non-destructive to road
surfaces, do not require closing roadways to install or repair, and are capable of wide-area vehicle detection with a single device, thus
enabling one input device to do the work of many in-pavement loops. Due to their location above-ground, these solutions have no
exposure to the wear and tear associated with expanding and contracting pavement and generally less exposure to the vibration and
compaction caused by traffic. Furthermore, in the event of malfunction or product failure, above-ground detection solutions can be
serviced and repaired without shutting down the roadway. Each of these factors results in greater up-time and increased reliability of
above-ground detection solutions compared to in-pavement loop detectors. These technology solutions also offer a broader set of
detection capabilities and a wider field of view than in-pavement loop detectors. In addition, a single unit video- or radar-based system
can detect and measure a variety of parameters, including vehicle presence, counts, speed, length, time occupancy, headway and flow
rate as well as environmental factors and obstructions to the roadway. An equivalent installation using loops would require many
installations per lane.
We believe our Autoscope video and RTMS radar products are competitive with and can take market share from in-pavement loop
detectors. Based on our determination, the U.S. ITS above-ground detection market sales in 2014 were approximately $107 million, and
the worldwide ITS above-ground detection market was approximately $215 million. We believe that we are the leader in the U.S.
above-ground detection market in terms of sales volume, and we estimate that U.S. sales of in-pavement loop detectors that our
Autoscope video and RTMS radar products can supplant were approximately $106 million in 2014.
We believe that several trends are driving the growth in ITS and adjacent market segments:
Proliferation of Traffic. In many countries, there has been a surge in the number of vehicles on roadways. Due to the growth of emerging
economies and elevated standards of living, more people desire and are able to afford automobiles. The number of vehicles utilizing the
world’s roadway infrastructure is growing at a quicker pace than new roads, bridges and highways are being constructed. The population
of the United States grew by about 30%, or 75 million, from 1990 to 2014, while highway miles have increased by approximately 8%
in the same period. Overall, the growth in roadway infrastructure is failing to match the surge in the number of vehicles using it. Above-
ground detection based traffic management and control systems address the problem by monitoring high traffic areas and analyzing data
that can be used to mitigate traffic problems.
The Demographics of Urbanization. Accelerated worldwide urbanization drives the creation and expansion of middle classes and
produces heightened demand for automobiles. Currently, there are at least 400 cities in the world with over 1 million people. Because
automobiles can be introduced to a metropolitan area faster than roadway infrastructure can be constructed, the result is continuously
worsening traffic. Expanding the roadway infrastructure is slow and costly to implement, and often environmentally undesirable, so
government agencies are increasingly turning to technology-based congestion solutions that optimize performance and throughput of
existing and new roadway infrastructure. Detection is the requisite common denominator for any technology-based solution.
The Melding of Large City Service Domains. Large cities require a wide range of service domains, including traffic. These cities are
increasingly turning to centralized management of these service domains, employing a command and control model that requires sharing
and integrating data across service domains to operate effectively and lower total cost. For example, data collected for the traffic
management service domain is relevant to all of the other service domains. This means that each sensor can supply information to
multiple domain services. In turn, the sharing of detection information across service domains should increase the level of sophistication
required to process and interpret that information. Additionally, above-ground detection products are more capable of performing certain
complicated tasks than humans. This makes the concepts of “rich sensing” and “instrumenting the city” through above-ground detection
solutions cost effective, which we believe will result in the extensive proliferation of sophisticated sensors and detection devices.
Solutions for Adjacent Markets. We believe that the adjacent markets of ITS, security/surveillance and parking management are
converging, and that this convergence will accelerate as above-ground detection systems become more cost-effective now that a single
sensor can be used for multiple purposes. Because the technologies involved are closely related, our sensor technology can be adapted
to or is already capable of addressing these adjacent markets.
Our Competitive Strengths
We are a leading provider of software-based detection products and solutions for the ITS industry. We have the following competitive
strengths that we expect will continue to enhance our leadership position:
Leading Proprietary Technologies. Over the last two decades, we have developed or acquired a proprietary portfolio of complex
software algorithms and applications that we have continuously enhanced and refined. These algorithms, which include our advanced
signal processing technologies, allow our video and radar products to capture and analyze objects in diverse weather and lighting
2
conditions and to balance the accuracy of positive detection and the avoidance of false detections. Due to the strength of our proprietary
technologies, we believe we command premium pricing. Above-ground detection technologies similar to ours are also difficult to
develop and refine in a commercially viable manner. We therefore should be well positioned to quickly introduce next-generation
products to market.
Proven Ability to Develop, Enhance and Market New Products. We are continually developing and enhancing our product offerings.
Over the last two decades, we have demonstrated our ability to lead the market with new products and product enhancements. For
example, the Autoscope Solo system was the first fully integrated color camera, zoom lens and machine vision processor in the above-
ground detection market. Our RTMS Radar business unit was one of the first to introduce radar-based technology solutions for ITS
applications, and we continue to lead the market with technology enhancements and new products, such as RTMS radar. Furthermore,
our radar product, RTMS Sx-300, is an example of development driven by the voice of our customers. We have developed a high
quality radar detection solution with increased reliability and longevity. We have successfully collaborated with our long-term channel
partners to market these products. We believe that developing, enhancing and marketing new products with our partners can translate
into strong organic revenue growth and high levels of profitability.
Leading Distribution Channel. Since 1991, we have maintained a relationship with Econolite, which has the exclusive right to
manufacture, market and distribute our Autoscope video products in the United States, Mexico, Canada and the Caribbean. We believe
that Econolite is the leading distributor of ITS control products in North America and the Caribbean. This relationship enhances our
ability to commercialize and market new products and allows us to focus more resources on developing advanced signal processing
software algorithms.
Broad Product Portfolio. Our product portfolio leverages our core software-based algorithms to enable end users to detect and monitor
objects in a designated field of view. We believe that our family of Autoscope video and RTMS radar products allows us to offer a broad
product portfolio that meets the needs of our end users. Additionally, our intention is to use our broad product portfolio to offer hybrid
products that satisfy traffic requirements.
Experienced Management Team and Engineering Staff. Our management team and engineering staff are highly experienced in the
ITS and software industries. Additionally, the continuity of our engineering staff should allow the uninterrupted development of new or
improved products.
Our Growth Strategy
As part of our growth strategy, we seek to:
Enhance and Extend Our Technology Leadership in ITS. We believe we have established ourselves as a leading provider of technology
in the ITS market segment. We believe that we continue to have an opportunity to accelerate our growth. We plan to do this by improving
the accuracy and functionality of our products and opportunistically expanding our product offering into adjacent markets, as well as
expanding our portfolio and channels through licensing. Having developed and introduced a hybrid product, we expect to take advantage
of our technical leadership in ITS and further differentiate us from our competitors.
Expand into Adjacent Markets. Our core skill is the implementation of software-based above-ground detection products and solutions.
Over the past two decades, we have been developing and refining our complex signal processing software algorithms. We should be
able to effectively utilize our core software skills more broadly as markets converge. We believe that a driver of this convergence is that
above-ground detection systems will become more cost-effective when a single sensor can be used for multiple purposes. As a result,
our objective is to become the leading supplier of critical detection components to third party management systems, particularly those
that exploit the convergence of traffic. To do this, we are integrating this concept into our long-range engineering development road-map
and will evaluate the use of technology licensing and channel strategies that support this vision.
Increase the Scope of Our Distribution and Direct Sales. We have made substantial investments in product adjustments to tailor our
solutions to the differing needs of our international end users and in new product acquisitions for both domestic and international
markets. We have also invested in sales and marketing expansion, with a focus on our European subsidiaries. Markets in Eastern Europe,
the Asia/Pacific region, the Middle East, Africa and South America, which have historically lagged North America and Western Europe
in their use of above-ground detection, have recently begun to increase the adoption of detection technology in their traffic systems. We
intend to continue to refine our product offerings through engineering development and technology licensing to take advantage of the
accelerated pace of the adoption of above-ground detection throughout the developing world.
Our Products and Solutions
Our vehicle and traffic detection products are critical components of many ITS applications. Our Autoscope video systems and RTMS
radar systems convert sensory input collected by video cameras and radar units into vehicle detection and traffic data used to operate,
monitor and improve the efficiency of roadway infrastructure. At the core of each product line are proprietary digital signal processing
3
algorithms and sophisticated embedded software that analyze sensory input and deliver actionable data to integrated applications. We
invested approximately $4.7 million, $4.9 million and $3.7 million on research and development in 2015, 2014 and 2013, respectively,
to develop and enhance our product technology. Our digital signal processing software algorithms represent a foundation on which
support for additional sensory inputs such as acoustic, chemical, smoke, weather and vibration sensors may be added in the future. A
diagram displaying our fundamental product architecture is shown below.
4
The Image Sensing Product Architecture
Autoscope Video. Our Autoscope video system processes video input from a traffic scene in real time and extracts the required traffic
data, including vehicle presence, bicycle presence/differentiation, counts, speed, length, time occupancy (percent of time the detection
zone is occupied), average headway (time interval between vehicles) and flow rate (vehicles per hour per lane). Autoscope supports a
variety of standard video cameras or can be purchased with an integrated video camera. For intersections, the system communicates
with the intersection signal controller, which changes the traffic lights based on the data provided. In highway applications, the system
gathers vehicle count and flow rates and detects anomalous incidents, such as stopped vehicles. In any application, the data may also be
transmitted to a traffic management center via the internet or other standard communication means and processed in real time to assist
in traffic management and stored for later analysis for traffic planning purposes.
The Autoscope system comes in two varieties. Autoscope Encore is our integrated unit with a color zoom camera and a machine vision
processing computer contained in a compact housing that is our leading offering in the North American market. Autoscope RackVision
is our card only machine vision processing computer that is located in an intersection signal controller, control hub, incident management
center or traffic management center that receives video from a separate camera. The RackVision and its variants are our top selling
Autoscope products in international markets. Autoscope products offer digital MPEG-4 video streaming, high speed Ethernet interface,
web browser maintenance and data and video over power line communications.
RTMS Radar. Our RTMS radar systems use radar to measure vehicle presence, volume, occupancy, speed and classification information
for roadway monitoring applications. Data is transmitted to a central computer at a traffic management center via standard
communication means, including wireless. Data can be processed in real time to assist in traffic management and stored for later analysis
for traffic planning purposes.
RTMS radar is an integrated radar transmitter/receiver and special purpose computer contained in a compact, self-contained unit. The
unit is typically situated on roadway poles and side-fired, making it especially well-suited for highway detection applications.
Distribution, Sales and Marketing
We market and sell our products globally. Together with our partners, we offer a combination of high-performance detection technology
and experienced local support. Our end users primarily consist of federal, state, city and county departments of transportation, port,
highway, tunnel and other transportation authorities, law enforcement agencies and parking facility operators. The decision-makers
within these entities typically are traffic planners and engineers, who in turn often rely on consulting firms that perform planning and
feasibility studies. Our products sometimes are sold directly to system integrators or other suppliers of systems and services who are
operating under subcontracts in connection with major road construction contracts.
Sales of Autoscope Video in the United States, Mexico, Canada and the Caribbean. We have granted Econolite an exclusive right to
manufacture, market and distribute the Autoscope video system in the United States, Mexico, Canada and the Caribbean. The agreement
with Econolite grants it a first refusal right that arises when we make a proposal to Econolite to extend the license to additional products
5
in the United States, Mexico, Canada and the Caribbean and a first negotiation right that arises when we make a proposal to Econolite
to include rights corresponding to Econolite’s rights under our current agreements in countries not in these territories. Econolite provides
the marketing and technical support needed for its sales in these territories. Econolite pays us a royalty on the revenue derived from its
sales of the Autoscope system. We cooperate in marketing Autoscope video products with Econolite for the United States, Mexico,
Canada and the Caribbean and provide second-tier technical support. We have the right to terminate our agreements with Econolite if it
does not meet minimum annual sales levels or if Econolite fails to make payments as required by the agreements. In 2008, the term of
the original agreement with Econolite, as amended, was extended to 2031. The agreements can be terminated by either party upon three
years’ notice.
Sales of RTMS Radar in North America, the Caribbean and Latin America. We market the RTMS radar systems to a network of
distributors covering countries in North America, the Caribbean and Latin America. On a limited basis, we sell directly to the end user.
We provide technical support to these distributors from our various North American locations.
Sales in Europe, Asia, the Middle East and Africa. We market our Autoscope video and RTMS radar product lines of products to a
network of distributors covering countries in Europe, the Middle East, Africa and Asia through our wholly-owned subsidiaries that have
offices in Europe. On a limited basis, we sell directly to the end user. Technical support to these distributors is provided by our
wholly-owned subsidiaries in Europe, with second-tier support provided by our engineering groups. From time to time, we may grant
exclusive rights to Econolite for markets outside of our significant markets for certain jurisdictions or product sales based on facts and
circumstances related to the opportunities.
Competition
We compete with companies that develop, manufacture and sell traffic management devices using video and radar sensing technologies
as well as other above-ground detection technologies based on laser, infrared and acoustic sensors. For ITS applications, we also compete
with providers of in-pavement loop detectors and estimate that more than 70% of the traffic management systems currently in use in the
U.S. use in-pavement loop detectors. For competition with other above-ground detection products, we typically compete on performance
and functionality, and to a lesser extent on price. When competing against providers of loop detectors, we compete principally on ease
of installation and the total cost of ownership over a multi-year period, and to a lesser extent on functionality.
Among the companies that provide direct competition to Autoscope video worldwide are FLIR Systems, Inc., Signal Group Inc.
(Semex), Iteris, Inc. and Citilog S.A. Among the companies that provide direct competition to RTMS radar worldwide are Wavetronix,
LLC, MS Sedco Inc., Smartmicro Sensors GmbH and Xtralis, LLC. To our knowledge, Autoscope video and RTMS radar have the
largest number of installations as compared to their direct competitors. In addition, there are smaller local companies providing direct
competition in specific markets throughout the world. We are aware that these and other companies will continue to develop technologies
for use in traffic management, security, police and parking applications. One or more of these technologies could in the future provide
increased competition for our systems.
Other potential competitors of which we are aware include Siemens AG, Cognex Corp., Augusta Technologie AG, Matsushita Electric
Industrial Co., Ltd. (Panasonic), Sumitomo Corporation and Omron Electronics LLC. These companies have machine vision or radar
capabilities and have substantially more financial, technological, marketing, personnel and research and development resources than we
have.
Manufacturing
Autoscope video products for sale under the Econolite license agreement are manufactured through agreements with Econolite and
Wireless Technology, Inc. Econolite is responsible for setting warranty terms and must provide all service required under this warranty.
In Europe and Asia, we engage contract manufacturers to manufacture the Autoscope family of products.
Until July 24, 2012, we engaged contract manufacturers to produce subassemblies for our radar products based on our designs. These
subassemblies were then shipped to our facilities in Toronto, where we performed final assembly, testing and calibration and packaging
of finished units for shipment. We also performed warranty and post-warranty repairs of radar units in Toronto. From July 24, 2012
until July 14, 2014, our RTMS radar products were sold by Econolite in the United States, Mexico, Canada and the Caribbean. RTMS
products sold under the Econolite license agreement were manufactured through agreements with Econolite and Wireless Technology,
Inc. During this period, Econolite was responsible for setting warranty terms and service. In conjunction with the transition of RTMS
sales to Econolite, we engaged Wireless Technology, Inc. to manufacture our radar products and perform warranty and post-warranty
repairs of our radar units sold outside of North America. Effective July 14, 2014, marketing, manufacturing and distribution of the
RTMS radar product line in the United States, Mexico, Canada and Caribbean transitioned from Econolite to the Company. As a result,
we engage Wireless Technology, Inc. to manufacture our radar products and perform warranty and post-warranty repairs for all radar
units sold.
We typically provide a two to five year warranty on our products.
6
Most of the hardware components used to manufacture our products are standard electronics components that are available from multiple
sources. Although some of the components used in our products are obtained from single-source suppliers, we believe other component
vendors are available should the necessity arise. The European Parliament has enacted a directive for the restriction of the use of certain
hazardous substances in electrical and electronic equipment (“RoHS”). To our knowledge, our contract manufacturing and component
vendors in Europe and Asia comply with the European directive on RoHS.
Intellectual Property
To protect our rights to our proprietary know-how, technology and other intellectual property, it is our policy to require all employees
and consultants to sign confidentiality agreements that prohibit the disclosure of confidential information to any third parties. These
agreements also require disclosure and assignment to us of any discoveries and inventions made by employees and consultants while
they are devoted to our business activities. We also rely on trade secret, copyright and trademark laws to protect our intellectual property.
We have also entered into exclusive and non-exclusive license and confidentiality agreements relating to our own and third-party
technologies. We aggressively protect our processes, products, and strategies as proprietary trade secrets. Our efforts to protect
intellectual property and avoid disputes over proprietary rights include ongoing review of third-party patents and patent applications.
Environmental Matters
We believe our operations are in compliance with all applicable environmental regulations within the jurisdictions in which we operate.
Employees
As of December 31, 2015, we had 69 employees, consisting of 60 employees in North America, eight employees in Europe and one
employee in Asia. None of our employees are represented by a union.
Item 1A. Risk Factors
Information Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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 “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 discussed in the forward-looking
statements. Some factors that might cause these differences include the factors listed below. Although we have attempted to list these
factors comprehensively, we wish to caution investors that other factors may prove to be important in the future and may affect our
operating results. New factors may emerge from time to time, and it is not possible to predict all of these factors, nor can we assess the
effect each factor or combination of factors may have on our business.
We further caution you not to unduly rely on any forward-looking statements because they reflect our views only as of the date the
statements were made. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
If governmental entities elect not to use our products due to budgetary constraints, project delays or other reasons, our revenue may
fluctuate severely or be substantially diminished.
Our products are sold primarily to governmental entities. We expect that we will continue to rely substantially on revenue and royalties
from sales of our systems to governmental entities. In addition to normal business risks, it often takes considerable time before
governmental initiated projects are developed to the point at which a purchase of our systems would be made, and a purchase of our
products also may be subject to a time-consuming approval process. Additionally, governmental budgets and plans may change without
warning. Other risks of selling to governmental entities include dependence on appropriations and administrative allocation of funds,
changes in governmental procurement legislation and regulations and other policies that may reflect political developments, significant
changes in contract scheduling, competitive bidding and qualification requirements, performance bond requirements, intense
competition for government business and termination of purchase decisions for the convenience of the governmental entity. Substantial
delays in purchase decisions by governmental entities, or governmental budgetary constraints, could cause our revenue and income to
drop substantially or to fluctuate significantly between fiscal periods.
7
A majority of our gross profit has been generated from sales of our Autoscope family of products, and if we do not maintain the
market for these products, our business will be harmed.
Historically, a majority of our gross profit has been generated from sales of, or royalties from the sales of, Autoscope products. Gross
profit from Autoscope sales accounted for approximately 78% of our gross profit in 2015, 76% in 2014 and 86% in 2013. We anticipate
that gross profit from the sale of Autoscope systems will continue to account for a substantial portion of our gross profit for the
foreseeable future. As such, any significant decline in sales of our Autoscope system would have a material adverse impact on our
business, financial condition and results of operations.
If Econolite’s sales volume decreases or if it fails to pay royalties to us in a timely manner or at all, our financial results will suffer.
We have agreements with Econolite under which Econolite is the exclusive distributor of the Autoscope video system in the United
States, Mexico, Canada and the Caribbean. From July 24, 2012 until July 14, 2014, our RTMS radar products were sold by Econolite
in these geographic areas under the same arrangement. Our current agreements grant Econolite a first refusal right that arises when we
make a proposal to Econolite to extend the license to additional products in the United States, Mexico, Canada and the Caribbean. In
addition, the agreements grant Econolite a first negotiation right that arises when we make a proposal to Econolite to include rights
corresponding to Econolite’s rights under our current agreements in countries not in these territories. In exchange for its rights under
the agreements, Econolite pays us royalties for sales of the Autoscope video system and, from July 24, 2012 until July 14, 2014, the
RTMS radar products. Since 2002, a substantial portion of our revenue has consisted of royalties resulting from sales made by Econolite,
including 56% in 2015, 57% in 2014 and 59% in 2013. Econolite’s account receivable represented 45% of our accounts receivable at
December 31, 2015 and 59% of our accounts receivable at December 31, 2014. We expect that Econolite will continue to account for a
significant portion of our revenue for the foreseeable future. Any decrease in Econolite’s sales volume could significantly reduce our
royalty revenue and adversely impact earnings. A failure by Econolite to make royalty payments to us in a timely manner or at all will
harm our financial condition. In addition, we believe sales of our products are a material part of Econolite’s business, and any significant
decrease in Econolite’s sales of the other products it sells could harm Econolite, which could have a material adverse effect on our
business and prospects.
As a result of our continuing review of our business, we may have to undertake further restructuring plans that would require
additional charges, including incurring facility exit and restructuring charges.
We continue to evaluate our business, which may result in restructuring activities. We may choose to divest certain business operations
based on management's assessment of their strategic value to our business, consolidate or close certain facilities or outsource certain
functions. Decisions to eliminate or limit certain business operations in the future could involve the expenditure of capital, consumption
of management resources, realization of losses, transition and wind-up expenses, reduction in workforce, impairment of assets, facility
consolidation and the elimination of revenues along with associated costs, any of which could cause our operating results to decline and
may fail to yield the expected benefits. For more information regarding our restructuring and divestiture activities in 2015 and 2014,
see the discussion in Note 2 and Note 13 of our Notes to Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K.
The features and functions in our products have not been as widely utilized as traditional products offered by our competitors, and
the failure of our end users to accept the features and functions in our products could adversely affect our business and growth
prospects.
Video and radar technologies have not been utilized in the traffic management industry as extensively as other more traditional
technologies, mainly in-pavement loop detectors. Our financial success and growth prospects depend on the continued development of
the market for advanced technology solutions for traffic detection and management and the acceptance of our current Autoscope video
and RTMS radar and also future systems we may develop as reliable, cost-effective alternatives to traditional vehicle detection systems.
We cannot assure you that we will be able to utilize our technology profitably in other products or markets. If our end users do not
continue to increase their acceptance of the features and functions provided by our current systems or other systems we may develop in
the future, our business and growth prospects could be adversely affected.
Our operating costs tend to be fixed, while our revenue tends to be seasonal, thereby resulting in operating results that fluctuate
from quarter to quarter.
Our expense levels are based in part on our product development efforts and our expectations regarding future revenues and, in the
short-term, are generally fixed. Our quarterly revenues, however, have varied significantly in the past, with our first quarter historically
being the weakest due to weather conditions in parts of North America, Europe and Asia that make roadway construction more difficult.
Additionally, our international revenues have a significant large project component, resulting in a varying revenue stream. We expect
the seasonality of our revenue and the fixed nature of our operating costs to continue in the foreseeable future. Therefore, we may be
unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, if anticipated revenues
in any quarter do not occur or are delayed, our operating results for the quarter would be disproportionately affected. Operating results
8
also may fluctuate due to factors such as the demand for our products; product life cycle; the development, introduction and acceptance
of new products and product enhancements by us or our competitors; changes in the mix of distribution channels through which our
products are offered; changes in the level of operating expenses; end user order deferrals in anticipation of new products; competitive
conditions in the industry; and economic conditions generally. No assurance can be given that we will be able to achieve or maintain
profitability on a quarterly or annual basis in the future.
Increased competition may make it difficult for us to acquire and retain end users. If we are unsuccessful in developing new
applications and product enhancements, our products may become noncompetitive or obsolete.
Competition in ITS is continuing to grow. Some of the companies that may compete with us in the business of developing and
implementing traffic control and related security systems have substantially more financial, technological, marketing, personnel and
research and development resources than we have. Therefore, they may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or end user requirements. If we are unable to compete successfully with these companies, the
market share for our products will decrease, and competitive pressures may seriously harm our business.
Additionally, the market for vehicle detection is continuously seeking more advanced technological solutions to problems. Technologies
such as embedded loop detectors, pressure plates, pneumatic tubes, radars, lasers, magnetometers, acoustics and microwaves that have
been used as traffic sensing devices in the past are being enhanced for use in the traffic management industry, and new technologies
may be developed. We are aware of several companies that are developing traffic management devices using machine vision technology
or other advanced technology. Floating vehicle and/or radio frequency identification (RFID) tagged license plate initiatives are under
consideration and may be implemented. We expect to face increasingly competitive product developments, applications and
enhancements. New technologies or applications in traffic control systems from other companies or the development of new and
emerging technologies and applications, including vehicle-to-vehicle (VTV) communications, mobile applications, and new algorithms
or sensor technologies, may provide our end users with alternatives to our products and could render our solutions noncompetitive or
obsolete. If we are unable to increase the number of our applications and develop and commercialize product enhancements and
applications in a timely and cost-effective manner that respond to changing technology and satisfy the needs of our end users, our
business and financial results will suffer.
We may not achieve our growth plans for the expansion of our business.
In addition to market penetration, our long-term success depends on our ability to expand our business through new product
development, mergers and acquisitions, and/or geographic expansion.
New product development requires that we maintain our ability to improve existing products, continue to bring innovative products to
market in a timely fashion, and adapt products to the needs and standards of current and potential customers. Our products and services
may become less competitive or eclipsed by technologies to which we do not have access or which render our solutions obsolete.
Geographic expansion will be primarily outside of the U.S. and hence will be disproportionately subject to the risks of international
operations discussed in this Annual Report on Form 10-K.
Mergers and acquisitions will be accompanied by risks which may include:
failure to achieve the financial and strategic goals for the acquired and combined businesses;
● difficulties identifying suitable acquisition candidates at acceptable costs;
● unavailability of capital to conduct acquisitions;
●
● difficulty assimilating the operations and personnel of the acquired businesses;
● disruption of ongoing business and distraction of management from the ongoing business;
● dilution of existing shareholders and earnings per share;
● unanticipated, undisclosed or inaccurately assessed liabilities, legal risks and costs; and
● difficulties retaining our key vendors, customers or employees or those of the acquired business.
In addition, acquisitions of businesses having a significant presence outside the U.S. will increase our exposure to the risks of
international operations discussed in this Annual Report on Form 10-K.
Our dependence on third parties for manufacturing and marketing our products may prevent us from meeting customers’ needs in
a timely manner.
We do not have, and do not intend to develop in the near future, internal capabilities to manufacture our products. We have entered into
agreements with Econolite and Wireless Technology, Inc. (“WTI”) to manufacture the Autoscope system, the RTMS radar products and
related products for sales in the United States, Mexico, Canada and the Caribbean. We work with suppliers, most of whom are overseas,
9
to manufacture the rest of our products. We also need to comply with the European Union’s regulatory RoHS directive restricting the
use of certain hazardous substances in electrical and electronic equipment. If Econolite, WTI, or our other suppliers are unable to
manufacture our products in the future, we may be unable to identify other manufacturers able to meet product and quality demands in
a timely manner or at all. Our inability to find suitable manufacturers for our products could result in delays or reductions in product
shipments, which in turn may harm our business reputation and results of operations. In addition, we have granted Econolite the exclusive
right to market the Autoscope video system and related products in the United States, Mexico, Canada and the Caribbean. Consequently,
our revenue depends to a significant extent on Econolite’s marketing efforts. Econolite’s inability to effectively market the Autoscope
video system, or the disruption or termination of that relationship, could result in reduced revenue and market share for our products.
We and our third party manufacturers obtain some of the components of our products from a single source, and an interruption in
the supply of those components may prevent us from meeting customers’ needs in a timely manner and could therefore reduce our
sales.
Although substantially all of the hardware components incorporated into our products are standard electronics components that are
available from multiple sources, we and our third party manufacturers obtain some of the components from a single source. The loss or
interruption of any of these supply sources could force us or our manufacturers to identify new suppliers, which could increase our costs,
reduce our sales and profitability, or harm our customer relations by delaying product deliveries.
Regulations related to the use of conflict-free minerals may increase our costs and cause us to incur additional expenses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve the transparency and accountability
of the use by public companies in their products of minerals mined in certain countries and to prevent the sourcing of such “conflict”
minerals. As a result, the Securities and Exchange Commission enacted annual disclosure and reporting requirements for public
companies who use these minerals in their products, which apply to us. Under the final rules, we are required to conduct due diligence
to determine the source of any conflict minerals used in our products. We filed our first conflict minerals report on Form SD with the
Securities and Exchange Commission May 29, 2014, and we are required to file our next conflict minerals report on or before June 1,
2015. Although we expect to file the required report on a timely basis, our supply chain is broad-based and complex, and we may not
be able to easily verify the origins for all minerals used in our products. To the extent that any information furnished to us by our
suppliers is inaccurate or inadequate, we could face reputational and enforcement risks. In addition, the conflict mineral rules could
reduce the number of suppliers who provide components and products containing conflict-free minerals and thus could disrupt our
supply chain or that of our manufacturers and increase the cost of the components used in manufacturing our products and the costs of
our products to us. Any increased costs and expenses could have a material adverse impact on our financial condition and results of
operations.
Some of our products are covered by our warranties and, if the cost of fulfilling these warranties exceeds our warranty allowance, it
could adversely affect our financial condition and results of operations.
Unanticipated warranty and other costs for defective products could adversely affect our financial condition and results of operations
and our reputation. We generally provide a two to five year warranty on our product sales. These warranties require us to repair or
replace faulty products, among other customary warranty provisions. Although we monitor our warranty claims and provide an
allowance for estimated warranty costs, unanticipated claims in excess of the allowance could have a material adverse impact on our
financial condition and results of operations. Additionally, we rely on our third party manufacturers to fulfill our warranty repair
obligations to our customers. Adverse changes in these parties’ abilities to perform these repairs could cause a delay in repairs or require
us to source other parties to perform the repairs and could adversely affect impact our financial condition and results of operations. In
addition, the need to repair or replace products with design or manufacturing defects could adversely affect our reputation.
We may face increased competition if we fail to adequately protect our intellectual property rights, and any efforts to protect our
intellectual property rights may result in costly litigation.
Our success depends in large measure on the protection of our proprietary technology rights. We rely on trade secret, copyright and
trademark laws, confidentiality agreements with employees and third parties, and patents, all of which offer only limited protection. We
cannot assure you that the scope of these protective measures will exclude competitors or provide competitive advantages to us. We also
cannot assure you that we will become aware of all instances in which others develop similar products, duplicate any of our products,
or reverse engineer or misappropriate our proprietary technology. If our proprietary technology is misappropriated, our business and
financial results could be adversely affected. Litigation may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the proprietary rights of others. In addition, we may be the subject of
lawsuits by others who claim we violate their intellectual property rights.
Intellectual property litigation is very costly and could result in substantial expense and diversions of our resources, either of which
could adversely affect our business and financial condition and results of operations. In addition, there may be no effective legal recourse
10
against infringement of our intellectual property by third parties, whether due to limitations on enforcement of rights in foreign
jurisdictions or as a result of other factors.
We have not applied for patent protection in all countries in which we market and sell our products. Consequently, our proprietary rights
in the technology underlying our systems in countries other than the U.S. will be protected only to the extent that trade secret, copyright
or other non-patent protection is available and to the extent we are able to enforce our rights. The laws of other countries in which we
market our products may afford little or no effective protection of our proprietary technology, which could harm our business.
We plan to continue introducing new products and technologies and may not realize the degree or timing of benefits we initially
anticipated, which could adversely affect our business and results of operations.
We regularly invest substantial amounts in research and development efforts that pursue advancements in a range of technologies,
products and services. Our ability to realize the anticipated benefits of these advancements depends on a variety of factors, including
meeting development, production, certification and regulatory approval schedules; the execution of internal and external performance
plans; the availability of supplier-produced parts and materials; the performance of suppliers and vendors; achieving cost efficiencies;
the validation of innovative technologies; and the level of end user interest in new technologies and products. These factors involve
significant risks and uncertainties. We may encounter difficulties in developing and producing these new products and may not realize
the degree or timing of benefits initially anticipated. In particular, we cannot predict with certainty whether, when or in what quantities
our current or potential end users will have a demand for products currently in development or pending release. Moreover, as new
products are announced, sales of current products may decrease as end users delay making purchases until such new products are
available. Any of the foregoing could adversely affect our business and results of operations.
Our business could be adversely affected by product liability and commercial litigation.
Our products or services may be claimed to cause or contribute to personal injury or property damage to our customers’ employees or
facilities. Additionally, we are, at times, involved in commercial disputes with third parties, such as customers, distributors, vendors and
others. The ensuing claims may arise singularly, in groups of related claims, or in class actions involving multiple claimants. Such
claims and litigation are frequently expensive and time-consuming to resolve and may result in substantial liability to us, which liability
and related costs and expenses may not be recoverable through insurance or any other forms of reimbursement.
Our business could be affected by various legal and regulatory compliance risks, including those involving antitrust, environmental,
anti-bribery or anti-corruption laws and regulations.
We are subject to various legal and regulatory requirements and risks in the U.S. and other countries in which we have facilities or sell
our products involving compliance with antitrust, environmental, anti-bribery and anti-corruption laws and regulations, including the
U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act. Although we have internal policies and procedures with the intention
of assuring compliance with these laws and regulations, our employees, contractors, agents and licensees involved in our international
sales may take actions in violation of such policies. For more information, see the discussion in Note 16 of our Notes to Consolidated
Financial Statements contained elsewhere in this Annual Report on Form 10-K. Any future adverse development, ruling or settlement
could result in charges that could have an adverse effect on our results of operations or cash flows.
We price certain of our products at a premium compared to other technologies. As such, we may not be able to quickly respond to
emerging low-cost competitors, and our inability to do so could adversely affect revenue and profitability.
We price certain of our products at a premium as compared to products using less sophisticated technologies. As the technological
sophistication of our competitors and the size of the market increase, competing low-cost developers of machine vision products for
traffic are likely to emerge and grow stronger. If end users prefer low-cost alternatives over our products, our revenue and profitability
could be adversely affected.
Our revenue could be adversely affected by the emergence of local competitors and local biases in international markets.
Our experience indicates that local officials that purchase traffic management products in the international markets we serve favor
products that are developed and manufactured locally. As local competitors to our products emerge, local biases could erode our revenue
in Europe and Asia and adversely affect our sales and revenue in those markets.
Our failure to predict technological convergence could harm our business and could reduce our sales.
Within our product families, we currently utilize only certain detection technologies available in the ITS field. If we fail to predict
convergence of technology preferences in the market for ITS, or fail to identify and acquire complementary businesses or products that
broaden our current product offerings, we may not capture certain segments of the market, which could harm our business and reduce
our sales.
11
We sell our products internationally and are subject to various risks relating to such international activities, which could harm our
international sales and profitability.
Sales outside of the United States, including export sales from our U.S. business locations, accounted for approximately 17% of our
total revenue in 2015 and 29% of our total revenue in 2014. By doing business in international markets, we are exposed to risks separate
and distinct from those we face in our U.S. operations. Our international business may be adversely affected by changing political and
economic conditions in foreign countries. Additionally, fluctuations in currency exchange rates could affect demand for our products or
otherwise negatively affect profitability. Engaging in international business inherently involves a number of other difficulties and risks,
including:
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•
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export restrictions and controls relating to technology;
pricing pressure that we may experience internationally;
exposure to the risk of currency value fluctuations, where payment for products is denominated in a currency other than
U.S. dollars;
variability in the U.S. dollar value of foreign currency-denominated assets, earnings and cash flows;
required compliance with existing and new foreign regulatory requirements and laws;
laws and business practices favoring local companies;
longer payment cycles;
difficulty of enforcing agreements, including patent and trademarks, and collecting receivables through foreign legal
systems;
•
disputes with parties outside of the U.S., which may be more difficult, expensive and time-consuming to resolve than
disputes with parties located in the U.S.;
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political and economic instability, including volatility in the economic environment of the European Union caused by the
ongoing sovereign debt crisis in Europe;
tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on
foreign earnings;
higher danger of terrorist activity, war or civil unrest compared to domestic operations;
difficulties and costs of staffing and managing foreign operations; and
difficulties in enforcing intellectual property rights.
Our exposure to each of these risks may increase our costs, lengthen our sales cycle and require significant management attention. One
or more of these factors may harm our business.
Our inability to comply with European and Asian regulatory restrictions over hazardous substances and electronic waste could
restrict product sales in those markets and reduce profitability in the future.
The European Union’s Waste Electrical and Electronic Equipment (“WEEE”) directive makes producers of electrical goods financially
responsible for specified collection, recycling, treatment and disposal of past and future covered products. This directive must be enacted
and implemented by individual European Union governments, and certain producers will be financially responsible under the WEEE
legislation. This may impose requirements on us, which, if we are unable to meet them, could adversely affect our ability to market our
products in European Union countries, and our sales revenues and profitability would suffer as a consequence. In addition, the European
Parliament has enacted a directive for the restriction of the use of certain hazardous substances in electrical and electronic equipment.
This RoHS legislation restricts the use of such substances as mercury, lead, cadmium and hexavalent cadmium. If we are unable to have
our products manufactured in compliance with the RoHS directive, we would be unable to market our products in European Union
countries, and our revenues and profitability would suffer. In addition, various Asian governments could adopt their own versions of
environment-friendly electronic regulations similar to the European directives, RoHS and WEEE. This could require new and
12
unanticipated manufacturing changes, product testing and certification requirements, thereby increasing cost, delaying sales and
lowering revenue and profitability.
Our inability to manage growth effectively could seriously harm our business.
Growth and expansion of our business could significantly strain our capital resources as well as the time and abilities of our management
personnel. Our ability to manage growth effectively will require continued improvement of our operational, financial and management
systems and the successful training, motivation and management of our employees. If we are unable to manage growth successfully, our
business and operating results will suffer.
Our business operations will be severely disrupted if we lose key personnel or if we fail to attract and retain qualified personnel.
Our technology depends upon the knowledge, experience and skills of our key management and scientific and technical personnel.
Additionally, our ability to continue technological developments and to market our products, and thereby develop a competitive edge in
the marketplace, depends in large part on our ability to attract and retain qualified scientific and technical personnel. Competition for
qualified personnel is intense, and we cannot assure you that we will be able to attract and retain the individuals we need, especially if
our business expands and requires us to employ additional personnel. In addition, the loss of personnel or our failure to hire additional
personnel could materially and adversely affect our business, operating results and ability to expand. The loss of key personnel, or our
inability to hire and retain qualified personnel, would harm our business.
We may not be successful in integrating any acquired companies into our business, which could materially and adversely affect our
financial condition and operating results.
Part of our business strategy has been to acquire or invest in companies, products or technologies that complement our current products,
enhance our market coverage or technical capabilities or offer growth opportunities. For any acquisition, a significant amount of
management’s time and financial resources may be required to complete the acquisition and integrate the acquired business into our
existing operations. Even with this investment of management time and financial resources, an acquisition may not produce the revenue,
earnings or business synergies anticipated. Acquisitions involve numerous other risks, including the assumption of unanticipated
operating problems or legal liabilities; problems integrating the purchased operations, technologies or products; the diversion of
management’s attention from our core businesses; restrictions on the manner in which we may use purchased companies or assets
imposed by acquisition agreements; adverse effects on existing business relationships with suppliers and customers; incorrect estimates
made in the accounting for acquisitions and amortization of acquired intangible assets that would reduce future reported earnings (such
as goodwill impairments); ensuring acquired companies’ compliance with the requirements of the U.S. federal securities laws and
accounting rules; and the potential loss of customers or key employees of acquired businesses. We cannot assure you that any
acquisitions, investments, strategic alliances or joint ventures will be completed or integrated in a timely manner or achieve anticipated
synergies, will be structured or financed in a way that will enhance our business or creditworthiness, or will meet our strategic objectives
or otherwise be successful.
We may be required to recognize impairment charges for long-lived assets.
As of December 31, 2015, the net carrying value of long-lived assets (property and equipment, deferred tax assets and other intangible
assets) totaled approximately $1.7 million. In accordance with U.S. generally accepted accounting principles, we periodically assess
these assets to determine if they are impaired. Significant negative industry or economic trends, a significant and sustained decline in
our stock price, disruptions to our businesses, significant unexpected or planned changes in our use of assets, divestitures and market
capitalization declines may result in impairments to our goodwill and other long-lived assets. Future impairment charges could
significantly affect our results of operations in the periods recognized.
Our stock is thinly traded and our stock price is volatile.
Our common stock is thinly traded, with 4,559,952 shares of our 5,028,000 outstanding shares held by non-affiliates as of February 29,
2016. Based on the trading history of our common stock and the nature of the market for publicly traded securities of companies in
evolving high-tech industries, we believe there are several factors that have caused and are likely to continue to cause the market price
of our common stock to fluctuate substantially. The fluctuations may occur on a day-to-day basis or over a longer period of time. Factors
that may cause fluctuations in our stock price include announcements of large orders obtained by us or our competitors, substantial
cutbacks in government funding of highway projects or of the potential availability of alternative technologies for use in traffic control
and safety, quarterly fluctuations in our financial results or the financial results of our competitors, consolidation among our competitors,
fluctuations in stock market prices and volumes, and the volatility of the stock market.
13
Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could continue to
adversely affect our financial position, results of operations and cash flows, and we do not know if these conditions will improve in
the near future.
Our financial position, results of operations and cash flows could continue to be adversely affected by difficult conditions and significant
volatility in the capital, credit and commodities markets and in the overall worldwide economy. Although certain economic conditions
in the United States have improved, economic growth has been slow and uneven and may not be sustained. During economic downturns,
governmental entities in particular, which constitute most of our end users, reduce or delay their purchase of our products, which has
had and may continue to have an adverse effect on our business. Any uncertainty about the federal budget in the U.S. could have a
negative effect on the U.S. and global economy. The continuing impact that these factors might have on us and our business is uncertain
and cannot be estimated at this time. Current economic conditions have accentuated each of these risks and magnified their potential
effect on us and our business. The difficult conditions in these markets and the overall economy affect our business in a number of ways.
For example:
• Although we believe we have sufficient liquidity under our financing arrangements to run our business, under extreme
market conditions, there can be no assurance that such funds would be available or sufficient, and, in such a case, we may
not be able to successfully obtain additional financing on favorable terms, or at all.
• Continuing market volatility has exerted downward pressure on our stock price, which could make it more difficult or
unfavorable for us to raise additional capital in the future.
•
Economic conditions could result in customers in our markets continuing to experience financial difficulties, including
limited liquidity and their inability to obtain financing or electing to limit spending because of the economy which may
result, for example, in customers’ inability to pay us at all or on a timely basis and in declining tax revenue for our
customers that are governmental entities, which in turn could result in decreased sales and earnings for us.
We do not know if market conditions or the state of the overall economy will improve in the near future, when improvement will occur
or if any improvement will benefit our market segment.
Our articles of incorporation and bylaws, Minnesota law and our shareholder rights plan may inhibit a takeover that shareholders
consider favorable.
Provisions of our articles of incorporation and bylaws and applicable provisions of Minnesota law may delay or discourage transactions
involving an actual or potential change in our control or change in our management, including transactions in which shareholders might
otherwise receive a premium for their shares or transactions that our shareholders might otherwise deem to be in their best interests.
These provisions:
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permit our board of directors to issue up to 5,000,000 shares of preferred stock with any rights, preferences and privileges
as it may designate, including the right to approve an acquisition or other change in our control;
provide that the authorized number of directors may be increased by resolution of the board of directors;
provide that all vacancies, including newly-created directorships, may, except as otherwise required by law, be filled by
the affirmative vote of a majority of directors then in office, even if less than a quorum; and
eliminate cumulative voting rights, therefore allowing the holders of a majority of the shares of common stock entitled to
vote in any election of directors to elect all of the directors standing for election, if they should so choose.
Section 302A.671 of the Minnesota Business Corporation Act (“MBCA”) generally limits the voting rights of a shareholder acquiring
a substantial percentage of our voting shares in an attempted takeover or otherwise becoming a substantial shareholder of our company
unless holders of a majority of the voting power of all outstanding shares and the disinterested shares approve full voting rights for the
substantial shareholder. Section 302A.673 of the MBCA generally limits our ability to engage in any business combination with certain
persons who own 10% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past four
years have owned 10% or more of our outstanding voting stock. These provisions of the MBCA may have the effect of entrenching our
management team and may deprive shareholders of the opportunity to sell their shares to potential acquirers at a premium over prevailing
prices. This potential inability to obtain a control premium could reduce the price of our common stock.
In addition, in June 2013, we adopted a shareholder rights plan and declared a dividend to our shareholders of one preferred share
purchase right for each outstanding share of common stock. Generally, the shareholder rights plan provides that if a person or group
acquires 20% or more of our outstanding shares of common stock, subject to certain exceptions and under certain circumstances, the
rights may be exchanged by us for common stock or the holders of the rights, other than the acquiring person or group, could acquire
14
additional shares of our capital stock at a discount of the then current market price. Such exchanges or exercise of rights could cause
substantial dilution to a particular acquirer and discourage the acquirer from pursuing our company. The mere existence of a shareholder
rights plan often delays or makes a merger, tender offer or other acquisition more difficult to complete.
We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common
shareholders.
Our articles of incorporation permit our board of directors to establish the rights, privileges, preferences and restrictions, including
voting rights, of future series of our preferred stock and to issue such stock without approval from our shareholders. The rights of holders
of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition,
we could issue preferred stock to prevent a change in control of our Company, depriving common shareholders of an opportunity to sell
their stock at a price in excess of the prevailing market price.
We do not intend to declare cash dividends on our stock in the foreseeable future.
We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring
or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock will be
at the discretion of our board of directors and will depend upon our operating results, earnings, current and anticipated cash needs,
capital requirements, financial condition, future prospects, any contractual restrictions and any other factors deemed relevant by our
board of directors. Therefore, shareholders should not expect to receive dividend income from shares of our common stock.
15
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
We currently lease and occupy approximately 26,775 square feet in St. Paul, Minnesota for our headquarters. In February 2014, we
entered into an amendment to the lease for our headquarters which expanded the leased space from approximately 20,000 square feet to
approximately 26,775 square feet, extended the term of the lease to July 2020, and gave us the right to further extend the term of the
lease for one additional five year term. We also lease smaller facilities in Canada, Germany, Spain and Romania.
We believe that our current space is generally adequate to meet our current expected needs, and we do not intend to lease significantly
more space in 2016.
Item 3. Legal Proceedings
We are involved in legal actions and claims relating to various matters. Although we are unable to predict the ultimate outcome of these
legal actions and claims, it is the opinion of management that the disposition of these matters, taken as a whole, will not have a material
adverse effect on our Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market Information
Our common stock is traded on The NASDAQ Capital Market under the symbol “ISNS.” The quarterly high and low sales prices for
our common stock for our last two fiscal years are set forth below.
Quarter
First
Second
Third
Fourth
Shareholders
2015
2014
High
Low
High
Low
$
2.78
3.47
4.66
3.99
$
2.24
2.44
3.38
3.55
$
5.99
5.37
9.94
4.13
$
4.74
3.16
2.10
1.89
As of February 29, 2016, there were 20 holders of record of our common stock. The number of holders of record is based upon the
actual number of holders registered at such date and does not include holders of shares in “street names” or persons, partnerships,
associates, corporations, or other entities identified in security position listings maintained by depositories.
Dividends
We have never declared or paid a cash dividend on our common stock. We currently intend to retain earnings for use in the operation
and expansion of our business, and, consequently, we do not anticipate paying any dividends in the foreseeable future.
Debt Covenants
Our credit agreement includes certain financial covenants, including minimum debt service ratios, minimum cash flow coverage ratios,
and other financial measures. These financial covenants may restrict our ability to pay dividends and purchase outstanding shares of
common stock. At December 31, 2015 and December 31, 2014, we were in compliance with these financial covenants. Information on
our debt agreements is included in Item 7 of this Annual Report on Form 10-K.
17
Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial data for each of the three fiscal years ended December 31, 2015. The
statement of income data for the years ended and as of December 31, 2015, 2014 and 2013 are derived from our audited Consolidated
Financial Statements. The following information should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and with our Consolidated Financial Statements and the related notes thereto included
elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data:
Revenue:
Product sales
Royalties
Cost of revenue:
Product sales
Gross profit
Operating expenses:
Selling, marketing and product support
General and administrative
Research and development
Amortization of intangible assets
Restructuring
Investigation matter
Impairment of investment
Operating income (loss) from continuing operations
Other, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
Net loss from discontinued operations, net of tax (including
2015 loss on disposal of $1,081)
Net loss
Net income (loss) per share:
Basic
Continuing operations
Discontinued operations
Net basic earnings per share
Diluted
Continuing operations
Discontinued operations
Net diluted earnings per share
2013
2014
2015
(i n thousands, e xce pt pe r share data)
$
$
$
$
$
$
$
$
6,729
8,486
15,215
3,477
3,477
11,738
3,216
4,048
3,520
455
119
—
—
11,358
380
21
401
18
383
(3,485)
(3,102)
0.08
(0.70)
(0.62)
0.08
(0.69)
(0.61)
$
$
$
$
$
$
$
$
7,896
10,247
18,143
4,583
4,583
13,560
5,093
4,299
4,862
488
770
152
150
15,814
(2,254)
65
(2,189)
(154)
(2,035)
(7,668)
(9,703)
(0.41)
(1.54)
(1.95)
(0.41)
(1.54)
(1.95)
$
$
$
$
$
$
$
$
8,244
11,598
19,842
6,421
6,421
13,421
8,370
4,571
3,710
488
—
3,723
—
20,862
(7,441)
6
(7,435)
3,995
(11,430)
(4,471)
(15,901)
(2.31)
(0.90)
(3.21)
(2.31)
(0.90)
(3.21)
Weighted average number of common shares outstanding:
Basic
Diluted
5,011
5,019
4,983
4,983
4,955
4,955
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Selected
Financial Data and our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included
elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking
statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk Factors”
included elsewhere in this Annual Report on Form 10-K.
General. The Company previously conducted its operations through three business segments consisting of 1) Intersection, 2) Highway,
and 3) LPR. As further described in Note 2 of our Notes to Consolidated Financial Statements contained elsewhere in this Annual
Report on Form 10-K, on July 9, 2015, the Company completed the sale of its LPR segment. As a result, effective July 9, 2015, the
LPR business qualified for discontinued operations presentation in the Company’s consolidated financial statements. Accordingly,
financial results for the 12 months ended December 31, 2015 have been reported on this basis. Previously reported results for comparable
periods in 2014 and 2013 have also been restated to reflect this reclassification. As a result, all amounts presented in the accompanying
Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere in this Annual Report on From
10-K reflect the financial results and financial position of the Company’s continuing intersection and highway businesses, other than
consolidated amounts reflecting operating results and balances for discontinued operations.
The following discussion of year-to-year trends in financial statement results under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” aligns with the financial statement presentation described above.
We provide software based computer enabled detection (“CED”) products and solutions that use advanced signal processing software
algorithms to detect and monitor objects in a designated field of view. Our technology analyzes signals from a sophisticated sensor and
passes the information along to management systems, controllers or directly to users. Our core products, the Autoscope Video Vehicle
Detection System and RTMS Radar Detection System, operate using our proprietary application software in conjunction with video
cameras or radar and commonly available electronic components. Our systems are used by traffic managers primarily to improve the
flow of vehicle traffic and to enhance safety at intersections, main thoroughfares, freeways and tunnels.
Autoscope video systems are sold to distributors and end users of traffic management products in the United States, Mexico, Canada
and the Caribbean by Econolite Control Products, Inc. (“Econolite”), our exclusive licensee in these regions. We sell all of our systems
to distributors and end users in Europe and Asia through our subsidiaries. The majority of our sales are to end users that are funded by
government agencies responsible for traffic management.
RTMS Radar Business Model Change. From July 24, 2012 until July 14, 2014, our RTMS radar systems also were sold by Econolite
in the United States, Mexico, Canada and the Caribbean under the same arrangement as Econolite sold our Autoscope video systems.
Effective July 14, 2014, the marketing, manufacturing and distribution of the RTMS radar product line in these regions transitioned
from Econolite to the Company.
Trends and Challenges in Our Business
We believe the expected growth in our business can be attributed primarily to the following global trends:
• worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of road
infrastructure and the need to automate safety, security and access applications for automobiles and trucks, which has
increased demand for our products;
•
•
advances in information technology, which have made our products easier to market and implement;
the continued funding allocations for centralized traffic management services and automated enforcement schemes, which
have increased the ability of our primary end users to implement our products; and
•
general increases in the cost-effectiveness of electronics, which make our products more affordable for end users.
We believe our continued growth primarily depends upon:
•
•
continued adoption and governmental funding of intelligent transportation systems (“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;
19
•
•
•
countries in the developing world adopting above-ground detection technology, such as video or radar, instead of
in-pavement loop technology to manage traffic;
the use of CED to provide solutions to surveillance and environmental issues associated with increasing automobile use in
metropolitan areas; and
our ability to develop new products, such as hybrid CED devices incorporating, for example, radar and video technologies,
that provide increasingly accurate information and enhance the end users’ ability to cost-effectively manage traffic and
environmental issues.
Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchase
decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our
revenue between periods. The ongoing economic environment in Europe and the United States is further adding to the unpredictability
of purchase decisions, creating more delays than usual and decreasing governmental budgets, and it is likely to continue to affect our
revenue.
Key Financial Terms and Metrics
Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope video and RTMS radar
(from 2012 until July 14, 2014) systems in the United States, Mexico, Canada and the Caribbean and (2) revenue received from the
direct sales of our RTMS radar systems (after July 14, 2014) in the United States, Mexico, Canada and the Caribbean and all of our
systems in Europe and Asia. On July 14, 2014, we announced the transfer of North American marketing and manufacturing of the
RTMS radar product line from Econolite to Image Sensing Systems, ending our royalty agreement for radar sales. Autoscope video
royalties are calculated using a profit sharing model where the gross profits on sales of product made through Econolite are shared
equally with Econolite. This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and
product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive
impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were
made directly by us. The royalty arrangement is exclusive under a long-term agreement.
Cost of Revenue. There is no cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred
by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to
manufacture hardware platforms, which is influenced mainly by the cost of electronic components. The cost of revenue also includes
logistics costs, estimated expenses for product warranties, restructuring costs and inventory reserves. The key metric that we follow is
achieving certain gross margin percentages on product sales by geographic region and to a lesser extent by product line.
Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support; (2) general and
administrative; and (3) research and development. Selling, marketing and product support expenses consist of various costs related to
sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties;
travel, trade show and advertising costs; second-tier technical support for Econolite; and general product support, where applicable.
General and administrative expenses consist of certain corporate and administrative functions that support the development and sales of
our products and provide an infrastructure to support future growth. These expenses include management, supervisory and staff salaries
and benefits, legal and auditing fees, travel, rent and costs associated with being a public company, such as board of director fees, listing
fees and annual reporting expenses. Research and development expenses consist mainly of salaries and benefits for our engineers and
third party costs for consulting and prototyping. We measure all operating expenses against our annually approved budget, which is
developed with achieving a certain operating margin as a key focus. Also included in operating expenses are restructuring costs and
non-cash expense for intangible asset amortization.
Non-GAAP Operating Measure. We provide certain non-GAAP financial information as supplemental information to financial
measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles in the United States). This
non-GAAP information excludes the impact of amortizing intangible assets and may exclude other non-recurring items. Management
believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses
this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is
not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and
may not be computed the same as similarly titled measures used by other companies.
20
The table below reconciles non-GAAP income (loss) from continuing operations, which is a non-GAAP financial measure, to
comparable GAAP financial measures:
Income (loss) from continuing operations
Adjustments to reconcile to non-GAAP net loss
Amortization of intangible assets
Depreciation
Restructuring
Investigation matter
Impairment
Non-GAAP net income (loss) from continuing operations
$
Year Ended December 31,
2015
2014
2013
$
380
$
(2,254)
$
(7,441)
455
298
119
—
—
1,252
$
488
413
770
152
150
(281)
$
488
530
—
3,723
—
(2,700)
Seasonality. Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our business.
Our first quarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North
America, Europe and northern Asia. We expect such seasonality to continue for the foreseeable future. Additionally, our international
revenues regularly contain individually significant sales. This can result in significant variations of revenue between periods.
Accordingly, we believe that quarter-to-quarter comparisons of our financial results should not be relied upon as an indication of our
future performance. No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in
the future.
Segments. We currently operate in two reportable segments: Intersection and Highway. Autoscope video is our machine-vision product
line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales.
Video products are normally sold in the Intersection segment. The RTMS radar is our radar product line, and revenue consists of sales
to external customers. Radar products are normally sold in the Highway segment. As a result of business model changes and
modifications in how we manage our business, we may reevaluate our segment definitions in the future.
The following tables set forth selected unaudited financial information for each of our reportable segments (in thousands):
For the ye ar e nde d De ce mbe r 31, 2015
Hi ghway
Inte rse cti on
Total
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
10,198
9,128
—
1,210
$
5,017
2,610
455
—
$
15,215
11,738
455
1,210
For the ye ar e nde d De ce mbe r 31, 2014
Hi ghway
Inte rse cti on
Total
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
11,357
10,305
—
—
$
6,786
3,255
488
454
$
18,143
13,560
488
454
For the ye ar e nde d De ce mbe r 31, 2013
Hi ghway
Inte rse cti on
Total
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
13,428
11,559
—
—
$
6,414
1,862
488
942
$
19,842
13,421
488
942
21
Results of Operations
The following table sets forth, for the periods indicated, certain consolidated statements of operations data as a percent of total revenue
and gross profit on product sales and royalties as a percentage of international sales and royalties, respectively.
Ye ar Ende d De ce mbe r 31,
2015
2014
2013
Product sales
Royalties
Total revenue
Gross profit - product sales
Gross profit - royalties
Selling, marketing and product support
General and administrative
Research and development
Amortization of intangible assets
Restructuring
Investigation matter
Impairment
Income (loss) from continuing operations
Income tax expense (benefit)
Net income (loss) from continuing operations
%
44.2
55.8
100.0
48.3
100.0
21.1
26.6
23.1
3.0
0.8
—
—
2.5
0.1
2.5
%
43.5
56.5
100.0
42.0
100.0
28.1
23.7
26.8
2.7
4.2
0.8
0.8
(12.4)
(0.8)
(11.2)
%
41.5
58.5
100.0
22.1
100.0
42.2
23.0
18.7
2.5
—
18.8
—
(37.5)
20.1
(57.6)
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014. Total revenue decreased to $15.2 million in 2015 from
$18.1 million in 2014, a decrease of 16.1%. In the first quarter of 2015, we completed a restructuring plan to close our office in Asia.
Excluding Asia revenue of $1.9 million in 2014, revenue for 2015 decreased $1.0 million, a decrease of 6.0%. Royalty income decreased
to $8.5 million in 2015 from $10.2 million in 2014, a decrease of 17.2%. The decrease in royalties was the result of a decrease in
Autoscope video system sales under the Econolite agreement and the transition of RTMS radar product sales from Econolite to the
Company in 2014. Prior to the transfer of domestic radar sales and marketing activities from Econolite to the Company in July 2014,
we received radar royalties of approximately $709,000 in 2014. Autoscope video royalties were lower in the fiscal year ended December
31, 2015 compared to the fiscal year ended December 31, 2014 as a result of lower unit volume. Product sales decreased to $6.7 million
in 2015 from $7.8 million in 2014, a decrease of 14.8%. The decrease in product sales was a result of the planned withdrawal from the
Asia market in early 2015 and was partially offset by increases in product sales in other geographies.
Revenue for the Intersection segment decreased to $10.2 million in 2015 from $11.4 million in 2014, a decrease of 10.2%. The decrease
of revenue in the Intersection segment was mainly due to lower sales volume in North America.
Revenue for the Highway segment decreased to $5.0 million in 2015 from $6.8 million in 2014, a decrease of 26%. The decrease in
Highway was due to the planned withdrawal from the Asia market in early 2015.
Gross profit for product sales for 2015 was 48.3%, an increase of 6.3% from the gross margin of 42.0% in 2014. Product sales gross
profit for the Intersection product lines has historically been lower than gross profit for the Highway product lines and therefore the mix
of the product lines sold in any given period can result in varying gross profit. Additionally, the geographic sales mix of our product
sales can influence margins, as products sold in some jurisdictions have lower margins. We anticipate that gross profit for our product
sales in 2016 will be similar to 2015, while we expect royalty gross profit will be 100% in 2016.
Selling, marketing and product support expense decreased to $3.2 million or 21.1% of total revenue in 2015 from $5.1 million or 28.1%
of total revenue in 2014. Our selling, marketing and product support expense decreased mainly due to certain cost reductions. We
anticipate that annual selling, marketing and product support expense in 2016 will be similar to such expenses 2015.
General and administrative expense decreased slightly to $4.0 million from $4.3 million in 2014, but increased to 26.6% of total revenue
in 2015, from 23.7% of total revenue in 2014. General and administrative expenses decreased in 2015 mainly as a result of a decrease
in the professional fees related to the use of outside consultants which were partially offset by severance costs related to the separation
from former employees and other normal operating costs. We anticipate that annual general and administrative expenses in 2016 will
be similar to such expenses in 2015.
Research and development expense decreased to $3.5 million or 23.1% of total revenue in 2015, from $4.9 million or 26.8% of total
revenue in 2014. The decrease is primarily related to $1.2 million of software development costs related to the development of new
22
video detection technologies that were capitalized. In 2016, we will continue to develop our video detection technology and launch new
video products. We anticipate that research and development expense will increase in dollar amount in 2016 compared to 2015.
In the fourth quarter of 2014, the Company developed restructuring plans to close our offices in Asia. Because of these actions,
restructuring charges of approximately $119,000 were recorded in 2015.
Amortization of intangibles decreased to $455,000 in 2015 from $488,000 in 2014 and reflects the amortization of intangible assets
acquired in acquisitions. We anticipate that amortization of intangibles will decrease in 2016 compared to 2015.
Income tax expense of $18,000, or 4.5% of our pretax income, was recorded for the year ended December 31, 2015, compared to income
tax benefit of $154,000, or 7.0% of pretax loss, for the year ended December 31, 2014. The income tax expense in 2015 was primarily
driven by income tax in European jurisdictions.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013. Total revenue decreased to $18.1 million in 2014 from
$19.8 million in 2013, a decrease of 8.5%. In the first quarter of 2014, we implemented restructuring plans to improve our financial
performance in Europe, which included the closure of our office in Poland. Excluding Poland revenue of $2.3 million in 2013, revenue
for 2014 increased $600,000, an increase of 3.4%. Royalty income decreased to $10.2 million in 2014 from $11.6 million in 2013, a
decrease of 11.6%. The decrease in royalties was the result of a decrease in Autoscope video system sales under the Econolite agreement
and the transition of Autoscope radar product sales from Econolite to the Company. Prior to the transfer of domestic radar sales and
marketing activities from Econolite to the Company in July 2014, we received radar royalties of approximately $709,000 in 2014
compared to $1.3 million in 2013. Autoscope video royalties were lower in the fiscal year ended December 31, 2014 compared to the
fiscal year ended December 31, 2013 as a result of lower unit volume. Product sales decreased to $7.9 million in 2014 from $8.2 million
in 2013, a decrease of 4.2%. The decrease in product sales was mainly due to lower sales volume in Europe, which was partially offset
by an increase in Autoscope radar sales in North America due to the previously discussed radar transition. The decrease in European
sales volume was primarily the result of the Polish office closure.
Revenue for the Intersection segment decreased to $11.4 million in 2014 from $13.4 million in 2013, a decrease of 15.4%. The decrease
in the Intersection segment revenue was mainly due to lower sales volume in Europe and North America.
Revenue for the Highway segment increased to $6.8 million in 2014 from $6.4 million in 2013, an increase of 5.8%. The increase in
Highway revenue was due to the transition of the North American Highway sales from Econolite to Image Sensing Systems. This
transition resulted in the direct sale of products to customers instead of a royalty from Econolite beginning at the transition date of July
14, 2014.
Gross profit for product sales increased to 42.0% in 2014 from 22.1% in 2013. The increase is the result of a reduction for 2014 in
warranty and inventory obsolescence charges experienced in 2013. In general, product sales gross profit for the Intersection product
lines has historically been lower than gross profit for the Highway product lines and therefore the mix of the product lines sold in any
given period can result in varying gross profit. Additionally, the geographic sales mix of our product sales can influence margins, as
product sold in some jurisdictions have lower margins.
Selling, marketing and product support expense decreased to $5.1 million or 28.1% of total revenue in 2014 from $8.4 million or 42.2%
of total revenue in 2013. Our selling, marketing and product support expense decreased mainly due to certain cost reductions, which
were partially offset by nonrecurring expenses associated with transitioning the North American radar business from Econolite. Included
in these charges are royalties due to Econolite for orders that were received by Econolite but fulfilled by Image Sensing Systems. These
royalties to Econolite will end once all such open orders are fulfilled.
General and administrative expense decreased slightly to $4.3 million from $4.6 million in 2013, but increased to 23.7% of total revenue
in 2014, from 23.0% of total revenue in 2013. General and administrative expenses decreased in 2014 mainly as a result of a decrease
in the other professional fees related to the use of outside consultants which were partially offset by severance costs related to the
separation from former employees and other normal operating costs. Our direct costs related to the investigation involving our subsidiary
in Poland and associated remediation actions were approximately $152,000 for the year ended December 31, 2014 compared to $3.7
million for the year ended December 31, 2013. Please see Note 16 of our Notes to Consolidated Financial Statements included elsewhere
in this Annual Report on Form 10-K for a discussion of the investigation.
Research and development expense increased to $4.8 million or 26.8% of total revenue in 2014, from $3.7 million or 18.7% of total
revenue in 2013. The increase was mainly related to the increased expenditures on new research and development projects, the
acceleration of previously existing projects and other product developments.
23
In the first quarter of 2014, the Company implemented restructuring plans to improve our financial performance in Europe. These plans
included the closure of our office in Poland. Because of these actions, restructuring charges of approximately $460,000 were recorded
related primarily to the closure of facilities and employee terminations. In the fourth quarter of 2014, we developed restructuring plans
to close down our offices in Asia in order to reduce our cost structure. Because of these actions, restructuring charges of approximately
$310,000 were recorded related primarily to the closure of facilities and employee terminations.
Amortization of intangibles was $488,000 in both 2014 and 2013 and reflects the amortization of intangible assets acquired in
acquisitions.
Income tax benefit of $154,000, or 7.0% of our pretax loss, was recorded for the year ended December 31, 2014, compared to income
tax expense of $3.9 million, or 53.7% of pretax loss, for the year ended December 31, 2013. The income tax expense in 2013 was
primarily driven by the recognition of a valuation allowance of $6.6 million for the United States jurisdiction.
Liquidity and Capital Resources
At December 31, 2015, we had $2.6 million in cash and cash equivalents, compared to $2.7 million in cash at December 31, 2014.
On July 9, 2015, we closed on the sale of our LPR business unit for the purchase price of $4.2 million in cash, subject to certain
customary closing adjustments based on the difference between estimated net asset value and final net asset value, of which $3.8 million
has been paid to the Company. The remaining $420,000 was placed in an escrow account and will be available until July 9, 2016 to
satisfy any indemnification obligations the Company may have under the SAPA. The $420,000 in escrow is classified as “discontinued
operations assets” on the Consolidated Balance Sheet as of December 31, 2015. We used $1.6 million from the sale to strengthen our
balance sheet and to invest in our Autoscope video detection and RTMS radar detection products and solutions. Our investment
objectives are to preserve principal, maintain liquidity, and achieve the best available return consistent with our primary objectives of
safety and liquidity.
Net cash used for operating activities was $3.3 million in 2015, compared to cash used of $5.7 million in 2014 and cash used of $5.8
million in 2013. The primary reason for the decrease in cash in 2014 was operating losses, the timing of the collection of outstanding
receivables, as well as timing of the payment of outstanding payables, partially offset by the conversion of inventory. The primary
reasons for the decrease in cash in 2013 was the investments made in the Company’s product offerings. We anticipate that average
receivable collection days in 2016 will be similar to 2015 and that it will not have a material impact on our liquidity.
Net cash used for investing activities was $1.4 million in 2015, compared to cash provided by investing activities of $2.5 million in
2014 and cash provided by investing activities of $1.6 million in 2013. The investing of cash compared to the prior periods is the result
of the capitalized software development costs. Our planned additions of property and equipment are discretionary, and we do not expect
them to exceed historical levels in 2016.
There was no net cash provided by financing activities in 2015 or 2014, compared to cash provided of $9,000 in 2013.
In May 2014, the Company entered into a credit agreement and related documents with Alliance Bank providing for a revolving line of
credit for the Company. The credit agreement and related documents with Alliance Bank (collectively, the “Alliance Credit Agreement”)
provide up to a $5.0 million revolving line of credit. Amounts due under the Alliance Credit Agreement bear interest at a fixed annual
rate of 3.95%. Any advances are secured by the Company’s inventories, accounts receivable, cash, marketable securities, and
equipment. We are subject to certain covenants under the Alliance Credit Agreement. In March 2015, we entered into an agreement
with Alliance Bank amending the Alliance Credit Agreement to extend the maturity date from May 2015 to April 1, 2016. At December
31, 2015, we had no borrowings under the Alliance Credit Agreement, and we were in compliance with all financial covenants.
Prior to May 12, 2014, we had a revolving line of credit with Associated Bank, National Association (“Associated Bank”) that was
initially entered into as of May 1, 2008. We requested, and Associated Bank granted, a termination to the Credit Agreement effective
on May 12, 2014 in connection with the revolving line of credit from Alliance Bank described above.
We believe that cash and cash equivalents on hand at December 31, 2015, along with the availability of funds under our revolving line
of credit and cash provided by operating activities, will satisfy our projected working capital needs, investing activities, and other cash
requirements for the foreseeable future.
Off-Balance Sheet Arrangements
We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity, including special purpose
and similar entities or other off-balance sheet arrangements.
24
Critical Accounting Policies
Our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K are prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”), which require us to make estimates and assumptions in certain circumstances that
affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain
amounts, giving due consideration to materiality. We believe that of our significant accounting policies, the following are particularly
important to the portrayal of our results of operations and financial position, may require the application of a higher level of judgment
by our management, and as a result, are subject to an inherent degree of uncertainty. For further information, see Note 1 of our Notes to
the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Revenue Recognition and Allowance for Doubtful Accounts. We are required to comply with a variety of technical accounting
requirements in order to achieve consistent and accurate revenue recognition. Royalty income is recognized based on sales shipped or
delivered to our customers as reported to us by Econolite. Revenue is recognized when both product ownership and the risk of loss have
transferred to the customer and we have no remaining obligations. Allowances for doubtful accounts are estimated by management
based on an evaluation of potential losses related to customer receivable balances. We determine the allowance based on historical
write-off experience in the industry, regional economic data, and an evaluation of specific customer accounts for risk of loss. We review
our allowance for doubtful accounts monthly. Account balances are charged off against the allowance when we believe it is probable
the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. The establishment
of this reserve requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Although
management considers these balances adequate and proper, changes in economic conditions in specific markets in which we operate
could have an effect on reserve balances required.
Inventories. We maintain a material amount of inventory to support our engineering and manufacturing operations. This inventory is
stated at the lower of cost or market. On a regular basis, we review our inventory and identify that which is excess, slow moving, and
obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. Any identified excess, slow
moving, and obsolete inventory is written down to its market value through a charge to income from operations. It is possible that
additional inventory write-down charges may be required in the future if there is a significant decline in demand for our products.
Impairment of Long-Lived Assets. We review the carrying value of long-lived assets or asset groups, such as property and equipment
and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors,
or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or
asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset
group, we recognize an asset impairment charge against operations. The amount of the impairment loss recorded is the amount by which
the carrying value of the impaired asset or asset group exceeds its fair value.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment
to identify events or changes in circumstances indicating the carrying value of assets may not be recoverable, estimate future cash flows,
estimate asset fair values, and select a discount rate that reflects the risk inherent in future cash flows. Expected cash flows may not be
realized, which could cause long-lived assets to become impaired in future periods and could have a material adverse effect on future
results of operations.
Warranty Liabilities. The estimated cost to service warranty and customer service claims is included in cost of sales. This estimate is
based on historical trends of warranty claims. We regularly assess and adjust the estimate of accrued warranty claims by updating claims
rates for actual trends and projected claim costs. Our warranty liability contains uncertainties because our warranty obligations cover
an extended period of time. While these liability levels are based on historical warranty experience, they may not reflect the actual
claims that will occur over the upcoming warranty period, and additional warranty reserves may be required. A revision of estimated
claim rates or the projected cost of materials and freight associated with sending replacement parts to customers could have a material
adverse effect on future results of operations.
Income Taxes. We record a tax provision for the anticipated tax consequences of the 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.
25
New and Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
“Leases (Topic 842).” ASU 2016-02 provides new guidance on how an entity should account for leases and recognize associated lease
assets and liabilities. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December
15, 2018, and early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides
for certain practical expedients. In addition, the transition will require application of the new guidance at the beginning of the earliest
comparative period presented. We are currently determining our implementation approach and assessing the impact of ASU 2016-02 on
the consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as
noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years
beginning after December 15, 2016 (and interim periods within those fiscal years), with early adoption permitted. ASU 2015-17 may
be either applied prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We have elected to
early adopt ASU 2015-17 prospectively in the fourth quarter of 2015. As a result, we have presented all deferred tax assets and liabilities
as noncurrent on our consolidated balance sheet as of December 31, 2015, but have not reclassified current deferred tax assets and
liabilities on our consolidated balance sheet as of December 31, 2014. There was no significant impact on our results of operations as a
result of the adoption of ASU 2015-17.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 provides new guidance related
to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 specifies
new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related
to revenue and cash flows from contracts with customers.
On July 9, 2015, the FASB affirmed its proposal to defer the effective date of the ASU 2014-09 for all entities by one year. As a result,
public business entities, certain not-for-profit entities, and certain employee benefit plans will apply this new revenue standard to annual
reporting periods beginning after December 15, 2017. All other entities will apply this new revenue standard to annual reporting periods
beginning after December 15, 2018. Additionally, the FASB affirmed its proposal to permit all entities to apply ASU 2014-09 early,
but not before the original effective date for public business entities, certain not-for-profit entities, and certain employee benefit plans
(that is, annual periods beginning after December 15, 2016). Entities choosing to implement early will apply ASU 2014-09 to all interim
reporting periods within the year of adoption.
The Company is currently determining its implementation approach and assessing the impact of ASU 2014-09 on the consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Approximately 25% of our revenue has historically been derived from shipments to customers outside of 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, if we have not properly hedged, could
have a material effect on our results of operations or financial position.
26
Item 8.
Financial Statements and Supplementary Data
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $138 and $311, respectively
Inventories
Prepaid expenses and other current assets
$
Total current assets
Property and equipment:
Furniture and fixtures
Leasehold improvements
Equipment
Accumulated depreciation
Intangible assets, net
Deferred income taxes
Discontinued operations assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Warranty
Accrued compensation
Other current liabilities
Accrued restructuring
Total current liabilities
Deferred income taxes
Discontinued operations liabilities
Shareholders' equity
$
$
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding
Common stock, $.01 par value; 20,000,000 shares authorized, 5,028,000 and 4,995,963 issued and
outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
49
23,826
(258)
(18,220)
5,397
8,971
$
27
De ce mbe r 31,
2015
2014
2,648
3,063
648
445
6,804
491
426
3,397
4,314
3,796
518
1,210
19
420
8,971
1,519
760
722
573
—
3,574
—
—
—
$
$
$
$
2,656
2,534
825
660
6,675
449
406
3,443
4,298
3,601
697
454
62
7,002
14,890
2,451
824
517
585
216
4,593
165
1,812
—
49
23,547
(158)
(15,118)
8,320
14,890
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Ye ars e nde d De ce mbe r 31,
2014
2013
2015
6,729
8,486
15,215
3,477
3,477
11,738
3,216
4,048
3,520
455
119
—
—
11,358
380
21
401
18
383
(3,485)
(3,102)
0.08
(0.70)
(0.62)
0.08
(0.69)
(0.61)
$
$
$
$
$
$
$
$
7,896
10,247
18,143
4,583
4,583
13,560
5,093
4,299
4,862
488
770
152
150
15,814
(2,254)
65
(2,189)
(154)
(2,035)
(7,668)
(9,703)
(0.41)
(1.54)
(1.95)
(0.41)
(1.54)
(1.95)
$
$
$
$
$
$
$
$
8,244
11,598
19,842
6,421
6,421
13,421
8,370
4,571
3,710
488
—
3,723
—
20,862
(7,441)
6
(7,435)
3,995
(11,430)
(4,471)
(15,901)
(2.31)
(0.90)
(3.21)
(2.31)
(0.90)
(3.21)
5,011
5,019
4,983
4,983
4,955
4,955
Revenue:
Product sales
Royalties
Cost of revenue:
Product sales
Gross profit
Operating expenses:
Selling, marketing and product support
General and administrative
Research and development
Amortization of intangible assets
Restructuring
Investigation matter
Impairment of investment
Operating income (loss) from continuing operations
Other, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
Net loss from discontinued operations, net of tax (including 2015
loss on disposal of $1,081)
Net loss
Net income (loss) per share:
Basic
Continuing operations
Discontinued operations
Net basic earnings per share
Diluted
Continuing operations
Discontinued operations
Net diluted earnings per share
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
28
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive loss
$
$
Years ended December 31,
2014
2015
(3,102)
$
(9,703)
$
2013
(15,901)
(100)
(3,202)
$
(762)
(10,465)
$
214
(15,687)
See accompanying notes to the consolidated financial statements.
29
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Operating activities:
Net loss from continued operations
Net loss from discontinued operations, net of tax
Net loss
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation
Amortization
Stock-based compensation
Impairment
Deferred income tax expense
Loss on disposal of assets
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
Net cash used for continuing operating activities
Net cash provided by discontinuing operating activities
Net cash used for operating activities
Investing activities:
Capitalized software development costs
Sales and maturities of marketable securities
Purchases of marketable securities
Purchases of property and equipment
Proceeds (purchases) of other investments
Net cash provided by (used for) continuing investing activities
Net cash provided by (used for) discontinued investing activities
Net cash provided by investing activities
Financing activities:
Proceeds from exercise of stock options
Net cash provided by continuing financing activities
Effect of exchange rate changes on cash
Decrease in cash and cash equivalents
Ye ars e nde d De ce mbe r 31,
2015
2014
2013
$
$
383
(3,485)
(3,102)
$
(2,035)
(7,668)
(9,703)
(11,430)
(4,471)
(15,901)
298
455
279
—
4
(157)
(529)
177
258
(932)
(92)
(3,341)
1,557
(1,784)
(1,210)
—
—
(150)
—
(1,360)
3,253
1,893
—
—
(117)
(8)
413
488
271
150
—
41
1,194
126
643
1,075
(352)
(5,654)
3,075
(2,579)
—
2,639
—
(298)
150
2,491
(197)
2,294
—
—
(623)
(908)
530
488
213
—
4,085
—
2,055
1,709
298
(27)
755
(5,795)
278
(5,517)
—
7,686
(5,507)
(300)
(300)
1,579
(789)
790
9
9
(52)
(4,770)
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2,656
2,648
$
3,564
2,656
$
8,334
3,564
$
See accompanying notes to the consolidated financial statements.
30
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
Shares
Issued
Common
Stock
Paid-In
Captal
Income
(Loss)
Additional
Comprehensive
Earnings
(accumulated
deficit)
Total
Accumulated
O ther
Retained
Balance at December 31, 2012
4,966,619
$
49
$
23,055
$
390
$
10,486
$
33,980
Stock awards issued
Common stock issued for options exercised
Acquisition-related shares surrendered
Stock-based compensation
Comprehensive loss:
Foreign currency translation adjustment
Net loss
Total comprehensive loss
Balance at December 31, 2013
Stock awards issued
Stock-based compensation
Comprehensive loss:
Foreign currency translation adjustment
Net loss
Total comprehensive loss
Balance at December 31, 2014
Stock awards issued
Stock-based compensation
Comprehensive loss:
Foreign currency translation adjustment
Net loss
Total comprehensive loss
Balance at December 31, 2015
13,395
2,333
(7,500)
-
-
-
-
4,974,847
21,116
-
-
-
-
4,995,963
32,037
-
-
-
-
5,028,000
-
-
-
-
75
8
-
138
-
-
-
-
-
-
-
-
75
8
-
138
-
-
-
$
49
-
-
-
23,276
$
214
-
-
604
$
-
(15,901)
-
(5,415)
$
214
(15,901)
(15,687)
18,514
$
-
-
91
180
-
-
-
-
91
180
-
-
-
$
49
-
-
-
23,547
$
(762)
-
-
(158)
$
-
(9,703)
-
(15,118)
$
(762)
(9,703)
(10,465)
8,320
$
-
-
106
173
-
-
-
-
106
173
-
-
-
$
49
-
-
-
23,826
$
(100)
-
-
(258)
$
-
(3,102)
-
(18,220)
$
(100)
(3,102)
(3,202)
5,397
$
See accompanying notes to the consolidated financial statements.
31
Notes to Consolidated Financial Statements
December 31, 2015
1.
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Image Sensing Systems, Inc. (referred to herein as “we,” the “Company,” “us” and “our”) develops and markets software-based
computer enabled detection products for use in traffic, safety, security, police and parking applications. 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 Company previously conducted its operations through three businesses consisting of 1) Intersection, 2) Highway, and 3) LPR. As
further described in Note 2 of these Notes to Consolidated Financial Statements, on July 9, 2015, the Company completed the sale of its
LPR segment. As a result, effective July 9, 2015, the LPR business qualified for discontinued operations presentation in the Company’s
consolidated financial statements. Accordingly, financial results for the 12 months ended December 31, 2015 have been reported on
this basis. Previously reported results for comparable periods in 2014 and 2013 have also been restated to reflect this reclassification.
As a result, all amounts presented in the Consolidated Financial Statements and Notes to Consolidated Financial Statements reflect the
financial results and financial position of the Company’s continuing intersection and highway businesses, other than consolidated
amounts reflecting operating results and balances for both the continuing and discontinued operations.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Image Sensing Systems, Inc. and its wholly-owned subsidiaries: Image
Sensing Systems HK Limited (ISS HK) located in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) located in
China; Image Sensing Systems Holdings Limited (ISS Holdings), Image Sensing Systems Europe Limited (ISS Europe), Image Sensing
Systems EMEA Limited (ISS UK) located in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O., (ISS Poland)
located in Poland; Image Sensing Systems Spain SLU (ISS Spain) located in Spain; Image Sensing Systems Germany, GmbH (ISS
Germany) located in Germany; and ISS Image Sensing Systems Canada Limited (ISS Canada) located in Canada. All significant
inter-company transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
We recognize revenue on a sales arrangement when it is realized or realizable and earned, which occurs when all of the following criteria
have been met: persuasive evidence of an arrangement exists; delivery and title transfer have occurred or services have been rendered;
the sales price is fixed and determinable; collectability is reasonably assured; and all significant obligations to the customer have been
fulfilled.
Certain sales may contain multiple elements for revenue recognition purposes. We consider each deliverable that provides value to the
customer on a standalone basis as a separable element. Separable elements in these arrangements may include the hardware, software,
installation services, training and support. We initially allocate consideration to each separable element using the relative selling price
method. Selling prices are determined by us based on either vendor-specific objective evidence (“VSOE”) (the actual selling prices of
similar products and services sold on a standalone basis) or, in the absence of VSOE, our best estimate of the selling price. Factors
considered by us in determining estimated selling prices for applicable elements generally include overall economic conditions, customer
demand, costs incurred by us to provide the deliverable, as well as our historical pricing practices. Under these arrangements, revenue
associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the
delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement.
Under arrangements where special acceptance protocols exist, installation services and training may not be considered separable. Under
those circumstances, revenue for the entire arrangement is recognized upon the completion of installation, training and the fulfillment
of any other significant obligations specific to the terms of the arrangement. Arrangements that do not contain any separable elements
are typically recognized when the products are shipped and title has transferred to the customer.
Revenue from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the
service is performed or ratably over the defined contractual period for service maintenance contracts.
Econolite Control Products, Inc. (“Econolite”) is our licensee that sells certain of our 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.
32
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.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded
as current liabilities until remitted to the relevant government authority.
SHIPPING AND HANDLING
Freight revenue billed to customers is reported within revenue on the Consolidated Statements of Operations, and expenses incurred for
shipping products to customers are reported within cost of revenue on the Consolidated Statements of Operations.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash
equivalents, both inside and outside the United States, are invested in money market funds and bank deposits in local currency
denominations. Cash located in foreign banks was $700,000 and $2.0 million at December 31, 2015 and 2014, respectively. We hold
our cash and cash equivalents with financial institutions and, at times, the amounts of our balances may be in excess of insurance limits.
MARKETABLE SECURITIES
We classify marketable debt securities as available-for-sale investments and these securities are stated at their estimated fair value. The
value of these securities is subject to market and credit volatility during the period these investments are held.
ACCOUNTS RECEIVABLE
We grant credit to customers in the normal course of business and generally do not require collateral from domestic customers. When
deemed appropriate, receivables from customers outside the United States are supported by letters of credit from financial institutions.
Management performs on-going credit evaluations of customers. The allowance for doubtful accounts is based on management’s
assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition
of those specific customers. We record an allowance to reduce receivables to the amount that is reasonably believed to be collectible
and consider factors such as the financial condition of the customer and the aging of the receivables. If there is a deterioration of a
customer’s financial condition, if we become aware of additional information related to the credit worthiness of a customer, or if future
actual default rates on trade receivables in general differ from those currently anticipated, we may have to adjust our allowance for
doubtful accounts, which would affect earnings in the period the adjustments were made.
INVENTORIES
Inventories are primarily electronic components and finished goods and are valued at the lower of cost or market determined under the
first-in, first-out accounting method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, replacements, and improvements are capitalized at cost, while maintenance and
repairs are charged to operations as incurred. Depreciation is recorded using the straight-line method over the estimated useful lives of
the assets and by accelerated methods for income tax purposes. Leasehold improvements are depreciated over the shorter of the estimated
useful lives of the assets or the contractual term of the lease, with consideration of lease renewal options if renewal appears probable.
Depreciation is recorded over a three- to seven-year period for financial reporting purposes.
INCOME TAXES
We record a tax provision for the anticipated tax consequences of the 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 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
33
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 and services 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 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. We reached technological feasibility for certain software
products and, as a result, capitalized $1.2 million of software development costs during the year ended December 31, 2015.
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 December 31, 2015 and 2014, there were no indefinite-lived intangible assets.
IMPAIRMENT OF LONG-LIVED ASSETS
We review the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to
amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate
that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, we recognize an asset
impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the
impaired asset or asset group exceeds its fair value. No such impairment losses were recorded during the years ended December 31,
2015, 2014 or 2013.
RESEARCH AND DEVELOPMENT
Research and development costs associated with new products are charged to operations in the period incurred.
WARRANTIES
We generally provide a two to five year warranty on product sales. We record estimated warranty costs at the time of sale and accrue
for specific items at the time that their existence is known and the amounts are determinable. We estimate warranty costs using standard
quantitative measures based on historical warranty claim experience and an evaluation of specific customer warranty issues. In addition,
warranty provisions are also recognized for certain nonrecurring product claims that are individually significant.
FOREIGN CURRENCY
The financial position and results of operations of our foreign subsidiaries are measured using local currency as the functional currency.
Assets and liabilities are translated using fiscal period-end exchange rates, and statements of operations are translated using average
exchange rates applicable to each period, with the resulting translation adjustments recorded as a separate component of shareholders’
equity under “Accumulated other comprehensive loss”. Gains and losses from foreign currency transactions are recognized in the
Consolidated Statements of Operations.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by
the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share includes potentially
dilutive common shares consisting of stock options, restricted stock and warrants using the treasury stock method. Under the treasury
stock method, shares associated with certain stock options have been excluded from the diluted weighted average shares outstanding
calculation because the exercise of those options would lead to a net reduction in common shares outstanding. As a result, stock options
34
to acquire 282,750, 354,000 and 348,000 weighted common shares have been excluded from the diluted weighted shares outstanding
calculation for the years ended December 31, 2015, 2014 and 2013, respectively, because the exercise prices were greater than the
average market price of the common shares during the period and were excluded from the calculation of diluted net income per share.
USE OF ESTIMATES
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of
the date of the financial statements, and reported amounts of revenue and expense during the reporting period. Predicting future events
is inherently an imprecise activity and, as such, requires the use of judgment. Ultimate results could differ from those estimates. Changes
in these estimates will be reflected in the financial statements in future periods.
STOCK-BASED COMPENSATION
We measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award
at the date of grant and recognize the cost over the period during which an employee is required to provide services in exchange for the
award. Stock options are granted at exercise prices equal to the closing market price of our stock on the day before the date of grant.
For purposes of determining the estimated fair value of stock-based payment awards, we utilize a Black-Scholes option pricing model,
which requires the input of certain assumptions requiring management judgment. Because our employee stock option awards have
characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect
fair value estimates, existing models may not provide a reliable single measure of the fair value of employee stock options. Management
will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation.
Circumstances may change and additional data may become available over time that could result in changes to these assumptions and
methodologies and thereby materially impact the fair value determination of future grants of stock-based payment awards. If factors
change and we employ different assumptions in future periods, the compensation expense recorded may differ significantly from the
stock-based compensation expense recorded in the current period.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
“Leases (Topic 842).” ASU 2016-02 provides new guidance on how an entity should account for leases and recognize associated lease
assets and liabilities. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December
15, 2018, and early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides
for certain practical expedients. In addition, the transition will require application of the new guidance at the beginning of the earliest
comparative period presented. We are currently determining our implementation approach and assessing the impact of ASU 2016-02 on
the consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as
noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years
beginning after December 15, 2016 (and interim periods within those fiscal years), with early adoption permitted. ASU 2015-17 may
be either applied prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We have elected to
early adopt ASU 2015-17 prospectively in the fourth quarter of 2015. As a result, we have presented all deferred tax assets and liabilities
as noncurrent on our consolidated balance sheet as of December 31, 2015, but have not reclassified current deferred tax assets and
liabilities on our consolidated balance sheet as of December 31, 2014. There was no impact on our results of operations as a result of
the adoption of ASU 2015-17.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 provides new guidance related
to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 specifies
new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related
to revenue and cash flows from contracts with customers.
On July 9, 2015, the FASB affirmed its proposal to defer the effective date of ASU 2014-09 for all entities by one year. As a result,
public business entities, certain not-for-profit entities, and certain employee benefit plans will apply this new revenue standard to annual
reporting periods beginning after December 15, 2017. All other entities will apply this new revenue standard to annual reporting periods
beginning after December 15, 2018. Additionally, the FASB affirmed its proposal to permit all entities to apply ASU 2014-09 early,
but not before the original effective date for public business entities, certain not-for-profit entities, and certain employee benefit plans
(that is, annual periods beginning after December 15, 2016). Entities choosing to implement early, will apply ASU 2014-09 standard
to all interim reporting periods within the year of adoption.
35
The Company is currently determining its implementation approach and assessing the impact of ASU 2014-09 on the consolidated
financial statements.
2.
Divestiture of Automatic License Plate Recognition Business
On July 9, 2015, the Company entered into a share and asset sales purchase agreement (the “SAPA”) with TagMaster AB (the “Buyer”).
Under the terms of the SAPA, the Company and Image Sensing Systems EMEA Limited, a wholly-owned subsidiary of the Company
(“ISS EMEA”), sold to the Buyer the entire issued share capital of Image Sensing Systems UK Limited, a wholly-owned subsidiary of
ISS EMEA, as well as certain other assets owned by the Company primarily used or primarily held for use in connection with its license
plate recognition (LPR) business. The Buyer also agreed to assume on the closing date certain agreements and liabilities relating to the
LPR business and the acquired assets. Additionally, the Company and the Buyer entered into a transitional services agreement.
Effective July 9, 2015, the LPR business qualified for discontinued operations presentation in the Company’s consolidated financial
statements. In accordance with Accounting Standards Codification (“ASC”) 205-20, the results of the discontinued LPR business have
been presented as discontinued operations. As such, financial results for the 12 months ended December 31, 2015 have been reported
on this basis. Previously reported results for comparable periods in 2014 and 2013 have also been restated to reflect this reclassification.
The purchase price for the LPR business was $4.2 million, subject to certain customary closing adjustments based on the difference
between estimated net asset value and final net asset value, of which $3.8 million has been paid to the Company. The remaining
$420,000 was placed in an escrow account and will be available until July 9, 2016 to satisfy any indemnification obligations the
Company may have under the SAPA. The $420,000 in escrow is classified as “discontinued operations assets” on the Company’s
Consolidated Balance Sheets as of December 31, 2015. In the third quarter of 2015, the Company recorded a loss on sale of the LPR
business of $1.1 million, exclusive of the impact of transaction related expenses recorded through December 31, 2015.
The operational results of the LPR business are presented in the “Net loss from discontinued operations” line item on the Consolidated
Statements of Operations. Also included in this line item for the 12 months ended December 31, 2015 is the loss on sale of the LPR
business and non-recurring expenses incurred by the Company as a result of the sale of the LPR business, including third party
transaction specific costs. These non-recurring expenses amounted to $985,000 for the 12 months ended December 31, 2015. The loss
on the sale of the LPR business had no current or prior year income tax expense impact.
In accordance with ASC 205-20, no general corporate charges were allocated to the discontinued business. The assets and liabilities of
the discontinued business are presented on the Consolidated Balance Sheets as assets and liabilities from discontinued operations.
Other than consolidated amounts reflecting operating results and balances for both the continuing and discontinuing operations, all
remaining amounts presented in the Consolidated Financial Statements and Notes to Consolidated Financial Statements reflect the
financial results and financial position of the Company’s continuing Autoscope Video and RTMS businesses.
Revenue, operating loss, loss on sale of business, and net loss from discontinued operations were as follows (in thousands):
Net Revenue
Operating (loss) from discontinued operations
Loss on sale of discontinued operations
Income tax expense (benefit)
Net loss on discontinued operations, net of tax
Ye ar Ende d
De ce mbe r 31,
2015
2014
2013
$
$
1,409
(2,538)
(1,081)
(134)
(3,485)
$
$
1,452
(7,688)
—
(20)
(7,668)
$
$
2,980
(4,529)
—
(58)
(4,471)
The major classes of assets and liabilities from discontinued operations were as follows (in thousands):
36
Accounts receivable, net
Inventories
Other current assets
Current assets from discontinued operations
$
Property and equipment, net:
Intangible assets, net
Non-current assets from discontinued operations
Trade accounts payable
Other current liabilities
Current liabilities from discontinued operations
Ye ar Ende d
De ce mbe r 31,
2015
2014
$
—
—
420
420
—
—
—
—
—
—
1,685
1,409
209
3,303
167
3,532
3,699
864
857
1,721
Non-current liabilities from discontinued operations $
—
$
91
3.
FAIR VALUE MEASUREMENTS AND MARKETABLE SECURITIES
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.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair
value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair
value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Investments are comprised of high-grade municipal bonds, U.S. government securities and commercial paper and are classified as Level
1 or Level 2, depending on trading frequency and volume and our ability to obtain pricing information on an ongoing basis.
As of December 31, 2015 and 2014, there were no marketable securities outstanding.
Proceeds from maturities or sales of available-for-sale securities were $2.6 million and $7.7 million during the years ended December
31, 2014 and 2013, respectively. Realized gains and losses are determined using the specific identification method. Realized gains and
losses related to sales of available-for-sale investments during the years ended December 31, 2014 and 2013 were immaterial and
included in other income.
Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
Our intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination,
individually or with a group of other assets. These nonfinancial assets were initially, and have historically been, measured and recognized
at amounts equal to the fair value determined as of the date of acquisition.
Periodically, these nonfinancial assets are tested for impairment by comparing their respective carrying values to the estimated fair value
of the reporting unit or asset group in which they reside.
37
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 assets and liabilities.
4.
INVENTORIES
Inventories consisted of $648,000 and $825,000 of finished goods as of December 31, 2015 and 2014, respectively.
5.
INTANGIBLE ASSETS
Intangible assets consisted of the following (dollars in thousands):
December 31, 2015
Gross
Carrying
Amount
$
$
3,900
1,210
5,110
Accumulated
Amortization
$
(3,900)
—
(3,900)
$
$
$
Net
Carrying
Value
—
1,210
1,210
December 31, 2014
Gross
Carrying
Amount
$
3,900
Accumulated
Amortization
$
(3,446)
Net
Carrying
Value
$
454
Weighted
Average
Useful Life
(in Years)
—
10.0
10.0
Weighted
Average
Useful Life
(in Years)
1.0
Developed technology
Software development
Developed technology
6.
CREDIT FACILITIES
In May 2014, the Company entered into a credit agreement and related documents with Alliance Bank providing for a revolving line of
credit for the Company. The credit agreement and related documents with Alliance Bank (collectively, the “Alliance Credit Agreement”)
provide up to a $5.0 million revolving line of credit. Amounts due under the Alliance Credit Agreement bear interest at a fixed annual
rate of 3.95%. Any advances are secured by the Company’s inventories, accounts receivable, cash, marketable securities, and
equipment. We are subject to certain covenants under the Alliance Credit Agreement. In March 2015, we entered into an agreement
with Alliance Bank amending the Alliance Credit Agreement to extend the maturity date from May 2015 to April 1, 2016. At December
31, 2015, we had no borrowings under the Alliance Credit Agreement, and we were in compliance with all financial covenants.
Prior to May 12, 2014, we had a revolving line of credit with Associated Bank, National Association (“Associated Bank”) that was
initially entered into as of May 1, 2008. We requested, and Associated Bank granted, a termination to the Credit Agreement effective
on May 12, 2014 in connection with the revolving line of credit from Alliance Bank described above.
7.
WARRANTIES
Warranty liability and related activity consisted of the following (in thousands):
Beginning balance
Warranty provisions
Warranty claims
Adjustments to preexisting warranties
Ending balance
Years ended December 31,
2014
2015
2013
$
$
$
$
824
198
(293)
31
760
38
771
328
(329)
54
824
$
$
343
209
(283)
502
771
8.
INCOME TAXES
The components of income (loss) before income taxes were as follows (in thousands):
Ye ars e nde d De ce mbe r 31,
2014
2015
2013
Income (loss) from continuing operations before
income taxes and discontinued operations
Domestic
Foreign
Total
$
$
1,057
(656)
401
$
$
480
(2,669)
(2,189)
$
$
(6,275)
(1,160)
(7,435)
The components of income tax expense (benefit) were as follows (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total income tax expense (benefit)
Ye ars e nde d De ce mbe r 31,
2014
2015
2013
$
$
$
$
—
7
9
16
—
—
2
2
18
$
$
$
$
(158)
3
17
(138)
—
—
(16)
(16)
(154)
$
$
$
$
(230)
(7)
80
(157)
4,083
120
(51)
4,152
3,995
A reconciliation from the federal statutory income tax provision to our effective tax expense (benefit) is as follows (in thousands):
Ye ars e nde d De ce mbe r 31,
2014
2015
2013
United States federal tax statutory rate
State taxes, net of federal benefit
Valuation allowances against deferred tax assets
Research and development tax credits
Foreign provision different than U.S. tax rate
Stock option expense
Adjustment of prior year tax credits and refunds
Uncertain tax positions
Other
$
$
137
(6)
637
(716)
104
21
(40)
-
(119)
$
(766)
(233)
769
(374)
483
33
102
(10)
(158)
(2,528)
(36)
6,657
(252)
148
28
(63)
(8)
49
Total
$
18
$
(154)
$
3,995
39
A summary of the deferred tax assets and liabilities is as follows (in thousands):
Deferred tax assets:
Accrued compensation and benefits
Inventory reserves
Allowance for doubtful accounts
Warranty reserves
Intangible and other assets
Net operating loss carryforwards
Non-qualified stock option expense
Property, equipment and other
Research and development credit
Total deferred tax asset:
Less: valuation allowance
Net deferred tax assets:
Deferred tax liabilities:
Prepaid expenses and other
Total deferred tax liability:
Ye ars e nde d De ce mbe r 31,
2015
2014
$
186
27
9
168
3,027
6,898
114
133
1,710
12,272
(12,205)
67
$
141
217
112
194
3,476
5,620
77
158
913
10,908
(10,950)
(42)
(48)
(48)
(61)
(61)
Total net deferred tax asset/(liability)
$
19
$
(103)
As of December 31, 2015, the Company had sustained a significant loss. The net operation loss (“NOL”) carry forward in the United
States, United Kingdom, Hong Kong, Canada and China is $14.1 million, $8.8 million, $1.3 million, $70,000 and $113,000, respectively.
The Company’s management believes that it is not more likely than not the net operating losses will be utilized. Accordingly, as of
December 31, 2015, a full valuation allowance is provided, except Canadian NOL.
In accordance with ASC 740-30, we have not recognized a deferred tax liability for the undistributed earnings of certain of our foreign
operations because those subsidiaries have invested or will invest the undistributed earnings indefinitely. It is impractical for us to
determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Deferred taxes are recorded for
earnings of foreign operations when we determine that such earnings are no longer indefinitely reinvested.
We realize an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and an increase in additional paid-in capital.
The Company has recognized no material uncertain tax positions as of December 31, 2015. The Company files income tax returns in
the U.S federal jurisdiction, various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S
federal or state and local income tax examinations by tax authorities for years before 2011. It is difficult to predict the final timing
and resolution of any particular uncertain tax position. Based on the Company's assessment of many factors, including past
experience and complex judgments about future events, the Company does not currently anticipate significant changes in its uncertain
tax positions over the next 12 months.
9.
LICENSING
We have licensed the exclusive right to manufacture and market the Autoscope video and RTMS radar (from July 24, 2012 to July 14,
2014) technology in the United States, Mexico, Canada and the Caribbean to Econolite, and we receive royalties from Econolite on sales
of systems in those territories as well as in non-exclusive territories as allowed from time to time. We may terminate our agreement with
Econolite if a minimum annual sales level is not met or if Econolite fails to make royalty payments as required by the agreement. The
agreement’s term runs to 2031, unless terminated by either party upon three years’ notice.
We recognized royalty income from this agreement of $8.5 million, $10.2 million and $11.6 million in 2015, 2014 and 2013,
respectively.
40
10.
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Royalty income from Econolite comprised 56%, 56% and 58% of revenue in the years ended December 31, 2015, 2014 and 2013,
respectively. Accounts receivable from Econolite were $1.4 million and $1.5 million at December 31, 2015 and 2014, respectively.
Major disruptions in the manufacturing and distribution of our products by Econolite or the inability of Econolite to make payments on
its accounts receivable with us could have a material adverse effect on our business, financial condition and results of operations.
Econolite was the only customer that comprised more than 10% of accounts receivable as of December 31, 2015.
11.
RETIREMENT SAVINGS PLANS
Substantially all of our employees in the United States are eligible to participate in a qualified defined contribution 401(k) plan.
Participants may elect to have a specified portion of their salary contributed to the plan, and we may make discretionary contributions
to the plan. ISS HK and ISS UK are obligated to contribute to certain employee pension plans. We made contributions totaling $84,000,
$108,000 and $100,000 to the plans for 2015, 2014 and 2013, respectively.
12.
SHAREHOLDERS’ EQUITY
Stock-Based Compensation
We compensate officers, directors and key employees with stock-based compensation under stock plans approved by our shareholders
and 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 proportionally 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 ten years.
Performance stock options are time based; however, the final number of awards earned and the related compensation expense is adjusted
up or down to the extent the performance target is met. The actual number of shares that will ultimately vest ranges from 90% to 100%
of the targeted amount if the minimum performance target is achieved. For performance stock awards granted in 2015, the performance
target was operating profit. We evaluate the likelihood of meeting the performance target at each reporting period and adjust
compensation expense, on a cumulative basis, based on the expected achievement of each performance target.
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 years ended December 31, 2015, 2014 and 2013 was $279,000, $271,000 and
$213,000, respectively. At December 31, 2015, a total of 377,803 shares were available for grant under these plans.
The following table summarizes stock option activity for 2015, 2014 and 2013:
Options outstanding at beginning of year
Granted
Exercised
Expired
Forfeited
Options outstanding at end of year
Options eligible for exercise at year-end
________________________________
*Weighted Average Exercise Price
2015
Shares
354,000
50,000
—
(3,000)
(93,250)
307,750
165,625
$
$
$
$
$
$
$
WAEP*
6.30
2.73
—
9.22
5.43
5.96
7.20
2014
2013
Shares
339,750
167,500
—
—
(153,250)
354,000
174,000
WAEP*
6.73
4.92
—
—
5.74
6.30
7.16
$
$
$
$
$
$
$
Shares
398,893
86,000
(2,333)
(4,000)
(138,810)
339,750
130,688
WAEP*
7.95
6.82
3.65
9.00
10.28
6.73
7.71
$
$
$
$
$
$
$
Options outstanding at December 31, 2015 had a weighted average remaining contractual term of 6.3 years and had an aggregate intrinsic
value of $46,000. Options eligible for exercise at December 31, 2015 had a weighted average remaining contractual term of 4.7 years
and had no aggregate intrinsic value.
There were no stock options exercised during the fiscal years ended December 31, 2015 and 2014. The total intrinsic value of stock
options exercised during the fiscal year ended December 31, 2013 was $4,000.
The fair value of stock options granted under stock-based compensation programs has been estimated as of the date of each grant using
the multiple option form of the Black-Scholes valuation model, based on the grant price and assumptions regarding the expected grant
life, stock price volatility, dividends, and risk-free interest rates. Each vesting period of an option award is valued separately, with this
value being recognized evenly over the vesting period. The weighted average per share grant date fair value of options to purchase
50,000, 167,500 and 86,000 shares granted for the years ended December 31, 2015, 2014 and 2013 was $1.53, $2.20 and $3.53,
41
respectively. The weighted average assumptions used to determine the fair value of stock options granted during those fiscal years were
as follows:
Expected life (in years)
Risk-free interest rate
Expected volatility
Dividend yield
2015
5.0
1.60
67
%
%
0 %
2014
5.0
1.55
50
%
%
0 %
2013
5.0
1.52
60
%
%
0 %
The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on
historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity
U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. We estimate stock price volatility
based on a historical weekly price observation. The dividend yield assumption is based on the annualized current dividend divided by
the share price on the grant date. We have not historically paid any cash dividends and do not expect to do so in the foreseeable future.
Other information pertaining to options for the years ended December 31, 2015, 2014 and 2013 is as follows:
2015
2014
2013
Stock-based compensation expense recognized
within general and administrative expense on
the consolidated statements of operations
Cash received from the exercise of options
Excess income tax benefits from exercise of stock options
$
$
279,000
-
-
271,000
-
-
$
213,000
8,500
-
Stock Awards
We 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. Compensation expense related to stock awards 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. During the quarter ended December 31, 2015, there were stock
awards issued for 8,285 shares with a weighted-average grant date fair value of $3.77. For the year ended December 31, 2015, there
were stock awards issued for 32,037 shares with a weighted-average grant date fair value of $3.32.
13.
RESTRUCTURING
In the first quarter of 2014, the Company implemented restructuring plans to improve our financial performance in Europe. These plans
included the closure of our office in Poland. Because of these actions, restructuring charges of approximately $460,000 were recorded
related primarily to the closure of facilities and legal costs.
In the fourth quarter of 2014, the Company developed restructuring plans to close our offices in Asia. Because of these actions,
restructuring charges of approximately $310,000 were recorded related primarily to facilities and employee terminations. In the first
quarter of 2015, we completed the restructuring plans to close our offices in Asia.
The following table shows the restructuring activity for 2014 and 2015 (in thousands):
Balance at January 1, 2014
Charges
Payments/settlements
Balance at December 31, 2014
Charges
Settlements
Balance at December 31, 2015
Facility Costs
Termination
and Contract
Inventory
Benefits
-
$
250
(60)
190
$
-
(190)
$
-
Termination
-
$
463
(437)
26
$
-
(26)
$
-
Charges
-
$
57
(57)
-
$
-
-
$
-
Total
-
$
770
(554)
216
$
-
(216)
$
-
42
14.
SEGMENT INFORMATION
The Company’s Chief Executive Officer and management regularly review financial information for the Company’s operating segments.
The Company previously conducted its operations through three businesses consisting of 1) Intersection, 2) Highway, and 3) LPR. As
further described in Note 2 of these Notes to Consolidated Financial Statements, on July 9, 2015, the Company completed the sale of its
LPR segment. As a result, effective July 9, 2015, the LPR business qualified for discontinued operations presentation in the Company’s
consolidated financial statements. Accordingly, financial results for the 12 months ended December 31, 2015 have been reported on
this basis. Previously reported results for comparable periods in 2014 and 2013 have also been restated to reflect this reclassification.
Accordingly, effective July 9, 2015, the Company has two reportable segments, Intersection and Highway. Autoscope video is our
machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of
international product sales. Video products are normally sold in the Intersection segment. The RTMS is our radar product line, and
revenue consists of international and North American product sales as well as a portion of royalties for the periods from July 24, 2012
to July 14, 2014 (all of which are received from Econolite). Radar products are normally sold in the Highway segment.
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 tables set forth selected unaudited financial information for each of our reportable segments (in thousands):
For the ye ar e nde d De ce mbe r 31, 2015
Highway
Inte rse ction
Total
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
10,198
9,128
—
1,210
$
5,017
2,610
455
—
$
15,215
11,738
455
1,210
For the ye ar e nde d De ce mbe r 31, 2014
Highway
Inte rse ction
Total
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
11,357
10,305
—
—
$
6,786
3,255
488
454
$
18,143
13,560
488
454
For the ye ar e nde d De ce mbe r 31, 2013
Highway
Inte rse ction
Total
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
13,428
11,559
—
—
$
6,414
1,862
488
942
$
19,842
13,421
488
942
We derived the following percentages of our net revenues from the following geographic regions:
Asia Pacific
Europe
North America
2015
0%
17%
83%
2014
11%
18%
71%
2013
14%
26%
60%
No countries other than the United States had revenue in excess of 10% of our total revenue during any periods presented. The aggregate
net book value of long-lived assets held outside of the United States, not including intangible assets, was $101,000 and $121,000 at
December 31, 2015 and 2014, respectively.
43
15.
OTHER ASSETS
In January 2013, we acquired a minority interest in the shares of common stock of Municipal Parking Services, Inc. (MPS) for an
aggregate purchase price of $300,000. The investment was accounted for under the cost method and was included in Other Assets on
our consolidated balance sheet at December 31, 2013. In October 2014, our minority interest in MPS was purchased by MPS for
$150,000. We recorded an impairment charge of $150,000 in operating expenses in the third quarter of 2014. During the period from
April 2013 until March 2 2016, the Chief Executive Officer of MPS served on our Board of Directors.
16.
COMMITMENTS AND CONTINGENCIES
Operating Leases
We rent office space and equipment under operating lease agreements expiring at various dates through January 2016. Rent expense
for office facilities was $480,000 in 2015, $581,000 in 2014 and $616,000 in 2013. Minimum annual rental commitments under
noncancelable operating leases are as follows (in thousands):
Future Lease
Payments
$
2016
2017
2018
2019
2020
275
263
218
218
127
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 generally accepted accounting principles
in the United States, 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 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.
Investigation Matter
As previously disclosed, Polish authorities conducted an investigation into violations of Polish law related to tenders in the City of Łodź,
Poland. A Special Subcommittee of our Audit Committee comprised solely of independent directors retained independent counsel and
accounting advisors who conducted an investigation focusing on possible violations of Company policy, internal controls, and laws,
including the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and Polish law. We voluntarily disclosed this matter to the
United States Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”).
During the third quarter of 2014, we received a letter from the DOJ informing us that their inquiry into this matter had been closed,
citing the Company’s voluntary disclosure, thorough investigation, cooperation and voluntary enhancements to its compliance program.
Additionally, the SEC previously notified the Company that it had closed its investigation without recommending enforcement action.
Neither the Company nor any of our subsidiaries was charged with any offense, and there were no fines levied at the close of the
investigation by the DOJ or SEC.
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Image Sensing Systems, Inc.
We have audited the accompanying consolidated balance sheets of Image Sensing Systems, Inc. (a Minnesota corporation) and
subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive
loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Image Sensing Systems, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the
United States of America.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
March 10, 2016
45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (Exchange Act)), that are designed to reasonably ensure that information required to be disclosed by us in the reports
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the
period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.
Management’s report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United
States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally
accepted accounting principles in the United States of America and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process that involves human diligence and is subject to lapses in
judgment or breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion
or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, although not eliminate, these risks.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Further,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in “Internal Control—Integrated Framework”. Based on this assessment, management has concluded that our internal control
over financial reporting was effective as of December 31, 2015.
Changes in internal control over financial reporting
During the most recent fiscal quarter covered by this Annual Report on Form 10-K, there has been no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
46
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethics which applies to our principal executive, accounting and financial officers. The Code of Ethics is
published on our website at www.imagesensing.com. Any amendments to the Code of Ethics and waivers of the Code of Ethics for our
principal executive, accounting and financial officers will be published on our website.
The sections entitled “Proposal I - Election of Directors,” “Audit Committee” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in our definitive proxy statement for our 2016 annual meeting of shareholders are incorporated into this Annual Report on
Form 10-K by reference.
Item 11. Executive Compensation
The sections entitled “Executive Compensation” and “Compensation of Directors” in our definitive proxy statement for the 2016 annual
meeting of shareholders are incorporated into this Annual Report on Form 10-K by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan Information
The following table provides information as of December 31, 2015 about our shares of common stock subject to outstanding awards or
available for future awards under our equity compensation plans and arrangements.
Number of securities remaining
Number of securities to
Weighted-average exercise
available for future issuance
be issued upon exercise
price of outstanding
under equity compensation plans
of outstanding options,
warrants and rights
options, warrants and
rights
(excluding securities reflected in
the first column)(1)
Plan Category
Equity compensation plans approved by shareholders
307,750
$
5.96
377,803
(1) The 377,803 shares available for grant under the 2014 Stock Option and Incentive Plan may become the subject of future
awards in the form of stock options, stock appreciation rights, restricted stock, performance awards or other stock-based awards.
The section entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2016
annual meeting of shareholders is incorporated into this Annual Report on Form 10-K by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The section entitled “Certain Relationships and Related Transactions” in our definitive proxy statement for the 2016 annual meeting of
shareholders is incorporated into this Annual Report on Form 10-K by reference.
Item 14. Principal Accountant Fees and Services
The sections entitled “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees” and “Policy on Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services Provided by Our Independent Registered Public Accounting Firm” in our definitive proxy
statement for our 2016 annual meeting of shareholders are incorporated into this Annual Report on Form 10-K by reference.
47
Item 15. Exhibits and Financial Statement Schedules
(a)
Documents filed as part of this report:
1.
Financial statements
PART IV
The following Consolidated Financial Statements are included in Part II, Item 8. “Financial Statements and
Supplementary Data”:
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flow for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2.
Financial Statement Schedules:
All financial statement schedules have been omitted because they are not required.
3.
The following documents are filed as exhibits to this report:
Exhibit No.
Description
2.1**
3(i).1
3(i).2
3(ii)
4.1
10.1
10.2*
10.3
10.4
Share and Asset Sale and Purchase Agreement dated as of July 9, 2015 among Image Sensing Systems,
Inc., Image Sensing Systems EMEA Limited and TagMaster AB (“SAPA”). (Pursuant to Item 601(b)(2)
of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934, certain
schedules to the SAPA were not filed, and the SAPA briefly identifies the contents of these schedules.
Image Sensing Systems, Inc. hereby agrees to furnish supplementally a copy of any omitted schedules to
the Securities and Exchange Commission upon its request), incorporated by reference to Exhibit 2.1 to
ISS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 0-26056).
Restated Articles of Incorporation of ISS, incorporated by reference to Exhibit 3.1 to ISS’ Registration
Statement on Form SB-2 (Registration No. 33-90298C) filed on March 15, 1995, as amended (Registration
Statement).
Articles of Amendment to Articles of Incorporation of ISS, incorporated by reference to Exhibit 3.2 to
ISS’ Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 (File No. 0-26056).
Bylaws of ISS, incorporated by reference to Exhibit 3(ii) to ISS’ Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011 (File No. 0-26056).
Specimen form of ISS’ common stock certificate, incorporated by reference to Exhibit 4.1 to ISS’
Registration Statement.
Form of Distributor Agreement, incorporated by reference to Exhibit 10.1 to ISS’ Registration Statement.
Employment Agreement between ISS and Gregory R. L. Smith, dated December 8, 2006, incorporated by
reference to Exhibit 10.1 to ISS’ Current Report on Form 8-K dated December 8, 2006 (File No. 0-26056).
Amendment VII to Office Lease Agreement dated April 26, 2007 by and between ISS and Spruce Tree
Centre L.L.P., incorporated by reference to Exhibit 10.11 to ISS’ Annual Report on Form 10-K for the
year ended December 31, 2007 (File No. 0-26056) (2007 Form 10-K).
Modification to Manufacturing, Distributing and Technology License Agreement dated September 1, 2000
by and between ISS and Econolite Control Products, Inc. (Econolite), incorporated by reference to Exhibit
10.12 to ISS’ 2007 Form 10-K.
48
10.5*
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Image Sensing Systems, Inc. 2005 Stock Incentive Plan, incorporated by reference to Appendix A to ISS’
proxy statement filed with the SEC on April 19, 2005 (File No. 0-26056).
Manufacturing, Distributing and Technology License Agreement dated June 11, 1991 by and between ISS
and Econolite Control Products, Inc. (Econolite), incorporated by reference to Exhibit 10.1 to the
Registration Statement.
Extension and Second Modification to License Agreement dated July 13, 2001 by and between ISS and
Econolite, incorporated by reference to Exhibit 10.12 to ISS’ Annual Report on Form 10-KSB for the year
ended December 31, 2001 (File No. 0-26056) (2001 Form 10-KSB).
Office Lease Agreement dated November 24, 1998 by and between ISS and Spruce Tree Centre L.L.P.,
incorporated by reference to Exhibit 10.18 to ISS’ Annual Report on Form 10-KSB for the year ended
December 31, 1998 (File No. 0-26056).
Production Agreement dated February 14, 2002 by and among ISS, Wireless Technology, Inc. and
Econolite, incorporated by reference to Exhibit 10.20 to ISS’ 2001 Form 10-KSB.
Extension and Third Modification to Manufacturing Distributing and Technology License Agreement
dated July 3, 2008 by and between ISS and Econolite, incorporated by reference to Exhibit 10.1 to ISS’
Current Report on Form 8-K dated July 3, 2008 (File No. 0-26056).
Fourth Modification to Manufacturing, Distributing and Technology License Agreement dated as of
December 15, 2011 by and between ISS and Econolite, incorporated by reference to Exhibit 10.1 to ISS’
Current Report on Form 8-K dated December 15, 2011 (File No. 0-26056).
Loan Agreement dated May 1, 2008 (2008 Loan Agreement) by and between ISS and Associated Bank,
National Association (Associated Bank), incorporated by reference to Exhibit 10.19 to ISS’ Registration
Statement on Form S-1 filed on May 12, 2008 (Registration No. 333-150852) (Form S-1).
Security Agreement dated May 1, 2008 by and between ISS and Associated Bank, incorporated by
reference to Exhibit 10.20 to ISS’ Form S-1.
Promissory Note (Line of Credit) dated May 1, 2008 in the original principal amount of $5,000,000 issued
by ISS to Associated Bank, incorporated by reference to Exhibit 10.21 to ISS’ Form S-1.
Promissory Note (Loan) dated May 1, 2008 in the original principal amount of $3,000,000 issued by ISS
to Associated Bank, incorporated by reference to Exhibit 10.22 to ISS’ Form S-1.
Modification Agreement dated December 28, 2009 by and between ISS and Associated Bank under which
ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit 10.18
to ISS’ Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-26056) (2009
Form 10-K).
Promissory Note (Loan) dated December 28, 2009 in the original principal amount of $4,000,000 issued
by ISS to Associated Bank, incorporated by reference to Exhibit 10.19 to the 2009 Form 10-K.
Lease dated February 1, 2010 between Image Sensing Systems UK Limited and Nortrust Nominees
Limited, incorporated by reference to Exhibit 10.1 to ISS’ Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010 (File No. 0-26056).
Third Modification Agreement dated December 28, 2010 by and between ISS and Associated Bank under
which ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit
10.21 to ISS’ Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 0-26056).
Fourth Modification Agreement dated December 22, 2011 by and between ISS and Associated Bank under
which ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit
10.1 to ISS’ Current Report on Form 8-K dated December 22, 2011 (File No. 0-26056).
49
10.21
10.22**
10.23
10.24
10.25
10.26
10.27
10.28
10.29
21
23.1
24
31.1
31.2
32.1
99.1
99.2
99.3
Fifth Modification Agreement dated December 24, 2012 by and between ISS and Associated Bank under
which ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit
10.1 to ISS’ Current Report on Form 8-K dated December 24, 2012 (File No. 0-26056).
Amendment XIII to Office Lease Agreement by and between Spruce Tree Centre L. L. P. and Image
Sensing Systems dated as of February 18, 2014, incorporated by reference to Exhibit 10.26 to ISS’ Annual
Report on Form 10-K for the year ended December 31, 2013 (File No. 0-26056).
Amended and Restated Employment Agreement dated as of April 23, 2014 by and between ISS and Kris
B. Tufto, incorporated by reference to Exhibit 10.1 to ISS’ Quarterly Report on Form 10-Q for the quarter
ended March 31, 2014 (File No. 0-26956) (March 31, 2014 Form 10-Q).
Amended and Restated Employment Agreement dated as of April 22, 2014 by and between ISS and Dale
E. Parker, incorporated by reference to Exhibit 10.2 to ISS’ March 31, 2014 Form 10-Q.
Commitment Letter effective as of May 12, 2014 by and between ISS and Alliance Bank, incorporated by
reference to Exhibit 10.3 to ISS’ March 31, 2014 Form 10-Q.
Security Agreement dated as of May 12, 2014 by and between ISS and Alliance Bank, incorporated by
reference to Exhibit 10.4 to ISS’ March 31, 2014 Form 10-Q.
Promissory Note dated as of May 12, 2014 in the original principal amount of $5,000,000 issued by ISS
to Alliance Bank, incorporated by reference to Exhibit 10.5 to ISS’ March 31, 2014 Form 10-Q.
Amendment to Commitment Letter dated as of March 16, 2015 by and between ISS and Alliance Bank
(filed herewith).
Amendment to Promissory Note effective as of March 16, 2015 issued by ISS to Alliance Bank (filed
herewith).
List of Subsidiaries of ISS (filed herewith).
Consent of Independent Registered Public Accounting Firm (filed herewith).
Power of Attorney (included on signature page).
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
Extension of Modification to Manufacturing, Distributing and Technology License Agreement dated May
31, 2002 by and between ISS and Econolite, incorporated by reference to Exhibit 99.2 to ISS’ 2007 Form
10-K.
Letter agreement dated June 19, 1997 by and between ISS and Econolite, incorporated by reference to
Exhibit 99.3 to ISS’ 2007 Form 10-K.
License and Distribution Agreement dated January 2, 2011 by and among ISS, Econolite and Econolite
Canada Inc., incorporated by reference to Exhibit 99.3 to ISS’ Annual Report on Form 10-K for the year
ended December 31, 2011 (File No. 0-26056).
*
Management contract or compensatory plan or arrangement.
50
**
Portions of this exhibit are treated as confidential pursuant to a request for confidential treatment filed by ISS with the SEC.
Copies of all exhibits not attached will be furnished without charge upon written request to the Company at the address set
forth on the inside back cover page of this Annual Report on Form 10-K.
51
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Dale E. Parker
Dale E. Parker
Interim President, Interim Chief Executive Officer and Chief Financial Officer
(Interim Principal Executive Officer, Principal Financial Officer
and Principal Accounting Officer)
Date: March 10, 2016
Each person whose signature to this Annual Report on Form 10-K appears below hereby constitutes and appoints Dale E.
Parker as his or her true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his or her behalf individually
and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments to this Annual Report on
Form 10-K, and any and all instruments or documents filed as part of or in connection with this Annual Report on Form 10-K or any
amendments hereto, and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes,
shall do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
/s/ Dale E. Parker
Dale E. Parker
Interim President, Interim Chief Executive Officer and Chief
Financial Officer
(Interim Principal Executive Officer, Principal Financial
Officer
and Principal Accounting Officer)
/s/ James W. Bracke
James W. Bracke
Chairman of the Board of Directors
/s/ Melissa B. Fisher
Melissa B. Fisher
Director
/s/ Andrew T. Berger
Andrew T. Berger
Director
/s/ Paul F. Lidsky
Paul F. Lidsky
Director
Date: March 10, 2016
Date: March 10, 2016
Date: March 10, 2016
Date: March 10, 2016
Date: March 10, 2016
52
Exhibit Index
Exhibit No.
Description
2.1**
3(i).1
3(i).2
3(ii)
4.1
10.1
10.2*
10.3
10.4
10.5*
10.6
10.7
10.8
10.9
Share and Asset Sale and Purchase Agreement dated as of July 9, 2015 among Image Sensing Systems,
Inc., Image Sensing Systems EMEA Limited and TagMaster AB (“SAPA”). (Pursuant to Item 601(b)(2)
of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934, certain
schedules to the SAPA were not filed, and the SAPA briefly identifies the contents of these schedules.
Image Sensing Systems, Inc. hereby agrees to furnish supplementally a copy of any omitted schedules to
the Securities and Exchange Commission upon its request), incorporated by reference to Exhibit 2.1 to
ISS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 0-26056).
Restated Articles of Incorporation of ISS, incorporated by reference to Exhibit 3.1 to ISS’ Registration
Statement on Form SB-2 (Registration No. 33-90298C) filed on March 15, 1995, as amended
(Registration Statement).
Articles of Amendment to Articles of Incorporation of ISS, incorporated by reference to Exhibit 3.2 to
ISS’ Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 (File No. 0-26056).
Bylaws of ISS, incorporated by reference to Exhibit 3(ii) to ISS’ Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011 (File No. 0-26056).
Specimen form of ISS’ common stock certificate, incorporated by reference to Exhibit 4.1 to ISS’
Registration Statement.
Form of Distributor Agreement, incorporated by reference to Exhibit 10.1 to ISS’ Registration Statement.
Employment Agreement between ISS and Gregory R. L. Smith, dated December 8, 2006, incorporated
by reference to Exhibit 10.1 to ISS’ Current Report on Form 8-K dated December 8, 2006 (File No. 0-
26056).
Amendment VII to Office Lease Agreement dated April 26, 2007 by and between ISS and Spruce Tree
Centre L.L.P., incorporated by reference to Exhibit 10.11 to ISS’ Annual Report on Form 10-K for the
year ended December 31, 2007 (File No. 0-26056) (2007 Form 10-K).
Modification to Manufacturing, Distributing and Technology License Agreement dated September 1,
2000 by and between ISS and Econolite Control Products, Inc. (Econolite), incorporated by reference to
Exhibit 10.12 to ISS’ 2007 Form 10-K.
Image Sensing Systems, Inc. 2005 Stock Incentive Plan, incorporated by reference to Appendix A to ISS’
proxy statement filed with the SEC on April 19, 2005 (File No. 0-26056).
Manufacturing, Distributing and Technology License Agreement dated June 11, 1991 by and between
ISS and Econolite Control Products, Inc. (Econolite), incorporated by reference to Exhibit 10.1 to the
Registration Statement.
Extension and Second Modification to License Agreement dated July 13, 2001 by and between ISS and
Econolite, incorporated by reference to Exhibit 10.12 to ISS’ Annual Report on Form 10-KSB for the
year ended December 31, 2001 (File No. 0-26056) (2001 Form 10-KSB).
Office Lease Agreement dated November 24, 1998 by and between ISS and Spruce Tree Centre L.L.P.,
incorporated by reference to Exhibit 10.18 to ISS’ Annual Report on Form 10-KSB for the year ended
December 31, 1998 (File No. 0-26056).
Production Agreement dated February 14, 2002 by and among ISS, Wireless Technology, Inc. and
Econolite, incorporated by reference to Exhibit 10.20 to ISS’ 2001 Form 10-KSB.
53
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Extension and Third Modification to Manufacturing Distributing and Technology License Agreement
dated July 3, 2008 by and between ISS and Econolite, incorporated by reference to Exhibit 10.1 to ISS’
Current Report on Form 8-K dated July 3, 2008 (File No. 0-26056).
Fourth Modification to Manufacturing, Distributing and Technology License Agreement dated as of
December 15, 2011 by and between ISS and Econolite, incorporated by reference to Exhibit 10.1 to ISS’
Current Report on Form 8-K dated December 15, 2011 (File No. 0-26056).
Loan Agreement dated May 1, 2008 (2008 Loan Agreement) by and between ISS and Associated Bank,
National Association (Associated Bank), incorporated by reference to Exhibit 10.19 to ISS’ Registration
Statement on Form S-1 filed on May 12, 2008 (Registration No. 333-150852) (Form S-1).
Security Agreement dated May 1, 2008 by and between ISS and Associated Bank, incorporated by
reference to Exhibit 10.20 to ISS’ Form S-1.
Promissory Note (Line of Credit) dated May 1, 2008 in the original principal amount of $5,000,000 issued
by ISS to Associated Bank, incorporated by reference to Exhibit 10.21 to ISS’ Form S-1.
Promissory Note (Loan) dated May 1, 2008 in the original principal amount of $3,000,000 issued by ISS
to Associated Bank, incorporated by reference to Exhibit 10.22 to ISS’ Form S-1.
Modification Agreement dated December 28, 2009 by and between ISS and Associated Bank under which
ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit 10.18
to ISS’ Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-26056) (2009
Form 10-K).
Promissory Note (Loan) dated December 28, 2009 in the original principal amount of $4,000,000 issued
by ISS to Associated Bank, incorporated by reference to Exhibit 10.19 to the 2009 Form 10-K.
Lease dated February 1, 2010 between Image Sensing Systems UK Limited and Nortrust Nominees
Limited, incorporated by reference to Exhibit 10.1 to ISS’ Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010 (File No. 0-26056).
Third Modification Agreement dated December 28, 2010 by and between ISS and Associated Bank under
which ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit
10.21 to ISS’ Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 0-26056).
Fourth Modification Agreement dated December 22, 2011 by and between ISS and Associated Bank
under which ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to
Exhibit 10.1 to ISS’ Current Report on Form 8-K dated December 22, 2011 (File No. 0-26056).
Fifth Modification Agreement dated December 24, 2012 by and between ISS and Associated Bank under
which ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by reference to Exhibit
10.1 to ISS’ Current Report on Form 8-K dated December 24, 2012 (File No. 0-26056).
10.22**
Amendment XIII to Office Lease Agreement by and between Spruce Tree Centre L. L. P. and Image
Sensing Systems dated as of February 18, 2014, incorporated by reference to Exhibit 10.26 to ISS’ Annual
Report on Form 10-K for the year ended December 31, 2013 (File No. 0-26056).
10.23
10.24
10.25
Amended and Restated Employment Agreement dated as of April 23, 2014 by and between ISS and Kris
B. Tufto, incorporated by reference to Exhibit 10.1 to ISS’ Quarterly Report on Form 10-Q for the quarter
ended March 31, 2014 (File No. 0-26956) (March 31, 2014 Form 10-Q).
Amended and Restated Employment Agreement dated as of April 22, 2014 by and between ISS and Dale
E. Parker, incorporated by reference to Exhibit 10.2 to ISS’ March 31, 2014 Form 10-Q.
Commitment Letter effective as of May 12, 2014 by and between ISS and Alliance Bank, incorporated
by reference to Exhibit 10.3 to ISS’ March 31, 2014 Form 10-Q.
54
10.26
10.27
10.28
10.29
21
23.1
24
31.1
31.2
32.1
99.1
99.2
99.3
Security Agreement dated as of May 12, 2014 by and between ISS and Alliance Bank, incorporated by
reference to Exhibit 10.4 to ISS’ March 31, 2014 Form 10-Q.
Promissory Note dated as of May 12, 2014 in the original principal amount of $5,000,000 issued by ISS
to Alliance Bank, incorporated by reference to Exhibit 10.5 to ISS’ March 31, 2014 Form 10-Q.
Amendment to Commitment Letter dated as of March 16, 2015 by and between ISS and Alliance Bank,
incorporated by reference to Exhibit 10.31 to ISS’ Annual Report on Form 10-K for the year ended
December 31, 2014 (File No 0-26056).
Amendment to Promissory Note effective as of March 16, 2015 issued by ISS to Alliance Bank,
incorporated by reference to Exhibit 10.32 to ISS’ Annual Report on Form 10-K for the year ended
December 31, 2014 (File No 0-26056).
List of Subsidiaries of ISS (filed herewith).
Consent of Independent Registered Public Accounting Firm (filed herewith).
Power of Attorney (included on signature page).
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
Extension of Modification to Manufacturing, Distributing and Technology License Agreement dated May
31, 2002 by and between ISS and Econolite, incorporated by reference to Exhibit 99.2 to ISS’ 2007 Form
10-K.
Letter agreement dated June 19, 1997 by and between ISS and Econolite, incorporated by reference to
Exhibit 99.3 to ISS’ 2007 Form 10-K.
License and Distribution Agreement dated January 2, 2011 by and among ISS, Econolite and Econolite
Canada Inc., incorporated by reference to Exhibit 99.3 to ISS’ Annual Report on Form 10-K for the year
ended December 31, 2011 (File No. 0-26056).
*
**
Management contract or compensatory plan or arrangement.
Portions of this exhibit are treated as confidential pursuant to a request for confidential treatment filed by ISS with the SEC.
Copies of all exhibits not attached will be furnished without charge upon written request to the Company at the address set
forth on the inside back cover page of this Annual Report on Form 10-K.
55
List of Subsidiaries of Image Sensing Systems, Inc.
Exhibit 21
Name of Subsidiaries
Image Sensing Systems HK Limited
Jurisdiction of Incorporation or Organization
Hong Kong Special Administrative Region of the People’s
Republic of China
Image Sensing Systems (Shenzhen) Limited
China (PRC)
Image Sensing Systems EMEA Limited
Image Sensing Systems Europe Limited
Image Sensing Systems Holdings Limited
Image Sensing Systems Europe Limited SP.Z.O.O.
Image Sensing Systems Germany, GmbH
Image Sensing Systems Spain SLU
Image Sensing Systems Canada Ltd.
United Kingdom
United Kingdom
United Kingdom
Poland
Germany
Spain
Canada
56
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We have issued our report dated March 10, 2016, with respect to the consolidated financial statements included in the Annual
Report of Image Sensing Systems, Inc. on Form 10-K for the year ended December 31, 2015. We hereby consent to the
incorporation by reference of said report in the Registration Statements of Image Sensing Systems, Inc. on Forms S-3 (File
No. 333-162810, effective November 18, 2009 and File No. 333-41706, effective July 19, 2000) and on Forms S-8 (File No.
333-195923, effective May 13, 2014; File No. 333-167496, effective June 14, 2010; File No. 333-165303, effective March 8,
2010; File No. 333-152117, effective July 3, 2008; File No. 333-142449, effective April 30, 2007; File No. 333-82546, effective
February 11, 2002; File No. 333-86169, effective August 30, 1999 and File No. 333-09289, effective July 31, 1996).
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
March 10, 2016
57
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dale E. Parker, certify that:
1.
I have reviewed this annual report on Form 10-K of Image Sensing Systems, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 10, 2016
/s/ Dale E. Parker
Name: Dale E. Parker
Title: Interim President and Interim Chief Executive Officer
58
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dale E. Parker, certify that:
1.
I have reviewed this annual report on Form 10-K of Image Sensing Systems, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 10, 2016
/s/ Dale E. Parker
Name: Dale E. Parker
Title: Chief Financial Officer
59
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Image Sensing System, Inc. (the “Company”) for the fiscal year ended
December 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), I, Dale E. Parker, President, Chief Executive
Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Dale E. Parker
Dale E. Parker
Interim President, Interim Chief Executive Officer and Chief Financial
Officer
March 10, 2016
60
Corporate Information
Directors and Officers
Andrew T. Berger*‡
Director
James W. Bracke*†‡
Chairman of the Board
Melissa Fisher*†‡
Director
Paul F. Lidsky*†‡
Director
Dale E. Parker
Director, Interim President, Interim Chief Executive Officer,
Chief Financial Officer, Chief Operating Officer, Treasurer and
Secretary
* Member of audit committee
† Member of compensation and stock option committee
‡ Member of nominating and corporate governance committee
Annual Shareholders’ Meeting
The annual meeting of the shareholders will be held on May
10, 2016, at 9:00 am CDT at Image Sensing Systems, 1600
University Avenue West, Suite 500, St. Paul, MN 55104.
Legal Counsel
Winthrop & Weinstine, P.A.
Independent Registered Public
Accounting Firm
Grant Thornton LLP
Stock Transfer Agent
Continental Stock Transfer & Trust Company
Location
Corporate Headquarters
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825
A copy of the Company’s Form 10-K, filed with the Securities
and Exchange Commission, may be obtained without charge
upon written request to the Company.
A copy of this 2015 Annual Report to Shareholders can be
obtained from our Web site: imagesensing.com
Price Range for Common Stock
The Company’s common stock trades on The Nasdaq Capital Market tier of The Nasdaq Stock Market under the symbol ISNS.
The table below presents the price range of the high and low trading prices for the Company’s common stock for each period
indicated as reported by Nasdaq.
Quarter
First
Second
Third
Fourth
2015
2014
High
$ 2.78
3.47
4.66
3.99
Low
$2.24
2.44
3.38
3.55
High
$ 5.99
5.37
9.94
4.13
Low
$4.74
3.16
2.10
1.89
Image Sensing Systems, Inc. 1600 University Avenue West, Suite 500, St. Paul, Minnesota 55104
Phone +1.651.603.7700 Fax +1.651.305.6402 imagesensing.com