Annual Report
2018
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
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
or
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)
41-1519168
(I.R.S. Employer Identification No.)
500 Spruce Tree Centre, 1600 University Avenue
West
St. Paul, MN
(Address of Principal Executive Offices)
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 Name of each exchange on which registered
Common Stock, $0.01 par value The NASDAQ Capital Market
Preferred Stock Purchase Rights 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 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). 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, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$15,979,542 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 28, 2019 was 5,279,485 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the 2018
Annual Meeting of Shareholders (Proxy Statement)
Parts Into Which Incorporated
Part III
TABLE OF CONTENTS
1
1
6
16
16
16
16
17
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
18
Item 6. Selected Financial Data
19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
26
Item 8. Financial Statements and Supplementary Data
47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
47
Item 9A. Controls and Procedures
48
Item 9B. Other Information
49
PART III
49
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49
49
Item 13. Certain Relationships and Related Transactions, and Director Independence
49
Item 14. Principal Accountant Fees and Services
50
PART IV
50
Item 15. Exhibits and Financial Statement Schedules
50
Item 16. Form 10-K Summary
51
Signatures
52
Exhibit Index
17
i
Item 1. Business
General
PART I
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 applications such as
intersection control, highway, bridge and tunnel traffic management and traffic data collection.
We are a leading provider of above-ground detection products and solutions for the intelligent transportation
systems (“ITS”) industry. Our family of products, which we market as Autoscope® video or video products
(“Autoscope”), RTMS® radar or radar products (“RTMS”), and IntellitraffiQ® or iQ products provides end users
with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals from
sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our
products provide end users with complete solutions for the intersection and transportation markets.
Our technology is a process in which software, rather than humans, examines outputs from various types of
sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical
component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and
highways quickly enough to accommodate the increasing congestion levels. On average, United States commuters
lose 97 hours a year in congestion, which costs motorists $87 billion a year in time, an average of $1,348 per driver.
We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing
and new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our solutions are technically superior to those of our competitors because they have a higher level of
accuracy, limit the occurrence of false detection, are generally easier to install with lower costs of ownership, work
effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a
variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our
solutions well suited for use in ITS markets.
We believe the strength of our distribution channels positions us to increase the penetration of our technology-driven
solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the
Caribbean through exclusive agreements with Econolite Control Products, Inc. (“Econolite”), which we believe is
the leading distributor of ITS intersection control products in these markets.
We market the RTMS radar systems to a network of distributors globally. On a limited basis, we may sell directly
to the end user. We market our Autoscope video products outside the United States, Mexico, Canada and the
Caribbean through a combination of distribution and direct sales channels, through our office in Spain. Our end
users primarily include governmental agencies and municipalities.
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 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.
1
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 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. According to the Federal Highway Administration,
American drivers put a record 3.22 trillion miles on public roads and highways in 2017, an increase of 1.6% from
3.17 trillion miles in 2016. 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. By 2018, there were 548 cities around the world
with over 1 million inhabitants, and by 2030, a projected 706 cities will have at least 1 million residents. 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, connected vehicles and
security/surveillance 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 above-ground 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 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
introduce
innovative next-generation products to market.
in a commercially viable manner. We are
therefore well positioned
to quickly
2
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. Furthermore, Autoscope Vision is an example of
development driven by our customers. We have developed a high definition video detection solution with increased
accuracy, performance, and ease of use. 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 higher 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, RTMS
radar, and IntellitraffiQ software products allows us to offer a broad product portfolio that meets the needs of our
end users.
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 our next-generation video 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 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 begun to increase the adoption of detection technology in their traffic systems. We intend to
take advantage of the accelerated pace of the adoption of above-ground detection throughout the developing world
by increasing end user awareness of our products and applications as well as improve user aptitude.
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 algorithms and sophisticated embedded software that
analyze sensory input and deliver actionable data to integrated applications. We invested approximately $3.6 million
and $4.1 million on research and development in 2018 and 2017, respectively, to develop and enhance our product
technology. Our digital signal processing software algorithms represent a foundation on which to support additional
product development into the automatic incident detection (AID) market. A diagram displaying our fundamental
product architecture is shown below.
3
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), turning movements (quantifying the movement of
vehicles) and flow rate (vehicles per hour per lane). Autoscope supports a variety of standard video cameras or can
be purchased with an integrated high-definition 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. 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 Vision is our flagship integrated product that includes a
color high-definition, zoom camera and a machine vision processing computer contained in a compact housing that
is our leading offering in the North American market. Autoscope Pn-520 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 Pn-520 and its variants are our top selling
Autoscope products in international markets. Autoscope rack-based products offer digital MPEG-4 video streaming,
high speed Ethernet interface, web browser maintenance and data and video over power line communications. The
Autoscope Vision product offers digital streaming video, built-in WiFi for quick and easy setup, cost-effective three-
wire cable and full screen object detection and motion tracking algorithm technology for best in class detection
accuracy.
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 embedded processor 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.
The RTMS radar system is available in different varieties. RTMS Sx-300 is our base, non-intrusive radar for the
detection and measurement of traffic on roadways and is our leading offering in both North America and the Middle
East. The RTMS Sx-300 HDCAM has a high-definition camera that provides the user with visual setup
confirmation, data capture and real-time traffic surveillance. The Sx-300 HDCAM has been widely deployed in
North America for various applications such as ramp metering and wrong way driver detection. We also offer a
wrong way module that interfaces with the Sx-300 HDCAM digital video stream and leverages our video detection
algorithms to detect occurrences of vehicles driving the incorrect direction. The event is captured and sent to the
end users via short message service (SMS) and email in parallel with actuation or roadside or in-pavement warning
systems.
4
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. 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 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 agreement 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 60% 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 Iteris, Inc., Wavetronix,
LLC, FLIR Systems, Inc., GridSmart, Signal Group Inc. (Peek), Citilog S.A., Sensys Inc., and Smartmicro Inc.
Among the companies that provide direct competition to RTMS radar worldwide are Wavetronix, LLC, Houston
Radar, LLC, MS Sedco Inc., Smartmicro Sensors GmbH, and TraffiCast. 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 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.
5
Manufacturing
Autoscope video products for sale under the Econolite license agreement are manufactured through agreements with
Econolite. 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.
We engage E.I. Microcircuits, Inc. ("E.I. Micro") 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.
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, 2018, we had 53 employees, consisting of 50 employees in North America and three employees
in Europe. 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.
6
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, government shutdowns 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.
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,
our Autoscope products. Gross profit from Autoscope sales accounted for approximately 78% of our gross profit in
2018 and 74% in 2017. 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. 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. Since 2002, a substantial portion of our revenue has
consisted of royalties resulting from sales made by Econolite, including 61% in 2018 and 59% in 2017. Econolite’s
account receivable represented 42% of our accounts receivable at December 31, 2018 and 77% of our accounts
receivable at December 31, 2017. 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
2018 and 2017, see the discussion in 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 systems 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.
7
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 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, related security systems and connected vehicles 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 would require 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 would 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 would be accompanied by risks which may include:
● difficulties identifying suitable acquisition candidates at acceptable costs;
● unavailability of capital to conduct acquisitions;
● failure to achieve the financial and strategic goals for the acquired and combined businesses;
● difficulty assimilating the operations and personnel of the acquired businesses;
8
● 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 E.I. Micro 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, 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, E.I. Micro, 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 may experience difficulty obtaining materials or components for our
products, or the cost of materials or components may increase, either of which 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. Some materials or components may become scarce or difficult to obtain in the
market or they may increase in price. This could force us or our manufacturers to identify new suppliers, which
could increase our costs, affect the quality of materials, reduce our sales and profitability, or harm our customer
relations by delaying product deliveries due to increased lead times.
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. 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.
9
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 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. See Item 3 and Note 15 of our Notes to Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K. 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. 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 a segment of our product portfolio 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 a segment of our product portfolio 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.
10
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.
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 20% of our total revenue in 2018 and 17% of our total revenue in 2017. 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:
• 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.;
• 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.
11
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.
The United Kingdom’s withdrawal from the European Union could harm our business and financial results.
In June 2016, voters in the United Kingdom approved the withdrawal of the United Kingdom from the European
Union (commonly referred to as “Brexit”). In March 2017, the United Kingdom government initiated the exit
process under Article 50 of the Treaty of the European Union, commencing a period of up to two years for the
United Kingdom and the other European Union member states to negotiate the terms of the withdrawal. The British
government and the European Union have now negotiated a withdrawal agreement, and the European Union has
approved that agreement, but the British Parliament has not yet approved it. As a result, there remains considerable
uncertainty around the withdrawal. Failure to obtain parliamentary approval of the negotiated withdrawal agreement
would mean that the United Kingdom would leave the European Union on March 29, 2019, probably with no
agreement (a so-called "hard Brexit"). The consequences for the economies of the European Union members and of
the United Kingdom exiting the European Union are unknown and unpredictable, especially in the case of a hard
Brexit. Depending on the final terms of Brexit, we could face new regulatory costs and challenges and greater
volatility in the Pound Sterling and the euro. Any adjustments we make to our business and operations because of
Brexit could result in significant time and expense to complete. Any of the foregoing factors could have a material
adverse effect on our business, results of operations or financial condition.
Changes in U.S. trade policies may adversely impact our business and financial results.
The Company’s operations and performance depend significantly on global, regional and U.S. economic and
geopolitical conditions. In recent years, there has been discussion and dialogue regarding potential significant
changes to U.S. trade policies, legislation, treaties and tariffs, as well as trade policies and tariffs affecting China.
Changes to current policies by the U.S. government could affect our business, including potentially through
increased import tariffs and other influences on U.S. trade relations with China and other countries. The imposition
of tariffs or other trade barriers could increase our costs in certain markets and may cause our customers to find
alternative sourcing. In addition, other countries may change their own policies on business and foreign investment
in companies in their respective countries. Additionally, it is possible that U.S. policy changes and uncertainty about
such changes could increase market volatility and currency exchange rate fluctuations. Market volatility and
currency exchange rate fluctuations could have a material adverse effect on our business, financial condition, results
of operations or cash flows.
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 substances such 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 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.
12
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, 2018, the net carrying value of our long-lived assets (property and equipment, deferred tax
assets and other intangible assets) totaled approximately $3.7 million. In accordance with U.S. generally accepted
accounting principles (GAAP), 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 3,813,485 shares of our 5,279,485 outstanding shares held by non-affiliates
as of February 28, 2019. 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.
Rising interest rates may affect our ability to obtain financing and may cause us to suffer competitive
disadvantages.
The Company’s exposure to changes in interest rates relates primarily to the Company’s ability to obtain financing
in the future. If obtaining financing is adversely affected by rising interest rates or other factors, it could make it
more difficult or expensive for us to obtain financing, which in turn would adversely affect our ability to take
advantage of significant business opportunities and to react to changes in market or industry conditions.
13
The transition away from LIBOR may adversely affect our cost to obtain financing.
Central banks around the world, including the Board of Governors of the Federal Reserve, have commissioned
working groups of market participants and official sector representatives with the goal of finding suitable
replacements for the London Interbank Offered Rate (“LIBOR”) based on observable market transactions. It is
expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of
the next few years. The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has announced that it has
commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use
its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the
publication of such rates beyond 2021. The Federal Reserve Bank of New York and various other authorities have
commenced the publication of reforms and actions relating to alternatives to U.S. dollar LIBOR. Although the full
impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual
discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the
availability of financing, including LIBOR-based loans, and on our financing costs.
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 to run our business, under extreme market conditions,
there can be no assurance that financing, if needed, would be available or sufficient, and, in such a case,
we may not be able to successfully obtain 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:
•
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.
14
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 market 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. In August 2016, our Board of Directors
amended the shareholder rights plan to preserve the value of certain deferred tax benefits to the Company, including
those generated by net operating losses. Generally, the shareholder rights plan, as amended, provides that if a
person or group acquires 4.99% 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 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 the Company. The mere existence of a shareholder rights plan often
delays or makes a merger, tender offer or other acquisition more difficult to complete. In March 2018, our Board of
Directors recommended amending the shareholder rights plan to extending the term of the shareholder rights plan
from June 6, 2018 to June 5, 2020, subject to shareholder approval, to continue to preserve the value of certain
deferred tax assets. Our shareholders approved the amendment at the Company's annual meeting of shareholders
held in May 2018.
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 any and 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.
Our operations may be adversely affected by cybersecurity risks and we may incur increasing costs in an effort to
minimize those risks.
Although we take steps to secure our management information systems, the security measures we have implemented
may not be effective, and our systems may be vulnerable to theft, loss, damage and interruption from a number of
potential sources and events, including unauthorized access or security breaches, natural or man-made disasters,
cyberattacks, computer viruses, power loss, or other disruptive events. We may not have the resources or technical
sophistication to anticipate or prevent rapidly evolving types of cyberattacks. Attacks may be targeted at us, our
customers and suppliers, or others who have entrusted us with information.
Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel
and protection technologies, train employees and engage third-party experts and consultants, or in connection with
the notifications to employees, suppliers or the general public as part of our notification obligations to the various
governmental agencies that govern our business. Advances in computer capabilities, new technological discoveries,
or other developments may result in the breach or compromise of technology used by us to protect transaction or
other data. Our reputation, brand and financial condition could be adversely affected if, as a result of a significant
cyber event or other security issues: our operations are disrupted or shut down; our confidential, proprietary
information is stolen or disclosed; we must dedicate significant resources to system repairs or increase cyber
security protection; or we otherwise incur significant litigation or other costs.
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 and Spain.
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 2019.
Item 3. Legal Proceedings
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
United States generally accepted accounting principles, we record a liability in our Consolidated Financial
Statements with respect to any of these matters when it is both probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. With respect to any currently pending legal proceedings, we
have not established an estimated range of reasonably possible additional losses either because we believe that we
have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that
would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material
effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently
unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely
impact our results of operations, financial position or cash flows. We expense legal costs as incurred.
Item 4. Mine Safety Disclosures
Not applicable.
16
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
PART II
Market Information
Our common stock is traded on The NASDAQ Capital Market under the symbol “ISNS.”
Shareholders
As of February 28, 2019, there were 21 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 included certain financial covenants, including minimum debt service ratios, minimum cash
flow coverage ratios, and other financial measures. These financial covenants would have restricted our ability to
pay dividends and purchase outstanding shares of common stock. At December 31, 2018 and December 31,
2017, we were no longer subject to any debt 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 statement of income data for the years ended and as of December 31, 2018 and 2017 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 Statements of Operations Data:
Revenue:
2018
(in thousands, except per share data)
2017
Product sales
Royalties
Cost of revenue:
Product sales
Royalties
Gross profit
Operating expenses:
Selling, marketing and product support
General and administrative
Research and development
Restructuring
Income from operations
Other, net
Income from operations before income taxes
Income tax expense (benefit)
Net income
Net income per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
18
$
5,644 $
8,917
14,561
2,419
367
2,786
11,775
2,817
3,678
3,284
144
9,923
1,852
—
1,852
(10 )
1,862 $
0.36 $
0.36 $
5,204
5,221
$
$
$
5,919
8,605
14,524
2,563
362
2,925
11,599
2,486
3,981
3,010
—
9,477
2,122
41
2,163
85
2,078
0.41
0.40
5,128
5,136
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. We are a leading provider of above-ground detection products and solutions for the intelligent
transportation systems ("ITS") industry. Our family of products, which we market as Autoscope video or video
products ("Autoscope"), and RTMS radar or radar products ("RTMS"), provides end users with the tools needed to
optimize traffic flow and enhance driver safety. Our technology analyzes signals from sophisticated sensors and
transmits the information to management systems and controllers or directly to users. Our products provide users
with complete solutions for the intersection and transportation markets.
Our technology is a process in which software, rather than humans, examines outputs from various types of
sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical
component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and
highways quickly enough to accommodate the increasing congestion levels. On average, United States commuters
lose 97 hours a year in congestion, which costs motorists $87 billion a year in time, an average of $1,348 per
driver. We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement
existing and new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our solutions are technically superior to those of our competitors because they have a higher level of
accuracy, limit the occurrence of false detection, are generally easier to install with lower costs of ownership, work
effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a
variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our
solutions well suited for use in ITS markets.
We believe the strength of our distribution channels positions us to increase the penetration of our technology-driven
solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the
Caribbean through an exclusive agreement with Econolite Control Products, Inc. ("Econolite"), which we believe is
the leading distributor of ITS intersection control products in these markets.
We market the RTMS radar systems to a network of distributors in North America, the Caribbean and Latin
America. On a limited basis, we sell directly to the end user in these geographic areas. We market our Autoscope
video and RTMS radar products outside of the United States, Mexico, Canada and the Caribbean through a
combination of distribution and direct sales channels, through our office in Spain. Our end users primarily include
governmental agencies and municipalities.
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.
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.
19
We believe our continued growth primarily depends upon:
• continued adoption and governmental funding of ITS and other automated applications for traffic
control, safety and enforcement in developed countries;
• a propensity by traffic engineers to implement lower cost technology-based solutions rather than civil
engineering solutions such as widening roadways;
• countries in the developing world adopting above-ground detection technology, such as video or radar,
instead of in-pavement loop technology to manage traffic; and
• our ability to develop new products that provide increasingly accurate information and enhance the end
users’ ability to cost-effectively manage traffic and environmental issues.
Because the majority of our end users are governmental entities, we are faced with challenges related to potential
delays in purchase decisions by those entities and changes in budgetary constraints. These contingencies could result
in significant fluctuations in our revenue between periods. The ongoing economic environment in Europe and the
United States is further adding to the unpredictability of purchase decisions, creating more delays than usual and
decreasing governmental budgets, and it is likely to continue to affect our revenue.
Key Financial Terms and Metrics
Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope
video systems in the United States, Mexico, Canada and the Caribbean and (2) revenue received from the direct
sales of our RTMS radar systems and our Autoscope video systems in Europe and Asia. Autoscope video royalties
are calculated using a profit sharing model where the gross profits on sales of product made through Econolite are
shared equally with Econolite. This royalty arrangement has the benefit of decreasing our cost of revenues and our
selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite.
Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue,
which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is
exclusive under a long-term agreement.
Cost of Revenue. Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing,
warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of
the amount charged by our third party contractors to manufacture hardware platforms, which is influenced mainly by
the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product
warranties, restructuring costs and inventory reserves. The key metric that we follow is achieving certain gross
margin percentages on product sales by geographic region and to a lesser extent by product line.
Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support;
(2) general and administrative; and (3) research and development. Selling, marketing and product support expenses
consist of various costs related to sales and support of our products, including salaries, benefits and commissions
paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; second-tier
technical support for Econolite; and general product support, where applicable. General and administrative expenses
consist of certain corporate and administrative functions that support the development and sales of our products and
provide an infrastructure to support future growth. These expenses include management, supervisory and staff
salaries and benefits, legal and auditing fees, travel, rent and costs associated with being a public company, such as
board of director fees, listing fees and annual reporting expenses. Research and development expenses consist
mainly of salaries and benefits for our engineers and third party costs for consulting and prototyping. We measure
all operating expenses against our annually approved budget, which is developed with achieving a certain operating
margin as a key focus. Also included in operating expenses are any restructuring costs.
Non-GAAP Operating Measure. We provide certain non-GAAP financial information as supplemental information
to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting
Principles in the United States). This non-GAAP information excludes the impact of depreciating fixed assets and
amortizing intangible assets and may exclude other non-recurring items. Management believes that this presentation
facilitates the comparison of our current operating results to historical operating results. Management uses this non-
GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP
information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative
to GAAP financial measures and may not be computed the same as similarly titled measures used by other
companies.
20
The table below reconciles non-GAAP income from income from operations, which is a non-GAAP financial
measure, to comparable GAAP financial measures (in thousands):
Income from operations
Adjustments to reconcile to non-GAAP income
Amortization of intangible assets
Arbitration
Depreciation
Restructuring
Non-GAAP operating income
$
Years Ended December 31,
2018
2017
$
1,852
$
2,122
530
—
244
144
2,770
$
362
303
218
—
3,005
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 financial information for each of our reportable segments (in thousands):
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
$
Intersection
For the year ended December 31, 2018
Highway
Total
$
10,052
9,168
367
2,110
$
4,509
2,607
163
1,207
14,561
11,775
530
3,317
Intersection
For the year ended December 31, 2017
Highway
Total
$
10,109
9,048
362
2,477
$
4,415
2,551
—
1,008
14,524
11,599
362
3,485
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.
Product sales
Royalties
Total revenue
Gross profit - product sales
Gross profit - royalties
Selling, marketing and product support
General and administrative
Research and development
Restructuring
Income from operations
Income tax expense (benefit)
Net income
Years Ended December 31,
2017
2018
38.8 %
61.2
100.0
57.1
95.9
19.3
25.3
22.6
1.0
12.7
(0.1 )
12.8
40.8 %
59.2
100.0
56.7
95.8
17.1
27.4
20.7
—
14.6
0.6
14.3
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017. Total revenue increased to $14.6
million in 2018 from $14.5 million in 2017, an increase of 0.3%. Royalty income increased to $8.9 million in 2018
from $8.6 million in 2017, an increase of 3.6%. The increase in royalties was primarily due to higher volume of
sales related to our Autoscope Vision compared to the prior year. Included in 2017 were royalties related to the
Miami-Dade County sale through Econolite. Product sales decreased to $5.6 million in 2018 from $5.9 million in
2017, a decrease of 4.6%. The decrease in product sales was a result of reduced sales into the Middle East, offset in
part by increased sales in Europe and North America.
Revenue for the Intersection segment was $10.1 million in 2018, remaining consistent with out $10.1 million of
revenue in 2017.
22
Revenue for the Highway segment increased to $4.5 million in 2018 from $4.4 million in 2017, an increase of 2.1%.
The increase of revenue in the Highway segment is mainly attributable to increased volume in North America.
Gross profit for product sales increased to 57.1% in 2018 from 56.7% in 2017. Product sales gross profit decreased
$131,000 or 3.9% compared to the prior year. The decrease in product sales gross profit is primarily the result of
amortization costs related to products released for sale in 2018. Product sales gross profit for the Intersection
product lines has historically been lower than gross profit for the Highway product lines and therefore the mix of the
product lines sold in any given period can result in varying gross profit. Additionally, the geographic sales mix of
our product sales can influence margins, as products sold in some jurisdictions have lower margins.
Gross profit for royalty sales increased to 95.9% in 2018 from 95.8% in 2017. Gross profit for royalties increased
$307,000 or 3.7% compared to the prior year.
Selling, marketing and product support expense increased to $2.8 million, or 19.3% of total revenue, in
2018 compared to $2.5 million, or 17.1% of total revenue, in 2017.
General and administrative expense decreased to $3.7 million, or 25.3% of total revenue, in 2018 compared to $4.0
million, or 27.4% of total revenue, in 2017. General and administrative expense decreased in 2018 due to
approximately $303,000 of cost incurred related to the Econolite arbitration decision in 2017.
Research and development expense increased to $3.3 million, or 22.6% of total revenue, in 2018, from $3.0 million,
or 20.7% of total revenue, in 2017. The increase is partially due to decreased capitalized software development costs
in 2018 of $362,000 compared to capitalized software costs of $1.1 million in 2017. After normalizing for software
development costs, overall research and development expenditures decreased in 2018 compared to 2017. This
decrease is a result of less variable costs associated with development projects.
In the third quarter of 2018, the Company implemented restructuring plans for our office in Romania. Because of
these actions, restructuring charges of approximately $144,000 were recorded in 2018. There were no restructuring
charges recorded in 2017.
Income tax benefit of $10,000 or 0.5% of our pretax income was recorded for the year ended December 31, 2018,
compared to income tax expense of $85,000 or 4.0% of pretax income for the year ended December 31, 2017.
Consolidated net income was $1.9 million, or $0.36 per basic and diluted share, in 2018 compared to $2.1 million,
or $0.41 per basic and $0.40 per diluted share, in 2017.
Liquidity and Capital Resources
At December 31, 2018, we had $4.2 million in cash and cash equivalents compared to $3.2 million at December 31,
2017.
Net cash provided by operating activities was $1.7 million in 2018 compared to $3.0 million in 2017. The decrease
in net cash provided by operating activities in 2018 compared to the prior year can be primarily attributed to the
timing of collections for outstanding receivable balances and an increase in inventory purchases in 2018 compared
to the prior year. Inventory increased due to our transition to a new contract manufacturer in 2018.
23
Net cash used for investing activities was $556,000 in 2018, compared to net cash used for investing activities of
$1.4 million in 2017. The decrease in the amount of net cash used for investing activities in 2018 compared to the
prior year is primarily the result of capitalized internal software development costs decreasing when compared to
2017.
Net cash used for financing activities was $10,000 in 2018 compared to no net cash used for financing activities in
2017.
In May 2014, the Company entered into a credit agreement and related documents with Alliance Bank which
provided for a revolving line of credit for the Company. The credit agreement and related documents with Alliance
Bank (collectively, the "Alliance Credit Agreement") provided up to a $5.0 million revolving line of credit bearing
interest at a fixed annual rate of 3.95%. Any advances would have been secured by the Company's inventories,
accounts receivable, cash, marketable securities, and equipment. We were subject to certain covenants under the
Alliance Credit Agreement. In April 2016, we entered into an agreement with Alliance Bank amending the Alliance
Credit Agreement to extend the maturity date from April 1, 2016 to May 12, 2017. We chose not to renew the
Alliance Credit Agreement.
We believe that cash and cash equivalents on hand at December 31, 2018, along with the cash provided by operating
activities, will satisfy our projected working capital needs, investing activities, and other cash requirements for the
foreseeable future.
Off-Balance Sheet Arrangements
We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity,
including special purpose and similar entities or other off-balance sheet arrangements.
Critical Accounting Policies
Our 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 allowance 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.
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.
Software Development Costs. We incur costs associated with the development of software to be sold, leased, or
otherwise marketed. 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. A significant amount of judgment and estimation is required to assess when technological feasibility is
established as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating the
recoverability of capitalized software costs, we compare expected product performance, utilizing forecasted revenue
amounts, to the total costs incurred to date and estimates of additional costs to be incurred. If revised forecasted
product revenue is less than, and/or revised forecasted costs are greater than, the previously forecasted amounts, the
net realizable value may be lower than previously estimated, which could result in recognition of an impairment
charge in the period in which such a determination is made.
24
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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Approximately 20% 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 U.S. dollar relative
The strengthening of
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.
to foreign currencies decreases
25
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 $72
$
4,236 $
3,190
December 31,
2018
2017
and $20, 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
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Deferred revenue
Warranty
Accrued compensation
Other current liabilities
Total current liabilities
TOTAL LIABILITIES
Shareholders' equity
3,830
1,289
410
9,765
162
8
1,058
1,228
882
346
3,339
335
255
7,119
164
26
998
1,188
702
486
3,317
56
13,484 $
3,485
38
11,128
878 $
716
656
224
373
2,847
2,847
563
45
858
288
733
2,487
2,487
$
$
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued or outstanding
Common stock, $.01 par value; 20,000,000 shares authorized,
5,278,485 and 5,210,448 issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
—
—
52
24,550
(372 )
(13,593 )
10,637
13,484 $
51
24,355
(310 )
(15,455 )
8,641
11,128
$
See accompanying notes to the consolidated financial statements.
26
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue:
Product sales
Royalties
Cost of revenue:
Product sales
Royalties
Gross profit
Operating expenses:
Selling, marketing and product support
General and administrative
Research and development
Restructuring
Operating income from operations
Other, net
Income from operations before income taxes
Income tax expense (benefit)
Net income
Net income per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to the consolidated financial statements.
27
Years ended December 31,
2017
2018
$
5,644 $
8,917
14,561
5,919
8,605
14,524
2,419
367
2,786
11,775
2,563
362
2,925
11,599
2,817
3,678
3,284
144
9,923
1,852
—
1,852
(10 )
1,862 $
2,486
3,981
3,010
—
9,477
2,122
41
2,163
85
2,078
0.36 $
0.36 $
0.41
0.40
5,204
5,221
5,128
5,136
$
$
$
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years ended December 31,
2017
2018
$
1,862 $
2,078
(62 )
1,800 $
53
2,131
$
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive income
See accompanying notes to the consolidated financial statements.
28
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation
Software amortization
Stock-based compensation
Deferred income tax expense (benefit)
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 current liabilities
Net cash provided by operating activities
Investing activities:
Capitalized software development costs
Purchases of property and equipment
Net cash used for investing activities
Financing activities:
Stock for tax withholding
Net cash used for financing activities
Effect of exchange rate changes on cash
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Non-Cash investing and financing activities:
Purchase of property and equipment in accounts payable
See accompanying notes to the consolidated financial statements.
Years ended December 31,
2017
2018
$
1,862 $
2,078
244
530
206
(21 )
36
218
362
301
20
2
(491 )
(954 )
(132 )
337
45
1,662
(328 )
(194 )
26
280
185
2,950
(362 )
(194 )
(556 )
(1,052 )
(300 )
(1,352 )
(10 )
(10 )
—
—
(50 )
1,046
45
1,643
3,190
4,236 $
1,547
3,190
5 $
27
$
$
29
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
Shares
Issued
Common
Stock
Additional
Paid-In
Accumulated
Other
Comprehensive Accumulated
Capital
Loss
deficit
Total
Balance, December 31,
2016
5,094,473 $ 50 $ 24,055 $ (363 ) $ (17,533 ) $ 6,209
Stock-based compensation
115,975
1
300
—
—
301
Comprehensive income:
Foreign currency
translation adjustment
Net income
Balance, December 31,
2017
Stock-based compensation
Stock for tax withholding
Comprehensive income:
Foreign currency
translation adjustment
Net income
Balance, December 31,
2018
—
—
—
—
—
—
53
—
—
2,078
53
2,078
5,210,448 $ 51 $ 24,355 $ (310 ) $ (15,455 ) $ 8,641
70,285
(2,248 )
—
—
1
—
—
—
205
(10 )
—
—
—
—
206
(10 )
—
—
(62 )
—
—
1,862
(62 )
1,862
5,278,485 $ 52 $ 24,550 $ (372 ) $ (13,593 ) $ 10,637
See accompanying notes to the consolidated financial statements.
30
Image Sensing Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 2018
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
video and radar processing products for use in applications such as intersection control, highway, bridge and tunnel
traffic management and traffic data collection. We sell our products primarily to distributors and also receive
royalties under a license agreement with a manufacturer/distributor for certain of our products. Our products are
used primarily by governmental entities.
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), and 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.
REVENUE RECOGNITION
On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers (Topic 606), using the full retrospective transition method. The Company's adoption of ASU 2014-09
did not have a material impact on the amount and timing of revenue recognized in its consolidated financial
statements.
Under ASU 2014-09, we recognize revenue when control of the promised goods or services is transferred to
customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or
services.
We determine revenue recognition through the following steps:
Identification of a contract, or contracts, with a customer;
Identification of performance obligations in the contract;
●
●
● Determination of the transaction price;
● Allocation of the transaction price to the performance obligations in the contract; and
●
Recognition of revenue when, or as, we satisfy a performance obligation.
Revenue disaggregated by revenue source for the years ended December 31, 2018 and 2017 consists of the
following (in thousands). Revenue excludes sales and usage-based taxes where it has been determined that we are
acting as a pass-through agent.
Product sales
Royalties
Total revenue
$
$
Years Ended December 31,
2017
2018
5,644 $
8,917
14,561 $
5,919
8,605
14,524
31
Product Sales:
Product revenue is generated from the direct sales of our RTMS radar systems worldwide and our Autoscope video
systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to
our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or
services.
Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple
performance obligations may include the hardware, software, installation services, training, and support. In
arrangements where we have multiple performance obligations, the transaction price is allocated to each
performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling
prices based on the observable stand-alone prices charged to customers. For performance obligations without
observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the
expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.
Revenue 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. Our payment terms may vary by the type and location of our customer and the products or services
offered.
We record deferred revenues when cash payments are received or due in advance of our performance, including
amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain
products or services and customer types, we require payment before the products or services are delivered to the
customer.
We record provisions against sales revenue for estimated returns and allowances in the period when the related
revenue is recorded based on historical sales returns and changes in end user demand.
Royalties:
Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the
United States, Mexico, Canada and the Caribbean. The royalty of approximately 50% of the gross profit on licensed
products is recognized when the products are shipped or delivered by Econolite to its customers.
Practical Expedients and Exemptions:
We generally expense sales commissions when incurred because the amortization periods would have been one year
or less. These costs are recorded within sales and marketing expense.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length
of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to
invoice for services performed.
32
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 $226,000 and $677,000 at
December 31, 2018 and 2017, respectively. We hold our cash and cash equivalents with financial institutions and, at
times, the amounts of our balances may be in excess of deposit insurance limits.
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 net
realizable value 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 a material impact on our financial condition and operating
results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.
INTANGIBLE ASSETS
We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed.
Capitalized software development costs include purchased materials, services, internal labor and other costs
associated with the development of new products and services. Software development costs are expensed as incurred
until technological feasibility has been established, at which time future costs incurred are capitalized until the
product is available for general release to the public. Based on our product development process, technological
feasibility is generally established once product and detailed program designs have been completed, uncertainties
related to high-risk development issues have been resolved through coding and testing, and we have established that
the necessary skills, hardware, and software technology are available for production of the product. Once a software
product is available for general release to the public, capitalized development costs associated with that product will
begin to be amortized to cost of sales over the product’s estimated economic selling life, using the greater of
straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated
timing of product revenue recognition.
33
Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted
by estimates and assumptions of future revenues and expenses for these software products, as well as other factors
such as changes in product technologies. Any portion of unamortized capitalized software development costs that
are determined to be in excess of net realizable value have been expensed in the period in which such a
determination is made. Subsequent to reaching technological feasibility for certain software products, we
capitalized approximately $362,000 and $1.1 million of software development costs during the years ended
December 31, 2018 and 2017, respectively.
Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by
future cash flows and reviewed for impairment. At both December 31, 2018 and 2017, 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, 2018
and 2017.
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 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 PER SHARE
Basic income per share excludes dilution and is computed by dividing net income attributable to common
shareholders by the weighted-average number of common shares outstanding during the period. Diluted income per
share includes potentially dilutive common shares consisting of stock options and restricted stock 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 to acquire 37,058 and 103,681 weighted
common shares have been excluded from the diluted weighted shares outstanding calculation for the years ended
December 31, 2018 and 2017, 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.
LOSS CONTINGENCIES
We establish an accrual for loss contingencies when it is both probable that an asset has been impaired or a liability
has been incurred and the amount of the loss can be reasonably estimated. When loss contingencies are not probable
and cannot be reasonably estimated, we do not establish an accrual. However, when there is at least a reasonable
possibility that a loss has been incurred, but it is not probable or reasonably estimated, we disclose the nature of the
loss contingency and an estimate of the possible loss or range of loss as applicable. Any adjustment made to a loss
contingency accrual during an accounting period affects the earnings of the period.
34
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 or awards 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 options, 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
Accounting pronouncement recently adopted
In May 2014, the Financial Accounting Standards Board (the "FASB") issued ASU 2014-09, which supersedes the
revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition
(Topic 605). We adopted Topic 606 as of January 1, 2018 using the full retrospective transition method.
See Revenue Recognition above for further details.
Accounting pronouncements not yet adopted
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU 2016-02 provides guidance on
how an entity should account for leases and recognize associated lease assets and liabilities. This guidance is
effective for the Company in the first quarter of 2019. The Company will apply the modified retrospective method
of adoption as of January 1, 2019. We are currently assessing the impact of ASU 2016-02 on the consolidated
financial statements.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation-Stock Compensation (Topic 718)". ASU 2018-
07 largely aligns the accounting for share-based payment awards issued to employees and nonemployees by
expanding the scope of ASC 718 to apply to nonemployee share-based transactions, as long as the transaction is not
effectively a form of financing. The new guidance will be effective on January 1, 2019. We are currently
evaluating the potential impact that ASU No. 2018-07 may have on the consolidated financial statements.
In August 2018, the Securities and Exchange Commissions (the "SEC") adopted the final rule under SEC Release
No. 33-10532, "Disclosure Update and Simplification," amending certain disclosure requirements that were
redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure
requirements for the analysis of stockholders' equity for interim financial statements. Under the amendments, an
analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note
or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance for
each period for which a statement of comprehensive income is required to be filed. We anticipate the first
presentation of changes in consolidated stockholders' equity will be included in our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2019.
35
2. FAIR VALUE MEASUREMENTS
The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework
for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the
price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants at the
measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as
follows:
•
•
•
Level 1 – observable inputs such as quoted prices in active markets;
Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly; and
Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
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.
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.
Financial Instruments not Measured at Fair Value
Certain of our financial instruments are not measured at fair value and are recorded at carrying amounts
approximating fair value, based on their short-term nature or variable interest rate. These financial instruments
include cash and cash equivalents, accounts receivable, accounts payable and other current financial assets and
liabilities.
3. INVENTORIES
Inventories consisted of the following (in thousands):
Finished goods
Components
Total
December 31,
2018
2017
$
$
949 $
340
1,289 $
288
47
335
36
4. INTANGIBLE ASSETS
Intangible assets consisted of the following (dollars in thousands):
December 31, 2018
Gross
Carrying Accumulated
Amortization
Amount
Net
Weighted
Average
Carrying Useful Life
(in Years)
Value
Developed technology
$
Vision development costs
Software development in process
costs
IntellitraffiQ development costs
Wrong Way development costs
$
3,900 $
2,929
(3,900 ) $
(819 )
674
468
228
8,199 $
—
(59 )
(104 )
(4,882 ) $
—
2,110
674
409
124
3,317
—
8.0
—
4.0
2.0
7.1
December 31, 2017
Gross
Carrying Accumulated
Amortization
Amount
Weighted
Average
Useful
Life
(in Years)
Net
Carrying
Value
Developed technology
$
Vision development costs
Software development in process
costs
$
3,900 $
2,929
(3,900 ) $
(452 )
1,008
7,837 $
—
(4,352 ) $
—
2,477
1,008
3,485
—
8.0
—
8.0
The estimated future amortization expense related to other intangible assets for the next five fiscal years is as
follows (dollars in thousands):
Amortization
Expense
598
493
484
426
367
$
2019
2020
2021
2022
2023
The above amortization expense relates to various capitalized costs related to software development. Future
amortization amounts presented above are estimates. Actual future amortization expense may be different due to
future acquisitions, impairments, changes in amortization periods, or other factors.
In accordance with United States generally accepted accounting principles ("GAAP"), we performed an assessment
of recoverability on our software development costs, which is impacted by estimates and assumptions of future
revenue and expenses for these products, as well as other factors such as changes in product technologies. We
determined that the estimated undiscounted cash flows is greater than the asset carrying value, and there were no
impairment triggers as of December 31, 2018.
5. CREDIT FACILITIES
In May 2014, the Company entered into a credit agreement and related documents with Alliance Bank which
provided for a revolving line of credit for the Company. The credit agreement and related documents with Alliance
Bank (collectively, the “Alliance Credit Agreement”) provided up to a $5.0 million revolving line of credit
the
bearing interest at a
Company’s inventories, accounts receivable, cash, marketable securities, and equipment. We were subject to certain
covenants under the Alliance Credit Agreement. In April 2016, we entered into an agreement with Alliance Bank
amending the Alliance Credit Agreement to extend the maturity date from April 1, 2016 to May 12, 2017. We chose
not to renew the Alliance Credit Agreement.
rate of 3.95%. Any advances would have been secured by
fixed annual
37
6. WARRANTIES
Warranty liability and related activity consisted of the following (in thousands):
Years ended December 31,
2018
2017
Beginning balance
Warranty provisions
Warranty claims
Adjustments to preexisting warranties
Ending balance
$
$
858 $
123
(74 )
(251 )
656 $
1,223
47
(126 )
(286 )
858
7. INCOME TAXES
The components of income before income taxes were as follows (in thousands):
Years ended December 31,
2017
2018
Income from operations before income taxes
Domestic
Foreign
Total
$
$
2,455 $
(603 )
2,364
(201 )
1,852 $
2,163
The components of income tax expense (benefit) were as follows (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Years ended December 31,
2017
2018
$
— $
(2 )
13
$
11 $
$
—
$
—
(21 )
(21 )
Total income tax expense (benefit)
$
(10 ) $
38
—
5
60
65
(3 )
—
23
20
85
A reconciliation from the federal statutory income tax provision to our effective tax expense (benefit) is as follows
(in thousands):
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
Change in deferred tax rate from 35% to 21%
Other
Total
Years ended December 31,
2017
2018
$
390 $
(54 )
(251 )
(90 )
6
—
(24 )
—
13
(10 ) $
$
735
(237 )
(4,798 )
22
(11 )
6
1,231
3,146
(9 )
85
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
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:
Years ended December 31,
2017
2018
$
32 $
17
1
124
535
3,980
65
2,357
7,111
(7,013 )
98
49
1
4
165
994
3,897
44
2,230
7,384
(7,319 )
65
(42 )
(42 )
(27 )
(27 )
Total net deferred tax asset
$
56 $
38
As of December 31, 2018, the Company had sustained a significant accumulated tax loss. The net operating loss
(“NOL”) carry forward in the United States, the United Kingdom, Hong Kong, Canada and China as of December
31, 2018 was $16 million, $678,000, $1.6 million, $199,000 and $89,000, 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, 2018, a full valuation allowance is provided, except for the 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.
The Company has recognized no material uncertain tax positions as of December 31, 2018. The Company files
income tax returns in the U.S federal jurisdiction and 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 2014. 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.
39
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform
legislation (the "Tax Act"). The Tax Act makes significant changes in U.S. tax law, including a reduction in the U.S.
federal corporate income tax rate, changes to net operating loss carryforwards and carrybacks, and a repeal of the
corporate alternative minimum tax. The Tax Act reduced the U.S. corporate tax rate from 35% to 21%. As a result
of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This
revaluation did not have any income tax expense impact on the Company due to the full valuation allowance. The
other provisions of the Tax Act did not have a material impact on the Company's 2017 consolidated financial
statements. During 2018, the Company finalized its accounting for this matter and concluded that no material
adjustments were required.
8. LICENSING
We have licensed the exclusive right to manufacture and market the Autoscope video 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 $8.9 million and $8.6 million in 2018 and 2017, respectively.
9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Royalty revenue from Econolite comprised 61% and 59% of revenue in the years ended December 31, 2018 and
2017, respectively. Accounts receivable from Econolite were $1.6 million and $2.5 million at December 31, 2018
and 2017, 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. At December 31, 2018, Econolite comprised 42% of our
accounts receivable compared to 77% at December 31, 2017.
Product revenue from four of the Company's major customers other than Econolite comprised 17% and 9% of
revenue in the years ended December 31, 2018 and 2017, respectively. Accounts receivable from these customers
were $797,000 and $167,000 at December 31, 2018 and 2017, respectively. Major disruptions in the distribution of
our products by these customers or the inability to make payments on their accounts receivable with us could have a
material adverse effect on our business, financial condition and results of operations. At December 31, 2018, they
comprised more than 20% of accounts receivable.
10. 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. We made contributions totaling $49,000 and $81,000 to the plans for
2018 and 2017, respectively.
40
11. STOCK-BASED COMPENSATION
We compensate officers, directors, key employees and consultants with stock-based compensation under the Image
Sensing Systems, Inc. 2005 Stock Incentive Plan (the "2005 Plan") and the Image Sensing Systems, Inc. 2014 Stock
Option and Incentive Plan (the "2014 Plan"), both of which were approved by our shareholders and are administered
under the supervision of our Board of Directors. Although stock options granted under the 2005 Plan are still
outstanding, the 2005 Plan expired, and the Company can no longer grant options or other awards under the 2005
Plan. 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 3 to 5 years from the dates of the grant,
beginning one year from the date of grant, and have a contractual term of 9 to 10 years.
Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period. Stock-based
compensation expense included in general and administrative expense for the years ended December 31, 2018 and
2017 was $206,000 and $301,000, respectively. At December 31, 2018, 122,876 shares were available for grant
under the Company's stock option and incentive plan.
Stock Options
The following tables summarize stock option activity:
For the year ended December 31, 2018
Number of
Shares
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term (in
years)
Aggregate
Intrinsic
Value
Options outstanding at December
31, 2017
Granted
Exercised
Expired
Forfeited
85,750 $
— $
— $
(12,000 ) $
(34,750 ) $
5.78
—
—
5.76
5.26
4.00 $
— $
— $
— $
— $
—
—
—
—
363
Options outstanding at December
31, 2018
Options exercisable at December 31,
2018
39,000 $
6.26
2.80 $
4,480
39,000 $
6.26
2.80 $
4,480
For the year ended December 31, 2017
Number of
Shares
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term (in
years)
Aggregate
Intrinsic
Value
Options outstanding at December
31, 2016
Granted
Exercised
Expired
132,500 $
— $
— $
(22,000 ) $
6.15
—
—
8.26
4.50 $
— $
— $
— $
—
—
—
—
Forfeited
(24,750 ) $
5.55
— $
Options outstanding at December
31, 2017
Options exercisable at December 31,
2017
85,750 $
5.78
79,875 $
5.90
4.00 $
3.90 $
—
—
—
41
During the years ended December 31, 2018 and 2017, we recognized $1,000 and $17,000, respectively, of stock-
based compensation related to stock options.
At December 31, 2018, there was no unrecognized stock option expense related to non-vested stock options.
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. No options were granted for the years ended December 31, 2018 and 2017.
Restricted Stock and Stock Awards
Restricted stock awards are granted under the 2014 Plan at the discretion of the Compensation Committee of our
Board of Directors. We issue restricted stock awards to executive officers and key consultants. These awards may
contain certain performance conditions or time-based vesting criteria. The restricted stock awards granted to
executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is
recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant
date through the end of the vesting period. At the time of vesting, the recipients of common stock may request to
receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the
relevant jurisdiction's maximum statutory rate. Stock awards granted to consultants are recognized over the
performance period based on the stock price on the date when the consultant's performance is complete.
We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock
awards are fully vested at the time of issuance. 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.
The following table summarizes restricted stock award activity for 2018 and 2017:
2018
2017
Weighted
Average
Grant
Date Fair
Value
Number
of
Shares
Weighted
Average
Grant
Date Fair
Value
Number
of
Shares
Awards outstanding at beginning of year
Granted
Vested
Forfeited
32,000 $
85,619 $
(43,408 ) $
(15,334 ) $
2.95
— $
3.71 115,975 $
4.08 (83,975 ) $
— $
2.95
—
3.08
3.13
—
Awards outstanding at end of year
58,877 $
3.22 32,000 $
2.95
As of December 31, 2018, the total stock-based compensation expense related to non-vested awards not yet
recognized was $136,000, which is expected to be recognized over a weighted average period of 2.2 years. During
the years ended December 31, 2018 and 2017, we recognized $205,000 and $283,000, respectively, of stock-
based compensation expense related to restricted stock awards.
42
12. INCOME PER COMMON SHARE
Net income per share is computed by dividing net income by the daily weighted average number of common shares
outstanding during the applicable periods. Diluted net income per share includes the potentially dilutive effect of
common shares subject to outstanding stock options and restricted stock awards using the treasury stock method.
Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards
have been excluded from the diluted weighted average shares outstanding calculation because the exercise of those
options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding.
As a result, stock options to acquire 37,058 and 103,681 weighted common shares have been excluded from the
diluted weighted shares outstanding for the years ended December 31, 2018 and December 31, 2017, respectively.
A reconciliation of net income per share is as follows (in thousands, except per share data):
Numerator:
Net income
Denominator:
Weighted average common shares outstanding
Dilutive potential common shares
Shares used in diluted net income per common share
calculations
Basic net income per common share
Diluted net income per common share
Years ended December
31,
2018
2017
$
1,862 $
2,078
5,204
17
5,221
$
$
0.36 $
0.36 $
5,128
8
5,136
0.41
0.40
13. RESTRUCTURING AND EXIT ACTIVITIES
In the third quarter of 2018, we initiated the closure of the Bucharest, Romania office location, a sales office for
Image Sensing Systems EMEA Limited. The Company will continue doing business in the European region
utilizing its Barcelona, Spain sales office. As a result of the Romania closure, we incurred $144,000 of restructuring
charges in 2018.
The following table shows the restructuring activity for 2018 (in thousands):
Termination
Benefits
Facility Costs
and Contract
Termination
Total
Balance at January 1, 2018
Charges
Settlements
Balance at December 31, 2018
$
$
No restructuring charges were recorded in 2017.
— $
— $
—
92 52 144
(122 )
22
(74 )
18 $
(48 )
4 $
In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our
wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) located in Hong Kong; Image Sensing
Systems (Shenzhen) Limited (ISS WOFE) located in China; Image Sensing Systems Europe Limited (ISS Europe)
located in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O (ISS Poland) located in Poland;
and Image Sensing Systems Germany, GmbH (ISS Germany) located in Germany. At December 31, 2018, Image
Sensing Systems Europe Limited and Image Sensing Systems Europe Limited SP.Z.O.O were fully closed. We
incurred $3,000 and $31,000 of legal entity closure costs during 2018 and 2017, respectively.
43
14. SEGMENT INFORMATION
The Company's Chief Executive Officer and management regularly review financial information for the Company's
discrete operating segments. Based on similarities in the economic characteristics, nature of products and services,
production processes, type or class of customer served, method of distribution and regulatory environments, the
operating segments have been aggregated for financial statement purposes and categorized into two reportable
segments: Intersection and Highway.
Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received
from Econolite), as well as a portion of international product sales. Video products are normally sold in the
Intersection segment. RTMS is our radar product line, and revenue consists of international and North American
product sales. Radar products are normally sold in the Highway segment. All segment revenues are derived from
external customers.
Operating expenses and total assets are not allocated to the segments for internal reporting purposes. Due to the
changes in how we manage our business, we may reevaluate our segment definitions in the future.
The following tables set forth selected financial information for each of our reportable segments (in thousands):
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
Revenue
Gross profit
Amortization of intangible assets
Intangible assets
$
$
Intersection
For the year ended December 31, 2018
Highway
Total
$
10,052
9,168
367
2,110
$
4,509
2,607
163
1,207
14,561
11,775
530
3,317
Intersection
For the year ended December 31, 2017
Highway
Total
$
10,109
9,048
362
2,477
$
4,415
2,551
—
1,008
14,524
11,599
362
3,485
We derived the following percentages of our net revenues from the following geographic regions:
Asia Pacific
Europe
North America
For the years ended December
31,
2018
0%
13%
87%
2017
1%
16%
83%
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 $27,000 and $98,000 at December 31, 2018 and 2017, respectively.
44
15. COMMITMENTS AND CONTINGENCIES
Operating Leases
We rent office space and equipment under operating lease agreements expiring at various dates through November
2022. Rent expense for office facilities remained consistent in 2018 at $574,000 when compared to the prior year.
Minimum annual rental commitments under noncancelable operating leases are as follows (in thousands):
2019
2020
2021
2022
2023
Litigation
$
Future Lease
Payments
247
150
10
9
—
We are involved from time to time in various legal proceedings arising in the ordinary course of our business,
including primarily commercial, product liability, employment and intellectual property claims. In accordance with
GAAP, we record a liability in our Consolidated Financial Statements with respect to any of these matters when it is
both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With
respect to any currently pending legal proceedings, we have not established an estimated range of reasonably
possible additional losses either because we believe that we have valid defenses to claims asserted against us or the
proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do
not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial
position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome
of one or more claims asserted against us could adversely impact our results of operations, financial position or cash
flows. We expense legal costs as incurred.
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Image Sensing Systems, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Image Sensing Systems, Inc. and subsidiaries
(the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations,
comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended
December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 2018, in conformity with accounting principles generally
accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting
for revenue recognition in 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from
Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Boulay PLLP
We have served as the Company's auditor since 2016.
Minneapolis, Minnesota
March 14, 2019
46
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 Interim 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, 2018. 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 2013”. Based on this assessment,
management has concluded that our internal control over financial reporting was effective as of December 31, 2018.
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.
47
Item 9B. Other Information
None.
48
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 1 - Election of Directors,” “Audit Committee” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in our definitive proxy statement for our 2019 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 “Director Compensation - 2018” in our definitive proxy
statement for the 2019 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, 2018 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 to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-
average exercise
price of outstanding
options, warrants and
rights
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column)(1)
39,000 $
6.26
122,876
Plan Category
Equity
compensation
plans approved by
shareholders
(1) The 122,876 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 2019 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
2019 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 2019 annual meeting of shareholders are
incorporated into this Annual Report on Form 10-K by reference.
49
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
1. Financial statements
The following Consolidated Financial Statements are included in Part II, Item 8.
“Financial Statements and Supplementary Data”:
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018
and 2017
Consolidated Statements of Cash Flow for the years ended December 31, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018
and 2017
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
2. Financial Statement Schedules:
All financial statement schedules have been omitted because they are not required.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K:
The information called for by this item is incorporated herein by reference to the Exhibit
Index in this Annual Report on Form 10-K.
Item 16. Form 10-K Summary
None.
50
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.
Signatures
Image Sensing Systems, Inc.
/s/ Chad A. Stelzig
Chad A. Stelzig
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 14, 2019
Each person whose signature to this Annual Report on Form 10-K appears below hereby constitutes and
appoints Chad A. Stelzig and Todd C. Slawson, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution, to sign on his 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Chad A. Stelzig
Chad A. Stelzig
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ Todd C. Slawson
Todd C. Slawson
Interim Chief Financial Officer
(Interim Principal Financial
Officer and Interim Principal
Accounting Officer)
/s/ Andrew T. Berger
Andrew T. Berger
Executive Chairman of the Board
of Directors
/s/ Paul F. Lidsky
Paul F. Lidsky
Director
/s/ James W. Bracke
James W. Bracke
Director
Date: March 14, 2019
Date: March 14, 2019
Date: March 14, 2019
Date: March 14, 2019
Date: March 14, 2019
/s/ Geoffrey C. Davis
Date: March 14, 2019
Geoffrey C. Davis
Director
/s/ Joseph P. Daly
Joseph P. Daly
Director
Date: March 14, 2019
51
Exhibit No.
Description
Exhibit Index
3(i).1***
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).
3(i).2
3(i).3
3(ii)
4.1***
4.2
4.3
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).
Certificate of Designation amending the Articles of Incorporation of Image Sensing
Systems, Inc. as filed with the Minnesota Secretary of State on June 6, 2013, incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 6,
2013 (File No. 0-26056).
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.
Rights Agreement dated as of June 6, 2013, by and between ISS and Continental Stock
Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).
First Amendment to Rights Agreement dated as of August 23, 2016, by and between ISS
and Continental Stock Transfer & Trust Company, as rights agent, incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 23,
2016 (File No. 0-26056).
4.4
Second Amendment to Rights Agreement dated as of March 12, 2018, by and between
ISS and Continental Stock Transfer & Trust Company, as rights agent, incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated March 12,
2018 (File No. 0-26056).
10.1***
10.2*
10.3
10.4
10.5*
Form of Distributor Agreement, incorporated by reference to Exhibit 10.1 to ISS’
Registration Statement.
Benefit Agreement dated as of July 28, 2014 between ISS and Richard A. Ehrich
incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
dated June 24, 2016 (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).
52
10.6***
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.
10.7
10.8
10.9
10.10
10.11
10.12
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).
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).
10.13**
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).
10.14
10.15
10.16
10.17
10.18
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, incorporated by reference to Exhibit 10.31 to ISS’ Annual Report on Form
10-K for the year ended December 31, 2014.
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.
53
10.19*
10.20*
10.21*
16.1
21
23.1
24
31.1
31.2
32.1
32.2
99.1
99.2
99.3
Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan, incorporated by
references to Exhibit A to ISS’ Proxy Statement dated April 17, 2014.
Employment Agreement dated as of June 27, 2016 between ISS and Chad A. Stelzig,
incorporated by reference to Exhibit 10.1 to ISS’ Current Report on Form 8-K dated June
24, 2016 (File No. 0-26056).
Employment Agreement dated as of September 2, 2016 by and between ISS and Richard
Ehrich, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
dated September 2, 2016 (File No. 000-26056).
Letter from Grant Thornton LLP dated July 12, 2016 to the Securities and Exchange
Commission, incorporated by reference to Exhibit 16.1 to the Company’s Current Report
on Form 8-K dated July 10, 2016 (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 Interim Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
Certification of Interim 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.
*** Paper filing
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.
54
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
United Kingdom
Image Sensing Systems Holdings Limited
United Kingdom
Image Sensing Systems Germany, GmbH
Image Sensing Systems Spain SLU
Image Sensing Systems Canada Ltd.
Germany
Spain
Canada
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We have issued our report dated March 14, 2019, with respect to the consolidated financial statements included in
the Annual Report of Image Sensing Systems, Inc. on the Form 10-K for the years ended December 31, 2018 and
2017. 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-
861169, effective August 30, 1999 and File No. 333-09289, effective July 31, 1996).
/s/ Boulay PLLP
Minneapolis, Minnesota
March 14, 2019
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Chad A. Stelzig, 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 14, 2019
/s/ Chad A.
Stelzig
Name: Chad A. Stelzig
Title: President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Todd C. Slawson, 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 14, 2019
/s/ Todd C. Slawson
Name: Todd C. Slawson
Title: Interim Chief Financial Officer
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, 2018, as filed with the Securities and Exchange Commission (the
“Report”), I, Chad A. Stelzig, President, Chief Executive 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. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Chad A.
Stelzig
Chad A.
Stelzig
President and Chief Executive Officer
March 14, 2019
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Image Sensing System, Inc. (the “Company”) for
the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission (the
“Report”), I, Todd C. Slawson, Interim 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. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Todd C. Slawson
Todd C. Slawson
Interim Chief Financial Officer
March 14, 2019
Corporate Information
Directors and Officers
Andrew T. Berger*†‡
Executive Chairman of the Board
James W. Bracke*†‡
Director
Joseph P. Daly
Director
Geoffrey C. Davis*†
Director
Paul F. Lidsky*†‡
Director
Theodore T. Johnson
Interim Chief Financial Officer
Chad A. Stelzig
President and Chief Executive Officer
* 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 8, 2019, 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
Boulay PLLP
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 2018 Annual Report to Shareholders can be obtained from our web site: imagesensing.com.
1600 University Avenue West, Suite 500, St. Paul, Minnesota 55104
Phone +1.651.603.7700 Fax +1.651.305.6402
imagesensing.com