UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2021
or
¨TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-26056
Image Sensing Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Minnesota | 41-1519168 | |
State or Other Jurisdiction of Incorporation or Organization | I.R.S. Employer Identification No. | |
| ||
1600 University Avenue West | ||
St. Paul, MN | 55104 | |
Address of Principal Executive Offices | Zip Code |
(651) 603-7700
Registrant’s Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | ISNS | The Nasdaq Capital Market |
Preferred Stock Purchase Rights | ISNS | The Nasdaq Capital Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
|
Accelerated filer ¨ | |
Non-accelerated filer | |
Smaller reporting companyx | |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
1 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨Nox
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common Stock, $0.01 par value per share |
|
IMAGE SENSING SYSTEMS, INC.
TABLE OF CONTENTS
Image Sensing Systems, Inc.
(in thousands)
| September 30, |
| |||||
2017 |
| December 31, | |||||
(Unaudited) |
| 2016 | |||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 2,756 |
| $ | 1,547 |
| |
Accounts receivable, net of allowance for doubtful accounts of $83 and $90, respectively | 3,091 |
| 3,011 |
| |||
Inventories | 426 |
| 141 |
| |||
Prepaid expenses and other current assets | 396 |
| 281 |
| |||
Total current assets | 6,669 |
| 4,980 |
| |||
Property and equipment: | |||||||
Furniture and fixtures | 493 |
| 486 |
| |||
Leasehold improvements | 430 | 426 |
| ||||
Equipment | 3,849 |
| 3,561 | ||||
4,772 |
| 4,473 | |||||
Accumulated depreciation | 4,349 |
| 4,102 | ||||
423 |
| 371 |
| ||||
Intangible assets, net | 3,396 |
| 2,795 |
| |||
Deferred income taxes | 63 | 58 |
| ||||
TOTAL ASSETS | $ | 10,551 | $ | 8,204 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 827 |
| $ | 256 |
| |
Warranty | 987 |
| 1,223 |
| |||
Accrued compensation | 214 |
| 193 |
| |||
Other current liabilities |
| 648 |
| 323 |
| ||
Total current liabilities | 2,676 |
| 1,995 | ||||
TOTAL LIABILITIES | 2,676 | 1,995 |
| ||||
Shareholders' equity: | |||||||
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued or outstanding | — | — | |||||
Common stock, $0.01 par value; 20,000,000 shares authorized, 5,189,518 and 5,094,473 | |||||||
issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 51 |
| 50 |
| |||
Additional paid-in capital | 24,283 | 24,055 | |||||
Accumulated other comprehensive loss | (316 | ) | (363 | ) | |||
Accumulated deficit | (16,143 | ) | (17,533 | ) | |||
Total shareholders' equity | 7,875 |
| 6,209 |
| |||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 10,551 | $ | 8,204 | |||
| |||||||
See accompanying notes to the condensed consolidated financial statements. |
|
|
|
|
March 31, 2021 |
| December 31, | ||||||
(Unaudited) |
| 2020 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,212 |
| $ | 8,605 |
| ||
Accounts receivable, net of allowance for doubtful accounts of $5 and $2 respectively | 2,850 |
| 2,261 |
| ||||
Inventories | 829 |
| 770 |
| ||||
Prepaid expenses and other current assets | 434 |
| 480 |
| ||||
Total current assets | 12,325 |
| 12,116 |
| ||||
Property and equipment: | ||||||||
Furniture and fixtures | 154 |
| 154 |
| ||||
Leasehold improvements | 6 | 6 |
| |||||
Equipment | 1,222 |
| 1,215 | |||||
1,382 |
| 1,375 | ||||||
Accumulated depreciation | 1,114 |
| 1,072 | |||||
268 |
| 303 |
| |||||
Operating lease assets, net | 82 | 136 | ||||||
Intangible assets, net | 3,097 |
| 3,161 |
| ||||
Deferred income taxes | 5,507 | 5,708 |
| |||||
TOTAL ASSETS | $ | 21,279 | $ | 21,424 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 301 |
| $ | 547 |
| ||
Deferred revenue | 38 | 37 | ||||||
Warranty | 130 |
| 141 |
| ||||
Accrued compensation | 128 |
| 148 |
| ||||
Operating lease obligations | 75 | 126 | ||||||
Short-term debt | 0 | 349 | ||||||
Other current liabilities |
| 124 |
| 124 |
| |||
Total current liabilities | 796 |
| 1,472 | |||||
Operating lease obligations | 6 | 8 | ||||||
Long-term debt | 0 | 574 | ||||||
TOTAL LIABILITIES | 802 | 2,054 |
| |||||
Shareholders' equity: | ||||||||
Preferred stock, $0.01 par value; 5,000,000 shares authorized, NaN issued or outstanding | 0 | 0 | ||||||
Common stock, $0.01 par value; 20,000,000 shares authorized, 5,354,337 and 5,352,626 | ||||||||
issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 54 |
| 54 |
| ||||
Additional paid-in capital | 24,997 | 24,968 | ||||||
Accumulated other comprehensive loss | (203) | (150 | ) | |||||
Accumulated deficit | (4,371) | (5,502 | ) | |||||
Total shareholders' equity | 20,477 |
| 19,370 |
| ||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 21,279 | $ | 21,424 | ||||
| ||||||||
See accompanying notes to the condensed consolidated financial statements. |
|
|
|
|
Image Sensing Systems, Inc.
(Unaudited)
(Unaudited)
(in thousands, except per share data)
Three-Month | Nine-Month Periods Ended September 30, | Three-Month Periods Ended March 31, | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | ||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Product sales | $ | 1,120 |
| $ | 1,249 | $ | 4,189 | $ | 5,184 |
| $ | 1,163 | $ | 1,050 | |||||||||
Royalties |
| 2,504 |
|
| 2,133 |
| 5,994 |
| 6,113 |
| 1,816 | 2,109 | |||||||||||
3,624 |
| 3,382 | 10,183 | 11,297 |
| 2,979 | 3,159 | ||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||
Product sales |
| 512 |
|
| 814 |
| 1,764 |
| 2,696 |
| 613 | 531 | |||||||||||
Software amortization | 90 | — | 270 | — | |||||||||||||||||||
Royalties | 93 | 92 | |||||||||||||||||||||
| 602 |
|
| 814 |
| 2,034 |
| 2,696 |
| 706 | 623 | ||||||||||||
Gross profit | 3,022 |
| 2,568 | 8,149 | 8,601 |
| 2,273 | 2,536 | |||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Selling, general and administrative | 1,430 |
| 1,436 | 4,522 | 5,041 |
| 1,366 | 1,909 | |||||||||||||||
Research and development | 722 |
| 636 | 2,266 | 2,033 |
| 496 | 902 | |||||||||||||||
Restructuring | — |
| — | — | 126 |
| |||||||||||||||||
| 2,152 |
|
| 2,072 |
| 6,788 |
| 7,200 |
| 1,862 | 2,811 | ||||||||||||
Operating income from operations | 870 |
| 496 | 1,361 | 1,401 |
| |||||||||||||||||
Other, net |
| — |
|
| (27 | ) |
| 33 |
| (27 | ) | ||||||||||||
Income from operations before income taxes | 870 |
| 469 | 1,394 | 1,374 |
| |||||||||||||||||
Income tax expense | — |
| — | 4 | 4 | ||||||||||||||||||
Net income | $ | 870 |
| $ | 469 | $ | 1,390 | $ | 1,370 | ||||||||||||||
Net income per share: | |||||||||||||||||||||||
Income (loss) from operations | 411 | (275 | ) | ||||||||||||||||||||
Other income, net | 925 | 0 | |||||||||||||||||||||
Income (loss) from operations before income taxes | 1,336 | (275 | ) | ||||||||||||||||||||
Income tax expense (benefit) | 205 | (164 | ) | ||||||||||||||||||||
Net income (loss) | $ | 1,131 | $ | (111 | ) | ||||||||||||||||||
Net income (loss) per share: | |||||||||||||||||||||||
Basic | $ | 0.17 | $ | 0.09 | $ | 0.27 | $ | 0.27 | $ | 0.21 | $ | (0.02 | ) | ||||||||||
Diluted | $ | 0.17 |
| $ | 0.09 | $ | 0.27 | $ | 0.27 | $ | 0.21 | $ | (0.02 | ) | |||||||||
Weighted average number of common shares outstanding: | |||||||||||||||||||||||
Basic |
| 5,138 |
|
| 5,059 |
| 5,117 |
| 5,043 |
| 5,322 | 5,267 | |||||||||||
Diluted |
| 5,151 |
|
| 5,068 |
| 5,121 |
| 5,045 |
| 5,342 | 5,267 | |||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||
See accompanying notes to the condensed consolidated financial statements. | See accompanying notes to the condensed consolidated financial statements. | See accompanying notes to the condensed consolidated financial statements. |
Image Sensing Systems, Inc.
(Unaudited)
(Unaudited)
(in thousands)
Three-Month Periods Ended September 30, | Nine-Month Periods Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 870 | $ | 469 | $ | 1,390 | $ | 1,370 | |||||||
Other comprehensive income: | |||||||||||||||
Foreign currency translation adjustment | 16 | (19 | ) | 47 | (66 | ) | |||||||||
Comprehensive income | $ | 886 | $ | 450 | $ | 1,437 | $ | 1,304 | |||||||
See accompanying notes to the condensed consolidated financial statements. |
Three-Month Periods Ended March 31, | ||||||||
2021 | 2020 | |||||||
Net income (loss) | $ | 1,131 | $ | (111 | ) | |||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustment | (53 | ) | (106 | ) | ||||
Comprehensive income (loss) | $ | 1,078 | $ | (217 | ) | |||
See accompanying notes to the condensed consolidated financial statements. |
Image Sensing Systems, Inc.
(Unaudited)
(Unaudited)
(in thousands)
| Nine-Month Periods Ended | Three-Month Periods Ended | ||||||||||||
| 2017 |
| 2016 | 2021 |
| 2020 | ||||||||
Operating activities: |
|
|
|
|
|
|
|
| ||||||
Net income | $ | 1,390 |
| $ | 1,370 |
| ||||||||
Net income (loss) | $ | 1,131 |
| $ | (111 | ) | ||||||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation |
| 191 |
|
| 223 |
|
| 40 |
|
| 50 |
| ||
Software amortization |
| 270 |
|
| — |
|
| 187 |
|
| 174 |
| ||
Stock-based compensation |
| 229 |
|
| 160 |
|
| 53 |
|
| 59 |
| ||
Loss on disposal of assets |
| 2 |
|
| 13 |
| ||||||||
Deferred income tax expense | 201 | 0 | ||||||||||||
Forgiveness income from PPP Loan (Note L) | (931 | ) | 0 | |||||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable, net |
| (80 | ) |
| (63 | ) |
| (590 | ) |
| 228 | |||
Inventories | (285 | ) |
| 487 |
| (59 | ) |
| 95 |
| ||||
Prepaid expenses and other current assets |
| (120 | ) |
| 29 |
|
| 46 |
| (108 | ) | |||
Accounts payable |
| 448 |
|
| (1,134 | ) |
| (242 | ) |
| 186 | |||
Accrued expenses and other current liabilities |
| 110 |
|
| (658 | ) |
| (22 | ) |
| (79 | ) | ||
Net cash provided by operating activities |
| 2,155 |
|
| 427 |
| ||||||||
Net cash provided by (used for) operating activities |
| (186 | ) |
| 494 |
| ||||||||
Investing activities: |
|
|
|
|
|
|
|
|
|
|
| |||
Capitalized software development costs |
| (833 | ) |
| (1,632 | ) |
| (123 | ) |
| (22 | ) | ||
Purchases of property and equipment |
| (148 | ) |
| (113 | ) |
| (10 | ) |
| (75 | ) | ||
Net cash used for continuing investing activities |
| (981 | ) |
| (1,745 | ) | ||||||||
Net cash provided by discontinued investing activities |
| — |
|
| 420 |
| ||||||||
Net cash used for investing activities |
| (981 | ) |
| (1,325 | ) |
| (133 | ) |
| (97 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Financing activities: |
|
|
|
|
|
| ||||||||
Stock for tax withholding |
| (24 | ) |
| 0 | |||||||||
Net cash used for financing activities |
| (24 | ) |
| 0 | |||||||||
|
|
|
|
|
|
| ||||||||
Effect of exchange rate changes on cash |
| 35 |
|
| (73 | ) |
| (50 | ) |
| (90 | ) | ||
Increase (decrease) in cash and cash equivalents |
| 1,209 |
|
| (971 | ) | ||||||||
Change in cash and cash equivalents |
| (393 | ) |
| 307 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of period |
| 1,547 |
|
| 2,648 |
|
| 8,605 |
|
| 5,118 |
| ||
Cash and cash equivalents at end of period | $ | 2,756 |
| $ | 1,677 |
| $ | 8,212 |
| $ | 5,425 |
| ||
Non-Cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Purchase of property and equipment in accounts payable | $ | 85 |
| $ | — |
| $ | 3 |
| $ | 25 |
| ||
Capitalization of software development costs in accounts payable |
| 38 |
|
| — |
| ||||||||
See accompanying notes to the condensed consolidated financial statements. |
IMAGE SENSING SYSTEMS, INC.
Three-Month Period Ended March 31, 2020 | ||||||||||||||||||||||
Shares Issued | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||
Balance, December 31, 2019 | 5,322,849 | $ | 53 | $ | 24,751 | $ | (306 | ) | $ | (6,565 | ) | $ | 17,933 | |||||||||
Stock-based compensation | 8,950 | — | 59 | — | — | 59 | ||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (106 | ) | — | (106 | ) | ||||||||||||||
Net income (loss) | — | — | — | — | (111 | ) | (111 | ) | ||||||||||||||
Balance, March 31, 2020 | 5,331,799 | $ | 53 | $ | 24,810 | $ | (412 | ) | $ | (6,676 | ) | $ | 17,775 | |||||||||
Three-Month Period Ended March 31, 2021 | ||||||||||||||||||||||
Shares Issued | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||
Balance, December 31, 2020 | 5,352,626 | $ | 54 | $ | 24,968 | $ | (150 | ) | $ | (5,502 | ) | $ | 19,370 | |||||||||
Stock-based compensation | 7,035 | — | 53 | — | — | 53 | ||||||||||||||||
Stock for tax withholding | (5,324 | ) | — | (24 | ) | — | — | (24 | ) | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (53 | ) | — | (53 | ) | ||||||||||||||
Net income | — | — | — | — | 1,131 | 1,131 | ||||||||||||||||
Balance, March 31, 2021 | 5,354,337 | $ | 54 | $ | 24,997 | $ | (203 | ) | $ | (4,371 | ) | $ | 20,477 | |||||||||
See accompanying notes to the condensed consolidated financial statements |
8 |
IMAGE SENSING SYSTEMS, INC.
(Unaudited)
(Unaudited) March 31, 2021
September 30, 2017
Note A: Basis of Presentation
Image Sensing Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as "we," "us," "our" and the "Company") develops and markets video and radar processing products for use in applications such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. We sell our products primarily to distributors and also receive royalties under a license agreement with a manufacturer/distributor for certain of our products. Our products are used primarily by governmental entities.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q, which require the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals considered necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated.
Operating results for the three and nine month periods period ended September 30, 2017March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2021. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162020 as filed with the SEC.
Corporate Reorganization
On April 28, 2021, the Board of Directors of the Company approved proceeding with the implementation of a reorganization (the “Reorganization”) of the Company's corporate structure into a holding company structure. When implemented, the Company will become a wholly-owned subsidiary of a new holding company, Autoscope Technologies Corporation (“Autoscope”), which will replace the Company as the public company trading on the Nasdaq Stock Market. Outstanding shares of the Company will be automatically converted into shares of common stock of Autoscope. The holding company reorganization is not expected to result in a change in the directors, executive officers, management or business of the Company.
The Reorganization is intended to be a tax-free transaction for U.S. federal income tax purposes for the Company’s shareholders and, subject to obtaining required approvals or any other intervening developments, is expected to be completed in the second quarter of 2021.
Cash Dividend
On April 28, 2021, the Board of Directors of the Company approved a cash dividend of $0.12 per share to shareholders of record on the close of business on May 10, 2021, which is payable to shareholders on May 20, 2021.
Summary of Significant Accounting Policies
The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position and may require the application of a higher level of judgment by the Company's management and, as a result, are subject to an inherent degree of uncertainty.
Revenue Recognition
We recognize revenue on a sales arrangement when itcontrol of the promised goods or services is realizedtransferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or realizableservices.
We determine revenue recognition through the following steps: | |
● | Identification of a contract, or contracts, with a customer; |
● | Identification of performance obligations in the contract; |
● | Determination of the transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of revenue when, or as, we satisfy a performance obligation. |
9 |
Revenue disaggregated by revenue source for the three months ended March 31, 2021 and earned, which occurs when all2020 consists of the following criteria have(in thousands); revenue excludes sales and usage-based taxes when or if it has been met: persuasive evidencedetermined that we are acting as a pass-through agent:
Three Months Ended March 31, | |||||||
2021 | 2020 | ||||||
Product sales | $ | 1,163 | $ | 1,050 | |||
Royalties | 1,816 | 2,109 | |||||
Total revenue | $ | 2,979 | $ | 3,159 |
Product Sales:
Product revenue is generated primarily from the direct sales of an arrangement exists; deliveryour RTMS radar systems worldwide and title transfer have occurredour Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services have been rendered;is transferred to our customers in an amount that reflects the sales price is fixed and determinable; collectability is reasonably assured; and all significant obligationsamount we expect to the customer have been fulfilled.receive in exchange for those goods or services.
Certain product sales may contain multiple elementsperformance obligations for revenue recognition purposes. We consider each deliverable that provides value to the customer on a standalone basis as a separable element. Separable elements in these arrangementsMultiple performance obligations may include the hardware, software, installation services, training, support, and support. We initially allocate considerationextended warranties.In arrangements where we have multiple performance obligations, the transaction price is allocated to each separable elementperformance obligation using the relative stand-alone selling price method. Sellingprice.We generally determine stand-alone selling prices are determined by us based on either vendor-specific objective evidence ("VSOE") (the actualthe 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 of similar products and services sold on a standalone basis) or, in the absence of VSOE, our best estimate of the selling price. Factors considered by us in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand, costs incurred by us to provide the deliverable, as well as our historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement. Under arrangements where special acceptance protocols exist, installation services and training may not be considered separable. Under those circumstances, revenue for the entire arrangement is recognized upon the completion of installation, training and fulfillment of any other significant obligations specific to the terms of the arrangement. Arrangements that do not contain any separable elements are typically recognized when the products are shipped and title has transferred to the customer.prices.
Revenue from arrangements for services such as maintenance, repair, consulting and technical support areis recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts.
Econolite Control Products, Inc. (Econolite) is From time to time, our licensee that sells certainpayment terms may vary by the type and location of our products in the United States, Mexico, Canadacustomer and the Caribbean. products or services offered. Revenue for extended warranties are deferred until the coverage period and then recognized ratably over the extended warranty term.
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable.The royalty of approximately 50% of the gross profit on licensedterm between invoicing and when payment is due is not significant.For certain products is recognized whenor services and customer types, we require payment before the products or services are shipped or delivered by Econolite to its customers.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.
RevenueRoyalties:
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 netwithin sales and marketing expense.
We do not disclose the value of taxes collected from customers that are remittedunsatisfied 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 governmental authorities, withwhich we have the collected taxes recorded as current liabilities until remittedright to the relevant government authority.invoice for services performed.
10 |
Inventories
Inventories are primarily electronic components and finished goods and are valued at the lower of cost or market onnet realizable value determined under the first-in, first-out accounting method.
Income Taxes
We record a tax provision for the anticipated tax consequences of theour 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. In the event thatIf all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.
Intangible Assets
We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.
Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that isare determined to be in excess of net realizable value hashave been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, in a prior quarter, we capitalized approximately $305,000123,000 and $507,000$22,000 of software development costs during the quarters ended September 30, 2017March 31, 2021 and 2016,2020, respectively.
Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows and reviewed for impairment. At both September 30, 2017March 31, 2021 and December 31, 2016,2020, we determined there was no0 impairment of intangible assets. At both September 30, 2017March 31, 2021 and 2016,2020, there were no0 indefinite-lived intangible assets.
Note B: Recent Accounting Pronouncements
Accounting pronouncements recently adopted
In March 2016,August 2018, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")(ASU) No. 2016-09, “Compensation-Stock Compensation2018-13, "Fair Value Measurements (Topic 718)." ASU 2016-09 provides guidance on how an entity should account for stock compensation. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company adopted ASU 2016-09 effective January 1, 2017, and the adoption did not have a material impact on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)820)." ASU 2016-02 provides guidance on how an entity should account2018-13 eliminates, amends and adds disclosure requirements for leases and recognize associated lease assets and liabilities.fair value measurements. ASU 2016-022018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. ASU 2016-02 mustrequired to be adopted using a modified retrospective transition, and it provides for certain practical expedients.In addition, the transition will require application of ASU 2016-02 at the beginning of the earliest comparative period presented.We are currently determining our implementation approach and assessing the impact of ASU 2016-02 on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 provides guidance related to how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 specifies accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related to revenue and cash flows from contracts with customers.
On July 9, 2015, the FASB affirmed its proposal to defer the effective date of ASU 2014-09 for all entities by one year. As a result, public business entities, certain not-for-profit entities, and certain employee benefit plans will apply this revenue standard to annual reporting periods beginning after December 15, 2017.All other entities will apply ASU 2014-09 to annual reporting periods beginning after December 15, 2018. Additionally, the FASB affirmed its proposal to permit all entities to apply ASU 2014-09 early, but not before the original effective date for public business entities, certain not-for-profit entities, and certain employee benefit plans (that is, annual periods beginning after December 15, 2016). Entities choosing to implement early will apply ASU 2014-09 to all2019, including interim reporting periods within thethat annual period, which is our fiscal year 2020. We adopted these changes as of adoption. The Company is currently determining its implementation approach and assessing the impact of ASU 2014-09 on the consolidated financial statements. January 1, 2020; however, there are no required changes that apply to our fair value measurements disclosures.
Note C: Fair Value Measurements
The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
Level 1: | observable inputs such as quoted prices in active markets; | |
Level 2: | inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | |
Level 3: | unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
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.
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.
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.
Note D: Inventories
Inventories consisted of approximately $426,000the following (in thousands):
March 31, 2021 | December 31, 2020 | ||||
Finished goods | $ | 736 | $ | 661 | |
Components | 93 | 109 | |||
Total | $ | 829 | $ | 770 |
Note E: Operating Leases
The Company is subject to various non-cancelable operating leases for office space and $141,000IT equipment expiring at various dates through November 2022. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.
Most of finished goodsthese leases include an option to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use ("ROU") assets and lease liabilities because they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.
Because most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We used incremental borrowing rates as of September 30, 2017January 1, 2019 for operating leases that commenced prior to that date. We have a centrally managed treasury function; therefore, based on the applicable lease terms and December 31, 2016, respectively.the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
Note E: Intangible AssetsThe cost components of our operating leases were as follows (in thousands):
Three-Month Periods Ended March 31, | ||||||
2021 | 2020 | |||||
Operating lease costs | $ | 55 | $ | 66 | ||
Variable lease cost | 43 | 76 | ||||
Total | $ | 98 | $ | 142 |
Variable lease costs consist primarily of property taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment, which are paid based on actual costs incurred by the lessor.
13 |
Maturities for our lease liabilities for all operating leases are as follows (in thousands) as of March 31, 2021:
Total | |||
2021 | $ | 74 | |
2022 | 8 | ||
2023 and thereafter | 0 | ||
Total lease payments | 82 | ||
Less: Interest | (1 | ) | |
Present value of lease liabilities | $ | 81 |
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2021:
March 31, 2021 | ||
Remaining lease term and discount rate: | ||
Weighted average remaining lease term (years) | 0.59 | |
Weighted average discount rate | 4.75 | % |
Cash paid for amounts included in the measurement of operating lease liabilities was $55,000 and $67,000 for the three months ended March 31, 2021 and 2020, respectively, and these amounts are included in operating activities in the condensed consolidated statements of cash flows. There were no operating lease assets obtained in exchange for new operating lease liabilities for the three months ended March 31, 2021 and 2020.
14 |
Note F: Intangible Assets
Intangible assets consisted of the following (dollars in thousands):
| September 30, 2017 | March 31, 2021 | ||||||||||||||||||||||||||
|
|
| Weighted |
|
|
|
| Weighted |
| |||||||||||||||||||
| Gross |
| Net | Average |
| Gross |
| Net | Average |
| ||||||||||||||||||
| Carrying | Accumulated | Carrying | Useful Life |
| Carrying | Accumulated | Carrying | Useful Life |
| ||||||||||||||||||
| Amount | Amortization | Value | (in Years) |
| Amount | Amortization | Value | (in Years) |
| ||||||||||||||||||
Developed technology | $ | 3,900 | $ | (3,900 | ) | $ | — | — |
| |||||||||||||||||||
Wrong Way development costs | $ | 228 | $ | (228) | $ | 0 | — |
| ||||||||||||||||||||
Vision development costs | 2,885 | (360 | ) |
| 2,525 | 8.0 |
| 3,052 | (1,645) |
| 1,407 | 8.0 |
| |||||||||||||||
Software development costs | 871 | — |
| 871 | — |
| ||||||||||||||||||||||
Echo development costs | 1,852 | (308) |
| 1,544 | 7.0 |
| ||||||||||||||||||||||
IntellitraffiQ development costs |
| 468 |
| (322) |
| 146 | 4.0 |
| ||||||||||||||||||||
Total | $ | 7,656 | $ | (4,260 | ) | $ | 3,396 | 8.0 |
| $ | 5,600 | $ | (2,503) | $ | 3,097 | 7.0 |
|
| December 31, 2016 | |||||||||||||
|
|
|
| Weighted |
| |||||||||
| Gross | Net | Average |
| ||||||||||
| Carrying | Accumulated | Carrying | Useful Life |
| |||||||||
| Amount | Amortization | Value | (in Years) |
| |||||||||
Developed technology | $ | 3,900 | $ | (3,900 | ) | $ | — |
| — |
| ||||
Vision development costs | 2,885 | (90 | ) | 2,795 |
| 8.0 |
| |||||||
| $ | 6,785 | $ | (3,990 | ) | $ | 2,795 |
| 8.0 |
|
| December 31, 2020 | |||||||||||||
|
|
|
| Weighted |
| |||||||||
| Gross | Net | Average |
| ||||||||||
| Carrying | Accumulated | Carrying | Useful Life |
| |||||||||
| Amount | Amortization | Value | (in Years) |
| |||||||||
Wrong Way development costs | $ | 228 | $ | (228 | ) | $ | 0 |
| — |
| ||||
Vision development costs | 2,929 | (1,553 | ) | 1,376 |
| 8.0 |
| |||||||
Echo development costs |
| 1,852 |
| (242 | ) |
| 1,610 |
| 7.0 |
| ||||
IntellitraffiQ development costs | 468 | (293 | ) | 175 | 4.0 | |||||||||
Total | $ | 5,477 | $ | (2,316 | ) | $ | 3,161 |
| 7.3 |
|
Note F: 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 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.
Note G: Warranties
We generally provide a two to fivethree yearwarranty on product sales. Reserves to honor warranty claims are estimated and recorded at the time of sale based on historical claim information and are analyzed and adjusted periodically based on actual claim trends.
Warranty liability and related activity consisted of the following (in thousands):
| Nine-Month Periods Ended | Three-Month Periods Ended | ||||||||||||
| 2017 | 2016 | 2021 | 2020 | ||||||||||
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | $ | 1,223 | $ | 760 |
| $ | 141 | $ | 313 |
| ||||
Warranty provisions |
| 38 |
| 185 |
|
| 12 |
| 7 |
| ||||
Warranty claims | (111 | ) |
| (288 | ) | (7 | ) |
| (23 | ) | ||||
Adjustments to preexisting warranties | (167 | ) |
| 27 |
| (13 | ) |
| (75 | ) | ||||
Currency | 4 |
| — |
| (3 | ) |
| (2 | ) | |||||
Ending balance | $ | 987 | $ | 684 |
| $ | 130 | $ | 220 |
|
15 |
Note H: Stock-Based Compensation
We compensate officers, directors, key employees and consultants with stock-based compensation under stock optionthe Image Sensing Systems, Inc. 2014 Stock Option and incentive plansIncentive Plan (the "Plans""2014 Plan"), which was approved by our shareholders and is administered under the supervision of our Board of Directors. Stock option awards are granted at exercise prices equal to the closing price of our stock on the day before the date of grant. Generally, options vest proportionallyratably over periods ofthree to five years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of nine to ten10 years.
Performance stock options are time based; however, the final number of awards earned and the related compensation expense are adjusted up or down to the extent the performance target is met. The actual number of shares that will ultimately vest ranges from 90% to 100% of the targeted amount if the minimum performance target is achieved. We evaluate the likelihood of meeting the performance target at each reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of each performance target.
Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period. Stock-based compensation expense included in general and administrative expense for the three-month periods ended September 30, 2017March 31, 2021 and 20162020 was $76,000$53,000 and $100,000,59,000, respectively.Stock-based compensation expense included in general and administrative expense for the nine-month periods ended September 30, 2017 and 2016 was $229,000 and $160,000, respectively. At September 30, 2017, 211,843March 31, 2021, 148,024 shares were available for grant under the Company's stock option and incentive plan.2014 Plan.
Stock Options
A summary of the stock option activity for the first ninethree months of 20172021 is as follows:
Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
Options outstanding at December 31, 2020 | 15,000 | $ | 4.76 | 2.94 | $ | 2,700 | ||||||||||
Granted | 0 | $ | 0 | — | $ | 0 | ||||||||||
Exercised | 0 | $ | 0 | — | $ | 0 | ||||||||||
Expired | 0 | $ | 0 | — | $ | 0 | ||||||||||
Forfeited | (1,000 | ) | $ | 4.22 | — | $ | 320 | |||||||||
Options outstanding at March 31, 2021 | 14,000 | $ | 4.80 | 2.66 | $ | 2,611 | ||||||||||
Options exercisable at March 31, 2021 | 14,000 | $ | 4.80 | 2.66 | $ | 2,611 |
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 | 132,500 | $ | 6.15 | 4.50 | $ | — | ||||||||||
Granted | — | $ | — | — | $ | — | ||||||||||
Exercised | — | $ | — | — | $ | — | ||||||||||
Expired | (12,000 | ) | $ | 9.43 | — | $ | — | |||||||||
Forfeited | (22,000 | ) | $ | 5.72 | — | $ | — | |||||||||
Options outstanding at September 30, 2017 | 98,500 | $ | 5.85 | 3.95 | $ | — | ||||||||||
Options exercisable at September 30, 2017 | 90,625 | $ | 5.99 | 3.71 | $ | — |
16 |
There were no0 stock options exercised or expired and options to purchase 1,000 shares were forfeited during the threethree-month period ended March 31, 2021, and nine monththere were 0 options exercised, expired, or forfeited during the three-month period ended March 31, 2020. During each of the three-month periods ended September 30, 2017March 31, 2021 and September 30, 2016.2020, we recognized 0 stock-based compensation expense related to stock options. As of September 30, 2017,March 31, 2021, there was $9,000 of total0 unrecognized compensation cost related to non-vested stock options. The weighted average period over which the compensation cost is expected to be recognized is 0.61 of a year.
Restricted Stock Awards and Stock Awards
Restricted stock awards are granted under the 2014 Plan at the discretion of the Compensation Committee of our Board of Directors. We issue restricted stock awards to executive officers and key consultants. These awards may contain certain performance conditions or time-based vesting criteria. Executive officers vest in theThe restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant date through the end of the vesting period. At the time of vesting of the restricted stock awards, the recipients of common stock may request to receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the relevant jurisdiction's maximum statutory rate. StockCompensation expense related to any stock awards issued to consultants are recognized overemployees is determined on the performance periodgrant date based on the publicly-quoted fair market value of our common stock priceand is charged to earnings on the date when the consultant's performance is complete. grant date.
We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance. 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.
A summary of theThe following table summarizes restricted stock awards and stock award activity for the first ninethree months of 2017 is as follows:2021:
Number of |
|
| Weighted | ||||
Awards outstanding December 31, 2016 |
| — | $ | — |
| ||
Granted |
| 95,045 | 3.08 |
| |||
Vested |
| (63,045 | ) | 3.15 |
| ||
Expired |
| — | — |
| |||
Forfeited |
| — | — |
| |||
Awards outstanding at September 30, 2017 |
| 32,000 | $ | 2.95 |
|
Number of |
|
| Weighted | ||||
Awards outstanding December 31, 2020 |
| 33,330 | $ | 4.52 |
| ||
Granted |
| 7,035 | 4.44 |
| |||
Vested |
| (21,555 | ) | 4.20 |
| ||
Forfeited |
| 0 | 0 |
| |||
Awards outstanding at March 31, 2021 |
| 18,810 | $ | 4.86 |
|
As of September 30, 2017,March 31, 2021, the total stock-based compensation expense related to non-vested awards not yet recognized was $62,000,$59,000, which is expected to be recognized over a weighted average period of 2.450.98 years. The weighted average grant date fair value of restricted stock units granted during the nine-month period ended September 30, 2017 was $3.08. We granted restricted stock awards of 95,045 shares during the nine-month period ended September 30, 2017. During the nine-monththree-month periods ended September 30, 2017March 31, 2021 and September 30, 2016,March 31, 2020, we recognized $213,000$53,000 and $142,000,$59,000, respectively, of stock-based compensation expense related to restricted stock awards.
Note I: Income (loss) per Common Share
Net income (loss) per share is computed by dividing net income (loss) by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income (loss) per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding 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 and restricted stock awards to acquire100,196 and 206,467 5,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended September 30, 2017March 31, 2021 and 2016, respectively, and 132,247 and 239,399 weighted common shares have been excluded from the diluted weighted shares outstanding for the nine-month periods ended September 30, 2017 and 2016, respectively.2020.
17 |
A reconciliation of net income per share is as follows (in thousands, except per share data):
Three-Month Periods Ended September 30, | Nine-Month Periods Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 870 | $ | 469 | $ | 1,390 | $ | 1,370 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding | 5,138 | 5,059 | 5,117 | 5,043 | ||||||||||||
Dilutive potential common shares | 13 | 9 | 4 | 2 | ||||||||||||
Shares used in diluted net loss per common share calculations | 5,151 | 5,068 | 5,121 | 5,045 | ||||||||||||
Basic net income per common share | $ | 0.17 | $ | 0.09 | $ | 0.27 | $ | 0.27 | ||||||||
Diluted net income per common share | $ | 0.17 | $ | 0.09 | $ | 0.27 | $ | 0.27 |
Three-Month Periods Ended March 31, | ||||||||
2021 | 2020 | |||||||
Numerator: | ||||||||
Net income (loss) | $ | 1,131 | $ | (111 | ) | |||
Denominator: | ||||||||
Weighted average common shares outstanding | 5,322 | 5,267 | ||||||
Dilutive potential common shares | 20 | 0 | ||||||
Shares used in diluted net income (loss) per common share calculations | 5,342 | 5,267 | ||||||
Basic net income (loss) per common share | $ | 0.21 | $ | (0.02 | ) | |||
Diluted net income (loss) per common share | $ | 0.21 | $ | (0.02 | ) |
Note J: Segment Information
The Company's Chief Executive Officer and management regularly review financial information for the Company's discrete operating segments. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating segments have been aggregated for financial statement purposes and categorized into two2 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 settable sets forth selected unaudited financial information for each of our reportable segments (in thousands):
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
Intersection | Highway | Total | Intersection | Highway | Total | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Revenue | $ | 2,852 | $ | 2,452 | $ | 772 | $ | 930 | $ | 3,624 | $ | 3,382 | $ | 1,892 | $ | 2,250 | $ | 1,087 | $ | 909 | $ | 2,979 | $ | 3,159 | ||||||||||||
Gross profit | 2,577 | 2,291 | 445 | 277 | 3,022 | 2,568 | 1,724 | 2,069 | 549 | 467 | 2,273 | 2,536 | ||||||||||||||||||||||||
Amortization of intangible assets | 90 | — | — | — | 90 | — | 92 | 92 | 95 | 82 | 187 | 174 | ||||||||||||||||||||||||
Intangible assets | 2,569 | 2,842 | 827 | — | 3,396 | 2,842 | 1,407 | 1,651 | 1,690 | 2,071 | 3,097 | 3,722 |
Nine Months Ended September 30, | ||||||||||||||||||
Intersection | Highway | Total | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | $ | 6,970 | $ | 7,053 | $ | 3,213 | $ | 4,244 | $ | 10,183 | $ | 11,297 | ||||||
Gross profit | 6,266 | 6,543 | 1,883 | 2,058 | 8,149 | 8,601 | ||||||||||||
Amortization of intangible assets | 270 | — | — | — | 270 | — | ||||||||||||
Intangible assets | 2,569 | 2,842 | 827 | — | 3,396 | 2,842 |
Note K: Restructuring and Exit Activities
In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) in China; Image Sensing Systems Europe Limited (ISS Europe) in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O (ISS Poland) in Poland; and Image Sensing Systems Germany, GmbH (ISS Germany) in Germany. At December 31, 2018, Image Sensing Systems Europe Limited and Image Sensing Systems Europe Limited SP.Z.O.O were fully closed. At December 31, 2019, Image Sensing Systems Germany, GmbH was fully closed. During 2020, we initiated the closure of Image Sensing Systems EMEA Limited (ISS UK) and Image Sensing Systems Holdings Limited (ISS Holdings). At March 31, 2021, Image Sensing Systems (Shenzhen) Limited was fully closed. We incurred $16,000 and $30,000 for these entities' closure costs in the three-month periods ended March 31, 2021 and March 31, 2020, respectively.
Note L: Commitments and Contingencies
Debt
Under the Paycheck Protection Program ("PPP"), the United States Small Business Administration ("SBA") approved the Company's application to receive a loan in the amount of $923,700 (the "PPP Loan"). The PPP was established under the congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA. The PPP Loan to the Company was made through BMO Harris Bank N.A. (the "Lender"). On April 21, 2020, the Company's Board of Directors approved the PPP Loan, and the Company signed the promissory note (the "Note") evidencing the PPP Loan, which was dated as of April 17, 2020. The Lender distributed the $923,700 of proceeds of the PPP Loan to the Company on April 22, 2020.
The term of the PPP loan was 24 months after the date of the Note (the "Maturity Date"). The annual interest rate on the PPP Loan was 1.00%. No payments of principal or interest were due during the six months beginning on the date of the Note (the "Deferred Period"). The Company's obligations under the Note were not secured by a security interest in the Company's assets. The Note required the Lender's consent if the Company wanted to reorganize, merge, consolidate, or otherwise change its ownership or structure. The Note contained customary events of default by the Company relating to, among other things, payment defaults and the breach of representations and warranties or other provisions of the Note. Upon a default by the Company under the Note, the Lender could have accelerated the Company's obligations under the Note and pursued its rights against the Company under applicable law, including by filing suit and obtaining a judgment against the Company.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans made under the PPP after 24 weeks if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. On February 2, 2021, the Company was notified by the Lender that the Lender had received payment in full of the PPP Loan from the United States government, and the Company's PPP Loan had been forgiven. The Company recognized the amount of the loan and accrued interest forgiven totaling approximately $931,000 as other non-operating income in the first quarter of 2016,2021.
The foregoing description of the Company implemented restructuring plansNote does not purport to be complete and is qualified in Canada. Becauseits entirety by reference to the full text of these actions, restructuring charges of approximately $126,000 were recorded in the first nine months of 2016 related to employee terminations.Note filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2020 and incorporated herein by reference.
19 |
The following table shows the restructuring activity for the nine months ended September 30, 2016 (in thousands):
Facility Costs | ||||||||||||
Termination | and Contract | |||||||||||
Benefits | Termination | Total | ||||||||||
|
|
|
|
|
|
|
| |||||
Balance at January 1, 2016 |
| $ | — |
| $ | — |
| $ | — | |||
Charges |
|
| 126 |
| — |
|
| 126 | ||||
Payments/settlements |
|
| — |
| — |
|
| — | ||||
Balance at March 31, 2016 |
| $ | 126 |
| $ | — |
| $ | 126 |
| ||
|
|
|
|
|
|
|
|
|
| |||
Payments/settlements |
|
| (93 | ) | — |
| (93 | ) | ||||
Balance at June 30, 2016 |
| $ | 33 |
| $ | — | $ | 33 |
| |||
Payments/settlements |
|
| (33 | ) | — |
| (33 | ) | ||||
Balance at September 30, 2016 |
|
| — |
|
| — |
| — |
|
No restructuring charges were recorded in the three and nine months ended September 30, 2017.
Note L: Commitments and ContingenciesLitigation
Litigation
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with GAAP, we record a liability in our Consolidated Financial Statements with respect to any of these matters when it is both probable thatthat 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.
On May 5, 2016, Econolite,
Note M: Risks and Uncertainties
In December 2019, the outbreak of a novel strain of coronavirus, called COVID-19, originated in Wuhan, China, and has since spread worldwide, including to the U.S. To date, the COVID-19 pandemic has caused widespread disruptions to the U.S. and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the U.S., have reacted by instituting quarantines, restrictions on travel, and mandatory closures of businesses. Certain states and cities, including where we or the third parties with whom we engage operate, have also reacted by instituting quarantines, restrictions on travel, “stay at home” rules, restrictions on types of business that may continue to operate, and restrictions on the types of construction projects that may be undertaken.
The extent to which the COVID-19 pandemic impacts our exclusive North American manufacturerbusiness, financial condition and distributor, served a complaintresults of operations will depend on us for a lawsuit filed by Econolitefuture developments, which are highly uncertain and cannot be predicted with any confidence, including the scope, severity and duration of the pandemic; the actions taken to contain the pandemic or mitigate its impact, including the adoption, effectiveness, and availability of COVID-19 vaccines; the effect of any relaxation of current restrictions in the Superior Courtcommunity and regions in which we, our customers and end users do business; and the direct and indirect economic effects of the Statepandemic and containment measures, among others. The rapid development and fluidity of Californiathis situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic has affected, and may continue to adversely affect, our business, financial condition and results of operations, and it has had, and probably will continue to have, the effect of exacerbating many of the risks described in our Annual Report on Form 10-K for the County of Orange. The complaint asserted claims against us under the Manufacturing, Distributing and Technology License Agreement, as amended, with Econolite (the "Econolite Agreement") for breach of contract and breach of implied covenant of good faith and fair dealing and sought specific performance relatedyear ended December 31, 2020 including, but not limited to, the transitionfollowing:
Overview
Overview
General. We are a leading provider of above-ground detection products and solutions for the intelligent transportation systems ("ITS"(“ITS”) industry. Our family of products, which we market as Autoscope®Autoscope® video or video products (“Autoscope”), and RTMS®RTMS® radar or radar products ("RTMS"(“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 spend 42lose 99 hours a year stuck in traffic, and congestion, which costs motorists $160$88 billion a year.year in time, an average of $1,377 per driver (per INRIX 2019 Global Traffic scorecard). We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install with lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our solutions well suited for use in ITS markets.
We believe the strength of our distribution channels positions us to increase the penetration of our technology‑driven solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the Caribbean through an exclusive agreementagreements with Econolite Control Products, Inc. ("Econolite"(“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.globally. On a limited basis, we may sell directly to the end user in these geographic areas.user. 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 officesoffice in Spain and Romania.Spain. Our end users primarily include governmental agencies and municipalities.
The following discussion of period-to-period changes and trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation discussed above.
Trends and Challenges in Our Business
We believe the expected growth in our business can be attributed primarily to the following global trends:
We believe our continued growth primarily depends upon:
21 |
Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchasepurchasing decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue betweenamong periods. The ongoing economic environment in Europe and the United States isand the COVID-19 pandemic declared in March 2020 are further adding to the unpredictability of purchasepurchasing decisions, creating more delays than usual and decreasing governmental budgets, and it isthey are likely to continue to affect our revenue.
Key Financial Terms and Metrics
Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope video systems in the United States, Mexico, Canada and the Caribbean and (2) revenue received from the direct sales of our RTMS radar systems and our Autoscope video systems in Europe and Asia. Autoscope video royalties are calculated using a profit sharing model wherein which the gross profits on sales of product made through Econolite are shared equally with Econolite. This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is exclusive under athe long-term agreement.Manufacturing, Distributing and Technology Agreement dated as of June 11, 1991, as amended (the “Econolite Agreement”), between the Company and Econolite.
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 includedWe also include any restructuring costs in operating expenses are any restructuring costs.expenses.
22 |
Non-GAAP Operating Measure. Measures. We provide certain non-GAAP financial information as supplemental information to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles in the United States). This non-GAAP information excludes the impact of depreciating fixed assets and amortizing intangible assets, and depreciation, andit may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.
Reconciliations of GAAP income from operations to non-GAAP income from operations are as follows (in thousands):
Three-Month Periods Ended | Nine-Month Periods Ended | Three-Month Period Ended March 31, | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | ||||||||||||||||||
Income from operations | $ | 870 |
| $ | 496 |
| $ | 1,361 |
| $ | 1,401 |
| |||||||||||
Income (loss) from operations | $ | 411 | $ | (275 | ) | ||||||||||||||||||
Adjustments to reconcile to non-GAAP income | |||||||||||||||||||||||
Amortization of intangible assets | 187 | 174 | |||||||||||||||||||||
Depreciation | 64 |
| 74 |
| 191 |
| 223 |
| 40 | 50 | |||||||||||||
Amortization of intangible assets | 90 | — | 270 | — | |||||||||||||||||||
Restructuring charges | — |
| — |
| — |
| 126 |
| |||||||||||||||
Non-GAAP income from continuing operations | $ | 1,024 |
| $ | 570 |
| $ | 1,822 |
| $ | 1,750 |
| |||||||||||
Non-GAAP income (loss) from operations | $ | 638 | $ | (51 | ) |
Seasonality. Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our business. Our first quarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North America, Europe and northern Asia. We expect such seasonality to continue for the foreseeable future. Additionally, our international revenues regularly contain individually significant sales. This can result in significant variations of revenue between periods. Accordingly, we believe that quarter-to-quarter comparisons of our financial results should not be relied upon as an indication of our future performance. No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in the future.
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 isand IntellitraffiQ are our radar product line,lines, and revenue consists of sales to external customers. Radar products are normally sold in the Highway segment.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 settable sets forth selected unaudited financial information for each of our reportable segments (in thousands):
|
| Three Months Ended September 30, | ||||||||||||||||
|
| Intersection |
| Highway |
| Total | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||
Revenue | $ | 2,852 |
| $ | 2,452 |
| $ | 772 |
| $ | 930 |
| $ | 3,624 |
| $ | 3,382 | |
Gross profit | 2,577 | 2,291 | 445 | 277 | 3,022 | 2,568 | ||||||||||||
Amortization of intangible assets | 90 | — | — |
|
| — |
|
| 90 |
|
| — | ||||||
Intangible assets | 2,569 | 2,842 | 827 | — | 3,396 | 2,842 |
Three Months Ended March 31, | ||||||||||||||||||
Intersection | Highway | Total | ||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenue | $ | 1,892 | $ | 2,250 | $ | 1,087 | $ | 909 | $ | 2,979 | $ | 3,159 | ||||||
Gross profit | 1,724 | 2,069 | 549 | 467 | 2,273 | 2,536 | ||||||||||||
Amortization of intangible assets | 92 | 92 | 95 | 82 | 187 | 174 | ||||||||||||
Intangible assets | 1,407 | 1,651 | 1,690 | 2,071 | 3,097 | 3,722 |
|
| Nine Months Ended September 30, | ||||||||||||||||
|
| Intersection |
| Highway |
| Total | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue | $ | 6,970 |
| $ | 7,053 |
| $ | 3,213 | $ | 4,244 | $ | 10,183 |
| $ | 11,297 | |||
Gross profit |
| 6,266 |
|
| 6,543 |
|
| 1,883 | 2,058 | 8,149 |
|
| 8,601 | |||||
Amortization of intangible assets | 270 | — | — | — | 270 | — | ||||||||||||
Intangible assets | 2,569 | 2,842 | 827 | — | 3,396 | 2,842 |
23 |
Results of Operations
The following table sets forth, for the periods indicated, certain statements of operations data as a percent of total revenue and gross profit on product sales and royalties as a percentage of product sales and royalties, respectively.
| Three-Month Periods Ended September 30, |
| ||||
| 2017 |
| 2016 |
| ||
Product sales | 30.9 | % |
| 36.9 | % |
|
Royalties | 69.1 |
|
| 63.1 |
|
|
Total revenue | 100.0 |
|
| 100.0 |
|
|
Gross profit - product sales | 54.3 |
|
| 34.8 |
|
|
Gross profit - royalties | 96.4 |
|
| 100.0 |
|
|
Selling, general and administrative | 39.5 |
|
| 42.5 |
|
|
Research and development | 19.9 |
|
| 18.8 |
|
|
Income from operations | 24.0 |
|
| 13.9 |
| |
Income tax expense | — |
|
| — |
|
|
Net income | 24.0 |
|
| 13.9 |
|
Three-Month Periods Ended March 31, | ||||||
2021 | 2020 | |||||
Product sales | 39.0 | % | 33.2 | % | ||
Royalties | 61.0 | 66.8 | ||||
Total revenue | 100.0 | 100.0 | ||||
Gross profit - product sales | 47.3 | 49.4 | ||||
Gross profit - royalties | 94.9 | 95.6 | ||||
Selling, general and administrative | 45.9 | 60.4 | ||||
Research and development | 16.6 | 28.6 | ||||
Income (loss) from operations | 13.8 | (8.7 | ) | |||
Other income, net | 31.1 | — | ||||
Income tax expense (benefit) | 6.9 | (5.2 | ) | |||
Net income (loss) | 38.0 | (3.5 | ) |
| Nine-Month Periods Ended |
| ||||
| 2017 |
| 2016 |
| ||
Product sales | 41.1 | % |
| 45.9 | % |
|
Royalties | 58.9 | 54.1 |
|
| ||
Total revenue | 100.0 |
| 100.0 |
|
| |
Gross profit - product sales | 57.9 | 48.0 |
|
| ||
Gross profit - royalties | 95.5 | 100.0 |
|
| ||
Selling, general and administrative | 44.4 | 44.6 |
|
| ||
Research and development | 22.3 | 18.0 |
|
| ||
Restructuring | — | 1.1 |
|
| ||
Income from operations | 13.7 | 12.2 |
|
| ||
Income tax expense | — | — |
| |||
Net income | 13.7 | 12.1 |
|
Total revenueincreaseddecreasedto $3.63.0million in the three-month period ended September 30, 2017,first three months of 2021, from $3.43.2 million in the same period in20162020,an increasea decreaseof7.2%, and 5.7%. Royalty income decreasedto $10.21.8million in the firstninethree monthsof20172021from $11.32.1million in the firstninethree monthsof20162020,a decreaseof9.9%13.9%. Royalty income Product sales increasedto $2.5$1.2 million in the third quarterfirstthree monthsof20172021from $2.1 million in the third quarter of 2016, an increase of 17.4%, and decreased to $6.01.1million in the firstninethree monthsof2017 from $6.1 million in the first nine months 2020,an increaseof2016, a decrease of 1.9%10.8%.
Product sales decreased to $1.1 million in the third quarter of 2017 from $1.2 million in the third quarter of 2016, a decrease of 10.3%, and decreased to $4.2 million in the first nine months of 2017 from $5.2 million in the same period in 2016, a decrease of 19.2%. The decrease in product sales was primarily driven by a slower recovery of the European market and of funding of transportation initiatives.
Revenue for the Intersection segmentincreaseddecreasedto $2.91.9million in the three-month period ended September 30, 2017,firstthree monthsof2021 from $2.5 million in the three-month period ended September 30, 2016, an increase of 16.3%. The increase can be primarily attributed to a significant royalty sale into Miami-Dade County in the third quarter 2017. Revenue for the Intersection segment decreased to $7.02.3million in the first ninethree monthsof2017 from $7.1 million in the first nine months of 20162020,a decreaseof1.2%15.9%.
Revenue for the Highway segmentdecreasedincreasedto $772,0001.1 million in the three-month period ended September 30, 2017, firstthree monthsof2021from $930,0000.9million in the three-month period ended September 30, 2016firstthree monthsof2020,a decreasean increaseof17.0%19.6%. The decrease in revenue
Gross margin percent for product sales decreased to 47.3% in the three-month periodfirst three months of 2021 from 49.4% in the first three months of 2020. Product sales gross profit increased $31,000, or 6.0%, in the three months ended September 30, 2017, is primarily attributable to lower volume sales into North AmericaMarch 31, 2021 compared to the prior year period. Revenue forThe decrease in product gross margin percent was primarily the Highway segment decreased to $3.2 millionresult of a reduction in the warranty reserve in the first ninequarter of 2020.
Gross margin percent for royalty sales for thethree months of 2017ended March 31, 2021 decreased to 94.9% from $4.2 million95.6% in the first nine months of 2016same period in2020. Gross profit from royalties decreased $294,000, or 14.6%,a decrease of 24.3%. The decrease in revenue in the Highway segment in the first nine monthsquarter of 20172021 compared to the prior year period is due to an individually significant radar project into the Middle East that was recognized in the prior year period with no comparable sale in the nine months endedSeptember 30, 2017, and lower volume sales into North America compared to the prior year period.
Gross profit for product sales increased to 54.3% in the three months ended September 30, 2017, from 34.8% in the three months ended September 30, 2016. Product sales gross profit increased $173,000 or 39.8% in the three months ended September 30, 2017, compared to the prior year period. Gross profit for product sales increased to 57.9% in the first nine months of 2017 from 48.0% in the first nine months of 2016. Product sales gross profit decreased $63,000 or 2.5% in the nine months ended September 30, 2017, compared to the prior year period. The increase in gross margin percent in the nine months ended September 30, 2017, is primarily due to a reduction in warranty reserve related to the expired warranty coverage for a discontinued legacy product. Additionally, the geographic sales mix of our product sales can influence margins, as product sold in some jurisdictions have higher margins. We anticipate that gross profit for our product sales will be similar in 2017 as compared to 2016.
Gross profit for royalty sales for the three months ended September 30, 2017, decreased to 96.4% from 100.0% in the same period in 2016. Gross profit from royalties increased $281,000 or 13.2% in the three months ended September 30, 2017, compared to the prior year period. Gross profit from royalty sales decreased to 95.5% in the first nine months 2017 from 100.0% in the first nine months 2016. Gross profit from royalties decreased $389,000 or 6.4% compared to the prior year period. The decrease in royalty gross margin percent iswas due to lower royalty revenues while software amortization expense remained substantially the amortization of software capitalization costs related to the Autoscope Vision product released for sale in October 2016. We expect that royalty gross profit percentage will decrease in 2017 compared to 2016 due to this amortization.same.
Selling, general and administrative expense was $1.4million, or 39.5%45.9% of total revenue, in the third quarterfirstthree monthsof20172021compared to $1.41.9million, or42.5% of total revenue in the third quarter of 2016, and it decreased to $4.5 million or 44.4%60.4%of total revenue, in the firstninethree monthsof 20172020. A portion of the expense in the first three months of 2020 consisted of expenses for legal and outside consulting costs related to the efforts around exploring strategic alternatives to maximize shareholder value that we announced in January 2020.In light of current market conditions, including the effects of the COVID-19 pandemic, the strategic review process has been terminated.
Research and development expense decreasedto $496,000, or16.6%of total revenue, in the three-month period endedMarch 31, 2021, from $5.0 million$902,000, or44.6%28.6%of total revenue, in the first nine months of 2016.three-month period endedMarch 31, 2020. The reduction in expense is the result of cost saving measures enacted in 2016.Overall, we anticipate that in 2017 as compareddecrease was due to 2016, selling, general and administrative expense will decrease in dollar amount.
Research andhigher capitalized software development expense increased to $722,000 or 19.9% of total revenuecosts in the three-month period ended September 30, 2017, from $636,000 or 18.8%March 31, 2021 of total revenue in the three-month period ended September 30, 2016, and it increased to $2.3 million or 22.3% of total revenue in the first nine months of 2017 from $2.0 million or 18.0% of total revenue in the first nine months of 2016. The increase in research and development expenses is primarily due to lower software capitalization in 2017 compared to the prior year period. We capitalized $305,000 and $871,000 of costs associated with software development projects in the three-and nine-month periods ended September 30, 2017,$123,000 compared to capitalized software costs of $507,000$22,000 for the same period in 2020. After normalizing for software development costs, overall research and $1.6development expenditures decreased in the three-month period ended March 31, 2021 compared to the same period in the prior year due to lower headcount.
The Company recognized other income of $931,000 for the forgiveness of the Paycheck Protection Program loan and accrued interest during the first quarter.
There was $205,000 of income tax expense and $164,000 of income tax benefit recorded in the three-months ended March 31, 2021 and 2020, respectively.
Consolidated net income was $1.1 million, or $0.21 per basic and diluted share, in the three-month period ended March 31, 2021 compared to a net loss of $(111,000), or $(0.02) per basic and diluted share, in the comparable prior year periods.We anticipate that research and development costs will increase in dollar amount in 2017 compared to 2016.period.
24 |
In the first quarter of 2016, the Company implemented restructuring plans in Canada. Because of these actions, restructuring charges of approximately $126,000 were recorded related to employee terminations in the first nine months of 2016. There were no restructuring charges recorded in the nine months ended September 30, 2017.
Consolidated net income from operations was $870,000 and $1.4 million in the three and nine-month periods ended September 30, 2017, respectively, compared to a net income of $469,000 and $1.4 million in the comparable prior year periods. Consolidated net income per basic and diluted share was $0.17 and $0.27 for the three and nine months ended September 30, 2017, respectively, compared to a net income of $0.09 and $0.27 for the three and nine months ended September 30, 2016, respectively.
Liquidity and Capital Resources
At September 30, 2017,March 31, 2021, we had $2.8$8.2 million in cash and cash equivalents compared to $1.5$8.6 million in cash and cash equivalents at December 31, 2016.2020.
Net cash provided byused for operating activities was $2.2 million$186,000 in the first ninethree months of 20172021 compared to net cash provided by operating activities of $427,000$494,000 in the same period in 2016.2020. The primary reason for the increasedecrease in net cash provided by operating activities in the first ninethree months of 20172021 compared to the prior year period was the timing of the payment of outstanding payablesis primarily attributed to an increase in accounts receivable and accruals. We anticipate that average receivable collection daysa decrease in 2017 will be similar to 2016 and that they will not have a material impact on our liquidity.accounts payable.
Net cash used for continuing investing activities was $981,000$133,000 for the first ninethree months of 20172021 compared to net cash used for continuing investing activities of $1.7 million$97,000 in the same period in 2016.2020. The decreaseincrease of the amount of net cash used for continuing investing activities in the first ninethree months of 20172021 compared to the prior year period iswas primarily the result of higher capitalized internal software development costs decreasing compared to the prior year period.At September 30, 2017, approximately $38,000
Net cash used for financing activities was $24,000 in the first three months of capitalized software costs were2021 compared to $0 in accounts payable.Our planned additionsthe same period in 2020, due to shares withheld for taxes on the vesting of property and equipment are discretionary, and we do not expect them to exceed historical levels in 2016.restricted stock units.
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 September 30, 2017,March 31, 2021 and cash provided by operating activities will satisfy our projected working capital needs, investing activities, and other cash requirements for at least one year from the foreseeable future.date of these financial statements.
Off-Balance Sheet Arrangements
We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity, including special purpose and similar entities, or other off-balance sheet arrangements.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2017March 31, 2021 are set forth elsewhere in this Quarterly Report on Form 10-Q and are the same asshould be read in conjunction with those described in our Annual Report on Form 10-K.10-K and the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Cautionary Statement:
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events and can be identified by the use of forward-looking words such as "expects," "believes," "may," "will," "should," "intends," "plans," "estimates," or "anticipates" or other comparable terminology. Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results described in the forward-looking statements. Factors that might cause such differences include, but are not limited to:
We caution that the forward-looking statements made in this report or in other announcements made by us are further qualified by the risk factors set forth in Item 1A. toof our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020.
Approximately 20% of our revenue has historically been derived from shipments to customers outside the United States, and a large portion of this revenue is denominated in currencies other than the U.S. dollar. Our international subsidiaries have functional currencies other than our U.S. dollar reporting currency and, occasionally, transact business in currencies other than their functional currencies. These non-functional currency transactions expose us to market risk on assets, liabilities and cash flows recognized on these transactions.
OurThe strengthening of the U.S. dollar relative to foreign sales and results of operations are subject tocurrencies decreases the impactvalue of foreign currency fluctuations. From time to time, we entercurrency-denominated revenue and earnings when translated into currency hedges to attempt to lower our exposure to translation gains and losses as well as to limitU.S. dollars. Conversely, a weakening of the impactU.S. dollar increases the value of foreign currency translation upon the consolidation of our foreign subsidiaries.currency-denominated revenue and earnings. A 10%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.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2017,March 31, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter covered by this Quarterly Report on Form 10-Q, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
On May 5, 2016, Econolite, our exclusive North American manufacturer and distributor, served a complaint on us for a lawsuit filed by Econolite in the Superior Court of the State of California for the County of Orange. The complaint asserted claims against us under the Manufacturing, Distributing and Technology License Agreement, as amended, with Econolite (the "Econolite Agreement") for breach of contract and breach of implied covenant of good faith and fair dealing and sought specific performance related to the transition of North American RTMS sales and marketing activities from Econolite to us in July 2014. In the complaint, Econolite requested damages from us in an amount to be proven at trial and sought certain other remedies. On May 27, 2016, we removed the case to the Federal District Court, District of Central California. On November 15, 2016, Econolite and the Company entered into an Arbitration Agreement. On November 16, 2016, Econolite voluntarily dismissed all of its claims against the Company in the U.S. District Court but filed a demand for arbitration with JAMS (which is an alternative dispute resolution provider), asserting the same claims against the Company that it had asserted in the lawsuit. Arbitration commenced on November 16, 2016, and it remains ongoing. We believe that Econolite's claims are without merit, and we plan to vigorously defend against them. However, we cannot predict the outcome of this matter at this time or whether it will have a material adverse impact on our business prospects, financial condition, operating results or cash flow.
SomeOur results of the risk factors to which weoperations and our businessfinancial condition are subject areto numerous risks and uncertainties described in the section entitled "Item 1A. Risk Factors" in our Annual Report on Form 10-K for theour fiscal year ended December 31 2016. The risks and uncertainties described2020, filed on March 11, 2021. You should carefully consider these risk factors in our Annual Report are notconjunction with the only risks we face. Additional risks and uncertainties not presently known to us or that our management currently deems immaterial also may impair our business operations. Ifother information contained in this Quarterly Report. Should any of thethese risks described were to occur,materialize, our business, financial condition operating results and cash flowsfuture prospects could be materially adversely affected.negatively impacted. As of May 3, 2021, there had been no material changes to the disclosures made in the above-referenced Form 10-K.
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The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017:March 31, 2021:
Exhibit | Description | |
Amendment XIV to Office Lease Agreement by and between Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc., dated as of June 17, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2020 (File No. 0-26056). | ||
101 | The following financial information from the Quarterly Report on Form 10-Q for the quarter ended |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Image Sensing Systems, Inc. | |||
Dated: | By: | /s/ Chad A. Stelzig | |
Chad A. Stelzig | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Dated: | By: | /s/ | |
| |||
Chief Financial Officer | |||
| |||
and Principal Accounting Officer) |