UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period Commission File
ended September 30, 2001 Number 0-26056
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IMAGE SENSING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1519168
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State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
(Address of principal executive offices)
Registrant's telephone number, including area code: (651) 603-7700
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practical date.
Common Stock, $.01 Par Value: 3,152,777 shares as of October 26, 2001.
1
IMAGE SENSING SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Operations
Three- and nine-month periods ended September 30, 2001 5
and 2000
Condensed Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This quarterly Report on Form 10-QSB 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 the Company's expectations or beliefs
concerning future events and can be identified by the use of forward-looking
words such as "believes," "expects," "may," "will," "should," "intends,"
"plans," "estimates" or "anticipates" or other comparable terminology.
Forward-looking statements are subject to risks and uncertainties that may cause
the Company's actual results to differ materially from the results discussed in
the forward-looking statements. Factors that might cause such differences
include, but are not limited to:
o lack of market acceptance of the Company's products;
o dependence on third parties for manufacturing and marketing
capabilities and continuing ability to pay royalties owed;
o inability of the Company to diversify our product offerings;
o revenue fluctuations caused by the Company's dependence on sales
to governmental entities;
o failure of the Company to secure adequate protection for the
Company's intellectual property rights;
o failure of the Company to respond to evolving industry standards
and technological changes;
o inability of the Company to properly manage a growth in revenue
and/or production requirements;
o inability of the Company to meet our future additional capital
requirements; and
o control of the Company's voting stock by insiders.
We caution that the forward-looking statements made in this report or in other
announcements made by the Company are further qualified by the factors set forth
in Exhibit 99.1 to this Quarterly Report on Form 10-QSB, under the caption
"Cautionary Statement."
3
PART I - FINACIAL INFORMATION
Item 1. Financial Statements
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
2001 2000
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(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 1,147,000 $ 1,780,000
Accounts receivable 1,339,000 943,000
Inventories 582,000 370,000
Prepaid expenses 92,000 117,000
Deferred income taxes 92,000 92,000
----------- -----------
Total current assets 3,252,000 3,302,000
Property and equipment, net 351,000 383,000
Other assets:
Capitalized software development costs, net 1,259,000 1,453,000
Deferred income taxes 34,000 34,000
Other 107,000 110,000
----------- -----------
1,400,000 1,597,000
----------- -----------
Total assets $ 5,003,000 $ 5,282,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 584,000 $ 433,000
Accrued compensation 350,000 365,000
Deferred income 78,000 109,000
----------- -----------
Total current liabilites 1,012,000 907,000
Minority interest 61,000 134,000
Shareholders' equity:
Common stock 32,000 32,000
Additional paid-in capital 4,600,000 4,572,000
Retained earnings (deficit) (702,000) (363,000)
----------- -----------
3,930,000 4,241,000
----------- -----------
Total liabilities and shareholders' equity $ 5,003,000 $ 5,282,000
=========== ===========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
4
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three-Month Period Ended Nine-Month Period Ended
September 30 September 30
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2001 2000 2001 2000
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REVENUE:
Product sales $ 677,000 $ 901,000 $ 1,562,000 $ 2,051,000
Royalties 913,000 539,000 2,911,000 1,951,000
Consulting services 45,000 55,000 139,000 121,000
----------- ----------- ----------- -----------
1,635,000 1,495,000 4,612,000 4,123,000
COSTS OF REVENUE:
Product sales 373,000 530,000 834,000 1,138,000
Royalties 62,000 57,000 219,000 199,000
Consulting services 46,000 61,000 113,000 100,000
----------- ----------- ----------- -----------
481,000 648,000 1,166,000 1,437,000
----------- ----------- ----------- -----------
Gross profit 1,154,000 847,000 3,446,000 2,686,000
OPERATING EXPENSES:
General and administrative 585,000 660,000 1,856,000 1,868,000
Business development 499,000 313,000 1,446,000 1,026,000
Research and development 182,000 -- 594,000 --
----------- ----------- ----------- -----------
1,266,000 973,000 3,896,000 2,894,000
----------- ----------- ----------- -----------
Income (loss) from operations (112,000) (126,000) (450,000) (208,000)
Other income, net 33,000 35,000 88,000 96,000
----------- ----------- ----------- -----------
Loss before income taxes (79,000) (91,000) (362,000) (112,000)
Income (taxes) benefits -- -- -- 117,000
----------- ----------- ----------- -----------
Net loss before minority interest (79,000) $ (91,000) (362,000) 5,000
Minority interest 34,000 (12,000) 23,000 (12,000)
----------- ----------- ----------- -----------
Net loss $ (45,000) $ (103,000) $ (339,000) $ (7,000)
=========== =========== =========== ===========
Net income (loss) per common share - basic
and diluted ($ 0.01) ($ 0.03) $ (0.11) $ 0.00
=========== =========== =========== ===========
Weighted average number of common
shares outstanding:
Basic 3,153,000 3,143,000 3,153,000 3,143,000
=========== =========== =========== ===========
See accompanying notes
5
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine-Month Period Ended
September 30
------------------------------------
2001 2000
------------------------------------
OPERATING ACTIVITIES:
Net income $ (339,000) $ (7,000)
Adjustments to reconcile net income to
net cash provided by operating activities (95,000) 559,000
Minority interest (23,000) 12,000
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Net cash provided by operating activities (457,000) 564,000
INVESTING ACTIVITIES:
Purchase of property and equipment (154,000) (175,000)
Other -- (28,000)
Capitalized software development costs -- (434,000)
----------- -----------
Net cash used in investing activities (154,000) (637,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock option 28,000 688,000
Dividends paid by Flow Traffic (50,000) --
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Net cash provided by financing activities (22,000) 688,000
Increase (decrease) in cash and cash equivalents (633,000) 615,000
Cash and cash equivalents, beginning of period 1,780,000 1,319,000
----------- -----------
Cash and cash equivalents, end of period $ 1,147,000 $ 1,934,000
=========== ===========
See accompanying notes
6
IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2001
Note A: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three- and nine-month periods ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 2000.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
(Three- and Nine-Month Periods Ended September 30, 2001)
Revenues for the third quarter of 2001 were $1,635,000, an increase of 9% from
$1,495,000 for the same period a year ago, while revenues for the nine-month
period ended September 30, 2001 were $4,612,000, an increase of 12% from
$4,123,000 a year ago. The increase in revenues for these periods was due
primarily to the increase in royalty revenue from Econolite. Unit sales
increased 282% for the third quarter and have increased 219% for the nine-month
period ended September 30, 2001 compared to the same periods a year ago.
Revenues from direct sales and from royalties for the third quarter of 2001
decreased 25% and increased 69%, respectively, compared to the third quarter of
2000. Revenues from direct sales and from royalties for the nine-month period
ended September 30, 2001 decreased 24% and increased 49%, respectively, compared
to the same period in fiscal 2000. Our 2000 sales were higher than 2001 sales
due to a large order from Korea that we received and processed in the third
quarter of 2000. The increase in royalties is due to Econolite's success in
selling the new Solo Pro, (TM) with unit sales of 1,057 for the first nine
months of 2001 compared to sales of 173 units of the Solo product in the same
period of 2000.
Gross profit was $1,154,000 in the third quarter of 2001, or 71% of revenue,
compared to $847,000, or 57% of revenue, for the same period a year ago. Gross
profit for the nine-month period ended September 30, 2001 was $3,446,000, or 75%
of revenue, compared to $2,686,000, or 65% of revenue, for the same period a
year ago. Margins increased primarily due to a greater portion of revenues
coming from royalties versus product sales, as royalties have a higher gross
profit margin than do product sales.
General and administrative expenses were $585,000 and $1,856,000, respectively,
for the three- and nine-month periods ended September 30, 2001, compared to
$660,000 and $1,868,000, respectively, for the same periods a year ago. The
decrease is a result of cost-cutting measures started in the second quarter of
2001.
Business development expenses were $499,000 and $1,446,000, respectively, for
the three- and nine-month periods ended September 30, 2001, compared to $313,000
and $1,026,000, respectively, for the same periods a year ago. The increase
primarily is due to the Company's continuing development of the Wireless
Technology sales, marketing, and distribution infrastructure.
Research and development expenses were $182,000 and $594,000, respectively, for
the three- and nine-month periods ended September 30, 2001, compared to none for
the same periods a year ago. The increase is due to the fact that all
development efforts in the first nine months of 2000 were directed toward
software development for the new Autoscope Solo Release 3, a new comserver and
the next-generation Autoscope Solo Pro, with associated costs capitalized in
accordance with Statement of Financial Accounting Standards No. 86.
8
Loss from operations was $112,000 and $450,000, respectively, for the three- and
nine-month periods ended September 30, 2001, compared to $126,000 and $208,000,
respectively, for the same periods a year ago. The decrease in operating losses
for the third quarter was due primarily to the 69% increase in royalty revenues,
which was offset somewhat by increased business development expenses. The
increase in operating loss for the nine-month period is primarily due to the
increased business development expenses discussed above.
Other income, net, was $33,000 and $88,000, respectively, for the three- and
nine-month periods ended September 30, 2001, compared to $35,000 and $96,000,
respectively, for the same periods a year ago. The decrease resulted primarily
from lower interest income because of lower cash balances and yield on our
short-term investment.
The Company recognized no income tax benefit in 2001, versus a $117,000 benefit
in the first quarter of 2000. Management believes it is more likely than not
that the net deferred tax asset will be realized over the next three years.
The Company has net operating loss carryforwards for income tax purposes of
approximately $1,488,000 and research and development tax credits of $245,000
that expire in the years 2007 through 2019. The Company incurred losses in the
first, second and third quarters of 2001 and, therefore, has not accrued any
taxes.
Liquidity and Capital Resources
Cash used by operating activities was $457,000 for the nine-month period ended
September 30, 2001, compared to cash provided by operations of $564,000 for the
same period in 2000. The reduced cash flow from operations in the first nine
months of 2001 was primarily due to increases in both accounts receivable and
inventory, as compared to the same period in 2000.
Capital expenditures were $154,000 for the first nine months of 2001, compared
to $175,000 for the same period in 2000. The Company does not expect to make
significant changes to the level of investments in capital expenditures for the
balance of 2001. The Company did not capitalize software development costs in
the first nine months of 2001, whereas $434,000 of software development was
capitalized in the first nine months of 2000.
Management believes that the Company's cash and investment position, anticipated
cash flows from operations, and funds available through our bank line of credit
will be sufficient to meet working capital requirements for current operations
and planned new product introductions for the foreseeable future.
9
PART II: OTHER INFORMATION
Item 5. Other Information
The Company entered into a cross-license agreement with Detector Electronics
Corporation on July 20, 2001. Under the agreement, ISS will sell our Solo
Pro(TM) platform to Detector Electronics to enable Detector to add video-based
flame detection software to its flame detection product line, and ISS will
license from Detector Electronics its flame detection software. We intend to use
the flame detection software to create a combined traffic and flame detection
product based upon Solo Pro(TM) that will allow us to be much more competitive
in roadway and railway tunnel applications. The cross-license agreement is filed
as an exhibit to this Form 10-QSB.
In February 1999, the Company acquired a 60% interest, consisting of six shares,
in Max Resources Limited for an aggregate purchase price of $200,000. Max
Resources Limited subsequently changed its name to Flow Traffic Limited. The
Company transacts its Asian operations through Flow Traffic. In connection with
this acquisition, the Company entered into a shareholder agreement with the two
minority shareholders of Flow Traffic, each of whom holds two shares of Flow
Traffic. The shareholder agreement includes a put/call provision allowing the
minority shareholders to put their shares to the Company or the Company to call
the shares held by the minority shareholders. Under the terms of the agreement,
the purchase price to be paid by the Company upon the put or call of the shares
varies depending on when the put or call is exercised. If the minority
shareholders were to exercise the put provision during calendar year 2001, the
purchase price would be the lesser of $100,000 per share or the "formula price"
per share (as described below). If the Company were to exercise the call
provision in calendar year 2001, the purchase price would be the higher of
$100,000 per share or the formula price per share. If the put or call right is
exercised any time after January 1, 2002, then the price per share will be the
formula price, up to half of which could be paid in shares of Company common
stock. The formula price per share will be equal to the share's proportionate
interest in the value of Flow Traffic, which value shall equal:
1. the average annual sales of Flow Traffic over a three-year period,
multiplied by 150% and then divided by 2, plus
2. the average annual profits of Flow Traffic before taxes over a
three-year period, multiplied by 10, and then divided by 2. For purposes of this
provision, annual profit shall not have a value of less than zero.
In each instance, the three-year averaging period will include the two years
immediately preceding the valuation date, plus the year in which the put or call
is exercised. Under the terms of the agreement, the formula price will be
payable in two installments, with 50% of the aggregate price payable within 10
days after the put or call is exercised, and the remaining 50% payable within 10
days after completion of an audit of Flow Traffic's results for the calendar
year in which the put or call is exercised.
The subscription and shareholder agreements are filed as exhibits to this Form
10-QSB.
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this quarterly report on
Form 10-QSB for the quarterly period ended September 30, 2001:
Exhibit
Number Description
------- -----------
10.1 Definitive Agreement with Detector Electronics Corporation
dated July 20, 2001.
10.2 Subscription Agreement among the Company, Flow Traffic
Limited (f/k/a Max Resources Limited), Berkeley Development
Limited and M.J. Billow, dated February 1, 1999.
10.3 Shareholders' Agreement among the Company, Berkeley
Development Limited, M.J. Billow, Grove Place Limited, A.H.
Gould and Flow Traffic Limited (f/k/a Max Resources Limited),
dated February 1, 1999.
99.1 Cautionary Statement, incorporated herein by reference to
Exhibit 99 to the Company's Form 10-KSB for the fiscal year
ended December 31, 2000.
(b) Reports
No reports on Form 8-K were filed during the quarter covered by this
Form 10-QSB.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Image Sensing Systems, Inc.
--------------------------------------------
(Registrant)
Dated: November 14, 2001 /s/ William L. Russell
--------------------------------------------
William L. Russell
Chairman and Chief Executive Officer
(principal executive officer)
Dated: November 14, 2001 /s/ Jeffrey F. Martin
--------------------------------------------
Jeffrey F. Martin
Chief Financial Officer
(principal financial and accounting officer)
12