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General and
administrative expense increased to $975,000, or 20.4% of total revenue, in the
first quarter of 2009, up from $888,000, or 15.1% of total revenue, in the same
period in 2008. The 2009 increase in costs resulted mainly from increased
professional services expenses. We anticipate that for the remainder of 2009, the dollar amount of our quarterly
general and administrative expense will remain at levels similar to that of the
first quarter of 2009.
Research and
development expense increased to $811,000, or 16.9% of total revenue, in the
first quarter of 2009, up from $701,000, or 11.9% of total revenue, in the same
period in 2008. The increase was directly related to our investment in
video/radar hybrid solutions and tailored international offerings and the
realization of the impact of headcount additions made late in 2008. We
anticipate that for the remainder of 2009, the dollar amount of our quarterly research and development expense
will increase from the first quarter of 2009 level.
Amortization
of intangibles expense was $192,000 in the first quarter of 2009 and reflects
the amortization of intangible assets acquired in the EIS asset purchase.
Assuming there are no changes to our intangible assets, we anticipate amortization
expense will be $768,000 for all of 2009.
Other expense
was $12,000 in the first quarter of 2009 as compared to other income of $41,000
in the same period in 2008. In 2009, interest on bank debt exceeded interest
income as we moved into securities that had lower yields than in 2008.
Income tax
expense was $142,000, or 35.2% of pretax income, in the first quarter of 2009,
compared to $541,000, or 33.9% of pretax income, in the comparable quarter of
2008. We anticipate an effective tax rate of from 30% to 35% for all of 2009.
Liquidity and Capital Resources
At March 31,
2009, we had $10.9 million in cash and cash equivalents, compared to $10.3
million in cash and cash equivalents and $4.0 million in short-term
investments at December 31, 2008. Our investments held at December 31, 2008
were auction rate securities that were redeemed at par in January 2009.
Net cash
provided by operating activities was $1.6 million in 2009, compared to $1.2
million in 2008. The increase in 2009 was mainly a result of decreasing
receivable balances as opposed to the activity in 2008. We anticipate that
average receivable collection days in 2009 will increase over 2008 but that it
will not have a material impact on our liquidity. Our planned additions of
property and equipment are discretionary, and we do not expect them to exceed
historical levels in 2009. In addition to equipment purchases, in 2009 we paid
our 2008 earn-out liability of $1.2 million to the sellers of the EIS assets.
We also retired our bank debt in full in February 2009, paying a total of $3.75
million during the quarter ended March 31, 2009.
We have a
revolving line of credit agreement with our bank, Associated Bank. The
revolving line of credit provides for up to $5.0 million at an annual
interest rate equal to the greater of 4.5% or LIBOR plus 2.75%, as reset from
time to time by the bank. Advances on the line of credit cannot exceed a
borrowing base determined under a formula, which is a percentage of the amounts
of receivables. The line of credit currently has no borrowings outstanding and
matures on May 1, 2011. We believe, on an ongoing basis, we have regular
availability to draw a minimum of $3.0 million on our line of credit based on
qualifying assets.
In conjunction
with our EIS asset purchase, the sellers have an earn-out arrangement over
approximately three years from the December 2007 date of purchase. The earn-out
is based on earnings from RTMS sales less related cost of revenue and operating
expenses, depreciation and amortization, and it is calculated annually. If the
earnings are at target levels, the sellers would receive $2.0 million annually,
or $6.0 million in total. Superior performance of the assets could lead to an
earn-out in excess of $2 million, as the earn-out is not capped. Earn-out
payments generally are due within three months of the end of an earn-out
period. The first earn-out period ran from December 6, 2007 to December 31,
2008. Based on the results for RTMS for the first earn-out period, which ended December 31, 2008, the sellers of the EIS assets were
entitled to receive a $1.2 million earn-out payment, which was paid in March
and April 2009. If we are acquired or sell substantially all of our assets
before December 6, 2010, we must pay EIS $6.0 million less earn-out amounts
previously paid as an acceleration of potential earn-out payments under the EIS
asset purchase agreement.
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We believe
that cash and cash equivalents on hand at March 31, 2009, along with the
availability of funds under our $5.0 million revolving line of credit and cash
provided by operating activities, will satisfy our projected working capital
needs, payments under the EIS earn-out, investing activities, and other cash
requirements for the foreseeable future.
Off-Balance Sheet Arrangements
We do not
participate in transactions or have relationships or other arrangements with an
unconsolidated entity, including special purpose and similar entities or other
off-balance sheet arrangements.
Critical Accounting Policies
Our
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, 2008. The accounting policies used in preparing our interim 2009
Condensed Consolidated Financial Statements set forth elsewhere in this Quarterly Report
on Form 10-Q are the same as those described in our Annual Report on Form 10-K.
New and Recently Adopted Accounting
Pronouncements
In December
2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 141 (Revised 2007),
Business Combinations
. SFAS
No. 141(R) will significantly change the accounting for business
combinations. Under SFAS No. 141(R), an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at the acquisition-date fair value with limited exceptions. SFAS
No. 141(R) will change the accounting treatment for certain specific
items. SFAS No. 141(R) also includes a substantial number of new
disclosure requirements. SFAS No. 141(R) applies to us prospectively for
business combinations beginning in 2009, and its adoption did not have a
material impact on our financial statements.
In December
2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements An Amendment of ARB No. 51
.
SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interest. SFAS
No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The adoption of SFAS
No. 160 did not have a material impact on our financial statements.
In May 2008,
the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
. SFAS
No. 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles. SFAS No. 162 is effective 60
days following the approval by the Securities and Exchange Commission of the
Public Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles
. We do not anticipate that
the adoption of SFAS No. 162 will materially impact the Company.
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Table of Contents
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:
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historical
dependence on a single product for most of our revenue;
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budget
constraints by governmental entities that purchase our products, including
constraints caused by declining tax revenue;
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continuing
ability of our licensee to pay royalties owed;
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dependence
on third parties for manufacturing and marketing our products;
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dependence
on single-source suppliers to meet manufacturing needs;
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failure to
secure adequate protection for our intellectual property rights;
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development
of a competing product by another business using the underlying technology
included in the patent we had licensed from the University of Minnesota,
which expired in 2006;
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our
inability to develop new applications and product enhancements;
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our inability
to respond to low-cost local competitors in Asia and elsewhere;
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our
inability to properly manage a growth in revenue and/or production
requirements;
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the
influence over our voting stock by insiders;
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our
inability to hire and retain key scientific and technical personnel;
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our
inability to achieve and maintain effective internal controls;
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our
inability to comply with international regulatory restrictions over hazardous
substances and electronic waste; and
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conditions
beyond our control such as war, terrorist attacks, health epidemics and
economic recession.
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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. to our Annual Report on Form 10-K for the fiscal year ended December
31, 2008.
16
Table of Contents
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I
tem 3.
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Quantitative and Qualitative Disclosures About
Market Risks
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Our foreign
sales and results of operations are subject to the impact of foreign currency
fluctuations. We have not historically hedged our exposure to translation gains
and losses. Beginning in 2009, we have entered in to a limited number of hedges
that we anticipate will decrease our overall translation exposure. A 10%
adverse change in foreign currency rates would not have a material effect on
our results of operations or financial position.
We entered
into a number of currency hedging arrangements in 2009. The purpose of the
hedging was to lock in what we believe to be favorable rates on certain
currencies and to increase our predictability on certain expenses at our
foreign subsidiaries. All hedging activity is intended to qualify for hedge
accounting under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
, as amended. We
believe all contracts will be utilized to provide funds to cover operating
expenses.
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tem 4T.
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Controls and Procedures
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Evaluation of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (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
Chief Financial Officer concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter
covered by this report, 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.
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Table of Contents
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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None.
Some of the risk factors to
which we and our business are subject are described in the section entitled
Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2008. The risks and uncertainties described in our Annual Report
are not 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. If any of the risks described were to
occur, our business, financial condition, operating results and cash flows
could be materially adversely affected.
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Item 2.
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Unregistered Sales of Equity Securities and Use of
Proceeds
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None.
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It
em 3.
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Defaults Upon Senior Securities
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None.
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Item 4.
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Submission of Matters to a Vote of Security Holders.
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None.
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Item 5.
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Other Information
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None.
The following exhibits are
filed as part of this quarterly report on Form 10-Q for the quarterly period
ended March 31, 2009:
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Exhibit
Number
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Description
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31.1
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Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
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.
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Image Sensing Systems,
Inc.
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Dated: May 13, 2009
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By:
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/s/ Kenneth R. Aubrey
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Kenneth R. Aubrey
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President and Chief
Executive Officer
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(principal executive
officer)
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Dated: May 13, 2009
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By:
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/s/ Gregory R.L. Smith
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Gregory R.L. Smith
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Chief Financial Officer
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(principal financial and
accounting officer)
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Table of Contents
EXHIBIT INDEX
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Exhibit No.
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Description
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31.1
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Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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