General and administrative
expense increased to $1.5 million, or 23.9% of total revenue, in the first
quarter of 2011, up from $1.0 million, or 19.2% of total revenue, in the same
period in 2010. The increase related mostly to the addition of CitySync
operations. We anticipate that for the remainder of 2011, the dollar amount of
our quarterly general and administrative expense will remain at levels similar
to or slightly higher than that of the first quarter of 2011.
Research and development
expense increased to $1.0 million, or 16.7% of total revenue, in the first
quarter of 2011, up from $777,000, or 14.4% of total revenue, in the same
period in 2010. The increase related mostly to the addition of CitySync
operations. We anticipate that for the remainder of 2011, the dollar amount of
our quarterly research and development expense will increase from the first
quarter of 2011 level.
Amortization of intangibles
expense was $412,000 in the first quarter of 2011 and reflects the amortization
of intangible assets acquired in the EIS asset purchase and CitySync
acquisition. Assuming there are no changes to our intangible assets, we
anticipate amortization expense will be $1.6 million for all of 2011.
Other income was $4,000 in
2011 compared to other expense of $36,000 in the first quarter of 2010. In
2010, there was bank debt outstanding for the first quarter.
Income tax benefit was
$240,000, or 22.9% of pretax loss, in the first quarter of 2011, compared to
income tax expense of $170,000, or 29.7% of pretax income, in the comparable
quarter of 2010. We anticipate an effective tax rate of below 25% for all of
2011.
Liquidity and Capital Resources
At March 31, 2011, we had
$4.1 million in cash and cash equivalents and $3.6 million in short-term
investments, compared to $8.0 million in cash and cash equivalents and $4.0
million in short-term investments at December 31, 2010.
Net cash used by operating
activities in the three-month period ended March 31, 2011 was $2.1 million,
compared to net cash provided of $223,000 in the same period of 2010. The
decrease in 2011 was due mainly to a combination of the 2011 loss and a greater
change in payables and accruals in the 2011 quarter as compared to the same
period of 2010. We anticipate that average receivable collection days in 2011
will be similar to 2010 and 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 2011. In addition to equipment
purchases, in 2011 we paid 2010 related earn-out liabilities of $2.4 million to
the sellers of the EIS assets and CitySync.
We have a revolving line of
credit agreement with Associated Bank, National Association, or 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 eligible receivables. The line of credit currently has no borrowings
outstanding and matures on May 1, 2012. We believe that on an ongoing basis, we
will have regular availability to draw a minimum of $3.0 million on our line of
credit based on our qualifying assets.
In conjunction with our
acquisition of CitySync, the sellers have an earn-out arrangement over
approximately 18 months from the June 2010 date of purchase. The earn-out is
based on achieving certain revenue and minimum gross margins from the sale of
CitySync ANPR systems and it is calculated in two separate periods, each ending
on December 31. In each period there are two tiers and superior performance
could lead to a total earn-out of $2 million or higher, as the earn-out is not
capped. Earn-out payments are due within three months of the end of an earn-out
period. Based on the 2010 results, the sellers received a $696,000 earn-out for
the first period which ran from the June acquisition date to December 31, 2010.
The payment was made in March 2011, and the remaining liability recorded on our
balance sheet as of March 31, 2011 is the estimate for the second period
earn-out which runs from January 1, 2011 to December 31, 2011.
We believe that cash and
cash equivalents on hand at March 31, 2011, 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 CitySync earn-out, investing activities, and other cash
requirements for the foreseeable future.
- 12 -
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, 2010. The
accounting policies used in preparing our interim 2011 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 October 2009, the
Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements
.
The new standard changes the requirements for establishing separate units of
accounting in a multiple element arrangement and requires the allocation of
arrangement consideration to each deliverable based on the relative selling
price. The selling price for each deliverable is based on vendor-specific
objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE
is not available, or estimated selling price if neither VSOE nor TPE is
available. ASU No. 2009-13 became effective for us on January 1, 2011 and
did not have a material impact on our consolidated financial statements.
In January 2010, the
FASB issued ASU No. 2010-06,
Improving
Disclosures about Fair Value Measurements
(ASU 2010-06). ASU
2010-06 requires new disclosures regarding transfers in and out of Levels 1 and
2 and activity in Level 3 fair value measurements. It also clarifies existing
disclosure requirements regarding the level of disaggregation in certain
disclosures, inputs, and valuation techniques used in ASC 820,
Fair Value Measurements and Disclosures.
We adopted all of the requirements of this update on January 1, 2010, its
effective date, except for the new requirement regarding activity in Level 3
fair value measurements which has a later effective date under the provisions
of ASU 2010-6 and became effective on January 1, 2011. Adoption of this
pronouncement has not had a significant effect on our consolidated financial
statements disclosures.
In September 2010, the
FASB issued ASU No. 2010-20,
Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
, to enhance the
disclosures required for financing receivables (for example, loans, trade
accounts receivable, notes receivable, and receivables relating to a lessors
leveraged, direct financing, and sales-type leases) and allowances for credit
losses. The amended disclosures are designed to provide more information to
financial statement users regarding the credit quality of a creditors
financing receivables and the adequacy of its allowance for credit losses. We
adopted all of the requirements of the amended guidance on December 31, 2010,
its effective date, except for the disclosures regarding the activity during a
reporting period which became effective on January 1, 2011. Adoption of the
pronouncement has not had a significant effect on our consolidated financial
statement disclosures.
In December 2010, FASB
issued ASU 2010-28,
When to Perform Step 2
of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts,
which states that for an entity with reporting
units having zero or negative carrying amounts, the second step of the
impairment test shall be performed to measure the amount of impairment loss, if
any, when it is more likely than not that a goodwill impairment exists. In
considering whether it is more likely than not that a goodwill impairment
exists, an entity shall evaluate whether there are adverse qualitative factors.
We adopted ASU 2010-28 effective January 1, 2011 and do not expect it to
have a significant impact on our consolidated financial statements.
- 13 -
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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the mix of and margin on
the products we sell;
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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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our increased
international presence;
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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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unanticipated delays,
costs and expenses inherent in the development and marketing of new products,
including ANPR and hybrid products;
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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 affiliates;
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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
successfully integrate acquisitions;
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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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- 14 -
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, 2010.
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I
tem 3.
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Quantitative and Qualitative Disclosures About
Market Risk
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Our foreign
sales and results of operations are subject to the impact of foreign currency
fluctuations. From time to time, we enter into currency hedges to attempt to
lower our exposure to translation gains and losses as well as to limit the
impact of foreign currency translation upon the consolidation of our foreign
subsidiaries. A 10% adverse change in foreign currency rates, if we have not
hedged, could have a material effect on our results of operations or financial
position. Our current greatest exposure for a negative material impact to our
operations is a rising Canadian Dollar versus the U.S. Dollar.
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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.
- 15 -
P
ART II. OTHER INFORMATION
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tem 1.
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Legal
Proceedings
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None.
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tem 1A.
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Risk Factors
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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, 2010. 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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tem 2.
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Unregistered Sales of Equity Securities and Use of
Proceeds
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None.
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tem 3.
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Defaults Upon Senior Securities
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None.
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tem 4.
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[Removed and Reserved.]
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tem 5.
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Other Information
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None.
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I
tem 6.
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Exhibits
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The following exhibits are
filed as part of this quarterly report on Form 10-Q for the quarterly period
ended March 31, 2011:
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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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- 16 -
S
IGNATURES
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 12, 2011
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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 12, 2011
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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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- 17 -
E
XHIBIT 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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- 18 -
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