Table of Contents
General
and administrative expense increased to $6.3 million or 20.7% of total revenue
in 2011, from $4.4 million or 13.8% of total revenue in 2010. General and
administrative expenses increased in 2011 mainly as a result of the addition of
the CitySync organization and to a lesser extent due to increased foreign
currency exchange losses and bad debt reserves. We anticipate that general and
administrative expense will decrease both in terms of dollar amount and as a
percentage of revenue in 2012, as compared to 2011, as we realize the impact of
restructuring initiatives and the RTMS business model change.
Research
and development expense increased to $4.4 million or 14.5% of total revenue in
2011, up from $3.6 million or 11.5% of total revenue in 2010. The increase was
mainly related to the addition of the CitySync engineering organization and
increased expenditures on our hybrid product development. We anticipate that
research and development expense will remain similar or decrease slightly in
terms of dollar amount in 2012 as compared to 2011.
We
recognized a goodwill impairment in 2011 of $11.7 million that was triggered by
a significant decline in our market capitalization. If our stock price were to
experience a significant and sustained decline, we would expect to recognize a
further goodwill impairment charge.
As
discussed above, in December 2011, we announced a change to our North American
business model for the RTMS product line and certain restructuring initiatives.
As a result, we recognized restructuring expense of $448,000 related to
reserves for inventory and $287,000 related mainly to employee severance.
Amortization
of intangibles expense was $1.7 million in 2011 compared to $1.2 million in
2010 and reflects the amortization of intangible assets acquired in
acquisitions. Assuming there are no changes to our intangible assets, we
anticipate amortization expense will be approximately $1.6 million in 2012.
Other
income (expense), net was an income of $9,000 in 2011, primarily consisting of
interest income, as opposed to expense of $123,000 in 2010 mainly due to higher
debt balances in 2010, including a portion related to CitySync.
Income
tax benefit of $3.0 million, or 23.2% of our pretax loss, was recorded for the
year ended December 31, 2011, compared to income tax expense of $0.9 million,
or 23.2% of pretax income, for the year ended December 31, 2010. We expect the
effective rate in 2012 to be below 30%.
Year
Ended December 31, 2010 Compared to Year Ended December 31, 2009
.
Total revenue increased to $31.7 million in 2010 from $24.6 million in 2009, an
increase of 28.8%. Royalty income increased to $12.5 million in 2010 from $12.1
million in 2009, an increase of 3.4%. Product sales increased to $19.2 million
in 2010 from $12.5 million in 2009, an increase of 53.6%. The increase in
product sales was mainly due to the addition of the CitySync product line in
June 2010 and to a lesser extent due to improved sales of RTMS in international
markets. Revenue for the Autoscope segment increased to $16.7 million in 2010
from $16.2 million in 2009, an increase of 2.6%. Revenue for the RTMS segment
increased to $9.8 million in 2010 from $8.4 million in 2009, an increase of
17.6%. The increase resulted mainly as a result of improved sales in
international markets.
Gross
margins for product sales decreased to 59.3% in 2010 from 65.6% in 2009. The
decrease resulted mainly from the addition of the CitySync product line, which
currently earns lower margins than Autoscope or RTMS, and increased warranty
expense for RTMS, and to a lesser extent from increased pricing competition for
Autoscope internationally. Gross margins on royalty income remained consistent
at 100% in 2010 and 2009.
Selling,
marketing and product support expense increased to $9.8 million or 31.0% of
total revenue in 2010 from $7.2 million or 29.3% of total revenue in 2009. Our
selling, marketing and product support expense increased in 2010 mostly as a
result of the addition of the CitySync organization. Additionally, we invested
in market expansion activities in Europe and Asia, including adding senior
management.
General
and administrative expense increased to $4.4 million or 13.8% of total revenue
in 2010, from $3.8 million or 15.4% of total revenue in 2009. The general and
administrative expenses increased in 2010 mainly as a result of the addition of
the CitySync organization and to a lesser extent due to increased compensation
and benefits.
Research
and development expense increased to $3.6 million or 11.5% of total revenue in
2010, up from $3.3 million or 13.6% of total revenue in 2009. The increase was
mainly related to the addition of the CitySync engineering organization.
Amortization
of intangibles expense was $1.2 million in 2010 and reflects the amortization
of intangible assets acquired in both the EIS asset purchase and the CitySync
acquisition.
Other
income (expense) was an expense of $123,000 in 2010, primarily consisting of
interest expense, as opposed to income of $7,000 in 2009 mainly due to higher
debt balances in 2010, including a portion related to CitySync.
24
Table of Contents
Our
income tax effective rate was 23.2% in 2010 compared to 25.9% in 2009. The 2010
effective rate was positively impacted by increased tax credits for research
and development activities.
Liquidity
and Capital Resources
At
December 31, 2011, we had $5.2 million in cash and cash equivalents and $2.1 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.
Our investment objectives are to preserve principal, maintain liquidity, and
achieve the best available return consistent with its primary objectives of
safety and liquidity.
Net
cash used in operating activities was $1.3 million in 2011, compared to cash
provided by operating activities of $33,000 and $5.4 million in 2010 and 2009,
respectively. The primary reason for the cash used in 2011 was increased
inventory balances caused in part by lower than anticipated sales volume. The
primary reason for the 2010 change compared to 2009 was increased accounts and
other receivables outstanding, the majority of which related to CitySync
activity. We anticipate that average receivable collection days in 2012 will be
similar to 2011 and that it will not have a material impact on our liquidity.
Net
cash used in investing activities was $1.4 million in 2011, compared to cash
used in investing activities of $10.3 million and $1.8 million in 2010 and
2009, respectively. In 2011, investment balances decreased to partially fund
earn-out payments paid at the beginning of the year. Our planned additions of
property and equipment are discretionary, and we do not expect them to exceed
historical levels in 2012. We used $8.3 million of cash in 2010 to acquire
CitySync, including repaying seller loans.
Net
cash provided by financing activities was $105,000 in 2011, compared to cash
provided by financing activities of $4.4 million in 2010 and used in financing
activities of $251,000 in 2009. During 2010, we raised $8.8 million in cash,
net of offering expenses, through our 2010 secondary offering, which was used
to fund the purchase of CitySync.
In
December 2009, we entered into a term loan agreement for $4.0 million with
Associated Bank, National Association (Associated Bank), which we fully
repaid in September 2010.
We
also have a revolving line of credit agreement with 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, 2013. 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.
We
believe that cash and cash equivalents on hand at December 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, investing activities, and other cash requirements for the
foreseeable future.
Off-Balance
Sheet Arrangements
We
do not participate in transactions or have relationships or other arrangements
with an unconsolidated entity, including special purpose and similar entities
or other off-balance sheet arrangements.
Critical
Accounting Policies
Our
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K are prepared in accordance with U.S. generally accepted accounting
principles (GAAP), which require us to make estimates and assumptions in
certain circumstances that affect amounts reported. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts, giving due consideration to materiality. We believe that of
our significant accounting policies, the following are particularly important
to the portrayal of our results of operations and financial position, may
require the application of a higher level of judgment by our management, and as
a result, are subject to an inherent degree of uncertainty. For further information
see Summary of Significant Accounting Policies under Note 1 to the
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K.
Goodwill
.
We test goodwill at least annually for impairment. Goodwill is also tested for
impairment as changes in circumstances occur indicating that the carrying value
may not be recoverable. Goodwill impairment testing first requires a comparison
of the fair value of each reporting unit to the carrying value. If the carrying
value of the reporting unit exceeds fair value, goodwill is considered
impaired.
25
Table of Contents
We
have three discrete reporting units, two of which were assigned goodwill as of
December 31, 2011. The fair value of a reporting unit is estimated using a
discounted cash flow model that requires input of certain estimates and
assumptions requiring management judgment, including projections of economic
conditions and customer demand, revenue and margins, changes in competition,
operating costs, and new product introductions. While we believe the estimates
and assumptions used in determining the fair value of our reporting units are
reasonable, significant changes in our stock price, market capitalization or
estimates of future cash flows, such as those caused by unforeseen events or
changes in market conditions, could materially impact the fair value of a
reporting unit, which could result in the recognition of a goodwill impairment
charge.
Impairment
of Long-Lived Assets
. We review the carrying value
of long-lived assets or asset groups, such as property and equipment and
intangibles subject to amortization, when events or changes in circumstances
such as asset utilization, physical change, legal factors, or other matters
indicate that the carrying value may not be recoverable. When this review
indicates the carrying value of an asset or asset group exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset or asset group, we recognize an asset impairment
charge against operations. The amount of the impairment loss recorded is the
amount by which the carrying value of the impaired asset or asset group exceeds
its fair value.
Our
impairment loss calculations contain uncertainties because they require
management to make assumptions and to apply judgment to identify events or
changes in circumstances indicating the carrying value of assets may not be
recoverable, estimate future cash flows, estimate asset fair values, and select
a discount rate that reflects the risk inherent in future cash flows. Expected
cash flows may not be realized, which could cause long-lived assets to become
impaired in future periods and could have a material adverse effect on future
results of operations.
Revenue
Recognition and Allowance for Doubtful Accounts
.
Royalty income is recognized based upon a monthly royalty report provided to us
by Econolite. This report is prepared by Econolite based on its sales of
products we developed and is based on sales shipped or delivered to its
customers. Revenue is recognized when both product ownership and the risk of
loss have transferred to the customer and we have no remaining obligations.
Allowances for doubtful accounts are estimated by management based on
evaluation of potential losses related to customer receivable balances. We
determine the allowance based on historical write-off experience in the
industry, regional economic data, and evaluation of specific customer accounts
for risk of loss. We review our allowance for doubtful accounts monthly.
Account balances are charged off against the allowance when we believe it is
probable the receivable will not be recovered. We do not have any off-balance
sheet credit exposure related to our customers. The establishment of this
reserve requires the use of judgment and assumptions regarding the potential
for losses on receivable balances. Although management considers these balances
adequate and proper, changes in economic conditions in specific markets in
which we operate could have an effect on reserve balances required.
Income
Taxes
. We record a tax provision for the
anticipated tax consequences of the reported results of operations. Deferred
tax assets and liabilities are measured using the currently enacted tax rates
that apply to taxable income in effect for the years in which those deferred
tax assets and liabilities are expected to be realized or settled. We record a
valuation allowance to reduce deferred tax assets to the amount that is
believed more likely than not to be realized. We believe it is more likely than
not that forecasted income, including income that may be generated as a result
of certain tax planning strategies, together with the tax effects of the
deferred tax liabilities, will be sufficient to fully recover the remaining net
realizable value of our deferred tax assets. In the event that 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 managements expectations could
have a material impact on our financial condition and operating results.
Inventories
.
We maintain a material amount of inventory to support our engineering and
manufacturing operations. This inventory is stated at the lower of cost or
market. On a regular basis, we review our inventory and identify that which is
excess, slow moving, and obsolete by considering factors such as inventory
levels, expected product life, and forecasted sales demand. Any identified
excess, slow moving, and obsolete inventory is written down to its market value
through a charge to income from operations. It is possible that additional
inventory write-down charges may be required in the future if there is a
significant decline in demand for our products.
Warranty
Liabilities
. The estimated cost to service
warranty and customer service claims is included in cost of sales. This
estimate is based on historical trends of warranty claims. We regularly assess
and adjust the estimate of accrued warranty claims by updating claims rates for
actual trends and projected claim costs. Our warranty liability contains
uncertainties because our warranty obligations cover an extended period of
time. A revision of estimated claim rates or the projected cost of materials
and freight associated with sending replacement parts to customers could have a
material adverse effect on future results of operations.
26
Table of Contents
New
and Recently Adopted Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable Revenue
Arrangements
. ASU 2009-13 amends the criteria established in
Accounting Standards Codification (ASC) 605-25,
Revenue Recognition Multiple Element
Arrangements
, for separating consideration in multiple-deliverable
arrangements. This guidance establishes a selling price hierarchy for
determining the selling price of a deliverable. Specifically, the selling price
used for each deliverable is based on: (a) vendor-specific objective evidence
if available; (b) third-party evidence if vendor-specific objective evidence is
not available; or (c) estimated selling price if neither vendor-specific
objective evidence nor third-party evidence is available. In addition, ASU
2009-13 eliminates the residual method of allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. Also, ASU 2009-13
expands required disclosures related to a vendors multiple-deliverable revenue
arrangements. The provisions of ASU 2009-13 were effective prospectively for
revenue arrangements entered into or materially modified by us as of the
beginning of the current year. Our adoption of the provisions of ASU 2009-13
did not have a material impact on its Consolidated Financial Statements. We
incorporated the appropriate disclosure provisions of ASU 2009-13 upon
adoption.
In
May 2011, the FASB issued ASU 2011-04,
Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRS
, which also amends
ASC 820. The purpose of this guidance is to achieve commonality between US GAAP
and IFRS pertaining to fair value measurement and disclosure requirements. It
changes certain fair value measurement principles and enhances the disclosure
requirements particularly for Level 3 fair value measurements. The amendment
becomes effective for annual periods beginning after December 15, 2011. We do
not believe the adoption of this guidance will have a material impact on our
Consolidated Financial Statements.
In
June 2011, the FASB issued ASU 2011-05,
Presentation of Comprehensive Income
,
which provides an entity the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. In both choices, an entity is required
to present each component of net income along with total net income, each
component of other comprehensive income along with a total for other
comprehensive income, and a total amount for comprehensive income. This
eliminates the option to present the components of other comprehensive income
as part of the statement of changes in shareholders equity. The amendments do
not change the items that must be reported in other comprehensive income or
when an item of other comprehensive income must be reclassified to net income. Additionally,
in December 2011, the FASB issued ASU 2011-12,
Deferral
of the Effective Date for Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05,
which indefinitely defers the requirement
in ASU 2011-05 to present reclassification adjustments out of accumulated other
comprehensive income by component in both the statement in which net income is
presented and the statement in which other comprehensive income is presented.
During the deferral period, the existing requirements in U.S. GAAP for the
presentation of reclassification adjustments must continue to be followed. The
amendments are effective for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2011. The amendments are to be
applied retrospectively, with early adoption permitted. We do not believe the
adoption of this guidance will have a material impact on our Consolidated Financial
Statements.
In
September 2011, the FASB issued ASU 2011-08,
Testing Goodwill for Impairment (Topic
350)
. ASU 2011-08 simplifies how an entity is required to test
goodwill for impairment by allowing the entity to first assess qualitative factors
to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. Previous guidance under Topic 350 required an entity
to test goodwill for impairment, on at least an annual basis, by comparing the
fair value of a reporting unit with its carrying amount, including goodwill.
Under the provisions of ASU 2011-08, an entity is no longer required to
calculate the fair value of a reporting unit unless the entity determines,
based on a qualitative assessment, that it is more likely than not that its
fair value is less than its carrying amount. ASU 2011-08 is effective for
annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011 which, for us, will be the beginning of
fiscal year 2012. We do not believe the adoption of this guidance will have a
material impact on our Consolidated Financial Statements.
|
|
I
tem
7A.
|
Quantitative and Qualitative
Disclosures About Market Risks
|
Foreign Currency
Exchange Risk
Approximately
30% of our revenue has historically been derived from shipments to customers
outside of the United States, and a large portion of this revenue is
denominated in currencies other than the U.S. dollar. Our international
subsidiaries have functional currencies other than our U.S. dollar reporting
currency and, occasionally, transact business in currencies other than their
functional currencies. These non-functional currency transactions expose us to
market risk on assets, liabilities and cash flows recognized on these
transactions.
The
strengthening of the U.S. dollar relative to foreign currencies decreases the
value of foreign currency-denominated revenue and earnings when translated into
U.S. dollars. Conversely, a weakening of the U.S. dollar increases the value of
foreign currency-denominated revenue and earnings. A 10% adverse change in
foreign currency rates, if we have not properly hedged, could have a material
effect on our results of operations or financial position.
27
Table of Contents
|
|
I
tem 8.
|
Financial Statements and
Supplementary Data
|
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,224
|
|
$
|
8,021
|
|
Marketable securities
|
|
|
2,093
|
|
|
3,954
|
|
Accounts receivable, net of allowance for doubtful accounts of $677
and $328, respectively
|
|
|
10,148
|
|
|
10,137
|
|
Inventories
|
|
|
6,142
|
|
|
4,649
|
|
Prepaid expenses and other receivables
|
|
|
1,644
|
|
|
2,017
|
|
Deferred income taxes
|
|
|
429
|
|
|
230
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,680
|
|
|
29,008
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
444
|
|
|
380
|
|
Leasehold improvements
|
|
|
363
|
|
|
158
|
|
Equipment
|
|
|
3,364
|
|
|
2,714
|
|
|
|
|
|
|
|
|
|
|
|
|
4,171
|
|
|
3,252
|
|
Accumulated depreciation
|
|
|
2,736
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
1,435
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
3,131
|
|
|
|
|
Intangible assets
|
|
|
7,888
|
|
|
9,513
|
|
Goodwill
|
|
|
3,120
|
|
|
14,713
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
41,254
|
|
$
|
54,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,998
|
|
$
|
2,094
|
|
Accrued compensation
|
|
|
1,013
|
|
|
1,364
|
|
Accrued warranty and other
|
|
|
1,534
|
|
|
1,467
|
|
Earn-outs payable
|
|
|
|
|
|
2,928
|
|
Income taxes payable
|
|
|
67
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,612
|
|
|
7,870
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
290
|
|
Income taxes payable
|
|
|
316
|
|
|
175
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued or outstanding
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 20,000,000 shares authorized, 4,910,619
and 4,878,519
issued and outstanding, respectively
|
|
|
49
|
|
|
49
|
|
Additional paid-in capital
|
|
|
22,619
|
|
|
22,065
|
|
Accumulated other comprehensive income (loss)
|
|
|
(180
|
)
|
|
52
|
|
Retained earnings
|
|
|
13,838
|
|
|
23,855
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
36,326
|
|
|
46,021
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
41,254
|
|
$
|
54,356
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
28
Table of Contents
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
17,475
|
|
$
|
19,162
|
|
$
|
12,483
|
|
Royalties
|
|
|
13,046
|
|
|
12,519
|
|
|
12,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,521
|
|
|
31,681
|
|
|
24,593
|
|
Cost of revenue (exclusive of amortization shown below):
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
8,769
|
|
|
7,799
|
|
|
4,297
|
|
Restructuring
|
|
|
448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,217
|
|
|
7,799
|
|
|
4,297
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,304
|
|
|
23,882
|
|
|
20,296
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and product support
|
|
|
10,609
|
|
|
9,807
|
|
|
7,201
|
|
General and administrative
|
|
|
6,315
|
|
|
4,372
|
|
|
3,779
|
|
Research and development
|
|
|
4,424
|
|
|
3,630
|
|
|
3,336
|
|
Amortization of intangible assets
|
|
|
1,650
|
|
|
1,218
|
|
|
768
|
|
Restructuring
|
|
|
287
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
11,685
|
|
|
|
|
|
|
|
Acquisition related expenses (income)
|
|
|
(618
|
)
|
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,352
|
|
|
19,844
|
|
|
15,084
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(13,048
|
)
|
|
4,038
|
|
|
5,212
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
9
|
|
|
(123
|
)
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(13,039
|
)
|
|
3,915
|
|
|
5,219
|
|
Income tax expense (benefit)
|
|
|
(3,022
|
)
|
|
910
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,017
|
)
|
$
|
3,005
|
|
$
|
3,865
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.07
|
)
|
$
|
0.66
|
|
$
|
0.97
|
|
Diluted
|
|
|
(2.07
|
)
|
|
0.64
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,834
|
|
|
4,555
|
|
|
3,985
|
|
Diluted
|
|
|
4,834
|
|
|
4,667
|
|
|
4,081
|
|
See accompanying notes to the consolidated financial
statements.
29
Table of Contents
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,017
|
)
|
$
|
3,005
|
|
$
|
3,865
|
|
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
548
|
|
|
498
|
|
|
424
|
|
Amortization
|
|
|
1,650
|
|
|
1,218
|
|
|
768
|
|
Tax benefit from disqualifying dispositions
|
|
|
37
|
|
|
72
|
|
|
|
|
Stock-based compensation
|
|
|
412
|
|
|
342
|
|
|
341
|
|
Goodwill impairment
|
|
|
11,685
|
|
|
|
|
|
|
|
Earn-out income
|
|
|
(618
|
)
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
|
(3,620
|
)
|
|
174
|
|
|
138
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(11
|
)
|
|
(3,711
|
)
|
|
960
|
|
Inventories
|
|
|
(1,493
|
)
|
|
(1,309
|
)
|
|
(1,126
|
)
|
Prepaid expenses and other receivables
|
|
|
281
|
|
|
(1,229
|
)
|
|
(212
|
)
|
Accounts payable
|
|
|
(96
|
)
|
|
391
|
|
|
702
|
|
Accrued liabilities
|
|
|
(284
|
)
|
|
832
|
|
|
(384
|
)
|
Income taxes payable
|
|
|
215
|
|
|
(250
|
)
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(1,311
|
)
|
|
33
|
|
|
5,389
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisition
|
|
|
|
|
|
(8,316
|
)
|
|
|
|
Payment of earn-outs
|
|
|
(2,361
|
)
|
|
(1,541
|
)
|
|
(1,192
|
)
|
Purchases of marketable securities
|
|
|
(7,340
|
)
|
|
(8,882
|
)
|
|
(6,640
|
)
|
Sales and maturities of marketable securities
|
|
|
9,201
|
|
|
8,863
|
|
|
6,705
|
|
Purchases of property and equipment
|
|
|
(859
|
)
|
|
(380
|
)
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,359
|
)
|
|
(10,256
|
)
|
|
(1,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from common stock offering
|
|
|
|
|
|
8,818
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
105
|
|
|
121
|
|
|
1
|
|
Proceeds from bank debt
|
|
|
|
|
|
|
|
|
4,000
|
|
Repayment of bank debt
|
|
|
|
|
|
(4,556
|
)
|
|
(3,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
105
|
|
|
4,383
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(232
|
)
|
|
(223
|
)
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(2,797
|
)
|
|
(6,063
|
)
|
|
3,795
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
8,021
|
|
|
14,084
|
|
|
10,289
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,224
|
|
$
|
8,021
|
|
$
|
14,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds
|
|
$
|
57
|
|
$
|
1,571
|
|
$
|
1,488
|
|
Interest paid
|
|
$
|
6
|
|
$
|
155
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with CitySync acquisition
|
|
$
|
|
|
$
|
727
|
|
$
|
|
|
EIS earn-out payable recorded as additional goodwill
|
|
$
|
|
|
$
|
1,665
|
|
$
|
1,541
|
|
See accompanying notes to the consolidated financial
statements.
30
Table of Contents
IMAGE SENSING SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Retained
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
3,985,219
|
|
$
|
40
|
|
$
|
11,652
|
|
$
|
(147
|
)
|
$
|
16,985
|
|
$
|
28,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for options exercised
|
|
|
600
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
|
|
|
341
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
(24
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,865
|
|
|
3,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
3,985,819
|
|
|
40
|
|
|
11,994
|
|
|
(171
|
)
|
|
20,850
|
|
|
32,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying disposition
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
72
|
|
Common stock issued for options exercised
|
|
|
37,700
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
121
|
|
Common stock issued in secondary
offering, net
|
|
|
798,000
|
|
|
8
|
|
|
8,810
|
|
|
|
|
|
|
|
|
8,818
|
|
Common stock issued in CitySync
acquisition
|
|
|
57,000
|
|
|
1
|
|
|
726
|
|
|
|
|
|
|
|
|
727
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
342
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
|
|
223
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,005
|
|
|
3,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
4,878,519
|
|
|
49
|
|
|
22,065
|
|
|
52
|
|
|
23,855
|
|
|
46,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying disposition
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
37
|
|
Common stock issued for options exercised
|
|
|
32,100
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
105
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
412
|
|
|
|
|
|
|
|
|
412
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
(232
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,017
|
)
|
|
(10,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
4,910,619
|
|
$
|
49
|
|
$
|
22,619
|
|
$
|
(180
|
)
|
$
|
13,838
|
|
$
|
36,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
31
Table of Contents
Notes to Consolidated Financial Statements
December 31,
2011
|
|
1.
|
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
|
DESCRIPTION OF BUSINESS
Image
Sensing Systems, Inc. (referred to herein as we, the Company, us and
our) develops and markets software-based computer enabled detection products
for use in traffic, security, police and parking applications. 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.
PRINCIPLES OF
CONSOLIDATION
The
Consolidated Financial Statements include the accounts of Image Sensing
Systems, Inc. and its wholly-owned subsidiaries: Flow Traffic Ltd. (Flow
Traffic) located in Hong Kong; Image Sensing Systems Holdings Limited
(ISS/Holdings) and Image Sensing Systems Europe Ltd. (ISS/Europe), both located
in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O. (ISS/Poland),
located in Poland; ISS Image Sensing Systems Canada Ltd (ISS/Canada) and ISS
Canada Sales Corp. (Canada Sales Corp.), both located in Ontario, Canada; and
CitySync Limited (CitySync), located in the United Kingdom. All significant
inter-company transactions and balances have been eliminated in consolidation.
REVENUE
RECOGNITION
We
recognize revenue on a sales arrangement when it is realized or realizable and
earned, which occurs when all of the following criteria have been met:
persuasive evidence of an arrangement exists; delivery and title transfer has
occurred or services have been rendered; the sales price is fixed and
determinable; collectability is reasonably assured; and all significant
obligations to the customer have been fulfilled.
Certain
sales may contain multiple elements 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 arrangements may include
the hardware, software, installation services, training and support. We
initially allocate consideration to each separable element using the relative
selling price method. Selling prices are determined by us based on either
vendor-specific objective evidence (VSOE) (the actual 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.
Revenue
from arrangements for services such as maintenance, repair, consulting and
technical support are recognized either as the service is performed or ratably
over the defined contractual period for service maintenance contracts.
Econolite
Control Products, Inc. (Econolite) is a licensee that sells certain of our
products in North America, the Caribbean and Latin America. 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.
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.
Revenue
is recorded net of taxes collected from customers that are remitted to
governmental authorities, with the collected taxes recorded as current
liabilities until remitted to the relevant government authority.
32
Table of Contents
SHIPPING AND
HANDLING
Freight
revenue billed to customers is reported within revenue on the Consolidated
Statements of Operations, and expenses incurred for shipping products to
customers are reported within cost of revenue on the Consolidated Statements of
Operations.
CASH AND CASH
EQUIVALENTS
We
consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents, both inside and
outside the United States, are invested in money market funds and bank deposits
in local currency denominations. Cash located in foreign banks was $2.4 million
and $3.3 million at December 31, 2011 and 2010, respectively. We hold our cash
and cash equivalents with financial institutions and, at times, the amounts of
our balances may be in excess of insurance limits.
MARKETABLE SECURITIES
Our
investment portfolio is currently comprised of high-grade municipal bonds, U.S.
government securities and commercial paper. We classify marketable debt
securities as available-for-sale investments and these securities are stated at
their estimated fair value. The value of these securities is subject to market
and credit volatility during the period these investments are held.
ACCOUNTS
RECEIVABLE
We
grant credit to customers in the normal course of business and generally do not
require collateral. Management performs on-going credit evaluations of
customers. The allowance for doubtful accounts is based on managements
assessment of the collectability of specific customer accounts and includes
consideration of the credit worthiness and financial condition of those
specific customers. We record an allowance to reduce receivables to the amount
that is reasonably believed to be collectible and considers factors such as the
financial condition of the customer and the aging of the receivables. If there
is a deterioration of a customers financial condition, if we become aware of
additional information related to the credit worthiness of a customer, or if
future actual default rates on trade receivables in general differ from those
currently anticipated, we may have to adjust our allowance for doubtful
accounts, which would affect earnings in the period the adjustments were made.
INVENTORIES
Inventories
are primarily electronic components and finished goods and are valued at the
lower of cost or market on the first-in, first-out accounting method.
PROPERTY AND
EQUIPMENT
Property
and equipment are carried at cost. Additions, replacements, and improvements
are capitalized at cost, while maintenance and repairs are charged to
operations as incurred. Depreciation is recorded using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
depreciated over the shorter of the estimated useful lives of the assets or the
contractual term of the lease, with consideration of lease renewal options if
renewal appears probable. Depreciation is recorded over a three- to seven-year
period for financial reporting purposes and by accelerated methods for income
tax purposes.
INCOME TAXES
We
record a tax provision for the anticipated tax consequences of the reported
results of operations. Deferred tax assets and liabilities are measured using
the currently enacted tax rates that apply to taxable income in effect for the
years in which those deferred tax assets and liabilities are expected to be
realized or settled. We record a valuation allowance to reduce deferred tax
assets to the amount that is believed more likely than not to be realized. We
believe it is more likely than not that forecasted income, including income
that may be generated as a result of certain tax planning strategies, together
with the tax effects of the deferred tax liabilities, will be sufficient to
fully recover the remaining net realizable value of its deferred tax assets. In
the event that 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 managements expectations
could have a material impact on the our financial condition and operating
results. We recognize penalties and interest expense related to unrecognized
tax benefits in income tax expense.
GOODWILL AND
INTANGIBLE ASSETS
Goodwill
represents the excess of acquisition costs over the fair value of the net
assets of businesses acquired. Goodwill is not amortized, but instead tested at
least annually for impairment. Goodwill is also tested for impairment as
changes in circumstances occur indicating that the carrying value may not be
recoverable. EIS asset purchase related goodwill is tested on October 1 of each
year. CitySync goodwill is tested on April 1 of each year.
33
Table of Contents
Goodwill
impairment testing first requires a comparison of the fair value of each
reporting unit to the carrying value. If the carrying value of the reporting
unit exceeds fair value, goodwill is considered impaired. Impairment testing
for indefinite-lived intangible assets requires a comparison between the fair
value and the carrying value of the asset. If the carrying value of the asset
exceeds its fair value, the asset is reduced to fair value. See Note 5 to the
Consolidated Financial Statements for additional information on goodwill.
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. Fair values of goodwill and intangible assets are primarily
determined using discounted cash flow analyses. At both December 31, 2011 and 2010,
we determined there was no impairment of intangible assets. At both December
31, 2011 and 2010, there were no indefinite-lived intangible assets.
IMPAIRMENT OF
LONG-LIVED ASSETS
We
review the carrying value of long-lived assets or asset groups, such as
property and equipment and intangibles subject to amortization, when events or
changes in circumstances such as asset utilization, physical change, legal
factors, or other matters indicate that the carrying value may not be
recoverable. When this review indicates the carrying value of an asset or asset
group exceeds the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset or asset group, we recognize an
asset impairment charge against operations. The amount of the impairment loss
recorded is the amount by which the carrying value of the impaired asset or
asset group exceeds its fair value. No such impairment losses were recorded
during the years ended December 31, 2011, 2010 or 2009.
USE OF
ESTIMATES
Preparing
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from the estimates.
RESEARCH AND
DEVELOPMENT
Research
and development costs are charged to operations in the period incurred.
WARRANTIES
We
generally provide a standard two-year warranty 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 claim trends.
ADVERTISING
Advertising
costs are charged to operations in the period incurred and totaled $157,000,
$153,000 and $151,000 for the years ended December 31, 2011, 2010 and 2009,
respectively.
FOREIGN
CURRENCY
The
financial position and results of operations of our foreign subsidiaries are
measured using local currency as the functional currency. Assets and
liabilities are translated using fiscal period-end exchange rates, and
statements of operations are translated using average exchange rates applicable
to each period, with the resulting translation adjustments recorded as a
separate component of shareholders equity under Accumulated other
comprehensive income (loss). Gains and losses from foreign currency
transactions are recognized in the Consolidated Statements of Operations.
NET INCOME
(LOSS) PER SHARE
Basic
income (loss) per share excludes dilution and is computed by dividing net
income (loss) attributable to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted income (loss)
per share includes potentially dilutive common shares consisting of stock options,
restricted stock and warrants using the treasury stock method. Under the
treasury stock method, shares associated with certain stock options have been
excluded from the diluted weighted average shares outstanding calculation
because the exercise of those options would lead to a net reduction in common
shares outstanding. As a result, stock options to acquire 477,000, 133,000 and
36,000 weighted common shares have been excluded from the diluted weighted
shares outstanding calculation for the years ended December 31, 2011, 2010 and
2009, respectively, because the exercises prices were greater than the average
market price of the common shares during the period and were excluded from the
calculation of diluted net income per share.
34
Table of Contents
For
the years ended December 31, 2010 and 2009, respectively, 112,000 and 96,000
common share equivalents were included in the computation of diluted net income
per share.
USE OF
ESTIMATES
The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities as of the date of the financial statements,
and reported amounts of revenue and expense during the reporting period.
Predicting future events is inherently an imprecise activity and, as such,
requires the use of judgment. Ultimate results could differ from those
estimates. Changes in these estimates will be reflected in the financial
statements in future periods.
STOCK-BASED
COMPENSATION
We
measure the cost of employee services received in exchange for the award of
equity instruments based on the fair value of the award at the date of grant
and recognize the cost over the period during which an employee is required to
provide services in exchange for the award. Stock options are granted at
exercise prices equal to the closing market price of our stock on the date of
grant.
For
purposes of determining estimated fair value of stock-based payment awards, we
utilize a Black-Scholes option pricing model, which requires the input of
certain assumptions requiring management judgment. Because our employee stock
option awards have characteristics significantly different from those of traded
options, and because changes in the input assumptions can materially affect
fair value estimates, existing models may not provide a reliable single measure
of the fair value of employee stock options. Management will continue to assess
the assumptions and methodologies used to calculate estimated fair value of
stock-based compensation. Circumstances may change and additional data may
become available over time that could result in changes to these assumptions and
methodologies and thereby materially impact the fair value determination of
future grants of stock-based payment awards. If factors change and we employ
different assumptions in future periods, the compensation expense recorded may
differ significantly from the stock-based compensation expense recorded in the
current period.
SUBSEQUENT
EVENTS
Events
that have occurred subsequent to December 31, 2011 have been evaluated through
the date the Consolidated Financial Statements were issued. There have been no
subsequent events that occurred during such period that would require
recognition or disclosure in the Consolidated Financial Statements as of or for
the fiscal year ended December 31, 2011.
NEW ACCOUNTING
PRONOUNCEMENTS
In
October 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2009-13,
Multiple-Deliverable
Revenue Arrangements
. ASU 2009-13 amends the criteria established in
Accounting Standards Codification (ASC) 605-25,
Revenue Recognition Multiple Element Arrangements
, for
separating consideration in multiple-deliverable arrangements. This guidance
establishes a selling price hierarchy for determining the selling price of a
deliverable. Specifically, the selling price used for each deliverable is based
on: (a) vendor-specific objective evidence if available; (b) third-party
evidence if vendor-specific objective evidence is not available; or (c)
estimated selling price if neither vendor-specific objective evidence nor
third-party evidence is available. In addition, ASU 2009-13 eliminates the
residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the
relative selling price method. Also, ASU 2009-13 expands required disclosures
related to a vendors multiple-deliverable revenue arrangements. The provisions
of ASU 2009-13 were effective prospectively for revenue arrangements entered
into or materially modified by us as of the beginning of the current year. Our
adoption of the provisions of ASU 2009-13 did not have a material impact on its
Consolidated Financial Statements. We incorporated the appropriate disclosure
provisions of ASU 2009-13 upon adoption.
In
May 2011, the FASB issued ASU 2011-04,
Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRS
, which also amends ASC 820. The purpose of this
guidance is to achieve commonality between US GAAP and IFRS pertaining to fair
value measurement and disclosure requirements. It changes certain fair value
measurement principles and enhances the disclosure requirements particularly
for Level 3 fair value measurements. The amendment becomes effective for annual
periods beginning after December 15, 2011. We do not believe the adoption of
this guidance will have a material impact on our Consolidated Financial
Statements.
35
Table of Contents
In
June 2011, the FASB issued ASU 2011-05,
Presentation
of Comprehensive Income
, which provides an entity the option to
present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive
statements. In both choices, an entity is required to present each component of
net income along with total net income, each component of other comprehensive
income along with a total for other comprehensive income, and a total amount
for comprehensive income. This eliminates the option to present the components
of other comprehensive income as part of the statement of changes in
shareholders equity. The amendments do not change the items that must be
reported in other comprehensive income or when an item of other comprehensive
income must be reclassified to net income. Additionally, in December 2011, the
FASB issued ASU 2011-12,
Deferral of the
Effective Date for Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in Accounting Standards Update
No. 2011-05,
which indefinitely defers the requirement in ASU
2011-05 to present reclassification adjustments out of accumulated other
comprehensive income by component in both the statement in which net income is
presented and the statement in which other comprehensive income is presented.
During the deferral period, the existing requirements in U.S. GAAP for the
presentation of reclassification adjustments must continue to be followed. The
amendments are effective for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2011. The amendments are to be
applied retrospectively, with early adoption permitted. We do not believe the
adoption of this guidance will have a material impact on our Consolidated Financial
Statements.
In
September 2011, the FASB issued ASU 2011-08,
Testing
Goodwill for Impairment (Topic 350)
. ASU 2011-08 simplifies how an
entity is required to test goodwill for impairment by allowing the entity to
first assess qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test. Previous guidance
under Topic 350 required an entity to test goodwill for impairment, on at least
an annual basis, by comparing the fair value of a reporting unit with its
carrying amount, including goodwill. Under the provisions of ASU 2011-08, an
entity is no longer required to calculate the fair value of a reporting unit
unless the entity determines, based on a qualitative assessment, that it is more
likely than not that its fair value is less than its carrying amount. ASU
2011-08 is effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011 which, for us, will be the
beginning of fiscal year 2012. We do not believe the adoption of this guidance
will have a material impact on our Consolidated Financial Statements.
|
|
2.
|
FAIR VALUE MEASUREMENTS AND MARKETABLE SECURITIES
|
The
guidance for fair value measurements establishes the authoritative definition
of fair value, sets out a framework for measuring fair value and outlines the
required disclosures regarding fair value measurements. Fair value is the price
that would be received to sell an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. We use a three-tier fair value hierarchy based upon
observable and non-observable inputs as follows:
|
|
|
Level 1
observable inputs such as quoted prices in active markets;
|
|
Level 2
inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and
|
|
Level 3
unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions.
|
Assets
and Liabilities that are Measured at Fair Value on a Recurring Basis
The
fair value hierarchy requires the use of observable market data when available.
In instances in which the inputs used to measure fair value fall into different
levels of the fair value hierarchy, the fair value measurement has been
determined based on the lowest level input that is significant to the fair
value measurement in its entirety. Our assessment of the significance of a
particular item to the fair value measurement in its entirety requires
judgment, including the consideration of inputs specific to the asset or
liability.
Investments
are comprised of high-grade municipal bonds, U.S. government securities and
commercial paper and are classified as Level 1, as they trade with sufficient
frequency and volume to enable us to obtain pricing information on an ongoing
basis.
The
amortized cost and market value of our available-for-sale securities by major
security type were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
|
|
$
|
422
|
|
State and municipal bonds
|
|
|
866
|
|
|
2,217
|
|
Corporate obligations
|
|
|
1,227
|
|
|
1,315
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,093
|
|
$
|
3,954
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
We
evaluate impairment at each reporting period for securities where the fair
value of the investment is less than its cost. Unrealized gains and losses on
available-for-sale investments were immaterial as of December 31, 2011 and
2010.
Classification
of available-for-sale investments as current or noncurrent is dependent upon
our intended holding period, the securitys maturity date, or both. Contractual
maturities were less than one year for all available-for-sale investments as of
December 31, 2011. There were no available-for-sale investments with gross
unrealized losses that have been in a continuous unrealized loss position for more
than 12 months as of December 31, 2011 and 2010.
Proceeds
from maturities or sales of available-for-sale securities were $9.2 million,
$8.9 million and $6.7 million during the years ended December 31, 2011, 2010
and 2009, respectively. Realized gains and losses are determined on the
specific identification method. Realized gains and losses related to sales of
available-for-sale sales during the years ended December 31, 2011, 2010 and
2009 were immaterial and included in other income (expense).
Nonfinancial
Assets Measured at Fair Value on a Nonrecurring Basis
Our
goodwill, intangible assets and other long-lived assets are nonfinancial assets
that were acquired either as part of a business combination, individually or
with a group of other assets. These nonfinancial assets were initially, and
have historically been, measured and recognized at amounts equal to the fair
value determined as of the date of acquisition.
Periodically,
these nonfinancial assets are tested for impairment by comparing their
respective carrying values to the estimated fair value of the reporting unit or
asset group in which they reside. In the quarter ended September 30, 2011,
certain of these nonfinancial assets were deemed to be impaired (see Note 5),
and we recognized an impairment loss equal to the amount by which the carrying
value of each reporting unit exceeded their estimated fair value. Fair value
measurements of the reporting units were estimated using certain Level 3 inputs
requiring management judgment, including projections of economic conditions and
customer demand, revenue and margins, changes in competition, operating costs,
working capital requirements, and new product introductions.
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.
These financial instruments include cash and cash equivalents, accounts
receivable and accounts payable.
Inventories
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Electronic components
|
|
$
|
2,924
|
|
$
|
2,114
|
|
Finished goods
|
|
|
3,218
|
|
|
2,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,142
|
|
$
|
4,649
|
|
|
|
|
|
|
|
|
|
On
June 21, 2010, we purchased all of the outstanding equity of CitySync Limited
(CitySync), a privately-held developer and marketer of automatic number plate
recognition (ANPR) products. We believe the CitySync acquisition expands our
addressable market, strengthens our selling presence in Europe and extends the
opportunities for hybrid product developments. The total purchase price was
$9.6 million comprised of $7.9 million in cash plus 57,000 shares of our common
stock. Following the acquisition, CitySync became a wholly-owned subsidiary of
ISS/Europe.
37
Table of Contents
The
purchase price was allocated based on the fair values of assets acquired and
liabilities assumed. The following table summarizes the allocation of the
CitySync purchase price, including acquisition costs, to the fair values of the
assets acquired and liabilities assumed at the date of acquisition (in
thousands):
|
|
|
|
|
Consideration
transferred:
|
|
|
|
|
Cash
|
|
$
|
7,871
|
|
Fair value of common stock
|
|
|
727
|
|
Estimated fair value of earn-out
|
|
|
1,010
|
|
|
|
|
|
|
|
|
|
9,608
|
|
Allocation:
|
|
|
|
|
Accounts receivable, inventories and other
current assets
|
|
$
|
(1,684
|
)
|
Property and equipment
|
|
|
(242
|
)
|
Current liabilities assumed
|
|
|
2,450
|
|
Deferred income taxes
|
|
|
1,876
|
|
Developed technology
|
|
|
(3,300
|
)
|
Trade names
|
|
|
(1,900
|
)
|
Other intangibles
|
|
|
(1,500
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
5,308
|
|
|
|
|
|
|
The
results of CitySync operations are included in the accompanying Consolidated
Financial Statements since the date of the acquisition and are reported in the
CitySync segment. The following pro forma summary presents the results of
operations as if the acquisition had occurred on January 1, 2009. The table
below includes our results for the periods as shown and for CitySync based on a
January fiscal year. The pro forma results are not necessarily indicative of
the results that would have been achieved had the CitySync acquisition taken
place on that date (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
(Actual)
|
|
(Pro Forma)
|
|
(Pro Forma)
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
30,521
|
|
$
|
34,088
|
|
$
|
32,034
|
|
Net income (loss)
|
|
|
(10,017
|
)
|
|
2,508
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.07
|
)
|
$
|
0.55
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(2.07
|
)
|
$
|
0.53
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
Because
the goodwill and intangible assets related to the CitySync acquisition are
accounted for in Great Britain Pounds, they are impacted by period-end rates of
exchange to United States Dollars and therefore may vary in different reporting
periods.
Goodwill
consisted of the following reporting units (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
Additions
|
|
Impairments
|
|
Foreign
Currency
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Traffic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Traffic goodwill
|
|
$
|
1,050
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,050
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
(1,050
|
)
|
|
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Traffic goodwill
|
|
|
1,050
|
|
|
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIS goodwill
|
|
|
8,239
|
|
|
|
|
|
|
|
|
|
|
|
8,239
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
(6,867
|
)
|
|
|
|
|
(6,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIS goodwill
|
|
|
8,239
|
|
|
|
|
|
(6,867
|
)
|
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CitySync:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CitySync goodwill
|
|
|
5,424
|
|
|
|
|
|
|
|
|
92
|
|
|
5,516
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
(3,768
|
)
|
|
|
|
|
(3,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CitySync goodwill
|
|
|
5,424
|
|
|
|
|
|
(3,768
|
)
|
|
92
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
14,713
|
|
$
|
|
|
$
|
(11,685
|
)
|
$
|
92
|
|
$
|
3,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
Additions
|
|
Impairments
|
|
Foreign
Currency
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Traffic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Traffic goodwill
|
|
$
|
1,050
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,050
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Traffic goodwill
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIS goodwill
|
|
|
6,574
|
|
|
1,665
|
|
|
|
|
|
|
|
|
8,239
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIS goodwill
|
|
|
6,574
|
|
|
1,665
|
|
|
|
|
|
|
|
|
8,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CitySync:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CitySync goodwill
|
|
|
|
|
|
5,308
|
|
|
|
|
|
116
|
|
|
5,424
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CitySync goodwill
|
|
|
|
|
|
5,308
|
|
|
|
|
|
116
|
|
|
5,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
7,624
|
|
$
|
6,973
|
|
$
|
|
|
$
|
116
|
|
$
|
14,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
apply a fair value based impairment test to the carrying value of goodwill for
each reporting unit on an annual basis and on an interim basis if certain
events or circumstances indicate that an impairment loss may have occurred. In
the third quarter of 2011 the we experienced a significant and sustained
decline in its stock price. The decline resulted in our market capitalization
falling significantly below the recorded value of its consolidated net assets.
As a result, we concluded a triggering event had occurred and performed an
impairment test of goodwill for each reporting unit as of the end of the third
quarter of 2011.
Based
on the results of our initial assessment of impairment of its goodwill (step
1), we determined that the carrying value of each reporting unit exceeded its
estimated fair value. Therefore, we performed the second step of the impairment
assessment to determine the implied fair value of goodwill. In performing the
goodwill assessment, we used current market capitalization, discounted cash
flows and other factors as the best evidence of fair value.
We
recorded goodwill impairment charges in the third quarter of 2011 of $1.1
million, $3.7 million, and $6.9 million for the Flow Traffic Ltd., CitySync and
RTMS reporting units, respectively.
Intangible Assets
Intangible
assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted
Average
Useful Life
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
$
|
7,352
|
|
$
|
(2,570
|
)
|
$
|
4,782
|
|
|
5.5
|
|
Trade names
|
|
|
3,188
|
|
|
(1,356
|
)
|
|
1,832
|
|
|
3.7
|
|
Other
intangible assets
|
|
|
1,769
|
|
|
(495
|
)
|
|
1,274
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,309
|
|
$
|
(4,421
|
)
|
$
|
7,888
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted
Average
Useful Life
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
$
|
7,364
|
|
$
|
(1,705
|
)
|
$
|
5,659
|
|
|
6.5
|
|
Trade names
|
|
|
3,193
|
|
|
(870
|
)
|
|
2,323
|
|
|
4.7
|
|
Other
intangible assets
|
|
|
1,774
|
|
|
(243
|
)
|
|
1,531
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,331
|
|
$
|
(2,818
|
)
|
$
|
9,513
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Table of Contents
The
estimated future amortization expense related to other intangible assets for the
next five fiscal years is as follows (dollars in thousands):
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
|
|
|
2012
|
|
$
|
1,561
|
|
2013
|
|
|
1,283
|
|
2014
|
|
|
1,267
|
|
2015
|
|
|
1,234
|
|
2016
|
|
|
779
|
|
Future
amortization amounts presented above are estimates. Actual future amortization
expense may be different due to future acquisitions, impairments, changes in
amortization periods, or other factors.
In
connection with the triggering event discussed above, during the third quarter
of 2011, we reviewed our long-lived assets and determined that none of the
long-lived assets were impaired for its asset groups. The determination was
based on reviewing estimated undiscounted cash flows for our asset groups,
which were greater than their carrying values. As required under GAAP, this
impairment analysis occurred before the goodwill impairment assessment.
The
evaluation of the recoverability of long-lived assets requires us to make
significant estimates and assumptions. These estimates and assumptions primarily
include, but are not limited to, the identification of the asset group at the
lowest level of independent cash flows and the primary asset of the group; and
long-range forecasts of revenue, reflecting managements assessment of general
economic and industry conditions, operating income, depreciation and
amortization and working capital requirements.
We
have a revolving line of credit and had term loans with Associated Bank,
National Association (Associated Bank) that were initially entered into on
May 1, 2008. Our current revolving line of credit agreement (Credit
Agreement) with Associated Bank provides up to $5.0 million. The Credit
Agreement expires in May 2013 and bears interest at an annual rate equal to the
greater of (a) 3.5% or (b) LIBOR plus 2.75%. Any advances are secured by
inventories, accounts receivable and equipment. We are subject to certain
financial covenants under the Credit Agreement, including minimum debt service
coverage ratios, minimum cash flow coverage ratios and financial measures. At
December 31, 2011, we had no borrowings under the Credit Agreement, and we were
in compliance with all of its financial covenants.
In
December 2009, we entered into a term loan agreement for $4.0 million with
Associated Bank, which was fully repaid in September 2010.
Warranty
liability and related activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
624
|
|
$
|
289
|
|
$
|
217
|
|
Warranty
provisions
|
|
|
198
|
|
|
484
|
|
|
175
|
|
Warranty
claims
|
|
|
(318
|
)
|
|
(149
|
)
|
|
(103
|
)
|
Adjustments
to preexisting warranties
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
423
|
|
$
|
624
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
We
rent office space and equipment under operating lease agreements expiring at
various dates through January 2015. Rent expense for office facilities was $1.1
million in 2011, $777,000 in 2010 and $585,000 in 2009.
Future
minimum annual lease payments under noncancelable operating leases for the
years ending December 31, 2012, 2013, 2014 and 2015 are $548,000, $397,000,
$287,000 and $16,000, respectively.
40
Table of Contents
The
components of income (loss) before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes:
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(6,761
|
)
|
$
|
2,789
|
|
$
|
3,925
|
|
Foreign
|
|
|
(6,278
|
)
|
|
1,126
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(13,039
|
)
|
$
|
3,915
|
|
$
|
5,219
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of income tax expense (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
279
|
|
$
|
983
|
|
$
|
1,222
|
|
State
|
|
|
4
|
|
|
(65
|
)
|
|
23
|
|
Foreign
|
|
|
315
|
|
|
25
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
598
|
|
|
943
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,358
|
)
|
|
(32
|
)
|
|
82
|
|
State
|
|
|
(35
|
)
|
|
(1
|
)
|
|
5
|
|
Foreign
|
|
|
(1,227
|
)
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,620
|
)
|
|
(33
|
)
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
tax expense (benefit)
|
|
$
|
(3,022
|
)
|
$
|
910
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation from the federal statutory income tax provision to our effective
tax expense (benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States federal tax statutory rate
|
|
$
|
(4,433
|
)
|
$
|
1,331
|
|
$
|
1,774
|
|
State taxes,
net of federal benefit
|
|
|
(36
|
)
|
|
(47
|
)
|
|
18
|
|
Goodwill
impairment
|
|
|
1,299
|
|
|
|
|
|
|
|
Research and
development tax credits
|
|
|
(412
|
)
|
|
(454
|
)
|
|
(231
|
)
|
Non-deductible
acquisition expenses and earn-out
|
|
|
(155
|
)
|
|
238
|
|
|
|
|
Domestic
production activities deduction
|
|
|
(38
|
)
|
|
(111
|
)
|
|
(62
|
)
|
Foreign
provision (less than) greater than U.S. tax rate
|
|
|
641
|
|
|
(43
|
)
|
|
(58
|
)
|
Valuation
allowances against deferred tax assets
|
|
|
121
|
|
|
(55
|
)
|
|
|
|
Stock option
expense
|
|
|
82
|
|
|
75
|
|
|
74
|
|
Adjustment
of prior year tax credits and refunds
|
|
|
50
|
|
|
(64
|
)
|
|
(77
|
)
|
Uncertain
tax positions
|
|
|
(138
|
)
|
|
(33
|
)
|
|
(38
|
)
|
Other
|
|
|
(3
|
)
|
|
73
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,022
|
)
|
$
|
910
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Table of Contents
A
summary of the deferred tax assets and liabilities is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Accrued compensation and benefits
|
|
$
|
59
|
|
$
|
55
|
|
Prepaid expenses and other
|
|
|
(22
|
)
|
|
(43
|
)
|
Inventory reserves
|
|
|
169
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
119
|
|
|
75
|
|
Warranty reserves
|
|
|
104
|
|
|
143
|
|
|
|
|
|
|
|
|
|
Total
current deferred tax asset
|
|
|
429
|
|
|
230
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Intangible and other assets
|
|
|
2,089
|
|
|
(471
|
)
|
Foreign net operating loss carryforwards
|
|
|
991
|
|
|
|
|
Non-qualified stock option expense
|
|
|
192
|
|
|
164
|
|
Property, equipment and other
|
|
|
35
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax asset (liability):
|
|
|
3,307
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax asset (liability), net
|
|
|
3,131
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset (liability)
|
|
$
|
3,560
|
|
$
|
(60
|
)
|
|
|
|
|
|
|
|
|
As
of December 31, 2011, our subsidiaries in the United Kingdom and Hong Kong had
net operating loss carryovers of $3,382,000 and $1,067,000, respectively. These
net operating loss carryovers will not expire under local tax law. We
determined that the benefit of our Hong Kong subsidiarys net operating loss
carryover of $1,067,000 is uncertain. Accordingly, as of December 31, 2011, we
had a full valuation allowance against the Hong Kong subsidiarys deferred tax
asset in the amount of $176,000.
In
accordance with ASC 740-30, we have not recognized a deferred tax liability for
the undistributed earnings of certain of its foreign operations because those
subsidiaries have invested or will invest the undistributed earnings
indefinitely. At December 31, 2011, undistributed earnings were approximately
$1.6 million. It is impractical for us to determine the amount of unrecognized
deferred tax liabilities on these indefinitely reinvested earnings. Deferred
taxes are recorded for earnings of foreign operations when we determine that
such earnings are no longer indefinitely reinvested.
We
realize an income tax benefit from the exercise or early disposition of certain
stock options. This benefit results in a decrease in current income taxes
payable and an increase in additional paid-in capital.
A
reconciliation of the beginning and ending amount of the tax liability for
uncertain tax positions is as follows (in thousands):
|
|
|
|
|
Balance at
January 1, 2010
|
|
$
|
208
|
|
Additions
for current year tax positions
|
|
|
|
|
Reductions
as a result of lapses in statute of limitations
|
|
|
(33
|
)
|
|
|
|
|
|
Balance at
December 31, 2010
|
|
|
175
|
|
|
Additions
for current year tax positions
|
|
|
|
|
Reductions
as a result of lapses in statute of limitations
|
|
|
(139
|
)
|
|
|
|
|
|
Balance at
December 31, 2011
|
|
$
|
36
|
|
|
|
|
|
|
Included
in the balance of uncertain tax positions at December 31, 2011 are potential
benefits of $1,000 that, if recognized, would affect the effective tax rate.
The amount of unrecognized tax benefits are not expected to change materially
within the next 12 months. At December 31, 2011 and December 31, 2010, we had
no accrued interest related to uncertain income tax positions. At December 31,
2011 and December 31, 2010, no accrual for penalties related to uncertain tax
positions existed. Interest and penalties related to uncertain tax positions
are included in interest expense and general and administrative expense,
respectively, on the Consolidated Statements of Operations.
We
are subject to income taxes in the U.S. federal jurisdiction and various state
and foreign jurisdictions. Tax regulations within each jurisdiction are subject
to the interpretation of the related tax laws and require significant judgment
to apply. Generally, we are subject to U.S. federal, state, local and foreign
tax examinations by taxing authorities for years after the fiscal year ended
December 31, 2007.
42
Table of Contents
At December
31, 2011 and December 31, 2010, certain of our foreign subsidiaries were
expected to receive income tax refunds within the next fiscal year. As a
result, at December 31, 2011 and December 31, 2010, we recognized a current
income tax receivable of $488,000 and $314,000, respectively.
10.
LICENSING
We have
sublicensed the exclusive right to manufacture and market the Autoscope
technology in North America, the Caribbean and Latin America to Econolite and
receive royalties from Econolite on sales of the Autoscope system in those
territories as well as in non-exclusive territories as allowed from time to
time. We may terminate our agreement with Econolite if a minimum annual sales
level is not met or if Econolite fails to make royalty payments as required by
the agreement. The agreements term runs to 2031, unless terminated by either
party upon three years notice.
We
recognized royalty income from this agreement of $13.0 million, $12.5 million
and $12.1 million in 2011, 2010 and 2009, respectively.
11.
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Royalty
income from Econolite comprised 43%, 40% and 49% of revenue in the years ended
December 31, 2011, 2010 and 2009, respectively. Accounts receivable from
Econolite were $4.3 million and $2.6 million at December 31, 2011 and 2010,
respectively. Major disruptions in the manufacturing and distribution of our
products by Econolite or the inability of Econolite to make payments on its accounts
receivable with us could have a material adverse effect on our business,
financial condition and results of operations. Econolite was the only customer
that comprised more than 10% of accounts receivable as of December 31, 2011. In
April 2011, the Chief Executive Officer of the parent company of Econolite was
elected to our Board of Directors.
In addition
to Econolite, one international customer comprised more than 10% of accounts
receivable, accounting for 15% of the balance at December 31, 2010.
12. RETIREMENT SAVINGS PLAN
Substantially
all of our employees in the United States are eligible to participate in a
qualified defined contribution 401(k) plan in which participants may elect to
have a specified portion of their salary contributed to the plan and we may
make discretionary contributions to the plan. Flow Traffic and CitySync are
obligated to contribute to certain employee pension plans. We made
contributions totaling $170,000, $131,000 and $98,000 to the plans for 2011, 2010
and 2009, respectively.
13. SHAREHOLDERS EQUITY
Equity Financing
In April
2010, we sold 798,000 shares of our common stock to investors at $12.25 per
share under a registration statement on Form S-3 declared effective by the
Securities and Exchange Commission in December 2009. Net of underwriting fees
and other offering expenses, we received $8.8 million in net proceeds from the
offering.
Stock-Based Compensation
We
compensate officers, directors, and employees with stock-based compensation
under two stock plans approved by the Companys shareholders in 2006 and 2011
and administered under the supervision of our Board of Directors. In February
1995 and April 2005, we adopted the 1995 Long-Term Incentive and Stock Option
Plan (the 1995 Plan) and the 2005 Stock Incentive Plan (the 2005 Plan),
respectively, which provide for the granting of incentive (ISO) and
non-qualified (NQO) stock options, stock appreciation rights, restricted stock
awards and performance awards to our officers, directors, employees,
consultants and independent contractors. The 1995 Plan terminated in February
2005, although the options granted under the 1995 Plan remain outstanding
according to their terms. Options granted under the Plans generally vest over
three to five years and have a contractual term of six to ten years. At
December 31, 2011, a total of 68,500 shares were available for future grant
under the 2005 Plan.
43
Table of Contents
The
following table summarizes stock option activity for 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
WAEP*
|
|
Shares
|
|
WAEP*
|
|
Shares
|
|
WAEP*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at beginning of year
|
|
|
463,433
|
|
$
|
9.11
|
|
|
431,133
|
|
$
|
8.10
|
|
|
373,733
|
|
$
|
10.59
|
|
Granted
|
|
|
156,000
|
|
$
|
10.21
|
|
|
85,000
|
|
$
|
12.33
|
|
|
68,000
|
|
$
|
8.62
|
|
Exercised
|
|
|
(32,100
|
)
|
$
|
3.29
|
|
|
(37,700
|
)
|
$
|
3.31
|
|
|
(600
|
)
|
$
|
1.30
|
|
Forfeited or expired
|
|
|
(52,000
|
)
|
$
|
11.16
|
|
|
(15,000
|
)
|
$
|
6.69
|
|
|
(10,000
|
)
|
$
|
9.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
535,333
|
|
$
|
9.58
|
|
|
463,433
|
|
$
|
9.11
|
|
|
431,133
|
|
$
|
8.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options eligible for exercise at year-end
|
|
|
249,333
|
|
$
|
8.81
|
|
|
213,058
|
|
$
|
7.64
|
|
|
181,383
|
|
$
|
6.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Weighted
Average Exercise Price
|
Options
outstanding at December 31, 2011 had a weighted average remaining contractual
term of 4.1 years and an aggregate intrinsic value of approximately $250,000.
Options eligible for exercise at December 31, 2011 had a weighted average
remaining contractual term of 2.7 years and an aggregate intrinsic value of
$250,000.
The total
intrinsic value of stock options exercised during the fiscal years ended
December 31, 2011, 2010, 2009 was $211,000, $352,000 and $7,000, respectively.
The total fair value of option shares vested during 2011, 2010 and 2009 was
$977,000, $716,000 and $578,000, respectively.
The fair
value of stock options granted under stock-based compensation programs has been
estimated as of the date of each grant using the multiple option form of the
Black-Scholes valuation model, based on the grant price and assumptions
regarding the expected grant life, stock price volatility, dividends, and
risk-free interest rates. Each vesting period of an option award is valued
separately, with this value being recognized evenly over the vesting period.
The weighted average grant date fair value of options to purchase 156,000,
85,000 and 68,000 shares granted for the years ended December 31, 2011, 2010 and
2009 was $522,000, $348,000 and $279,000, respectively. The weighted average
assumptions used to determine the fair value of stock options granted during
those fiscal years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Expected life
(in years)
|
|
|
|
3.1
|
|
|
|
|
2.8
|
|
|
|
|
2.5
|
|
|
Risk-free
interest rate
|
|
|
|
1.47
|
%
|
|
|
|
1.39
|
%
|
|
|
|
2.63
|
%
|
|
Expected
volatility
|
|
|
|
44
|
%
|
|
|
|
78
|
%
|
|
|
|
45
|
%
|
|
Dividend
yield
|
|
|
|
0
|
%
|
|
|
|
0
|
%
|
|
|
|
0
|
%
|
|
The
expected life represents the period that the stock option awards are expected
to be outstanding and was determined based on historical and anticipated future
exercise and expiration patterns. The risk-free interest rate used is based on
the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining
term equal to the expected life of the grant. We estimate stock price
volatility based on a historical weekly price observation. The dividend yield
assumption is based on the annualized current dividend divided by the share
price on the grant date. We have not historically paid any dividends and do not
expect to do so in the foreseeable future.
Other
information pertaining to options for the years ended 2011, 2010 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Total intrinsic value (at exercise) of stock options exercised
|
|
$
|
211,000
|
|
$
|
352,000
|
|
$
|
7,000
|
|
Cash received from the exercise of stock options
|
|
$
|
105,000
|
|
$
|
121,000
|
|
$
|
1,000
|
|
Stock-based compensation expense recognized within general and
administrative expense on the consolidated statements of operations
|
|
$
|
412,000
|
|
$
|
342,000
|
|
$
|
341,000
|
|
Excess income tax benefits from exercise of stock options
|
|
$
|
37,000
|
|
$
|
72,000
|
|
$
|
|
|
At December 31, 2011, there was approximately $891,000 of total stock
option compensation expense related to non-vested awards not yet recognized,
which is expected to be recognized over a weighted-average period of 2.3 years.
44
Table of Contents
14.
RESTRUCTURING
In the
fourth quarter of 2011, we implemented a restructuring plan to improve our
financial performance. Related to these initiatives, we announced in December
2011 that we would transition the manufacture and distribution of RTMS products
to a third party, reduce our workforce and contract certain facilities. As a
result of these actions, we recorded restructuring charges within all
reportable segments that were comprised of termination benefits, facility
closure costs and inventory charges. Approximately $448,000 was recorded
in cost of revenue in the Consolidated Statement of Operations and the
remainder of $287,000 was recorded in operating expenses.
The
following table shows the restructuring activity for 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
Benefits
|
|
Facility Costs and
Contract
Termination
|
|
Inventory
Charges
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Charges
|
|
|
208
|
|
|
101
|
|
|
426
|
|
|
735
|
|
Settlements
|
|
|
(45
|
)
|
|
(36
|
)
|
|
(42
|
)
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2011
|
|
$
|
163
|
|
$
|
65
|
|
$
|
384
|
|
$
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect
to settle the remaining liability in 2012. In addition, we expect to incur
approximately $100,000 to $150,000 of restructuring charges in 2012 related to
additional employee termination benefits and other costs.
15.
SEGMENT INFORMATION
We currently operate in three reportable segments: Autoscope, RTMS and
CitySync. Autoscope 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. RTMS is our radar product line acquired in the EIS
asset purchase in December 2007. CitySync is our ANPR product line acquired in
the CitySync purchase in June 2010. All segment revenues are derived from
external customers.
Our presentation
of segments has changed from the prior year as company-wide organizational
changes completed in 2011 resulted in the chief operating decision-maker
focusing on segment gross profit. The segment information below has been
reclassified to reflect these changes. Operating expenses and total assets are
not allocated to the segments for internal reporting purposes. Due to the
amended manufacturing and distribution agreement with Econolite and the related
changes in how we manage our business, we may reevaluate our segment
definitions in the future.
The
following tables set forth selected unaudited financial information for each of
our reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2011
|
|
|
|
|
|
|
|
Autoscope
|
|
RTMS
|
|
CitySync
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,445
|
|
$
|
7,366
|
|
$
|
5,710
|
|
$
|
30,521
|
|
Gross profit
|
|
|
15,096
|
|
|
3,512
|
|
|
2,696
|
|
|
21,304
|
|
Goodwill impairment
|
|
|
525
|
|
|
7,392
|
|
|
3,768
|
|
|
11,685
|
|
Amortization of intangible
assets
|
|
|
|
|
|
768
|
|
|
882
|
|
|
1,650
|
|
Intangible assets and
goodwill
|
|
|
|
|
|
3,551
|
|
|
7,457
|
|
|
11,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010
|
|
|
|
|
|
|
|
Autoscope
|
|
RTMS
|
|
CitySync
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,659
|
|
$
|
9,819
|
|
$
|
5,203
|
|
$
|
31,681
|
|
Gross profit
|
|
|
15,054
|
|
|
6,104
|
|
|
2,724
|
|
|
23,882
|
|
Amortization of intangible
assets
|
|
|
|
|
|
768
|
|
|
450
|
|
|
1,218
|
|
Intangible assets and
goodwill
|
|
|
525
|
|
|
11,710
|
|
|
11,991
|
|
|
24,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009
|
|
|
|
|
|
|
|
Autoscope
|
|
RTMS
|
|
CitySync
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,240
|
|
$
|
8,353
|
|
$
|
|
|
$
|
24,593
|
|
Gross profit
|
|
|
14,773
|
|
|
5,523
|
|
|
|
|
|
20,296
|
|
Amortization of intangible
assets
|
|
|
|
|
|
768
|
|
|
|
|
|
768
|
|
Intangible assets and
goodwill
|
|
|
525
|
|
|
10,813
|
|
|
|
|
|
11,338
|
|
45
Table of Contents
We derived the following percentages of our net revenues from the
following geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
|
4
|
%
|
|
|
|
11
|
%
|
|
|
|
10
|
%
|
|
Europe
|
|
|
|
31
|
%
|
|
|
|
26
|
%
|
|
|
|
15
|
%
|
|
North
America
|
|
|
|
65
|
%
|
|
|
|
63
|
%
|
|
|
|
75
|
%
|
|
No
countries other than the United States and the United Kingdom had revenue in
excess of 10% of our total revenue during any periods presented. The aggregate
net book value of long-lived assets held outside of the United States, not
including goodwill and intangible assets, was $651,000 and $401,000 at December
31, 2011 and 2010 respectively.
16.
COMMITMENTS AND CONTINGENCIES
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 generally
accepted accounting principles in the United States, we record a liability in
our Consolidated Financial Statements with respect to any of these matters when
it is both probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. With respect to 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.
46
Table of Contents
Report of Independent Registered Public
Accounting Firm
Board of
Directors and Shareholders
Image Sensing Systems, Inc.
We
have audited the accompanying consolidated balance sheets of Image Sensing
Systems, Inc. (a Minnesota Corporation) and subsidiaries (the Company) as of
December 31, 2011 and 2010, and the related consolidated statements of
operations, shareholders equity and comprehensive income (loss), and cash
flows for each of the three years in the period ended December 31, 2011. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Image Sensing
Systems, Inc. and subsidiaries as of December 31, 2011 and 2010, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2011, in conformity with accounting principles
generally accepted in the United States of America.
/s/ GRANT
THORNTON LLP
Minneapolis,
Minnesota
March 19, 2012
47
Table of Contents
|
|
I
tem
9.
|
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
|
None.
|
|
I
tem
9A.
|
Controls and Procedures
|
Evaluation of disclosure controls and
procedures
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange
Act)), that are designed to reasonably ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the
period covered by this Annual Report on Form 10-K, our disclosure controls and
procedures were effective.
Managements report on internal control over
financial reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. Our internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect our
transactions and dispositions of our assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of the
financial statements in accordance with generally accepted accounting
principles in the United States of America and that our receipts and
expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
is subject to lapses in judgment or breakdowns resulting from human failures.
Internal control over financial reporting also can be circumvented by collusion
or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis
by internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, although not
eliminate, this risk.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Further, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2011. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal ControlIntegrated Framework. Based on this
assessment, management has concluded that our internal control over financial
reporting was effective as of December 31, 2011.
Changes in internal control over financial
reporting
During
the most recent fiscal quarter covered by this Annual Report on Form 10-K,
there has been no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
|
|
I
tem
9B.
|
Other Information
|
None.
48
Table of Contents
P
ART III
|
|
I
tem
10.
|
Directors, Executive Officers and
Corporate Governance
|
We
have adopted a Code of Ethics which applies to our principal executive,
accounting and financial officers. The Code of Ethics is published on our
website at www.imagesensing.com. Any amendments to the Code of Ethics and
waivers of the Code of Ethics for our principal executive, accounting and
financial officers will be published on our website.
The
sections entitled Proposal I - Election of Directors, Audit Committee and
Section 16(a) Beneficial Ownership Reporting Compliance in our definitive
proxy statement for our 2012 annual meeting of shareholders are incorporated
into this Annual Report on Form 10-K by reference.
|
|
I
tem
11.
|
Executive Compensation
|
The
sections entitled Executive Compensation and Compensation of Directors in
our definitive proxy statement for the 2012 annual meeting of shareholders are
incorporated into this Annual Report on Form 10-K by reference.
|
|
I
tem
12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
|
Equity Compensation Plan Information
The
following table provides information as of December 31, 2011 about our shares
of common stock subject to outstanding awards or available for future awards
under our equity compensation plans and arrangements.
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
Weighted-average exercise
price of outstanding
options, warrants and
rights
|
|
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column)
(2)
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by shareholders
(1)
|
|
|
535,333
|
|
$
|
9.58
|
|
|
68,500
|
|
(1)
Includes shares underlying stock options granted under the Image Sensing
Systems, Inc. 1995 Long-Term Incentive and Stock Option Plan (1995 Plan) and
non-qualified stock options granted outside the 1995 Plan between 1996 and 2000
to current and former members of the Board of Directors.
(2)
The 68,500 shares available for grant under the 2005 Stock Incentive Plan may
become the subject of future awards in the form of stock options, stock
appreciation rights, restricted stock, performance awards or other stock-based
awards.
The
section entitled Security Ownership of Certain Beneficial Owners and
Management in our definitive proxy statement for the 2012 annual meeting of
shareholders is incorporated into this Annual Report on Form 10-K by reference.
|
|
I
tem
13.
|
Certain Relationships and Related
Transactions, and Director Independence
|
The
section entitled Certain Relationships and Related Transactions in our
definitive proxy statement for the 2012 annual meeting of shareholders is
incorporated into this Annual Report on Form 10-K by reference.
|
|
I
tem
14.
|
Principal Accounting Fees and
Services
|
The
sections entitled Audit Fees, Audit-Related Fees, Tax Fees, All Other
Fees and Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services Provided by Our Independent Registered Public Accounting
Firm in our definitive proxy statement for our 2012 annual meeting of
shareholders are incorporated into this Annual Report on Form 10-K by
reference.
49
Table of Contents
P
ART IV
|
|
I
tem 15.
|
Exhibits and Financial Statement
Schedules
|
(a)
Documents filed as part of this report:
|
|
|
|
1.
|
Financial statements
|
|
|
|
|
|
The following Consolidated
Financial Statements are included in Part II, Item 8. Financial Statements
and Supplementary Data:
|
|
|
|
|
|
Consolidated Balance Sheets
as of December 31, 2011 and 2010
|
|
|
Consolidated Statements of
Operations for the years ended December 31, 2011, 2010 and 2009
|
|
|
Consolidated Statements of
Cash Flow for the years ended December 31, 2011, 2010 and 2009
|
|
|
Consolidated Statements of
Shareholders Equity and Comprehensive Income (Loss) for the years ended
December 31, 2011, 2010 and 2009
|
|
|
Notes to Consolidated
Financial Statements
|
|
|
Report of Independent
Registered Public Accounting Firm
|
|
|
|
|
2.
|
Financial Statement
Schedules:
|
|
|
|
|
|
All financial statement
schedules have been omitted because they are not required.
|
|
|
|
|
3.
|
The following documents are
filed as exhibits to this report:
|
|
|
|
Exhibit No.
|
Description
|
|
|
|
1.1
|
Underwriting Agreement by
and among ISS, Wedbush Securities Inc. and Craig-Hallum Capital Group Inc.
dated April 15, 2010, incorporated by reference to Exhibit 1.1 to ISS
Current Report on Form 8-K dated April 15, 2010.
|
|
|
|
|
2.1*
|
Asset Purchase Agreement
dated December 6, 2007 by and among Image Sensing Systems, Inc. (ISS), EIS
Electronic Integrated Systems Inc., Dan Manor and the other parties named
therein, incorporated by reference to Exhibit 2.1 to ISS Annual Report on
Form 10-K for the year ended December 31, 2007 (2007 Form 10-K). (Schedules
to this Agreement have not been filed in reliance on Item 601(b)(2) of
Regulation S-K of the Securities and Exchange Commission (SEC). ISS will
furnish supplementally copies of such schedules to the SEC upon its request.)
|
|
|
|
|
2.2
|
Share Purchase Agreement
dated June 21, 2010 by and among ISS, Image Sensing Systems Europe Limited,
CitySync Limited and three shareholders of CitySync Limited, incorporated by
reference to Exhibit 2.1 to ISS Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010.
|
|
|
|
|
3(i).1
|
Restated Articles of
Incorporation of ISS, incorporated by reference to Exhibit 3.1 to ISS
Registration Statement on Form SB-2 (Registration No. 33-90298C) filed on
March 15, 1995, as amended (Registration Statement).
|
|
|
|
|
3(i).2
|
Articles of Amendment to
Articles of Incorporation of ISS, incorporated by reference to Exhibit 3.2 to
ISS Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001.
|
|
|
|
|
3(ii)
|
Bylaws of ISS, incorporated
by reference to Exhibit 3(ii) to ISS Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011.
|
|
|
|
|
4.1
|
Specimen form of ISS
common stock certificate, incorporated by reference to Exhibit 4.1 to ISS
Registration Statement.
|
|
|
|
|
10.1
|
Form of Distributor
Agreement, incorporated by reference to Exhibit 10.1 to ISS Registration
Statement.
|
50
Table of Contents
|
|
|
|
10.2**
|
1995 Long-Term Incentive
and Stock Option Plan, amended and restated through May 17, 2001,
incorporated by reference to Exhibit 10.10 to ISS Annual Report on Form
10-KSB for the year ended December 31, 2001.
|
|
|
|
|
10.3**
|
Employment Agreement
between ISS and Kenneth R. Aubrey, dated December 12, 2006, effective on or
about January 15, 2007 (in capacity as President) and effective on or about
June 1, 2007 (in capacity of President and Chief Executive Officer),
incorporated by reference to Exhibit 10.1 to ISS Current Report on Form 8-K
dated December 14, 2006.
|
|
|
|
|
10.4**
|
Employment Agreement
between ISS and Gregory R. L. Smith, dated December 8, 2006, incorporated by
reference to Exhibit 10.1 to ISS Current Report on Form 8-K dated December
8, 2006.
|
|
|
|
|
10.5
|
Amendment VII to Office
Lease Agreement dated April 26, 2007 by and between ISS and Spruce Tree
Centre L.L.P., incorporated by reference to Exhibit 10.11 to ISS Annual
Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K).
|
|
|
|
|
10.6
|
Modification to
Manufacturing, Distributing and Technology License Agreement dated September
1, 2000 by and between ISS and Econolite Control Products, Inc. (Econolite),
incorporated by reference to Exhibit 10.12 to ISS 2007 Form 10-K.
|
|
|
|
|
10.7**
|
Image Sensing Systems, Inc.
2005 Stock Incentive Plan, incorporated by reference to Appendix A to ISS
proxy statement filed with the SEC on April 19, 2005.
|
|
|
|
|
10.8
|
Manufacturing, Distributing
and Technology License Agreement dated June 11, 1991 by and between ISS and
Econolite Control Products, Inc. (Econolite), incorporated by reference to
Exhibit 10.1 to the Registration Statement.
|
|
|
|
|
10.09
|
Extension and Second
Modification to License Agreement dated July 13, 2001 by and between ISS and
Econolite, incorporated by reference to Exhibit 10.12 to ISS Annual Report
on Form 10-KSB for the year ended December 31, 2001.
|
|
|
|
|
10.10
|
Office Lease Agreement
dated November 24, 1998 by and between ISS and Spruce Tree Centre L.L.P.,
incorporated by reference to Exhibit 10.18 to ISS Annual Report on Form
10-KSB for the year ended December 31, 1998.
|
|
|
|
|
10.11
|
Production Agreement dated
February 14, 2002 by and among ISS, Wireless Technology, Inc. and Econolite,
incorporated by reference to Exhibit 10.20 to ISS Annual Report on Form
10-KSB for the year ended December 31, 2001.
|
|
|
|
|
10.12
|
Extension and Third
Modification to Manufacturing Distributing and Technology License Agreement
dated July 3, 2008 by and between ISS and Econolite, incorporated by
reference to Exhibit 10.1 to ISS Current Report on Form 8-K dated July 3,
2008.
|
|
|
|
|
10.13
|
Fourth Modification to
Manufacturing, Distributing and Technology License Agreement dated as of
December 15, 2011 by and between ISS and Econolite, incorporated by reference
to Exhibit 10.1 to ISS Current Report on Form 8-K dated December 15, 2011.
|
|
|
|
|
10.14
|
Loan Agreement dated May 1,
2008 (2008 Loan Agreement) by and between ISS and Associated Bank, National
Association (Associated Bank), incorporated by reference to Exhibit 10.19 to
ISS Registration Statement on Form S-1 filed on May 12, 2008 (Form S-1).
|
|
|
|
|
10.15
|
Security Agreement dated May
1, 2008 by and between ISS and Associated Bank, incorporated by reference to
Exhibit 10.20 to ISS Form S-1.
|
|
|
|
|
10.16
|
Promissory Note (Line of
Credit) dated May 1, 2008 in the original principal amount of $5,000,000
issued by ISS to Associated Bank, incorporated by reference to Exhibit 10.21
to ISS Form S-1.
|
|
|
|
|
10.17
|
Promissory Note (Loan)
dated May 1, 2008 in the original principal amount of $3,000,000 issued by
ISS to Associated Bank, incorporated by reference to Exhibit 10.22 to ISS
Form S-1.
|
51
Table of Contents
|
|
|
|
10.18
|
Modification Agreement
dated December 28, 2009 by and between ISS and Associated Bank under which
ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by
reference to Exhibit 10.18 to ISS Annual Report on Form 10-K for the year
ended December 31, 2009 (2009 Form 10-K).
|
|
|
|
|
10.19
|
Promissory Note (Loan)
dated December 28, 2009 in the original principal amount of $4,000,000 issued
by ISS to Associated Bank, incorporated by reference to Exhibit 10.19 to the
2009 Form 10-K.
|
|
|
|
|
10.20
|
Lease dated February 1,
2010 between CitySync Limited and Nortrust Nominees Limited, incorporated by
reference to Exhibit 10.1 to ISS Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010.
|
|
|
|
|
10.21
|
Third Modification Agreement
dated December 28, 2010 by and between ISS and Associated Bank under which
ISS and Associated Bank amended the 2008 Loan Agreement, incorporated by
reference to Exhibit 10.21 to ISS Annual Report on Form 10-K for the year
ended December 31, 2010.
|
|
|
|
|
10.22
|
Fourth Modification
Agreement dated December 22, 2011 by and between ISS and Associated Bank
under which ISS and Associated Bank amended the 2008 Loan Agreement,
incorporated by reference to Exhibit 10.1 to ISS Current Report on Form 8-K
dated December 22, 2011.
|
|
|
|
|
21
|
List of Subsidiaries of ISS
(filed herewith).
|
|
|
|
|
23.1
|
Consent of Independent
Registered Public Accounting Firm (filed herewith).
|
|
|
|
|
24
|
Power of Attorney (included
on signature page).
|
|
|
|
|
31.1
|
Certification of Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
|
|
31.2
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
|
|
|
|
|
32.1
|
Certification of Chief Executive
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
|
|
32.2
|
Certification of Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
|
|
|
|
|
99.1
|
Extension of Modification
to Manufacturing, Distributing and Technology License Agreement dated May 31,
2002 by and between ISS and Econolite, incorporated by reference to Exhibit
99.2 to ISS 2007 Form 10-K.
|
|
|
|
|
99.2
|
Letter agreement dated June
19, 1997 by and between ISS and Econolite, incorporated by reference to
Exhibit 99.3 to ISS 2007 Form 10-K.
|
|
|
|
|
99.3
|
License and Distribution
Agreement dated January 2, 2011 by and among ISS, Econolite and Econolite
Canada Inc. (filed herewith).
|
|
|
|
|
|
|
*
|
Portions of this exhibit
are treated as confidential pursuant to a request for confidential treatment
filed by ISS with the SEC.
|
|
|
**
|
Management contract or
compensatory plan or arrangement.
|
|
|
|
Copies of all exhibits not
attached will be furnished without charge upon written request to the Company
at the address set forth on the inside back cover page of this Annual Report
on Form 10-K.
|
52
Table of Contents
S
ignatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Image Sensing Systems, Inc.
|
|
|
/s/ Kenneth R. Aubrey
|
|
Date: March
19, 2012
|
|
|
|
Kenneth R. Aubrey
|
|
|
President and Chief
Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
Each
person whose signature to this Annual Report on Form 10-K appears below hereby
constitutes and appoints Kenneth R. Aubrey and Gregory R. L. Smith, and each of
them, as his or her true and lawful attorney-in-fact and agent, with full power
of substitution, to sign on his or her behalf individually and in the capacity
stated below and to perform any acts necessary to be done in order to file all
amendments to this Annual Report on Form 10-K, and any and all instruments or
documents filed as part of or in connection with this Annual Report on Form
10-K or any amendments hereto, and each of the undersigned does hereby ratify
and confirm all that said attorney-in-fact and agent, or his substitutes, shall
do or cause to be done by virtue hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
|
|
|
/s/ Kenneth R. Aubrey
|
|
Date: March
19, 2012
|
|
|
|
Kenneth R. Aubrey
|
|
|
President and Chief
Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
/s/ Gregory R. L. Smith
|
|
Date: March
19, 2012
|
|
|
|
Gregory R. L. Smith
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and
Principal Accounting Officer)
|
|
|
|
|
|
/s/ James W. Bracke
|
|
Date: March
19, 2012
|
|
|
|
James W. Bracke
|
|
|
Chairman of the Board of
Directors
|
|
|
|
|
|
/s/ Michael C. Doyle
|
|
Date: March
19, 2012
|
|
|
|
Michael C. Doyle
|
|
|
Director
|
|
|
|
|
|
/s/ Michael G. Eleftheriou
|
|
Date: March
19, 2012
|
|
|
|
Michael G. Eleftheriou
|
|
|
Director
|
|
|
|
|
|
/s/ Panos G. Michalopoulos
|
|
Date: March
19, 2012
|
|
|
|
Panos G. Michalopoulos
|
|
|
Director
|
|
|
|
|
|
/s/ James Murdakes
|
|
Date: March
19, 2012
|
|
|
|
James Murdakes
|
|
|
Director
|
|
|
|
|
|
/s/ Kris Tufto
|
|
Date: March
19, 2012
|
|
|
|
Kris Tufto
|
|
|
Director
|
|
|
|
|
|
/s/ Sven A. Wehrwein
|
|
Date: March
19, 2012
|
|
|
|
Sven A. Wehrwein
Director
|
|
|
53
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