Design of the Compensation Program for the Named Executive Officers

The Committee and the Board have designed the compensation program for the Named Executive Officers to achieve the objectives described above, to ensure market competitiveness and to assure satisfaction of our objective of providing total executive pay that achieves an appropriate balance of variable pay ‑ for ‑ performance and at ‑ risk compensation . The compensation program will reward the Named Executive Officer s based upon corporate performance as well as the performance of th e Named Executive Officer s .

The compensation program for the Named Executive Officers includes the following elements: base salary, annual cash incentives, restricted stock grants and other benefits . We characterize the annual cash incentives and the restricted stock grants as performance ‑ based compensation . Our executive compensation policy for the Named Executive Officers provides that a significant portion of the total compensation payable to them will be in the form of performance ‑ based compensation . We do not have a target for each element of performance ‑ based compensation relative to total compensation . The elements of our compensati on program are described below.

Base Salaries .  Base salary is an important element of executive compensation because it provides executives with a fixed level of regular periodic income .  In determining base salaries for our Named Executive Officers, the Committee and the Board consider historic individual and corporate performance, level of responsibility and market and competitive data .  The Committee establishes base salaries for the Named Executive Officers at a level such that a significant portion of the total compensation that they can earn is performance ‑ based cash incentives and equity awards.

Annual Cash Incentive .  As part of our executive compensation program, the Named Executive Officers may receive annual cash incentive awards pursuant to our annual cash bonus program .  Targeted bonus amounts are designed to provide competitive incentive pay and reflect our pay ‑ for ‑ performance philosophy .  The Committee historically has reviewed and determined target bonus amounts annually.

Performance objectives intended to focus attention on achieving key goals are established at the beginning of each fiscal year.  The primary quantitative objective is achievement of revenue and net income targets set forth in our annual operating plan established by the Board of Directors .  Specifically, these include metrics such as revenue and net profit (after tax), international operations revenue and operating profit .  Additionally, the performance of the Named Executive Officers is judged on success in achieving certain strategic and operational initiatives .  In evaluating their performance, the Committee may consider other factors in awarding bonuses and may, in its discretion, award as a discretionary bonus a portion of any bonus amount that is not earned based upon achievement of the financial and other metrics described above .  The Committee reviews the individual incentive components of the Named Executive Officers ’ employment agreements, described below, and evaluates the objective portions relative to the Company’s performance .  The Committee also evaluates subjective, individual performance goals in determining the total amount of bonus to be awarded and has the ability to exercise discretion with respect to this portion . For the Named Executive Officers, up to one ‑ third of the bonus calculation may be associated with strategic and operational initiatives and is considered to be discretionary.

Grants of Stock Options and Stock Awards .   Our executive officers also may receive equity ‑ based incentive compensation under stock plans approved by our shareholders and administered under the supervision of our Board of Directors. Grants under the se plans are designed to align a significant portion of the executive compensation package with the long ‑ term interests of our shareholders . S tock options are generally granted with an exercise price equal to the closing sale price of the stock on the trading day before the date of grant, and they provide no cash benefit if the price of the stock does not exceed the grant price during the option’s term .  Therefore, for any value to be derived from an option grant, our performance needs to result in increased stock price performance and shareholder value over a multi ‑ year period. Individual equity awards historically have been recommended by the Committee based on an officer’s current performance, potential for future contribution and responsibility and market competitiveness. 

For 2017, the Committee recommended and the Board approved the grant of a stock award to the Named Executive Officers under the terms of the Company’s 2014 Stock Option and Incentive Plan.   The awards will vest as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if the officer is then an employee of the Company.

In 2016, and in connection with the appointment of Chad A. Stelzig as Interim President and Interim Chief Executive Officer, on June 27, 2016, the Committee recommended and the Board approved the grant of 10,000 shares of restricted stock to him under the terms of the Company’s 2014 Stock Option and Incentive Plan, which vest ed on December 27, 2016.

Retirement Plans .  We generally expect executives to plan for and fund their own retirement .  We maintain a 401(k) plan that permits eligible employees, including our Named Executive Officers, to defer a limited portion of salary and bonus into any of several investment alternatives .  We make matching contributions equal to 50% of the first 6% of compensation deferred by employees subject to a maximum annual match of $5,000 and maximums established under the Internal Revenue Code of 1986 (the “Code”).  We may also make discretionary contributions to the 401(k) plan .  Payments made to the Named Executive Officers for matching contributions are included in the Summary Compensation Table below .  We do not maintain defined benefit retirement or senior executive retirement plans, or provide post ‑ retirement medical benefits, for our Named Executive Officers.

Other Benefits and Perquisites .  Our executive compensation program also includes other benefits and perquisites .  The Named Executive Officers participate in Company ‑ sponsored group benefit plans such as health, life and disability insurance plans available to all employees .  In addition, Named Executive Officers may upon joining the Company receive assistance in relocating in the discretion of our Board of Directors.  For more detailed information regarding benefits and perquisites provided to our Named Executive Officers, see the Summary Compensation Table included elsewhere in this proxy statement.

2018 Compensation Program .  In March 2018, the Compensation Committee recommended and the Board of Directors approved a 2018 compensation plan for Chad A. Stelzig, the Company’s President and Chief Executive Officer, and Todd C. Slawson, the Company’s Interim Chief Financial Officer.  Under the compensation plan, Mr. Stelzig will receive an annual base salary of $237,500 , and Mr. Slawson will receive an annual base salary of $140,000.  In addition, the compensation plan includes a target cash bonus for Mr. Stelzig and Mr. Slawson if the Company achieves performance criteria for 2018 set by the Board.  Furthermore, Mr. Stelzig and Mr. Slawson each was granted an award of restricted common stock, under the Company’s 2014 Stock Option and Incentive Plan, with the grant date fair value equal to $64,000 for Mr. Stelzig and $48,000 for Mr. Slawson determined pursuant to Financial Accounting Standards Board Accounting Standard Codification Topic 718, Compensation - Stock Compensation.   The awards will vest as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if the officer is then an employee of the Company.   

2017 Compensation Program.  In March 2017, the Compensation Committee recommended and the Board of Directors approved a 2017 compensation plan for Chad A. Stelzig, the Company’s President and Chief Executive Officer, and Richard A. Ehrich, the Company’s former Chief Financial Officer as of his resignation on March 13, 2018.  Under the compensation plans, Mr. Stelzig received an annual base salary of $225,000 and Mr. Ehrich received an annual base salary of $180,000, which were the same as their annual base salaries for 2016 paid to them in their capacities as executive officers of the Company.  In addition, the compensation plan included target cash bonuses for Mr. Stelzig and Mr. Ehrich if the Company achieved performance criteria for 2017 set by the Board.  Additionally, on March 8, 2017, Mr. Stelzig and Mr. Ehrich each received an award of 10,000 shares of restricted common stock under the Company’s 2014 Stock Option and Incentive Plan.  The awards vest as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if the officer is then an employee of the Company.  Furthermore, on March 8, 2017, the Company’s Board of Directors approved the payment of a $25,000 cash bonus to Mr. Stelzig in recognition of his performance achievements to date.

Named Executive Officers’ Role in Compensation Decisions

The Committee recommends to the Board of Directors the actual and targeted compensation of the Company’s Named Executive Officers. The Board, with any non ‑ independent members abstaining, approves the compensation of the Named Executive Officers . (During 2016 until his resignation on June 24, 2016, Mr. Dale E. Parker was the only non-independent member of the Board and, during 2017, all members of the Board were independent.)  The Committee determines its recommendations regarding the compensation plan for the Named Executive Officers based on major goals and objectives established by the Board of Directors . When applicable, t he Committee also receives input from our Chief Executive Officer regarding another Named Executive Officer’s leadership capabilities, past performance and potential for future contributions when making its recommendations on actual and targeted compensation amounts for Named Executive Officers.

Other Considerations

Although the Committee and the Board consider tax and accounting issues in connection with their compensation decisions, those have not become material factors in their compensation decisions to date.  

Compensation Committee Report on Executive Compensation

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings by reference, including this proxy statement, in whole or in part, the following report of the Compensation Committee shall not be deemed to be incorporated by reference into any such filings and shall not otherwise be deemed filed under such acts.

We have reviewed and discussed the foregoing Compensation Discussion with management .  Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion be included in this proxy statement and in our Annual Report on Form 10 ‑ K for the year ended December 31, 201 7 .

Summary Compensation Table ‑ 201 7 and 201 6

The following table sets forth information about compensation awarded to, earned by or paid to our Named Executive Officers for 201 7 and 201 6 .

(1)     Consists of the grant date fair value of stock option awards during each year determined pursuant to Accounting Standards Codification (“ASC”) Topic 718. Refer to “Note 12 – Stock-Based Compensation” in our Annual Report on Form 10-K for the year ended December 31, 2017 and “Note 12 – Shareholders’ Equity” in our Annual Report on Form 10‑K for the year ended December 31, 2016 for a discussion of the assumptions used in calculating the grant date fair value. There can be no assurance that the amounts reflected in the table will ever be realized.

(2)     For Mr. Stelzig, the $5,000 in All Other Compensation for 2017 consists of the Company match paid into his 401(k) plan account in 2017.

(3)     For Mr. Stelzig, the $5,000 in All Other Compensation for 2016 consists of the Company match paid into his 401(k) plan account in 2016.

(4)     For Mr. Ehrich, the $5,000 in All Other Compensation for 2017 consists of the Company match paid into his 401(k) plan account in 2017.

(5)     For Mr. Ehrich, the $5,003 in All Other Compensation for 2016 consists of the Company match paid into his 401(k) plan account in 2016.

(6)     For Mr. Parker, the $5,000 in All Other Compensation for 2016 consists of the Company match paid into his 401(k) plan account in 2016.

Grants of Equity and Non-Equity Awards ‑ 2017

In the following table, we have provided information regarding equity and non-equity incentive plan awards under our 2014 Stock Option and Incentive Plan made to Mr . Stelzig and Mr. Ehrich for 201 7 .  

(1)    Represents the range of awards under the incentive component for 201 7 under the incentive cash bonus plans for Mr. Stelzig and Mr. Ehrich.  The amounts in these columns reflect the minimum payment level if an award is achieved, the target payment level and the maximum payment level under each plan if superior performance is attained.  Amounts actually paid for 201 7 are set forth in the “Non ‑ Equity Incentive Plan Compensation” column of the “Summary Compensation Table ‑ 201 7 and 201 6 ” above.

(2)    Represents the grant date fair value determined pursuant to ASC Topic 718.  Generally, the grant date fair value is the amount expensed in our financial statements over the vesting schedule of the stock options or restricted stock awards.

(3)    Consists of a restricted stock award granted under the 2014 Stock Option and Incentive Plan.  The restricted stock award will vest as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if the officer is then an employee of the Company.

(4)    Consists of a restricted stock award granted under the 2014 Stock Option and Incentive Plan.  The restricted stock award will vest as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if the officer is then an employee of the Company.

Outstanding Equity Awards at Fiscal Year ‑ End ‑ 20 17

In April 2005, we adopted the 2005 Stock Incentive Plan, and in May 2014, we adopted the 2014 Stock Option and Incentive Plan (collectively, the “Plans”), which provide for the granting of incentive stock options, non ‑ qualified stock options, stock appreciation rights, restricted stock awards and performance awards to our officers, directors, employees, consultants and independent contractors.  Options granted to employees under the Plans generally vest over three to five years based on service and have a contractual term of nine to 10 years. As of December 31, 201 7 , there were options outstanding under the Plans to purchase a total of 85,750 shares with a weighted average exercise price per share of $ 5.78 .

In the following table, we have provided information regarding outstanding stock option awards held at December   31, 201 7 by the Named Executive Officers.

_________________

Option Exercises and Stock Vested – 201 7

There were no stock options exercised by the Named Executive Officers in 2017.  Additionally, no shares vested in 2017 that related to stock awarded to Named Executive Officers.

Stock Options

Under the terms of our 2005 Stock Incentive Plan and 2014 Stock Option and Incentive Plan, if a participant’s employment with us terminates by reason of the participant’s death or disability, then, to the extent a stock option held by the participant is vested as of the date of death or disability, the stock option may be exercised by the participant, the legal representative of the participant’s estate, the legatee of the participant under the will of the participant, or the distributee of the participant’s estate, whichever is applicable, for a period of one year from the date of death or disability or until the expiration of the stated term of the stock option, whichever period is shorter.  Any options that are not vested as of the date of death or termination due to disability will immediately lapse and be of no further force or effect.

If a participant’s employment with us terminates for any reason other than death or disability or other than for cause, then, to the extent any stock option held by the participant is vested as of the date of termination, the stock option may be exercised for a period of 90 days from the date of termination or until the expiration of the stated term of the stock option, whichever period is shorter.  Any options that are not vested as of the date of termination will immediately lapse and be of no further force or effect.  Upon the termination of the participant’s employment by us for cause, any and all unexercised stock options granted to the participant will immediately lapse and be of no further force or effect.

In the event of a “change in control” of our Company, as that term is defined in the respective Plans, all stock options held by executive officers then outstanding and not fully vested will become fully vested and exercisable in accordance with their terms. 

Employment Agreements

Chad A. Stelzig

On June 27, 2016, we entered into an Employment Agreement with Chad A. Stelzig (the “Agreement”) providing that Mr. Stelzig will serve as our Interim President and Interim Chief Executive Officer.  The Agreement provides for a base salary for the year ended December 31, 2016 of $225,000.  The Agreement provides that Mr. Stelzig was eligible to receive a bonus to be determined by the Company’s Board of Directors and that he is entitled to insurance and other benefits in accordance with the Company’s standard executive employee programs.

The Agreement provides that if Mr. Stelzig’s termination of employment is voluntary on his part and not for “Good Reason” as defined in the Agreement, the Company must pay to Mr. Stelzig all earned and unpaid amounts due to him for salary through the termination date, and Mr. Stelzig will have 90 days after the date of the termination of his employment to exercise all options owned by Mr. Stelzig that are exercisable as of such termination date.  Any other options, restricted stock and restricted stock units owned by Mr. Stelzig shall automatically terminate.  The Agreement also provides that if the termination of employment is “With Cause” as defined in the Agreement, Mr. Stelzig will not be entitled to any severance, and all of the options, restricted stock and restricted stock units then owned by Mr. Stelzig shall automatically terminate.  It also provides that if the termination is “Without Cause” as defined in the Agreement, Mr. Stelzig will be entitled to six months of salary continuation, without eligibility for bonus, and he will have 90 days to exercise all o ptions that he owns that are exercisable as of such termination date. Any other options and any unvested restricted stock or restricted stock units for the Company’s common stock owned by him will terminate.  

On March 15, 2017, the Company approved a compensation plan for the year ending December 31, 2017 for Mr. Stelzig.  Under the compensation plan, Mr. Stelzig received a base salary of $225,000 plus a restricted stock award of 10,000 shares of common stock under the 2014 Stock Option and Incentive Plan.  The restricted award vests as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if Mr. Stelzig is then an employee of the Company.  In addition, for 2017, Mr. Stelzig received a Board approved cash bonus of $25,000 in recognition of performance achievements.  Furthermore, Mr. Stelzig was eligible to receive a cash bonus for 2017 to be determined by the Company’s Board of Directors.

Richard A. Ehrich

On September 2, 2016, we entered into a Benefit and Compensation Agreement with Richard A. Ehrich (the “2016 Employment Agreement”), effective on August 25, 2016, providing that as our Chief Financial Officer, Mr. Ehrich would receive a base salary for the year ending December 31, 2016 of $180,000.

The 2016 Employment Agreement provided that if Mr. Ehrich’s termination was “With Cause” as defined in the 2016 Employment Agreement, Mr. Ehrich would not be entitled to any severance.  It also provides that if the termination is “Without Cause” as defined in the Agreement, Mr. Ehrich would be entitled to six months of salary continuation, without eligibility for bonus.  If Mr. Ehrich voluntarily terminated his employment with the Company, the Company was required pay to him all earned and unpaid amounts due to him for salary thought the termination date.

On March 15, 2017, the Company approved a compensation plan for the year ending December 31, 2017 for Mr. Ehrich.  Under the compensation plan, Mr. Ehrich receive d a base salary of $180,000 plus a restricted stock award of 10,000 shares of common stock under the 201 4 Stock Option and Incentive Plan.  The restricted award was to vest  as to one-third of the shares subject to the awards on each of the first, second and third anniversary dates of the date of grant if Mr. Ehrich  was then an employee of the Company.  In addition, for 2017, Mr. Ehrich was eligible to receive a cash bonus to be determined by the Company’s Board of Directors.

Mr. Ehrich voluntarily resigned withou t “Good Reason” on March 13, 2018 as an officer, director and employee of the Company, and as a result he forfeited any unvested restricted stock awards.  In connection with his resignation, effective on March 13, 2018, Mr. Ehrich and the Company entered into a severance and Release Agreement (the "Release Agreement").  The Release Agreement provides that the Company will pay to Mr. Ehrich an amount equal to three months of base compensation over a three-month period on the conditions that Mr. Ehrich assists ISS, during such three-month period, in any matter requested by ISS.    Additionally, the Release Agreement provides that Mr. Ehrich is entitled to all amounts due related to his 2017 executive compensation plan, which is equal to $54,000, and that Mr. Ehrich will receive an amount equal to the closing price, as quoted on the Nasdaq Capital Market, of 3,333 shares of ISS common stock subject to his previously granted restricted stock award within 10 days of the expiration of the rescission periods described below.   Furthermore, the Release Agreement provides that Mr. Ehrich is to receive a continuation of all benefits over this three-month period.   The Release Agreement contains releases by Mr. Ehrich of claims he may have against the Company.   Mr. Ehrich may rescind the Release Agreement with respect to potential age-related claims within the seven-day period after March 13, 2018 and with respect to potential claims under the Minnesota Human Rights Act with the 15-day period after March 13, 2018.   If Mr. Ehrich rescinds the Release Agreement, he gives up any right to the aforementioned compensation.

Dale E. Parker

On April 22, 2014, we entered into an Amended and Restated Employment Agreement with Dale E. Parker (the “2014 Parker Employment Agreement”) providing that Mr. Parker would serve as our Chief Operating Officer, Chief Financial Officer and Treasurer.  The 2014 Parker Employment Agreement superseded the Employment Agreement between the Company and Mr. Parker dated as of June 25, 2013 (the “Original Parker Employment Agreement”).  The Original Parker Employment Agreement and the 2014 Parker Employment Agreement both provided that Mr. Parker was eligible to receive a bonus to be determined by the Company’s Board of Directors and that he was entitled to insurance and other benefits in accordance with the Company’s standard employee programs. 

The 2014 Parker Employment Agreement amended the Original Parker Employment Agreement to add certain “change in control” provisions.  The 2014 Parker Employment Agreement provide d that if Mr. Parker’s termination of employment was voluntary on his part and not for “Good Reason” as defined in the 2014 Parker Employment Agreement, the Company must pay to Mr. Parker all earned and unpaid amounts due to him for salary through the termination date and a pro rata portion of any incentive pay to which he would have been entitled had he remained in the Company’s employ, and Mr. Parker would have 90 days to exercise all options to purchase shares of the Company’s common stock that he own ed and were exercisable at the termination date.  Any other options and any unvested restricted stock or restricted stock units for the Company’s common stock that he own ed would terminate.  The 2014 Parker Employment Agreement also provide d that if the termination of employment was “With Cause” as defined in the 2014 Parker Employment Agreement, Mr. Parker would not be entitled to any severance, and any and all options, restricted stock and restricted stock units for the Company’s common stock that he owns would terminate. It also provide d that if the termination was “Without Cause” as defined in the 2014 Parker Employment Agreement, Mr. Parker would be entitled to 12 months of salary continuation, without eligibility for bonus, and he would have 90 days to exercise all options to purchase shares of the Company’s common stock that he own ed and that were exercisable at the termination date. Any other options and any unvested restricted stock or restricted stock units for the Company’s common stock owned by him would terminate.  Upon a “Change in Control Termination” as defined in the 2014 Parker Employment Agreement, the Company was to pay to Mr. Parker a severance payment equal to 1.5 times the amount of his annual salary and the total annual incentive pay to which he was entitled; any and all outstanding unvested options to purchase the Company’s common stock owned by him with an exercise price that was less than “Fair Market Value” of such common stock would vest and he would have 90 days to exercise all options; the risks of forfeiture on any restricted stock or restricted stock units owned by him would lapse; and for a period beginning on the date of the Change in Control Termination and ending on the earlier of the date that Mr. Parker obtain ed new employment or two years after the date of the Change in Control Termination, the Company would provide a continuation of the group medical insurance coverage previously provided to Mr. Parker by the Company and pay that portion of the premium for group medical insurance that it paid during his employment.  Under the 2014 Parker Employment Agreement, the Company was obligated to make the payments and provide the benefits to Mr. Parker if his employment was terminated Without Cause or upon a Change in Control Termination only if Mr. Parker ha d signed a release agreement, the form of which was attached to the 2014 Parker Employment Agreement.  The term “Change in Control Termination” as defined in the 2014 Parker Employment Agreement mean t that, upon or within 12 months after a “Change in Control,” Mr. Parker’s employment was terminated for any reason other than “With Cause” or Mr. Parker terminate d his employment for “Good Reason.”

In March 2016, the Company approved a compensation plan for the year ending December 31, 2016 for Mr. Parker.  Under the compensation plan, Mr. Parker received a base salary of $230,000 and was eligible to receive a restricted stock award with a grant date fair value equal to $275,000 if the Company’s common stock met certain performance metrics from the date of grant through December 31, 2016.  The shares of the common stock subject to the award were to vest as to 50% of the shares on the first anniversary date of the achievement date and 50% of such shares on the second anniversary date of the achievement date. The award was to automatically terminate and be forfeited if Mr. Parker’s employment with the Company was terminated for any reason during the performance period or if Mr. Parker’s employment with the Company was terminated for any reason after the attainment of the performance goal and before the award vest ed.  In addition, for 2016, Mr. Parker was to receive a total cash payment of $45,000 to be paid in 12 equal monthly installments through December 31, 2016. 

Mr. Parker voluntarily resigned without “Good Reason” on June 24, 2016 as an officer, director and employee of the Company, and he forfeited his restricted stock award and the remaining portions of his $45,000 cash payments.

Potential Payments upon Termination of Employment

The table below reflects the amount of compensation to Chad A. Stelzig and Richard A. Ehrich as our Named Executive Officer s as of December 31, 201 7 upon termination of employment under the specified circumstances.  The amounts shown assume that the termination was effective as of December 31, 201 7 , include amounts earned through that time and are estimates of the amounts which would be paid out to each of our Named Executive Officer s upon the termination of their employment.  The actual amounts to be paid out can be determined only at the time of actual separation from our Company. 

Other Post ‑ Employment Payments

We generally do not provide pension arrangements or post ‑ retirement health coverage for executive officers or other employees. We do not provide any nonqualified defined contribution or other deferred compensation plans.

RELATED PERSON TRANSACTIONS AND POLICY

Related Person Transactions

During the year ended December 31, 2017, the Company had no transactions with related persons as described in Item 404 of the SEC’s Regulation S-K.

Related Person Transaction Policy

The Company’s Code of Ethics and Business Conduct (the “Ethics Code”) requires that the Company’s Board or Audit Committee approve activities that could involve a conflict of interest if undertaken by an “associate,” which consists of the Company’s directors, officers, employees and consultants.  These transactions include owning a substantial interest in any competing business or in any outside distributor or customer that does or seeks to do business with the Company; providing services to any outside concern that does business with the Company or competes with the Company; representing the Company in any business transaction with a person or organization in which associates or their immediate family have a personal interest or may derive a benefit; or taking advantage of any business opportunity which may belong to the Company.  In considering these transactions under the Ethics Code, the Board or the Audit Committee would consider and evaluate information regarding the transaction, including the dollar amounts involved in the transaction. 

AUDIT COMMITTEE REPORT

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings by reference, including this proxy statement, in whole or in part, the following report of the Audit Committee shall not be deemed to be incorporated by reference into any such filings and shall not otherwise be deemed filed under such acts.

Audit Committee Report

The Audit Committee of the Board of Directors is currently composed of the following non ‑ employee directors: James W. Bracke (Chair), Andrew T. Berger and Paul F. Lidsky.  Mr. Bracke was appointed Audit Committee Chair on November 1, 2016. Prior to his appointment, Ms. Melissa Fisher was Chair of the Audit Committee from March 27. 2015 until she resigned from the Board on November 1, 2016.  The members of the Audit Committee in 201 7 were and now are independent for purposes of the listing standards of The Nasdaq Capital Market and the rules of the Securities and Exchange Commission.  For 201 7 , our Board of Directors identified members Lidsky, Bracke and Berger as audit committee financial experts under the rules of the Securities and Exchange Commission. The Audit Committee operates under a written charter adopted by the Board of Directors.

The Audit Committee oversees our financial reporting process on behalf of the Board of Directors and selects our independent registered public accounting firm.  Management has the primary responsibility for the financial reporting process, including our system of internal controls. Our independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with auditing standards generally accepted in the United States and issuing a report on our financial statements.  The Audit Committee discusses with our independent registered public accounting firm the overall scope and plans for its audits and meets with our independent registered public accounting firm, with and without management present, to discuss the results of its examinations, its evaluations of our internal controls, and the overall quality of our financial reporting.

In fulfilling our oversight responsibilities, the Audit Committee has met and held discussions with management and our independent registered public accounting firm. The Audit Committee reviewed and discussed the financial statements with management and our independent registered public accounting firm, including a discussion of the application of accounting principles generally accepted in the United States, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Audit Committee also has discussed with our independent registered public accounting firm the firm’s independence from management, including whether the provision of non ‑ audit services is compatible with maintaining the firm’s independence, and matters required to be discussed by the Auditing Standards No. 1301 , Communications with Audit Committee , as adopted by the Public Company Accounting Oversight Board. The Audit Committee received the written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with the independent accountant the independent account’s independence.

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited financial statements be included in Image Sensing Systems, Inc.’s Annual Report on Form 10 ‑ K for the fiscal year ended December 31, 201 7 filed with the Securities and Exchange Commission.  The Committee has selected Boulay P LLP as our independent registered public accounting firm for the fiscal year ending December 31, 201 8 .

CHANGE IN AND PAYMENT OF FEES TO OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM S

Change in Registered Public Accounting Firms

As disclosed in our Current Report on Form 8-K filed with the SEC on July 12, 2016, after completing a comprehensive, competitive process to determine our independent registered public accounting firm, on July 10, 2 01 6, the Company’s Audit Committee approved the engagement of Boulay PLLP (“Boulay”) as our independent registered public accounting firm for the fiscal year ending December 31, 2016.  Grant Thornton LLP (“GT”) served as our independent registered public accounting firm for each of the years ended December 31, 2015 and 2014.  We expect that a representative of Boulay will be present at the annual meeting of shareholders, will have the opportunity to make a statement if it desires to do so, and will be available to respond to appropriate questions.  A representative of GT is not expected to be present at the annual meeting.

The audit report of Boulay on the consolidated financial statements of the Company for the year ended December 31, 2016 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports of GT on the consolidated financial statements of the Company for each of the years ended December 31, 2015 and December 31, 2014 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

During the Company’s fiscal year ended December 31, 2015 and during the subsequent interim period from January 1, 2016 through July 10, 2016, (i) there were no disagreements with GT on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures that, if not resolved to GT's satisfaction, would have caused GT to make reference to the subject matter of the disagreement in connection with its reports and (ii) there were no “reportable events” as defined in Item 304(a)(1)(v) of the SEC’s Regulation S­K.

During the fiscal year ended December 31, 2015 and during the subsequent interim period from January 1, 2016 through July 10, 2016, neither the Company nor anyone on its behalf consulted Boulay regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report nor oral advice was provided to the Company that Boulay concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) of the SEC’s Regulation S-K) or a “reportable event” (as defined in Item 304(a)(1)(v) of the SEC’s Regulation S-K).

Audit Fees

Audit fees, including aggregate fees for the audit of our annual financial statements, reviews of our quarterly financial statements and reviews of filings with the Securities and Exchange Commission, were $ 64,340 and $ 92,900 for fiscal 201 7 and 201 6 , respectively.   Audit fees for fiscal 2016 consisted of $38,100 paid to GT and $54,800 paid to Boulay.

Audit ‑ Related Fees

There were no audit ‑ related fees paid to either Boulay or GT  for fiscal 201 7 and 201 6 .

Tax Fees

There were no tax ‑ related fees paid to either Boulay or GT  for fiscal 201 7 and 201 6 .

All Other Fees

We paid no other fees to our independent registered public accounting firm in 201 7 or 201 6 .

Policy on Audit Committee Pre ‑ Approval of Audit and Permissible Non ‑ Audit Services Provided by Our Independent Registered Public Accounting Firm

The Audit Committee is responsible for appointing, setting compensation for and overseeing the work of our independent registered public accounting firm.  The Audit Committee has established a policy for pre ‑ approving the services provided by our independent registered public accounting firm in accordance with the auditor independence rules of the Securities and Exchange Commission.  This policy requires the review and pre ‑ approval by the Audit Committee of all audit and permissible non ‑ audit services provided by our independent registered public accounting firm and an annual review of the financial plan for audit fees.

To ensure that auditor independence is maintained, the Audit Committee annually pre ‑ approves the audit services to be provided by our independent registered public accounting firm and the related estimated fees for such services, as well as the nature and extent of specific types of audit ‑ related, tax and other non ‑ audit services to be provided by our independent registered public accounting firm during the year.

As the need arises, other specific permitted services are pre ‑ approved on a case ‑ by ‑ case basis during the year.  A request for pre ‑ approval of services on a case ‑ by ‑ case basis must be submitted by our Interim Chief Financial Officer, providing information as to the nature of the particular service to be provided, estimated related fees and management’s assessment of the impact of the service on the auditor’s independence.  The Audit Committee has delegated to its Chair pre ‑ approval authority between meetings of the Audit Committee.  Any pre ‑ approvals made by the Chair must be reported to the Audit Committee.  The Audit Committee will not delegate to management the pre ‑ approval of services to be performed by our independent registered public accounting firm.

All of the services provided by our independent registered public accounting firm in fiscal 201 7 and 201 6 were approved by the Audit Committee under its pre ‑ approval policies.

PROPOSAL 2 ‑ RATIFICATION OF APPOINTMENT OF OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Boulay P LLP audited our consolidated financial statements for the fiscal year ended December 31, 201 7 .  The Audit Committee has appointed Boulay P LLP as our independent registered public accounting firm for the year ending December 31, 201 8 .

Although we are not required to do so, we are submitting the appointment of Boulay P LLP to serve as our independent registered public accounting firm for the fiscal year ending December 31, 201 8 for ratification in order to ascertain the views of our shareholders on this appointment.  If the appointment is not ratified, the Audit Committee will reconsider its selection. A representative of Boulay P LLP is expected to be present at the 201 8 annual meeting. The representative will have an opportunity to make a statement at the meeting and will be available to respond to appropriate questions from shareholders.

The Board of Directors recommends that you vote FOR ratification of the appointment of Boulay P LLP as our independent registered public accounting firm for the fiscal year ending December 31, 201 8 .  Proxies will be voted FOR ratifying this appointment unless otherwise specified.

PROPOSAL 3 –VOTE ON THE ADVISORY RESOLUTION TO APPROVE THE COMPENSATION PAID
TO OUR NAMED EXECUTIVE OFFICERS

Our executive compensation program emphasizes performance-based compensation, recognizes both quantitative and qualitative performance objectives based upon our executives officers’ responsibilities, and includes a mix of short-term cash and long-term equity-based compensation.  The annual cash incentives and the stock options and awards we grant to our Named Executive Officers, which constitute a significant portion of their total compensation, are performance-based compensation.  We believe that performance-based compensation can be a key factor in motivating executive performance to maximize shareholder value and align executive performance with our corporate objectives and shareholder interests.

We generally do not have separate retirement plans or benefits for our Named Executive Officers. They may participate in our 401(k) plan in which all eligible employees may participate.  In addition, our Named Executive Officers participate in Company-sponsored group benefit plans available to all employees. 

We urge you to read the Compensation Discussion section of this proxy statement for additional details on our executive compensation, including our compensation philosophy and objectives and the fiscal 201 7 compensation of our Named Executive Officers.  We believe that, viewed as a whole, our compensation practices and policies are appropriate and fair to both the Company and its executives.

As provided by the say-on-pay rules, we are asking you to vote on the adoption of the following resolution:

BE IT RESOLVED by the shareholders of Image Sensing Systems, Inc. that the shareholders approve the compensation of the Company's Named Executive Officers as disclosed pursuant to Item 402 of Regulation S-K in the Company's proxy statement for the 201 8 Annual Meeting.

Proxies will be voted in favor of the resolution unless shareholders specify otherwise in their proxies and except for broker non-votes. The affirmative vote of at least a majority of the voting power of the shares present, in person or by proxy, and entitled to vote (excluding broker non-votes) is required for advisory approval of our executive compensation. As an advisory vote, this proposal is non-binding. However, the Board and our Compensation Committee, which is responsible for designing and overseeing the administration of our executive compensation program, value the opinions of our shareholders and will consider the outcome of the vote when making future compensation decisions for our Named Executive Officers.

The Board of Directors recommends that you vote FOR the approval of the compensation of our Named Executive Officers as disclosed in this proxy statement pursuant to the SEC’s compensation disclosure rules.

PROPOSAL 4 –VOTE ON THE AMENDMENT TO OUR SECTION 382 SHAREHOLDER RIGHTS AGREEMENT

Background of and Reasons for the Amendment

Effective August 23, 2016, the Company’s Board of Directors authorized and adopted a First Amendment to Rights Agreement (the “ Section 382 Amendment ”) to the Rights Agreement between the Company and Continental Stock Transfer & Trust Company, as rights agent, dated as of June 6, 2013 (the “Original Rights Agreement”). The Board had previously declared a dividend distribution of one right (a “Right”) for each outstanding share of the Company’s common stock, par value $0.01 per share, to shareholders of record at the close of business on June 17, 2013 pursuant to the Original Rights Agreement. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Shares”), of the Company at an exercise price of $25.00 per one one-thousandth of a Preferred Share, subject to adjustment (the “Exercise Price”). (The Original Rights Agreement, as amended by the Section 382 Amendment , is referred to in this Proxy Statement as the “Rights Agreement.”). 

The Section 382 Amendment was submitted to our shareholders for their approval at the annual meeting of shareholders held on May 11, 2017, and the shareholders approved the Section 382 Amendment.  On March 12, 2018, our Board of Directors adopted an amendment to the Rights Agreement (the “2018 Amendment”) to extend the expiration date of the Rights Agreement from June 6, 2018 to June 5, 2020.  The Company is now submitting the 2018 Amendment to the shareholders for their consideration and approval.

By adopting the 2018 Amendment , the Board is helping to preserve the value of certain deferred tax benefits of the Company, including those generated by net operating losses (collectively, the “Tax Benefits”). As of December 31, 2017 , we estimate that we had U.S. federal net operating loss carryforwards of $ 16 million . Unless otherwise restricted, we believe that we will be able to carry forward a significant amount of these net operating loss carryforwards and any other Tax B enefits, and so these Tax B enefits could be a substantial asset to us. If we experience an ownership change for purposes of Section 382 of the Code, however, our ability to use our Tax Benefits will be substantially limited. These limitations could require us to pay U.S. federal income taxes earlier than would otherwise be required if such limitations were not in effect and could cause the Tax Benefits to expire unused, in each case reducing or eliminating the benefit of the Tax Benefits . Similar rules and limitations may apply for state income tax purposes.

In ge neral terms, the Rights Agreement works by imposing a significant penalty upon any person or group that acquires 4.99% or more of the outstanding shares of the Company’s common stock without the approval of the Board. The Company’s ability to use the Tax Benefits would be substantially limited if it were to experience an “ownership change” as defined under Section 382 of the Code. In general, an ownership change would occur if there is a greater than 50-percentage point change in ownership of securities by shareholders owning (or deemed to own under Section 382 of the Code) five percent or more of a corporation’s securities over a rolling three-year period. The Rights Agreement reduces the likelihood that changes in the Company’s investor base have the unintended effect of limiting the Company’s use of its Tax Benefits. The Board believes it is in the best interest of the Company and its shareholders that the Company provide for the protection of the Tax Benefits by adopting the 2018  Amendment extending the expiration date of the Rights Agreement

The Rights Agreement is intended to act as a deterrent to any Acquiring Person (as defined below). This would protect the Tax Benefits because changes in ownership by a person owning less than 4.99% of the Company's common stock are not included in the c alculation of “ownership change” for purposes of Section 382 of the Code. The Board has established procedures to consider requests to exempt certain acquisitions of the Company’s securities from the Rights Agreement if the Board determines that doing so would not limit or impair the availability of the Tax Benefits or is otherwise in the best interests of the Company.

Description of the Rights Agreement

Distribution and Transfer of Rights; Rights Certificates

Before the Distribution Date referred to below:

• the Rights are and will be evidenced by and trade with the stock certificates for the shares of the Company’s common stock (or, with respect to any uncertificated shares of common stock registered in book entry form, by notation in book entry), and no separate Rights certificates will be distributed;

• stock certificates for shares of the Company’s common stock issued after the Record Date (as that term is defined in the Rights Agreement) contain a legend incorporating the Rights Agreement by reference (and, for any uncertificated shares of common stock registered in book entry form, this legend is contained in a notation in book entry);

• new Rights will accompany any new shares of the Company’s common stock issued after the Record Date; and

• the surrender for transfer of any certificates for shares of the Company’s common stock (or the surrender for transfer of any uncertificated shares of common stock registered in book entry form) will also constitute the transfer of the Rights associated with such shares.

Distribution Date

Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Company’s common stock and become exercisable following (i) the 10th business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person has acquired beneficial ownership of 4.99% or more of the Common Shares or (ii) the 10th business day (or such later date as may be determined by the Board) after a person or group announces a tender or exchange offer that would result in ownership by a person or group of 4.99% or more of the Company’s common stock. The date on which the Rights separate from the shares of the Company’s common stock and become exercisable is referred to as the “Distribution Date.”

After the Distribution Date, the Rights will separate from the shares of common stock and be evidenced by book-entry credits or by Rights certificates that the Company will cause to be mailed to all eligible holders of common stock, and any Rights held by an Acquiring Person will be void and may not be exercised.

Preferred Shares Purchasable Upon Exercise of Rights

After the Distribution Date, each Right will entitle the holder to purchase, for the Exercise Price (as that term is defined in the Rights Agreement), one one-thousandth of a Preferred Share having economic and other terms similar to that of one share of the Company’s common stock. This portion of a Preferred Share is intended to give the shareholder approximately the same dividend, voting and liquidation rights as would one share of common stock and should approximate the value of one share of common stock.

More specifically, each one one-thousandth of a Preferred Share, if issued, will:

• not be redeemable;

• entitle its holder to quarterly dividend payments of $0.001 per share, or an amount equal to the dividend paid on one share of common stock, whichever is greater;

• entitle its holder upon liquidation either to receive $1.00 per share or an amount equal to the payment made on one share of common stock, whichever is greater;

• have the same voting power as one share of common stock; and

• entitle its holder to a per share payment equal to the payment made on one share of common stock, if the shares of common stock are exchanged via merger, consolidation or a similar transaction.

Consequences of a Person or Group Becoming an Acquiring Person

Definition of Acquiring Person .  An “Acquiring Person” is a person or group that, together with affiliates and associates of such person or group, acquires beneficial ownership of 4.99% or more of the Company’s common stock, other than (i) an “Exempt Person”; (ii) any shareholder that, as of the time of the first public announcement of adoption of the Section 382 Amendment , beneficially owns 4.99% or more of the Company’s common stock (unless and until such person thereafter acquires any additional shares of common stock, subject to certain exceptions); (iii) a person who becomes an Acquiring Person solely as a result of the Company repurchasing shares of its common stock; and (iv) certain shareholders who inadvertently buy shares in excess of 4.99% of the shares of common stock and who thereafter reduce the percentage of the shares they own below 4.99%. An Exempt Person is defined as the Company, its subsidiaries and their respective employee benefit plans; and any person that the Board has affirmatively determined, in its sole discretion, prior to the Distribution Date, in light of the intent and purposes of the Rights Agreement or other circumstances facing the Company, shall not be deemed an Acquiring Person.

Flip-In Trigger .  If an Acquiring Person acquires beneficial ownership of 4.99% or more of the outstanding shares of the Company’s common stock, all holders of Rights may purchase, for the Exercise Price, a number of shares of common stock (or, in certain circumstances, cash, property or other securities of the Company) having a then-current market value equal to twice the Exercise Price, based on the market price of the common stock before such acquisition. However, the Rights are not exercisable following the occurrence of such an event until the Rights are no longer redeemable by the Company, as described below.

Following the occurrence of an event described in the preceding paragraph, all Rights that are or, under certain circumstances specified in the Rights Agreement, were beneficially owned by an Acquiring Person or certain of its transferees will be null and void.

Flip-Over Trigger .  If, after an Acquiring Person obtains 4.99% or more of the outstanding shares of the Company’s common stock, the Company merges into another entity, an acquiring entity merges into the Company, or the Company sells or transfers more than 50% of its assets, cash flow or earning power, then each Right (except for Rights that have previously been voided as set forth above) will entitle its holder to purchase, for the Exercise Price, a number of shares of stock of the acquiring person engaging in the transaction having a then-current market value equal to twice the Exercise Price, based on the market price of the acquiring person’s stock before such transaction.

Redemption of the Rights

The Board may redeem the Rights for $0.001 per Right (payable in cash, shares of the Company’s common stock or other consideration deemed appropriate by the Board) at any time before a person becomes an Acquiring Person. When the Board redeems the Rights, the Rights will terminate, and the only right of the holders of the Rights will be to receive the $0.001 redemption price. The redemption price will be adjusted if the Company undertakes a stock dividend or a stock split of its common stock.

Exchange

After a person or group becomes an Acquiring Person, but before an Acquiring Person beneficially owns 50 % of the outstanding shares of the Company’s common stock, the Board may extinguish the Rights (except for Rights that have previously been voided as set forth above), in whole or in part, by exchanging two shares of common stock or an equivalent security for each Right. In certain circumstances, the Company may elect to exchange the Rights for cash or other securities of the Company having a value approximately equal to two shares of common stock.

Expiration of the Rights

The Rights expire on the e arliest of (i) 5:00 p.m., Eastern time, on June 6, 2018 (unless such date is extended because the 2018 Amendment is approved by the Company’s shareholders ); (ii) the time at which the Rights are redeemed or exchanged under the Rights Agreement; (i ii ) the repeal of Section 382 of the Code or any successor statute or any other change if the Board determines that the Rights Agreement is no longer necessary or desirable for the preservation of the Tax Benefits; or ( i v) the time at which the Board determines that the Tax Benefits are fully utilized or no longer available.   If the Company’s shareholders approve the 2018 Amendment, the Rights will expire at the earliest of 5:00 p.m., Eastern time, on June 5, 2020 (unless such date is extended) and the occurrence of the other events set forth in clauses (ii) through (iv) of the foregoing sentence.

Amendment of Terms of Rights Agreement and Rights

The terms of the Rights and the Rights Agreement may be amended in any respect without the consent of the holders of the Rights on or before the Distribution Date. After the Distribution Date, the terms of the Rights and the Rights Agreement may be amended without the consent of the holders of Rights in order to cure any ambiguities, to shorten or lengthen any time period set forth in the Rights Agreement, or to make changes that do not adversely affect the interests of holders of the Rights.

Voting Rights; Other Shareholder Rights

The Rights do not have any voting rights. Until a Right is exercised, the holder of the Right will have no separate rights as a shareholder of the Company.

Anti-Dilution Provisions

The Board may adjust the Exercise Price, the number of Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split or a reclassification of the Company’s Preferred Shares or shares of common stock.

With certain exceptions, no adjustments to the Exercise Price will be made until the cumulative adjustments amount to at least 1% of the Exercise Price. No fractional Preferred Shares will be issued and, in lieu thereof, an adjustment in cash will be made based on the current market price of the Preferred Shares.

Taxes

The distribution of Rights should not be taxable for federal income tax purposes. However, following any occurrence of an event that renders the Rights exercisable or upon any redemption of the Rights, shareholders may recognize taxable income.

The foregoing is a summary of the terms of the Rights Agreement. The summary does not purport to be complete and is qualified in its entirety by reference to full text of the 2018 Amendment attached as Appendix A ,  the full text of the Section 382 Amendment attached as Appendix B , and the full text of the Original Rights Agreement attached as Appendix C .

Certain Considerations Relating to the Rights Agreement

The Board believes that attempting to protect the Tax Benefits as described above is in our and the shareholders’ best interests. Nonetheless, we cannot eliminate the possibility that an ownership change will occur even if the 2018 Amendment is approved. You should consider the factors below when making your decision.

• Future Use and Amount of the Tax Benefits Are Uncertain . Our use of the Tax Benefits depends on our ability to generate taxable income in the future. We cannot assure you whether we will have taxable income in any applicable period or, if we do, whether such income or the Tax Benefits at such time will exceed any potential limitation under Section 382 of the Code. 

• Potential Challenge to the Tax Benefits . The amount of the Tax Benefits has not been audited or otherwise validated by the Internal Revenue Service (the “IRS”). The IRS could challenge the amount of the Tax Benefits, which could result in an increase in our liability in the future for income taxes. In addition, determining whether an ownership change has occurred is subject to uncertainty because of the complexity and ambiguity of the Section 382 provisions and because of limitations on the knowledge that any publicly-traded company can have about the ownership of, and transactions in, its securities on a timely basis. Therefore, we cannot assure you that the IRS or another taxing authority will not claim that we experienced an ownership change and attempt to reduce the benefit of the Tax Benefits available to us at such time even if the Rights Agreement is in place. 

• Continued Possibility of Ownership Change . Although the Rights Agreement is intended to diminish the likelihood of an ownership change by deterring (rather than prohibiting) persons or groups of persons from acquiring beneficial ownership of our common stock in excess of the specified limitations, we cannot assure you that it will be effective. The amount by which an ownership interest may change in the future could, for example, be affected by sales of our common stock by s hare holders who are 5% shareholders (as defined under Section 382 of the Code) or by sales or purchases of stock or other interests in corporations, partnerships or other legal entities that own 5% or more of our common stock, over which we have no control. Additionally, it may be in our best interests, taking into account all relevant facts and circumstances at the time, to permit the acquisition of common stock in excess of the specified limitations or to issue a reasonable amount of equity in the future, all of which may increase the likelihood of an ownership change. 

• Potential Effects on Liquidity . The Rights Agreement is intended to deter persons or groups of persons from acquiring beneficial ownership of our common stock in excess of the specified limitations. A shareholder’s ability to dispose of our common stock may be limited if the Rights Agreement reduces the number of persons willing to acquire our common stock or the amount they are willing to acquire. A shareholder may become an Acquiring Person upon actions taken by persons related to, or affiliated with, them. Shareholders are advised to carefully monitor their ownership of our common stock and consult their own legal advisors and/or us to determine whether their ownership of the shares approaches the proscribed level. 

• Potential Impact on Value . The Rights Agreement could negatively impact the value of our common stock by deterring persons or groups of persons from acquiring our common stock, including in acquisitions for which some shareholders might receive a premium above market value. 

• Anti-Takeover Effect . The Board adopted the Section 382 Amendment and the 2018 Amendment to diminish the risk that our ability to use the Tax Benefits to reduce potential federal and state income tax obligations becomes limited. Nonetheless, the Rights Agreement may have an “anti-takeover effect” because it may deter a person or group of persons from acquiring beneficial ownership of 4.99% or more of our common stock or, in the case of a person or group of persons that already own 4.99% or more of our common stock, from increasing its percentage ownership by more than 1.00% of our outstanding shares. The Rights Agreement could discourage or prevent a merger, tender offer, proxy contest or accumulations of substantial blocks of shares. 

Proxies will be voted in favor of the 2018 Amendment unless shareholders specify otherwise in their proxies and except for broker non-votes.  The affirmative vote of at least a majority of the voting power of the shares present, in person or by proxy, and entitled to vote (excluding broker non-votes) is required for the approval of the 2018 Amendment . If the 2018 Amendment is not approved, the Rights Agreement will expire at 5:00 p.m., Eastern time, on June 6, 2018.

The Board of Directors recommends that you vote FOR the approval of the 2018 Amendment.

SHAREHOLDER PROPOSALS FOR THE 201 9 ANNUAL MEETING

Any proposal by a shareholder to be included in our proxy statement for the 201 9 annual meeting must comply with the applicable rules and regulations of the Securities and Exchange Commission and must be received at our principal executive offices, 500 Spruce Tree Centre, 1600 University Avenue West, St. Paul, Minnesota 55104, no later than November 22 , 201 8 . Pursuant to the rules of the Securities and Exchange Commission, proxies solicited by management for the next annual meeting may grant management the authority to vote in its discretion on any proposal submitted by a shareholder otherwise than through inclusion in the proxy statement for the meeting unless we have received notice of the shareholder proposal at our principal executive offices on or before February 4 , 201 9 .

ANNUAL REPORT TO SHAREHOLDERS

We are including with this proxy statement our Annual Report to Shareholders for the year ended December 31, 201 7 , which includes our Annual Report on Form 10 ‑ K for the year ended December 31, 201 7 , without certain exhibits.  Shareholders may request a complete copy of our Annual Report on Form 10 ‑ K for fiscal 201 7 with all exhibits, as filed with the Securities and Exchange Commission, by writing to Image Sensing Systems, Inc., 500 Spruce Tree Centre, 1600 University Avenue West, St. Paul, Minnesota 55104, Attention: Chief Financial Officer.

OTHER MATTERS

We know of no matters other than those that are described in this proxy statement to come before the 201 8 annual meeting of shareholders.  However, if any other matters are properly brought before the meeting, one or more persons named in the proxy or their substitutes will vote in accordance with their best judgment on such matters.

Dated: March 22 , 201 8

Appendix C

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