UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number: 0-26056
IMAGE SENSING SYSTEMS, INC.
--------------------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1519168
------------------------------------- --------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
--------------------------------------------
(Address of principal executive offices)
(651) 603-7700
--------------------------------------------
(Issuer's telephone number)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: Common Stock, $.01 par value, 3,181,277
shares as of April 17, 2003.
IMAGE SENSING SYSTEMS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Operations for the
three-month periods ended March 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Item 3. Controls and Procedures 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Certifications 13
2
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange of 1934, as amended. Forward-looking
statements represent our expectations or beliefs concerning future events and
can be identified by the use of forward-looking words such as "believes," "may,"
"will," "should," "intends," "plans," "estimates," or "anticipates" or other
comparable terminology. Forward-looking statements are subject to risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to:
o lack of market acceptance of our products;
o budget constraints by governmental entities that purchase our
products;
o dependence on third parties for manufacturing and marketing
our products;
o continuing ability of our licensee to pay royalties owed;
o our inability to diversify our product offerings;
o revenue fluctuations caused by our dependence on sales to
governmental entities;
o failure to secure adequate protection for our intellectual
property rights;
o failure to respond to evolving industry standards and
technological changes;
o our inability to properly manage a growth in revenue and/or
production requirements;
o our inability to meet our future additional capital
requirements;
o our inability to retain key scientific and technical
personnel;
o control of our voting stock by insiders; and
o conditions beyond our control such as war, terrorist attacks,
severe acute respiratory syndrome (SARS) epidemic and economic
recession.
We caution that the forward-looking statements made in this report or in other
announcements made by the Company are further qualified by the factors set forth
in the Cautionary Statement included as Exhibit 99.1 to this Quarterly Report.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 2,943,000 $ 2,625,000
Accounts receivable 1,330,000 1,417,000
Inventories 193,000 174,000
Prepaid expenses 109,000 123,000
Deferred income taxes 267,000 267,000
------------ ------------
Total current assets 4,842,000 4,606,000
Property and equipment, net 174,000 167,000
Other assets:
Capitalized software development costs, net 872,000 937,000
Goodwill 1,050,000 1,050,000
Other 29,000 29,000
------------ ------------
1,951,000 2,016,000
------------ ------------
Total assets $ 6,967,000 $ 6,789,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 359,000 $ 412,000
Due former shareholders of subsidiary 450,000 450,000
Accrued compensation 447,000 546,000
Income taxes payable 171,000 104,000
Deferred revenue 13,000 13,000
------------ ------------
Total current liabilities 1,440,000 1,525,000
Deferred income taxes 141,000 141,000
Shareholders' equity:
Common stock 32,000 32,000
Additional paid-in capital 4,729,000 4,717,000
Retained earnings 625,000 374,000
------------ ------------
5,386,000 5,123,000
------------ ------------
Total liabilities and shareholders' equity $ 6,967,000 $ 6,789,000
============ ============
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
See accompanying notes
4
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three-Month Periods Ended
March 31
-------------------------------
2003 2002
------------ ------------
REVENUE:
Product sales $ 408,000 $ 638,000
Royalties 1,143,000 954,000
Consulting services 5,000 18,000
------------ ------------
1,556,000 1,610,000
COSTS OF REVENUE:
Product sales 204,000 309,000
Royalties 51,000 47,000
Consulting services 2,000 11,000
------------ ------------
257,000 367,000
------------ ------------
Gross profit 1,299,000 1,243,000
OPERATING EXPENSES:
Selling, marketing and product support 513,000 657,000
General and administrative 280,000 313,000
Research and development 183,000 234,000
Restructuring 268,000
------------ ------------
976,000 1,472,000
------------ ------------
Income (loss) from operations 323,000 (229,000)
Other income, net 3,000 3,000
------------ ------------
Income (loss) before income taxes 326,000 (226,000)
Income taxes 75,000 --
------------ ------------
Net income (loss) $ 251,000 $ (226,000)
============ ============
Net income (loss) per common share:
Basic $ 0.08 $ (0.07)
============ ============
Diluted $ 0.07 $ (0.07)
============ ============
Weighted average number of common shares outstanding:
Basic 3,178,000 3,153,000
============ ============
Diluted 3,452,000 3,153,000
============ ============
See accompanying notes
5
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three-Month Periods Ended
March 31
--------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 251,000 $ (226,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities 94,000 123,000
------------ ------------
Net cash provided by (used in) operating activities 345,000 (103,000)
INVESTING ACTIVITIES:
Purchase of property and equipment (39,000) (8,000)
Purchase of minority interest of Flow Traffic (250,000)
------------ ------------
Net cash used in investing activities (39,000) (258,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 12,000
------------ ------------
Net cash provided by financing activities 12,000 --
------------ ------------
Increase (decrease) in cash and cash equivalents 318,000 (361,000)
Cash and cash equivalents, beginning of period 2,625,000 1,200,000
------------ ------------
Cash and cash equivalents, end of period $ 2,943,000 $ 839,000
============ ============
See accompanying notes
6
IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2003
Note A: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 2002.
Certain reclassifications have been made in the 2002 condensed consolidated
financial statements to conform to the 2003 presentation.
Note B: Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
Three Month
Period Ended
March 31, 2003
---------------
Numerator:
Net income $ 251,000
===============
Denominator:
Shares used in basic earnings per share calculation 3,178,000
Effect of diluted securities:
Employee and director stock options 274,000
---------------
Shares used in diluted earnings per share calculations 3,452,000
===============
Basic earnings per share $ 0.08
===============
Diluted earnings per share $ 0.07
===============
For the three-month period ended March 31, 2002, stock options would have had an
anti-dilutive effect on loss per share. Had net income been achieved, no common
share equivalents shares would have been included in the computation of loss per
share
7
Note C: Stock Options
Stock options issued to employees are accounted for under the intrinsic value
method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." No stock-based employee compensation cost is reflected in net income
(loss), as all options granted had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) and net income (loss) per share if
we had applied the fair value method of accounting for stock options under the
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
2003 2002
------------ ------------
Net income (loss), as reported $ 251,000 $ (226,000)
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related
tax effects (68,000) (182,000)
------------ ------------
Pro-forma net income (loss) 183,000 $ (408,000)
============ ============
Income (loss) per share:
Basic - as reported $ .08 $ (.07)
Basic - pro forma .06 (.13)
Diluted - as reported $ .07 $ (.07)
Diluted - pro forma .05 (.13)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used: zero dividend yield; expected volatility of 136% in 2003 and
in 2002; risk-free interest rate of 4.25% in 2003 and in 2002; and expected life
of 10 years for all years presented.
Options to purchase 6,000 and 463,260 shares of common stock with a weighted
average exercise price of $7.50 and $3.24 were outstanding at March 31, 2003 and
2002, but were not included in the computation of diluted net earnings (loss)
per share because the exercise price exceeded the average market price of the
common shares during the period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview:
We have developed proprietary machine vision technology that converts real world
information into digital electronic signals for processing by computer, and have
applied it to traffic management problems. Our technology uses standard video
and computer equipment, combined with proprietary technology, including complex
detection algorithms, computer software, special purpose hardware, and a
Microsoft Windows(R)-based graphical user interface that enables
8
standard video cameras to work with the Autoscope system. The majority of our
revenue is derived from royalties received from Econolite Control Products,
Inc., our North American and Latin American distribution partner, based on their
sales of traffic control products which use our technology. A secondary source
of revenue comes from direct sales, which are primarily to customers in Europe
and Asia.
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Form 10-KSB for the fiscal year
ended December 31, 2002. These policies have been consistently applied in all
material respects and address such matters as revenue recognition, goodwill and
income tax accounting. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, we believe the estimates and judgments associated with the reported
amounts are appropriate under in the circumstances.
Results of Operations (Comparison of Three-Month Periods Ended March 31, 2003
and 2002):
Revenues for the first quarter of 2003 were $1,556,000, which were down 3% from
$1,610,000 for the same period a year ago. The decrease is attributable
primarily to decreased product sales in Europe and Asia which were offset in
part by increased royalty income resulting from increased sales of Autoscope
products in the United States by Econolite. We do not believe the decrease in
international sales represents a downward trend, but we cannot be sure that the
war in Iraq or the severe acute respiratory syndrome (SARS) epidemic in Asia may
not have an adverse effect on sales revenue for the balance of fiscal 2003.
Gross profits were $1,299,000 in the first quarter of 2003, or 83% of revenue,
compared to $1,243,000, or 77% of revenue, for the same period a year ago. The
margin percentage increase was due to the mix of revenue with higher margin
royalty income increasing as a percentage of total revenue as compared to
product sales, which have a lower gross profit margin.
Operating expenses were $976,000 for the first quarter of 2003 compared to
$1,472,000 for the same period a year ago. The decrease is due to the
non-recurrence of severance payments and other restructuring costs totaling
$268,000 incurred in the first quarter of 2002, as well as continued cost
savings from the restructuring.
Research and development expenses were $183,000 in the first quarter of 2003
compared to $234,000 for the same period a year ago. The decrease is due to
fewer new product development projects in progress in the current quarter and a
smaller engineering staff compared to the same period a year ago. We do not
expect these expenses to change appreciably in subsequent quarters of 2003.
Other income, net was $3,000 in the first quarter of 2003, the same as for the
comparable period a year ago.
9
Income tax expense for the first quarter of 2003 was $75,000. We expect to
eliminate our valuation allowance previously established to offset our net
operating loss and research and development tax credit carryforwards and thereby
incur less than the 34% statutory income tax rate for the remainder of fiscal
2003. No tax benefit from the loss incurred in the comparable period for the
prior year was derived as realization of the operating loss carryforward was not
reasonably assured. Accordingly, a valuation allowance was established in 2002
to fully offset the carryforwards.
Liquidity and Capital Resources:
Cash and cash equivalents increased by $318,000 for the first quarter of 2003
compared to a decrease in cash and cash equivalents of $361,000 for the same
period a year ago. In the first quarter of 2003, cash was provided primarily
from operating activities, offset in part by capital additions. For the same
period a year ago we had severance payment obligations of $268,000 and paid
$250,000 as an initial payment for the acquisition of the minority interest in
our subsidiary, Flow Traffic Ltd.
At March 31, 2003, we had $2,943,000 in cash and cash equivalents along with an
available revolving line of credit with a bank of $50,000, after giving effect
to letters of credit issued to the former minority shareholders of Flow Traffic.
On April 1, 2003, we paid $450,000 owed to the former shareholders of Flow
Traffic and cancelled the letters of credit, thereby increasing our available
line of credit to $500,000.
Management believes that our cash and investment position, anticipated cash
flows from operations, and funds available through our bank line of credit will
be sufficient to meet cash and working capital requirements for current
operations for the foreseeable future.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our chief
executive officer and chief financial officer, after
evaluating the effectiveness of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15d-14(c) as of a date (the "Evaluation
Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our
disclosure controls and procedures were adequate and designed
to ensure that material information relating to us and our
consolidated subsidiary would be made known to them by others
within those entities.
(b) Changes in internal controls. There were no significant
changes in our internal controls or to our knowledge, in other
factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
10
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this quarterly report on
Form 10-QSB for the quarterly period ended March 31, 2003.
Exhibit
Number Description
99.1 Cautionary Statement, incorporated herein by reference to
Exhibit 99.1 to the Company's Form 10-KSB for the fiscal year
ended December 31, 2002.
99.2 Certification of Chief Executive Officer.
99.3 Certification of Chief Financial Officer.
(b) Reports on Form 8-K
On January 9, 2003, we filed a Current Report on Form 8-K disclosing a
change in our independent accountants.
11
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Image Sensing Systems, Inc.
By:
Dated: April 29, 2003 /s/ James Murdakes
--------------------------------------------
James Murdakes
Chairman and Chief Executive Officer
(principal executive officer)
Dated: April 29, 2003 /s/ Arthur J. Bourgeois
--------------------------------------------
Arthur J. Bourgeois
Chief Financial Officer
(principal financial and accounting officer)
12
CERTIFICATION
I, James Murdakes, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Image
Sensing Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 29, 2003 /s/ JAMES MURDAKES
---------------------------
James Murdakes
Chief Executive Officer
13
CERTIFICATION
I, Arthur J. Bourgeois, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Image
Sensing Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 29, 2003 /s/ ARTHUR J. BOURGEOIS
-----------------------------------
Arthur J. Bourgeois
Chief Financial Officer
14