UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the period ended March 31, 2002 Commission File Number 0-26056
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IMAGE SENSING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1519168
-------------------------------- ----------------------------------
State of other jurisdiction of I.R.S. Employer Identification No.
Incorporation organization
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
(Address of principal executive offices)
Registrant's telephone number, including area code: (651) 603-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value
-3,152,777 shares as of May 7, 2002.
IMAGE SENSING SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Operations
Three-month periods ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows
Three-month periods ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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 the Company's products;
o dependence on third parties for manufacturing and marketing
capabilities and continuing ability to pay royalties owed;
o inability of the Company to diversify our product offerings;
o revenue fluctuations caused by the Company's dependence on
sales to governmental entities;
o failure of the Company to secure adequate protection for the
Company's intellectual property rights;
o failure of the Company to respond to evolving industry
standards and technological changes;
o inability of the Company to properly manage a growth in
revenue and/or production requirements;
o inability of the Company to meet our future additional capital
requirements; and
o control of the Company's voting stock by insiders.
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
2002 2001
------------ ------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 839,000 $ 1,200,000
Accounts receivable 1,278,000 1,589,000
Inventories 335,000 341,000
Prepaid expenses 124,000 88,000
Deferred income taxes 92,000 92,000
------------ ------------
Total current assets 2,668,000 3,310,000
Property and equipment, net 303,000 351,000
Other assets:
Capitalized software development costs, net 1,130,000 1,195,000
Goodwill 950,000 77,000
Deferred income taxes 34,000 34,000
Other 29,000 37,000
------------ ------------
2,143,000 1,343,000
------------ ------------
Total assets $ 5,114,000 $ 5,004,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 485,000 $ 720,000
Accrued compensation 309,000 374,000
Deferred revenue 32,000 40,000
------------ ------------
Total current liabilities 826,000 1,134,000
Long-term debt 700,000 --
Minority interest -- 56,000
Shareholders' equity:
Common stock 32,000 32,000
Additional paid-in capital 4,600,000 4,600,000
Retained earnings (deficit) (1,044,000) (818,000)
------------ ------------
3,588,000 3,814,000
------------ ------------
Total liabilities and shareholders' equity $ 5,114,000 $ 5,004,000
============ ============
Note: The balance sheet at December 31, 2001 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 for complete financial statements.
See accompanying notes
4
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three-Month Periods Ended
March 31
------------------------------
2002 2001
------------ ------------
REVENUE:
Product sales $ 638,000 $ 386,000
Royalties 954,000 1,012,000
Consulting services 18,000 35,000
------------ ------------
1,610,000 1,433,000
COSTS OF REVENUE:
Product sales 309,000 201,000
Royalties 47,000 100,000
Consulting services 11,000 30,000
------------ ------------
367,000 331,000
------------ ------------
Gross profit 1,243,000 1,102,000
OPERATING EXPENSES:
General and administrative 502,000 601,000
Business development 468,000 537,000
Research and development 234,000 213,000
Restructuring 268,000 --
------------ ------------
1,472,000 1,351,000
------------ ------------
Loss from operations (229,000) (249,000)
Other income, net 3,000 27,000
------------ ------------
Net loss before minority interest (226,000) (222,000)
Minority interest -- (2,000)
------------ ------------
Net loss $ (226,000) $ (224,000)
============ ============
Net loss per common share - basic and diluted $ (0.07) $ (0.07)
============ ============
Weighted average number of common shares outstanding:
basic and diluted 3,152,777 3,014,600
============ ============
See accompanying notes
5
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three-Month Periods Ended
March 31
------------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (226,000) $ (224,000)
Adjustments to reconcile net loss to
net cash used by operating activities 123,000 (95,000)
Minority interest -- (2,000)
------------ ------------
Net cash used in operating activities (103,000) (321,000)
INVESTING ACTIVITIES:
Purchase of minority interest (250,000) --
Purchase of property and equipment (8,000) (85,000)
------------ ------------
Net cash used in investing activities (258,000) (85,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock option -- 10,000
Dividends paid by Flow Traffic -- (50,000)
------------ ------------
Net cash used in financing activities -- (40,000)
------------ ------------
Decrease in cash and cash equivalents (361,000) (446,000)
Cash and cash equivalents, beginning of period 1,200,000 1,780,000
------------ ------------
Cash and cash equivalents, end of period $ 839,000 $ 1,334,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION; NON-CASH
TRANSACTION:
Long-term debt incurred as part of acquisition
of the minority interest of Flow Traffic Ltd. $ 700,000 $ --
============ ============
See accompanying notes
6
IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
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 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 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, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. For further information,
refer to the financial statements and footnotes thereto for the year ended
December 31, 2001.
Note B: Acquisition of Remaining Outstanding Shares of Flow Traffic Ltd
On January 7, 2002, the Company acquired the remaining 40% of Flow Traffic Ltd.
for $950,000, plus contingent consideration related to earn-out arrangements
totaling $100,000. The acquisition included a $250,000 cash payment, additional
future cash payments totaling $450,000, secured by letters of credit, and notes
payable totaling $250,000. The additional payments of $450,000 are payable at
any time between April 1, 2003 and April 30, 2003, and the letters of credit
expire on April 30, 2003, The notes payable totaling $250,000 are due on demand
after April 1, 2003, mature on January 7, 2007, are non-interest bearing and are
unsecured.
On April 15, 2002, the acquisition agreement was amended in connection with the
termination of employment of a former shareholder of Flow Traffic Ltd., and the
Company paid $50,000 to accelerate his earn-out arrangement. Negotiations are
currently underway which may result in payment of the remaining $50,000 earn-out
to another former shareholder and current executive employee of Flow Traffic
Ltd.
Note C: Restructuring Expenses
In the first quarter of 2002, the Company accepted the resignation of its chief
executive officer and down-sized its engineering staff by five and its marketing
staff by two. Severance and other costs related to the restructuring totaled
$268,000 in the first quarter, all of which has been paid.
In April 2002, the Company terminated a consultancy agreement with a former
shareholder of Flow Traffic Ltd., who had become the Company's interim chief
executive officer, paying him $60,000 in April and agreeing to pay $$60,000 by
September 1, 2002 and $58,000 by January 7, 2003. In addition, the Company
terminated an executive agreement with its chief financial officer, and paid
$36,000 in settlement costs. Total restructuring expense in April 2002 was
$206,000, of which $118,000 remains to be paid.
7
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 standard video
cameras to work with the Autoscope system.
Results of Operations (Comparison of Three-Month Periods Ended March 31, 2002
and March 31, 2001):
Revenues for the first quarter of 2002 were $1,610,000, up 12% from $1,433,000
for the same period a year ago. The increase is attributable primarily to
increased product sales ($638,000 in 2002 versus $386,000 in the same period a
year ago).
Gross profits were $1,243,000 in the first quarter of 2002, or 77% of revenue,
compared to $1,102,000, or 77% of revenue, for the same period a year ago. The
margin percentage remained constant due to a slight increase in margins on
product sales offset by a decrease in higher margin royalty income.
Operating expenses were $1,472,000 for the first quarter of 2002 compared to
$1,351,000 for the same period a year ago. The increase is due to $268,000 in
severance pay and other restructuring costs incurred in the first quarter of
2002 offset in part by subsequent employment cost savings. See Note C of
the Notes to Condensed Consolidated Financial Statements.
Research and development expenses were $234,000 in the first quarter of 2002
compared to $213,000 for the same period a year ago. The increase is due to
accelerated engineering efforts needed to complete two development projects in
the quarter. We expect these expenses will decrease in subsequent quarters of
2002 as a result of the downsizing of the engineering staff. See Note C of the
Notes to Condensed Consolidated Financial Statements.
Other income, net was $3,000 in the first quarter of 2002 compared to $27,000
for the same period a year ago. The decrease is due to decreased miscellaneous
non-recurring income in the first quarter and interest expense on long-term debt
incurred as part of the Flow Traffic Ltd. acquisition.
We recognized no income tax benefit in 2002 or 2001. We believe it is more
likely than not that the net deferred tax asset will be realized over the next
three years as timing differences related to capitalized software development
costs increase taxable income.
8
We expect to avail ourselves of net operating loss and research and development
tax credit carryforwards and therefore to incur insignificant income tax expense
in 2002. As of March 31, 2002, we have net operating loss carryforwards for
income tax purposes of $1,882,000 and research and development tax credits of
$290,000 that expire in the years 2007 through 2020.
Liquidity and Capital Resources:
Cash used by operating activities was $103,000 for the first quarter of 2002,
compared to $321,000 for the same period in 2001. In the first quarter of 2002,
the use of cash was primarily in connection with the satisfaction of our
severance payment obligations discussed above, offset in part by reductions of
accounts receivables exceeding the reduction of accounts payable. In the first
quarter of 2001, the use of cash was primarily due to the operating loss and
receivables increasing in excess of increases in accounts payable.
Capital expenditures were $258,000 for the first quarter of 2002, compared to
$85,000 for the same period in 2001. The primary capital expenditure in the
first quarter of 2002 was the acquisition of the 40% minority interest in our
subsidiary, Flow Traffic Ltd. The acquisition included a $250,000 cash payment,
additional future cash payments totaling $450,000, secured by letters of credit,
and notes payable totaling $250,000. The additional payments of $450,000 are
payable at any time between April 1, 2003 and April 30, 2003, and the letters of
credit expire on April 30, 2003, The notes payable totaling $250,000 are due on
demand after April 1, 2003, mature on January 7, 2007, are non-interest bearing
and are unsecured. The additional future cash payments and notes payable,
totaling $700,000, are included in long-term debt.
In April 2002, we paid an additional $50,000 in connection with the settlement
agreement with a former shareholder of Flow Traffic Ltd., and may incur $50,000
of additional cost in the second quarter of 2002 for the other minority
shareholder who is currently an executive of Flow Traffic Ltd. We do not expect
to make other significant capital expenditures for the balance of 2002.
At March 31, 2002, we had $839,000 in cash and cash equivalents along with an
available revolving line of credit with a bank of $500,000. Current availability
on our line of credit is $50,000 with the balance used to secure the letter of
credit issued to the former minority shareholders of Flow Traffic Ltd.
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 remainder of the year.
9
PART II: OTHER INFORMATION
Item 5. Other Information
The Company retained Arthur J. Bourgeois as its Chief
Financial Officer as of May 1, 2002, pursuant to a consultant
agreement filed as Exhibit 10.1 to this Quarterly Report.
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,
2002.
Exhibit
Number Description
10.1 Consultant Agreement effective May 1, 2002
between the Company and Arthur J. Bourgeois
99.1 Cautionary Statement, incorporated herein by
reference to Exhibit 99 to the Company's Form
10-KSB for the fiscal year ended December 31,
2001.
(b) Reports
No reports on Form 8-K were filed during the quarter covered
by this Form 10-QSB.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Image Sensing Systems, Inc.
---------------------------------------------
(Registrant)
Dated: May 15, 2002 /s/ James Murdakes
---------------------------------------------
James Murdakes
Chairman and Chief Executive Officer
(principal executive officer)
Dated: May 15, 2002 /s/ Arthur J. Bourgeois
---------------------------------------------
Arthur J. Bourgeois
Chief Financial Officer
(principal financial and accounting officer)
11