Autoscope Technologies Corp 10-Q for FY2020 Q3
Autoscope Technologies Corp (AATC)
About this 10-Q
Autoscope Technologies Corp filed this 10-Q on November 10, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.75M
- up 1.7% from $3.69M a year earlier
- Net income
- $659K
- down 89.2% from net income of $6.13M a year earlier
- Diluted EPS
- $0.12
- down 89.7% from $1.16 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
(Exact Name of Registrant as Specified in its Charter)
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State or Other Jurisdiction of Incorporation or Organization |
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I.R.S. Employer Identification No. |
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Address of Principal Executive Offices |
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Registrant’s Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ |
| Accelerated filer ¨ |
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x |
| Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at October 31, 2020 |
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Common Stock, $0.01 par value per share |
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IMAGE SENSING SYSTEMS, INC.
TABLE OF CONTENTS
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Image Sensing Systems, Inc.
(in thousands)
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September 30, 2020 |
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December 31, |
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(Unaudited) |
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2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment: |
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Furniture and fixtures |
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Leasehold improvements |
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Equipment |
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Accumulated depreciation |
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Operating lease assets, net |
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Intangible assets, net |
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Deferred income taxes |
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TOTAL ASSETS |
$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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| Deferred revenue | ||||||||
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Warranty |
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Accrued compensation |
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| Operating lease obligations |
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Other current liabilities |
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Total current liabilities |
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| Operating lease obligations |
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TOTAL LIABILITIES |
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Shareholders' equity: |
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Preferred stock, $ |
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Common stock, $ |
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issued and outstanding at September 30, 2020 and December 31, 2019, respectively |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
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Accumulated deficit |
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Total shareholders' equity |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements. |
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Image Sensing Systems, Inc.
(Unaudited)
(in thousands, except per share data)
| Three-Month Periods Ended September 30, |
Nine-Month Periods Ended September 30, |
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| 2020 | 2019 | 2020 | 2019 | |||||||||||||
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Revenue: |
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Product sales |
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Royalties |
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Cost of revenue: |
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Product sales |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Income from operations before income taxes |
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| Income tax expense (benefit) | ( |
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Net income |
$ | $ | $ | $ | ||||||||||||
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Net income per share: |
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Basic |
$ | $ | $ | $ | ||||||||||||
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Diluted |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to the condensed consolidated financial statements. |
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Image Sensing Systems, Inc.
(Unaudited)
(in thousands)
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Three-Month Periods Ended September 30, |
Nine-Month Periods Ended September 30, |
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| 2020 | 2019 | 2020 | 2019 | |||||||||||||
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Net income |
$ | $ | $ | $ | ||||||||||||
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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Comprehensive income |
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| See accompanying notes to the condensed consolidated financial statements. | ||||||||||||||||
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Image Sensing Systems, Inc.
(Unaudited)
(in thousands)
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Nine-Month Periods Ended |
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2020 |
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2019 |
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Operating activities: |
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Net income |
$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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Software amortization |
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Stock-based compensation |
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| Deferred income tax benefit | ( |
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| Loss on disposal of assets | |||||||
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Accounts payable |
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Accrued expenses and other current liabilities |
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( |
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| Other (Lease asset and obligations) | ( |
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Net cash provided by operating activities |
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Investing activities: |
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Capitalized software development costs |
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Purchases of property and equipment |
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Net cash used for investing activities |
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Financing activities: |
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Stock for tax withholding |
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Proceeds from PPP Loan (Note L) |
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| Proceeds from stock options exercised | |||||||
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Net cash provided by (used for) financing activities |
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Effect of exchange rate changes on cash |
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Change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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Non-Cash investing and financing activities: |
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Purchase of property and equipment in accounts payable |
$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements. |
| 7 |
IMAGE SENSING SYSTEMS, INC.
| Three-Month Period Ended September 30, 2019 |
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Shares Issued |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total | |||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( |
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| Net income | — | — | — | — | ||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||
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Three-Month Period Ended September 30, 2020 |
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Shares Issued |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total | |||||||||||||||||
| Balance, June 30, 2020 |
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$ | $ | $ | ( |
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| Stock-based compensation | — | — | — | |||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||
| See accompanying notes to the condensed consolidated financial statements |
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| 8 |
| Nine-Month Period Ended September 30, 2019 |
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Shares Issued |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total | |||||||||||||||||
| Balance, December 31, 2018 |
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$ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||
| Stock options exercised |
— | — | — | |||||||||||||||||||
| Stock for tax withholding | ( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( |
) | — | ( |
) | ||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||
| Cumulative effect from adoption of ASU No. 2016-02 | — | — | — | — | ||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||
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Nine-Month Period Ended September 30, 2020 |
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Shares Issued |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total |
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| Balance, December 31, 2019 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||
| Stock for tax withholding | ( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||
| Comprehensive income: | ||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||
| Balance, September 30, 2020 |
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$ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
| See accompanying notes to the condensed consolidated financial statements |
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| 9 |
IMAGE SENSING SYSTEMS, INC.
(Unaudited)
September 30, 2020
Note A: Basis of Presentation
Image Sensing Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as "we," "us," "our" and the "Company") develops and markets video and radar processing products for use in applications such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. We sell our products primarily to distributors and also receive royalties under a license agreement with a manufacturer/distributor for certain of our products. Our products are used primarily by governmental entities.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q, which require the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals considered necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated.
Operating results for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC.
Summary of Significant Accounting Policies
The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position and may require the application of a higher level of judgment by the Company's management and, as a result, are subject to an inherent degree of uncertainty.
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
| We determine revenue recognition through the following steps: | |
| ● | Identification of a contract, or contracts, with a customer; |
| ● | Identification of performance obligations in the contract; |
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Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, we satisfy a performance obligation. |
Revenue disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent:
| Three Months Ended September 30, | Nine Months Ended September 30, |
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| 2020 | 2019 | 2020 | 2019 | ||||||||||
| Product sales | $ | $ | $ | $ | |||||||||
| Royalties | |||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||
| 10 |
Product Sales:
Product revenue is generated primarily from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the amount we expect to receive in exchange for those goods or services.
Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple performance obligations may include hardware, software, installation services, training, support, and extended warranties. In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. For performance obligations without observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.
Revenue for services such as maintenance, repair, and technical support is recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. From time to time, our payment terms may vary by the type and location of our customer and the products or services offered. Revenue for extended warranties are deferred until the coverage period and then recognized ratably over the extended warranty term.
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
We record provisions against sales revenue for estimated returns and allowances in the period when the related revenue is recorded based on historical sales returns and changes in end user demand.
Royalties:
Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean. The royalty of approximately
Practical Expedients and Exemptions:
We generally expense sales commissions when incurred because the amortization periods would have been
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of
| 11 |
Inventories
Inventories are primarily electronic components and finished goods and are valued at the lower of cost or net realizable value determined under the first-in, first-out accounting method.
Income Taxes
We record a tax provision for the anticipated tax consequences of our reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.
Intangible Assets
We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.
Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value have been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized
Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows and reviewed for impairment. At both September 30, 2020 and 2019, we determined there was
| 12 |
Note B: Recent Accounting Pronouncements
Accounting pronouncements recently adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU') No. 2016-02, "Leases (Topic 842)". We adopted ASU 2016-02 and its amendments and elected the effective date transition method as of January 1, 2019, which included recognizing a cumulative effect adjustment through opening an accumulated deficit as of that date. See Note E: Operating Leases for further details.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation-Stock Compensation (Topic 718)". ASU 2018-07 largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of Accounting Standards Codification 718 to apply to nonemployee share-based transactions as long as the transaction is not effectively a form of financing. We adopted ASU No. 2018-07 as of January 1, 2019. There was no impact to the Company's consolidated financial statements.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, "Disclosure Update and Simplification," amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed. We adopted these changes as of January 1, 2019.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurements (Topic 820)." ASU 2018-13 eliminates, amends and adds disclosure requirements for fair value measurements. ASU 2018-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2020. We adopted these changes as of January 1, 2020; however, there are no required changes that apply to our fair value measurements disclosures.
Note C: Fair Value Measurements
The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
| Level 1: |
observable inputs such as quoted prices in active markets; |
|
| Level 2: |
inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
|
| Level 3: |
unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
Our intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially, and have historically been, measured and recognized at amounts equal to the fair value determined as of the date of acquisition.
Financial Instruments not Measured at Fair Value
Certain of our financial instruments are not measured at fair value and are recorded at carrying amounts approximating fair value, based on their short-term nature or variable interest rate. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and other current financial assets and liabilities.
| 13 |
Note D: Inventories
Inventories consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||
|
Finished goods |
$ | $ | |
||
| Components | |||||
|
Total |
$ | $ | |||
Note E: Operating Leases
On January 1, 2019, we adopted ASU No. 2016-02, "Leases (Topic 842)" and its amendments and elected the effective date transition method, which included recognizing a cumulative effect adjustment through opening an accumulated deficit as of that date. We recorded $
The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through November 2022. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.
Most of these leases include an option to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use ("ROU") assets and lease liabilities because they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.
Because most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
The cost components of our operating leases were as follows (in thousands):
|
Three-Month Periods Ended September 30, |
Nine-Month Periods Ended September 30, |
||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||
| Operating lease costs | $ | $ | $ | $ | |||||||
| Variable lease cost | |||||||||||
| Total | $ | $ | $ | $ | |||||||
Variable lease costs consist primarily of property taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment, which are paid based on actual costs incurred by the lessor.
| 14 |
Maturities for our lease liabilities for all operating leases are as follows (in thousands) as of September 30, 2020:
| Total |
|||
| 2020 | $ | ||
| 2021 | |||
| 2022 | |||
| 2023 and thereafter | |||
| Total lease payments | |||
| Less: Interest | ( |
) | |
| Present value of lease liabilities | $ | ||
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2020:
| September 30, 2020 |
||
| Remaining lease term and discount rate: | ||
| Weighted average remaining lease term (years) | ||
| Weighted average discount rate | % | |
Cash paid for amounts included in the measurement of operating lease liabilities was $
| 15 |
Note F: Intangible Assets
Intangible assets consisted of the following (dollars in thousands):
|
|
September 30, 2020 |
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Weighted |
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Gross |
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Net |
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Average |
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Carrying |
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Accumulated |
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Carrying |
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Useful Life |
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||||||
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Amount |
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Amortization |
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Value |
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(in Years) |
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||||||
|
Wrong Way development costs |
$ |
|
|
|
$ |
( |
|
$ |
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— |
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|
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Vision development costs |
|
|
|
|
|
( |
) |
|
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|
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Echo development costs |
|
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( |
) |
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IntellitraffiQ development costs |
|
|
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( |
) |
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|
|||||
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Total |
$ |
|
|
|
$ |
( |
) |
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$ |
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|
|
|
|
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December 31, 2019 |
|||||||||||||
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Weighted |
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Gross |
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Net |
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Average |
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||||
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Carrying |
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Accumulated |
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Carrying |
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Useful Life |
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||||||
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Amount |
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Amortization |
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Value |
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(in Years) |
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||||||
|
Developed technology |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
— |
|
|
Vision development costs |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Software development in process costs |
|
|
|
|
|
|
|
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— |
|
||||
| IntellitraffiQ development costs | ( |
) | ||||||||||||
| Wrong Way development costs |
|
( |
) | |||||||||||
|
Total |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
Note G: Warranties
We generally provide a to
Warranty liability and related activity consisted of the following (in thousands):
|
|
Nine-Month Periods Ended |
||||||
|
|
2020 |
|
2019 |
||||
|
|
|
|
|
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Beginning balance |
$ |
|
|
|
$ |
|
|
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Warranty provisions |
|
|
|
|
|
|
|
|
Warranty claims |
|
( |
) |
|
|
( |
) |
|
Adjustments to preexisting warranties |
|
( |
) |
|
|
( |
) |
|
Currency |
|
|
|
|
( |
) | |
|
Ending balance |
$ |
|
|
|
$ |
|
|
| 16 |
Note H: Stock-Based Compensation
We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), which was approved by our shareholders and is administered under the supervision of our Board of Directors. Stock option awards are granted at exercise prices equal to the closing price of our stock on the day before the date of grant. Generally, options vest ratably over periods of to
Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period. Stock-based compensation expense included in general and administrative expense for the three-month periods ended September 30, 2020 and 2019 was $
Stock Options
A summary of the stock option activity for the first nine months of 2020 is as follows:
|
Number of Shares |
Weighted Average Exercise Price per Share |
Weighted Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value |
|||||||||||||
| Options outstanding at December 31, 2019 |
$ | $ | ||||||||||||||
| Granted |
$ | — | $ | |||||||||||||
| Exercised |
$ | — | $ | |||||||||||||
| Expired |
$ | — | $ | |||||||||||||
| Forfeited |
( |
) | $ | — | $ | |||||||||||
| Options outstanding at September 30, 2020 | $ | $ | ||||||||||||||
| Options exercisable at September 30, 2020 | $ | $ | ||||||||||||||
| 17 |
There were
Restricted Stock Awards and Stock Awards
Restricted stock awards are granted under the 2014 Plan at the discretion of the Compensation Committee of our Board of Directors. We issue restricted stock awards to executive officers and key consultants. These awards may contain certain performance conditions or time-based vesting criteria.
We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance.
The following table summarizes restricted stock award activity for the first nine months of 2020:
|
|
Number of |
|
|
Weighted |
|||
|
Awards outstanding December 31, 2019 |
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
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Vested |
|
( |
) |
|
|
|
|
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Forfeited |
|
|
|
|
|
|
|
|
Awards outstanding at September 30, 2020 |
|
|
|
|
$ |
|
|
As of September 30, 2020, the total stock-based compensation expense related to non-vested awards not yet recognized was $
Note I: Income per Common Share
Net income per share is computed by dividing net income by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding because the exercise of those options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding. As a result, stock options and restricted stock awards to acquire
| 18 |
A reconciliation of net income per share is as follows (in thousands, except per share data):
|
Three-Month Periods Ended September 30, |
Nine-Month Periods Ended September 30, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator: |
||||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Denominator: |
||||||||||||||||
| Weighted average common shares outstanding |
||||||||||||||||
| Dilutive potential common shares |
||||||||||||||||
| Shares used in diluted net income per common share calculations |
||||||||||||||||
| Basic net income per common share |
$ | $ | $ | $ | ||||||||||||
| Diluted net income per common share |
$ | $ | $ | $ | ||||||||||||
Note J: Segment Information
The Company's Chief Executive Officer and management regularly review financial information for the Company's discrete operating segments. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating segments have been aggregated for financial statement purposes and categorized into
Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. RTMS is our radar product line, and revenue consists of international and North American product sales. Radar products are normally sold in the Highway segment. All segment revenues are derived from external customers.
Operating expenses and total assets are not allocated to the segments for internal reporting purposes. Due to the changes in how we manage our business, we may reevaluate our segment definitions in the future.
The following table sets forth selected unaudited financial information for each of our reportable segments (in thousands):
|
Three Months Ended September 30, |
||||||||||||||||||
|
Intersection |
Highway |
Total |
||||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Revenue |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||
|
Gross profit |
|
|
|
|
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|
||||||||||||
|
Amortization of intangible assets |
|
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||||||||||||
|
Intangible assets |
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| Nine Months Ended September 30, | ||||||||||||||||||
| Intersection | Highway | Total | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue |
$ | $ | $ | $ | $ | $ | ||||||||||||
| Gross profit | ||||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||||
| Intangible assets | ||||||||||||||||||
| 19 |
Note K: Restructuring and Exit Activities
In the third quarter of 2018, we initiated the closure of our Bucharest, Romania office location, which was a sales office for Image Sensing Systems EMEA Limited, a United Kingdom subsidiary. The Company will continue doing business in the European region utilizing its Barcelona, Spain sales office. We incurred
In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) in China; Image Sensing Systems Europe Limited (ISS Europe) in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O (ISS Poland) in Poland; and Image Sensing Systems Germany, GmbH (ISS Germany) in Germany. At December 31, 2018, Image Sensing Systems Europe Limited and Image Sensing Systems Europe Limited SP.Z.O.O were fully closed. At December 31, 2019, Image Sensing Systems Germany, GmbH was fully closed. During the first quarter of 2020, we initiated the closure of Image Sensing Systems EMEA Limited (ISS UK) and Image Sensing Systems Holdings Limited (ISS Holdings). We incurred $
Note L: Commitments and Contingencies
Debt
Under the Paycheck Protection Program ("PPP"), the United States Small Business Administration ("SBA") approved the Company's application to receive a loan in the amount of $
The term of the PPP loan is
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans made under the PPP after 24 weeks if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company intends to use the entire PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. To obtain full or partial forgiveness of the PPP Loan, the Company must request forgiveness and provide satisfactory documentation in accordance with applicable SBA guidelines. Interest payable on the PPP Loan will be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the PPP Loan. As of September 30, 2020, the Company had not recognized any forgiveness of this PPP Loan.
The Company will be obligated to repay any part of the principal amount due under the Note that is not forgiven, together with accrued interest, until the unforgiven portion is paid in full. Beginning one month after the expiration of the Deferred Period and continuing monthly until the Maturity Date, the Company will be obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion of the PPP Loan in such equal amounts as are required to fully amortize the principal amount outstanding under the Note. The Company may prepay any unforgiven amount due under the Note at any time without premium or penalty.
The foregoing description of the Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Note filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2020 and incorporated herein by reference.
| 20 |
Litigation
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with GAAP, we record a liability in our Consolidated Financial Statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to any currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our results of operations, financial position or cash flows. We expense legal costs as incurred.
Note M: Risks and Uncertainties
The Company is considered an essential service and has remained operational during the COVID-19 pandemic. As of the middle of March 2020, the Company closed its corporate office in St. Paul, and all of the Company’s employees began working from home and did not experience any significant interruptions during this transition. The corporate office remains closed, and the Company is working on a plan to reopen its corporate office during 2021, provided that appropriate safeguards are in place and the Company’s plan is in line with state and federal guidelines.
| 21 |
Overview
General. We are a leading provider of above-ground detection products and solutions for the intelligent transportation systems (“ITS”) industry. Our family of products, which we market as Autoscope® video or video products (“Autoscope”), RTMS® radar or radar products (“RTMS”), and IntellitraffiQ® or iQ products, provides end users with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals from sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our products provide end users with complete solutions for the intersection and transportation markets.
Our technology is a process in which software, rather than humans, examines outputs from various types of sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and highways quickly enough to accommodate the increasing congestion levels. On average, and before the outbreak of COVID-19, United States commuters lost 97 hours a year in congestion, which cost motorists $87 billion a year in time, which is an average of $1,365 per driver (per INRIX 2018 Global Traffic scorecard). COVID-19 has reduced travel volume and to some extent congestion since March 2020. We believe that traffic volume will increase in 2021 if the COVID-19 pandemic subsides. We believe vehicle usage will increase above pre-COVID-19 levels and will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install, have lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our solutions well suited for use in ITS markets.
We believe the strength of our distribution channels positions us to increase the penetration of our technology‑driven solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the Caribbean through an exclusive agreement with Econolite Control Products, Inc. ("Econolite"), which we believe is the leading distributor of ITS intersection control products in these markets.
We market the RTMS radar systems to a network of distributors globally. On a limited basis, we may sell directly to the end user. We market our Autoscope video products outside of the United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels, through our office in Spain. Our end users primarily include governmental agencies and municipalities.
The following discussion of period-to-period changes and trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation discussed above.
Trends and Challenges in Our Business
We believe the expected growth in our business can be attributed primarily to the following global trends:
- worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of road infrastructure and the need to automate safety, security and access applications for automobiles and trucks, which has increased demand for our products;
- advances in information technology, which have made our products easier to market, implement and integrate;
- the continued funding allocations for centralized traffic management services and automated enforcement schemes, which have increased the ability of our primary end users to implement our products; and
- general increases in the cost effectiveness of electronics, which make our products more affordable for end users.
We believe our continued growth primarily depends upon:
- continued adoption and governmental funding of ITS and other automated applications for traffic control, safety and enforcement in developed countries;
- a propensity by traffic engineers to implement lower cost technology-based solutions rather than civil engineering solutions such as widening roadways;
- countries in the developing world adopting above-ground detection technology, such as video or radar, instead of in-pavement loop technology to manage traffic; and
- our ability to develop new products that provide increasingly accurate information and enhance the end users' ability to cost-effectively manage traffic and environmental issues.
| 22 |
Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchasing decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue among periods. The ongoing economic environment in Europe and the United States and the COVID-19 pandemic declared in March 2020 are further adding to the unpredictability of purchasing decisions, creating more delays than usual and decreasing governmental budgets, and they are likely to continue to affect our revenue.
Key Financial Terms and Metrics
Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope video systems in the United States, Mexico, Canada and the Caribbean and (2) revenue received from the direct sales of our RTMS radar systems and our Autoscope video systems in Europe and Asia. Autoscope video royalties are calculated using a profit sharing model in which the gross profits on sales of product made through Econolite are shared equally with Econolite. This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is exclusive under the long-term Manufacturing, Distributing and Technology Agreement dated as of June 11, 1991, as amended (the “Econolite Agreement”), between the Company and Econolite.
On April 13, 2020, Econolite informed the Company that Econolite had agreed to temporarily close its manufacturing facility in Tecate, Mexico, under guidance from the local government due to COVID-19. It is the Company’s understanding that Econolite manufactures the Company’s Autoscope products at this facility. By a letter to Econolite dated April 22, 2020, the Company informed Econolite that the Econolite Agreement requires Econolite to maintain sufficient inventory of products governed by the Econolite Agreement to permit Econolite to satisfy demand in the “Territory” (as that term is defined in the Econolite Agreement). Because it was the Company’s understanding that Econolite had not maintained sufficient quantities of completed Autoscope products to satisfy product demand in the Territory, in its April 22, 2020 letter, the Company informed Econolite that Econolite was in breach of the Econolite Agreement and had 60 days from the date of the Company’s letter to manufacture sufficient levels of the Company’s products, including the Company’s Autoscope products, to satisfy demand in the Territory. In the letter, the Company stated that if Econolite failed to comply with this provision of the Econolite Agreement within the 60-day cure period, the Company may elect to terminate the Econolite Agreement.
Based on information obtained by the Company, Econolite made alternative arrangements to manufacture Autoscope and related products that had been manufactured at its Mexican facility. We were told by Econolite in late June 2020 that the local government allowed the reopening of the Tecate, Mexico manufacturing facility, and Econolite had resumed the manufacture of the Company’s Autoscope product line. As of September 30, 2020, the Company had not yet suffered any shortages of product due to the temporary closing of Econolite’s facility in Tecate, Mexico. However, it is uncertain the local government will allow the Tecate, Mexico facility to remain open due to COVID-19 and whether Econolite is meeting, and can continue to meet, the demand for the products in the Territory. We are working with Econolite to provide more accurate and timely information with regard to the status and capacity of its manufacturing facilities, including its Tecate, Mexico operation, and to agree to new plans to ensure that Econolite has sufficient inventory to satisfy future demand in the Territory. If Econolite cannot do so, and if any of the Company’s other third-party suppliers are unable to manufacture sufficient product to meet the demand for products in the Territory, then the Company may be prevented or delayed from effectively operating our business, and the manufacture, supply, and sale of our services and our financial results could be adversely affected.Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support; (2) general and administrative; and (3) research and development. Selling, marketing and product support expenses consist of various costs related to sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; second-tier technical support for Econolite; and general product support, where applicable. General and administrative expenses consist of certain corporate and administrative functions that support the development and sales of our products and provide an infrastructure to support future growth. These expenses include management, supervisory and staff salaries and benefits; legal and auditing fees; travel; rent; and costs associated with being a public company, such as board of director fees, listing fees and annual reporting expenses. Research and development expenses consist mainly of salaries and benefits for our engineers and third party costs for consulting and prototyping. We measure all operating expenses against our annually approved budget, which is developed with achieving a certain operating margin as a key focus. We also include any restructuring costs in operating expenses.
| 23 |
Non-GAAP Operating Measures. We provide certain non-GAAP financial information as supplemental information to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles in the United States). This non-GAAP information excludes the impact of depreciating fixed assets and amortizing intangible assets, and it may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.
Reconciliations of GAAP income from operations to non-GAAP income from operations are as follows (in thousands):
|
Three-Month Periods Ended September 30, |
Nine-Month Period Ended September 30, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
|
Income from operations |
$ | 641 | $ | 925 | $ | 737 | $ | 1,880 | ||||||||
|
Adjustments to reconcile to non-GAAP income |
||||||||||||||||
|
Amortization of intangible assets |
187 | 149 | 549 | 448 | ||||||||||||
|
Depreciation |
58 | 50 | 176 | 149 | ||||||||||||
| Restructuring | — | — | — | 2 | ||||||||||||
|
Non-GAAP income from operations |
$ | 886 | $ | 1,124 | $ | 1,462 | $ | 2,479 | ||||||||
Seasonality. Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our business. Our first quarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North America, Europe and northern Asia. We expect such seasonality to continue for the foreseeable future. Additionally, our international revenues regularly contain individually significant sales. This can result in significant variations of revenue between periods. Accordingly, we believe that quarter-to-quarter comparisons of our financial results should not be relied upon as an indication of our future performance. No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in the future.
Segments. We currently operate in two reportable segments: Intersection and Highway. Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. RTMS and IntellitraffiQ are our radar product lines, and revenue consists of sales to external customers. Radar products are normally sold in the Highway segment. As a result of business model changes and modifications in how we manage our business, we may reevaluate our segment definitions in the future.
The following table sets forth selected unaudited financial information for each of our reportable segments (in thousands):
| Three Months Ended September 30, |
||||||||||||||||||
| Intersection | Highway | Total | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue | $ | 2,502 | $ | 2,789 | $ | 1,248 | $ | 900 | $ | 3,750 | $ | 3,689 | ||||||
| Gross profit | 2,228 | 2,555 | 639 | 621 | 2,867 | 3,176 | ||||||||||||
| Amortization of intangible assets | 92 | 92 | 95 | 57 | 187 | 149 | ||||||||||||
| Intangible assets | 1,468 | 1,835 | 1,880 | 2,076 | 3,348 | 3,911 | ||||||||||||
| Nine Months Ended September 30, |
||||||||||||||||||
| Intersection | Highway | Total | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue | $ | 7,217 | $ | 7,373 | $ | 3,079 | $ | 3,913 | $ | 10,296 | $ | 11,286 | ||||||
| Gross profit | 6,530 | 6,586 | 1,649 | 2,211 | 8,179 | 8,797 | ||||||||||||
| Amortization of intangible assets | 275 | 275 | 274 | 173 | 549 | 448 | ||||||||||||
| Intangible assets | 1,468 | 1,835 | 1,880 | 2,076 | 3,348 | 3,911 | ||||||||||||
| 24 |
Results of Operations
The following table sets forth, for the periods indicated, certain statements of operations data as a percent of total revenue and gross profit on product sales and royalties as a percentage of product sales and royalties, respectively.
|
|
Three-Month Periods Ended |
|
||||
|
|
2020 |
|
2019 |
|
||
|
Product sales |
41.0 |
% |
|
35.2 |
% |
|
|
Royalties |
59.0 |
64.8 |
|
|
||
|
Total revenue |
100.0 |
|
|
100.0 |
|
|
|
Gross profit - product sales |
48.6 |
67.6 |
|
|
||
|
Gross profit - royalties |
95.8 |
96.2 |
|
|
||
|
Selling, general and administrative |
37.9 |
42.3 |
|
|
||
|
Research and development |
21.4 |
18.7 |
|
|
||
|
Income from operations |
17.1 |
25.1 |
|
|||
|
Income tax benefit |
(0.5 |
) |
(141.1 |
) |
|
|
|
Net income |
17.6 |
166.2 |
|
|||
| Nine-Month Periods Ended September 30, |
||||||
| 2020 | 2019 | |||||
| Product sales | 36.5 | % | 43.8 | % | ||
| Royalties | 63.5 | 56.2 | ||||
| Total revenue | 100.0 | 100.0 | ||||
| Gross profit - product sales | 51.0 | 55.2 | ||||
| Gross profit - royalties | 95.8 | 95.7 | ||||
| Selling, general and administrative | 47.5 | 43.5 | ||||
| Research and development | 24.7 | 17.8 | ||||
| Income from operations | 7.2 | 16.7 | ||||
| Income tax expense (benefit) | 0.4 | (46.1 | ) | |||
| Net income | 6.8 | 62.8 | ||||
| 25 |
Total revenue increased to $3.8 million in the three-month period ended September 30, 2020 from $3.7 million in the same period in 2019, an increase of 1.7%, and decreased to $10.3 million in the first nine months of 2020, from $11.3 million in the same period in 2019, a decrease of 8.8%. Royalty income decreased to $2.2 million in the third quarter of 2020 from $2.4 million in the third quarter of 2019, and increased to $6.5 million in the first nine months of 2020 from $6.3 million in the first nine months of 2019, an increase of 3.0%. Product sales increased to $1.5 million in the third quarter of 2020 from $1.3 million in the third quarter of 2019, an increase of 18.4%, and decreased to $3.8 million in the first nine months of 2020 from $4.9 million in the first nine months of 2019, a decrease of 23.9%. The decrease in product sales in the first nine months of 2020 was a result of project timing and COVID-19 related challenges.
Revenue for the Intersection segment decreased to $2.5 million in the three-month period ended September 30, 2020 from $2.8 million in the three-month period ended September 30, 2019 a decrease of 10.3%. Revenue for the Intersection segment decreased to $7.2 million in the first nine months of 2020 from $7.4 million in the first nine months of 2019, a decrease of 2.1%.
Revenue for the Highway segment increased to $1.2 million in the three-month period ended September 30, 2020 from $900,000 in the three-month period ended September 30, 2019, an increase of 38.7%%. Revenue for the Highway segment decreased to $3.1 million in the first nine months of 2020 from $3.9 million in the first nine months of 2019, a decrease of 21.3%. The decrease in revenue in the Highway segment in the first nine months of 2020 was attributable to project timing and COVID-19 related challenges which impacted increasing numbers of regions during the year.
Gross margin percent for product sales decreased to 48.6% in the three months ended September 30, 2020 from 67.6% in the three months ended September 30, 2019. The dollar amount of product sales gross profit decreased $131,000, or 15%, in the three months ended September 30, 2020 compared to the prior year period. Gross margin percent for product sales decreased to 51.0% in the first nine months of 2020 from 55.2% in the first nine months of 2019. Product sales gross profit decreased $808,000, or 30%, in the nine months ended September 30, 2020 compared to the prior year period. The decrease in product gross margin percent was primarily the result of a reduction in the warranty reserve and revenues related to consulting services in the third quarter of 2019.
Gross margin percent for royalty sales for the three months ended September 30, 2020 decreased to 95.8% from 96.2% compared to the same period in 2019. The dollar amount of gross profit from royalties decreased to $2.1 million in the three months ended September 30, 2020 from $2.3 million compared to the prior year period. Gross margin percent for royalty sales for the nine months ended September 30, 2020 increased to 95.8% from 95.7% in the same period in 2019. Gross profit from royalties increased $190,000, or 3.1%, in the nine months ended September 30, 2020 compared to the prior year period. The increase in royalty gross margin percent was due to higher royalty revenues while software amortization expense remained substantially the same.
Selling, general and administrative expense was $1.4 million, or 37.9% of total revenue, in the third quarter of 2020 compared to $1.6 million, or 42.3% of total revenue, in the third quarter of 2019, and decreased to $4.9 million, or 47.5% of total revenue, in the first nine months of 2020 compared to $4.9 million, or 43.5% of total revenue, in the first nine months of 2019. A portion of the expense in the first nine months of 2020 consisted of expenses for legal and outside consulting costs related to the efforts around exploring strategic alternatives to maximize shareholder value that we announced in January 2020. In light of current market conditions, including the effects of the COVID-19 pandemic, the strategic review process has been terminated.
Research and development expense increased to $804,000, or 21.4% of total revenue, in the three-month period ended September 30, 2020 from $691,000, or 18.7% of total revenue, in the three-month period ended September 30, 2019, and increased to $2.5 million, or 24.7% of total revenue, in the nine-month period ended September 30, 2020, from $2.0 million, or 17.8% of total revenue, in the nine-month period ended September 30, 2019. The increase was due to lower capitalized software development costs in the nine-month period ended September 30, 2020 of $22,000 compared to capitalized software costs of $1.0 million for the same period in 2019. After normalizing for software development costs, overall research and development expenditures decreased in the nine-month period ended September 30, 2020 compared to the same period in the prior year.
There was $18,000 of income tax benefit and $39,000 of income tax expense recorded in the three and nine months ended September 30, 2020, respectively. There was $5.2 million of income tax benefit recorded in the three and nine months ended September 30, 2019 due to releasing a significant portion of the deferred tax asset valuation allowance of $5.4 million.
Consolidated net income was $659,000, or $0.12 per basic share and diluted share, in the three-month period ended September 30, 2020 compared to a net income of $6.1 million, or $1.17 per basic and diluted share, in the comparable prior year period. Consolidated net income was $698,000, or $0.13 per basic and diluted share, in the nine-month period ended September 30, 2020 compared to a net income of $7.1 million, or $1.35 per basic and diluted share, in the comparable prior year period.
| 26 |
Liquidity and Capital Resources
At September 30, 2020, we had $7.5 million in cash and cash equivalents compared to $5.1 million in cash and cash equivalents at December 31, 2019.
Net cash provided by operating activities was $1.5 million in the first nine months of 2020 compared to net cash provided by operating activities of $1.9 million in the same period in 2019. The decrease in net cash provided by operating activities in the first nine months of 2020 compared to the prior year period is primarily attributed to lower net income and an increase in accounts receivable.
Net cash provided by financing activities was $918,000 in the first nine months of 2020, primarily attributed to the funding of $924,000 we received from the United States Small Business Administration (SBA) in the form of the Paycheck Protection Program loan (the "PPP Loan"). See Note L of the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further description of the PPP Loan.
Net cash used for investing activities was $134,000 for the first nine months of 2020 compared to net cash used for investing activities of $1.3 million in the same period in 2019. The decrease of the amount of net cash used for investing activities in the first nine months of 2020 compared to the prior year period was primarily the result of lower capitalized internal software development costs compared to the prior year period.
We believe that cash and cash equivalents on hand at September 30, 2020, cash provided by operating activities, and the cash provided by the PPP Loan will satisfy our projected working capital needs, investing activities, and other cash requirements until at least September 30, 2021.
Off-Balance Sheet Arrangements
We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity, including special purpose and similar entities, or other off-balance sheet arrangements.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2020 are set forth elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction with those described in our Annual Report on Form 10-K and the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.
| 27 |
Cautionary Statement:
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events and can be identified by the use of forward-looking words such as "expects," "believes," "may," "will," "should," "intends," "plans," "estimates," or "anticipates" or other comparable terminology. Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results described in the forward-looking statements. Factors that might cause such differences include, but are not limited to:
- our historical dependence on a single product for most of our revenue;
- budget constraints by governmental entities that purchase our products, including constraints caused by declining tax revenue;
- the continuing ability of Econolite to pay royalties owed;
- the mix of and margin on the products we sell;
- our dependence on third parties for manufacturing and marketing our products;
- our dependence on single-source suppliers to meet manufacturing needs;
- our failure to secure adequate protection for our intellectual property rights;
- our inability to develop new applications and product enhancements;
- the potential disruptive effect on the markets we serve of new and emerging technologies and applications, including vehicle-to-vehicle communications and autonomous vehicles;
- unanticipated delays, costs and expenses inherent in the development and marketing of new products;
- our inability to respond to low-cost local competitors;
- our inability to properly manage any growth in revenue and/or production requirements;
- the influence over our voting stock by affiliates;
- our inability to hire and retain key scientific and technical personnel;
- the effects of legal matters in which we may become involved;
- our inability to achieve and maintain effective internal controls;
- our inability to successfully integrate any acquisitions;
- tariffs and other trade barriers;
- political and economic instability, including continuing volatility in the economic and political environment of the European Union;
- our inability to comply with international regulatory restrictions over hazardous substances and electronic waste; and
- conditions beyond our control such as war, terrorist attacks, health epidemics (including the COVID-19 pandemic caused by the coronavirus) and economic recession.
We caution that the forward-looking statements made in this report or in other announcements made by us are further qualified by the risk factors set forth in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.
| 28 |
Approximately 20% of our revenue has historically been derived from shipments to customers outside the United States, and a large portion of this revenue is denominated in currencies other than the U.S. dollar. Our international subsidiaries have functional currencies other than our U.S. dollar reporting currency and, occasionally, transact business in currencies other than their functional currencies. These non-functional currency transactions expose us to market risk on assets, liabilities and cash flows recognized on these transactions.
The strengthening of the U.S. dollar relative to foreign currencies decreases the value of foreign currency-denominated revenue and earnings when translated into U.S. dollars. Conversely, a weakening of the U.S. dollar increases the value of foreign currency-denominated revenue and earnings. A 10% adverse change in foreign currency rates could have a material effect on our results of operations or financial position.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2020, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter covered by this Quarterly Report on Form 10-Q, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 29 |
None.
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended December 31 2019, filed on March 12, 2020. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of November 10, 2020, there had been no material changes to the disclosures made in the above-referenced Form 10-K, other than as set forth below.
COVID-19 has affected and could continue to affect our sales and disrupt our operations and have a material adverse impact on our sales, financial results, financial condition and stock price.
COVID-19 that was reported to have surfaced in December 2019 and that has spread worldwide has affected and could adversely impact the Company’s operations or those of our third-party suppliers, as well as our sales to customers and our stock price. In particular, our product revenue in our international market segments was adversely impacted by COVID-19 due to their early and aggressive reaction to COVID-19, resulting in lock-downs of many regions. Although we eliminated discretionary spending, deferred programmatic expense to the second half of 2020, and took actions to increase our liquidity (including obtaining the PPP Loan), the extent to which COVID-19 will continue to impact the Company’s operations, those of our third-party suppliers, or our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence. The recent surge of COVID-19 in the United States and Europe may result in more lock-downs and increase the uncertainty and negative effects caused by COVID-19 on the Company. If the Company or any of our third-party suppliers encounter any further disruptions to our or their respective operations or facilities, or if our customers were to partially or fully close for an extended period of time due to COVID-19 or the governments' reactions to it, then we or they may be prevented or delayed from effectively operating our or their business, respectively, and the manufacture, supply, and sale of our services and our sales, financial condition, financial results and stock price could be adversely affected.
None.
None.
None.
None.
| 30 |
The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020:
|
|
||
|
Exhibit |
|
Description |
| Amendment XIV to Office Lease Agreement by and between Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc., dated as of June 17, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2020 (File No. 0-26056). | ||
|
|
||
|
|
||
|
|
||
|
|
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|
101 |
|
The following financial information from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements (filed herewith). |
| 31 |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Image Sensing Systems, Inc. |
|
|
Dated: November 10, 2020 |
By: |
/s/ Chad A. Stelzig |
|
|
|
Chad A. Stelzig |
|
|
|
President and Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
Dated: November 10, 2020 |
By: |
/s/ Frank G. Hallowell |
|
|
|
Frank G. Hallowell |
|
|
|
Chief Financial Officer |
|
(Principal Financial Officer and Principal Accounting Officer) |
||
| 32 |
| 33 |