UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number: 0-26056
IMAGE SENSING SYSTEMS, INC.
--------------------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1519168
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 SPRUCE TREE CENTRE
1600 UNIVERSITY AVE. W.
ST. PAUL, MN 55104-3825
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(Address of principal executive offices)
(651) 603-7700
--------------------------------------------
(Issuer's telephone number)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: Common Stock, $.01 par value, 3,547,522
shares as of April 22, 2005.
Transitional Small Business Disclosure Format: Yes [_] No [X]
IMAGE SENSING SYSTEMS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income for the
three-month periods ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of
Operations 8
Item 3. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 6. Exhibits 13
Signatures 14
Exhibit Index 15
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
----------- ------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,602,000 $ 1,262,000
Short-term investments 5,450,000 5,000,000
Accounts receivable 1,643,000 2,176,000
Inventories 489,000 404,000
Investment in callable FHLB bonds 2,300,000 2,300,000
Prepaid expenses 91,000 275,000
Deferred income taxes 49,000 49,000
----------- -----------
Total current assets 11,624,000 11,466,000
Property and equipment, net 145,000 127,000
Other assets:
Capitalized software development costs, net 355,000 420,000
Goodwill 1,050,000 1,050,000
----------- -----------
1,405,000 1,470,000
----------- -----------
Total assets $13,174,000 $13,063,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 375,000 $ 402,000
Accrued compensation 346,000 708,000
Income taxes payable 96,000 30,000
----------- -----------
Total current liabilites 817,000 1,140,000
Deferred income taxes 144,000 144,000
Shareholders' equity:
Common stock 35,000 35,000
Additional paid-in capital 6,578,000 6,541,000
Retained earnings 5,600,000 5,203,000
----------- -----------
12,213,000 11,779,000
----------- -----------
Total liabilities and shareholders' equity $13,174,000 $13,063,000
=========== ===========
Note: The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
See accompanying notes
3
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three-Month Periods Ended
March 31
-------------------------
2005 2004
---------- ----------
REVENUE:
Product sales $ 430,000 $ 830,000
Royalties 1,697,000 1,243,000
---------- ----------
2,127,000 2,073,000
COSTS OF REVENUE:
Product sales 183,000 415,000
Royalties 80,000 58,000
---------- ----------
263,000 473,000
---------- ----------
Gross profit 1,864,000 1,600,000
OPERATING EXPENSES:
Selling, marketing and product support 665,000 622,000
General and administrative 320,000 320,000
Research and development 283,000 194,000
---------- ----------
1,268,000 1,136,000
---------- ----------
Income from operations 596,000 464,000
Other income, net 44,000 13,000
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Income before income taxes 640,000 477,000
Income taxes 243,000 157,000
---------- ----------
Net income $ 397,000 $ 320,000
========== ==========
Net income per common share:
Basic $ 0.11 $ 0.10
========== ==========
Diluted $ 0.10 $ 0.09
========== ==========
Weighted average number of common shares outstanding:
Basic 3,544,000 3,292,000
========== ==========
Diluted 3,886,000 3,760,000
========== ==========
See accompanying notes
4
IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three-Month Periods Ended
March 31
--------------------------
2005 2004
----------- -----------
OPERATING ACTIVITIES:
Net income $ 397,000 $ 320,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 91,000 83,000
Change in operating assets and liabilities 308,000 (495,000)
----------- -----------
Net cash provided by (used in) operating activities 796,000 (92,000)
INVESTING ACTIVITIES:
Purchase of property and equipment (45,000) (44,000)
Sale (purchase) of short-term investments (450,000) 600,000
Purchase of callable FHLB bonds -- (1,204,000)
----------- -----------
Net cash used in investing activities (495,000) (648,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 39,000 37,000
----------- -----------
Net cash provided by financing activities 39,000 37,000
----------- -----------
Increase (decrease) in cash and cash equivalents 340,000 (703,000)
Cash and cash equivalents, beginning of period 1,262,000 2,034,000
----------- -----------
Cash and cash equivalents, end of period $ 1,602,000 $ 1,331,000
=========== ===========
See accompanying notes
5
IMAGE SENSING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) March 31, 2005
Note A: Basis of Presentation
-----------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 2004.
Note B: Earnings Per Share
--------------------------
The following table sets forth the computations of basic and diluted earnings
per share for the three-month periods ended March 31, 2005 and 2004:
2005 2004
---------- ----------
Numerator:
Net income $ 397,000 $ 320,000
========== ==========
Denominator:
Shares used in basic earnings per share calculation 3,544,000 3,292,000
Effect of diluted securities:
Employee and director stock options 342,000 468,000
---------- ----------
Shares used in diluted earnings per share calculations 3,886,000 3,760,000
========== ==========
Basic earnings per share $ 0.11 $ 0.10
========== ==========
Diluted earnings per share $ 0.10 $ 0.09
========== ==========
6
Note C: Stock Options
---------------------
Stock options issued to employees are accounted for under the intrinsic value
method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." No stock-based employee compensation cost is reflected in net
income, as all options granted had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and net income per share if we had applied
the fair value method of accounting for stock options under the provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock-Based Compensation":
2005 2004
---------- -----------
Net income, as reported $ 397,000 $ 320,000
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (55,000) (55,000)
---------- -----------
Pro-forma net income $ 342,000 $ 265,000
========== ===========
Income per share:
Basic - as reported $ .11 $ .10
========== ===========
Basic - pro forma $ .10 $ .08
========== ===========
Diluted - as reported $ .10 $ .09
========== ===========
Diluted - pro forma $ .09 $ .07
========== ===========
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used: zero dividend yield; expected volatility of 127%; risk-free
interest rate of 4.27% and expected life of 10 years for all years presented.
In December 2004, the FASB issued Statement of Financial Accounting Standards
Statement No. 123 (revised 2004), Share-Based Payment. This Statement is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, is
effective in the first annual period that begins after December 15, 2005 and
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services and requires that the
compensation cost relating to share-based payment transactions be measured on
the fair value of the equity or liability instruments issued. Management is
currently assessing if the adoption of this Statement will have a material
impact on the Company.
7
Item 2. Management's Discussion and Analysis or Plan 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(R) Wide Area Video Vehicle Detection System.
Autoscope systems are sold to distributors and end users of traffic management
products in North America and Latin America by Econolite Control Products, Inc.
(Econolite), our master distributor in those locations. We also sell Autoscope
products to distributors and end users in Europe and Asia through our European
and Hong Kong subsidiaries, respectively. The Autoscope system is used by
traffic managers primarily to improve the flow of vehicle traffic and to enhance
safety at intersections, main thoroughfares, freeways and tunnels. Flow Traffic
Ltd., our Asian subsidiary, also sells other traffic management products and
systems in Asia.
The majority of our revenue is derived from royalties received from Econolite,
with a second primary source of revenue produced from direct product sales in
Europe and Asia. End users of the Autoscope system throughout the world are
generally funded by government agencies responsible for traffic management
and/or traffic law enforcement.
Our success is primarily dependent upon (1) continued governmental funding of
"Intelligent Transportation Systems", such as machine vision for traffic
control; (2) our ability through Econolite and our sales representatives in
Europe and Asia, to successfully market the Autoscope System to individual
traffic managers and (3) our ability to develop new machine vision products and
applications that enhance the traffic manager's ability to cost-effectively
improve traffic flow and safety.
8
Results of Operations: (Comparison of three-month periods ended March 31, 2005
---------------------
and 2004)
The following table sets forth for the three-month periods ended March 31, 2005
and 2004, certain statements of income data as a percent of total revenue and
gross profit on product sales and royalties as a percentage of product sales and
royalties, respectively, shown in italics:
2005 2004
-------- --------
Product sales 20.2% 40.0%
Royalties 79.8 60.0
-------- --------
Total revenue 100.0 100.0
GROSS PROFIT - PRODUCT SALES 57.4 50.0
GROSS PROFIT - ROYALTIES 95.3 95.3
Selling, marketing and product support 31.3 30.0
General and administrative 15.0 15.4
Research and development 13.3 9.4
Income from operations 28.0 22.4
Income taxes 11.4 7.6
Net income 18.7 15.4
Total revenue increased to $2,127,000 in the first quarter of 2005 from
$2,073,000 in the first quarter of 2004, an increase of 2.6%. Product sales for
2005 decreased to $430,000, or 20.2% of revenue, from $830,000, or 40.0% of
revenue, in 2004. The 48.2% decrease in product sales compared to 2004 was due
primarily to the fact that we were transitioning to a new loop detection product
in the first quarter of 2005 and had no sales of the product by our Hong Kong
subsidiary compared to sales of over $350,000 in the first quarter of 2004. We
are currently proposing the new loop detection product on several bid
opportunities in Asia and expect sales of the product to begin in the second
quarter of 2005. We also were unable to repeat a large order sold in the first
quarter of 2004 to a customer in Greece in preparation for the 2004 Olympics in
Athens. Royalty income for the first quarter of 2005 increased to $1,697,000, or
79.8% of revenue, from $1,243,000, or 60.0% of revenue, in 2004. The 36.5%
increase in royalty income in 2005 resulted primarily from a similar increase in
sales volume of the Autoscope Solo Pro product by Econolite.
Gross profits on product sales for the first quarter of 2005 were $247,000, a
40.5% decrease from $415,000 in the comparable quarter of 2004, a result of the
decrease in sales in the quarter. Gross profit margins on product sales
increased to 57.4%, compared to 50.0% in 2004, due primarily to the mix of
product sales with less sales of lower margin camera and loop detection products
in 2005 compared to 2004. Gross profit margins on royalty income remained
unchanged.
Selling, marketing and product support expenses were $665,000, or 31.3% of
revenue, in the first quarter of 2005, compared to $622,000, or 30.0% of
revenue, in the comparable quarter of 2004. The increases in both total dollars
expended and as a percent of sales resulted primarily from adding sales and
support staff for our new branch office in Poland. We do not expect the level of
selling, marketing and product support expenses to increase appreciably over the
remaining three quarters of 2005. General and administrative expenses were
$320,000, or 15.0% of revenue, in
9
2005, compared to $320,000, or 15.4% of revenue, in 2004. We do not expect the
level of general and administrative expenses to increase appreciably over the
remaining three quarters of 2005. Research and development expenses totaled
$283,000, or 13.3% of revenue, in 2005 compared to $194,000, or 9.4% of revenue,
in 2004. The increase resulted primarily from the allocation of more engineering
time to new product development in 2005 compared to 2004. We expect that
research and development expenses will continue to increase marginally in 2005
as we complete or advance the development of several new products.
Income from operations in the first quarter of 2005 was $596,000, or 28.0% of
revenue, compared to $464,000, or 22.4% of revenue, in the comparable quarter in
2004, an increase of 28.4%. The increase resulted primarily from the 36.5%
growth in revenue from royalties offset in part by lower product sales and
increased operating expenses as described above.
Income taxes were $243,000 or 38.0% of pretax income in the first quarter of
2005, compared to $157,000 or 32.9% of pretax income in the comparable quarter
of 2004. The increase in income taxes was due primarily to having more taxable
income in 2005 and the increase in the effective tax rate was due primarily from
the losses sustained by our foreign subsidiaries that do not generate tax
benefits. We expect the effective income tax rate to decrease to about 34% of
pretax income if our foreign subsidiaries become profitable in the remaining
quarters of 2005.
Net income was $397,000 in the first quarter of 2005, a 24.1% increase compared
to $320,000 in the comparable quarter of 2004, due to the factors discussed
above.
Liquidity and Capital Resources:
--------------------------------
At March 31, 2005, we had $1,602,000 in cash and cash equivalents, compared to
$1,262,000 at December 31, 2004. We had working capital of $10,807,000, and a
ratio of current assets to current liabilities of 14.2 to 1 at March 31, 2005,
compared to $10,326,000 and 10.1 to 1, respectively, at the end of 2004. In
addition, we increased our short-term investments to $5,450,000 at March 31,
2005 from $5,000,000 at the end of 2004.
Net cash provided by operating activities was $796,000 in the first quarter of
2005, compared to $92,000 net cash used by operating activities in 2004. The
primary reason for the change was that we received an unusually large payment on
accounts receivable in March 2005 and we used an overpayment on estimated income
taxes in 2004 to pay the balance owing for 2004, wherein the first quarter of
2004 we paid over $300,000 in income taxes on the balance owing for 2003. We
invested $450,000 of the cash generated from operating activities in short-term
tax-exempt bonds and $45,000 in property and equipment.
We have a credit agreement that provides up to $1,000,000 in short-term
borrowings at .5% over the prime rate (effective rate of 6.25% at March 31,
2005). Loans would be unsecured except for the bank's right of setoff against
checking, savings and other accounts we have with the bank. We had no
outstanding borrowings under the credit agreement in 2005 or 2004.
We believe that cash and cash equivalents on hand at March 31, 2005, our
$1,000,000 revolving line of credit with Wells Fargo Bank Minnesota, N.A. and
cash provided by operating activities
10
will satisfy our projected working capital needs, investing activities and other
cash requirements in the foreseeable future.
Off-Balance Sheet Arrangements:
-------------------------------
We have no off-balance sheet arrangements.
Cautionary Statement:
---------------------
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 "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 discussed in the forward-looking statements. Factors
that might cause such differences include, but are not limited to:
o dependence on a single product for most of our revenue;
o budget constraints by governmental entities that purchase our
products;
o continuing ability of our licensee to pay royalties owed;
o dependence on third parties for manufacturing and marketing
our products;
o dependence on single-source suppliers to meet manufacturing
needs;
o failure to secure adequate protection for our intellectual
property rights;
o our inability to develop new applications and product
enhancements;
o our inability to properly manage a growth in revenue and/or
production requirements;
o control of our voting stock by insiders;
o our inability to retain key scientific and technical
personnel;
o our inability to achieve and maintain effective internal
controls;
o our inability to comply with international regulatory
restrictions over hazardous substances and electronic waste;
and
11
o conditions beyond our control such as war, terrorist attacks,
health epidemics 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 1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures
were effective in timely alerting them to the material information relating to
us (or our consolidated subsidiaries) required to be included in the reports we
file or submit under the Exchange Act.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
During the fiscal quarter covered by this report, there has been no change in
our internal control over financial reporting (as defined in Rule 13a-15(f) or
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
12
PART II - OTHER INFORMATION
Item 6. Exhibits
The following exhibits are filed as part of this quarterly report on Form 10-QSB
for the quarterly period ended March 31, 2005.
Exhibit
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Chief Executive Officer Certification pursuant to 18 U. S. C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification pursuant to 18 U. S. C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Image Sensing Systems, Inc.
By:
Dated: April 29, 2005 /s/ James Murdakes
--------------------------------------------
James Murdakes
Chairman and Chief Executive Officer
(principal executive officer)
Dated: April 29, 2005 /s/ Arthur J. Bourgeois
--------------------------------------------
Arthur J. Bourgeois
Chief Financial Officer
(principal financial and accounting officer)
14
EXHIBIT INDEX TO FORM 10-QSB
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, dated
April 29, 2005.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, dated
April 29, 2005.
32.1 Chief Executive Officer Certification pursuant to 18 U. S. C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 29, 2005.
32.2 Chief Financial Officer Certification pursuant to 18 U. S. C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 29, 2005.
15