10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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: 0-26056

Image Sensing Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

Minnesota	41-1519168
State or Other Jurisdiction of Incorporation or Organization	I.R.S. Employer Identification No.
500 Spruce Tree Centre
1600 University Avenue West
St. Paul, MN	55104
Address of Principal Executive Offices	Zip Code

(651) 603-7700

Registrant’s Telephone Number, Including Area Code

Not Applicable

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No ¨

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).  Yes x    No ¨

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.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨ 

Smaller reporting company x

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.    ¨

1

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨    No x

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ISNS	The NASDAQ Capital Market
Preferred Stock Purchase Rights	ISNS	The NASDAQ Capital Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at April 30, 2019
Common Stock, $0.01 par value per share	5,304,457 shares

2

IMAGE SENSING SYSTEMS, INC.

TABLE OF CONTENTS 

​​​​​​​​​​​​​​​​​

PART I. FINANCIAL INFORMATION	4
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations	5
Condensed Consolidated Statements of Comprehensive Income (Loss)	6
Condensed Consolidated Statements of Cash Flows	7
Condensed Consolidated Statements of Shareholders' Equity	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	26
PART II. OTHER INFORMATION	27
Item 1. Legal Proceedings	27
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	28
SIGNATURES	29
EXHIBIT INDEX	30

3

PART I. FINANCIAL INFORMATION

Item 1.         Financial Statements

Image Sensing Systems, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

	March 31, 2019			December 31,
	(Unaudited)			2018
ASSETS
Current assets:
Cash and cash equivalents	$	3,948		$	4,236
Accounts receivable, net of allowance for doubtful accounts of $74 and $72, respectively		3,417			3,830
Inventories		1,208			1,289
Prepaid expenses and other current assets		353			410
Total current assets		8,926			9,765
Property and equipment:
Furniture and fixtures		163			162
Leasehold improvements		8			8
Equipment		1,131			1,058
		1,302			1,228
Accumulated depreciation		936			882
		366			346
Operating lease assets, net		370			—
Intangible assets, net		3,586			3,317
Deferred income taxes		57			56
TOTAL ASSETS	$	13,305		$	13,484
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	248		$	878
Deferred revenue		628			716
Warranty		573			656
Accrued compensation		145			224
Operating lease obligations		254			—
Other current liabilities		291			373
Total current liabilities		2,139			2,847
Operating lease obligations		116			—
TOTAL LIABILITIES		2,255			2,847
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $0.01 par value; 20,000,000 shares authorized, 5,293,941 and 5,278,485
issued and outstanding at March 31, 2019 and December 31, 2018, respectively		52			52
Additional paid-in capital		24,592			24,550
Accumulated other comprehensive loss		(342	)		(372	)
Accumulated deficit		(13,252	)		(13,593	)
Total shareholders' equity		11,050			10,637
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	13,305		$	13,484
See accompanying notes to the condensed consolidated financial statements.

4

Image Sensing Systems, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

	Three-Month Periods Ended March 31,
	2019		2018
Revenue:
Product sales	$	1,621	$	844
Royalties		1,751		2,166
		3,372		3,010
Cost of revenue:
Product sales		685		355
Royalties		92		92
		777		447
Gross profit		2,595		2,563
Operating expenses:
Selling, general and administrative		1,665		1,761
Research and development		620		819
Restructuring charges		2		—
		2,287		2,580
Operating income (loss) from operations		308		(17	)
Income (loss) from operations before income taxes		308		(17	)
Income tax expense		—		—
Net income (loss)	$	308	$	(17	)
Net income (loss) per share:
Basic	$	0.06	$	(0.00	)
Diluted	$	0.06	$	(0.00	)
Weighted average number of common shares outstanding:
Basic		5,224		5,181
Diluted		5,243		5,181
See accompanying notes to the condensed consolidated financial statements.

5

Image Sensing Systems, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(in thousands)

	Three-Month Periods Ended March 31,
	2019		2018
Net income (loss)	$	308	$	(17	)
Other comprehensive income (loss):
Foreign currency translation adjustment		30		(1	)
Comprehensive income (loss)	$	338	$	(18	)
See accompanying notes to the condensed consolidated financial statements.

6

Image Sensing Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Three-Month Periods Ended March 31,
	2019			2018
Operating activities:
Net income (loss)	$	308		$	(17	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		51			63
Software amortization		150			111
Stock-based compensation		50			85
Loss on disposal of assets		—			1
Changes in operating assets and liabilities:
Accounts receivable, net		413			583
Inventories		81			(53	)
Prepaid expenses and other current assets		57			(69	)
Accounts payable		(626	)		24
Accrued expenses and other current liabilities		(300	)		(472	)
Net cash provided by operating activities		184			256
Investing activities:
Capitalized software development costs		(419	)		(66	)
Purchases of property and equipment		(75	)		(47	)
Net cash used for investing activities		(494	)		(113	)
Financing activities:
Stock for tax withholding		(12	)		(10	)
Proceeds from stock options exercised		4			—
Net cash used for financing activities		(8	)		(10	)
Effect of exchange rate changes on cash		30			(1	)
Change in cash and cash equivalents		(288	)		132
Cash and cash equivalents at beginning of period		4,236			3,190
Cash and cash equivalents at end of period	$	3,948		$	3,322
Non-Cash investing and financing activities:
Purchase of property and equipment in accounts payable	$	9		$	25

See accompanying notes to the condensed consolidated financial statements.

7

IMAGE SENSING SYSTEMS, INC.

Condensed Consolidated Statements of Shareholders' Equity

(in thousands, except share data)

	Three-Month Period Ended March 31, 2018
	Shares Issued		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, December 31, 2017	5,210,448		$	51	$	24,355		$	(310	)	$	(15,455	)	$	8,641
Stock-based compensation	48,026			1		84			—			—			85
Stock for tax withholding	(2,248	)		—		(10	)		—			—			(10	)
Comprehensive income (loss):
Foreign currency translation adjustment	—			—		—			(1	)		—			(1	)
Net loss	—			—		—			—			(17	)		(17	)
Balance, March 31, 2018	5,256,226		$	52	$	24,429		$	(311	)	$	(15,472	)	$	8,698
	Three-Month Period Ended March 31, 2019
	Shares Issued			Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, December 31, 2018	5,278,485		$	52	$	24,550		$	(372	)	$	(13,593	)	$	10,637
Stock-based compensation	16,818			—		50			—			—			50
Stock options exercised	1,000			—		4			—			—			4
Stock for tax withholding	(2,362	)		—		(12	)		—			—			(12	)
Comprehensive income:
Foreign currency translation adjustment	—			—		—			30			—			30
Net income	—			—		—			—			308			308
Cumulative effect from adoption of ASU No. 2016-02	—			—		—			—			33			33
Balance, March 31, 2019	5,293,941		$	52	$	24,592		$	(342	)	$	(13,252	)	$	11,050
See accompanying notes to the condensed consolidated financial statements

 

8

IMAGE SENSING SYSTEMS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

March 31, 2019

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 month periods ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018 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 

On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective transition method. The Company's adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.

Under ASU 2014-09, 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;
●	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 months ended March 31, 2019 and 2018 consists of the following (in thousands): revenue excludes sales and usage-based taxes where it has been determined that we are acting as a pass-through agent. 

	Three Months Ended March 31,
	2019		2018
Product sales	$	1,621	$	844
Royalties		1,751		2,166
Total revenue	$	3,372	$	3,010

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Product Sales:

Product revenue is generated from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems outside of North America. 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 the hardware, software, installation services, training, and support.  In arrangements when 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 from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Our payment terms may vary by the type and location of our customer and the products or services offered. 

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 we deliver the products or perform services.

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. We earn and recognize the royalty of approximately 50% of Econolite's gross profit on licensed products when the products are shipped or delivered to its customers.

Practical Expedients and Exemptions:

We generally expense sales commissions when incurred because the amortization periods would have been one year or less.  These costs are recorded within sales and marketing expense.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

10

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 the 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 deferred tax assets. In the event that 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 straight-line method in a manner 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 is determined to be in excess of net realizable value has been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately $419,000 and $66,000 of software development costs during the quarters ended March 31, 2019 and 2018, respectively. 

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 March 31, 2019 and 2018, we determined there was no impairment of intangible assets. At both March 31, 2019 and 2018, there were no indefinite-lived intangible assets.

11

Note B: Recent Accounting Pronouncements 

Accounting pronouncement recently adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued 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 accumulated deficit as of that date.  Prior year amounts were not recast under the transition approach and, therefore, prior year amounts are excluded from the operating leases footnote. 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.

Accounting pronouncements not yet adopted

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. The standard 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. Certain disclosures in the amendment are to be applied using a retrospective approach while other disclosures are to be applied using a prospective approach. Early adoption is permitted. We have not yet evaluated the impact the adoption of this guidance may have on our financial condition, results of operations or 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.

12

Note D: Inventories

Inventories consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Finished goods	$	856	$	949
Components		352		340
Total	$	1,208	$	1,289

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 accumulated deficit as of that date.

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.

Under ASC 840, rent expense for office facilities for the period ended March 31, 2018 was $146,000.

The cost components of our operating leases were as follows (in thousands) for the period ended March 31, 2019: 

	Three-Month Period
	Total
Operating lease costs	$	65
Variable lease cost		76
Short-term lease cost		—
Total	$	141

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.

13

Maturities or our lease liabilities for all operating leases are as follows (in thousands) as of March 31, 2019:

	Total
2019	$	265
2020		104
2021		9
2022		5
2023		—
2024 and thereafter		—
Total lease payments		383
Less: Interest		(13	)
Present value of lease liabilities	$	370

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2019:

	March 31, 2019
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1.6
Weighted average discount rate	4.75	%

Cash paid for amounts included in the measurement of operating lease liabilities were $65,000 for the three months ended March 31, 2019 and this amount is included in operating activities in the condensed consolidated statements of cash flows.  Separate from the initial recognition of the existing leases, there were no operating lease assets obtained in exchange for new operating lease liabilities for the three months ended March 31, 2019.

14

Note F: Intangible Assets

Intangible assets consisted of the following (dollars in thousands):            

	March 31, 2019
								Weighted
	Gross					Net		Average
	Carrying		Accumulated			Carrying		Useful Life
	Amount		Amortization			Value		(in Years)
Developed technology	$	3,900	$	(3,900	)	$	—	—
Vision development costs		2,929		(911	)		2,018	8.0
Software development in process costs		1,093		—			1,093	—
IntellitraffiQ development costs		468		(88	)		380	4.0
Wrong Way development costs		228		(133	)		95	2.0
Total	$	8,618	$	(5,032	)	$	3,586	7.1

	December 31, 2018
								Weighted
	Gross					Net		Average
	Carrying		Accumulated			Carrying		Useful Life
	Amount		Amortization			Value		(in Years)
Developed technology	$	3,900	$	(3,900	)	$	—	—
Vision development costs		2,929		(819	)		2,110	8.0
Software development in process costs		674		—			674	—
IntellitraffiQ development costs		468		(59	)		409	4.0
Wrong Way development costs		228		(104	)		124	2.0
Total	$	8,199	$	(4,882	)	$	3,317	7.1

Note G: Warranties 

We generally provide a 2 to 5 year warranty on product sales. Reserves to honor warranty claims are estimated and recorded at the time of sale based on historical claim information and are analyzed and adjusted periodically based on actual claim trends.

Warranty liability and related activity consisted of the following (in thousands):

	Three-Month Periods Ended March 31,
	2019			2018
Beginning balance	$	656		$	858
Warranty provisions		30			30
Warranty claims		(33	)		(11	)
Adjustments to preexisting warranties		(81	)		(102	)
Currency		1			2
Ending balance	$	573		$	777

15

Note H: Stock-Based Compensation

We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2005 Stock Incentive Plan (the "2005 Plan") and the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), both of which were approved by our shareholders and are administered under the supervision of our Board of Directors. Although stock options granted under the 2005 Plan are still outstanding, the 2005 Plan expired, and the Company can no longer grant options or other awards under the 2005 Plan. 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 3 to 5 years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of 9 to 10 years.

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 March 31, 2019 and 2018 was $50,000 and $85,000, respectively. At March 31, 2019, 108,420 shares were available for grant under the Company's 2014 Plan.

Stock Options

A summary of the option activity for the first three months of 2019 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, 2018		39,000		$	6.26		2.80	$	4,480
Granted		—		$	—		—	$	—
Exercised		(1,000	)	$	4.22		—	$	950
Expired		—		$	—		—	$	—
Forfeited		(4,000	)	$	4.22		—	$	3,360
Options outstanding at March 31, 2019		34,000		$	6.56		2.20	$	9,420
Options exercisable at March 31, 2019		34,000		$	6.56		2.20	$	9,420

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There were options to purchase 1,000 shares of common stock exercised during the three-month period ended March 31, 2019 and no options exercised in the three-month period ended March 31, 2018. During the three-month period ended March 31, 2019 we recognized no stock-based compensation expense related to stock options compared to $1,000 recognized during the three-month period ended March 31, 2018.  As of March 31, 2019, there was no unrecognized compensation cost related to non-vested stock options.

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. The restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant date through the end of the vesting period. At the time of vesting of the restricted stock awards, the recipients of common stock may request to receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the relevant jurisdiction's maximum statutory rate.

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. Compensation expense related to any stock awards issued to employees is determined on the grant date based on the publicly-quoted fair market value of our common stock and is charged to earnings on the grant date.  

The following table summarizes restricted stock award activity for the first three months of 2019:

	Number of Shares			Weighted Average Grant Date Fair Value
Awards outstanding December 31, 2018	58,877		$	3.22
Granted	28,644			5.04
Vested	(22,976	)		3.54
Forfeited	(11,826	)		3.04
Awards outstanding at March 31, 2019	52,719		$	4.11

As of March 31, 2019, the total stock-based compensation expense related to non-vested awards not yet recognized was $198,000, which is expected to be recognized over a weighted average period of 2.5 years.  During the three-month periods ended March 31, 2019 and March 31, 2018, we recognized $50,000 and $84,000, respectively, of stock-based compensation expense related to restricted stock awards.

Note I: Income per Common Share

Net income (loss) 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 diluted weighted average shares outstanding calculation 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 23,000 and 83,086 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended March 31, 2019 and 2018, respectively.

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A reconciliation of net income per share is as follows (in thousands, except per share data): 

	Three-Month  Periods Ended March 31,
	2019		2018
Numerator:
Net income (loss)	$	308	$	(17	)
Denominator:
Weighted average common shares outstanding		5,224		5,181
Dilutive potential common shares		19		—
Shares used in diluted net income per common share calculations		5,243		5,181
Basic net income (loss) per common share	$	0.06	$	(0.00	)
Diluted net income (loss) per common share	$	0.06	$	(0.00	)

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 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 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 March 31,
	Intersection				Highway				Total
	2019		2018		2019		2018		2019		2018
Revenue	$	2,072	$	2,417	$	1,300	$	593	$	3,372	$	3,010
Gross profit		1,792		2,186		803		377		2,595		2,563
Amortization of intangible assets		92		92		58		19		150		111
Intangible assets		2,018		2,385		1,568		1,055		3,586		3,440

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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.  The Company will continue doing business in the European region utilizing the Barcelona, Spain sales office.  We incurred $2,000 of costs for the closure of our office in Romania in the three-month period ended March 31, 2019.  No costs related to the closure of the Romania location were incurred in the three-month period ended March 31, 2018.

The following table shows the restructuring activity for the first three months of 2019 (in thousands):

	Termination Benefits		Facility Costs and Contract Termination		Total
Balance at December 31, 2018	$	18	$	4	$	22
Charges		2		—		2
Settlements		(9)		(4)		(13)
Balance at March 31, 2019	$	11	$	—	$	11

In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our following wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) located in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) located in China; and Image Sensing Systems Germany, GmbH (ISS Germany) located in Germany. We incurred no costs for these entity closures in the three-month periods ended March 31, 2019 and March 31, 2018.

Note L: Commitments and Contingencies

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.

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Item 2.         Management's Discussion and Analysis of Financial Condition and Results of Operations

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, United States commuters lose 97 hours a year in congestion, which costs motorists $87 billion a year in time, an average of $1,348 per driver. We believe this growing use of vehicles 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 

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• 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.

Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchase 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 is further adding to the unpredictability of purchase decisions, creating more delays than usual and decreasing governmental budgets, and it is 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 a long-term agreement.

Cost of Revenue. Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to manufacture hardware platforms, which is influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, restructuring costs and inventory reserves. The key metric that we follow is achieving certain gross margin percentages on product sales by geographic region and to a lesser extent by product line.

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.

Non-GAAP Operating Measure. 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 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 (loss) from operations to non-GAAP income from operations are as follows (in thousands):  

	Three-Month Periods Ended   March 31,
	2019		2018
Income (loss) from operations	$	308	$	(17	)
Adjustments to reconcile to non-GAAP income
Amortization of intangible assets		150		111
Depreciation		51		63
Restructuring		2		—
Non-GAAP income from continuing operations	$	511	$	157

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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. The RTMS is our radar product line, 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 March 31,
	Intersection				Highway				Total
	2019		2018		2019		2018		2019		2018
Revenue	$	2,072	$	2,417	$	1,300	$	593	$	3,372	$	3,010
Gross profit		1,792		2,186		803		377		2,595		2,563
Amortization of intangible assets		92		92		58		19		150		111
Intangible assets		2,018		2,385		1,568		1,055		3,586		3,440

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 March 31,
	2019		2018
Product sales	48.1	%	28.0	%
Royalties	51.9		72.0
Total revenue	100.0		100.0
Gross profit - product sales	57.7		57.9
Gross profit - royalties	94.7		95.8
Selling, general and administrative	49.4		58.5
Research and development	18.4		27.2
Income (loss) from operations	9.1		(0.6	)
Income tax expense	—		—
Net income (loss)	9.1		(0.6	)

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Total revenue increased to $3.4 million in the three-month period ended March 31, 2019 from $3.0 million in the same period in 2018, an increase of 12.0%. Royalty income decreased to $1.8 million in the first quarter of 2019 from $2.2 million in the first quarter of 2018, a decrease of 19.2%. The decrease in royalties was due to a particularly harsh winter, which exaggerated the effects of seasonality on royalty income. Product sales increased to $1.6 million in the first quarter of 2019 from $844,000 in the first quarter of 2018, an increase of 92.1%. 

Revenue for the Intersection segment decreased to $2.1 million in the three-month period ended March 31, 2019 from $2.4 million in the three-month period ended March 31, 2018, a decrease of 14.3%.

Revenue for the Highway segment increased to $1.3 million in the three-month period ended March 31, 2019 from $593,000 in the three-month period ended March 31, 2018, an increase of 119.2%. The increase in revenue in the Highway segment is attributable to an increased focus on improving sales tactics and better management of channel partners.

Gross profit for product sales decreased to 57.7% in the three months ended March 31, 2019 from 57.9% in the three months ended March 31, 2018. The dollar amount of product sales gross profit increased $447,000 or 91.4%, in the three months ended March 31, 2019 compared to the prior year period.

Gross profit for royalty sales for the three months ended March 31, 2019 decreased to 94.7% from 95.8% in the same period in 2018. The dollar amount of gross profit from royalties decreased $415,000, or 20.0%, in the three months ended March 31, 2019 compared to the prior year period. The decrease in royalty gross margin percent is due to lower royalty revenues while software amortization remained substantially the same.

Selling, general and administrative expense was $1.7 million, or 49.4% of total revenue, in the first quarter of 2019 compared to $1.8 million, or 58.5% of total revenue, in the first quarter of 2018. The decrease in expense in the three months of 2019 is primarily a result of the timing of costs related to a semi-annual trade show, Intertraffic, that took place in the first quarter of 2018.

Research and development expense decreased to $620,000, or 18.4% of total revenue, in the three-month period ended March 31, 2019 from $819,000, or 27.2% of total revenue, in the three-month period ended March 31, 2018.  The decrease is partially due to increased capitalized software development costs in the three-month period ended March 31, 2019 of $419,000 compared to capitalized software costs of $66,000 in the comparable prior year period.  After normalizing for software development costs, overall research and development expenditures increased in the three-month period ended March 31, 2019 compared to the same period in the prior year.  This increase is due to increased salary expenses due to headcount and outside consultant professional fees.

There was no income tax expense recorded in the first three months of 2019 or 2018.

Consolidated net income was $308,000, or $0.06 per basic and diluted share, in the three-month period ended March 31, 2019 compared to a net loss of $17,000, or $0.00 per basic and diluted share in the comparable prior year period.

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Liquidity and Capital Resources

At March 31, 2019, we had $3.9 million in cash and cash equivalents compared to $4.2 million in cash and cash equivalents at December 31, 2018.

Net cash provided by operating activities was $184,000 in the first three months of 2019 compared to net cash provided by operating activities of $256,000 in the same period in 2018.  The decrease in net cash provided by operating activities in the first three months of 2019 compared to the prior year period can be primarily attributed to the timing of payments related to outstanding accruals and accounts payable balances and offset by the timing of collections for outstanding receivable balances in the first three months of 2019 compared to the prior year period.

Net cash used for investing activities was $494,000 for the first three months of 2019 compared to net cash used for investing activities of $113,000 in the same period in 2018. The increase of the amount of net cash used for investing activities in the first three months of 2019 compared to the prior year period is primarily the result of increased capitalized internal software development costs compared to the prior year period.

We believe that cash and cash equivalents on hand at March 31, 2019 and cash provided by operating activities will satisfy our projected working capital needs, investing activities, and other cash requirements for the foreseeable future.

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, 2018. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2019 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.

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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 politacal 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 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. to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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Item 3.         Quantitative and Qualitative Disclosures About Market Risk

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.

Item 4.         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 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 March 31, 2019, 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.

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PART II. OTHER INFORMATION

Item 1.         Legal Proceedings

None.

Item 1A.      Risk Factors

Some of the risk factors to which we and our business are subject are described in the section entitled "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018. The risks and uncertainties described in our Annual Report are not the only risks we face. Additional risks and uncertainties not presently known to us or that our management currently deems immaterial also may impair our business operations. If any of the risks described were to occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.         Defaults Upon Senior Securities

None.

Item 4.         Mine Safety Disclosures

None.

Item 5.         Other Information

None.

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Item 6.         Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019:

Exhibit Number	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101	The following financial information from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, 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).

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SIGNATURES

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: May 7, 2019	By:	/s/ Chad A. Stelzig
		Chad A. Stelzig
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated: May 7, 2019	By:	/s/ Frank G. Hallowell
		Frank G. Hallowell
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101	The following financial information from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, 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).

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Chad A. Stelzig, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Image Sensing Systems, Inc. for its fiscal quarter ended March 31, 2019;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2019

/s/ Chad A. Stelzig

Name: Chad A. Stelzig

Title: President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Frank G. Hallowell, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Image Sensing Systems, Inc. for its fiscal quarter ended March 31, 2019;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2019

/s/ Frank G. Hallowell

Name: Frank G. Hallowell

Title: Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Image Sensing Systems, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Chad A. Stelzig,  President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Chad A. Stelzig

Chad A. Stelzig

President and Chief Executive Officer

May 7, 2019

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Image Sensing Systems, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Frank G. Hallowell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Frank G. Hallowell

Frank G. Hallowell

Chief Financial Officer

May 7, 2019

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2019	Apr. 30, 2019
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1
Entity Registrant Name	IMAGE SENSING SYSTEMS INC
Entity Central Index Key	0000943034
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		5,304,457
Entity Current Reporting Status	Yes
Entity Small Business	true
Entity Emerging Growth Company	false

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Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 3,948	$ 4,236
Accounts receivable, net of allowance for doubtful accounts of $74 and $72, respectively	3,417	3,830
Inventories	1,208	1,289
Prepaid expenses and other current assets	353	410
Total current assets	8,926	9,765
Property and equipment:
Furniture and fixtures	163	162
Leasehold improvements	8	8
Equipment	1,131	1,058
Property and equipment, Gross	1,302	1,228
Accumulated depreciation	936	882
Property and equipment, Net	366	346
Operating lease assets, net	370	0
Intangible assets, net	3,586	3,317
Deferred income taxes	57	56
TOTAL ASSETS	13,305	13,484
Current liabilities:
Accounts payable	248	878
Deferred revenue	628	716
Warranty	573	656
Accrued compensation	145	224
Operating lease obligations	254	0
Other current liabilities	291	373
Total current liabilities	2,139	2,847
Operating lease obligations	116	0
TOTAL LIABILITIES	2,255	2,847
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued or outstanding	0	0
Common stock, $0.01 par value; 20,000,000 shares authorized, 5,293,941 and 5,278,485 issued and outstanding at March 31, 2019 and December 31, 2018, respectively	52	52
Additional paid-in capital	24,592	24,550
Accumulated other comprehensive loss	(342)	(372)
Accumulated deficit	(13,252)	(13,593)
Total shareholders' equity	11,050	10,637
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 13,305	$ 13,484

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Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Condensed Consolidated Balance Sheets [Abstract]
Accounts receivable, allowance for doubtful accounts	$ 74	$ 72
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock shares authorized	5,000,000	5,000,000
Preferred stock shares issued	0	0
Preferred stock shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock shares authorized	20,000,000	20,000,000
Common stock shares issued	5,293,941	5,278,485
Common stock shares outstanding	5,293,941	5,278,485

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Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Revenue:
Total Revenue	$ 3,372	$ 3,010
Cost of revenue:
Total Cost of revenue	777	447
Gross profit	2,595	2,563
Operating expenses:
Selling, general and administrative	1,665	1,761
Research and development	620	819
Restructuring charges	2	0
Total Operating expenses	2,287	2,580
Operating income (loss) from operations	308	(17)
Income (loss) from operations before income taxes	308	(17)
Income tax expense	0	0
Net income (loss)	$ 308	$ (17)
Net income (loss) per share:
Basic (in dollars per share)	$ 0.06	$ (0.00)
Diluted (in dollars per share)	$ 0.06	$ (0.00)
Weighted average number of common shares outstanding:
Basic (in shares)	5,224	5,181
Diluted (in shares)	5,243	5,181
Product sales [Member]
Revenue:
Total Revenue	$ 1,621	$ 844
Cost of revenue:
Total Cost of revenue	685	355
Royalties [Member]
Revenue:
Total Revenue	1,751	2,166
Cost of revenue:
Total Cost of revenue	$ 92	$ 92

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Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income (loss)	$ 308	$ (17)
Other comprehensive income (loss):
Foreign currency translation adjustment	30	(1)
Comprehensive income (loss)	$ 338	$ (18)

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Condensed Consolidated Statements of Cash Flows - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Operating activities:
Net income (loss)	$ 308,000	$ (17,000)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	51,000	63,000
Software amortization	150,000	111,000
Stock-based compensation	50,000	85,000
Loss on disposal of assets	0	1,000
Changes in operating assets and liabilities:
Accounts receivable, net	413,000	583,000
Inventories	81,000	(53,000)
Prepaid expenses and other current assets	57,000	(69,000)
Accounts payable	(626,000)	24,000
Accrued expenses and other current liabilities	(300,000)	(472,000)
Net cash provided by operating activities	184,000	256,000
Investing activities:
Capitalized software development costs	(419,000)	(66,000)
Purchases of property and equipment	(75,000)	(47,000)
Net cash used for investing activities	(494,000)	(113,000)
Financing activities:
Stock for tax withholding	(12,000)	(10,000)
Proceeds from stock options exercised	4,000	0
Net cash used for financing activities	(8,000)	(10,000)
Effect of exchange rate changes on cash	30,000	(1,000)
Increase in cash and cash equivalents	(288,000)	132,000
Cash and cash equivalents at beginning of period	4,236,000	3,190,000
Cash and cash equivalents at end of period	3,948,000	3,322,000
Non-Cash investing and financing activities:
Purchase of property and equipment in accounts payable	$ 9,000	$ 25,000

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Condensed Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-In Captal	Accumulated Other Comprehensive Loss	Accumulated Deficit
Balance at Mar. 31, 2018	$ 8,698	$ 52	$ 24,429	$ (311)	$ (15,472)
Balance (in shares) at Mar. 31, 2018		5,256,226
Stock-based compensation	85	$ 1	84
Stock-based compensation (in shares)		48,026
Stock for tax withholding	(10)		(10)
Stock for tax withholding (in shares)		(2,248)
Comprehensive income:
Foreign currency translation adjustment	(1)			(1)
Net income	(17)				(17)
Balance at Dec. 31, 2017	8,641	$ 51	24,355	(310)	(15,455)
Balance (in shares) at Dec. 31, 2017		5,210,448
Balance at Mar. 31, 2019	11,050	$ 52	24,592	(342)	(13,252)
Balance (in shares) at Mar. 31, 2019		5,293,941
Stock-based compensation	50		50
Stock-based compensation (in shares)		16,818
Stock options exercised	$ 4		4
Stock options exercised (in shares)	1,000	1,000
Stock for tax withholding	$ (12)		(12)
Stock for tax withholding (in shares)		(2,362)
Comprehensive income:
Foreign currency translation adjustment	30			30
Net income	308				308
Cumulative effect from adoption of ASU No. 2016-02	33				33
Balance at Dec. 31, 2018	$ 10,637	$ 52	$ 24,550	$ (372)	$ (13,593)
Balance (in shares) at Dec. 31, 2018	5,278,485

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Basis of Presentation

3 Months Ended

Mar. 31, 2019

Basis of Presentation [Abstract]

Basis of Presentation

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 month periods ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018 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 

On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective transition method. The Company's adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.

Under ASU 2014-09, 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;
●	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 months ended March 31, 2019 and 2018 consists of the following (in thousands): revenue excludes sales and usage-based taxes where it has been determined that we are acting as a pass-through agent. 

	Three Months Ended March 31,
	2019		2018
Product sales	$	1,621	$	844
Royalties		1,751		2,166
Total revenue	$	3,372	$	3,010

Product Sales:

Product revenue is generated from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems outside of North America. 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 the hardware, software, installation services, training, and support.  In arrangements when 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 from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Our payment terms may vary by the type and location of our customer and the products or services offered. 

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 we deliver the products or perform services.

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. We earn and recognize the royalty of approximately 50% of Econolite's gross profit on licensed products when the products are shipped or delivered to its customers.

Practical Expedients and Exemptions:

We generally expense sales commissions when incurred because the amortization periods would have been one year or less.  These costs are recorded within sales and marketing expense.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

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 the 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 deferred tax assets. In the event that 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 straight-line method in a manner 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 is determined to be in excess of net realizable value has been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately $419,000 and $66,000 of software development costs during the quarters ended March 31, 2019 and 2018, respectively. 

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 March 31, 2019 and 2018, we determined there was no impairment of intangible assets. At both March 31, 2019 and 2018, there were no indefinite-lived intangible assets.

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2019

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note B: Recent Accounting Pronouncements 

Accounting pronouncement recently adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued 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 accumulated deficit as of that date.  Prior year amounts were not recast under the transition approach and, therefore, prior year amounts are excluded from the operating leases footnote. 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.

Accounting pronouncements not yet adopted

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. The standard 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. Certain disclosures in the amendment are to be applied using a retrospective approach while other disclosures are to be applied using a prospective approach. Early adoption is permitted. We have not yet evaluated the impact the adoption of this guidance may have on our financial condition, results of operations or disclosures.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2019

Fair Value Measurements [Abstract]

Fair Value Measurements

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.

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Inventories

3 Months Ended

Mar. 31, 2019

Inventories [Abstract]

Inventories

Note D: Inventories

Inventories consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Finished goods	$	856	$	949
Components		352		340
Total	$	1,208	$	1,289

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Operating Leases

3 Months Ended

Mar. 31, 2019

Operating Leases [Abstract]

Operating Leases

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 accumulated deficit as of that date.

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.

Under ASC 840, rent expense for office facilities for the period ended March 31, 2018 was $146,000.

The cost components of our operating leases were as follows (in thousands) for the period ended March 31, 2019: 

	Three-Month Period
	Total
Operating lease costs	$	65
Variable lease cost		76
Short-term lease cost		—
Total	$	141

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.

Maturities or our lease liabilities for all operating leases are as follows (in thousands) as of March 31, 2019:

	Total
2019	$	265
2020		104
2021		9
2022		5
2023		—
2024 and thereafter		—
Total lease payments		383
Less: Interest		(13	)
Present value of lease liabilities	$	370

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2019:

	March 31, 2019
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1.6
Weighted average discount rate	4.75	%

Cash paid for amounts included in the measurement of operating lease liabilities were $65,000 for the three months ended March 31, 2019 and this amount is included in operating activities in the condensed consolidated statements of cash flows.  Separate from the initial recognition of the existing leases, there were no operating lease assets obtained in exchange for new operating lease liabilities for the three months ended March 31, 2019.

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Intangible Assets

3 Months Ended

Mar. 31, 2019

Intangible Assets [Abstract]

Intangible Assets

Note F: Intangible Assets

Intangible assets consisted of the following (dollars in thousands):            

	March 31, 2019
								Weighted
	Gross					Net		Average
	Carrying		Accumulated			Carrying		Useful Life
	Amount		Amortization			Value		(in Years)
Developed technology	$	3,900	$	(3,900	)	$	—	—
Vision development costs		2,929		(911	)		2,018	8.0
Software development in process costs		1,093		—			1,093	—
IntellitraffiQ development costs		468		(88	)		380	4.0
Wrong Way development costs		228		(133	)		95	2.0
Total	$	8,618	$	(5,032	)	$	3,586	7.1

	December 31, 2018
								Weighted
	Gross					Net		Average
	Carrying		Accumulated			Carrying		Useful Life
	Amount		Amortization			Value		(in Years)
Developed technology	$	3,900	$	(3,900	)	$	—	—
Vision development costs		2,929		(819	)		2,110	8.0
Software development in process costs		674		—			674	—
IntellitraffiQ development costs		468		(59	)		409	4.0
Wrong Way development costs		228		(104	)		124	2.0
Total	$	8,199	$	(4,882	)	$	3,317	7.1

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Warranties

3 Months Ended

Mar. 31, 2019

Warranties [Abstract]

Warranties

Note G: Warranties 

We generally provide a 2 to 5 year warranty on product sales. Reserves to honor warranty claims are estimated and recorded at the time of sale based on historical claim information and are analyzed and adjusted periodically based on actual claim trends.

Warranty liability and related activity consisted of the following (in thousands):

	Three-Month Periods Ended March 31,
	2019			2018
Beginning balance	$	656		$	858
Warranty provisions		30			30
Warranty claims		(33	)		(11	)
Adjustments to preexisting warranties		(81	)		(102	)
Currency		1			2
Ending balance	$	573		$	777

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2019

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note H: Stock-Based Compensation

We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2005 Stock Incentive Plan (the "2005 Plan") and the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), both of which were approved by our shareholders and are administered under the supervision of our Board of Directors. Although stock options granted under the 2005 Plan are still outstanding, the 2005 Plan expired, and the Company can no longer grant options or other awards under the 2005 Plan. 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 3 to 5 years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of 9 to 10 years.

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 March 31, 2019 and 2018 was $50,000 and $85,000, respectively. At March 31, 2019, 108,420 shares were available for grant under the Company's 2014 Plan.

Stock Options

A summary of the option activity for the first three months of 2019 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, 2018		39,000		$	6.26		2.80	$	4,480
Granted		—		$	—		—	$	—
Exercised		(1,000	)	$	4.22		—	$	950
Expired		—		$	—		—	$	—
Forfeited		(4,000	)	$	4.22		—	$	3,360
Options outstanding at March 31, 2019		34,000		$	6.56		2.20	$	9,420
Options exercisable at March 31, 2019		34,000		$	6.56		2.20	$	9,420

There were options to purchase 1,000 shares of common stock exercised during the three-month period ended March 31, 2019 and no options exercised in the three-month period ended March 31, 2018. During the three-month period ended March 31, 2019 we recognized no stock-based compensation expense related to stock options compared to $1,000 recognized during the three-month period ended March 31, 2018.  As of March 31, 2019, there was no unrecognized compensation cost related to non-vested stock options.

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. The restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant date through the end of the vesting period. At the time of vesting of the restricted stock awards, the recipients of common stock may request to receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the relevant jurisdiction's maximum statutory rate.

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. Compensation expense related to any stock awards issued to employees is determined on the grant date based on the publicly-quoted fair market value of our common stock and is charged to earnings on the grant date.  

The following table summarizes restricted stock award activity for the first three months of 2019:

	Number of Shares			Weighted Average Grant Date Fair Value
Awards outstanding December 31, 2018	58,877		$	3.22
Granted	28,644			5.04
Vested	(22,976	)		3.54
Forfeited	(11,826	)		3.04
Awards outstanding at March 31, 2019	52,719		$	4.11

As of March 31, 2019, the total stock-based compensation expense related to non-vested awards not yet recognized was $198,000, which is expected to be recognized over a weighted average period of 2.5 years.  During the three-month periods ended March 31, 2019 and March 31, 2018, we recognized $50,000 and $84,000, respectively, of stock-based compensation expense related to restricted stock awards.

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Income per Common Share

3 Months Ended

Mar. 31, 2019

Income per Common Share [Abstract]

Income per Common Share

Note I: Income per Common Share

Net income (loss) 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 diluted weighted average shares outstanding calculation 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 23,000 and 83,086 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended March 31, 2019 and 2018, respectively.

A reconciliation of net income per share is as follows (in thousands, except per share data): 

	Three-Month  Periods Ended March 31,
	2019		2018
Numerator:
Net income (loss)	$	308	$	(17	)
Denominator:
Weighted average common shares outstanding		5,224		5,181
Dilutive potential common shares		19		—
Shares used in diluted net income per common share calculations		5,243		5,181
Basic net income (loss) per common share	$	0.06	$	(0.00	)
Diluted net income (loss) per common share	$	0.06	$	(0.00	)

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Segment Information

3 Months Ended

Mar. 31, 2019

Segment Information [Abstract]

Segment Information

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 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 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 March 31,
	Intersection				Highway				Total
	2019		2018		2019		2018		2019		2018
Revenue	$	2,072	$	2,417	$	1,300	$	593	$	3,372	$	3,010
Gross profit		1,792		2,186		803		377		2,595		2,563
Amortization of intangible assets		92		92		58		19		150		111
Intangible assets		2,018		2,385		1,568		1,055		3,586		3,440

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Restructuring and Exit Activities

3 Months Ended

Mar. 31, 2019

Restructuring and Exit Activities [Abstract]

Restructuring and Exit Activities

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.  The Company will continue doing business in the European region utilizing the Barcelona, Spain sales office.  We incurred $2,000 of costs for the closure of our office in Romania in the three-month period ended March 31, 2019.  No costs related to the closure of the Romania location were incurred in the three-month period ended March 31, 2018.

The following table shows the restructuring activity for the first three months of 2019 (in thousands):

	Termination Benefits		Facility Costs and Contract Termination		Total
Balance at December 31, 2018	$	18	$	4	$	22
Charges		2		—		2
Settlements		(9)		(4)		(13)
Balance at March 31, 2019	$	11	$	—	$	11

In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our following wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) located in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) located in China; and Image Sensing Systems Germany, GmbH (ISS Germany) located in Germany. We incurred no costs for these entity closures in the three-month periods ended March 31, 2019 and March 31, 2018.

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2019

Commitments and Contingencies [Abstract]

Commitments and Contingencies

Note L: Commitments and Contingencies

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.

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Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2019

Basis of Presentation [Abstract]

Revenue Recognition

Revenue Recognition 

On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective transition method. The Company's adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.

Under ASU 2014-09, 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;
●	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 months ended March 31, 2019 and 2018 consists of the following (in thousands): revenue excludes sales and usage-based taxes where it has been determined that we are acting as a pass-through agent. 

	Three Months Ended March 31,
	2019		2018
Product sales	$	1,621	$	844
Royalties		1,751		2,166
Total revenue	$	3,372	$	3,010

Product Sales:

Product revenue is generated from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems outside of North America. 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 the hardware, software, installation services, training, and support.  In arrangements when 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 from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Our payment terms may vary by the type and location of our customer and the products or services offered. 

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 we deliver the products or perform services.

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. We earn and recognize the royalty of approximately 50% of Econolite's gross profit on licensed products when the products are shipped or delivered to its customers.

Practical Expedients and Exemptions:

We generally expense sales commissions when incurred because the amortization periods would have been one year or less.  These costs are recorded within sales and marketing expense.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Inventories

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

Income Taxes

We record a tax provision for the anticipated tax consequences of the 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 deferred tax assets. In the event that 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

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 straight-line method in a manner 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 is determined to be in excess of net realizable value has been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately $419,000 and $66,000 of software development costs during the quarters ended March 31, 2019 and 2018, respectively. 

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 March 31, 2019 and 2018, we determined there was no impairment of intangible assets. At both March 31, 2019 and 2018, there were no indefinite-lived intangible assets.

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Basis of Presentation (Tables)

3 Months Ended

Mar. 31, 2019

Basis of Presentation [Abstract]

Schedule of revenue disaggregated by revenue source

Revenue disaggregated by revenue source for the three months ended March 31, 2019 and 2018 consists of the following (in thousands): revenue excludes sales and usage-based taxes where it has been determined that we are acting as a pass-through agent. 

	Three Months Ended March 31,
	2019		2018
Product sales	$	1,621	$	844
Royalties		1,751		2,166
Total revenue	$	3,372	$	3,010

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Inventories (Tables)

3 Months Ended

Mar. 31, 2019

Inventories [Abstract]

Schedule of Inventories

Inventories consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Finished goods	$	856	$	949
Components		352		340
Total	$	1,208	$	1,289

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Operating Leases (Tables)

3 Months Ended

Mar. 31, 2019

Operating Leases [Abstract]

Schedule of components of our costs for operating leases

The cost components of our operating leases were as follows (in thousands) for the period ended March 31, 2019: 

	Three-Month Period
	Total
Operating lease costs	$	65
Variable lease cost		76
Short-term lease cost		—
Total	$	141

Schedule of the future maturities of lease liabilities

Maturities or our lease liabilities for all operating leases are as follows (in thousands) as of March 31, 2019:

	Total
2019	$	265
2020		104
2021		9
2022		5
2023		—
2024 and thereafter		—
Total lease payments		383
Less: Interest		(13	)
Present value of lease liabilities	$	370

Remaining lease term and discount rate

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2019:

	March 31, 2019
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1.6
Weighted average discount rate	4.75	%

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Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2019

Intangible Assets [Abstract]

Schedule of intangible assets

Intangible assets consisted of the following (dollars in thousands):            

	March 31, 2019
								Weighted
	Gross					Net		Average
	Carrying		Accumulated			Carrying		Useful Life
	Amount		Amortization			Value		(in Years)
Developed technology	$	3,900	$	(3,900	)	$	—	—
Vision development costs		2,929		(911	)		2,018	8.0
Software development in process costs		1,093		—			1,093	—
IntellitraffiQ development costs		468		(88	)		380	4.0
Wrong Way development costs		228		(133	)		95	2.0
Total	$	8,618	$	(5,032	)	$	3,586	7.1

	December 31, 2018
								Weighted
	Gross					Net		Average
	Carrying		Accumulated			Carrying		Useful Life
	Amount		Amortization			Value		(in Years)
Developed technology	$	3,900	$	(3,900	)	$	—	—
Vision development costs		2,929		(819	)		2,110	8.0
Software development in process costs		674		—			674	—
IntellitraffiQ development costs		468		(59	)		409	4.0
Wrong Way development costs		228		(104	)		124	2.0
Total	$	8,199	$	(4,882	)	$	3,317	7.1

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Warranties (Tables)

3 Months Ended

Mar. 31, 2019

Warranties [Abstract]

Warranty liability and related activity

Warranty liability and related activity consisted of the following (in thousands):

	Three-Month Periods Ended March 31,
	2019			2018
Beginning balance	$	656		$	858
Warranty provisions		30			30
Warranty claims		(33	)		(11	)
Adjustments to preexisting warranties		(81	)		(102	)
Currency		1			2
Ending balance	$	573		$	777

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Stock-Based Compensation (Tables)

3 Months Ended

Mar. 31, 2019

Stock-Based Compensation [Abstract]

Schedule of stock option activity

A summary of the option activity for the first three months of 2019 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, 2018		39,000		$	6.26		2.80	$	4,480
Granted		—		$	—		—	$	—
Exercised		(1,000	)	$	4.22		—	$	950
Expired		—		$	—		—	$	—
Forfeited		(4,000	)	$	4.22		—	$	3,360
Options outstanding at March 31, 2019		34,000		$	6.56		2.20	$	9,420
Options exercisable at March 31, 2019		34,000		$	6.56		2.20	$	9,420

Table summarizes restricted stock award activity

The following table summarizes restricted stock award activity for the first three months of 2019:

	Number of Shares			Weighted Average Grant Date Fair Value
Awards outstanding December 31, 2018	58,877		$	3.22
Granted	28,644			5.04
Vested	(22,976	)		3.54
Forfeited	(11,826	)		3.04
Awards outstanding at March 31, 2019	52,719		$	4.11

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Income per Common Share (Tables)

3 Months Ended

Mar. 31, 2019

Income per Common Share [Abstract]

Schedule of reconciliation of net income per share

A reconciliation of net income per share is as follows (in thousands, except per share data): 

	Three-Month  Periods Ended March 31,
	2019		2018
Numerator:
Net income (loss)	$	308	$	(17	)
Denominator:
Weighted average common shares outstanding		5,224		5,181
Dilutive potential common shares		19		—
Shares used in diluted net income per common share calculations		5,243		5,181
Basic net income (loss) per common share	$	0.06	$	(0.00	)
Diluted net income (loss) per common share	$	0.06	$	(0.00	)

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Segment Information (Tables)

3 Months Ended

Mar. 31, 2019

Segment Information [Abstract]

Schedule of financial information by reportable segment

The following table sets forth selected unaudited financial information for each of our reportable segments (in thousands):

	Three Months Ended March 31,
	Intersection				Highway				Total
	2019		2018		2019		2018		2019		2018
Revenue	$	2,072	$	2,417	$	1,300	$	593	$	3,372	$	3,010
Gross profit		1,792		2,186		803		377		2,595		2,563
Amortization of intangible assets		92		92		58		19		150		111
Intangible assets		2,018		2,385		1,568		1,055		3,586		3,440

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Restructuring and Exit Activities (Tables)

3 Months Ended

Mar. 31, 2019

Restructuring and Exit Activities [Abstract]

Schedule of restructuring activity

The following table shows the restructuring activity for the first three months of 2019 (in thousands):

	Termination Benefits		Facility Costs and Contract Termination		Total
Balance at December 31, 2018	$	18	$	4	$	22
Charges		2		—		2
Settlements		(9)		(4)		(13)
Balance at March 31, 2019	$	11	$	—	$	11

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Basis of Presentation (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Basis of Presentation [Abstract]
Royalty percentage of gross profit on licensed products	50.00%
Amortization period for expense sales commissions incurred, maximum	1 year
Period for the value of unsatisfied performance obligations which are not disclosed	1 year
Software development costs capitalized	$ 419,000	$ 66,000
Impairment of intangible assets	0	0
Indefinite‑lived intangible assets	$ 0	$ 0

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Basis of Presentation (Details 2) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Total Revenue	$ 3,372	$ 3,010
Product sales [Member]
Total Revenue	1,621	844
Royalties [Member]
Total Revenue	$ 1,751	$ 2,166

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Inventories (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Inventories [Abstract]
Finished goods	$ 856	$ 949
Components	352	340
Total	$ 1,208	$ 1,289

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Operating Leases (Details)	3 Months Ended
	Mar. 31, 2019 USD ($)
Operating Leases [Abstract]
Operating lease cost	$ 65,000
Variable lease cost	76,000
Short-term lease cost	0
Total	$ 141,000

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Operating Leases (Details 2) $ in Thousands	Mar. 31, 2019 USD ($)
Operating Leases [Abstract]
2019	$ 265
2020	104
2021	9
2022	5
2023	0
2024 and thereafter	0
Total lease payments	383
Less: Interest	(13)
Present value of lease liabilities	$ 370

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Operating Leases (Details 3)	Mar. 31, 2019
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1 year 7 months 6 days
Weighted average discount rate	4.75%

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Operating Leases (Narrative) (Details)	3 Months Ended
	Mar. 31, 2019 USD ($)
Operating Leases [Abstract]
Operating Leases, Rent Expense	$ 146,000
Cash paid operating lease costs	$ 65,000

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Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 8,618	$ 8,199
Accumulated Amortization	(5,032)	(4,882)
Net Carrying Value	$ 3,586	$ 3,317
Weighted Average Useful Life	7 years 1 month 6 days	7 years 1 month 6 days
Developed technology [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 3,900	$ 3,900
Accumulated Amortization	(3,900)	(3,900)
Net Carrying Value	0	0
Vision Development Costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	2,929	2,929
Accumulated Amortization	(911)	(819)
Net Carrying Value	$ 2,018	$ 2,110
Weighted Average Useful Life	8 years	8 years
Software development in process costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 1,093	$ 674
Accumulated Amortization	0	0
Net Carrying Value	1,093	674
IntellitraffiQ Development Costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	468	468
Accumulated Amortization	(88)	(59)
Net Carrying Value	$ 380	$ 409
Weighted Average Useful Life	4 years	4 years
Wrong Way Development Costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 228	$ 228
Accumulated Amortization	(133)	(104)
Net Carrying Value	$ 95	$ 124
Weighted Average Useful Life	2 years	2 years

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Warranties (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Product Warranty Liability [Line Items]
Beginning balance	$ 656	$ 858
Warranty provisions	30	30
Warranty claims	(33)	(11)
Adjustments to preexisting warranties	(81)	(102)
Currency	1	2
Ending balance	$ 573	$ 777
Minimum [Member]
Product Warranty Liability [Line Items]
Product Warranty Period	2 years
Maximum [Member]
Product Warranty Liability [Line Items]
Product Warranty Period	5 years

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Stock-Based Compensation (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 50,000	$ 85,000
Shares available for grant	108,420
Stock-based compensation	$ 50,000	85,000
Stock option exercised	1,000
Stock awards, weighted average grant date fair value	$ 5.04
Stock awards granted	28,644
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option awards, vesting term	3 years
Stock option awards, contractual term	9 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option awards, vesting term	5 years
Stock option awards, contractual term	10 years
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 0	1,000
Unrecognized compensation cost related to non-vested stock awards	0
Stock-based compensation	$ 0	$ 1,000
Stock option exercised	1,000	0
Restricted Stock Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 50,000	$ 84,000
Unrecognized compensation cost related to non-vested stock awards	198,000
Stock-based compensation	$ 50,000	$ 84,000
Period for recognition of unrecognized compensation cost related to non-vested stock awards	2 years 6 months
Vesting rights description of stock awards granted	The restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met.

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Stock-Based Compensation (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Number of Shares
Outstanding - beginning of period	39,000
Granted	0
Exercised	(1,000)
Expired	0
Forfeited	(4,000)
Outstanding - end of period	34,000	39,000
Exercisable - end of period	34,000
Weighted Average Exercise Price
Outstanding - beginning of period	$ 6.26
Granted	0
Exercised	4.22
Expired	0
Forfeited	4.22
Outstanding - end of period	6.56	$ 6.26
Exercisable - end of period	$ 6.56
Weighted Average Remaining Contractual Term
Options outstanding	2 years 2 months 12 days	2 years 9 months 18 days
Options exercisable	2 years 2 months 12 days
Aggregate Intrinsic Value
Outstanding - beginning of period	$ 4,480
Granted	0
Exercised	950
Expired	0
Forfeited	3,360
Outstanding - end of period	9,420	$ 4,480
Options exercisable	$ 9,420

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Stock-Based Compensation (Details 2)	3 Months Ended
	Mar. 31, 2019 $ / shares shares
Restricted Stock Awards Activity [Abstract]
Awards outstanding at beginning of year | shares	58,877
Granted | shares	28,644
Vested | shares	(22,976)
Forfeited | shares	(11,826)
Awards outstanding at end of year | shares	52,719
Weighted Average grant date fair value
Outstanding at beginning of year | $ / shares	$ 3.22
Granted | $ / shares	5.04
Vested | $ / shares	3.54
Forfeited | $ / shares	3.04
Outstanding at end of year | $ / shares	$ 4.11

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Income per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Income per Common Share [Abstract]
Basic net income per common share	$ 0.06	$ (0.00)
Diluted net income per common share	$ 0.06	$ (0.00)
Numerator:
Net income (loss)	$ 308	$ (17)
Denominator:
Weighted average common shares outstanding	5,224	5,181
Dilutive potential common shares	19	0
Shares used in diluted net income per common share calculations	5,243	5,181
Shares excluded from diluted weighted shares outstanding	23,000	83,086

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Segment Information (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)	Mar. 31, 2018 USD ($)
Segment Reporting Information [Line Items]
Number of Reportable Segments	2
Revenue	$ 3,372	$ 3,010
Gross profit	2,595	2,563
Amortization of intangible assets	150	111
Intangible assets	3,586	3,440
Intersection [Member]
Segment Reporting Information [Line Items]
Revenue	2,072	2,417
Gross profit	1,792	2,186
Amortization of intangible assets	92	92
Intangible assets	2,018	2,385
Highway [Member]
Segment Reporting Information [Line Items]
Revenue	1,300	593
Gross profit	803	377
Amortization of intangible assets	58	19
Intangible assets	$ 1,568	$ 1,055

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Restructuring and Exit Activities (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Restructuring Cost and Reserve [Line Items]
Costs related to the closure of Entity	$ 2,000	$ 0
Entity closures cost	2,000
ISS HK, ISS WOFE and ISS Germany [Member]
Restructuring Cost and Reserve [Line Items]
Entity closures cost	$ 0	$ 0

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Restructuring and Exit Activities (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Restructuring Reserve [Roll Forward]
Balance at beginning of period	$ 22
Charges	2
Settlements	(13)
Balance at end of period	11
Facility Costs And Contract Termination [Member]
Restructuring Reserve [Roll Forward]
Balance at beginning of period	4
Charges	0
Settlements	(4)
Balance at end of period	0
Termination Benefits [Member]
Restructuring Reserve [Roll Forward]
Balance at beginning of period	18
Charges	2
Settlements	(9)
Balance at end of period	$ 11