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 June 30, 2020

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.
Spruce Tree Centre, Suite 400
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

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 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 x	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

 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 July 31, 2020
Common Stock, $0.01 par value per share	5,338,071 shares

2

IMAGE SENSING SYSTEMS, INC.

TABLE OF CONTENTS 

​​​​​​​​​​​​​​​​​

PART I. FINANCIAL INFORMATION	4
Item 1. Financial Statements (Unaudited)	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	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
PART II. OTHER INFORMATION	30
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	30
Item 4. Mine Safety Disclosures	30
Item 5. Other Information	30
Item 6. Exhibits	31
SIGNATURES	32
EXHIBIT INDEX	33

3

PART I. FINANCIAL INFORMATION

Item 1.         Financial Statements

Image Sensing Systems, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

	June 30, 2020			December 31,
	(Unaudited)			2019
ASSETS
Current assets:
Cash and cash equivalents	$	6,834		$	5,118
Accounts receivable, net of allowance for doubtful accounts of $20 and $19 respectively		2,629			3,126
Inventories		640			781
Prepaid expenses and other current assets		512			463
Total current assets		10,615			9,488
Property and equipment:
Furniture and fixtures		147			163
Leasehold improvements		6			6
Equipment		1,418			1,339
		1,571			1,508
Accumulated depreciation		1,186			1,089
		385			419
Operating lease assets, net		245			181
Intangible assets, net		3,535			3,875
Deferred income taxes		5,219			5,220
TOTAL ASSETS	$	19,999		$	19,183
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	253		$	373
Deferred revenue		18			28
Warranty		150			313
Accrued compensation		235			105
Operating lease obligations		216			164
Short-term debt		402			—
Other current liabilities		148			248
Total current liabilities		1,422			1,231
Operating lease obligations		28			19
Long-term debt		522			—
TOTAL LIABILITIES		1,972			1,250
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, 5,338,071 and 5,322,849
issued and outstanding at June 30, 2020 and December 31, 2019, respectively		53			53
Additional paid-in capital		24,858			24,751
Accumulated other comprehensive loss		(358	)		(306	)
Accumulated deficit		(6,526	)		(6,565	)
Total shareholders' equity		18,027			17,933
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	19,999		$	19,183
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 June 30,				Six-Month Periods Ended June 30,
	2020		2019		2020		2019
Revenue:
Product sales	$	1,172	$	2,020	$	2,222	$	3,641
Royalties		2,215		2,205		4,324		3,956
		3,387		4,225		6,546		7,597
Cost of revenue:
Product sales		520		1,108		1,051		1,793
Royalties		91		91		183		183
		611		1,199		1,234		1,976
Gross profit		2,776		3,026		5,312		5,621
Operating expenses:
Selling, general and administrative		1,563		1,682		3,472		3,347
Research and development		842		697		1,744		1,317
Restructuring charges		—		—		—		2
		2,405		2,379		5,216		4,666
Income from operations before income taxes		371		647		96		955
Income tax expense		221		—		57		—
Net income	$	150	$	647	$	39	$	955
Net income per share:
Basic	$	0.03	$	0.12	$	0.01	$	0.18
Diluted	$	0.03	$	0.12	$	0.01	$	0.18
Weighted average number of common shares outstanding:
Basic		5,296		5,244		5,281		5,234
Diluted		5,299		5,259		5,299		5,248
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 June 30,					Six-Month Periods Ended June 30,
	2020		2019			2020			2019
Net income	$	150	$	647		$	39		$	955
Other comprehensive income (loss):
Foreign currency translation adjustment		54		(40	)		(52	)		(10	)
Comprehensive income (loss)	$	204	$	607		$	(13	)	$	945
See accompanying notes to the condensed consolidated financial statements.

6

Image Sensing Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Six-Month Periods Ended June 30,
	2020			2019
Operating activities:
Net income	$	39		$	955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		118			99
Software amortization		362			299
Stock-based compensation		113			104
Changes in operating assets and liabilities:
Accounts receivable, net		497			282
Inventories		141			608
Prepaid expenses and other current assets		(49	)		(53	)
Accounts payable		(106	)		(451	)
Accrued expenses and other current liabilities		(146	)		(899	)
Net cash provided by operating activities		969			944
Investing activities:
Capitalized software development costs		(22	)		(762	)
Purchases of property and equipment		(102	)		(160	)
Net cash used for investing activities		(124	)		(922	)
Financing activities:
Stock for tax withholding		(6	)		(21	)
Proceeds from PPP Loan		924			—
Proceeds from stock options exercised		—			4
Net cash provided by (used for) financing activities		918			(17	)
Effect of exchange rate changes on cash		(47	)		(12	)
Change in cash and cash equivalents		1,716			(7	)
Cash and cash equivalents at beginning of period		5,118			4,236
Cash and cash equivalents at end of period	$	6,834		$	4,229
Non-Cash investing and financing activities:
Purchase of property and equipment in accounts payable	$	—		$	5

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 June 30, 2019
	Shares Issued		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, March 31, 2019	5,293,941		$	52	$	24,592		$	(342	)	$	(13,252	)	$	11,050
Stock-based compensation	16,996			—		54			—			—			54
Stock for tax withholding	(1,678	)		—		(9	)		—			—			(9	)
Comprehensive income (loss):
Foreign currency translation adjustment	—			—		—			(40	)		—			(40	)
Net income	—			—		—			—			647			647
Balance, June 30, 2019	5,309,259		$	52	$	24,637		$	(382	)	$	(12,605	)	$	11,702
	Three-Month Period Ended June 30, 2020
	Shares Issued		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, March 31, 2020	5,331,799		$	53	$	24,810		$	(412	)	$	(6,676	)	$	17,775
Stock-based compensation	7,950			—		54			—			—			54
Stock for tax withholding	(1,678	)		—		(6	)		—			—			(6	)
Comprehensive income (loss):
Foreign currency translation adjustment	—			—		—			54			—			54
Net income	—			—		—			—			150			150
Balance, June 30, 2020	5,338,071		$	53	$	24,858		$	(358	)	$	(6,526	)	$	18,027
See accompanying notes to the condensed consolidated financial statements

8

	Six-Month Period Ended June 30, 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	33,814			—		104			—			—			104
Stock options exercised	1,000			—		4			—			—			4
Stock for tax withholding	(4,040	)		—		(21	)		—			—			(21	)
Comprehensive income (loss):
Foreign currency translation adjustment	—			—		—			(10	)		—			(10	)
Net income	—			—		—			—			955			955
Cumulative effect from adoption of ASU No. 2016-02	—			—		—			—			33			33
Balance, June 30, 2019	5,309,259		$	52	$	24,637		$	(382	)	$	(12,605	)	$	11,702
	Six-Month Period Ended June 30, 2020
	Shares Issued		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, December 31, 2019	5,322,849		$	53	$	24,751		$	(306	)	$	(6,565	)	$	17,933
Stock-based compensation	16,900			—		113			—			—			113
Stock for tax withholding	(1,678	)		—		(6	)		—			—			(6	)
Comprehensive income (loss):
Foreign currency translation adjustment	—			—		—			(52	)		—			(52	)
Net income	—			—		—			—			39			39
Balance, June 30, 2020	5,338,071		$	53	$	24,858		$	(358	)	$	(6,526	)	$	18,027
See accompanying notes to the condensed consolidated financial statements

9

IMAGE SENSING SYSTEMS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

June 30, 2020

Note A: Basis of Presentation

Image Sensing Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as "we," "us," "our" and the "Company") develops and markets video and radar processing products for use in applications such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. We sell our products primarily to distributors and also receive royalties under a license agreement with a manufacturer/distributor for certain of our products. Our products are used primarily by governmental entities.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q, which require the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals considered necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated.

Operating results for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC.

Summary of Significant Accounting Policies

The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position and may require the application of a higher level of judgment by the Company's management and, as a result, are subject to an inherent degree of uncertainty.

Revenue Recognition  

We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:
●	Identification of a contract, or contracts, with a customer;
●	Identification of performance obligations in the contract;
●	Determination of the transaction price;
●	Allocation of the transaction price to the performance obligations in the contract; and
●	Recognition of revenue when, or as, we satisfy a performance obligation.

Revenue disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Product sales	$	1,172	$	2,020	$	2,222	$	3,641
Royalties		2,215		2,205		4,324		3,956
Total revenue	$	3,387	$	4,225	$	6,546	$	7,597

10

Product Sales:

Product revenue is generated primarily from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the amount we expect to receive in exchange for those goods or services.

Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple performance obligations may include hardware, software, installation services, training, and support.  In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. For performance obligations without observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.

Revenue for services such as maintenance, repair, and technical support is recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. From time to time, our payment terms may vary by the type and location of our customer and the products or services offered. 

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

We record provisions against sales revenue for estimated returns and allowances in the period when the related revenue is recorded based on historical sales returns and changes in end user demand.

Royalties:

Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean.  The royalty of approximately 50% of the gross profit on licensed products is recognized when the products are shipped or delivered by Econolite 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.

11

Inventories

Inventories are primarily electronic components and finished goods and are valued at the lower of cost or net realizable value determined under the first-in, first-out accounting method.

Income Taxes

We record a tax provision for the anticipated tax consequences of our reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.

Intangible Assets

We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.

Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value have been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately no costs and $343,000 of software development costs during the quarters ended June 30, 2020 and 2019, respectively, and $22,000 and $762,000 during the six-month periods ended June 30, 2020 and 2019, 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 June 30, 2020 and 2019, we determined there was no impairment of intangible assets. At both June 30, 2020 and 2019, there were no indefinite-lived intangible assets.

12

Note B: Recent Accounting Pronouncements 

Accounting pronouncements 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 an accumulated deficit as of that date. See Note E: Operating Leases for further details.

In June 2018, the FASB issued ASU No. 2018-07, "Compensation-Stock Compensation (Topic 718)". ASU 2018-07 largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of Accounting Standards Codification 718 to apply to nonemployee share-based transactions as long as the transaction is not effectively a form of financing. We adopted ASU No. 2018-07 as of January 1, 2019. There was no impact to the Company's consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, "Disclosure Update and Simplification," amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed. We adopted these changes as of January 1, 2019.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurements (Topic 820)." ASU 2018-13 eliminates, amends and adds disclosure requirements for fair value measurements. ASU 2018-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2020.  We adopted these changes as of January 1, 2020; however, there are no required changes that apply to our fair value measurements disclosures. 

Note C: Fair Value Measurements

The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:

Level 1:	observable inputs such as quoted prices in active markets;
Level 2:	inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:	unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

Our intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially, and have historically been, measured and recognized at amounts equal to the fair value determined as of the date of acquisition.

Financial Instruments not Measured at Fair Value

Certain of our financial instruments are not measured at fair value and are recorded at carrying amounts approximating fair value, based on their short-term nature or variable interest rate. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and other current financial assets and liabilities.

13

Note D: Inventories

Inventories consisted of the following (in thousands):

	June 30, 2020		December 31, 2019
Finished goods	$	497	$	551
Components		143		230
Total	$	640	$	781

Note E: Operating Leases

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), and its amendments and elected the effective date transition method, which included recognizing a cumulative effect adjustment through opening an accumulated deficit as of that date.  We recorded $431,000 of operating lease assets and operating lease obligations as of January 1, 2019.

The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through November 2022. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

Most of these leases include an option to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use ("ROU") assets and lease liabilities because they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.

Because most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.

The cost components of our operating leases were as follows (in thousands): 

	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
	2020			2019	2020		2019
Operating lease costs	$	65	$	66	$	131	$	131
Variable lease cost		93		77		169		153
Total	$	158	$	143	$	300	$	284

Variable lease costs consist primarily of property taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment, which are paid based on actual costs incurred by the lessor.

14

Maturities for our lease liabilities for all operating leases are as follows (in thousands) as of June 30, 2020:

	Total
2020	$	111
2021		123
2022		14
2023 and thereafter		2
Total lease payments		250
Less: Interest		(6	)
Present value of lease liabilities	$	244

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 30, 2020:

	June 30, 2020
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1.19
Weighted average discount rate	4.75	%

Cash paid for amounts included in the measurement of operating lease liabilities was $134,000 and $131,000 for the six months ended June 30, 2020 and 2019, respectively, and these amounts are 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 six months ended June 30, 2020 and 2019, except that during the three months ended June 30, 2020, we agreed to a one-year extension of our office space which increased operating lease assets and liabilities by $194,000.

15

Note F: Intangible Assets

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

	June 30, 2020
								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		(1,370	)		1,559	8.0
Echo development costs		1,852		(110	)		1,742	7.0
IntellitraffiQ development costs		468		(234	)		234	4.0
Wrong Way development costs		228		(228	)		—	—
Total	$	9,377	$	(5,842	)	$	3,535	7.2

	December 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		(1,186	)		1,743	8.0
Software development in process costs		1,830		—			1,830	—
IntellitraffiQ development costs		468		(176	)		292	4.0
Wrong Way development costs		228		(218	)		10	2.0
Total	$	9,355	$	(5,480	)	$	3,875	7.1

Note G: Warranties 

We generally provide a two to three 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):

	Six-Month Periods Ended June 30,
	2020			2019
Beginning balance	$	313		$	656
Warranty provisions		13			78
Warranty claims		(26	)		(55	)
Adjustments to preexisting warranties		(149	)		(114	)
Currency		(1	)		(1	)
Ending balance	$	150		$	564

16

Note H: Stock-Based Compensation

We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), which was approved by our shareholders and is administered under the supervision of our Board of Directors. The Image Sensing Systems, Inc. 2005 Stock Incentive Plan (the "2005 Plan") expired in 2015, and there are no options or other awards outstanding 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 three to five years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of nine 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 June 30, 2020 and 2019 was $55,000 and $54,000, respectively. Stock-based compensation expense included in general and administrative expense for the six-month periods ended June 30, 2020 and 2019 was $113,000 and $104,000, respectively. At June 30, 2020, 164,290 shares were available for grant under the Company's 2014 Plan.

Stock Options

A summary of the stock option activity for the first six months of 2020 is as follows:

	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2019		16,000		$	4.73		3.97	$	3,505
Granted		—		$	—		—	$	—
Exercised		—		$	—		—	$	—
Expired		—		$	—		—	$	—
Forfeited		(1,000	)	$	4.22		—	$	—
Options outstanding at June 30, 2020		15,000		$	4.76		3.44	$	—
Options exercisable at June 30, 2020		15,000		$	4.76		3.44	$	—

17

There were no stock options exercised or expired and options to purchase 1,000 shares forfeited, during the six-month period ended June 30, 2020, and there were options to purchase 1,000 shares exercised, options to purchase 18,000 shares expired, and options to purchase 4,000 shares forfeited during the six-month period ended June 30, 2019. During each of the six-month periods ended June 30, 2020 and 2019, we recognized no stock-based compensation expense related to stock options. As of June 30, 2020, 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. 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. 

We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance. 

The following table summarizes restricted stock award activity for the first six months of 2020:

	Number of Shares			Weighted Average Grant Date Fair Value
Awards outstanding December 31, 2019	58,961		$	4.32
Granted	16,900			3.70
Vested	(42,531	)		3.92
Forfeited	—			—
Awards outstanding at June 30, 2020	33,330		$	4.52

As of June 30, 2020, the total stock-based compensation expense related to non-vested awards not yet recognized was $129,000, which is expected to be recognized over a weighted average period of 1.5 years. During the six-month periods ended June 30, 2020 and June 30, 2019, we recognized $113,000 and $104,000, respectively, of stock-based compensation expense related to restricted stock awards.

Note I: Income (Loss) per Common Share

Net income (loss) per share is computed by dividing net income (loss) by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income (loss) per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding because the exercise of those options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding. As a result, stock options and restricted stock awards to acquire 15,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended June 30, 2020 and 2019, respectively and 5,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the six-month periods ended June 30, 2020 and 2019, respectively. 

18

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

	Three-Month  Periods Ended June 30,				Six-Month  Periods Ended June 30,
	2020		2019		2020		2019
Numerator:
Net income	$	150	$	647	$	39	$	955
Denominator:
Weighted average common shares outstanding		5,296		5,244		5,281		5,234
Dilutive potential common shares		3		15		18		14
Shares used in diluted net income per common share calculations		5,299		5,259		5,299		5,248
Basic net income per common share	$	0.03	$	0.12	$	0.01	$	0.18
Diluted net income per common share	$	0.03	$	0.12	$	0.01	$	0.18

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 June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	2,465	$	2,512	$	922	$	1,713	$	3,387	$	4,225
Gross profit		2,233		2,239		543		787		2,776		3,026
Amortization of intangible assets		91		91		97		58		188		149
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

	Six Months Ended June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	4,715	$	4,584	$	1,831	$	3,013	$	6,546	$	7,597
Gross profit		4,302		4,031		1,010		1,590		5,312		5,621
Amortization of intangible assets		183		183		179		116		362		299
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

19

Note K: Restructuring and Exit Activities

In the third quarter of 2018, we initiated the closure of our Bucharest, Romania office location, which was a sales office for Image Sensing Systems EMEA Limited, a United Kingdom subsidiary. The Company will continue doing business in the European region utilizing its Barcelona, Spain sales office. We incurred no costs for the closure of our office in Romania in the six-month period ended June 30, 2020 and $2,000 of costs related to the closure of the Romania location in the six-month period ended June 30, 2019. 

In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) in China; Image Sensing Systems Europe Limited (ISS Europe) in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O (ISS Poland) in Poland; and Image Sensing Systems Germany, GmbH (ISS Germany) in Germany. At December 31, 2018, Image Sensing Systems Europe Limited and Image Sensing Systems Europe Limited SP.Z.O.O were fully closed. At December 31, 2019, Image Sensing Systems Germany, GmbH was fully closed. During the first quarter of 2020, we initiated the closure of Image Sensing Systems EMEA Limited (ISS UK) and Image Sensing Systems Holdings Limited (ISS Holdings). We incurred $32,000 and no costs, respectively, for these entities' closure costs in the six-month periods ended June 30, 2020 and June 30, 2019.

Note L: Commitments and Contingencies

Debt

Under the Paycheck Protection Program ("PPP"), the United States Small Business Administration ("SBA") approved the Company's application to receive a loan in the amount of $923,700 (the "PPP Loan").  The PPP was established under the congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.  The PPP Loan to the Company was made through BMO Harris Bank N.A. (the "Lender"). On April 21, 2020, the Company's Board of Directors approved the PPP Loan and the Company signed the promissory note (the "Note") evidencing the PPP Loan, which is dated as of April 17, 2020.  The Lender distributed the $923,700 of proceeds of the PPP Loan to the Company on April 22, 2020.

The term of the PPP loan is 24 months after the date of the Note (the "Maturity Date").  The annual interest rate on the PPP Loan is 1.00%.  No payments of principal or interest are due during the six months beginning on the date of the Note (the "Deferred Period").  The Company's obligations under the Note are not secured by a security interest in the Company's assets.  The Note requires the Lender's consent if the Company wants to reorganize, merge, consolidate, or otherwise change its ownership or structure.  The Note contains customary events of default by the Company relating to, among other things, payment defaults and the breach of representations and warranties or other provisions of the Note.  Upon a default by the Company under the Note, the Lender may accelerate the Company's obligations under the Note and pursue its rights against the Company under applicable law, including by filing suit and obtaining a judgment against the Company.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans made under the PPP after eight weeks if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company intends to use the entire PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. To obtain full or partial forgiveness of the PPP Loan, the Company must request forgiveness and provide satisfactory documentation in accordance with applicable SBA guidelines. Interest payable on the PPP Loan will be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the PPP Loan. As of June 30, 2020, the Company had not recognized any forgiveness of this PPP Loan.  

The Company will be obligated to repay any part of the principal amount due under the Note that is not forgiven, together with accrued interest, until the unforgiven portion is paid in full. Beginning one month after the expiration of the Deferred Period and continuing monthly until the Maturity Date, the Company will be obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion of the PPP Loan in such equal amounts as are required to fully amortize the principal amount outstanding under the Note. The Company may prepay any unforgiven amount due under the Note at any time without premium or penalty.

The foregoing description of the Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Note filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2020 and incorporated herein by reference.

20

Litigation

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with GAAP, we record a liability in our Consolidated Financial Statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to any currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our results of operations, financial position or cash flows. We expense legal costs as incurred.

Note M: Risks and Uncertainties

The Company is considered an essential service and has remained operational during the COVID-19 pandemic.  As of the middle of March 2020, the Company closed its corporate office in St. Paul, and all of the Company’s employees began working from home and did not experience any significant interruptions during this transition.  The corporate office remains closed, and the Company is working on a plan to reopen its corporate office during the third quarter of 2020, provided that appropriate safeguards are in place and the Company’s plan is in line with state and federal guidelines. The Company has worked with key suppliers to ensure there is an adequate supply of components and capacity to manufacture and deliver products.  On April 13, 2020, Econolite informed the Company that Econolite had agreed to temporarily close its manufacturing facility in Tecate, Mexico, under guidance from the local government due to COVID-19. Based on information obtained by the Company, Econolite has made alternative arrangements to manufacture Autoscope and related products that had been manufactured at its Mexican facility. In late June 2020, we were informed by Econolite that its Mexican facility has been reopened and Econolite has resumed the manufacture of Autoscope and related products.  

21

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, and before the outbreak of COVID-19, United States commuters lost 97 hours a year in congestion, which cost motorists $87 billion a year in time, which is an average of $1,365 per driver (per INRIX 2018 Global Traffic scorecard). COVID-19 has reduced travel volume and to some extent congestion since March 2020. We believe that traffic volume will increase in 2021 as the COVID-19 pandemic subsides.  We believe vehicle usage will increase above pre-COVID-19 levels and will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.

We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install, have lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our solutions well suited for use in ITS markets.

We believe the strength of our distribution channels positions us to increase the penetration of our technology‑driven solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the Caribbean through an exclusive agreement with Econolite Control Products, Inc. ("Econolite"), which we believe is the leading distributor of ITS intersection control products in these markets.

We market the RTMS radar systems to a network of distributors globally.  On a limited basis, we may sell directly to the end user.  We market our Autoscope video products outside of the United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels, through our office in Spain. Our end users primarily include governmental agencies and municipalities.

The following discussion of period-to-period changes and trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation discussed above. 

Trends and Challenges in Our Business

We believe the expected growth in our business can be attributed primarily to the following global trends:

• worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of road infrastructure and the need to automate safety, security and access applications for automobiles and trucks, which has increased demand for our products;
• advances in information technology, which have made our products easier to market, implement and integrate;
• the continued funding allocations for centralized traffic management services and automated enforcement schemes, which have increased the ability of our primary end users to implement our products; and 
• general increases in the cost effectiveness of electronics, which make our products more affordable for end users.

We believe our continued growth primarily depends upon:

• continued adoption and governmental funding of ITS and other automated applications for traffic control, safety and enforcement in developed countries;
• a propensity by traffic engineers to implement lower cost technology-based solutions rather than civil engineering solutions such as widening roadways;
• countries in the developing world adopting above-ground detection technology, such as video or radar, instead of in-pavement loop technology to manage traffic; and 

• our ability to develop new products that provide increasingly accurate information and enhance the end users' ability to cost-effectively manage traffic and environmental issues.

22

Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchasing decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue among periods. The ongoing economic environment in Europe and the United States and the COVID-19 pandemic declared in March 2019 are further adding to the unpredictability of purchasing decisions, creating more delays than usual and decreasing governmental budgets, and they are likely to continue to affect our revenue.

Key Financial Terms and Metrics

Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope video systems in the United States, Mexico, Canada and the Caribbean and (2) revenue received from the direct sales of our RTMS radar systems and our Autoscope video systems in Europe and Asia.  Autoscope video royalties are calculated using a profit sharing model in which the gross profits on sales of product made through Econolite are shared equally with Econolite.  This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is exclusive under the long-term Manufacturing, Distributing and Technology Agreement dated as of June 11, 1991, as amended (the “Econolite Agreement”), between the Company and Econolite.

On April 13, 2020, Econolite informed the Company that Econolite had agreed to temporarily close its manufacturing facility in Tecate, Mexico, under guidance from the local government due to COVID-19.  It is the Company’s understanding that Econolite manufactures the Company’s Autoscope products at this facility.  By a letter to Econolite dated April 22, 2020, the Company informed Econolite that the Econolite Agreement requires Econolite to maintain sufficient inventory of products governed by the Econolite Agreement to permit Econolite to satisfy demand in the “Territory” (as that term is defined in the Econolite Agreement).  Because it was the Company’s understanding that Econolite had not maintained sufficient quantities of completed Autoscope products to satisfy product demand in the Territory, in its April 22, 2020 letter, the Company informed Econolite that Econolite was in breach of the Econolite Agreement and had 60 days from the date of the Company’s letter to manufacture sufficient levels of the Company’s products, including the Company’s Autoscope products, to satisfy demand in the Territory.  In the letter, the Company stated that if Econolite fails to comply with this provision of the Econolite Agreement within the 60-day cure period, the Company may elect to terminate the Econolite Agreement.

Based on information obtained by the Company, Econolite has made alternative arrangements to manufacture Autoscope and related products that had been manufactured at its Mexican facility.  We were told by Econolite in late June 2020 that the local government allowed the reopening of the Tecate, Mexico manufacturing facility and Econolite had resumed the manufacture of the Company’s Autoscope product line.  As of July 31, 2020, the Company had not yet suffered any shortages of product due to the temporary closing of Econolite’s facility in Tecate, Mexico during the second quarter of 2020.  However, it is uncertain the local government will allow the Tecate, Mexico facility to remain open due to COVID-19 and whether Econolite is meeting, and can continue to meet, the demand for the products in the Territory.  We are working with Econolite to provide more accurate and timely information with regard to the status and capacity of its manufacturing facilities, including its Tecate, Mexico operation, and to agree to new plans to ensure that Econolite has sufficient inventory to satisfy future demand in the Territory.  If Econolite cannot do so, and if any of the Company’s other third-party suppliers are unable to manufacture sufficient product to meet the demand for products in the Territory, then the Company may be prevented or delayed from effectively operating our business, and the manufacture, supply, and sale of our services and our financial results could be adversely affected. 

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 products, whose costs are influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, and inventory obsolescence. The key metric that we follow is achieving certain gross margin percentages on product sales by operating segment.

Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support; (2) general and administrative; and (3) research and development. Selling, marketing and product support expenses consist of various costs related to sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; second-tier technical support for Econolite; and general product support, where applicable. General and administrative expenses consist of certain corporate and administrative functions that support the development and sales of our products and provide an infrastructure to support future growth. These expenses include management, supervisory and staff salaries and benefits; legal and auditing fees; travel; rent; and costs associated with being a public company, such as board of director fees, listing fees and annual reporting expenses. Research and development expenses consist mainly of salaries and benefits for our engineers and third party costs for consulting and prototyping. We measure all operating expenses against our annually approved budget, which is developed with achieving a certain operating margin as a key focus. We also include any restructuring costs in operating expenses.

23

Non-GAAP Operating 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 it may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.

Reconciliations of GAAP income from operations to non-GAAP income from operations are as follows (in thousands):  

	Three-Month Periods Ended   June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
Income from operations	$	371	$	647	$	96	$	955
Adjustments to reconcile to non-GAAP income
Amortization of intangible assets		188		149		362		299
Depreciation		62		48		118		99
Restructuring		—		—		—		2
Non-GAAP income from operations	$	621	$	844	$	576	$	1,355

Seasonality. Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our business. Our first quarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North America, Europe and northern Asia. We expect such seasonality to continue for the foreseeable future. Additionally, our international revenues regularly contain individually significant sales. This can result in significant variations of revenue between periods. Accordingly, we believe that quarter-to-quarter comparisons of our financial results should not be relied upon as an indication of our future performance. No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in the future. 

Segments. We currently operate in two reportable segments: Intersection and Highway. Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. RTMS and IntellitraffiQ are our radar product lines, and revenue consists of sales to external customers. Radar products are normally sold in the Highway segment.  As a result of business model changes and modifications in how we manage our business, we may reevaluate our segment definitions in the future.

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

	Three Months Ended June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	2,465	$	2,512	$	922	$	1,713	$	3,387	$	4,225
Gross profit		2,233		2,239		543		787		2,776		3,026
Amortization of intangible assets		91		91		97		58		188		149
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

	Six Months Ended June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	4,715	$	4,584	$	1,831	$	3,013	$	6,546	$	7,597
Gross profit		4,302		4,031		1,010		1,590		5,312		5,621
Amortization of intangible assets		183		183		179		116		362		299
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

24

Results of Operations  

The following table sets forth, for the periods indicated, certain statements of operations data as a percent of total revenue and gross profit on product sales and royalties as a percentage of product sales and royalties, respectively.

	Three-Month Periods Ended June 30,
	2020		2019
Product sales	34.6	%	47.8	%
Royalties	65.4		52.2
Total revenue	100.0		100.0
Gross profit - product sales	55.6		45.1
Gross profit - royalties	95.9		95.9
Selling, general and administrative	46.1		39.8
Research and development	24.9		16.5
Income from operations	11.0		15.3
Income tax expense	6.5		—
Net income	4.4		15.3

	Six-Month Periods Ended June 30,
	2020		2019
Product sales	33.9	%	47.9	%
Royalties	66.1		52.1
Total revenue	100.0		100.0
Gross profit - product sales	52.7		50.8
Gross profit - royalties	95.8		95.4
Selling, general and administrative	53.0		44.1
Research and development	26.6		17.3
Income from operations	1.5		12.6
Income tax expense	0.9		—
Net income	0.6		12.6

25

Total revenue decreased to $3.4 million in the three-month period ended June 30, 2020 from $4.2 million in the same period in 2019, a decrease of 19.8%, and decreased to $6.5 million in the first six months of 2020, from $7.6 million in the same period in 2019, a decrease of 13.8%. Royalty income remained consistent at $2.2 million in the second quarter of 2020 compared to the second quarter of 2019, and increased to $4.3 million in the first six months of 2020 from $4.0 million in the first six months of 2019, an increase of 9.3%. Product sales decreased to $1.2 million in the second quarter of 2020 from $2.0 million in the second quarter of 2019, a decrease of 42.0%, and decreased to $2.2 million in the first six months of 2020 from $3.6 million in the first six months of 2019, a decrease of 39.0%. The decrease in product sales in the first six months of 2020 was a result of project timing and COVID-19 related challenges.

Revenue for the Intersection segment remained consistent at $2.5 million in the three-month period ended June 30, 2020 compared to the three-month period ended June 30, 2019. Revenue for the Intersection segment increased to $4.7 million in the first six months of 2020 from $4.6 million in the first six months of 2019, an increase of 2.9%.

Revenue for the Highway segment decreased to $922,000 in the three-month period ended June 30, 2020 from $1.7 million in the three-month period ended June 30, 2019, a decrease of 46.2%. Revenue for the Highway segment decreased to $1.8 million in the first six months of 2020 from $3.0 million in the first six months of 2019, a decrease of 39.2%. The decrease in revenue in the Highway segment in the first six months of 2020 was attributable to project timing and COVID-19  related challenges which impacted increasing numbers of regions during the year.

Gross margin percent for product sales increased to 55.6% in the three months ended June 30, 2020 from 45.1% in the three months ended June 30, 2019. The dollar amount of product sales gross profit decreased $260,000, or 29%, in the three months ended June 30, 2020 compared to the prior year period. Gross margin percent for product sales increased to 52.7% in the first six months of 2020 from 50.8% in the first six months of 2019. Product sales gross profit decreased $677,000 or 37% in the six months ended June 30, 2020 compared to the prior year period. The increase in product gross margin percent was the result of an individually significant, low margin sale into the Middle East region in the second quarter of 2019.

Gross margin percent for royalty sales for the three months ended June 30, 2020 remained consistent at 95.9% compared to the same period in 2019. The dollar amount of gross profit from royalties remained consistent at $2.1 million in the three months ended June 30, 2020 compared to the prior year period. Gross margin percent for royalty sales for the six months ended June 30, 2020 increased to 95.8% from 95.4% in the same period in 2019. Gross profit from royalties increased $368,000, or 9.8%, in the six months ended June 30, 2020 compared to the prior year period. The increase in royalty gross margin percent was due to higher royalty revenues while software amortization expense remained substantially the same.

Selling, general and administrative expense was $1.6 million, or 46.1% of total revenue, in the second quarter of 2020 compared to $1.7 million, or 39.8% of total revenue, in the second quarter of 2019, and increased to $3.5 million, or 53.0% of total revenue, in the first six months of 2020 compared to $3.3 million, or 44.1% of total revenue, in the first six months of 2019. The increase in expense in the first six months of 2020 was primarily a result of increased expenses for legal and outside consulting costs related to the efforts around exploring strategic alternatives to maximize shareholder value that was announced in January 2020.

Research and development expense increased to $842,000, or 24.9% of total revenue, in the three-month period ended June 30, 2020 from $697,000, or 16.5% of total revenue, in the three-month period ended June 30, 2019, and increased to $1.7 million, or 26.6% of total revenue, in the six-month period ended June 30, 2020, from $1.3 million, or 17.3% of total revenue, in the six-month period ended June 30, 2019. The increase was partially due to lower capitalized software development costs in the six-month period ended June 30, 2020 of $22,000 compared to capitalized software costs of $762,000 for the same period in 2019.  After normalizing for software development costs, overall research and development expenditures decreased in the six-month period ended June 30, 2020 compared to the same period in the prior year. 

There was $221,000 and $57,000 of income tax expense recorded in the three and six months ended June 30, 2020, respectively. There was no income tax expense recorded in the three and six months ended June 30, 2019. 

Consolidated net income was $150,000, or $0.03 per basic share and diluted share, in the three-month period ended June 30, 2020 compared to a net income of $647,000, or $0.12 per basic and diluted share, in the comparable prior year period. Consolidated net income was $39,000, or $0.01 per basic and diluted share, in the six-month period ended June 30, 2020 compared to a net income of $955,000, or $0.18 per basic and diluted share, in the comparable prior year period. 

26

Liquidity and Capital Resources

At June 30, 2020, we had $6.8 million in cash and cash equivalents compared to $5.1 million in cash and cash equivalents at December 31, 2019.

Net cash provided by operating activities was $969,000 in the first six months of 2020 compared to net cash provided by operating activities of $944,000 in the same period in 2019. The increase in net cash provided by operating activities in the first six months of 2020 compared to the prior year period is primarily attributed to an increase in accounts receivable collections and the reduction in accounts payable and other accrued liabilities. Net cash provided by financing activities was $918,000, primarily attributed to the funding of $924,000 we received from the United States Small Business Administration (SBA) in the form of the Paycheck Protection Program loan (the "PPP Loan"). See Note L of the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further description of the PPP Loan. 

Net cash used for investing activities was $124,000 for the first six months of 2020 compared to net cash used for investing activities of $922,000 in the same period in 2019. The decrease of the amount of net cash used for investing activities in the first six months of 2020 compared to the prior year period was primarily the result of lower capitalized internal software development costs compared to the prior year period.

We believe that cash and cash equivalents on hand at June 30, 2020, cash provided by operating activities, and the cash provided by the PPP Loan will satisfy our projected working capital needs, investing activities, and other cash requirements until at least June 30, 2021.

Off-Balance Sheet Arrangements

We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity, including special purpose and similar entities, or other off-balance sheet arrangements.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019. The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the three and six months ended June 30, 2020 are set forth elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction with those described in our Annual Report on Form 10-K and the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.

27

Cautionary Statement:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events and can be identified by the use of forward-looking words such as "expects," "believes," "may," "will," "should," "intends," "plans," "estimates," or "anticipates" or other comparable terminology. Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results described in the forward-looking statements. Factors that might cause such differences include, but are not limited to:

• our historical dependence on a single product for most of our revenue;
• budget constraints by governmental entities that purchase our products, including constraints caused by declining tax revenue;
• the continuing ability of Econolite to pay royalties owed;

• the mix of and margin on the products we sell;
• our dependence on third parties for manufacturing and marketing our products;
• our dependence on single-source suppliers to meet manufacturing needs;
• our failure to secure adequate protection for our intellectual property rights;
• our inability to develop new applications and product enhancements;
• the potential disruptive effect on the markets we serve of new and emerging technologies and applications, including vehicle-to-vehicle communications and autonomous vehicles;
• unanticipated delays, costs and expenses inherent in the development and marketing of new products;
• our inability to respond to low-cost local competitors;
• our inability to properly manage any growth in revenue and/or production requirements;
• the influence over our voting stock by affiliates;
• our inability to hire and retain key scientific and technical personnel;
• the effects of legal matters in which we may become involved;
• our inability to achieve and maintain effective internal controls;
• our inability to successfully integrate any acquisitions;
• tariffs and other trade barriers;
• political and economic instability, including continuing volatility in the economic and political environment of the European Union;
• our inability to comply with international regulatory restrictions over hazardous substances and electronic waste; and
• conditions beyond our control such as war, terrorist attacks, health epidemics (including the COVID-19 pandemic caused by the coronavirus) and economic recession.

We caution that the forward-looking statements made in this report or in other announcements made by us are further qualified by the risk factors set forth in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.

28

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 June 30, 2020, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter covered by this Quarterly Report on Form 10-Q, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

PART II. OTHER INFORMATION

Item 1.         Legal Proceedings

None.

Item 1A.      Risk Factors

Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended December 31 2019, filed on March 12, 2020. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of August 12, 2020, there had been no material changes to the disclosures made in the above-referenced Form 10-K, other than as set forth below.

COVID-19 has affected and could continue to affect our sales and disrupt our operations and have a material adverse impact on our sales, financial results, financial condition and stock price.

The COVID-19 that was reported to have surfaced in December 2019 and that has spread worldwide has affected and could adversely impact the Company’s operations or those of our third-party suppliers, as well as our sales to customers and our stock price. In particular, our product revenue in our international market segments was adversely impacted by COVID-19 due to their early and aggressive reaction to COVID-19, resulting in lockdowns of many regions. Although we eliminated discretionary spending, deferred programmatic expense to the second half of 2020, and took actions to increase our liquidity (including obtaining the PPP Loan), the extent to which COVID-19 will continue to impact the Company’s operations, those of our third-party suppliers, or our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence. If the Company or any of our third-party suppliers encounter any further disruptions to our or their respective operations or facilities, or if our customers were to partially or fully close for an extended period of time due to COVID-19 then we or they may be prevented or delayed from effectively operating our or their business, respectively, and the manufacture, supply, and sale of our services and our sales, financial condition, financial results and stock price could be adversely affected.

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.

30

Item 6.         Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020:

Exhibit Number	Description
3.1	Certificate of Designation amending the Articles of Incorporation of Image Sensing Systems, Inc. as filed with the Minnesota Secretary of State on June 6, 2013, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).
4.1	Third Amendment to Rights Agreement dated as of June 4, 2020, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 4, 2020 (File No. 0-26056).
4.2	Second Amendment to Rights Agreement dated as of March 12, 2018, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 12, 2018 (File No. 0-26056).
4.3	First Amendment to Rights Agreement dated as of August 23, 2016, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 23, 2016 (File No. 026056).
4.4	Rights Agreement dated as of June 6, 2013, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).
10.1	Promissory Note, between BMO Harris Bank N.A. and Image Sensing Systems, Inc., dated as of April 17, 2020, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 23, 2020 (File No. 0-26056).
10.2	Amendment XIV to Office Lease Agreement by and between Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc., dated as of June 17, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2020 (File No. 0-26056).
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 June 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements (filed herewith).

31

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: August 12, 2020	By:	/s/ Chad A. Stelzig
		Chad A. Stelzig
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated: August 12, 2020	By:	/s/ Frank G. Hallowell
		Frank G. Hallowell
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

32

EXHIBIT INDEX

Exhibit No.	Description
3.1	Certificate of Designation amending the Articles of Incorporation of Image Sensing Systems, Inc. as filed with the Minnesota Secretary of State on June 6, 2013, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).
4.1	Third Amendment to Rights Agreement dated as of June 4, 2020, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 4, 2020 (File No. 0-26056).
4.2	Second Amendment to Rights Agreement dated as of March 12, 2018, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 12, 2018 (File No. 0-26056).
4.3	First Amendment to Rights Agreement dated as of August 23, 2016, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 23, 2016 (File No. 026056).
4.4	Rights Agreement dated as of June 6, 2013, by and between Image Sensing Systems, Inc. and Continental Stock Transfer & Trust Company, as rights agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 6, 2013 (File No. 0-26056).
10.1	Promissory Note, between BMO Harris Bank N.A. and Image Sensing Systems, Inc., dated as of April 17, 2020, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 23, 2020 (File No. 0-26056).
10.2	Amendment XIV to Office Lease Agreement by and between Spruce Tree Centre L.L.P. and Image Sensing Systems, Inc., dated as of June 17, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2020 (File No. 0-26056).
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 June 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language), (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements (filed herewith).

4.3 

33

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 June 30, 2020;

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: August 12, 2020

/s/ Chad A. Stelzig

Name: Chad A. Stelzig

Title: President and Chief Executive Officer

(Principal 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 June 30, 2020;

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: August 12, 2020

/s/ Frank G. Hallowell

Name: Frank G. Hallowell

Title: Chief Financial Officer

(Principal Financial Officer and Principal Accounting 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 June 30, 2020, 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

(Principal Executive Officer)

August 12, 2020

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 June 30, 2020, 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

(Principal Financial Officer and Principal Accounting Officer)

August 12, 2020

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Jul. 31, 2020
Entity Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
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		5,338,071
Entity Current Reporting Status	Yes
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity File Number	0-26056
Entity Address, Address Line One	Spruce Tree Centre, Suite 400
Entity Address, Address Line Two	1600 University Avenue West
Entity Address, City or Town	St. Paul
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55104
Entity Tax Identification Number	41-1519168
City Area Code	(651)
Local Phone Number	603-7700
Entity Incorporation, State or Country Code	MN
Entity Interactive Data Current	Yes
Document Quarterly Report	true
Document Transition Report	false
Common Stock [Member]
Entity Information [Line Items]
Title of 12(b) Security	Common Stock, $0.01 par value
Trading Symbol	ISNS
Security Exchange Name	NASDAQ
Rights [Member]
Entity Information [Line Items]
Title of 12(b) Security	Preferred Stock Purchase Rights
Trading Symbol	ISNS
Security Exchange Name	NASDAQ

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 6,834	$ 5,118
Accounts receivable, net of allowance for doubtful accounts of $20 and $19 respectively	2,629	3,126
Inventories	640	781
Prepaid expenses and other current assets	512	463
Total current assets	10,615	9,488
Property and equipment:
Furniture and fixtures	147	163
Leasehold improvements	6	6
Equipment	1,418	1,339
Property and equipment, Gross	1,571	1,508
Accumulated depreciation	1,186	1,089
Property and equipment, Net	385	419
Operating lease assets, net	245	181
Intangible assets, net	3,535	3,875
Deferred income taxes	5,219	5,220
TOTAL ASSETS	19,999	19,183
Current liabilities:
Accounts payable	253	373
Deferred revenue	18	28
Warranty	150	313
Accrued compensation	235	105
Operating lease obligations	216	164
Short-term debt	402	0
Other current liabilities	148	248
Total current liabilities	1,422	1,231
Operating lease obligations	28	19
Long-term debt	522	0
TOTAL LIABILITIES	1,972	1,250
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, 5,338,071 and 5,322,849 issued and outstanding at June 30, 2020 and December 31, 2019, respectively	53	53
Additional paid-in capital	24,858	24,751
Accumulated other comprehensive loss	(358)	(306)
Accumulated deficit	(6,526)	(6,565)
Total shareholders' equity	18,027	17,933
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 19,999	$ 19,183

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Condensed Consolidated Balance Sheets [Abstract]
Accounts receivable, allowance for doubtful accounts	$ 20	$ 19
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	5,338,071	5,322,849
Common stock shares outstanding	5,338,071	5,322,849

XML

Condensed Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Revenue:
Total Revenue	$ 3,387	$ 4,225	$ 6,546	$ 7,597
Cost of revenue:
Total Cost of revenue	611	1,199	1,234	1,976
Gross profit	2,776	3,026	5,312	5,621
Operating expenses:
Selling, general and administrative	1,563	1,682	3,472	3,347
Research and development	842	697	1,744	1,317
Restructuring charges	0	0	0	2
Total Operating expenses	2,405	2,379	5,216	4,666
Income from operations before income taxes	371	647	96	955
Income tax expense	221	0	57	0
Net income	$ 150	$ 647	$ 39	$ 955
Net income per share:
Basic (in dollars per share)	$ 0.03	$ 0.12	$ 0.01	$ 0.18
Diluted (in dollars per share)	$ 0.03	$ 0.12	$ 0.01	$ 0.18
Weighted average number of common shares outstanding:
Basic (in shares)	5,296	5,244	5,281	5,234
Diluted (in shares)	5,299	5,259	5,299	5,248
Product sales [Member]
Revenue:
Total Revenue	$ 1,172	$ 2,020	$ 2,222	$ 3,641
Cost of revenue:
Total Cost of revenue	520	1,108	1,051	1,793
Royalties [Member]
Revenue:
Total Revenue	2,215	2,205	4,324	3,956
Cost of revenue:
Total Cost of revenue	$ 91	$ 91	$ 183	$ 183

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income	$ 150	$ 647	$ 39	$ 955
Other comprehensive income (loss):
Foreign currency translation adjustment	54	(40)	(52)	(10)
Comprehensive income (loss)	$ 204	$ 607	$ (13)	$ 945

XML

Condensed Consolidated Statements of Cash Flows - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Operating activities:
Net income	$ 39,000	$ 955,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	118,000	99,000
Software amortization	362,000	299,000
Stock-based compensation	113,000	104,000
Changes in operating assets and liabilities:
Accounts receivable, net	497,000	282,000
Inventories	141,000	608,000
Prepaid expenses and other current assets	(49,000)	(53,000)
Accounts payable	(106,000)	(451,000)
Accrued expenses and other current liabilities	(146,000)	(899,000)
Net cash provided by operating activities	969,000	944,000
Investing activities:
Capitalized software development costs	(22,000)	(762,000)
Purchases of property and equipment	(102,000)	(160,000)
Net cash used for investing activities	(124,000)	(922,000)
Financing activities:
Stock for tax withholding	(6,000)	(21,000)
Proceeds from PPP Loan	923,700	0
Proceeds from stock options exercised	0	4,000
Net cash provided by (used for) financing activities	918,000	(17,000)
Effect of exchange rate changes on cash	(47,000)	(12,000)
Change in cash and cash equivalents	1,716,000	(7,000)
Cash and cash equivalents at beginning of period	5,118,000	4,236,000
Cash and cash equivalents at end of period	6,834,000	4,229,000
Non-Cash investing and financing activities:
Purchase of property and equipment in accounts payable	$ 0	$ 5,000

XML

Condensed Consolidated Statements of Shareholders' Equity - USD ($)	Total	Common Stock	Additional Paid-In Captal	Accumulated Other Comprehensive Loss	Accumulated Deficit
Balance at Jun. 30, 2019	$ 11,702,000	$ 52,000	$ 24,637,000	$ (382,000)	$ (12,605,000)
Balance (in shares) at Jun. 30, 2019		5,309,259
Stock-based compensation	104,000		104,000
Stock-based compensation (in shares)		33,814
Stock options exercised	4,000		4,000
Stock options exercised (in shares)		1,000
Stock for tax withholding	(21,000)		(21,000)
Stock for tax withholding (in shares)		(4,040)
Comprehensive income (loss):
Foreign currency translation adjustment	(10,000)			(10,000)
Net income	955,000				955,000
Cumulative effect from adoption of ASU No. 2016-02	33,000				33,000
Balance at Dec. 31, 2018	10,637,000	$ 52,000	24,550,000	(372,000)	(13,593,000)
Balance (in shares) at Dec. 31, 2018		5,278,485
Balance at Jun. 30, 2019	11,702,000	$ 52,000	24,637,000	(382,000)	(12,605,000)
Balance (in shares) at Jun. 30, 2019		5,309,259
Stock-based compensation	54,000		54,000
Stock-based compensation (in shares)		16,996
Stock for tax withholding	(9,000)		(9,000)
Stock for tax withholding (in shares)		(1,678)
Comprehensive income (loss):
Foreign currency translation adjustment	(40,000)			(40,000)
Net income	647,000				647,000
Balance at Mar. 31, 2019	11,050,000	$ 52,000	24,592,000	(342,000)	(13,252,000)
Balance (in shares) at Mar. 31, 2019		5,293,941
Balance at Jun. 30, 2020	18,027,000	$ 53,000	24,858,000	(358,000)	(6,526,000)
Balance (in shares) at Jun. 30, 2020		5,338,071
Stock-based compensation	$ 113,000		113,000
Stock-based compensation (in shares)		16,900
Stock options exercised (in shares)	0
Stock for tax withholding	$ (6,000)		(6,000)
Stock for tax withholding (in shares)		(1,678)
Comprehensive income (loss):
Foreign currency translation adjustment	(52,000)			(52,000)
Net income	39,000				39,000
Balance at Dec. 31, 2019	17,933,000	$ 53,000	24,751,000	(306,000)	(6,565,000)
Balance (in shares) at Dec. 31, 2019		5,322,849
Balance at Jun. 30, 2020	18,027,000	$ 53,000	24,858,000	(358,000)	(6,526,000)
Balance (in shares) at Jun. 30, 2020		5,338,071
Stock-based compensation	54,000		54,000
Stock-based compensation (in shares)		7,950
Stock for tax withholding	(6,000)		(6,000)
Stock for tax withholding (in shares)		(1,678)
Comprehensive income (loss):
Foreign currency translation adjustment	54,000			54,000
Net income	150,000				150,000
Balance at Mar. 31, 2020	$ 17,775,000	$ 53,000	$ 24,810	$ (412,000)	$ (6,676,000)
Balance (in shares) at Mar. 31, 2020		5,331,799

XML

Basis of Presentation

6 Months Ended

Jun. 30, 2020

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 and six month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC.

Summary of Significant Accounting Policies

The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position and may require the application of a higher level of judgment by the Company's management and, as a result, are subject to an inherent degree of uncertainty.

Revenue Recognition  

We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:
●	Identification of a contract, or contracts, with a customer;
●	Identification of performance obligations in the contract;
●	Determination of the transaction price;
●	Allocation of the transaction price to the performance obligations in the contract; and
●	Recognition of revenue when, or as, we satisfy a performance obligation.

Revenue disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Product sales	$	1,172	$	2,020	$	2,222	$	3,641
Royalties		2,215		2,205		4,324		3,956
Total revenue	$	3,387	$	4,225	$	6,546	$	7,597

Product Sales:

Product revenue is generated primarily from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the amount we expect to receive in exchange for those goods or services.

Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple performance obligations may include hardware, software, installation services, training, and support.  In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. For performance obligations without observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.

Revenue for services such as maintenance, repair, and technical support is recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. From time to time, our payment terms may vary by the type and location of our customer and the products or services offered. 

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

We record provisions against sales revenue for estimated returns and allowances in the period when the related revenue is recorded based on historical sales returns and changes in end user demand.

Royalties:

Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean.  The royalty of approximately 50% of the gross profit on licensed products is recognized when the products are shipped or delivered by Econolite 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 our reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.

Intangible Assets

We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.

Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value have been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately no costs and $343,000 of software development costs during the quarters ended June 30, 2020 and 2019, respectively, and $22,000 and $762,000 during the six-month periods ended June 30, 2020 and 2019, 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 June 30, 2020 and 2019, we determined there was no impairment of intangible assets. At both June 30, 2020 and 2019, there were no indefinite-lived intangible assets.

XML

Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2020

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note B: Recent Accounting Pronouncements 

Accounting pronouncements 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 an accumulated deficit as of that date. See Note E: Operating Leases for further details.

In June 2018, the FASB issued ASU No. 2018-07, "Compensation-Stock Compensation (Topic 718)". ASU 2018-07 largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of Accounting Standards Codification 718 to apply to nonemployee share-based transactions as long as the transaction is not effectively a form of financing. We adopted ASU No. 2018-07 as of January 1, 2019. There was no impact to the Company's consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, "Disclosure Update and Simplification," amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed. We adopted these changes as of January 1, 2019.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurements (Topic 820)." ASU 2018-13 eliminates, amends and adds disclosure requirements for fair value measurements. ASU 2018-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2020.  We adopted these changes as of January 1, 2020; however, there are no required changes that apply to our fair value measurements disclosures. 

XML

Fair Value Measurements

6 Months Ended

Jun. 30, 2020

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.

XML

Inventories

6 Months Ended

Jun. 30, 2020

Inventories [Abstract]

Inventories

Note D: Inventories

Inventories consisted of the following (in thousands):

	June 30, 2020		December 31, 2019
Finished goods	$	497	$	551
Components		143		230
Total	$	640	$	781

XML

Operating Leases

6 Months Ended

Jun. 30, 2020

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 an accumulated deficit as of that date.  We recorded $431,000 of operating lease assets and operating lease obligations as of January 1, 2019.

The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through November 2022. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

Most of these leases include an option to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use ("ROU") assets and lease liabilities because they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.

Because most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.

The cost components of our operating leases were as follows (in thousands): 

	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
	2020			2019	2020		2019
Operating lease costs	$	65	$	66	$	131	$	131
Variable lease cost		93		77		169		153
Total	$	158	$	143	$	300	$	284

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 for our lease liabilities for all operating leases are as follows (in thousands) as of June 30, 2020:

	Total
2020	$	111
2021		123
2022		14
2023 and thereafter		2
Total lease payments		250
Less: Interest		(6	)
Present value of lease liabilities	$	244

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 30, 2020:

	June 30, 2020
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1.19
Weighted average discount rate	4.75	%

Cash paid for amounts included in the measurement of operating lease liabilities was $134,000 and $131,000 for the six months ended June 30, 2020 and 2019, respectively, and these amounts are 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 six months ended June 30, 2020 and 2019, except that during the three months ended June 30, 2020, we agreed to a one-year extension of our office space which increased operating lease assets and liabilities by $194,000.

XML

Intangible Assets

6 Months Ended

Jun. 30, 2020

Intangible Assets [Abstract]

Intangible Assets

Note F: Intangible Assets

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

	June 30, 2020
								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		(1,370	)		1,559	8.0
Echo development costs		1,852		(110	)		1,742	7.0
IntellitraffiQ development costs		468		(234	)		234	4.0
Wrong Way development costs		228		(228	)		—	—
Total	$	9,377	$	(5,842	)	$	3,535	7.2

	December 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		(1,186	)		1,743	8.0
Software development in process costs		1,830		—			1,830	—
IntellitraffiQ development costs		468		(176	)		292	4.0
Wrong Way development costs		228		(218	)		10	2.0
Total	$	9,355	$	(5,480	)	$	3,875	7.1

XML

Warranties

6 Months Ended

Jun. 30, 2020

Warranties [Abstract]

Warranties

Note G: Warranties 

We generally provide a two to three 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):

	Six-Month Periods Ended June 30,
	2020			2019
Beginning balance	$	313		$	656
Warranty provisions		13			78
Warranty claims		(26	)		(55	)
Adjustments to preexisting warranties		(149	)		(114	)
Currency		(1	)		(1	)
Ending balance	$	150		$	564

XML

Stock-Based Compensation

6 Months Ended

Jun. 30, 2020

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. 2014 Stock Option and Incentive Plan (the "2014 Plan"), which was approved by our shareholders and is administered under the supervision of our Board of Directors. The Image Sensing Systems, Inc. 2005 Stock Incentive Plan (the "2005 Plan") expired in 2015, and there are no options or other awards outstanding 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 three to five years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of nine 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 June 30, 2020 and 2019 was $55,000 and $54,000, respectively. Stock-based compensation expense included in general and administrative expense for the six-month periods ended June 30, 2020 and 2019 was $113,000 and $104,000, respectively. At June 30, 2020, 164,290 shares were available for grant under the Company's 2014 Plan.

Stock Options

A summary of the stock option activity for the first six months of 2020 is as follows:

	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2019		16,000		$	4.73		3.97	$	3,505
Granted		—		$	—		—	$	—
Exercised		—		$	—		—	$	—
Expired		—		$	—		—	$	—
Forfeited		(1,000	)	$	4.22		—	$	—
Options outstanding at June 30, 2020		15,000		$	4.76		3.44	$	—
Options exercisable at June 30, 2020		15,000		$	4.76		3.44	$	—

There were no stock options exercised or expired and options to purchase 1,000 shares forfeited, during the six-month period ended June 30, 2020, and there were options to purchase 1,000 shares exercised, options to purchase 18,000 shares expired, and options to purchase 4,000 shares forfeited during the six-month period ended June 30, 2019. During each of the six-month periods ended June 30, 2020 and 2019, we recognized no stock-based compensation expense related to stock options. As of June 30, 2020, 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. 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. 

We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance. 

The following table summarizes restricted stock award activity for the first six months of 2020:

	Number of Shares			Weighted Average Grant Date Fair Value
Awards outstanding December 31, 2019	58,961		$	4.32
Granted	16,900			3.70
Vested	(42,531	)		3.92
Forfeited	—			—
Awards outstanding at June 30, 2020	33,330		$	4.52

As of June 30, 2020, the total stock-based compensation expense related to non-vested awards not yet recognized was $129,000, which is expected to be recognized over a weighted average period of 1.5 years. During the six-month periods ended June 30, 2020 and June 30, 2019, we recognized $113,000 and $104,000, respectively, of stock-based compensation expense related to restricted stock awards.

XML

Income (Loss) per Common Share

6 Months Ended

Jun. 30, 2020

Income (Loss) per Common Share [Abstract]

Income (Loss) per Common Share

Note I: Income (Loss) per Common Share

Net income (loss) per share is computed by dividing net income (loss) by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income (loss) per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding because the exercise of those options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding. As a result, stock options and restricted stock awards to acquire 15,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended June 30, 2020 and 2019, respectively and 5,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the six-month periods ended June 30, 2020 and 2019, respectively. 

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

	Three-Month  Periods Ended June 30,				Six-Month  Periods Ended June 30,
	2020		2019		2020		2019
Numerator:
Net income	$	150	$	647	$	39	$	955
Denominator:
Weighted average common shares outstanding		5,296		5,244		5,281		5,234
Dilutive potential common shares		3		15		18		14
Shares used in diluted net income per common share calculations		5,299		5,259		5,299		5,248
Basic net income per common share	$	0.03	$	0.12	$	0.01	$	0.18
Diluted net income per common share	$	0.03	$	0.12	$	0.01	$	0.18

XML

Segment Information

6 Months Ended

Jun. 30, 2020

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 June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	2,465	$	2,512	$	922	$	1,713	$	3,387	$	4,225
Gross profit		2,233		2,239		543		787		2,776		3,026
Amortization of intangible assets		91		91		97		58		188		149
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

	Six Months Ended June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	4,715	$	4,584	$	1,831	$	3,013	$	6,546	$	7,597
Gross profit		4,302		4,031		1,010		1,590		5,312		5,621
Amortization of intangible assets		183		183		179		116		362		299
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

XML

Restructuring and Exit Activities

6 Months Ended

Jun. 30, 2020

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, a United Kingdom subsidiary. The Company will continue doing business in the European region utilizing its Barcelona, Spain sales office. We incurred no costs for the closure of our office in Romania in the six-month period ended June 30, 2020 and $2,000 of costs related to the closure of the Romania location in the six-month period ended June 30, 2019. 

In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) in China; Image Sensing Systems Europe Limited (ISS Europe) in the United Kingdom; Image Sensing Systems Europe Limited SP.Z.O.O (ISS Poland) in Poland; and Image Sensing Systems Germany, GmbH (ISS Germany) in Germany. At December 31, 2018, Image Sensing Systems Europe Limited and Image Sensing Systems Europe Limited SP.Z.O.O were fully closed. At December 31, 2019, Image Sensing Systems Germany, GmbH was fully closed. During the first quarter of 2020, we initiated the closure of Image Sensing Systems EMEA Limited (ISS UK) and Image Sensing Systems Holdings Limited (ISS Holdings). We incurred $32,000 and no costs, respectively, for these entities' closure costs in the six-month periods ended June 30, 2020 and June 30, 2019.

XML

Commitments and Contingencies

6 Months Ended

Jun. 30, 2020

Commitments and Contingencies [Abstract]

Commitments and Contingencies

Note L: Commitments and Contingencies

Debt

Under the Paycheck Protection Program ("PPP"), the United States Small Business Administration ("SBA") approved the Company's application to receive a loan in the amount of $923,700 (the "PPP Loan").  The PPP was established under the congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.  The PPP Loan to the Company was made through BMO Harris Bank N.A. (the "Lender"). On April 21, 2020, the Company's Board of Directors approved the PPP Loan and the Company signed the promissory note (the "Note") evidencing the PPP Loan, which is dated as of April 17, 2020.  The Lender distributed the $923,700 of proceeds of the PPP Loan to the Company on April 22, 2020.

The term of the PPP loan is 24 months after the date of the Note (the "Maturity Date").  The annual interest rate on the PPP Loan is 1.00%.  No payments of principal or interest are due during the six months beginning on the date of the Note (the "Deferred Period").  The Company's obligations under the Note are not secured by a security interest in the Company's assets.  The Note requires the Lender's consent if the Company wants to reorganize, merge, consolidate, or otherwise change its ownership or structure.  The Note contains customary events of default by the Company relating to, among other things, payment defaults and the breach of representations and warranties or other provisions of the Note.  Upon a default by the Company under the Note, the Lender may accelerate the Company's obligations under the Note and pursue its rights against the Company under applicable law, including by filing suit and obtaining a judgment against the Company.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans made under the PPP after eight weeks if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company intends to use the entire PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. However, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. To obtain full or partial forgiveness of the PPP Loan, the Company must request forgiveness and provide satisfactory documentation in accordance with applicable SBA guidelines. Interest payable on the PPP Loan will be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the PPP Loan. As of June 30, 2020, the Company had not recognized any forgiveness of this PPP Loan.  

The Company will be obligated to repay any part of the principal amount due under the Note that is not forgiven, together with accrued interest, until the unforgiven portion is paid in full. Beginning one month after the expiration of the Deferred Period and continuing monthly until the Maturity Date, the Company will be obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion of the PPP Loan in such equal amounts as are required to fully amortize the principal amount outstanding under the Note. The Company may prepay any unforgiven amount due under the Note at any time without premium or penalty.

The foregoing description of the Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Note filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2020 and incorporated herein by reference.

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.

XML

Risks and Uncertainties

6 Months Ended

Jun. 30, 2020

Risks and Uncertainties [Abstract]

Risks and Uncertainties

Note M: Risks and Uncertainties

The Company is considered an essential service and has remained operational during the COVID-19 pandemic.  As of the middle of March 2020, the Company closed its corporate office in St. Paul, and all of the Company’s employees began working from home and did not experience any significant interruptions during this transition.  The corporate office remains closed, and the Company is working on a plan to reopen its corporate office during the third quarter of 2020, provided that appropriate safeguards are in place and the Company’s plan is in line with state and federal guidelines. The Company has worked with key suppliers to ensure there is an adequate supply of components and capacity to manufacture and deliver products.  On April 13, 2020, Econolite informed the Company that Econolite had agreed to temporarily close its manufacturing facility in Tecate, Mexico, under guidance from the local government due to COVID-19. Based on information obtained by the Company, Econolite has made alternative arrangements to manufacture Autoscope and related products that had been manufactured at its Mexican facility. In late June 2020, we were informed by Econolite that its Mexican facility has been reopened and Econolite has resumed the manufacture of Autoscope and related products.  

XML

Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2020

Basis of Presentation [Abstract]

Revenue Recognition

Revenue Recognition  

We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:
●	Identification of a contract, or contracts, with a customer;
●	Identification of performance obligations in the contract;
●	Determination of the transaction price;
●	Allocation of the transaction price to the performance obligations in the contract; and
●	Recognition of revenue when, or as, we satisfy a performance obligation.

Revenue disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Product sales	$	1,172	$	2,020	$	2,222	$	3,641
Royalties		2,215		2,205		4,324		3,956
Total revenue	$	3,387	$	4,225	$	6,546	$	7,597

Product Sales:

Product revenue is generated primarily from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the amount we expect to receive in exchange for those goods or services.

Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple performance obligations may include hardware, software, installation services, training, and support.  In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. For performance obligations without observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.

Revenue for services such as maintenance, repair, and technical support is recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. From time to time, our payment terms may vary by the type and location of our customer and the products or services offered. 

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

We record provisions against sales revenue for estimated returns and allowances in the period when the related revenue is recorded based on historical sales returns and changes in end user demand.

Royalties:

Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean.  The royalty of approximately 50% of the gross profit on licensed products is recognized when the products are shipped or delivered by Econolite 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 our reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.

Intangible Assets

Intangible Assets

We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.

Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value have been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately no costs and $343,000 of software development costs during the quarters ended June 30, 2020 and 2019, respectively, and $22,000 and $762,000 during the six-month periods ended June 30, 2020 and 2019, 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 June 30, 2020 and 2019, we determined there was no impairment of intangible assets. At both June 30, 2020 and 2019, there were no indefinite-lived intangible assets.

XML

Basis of Presentation (Tables)

6 Months Ended

Jun. 30, 2020

Basis of Presentation [Abstract]

Schedule of revenue disaggregated by revenue source

Revenue disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Product sales	$	1,172	$	2,020	$	2,222	$	3,641
Royalties		2,215		2,205		4,324		3,956
Total revenue	$	3,387	$	4,225	$	6,546	$	7,597

XML

Inventories (Tables)

6 Months Ended

Jun. 30, 2020

Inventories [Abstract]

Schedule of Inventories

Inventories consisted of the following (in thousands):

	June 30, 2020		December 31, 2019
Finished goods	$	497	$	551
Components		143		230
Total	$	640	$	781

XML

Operating Leases (Tables)

6 Months Ended

Jun. 30, 2020

Operating Leases [Abstract]

Schedule of components of our costs for operating leases

The cost components of our operating leases were as follows (in thousands): 

	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
	2020			2019	2020		2019
Operating lease costs	$	65	$	66	$	131	$	131
Variable lease cost		93		77		169		153
Total	$	158	$	143	$	300	$	284

Schedule of the future maturities of lease liabilities

Maturities for our lease liabilities for all operating leases are as follows (in thousands) as of June 30, 2020:

	Total
2020	$	111
2021		123
2022		14
2023 and thereafter		2
Total lease payments		250
Less: Interest		(6	)
Present value of lease liabilities	$	244

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 June 30, 2020:

	June 30, 2020
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1.19
Weighted average discount rate	4.75	%

XML

Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2020

Intangible Assets [Abstract]

Schedule of intangible assets

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

	June 30, 2020
								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		(1,370	)		1,559	8.0
Echo development costs		1,852		(110	)		1,742	7.0
IntellitraffiQ development costs		468		(234	)		234	4.0
Wrong Way development costs		228		(228	)		—	—
Total	$	9,377	$	(5,842	)	$	3,535	7.2

	December 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		(1,186	)		1,743	8.0
Software development in process costs		1,830		—			1,830	—
IntellitraffiQ development costs		468		(176	)		292	4.0
Wrong Way development costs		228		(218	)		10	2.0
Total	$	9,355	$	(5,480	)	$	3,875	7.1

XML

Warranties (Tables)

6 Months Ended

Jun. 30, 2020

Warranties [Abstract]

Warranty liability and related activity

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

	Six-Month Periods Ended June 30,
	2020			2019
Beginning balance	$	313		$	656
Warranty provisions		13			78
Warranty claims		(26	)		(55	)
Adjustments to preexisting warranties		(149	)		(114	)
Currency		(1	)		(1	)
Ending balance	$	150		$	564

XML

Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2020

Stock-Based Compensation [Abstract]

Schedule of stock option activity

A summary of the stock option activity for the first six months of 2020 is as follows:

	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2019		16,000		$	4.73		3.97	$	3,505
Granted		—		$	—		—	$	—
Exercised		—		$	—		—	$	—
Expired		—		$	—		—	$	—
Forfeited		(1,000	)	$	4.22		—	$	—
Options outstanding at June 30, 2020		15,000		$	4.76		3.44	$	—
Options exercisable at June 30, 2020		15,000		$	4.76		3.44	$	—

Table summarizes restricted stock award activity

The following table summarizes restricted stock award activity for the first six months of 2020:

	Number of Shares			Weighted Average Grant Date Fair Value
Awards outstanding December 31, 2019	58,961		$	4.32
Granted	16,900			3.70
Vested	(42,531	)		3.92
Forfeited	—			—
Awards outstanding at June 30, 2020	33,330		$	4.52

XML

Income (Loss) per Common Share (Tables)

6 Months Ended

Jun. 30, 2020

Income (Loss) per Common Share [Abstract]

Schedule of reconciliation of net income (loss) per share

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

	Three-Month  Periods Ended June 30,				Six-Month  Periods Ended June 30,
	2020		2019		2020		2019
Numerator:
Net income	$	150	$	647	$	39	$	955
Denominator:
Weighted average common shares outstanding		5,296		5,244		5,281		5,234
Dilutive potential common shares		3		15		18		14
Shares used in diluted net income per common share calculations		5,299		5,259		5,299		5,248
Basic net income per common share	$	0.03	$	0.12	$	0.01	$	0.18
Diluted net income per common share	$	0.03	$	0.12	$	0.01	$	0.18

XML

Segment Information (Tables)

6 Months Ended

Jun. 30, 2020

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 June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	2,465	$	2,512	$	922	$	1,713	$	3,387	$	4,225
Gross profit		2,233		2,239		543		787		2,776		3,026
Amortization of intangible assets		91		91		97		58		188		149
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

	Six Months Ended June 30,
	Intersection				Highway				Total
	2020		2019		2020		2019		2020		2019
Revenue	$	4,715	$	4,584	$	1,831	$	3,013	$	6,546	$	7,597
Gross profit		4,302		4,031		1,010		1,590		5,312		5,621
Amortization of intangible assets		183		183		179		116		362		299
Intangible assets		1,559		1,926		1,976		1,854		3,535		3,780

XML

Basis of Presentation (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
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	$ 0	$ 343,000	$ 22,000	$ 762,000
Impairment of intangible assets			0	0
Indefinite‑lived intangible assets	$ 0	$ 0	$ 0	$ 0

XML

Basis of Presentation (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Total Revenue	$ 3,387	$ 4,225	$ 6,546	$ 7,597
Product sales [Member]
Total Revenue	1,172	2,020	2,222	3,641
Royalties [Member]
Total Revenue	$ 2,215	$ 2,205	$ 4,324	$ 3,956

XML

Inventories (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Inventories [Abstract]
Finished goods	$ 497	$ 551
Components	143	230
Total	$ 640	$ 781

XML

Operating Leases (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Operating Leases [Abstract]
Operating lease cost	$ 65	$ 66	$ 131	$ 131
Variable lease cost	93	77	169	153
Total	$ 158	$ 143	$ 300	$ 284

XML

Operating Leases (Details 2) $ in Thousands	Jun. 30, 2020 USD ($)
Operating Leases [Abstract]
2020	$ 111
2021	123
2022	14
2023 and thereafter	2
Total lease payments	250
Less: Interest	(6)
Present value of lease liabilities	$ 244

XML

Operating Leases (Details 3)	Jun. 30, 2020
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	1 year 2 months 8 days
Weighted average discount rate	4.75%

XML

Operating Leases (Narrative) (Details) - USD ($)	3 Months Ended	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2018
Operating Leases [Abstract]
Operating lease asset				$ 431,000
Operating lease obligation				$ 431,000
Cash paid operating lease costs		$ 134,000	$ 131,000
Increase in operating lease assets and liabilities	$ 194,000

XML

Intangible Assets (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 9,377	$ 9,355
Accumulated Amortization	(5,842)	(5,480)
Net Carrying Value	$ 3,535	$ 3,875
Weighted Average Useful Life	7 years 2 months 12 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	(1,370)	(1,186)
Net Carrying Value	$ 1,559	$ 1,743
Weighted Average Useful Life	8 years	8 years
Echo development costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 1,852
Accumulated Amortization	(110)
Net Carrying Value	$ 1,742
Weighted Average Useful Life	7 years
Software development in process costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount		$ 1,830
Accumulated Amortization		0
Net Carrying Value		1,830
IntellitraffiQ Development Costs [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 468	468
Accumulated Amortization	(234)	(176)
Net Carrying Value	$ 234	$ 292
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	(228)	(218)
Net Carrying Value	$ 0	$ 10
Weighted Average Useful Life		2 years

XML

Warranties (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Product Warranty Liability [Line Items]
Beginning balance	$ 313	$ 656
Warranty provisions	13	78
Warranty claims	(26)	(55)
Adjustments to preexisting warranties	(149)	(114)
Currency	(1)	(1)
Ending balance	$ 150	$ 564
Minimum [Member]
Product Warranty Liability [Line Items]
Product Warranty Period	2 years
Maximum [Member]
Product Warranty Liability [Line Items]
Product Warranty Period	3 years

XML

Stock-Based Compensation (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options or other awards outstanding	15,000		15,000		16,000
Stock-based compensation expense	$ 55,000	$ 54,000	$ 113,000	$ 104,000
Shares available for grant	164,290		164,290
Stock option exercised			0
Options forfeited			1,000
Options expired			0
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]
Options or other awards outstanding	0		0
Stock-based compensation expense			$ 0	$ 0
Unrecognized compensation cost related to non-vested stock awards	$ 0		$ 0
Stock option exercised	0		0	1,000
Options forfeited			1,000	4,000
Options expired				18,000
Restricted Stock Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense			$ 113,000	$ 104,000
Unrecognized compensation cost related to non-vested stock awards	$ 129,000		$ 129,000
Period for recognition of unrecognized compensation cost related to non-vested stock awards			1 year 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.

XML

Stock-Based Compensation (Details) $ / shares in Units, $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020 USD ($) $ / shares shares	Dec. 31, 2019 USD ($) $ / shares shares
Number of Shares
Outstanding - beginning of period | shares	16,000
Granted | shares	0
Exercised | shares	0
Expired | shares	0
Forfeited | shares	(1,000)
Outstanding - end of period | shares	15,000	16,000
Exercisable - end of period | shares	15,000
Weighted Average Exercise Price per Share
Outstanding - beginning of period | $ / shares	$ 4.73
Granted | $ / shares	0
Exercised | $ / shares	0
Expired | $ / shares	0
Forfeited | $ / shares	4.22
Outstanding - end of period | $ / shares	4.76	$ 4.73
Exercisable - end of period | $ / shares	$ 4.76
Weighted Average Remaining Contractual Term
Options outstanding	3 years 5 months 8 days	3 years 11 months 19 days
Options exercisable	3 years 5 months 8 days
Aggregate Intrinsic Value
Outstanding - beginning of period | $	$ 3,505
Granted | $	0
Exercised | $	0
Expired | $	0
Forfeited | $	0
Outstanding - end of period | $	0	$ 3,505
Options exercisable | $	$ 0

XML

Stock-Based Compensation (Details 2)	6 Months Ended
	Jun. 30, 2020 $ / shares shares
Number of Shares
Awards outstanding at beginning of year | shares	58,961
Granted | shares	16,900
Vested | shares	(42,531)
Forfeited | shares	0
Awards outstanding at end of year | shares	33,330
Weighted Average grant date fair value
Outstanding at beginning of year | $ / shares	$ 4.32
Granted | $ / shares	3.70
Vested | $ / shares	3.92
Forfeited | $ / shares	0
Outstanding at end of year | $ / shares	$ 4.52

XML

Income (Loss) per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Numerator:
Net income	$ 150	$ 647	$ 39	$ 955
Denominator:
Weighted average common shares outstanding	5,296	5,244	5,281	5,234
Dilutive potential common shares	3	15	18	14
Shares used in diluted net income per common share calculations	5,299	5,259	5,299	5,248
Basic net income per common share	$ 0.03	$ 0.12	$ 0.01	$ 0.18
Diluted net income per common share	$ 0.03	$ 0.12	$ 0.01	$ 0.18
Shares excluded from diluted weighted shares outstanding	15,000	2,000	5,000	2,000

XML

Segment Information (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)
Segment Reporting Information [Line Items]
Number of Reportable Segments			2
Revenue	$ 3,387	$ 4,225	$ 6,546	$ 7,597
Gross profit	2,776	3,026	5,312	5,621
Amortization of intangible assets	188	149	362	299
Intangible assets	3,535	3,780	3,535	3,780
Intersection [Member]
Segment Reporting Information [Line Items]
Revenue	2,465	2,512	4,715	4,584
Gross profit	2,233	2,239	4,302	4,031
Amortization of intangible assets	91	91	183	183
Intangible assets	1,559	1,926	1,559	1,926
Highway [Member]
Segment Reporting Information [Line Items]
Revenue	922	1,713	1,831	3,013
Gross profit	543	787	1,010	1,590
Amortization of intangible assets	97	58	179	116
Intangible assets	$ 1,976	$ 1,854	$ 1,976	$ 1,854

XML

Restructuring and Exit Activities (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Restructuring Cost and Reserve [Line Items]
Costs related to the closure of Entity		$ 2,000
ISS UK and ISS Holdings [Member]
Restructuring Cost and Reserve [Line Items]
Entity closures cost	$ 32,000

XML

Commitments and Contingencies (Details) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Apr. 21, 2020
Commitments and Contingencies
Proceeds from PPP Loan	$ 923,700	$ 0
Paycheck Protection Program [Member]
Commitments and Contingencies
Amount of loan			$ 923,700
Term of PPP loan	24 months
Annual interest rate on PPP loan	1.00%