Company Quick10K Filing
Image Sensing Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 5 $28
10-Q 2019-11-13 Quarter: 2019-09-30
10-Q 2019-08-12 Quarter: 2019-06-30
10-Q 2019-05-07 Quarter: 2019-03-31
10-K 2019-03-14 Annual: 2018-12-31
10-Q 2018-11-13 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-14 Quarter: 2018-03-31
10-K 2018-03-14 Annual: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-10-01
10-Q 2017-08-10 Quarter: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-K 2017-03-24 Annual: 2016-12-31
10-Q 2016-11-10 Quarter: 2016-09-30
10-Q 2016-08-08 Quarter: 2016-06-30
10-Q 2016-05-12 Quarter: 2016-03-31
10-K 2016-03-10 Annual: 2015-12-31
10-Q 2015-11-12 Quarter: 2015-09-30
10-Q 2015-08-11 Quarter: 2015-06-30
10-Q 2015-05-14 Quarter: 2015-03-31
10-K 2015-03-20 Annual: 2014-12-31
10-Q 2014-11-04 Quarter: 2014-09-30
10-Q 2014-08-04 Quarter: 2014-06-30
10-Q 2014-05-12 Quarter: 2014-03-31
10-K 2014-03-06 Annual: 2013-12-31
10-Q 2013-11-06 Quarter: 2013-09-30
10-Q 2013-08-07 Quarter: 2013-06-30
10-Q 2013-05-08 Quarter: 2013-03-31
10-K 2013-03-27 Annual: 2012-12-31
10-Q 2012-08-07 Quarter: 2012-06-30
10-Q 2012-05-08 Quarter: 2012-03-31
10-K 2012-03-19 Annual: 2011-12-31
10-Q 2011-11-10 Quarter: 2011-09-30
10-Q 2011-08-12 Quarter: 2011-06-30
10-Q 2011-05-13 Quarter: 2011-03-31
10-K 2011-03-24 Annual: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
10-Q 2010-08-09 Quarter: 2010-06-30
10-Q 2010-05-11 Quarter: 2010-03-31
10-K 2010-03-24 Annual: 2009-12-31
8-K 2020-01-08 Regulation FD, Exhibits
8-K 2019-11-13 Earnings, Exhibits
8-K 2019-08-12 Earnings, Exhibits
8-K 2019-05-08 Officers, Shareholder Vote
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-04-29 Officers, Exhibits
8-K 2019-03-18 Officers, Exhibits
8-K 2019-03-14 Earnings, Exhibits
8-K 2019-01-14 Exhibits
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-05-14 Earnings, Exhibits
8-K 2018-05-01 Shareholder Vote
8-K 2018-03-14 Earnings, Exhibits
8-K 2018-03-13 Officers, Exhibits
8-K 2018-03-12 Enter Agreement, Shareholder Rights, Other Events, Exhibits
8-K 2018-01-23 Earnings, Exhibits
ISNS 2019-09-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex311_1.htm
EX-31.2 ex312_2.htm
EX-32.1 ex321_3.htm
EX-32.2 ex322_4.htm

Image Sensing Systems Earnings 2019-09-30

ISNS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
BOXL 31 24 21 38 10 -8 -6 32 27% -5.6 -32%
RETO 31 82 29 0 0 0 0 38 0%
PFIN 28 58 11 48 23 6 10 27 47% 2.6 11%
CLIR 28 14 2 0 -0 -10 -9 18 -2.0 -67%
ISNS 28 13 2 10 12 2 3 24 121% 7.5 17%
SVT 26 44 12 51 12 3 5 27 24% 5.0 7%
CVR 25 33 3 35 6 1 1 24 19% 17.4 3%
SYPR 24 66 51 89 8 -3 0 19 9% 178.2 -5%
CVV 23 49 16 17 0 -8 -7 27 2% -4.2 -16%
NEON 20 11 4 8 7 -3 -2 15 89% -6.7 -29%

isns-20190930.htm
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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 September 30, 2019

or

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

For the transition period from                       to

Commission file number: 0-26056

Image Sensing Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

Minnesota

 

41-1519168

State or Other Jurisdiction of

Incorporation or Organization

 

I.R.S. Employer Identification No.

 

 

 

500 Spruce Tree Centre

 

 

1600 University Avenue West

 

 

St. Paul, MN

 

55104

Address of Principal Executive Offices

 

Zip Code

 

(651) 603-7700

Registrant’s Telephone Number, Including Area Code

 

Not Applicable

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


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 ¨ 

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 October 31, 2019

Common Stock, $0.01 par value per share

 

5,315,739 shares


2


 

IMAGE SENSING SYSTEMS, INC.

TABLE OF CONTENTS 

​​​​​​​​​​​​​​​​​



PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Comprehensive Income 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 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION 28
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 28
Item 6. Exhibits 29
SIGNATURES 30
EXHIBIT INDEX 31

 

3


 

 

Image Sensing Systems, Inc.

Condensed Consolidated Balance Sheets

(in thousands)


September 30,

2019

 

December 31,


(Unaudited)

 

2018

ASSETS








Current assets:








Cash and cash equivalents

$

4,723

 


$

4,236

 

Accounts receivable, net of allowance for doubtful accounts of $23 and $72 respectively 


3,376

 



3,830

 

Inventories


765

 



1,289

 

Prepaid expenses and other current assets


528

 



410

 

Total current assets

9,392

 



9,765

 




 





Property and equipment:



 





Furniture and fixtures


    162

 



162

 

Leasehold improvements


  6




8

 

Equipment


1,294

 



1,058




   1,462

 



1,228


Accumulated depreciation


   1,033

 



882




429

 



346

 









Operating lease assets, net


245





Intangible assets, net 


3,911

 



3,317

 

Deferred income taxes


5,257




56

 

TOTAL ASSETS

$

19,234



$

13,484










LIABILITIES AND SHAREHOLDERS' EQUITY








Current liabilities:








Accounts payable

$

      395

 


$

878

 

Deferred revenue
23


716

Warranty


   444

 



656

 

Accrued compensation


     76

 



 224

 

Operating lease obligations
222



Other current liabilities

 

235

 



373

 

Total current liabilities


1,395

 



 2,847










Operating lease obligations

24





TOTAL LIABILITIES


1,419




 2,847

 




 




 

Shareholders' equity:








Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued or outstanding






Common stock, $0.01 par value; 20,000,000 shares authorized, 5,315,739 and 5,278,485


 




  

 issued and outstanding at September 30, 2019 and December 31, 2018, respectively


53

 



   52

 

Additional paid-in capital


 24,694




24,550


Accumulated other comprehensive loss


(457

)



(372

)

Accumulated deficit


(6,475

)



(13,593

)

Total shareholders' equity


17,815

 



10,637

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

19,234



$

13,484


 








See accompanying notes to the condensed consolidated financial statements.                           

 


 



 

 

 

4


Image Sensing Systems, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)


 
Three-Month
Periods Ended
September 30,

Nine-Month
Periods Ended
September 30,
 
2019
2018
2019     2018

Revenue:










             

Product sales


$
1,299

$ 1,750


$ 4,940     $

3,970

 

Royalties



2,390


2,299


  6,346       6,982  
 

3,689


4,049

  11,286       10,952  

Cost of revenue:










             

Product sales



421


652

  2,214       1,616  
  Royalties

92


91


  275       275  
 

513


743

  2,489       1,891  

Gross profit



3,176


3,306

  8,797       9,061  
 








             

Operating expenses:










             

 Selling, general and administrative



1,560


1,592


  4,907       5,118  

 Research and development



691


863

  2,008       2,598  
Restructuring charges







2



 

2,251


2,455

  6,917       7,716  

Income from operations



925


851


  1,880       1,345

Income from operations before income taxes



925



851


  1,880       1,345
Income tax benefit

(5,205 )





(5,205 )


Net income


$ 6,130

$ 851

$ 7,085     $ 1,345

Net income per share:










             

Basic


$ 1.17

$ 0.16


$ 1.35     $ 0.26

Diluted


$
1.16


$ 0.16

$ 1.35     $ 0.26
 








             

Weighted average number of common shares outstanding:










         
 

Basic



5,252


5,212

  5,240       5,200  

Diluted



5,270



5,244

  5,259       5,206  

 










             

See accompanying notes to the condensed consolidated financial statements.

 

5


Image Sensing Systems, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

 



Three-Month Periods Ended

September 30,


Nine-Month Periods Ended

September 30,



2019
2018
2019   2018

Net income


$ 6,130

$ 851

$ 7,085     $ 1,345

Other comprehensive income (loss):










             

Foreign currency translation adjustment



(75 )


  (85 )     (17 )

Comprehensive income


$ 6,055
$ 851

$ 7,000   $ 1,328











             
See accompanying notes to the condensed consolidated financial statements.                         

 

6


Image Sensing Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

Nine-Month Periods Ended
September 30,

 

2019

 

2018

Operating activities:

 

 

 


 

 

 

Net income

$

7,085

 


$

1,345




 




 

Adjustments to reconcile net income to net cash provided by operating activities:



 




 

Depreciation

 

149

 


 

191

 

Software amortization

 

448

 


 

380

 

Stock-based compensation

 

162

 


 

164

 

       Deferred income tax benefit
(5,200 )


Loss on disposal of assets

 

 


 

5

 

Changes in operating assets and liabilities:

 

 

 


 

 

 

Accounts receivable, net

 

454


 

(383

)

Inventories


524


 

(444

Prepaid expenses and other current assets

 

(118

)


 

(163

)

Accounts payable

 

(468

)


 

10

Accrued expenses and other current liabilities

 

(1,159

)


 

(430

)
            Other (Lease asset and obligations)
2




Net cash provided by operating activities

 

1,879

 


 

675

 




 




 

Investing activities:

 

 

 


 

 

 

Capitalized software development costs

 

(1,042

)


 

(134

Purchases of property and equipment

 

(239

)


 

(163

Net cash used for investing activities 

 

(1,281

)  

 

(297

)

 

 

 

 


 

 

 

Financing activities:

 

 

 

 

 

 

 

         Stock for tax withholding

 

(21

)  

 

(10

)
         Proceeds from stock options exercised
4



Net cash used for financing activities

 

(17

)  

 

(10

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(94

)


 

(13

)

Change in cash and cash equivalents

 

487


 

355

 

 

 

 


 

 

 

Cash and cash equivalents at beginning of period

 

4,236

 


 

3,190

 

Cash and cash equivalents at end of period

$

4,723

 


$

3,545

 




 




 




 




 

Non-Cash investing and financing activities:

 

 

 


 

 

 

Purchase of property and equipment in accounts payable

$

20

 


$

18

 









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 September 30, 2018

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total























Balance, June 30, 2018 5,269,809

$ 52

$ 24,467

$ (327 )
$ (14,961 )
$ 9,231























Stock-based compensation 4,064





41








41
Comprehensive income (loss):















Foreign currency translation adjustment













Net income










851


851
Balance, September 30, 2018 5,273,873

$ 52

$ 24,508

$ (327 )
$ (14,110 )
$ 10,123
























Three-Month Period Ended September 30, 2019


Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total
























Balance, June 30, 2019 5,309,259

$ 52

$ 24,637

$ (382 )
$ (12,605 )
$ 11,702























Stock-based compensation 6,480


1


57








58
Comprehensive income (loss):





















Foreign currency translation adjustment








(75 )




(75 )
Net income











6,130


6,130
Balance, September 30, 2019 5,315,739

$ 53

$ 24,694

$ (457 )
$ (6,475 )
$ 17,815























See accompanying notes to the condensed consolidated financial statements 

8




Nine-Month Period Ended September 30, 2018


Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total























Balance, December 31, 2017 5,210,448

$ 51

$ 24,355

$ (310 )
$ (15,455 )
$ 8,641























Stock-based compensation 

65,673


1


163








164
Stock for tax withholding (2,248 )




(10 )







(10 )
Comprehensive income (loss):





















Foreign currency translation adjustment








(17 )




(17 )
Net income











1,345

1,345
Balance, September 30, 2018 5,273,873

$ 52

$ 24,508

$ (327 )
$ (14,110 )
$ 10,123
























Nine-Month Period Ended September 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 40,294


1


161








162
Stock options exercised 1,000





4








4
Stock for tax withholding (4,040 )




(21 )







(21 )
Comprehensive income:





















Foreign currency translation adjustment








(85 )




(85 )
Net income











7,085


7,085
Cumulative effect from adoption of ASU No. 2016-02  











33


33
Balance, September 30, 2019 5,315,739

$ 53

$ 24,694

$ (457 )
$ (6,475 )
$ 17,815























See accompanying notes to the condensed consolidated financial statements

 
9


IMAGE SENSING SYSTEMS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

September 30, 2019

 

Note A: Basis of Presentation

 

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

 

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

 

Operating results for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the SEC.

 

Summary of Significant Accounting Policies

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

 

Revenue Recognition 

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

 

Under ASU 2014-09, we recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.


We determine revenue recognition through the following steps:
Identification of a contract, or contracts, with a customer;
Identification of performance obligations in the contract;

Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.

 

Revenue disaggregated by revenue source for the three and nine months ended September 30, 2019 and 2018 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

 



Three Months Ended September 30,
Nine Months Ended September 30,



2019
2018
2019
  2018

Product sales
$ 1,299
$ 1,750
$ 4,940   $ 3,970
Royalties

2,390

2,299
  6,346     6,982
Total revenue
$ 3,689
$ 4,049
$ 11,286   $ 10,952

 

10


Product Sales:

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

 

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

 

Revenue 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, we may provide ITS consulting services with a defined contract where deliverables may vary according to customer requirements. Our payment terms may vary by the type and location of our customer and the products or services offered. During the third quarter of 2019, management identified and corrected an immaterial error related to revenue from consulting services of approximately $120,000 by recognizing this revenue during the third quarter of 2019. These consulting services were performed and qualified for revenue recognition in prior periods, primarily during 2018

 

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

 

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

 

Royalties:

Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean. We earn and recognize the royalty of approximately 50% of Econolite's gross profit on licensed products when the products are shipped or delivered to its customers.

 

Practical Expedients and Exemptions:


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

 

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

 

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. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period in which 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.


On a quarterly basis, the Company evaluates all positive and negative evidence in determining if the valuation allowance is fairly stated. At September 30, 2019, the Company determined that, based on the profitability it has achieved, historical taxable cumulative profits, and estimates of future income, there is sufficient positive evidence to conclude that the likelihood of realization of deferred tax assets outweighs the negative evidence. The valuation allowance was partially released for the deferred tax assets that the Company is more likely than not to realize, which resulted in a $5.2 million non-cash income tax benefit from the recognition of $5.4 million in net deferred tax assets for the three- and nine-month periods ended September 30, 2019.

 

Intangible Assets

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

Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that is determined to be in excess of net realizable value has been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized approximately $281,000 and $32,000 of software development costs during the quarters ended September 30, 2019 and 2018, respectively, and approximately $1.0 million and $134,000 during the nine months ended September 30, 2019 and 2018, respectively. 

Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows and reviewed for impairment. At both September 30, 2019 and 2018, we determined there was no impairment of intangible assets. At both September 30, 2019 and 2018, 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 accumulated deficit as of that date.  Prior year amounts were not recast under the transition approach and, therefore, prior year amounts are excluded from the operating leases footnote. See Note E: Operating Leases for further details.

 

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

 

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

 

Accounting pronouncements not yet adopted

 

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurements (Topic 820)." ASU 2018-13 eliminates, amends and adds disclosure requirements for fair value measurements. The standard is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2020. Certain disclosures in the amendment are to be applied using a retrospective approach while other disclosures are to be applied using a prospective approach. Early adoption is permitted. We have not yet evaluated the impact the adoption of this guidance may have on our financial condition, results of operations or disclosures.

 

Note C: Fair Value Measurements

 

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


Level 1: observable inputs such as quoted prices in active markets;

Level 2: inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.


Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

 

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

 

Financial Instruments not Measured at Fair Value

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

 

13


Note D: Inventories

 

Inventories consisted of the following (in thousands):



 September 30, 2019 
 December 31, 2018 

Finished goods

 $  496  
 $  949  
Components   269  
  340  

Total

 $  765  
 $  1,289  

Note E: Operating Leases

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

 

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

  

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

 

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

 

Under Accounting Standards Codification (ASC) 840, rent expense for office facilities for the three- and nine-month periods ended September 30, 2018 was $147,000 and $438,000, respectively.

  

The cost components of our operating leases were as follows (in thousands) for the following periods ended September 30, 2019

 


Three-Month

Period


Nine-Month

Period


Total

Total
Operating lease costs $ 67

$ 198
Variable lease cost
76


229
Total $ 143

$ 427

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

 

14



Maturities for our lease liabilities for all operating leases are as follows (in thousands) as of September 30, 2019:



Total
2019 $ 67
2020
166
2021
11
2022
8
2023 and thereafter

Total lease payments
252
Less: Interest
(6 )
Present value of lease liabilities $ 246


The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2019:

 


September 30, 2019
Remaining lease term and discount rate:

Weighted average remaining lease term (years) 0.9
Weighted average discount rate 4.75 %


Cash paid for amounts included in the measurement of operating lease liabilities was $197,000 for the nine months ended September 30, 2019, and this amount is included in operating activities in the condensed consolidated statements of cash flows. Separate from the initial recognition of the existing leases, there were no operating lease assets obtained in exchange for new operating lease liabilities for the nine months ended September 30, 2019.


15



Note F: Intangible Assets

 

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

 

 

September 30, 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




(1,094

)


 

1,835



8.0

 

Software development in process costs            


1,716






 

1,716



 

IntellitraffiQ development costs

 

468

   

 

(146

)  

 

322

   

4.0

 

Wrong Way development costs

 

228

   

 

(190

)  

 

38

   

2.0

 

Total

$

9,241



$

(5,330

)


$

3,911



7.1

 

 

 

December 31, 2018

 


 





 



 



Weighted

 

 

Gross






Net


Average

 

 

Carrying


Accumulated


Carrying


Useful Life

 

 

 Amount


 Amortization


 Value


(in Years)

 

Developed technology

$

3,900



$

(3,900

)


$

 


 

Vision development costs               


2,929




(819

)



2,110

 


8.0

 

Software development in process costs            

 

674

   

 

 

 

 

674

 

 

 

IntellitraffiQ development costs
468


(59 )

409

4.0
Wrong Way development costs

228




(104 )

124

2.0

  Total

$

8,199



$

(4,882

)


$

3,317

 


7.1

 

 

Note G: Warranties 

 

We generally provide a two to five 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):

 

 

Nine-Month Periods Ended
September 30,

 

2019


2018

 

 

 



 

 

 

Beginning balance

$

656



$

858

 

Warranty provisions

 

100



 

  103

 

Warranty claims


(69

)


 

(25

)

Adjustments to preexisting warranties


(240

)


 

(231

Currency


(3

)


 

(7

) 

Ending balance

$

444



$

698

 

 

16



Note H: Stock-Based Compensation

 

We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2005 Stock Incentive Plan (the "2005 Plan") and the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), both of which were approved by our shareholders and are administered under the supervision of our Board of Directors. Although stock options granted under the 2005 Plan are still outstanding, the 2005 Plan expired, and the Company can no longer grant options or other awards under the 2005 Plan. Stock option awards are granted at exercise prices equal to the closing price of our stock on the day before the date of grant. Generally, options vest ratably over periods of 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 September 30, 2019 and 2018 was $58,000 and $41,000, respectively. Stock-based compensation expense included in general and administrative expense for the nine-month periods ended September 30, 2019 and 2018 was $162,000 and $164,000, respectively. At September 30, 2019, 186,622 shares were available for grant under the Company's 2014 Plan.

 

Stock Options

 

A summary of the stock option activity for the first nine months of 2019 is as follows:

 

   

Number of

Shares

  Weighted
Average
Exercise
Price per
Share
  Weighted
Average
Remaining
Contractual
Term (in years)
  Aggregate
Intrinsic
Value
Options outstanding at December 31, 2018
    39,000     $ 6.26       2.80     $ 4,480  
Granted
        $           $  
Exercised
    (1,000 )   $ 4.22           $ 950  
Expired
    (18,000 ) $ 8.19           $  
Forfeited
    (4,000 )
$ 4.22           $ 3,360  




 


                 
Options outstanding at September 30, 2019     16,000  
$ 4.73
    4.20
  $ 4,903
Options exercisable at September 30, 2019     16,000     $ 4.73       4.20
  $ 4,903  

 

17



There were no stock options and stock options to purchase 1,000 shares exercised during the three and nine-month periods ended September 30, 2019, respectively, and no stock options exercised in the three- and nine-month periods ended September 30, 2018. During the nine-month period ended September 30, 2019, we recognized no stock-based compensation expense related to stock options compared to $1,000 recognized during the nine-month period ended September 30, 2018. As of September 30, 2019, there was no unrecognized compensation cost related to non-vested stock options.

 

Restricted Stock Awards and Stock Awards

 

Restricted stock awards are granted under the 2014 Plan at the discretion of the Compensation Committee of our Board of Directors. We issue restricted stock awards to executive officers and key consultants. These awards may contain certain performance conditions or time-based vesting criteria. The restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant date through the end of the vesting period. At the time of vesting of the restricted stock awards, the recipients of common stock may request to receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the relevant jurisdiction's maximum statutory rate.

 

We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance. Compensation expense related to any stock awards issued to employees is determined on the grant date based on the publicly-quoted fair market value of our common stock and is charged to earnings on the grant date.  

 

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

 


 

Number of
Shares

 

 

Weighted
Average
Grant Date
Fair Value

Awards outstanding December 31, 2018

 

58,877



$

3.22

 

Granted

 

52,120




5.02

 

Vested

 

(40,210

)



3.99

 

Forfeited

 

(11,826

)



3.04

 

Awards outstanding at September 30, 2019

 

58,961



$

4.32

 

 

As of September 30, 2019, the total stock-based compensation expense related to non-vested awards not yet recognized was $204,000, which is expected to be recognized over a weighted average period of 2.2 years. During the nine-month periods ended September 30, 2019 and September 30, 2018, we recognized $162,000 and $163,000, respectively, of stock-based compensation expense related to restricted stock awards.

 

Note I: Income per Common Share

 

Net income per share is computed by dividing net income by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding because the exercise of those options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding. As a result, stock options and restricted stock awards to acquire 5,000 and 22,065 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended September 30, 2019 and 2018, respectively, and 11,000 and 64,041 weighted common shares have been excluded from the diluted weighted shares outstanding for the nine-month periods ended September 30, 2019 and 2018, respectively.

 

18


 

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

 

 

Three-Month 

Periods Ended

September 30,


Nine-Month 

Periods Ended

September 30,

 
2019
2018
2019   2018
 








             
Numerator:









             
Net income 

$ 6,130

$ 851

$ 7,085     $ 1,345
Denominator:









             
Weighted average common shares outstanding


5,252


5,212

  5,240       5,200  
Dilutive potential common shares


18


32

  19       6  
Shares used in diluted net income per common share calculations


5,270


5,244

  5,259       5,206  
Basic net income per common share

$ 1.17

$ 0.16

$ 1.35     $ 0.26
Diluted net income per common share

$ 1.16

$ 0.16

$ 1.35     $ 0.26

 

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 and IntellitraffiQ are our radar product lines, and revenue consists of international and North American product sales. Radar products are normally sold in the Highway segment. All segment revenues are derived from external customers.   

 

Operating expenses and total assets are not allocated to the segments for internal reporting purposes. Due to the changes in how we manage our business, we may reevaluate our segment definitions in the future.   

 

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

 



Three Months Ended September 30,


 

Intersection


Highway


Total


 

2019

 

2018

 

2019

 

2018

 

2019


2018

                                     

Revenue


$

2,789

 

$

2,599

 

$

900

 

$

1,450

 

$

3,689

 

$

4,049

Gross profit



2,555

   

2,386

   

621

   

920

   

3,176

   

3,306

Amortization of intangible assets

 

92

   

91

   

57

   

58

   

149

   

149

Intangible assets

 

1,835

   

2,202

   

2,076

   

1,037

   

3,911

   

3,239




Nine Months Ended September 30,

 

Intersection


Highway


Total


 

2019

 

2018

 

2019

 

2018

 

2019


2018

                                     

Revenue


$

7,373

 

$

7,858

 

$

3,913

 

$

3,094

 

$

11,286

 

$

10,952

Gross profit



6,586

   

7,168

   

2,211

   

1,893

   

8,797

   

9,061

Amortization of intangible assets

 

275

   

275

   

173

   

105

   

448

   

380

Intangible assets

 

1,835

   

2,202

   

2,076

   

1,037

   

3,911

   

3,239


 

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 $2,000 of costs for the closure of our office in Romania in the nine-month period ended September 30, 2019No costs related to the closure of the Romania location were incurred in the nine-month period ended September 30, 2018

 

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

 


Termination Benefits

Facility Costs and Contract Termination

Total

Balance at December 31, 2018 $ 18
$ 4
$ 22
Charges
2



2
Settlements
(20 )
(4 )
(24 )
Balance at September 30, 2019 $
$
$

 

In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our following wholly-owned subsidiaries: Image Sensing Systems HK Limited (ISS HK) located in Hong Kong; Image Sensing Systems (Shenzhen) Limited (ISS WOFE) located in China; and Image Sensing Systems Germany, GmbH (ISS Germany) located in Germany. We incurred no costs for these entity closures in the nine-month periods ended September 30, 2019 and September 30, 2018.

 

Note L: Commitments and Contingencies

 

Litigation

 

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

 

20


Overview

General.  We are a leading provider of above-ground detection products and solutions for the intelligent transportation systems (“ITS”) industry. Our family of products, which we market as Autoscope® video or video products (“Autoscope”), RTMS® radar or radar products (“RTMS”), and IntellitraffiQ® or iQ products, provides end users with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals from sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our products provide end users with complete solutions for the intersection and transportation markets.

Our technology is a process in which software, rather than humans, examines outputs from various types of sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and highways quickly enough to accommodate the increasing congestion levels. On average, United States commuters lose 97 hours a year in congestion, which costs motorists $87 billion a year in time, which is an average of $1,348 per driver. We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.

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

We believe the strength of our distribution channels positions us to increase the penetration of our technologydriven 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 consist of 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.
21


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

Key Financial Terms and Metrics

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

Cost of Revenue. Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to manufacture hardware 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.

Non-GAAP Operating Measure. We provide certain non-GAAP financial information as supplemental information to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles in the United States). This non-GAAP information excludes the impact of depreciating fixed assets and amortizing intangible assets, and may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.

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



Three-Month Periods Ended  

September 30,


  Nine-Month Periods Ended  

September 30,

 
 2019
 2018
  2019       2018
 








             

Income from operations


$ 925

$ 851

$ 1,880     $ 1,345

Adjustments to reconcile to non-GAAP income










         
 

Amortization of intangible assets



149


149

  448       380
 

Depreciation



50


65

  149       191  
Restructuring







2



Non-GAAP income from operations


$ 1,124

$ 1,065

$ 2,479     $ 1,916  

 

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. 

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

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



Three Months Ended September 30,


Intersection
Highway
Total


2019
2018
2019
2018
2019
2018



















Revenue
$ 2,789
$ 2,599
$ 900
$ 1,450
$ 3,689
$ 4,049
Gross profit

2,555

2,386

621

920

3,176

3,306
Amortization of intangible assets

92

91

57

58

149

149
Intangible assets

1,835

2,202

2,076

1,037

3,911

3,239



Nine Months Ended September 30,


Intersection
Highway
Total


2019
2018
2019
2018
2019
2018



















Revenue
$ 7,373
$ 7,858
$ 3,913
$ 3,094
$ 11,286
$ 10,952
Gross profit

6,586

7,168

2,211

1,893

8,797

9,061
Amortization of intangible assets

275

275

173

105

448

380
Intangible assets

1,835

2,202

2,076

1,037

3,911

3,239

 

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
September 30,
 

 

 

2019

 

2018 

 

Product sales

35.2

%

 

43.2

%

 

Royalties

64.8


 

56.8

 

 

Total revenue

100.0


 

100.0

 

 

Gross profit - product sales

67.6


 

62.7

 

 

Gross profit - royalties

96.2


 

96.0

 

 

Selling, general and administrative

42.3


 

39.3

 

 

Research and development

18.7

   

21.3

 

 

Income from operations

25.1

 

21.0

 

Income tax benefit

(141.1

)  


 

Net income

166.2

 

21.0

 


  Nine-Month Periods Ended
September 30,


2019
2018
Product sales 43.8 %
36.2 %
Royalties 56.2

63.8

Total revenue 100.0

100.0

Gross profit - product sales 55.2

59.3

Gross profit - royalties 95.7

96.1

Selling, general and administrative 43.5

46.7

Research and development 17.8

23.7

Income from operations 16.7

12.3