IMAGENSING SYSTEMS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Selected Financial Data and our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forwardlooking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" included elsewhere in this Annual Report on Form 10-K.
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") and RTMS radar or radar products ("RTMS"), 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 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,
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 with 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
We market the RTMS radar systems to a network of distributors in
The following discussion of year-to-year trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation described 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 and implement;
• 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 costeffectiveness of electronics, which make our
products more affordable for end users.
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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 technologybased solutions rather than civil engineering solutions
such as widening roadways;
• countries in the developing world adopting aboveground detection
technology, such as video or radar, instead of inpavement loop technology
to manage traffic; and
• our ability to develop new products that provide increasingly accurate
information and enhance the end users' ability to costeffectively manage
traffic and environmental issues.
Because the majority of our end users are governmental entities, we are faced
with challenges related to potential delays in purchase decisions by those
entities and changes in budgetary constraints. These contingencies could result
in significant fluctuations in our revenue between periods. The ongoing economic
environment in
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
Cost of Revenue. Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to manufacture hardware platforms, which is influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, restructuring costs and inventory reserves. The key metric that we follow is achieving certain gross margin percentages on product sales by geographic region and to a lesser extent by product line.
Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support; (2) general and administrative; and (3) research and development. Selling, marketing and product support expenses consist of various costs related to sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; secondtier 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. Also included in operating expenses are any restructuring costs.
NonGAAP Operating Measure. We provide certain non-GAAP financial information as
supplemental information to financial measures calculated and presented in
accordance with
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The table below reconciles non-GAAP income from income from operations, which is
a non-GAAP financial measure, to comparable GAAP financial measures (in
thousands):
Years Ended December 31,
2020 2019
Income from operations $ 608 $ 1,830
Adjustments to reconcile to non-GAAP income
Amortization of intangible assets 736 598
Depreciation 224 197
Restructuring - 2
Non-GAAP operating income $ 1,568 $ 2,627 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
Segments. We currently operate in two reportable segments: Intersection and Highway. Autoscope video is our machinevision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. The RTMS radar is our radar product line, and revenue consists of sales to external customers. Radar products are normally sold in the Highway segment. As a result of business model changes and modifications in how we manage our business, we may reevaluate our segment definitions in the future.
The following tables set forth selected financial information for each of our reportable segments (in thousands):
For the year ended December 31, 2020
Intersection Highway Total
Revenue $ 9,301 $ 3,872 $ 13,173
Gross profit 8,401 1,987 10,388
Amortization of intangible assets 367 369 736
Intangible assets 1,376 1,785 3,161
For the year ended December 31, 2019
Intersection Highway Total
Revenue $ 9,599 $ 5,133 $ 14,732
Gross profit 8,613 2,990 11,603
Amortization of intangible assets 367 231 598
Intangible assets 1,743 2,132 3,875
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Results of Operations
The following table sets forth, for the periods indicated, certain consolidated
statements of operations data as a percent of total revenue and gross profit on
product sales and royalties as a percentage of international sales and
royalties, respectively.
Years Ended December 31,
2020 2019
Product sales 36.7 % 43.6 %
Royalties 63.3 56.4
Total revenue 100.0 100.0
Gross profit - product sales 49.9 57.0
Gross profit - royalties 95.6 95.6
Selling, marketing and product support 19.3 18.2
General and administrative 29.6 28.9
Research and development 25.3 19.3
Income from operations 4.6 12.4
Income tax benefit (3.5 ) (35.1 )
Net income 8.1 47.5
Year Ended
Revenue for the Intersection segment decreased to
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Revenue for the Highway segment decreased to
Gross profit for product sales decreased to 49.9% in 2020 from 57.0% in 2019.
Product sales gross profit decreased
Gross profit for royalty sales remained unchanged at 95.6% in 2020 compared
to 2019. Gross profit for royalties in 2020 increased
Selling, marketing and product support expense decreased to
General and administrative expense decreased to
Research and development expense increased to
In the third quarter of 2018, the Company implemented restructuring plans for
its office in
Income tax benefit of
Consolidated net income was
Liquidity and Capital Resources
At
Net cash provided by operating activities was
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Net cash used for investing activities was
Net cash provided by financing activities was
We believe that cash and cash equivalents on hand at
OffBalance 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 offbalance sheet arrangements.
Critical Accounting Policies
Our Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K are prepared in accordance with
Revenue Recognition and Allowance for Doubtful Accounts. We are required to comply with a variety of technical accounting requirements in order to achieve consistent and accurate revenue recognition. Royalty income is recognized based on sales shipped or delivered to our customers as reported to us by Econolite. Revenue is recognized when both product ownership and the risk of loss have transferred to the customer and we have no remaining obligations. Allowances for doubtful accounts are estimated by management based on an evaluation of potential losses related to customer receivable balances. We determine the allowance based on historical writeoff experience in the industry, regional economic data, and an evaluation of specific customer accounts for risk of loss. We review our allowance for doubtful accounts monthly. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We do not have any offbalance sheet credit exposure related to our customers. The establishment of this allowance requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Although management considers these balances adequate and proper, changes in economic conditions in specific markets in which we operate could have an effect on reserve balances required.
Warranty Liabilities. The estimated cost to service warranty and customer service claims is included in cost of sales. This estimate is based on historical trends of warranty claims. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. Our warranty liability contains uncertainties because our warranty obligations cover an extended period of time. While these liability levels are based on historical warranty experience, they may not reflect the actual claims that will occur over the upcoming warranty period, and additional warranty reserves may be required. A revision of estimated claim rates or the projected cost of materials and freight associated with sending replacement parts to customers could have a material adverse effect on future results of operations.
Software Development Costs. We incur costs associated with the development of software to be sold, leased, or otherwise marketed. 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. A significant amount of judgment and estimation is required to assess when technological feasibility is established as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized software costs, we compare expected product performance, utilizing forecasted revenue amounts, to the total costs incurred to date and estimates of additional costs to be incurred. If revised forecasted product revenue is less than, and/or revised forecasted costs are greater than, the previously forecasted amounts, the net realizable value may be lower than previously estimated, which could result in recognition of an impairment charge in the period in which such a determination is made.
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Impairment of LongLived Assets. We review the carrying value of longlived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, we recognize an asset impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to identify events or changes in circumstances indicating the carrying value of assets may not be recoverable, estimate future cash flows, estimate asset fair values, and select a discount rate that reflects the risk inherent in future cash flows. Expected cash flows may not be realized, which could cause longlived assets to become impaired in future periods and could have a material adverse effect on future results of operations.
Income Taxes. We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of 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.
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