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 $1,365 per driver (per INRIX 2018 Global Traffic scorecard). 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 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:

º 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;

º advances in information technology, which have made our products easier to


     market, implement and integrate;
   º 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

º 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:

º continued adoption and governmental funding of ITS and other automated

applications for traffic control, safety and enforcement in developed

countries;

º a propensity by traffic engineers to implement lower cost technology-based

solutions rather than civil engineering solutions such as widening

roadways;

º 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

º 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.

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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 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.
We do not know whether the plant remains closed. 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.  The Company has not yet suffered any
shortages of product due to the temporary closing of Econolite's facility in
Tecate, Mexico.  However, it is uncertain whether Econolite is meeting, and can
continue to meet, the demand for the products 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.

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.

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



                                                                    Three-Month Periods Ended
                                                                            March 31,
                                                                   2020                       2019

Income (loss) from operations                              $          (275 )             $        308
Adjustments to reconcile to non-GAAP income
Amortization of intangible assets                                      174                        150
Depreciation                                                            50                         51
Restructuring                                                            -                          2
Non-GAAP income (loss) from operations                     $           (51 )             $        511




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 March 31,
                                     Intersection        Highway            Total
                                    2020     2019     2020     2019     2020     2019

Revenue                            $ 2,250  $ 2,072  $   909  $ 1,300  $ 3,159  $ 3,372
Gross profit                         2,069    1,792      467      803    2,536    2,595
Amortization of intangible assets       92       92       82       58      174      150
Intangible assets                    1,651    2,018    2,071    1,568    3,722    3,586




Results of Operations

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

                                      Three-Month Periods Ended
                                             March 31,
                                        2020            2019
Product sales                             33.2 %           48.1 %
Royalties                                 66.8             51.9
Total revenue                            100.0            100.0
Gross profit - product sales              49.4             57.7
Gross profit - royalties                  95.6             94.7
Selling, general and administrative       60.4             49.4
Research and development                  28.6             18.4
Income (loss) from operations             (8.7 )            9.1
Income tax benefit                        (5.2 )              -
Net income (loss)                         (3.5 )            9.1




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Total revenue decreased to $3.2 million in the three-month period ended March
31, 2020 from $3.4 million in the same period in 2019, a
decrease of 6.3%. Royalty income increased to $2.1 million in the first quarter
of 2020 from $1.8 million in the first quarter of 2019. The increase in
royalties in the first three months of 2020 was led by strong sales in the Upper
Midwest and Sunbelt. Product sales decreased to $1.1 million in the first
quarter of 2020 from $1.6 million in the first quarter of 2019, a decrease of
35.2%. The decrease in product sales in the first three months of 2020 was a
result of project timing and COVID-19 related supply chain challenges that
prevented the delivery of product late in the quarter.  These challenges have
since been resolved and our supply chain is positioned to meet anticipated
demand.

Revenue for the Intersection segment increased to $2.3 million in the
three-month period ended March 31, 2020 from $2.1 million in the three-month
period ended March 31, 2019. The increase in revenue in the Intersection segment
in the first three months of 2020 was attributable to the increase in royalties.

Revenue for the Highway segment decreased to $0.9 million in the three-month
period ended March 31, 2020 from $1.3 million in the three-month period
ended March 31, 2019. The decrease in revenue in the Highway segment in the
first three months of 2020 was attributable to the supply chain challenges and
project timing as COVID-19 impacted increasing numbers of regions towards the
end of the quarter.

Gross margin percent for product sales decreased to 49.4% in the three months
ended March 31, 2020 from 57.7% in the three months ended March 31, 2019. The
dollar amount of product sales gross profit decreased $417,000, or 45%, in the
three months ended March 31, 2020 compared to the prior year period. The
decrease in product gross margin percent in the first three months of 2020 was
the result of lower sales volumes in combination with increased amortization of
intangible assets, increased inventory obsolescence, and decreased warranty
adjustments, all of which impact product margins.

Gross margin percent for royalty sales for the three months ended March 31,
2020 increased to 95.6% from 94.7% in the same period in 2019. The dollar amount
of gross profit from royalties increased $358,000, or 22%, in the three months
ended March 31, 2020 compared to the prior year period. The increase in royalty
gross margin percent in the first three months of 2020 was due to higher royalty
revenues.

Selling, general and administrative expense was $1.9 million, or 60.4% of total revenue, in the first quarter of 2020 compared to $1.7 million, or 49.4% of total revenue, in the first quarter of 2019. The increase in expense in the first three 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.



Research and development expense increased to $902,000, or 28.6% of total
revenue, in the three-month period ended March 31, 2020 from $620,000, or 18.4%
of total revenue, in the three-month period ended March 31, 2019. The
increase was partially due to decreased capitalized software development costs
in the three-month period ended March 31, 2020 of $22,000 compared to
capitalized software costs of $419,000 for the same period in 2019.  After
normalizing for software development costs, overall research and development
expenditures decreased in the three-month period ended March 31, 2020 compared
to the same period in the prior year.

There was an income tax benefit of $164,000 recorded in the first three months
of 2020 and no income tax expense or benefit recorded in the first three months
of 2019.

Consolidated net loss was $(111,000), or $(0.02) per basic share and diluted
share, in the three-month period ended March 31, 2020 compared to a net income
of $308,000, or $0.06 per basic and diluted share, in the comparable prior year
period. The net loss for the quarter ended March 31, 2020 is primarily due to
the decrease in product revenues and increased operating expenses.



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Liquidity and Capital Resources

At March 31, 2020, we had $5.4 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 $494,000 in the first three months
of 2020 compared to net cash provided by operating activities of $184,000 in the
same period in 2019. The increase in net cash provided by operating activities
in the first three months of 2020 compared to the prior year period is primarily
attributed to the reduction in accounts payable and other accrued liabilities
during the first three months of 2019 compared to the current year period.



Net cash used for investing activities was $97,000 for the first three months of
2020 compared to net cash used for investing activities of $494,000 in the same
period in 2019. The decrease of the amount of net cash used for investing
activities in the first three months of 2020 compared to the prior year period
was primarily the result of decreased capitalized internal software development
costs compared to the prior year period.



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.



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.



We believe that cash and cash equivalents on hand at March 31, 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 for at least one year from the date of these financial
statements.

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 months
ended March 31, 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.

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Cautionary Statement:



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

º our historical dependence on a single product for most of our revenue;

º budget constraints by governmental entities that purchase our products,


     including constraints caused by declining tax revenue;
   º the continuing ability of Econolite to pay royalties owed;

   º the mix of and margin on the products we sell;
   º our dependence on third parties for manufacturing and marketing our
     products;

º our dependence on single-source suppliers to meet manufacturing needs;

º our failure to secure adequate protection for our intellectual property

rights;

º our inability to develop new applications and product enhancements;

º the potential disruptive effect on the markets we serve of new and emerging

technologies and applications, including vehicle-to-vehicle communications

and autonomous vehicles;

º unanticipated delays, costs and expenses inherent in the development and

marketing of new products;

º our inability to respond to low-cost local competitors;

º our inability to properly manage any growth in revenue and/or production

requirements;

º the influence over our voting stock by affiliates;

º our inability to hire and retain key scientific and technical personnel;


   º the effects of legal matters in which we may become involved;
   º our inability to achieve and maintain effective internal controls;
   º our inability to successfully integrate any acquisitions;
   º tariffs and other trade barriers;

º political and economic instability, including continuing volatility in the

economic and political environment of the European Union;

º our inability to comply with international regulatory restrictions over

hazardous substances and electronic waste; and

º 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.

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