Image Sensing Systems Announces Third Quarter Financial Results

ST. PAUL, Minn. , Oct. 30 /PRNewswire-FirstCall/ -- Image Sensing Systems, Inc. (Nasdaq: ISNS), announced today its financial results for the third quarter ended September 30, 2008 .

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Net income for the quarter ended September 30, 2008 was $1.2 million ($0.29 per fully diluted share) compared to $1.3 million ($0.34 per fully diluted share) for the same period in 2007. Net income for the first nine months of 2008 was $3.4 million ($0.86 per diluted share) compared to $2.6 million ($0.66 per diluted share) for the same period in 2007.

Revenue for the third quarter was $6.1 million compared to $4.2 million for the same period a year ago, while revenue for the first nine months of 2008 was $18.7 million compared to $9.9 million for the same period a year ago. Revenue from royalties increased 23% to $3.7 million from $3.0 million in the third quarter of 2007 and 31% to $10.0 million from $7.6 million in the first nine months of 2007, reflecting the continued success of our North American distributor, Econolite Control Products, Inc. (ECPI), in selling Autoscope(R) products in the United States and Canada . North American sales, which are sales of RTMS(R) in North America , were $920,000 for the third quarter and $4.5 million for the first nine months of 2008. International sales, which include both Autoscope and RTMS sales outside of North America , were $1.4 million in the third quarter, a 24% increase over $1.1 million in the same period in 2007, and $4.2 million in the first nine months, an 89% increase over $2.2 million in the same period of 2007. Sales of RTMS world- wide for the quarter were $1.2 million. We acquired the RTMS family of products in December 2007 .

On a non-GAAP basis for the third quarter, excluding intangible asset amortization and withdrawn offering expenses, each net of tax, net income was $1.4 million ($0.36 per fully diluted share) and operating income was $2.1 million. On a non-GAAP basis for the first nine months, net income increased 55% to $4.0 million ($0.99 per fully diluted share) and operating income increased 85% to $5.7 million as compared to the same period of 2007.

Ken Aubrey , CEO, said, "We noted continued increasing demand for our products in the quarter with the exception of our North American RTMS business. We believe the RTMS results underperformed due to a number of disparate reasons. Again, we believe the integration of the EIS asset purchase and final Terra transition matters are progressing on schedule and are beginning to show signs of bearing fruit. We're also advancing a number of product initiatives, including video/radar hybrid solutions, that are exciting."

Follow-on Offering Update

Given our recent share price range, unfavorable market conditions and the lack of need for increased working capital at present, we believe that proceeding with an offering at this time is not in the best interests of our shareholders and therefore, we have decided to withdraw the follow-on offering. As such, we have expensed offering costs incurred of $221,000 ($146,000 net of tax or $0.04 per share) in the third quarter of 2008. The costs are included in general and administrative expense in the income statement.

Auction Rate Security Update

We hold $5.4 million in face value of student loan backed auction rate securities (ARS), substantially all of which are Federal government backed. The ARS were purchased through, and are still held in, accounts at UBS and Credit Suisse. Recently, both UBS and Credit Suisse announced settlements with governmental authorities under which the banks have agreed to repurchase our ARS at face value (par) by January 2009 . This is a positive development and we are optimistic about the outcome. However, because of the uncertainty of collection under the agreements, we have continued to account for the ARS as we have the previous two quarters with a temporary impairment reflected.

Our updated analysis of the ARS fair value indicates there is a temporary impairment of $449,000 ($296,000 net of tax). The ARS are classified as long- term assets at September 30, 2008 . This unrealized loss does not flow through our income statement; rather it is recorded directly to shareholders' equity as a component of accumulated other comprehensive income/loss. Notwithstanding the potential settlements, there is uncertainty in the ARS market and, should circumstances change, we may deem the impairment to be other than temporary or otherwise adjust our analysis.

Non-GAAP Information

We provide certain non-GAAP financial information as supplemental information to GAAP amounts. This non-GAAP information excludes the impact, net of tax, of amortizing the intangible assets from the EIS asset purchase and excludes the costs incurred in conjunction with our withdrawn follow-on offering that were expensed in the quarter ended September 30, 2008 . 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.

About Image Sensing

Image Sensing Systems, Inc. is a technology company specializing in software-based detection solutions for the Intelligent Transportation Systems (ITS) sector and adjacent overlapping markets. Our industry leading computer enabled detection (CED) products, including the Autoscope(R) machine-vision family and the RTMS(R) radar family, combine embedded software signal processing with sophisticated sensing technologies for use in transportation and safety/surveillance management. CED is a group of technologies in which software, rather than humans, examines the outputs of complex sensors to determine what is happening in the field of view in real-time. With more than 80,000 instances sold in over 60 countries worldwide, our depth of experience coupled with breadth of product portfolio uniquely positions us to provide powerful hybrid technology solutions and to exploit the convergence of the traffic, security and environmental management markets. We are headquartered in St. Paul, Minnesota . Visit us on the web at imagesensing.com.

Safe Harbor Statement: Statements made in this release concerning the Company's or management's intentions, expectations, or predictions about future results or events are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which variations could be material and adverse. Factors that could produce such a variation include, but are not limited to, the following: the inherent unreliability of earnings, revenue and cash flow predictions due to numerous factors, many of which are beyond the Company's control; developments in the demand for the Company's products and services; relationships with the Company's major customers and suppliers; unanticipated delays, costs and expenses inherent in the development and marketing of new products and services; the impact of governmental laws and regulations; and competitive factors. Our forward-looking statements speak only as of the time made, and we assume no obligation to publicly update any such statements. Additional information concerning these and other factors that could cause actual results and events to differ materially from the Company's current expectations are contained in the Company's reports and other documents filed with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2007 .

Image Sensing Systems, Inc. Condensed Consolidated Statements of Income (in thousands, except per share information) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Revenue Royalties $3,742 $3,041 $10,007 $7,636 North American sales 920 - 4,468 - International sales 1,420 1,143 4,221 2,232 6,082 4,184 18,696 9,868 Cost of revenue Cost of sales 860 536 3,468 951 Gross profit 5,222 3,648 15,228 8,917 Operating expenses Selling, marketing and product support 1,695 749 4,688 2,310 General and administrative 980 710 2,883 1,832 Research and development 701 553 2,167 1,681 Amortization of intangible assets 192 - 576 - 3,568 2,012 10,314 5,823 Income from operations 1,654 1,636 4,914 3,094 Other income (expense), net (6) 149 58 429 Income before income taxes 1,648 1,785 4,972 3,523 Income taxes 486 488 1,539 968 Net income $1,162 $1,297 $3,433 $2,555 Net income per common share Basic $0.29 $0.35 $0.87 $0.68 Diluted $0.29 $0.34 $0.86 $0.66 Weighted average shares outstanding Basic 3,942 3,780 3,933 3,777 Diluted 4,005 3,866 4,010 3,876 Image Sensing Systems, Inc. Condensed Consolidated Statements of Income Reconciliation of GAAP to non-GAAP basis (in thousands, except per share information) (unaudited) GAAP Non-GAAP basis adjustments basis Quarter ended September 30, 2008 Revenue $ 6,082 $- $ 6,082 Cost of revenue 860 - 860 Gross profit 5,222 - 5,222 Operating expenses 3,568 (413)(1,2) 3,155 Income from operations 1,654 413 2,067 Other income (expense), net (6) - (6) Income before income taxes 1,648 413 2,061 Income taxes 486 140 (3) 626 Net income $1,162 $273 $1,435 Basic net income per share $0.29 $0.36 Diluted net income per share $0.29 $0.36 Weighted shares - basic 3,942 3,942 Weighted shares - diluted 4,005 4,005 GAAP Non-GAAP basis adjustments basis Nine months ended September 30, 2008 Revenue $18,696 $- $18,696 Cost of revenue 3,468 - 3,468 Gross profit 15,228 - 15,228 Operating expenses 10,314 (797) (1,2) 9,517 Income from operations 4,914 797 5,711 Other income, net 58 - 58 Income before income taxes 4,972 797 5,769 Income taxes 1,539 271 (3) 1,810 Net income $ 3,433 $526 $3,959 Basic net income per share $0.87 $1.01 Diluted net income per share $0.86 $0.99 Weighted shares - basic 3,933 3,933 Weighted shares - diluted 4,010 4,010 Notes to adjustments - (1) Intangible asset amortization for the period of $192 and $576, respectively (2) Withdrawn offering cost expense of $221 (3) Income tax expense impact of (1) and (2) at ISS' marginal tax rate of 34% Image Sensing Systems, Inc. Condensed Consolidated Balance Sheets (in thousands) (unaudited) September 30, December 31, 2008 2007 Assets Current assets Cash and cash equivalents $7,673 $10,876 Receivables, net 5,945 4,997 Inventories 2,090 1,579 Prepaid expenses and deferred taxes 357 370 16,065 17,822 Property and equipment, net 652 700 Investments, net of valuation allowance (restricted) 4,951 - Deferred income taxes 1,893 1,676 Goodwill and intangible assets, net 9,564 10,140 $33,125 $30,338 Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued expenses $ 1,928 $ 2,029 Bank debt, current 1,000 5,000 Income taxes payable 463 - 3,391 7,029 Bank debt, long-term 3,000 - Income taxes payable - 84 Shareholders' equity 26,734 23,225 $33,125 $30,338 Image Sensing Systems, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended September 30, 2008 2007 Operating activities Net income $3,433 $2,555 Adjustments to reconcile net income to net cash provided by operations Depreciation and amortization 863 197 Stock option expense 246 132 Changes in operating assets and liabilities (1,215) (2,234) Net cash provided by operating activities 3,327 650 Investing activities Purchase of property and equipment, net of disposals (239) (71) Sale (purchase) of investments (5,400) 2,100 Net cash provided by (used in) investing activities (5,639) 2,029 Financing activities Repayment of bank debt (1,000) - Proceeds from exercise of stock options 109 35 Net cash provided by (used in) financing activities (891) 35 Increase (decrease) in cash and cash equivalents (3,203) 2,714 Cash and cash equivalents, beginning of period 10,876 11,626 Cash and cash equivalents, end of period $7,673 $14,340

SOURCE Image Sensing Systems, Inc.

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