MN Software Co. Narrows Loss; 2 Workers Under Investigation

Image Sensing Systems fired two Polish employees who are being investigated for alleged criminal conduct; the company's investigation into the matter, meanwhile, has cost $1.5 million to date.

St. Paul-based software company Image Sensing Systems, Inc., this week reported a narrowed loss for its latest fiscal year—and it also disclosed that two of its employees in Poland are under criminal investigation, and the company’s costs related to the matter have climbed to $1.5 million.

Image Sensing Systems, which makes detection software that is used in traffic management and for security and surveillance purposes, is one of Minnesota’s 85-largest public companies based on revenue.

The company reported a 2012 net loss of $3.4 million, or $0.69 per share, an improvement from a loss of $10 million, or $2.07 per share, in 2011. Excluding certain restructuring and other charges, the company reported net income of $890,000, or $0.18 per share.

Revenue, meanwhile, declined during the year. The company reported 2012 sales of $25 million, down 18 percent from $30.5 million the prior year.

CEO Kris Tufto said in a statement that fourth-quarter revenue—which slid 23 percent to $6.8 million—was “soft,” but the company sees “momentum building,” and it has increased its cash and investments. New products should also help improve market share, he said.

Meanwhile, the company disclosed in a regulatory filing that two employees within its Polish subsidiary are the subjects of a criminal investigation. Image Sensing Systems said the former employees—who have since been fired—were “charged with criminal violations of certain laws related to a project in the City of Lodz, Poland.” The company has sales, marketing, and distribution operations in Poland.

The investigation in Poland is ongoing, and it pertains to an alleged violation of anti-bribery laws, according to a company spokesman.

Neither the company itself nor any of its subsidiaries has been charged with a crime, but a committee comprising Image Sensing Systems’ independent directors, with the help of independent counsel and accounting advisors, is investigating any possible violations of company policy. Image Sensing Systems said its investigation is also focusing on possible violations of law, including the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act, and Polish laws. The internal investigation is ongoing, the company said.

Tufto said in a statement that the company’s costs related to the matter were “immaterial” in 2012 but totaled roughly $1.5 million through March 22 of this year.

“We take these matters very seriously and are cooperating fully. Image Sensing Systems aims to conduct its business lawfully and ethically,” Tufto said. “We have taken remedial actions, including ending the employment of the two Polish employees. We are also assessing and implementing enhancements to our internal policies, procedures, and controls.”

“While we are working diligently towards a timely conclusion, we are presently unable to determine the likely outcome or range of loss, if any, or predict with certainty the timeline for resolution of these matters,” Tufto added.

Tufto took over as interim president and CEO in October after the company ousted its former chief executive, Kenneth Aubrey.

His appointment came during a challenging period for the company. Its 2011 net loss of $10 million was down from a profit of $3 million the previous year.

Tufto said in a Tuesday statement that Image Sensing Systems’ business is seasonally driven, and the company expects revenue generation to be “challenging” in the first quarter.

“And as we guided previously, we plan to increase operational expenses in the near term to solidify our efforts in various engineering and marketing areas,” he said. “We believe these investments are prudent and will result in achieving reasonable profit levels and revenue growth through better utilization of our assets.”

Image Sensing Systems’ stock price was closed down about 18 percent at $4.40 Wednesday.

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