Exhibit 10.3


COMMITMENT LETTER


May 7, 2014


Mr. Kris B.
Tufto

President and CEO

Image Sensing Systems, Inc.

1600 West University Ave., Suite 500

St. Paul, MN 55104


	
  

 	
  

 
	
 Re:

 	
 $5,000,000.00 Revolving Line of Credit Loan

 


Dear Mr. Tufto:


Alliance Bank (the “Lender”) hereby agrees to make a loan (the
“Loan”)
to Image Sensing Systems, Inc., a Minnesota corporation (the “Borrower”).
The Loan shall be a revolving line of credit loan in the original principal
amount of $5,000,000.00, and shall be utilized to provide the Borrower with
working capital.


The basic terms of the Loan, as set forth below, shall be contained in
a Promissory Note to be executed by the Borrower, payable to the order of the
Lender and dated the date of closing (the “Note”):


	
  

 	
  

 	
  

 
	
  

 	
 A.

 	
 LOAN AMOUNT: The sum of up to the amount of Five Million
 and no/100 ($5,000,000.00) Dollars (the “Loan
 Amount”).

 
	
  

 	
  

 	
  

 
	
  

 	
 B.

 	
 INTEREST RATE: The
 rate of interest on the Note shall be a
 fixed rate equal to three and ninety-five one hundredths percent (3.95%) per annum. Interest shall be calculated on the basis of
 the actual number of days elapsed and a 360 day year.

 
	
  

 	
  

 	
  

 
	
  

 	
 C.

 	
 PAYMENT SCHEDULE: The Note shall be payable in consecutive monthly
 installments of all accrued
 interest to date of payment commencing thirty (30) days after the date of the
 Note and continuing on the same day of each and every month thereafter until
 one (1) year after the date of the Note, at which time the entire unpaid principal balance plus accrued and
 unpaid interest shall be due and payable in full (the “Maturity Date”).

 
	
  

 	
  

 	
  

 
	
  

 	
 D.

 	
 PREPAYMENT: The
 Note may be prepaid in whole or in part at any time without penalty.

 













	
  

 	
  

 	
  

 
	
  

 	
 E.

 	
 LATE CHARGE: If
 any installment or payment of principal, interest or otherwise on or relating
 to the Note, including any final balloon installment or payment, is not paid
 within ten (10) days of the due date thereof, the Borrower shall pay to the
 Lender a late charge equal to five percent (5%) of the amount of such
 installment or payment, including any final balloon installment or payment.
 The Borrower acknowledges that the late payment fee is not imposed as a
 charge for the use of money, but to permit the Lender to offset its
 administrative expenses and other costs in dealing with loans not paid on
 time. The late payment fee shall in no way be deemed an interest charge. This provision shall
 not be deemed to excuse a late payment or be deemed a waiver of any other rights the
 Lender may have, including the right to declare the entire unpaid principal
 and interest immediately due
 and payable.

 
	
  

 	
  

 	
  

 
	
  

 	
 F.

 	
 RATE INCREASE:
 Upon the occurrence of and during the continuance of an Event of Default (as
 defined in the Note), the rate of interest on the Note shall, at the option
 of the Lender, automatically increase by five percent (5%) per annum. Any increase
 in the rate of interest pursuant to this paragraph shall be in addition to
 and not in lieu of any of the charges which become due pursuant to Paragraph
 E above.

 
	
  

 	
  

 	
  

 
	
  

 	
 G.

 	
 ACCOUNT
 MAINTENANCE: Until such time as the Note is fully
 paid, the Borrower shall maintain the Borrower’s primary operating accounts
 and all of the money market accounts with the Lender or an affiliate of the
 Lender. If the Borrower fails to maintain
 or cause to be maintained all such operating
 and money market accounts with the Lender or an affiliate of the Lender, then
 such failure to maintain or cause to maintain all such accounts shall
 constitute an Event of Default. Notwithstanding anything to the
 contrary herein, at all times during the term of the Loan, the funds in the
 Borrower’s money market account and operating account must be maintained at a
 level sufficient to cover any advances made under the Loan. 

 
	
  

 	
  

 	
  

 
	
  

 	
 H.

 	
 APPLICATION OF PAYMENTS:
 All payments and prepayments shall, at the option of the Lender, be applied
 first to any costs of collection, second to any late charges, third to
 accrued interest on the Note, and lastly to principal and, in the case of
 prepayments, to installments of principal in the inverse order of their
 maturity. Anything to the contrary herein or in the Loan documentation to
 follow notwithstanding, upon the occurrence of an Event of Default, the
 Lender shall have the right to apply all future payments and prepayments in
 such manner as the Lender shall solely determine.

 
	
  

 	
  

 	
  

 
	
  

 	
 I.

 	
 REVOLVING LINE OF
 CREDIT: The Note evidences a revolving line of credit
 loan under which advances, payments and re-advances may be made from time to time up to a maximum principal
 amount of $5,000,000.00. Subject to all
 further conditions and restrictions set forth in the Loan documentation incident hereto, the Borrower may
 borrow, repay and reborrow pursuant to the Note, as described in the
 preceding sentence.

 


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The commitment of the Lender to make the Loan is based upon the
financial and other information furnished and representations made to the
Lender by or on behalf of the Borrower (as hereinafter defined), and said
commitment is subject to the truth and accuracy of said information and
representations as of the date of closing. In addition, the commitment of the
Lender to make said Loan is subject to certain conditions as specified below:


	
  

 	
  

 
	
  

 	
 1.     SECURITY AGREEMENT: To secure repayment
 of the Note, the Lender shall have received a Security Agreement (the “Security Agreement”) duly executed and
 delivered by the Borrower granting to the Lender a first position security
 interest (subject only to any existing security interests in favor of the
 Lender) in and to all Assets of the Borrower, including, but not limited to,
 the following (the “Collateral”):
 (a) all fixtures, equipment, vehicles and personal property of every kind and
 nature whatsoever now owned or hereafter owned, including all extensions,
 additions, improvements, betterments, renewals and replacements of any of the
 foregoing; (b) all Accounts (including, but not limited to, the Borrower’s
 operating accounts, money market accounts, and interest reserve account [as
 hereinafter defined] maintained with the Lender), Chattel Paper, Commercial
 Tort or other claims, and General Intangibles; (c) all inventory now owned or
 hereafter owned; (d) all insurance, condemnation and other products or
 proceeds of the foregoing. The Lender shall also have the right to file such
 UCC Financing Statements with respect to the Security Agreement as the Lender
 may require.

 
	
  

 	
  

 
	
  

 	
 2.     CROSS COLLATERALIZATION: The Borrower
 agrees that any security interest provided in Collateral hereunder, or any
 Collateral provided in connection with any and all other indebtedness of
 Borrower to Lender, whether or not such indebtedness is related by class or
 claim and whether or not contemplated by the parties at the time of executing
 each evidence of indebtedness, shall act as Collateral for all said
 indebtedness. This cross-collateralization provision shall not apply to any
 Collateral that is/are household goods or a principal dwelling.

 
	
  

 	
  

 
	
  

 	
 3.     INTEREST RESERVE ACCOUNT: The Borrower agrees that, during the term of
 the Loan and at the Lender’s sole option, an interest reserve account may be
 established wherein $200,000.00 of the Loan amount shall be held in reserve
 for a total of one year’s interest payments due on the Note. Until the Loan
 is fully paid, the Lender shall
 have a first position security
 interest in all amounts held within the interest reserve account.

 
	
  

 	
  

 
	
  

 	
 4.     INSURANCE:
 The Lender shall have received evidence that the following policies of
 insurance have been obtained and that the premiums for the current policy
 year have been paid, plus timely proof of payment of yearly premiums
 throughout the term of the Loan:

 


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 (a)     Comprehensive General Public
 Liability Insurance, providing for limits of coverage of not less than
 $1,000,000.00/$1,000,000.00 and naming the Lender as an additional insured.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
 (b)     Hazard Insurance, with
 respect to the Collateral, insuring against loss by fire, lightning, theft,
 vandalism, malicious mischief and other risks customarily covered by a
 standard extended coverage endorsement, in an amount not less than the full
 insurable value thereof and naming the Lender as mortgagee and loss payee.

 
	
  

 	
  

 
	
  

 	
 All such insurance shall be written by a company or companies
 acceptable to the Lender licensed to do business in the State of Minnesota.
 Such policies of insurance shall be subject to the approval of the Lender as
 to form, substance and (except as expressly designated above) amount, and,
 without limiting the generality of the foregoing, each such policy shall
 provide that the insurer shall give the Lender at least thirty (30) days
 prior written notice of cancellation, termination, amendment or non-renewal
 thereof. All such policies shall be in an amount sufficient to prevent the
 insured from becoming a co-insurer thereunder

 
	
  

 	
  

 
	
  

 	
 5.     OPINION
 OF COUNSEL OF THE BORROWER: The Borrower acknowledges that the
 Lender has recommended that the Borrower obtain legal counsel to represent it
 in connection with the Loan. However, at the request of the Borrower, and due
 to the Borrower’s sophistication with respect to transactions of this type,
 the Lender has agreed to waive its customary requirement of an opinion of
 legal counsel of the Borrower.

 
	
  

 	
  

 	
  

 
	
  

 	
 6.          APPROVAL AND PREPARATION OF DOCUMENTS:
 All documents and agreements contemplated by this commitment shall be
 prepared and approved by, and all matters incident hereto shall be acceptable
 to and approved by, the Lender’s legal counsel.

 
	
  

 	
  

 
	
  

 	
 7.     OTHER
 DOCUMENTS: The Borrower and any other appropriate party shall have
 executed and delivered to the Lender such other documents, instruments and
 agreements as the Lender may reasonably request.

 
	
  

 	
  

 
	
  

 	
 8.     LOAN ORIGINATION FEE: The Lender shall
 have received an origination fee in the amount of Ten Thousand and no/100
 ($10,000.00) Dollars, which fee shall be in addition to all other amounts
 which the Borrower is required to pay hereunder, including, without
 limitation, reimbursement of the Lender for costs and expenses pursuant to
 Paragraph 9 hereof

 
	
  

 	
  

 
	
  

 	
 9.  EXPENSES:
 The Lender shall have been reimbursed by the Borrower for all out-of-pocket
 costs and expenses incurred by the Lender in connection with this Commitment
 Letter and the Loan transaction contemplated hereby, including, without
 limitation, Loan brokerage fees, attorneys’ fees of $1,000.00 plus
 out-of-pocket costs, closing charges, documentary or tax stamps, recording
 and filing fees. These expenses shall be paid by the Borrower at the time of
 closing. If the Loan does not close and as to expenses incurred after
 closing, these expenses shall be paid by the Borrower upon the Lender’s
 demand.

 


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 10.  FINANCIAL
 STATEMENTS: The Borrower shall have delivered to the Lender such
 financial statements and other financial information/documentation as the
 Lender may reasonably require before and during the term of the Loan,
 including financial statements (on forms provided by the Lender) and Federal
 Income Tax Returns. The foregoing financial information/documentation shall
 be provided to the Lender in a timely manner as reasonably required by the
 Lender.

 
	
  

 	
  

 
	
  

 	
 11.  AUTHORITY DOCUMENTS:
 The Lender shall have received a Certificate of Good Standing from the
 Minnesota Secretary of State relative to the Borrower, and such other
 authority documents relating to the Borrower as the Lender may request.

 
	
  

 	
  

 
	
  

 	
 12. RESOLUTION: The
 Lender shall have received a Resolution of the Board of Directors of the
 Borrower authorizing the execution, delivery and performance of this
 Commitment Letter, the Note, the Security Agreement, and any and all other
 documents related thereto or required hereby.

 
	
  

 	
  

 
	
  

 	
 13. PROCEEDINGS: Except
 as may be disclosed in writing by the Borrower to the Lender, there shall, at
 the time of closing, be no action, proceeding or investigation pending or
 threatened (or any basis therefor) which might materially adversely affect
 the condition, business or prospect of the Borrower, the Collateral, or any
 other properties or assets of the Borrower, or which might adversely affect
 the ability of the Borrower to perform the Borrower’s obligations under the
 Loan documentation.

 
	
  

 	
  

 
	
  

 	
 14. NEGATIVE COVENANTS:
 The Borrower hereby covenants and agrees with the Lender that so long as the
 Note remains unpaid, the Borrower, without the Lender’s prior written
 consent, shall not: (a) sell, assign, transfer or otherwise convey a majority
 or controlling interest in the Borrower whether in one transaction or in a
 series of related transactions; (b) lease or sell all or substantially all of
 the Borrower’s property or business to any other entity or entities, whether
 in one transaction or in a series of related transactions; or (c) consolidate
 with or merge the Borrower into or with any other entity or entities.
 Notwithstanding the foregoing, the Lender will permit a sale, assignment,
 transfer, conveyance, lease, consolidation or merger provided the Lender’s
 Collateral position is not unduly impaired thereby.

 


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 15.  NO ASSIGNMENT:
 This commitment is personal to the Borrower and may not be assigned by the
 Borrower in whole or in part without the prior written consent of the Lender.

 
	
  

 	
  

 
	
  

 	
 16.  SECONDARY FINANCING:
 There shall be no additional financing by the Borrower which is secured by a
 lien on the Collateral without the prior written consent of the Lender.

 
	
  

 	
  

 
	
  

 	
 17.  CROSS-DEFAULT:
 A default with respect to the Note shall
 also constitute a default with respect
 to any other indebtedness or liability of the Borrower to the Lender, whether any such other indebtedness is now
 existing or hereafter existing, and a default with respect to any such other
 indebtedness or liability of the Borrower to the Lender shall also
 constitute a default with respect to the Note.

 
	
  

 	
  

 
	
  

 	
 18.  EXPIRATION OF
 COMMITMENT: If the Loan transaction contemplated hereby has not
 been consummated prior thereto, this Commitment Letter and the commitment of
 the Lender hereunder shall expire May 15, 2014, unless extended in writing by
 the Lender.

 
	
  

 	
  

 
	
  

 	
 19.  THIRD PARTY LENDER
 AUTHORIZATION: The Borrower hereby authorizes the Lender, its
 officers, employees, attorneys and agents to obtain from or provide to,
 without further authorization from or notice to the Borrower, any and all
 financial and banking information that the Lender may desire to obtain from
 or provide to the Borrower’s third party lenders.

 
	
  

 	
  

 
	
  

 	
 20.  THE BORROWER HEREBY
 WAIVES ANY RIGHT TO A TRIAL BY JURY UNDER ANY ACTION OR PROCEEDING ARISING
 DIRECTLY OR INDIRECTLY OUT OF THIS COMMITMENT LETTER, THE LOAN TRANSACTION
 GENERALLY, AND ALL DOCUMENTS INCIDENT THERETO.

 


The Lender also understands, and by signing this commitment, the
Borrower hereby warrants and represents to the Lender that the following
matters are true and correct in all respects:


	
  

 	
  

 	
  

 
	
  

 	
 A.

 	
 Litigation. There is no action, suit or
 proceeding pending or threatened against or affecting the Borrower which, if
 adversely determined, would have a material adverse effect on the condition
 (financial or otherwise), properties or assets of the Borrower or which would
 question the validity of this Commitment Letter or any instrument, document
 or other agreement related thereto or required thereby, or impair the ability
 of the Borrower to perform the Borrower’s obligations hereunder or
 thereunder.

 
	
  

 	
  

 	
  

 
	
  

 	
 B.

 	
 Default. The Borrower is not in default of a
 material provision under any material agreement, instrument, decree or order
 to which the Borrower is a party or by which the Borrower or the Borrower’s
 property are bound or affected.

 
	
  

 	
  

 	
  

 
	
  

 	
 C.

 	
 Taxes. The Borrower has filed all tax
 returns required to be filed and has paid all taxes shown thereon to be due,
 including interest and penalties, which are not being contested in good faith
 and by appropriate proceedings, and has no information or knowledge of any
 objections to or claims for additional taxes in respect of federal or state
 income tax returns for prior years.

 


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 D.

 	
 Judgments. There are no judgments
 outstanding or docketed against the Borrower.

 


If the foregoing terms, conditions and agreements are acceptable, then
you should see that a copy of this letter is executed by the Borrower and
returned to the Lender. Thereupon, this Commitment Letter will become a binding
agreement among the Borrower and the Lender in accordance with its terms.


Sincerely,


ALLIANCE BANK


	
  

 	
  

 	
  

 
	
 By:

 	
 /s/ R. Scott
 Johnson



 	
  

 
	
  

 	
      R.
 Scott Johnson

 	
  

 
	
  

 	
      Its
 Vice President

 	
  

 


CONFIRMED AND ACCEPTED TO BE EFFECTIVE THE 12TH
DAY OF MAY, 2014.


BORROWER:


Image Sensing Systems, Inc.


	
  

 	
  

 	
  

 
	
 By:

 	
 /s/ Kris B. Tufto



 	
  

 
	
  

 	
      Kris B. Tufto

 	
  

 
	
  

 	
      Its President and CEO

 	
  

 


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