Exhibit 10.4


SECURITY AGREEMENT


Image Sensing Systems, Inc., a Minnesota corporation (hereinafter
called the “Debtor”), whose
address is 1600 West University Avenue, Suite 500, St. Paul, Minnesota, 55104,
and Alliance Bank, a Minnesota banking corporation, whose address is 55 East
Fifth Street, Suite 115, St. Paul, Minnesota, 55101 (hereinafter called the “Secured Party”), agree as follows: The
Debtor grants to the Secured Party a first position security interest in the
property described below together with any additions and accessions thereto,
replacements thereof, and all insurance, condemnation and other products or
proceeds thereof, to secure prompt payment when due of all amounts owed by the
Debtor to the Secured Party whether now existing or hereafter existing,
including all amounts owed pursuant to that certain $5,000,000.00 Promissory
Note dated effective May 12, 2014, from the Debtor to the Secured Party (the “Note”) and any and all extensions,
modifications, renewals, amendments, and replacements thereof, and any and all
future advances made by the Secured Party to the Debtor at the Secured Party’s
option, together with all other liabilities of the Debtor to the Secured Party
(primarily, secondarily, direct, contingent, sole, joint, or several) due or to
become due or which may be hereafter contracted or acquired and the performance
of all of the terms and conditions of this Security Agreement:


	
  

 	
  

 	
  

 
	
  

 	
 all Assets of the Debtor, including, but not limited to, the
 following: (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
 Debtor’s operating accounts, money market accounts, and interest reserve
 account maintained with the Secured Party), Chattel Paper, Commercial Tort or
 other claims, and General Intangibles; (c) all inventory now owned or
 hereafter owned.

 	
  

 



The above-described
property hereinafter referred to as the “Collateral”.


THE DEBTOR
HEREBY AGREES, WARRANTS AND COVENANTS THAT:


	
  

 	
  

 
	
 1.

 	
 The Secured Party may examine and inspect the Collateral at any time,
 wherever located.

 
	
  

 	
  

 
	
 2.

 	
 The Collateral is for business use and is specifically to be used in
 operation of the Debtor’s business.

 
	
  

 	
  

 
	
 3.

 	
 The Collateral shall not be attached to real estate without the
 Secured Party’s prior written consent. If any of the Collateral is or is to
 become a fixture, the Debtor agrees to furnish the Secured Party with a
 statement signed by all persons who have or claim an interest in the real
 estate concerned, which statement shall provide that the signer consents to
 the security interest created hereby and disclaims any interest in the Collateral
 as fixtures.

 













	
  

 	
  

 
	
 4.

 	
 Except for the security interest granted hereby and other security
 interests granted to the Secured Party that have been approved by the Secured
 Party, the Debtor is the owner of the Collateral, free and clear of all
 liens, security interests or encumbrances, and the Debtor will defend the
 Collateral against all claims and demands of all persons at any time claiming
 the same or any interest therein.

 
	
  

 	
  

 
	
 5.

 	
 The Debtor will not sell or offer to sell or otherwise transfer or
 encumber the Collateral except in the ordinary course of business without the
 prior written consent of the Secured Party, and will keep the Collateral in
 good order and repair, and will not waste or destroy the Collateral.

 
	
  

 	
  

 
	
 6.

 	
 No financing statement covering the Collateral is on file in any
 public office other than the financing statements filed by or at the
 direction of the Secured Party, and at the request of the Secured Party, the
 Debtor hereby authorizes the Secured Party to file one or more financing statements
 pursuant to the Uniform Commercial Code in form satisfactory to the Secured
 Party for filing in all public offices wherever filing is deemed necessary or
 desirable by the Secured Party.

 
	
  

 	
  

 
	
 7.

 	
 The Debtor will keep the Collateral insured at all times against loss
 by fire and other hazards concerning which, in the judgment of the Secured
 Party, insurance protection is necessary, in a company or companies
 satisfactory to the Secured Party and in amounts sufficient to protect the
 Secured Party against loss or damage to the Collateral, and will pay the
 premiums therefor. Such policy or policies of insurance will be delivered to
 and held by the Secured Party, together with loss payable clauses in favor of
 the Secured Party as its interest may appear, in form satisfactory to the
 Secured Party. The Secured Party may act as attorney-in-fact for the Debtor
 in obtaining, adjusting, settling and canceling such insurance and endorsing
 any drafts.

 
	
  

 	
  

 
	
 8.

 	
 At its option, upon default of the Debtor to do so, the Secured Party
 may discharge taxes, liens, or security interests or other encumbrances
 placed on the Collateral, may pay for insurance on the Collateral, and may
 pay for the maintenance and preservation of the Collateral. The Debtor agrees
 to reimburse the Secured Party on demand for any payment made, or any expense
 incurred by the Secured Party pursuant to the foregoing authorization.

 
	
  

 	
  

 
	
 9.

 	
 Until the occurrence of an Event of Default (as defined in the Note),
 the Debtor may retain possession of the Collateral, and use the same in any
 lawful manner not inconsistent with the agreements herein or with the terms
 and conditions of any policy of insurance thereon.

 


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 10.

 	
 Upon the occurrence of an Event of Default, the Secured Party shall
 have the right, at its option and without demand or notice, in addition to
 all other rights and remedies available in law and equity, to exercise all of
 the rights and remedies of a secured party under the Uniform Commercial Code
 or any other applicable law. The Debtor agrees that, upon an Event of
 Default, the Debtor will make the Collateral available to the Secured Party
 at a place to be designated by the Secured Party which is reasonably
 convenient. The Debtor further agrees to pay all costs and expenses of the Secured
 Party, including reasonable attorney’s fees, in collection of any amount due
 from the Debtor to the Secured Party herein or for the enforcement hereof. If
 any notice of sale, disposition or other intended action by the Secured Party
 is required by law to be given to the Debtor, such notice shall be deemed
 reasonably and properly given if mailed to the Debtor at such address of the
 Debtor as may be shown on the Secured Party’s records, at least ten (10) days
 before such sale, disposition or other intended action. Waiver of any default
 hereunder by the Secured Party shall not be a waiver of any other default or
 of the same default on a later occasion. No delay or failure by the Secured
 Party to exercise any right or remedy shall be a waiver of any such right or
 remedy and no single or partial exercise by the Secured Party of any right or
 remedy shall preclude other or further exercise thereof or the exercise of
 any other right or remedy at any time.

 
	
  

 	
  

 
	
 11.

 	
 This Agreement and the security interest in the Collateral created
 hereby shall terminate when the Debtor has repaid the Secured Party the
 amount due on the Note and all other indebtedness and liability from the
 Debtor to the Secured Party whether now existing or hereafter existing.

 
	
  

 	
  

 
	
 12.

 	
 No waiver by the Secured Party of any default shall be effective
 unless in writing, nor operate as a waiver of any other default or of the
 same default on a future occasion.

 
	
  

 	
  

 
	
 13.

 	
 The Secured Party is hereby appointed the attorney-in-fact for the
 Debtor to do all things and acts necessary to perfect, and to continue to
 perfect, the security interest in the Collateral and to exercise its rights
 with respect to the Collateral.

 
	
  

 	
  

 
	
 14.

 	
 The Debtor waives demand, notice, protest, notice of acceptance of
 this Security Agreement, notice of loans made, credit extended, Collateral
 received or delivered or other action taken in reliance hereon and all other
 demands and notices of any description. With respect to both the obligations
 secured by the Security Agreement and the Collateral, the Debtor assents to
 any extension or postponement of the time of payment or any other indulgence,
 to any substitution, exchange or release of or failure to perfect any
 security interest in any Collateral, to the addition or release of any party
 or person primarily or secondarily liable, to the acceptance of partial
 payment thereon and the settlement, compromising or adjusting of any thereof,
 all in such manner and at such time or times as the Secured Party may deem
 advisable. The Secured Party shall have no duty as to the collection or
 protection of the Collateral or any income therefrom, the preservation of
 rights against prior parties, or the preservation of any rights pertaining
 thereto beyond the safe custody thereof. The Debtor further waives any and
 all other suretyship defenses.

 


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 15.

 	
 THE UNDERSIGNED
 ACKNOWLEDGES THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED AND THAT
 THE TIME AND EXPENSE REQUIRED FOR TRIAL BY A JURY MAY EXCEED THE TIME AND EXPENSE REQUIRED FOR TRIAL WITHOUT A JURY. THE
 UNDERSIGNED, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH
 COUNSEL OF ITS CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT
 OF SECURED PARTY AND THE UNDERSIGNED,
 WAIVE ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING
 THE PERFORMANCE OR ENFORCEMENT OF, OR IN
 ANY WAY RELATED TO, THIS AGREEMENT, ANY RELATED AGREEMENTS OR OBLIGATIONS THEREUNDER. THE UNDERSIGNED HAVE READ ALL OF THIS AGREEMENT
 AND UNDERSTAND ALL OF THE
 PROVISIONS OF THIS AGREEMENT. THE UNDERSIGNED ALSO AGREE THAT COMPLIANCE BY SECURED PARTY WITH THE
 EXPRESS PROVISIONS OF THIS AGREEMENT SHALL CONSTITUTE GOOD FAITH AND SHALL BE
 CONSIDERED REASONABLE FOR ALL PURPOSES.

 



IN WITNESS
WHEREOF, the parties have signed this Agreement effective the 12th
day of May, 2014.


	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 
	
 SECURED PARTY:

 	
  

 	
  

 	
 DEBTOR:

 
	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 
	
 Alliance
 Bank

 	
  

 	
  

 	
 Image
 Sensing Systems, Inc.

 
	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 
	
 By:

 	
 /s/ R. Scott
 Johnson

 	
  

 	
  

 	
 By:

 	
 /s/ Kris B.
 Tufto

 	
  

 
	
  

 	
     R. Scott
 Johnson

 	
  

 	
  

 	
     Kris B.
 Tufto

 
	
  

 	
     Its Vice
 President

 	
  

 	
  

 	
     Its President
 and CEO

 


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