UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K
(Mark one)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0‑26056
Image Sensing Systems, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41‑1519168
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
500 Spruce Tree Centre, 1600 University Avenue West,
St. Paul, MN 55104
(Address of principal executive offices) (Zip Code)
(651) 603‑7700
(Registrant’s telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value The NASDAQ Capital Market
Preferred Stock Purchase Rights The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
☒
No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):
Large accelerated filer
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Accelerated filer
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Non‑accelerated filer
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Smaller reporting company
☒
(Do not check if a smaller reporting company.)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes
☐
No
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As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non‑affiliates of the registrant was $8,306,196 based on the closing sale price as reported on The NASDAQ Capital Market. The number of shares outstanding of the registrant’s $0.01 par value common stock as of February 28, 2017 was 5,094,473 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document
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Parts Into Which Incorporated
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Proxy Statement for the 2017 Annual Meeting of Shareholders (Proxy Statement)
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Part III
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PART I
Item 1. Business
General
Image Sensing Systems, Inc. (referred to in this Annual Report on Form 10-K as “we,” “us,” “our” and the “Company”) develops and markets video and radar processing products for use in traffic applications such as intersection control, highway, bridge and tunnel traffic management and traffic data collection.
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”), and RTMS
®
radar or radar products (“RTMS”), 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 spend 42 hours a year stuck in traffic, and congestion costs motorists $160 billion a year. 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 with 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 technology‑driven solutions in the marketplace. We market our Autoscope video products in the United States, Mexico, Canada and the Caribbean through exclusive agreements 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 in North America, the Caribbean and Latin America. On a limited basis, we sell directly to the end user in these geographic areas. We market our Autoscope video and RTMS radar products outside of the United States, Mexico, Canada and the Caribbean through a combination of distribution and direct sales channels, through our offices in Spain and Romania. Our end users primarily include governmental agencies and municipalities.
On July 9, 2015, the Company entered into a share and asset sales purchase agreement (the “SAPA”) with TagMaster AB (the “Buyer”). Under the terms of the SAPA, the Company and Image Sensing Systems EMEA Limited, a wholly-owned subsidiary of the Company (“ISS EMEA”), sold to the Buyer the entire issued share capital of Image Sensing Systems UK Limited, a wholly-owned subsidiary of ISS EMEA, as well as certain other assets owned by the Company primarily used or primarily held for use in connection with its license plate recognition (LPR) business. The Buyer also agreed to assume on the closing date certain agreements and liabilities relating to the LPR business and the acquired assets. Additionally, the Company and the Buyer entered into a transitional services agreement.
Industry Overview
The Intelligent Transportation Systems Market
. ITS encompasses a broad range of information processing and control electronics technologies that, when integrated into roadway infrastructure, help monitor and manage traffic flow, reduce congestion and enhance driver safety. The ITS market has been built around the detection of conditions that impact the proper operation of roadway infrastructure. ITS applications include a wide array of traffic management systems, such as traffic signal control, tolling and variable messaging signs. ITS technologies include video vehicle detection, inductive loop detection, sensing technologies (such as radar), floating cellular data, computational technologies and wireless communications.
In traffic management applications, vehicle detection products are used for automated vehicle detection and are a primary data source upon which ITS solutions are built. Traditionally, automated vehicle detection is performed using inductive wire loops buried in the pavement. However, in‑pavement loop detectors are costly to install, difficult to maintain, expensive to repair and not capable of either wide‑area vehicle detection without installations of multiple loops.
Above‑ground detection solutions for ITS offer
several advantages to in‑pavement loop detectors. Above‑ground
detection solutions tend to have a lower total cost of ownership than in‑pavement
loop detectors because above‑ground solutions are non‑destructive
to road surfaces, do not require closing roadways to install or repair, and are
capable of wide‑area vehicle detection with a single device, thus
enabling one input device to do the work of many in‑pavement loops. Due
to their location above-ground, these solutions have no exposure to the wear
and tear associated with expanding and contracting pavement and generally less
exposure to the vibration and compaction caused by traffic. Furthermore, in the
event of malfunction or product failure, above‑ground detection solutions
can be serviced and repaired without shutting down the roadway. Each of these
factors results in greater up‑time and increased reliability of above‑ground
detection solutions compared to in‑pavement loop detectors. These
technology solutions also offer a broader set of detection capabilities and a
wider field of view than in‑pavement loop detectors. In addition, a
single unit video‑ or radar‑based system can detect and measure a
variety of parameters, including vehicle presence, counts, speed, length, time
occupancy, headway and flow rate as well as environmental factors and
obstructions to the roadway. An equivalent installation using loops would
require many installations per lane.
We
believe our Autoscope video and RTMS radar products are competitive with and
can take market share from in‑pavement loop detectors. Based on our
determination, the U.S. ITS above-ground detection market sales in 2016 were
approximately $102 million, and the worldwide ITS above-ground detection market
was approximately $242 million. We believe that we are the leader in the U.S.
above-ground detection market in terms of sales volume, and we estimate that global
sales of in‑pavement loop detectors that our Autoscope video and RTMS
radar products can supplant were approximately $115 million in 2016.
We
believe that several trends are driving the growth in ITS and adjacent market
segments:
Proliferation
of Traffic
. In many countries, there
has been a surge in the number of vehicles on roadways. Due to the growth of
emerging economies and elevated standards of living, more people desire and are
able to afford automobiles. The number of vehicles utilizing the world’s
roadway infrastructure is growing at a quicker pace than new roads, bridges and
highways are being constructed. The population of the United States grew by about
30%, or 75 million, from 1990 to 2015, while highway miles increased by
approximately 7% in the same period. Overall, the growth in roadway
infrastructure is failing to match the surge in the number of vehicles using
it. Above-ground detection based traffic management and control systems address
the problem by monitoring high traffic areas and analyzing data that can be
used to mitigate traffic problems.
The
Demographics of Urbanization
.
Accelerated worldwide urbanization drives the creation and expansion of middle
classes and produces heightened demand for automobiles. Currently, there are at
least 500 cities in the world with over 1 million people. Because automobiles
can be introduced to a metropolitan area faster than roadway infrastructure can
be constructed, the result is continuously worsening traffic. Expanding the
roadway infrastructure is slow and costly to implement, and often
environmentally undesirable, so government agencies are increasingly turning to
technology‑based congestion solutions that optimize performance and
throughput of existing and new roadway infrastructure. Detection is the
requisite common denominator for any technology‑based solution.
The
Melding of Large City Service Domains
.
Large cities require a wide range of service domains, including traffic. These
cities are increasingly turning to centralized management of these service
domains, employing a command and control model that requires sharing and
integrating data across service domains to operate effectively and lower total
cost. For example, data collected for the traffic management service domain is
relevant to all of the other service domains. This means that each sensor can
supply information to multiple domain services. In turn, the sharing of
detection information across service domains should increase the level of
sophistication required to process and interpret that information.
Additionally, above-ground detection products are more capable of performing
certain complicated tasks than humans. This makes the concepts of “rich
sensing” and “instrumenting the city” through above-ground detection solutions
cost effective, which we believe will result in the extensive proliferation of
sophisticated sensors and detection devices.
Solutions
for Adjacent Markets
. We believe that
the adjacent markets of ITS, security/surveillance and parking management are
converging, and that this convergence will accelerate as above-ground detection
systems become more cost‑effective now that a single sensor can be used
for multiple purposes. Because the technologies involved are closely related, our
sensor technology can be adapted to or is already capable of addressing these
adjacent markets.
Our Competitive Strengths
We
are a leading provider of above-ground detection products and solutions for the
ITS industry. We have the following competitive strengths that we expect will
continue to enhance our leadership position:
Leading Proprietary Technologies
. Over the last two decades, we have developed or acquired a
proprietary portfolio of complex software algorithms and applications that we
have continuously enhanced and refined. These algorithms, which include our
advanced signal processing technologies, allow our video and radar products to
capture and analyze objects in diverse weather and lighting conditions and to
balance the accuracy of positive detection and the avoidance of false
detections. Due to the strength of our proprietary technologies, we believe we
command premium pricing. Above-ground detection technologies similar to ours
are also
difficult to develop and refine in a
commercially viable manner. We therefore should be well positioned to quickly
introduce next‑generation products to market.
Proven Ability to Develop, Enhance and Market New Products
. We are continually developing and enhancing our
product offerings. Over the last two decades, we have demonstrated our ability
to lead the market with new products and product enhancements. For example, the
Autoscope Solo system was the first fully integrated color camera, zoom lens
and machine vision processor in the above-ground detection market. Our RTMS
Radar business unit was one of the first to introduce radar‑based
technology solutions for ITS applications, and we continue to lead the market
with technology enhancements and new products. Furthermore, our next
generation video product, Autoscope Vision, is an example of development driven
by the voice of our customers. We have developed a high quality video
detection solution with increased accuracy and performance. We have
successfully collaborated with our long‑term channel partners to market
these products. We believe that developing, enhancing and marketing new
products with our partners can translate into strong organic revenue growth and
high levels of profitability.
Leading Distribution Channel
.
Since 1991, we have maintained a relationship with Econolite, which has the
exclusive right to manufacture, market and distribute our Autoscope video
products in the United States, Mexico, Canada and the Caribbean. We believe
that Econolite is the leading distributor of ITS control products in North
America and the Caribbean. This relationship enhances our ability to
commercialize and market new products and allows us to focus more resources on
developing advanced signal processing software algorithms.
Broad Product Portfolio
.
Our product portfolio leverages our core software‑based algorithms to
enable end users to detect and monitor objects in a designated field of view.
We believe that our family of Autoscope video and RTMS radar products allows us
to offer a broad product portfolio that meets the needs of our end users.
Experienced Management Team and Engineering Staff
. Our management team and engineering staff are
highly experienced in the ITS and software industries. Additionally, the
continuity of our engineering staff should allow the uninterrupted development
of new or improved products.
Our Growth Strategy
As
part of our growth strategy, we seek to:
Enhance and Extend Our Technology Leadership in ITS
. We believe we have established ourselves as a
leading provider of technology in the ITS market segment. We believe that we
continue to have an opportunity to accelerate our growth. We plan to do this by
improving the accuracy and functionality of our products and opportunistically
expanding our product offering into adjacent markets, as well as expanding our
portfolio and channels through licensing. Having developed and introduced our
next-generation video product, we expect to take advantage of our technical
leadership in ITS and further differentiate us from our competitors.
Expand into Adjacent Markets
.
Our core skill is the implementation of above-ground detection products and
solutions. Over the past two decades, we have been developing and refining our
complex signal processing software algorithms. We should be able to effectively
utilize our core software skills more broadly as markets converge. We believe
that a driver of this convergence is that above-ground detection systems will
become more cost‑effective when a single sensor can be used for multiple purposes.
As a result, our objective is to become the leading supplier of critical
detection components to third party management systems, particularly those that
exploit the convergence of traffic. To do this, we are integrating this concept
into our long‑range engineering development road‑map and will
evaluate the use of technology licensing and channel strategies that support
this vision.
Increase the Scope of Our Distribution and Direct Sales
. We have made substantial investments in product
adjustments to tailor our solutions to the differing needs of our international
end users and in new product acquisitions for both domestic and international
markets. We have also invested in sales and marketing expansion, with a focus
on our European subsidiaries. Markets in Eastern Europe, the Asia/Pacific
region, the Middle East, Africa and South America, which have historically
lagged North America and Western Europe in their use of above-ground detection,
have begun to increase the adoption of detection technology in their traffic
systems. We intend to take advantage of the accelerated pace of the adoption of
above-ground detection throughout the developing world by increasing end user
awareness of our products and applications as well as improve user aptitude.
Our Products and Solutions
Our
vehicle and traffic detection products are critical components of many ITS
applications. Our Autoscope video systems and RTMS radar systems convert
sensory input collected by video cameras and radar units into vehicle detection
and traffic data used to operate, monitor and improve the efficiency of roadway
infrastructure. At the core of each product line are proprietary digital signal
processing algorithms and sophisticated embedded software that analyze sensory
input and deliver actionable data to integrated applications. We invested
approximately $4.6 million and $4.7 million on research and development in 2016
and 2015, respectively, to develop and enhance our product technology. Our
digital signal processing software algorithms represent a foundation on which
to support
additional product development into the
automatic incident detection (AID) market. A diagram displaying our fundamental
product architecture is shown below.
The Image Sensing Product Architecture
Autoscope Video
. Our
Autoscope video system processes video input from a traffic scene in real time
and extracts the required traffic data, including vehicle presence, bicycle
presence/differentiation, counts, speed, length, time occupancy (percent of
time the detection zone is occupied), average headway (time interval between
vehicles), turning movements (quantifying the movement of vehicles ) and flow
rate (vehicles per hour per lane). Autoscope supports a variety of standard
video cameras or can be purchased with an integrated high-definition video
camera. For intersections, the system communicates with the intersection signal
controller, which changes the traffic lights based on the data provided. In
highway applications, the system gathers vehicle count and flow rates and
detects anomalous incidents, such as stopped vehicles. In any application, the
data may also be transmitted to a traffic management center via the internet or
other standard communication means and processed in real time to assist in
traffic management and stored for later analysis for traffic planning purposes.
The
Autoscope system comes in two varieties. Autoscope Vision is our next-generation
integrated unit with a color high-definition, zoom camera and a machine vision
processing computer contained in a compact housing that is our leading offering
in the North American market. Autoscope RackVision is our card only
machine vision processing computer that is located in an intersection signal
controller, control hub, incident management center or traffic management
center that receives video from a separate camera. The RackVision and its
variants are our top selling Autoscope products in international markets.
Autoscope rack-based products offer digital MPEG‑4 video streaming, high
speed Ethernet interface, web browser maintenance and data and video over power
line communications. The Autoscope Vision product offers digital streaming
video, built-in WiFi for quick and easy setup, cost-effective three-wire cable
and object tracking algorithm technology for best in class detection accuracy.
RTMS Radar
. Our RTMS
radar systems use radar to measure vehicle presence, volume, occupancy, speed
and classification information for roadway monitoring applications. Data is
transmitted to a central computer at a traffic management center via standard
communication means, including wireless. Data can be processed in real time to
assist in traffic management and stored for later analysis for traffic planning
purposes.
RTMS
radar is an integrated radar transmitter/receiver and special purpose computer
contained in a compact, self‑contained unit. The unit is typically
situated on roadway poles and side‑fired, making it especially
well-suited for highway detection applications.
The
RTMS radar system come in a few different varieties. RTMS Sx-300 is our base,
non-intrusive radar for detection and measurement of traffic on roadways and is
our leading offering in both North America and the Middle East. The RTMS Sx-300
HDCAM has a high-definition camera that provides the
user with visual setup confirmation, data capture and real-time traffic
surveillance. The Sx-300 HDCAM has been widely deployed in North America for
various applications such as ramp metering. The RTMS Sx-300 BT is an
integrated Sx-300 with dual channel Bluetooth sensor and is ideal for providing
the most accurate travel time and origin/destination information.
Distribution, Sales and Marketing
We
market and sell our products globally. Together with our partners, we offer a
combination of high‑performance detection technology and experienced
local support. Our end users primarily consist of federal, state, city and
county departments of transportation, port, highway, tunnel and other
transportation authorities. The decision‑makers within these entities
typically are traffic planners and engineers, who in turn often rely on
consulting firms that perform planning and feasibility studies. Our products
sometimes are sold directly to system integrators or other suppliers of systems
and services who are operating under subcontracts in connection with major road
construction contracts.
Sales of Autoscope Video in the United States, Mexico, Canada and the
Caribbean
. We have granted
Econolite an exclusive right to manufacture, market and distribute the
Autoscope video system in the United States, Mexico, Canada and the Caribbean.
The agreement with Econolite grants it a first refusal right that arises when
we make a proposal to Econolite to extend the license to additional products in
the United States, Mexico, Canada and the Caribbean and a first negotiation
right that arises when we make a proposal to Econolite to include rights
corresponding to Econolite’s rights under our current agreements in countries not
in these territories. Econolite provides the marketing and technical support
needed for its sales in these territories. Econolite pays us a royalty on the
revenue derived from its sales of the Autoscope system. We cooperate in
marketing Autoscope video products with Econolite for the United States,
Mexico, Canada and the Caribbean and provide second‑tier technical
support. We have the right to terminate our agreements with Econolite if it
does not meet minimum annual sales levels or if Econolite fails to make
payments as required by the agreements. In 2008, the term of the original
agreement with Econolite, as amended, was extended to 2031. The agreements can
be terminated by either party upon three years’ notice.
Sales of RTMS Radar in North America, the Caribbean and Latin America
. We market the RTMS radar systems to a network of
distributors covering countries in North America, the Caribbean and Latin
America. On a limited basis, we sell directly to the end user. We provide
technical support to these distributors from our various North American
locations.
Sales in Europe, Asia, the Middle East and Africa
. We market our Autoscope video and RTMS radar product
lines of products to a network of distributors covering countries in Europe,
the Middle East, Africa and Asia through our wholly‑owned subsidiaries
that have offices in Europe. On a limited basis, we sell directly to the end
user. Technical support to these distributors is provided by our wholly‑owned
subsidiaries in Europe, with second‑tier support provided by our
engineering groups. From time to time, we may grant exclusive rights to
Econolite for markets outside of our significant markets for certain
jurisdictions or product sales based on facts and circumstances related to the
opportunities.
Competition
We
compete with companies that develop, manufacture and sell traffic management
devices using video and radar sensing technologies as well as other above‑ground
detection technologies based on laser, infrared and acoustic sensors. For ITS
applications, we also compete with providers of in‑pavement loop
detectors and estimate that more than 70% of the traffic management systems
currently in use in the U.S. use in‑pavement loop detectors. For
competition with other above‑ground detection products, we typically
compete on performance and functionality, and to a lesser extent on price. When
competing against providers of loop detectors, we compete principally on ease
of installation and the total cost of ownership over a multi‑year period,
and to a lesser extent on functionality.
Among
the companies that provide direct competition to Autoscope video worldwide are
FLIR Systems, Inc., Signal Group Inc. (Semex), Iteris, Inc. and Citilog S.A.
Among the companies that provide direct competition to RTMS radar worldwide are
Wavetronix, LLC, MS Sedco Inc., Smartmicro Sensors GmbH and Xtralis, LLC. To
our knowledge, Autoscope video and RTMS radar have the largest number of
installations as compared to their direct competitors. In addition, there are
smaller local companies providing direct competition in specific markets
throughout the world. We are aware that these and other companies will continue
to develop technologies for use in traffic management applications. One or more
of these technologies could in the future provide increased competition for our
systems.
Other
potential competitors of which we are aware include Siemens AG, Cognex Corp.,
Augusta Technologie AG, Matsushita Electric Industrial Co., Ltd. (Panasonic),
Sumitomo Corporation and Omron Electronics LLC. These companies have machine
vision or radar capabilities and have substantially more financial,
technological, marketing, personnel and research and development resources than
we have.
Manufacturing
Autoscope
video products for sale under the Econolite license agreement are manufactured
through agreements with Econolite and Wireless Technology, Inc. Econolite is
responsible for setting warranty terms and must provide all service required
under this warranty. In Europe and Asia, we engage contract manufacturers to
manufacture the Autoscope family of products.
We
engage Wireless Technology, Inc. to manufacture our radar products and perform
warranty and post-warranty repairs for all radar units sold.
We
typically provide a two to five year warranty on our products.
Most
of the hardware components used to manufacture our products are standard
electronics components that are available from multiple sources. Although some
of the components used in our products are obtained from single‑source
suppliers, we believe other component vendors are available should the
necessity arise. The European Parliament has enacted a directive for the
restriction of the use of certain hazardous substances in electrical and
electronic equipment (“RoHS”). To our knowledge, our contract manufacturing
and component vendors in Europe and Asia comply with the European directive on
RoHS.
Intellectual Property
To
protect our rights to our proprietary know‑how, technology and other
intellectual property, it is our policy to require all employees and
consultants to sign confidentiality agreements that prohibit the disclosure of
confidential information to any third parties. These agreements also require
disclosure and assignment to us of any discoveries and inventions made by
employees and consultants while they are devoted to our business activities. We
also rely on trade secret, copyright and trademark laws to protect our
intellectual property. We have also entered into exclusive and non‑exclusive
license and confidentiality agreements relating to our own and third‑party
technologies. We aggressively protect our processes, products, and strategies
as proprietary trade secrets. Our efforts to protect intellectual property and
avoid disputes over proprietary rights include ongoing review of third‑party
patents and patent applications.
Environmental Matters
We
believe our operations are in compliance with all applicable environmental
regulations within the jurisdictions in which we operate.
Employees
As
of December 31, 2016, we had 56 employees, consisting of 49 employees in North
America, and seven employees in Europe. None of our employees are represented
by a union.
Item 1A. Risk Factors
Information Regarding Forward‑Looking
Statements
This
Annual Report on Form 10‑K 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 “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 discussed in the forward‑looking statements. Some
factors that might cause these differences include the factors listed below.
Although we have attempted to list these factors comprehensively, we wish to
caution investors that other factors may prove to be important in the future
and may affect our operating results. New factors may emerge from time to time,
and it is not possible to predict all of these factors, nor can we assess the
effect each factor or combination of factors may have on our business.
We
further caution you not to unduly rely on any forward‑looking statements
because they reflect our views only as of the date the statements were made. We
undertake no obligation to publicly update or revise any forward‑looking
statements whether as a result of new information, future events or otherwise.
If
governmental entities elect not to use our products due to budgetary constraints,
project delays or other reasons, our revenue may fluctuate severely or be
substantially diminished.
Our
products are sold primarily to governmental entities. We expect that we will
continue to rely substantially on revenue and royalties from sales of our
systems to governmental entities. In addition to normal business risks, it
often takes considerable time before governmental initiated projects are
developed to the point at which a purchase of our systems would be made, and a
purchase of our products also may be subject to a time‑consuming approval
process. Additionally, governmental budgets and plans may change without
warning. Other risks of selling to governmental entities include dependence on
appropriations and administrative allocation of funds, changes in governmental
procurement legislation and regulations and other policies that may reflect
political developments, significant changes in contract scheduling, competitive
bidding and qualification requirements, performance bond requirements, intense
competition for government business and termination of purchase decisions for
the convenience of the governmental entity. Substantial delays in purchase
decisions by governmental entities, or governmental budgetary constraints,
could cause our revenue and income to drop substantially or to fluctuate
significantly between fiscal periods.
A majority of our gross profit has been
generated from sales of our Autoscope family of products, and if we do not
maintain the market for these products, our business will be harmed.
Historically,
a majority of our gross profit has been generated from sales of, or royalties
from the sales of, Autoscope products. Gross profit from Autoscope sales
accounted for approximately 78% of our gross profit in 2016 and 2015. We
anticipate that gross profit from the sale of Autoscope systems will continue
to account for a substantial portion of our gross profit for the foreseeable
future. As such, any significant decline in sales of our Autoscope system would
have a material adverse impact on our business, financial condition and results
of operations.
If Econolite’s sales volume decreases or
if it fails to pay royalties to us in a timely manner or at all, our financial
results will suffer.
We
have agreements with Econolite under which Econolite is the exclusive
distributor of the Autoscope video system in the United States, Mexico, Canada
and the Caribbean. Our current agreements grant Econolite a first refusal
right that arises when we make a proposal to Econolite to extend the license to
additional products in the United States, Mexico, Canada and the Caribbean. In
addition, the agreements grant Econolite a first negotiation right that arises
when we make a proposal to Econolite to include rights corresponding to Econolite’s
rights under our current agreements in countries not in these territories. In
exchange for its rights under the agreements, Econolite pays us royalties for
sales of the Autoscope video system. Since 2002, a substantial portion of our
revenue has consisted of royalties resulting from sales made by Econolite,
including 55% in 2016, and 56% in 2015. Econolite’s account receivable
represented 61% of our accounts receivable at December 31, 2016 and 45% of our
accounts receivable at December 31, 2015. We expect that Econolite will
continue to account for a significant portion of our revenue for the
foreseeable future. Any decrease in Econolite’s sales volume could
significantly reduce our royalty revenue and adversely impact earnings. A
failure by Econolite to make royalty payments to us in a timely manner or at
all will harm our financial condition. In addition, we believe sales of our
products are a material part of Econolite’s business, and any significant
decrease in Econolite’s sales of the other products it sells could harm
Econolite, which could have a material adverse effect on our business and
prospects.
As a result of our continuing review of
our business, we may have to undertake further restructuring plans that would
require additional charges, including incurring facility exit and restructuring
charges.
We
continue to evaluate our business, which may result in restructuring
activities. We may choose to divest certain business operations based on
management's assessment of their strategic value to our business, consolidate
or close certain facilities or outsource certain functions. Decisions to
eliminate or limit certain business operations in the future could involve the
expenditure of capital, consumption of management resources, realization of losses,
transition and wind-up expenses, reduction in workforce, impairment of assets,
facility consolidation and the elimination of revenues along with associated
costs, any of which could cause our operating results to decline and may fail
to yield the expected benefits. For more information regarding our
restructuring and divestiture activities in 2016 and 2015, see the discussion
in Note 2 and Note 13 of our Notes to Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K.
The features and functions in our products
have not been as widely utilized as traditional products offered by our
competitors, and the failure of our end users to accept the features and
functions in our products could adversely affect our business and growth
prospects.
Video
and radar technologies have not been utilized in the traffic management
industry as extensively as other more traditional technologies, mainly in‑pavement
loop detectors. Our financial success and growth prospects depend on the continued
development of the market for advanced technology solutions for traffic
detection and management and the acceptance of our current Autoscope video and RTMS
radar and also future systems we may develop as reliable, cost‑effective
alternatives to traditional vehicle detection systems. We cannot assure you
that we will be able to utilize our technology profitably in other products or
markets. If our end users
do not continue to increase
their acceptance of the features and functions provided by our current systems
or other systems we may develop in the future, our business and growth
prospects could be adversely affected.
Our operating costs tend to be fixed, while our revenue
tends to be seasonal, thereby resulting in operating results that fluctuate
from quarter to quarter.
Our
expense levels are based in part on our product development efforts and our
expectations regarding future revenues and, in the short‑term, are
generally fixed. Our quarterly revenues, however, have varied significantly in
the past, with our first quarter historically being the weakest due to weather
conditions in parts of North America, Europe and Asia that make roadway
construction more difficult. Additionally, our international revenues have a significant
large project component, resulting in a varying revenue stream. We expect the
seasonality of our revenue and the fixed nature of our operating costs to
continue in the foreseeable future. Therefore, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
As a result, if anticipated revenues in any quarter do not occur or are
delayed, our operating results for the quarter would be disproportionately
affected. Operating results also may fluctuate due to factors such as the
demand for our products; product life cycle; the development, introduction and
acceptance of new products and product enhancements by us or our competitors;
changes in the mix of distribution channels through which our products are
offered; changes in the level of operating expenses; end user order deferrals
in anticipation of new products; competitive conditions in the industry; and
economic conditions generally. No assurance can be given that we will be able
to achieve or maintain profitability on a quarterly or annual basis in the
future.
Increased competition may make it
difficult for us to acquire and retain end users. If we are unsuccessful in
developing new applications and product enhancements, our products may become
noncompetitive or obsolete.
Competition
in ITS is continuing to grow. Some of the companies that may compete with us in
the business of developing and implementing traffic control and related
security systems have substantially more financial, technological, marketing,
personnel and research and development resources than we have. Therefore, they
may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or end user requirements. If we are
unable to compete successfully with these companies, the market share for our
products will decrease, and competitive pressures may seriously harm our
business.
Additionally,
the market for vehicle detection is continuously seeking more advanced
technological solutions to problems. Technologies such as embedded loop
detectors, pressure plates, pneumatic tubes, radars, lasers, magnetometers,
acoustics and microwaves that have been used as traffic sensing devices in the
past are being enhanced for use in the traffic management industry, and new
technologies may be developed. We are aware of several companies that are
developing traffic management devices using machine vision technology or other
advanced technology. Floating vehicle and/or radio frequency identification
(RFID) tagged license plate initiatives are under consideration and may be
implemented. We expect to face increasingly competitive product developments,
applications and enhancements. New technologies or applications in traffic
control systems from other companies or the development of new and emerging
technologies and applications, including vehicle-to-vehicle (VTV)
communications, mobile applications, and new algorithms or sensor technologies,
may provide our end users with alternatives to our products and could render
our solutions noncompetitive or obsolete. If we are unable to increase the
number of our applications and develop and commercialize product enhancements
and applications in a timely and cost-effective manner that respond to changing
technology and satisfy the needs of our end users, our business and financial
results will suffer.
We may not achieve our growth plans for
the expansion of our business.
In
addition to market penetration, our long‑term success depends on our
ability to expand our business through new product development, mergers and
acquisitions, and/or geographic expansion.
New
product development
would require
that we maintain our ability to improve existing products, continue to bring
innovative products to market in a timely fashion, and adapt products to the
needs and standards of current and potential customers. Our products and
services may become less competitive or eclipsed by technologies to which we do
not have access or which render our solutions obsolete.
Geographic
expansion
would be primarily outside
of the U.S. and hence will be disproportionately subject to the risks of
international operations discussed in this Annual Report on Form 10-K.
Mergers
and acquisitions
would be accompanied
by risks which may include:
● difficulties identifying
suitable acquisition candidates at acceptable costs;
● unavailability of capital to
conduct acquisitions;
● failure to achieve the
financial and strategic goals for the acquired and combined businesses;
● difficulty assimilating the
operations and personnel of the acquired businesses;
● disruption
of ongoing business and distraction of management from the ongoing business;
● dilution of existing
shareholders and earnings per share;
● unanticipated, undisclosed or
inaccurately assessed liabilities, legal risks and costs; and
● difficulties retaining our
key vendors, customers or employees or those of the acquired business.
In
addition, acquisitions of businesses having a significant presence outside the
U.S. will increase our exposure to the risks of international operations
discussed in this Annual Report on Form 10-K.
Our dependence on third parties for
manufacturing and marketing our products may prevent us from meeting customers’
needs in a timely manner.
We
do not have, and do not intend to develop in the near future, internal
capabilities to manufacture our products. We have entered into agreements with
Econolite and Wireless Technology, Inc. (“WTI”) to manufacture the Autoscope
system, the RTMS radar products and related products for sales in the United
States, Mexico, Canada and the Caribbean. We work with suppliers, most of whom
are overseas, to manufacture the rest of our products. We also need to comply
with the European Union’s regulatory RoHS directive restricting the use of
certain hazardous substances in electrical and electronic equipment. If
Econolite, WTI, or our other suppliers are unable to manufacture our products
in the future, we may be unable to identify other manufacturers able to meet
product and quality demands in a timely manner or at all. Our inability to find
suitable manufacturers for our products could result in delays or reductions in
product shipments, which in turn may harm our business reputation and results
of operations. In addition, we have granted Econolite the exclusive right to
market the Autoscope video system and related products in the United States,
Mexico, Canada and the Caribbean. Consequently, our revenue depends to a
significant extent on Econolite’s marketing efforts. Econolite’s inability to
effectively market the Autoscope video system, or the disruption or termination
of that relationship, could result in reduced revenue and market share for our
products.
We and our third party manufacturers
obtain some of the components of our products from a single source, and an
interruption in the supply of those components may prevent us from meeting
customers’ needs in a timely manner and could therefore reduce our sales.
Although
substantially all of the hardware components incorporated into our products are
standard electronics components that are available from multiple sources, we
and our third party manufacturers obtain some of the components from a single
source. The loss or interruption of any of these supply sources could force us
or our manufacturers to identify new suppliers, which could increase our costs,
reduce our sales and profitability, or harm our customer relations by delaying
product deliveries.
Regulations related to the use of conflict‑free
minerals may increase our costs and cause us to incur additional expenses.
The
Dodd‑Frank Wall Street Reform and Consumer Protection Act contains
provisions to improve the transparency and accountability of the use by public
companies in their products of minerals mined in certain countries and to prevent
the sourcing of such “conflict” minerals. As a result, the Securities and
Exchange Commission enacted annual disclosure and reporting requirements for
public companies who use these minerals in their products, which apply to us.
Under the final rules, we are required to conduct due diligence to determine
the source of any conflict minerals used in our products. Although we expect
to file the required report on a timely basis, our supply chain is broad‑based
and complex, and we may not be able to easily verify the origins for all
minerals used in our products. To the extent that any information furnished to
us by our suppliers is inaccurate or inadequate, we could face reputational and
enforcement risks. In addition, the conflict mineral rules could reduce the
number of suppliers who provide components and products containing conflict‑free
minerals and thus could disrupt our supply chain or that of our manufacturers
and increase the cost of the components used in manufacturing our products and
the costs of our products to us. Any increased costs and expenses could have a
material adverse impact on our financial condition and results of operations.
Some of our products are covered by our
warranties and, if the cost of fulfilling these warranties exceeds our warranty
allowance, it could adversely affect our financial condition and results of
operations.
Unanticipated
warranty and other costs for defective products could adversely affect our
financial condition and results of operations and our reputation. We generally
provide a two to five year warranty on our product sales. These warranties
require us to repair or replace faulty products, among other customary warranty
provisions. Although we monitor our warranty claims and provide an allowance
for estimated warranty costs, unanticipated claims in excess of the allowance
could have a material adverse impact on our financial condition and results of
operations. Additionally, we rely on our third party manufacturers to fulfill
our warranty repair obligations to our customers. Adverse changes in these
parties’ abilities to perform these repairs could cause a delay in repairs or
require us to source other parties to perform the repairs and could adversely
affect impact our financial condition and results of operations. In addition,
the need to repair or replace products with design or manufacturing defects
could adversely affect our reputation.
We may
face increased competition if we fail to adequately protect our intellectual
property rights, and any efforts to protect our intellectual property rights
may result in costly litigation.
Our
success depends in large measure on the protection of our proprietary
technology rights. We rely on trade secret, copyright and trademark laws,
confidentiality agreements with employees and third parties, and patents, all
of which offer only limited protection. We cannot assure you that the scope of
these protective measures will exclude competitors or provide competitive
advantages to us. We also cannot assure you that we will become aware of all
instances in which others develop similar products, duplicate any of our
products, or reverse engineer or misappropriate our proprietary technology. If
our proprietary technology is misappropriated, our business and financial
results could be adversely affected. Litigation may be necessary in the future
to enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. In
addition, we may be the subject of lawsuits by others who claim we violate
their intellectual property rights.
Intellectual
property litigation is very costly and could result in substantial expense and
diversions of our resources, either of which could adversely affect our
business and financial condition and results of operations. In addition, there
may be no effective legal recourse against infringement of our intellectual
property by third parties, whether due to limitations on enforcement of rights
in foreign jurisdictions or as a result of other factors.
We
have not applied for patent protection in all countries in which we market and
sell our products. Consequently, our proprietary rights in the technology
underlying our systems in countries other than the U.S. will be protected only
to the extent that trade secret, copyright or other non‑patent protection
is available and to the extent we are able to enforce our rights. The laws of
other countries in which we market our products may afford little or no
effective protection of our proprietary technology, which could harm our
business.
We plan to continue introducing new
products and technologies and may not realize the degree or timing of benefits
we initially anticipated, which could adversely affect our business and results
of operations.
We
regularly invest substantial amounts in research and development efforts that
pursue advancements in a range of technologies, products and services. Our
ability to realize the anticipated benefits of these advancements depends on a
variety of factors, including meeting development, production, certification
and regulatory approval schedules; the execution of internal and external
performance plans; the availability of supplier‑produced parts and
materials; the performance of suppliers and vendors; achieving cost
efficiencies; the validation of innovative technologies; and the level of end
user interest in new technologies and products. These factors involve
significant risks and uncertainties. We may encounter difficulties in
developing and producing these new products and may not realize the degree or
timing of benefits initially anticipated. In particular, we cannot predict with
certainty whether, when or in what quantities our current or potential end
users will have a demand for products currently in development or pending
release. Moreover, as new products are announced, sales of current products may
decrease as end users delay making purchases until such new products are
available. Any of the foregoing could adversely affect our business and results
of operations.
Our business could be adversely affected
by product liability and commercial litigation.
Our
products or services may be claimed to cause or contribute to personal injury
or property damage to our customers’ employees or facilities. Additionally, we
are, at times, involved in commercial disputes with third parties, such as
customers, distributors, vendors and others. See Note 15 of our Notes to
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K. The ensuing claims may arise singularly, in groups of related
claims, or in class actions involving multiple claimants. Such claims and
litigation are frequently expensive and time‑consuming to resolve and may
result in substantial liability to us, which liability and related costs and
expenses may not be recoverable through insurance or any other forms of
reimbursement.
Our business could be affected by various
legal and regulatory compliance risks, including those involving antitrust,
environmental, anti-bribery or anti-corruption laws and regulations.
We are subject to various legal and
regulatory requirements and risks in the U.S. and other countries in which we
have facilities or sell our products involving compliance with antitrust,
environmental, anti-bribery and anti-corruption laws and regulations, including
the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act. Although
we have internal policies and procedures with the intention of assuring
compliance with these laws and regulations, our employees, contractors, agents
and licensees involved in our international sales may take actions in violation
of such policies. Any future adverse development, ruling or settlement could
result in charges that could have an adverse effect on our results of
operations or cash flows.
We price certain of our products at a
premium compared to other technologies. As such, we may not be able to quickly
respond to emerging low‑cost competitors, and our inability to do so
could adversely affect revenue and profitability.
We
price certain of our products at a premium as compared to products using less
sophisticated technologies. As the technological sophistication of our
competitors and the size of the market increase, competing low‑cost
developers of machine vision products for
traffic are
likely to emerge and grow stronger. If end users prefer low‑cost
alternatives over our products, our revenue and profitability could be
adversely affected.
Our revenue could be adversely affected by
the emergence of local competitors and local biases in international markets.
Our
experience indicates that local officials that purchase traffic management products
in the international markets we serve favor products that are developed and
manufactured locally. As local competitors to our products emerge, local biases
could erode our revenue in Europe and Asia and adversely affect our sales and
revenue in those markets.
Our failure to predict technological
convergence could harm our business and could reduce our sales.
Within
our product families, we currently utilize only certain detection technologies
available in the ITS field. If we fail to predict convergence of technology
preferences in the market for ITS, or fail to identify and acquire
complementary businesses or products that broaden our current product
offerings, we may not capture certain segments of the market, which could harm
our business and reduce our sales.
We sell our products internationally and
are subject to various risks relating to such international activities, which
could harm our international sales and profitability.
Sales
outside of the United States, including export sales from our U.S. business
locations, accounted for approximately 18% of our total revenue in 2016 and 17%
of our total revenue in 2015. By doing business in international markets, we
are exposed to risks separate and distinct from those we face in our U.S.
operations. Our international business may be adversely affected by changing
political and economic conditions in foreign countries. Additionally,
fluctuations in currency exchange rates could affect demand for our products or
otherwise negatively affect profitability. Engaging in international business
inherently involves a number of other difficulties and risks, including:
• export restrictions
and controls relating to technology;
• pricing pressure that
we may experience internationally;
• exposure to the risk
of currency value fluctuations, where payment for products is denominated in a
currency other than U.S. dollars;
• variability in the
U.S. dollar value of foreign currency‑denominated assets, earnings and
cash flows;
• required compliance
with existing and new foreign regulatory requirements and laws;
• laws and business
practices favoring local companies;
• longer payment
cycles;
• difficulty of
enforcing agreements, including patent and trademarks, and collecting
receivables through foreign legal systems;
·
disputes with parties
outside of the U.S., which may be more difficult, expensive and time-consuming
to resolve than disputes with parties located in the U.S.;
• political and
economic instability, including volatility in the economic environment of the
European Union caused by the ongoing sovereign debt crisis in Europe;
• tax rates in certain
foreign countries that exceed those in the U.S. and the imposition of
withholding requirements on foreign earnings;
• higher danger of
terrorist activity, war or civil unrest compared to domestic operations;
• difficulties and
costs of staffing and managing foreign operations; and
• difficulties in
enforcing intellectual property rights.
Our exposure to each of these risks may increase our
costs, lengthen our sales cycle and require significant management attention.
One or more of these factors may harm our business.
Our inability to comply with European and
Asian regulatory restrictions over hazardous substances and electronic waste
could restrict product sales in those markets and reduce profitability in the
future.
The
European Union’s Waste Electrical and Electronic Equipment (“WEEE”) directive
makes producers of electrical goods financially responsible for specified collection,
recycling, treatment and disposal of past and future covered products. This
directive must be enacted and implemented by individual European Union
governments, and certain producers will be financially responsible under the
WEEE legislation. This may impose requirements on us, which, if we are unable
to meet them, could adversely affect our ability to market our products in
European Union countries, and our sales revenues and profitability would suffer
as a consequence. In addition, the European Parliament has enacted a directive
for the restriction of the use of certain hazardous substances in electrical
and electronic equipment. This RoHS legislation restricts the use of
substances such as mercury, lead, cadmium and hexavalent cadmium. If we are unable
to have our products manufactured in compliance with the RoHS directive, we
would be unable to market our products in European Union countries, and our
revenues and profitability would suffer. In addition, various Asian governments
could adopt their own versions of environment‑friendly electronic
regulations similar to the European directives, RoHS and WEEE. This could
require new and unanticipated manufacturing changes, product testing and
certification requirements, thereby increasing cost, delaying sales and
lowering revenue and profitability.
Our inability to manage growth effectively
could seriously harm our business.
Growth
and expansion of our business could significantly strain our capital resources
as well as the time and abilities of our management personnel. Our ability to
manage growth effectively will require continued improvement of our
operational, financial and management systems and the successful training,
motivation and management of our employees. If we are unable to manage growth successfully,
our business and operating results will suffer.
Our business operations will be severely
disrupted if we lose key personnel or if we fail to attract and retain
qualified personnel.
Our
technology depends upon the knowledge, experience and skills of our key
management and scientific and technical personnel. Additionally, our ability to
continue technological developments and to market our products, and thereby
develop a competitive edge in the marketplace, depends in large part on our
ability to attract and retain qualified scientific and technical personnel.
Competition for qualified personnel is intense, and we cannot assure you that
we will be able to attract and retain the individuals we need, especially if
our business expands and requires us to employ additional personnel. In
addition, the loss of personnel or our failure to hire additional personnel
could materially and adversely affect our business, operating results and ability
to expand. The loss of key personnel, or our inability to hire and retain
qualified personnel, would harm our business.
We may not be successful in integrating any
acquired companies into our business, which could materially and adversely
affect our financial condition and operating results.
Part
of our business strategy has been to acquire or invest in companies, products
or technologies that complement our current products, enhance our market
coverage or technical capabilities or offer growth opportunities. For any
acquisition, a significant amount of management’s time and financial resources
may be required to complete the acquisition and integrate the acquired business
into our existing operations. Even with this investment of management time and
financial resources, an acquisition may not produce the revenue, earnings or
business synergies anticipated. Acquisitions involve numerous other risks,
including the assumption of unanticipated operating problems or legal
liabilities; problems integrating the purchased operations, technologies or
products; the diversion of management’s attention from our core businesses;
restrictions on the manner in which we may use purchased companies or assets
imposed by acquisition agreements; adverse effects on existing business
relationships with suppliers and customers; incorrect estimates made in the
accounting for acquisitions and amortization of acquired intangible assets that
would reduce future reported earnings (such as goodwill impairments); ensuring
acquired companies’ compliance with the requirements of the U.S. federal
securities laws and accounting rules; and the potential loss of customers or
key employees of acquired businesses. We cannot assure you that any
acquisitions, investments, strategic alliances or joint ventures will be
completed or integrated in a timely manner or achieve anticipated synergies,
will be structured or financed in a way that will enhance our business or
creditworthiness, or will meet our strategic objectives or otherwise be
successful.
We may be required to recognize impairment charges for long‑lived
assets.
As of December 31, 2016, the net carrying
value of our long‑lived assets (property and equipment, deferred tax
assets and other intangible assets) totaled approximately $3.2 million. In
accordance with U.S. generally accepted accounting principles, we periodically
assess these assets to determine if they are impaired. Significant negative
industry or economic trends, a significant and sustained decline in our stock
price, disruptions to our businesses, significant unexpected or planned changes
in our use of assets,
divestitures and market
capitalization declines may result in impairments to our goodwill and other
long‑lived assets. Future impairment charges could significantly affect
our results of operations in the periods recognized.
Our stock is thinly traded and our stock
price is volatile.
Our
common stock is thinly traded, with 3,832,431 shares of our 5,094,473 outstanding
shares held by non‑affiliates as of February 28, 2017. Based on the
trading history of our common stock and the nature of the market for publicly
traded securities of companies in evolving high‑tech industries, we
believe there are several factors that have caused and are likely to continue
to cause the market price of our common stock to fluctuate substantially. The
fluctuations may occur on a day‑to‑day basis or over a longer
period of time. Factors that may cause fluctuations in our stock price include
announcements of large orders obtained by us or our competitors, substantial
cutbacks in government funding of highway projects or of the potential
availability of alternative technologies for use in traffic control and safety,
quarterly fluctuations in our financial results or the financial results of our
competitors, consolidation among our competitors, fluctuations in stock market
prices and volumes, and the volatility of the stock market.
Difficult and volatile conditions in the
capital, credit and commodities markets and in the overall economy could continue
to adversely affect our financial position, results of operations and cash
flows, and we do not know if these conditions will improve in the near future.
Our
financial position, results of operations and cash flows could continue to be
adversely affected by difficult conditions and significant volatility in the
capital, credit and commodities markets and in the overall worldwide economy.
Although certain economic conditions in the United States have improved,
economic growth has been slow and uneven and may not be sustained. During
economic downturns, governmental entities in particular, which constitute most
of our end users, reduce or delay their purchase of our products, which has had
and may continue to have an adverse effect on our business. Any uncertainty
about the federal budget in the U.S. could have a negative effect on the U.S.
and global economy. The continuing impact that these factors might have on us
and our business is uncertain and cannot be estimated at this time. Current
economic conditions have accentuated each of these risks and magnified their
potential effect on us and our business. The difficult conditions in these
markets and the overall economy affect our business in a number of ways. For
example:
• Although we believe
we have sufficient liquidity under our financing arrangements to run our
business, under extreme market conditions, there can be no assurance that such
funds would be available or sufficient, and, in such a case, we may not be able
to successfully obtain additional financing on favorable terms, or at all.
• Continuing market
volatility has exerted downward pressure on our stock price, which could make
it more difficult or unfavorable for us to raise additional capital in the
future.
• Economic conditions
could result in customers in our markets continuing to experience financial
difficulties, including limited liquidity and their inability to obtain
financing or electing to limit spending because of the economy which may
result, for example, in customers’ inability to pay us at all or on a timely
basis and in declining tax revenue for our customers that are governmental
entities, which in turn could result in decreased sales and earnings for us.
We
do not know if market conditions or the state of the overall economy will
improve in the near future, when improvement will occur or if any improvement
will benefit our market segment.
Our articles of incorporation and bylaws,
Minnesota law and our shareholder rights plan may inhibit a takeover that
shareholders consider favorable.
Provisions
of our articles of incorporation and bylaws and applicable provisions of
Minnesota law may delay or discourage transactions involving an actual or
potential change in our control or change in our management, including
transactions in which shareholders might otherwise receive a premium for their
shares or transactions that our shareholders might otherwise deem to be in
their best interests. These provisions:
• permit our board of
directors to issue up to 5,000,000 shares of preferred stock with any rights,
preferences and privileges as it may designate, including the right to approve
an acquisition or other change in our control;
• provide that the
authorized number of directors may be increased by resolution of the board of
directors;
• provide that all
vacancies, including newly‑created directorships, may, except as
otherwise required by law, be filled by the affirmative vote of a majority of
directors then in office, even if less than a quorum; and
• eliminate cumulative
voting rights, therefore allowing the holders of a majority of the shares of
common stock entitled to vote in any election of directors to elect all of the
directors standing for election, if they should so choose.
Section 302A.671 of the Minnesota Business Corporation
Act (“MBCA”) generally limits the voting rights of a shareholder acquiring a
substantial percentage of our voting shares in an attempted takeover or
otherwise becoming a substantial shareholder of our company unless holders of a
majority of the voting power of all outstanding shares and the disinterested
shares approve full voting rights for the substantial shareholder. Section
302A.673 of the MBCA generally limits our ability to engage in any business
combination with certain persons who own 10% or more of our outstanding voting
stock or any of our associates or affiliates who at any time in the past four
years have owned 10% or more of our outstanding voting stock. These provisions
of the MBCA may have the effect of entrenching our management team and may deprive
shareholders of the opportunity to sell their shares to potential acquirers at
a premium over prevailing market prices. This potential inability to obtain a
control premium could reduce the price of our common stock.
In
addition, in June 2013, we adopted a shareholder rights plan and declared a
dividend to our shareholders of one preferred share purchase right for each
outstanding share of common stock. In August 2016, our Board of Directors
amended the shareholder rights plan to preserve the value of certain deferred
tax benefits to the Company, including those generated by net operating
losses. Generally, the shareholder rights plan, as amended, provides that if a
person or group acquires 4.99% or more of our outstanding shares of common
stock, subject to certain exceptions and under certain circumstances, the
rights may be exchanged by us for common stock or the holders of the rights,
other than the acquiring person or group, could acquire additional shares of
our capital stock at a discount of the then current market price. Such
exchanges or exercise of rights could cause substantial dilution to a
particular acquirer and discourage the acquirer from pursuing the Company. The
mere existence of a shareholder rights plan often delays or makes a merger, tender
offer or other acquisition more difficult to complete.
We can issue shares of preferred stock
without shareholder approval, which could adversely affect the rights of common
shareholders.
Our
articles of incorporation permit our board of directors to establish the
rights, privileges, preferences and restrictions, including voting rights, of
future series of our preferred stock and to issue such stock without approval
from our shareholders. The rights of holders of our common stock may suffer as
a result of the rights granted to holders of preferred stock that may be issued
in the future. In addition, we could issue preferred stock to prevent a change
in control of our Company, depriving common shareholders of an opportunity to
sell their stock at a price in excess of the prevailing market price.
We do not intend to declare cash dividends
on our stock in the foreseeable future.
We
currently intend to retain any and all future earnings for the operation and
expansion of our business and, therefore, do not anticipate declaring or paying
cash dividends on our common stock in the foreseeable future. Any payment of
cash dividends on our common stock will be at the discretion of our board of
directors and will depend upon our operating results, earnings, current and
anticipated cash needs, capital requirements, financial condition, future
prospects, any contractual restrictions and any other factors deemed relevant
by our board of directors. Therefore, shareholders should not expect to receive
dividend income from shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently lease and occupy
approximately 26,775 square feet in St. Paul, Minnesota for our headquarters. In
February 2014, we entered into an amendment to the lease for our headquarters
which expanded the leased space from approximately 20,000 square feet to
approximately 26,775 square feet, extended the term of the lease to July 2020,
and gave us the right to further extend the term of the lease for one additional
five year term. We also lease smaller facilities in Canada, Spain and Romania.
We believe that our current
space is generally adequate to meet our current expected needs, and we do not
intend to lease significantly more space in 2017.
Item 3. Legal
Proceedings
We are
involved from time to time in various legal proceedings arising in the ordinary
course of our business, including primarily commercial, product liability,
employment and intellectual property claims. In accordance with GAAP, we record
a liability in our Consolidated Financial Statements with respect to any of
these matters when it is both probable that a liability has been incurred and
the amount of the liability can be reasonably estimated. With respect to any currently
pending legal proceedings, we have not established an estimated range of
reasonably possible additional losses either because we believe that we have
valid defenses to claims asserted against us or the proceeding has not advanced
to a stage of discovery that would enable us to establish an estimate. We
currently do not expect the outcome of these matters to have a material effect
on our consolidated results of operations, financial position or cash flows.
Litigation, however, is inherently unpredictable, and it is possible that the
ultimate outcome of one or more claims asserted against us could adversely
impact our results of operations, financial position or cash flows. We expense
legal costs as incurred.
On May 5, 2016, Econolite, our
exclusive North American manufacturer and distributor, served a complaint on us
for a lawsuit filed by Econolite in the Superior Court of the State of
California for the County of Orange. The complaint asserted claims against us
under the Manufacturing, Distributing and Technology License Agreement, as
amended, with Econolite (the “Econolite Agreement”) for breach of contract and
breach of implied covenant of good faith and fair dealing and sought specific
performance related to the transition of North American RTMS sales and
marketing activities from Econolite to us in July 2014. In the complaint,
Econolite requested damages from us in an amount to be proven at trial and
sought certain other remedies. On May 27, 2016, we removed the case to the
Federal District Court, District of Central California. On November 15, 2016,
Econolite and the Company entered into an Arbitration Agreement. On November
16, 2016, Econolite voluntarily dismissed all of its claims against the Company
in the U.S. District Court but filed a demand for arbitration with JAMS (which
is an alternative dispute resolution provider), asserting the same claims
against the Company that it had asserted in the lawsuit. Arbitration commenced
on November 16, 2016, and it remains ongoing. We believe that Econolite’s
claims are without merit, and we plan to vigorously defend against them.
However, we cannot predict the outcome of this matter at this time or whether
it will have a material adverse impact on our business prospects, financial
condition, operating results or cash flow.
Item 4. Mine Safety
Disclosures
Not applicable.