Business
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, security, police and parking
applications such as intersection control, highway, bridge and tunnel traffic
management, venue security, entry control, license plate recognition and
traffic data collection.
We are a leading provider of software-based computer enabled detection
(CED) products and solutions for the intelligent transportation systems
(ITS) industry and adjacent security and law enforcement markets. Our family
of products, which we market as Autoscope® video (video or video products),
Autoscope® radar (radar or radar products) and automatic license
plate recognition (LPR), provides end users with the tools needed to optimize
traffic flow, enhance driver safety, regulate air quality and address
security/surveillance concerns. Our technology analyzes signals from sophisticated
sensors and transmits the information to management systems and controllers or
directly to users. Our software solutions, which we market as CitySync, provide
end users with complete solutions of our hardware and software for the law
enforcement, security and parking market.
CED 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, CED is a critical component of managing
congestion and traffic flow. In many markets, it is not possible to build
roads, bridges and highways quickly enough to accommodate increasing automobile
ownership. For example, in China, 22 million vehicles were introduced in 2013,
up from the 19 million vehicles introduced in 2012. This is expected to rise to
30 million vehicles per year by 2020. In 2014, the number of vehicles in China
surpassed 250 million. We believe this growing use of vehicles worldwide will
make CED-based ITS solutions increasingly necessary to complement existing and
new roadway infrastructure to manage traffic flow and optimize throughput.
We believe our CED 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 as well as adjacent security
markets. We believe that the market for CED is increasingly favoring converged
solutions that include ITS, security/surveillance and environmental management,
which we expect to increase demand for CED products such as ours.
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 products in North America, the Caribbean and Latin
America through exclusive agreements with Econolite Control Products, Inc.
(Econolite), which we believe is the leading distributor of ITS intersection
control products in North America and the Caribbean. In January 2011, we
entered into an agreement granting to Econolite and its affiliate, Econolite
Canada, Inc., the exclusive right to distribute our Autoscope radar products in
Canada. In December 2011, we modified our agreement with Econolite to grant it
the exclusive right to manufacture and distribute our Autoscope radar products
in the United States and Mexico.
We market our Autoscope video, Autoscope radar and LPR products outside
of North America, the Caribbean and Latin America through a combination of
distribution and direct sales channels, including our wholly-owned subsidiaries
in Hong Kong and the United Kingdom. Our end users primarily include
governmental agencies and municipalities, and, as of December 31, 2013, we had
sold over 150,000 units in more than 60 countries.
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, LPR,
inductive loop detection, sensing technologies (such as radars), floating
cellular data, computational technologies and wireless communications.
In traffic
management applications, CED 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 or recognizing
license plate numbers.
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Above-ground CED solutions for ITS offer several advantages to
in-pavement loop detectors. Above-ground CED solutions tend to have lower total
cost of ownership than in-pavement loop detectors because above-ground CED
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, CED 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 CED 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 CED solutions compared to in-pavement loop
detectors. Above-ground CED solutions also offer a broader set of detection
capabilities and a wider field of view than in-pavement loop detectors. For
example, unlike in-pavement loops, above-ground CED solutions can detect smoke
and debris. In addition, a single unit video- or radar-based CED 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 Autoscope 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
2012 were approximately $100 to $120 million and the worldwide ITS above-ground
detection market was approximately $200 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 U.S. sales of in-pavement loop detectors that our Autoscope
and Autoscope radar products can supplant were approximately $250 million in
2012.
Our CitySync solutions add further to our offerings in ITS. In many ITS
applications, such as journey time measurement, it is critical to ascertain the
identity of the vehicle or to be able to uniquely identify a vehicle at a
different time or location. LPR is among the most widely used methods for these
applications.
As part of our CitySync solutions, we have dedicated research and
development time to creating our CitySync initiative called Safe Cities,
which helps communities improve safety and efficiency. We are investing thought
leadership into this initiative by investigating new ways to combine leading-edge
above-ground detection technology, radar, and Big Data collection and
analysis to give law enforcement, security, parking and traffic management
professionals more precise and accurate information. With increased real-time
reaction capabilities and in-depth analytics, these professionals will be able
to make more confident and proactive decisions that will streamline operations
and improve safety.
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 worlds
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 20%, or 65 million, from 1990 to 2010, while highway miles have increased
by approximately 4% in the same period. Between 1990 and 2010, the number of
registered highway vehicles in the U.S. increased from 193 million to 255
million. Overall, the growth in roadway infrastructure is failing to match the
surge in the number of vehicles using it. CED-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 400
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. Because expanding
the roadway infrastructure is slow and costly to implement, and often
environmentally undesirable, 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,
security/surveillance and environmental protection. 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 so
called Safe Cities initiatives. For example, data collected for the traffic
management service domain is relevant to all of the other service domains. This
means that each CED 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, CED is becoming less costly to manufacture while
becoming more capable of performing certain complicated tasks than humans. This
makes the concepts of rich sensing and instrumenting the city through CED
solutions cost effective, which we believe will result in the extensive
proliferation of sophisticated sensors and detection devices.
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The non- ITS LPR Market
.
In addition to ITS, LPR is widely used for applications in security, police and
parking, among others. We believe the sum of these world-wide markets is
significant and currently is in excess of $350 million for their LPR
components. We also believe the competitive landscape is fragmented, with no
dominant market share for any one competitor.
Security
. LPR is used in security applications
world-wide for border crossings, airports and venues such as convention centers
and sports arenas. Additionally, private industry uses LPR to help control
entrances at high value locations, such as power plants. Homeland security and
counter-terrorism activities benefit from LPR as part of the solution.
Police
. Law enforcement has adopted LPR for a
variety of applications. Police may use LPR to gather information on a stopped
vehicle in a faster, automated fashion. LPR can scan for vehicles of interest
from a fixed position or from a moving police vehicle, looking for stolen cars
or for automobiles of individuals with arrest warrants outstanding. Also, LPR
is regularly used as a component of red light, speed and bus lane enforcement
systems.
Parking
. Both public and private parking
facilities have recently undergone a significant period of automation where
human attendants have been replaced by machines that control access. LPR is
employed in numerous parking functions, including automatic entrance/exit, open
spot locator assistance, lost vehicle location, theft avoidance and related
security aspects.
Solutions for Adjacent Markets
.
We believe that the adjacent markets of ITS, security/surveillance and
environmental management are converging, and that this convergence will
accelerate as CED systems become more cost-effective now that a single CED unit
can be used for multiple purposes. Because the CED technologies involved are
closely related, our CED technology can be adapted to or is already capable of
addressing these adjacent markets.
Our Competitive Strengths
We are a leading provider of software-based CED products and solutions
for the ITS industry and related security and law enforcement markets. 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 detection and LPR
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. CED 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. Electronic Integrated Systems, Inc. (EIS),
from which we purchased our radar product line, was one of the first companies
to introduce radar-based technology solutions for ITS applications, and we
continue to lead the market with technology enhancements and new products, such
as Autoscope radar. Additionally, the CitySync system we acquired from Image
Sensing Systems UK Limited (ISS UK), formerly known as CitySync Limited, was
the first in the LPR market to capture multiple license plates in the same lane
with a standard configuration. Our CitySync solution offering includes the
first cloud computing platform for providing rich data analytics in real-time.
Furthermore, our hybrid CED product, Autoscope® Duo, is the first commercial
product to combine video and radar capabilities in a single unit to provide
high accuracy in all weather conditions and gives us an entrée to significantly
expand our accessible market by continuing to drive the conversion from legacy
loop detection to above-ground detection. 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 translates
into strong organic revenue growth and high levels of profitability.
Leading Distribution Channel
.
We have maintained a relationship with Econolite for the exclusive manufacture
and distribution of our Autoscope products in North America and the Caribbean
since 1991 and in Latin America since 2002. We have now expanded this
relationship to include the manufacture and distribution of our Autoscope radar
products in the United States, Canada and Mexico. 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 for CED to
enable end users to detect and monitor objects in a designated field of view.
We believe that our family of Autoscope video, radar and LPR products allows us
to offer a broad product portfolio that meets the needs of our end users.
Additionally, our intention is to use our broad product portfolio to offer hybrid products that satisfy traffic, security/surveillance
and environmental management requirements, such as Autoscope® Duo.
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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 CED 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 a
hybrid CED product, Autoscope®Duo, we expect to take advantage of our technical
leadership in ITS and further differentiate us from our competitors.
Expand LPR Markets
.
We believe that the LPR market is poised for growth at a higher rate than the
ITS market. Further, we believe that our financial strength, distribution
channels and customer base will add to our ability to grow Autoscope
LPR-related revenue and our CitySync Safety solutions.
Expand into Adjacent Markets
.
Our core skill is the implementation of software-based CED 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, including
security/surveillance and environmental management systems, converge. We
believe that a driver of this convergence is that CED systems will become more
cost-effective when a single CED unit can be used for multiple purposes. As a
result, our objective is to become the leading supplier of critical CED
components to third party management systems, particularly those that exploit
the convergence of traffic, security/surveillance and environmental management
systems. 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 and Asian 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
CED, have recently begun to increase the adoption of CED in their traffic,
security/surveillance and environmental management systems. We intend to
continue to refine our product offerings through engineering development and
technology licensing to take advantage of the accelerated pace of the adoption
of CED throughout the developing world.
Our Products and Solutions
Our vehicle and traffic detection products are critical components of
many ITS and adjacent security and law enforcement applications. Our Autoscope
video systems and Autoscope 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. Our
Autoscope LPR systems use video sensors in the visible and infrared spectrums
to read license or number plates for traffic data, security, police and parking
applications. 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 $5.0 million, $4.1 million and $4.4 million on research and
development in 2013, 2012 and 2011, respectively, to develop and enhance our
product technology. Our digital signal processing software algorithms represent
a foundation on which support for additional sensory inputs such as acoustic,
chemical, smoke, weather and vibration sensors may be added in the future. A
diagram displaying our fundamental product architecture is shown below.
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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,
counts, speed, length, time occupancy (percent of time the detection zone is
occupied), average headway (time interval between vehicles) and flow rate
(vehicles per hour per lane). Autoscope supports a variety of standard video
cameras or can be purchased with an integrated 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 or wrong-way vehicles. In tunnel safety applications, Autoscope
provides alerts to operators upon detecting stopped, wrong-way or slow moving
vehicles and upon detecting pedestrians, debris or smoke. 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 Encore is our
integrated unit with a color 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 products
offer digital MPEG-4 video streaming, high speed Ethernet interface, web
browser maintenance and data and video over power line communications.
Autoscope Radar
.
Our Autoscope 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.
Autoscope 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.
Autoscope LPR
.
Our LPR systems process video information gathered from the visible and
infrared spectrum to perform LPR for ITS, security, police and parking
applications. Data is transmitted to other integrated systems or stored in
onboard vehicle systems for later processing. Data can be processed to assist
in traffic and parking management, real-time law enforcement and traffic alerts
and stored for later analysis for traffic, security and commercial purposes.
At the core of each Autoscope LPR system is the Autoscope Base software
suite, which runs the LPR algorithms and related processes, including
communications. Autoscope Base operates with both non-proprietary and
proprietary cameras. We offer a range of proprietary analog, high definition
and intelligent cameras for both fixed and mobile systems.
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Hybrid
.
Video detection is best suited to applications in which the ability to act on
complex and detailed information is desired. However, video can encounter
difficulties in poorly-lit environments, in adverse weather conditions (such as
fog or driving snow), in situations in which vehicles are obscured (for
example, by other vehicles), or in extraordinarily dirty environments in which
airborne particulates obscure the view. Also, despite the compensating factors
of using high-quality color video, video can be susceptible to false detections
due to shadows or reflections. Radar is less able to distinguish fine details
than video but is considerably less affected by adverse environmental
conditions and, to some degree, can see through certain kinds of obstructions.
It also does not recognize shadows or visual reflections.
By combining video and radar sensors and algorithmically comparing
their outputs in our hybrid Autoscope® Duo product, we believe we are able to
offer our end users a product that provides superior accuracy in all weather
conditions. The Autoscope®Duo is able to coalesce the strengths of each type
of sensor to overcome the others limitations. The result is improved overall
performance in a broader range of circumstances, allowing us access to a larger
market.
CitySync.
Our
CitySync solutions provide the end user with a complete package including hardware and software. CitySync solutions are currently
positioned around our LPR technology and platform. These solutions combine intelligent cameras with our market specific software
packages that we believe offer our end users with complete LPR solutions. The Rapid Plate Recognition technology reads a license
plate numerous times and uses multiple advanced methods for both optical character recognition and plate finding for each plate
read. The speed of our solutions allows us the capability to read hundreds of plates simultaneously. We believe our CitySync solutions
provide the highest accuracy for the markets we serve. We believe in the development of our CitySync solutions and will continue
to grow and enhance these solutions into all of our markets.
Distribution, Sales and Marketing
We market and sell our products globally. As of December 31, 2013, we
had supplied systems for more than 150,000 units in more than 60 countries.
Together with our partners, we offer a combination of high-performance CED
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, law enforcement agencies and
parking facility operators. 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 and Autoscope Radar in North America, the Caribbean and Latin America
.
We have granted Econolite an exclusive right to manufacture, market and
distribute the Autoscope system in North America, the Caribbean and Latin
America. In January 2011, we entered into an agreement granting to Econolite
and its affiliate, Econolite Canada, Inc., the exclusive right to distribute
our Autoscope radar products in Canada. In December 2011, we modified our
agreement with Econolite to grant it the exclusive right to manufacture and
distribute our Autoscope radar products in the United States and Mexico. The
agreements with Econolite grant it a first refusal right that arises when we
make a proposal to Econolite to extend the license to additional products in
North America, the Caribbean and Latin America and a first negotiation right
that arises when we make a proposal to Econolite to include rights
corresponding to Econolites 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. In January 2011,
Econolite began paying us a royalty on Autoscope radar sales in Canada and, in
January 2012, on sales of radar products in the United States and Mexico. We
cooperate in marketing Autoscope and radar products with Econolite for North
America, the Caribbean and Latin America 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 term of the
agreement with Econolite to manufacture and distribute our Autoscope radar
products in Canada expires in 2028. The agreements can be terminated by either
party upon three years notice.
Sales of Autoscope
LPR in North America, the Caribbean and Latin America
.
We market the Autoscope LPR 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, radar and LPR 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 Hong Kong and the United Kingdom. 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 and Asia,
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 CED 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 CED 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.
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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 Autoscope
radar worldwide are Wavetronix, LLC, MS Sedco Inc. and Xtralis, LLC. Among the
companies that provide direct competition to Autoscope LPR worldwide are 3M
Company, Perceptics LLC, Genetec Inc., Vigilant Solutions and Elsag Datamat
S.p.a. All of these companies have working installations of their systems in
the U.S. and other parts of the world. To our knowledge, Autoscope and
Autoscope 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, security, police and parking 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. In January 2011, we entered into an agreement with Econolite to distribute
our Autoscope radar products in Canada. In December 2011, our original
agreement with Econolite was amended to include the exclusive manufacture and
distribution of Autoscope radar products in the United States and Mexico
beginning on January 1, 2012. 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.
Until January 2012, we engaged contract manufacturers to produce
subassemblies for our radar products based on our designs. These subassemblies
were then shipped to our facilities in Toronto, where we performed final
assembly, testing and calibration and packaging of finished units for shipment.
We also performed warranty and post-warranty repairs of radar units in Toronto.
Beginning in January 2012, Econolite is responsible for setting warranty terms
and must provide all service required under this warranty for radar products
for product sales in North America.
Autoscope LPR products are manufactured through contract manufacturers
in the United Kingdom and the United States.
We typically provide a two-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, 2013, we had 124 employees, consisting of 69
employees in North America, 45 employees in Europe and 10 employees in Asia.
None of our employees are represented by a union.
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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 71% of our gross profit in 2013,
77% in 2012 and 71% in 2011. 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 Econolites 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 North America, the
Caribbean and Latin America and the Autoscope® radar products in the United
States, Canada and Mexico. The agreements grant Econolite a first refusal right
that arises when we make a proposal to Econolite to extend the license to
additional products in North America, the Caribbean and Latin America. In addition,
the agreements grant Econolite a first negotiation right that arises when we
make a proposal to Econolite to include rights corresponding to Econolites
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 and the Autoscope® radar products. Since
2002, a substantial portion of our revenue has consisted of royalties resulting
from sales made by Econolite, including 44% in 2013, 50% in 2012 and 43% in
2011. Econolites account receivable represented 26% of our accounts receivable
at December 31, 2013 and 35% of our accounts receivable at December 31, 2012.
We expect that Econolite will continue to account for a significant portion of
our revenue for the foreseeable future. Any decrease in Econolites 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 Econolites business, and any
significant decrease in Econolites sales of the other products it sells could
harm Econolite, which could have a material adverse effect on our business and
prospects.
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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, Autoscope® radar and LPR systems 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.
Existing and future
laws, ordinances and regulations and constitutional provisions protecting
privacy rights could negatively affect the acceptance and sale of our video and
LPR products and systems and have a negative effect on our financial condition
and results of operations.
The use of video and LPR products and systems has been challenged,
limited and banned under existing laws, ordinances and regulations and
constitutional provisions protecting privacy rights. In addition, governments
and governmental agencies have stopped or suspended their use of LPR systems.
For example, Maine, New Jersey and Virginia have laws limiting the use of LPR
systems; New Hampshire bans their use; legislation has been proposed in
Minnesota limiting the use of data collected by LPR systems; and the Boston
Police Department has indefinitely halted its use of LPR systems. In addition,
laws, ordinances, regulations and constitutional provisions may be adopted in
the future to limit the use of video and LPR products and systems. These
existing and new laws, ordinances, regulations and constitutional provisions
could negatively affect the acceptance and sale of our video and LPR products
and systems and thus have a negative effect on our financial condition and
results of operations.
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 the areas of ITS, security and parking management 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 and LPR 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
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.
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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
requires 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
will 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
will be accompanied
by risks which may include:
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difficulties
identifying suitable acquisition candidates at acceptable costs;
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unavailability
of capital to conduct acquisitions;
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failure to
achieve the financial and strategic goals for the acquired and combined
businesses;
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difficulty
assimilating the operations and personnel of the acquired businesses;
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disruption
of ongoing business and distraction of management from the ongoing business;
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dilution of
existing shareholders and earnings per share;
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unanticipated,
undisclosed or inaccurately assessed liabilities, legal risks and costs; and
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difficulties
retaining our key vendors, customers or employees or those of the acquired
business.
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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 Autoscope® radar products and related products for
sales in North America, the Caribbean and Latin America. We have arrangements
with Hansatech EMS Limited (Hansatech) in the United Kingdom to manufacture
our LPR systems. We work with suppliers, most of whom are overseas, to
manufacture the rest of our products. We also need to comply with the European
Unions regulatory RoHS directive restricting the use of certain hazardous
substances in electrical and electronic equipment. If Econolite, WTI, Hansatech
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 North America, the
Caribbean and Latin America and the Autoscope® radar products in the United
States, Canada and Mexico. Consequently, our revenue depends to a significant
extent on Econolites marketing efforts. Econolites inability to effectively
market the Autoscope® video system or the Autoscope® radar products, 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.
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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 new 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, and we are required to file our first conflict minerals report with
the Securities and Exchange Commission on or before May 31, 2014. 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 new 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-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 a 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.
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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, vendors and others. 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. For more information, see
the discussion in Note 15 of our Notes to Consolidated Financial Statements
contained elsewhere in this Annual Report on Form 10-K. 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 51% of our total revenue
in 2013. 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:
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export
restrictions and controls relating to technology;
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pricing
pressure that we may experience internationally;
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exposure to
the risk of currency value fluctuations, where payment for products is
denominated in a currency other than U.S. dollars;
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variability
in the U.S. dollar value of foreign currency-denominated assets, earnings and
cash flows;
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required
compliance with existing and new foreign regulatory requirements and laws;
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laws and business
practices favoring local companies;
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longer
payment cycles;
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difficulty
of enforcing agreements, including patent and trademarks, and collecting
receivables through foreign legal systems;
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political
and economic instability, including volatility in the economic environment of
the European Union caused by the ongoing sovereign debt crisis in Europe;
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tax rates in
certain foreign countries that exceed those in the U.S. and the imposition of
withholding requirements on foreign earnings;
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higher
danger of terrorist activity, war or civil unrest compared to domestic
operations;
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difficulties
and costs of staffing and managing foreign operations; and
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difficulties
in enforcing intellectual property rights.
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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 Unions 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 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
such substances 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.
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We may not be
successful in integrating 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 managements 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 managements 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, 2013, the net carrying value of long-lived assets (property and
equipment, deferred tax assets and other intangible assets) totaled
approximately $8.1 million. In accordance with 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 3,350,684 shares of our
4,974,847 outstanding shares held by non-affiliates as of February 28,
2014. 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 or shown signs of improvement, economic growth has been slow and
uneven. In recent years, the weak global economic conditions, particularly in
the U.S. and Europe, have negatively affected our sales and profitability.
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:
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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.
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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.
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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.
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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 and Minnesota law 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:
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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;
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provide that
the authorized number of directors may be increased by resolution of the
board of directors;
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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
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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.
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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 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. Generally, the shareholder rights
plan provides that if a person or group acquires 20% 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 our 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 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.
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