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1、Annual Report2017UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549 FORM 10 K(Mark one)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,2017or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES E
2、XCHANGE ACT OF 1934For the transition period from _ to _Commission file number:026056 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 C
3、entre,1600 University Avenue West St.Paul,MN 55104(Address of Principal Executive Offices)(Zip Code)(651)603 7700(Registrants 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
4、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
5、wellknown seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d)of the Act.Yes No Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Sectio
6、n 13 or Section 15(d)of the Securities Exchange Act of1934 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 filingrequirements for the past 90 days.Yes No Indicate by check mark whether the registrant has s
7、ubmitted electronically and posted on its corporate Web site,if any,every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation ST during the preceding 12 months(or for such shorter period that the registrant was requiredto submit and post such files).Yes No Ind
8、icate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein,and will not be contained,to thebest of registrants knowledge,in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to
9、this Form10K.Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a nonaccelerated filer,smaller reporting company,or anemerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and emerging grow
10、th company in Rule12b2 of the Exchange Act.(Check one):Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company)Smaller reporting company Emerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not
11、 to use the extended transition period for complying with any newor revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b2 of the Act).Yes No As of June 30,2017,the aggregat
12、e market value of the registrants common stock held by nonaffiliates of the registrant was$13,865,180 based on the closing saleprice as reported on The NASDAQ Capital Market.The number of shares outstanding of the registrants$0.01 par value common stock as of February 28,2018 was5,210,448 shares.DOC
13、UMENTS INCORPORATED BY REFERENCEDocument Parts Into Which IncorporatedProxy Statement for the 2018 Annual Meeting of Shareholders(Proxy Statement)Part III TABLE OF CONTENTSPART I1Item 1.Business1Item 1A.Risk Factors6Item 1B.Unresolved Staff Comments15Item 2.Properties15Item 3.Legal Proceedings15Item
14、 4.Mine Safety Disclosures15PART II16Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities16Item 6.Selected Financial Data17Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 7A.Quantitative an
15、d Qualitative Disclosures About Market Risk24Item 8.Financial Statements and Supplementary Data25Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure45Item 9A.Controls and Procedures45Item 9B.Other Information46PART III47Item 10.Directors,Executive Officers and
16、 Corporate Governance47Item 11.Executive Compensation47Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters47Item 13.Certain Relationships and Related Transactions,and Director Independence47Item 14.Principal Accountant Fees and Services47PART IV48It
17、em 15.Exhibits and Financial Statement Schedules48Item 16.Form 10-K Summary51Signatures52Exhibit Index53 iPART IItem 1.BusinessGeneralImage Sensing Systems,Inc.(referred to in this Annual Report on Form 10-K as“we,”“us,”“our”and the“Company”)develops and marketsvideo and radar processing products fo
18、r use in traffic applications such as intersection control,highway,bridge and tunnel traffic managementand traffic data collection.We are a leading provider of above-ground detection products and solutions for the intelligent transportation systems(“ITS”)industry.Ourfamily of products,which we marke
19、t 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 sophisticatedsensors and transmits the information to management systems and c
20、ontrollers or directly to users.Our products provide end users withcomplete 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 determinewhat is happening in a field
21、 of view.In the ITS industry,this process is a critical component of managing congestion and traffic flow.In manycities,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
22、 in traffic,and congestion costs motorists$160 billion a year.We believe this growing useof vehicles will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flowand optimize throughput.We believe our solutions are technically superio
23、r to those of our competitors because they have a higher level of accuracy,limit the occurrenceof 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 va
24、riety of sensors for a number of tasks.It is our view that the technical advantagesof 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 technologydriven solutions in themarketplace.W
25、e market our Autoscope video products in the United States,Mexico,Canada and the Caribbean through exclusive agreementswith Econolite Control Products,Inc.(“Econolite”),which we believe is the leading distributor of ITS intersection control products in thesemarkets.We market the RTMS radar systems t
26、o a network of distributors,and on a limited basis directly to end users,worldwide.We market ourAutoscope video products outside of the United States,Mexico,Canada and the Caribbean through a combination of distribution and directsales channels,through our offices in Spain and Romania.Our end users
27、primarily include governmental agencies and municipalities.Industry OverviewThe Intelligent Transportation Systems Market.ITS encompasses a broad range of information processing and control electronicstechnologies that,when integrated into roadway infrastructure,help monitor and manage traffic flow,
28、reduce congestion and enhance driversafety.The ITS market has been built around the detection of conditions that impact the proper operation of roadway infrastructure.ITSapplications include a wide array of traffic management systems,such as traffic signal control,tolling and variable messaging sign
29、s.ITStechnologies 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
30、a primary data source uponwhich ITS solutions are built.Traditionally,automated vehicle detection is performed using inductive wire loops buried in the pavement.However,inpavement loop detectors are costly to install,difficult to maintain,expensive to repair and not capable of either widearea vehicl
31、edetection without installations of multiple loops.1Aboveground detection solutions for ITS offer several advantages to inpavement loop detectors.Aboveground detection solutions tend tohave a lower total cost of ownership than inpavement loop detectors because aboveground solutions are nondestructiv
32、e to road surfaces,donot require closing roadways to install or repair,and are capable of widearea vehicle detection with a single device,thus enabling one inputdevice to do the work of many inpavement loops.Due to their location above-ground,these solutions have no exposure to the wear and tearasso
33、ciated 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,aboveground detection solutions can be serviced and repaired without shuttingdown the roadway.Each of these factors
34、results in greater uptime and increased reliability of aboveground detection solutions compared toinpavement loop detectors.These technology solutions also offer a broader set of detection capabilities and a wider field of view thaninpavement loop detectors.In addition,a single unit video or radarba
35、sed system can detect and measure a variety of parameters,includingvehicle presence,counts,speed,length,time occupancy,headway and flow rate as well as environmental factors and obstructions to theroadway.An equivalent installation using loops would require many installations per lane.We believe tha
36、t 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 emergingeconomies and elevated standards of living,more people desire and are able to afford automo
37、biles.The number of vehicles utilizing the worldsroadway infrastructure is growing at a quicker pace than new roads,bridges and highways are being constructed.According to the FederalHighway Administration,American drivers put a record 3.22 trillion miles on public roads and highways in 2016,an incr
38、ease of 2.8%from 3.1trillion miles in 2015.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 thatcan
39、 be used to mitigate traffic problems.The Demographics of Urbanization.Accelerated worldwide urbanization drives the creation and expansion of middle classes and producesheightened demand for automobiles.Currently,there are at least 500 cities in the world with over 1 million people.Because automobi
40、les can beintroduced to a metropolitan area faster than roadway infrastructure can be constructed,the result is continuously worsening traffic.Expandingthe roadway infrastructure is slow and costly to implement,and often environmentally undesirable,so government agencies are increasinglyturning to t
41、echnologybased congestion solutions that optimize performance and throughput of existing and new roadway infrastructure.Detection is the requisite common denominator for any technologybased solution.The Melding of Large City Service Domains.Large cities require a wide range of service domains,includ
42、ing traffic.These cities are increasinglyturning to centralized management of these service domains,employing a command and control model that requires sharing and integratingdata across service domains to operate effectively and lower total cost.For example,data collected for the traffic management
43、 service domain isrelevant to all of the other service domains.This means that each sensor can supply information to multiple domain services.In turn,thesharing of detection information across service domains should increase the level of sophistication required to process and interpret thatinformati
44、on.Additionally,above-ground detection products are more capable of performing certain complicated tasks than humans.Thismakes the concepts of“rich sensing”and“instrumenting the city”through above-ground detection solutions cost effective,which we believewill result in the extensive proliferation of
45、 sophisticated sensors and detection devices.Solutions for Adjacent Markets.We believe that the adjacent markets of ITS and security/surveillance are converging,and that thisconvergence will accelerate as above-ground detection systems become more costeffective now that a single sensor can be used f
46、or multiplepurposes.Because the technologies involved are closely related,our sensor technology can be adapted to or is already capable of addressingthese adjacent markets.Our Competitive StrengthsWe are a leading provider of above-ground detection products and solutions for the ITS industry.We have
47、 the following competitive strengthsthat 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 softwarealgorithms and applications that we have continuously enhanced and r
48、efined.These algorithms,which include our advanced signal processingtechnologies,allow our video and radar products to capture and analyze objects in diverse weather and lighting conditions and to balance theaccuracy of positive detection and the avoidance of false detections.Due to the strength of
49、our proprietary technologies,we believe wecommand premium pricing.Above-ground detection technologies similar to ours are also difficult to develop and refine in a commercially viablemanner.We are therefore well positioned to quickly introduce innovative nextgeneration products to market.2Proven Abi
50、lity to Develop,Enhance and Market New Products.We are continually developing and enhancing our product offerings.Over thelast two decades,we have demonstrated our ability to lead the market with new products and product enhancements.For example,theAutoscope Solo system was the first fully integrate
51、d color camera,zoom lens and machine vision processor in the above-ground detectionmarket.Our RTMS Radar business unit was one of the first to introduce radarbased technology solutions for ITS applications,and wecontinue to lead the market with technology enhancements and new products.Furthermore,ou
52、r next generation video product,Autoscope Vision,is an example of development driven by the voice of our customers.We have developed a high definition video detectionsolution with increased accuracy,performance,and ease of use.We have successfully collaborated with our longterm channel partners toma
53、rket these products.We believe that developing,enhancing and marketing new products with our partners can translate into strong organicrevenue growth and high levels of profitability.Leading Distribution Channel.Since 1991,we have maintained a relationship with Econolite,which has the exclusive righ
54、t to manufacture,market and distribute our Autoscope video products in the United States,Mexico,Canada and the Caribbean.We believe that Econolite is theleading distributor of ITS control products in North America and the Caribbean.This relationship enhances our ability to commercialize andmarket ne
55、w products and allows us to focus more resources on developing advanced signal processing software algorithms.Broad Product Portfolio.Our product portfolio leverages our core softwarebased algorithms to enable end users to detect and monitorobjects in a designated field of view.We believe that our f
56、amily of Autoscope video and RTMS radar products allows us to offer a broadproduct 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 andsoftware industries.Additionally,the con
57、tinuity of our engineering staff should allow the uninterrupted development of new or improvedproducts.Our Growth StrategyAs 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 inthe I
58、TS market segment.We believe that we continue to have an opportunity to accelerate our growth.We plan to do this by improving theaccuracy and functionality of our products and opportunistically expanding our product offering into adjacent markets,as well as expandingour portfolio and channels throug
59、h licensing.Having developed and introduced our next-generation video product,we expect to takeadvantage 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 solut
60、ions.Over the past twodecades,we have been developing and refining our complex signal processing software algorithms.We should be able to effectively utilize ourcore software skills more broadly as markets converge.We believe that a driver of this convergence is that above-ground detection systems w
61、illbecome more costeffective when a single sensor can be used for multiple purposes.As a result,our objective is to become the leading supplierof critical detection components to third party management systems,particularly those that exploit the convergence of traffic.To do this,we areintegrating th
62、is concept into our longrange engineering development roadmap and will evaluate the use of technology licensing and channelstrategies that support this vision.Increase the Scope of Our Distribution and Direct Sales.We have made substantial investments in product adjustments to tailor our solutionsto
63、 the differing needs of our international end users and in new product acquisitions for both domestic and international markets.We have alsoinvested in sales and marketing expansion,with a focus on our European subsidiaries.Markets in Eastern Europe,the Asia/Pacific region,theMiddle East,Africa and
64、South America,which have historically lagged North America and Western Europe in their use of above-grounddetection,have begun to increase the adoption of detection technology in their traffic systems.We intend to take advantage of the acceleratedpace of the adoption of above-ground detection throug
65、hout the developing world by increasing end user awareness of our products andapplications as well as improve user aptitude.Our Products and SolutionsOur vehicle and traffic detection products are critical components of many ITS applications.Our Autoscope video systems and RTMS radarsystems convert
66、sensory input collected by video cameras and radar units into vehicle detection and traffic data used to operate,monitor andimprove the efficiency of roadway infrastructure.At the core of each product line are proprietary digital signal processing algorithms andsophisticated embedded software that a
67、nalyze sensory input and deliver actionable data to integrated applications.We invested approximately$4.1 million and$4.6 million on research and development in 2017 and 2016,respectively,to develop and enhance our product technology.Ourdigital signal processing software algorithms represent a found
68、ation on which to support additional product development into the automaticincident detection(AID)market.A diagram displaying our fundamental product architecture is shown below.3The Image Sensing Product Architecture Autoscope Video.Our Autoscope video system processes video input from a traffic sc
69、ene 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 isoccupied),turning movements(quantifying the movement of vehicles)and flow rate(vehicles per hour per lane).Autos
70、cope supports a varietyof standard video cameras or can be purchased with an integrated high-definition video camera.For intersections,the system communicateswith the intersection signal controller,which changes the traffic lights based on the data provided.In highway applications,the system gathers
71、vehicle count and flow rates.In any application,the data may also be transmitted to a traffic management center via the internet or otherstandard communication means and processed in real time to assist in traffic management and stored for later analysis for traffic planningpurposes.The Autoscope sy
72、stem comes in two varieties.Autoscope Vision is our flagship integrated product that includes a color high-definition,zoomcamera and a machine vision processing computer contained in a compact housing that is our leading offering in the North American market.Autoscope Pn-520 is our card only machine
73、 vision processing computer that is located in an intersection signal controller,control hub,incidentmanagement center or traffic management center that receives video from a separate camera.The Pn-520 and its variants are our top sellingAutoscope products in international markets.Autoscope rack-bas
74、ed products offer digital MPEG4 video streaming,high speed Ethernetinterface,web browser maintenance and data and video over power line communications.The Autoscope Vision product offers digitalstreaming video,built-in WiFi for quick and easy setup,cost-effective three-wire cable and full screen obj
75、ect detection and motion trackingalgorithm 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 forroadway monitoring applications.Data is transmitted to a central computer at a t
76、raffic 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 embedded processor contained in a com
77、pact,selfcontained unit.The unit istypically situated on roadway poles and sidefired,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 trafficon road
78、ways and is our leading offering in both North America and the Middle East.The RTMS Sx-300 HDCAM has a high-definition camerathat provides the user with visual setup confirmation,data capture and real-time traffic surveillance.The Sx-300 HDCAM has been widelydeployed in North America for various app
79、lications such as ramp metering and wrong way driver detection.The RTMS Sx-300 BT is anintegrated Sx-300 with dual channel Bluetooth sensor and is ideal for providing the most accurate travel time and origin/destinationinformation.We also offer a wrong way module that interfaces with the Sx-300 HDCA
80、M digital video stream and leverages our video detectionalgorithms to detect occurrences of vehicles driving the incorrect direction.The event is captured and sent to the end users via SMS and emailin parallel with actuation or roadside or in-pavement warning systems.4Distribution,Sales and Marketin
81、gWe market and sell our products globally.Together with our partners,we offer a combination of highperformance detection technology andexperienced local support.Our end users primarily consist of federal,state,city and county departments of transportation,port,highway,tunneland other transportation
82、authorities.The decisionmakers within these entities typically are traffic planners and engineers,who in turn oftenrely on consulting firms that perform planning and feasibility studies.Our products sometimes are sold directly to system integrators or othersuppliers of systems and services who are o
83、perating 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 tomanufacture,market and distribute the Autoscope video system in the United States,Mexico,Canad
84、a and the Caribbean.The agreement withEconolite grants it a first refusal right that arises when we make a proposal to Econolite to extend the license to additional products in theUnited States,Mexico,Canada and the Caribbean and a first negotiation right that arises when we make a proposal to Econo
85、lite to includerights corresponding to Econolites rights under our current agreements in countries not in these territories.Econolite provides the marketingand technical support needed for its sales in these territories.Econolite pays us a royalty on the revenue derived from its sales of theAutoscop
86、e system.We cooperate in marketing Autoscope video products with Econolite for the United States,Mexico,Canada and theCaribbean and provide secondtier technical support.We have the right to terminate our agreements with Econolite if it does not meet minimumannual sales levels or if Econolite fails t
87、o make payments as required by the agreements.In 2008,the term of the original agreement withEconolite,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 rada
88、r systems to a network of distributorscovering countries in North America,the Caribbean and Latin America.On a limited basis,we sell directly to the end user.We provide technicalsupport to these distributors from our various North American locations.Sales in Europe,Asia,the Middle East and Africa.We
89、 market our Autoscope video and RTMS radar product lines of products to a network ofdistributors covering countries in Europe,the Middle East,Africa and Asia through our whollyowned subsidiaries that have offices in Europe.On a limited basis,we sell directly to the end user.Technical support to thes
90、e distributors is provided by our whollyowned subsidiaries inEurope,with secondtier support provided by our engineering groups.From time to time,we may grant exclusive rights to Econolite for marketsoutside of our significant markets for certain jurisdictions or product sales based on facts and circ
91、umstances related to the opportunities.CompetitionWe compete with companies that develop,manufacture and sell traffic management devices using video and radar sensing technologies as wellas other aboveground detection technologies based on laser,infrared and acoustic sensors.For ITS applications,we
92、also compete withproviders of inpavement loop detectors and estimate that more than 60%of the traffic management systems currently in use in the U.S.useinpavement loop detectors.For competition with other aboveground detection products,we typically compete on performance andfunctionality,and to a le
93、sser extent on price.When competing against providers of loop detectors,we compete principally on ease ofinstallation and the total cost of ownership over a multiyear period,and to a lesser extent on functionality.Among the companies that provide direct competition to Autoscope video worldwide are I
94、teris,Inc.,Wavetronix,LLC,FLIR Systems,Inc.,Signal Group Inc.(Peek),Citilog S.A.,Sensys Inc.,and Smartmicro Inc.Among the companies that provide direct competition to RTMS radarworldwide are Wavetronix,LLC,Houston Radar,LLC,MS Sedco Inc.,Smartmicro Sensors GmbH,and TraffiCast.To our knowledge,Autosc
95、opevideo and RTMS radar have the largest number of installations as compared to their direct competitors.In addition,there are smaller localcompanies providing direct competition in specific markets throughout the world.We are aware that these and other companies will continue todevelop technologies
96、 for use in traffic management applications.One or more of these technologies could in the future provide increasedcompetition for our systems.Other potential competitors of which we are aware include Siemens AG,Cognex Corp.,Augusta Technologie AG,Matsushita Electric IndustrialCo.,Ltd.(Panasonic),Su
97、mitomo Corporation and Omron Electronics LLC.These companies have machine vision or radar capabilities and havesubstantially more financial,technological,marketing,personnel and research and development resources than we have.5ManufacturingAutoscope video products for sale under the Econolite licens
98、e agreement are manufactured through agreements with Econolite and WirelessTechnology,Inc.Econolite is responsible for setting warranty terms and must provide all service required under this warranty.In Europe andAsia,we engage contract manufacturers to manufacture the Autoscope family of products.W
99、e engage Wireless Technology,Inc.to manufacture our radar products and perform warranty and post-warranty repairs for all radar unitssold.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 compone
100、nts that are available from multiplesources.Although some of the components used in our products are obtained from singlesource suppliers,we believe other componentvendors are available should the necessity arise.The European Parliament has enacted a directive for the restriction of the use of certa
101、inhazardous substances in electrical and electronic equipment(“RoHS”).To our knowledge,our contract manufacturing and component vendorsin Europe and Asia comply with the European directive on RoHS.Intellectual PropertyTo protect our rights to our proprietary knowhow,technology and other intellectual
102、 property,it is our policy to require all employees andconsultants to sign confidentiality agreements that prohibit the disclosure of confidential information to any third parties.These agreementsalso require disclosure and assignment to us of any discoveries and inventions made by employees and con
103、sultants while they are devoted toour business activities.We also rely on trade secret,copyright and trademark laws to protect our intellectual property.We have also enteredinto exclusive and nonexclusive license and confidentiality agreements relating to our own and thirdparty technologies.We aggre
104、ssivelyprotect our processes,products,and strategies as proprietary trade secrets.Our efforts to protect intellectual property and avoid disputes overproprietary rights include ongoing review of thirdparty patents and patent applications.Environmental MattersWe believe our operations are in complian
105、ce with all applicable environmental regulations within the jurisdictions in which we operate.EmployeesAs of December 31,2017,we had 59 employees,consisting of 49 employees in North America and 10 employees in Europe.None of ouremployees are represented by a union.Item 1A.Risk FactorsInformation Reg
106、arding Forward Looking StatementsThis Annual Report on Form 10K contains forwardlooking statements within the meaning of Section 27A of the Securities Act of 1933,asamended,and Section 21E of the Securities Exchange of 1934,as amended.Forwardlooking statements represent our expectations or beliefsco
107、ncerning future events and can be identified by the use of forwardlooking words such as“believes,”“may,”“will,”“should,”“intends,”“plans,”“estimates,”or“anticipates”or other comparable terminology.Forwardlooking statements are subject to risks and uncertainties thatmay cause our actual results to di
108、ffer materially from the results discussed in the forwardlooking statements.Some factors that might causethese differences include the factors listed below.Although we have attempted to list these factors comprehensively,we wish to cautioninvestors that other factors may prove to be important in the
109、 future and may affect our operating results.New factors may emerge from time totime,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 ourbusiness.We further caution you not to unduly rely on any forwardlooking state
110、ments because they reflect our views only as of the date the statementswere made.We undertake no obligation to publicly update or revise any forwardlooking statements whether as a result of new information,future events or otherwise.6If governmental entities elect not to use our products due to budg
111、etary constraints,project delays or other reasons,our revenue mayfluctuate 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 fromsales of our systems to governmental entities
112、.In addition to normal business risks,it often takes considerable time before governmentalinitiated projects are developed to the point at which a purchase of our systems would be made,and a purchase of our products also may besubject to a timeconsuming approval process.Additionally,governmental bud
113、gets and plans may change without warning.Other risks ofselling to governmental entities include dependence on appropriations and administrative allocation of funds,changes in governmentalprocurement legislation and regulations and other policies that may reflect political developments,significant c
114、hanges in contract scheduling,competitive bidding and qualification requirements,performance bond requirements,intense competition for government business andtermination of purchase decisions for the convenience of the governmental entity.Substantial delays in purchase decisions by governmentalentit
115、ies,or governmental budgetary constraints,could cause our revenue and income to drop substantially or to fluctuate significantly betweenfiscal 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 forthese produc
116、ts,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 profitfrom Autoscope sales accounted for approximately 74%of our gross profit in 2017 and 78%in 2016.We anticipate that gross profit fro
117、m thesale of Autoscope systems will continue to account for a substantial portion of our gross profit for the foreseeable future.As such,anysignificant decline in sales of our Autoscope system would have a material adverse impact on our business,financial condition and results ofoperations.If Econol
118、ites 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
119、 current agreements grant Econolite a first refusal right that arises when we make a proposal toEconolite to extend the license to additional products in the United States,Mexico,Canada and the Caribbean.In addition,the agreements grantEconolite a first negotiation right that arises when we make a p
120、roposal to Econolite to include rights corresponding to Econolites rights underour current agreements in countries not in these territories.In exchange for its rights under the agreements,Econolite pays us royalties for salesof the Autoscope video system.Since 2002,a substantial portion of our reven
121、ue has consisted of royalties resulting from sales made byEconolite,including 59%in 2017 and 55%in 2016.Econolites account receivable represented 77%of our accounts receivable at December 31,2017 and 61%of our accounts receivable at December 31,2016.We expect that Econolite will continue to account
122、for a significant portion of ourrevenue for the foreseeable future.Any decrease in Econolites sales volume could significantly reduce our royalty revenue and adverselyimpact earnings.A failure by Econolite to make royalty payments to us in a timely manner or at all will harm our financial condition.
123、In addition,we believe sales of our products are a material part of Econolites business,and any significant decrease in Econolites sales of the otherproducts 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
124、 our business,we may have to undertake further restructuring plans that would require additionalcharges,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 ba
125、sedon managements 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 managementresources,realizati
126、on of losses,transition and wind-up expenses,reduction in workforce,impairment of assets,facility consolidation and theelimination of revenues along with associated costs,any of which could cause our operating results to decline and may fail to yield theexpected benefits.For more information regardi
127、ng our restructuring and divestiture activities in 2017 and 2016,see the discussion in Note 2 andNote 14 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
128、products offered by our competitors,and thefailure 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 tradit
129、ional technologies,mainly inpavement loop detectors.Our financial success and growth prospects depend on the continued development of the market foradvanced technology solutions for traffic detection and management and the acceptance of our current Autoscope video and RTMS radar andalso future syste
130、ms we may develop as reliable,costeffective alternatives to traditional vehicle detection systems.We cannot assure you thatwe will be able to utilize our technology profitably in other products or markets.If our end users do not continue to increase their acceptance ofthe features and functions prov
131、ided by our current systems or other systems we may develop in the future,our business and growth prospectscould be adversely affected.7Our operating costs tend to be fixed,while our revenue tends to be seasonal,thereby resulting in operating results that fluctuate fromquarter to quarter.Our expense
132、 levels are based in part on our product development efforts and our expectations regarding future revenues and,in the shortterm,are generally fixed.Our quarterly revenues,however,have varied significantly in the past,with our first quarter historically being the weakestdue to weather conditions in
133、parts of North America,Europe and Asia that make roadway construction more difficult.Additionally,ourinternational revenues have a significant large project component,resulting in a varying revenue stream.We expect the seasonality of ourrevenue and the fixed nature of our operating costs to continue
134、 in the foreseeable future.Therefore,we may be unable to adjust our spending ina timely manner to compensate for any unexpected revenue shortfall.As a result,if anticipated revenues in any quarter do not occur or aredelayed,our operating results for the quarter would be disproportionately affected.O
135、perating results also may fluctuate due to factors such asthe demand for our products product life cycle the development,introduction and acceptance of new products and product enhancements byus or our competitors changes in the mix of distribution channels through which our products are offered cha
136、nges in the level of operatingexpenses 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.In
137、creased competition may make it difficult for us to acquire and retain end users.If we are unsuccessful in developing new applicationsand 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
138、 the business of developing and implementingtraffic control and related security systems have substantially more financial,technological,marketing,personnel and research anddevelopment resources than we have.Therefore,they may be able to respond more quickly than we can to new or changing opportunit
139、ies,technologies,standards or end user requirements.If we are unable to compete successfully with these companies,the market share for ourproducts will decrease,and competitive pressures may seriously harm our business.Additionally,the market for vehicle detection is continuously seeking more advanc
140、ed technological solutions to problems.Technologies suchas embedded loop detectors,pressure plates,pneumatic tubes,radars,lasers,magnetometers,acoustics and microwaves that have been usedas traffic sensing devices in the past are being enhanced for use in the traffic management industry,and new tech
141、nologies may be developed.We are aware of several companies that are developing traffic management devices using machine vision technology or other advancedtechnology.Floating vehicle and/or radio frequency identification(RFID)tagged license plate initiatives are under consideration and may beimplem
142、ented.We expect to face increasingly competitive product developments,applications and enhancements.New technologies orapplications in traffic control systems from other companies or the development of new and emerging technologies and applications,includingvehicle-to-vehicle(VTV)communications,mobi
143、le applications,and new algorithms or sensor technologies,may provide our end users withalternatives to our products and could render our solutions noncompetitive or obsolete.If we are unable to increase the number of ourapplications and develop and commercialize product enhancements and application
144、s in a timely and cost-effective manner that respond tochanging 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 longterm success depends on our
145、 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 tomarket in a timely fashion,and adapt products t
146、o the needs and standards of current and potential customers.Our products and services maybecome 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 disproporti
147、onately subject to the risks of internationaloperations 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
148、 failure to achieve the financial and strategic goals for the acquired and combined businesses difficulty assimilating the operations and personnel of the acquired businesses 8 disruption of ongoing business and distraction of management from the ongoing business dilution of existing shareholders an
149、d 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 incr
150、ease our exposure to the risks of internationaloperations 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 timelymanner.We do not have,and do not intend to develop in the near fu
151、ture,internal capabilities to manufacture our products.We have entered intoagreements with Econolite and Wireless Technology,Inc.(“WTI”)to manufacture the Autoscope system,the RTMS radar products and relatedproducts for sales in the United States,Mexico,Canada and the Caribbean.We work with supplier
152、s,most of whom are overseas,to manufacturethe rest of our products.We also need to comply with the European Unions regulatory RoHS directive restricting the use of certain hazardoussubstances in electrical and electronic equipment.If Econolite,WTI,or our other suppliers are unable to manufacture our
153、 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 findsuitable manufacturers for our products could result in delays or reductions in product shipments,which in turn may harm our businessrep
154、utation and results of operations.In addition,we have granted Econolite the exclusive right to market the Autoscope video system andrelated products in the United States,Mexico,Canada and the Caribbean.Consequently,our revenue depends to a significant extent onEconolites marketing efforts.Econolites
155、 inability to effectively market the Autoscope video system,or the disruption or termination of thatrelationship,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 interrupti
156、on in thesupply 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 availablefrom multiple sources,we
157、and our third party manufacturers obtain some of the components from a single source.The loss or interruption ofany of these supply sources could force us or our manufacturers to identify new suppliers,which could increase our costs,reduce our salesand profitability,or harm our customer relations by
158、 delaying product deliveries.Regulations related to the use of conflict free minerals may increase our costs and cause us to incur additional expenses.The DoddFrank Wall Street Reform and Consumer Protection Act contains provisions to improve the transparency and accountability of theuse by public c
159、ompanies in their products of minerals mined in certain countries and to prevent the sourcing of such“conflict”minerals.As aresult,the Securities and Exchange Commission enacted annual disclosure and reporting requirements for public companies who use theseminerals in their products,which apply to u
160、s.Under the final rules,we are required to conduct due diligence to determine the source of anyconflict minerals used in our products.Although we expect to file the required report on a timely basis,our supply chain is broadbased andcomplex,and we may not be able to easily verify the origins for all
161、 minerals used in our products.To the extent that any information furnishedto us by our suppliers is inaccurate or inadequate,we could face reputational and enforcement risks.In addition,the conflict mineral rulescould reduce the number of suppliers who provide components and products containing con
162、flictfree minerals and thus could disrupt oursupply chain or that of our manufacturers and increase the cost of the components used in manufacturing our products and the costs of ourproducts to us.Any increased costs and expenses could have a material adverse impact on our financial condition and re
163、sults of operations.Some of our products are covered by our warranties and,if the cost of fulfilling these warranties exceeds our warranty allowance,it couldadversely affect our financial condition and results of operations.Unanticipated warranty and other costs for defective products could adversel
164、y affect our financial condition and results of operations and ourreputation.We generally provide a two to five year warranty on our product sales.These warranties require us to repair or replace faultyproducts,among other customary warranty provisions.Although we monitor our warranty claims and pro
165、vide an allowance for estimatedwarranty costs,unanticipated claims in excess of the allowance could have a material adverse impact on our financial condition and results ofoperations.Additionally,we rely on our third party manufacturers to fulfill our warranty repair obligations to our customers.Adv
166、erse changesin these parties abilities to perform these repairs could cause a delay in repairs or require us to source other parties to perform the repairs andcould adversely affect impact our financial condition and results of operations.In addition,the need to repair or replace products with desig
167、nor manufacturing defects could adversely affect our reputation.9We may face increased competition if we fail to adequately protect our intellectual property rights,and any efforts to protect ourintellectual property rights may result in costly litigation.Our success depends in large measure on the
168、protection of our proprietary technology rights.We rely on trade secret,copyright and trademarklaws,confidentiality agreements with employees and third parties,and patents,all of which offer only limited protection.We cannot assure youthat the scope of these protective measures will exclude competit
169、ors or provide competitive advantages to us.We also cannot assure you thatwe will become aware of all instances in which others develop similar products,duplicate any of our products,or reverse engineer ormisappropriate our proprietary technology.If our proprietary technology is misappropriated,our
170、business and financial results could beadversely affected.Litigation may be necessary in the future to enforce our intellectual property rights,to protect our trade secrets or todetermine the validity and scope of the proprietary rights of others.In addition,we may be the subject of lawsuits by othe
171、rs who claim weviolate their intellectual property rights.Intellectual property litigation is very costly and could result in substantial expense and diversions of our resources,either of which couldadversely affect our business and financial condition and results of operations.In addition,there may
172、 be no effective legal recourse againstinfringement of our intellectual property by third parties,whether due to limitations on enforcement of rights in foreign jurisdictions or as aresult of other factors.We have not applied for patent protection in all countries in which we market and sell our pro
173、ducts.Consequently,our proprietary rights in thetechnology underlying our systems in countries other than the U.S.will be protected only to the extent that trade secret,copyright or othernonpatent protection is available and to the extent we are able to enforce our rights.The laws of other countries
174、 in which we market ourproducts 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 initiallyanticipated,which could adversely af
175、fect our business and results of operations.We regularly invest substantial amounts in research and development efforts that pursue advancements in a range of technologies,productsand services.Our ability to realize the anticipated benefits of these advancements depends on a variety of factors,inclu
176、ding meetingdevelopment,production,certification and regulatory approval schedules the execution of internal and external performance plans theavailability of supplierproduced parts and materials the performance of suppliers and vendors achieving cost efficiencies the validation ofinnovative technol
177、ogies and the level of end user interest in new technologies and products.These factors involve significant risks anduncertainties.We may encounter difficulties in developing and producing these new products and may not realize the degree or timing ofbenefits initially anticipated.In particular,we c
178、annot predict with certainty whether,when or in what quantities our current or potential endusers will have a demand for products currently in development or pending release.Moreover,as new products are announced,sales of currentproducts may decrease as end users delay making purchases until such ne
179、w products are available.Any of the foregoing could adverselyaffect 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 o
180、ur customers employees or facilities.Additionally,we are,at times,involved in commercial disputes with third parties,such as customers,distributors,vendors and others.See Note16 of our Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.The ensuing claims
181、 may arisesingularly,in groups of related claims,or in class actions involving multiple claimants.Such claims and litigation are frequently expensive andtimeconsuming to resolve and may result in substantial liability to us,which liability and related costs and expenses may not be recoverablethrough
182、 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
183、in the U.S.and other countries in which we have facilities or sell ourproducts involving compliance with antitrust,environmental,anti-bribery and anti-corruption laws and regulations,including the U.S.ForeignCorrupt Practices Act and the U.K.Anti-Bribery Act.Although we have internal policies and pr
184、ocedures with the intention of assuringcompliance with these laws and regulations,our employees,contractors,agents and licensees involved in our international sales may takeactions in violation of such policies.Any future adverse development,ruling or settlement could result in charges that could ha
185、ve an adverseeffect on our results of operations or cash flows.We price a segment of our product portfolio at a premium compared to other technologies.As such,we may not be able to quickly respondto emerging low cost competitors,and our inability to do so could adversely affect revenue and profitabi
186、lity.We price segment of our product portfolio at a premium as compared to products using less sophisticated technologies.As the technologicalsophistication of our competitors and the size of the market increase,competing lowcost developers of machine vision products for traffic arelikely to emerge
187、and grow stronger.If end users prefer lowcost alternatives over our products,our revenue and profitability could be adverselyaffected.10Our revenue could be adversely affected by the emergence of local competitors and local biases in international markets.Our experience indicates that local official
188、s that purchase traffic management products in the international markets we serve favor products thatare developed and manufactured locally.As local competitors to our products emerge,local biases could erode our revenue in Europe and Asiaand adversely affect our sales and revenue in those markets.O
189、ur 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 oftechnology preferences in the market for ITS,or fail
190、to identify and acquire complementary businesses or products that broaden our currentproduct 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 internati
191、onal activities,which could harm ourinternational sales and profitability.Sales outside of the United States,including export sales from our U.S.business locations,accounted for approximately 17%of our totalrevenue in 2017 and 18%of our total revenue in 2016.By doing business in international market
192、s,we are exposed to risks separate and distinctfrom those we face in our U.S.operations.Our international business may be adversely affected by changing political and economic conditionsin foreign countries.Additionally,fluctuations in currency exchange rates could affect demand for our products or
193、otherwise negatively affectprofitability.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 fl
194、uctuations where payment for products is denominated in a currency other than U.S.dollars variability in the U.S.dollar value of foreign currencydenominated assets,earnings and cash flows required compliance with existing and new foreign regulatory requirements and laws laws and business practices f
195、avoring 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 withpa
196、rties located in the U.S.political and economic instability,including volatility in the economic environment of the European Union caused by the ongoingsovereign debt crisis in Europe tax rates in certain foreign countries that exceed those in the U.S.and the imposition of withholding requirements o
197、n foreignearnings 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.11Our exposure to each of these risks may increase our costs,lengthe
198、n our sales cycle and require significant management attention.One or moreof these factors may harm our business.Our inability to comply with European and Asian regulatory restrictions over hazardous substances and electronic waste could restrictproduct sales in those markets and reduce profitabilit
199、y in the future.The European Unions Waste Electrical and Electronic Equipment(“WEEE”)directive makes producers of electrical goods financiallyresponsible for specified collection,recycling,treatment and disposal of past and future covered products.This directive must be enacted andimplemented by ind
200、ividual European Union governments,and certain producers will be financially responsible under the WEEE legislation.Thismay impose requirements on us,which,if we are unable to meet them,could adversely affect our ability to market our products in EuropeanUnion countries,and our sales revenues and pr
201、ofitability would suffer as a consequence.In addition,the European Parliament has enacted adirective for the restriction of the use of certain hazardous substances in electrical and electronic equipment.This RoHS legislation restricts theuse of substances such as mercury,lead,cadmium and hexavalent
202、cadmium.If we are unable to have our products manufactured in compliancewith the RoHS directive,we would be unable to market our products in European Union countries,and our revenues and profitability wouldsuffer.In addition,various Asian governments could adopt their own versions of environmentfrie
203、ndly electronic regulations similar to theEuropean directives,RoHS and WEEE.This could require new and unanticipated manufacturing changes,product testing and certificationrequirements,thereby increasing cost,delaying sales and lowering revenue and profitability.Our inability to manage growth effect
204、ively 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 managementpersonnel.Our ability to manage growth effectively will require continued improvement of our operational,financial and mana
205、gement systemsand the successful training,motivation and management of our employees.If we are unable to manage growth successfully,our business andoperating results will suffer.Our business operations will be severely disrupted if we lose key personnel or if we fail to attract and retain qualified
206、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 themarketplace,depends in large
207、part on our ability to attract and retain qualified scientific and technical personnel.Competition for qualifiedpersonnel is intense,and we cannot assure you that we will be able to attract and retain the individuals we need,especially if our businessexpands and requires us to employ additional pers
208、onnel.In addition,the loss of personnel or our failure to hire additional personnel couldmaterially and adversely affect our business,operating results and ability to expand.The loss of key personnel,or our inability to hire andretain qualified personnel,would harm our business.We may not be success
209、ful in integrating any acquired companies into our business,which could materially and adversely affect ourfinancial 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 mark
210、et coverage or technical capabilities or offer growth opportunities.For any acquisition,a significant amount of managementstime and financial resources may be required to complete the acquisition and integrate the acquired business into our existing operations.Evenwith this investment of management
211、time and financial resources,an acquisition may not produce the revenue,earnings or business synergiesanticipated.Acquisitions involve numerous other risks,including the assumption of unanticipated operating problems or legal liabilitiesproblems integrating the purchased operations,technologies or p
212、roducts the diversion of managements attention from our core businessesrestrictions on the manner in which we may use purchased companies or assets imposed by acquisition agreements adverse effects on existingbusiness relationships with suppliers and customers incorrect estimates made in the account
213、ing for acquisitions and amortization of acquiredintangible assets that would reduce future reported earnings(such as goodwill impairments)ensuring acquired companies compliance with therequirements of the U.S.federal securities laws and accounting rules and the potential loss of customers or key em
214、ployees of acquiredbusinesses.We cannot assure you that any acquisitions,investments,strategic alliances or joint ventures will be completed or integrated in atimely manner or achieve anticipated synergies,will be structured or financed in a way that will enhance our business or creditworthiness,orw
215、ill meet our strategic objectives or otherwise be successful.We may be required to recognize impairment charges for long lived assets.As of December 31,2017,the net carrying value of our longlived assets(property and equipment,deferred tax assets and other intangibleassets)totaled approximately$4.0
216、million.In accordance with U.S.generally accepted accounting principles,we periodically assess these assetsto 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
217、 planned changes in our use of assets,divestitures and market capitalization declinesmay result in impairments to our goodwill and other longlived assets.Future impairment charges could significantly affect our results ofoperations in the periods recognized.12Our stock is thinly traded and our stock
218、 price is volatile.Our common stock is thinly traded,with 3,880,439 shares of our 5,210,448 outstanding shares held by nonaffiliates as of February 28,2018.Based on the trading history of our common stock and the nature of the market for publicly traded securities of companies in evolvinghightech in
219、dustries,we believe there are several factors that have caused and are likely to continue to cause the market price of our commonstock to fluctuate substantially.The fluctuations may occur on a daytoday basis or over a longer period of time.Factors that may causefluctuations in our stock price inclu
220、de announcements of large orders obtained by us or our competitors,substantial cutbacks in governmentfunding of highway projects or of the potential availability of alternative technologies for use in traffic control and safety,quarterly fluctuationsin our financial results or the financial results
221、of our competitors,consolidation among our competitors,fluctuations in stock market prices andvolumes,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 adverselyaffect our financial posi
222、tion,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 significantvolatility in the capital,credit and commodities
223、 markets and in the overall worldwide economy.Although certain economic conditions in theUnited 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
224、their purchase of our products,which has had andmay continue to have an adverse effect on our business.Any uncertainty about the federal budget in the U.S.could have a negative effect onthe U.S.and global economy.The continuing impact that these factors might have on us and our business is uncertain
225、 and cannot be estimatedat this time.Current economic conditions have accentuated each of these risks and magnified their potential effect on us and our business.Thedifficult conditions in these markets and the overall economy affect our business in a number of ways.For example:Although we believe w
226、e have sufficient liquidity under our financing arrangements to run our business,under extreme marketconditions,there can be no assurance that such funds would be available or sufficient,and,in such a case,we may not be able tosuccessfully obtain additional financing on favorable terms,or at all.Con
227、tinuing market volatility has exerted downward pressure on our stock price,which could make it more difficult or unfavorablefor us to raise additional capital in the future.Economic conditions could result in customers in our markets continuing to experience financial difficulties,including limitedl
228、iquidity 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 governmentalentities,which in turn could result in d
229、ecreased 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 anyimprovement will benefit our market segment.Our articles of incorporation and bylaws,Minnesota law and our shareholder right
230、s plan may inhibit a takeover that shareholdersconsider favorable.Provisions of our articles of incorporation and bylaws and applicable provisions of Minnesota law may delay or discourage transactionsinvolving an actual or potential change in our control or change in our management,including transac
231、tions in which shareholders mightotherwise receive a premium for their shares or transactions that our shareholders might otherwise deem to be in their best interests.Theseprovisions:permit our board of directors to issue up to 5,000,000 shares of preferred stock with any rights,preferences and priv
232、ileges as it maydesignate,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 newlycreated directorships,may,except as otherwise requ
233、ired by law,be filled by theaffirmative 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 inany election of directors to elect all of the directo
234、rs standing for election,if they should so choose.13Section 302A.671 of the Minnesota Business Corporation Act(“MBCA”)generally limits the voting rights of a shareholder acquiring asubstantial percentage of our voting shares in an attempted takeover or otherwise becoming a substantial shareholder of
235、 our company unlessholders of a majority of the voting power of all outstanding shares and the disinterested shares approve full voting rights for the substantialshareholder.Section 302A.673 of the MBCA generally limits our ability to engage in any business combination with certain persons who own10
236、%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%ormore of our outstanding voting stock.These provisions of the MBCA may have the effect of entrenching our management team and maydeprive shareholders of the opportuni
237、ty to sell their shares to potential acquirers at a premium over prevailing market prices.This potentialinability 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 pr
238、eferred share purchaseright for each outstanding share of common stock.In August 2016,our Board of Directors amended the shareholder rights plan to preserve thevalue of certain deferred tax benefits to the Company,including those generated by net operating losses.Generally,the shareholder rights pla
239、n,as amended,provides that if a person or group acquires 4.99%or more of our outstanding shares of common stock,subject to certainexceptions and under certain circumstances,the rights may be exchanged by us for common stock or the holders of the rights,other than theacquiring person or group,could a
240、cquire additional shares of our capital stock at a discount of the then current market price.Such exchanges orexercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuing the Company.The mereexistence of a shareholder rights plan often delays
241、 or makes a merger,tender offer or other acquisition more difficult to complete.In March2018,our Board of Directors extended the shareholder rights plan to continue to preserve the value of certain deferred tax assets,subject toshareholder approval at the Companys next annual meeting.We can issue sh
242、ares 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 votingrights,of future series of our preferred sto
243、ck and to issue such stock without approval from our shareholders.The rights of holders of ourcommon 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 couldissue preferred stock to prevent a change in control of our Compa
244、ny,depriving common shareholders of an opportunity to sell their stock at aprice 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
245、 business and,therefore,do not anticipatedeclaring or paying cash dividends on our common stock in the foreseeable future.Any payment of cash dividends on our common stock willbe at the discretion of our board of directors and will depend upon our operating results,earnings,current and anticipated c
246、ash needs,capitalrequirements,financial condition,future prospects,any contractual restrictions and any other factors deemed relevant by our board ofdirectors.Therefore,shareholders should not expect to receive dividend income from shares of our common stock.14Item 1B.Unresolved Staff CommentsNone.I
247、tem 2.PropertiesWe currently lease and occupy approximately 26,775 square feet in St.Paul,Minnesota for our headquarters.In February 2014,we entered intoan amendment to the lease for our headquarters which expanded the leased space from approximately 20,000 square feet to approximately 26,775square
248、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 yearterm.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
249、we do not intend to lease significantly morespace in 2018.Item 3.Legal ProceedingsWe 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 w
250、ith United States generally accepted accounting principles,werecord a liability in our Consolidated Financial Statements with respect to any of these matters when it is both probable that a liability has beenincurred and the amount of the liability can be reasonably estimated.With respect to any cur
251、rently pending legal proceedings,we have notestablished an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claimsasserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estim
252、ate.We currently donot 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 coulda
253、dversely 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 Econolitein the Superior Court of the State of California fo
254、r 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 ofimplied covenant of good faith and fair dealing and sought specific performance
255、 related to the transition of North American RTMS sales andmarketing activities from Econolite to us in July 2014.In the complaint,Econolite requested damages from us in an amount to be proven at trialand sought certain other remedies.On May 27,2016,we removed the case to the Federal District Court,
256、District of Central California.OnNovember 15,2016,Econolite and the Company entered into an Arbitration Agreement.On November 16,2016,Econolite voluntarily dismissedall of its claims against the Company in the U.S.District Court but filed a demand for arbitration with JAMS(which is an alternative di
257、sputeresolution provider),asserting the same claims against the Company that it had asserted in the lawsuit.Arbitration commenced on November16,2016.On January 23,2018,the Company received the arbitrators final decision concerning this matter.As a result of the arbitratorsdecision,the Company is to
258、pay to Econolite$262,000 for unused RTMS inventory and$246,000 for RTMS royalties.The Company wasawarded$205,000 for RTMS royalties already paid to Econolite.As a result,the Company recorded$303,000 of expense in its financialstatements as of and for the quarter ended December 31,2017.Item 4.Mine Sa
259、fety DisclosuresNot applicable.15PART IIItem 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of EquitySecuritiesMarket InformationOur common stock is traded on The NASDAQ Capital Market under the symbol“ISNS.”The quarterly high and low sales prices for ourcomm
260、on stock for our last two fiscal years are set forth below.2017 2016Quarter High Low High Low First$3.90$2.80$3.43$2.63Second 3.70 2.85 2.90 2.15Third 3.85 2.65 4.09 2.24Fourth 3.55 2.85 3.98 3.55 ShareholdersAs of February 28,2018,there were 27 holders of record of our common stock.The number of ho
261、lders of record is based upon the actualnumber of holders registered at such date and does not include holders of shares in“street names”or persons,partnerships,associates,corporations,or other entities identified in security position listings maintained by depositories.DividendsWe have never declar
262、ed or paid a cash dividend on our common stock.We currently intend to retain earnings for use in the operation andexpansion of our business,and,consequently,we do not anticipate paying any dividends in the foreseeable future.Debt CovenantsOur credit agreement included certain financial covenants,inc
263、luding minimum debt service ratios,minimum cash flow coverage ratios,and otherfinancial measures.These financial covenants would have restricted our ability to pay dividends and purchase outstanding shares of commonstock.At December 31,2016,we were in compliance with these financial covenants.At Dec
264、ember 31,2017 we were no longer subject to anydebt covenants.Information on our debt agreements is included in Item 7 of this Annual Report on Form 10K.16Item 6.Selected Financial DataThe following statement of income data for the years ended and as of December 31,2017 and 2016 are derived from our
265、audited ConsolidatedFinancial Statements.The following information should be read in conjunction with“Managements Discussion and Analysis of FinancialCondition and Results of Operations”and with our Consolidated Financial Statements and the related notes thereto included elsewhere in thisAnnual Repo
266、rt on Form 10-K.2017 2016(in thousands,except per share data)Consolidated Statements of Operations Data:Revenue:Product sales$5,919$6,398 Royalties 8,605 7,744 14,524 14,142 Cost of revenue:Product sales 2,563 4,008 Software amortization362 90 2,925 4,098 Gross profit 11,599 10,044 Operating expense
267、s:Selling,marketing and product support 2,486 2,417 General and administrative 3,981 3,868 Research and development 3,010 2,946 Restructuring 126 9,477 9,357 Operating income from operations 2,122 687 Other,net 41 (25)Income from operations before income taxes 2,163 662 Income tax expense(benefit)85
268、 (25)Net income$2,078$687 Net income per share:Basic$0.41$0.14 Diluted$0.40$0.14 Weighted average number of common shares outstanding:Basic 5,128 5,050 Diluted 5,136 5,055 17Item 7.Managements Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analys
269、is of our financial condition and results of operations should be read in conjunction with the SelectedFinancial Data and our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K.Our actual results coul
270、d differ materially from those anticipated in the forwardlookingstatements included in this discussion as a result of certain factors,including,but not limited to,those discussed in“Risk Factors”includedelsewhere in this Annual Report on Form 10-K.General.We are a leading provider of above-ground de
271、tection 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 sa
272、fety.Our technology analyzes signals fromsophisticated sensors and transmits the information to management systems and controllers or directly to users.Our products provide userswith complete solutions for the intersection and transportation markets.Our technology is a process in which software,rath
273、er than humans,examines outputs from various types of sophisticated sensors to determinewhat is happening in a field of view.In the ITS industry,this process is a critical component of managing congestion and traffic flow.In manycities,it is not possible to build roads,bridges and highways quickly e
274、nough 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 useof vehicles will make our ITS solutions increasingly necessary to complement existing and new r
275、oadway infrastructure to manage traffic flowand optimize throughput.We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy,limit the occurrenceof false detection,are generally easier to install with lower costs of ownership,work eff
276、ectively 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 advantagesof our products make our solutions well suited for use in ITS markets.We believe the strength of our
277、distribution channels positions us to increase the penetration of our technologydriven solutions in themarketplace.We market our Autoscope video products in the United States,Mexico,Canada and the Caribbean through an exclusive agreementwith Econolite Control Products,Inc.(Econolite),which we believ
278、e is the leading distributor of ITS intersection control products in thesemarkets.We market the RTMS radar systems to a network of distributors in North America,the Caribbean and Latin America.On a limited basis,we selldirectly to the end user in these geographic areas.We market our Autoscope video
279、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.The following discussion of year-to-y
280、ear trends in financial statement results under“Managements Discussion and Analysis of FinancialCondition and Results of Operations”aligns with the financial statement presentation described above.Trends and Challenges in Our BusinessWe believe the expected growth in our business can be attributed p
281、rimarily to the following global trends:worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of roadinfrastructure and the need to automate safety,security and access applications for automobiles and trucks,which has increaseddemand for our
282、 products advances in information technology,which have made our products easier to market and implement the continued funding allocations for centralized traffic management services and automated enforcement schemes,which haveincreased the ability of our primary end users to implement our products
283、and general increases in the costeffectiveness of electronics,which make our products more affordable for end users.18We believe our continued growth primarily depends upon:continued adoption and governmental funding of ITS and other automated applications for traffic control,safety and enforcementi
284、n developed countries a propensity by traffic engineers to implement lower cost technologybased solutions rather than civil engineering solutions suchas widening roadways countries in the developing world adopting aboveground detection technology,such as video or radar,instead of inpavementloop tech
285、nology to manage traffic and our ability to develop new products that provide increasingly accurate information and enhance the end users ability tocosteffectively manage traffic and environmental issues.Because the majority of our end users are governmental entities,we are faced with challenges rel
286、ated to potential delays in purchase decisionsby those entities and changes in budgetary constraints.These contingencies could result in significant fluctuations in our revenue betweenperiods.The ongoing economic environment in Europe and the United States is further adding to the unpredictability o
287、f purchase decisions,creating more delays than usual and decreasing governmental budgets,and it is likely to continue to affect our revenue.Key Financial Terms and MetricsRevenue.We derive revenue from two sources:(1)royalties received from Econolite for sales of the Autoscope video systems in the U
288、nitedStates,Mexico,Canada and the Caribbean and(2)revenue received from the direct sales of our RTMS radar systems and our Autoscope videosystems in Europe and Asia.Autoscope video royalties are calculated using a profit sharing model where the gross profits on sales of productmade through Econolite
289、 are shared equally with Econolite.This royalty arrangement has the benefit of decreasing our cost of revenues and ourselling,marketing and product support expenses because these costs and expenses are borne primarily by Econolite.Although this royaltymodel has a positive impact on our gross margin,
290、it also negatively impacts our total revenue,which would be higher if all the sales made byEconolite were made directly by us.The royalty arrangement is exclusive under a longterm agreement.Cost of Revenue.Software amortization is the sole cost of revenue related to royalties,as virtually all manufa
291、cturing,warranty and related costsare incurred by Econolite.Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors tomanufacture hardware platforms,which is influenced mainly by the cost of electronic components.The cost of revenue also inclu
292、des logisticscosts,estimated expenses for product warranties,restructuring costs and inventory reserves.The key metric that we follow is achieving certaingross margin percentages on product sales by geographic region and to a lesser extent by product line.Operating Expenses.Our operating expenses fa
293、ll into three categories:(1)selling,marketing and product support(2)general andadministrative and(3)research and development.Selling,marketing and product support expenses consist of various costs related to sales andsupport of our products,including salaries,benefits and commissions paid to our per
294、sonnel commissions paid to third parties travel,tradeshow and advertising costs secondtier technical support for Econolite and general product support,where applicable.General andadministrative expenses consist of certain corporate and administrative functions that support the development and sales
295、of our products andprovide an infrastructure to support future growth.These expenses include management,supervisory and staff salaries and benefits,legal andauditing fees,travel,rent and costs associated with being a public company,such as board of director fees,listing fees and annual reportingexpe
296、nses.Research and development expenses consist mainly of salaries and benefits for our engineers and third party costs for consultingand prototyping.We measure all operating expenses against our annually approved budget,which is developed with achieving a certainoperating margin as a key focus.Also
297、included in operating expenses are any restructuring costs.NonGAAP Operating Measure.We provide certain non-GAAP financial information as supplemental information to financial measurescalculated and presented in accordance with GAAP(Generally Accepted Accounting Principles in the United States).This
298、 non-GAAPinformation excludes the impact of depreciating fixed assets and amortizing intangible assets and may exclude other non-recurring items.Management believes that this presentation facilitates the comparison of our current operating results to historical operating results.Management uses this
299、 non-GAAP information to evaluate short-term and long-term operating trends in our core operations.Non-GAAPinformation is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financialmeasures and may not be computed the same as similarly title
300、d measures used by other companies.19The table below reconciles non-GAAP income from continuing operations,which is a non-GAAP financial measure,to comparable GAAPfinancial measures:Year Ended December 31,2017 2016 Operating income from continuing operations$2,122$687Adjustments to reconcile to non-
301、GAAP net income Amortization of intangible assets 362 90Arbitration 303 Depreciation 218 300Restructuring 126Non-GAAP operating income from continuing operations$3,005$1,203 Seasonality.Our quarterly revenues and operating results have varied significantly in the past due to the seasonality of our b
302、usiness.Our firstquarter generally is the weakest due to weather conditions that make roadway construction more difficult in parts of North America,Europe andnorthern Asia.We expect such seasonality to continue for the foreseeable future.Additionally,our international revenues regularly containindiv
303、idually significant sales.This can result in significant variations of revenue between periods.Accordingly,we believe thatquartertoquarter comparisons of our financial results should not be relied upon as an indication of our future performance.No assurance canbe given that we will be able to achiev
304、e or maintain profitability on a quarterly or annual basis in the future.Segments.We currently operate in two reportable segments:Intersection and Highway.Autoscope video is our machinevision product line,and revenue consists of royalties(all of which are received from Econolite),as well as a portio
305、n of international product sales.Video productsare normally sold in the Intersection segment.The RTMS radar is our radar product line,and revenue consists of sales to external customers.Radar products are normally sold in the Highway segment.As a result of business model changes and modifications in
306、 how we manage ourbusiness,we may reevaluate our segment definitions in the future.The following tables set forth selected financial information for each of our reportable segments(in thousands):For the year ended December 31,2017 Intersection Highway Total Revenue$10,109$4,415$14,524Gross profit 9,
307、048 2,551 11,599Amortization of intangible assets 362 362Intangible assets 2,477 1,008 3,485 For the year ended December 31,2016 Intersection Highway Total Revenue$8,829$5,313$14,142Gross profit 8,099 1,945 10,044Amortization of intangible assets 90 90Intangible assets 2,795 2,795 20Results of Opera
308、tionsThe following table sets forth,for the periods indicated,certain consolidated statements of operations data as a percent of total revenue andgross profit on product sales and royalties as a percentage of international sales and royalties,respectively.Years Ended December 31,20172016 Product sal
309、es40.8%45.2%Royalties59.2 54.8Total revenue100.0 100.0Gross profit-product sales56.7 37.4Gross profit-royalties95.8 98.8Selling,marketing and product support17.1 17.1General and administrative27.4 27.4Research and development20.7 20.8Restructuring 0.9Operating income from operations14.6 4.9Income ta
310、x expense(benefit)0.6(0.2)Net income from operations14.3 4.9 Year Ended December 31,2017 Compared to Year Ended December 31,2016.Total revenue increased to$14.5 million in 2017 from$14.1million in 2016,an increase of 2.7%.Royalty income increased to$8.6 million in 2017 from$7.7 million in 2016,an in
311、crease of 11.1%.Autoscopevideo royalties were higher in the year ended December 31,2017 compared to the year ended December 31,2016.Included in 2017 wereroyalties related to the Miami-Dade County sale through Econolite.Product sales decreased to$5.9 million in 2017 from$6.4 million in 2016,adecrease
312、 of 7.5%.The decrease in product sales was a result of reduced sales into the North American region compared to the prior yearperiod,partially offset by increased product sales into the European region.Revenue for the Intersection segment increased to$10.1 million in 2017 from$8.8 million in 2016,an
313、 increase of 14.5%.The increase can beprimarily attributed to a significant royalty sale into Miami-Dade County in 2017 and higher sales volume into the European region compared tothe prior year.21Revenue for the Highway segment decreased to$4.4 million in 2017 from$5.3 million in 2016,a decrease of
314、 16.9%.The decrease of revenue inthe Highway segment is mainly attributable to reduced product sales into the North American region.Gross profit for product sales increased to 56.7%in 2017 from 37.4%in 2016.Product sales gross profit increased$966,000 or 40.4%comparedto the prior year.The increase i
315、n product gross margin is driven by a$473,000 non-cash warranty charge in the fourth quarter of 2016 which didnot occur in 2017.Product sales gross profit for the Intersection product lines has historically been lower than gross profit for the Highwayproduct lines and therefore the mix of the produc
316、t lines sold in any given period can result in varying gross profit.Additionally,the geographicsales mix of our product sales can influence margins,as products sold in some jurisdictions have lower margins.Gross profit for royalty sales decreased to 95.8%in 2017 from 98.8%in 2016.Gross profit for ro
317、yalties increased$589,000 or 7.7%compared tothe prior year.Royalties gross profit percent decreased due to the amortization of software capitalization costs related to the Autoscope Visionproduct released for sale in October 2016.On a non-GAAP basis,excluding the individually significant warranty ch
318、arge related to the legacy product no longer sold,full year 2016 non-GAAP gross margin and product gross margin percentages would have been 74.4%and 44.8%,respectively.Selling,marketing and product support expense increased to$2.5 million in 2017 from$2.4 million in 2016,remaining constant year-over
319、-year at17.1%of revenue.General and administrative expense increased to$4.0 million from$3.9 million in 2016,remaining constant year-over-year at 27.4%of revenue.General and administrative expenses increased in 2017 because of approximately$303,000 incurred cost related to the Econolite arbitrationd
320、ecision,offset by cost saving measures enacted in 2016.Research and development expense increased to$3.0 million or 20.7%of total revenue in 2017,from$2.9 million or 20.8%of total revenue in2016.The increase is primarily due to$1.1 million of software development costs related to the development of
321、our new video and radardetection technologies that were capitalized.In comparison,we capitalized$1.7 million of software development costs in 2016.In the first quarter of 2016,the Company implemented restructuring plans for our office in Canada.Because of these actions,restructuringcharges of approx
322、imately$126,000 were recorded in 2016.There were no restructuring charges recorded in 2017.Income tax expense of$85,000 or 4.0%of our pretax income was recorded for the year ended December 31,2017,compared to income tax benefitof$25,000 or 3.8%of pretax income for the year ended December 31,2016.Liq
323、uidity and Capital ResourcesAt December 31,2017,we had$3.2 million in cash and cash equivalents,compared to$1.5 million at December 31,2016.On July 9,2015,the Company entered into a share and asset sales purchase agreement(the SAPA)with TagMaster AB for the purchase priceof$4.2 million,subject to ce
324、rtain customary closing adjustments based on the difference between estimated net asset value and final net assetvalue,of which$3.8 million was paid to the Company at closing.The remaining$420,000 was placed in an escrow account and was availableuntil July 9,2016 to satisfy any indemnification oblig
325、ations the Company may have had under the SAPA.The$420,000 in escrow was releasedto the Company during the third quarter of 2016.Net cash provided by operating activities was$3.0 million in 2017 compared to$447,000 in 2016.The primary reason for the increase in net cashprovided by operating activiti
326、es in 2017 was the increase in net income combined with the timing of the payment of outstanding payables.22Net cash used for continuing investing activities was$1.4 million in 2017,compared to net cash used for continuing investing activities of$1.8million in 2016.The decreased investing of cash us
327、ed for continuing investing activities in 2017 compared to the prior period is the result of thecapitalized software development costs.No net cash was used for financing activities in 2017 compared to$17,000 of net cash used for financing activities in 2016.In May 2014,the Company entered into a cre
328、dit agreement and related documents with Alliance Bank which provided for a revolving line ofcredit for the Company.The credit agreement and related documents with Alliance Bank(collectively,the Alliance Credit Agreement)provided up to$5.0 million revolving line of credit bearing interest at a fixed
329、 annual rate of 3.95%.Any advances would have been secured bythe Companys inventories,accounts receivable,cash,marketable securities,and equipment.We were subject to certain covenants under theAlliance Credit Agreement.In April 2016,we entered into an agreement with Alliance Bank amending the Allian
330、ce Credit Agreement to extendthe maturity date from April 1,2016 to May 12,2017.We chose not to renew the Alliance Credit Agreement.We believe that cash and cash equivalents on hand at December 31,2017,along with the cash provided by operating activities,will satisfy ourprojected working capital nee
331、ds,investing activities,and other cash requirements for the foreseeable future.Off Balance Sheet ArrangementsWe do not participate in transactions or have relationships or other arrangements with an unconsolidated entity,including special purpose andsimilar entities or other offbalance sheet arrange
332、ments.Critical Accounting PoliciesOur Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K are prepared in accordance with U.S.generallyaccepted accounting principles(“GAAP”),which require us to make estimates and assumptions in certain circumstances that affect am
333、ountsreported.In preparing these financial statements,management has made its best estimates and judgments of certain amounts,giving dueconsideration to materiality.We believe that of our significant accounting policies,the following are particularly important to the portrayal ofour results of operations and financial position,may require the application of a higher level of judgment by our manage
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