1、Annual Report 2013Last year was pivotal in the growth trajectory for Image Sensing Systems,marked by significant progress in product development and the continued traction we are seeing in the growth of our sales pipeline,both in terms of size and quality.From a strategic point of view,we defined ou
2、r companys direction around making cities safer with our existing and future technology solutions and innovations.We are encouraged by the momentum we had in product sales growth in the second half of 2013.Were also excited about our recent product launches,including our best-in-class CitySync Safet
3、y solution,that reads license or number plates for traffic data,security,police,and parking applications.2013:A Year of TransitionWhile we made tremendous strides in starting to leverage our core competencies and the many assets we have developed,we continued to fight economic headwinds in the globa
4、l economies.We were also slowed,in our transition,by a Foreign Corrupt Practices Act(FCPA)investigation into matters originating in Poland and quality and warranty issues within our legacy product portfolio.However,we continued to drive innovation despite these constraints.Our new product and soluti
5、ons offering truly differentiates us within our chosen markets,and we are getting great receptivity at trade shows and from potential customers.In a market ripe for innovation,we are shifting the focus to customer-led,benefit-based high tech solutions.Were very excited about the growth potential fro
6、m this suite of products.During the year,we saw further recovery and stabilization in the North American and international markets that we serve.While that improvement was uneven within our target international markets,we made good progress and grew in both our EMEA and Asia Pacific regions.In North
7、 America,we continued to strengthen our partnership relationship with Econolite and collaborated with them to address a number of market opportunities.We also began to build out our Safety Management portfolio of products and solutions for the Crime/Law Enforcement,Parking and Security/Access Contro
8、l markets.From a revenue perspective,full-year 2013 revenue grew 5 percent over 2012,to$26.3 million.More importantly,we saw accelerated product sales growth in the second half of the year as a result of our investments and development efforts.Full-year Product and Solutions sales rose 17 percent ov
9、er 2012 to$14.7 million,while our License Plate Recognition product group revenue increased 34 percent year-over-year to$6.4 million.We believe that helping mayors,the police and public works departments leverage our robust solutions to make their cities safer is a force multiplier and cost containm
10、ent strategy to help manage their already constrained budgets.Through in-depth market research around our safe city strategy,we are focused on delivering technologies that can be deployed today,as well as the many new innovations that we and our partners will develop to benefit citizen safety in any
11、 environment in the future.We understand that citizens and the people who run cities and municipalities hold safety as their foremost concern,and Image Sensing Systems will be there with innovative products and technologies to support these issues.Our leading-edge Safe City technology provides the d
12、ata and analytics that law enforcement,security,parking,and traffic management professionals need to construct and build a safe locale.We currently have an early installation in a U.S.city thats showing great returns To Our Shareholders:in solving crimes quickly;we will keep you updated on our progr
13、ess.We believe that combining our world renowned LPR engine with the highest quality fixed cameras and a crime-solving back office software is an industry first.Key MilestonesTraffic ManagementIn our Traffic Management market segment we made three key announcements in 2013.To support our mission to
14、be a customer-led company,the first product to come from that effort is an entry level Autoscope video detection product for intersections,the Sn-500 and Sn-510.In conjunction with these new video products,we also announced an industry-leading intersection set-up tool,the Autoscope Zone Detection To
15、ol(ZDT).Our new,easy-to-use graphical user interface,or GUI,can set-up an four approach intersection in as little as 15 minutes and has set a new industry standard.This overall solution addresses a key market segment and is targeted at lower cost markets:municipalities that have very limited resourc
16、es and budgets.We also introduced our back office software solution,CitySync Metro,for the Traffic Management market.CitySync Metro was designed for reliability and accuracy in all weather conditions and large scale projects.The product is also easy to install-with no lane closures-and requires no o
17、ngoing maintenance.It is also suitable for both highway and urban traffic management applications.We are very excited about the growth potential from this product.Safety ManagementIn the Safety Management market,we had a major launch in October of our cloud and on-premises analytics back office solu
18、tion-CitySync Safety.This product is unique in its market focus,as it provides the ability to quickly locate vehicles near a crime scene,and is able to run other analytic queries that assist the police department in rapid crime solving capabilities.CitySync Safety can generate value for a city and p
19、olice department.As stated earlier,indications are very promising and we believe that better and more precise decisions can be driven from the data and analytics that our solution delivers.Looking AheadAs we discussed in last years shareholder letter,we believe the future is bright for Image Sensing
20、 Systems.We are also confident that the FCPA and product issues are winding down and we can focus all of our energies on adding value to cities and municipalities,throughout the world.From a product and solution portfolio perspective,we are more focused than ever on user and customer needs and belie
21、ve that ISS is a strategic value-add to our customers operations in the Traffic and Safety Management markets.We have spent the last year building out our suite of products and services and we expect the investments we have made will start to pay dividends in 2014.We are seeing increased momentum in
22、 our product and solutions sales and are confident in the springboard for growth that our platform provides.Im proud of our progress and our dedicated team of employees who have combined to create our industry-leading products and solutions offerings.We continue to face tremendous growth opportuniti
23、es in both domestic and international markets and are positioned to capitalize on them.Lastly,we have added strength to our executive management team as well as the sales,marketing and engineering functions.These new additions further augment our existing talented team of individuals as we continue
24、to execute on our strategy.We are confident in our future and the ISS team is passionate about returning the company to historical profitability levels and growing shareholder value.Thank you again for your continued support and we look forward to updating you on our milestones throughout the year.T
25、hank You,Kris TuftoChief Executive Officer(This page has been left blank intentionally.)UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON,D.C.20549 FORM 10-K (Mark one)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
26、2013 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _ to _ Commission file number:0-26056 Image Sensing Systems,Inc.(Exact name of registrant as specified in its charter)Minnesota 41-1519168 (State or other jurisdiction of in
27、corporation or organization)(I.R.S.Employer Identification No.)500 Spruce Tree Centre,1600 University Avenue West,St.Paul,MN 55104 (Address of principal executive offices)(Zip Code)(651)603-7700(Registrants telephone number,including area code)Not applicable.(Former name,former address and former fi
28、scal year,if changed since last report)Securities registered pursuant to Section 12(b)of the Act:Title of each class Name of each exchange on which registered Common Stock,$0.01 par value The NASDAQ Capital Market Securities registered pursuant to Section 12(g)of the Act:None.Indicate by check mark
29、if the registrant is a well-known 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 requir
30、ed to be filed by Section 13 or Section 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports)and(2)has been subject to such filing requirements for the past 90 days.Yes No Indicate by check mark wh
31、ether the registrant has submitted electronically and posted on its corporate Web site,if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit an
32、d post such files).Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained,to the best of registrants knowledge,in definitive proxy or information statements incorporated by reference in Part III of thi
33、s Form 10-K or any amendment to this Form 10-K.Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer or a smaller reporting company.See the definitions of“large accelerated filer,”“accelerated filer”and“smaller reporting company”in Ru
34、le 12b-2 of the Exchange Act.(Check one):Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company.)Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Act).Yes No As of June 30,
35、2013,the aggregate market value of the registrants common stock held by non-affiliates of the registrant was$22,081,730 based on the closing sale price as reported on The NASDAQ Capital Market.The number of shares outstanding of the registrants$0.01 par value common stock as of February 28,2014 was
36、4,974,847 shares.DOCUMENTS INCORPORATED BY REFERENCE Document Parts Into Which Incorporated Proxy Statement for the 2014 Annual Meeting of Shareholders(Proxy Statement)Part III i TABLE OF CONTENTS PART I.1 Item 1.Business.1 Item 1A.Risk Factors.8 Item 1B.Unresolved Staff Comments.16 Item 2.Propertie
37、s.16 Item 3.Legal Proceedings.16 Item 4.Mine Safety Disclosures.16 PART II.17 Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.17 Item 6.Selected Financial Data.18 Item 7.Managements Discussion and Analysis of Financial Condition and R
38、esults of Operations.19 Item 7A.Quantitative and Qualitative Disclosures About Market Risk.26 Item 8.Financial Statements and Supplementary Data.27 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.47 Item 9A.Controls and Procedures.47 Item 9B.Other Informat
39、ion.47 PART III.48 Item 10.Directors,Executive Officers and Corporate Governance.48 Item 11.Executive Compensation.48 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.48 Item 13.Certain Relationships and Related Transactions,and Director Independ
40、ence.48 Item 14.Principal Accountant Fees and Services.48 PART IV.49 Item 15.Exhibits and Financial Statement Schedules.49 Signatures.52 Exhibit Index.53 1 PART I Item 1.Business Business Image Sensing Systems,Inc.(referred to in this Annual Report on Form 10-K as“we,”“us,”“our”and the“Company”)deve
41、lops and markets video and radar processing products for use in traffic,security,police and parking applications such as intersection control,highway,bridge and tunnel traffic management,venue security,entry control,license plate recognition and traffic data collection.We are a leading provider of s
42、oftware-based computer enabled detection(“CED”)products and solutions for the intelligent transportation systems(“ITS”)industry and adjacent security and law enforcement markets.Our family of products,which we market as Autoscope video(video or video products),Autoscope radar(radar or radar products
43、)and automatic license plate recognition(“LPR”),provides end users with the tools needed to optimize traffic flow,enhance driver safety,regulate air quality and address security/surveillance concerns.Our technology analyzes signals from sophisticated sensors and transmits the information to manageme
44、nt systems and controllers or directly to users.Our software solutions,which we market as CitySync,provide end users with complete solutions of our hardware and software for the law enforcement,security and parking market.CED is a process in which software rather than humans examines outputs from va
45、rious types of sophisticated sensors to determine what is happening in a field of view.In the ITS industry,CED is a critical component of managing congestion and traffic flow.In many markets,it is not possible to build roads,bridges and highways quickly enough to accommodate increasing automobile ow
46、nership.For example,in China,22 million vehicles were introduced in 2013,up from the 19 million vehicles introduced in 2012.This is expected to rise to 30 million vehicles per year by 2020.In 2014,the number of vehicles in China surpassed 250 million.We believe this growing use of vehicles worldwide
47、 will make CED-based ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput.We believe our CED solutions are technically superior to those of our competitors because they have a higher level of accuracy,limit the occu
48、rrence of false detection,are generally easier to install with lower costs of ownership,work effectively in a multitude of light and weather conditions,and provide end users the ability to manage inputs from a variety of sensors for a number of tasks.It is our view that the technical advantages of o
49、ur products make our solutions well suited for use in ITS as well as adjacent security markets.We believe that the market for CED is increasingly favoring converged solutions that include ITS,security/surveillance and environmental management,which we expect to increase demand for CED products such
50、as ours.We believe the strength of our distribution channels positions us to increase the penetration of our technology-driven solutions in the marketplace.We market our Autoscope products in North America,the Caribbean and Latin America through exclusive agreements with Econolite Control Products,I
51、nc.(“Econolite”),which we believe is the leading distributor of ITS intersection control products in North America and the Caribbean.In January 2011,we entered into an agreement granting to Econolite and its affiliate,Econolite Canada,Inc.,the exclusive right to distribute our Autoscope radar produc
52、ts in Canada.In December 2011,we modified our agreement with Econolite to grant it the exclusive right to manufacture and distribute our Autoscope radar products in the United States and Mexico.We market our Autoscope video,Autoscope radar and LPR products outside of North America,the Caribbean and
53、Latin America through a combination of distribution and direct sales channels,including our wholly-owned subsidiaries in Hong Kong and the United Kingdom.Our end users primarily include governmental agencies and municipalities,and,as of December 31,2013,we had sold over 150,000 units in more than 60
54、 countries.Industry Overview The Intelligent Transportation Systems Market.ITS encompasses a broad range of information processing and control electronics technologies that,when integrated into roadway infrastructure,help monitor and manage traffic flow,reduce congestion and enhance driver safety.Th
55、e ITS market has been built around the detection of conditions that impact the proper operation of roadway infrastructure.ITS applications include a wide array of traffic management systems,such as traffic signal control,tolling and variable messaging signs.ITS technologies include video vehicle det
56、ection,LPR,inductive loop detection,sensing technologies(such as radars),floating cellular data,computational technologies and wireless communications.In traffic management applications,CED products are used for automated vehicle detection and are a primary data source upon which ITS solutions are b
57、uilt.Traditionally,automated vehicle detection is performed using inductive wire loops buried in the pavement.However,in-pavement loop detectors are costly to install,difficult to maintain,expensive to repair and not capable of either wide-area vehicle detection without installations of multiple loo
58、ps or recognizing license plate numbers.2 Above-ground CED solutions for ITS offer several advantages to in-pavement loop detectors.Above-ground CED solutions tend to have lower total cost of ownership than in-pavement loop detectors because above-ground CED solutions are non-destructive to road sur
59、faces,do not require closing roadways to install or repair,and are capable of wide-area vehicle detection with a single device,thus enabling one input device to do the work of many in-pavement loops.Due to their location above-ground,CED solutions have no exposure to the wear and tear associated wit
60、h expanding and contracting pavement and generally less exposure to the vibration and compaction caused by traffic.Furthermore,in the event of malfunction or product failure,above-ground CED solutions can be serviced and repaired without shutting down the roadway.Each of these factors results in gre
61、ater up-time and increased reliability of above-ground CED solutions compared to in-pavement loop detectors.Above-ground CED solutions also offer a broader set of detection capabilities and a wider field of view than in-pavement loop detectors.For example,unlike in-pavement loops,above-ground CED so
62、lutions can detect smoke and debris.In addition,a single unit video-or radar-based CED system can detect and measure a variety of parameters,including vehicle presence,counts,speed,length,time occupancy,headway and flow rate as well as environmental factors and obstructions to the roadway.An equival
63、ent installation using loops would require many installations per lane.We believe our Autoscope video and Autoscope radar products are competitive with and can take market share from in-pavement loop detectors.Based on our determination,the U.S.ITS above-ground detection market sales in 2012 were ap
64、proximately$100 to$120 million and the worldwide ITS above-ground detection market was approximately$200 million.We believe that we are the leader in the U.S.above-ground detection market in terms of sales volume,and we estimate that U.S.sales of in-pavement loop detectors that our Autoscope and Aut
65、oscope radar products can supplant were approximately$250 million in 2012.Our CitySync solutions add further to our offerings in ITS.In many ITS applications,such as journey time measurement,it is critical to ascertain the identity of the vehicle or to be able to uniquely identify a vehicle at a dif
66、ferent time or location.LPR is among the most widely used methods for these applications.As part of our CitySync solutions,we have dedicated research and development time to creating our CitySync initiative called“Safe Cities,”which helps communities improve safety and efficiency.We are investing th
67、ought leadership into this initiative by investigating new ways to combine leading-edge above-ground detection technology,radar,and“Big Data”collection and analysis to give law enforcement,security,parking and traffic management professionals more precise and accurate information.With increased real
68、-time reaction capabilities and in-depth analytics,these professionals will be able to make more confident and proactive decisions that will streamline operations and improve safety.We believe that several trends are driving the growth in ITS and adjacent market segments:Proliferation of Traffic.In
69、many countries,there has been a surge in the number of vehicles on roadways.Due to the growth of emerging economies and elevated standards of living,more people desire and are able to afford automobiles.The number of vehicles utilizing the worlds roadway infrastructure is growing at a quicker pace t
70、han new roads,bridges and highways are being constructed.The population of the United States grew by about 20%,or 65 million,from 1990 to 2010,while highway miles have increased by approximately 4%in the same period.Between 1990 and 2010,the number of registered highway vehicles in the U.S.increased
71、 from 193 million to 255 million.Overall,the growth in roadway infrastructure is failing to match the surge in the number of vehicles using it.CED-based traffic management and control systems address the problem by monitoring high traffic areas and analyzing data that can be used to mitigate traffic
72、 problems.The Demographics of Urbanization.Accelerated worldwide urbanization drives the creation and expansion of middle classes and produces heightened demand for automobiles.Currently,there are at least 400 cities in the world with over 1 million people.Because automobiles can be introduced to a
73、metropolitan area faster than roadway infrastructure can be constructed,the result is continuously worsening traffic.Because expanding the roadway infrastructure is slow and costly to implement,and often environmentally undesirable,government agencies are increasingly turning to technology-based con
74、gestion solutions that optimize performance and throughput of existing and new roadway infrastructure.Detection is the requisite common denominator for any technology-based solution.The Melding of Large City Service Domains.Large cities require a wide range of service domains,including traffic,secur
75、ity/surveillance and environmental protection.These cities are increasingly turning to centralized management of these service domains,employing a command and control model that requires sharing and integrating data across service domains to operate effectively and lower total cost so called“Safe Ci
76、ties”initiatives.For example,data collected for the traffic management service domain is relevant to all of the other service domains.This means that each CED sensor can supply information to multiple domain services.In turn,the sharing of detection information across service domains should increase
77、 the level of sophistication required to process and interpret that information.Additionally,CED is becoming less costly to manufacture while becoming more capable of performing certain complicated tasks than humans.This makes the concepts of“rich sensing”and“instrumenting the city”through CED solut
78、ions cost effective,which we believe will result in the extensive proliferation of sophisticated sensors and detection devices.3 The non-ITS LPR Market.In addition to ITS,LPR is widely used for applications in security,police and parking,among others.We believe the sum of these world-wide markets is
79、 significant and currently is in excess of$350 million for their LPR components.We also believe the competitive landscape is fragmented,with no dominant market share for any one competitor.Security.LPR is used in security applications world-wide for border crossings,airports and venues such as conve
80、ntion centers and sports arenas.Additionally,private industry uses LPR to help control entrances at high value locations,such as power plants.Homeland security and counter-terrorism activities benefit from LPR as part of the solution.Police.Law enforcement has adopted LPR for a variety of applicatio
81、ns.Police may use LPR to gather information on a stopped vehicle in a faster,automated fashion.LPR can scan for vehicles of interest from a fixed position or from a moving police vehicle,looking for stolen cars or for automobiles of individuals with arrest warrants outstanding.Also,LPR is regularly
82、used as a component of red light,speed and bus lane enforcement systems.Parking.Both public and private parking facilities have recently undergone a significant period of automation where human attendants have been replaced by machines that control access.LPR is employed in numerous parking function
83、s,including automatic entrance/exit,open spot locator assistance,lost vehicle location,theft avoidance and related security aspects.Solutions for Adjacent Markets.We believe that the adjacent markets of ITS,security/surveillance and environmental management are converging,and that this convergence w
84、ill accelerate as CED systems become more cost-effective now that a single CED unit can be used for multiple purposes.Because the CED technologies involved are closely related,our CED technology can be adapted to or is already capable of addressing these adjacent markets.Our Competitive Strengths We
85、 are a leading provider of software-based CED products and solutions for the ITS industry and related security and law enforcement markets.We have the following competitive strengths that we expect will continue to enhance our leadership position:Leading Proprietary Technologies.Over the last two de
86、cades,we have developed or acquired a proprietary portfolio of complex software algorithms and applications that we have continuously enhanced and refined.These algorithms,which include our advanced signal processing technologies,allow our video and radar detection and LPR products to capture and an
87、alyze objects in diverse weather and lighting conditions and to balance the accuracy of positive detection and the avoidance of false detections.Due to the strength of our proprietary technologies,we believe we command premium pricing.CED technologies similar to ours are also difficult to develop an
88、d refine in a commercially viable manner.We therefore should be well positioned to quickly introduce next-generation products to market.Proven Ability to Develop,Enhance and Market New Products.We are continually developing and enhancing our product offerings.Over the last two decades,we have demons
89、trated our ability to lead the market with new products and product enhancements.For example,the Autoscope Solo system was the first fully integrated color camera,zoom lens and machine vision processor in the above-ground detection market.Electronic Integrated Systems,Inc.(“EIS”),from which we purch
90、ased our radar product line,was one of the first companies to introduce radar-based technology solutions for ITS applications,and we continue to lead the market with technology enhancements and new products,such as Autoscope radar.Additionally,the CitySync system we acquired from Image Sensing Syste
91、ms UK Limited(“ISS UK”),formerly known as CitySync Limited,was the first in the LPR market to capture multiple license plates in the same lane with a standard configuration.Our CitySync solution offering includes the first cloud computing platform for providing rich data analytics in real-time.Furth
92、ermore,our hybrid CED product,Autoscope Duo,is the first commercial product to combine video and radar capabilities in a single unit to provide high accuracy in all weather conditions and gives us an entre to significantly expand our accessible market by continuing to drive the conversion from legac
93、y loop detection to above-ground detection.We have successfully collaborated with our long-term channel partners to market these products.We believe that developing,enhancing and marketing new products with our partners translates into strong organic revenue growth and high levels of profitability.L
94、eading Distribution Channel.We have maintained a relationship with Econolite for the exclusive manufacture and distribution of our Autoscope products in North America and the Caribbean since 1991 and in Latin America since 2002.We have now expanded this relationship to include the manufacture and di
95、stribution of our Autoscope radar products in the United States,Canada and Mexico.We believe that Econolite is the leading distributor of ITS control products in North America and the Caribbean.This relationship enhances our ability to commercialize and market new products and allows us to focus mor
96、e resources on developing advanced signal processing software algorithms.Broad Product Portfolio.Our product portfolio leverages our core software-based algorithms for CED to enable end users to detect and monitor objects in a designated field of view.We believe that our family of Autoscope video,ra
97、dar and LPR products allows us to offer a broad product portfolio that meets the needs of our end users.Additionally,our intention is to use our broad product portfolio 4 to offer hybrid products that satisfy traffic,security/surveillance and environmental management requirements,such as Autoscope D
98、uo.Experienced Management Team and Engineering Staff.Our management team and engineering staff are highly experienced in the ITS and software industries.Additionally,the continuity of our engineering staff should allow the uninterrupted development of new or improved products.Our Growth Strategy As
99、part of our growth strategy,we seek to:Enhance and Extend Our Technology Leadership in ITS.We believe we have established ourselves as a leading provider of CED in the ITS market segment.We believe that we continue to have an opportunity to accelerate our growth.We plan to do this by improving the a
100、ccuracy and functionality of our products and opportunistically expanding our product offering into adjacent markets,as well as expanding our portfolio and channels through licensing.Having developed and introduced a hybrid CED product,AutoscopeDuo,we expect to take advantage of our technical leader
101、ship in ITS and further differentiate us from our competitors.Expand LPR Markets.We believe that the LPR market is poised for growth at a higher rate than the ITS market.Further,we believe that our financial strength,distribution channels and customer base will add to our ability to grow Autoscope L
102、PR-related revenue and our CitySync Safety solutions.Expand into Adjacent Markets.Our core skill is the implementation of software-based CED products and solutions.Over the past two decades,we have been developing and refining our complex signal processing software algorithms.We should be able to ef
103、fectively utilize our core software skills more broadly as markets,including security/surveillance and environmental management systems,converge.We believe that a driver of this convergence is that CED systems will become more cost-effective when a single CED unit can be used for multiple purposes.A
104、s a result,our objective is to become the leading supplier of critical CED components to third party management systems,particularly those that exploit the convergence of traffic,security/surveillance and environmental management systems.To do this,we are integrating this concept into our long-range
105、 engineering development road-map and will evaluate the use of technology licensing and channel strategies that support this vision.Increase the Scope of Our Distribution and Direct Sales.We have made substantial investments in product adjustments to tailor our solutions to the differing needs of ou
106、r international end users and in new product acquisitions for both domestic and international markets.We have also invested in sales and marketing expansion,with a focus on our European and Asian subsidiaries.Markets in Eastern Europe,the Asia/Pacific region,the Middle East,Africa and South America,
107、which have historically lagged North America and Western Europe in their use of CED,have recently begun to increase the adoption of CED in their traffic,security/surveillance and environmental management systems.We intend to continue to refine our product offerings through engineering development an
108、d technology licensing to take advantage of the accelerated pace of the adoption of CED throughout the developing world.Our Products and Solutions Our vehicle and traffic detection products are critical components of many ITS and adjacent security and law enforcement applications.Our Autoscope video
109、 systems and Autoscope radar systems convert sensory input collected by video cameras and radar units into vehicle detection and traffic data used to operate,monitor and improve the efficiency of roadway infrastructure.Our Autoscope LPR systems use video sensors in the visible and infrared spectrums
110、 to read license or number plates for traffic data,security,police and parking applications.At the core of each product line are proprietary digital signal processing algorithms and sophisticated embedded software that analyze sensory input and deliver actionable data to integrated applications.We i
111、nvested approximately$5.0 million,$4.1 million and$4.4 million on research and development in 2013,2012 and 2011,respectively,to develop and enhance our product technology.Our digital signal processing software algorithms represent a foundation on which support for additional sensory inputs such as
112、acoustic,chemical,smoke,weather and vibration sensors may be added in the future.A diagram displaying our fundamental product architecture is shown below.5 The Image Sensing Product Architecture Autoscope Video.Our Autoscope video system processes video input from a traffic scene in real time and ex
113、tracts the required traffic data,including vehicle presence,counts,speed,length,time occupancy(percent of time the detection zone is occupied),average headway(time interval between vehicles)and flow rate(vehicles per hour per lane).Autoscope supports a variety of standard video cameras or can be pur
114、chased with an integrated video camera.For intersections,the system communicates with the intersection signal controller,which changes the traffic lights based on the data provided.In highway applications,the system gathers vehicle count and flow rates and detects anomalous incidents,such as stopped
115、 or wrong-way vehicles.In tunnel safety applications,Autoscope provides alerts to operators upon detecting stopped,wrong-way or slow moving vehicles and upon detecting pedestrians,debris or smoke.In any application,the data may also be transmitted to a traffic management center via the internet or o
116、ther standard communication means and processed in real time to assist in traffic management and stored for later analysis for traffic planning purposes.The Autoscope system comes in two varieties.Autoscope Encore is our integrated unit with a color zoom camera and a machine vision processing comput
117、er contained in a compact housing that is our leading offering in the North American market.Autoscope RackVision is our card only machine vision processing computer that is located in an intersection signal controller,control hub,incident management center or traffic management center that receives
118、video from a separate camera.The RackVision and its variants are our top selling Autoscope products in international markets.Autoscope products offer digital MPEG-4 video streaming,high speed Ethernet interface,web browser maintenance and data and video over power line communications.Autoscope Radar
119、.Our Autoscope radar systems use radar to measure vehicle presence,volume,occupancy,speed and classification information for roadway monitoring applications.Data is transmitted to a central computer at a traffic management center via standard communication means,including wireless.Data can be proces
120、sed in real time to assist in traffic management and stored for later analysis for traffic planning purposes.Autoscope radar is an integrated radar transmitter/receiver and special purpose computer contained in a compact,self-contained unit.The unit is typically situated on roadway poles and side-fi
121、red,making it especially well-suited for highway detection applications.Autoscope LPR.Our LPR systems process video information gathered from the visible and infrared spectrum to perform LPR for ITS,security,police and parking applications.Data is transmitted to other integrated systems or stored in
122、 onboard vehicle systems for later processing.Data can be processed to assist in traffic and parking management,real-time law enforcement and traffic alerts and stored for later analysis for traffic,security and commercial purposes.At the core of each Autoscope LPR system is the Autoscope Base softw
123、are suite,which runs the LPR algorithms and related processes,including communications.Autoscope Base operates with both non-proprietary and proprietary cameras.We offer a range of proprietary analog,high definition and intelligent cameras for both fixed and mobile systems.6 Hybrid.Video detection i
124、s best suited to applications in which the ability to act on complex and detailed information is desired.However,video can encounter difficulties in poorly-lit environments,in adverse weather conditions(such as fog or driving snow),in situations in which vehicles are obscured(for example,by other ve
125、hicles),or in extraordinarily dirty environments in which airborne particulates obscure the view.Also,despite the compensating factors of using high-quality color video,video can be susceptible to false detections due to shadows or reflections.Radar is less able to distinguish fine details than vide
126、o but is considerably less affected by adverse environmental conditions and,to some degree,can see through certain kinds of obstructions.It also does not recognize shadows or visual reflections.By combining video and radar sensors and algorithmically comparing their outputs in our hybrid Autoscope D
127、uo product,we believe we are able to offer our end users a product that provides superior accuracy in all weather conditions.The AutoscopeDuo is able to coalesce the strengths of each type of sensor to overcome the others limitations.The result is improved overall performance in a broader range of c
128、ircumstances,allowing us access to a larger market.CitySync.Our CitySync solutions provide the end user with a complete package including hardware and software.CitySync solutions are currently positioned around our LPR technology and platform.These solutions combine intelligent cameras with our mark
129、et specific software packages that we believe offer our end users with complete LPR solutions.The Rapid Plate Recognition technology reads a license plate numerous times and uses multiple advanced methods for both optical character recognition and plate finding for each plate read.The speed of our s
130、olutions allows us the capability to read hundreds of plates simultaneously.We believe our CitySync solutions provide the highest accuracy for the markets we serve.We believe in the development of our CitySync solutions and will continue to grow and enhance these solutions into all of our markets.Di
131、stribution,Sales and Marketing We market and sell our products globally.As of December 31,2013,we had supplied systems for more than 150,000 units in more than 60 countries.Together with our partners,we offer a combination of high-performance CED technology and experienced local support.Our end user
132、s primarily consist of federal,state,city and county departments of transportation,port,highway,tunnel and other transportation authorities,law enforcement agencies and parking facility operators.The decision-makers within these entities typically are traffic planners and engineers,who in turn often
133、 rely on consulting firms that perform planning and feasibility studies.Our products sometimes are sold directly to system integrators or other suppliers of systems and services who are operating under subcontracts in connection with major road construction contracts.Sales of Autoscope Video and Aut
134、oscope Radar in North America,the Caribbean and Latin America.We have granted Econolite an exclusive right to manufacture,market and distribute the Autoscope system in North America,the Caribbean and Latin America.In January 2011,we entered into an agreement granting to Econolite and its affiliate,E
135、conolite Canada,Inc.,the exclusive right to distribute our Autoscope radar products in Canada.In December 2011,we modified our agreement with Econolite to grant it the exclusive right to manufacture and distribute our Autoscope radar products in the United States and Mexico.The agreements with Econo
136、lite grant it a first refusal right that arises when we make a proposal to Econolite to extend the license to additional products in North America,the Caribbean and Latin America and a first negotiation right that arises when we make a proposal to Econolite to include rights corresponding to Econoli
137、tes rights under our current agreements in countries not in these territories.Econolite provides the marketing and technical support needed for its sales in these territories.Econolite pays us a royalty on the revenue derived from its sales of the Autoscope system.In January 2011,Econolite began pay
138、ing us a royalty on Autoscope radar sales in Canada and,in January 2012,on sales of radar products in the United States and Mexico.We cooperate in marketing Autoscope video and radar products with Econolite for North America,the Caribbean and Latin America and provide second-tier technical support.W
139、e have the right to terminate our agreements with Econolite if it does not meet minimum annual sales levels or if Econolite fails to make payments as required by the agreements.In 2008,the term of the original agreement with Econolite,as amended,was extended to 2031.The term of the agreement with Ec
140、onolite to manufacture and distribute our Autoscope radar products in Canada expires in 2028.The agreements can be terminated by either party upon three years notice.Sales of Autoscope LPR in North America,the Caribbean and Latin America.We market the Autoscope LPR systems to a network of distributo
141、rs covering countries in North America,the Caribbean and Latin America.On a limited basis,we sell directly to the end user.We provide technical support to these distributors from our various North American locations.Sales in Europe,Asia,the Middle East and Africa.We market our Autoscope video,radar
142、and LPR lines of products to a network of distributors covering countries in Europe,the Middle East,Africa and Asia through our wholly-owned subsidiaries that have offices in Hong Kong and the United Kingdom.On a limited basis,we sell directly to the end user.Technical support to these distributors
143、is provided by our wholly-owned subsidiaries in Europe and Asia,with second-tier support provided by our engineering groups.From time to time,we may grant exclusive rights to Econolite for markets outside of our significant markets for certain jurisdictions or product sales based on facts and circum
144、stances related to the opportunities.7 Competition We compete with companies that develop,manufacture and sell traffic management devices using video and radar sensing technologies as well as other above-ground CED technologies based on laser,infrared and acoustic sensors.For ITS applications,we als
145、o compete with providers of in-pavement loop detectors and estimate that more than 70%of the traffic management systems currently in use in the U.S.use in-pavement loop detectors.For competition with other above-ground CED products,we typically compete on performance and functionality,and to a lesse
146、r extent on price.When competing against providers of loop detectors,we compete principally on ease of installation and the total cost of ownership over a multi-year period,and to a lesser extent on functionality.Among the companies that provide direct competition to Autoscope video worldwide are FL
147、IR Systems,Inc.,Signal Group Inc.(Semex),Iteris,Inc.and Citilog S.A.Among the companies that provide direct competition to Autoscope radar worldwide are Wavetronix,LLC,MS Sedco Inc.and Xtralis,LLC.Among the companies that provide direct competition to Autoscope LPR worldwide are 3M Company,Perceptic
148、s LLC,Genetec Inc.,Vigilant Solutions and Elsag Datamat S.p.a.All of these companies have working installations of their systems in the U.S.and other parts of the world.To our knowledge,Autoscope and Autoscope radar have the largest number of installations as compared to their direct competitors.In
149、addition,there are smaller local companies providing direct competition in specific markets throughout the world.We are aware that these and other companies will continue to develop technologies for use in traffic management,security,police and parking applications.One or more of these technologies
150、could in the future provide increased competition for our systems.Other potential competitors of which we are aware include Siemens AG,Cognex Corp.,Augusta Technologie AG,Matsushita Electric Industrial Co.,Ltd.(Panasonic),Sumitomo Corporation and Omron Electronics LLC.These companies have machine vi
151、sion or radar capabilities and have substantially more financial,technological,marketing,personnel and research and development resources than we have.Manufacturing Autoscope video products for sale under the Econolite license agreement are manufactured through agreements with Econolite and Wireless
152、 Technology,Inc.In January 2011,we entered into an agreement with Econolite to distribute our Autoscope radar products in Canada.In December 2011,our original agreement with Econolite was amended to include the exclusive manufacture and distribution of Autoscope radar products in the United States a
153、nd Mexico beginning on January 1,2012.Econolite is responsible for setting warranty terms and must provide all service required under this warranty.In Europe and Asia,we engage contract manufacturers to manufacture the Autoscope family of products.Until January 2012,we engaged contract manufacturers
154、 to produce subassemblies for our radar products based on our designs.These subassemblies were then shipped to our facilities in Toronto,where we performed final assembly,testing and calibration and packaging of finished units for shipment.We also performed warranty and post-warranty repairs of rada
155、r units in Toronto.Beginning in January 2012,Econolite is responsible for setting warranty terms and must provide all service required under this warranty for radar products for product sales in North America.Autoscope LPR products are manufactured through contract manufacturers in the United Kingdo
156、m and the United States.We typically provide a two-year warranty on our products.Most of the hardware components used to manufacture our products are standard electronics components that are available from multiple sources.Although some of the components used in our products are obtained from single
157、-source suppliers,we believe other component vendors are available should the necessity arise.The European Parliament has enacted a directive for the restriction of the use of certain hazardous substances in electrical and electronic equipment(“RoHS”).To our knowledge,our contract manufacturing and
158、component vendors in Europe and Asia comply with the European directive on RoHS.Intellectual Property To protect our rights to our proprietary know-how,technology and other intellectual property,it is our policy to require all employees and consultants to sign confidentiality agreements that prohibi
159、t the disclosure of confidential information to any third parties.These agreements also require disclosure and assignment to us of any discoveries and inventions made by employees and consultants while they are devoted to our business activities.We also rely on trade secret,copyright and trademark l
160、aws to protect our intellectual property.We have also entered into exclusive and non-exclusive license and confidentiality agreements relating to our own and third-party technologies.We aggressively protect our processes,products,and strategies as proprietary trade secrets.Our efforts to protect int
161、ellectual property and avoid disputes over proprietary rights include ongoing review of third-party patents and patent applications.8 Environmental Matters We believe our operations are in compliance with all applicable environmental regulations within the jurisdictions in which we operate.Employees
162、 As of December 31,2013,we had 124 employees,consisting of 69 employees in North America,45 employees in Europe and 10 employees in Asia.None of our employees are represented by a union.Item 1A.Risk Factors Information Regarding Forward-Looking Statements This Annual Report on Form 10-K contains for
163、ward-looking statements within the meaning of Section 27A of the Securities Act of 1933,as amended,and Section 21E of the Securities Exchange of 1934,as amended.Forward-looking statements represent our expectations or beliefs concerning future events and can be identified by the use of forward-looki
164、ng words such as“believes,”“may,”“will,”“should,”“intends,”“plans,”“estimates,”or“anticipates”or other comparable terminology.Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking sta
165、tements.Some factors that might cause these differences include the factors listed below.Although we have attempted to list these factors comprehensively,we wish to caution investors that other factors may prove to be important in the future and may affect our operating results.New factors may emerg
166、e from time to time,and it is not possible to predict all of these factors,nor can we assess the effect each factor or combination of factors may have on our business.We further caution you not to unduly rely on any forward-looking statements because they reflect our views only as of the date the st
167、atements were made.We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information,future events or otherwise.If governmental entities elect not to use our products due to budgetary constraints,project delays or other reasons,our revenue
168、may fluctuate severely or be substantially diminished.Our products are sold primarily to governmental entities.We expect that we will continue to rely substantially on revenue and royalties from sales of our systems to governmental entities.In addition to normal business risks,it often takes conside
169、rable time before governmental initiated projects are developed to the point at which a purchase of our systems would be made,and a purchase of our products also may be subject to a time-consuming approval process.Additionally,governmental budgets and plans may change without warning.Other risks of
170、selling to governmental entities include dependence on appropriations and administrative allocation of funds,changes in governmental procurement legislation and regulations and other policies that may reflect political developments,significant changes in contract scheduling,competitive bidding and q
171、ualification requirements,performance bond requirements,intense competition for government business and termination of purchase decisions for the convenience of the governmental entity.Substantial delays in purchase decisions by governmental entities,or governmental budgetary constraints,could cause
172、 our revenue and income to drop substantially or to fluctuate significantly between fiscal periods.A majority of our gross profit has been generated from sales of our Autoscope family of products,and if we do not maintain the market for these products,our business will be harmed.Historically,a major
173、ity of our gross profit has been generated from sales of,or royalties from the sales of,Autoscope products.Gross profit from Autoscope sales accounted for approximately 71%of our gross profit in 2013,77%in 2012 and 71%in 2011.We anticipate that gross profit from the sale of Autoscope systems will co
174、ntinue to account for a substantial portion of our gross profit for the foreseeable future.As such,any significant decline in sales of our Autoscope system would have a material adverse impact on our business,financial condition and results of operations.If Econolites sales volume decreases or if it
175、 fails to pay royalties to us in a timely manner or at all,our financial results will suffer.We have agreements with Econolite under which Econolite is the exclusive distributor of the Autoscope video system in North America,the Caribbean and Latin America and the Autoscope radar products in the Uni
176、ted States,Canada and Mexico.The agreements grant Econolite a first refusal right that arises when we make a proposal to Econolite to extend the license to additional products in North America,the Caribbean and Latin America.In addition,the agreements grant Econolite a first negotiation right that a
177、rises when we make a proposal to Econolite to include rights corresponding to Econolites rights under our current agreements in countries not in these territories.In exchange for its rights under the agreements,Econolite pays us royalties for sales of the Autoscope video system and the Autoscope rad
178、ar products.Since 2002,a substantial portion of our revenue has consisted of 9 royalties resulting from sales made by Econolite,including 44%in 2013,50%in 2012 and 43%in 2011.Econolites account receivable represented 26%of our accounts receivable at December 31,2013 and 35%of our accounts receivable
179、 at December 31,2012.We expect that Econolite will continue to account for a significant portion of our revenue for the foreseeable future.Any decrease in Econolites sales volume could significantly reduce our royalty revenue and adversely impact earnings.A failure by Econolite to make royalty payme
180、nts to us in a timely manner or at all will harm our financial condition.In addition,we believe sales of our products are a material part of Econolites business,and any significant decrease in Econolites sales of the other products it sells could harm Econolite,which could have a material adverse ef
181、fect on our business and prospects.The features and functions in our products have not been as widely utilized as traditional products offered by our competitors,and the failure of our end users to accept the features and functions in our products could adversely affect our business and growth prosp
182、ects.Video and radar technologies have not been utilized in the traffic management industry as extensively as other more traditional technologies,mainly in-pavement loop detectors.Our financial success and growth prospects depend on the continued development of the market for advanced technology sol
183、utions for traffic detection and management and the acceptance of our current Autoscope video,Autoscope radar and LPR systems and also future systems we may develop as reliable,cost-effective alternatives to traditional vehicle detection systems.We cannot assure you that we will be able to utilize o
184、ur technology profitably in other products or markets.If our end users do not continue to increase their acceptance of the features and functions provided by our current systems or other systems we may develop in the future,our business and growth prospects could be adversely affected.Existing and f
185、uture laws,ordinances and regulations and constitutional provisions protecting privacy rights could negatively affect the acceptance and sale of our video and LPR products and systems and have a negative effect on our financial condition and results of operations.The use of video and LPR products an
186、d systems has been challenged,limited and banned under existing laws,ordinances and regulations and constitutional provisions protecting privacy rights.In addition,governments and governmental agencies have stopped or suspended their use of LPR systems.For example,Maine,New Jersey and Virginia have
187、laws limiting the use of LPR systems;New Hampshire bans their use;legislation has been proposed in Minnesota limiting the use of data collected by LPR systems;and the Boston Police Department has indefinitely halted its use of LPR systems.In addition,laws,ordinances,regulations and constitutional pr
188、ovisions may be adopted in the future to limit the use of video and LPR products and systems.These existing and new laws,ordinances,regulations and constitutional provisions could negatively affect the acceptance and sale of our video and LPR products and systems and thus have a negative effect on o
189、ur financial condition and results of operations.Our operating costs tend to be fixed,while our revenue tends to be seasonal,thereby resulting in operating results that fluctuate from quarter to quarter.Our expense levels are based in part on our product development efforts and our expectations rega
190、rding future revenues and,in the short-term,are generally fixed.Our quarterly revenues,however,have varied significantly in the past,with our first quarter historically being the weakest due to weather conditions in parts of North America,Europe and Asia that make roadway construction more difficult
191、.Additionally,our international revenues have a significant large project component,resulting in a varying revenue stream.We expect the seasonality of our revenue and the fixed nature of our operating costs to continue in the foreseeable future.Therefore,we may be unable to adjust our spending in a
192、timely manner to compensate for any unexpected revenue shortfall.As a result,if anticipated revenues in any quarter do not occur or are delayed,our operating results for the quarter would be disproportionately affected.Operating results also may fluctuate due to factors such as the demand for our pr
193、oducts;product life cycle;the development,introduction and acceptance of new products and product enhancements by us or our competitors;changes in the mix of distribution channels through which our products are offered;changes in the level of operating expenses;end user order deferrals in anticipati
194、on of new products;competitive conditions in the industry;and economic conditions generally.No assurance can be given that we will be able to achieve or maintain profitability on a quarterly or annual basis in the future.Increased competition may make it difficult for us to acquire and retain end us
195、ers.If we are unsuccessful in developing new applications and product enhancements,our products may become noncompetitive or obsolete.Competition in the areas of ITS,security and parking management is continuing to grow.Some of the companies that may compete with us in the business of developing and
196、 implementing traffic control and related security systems have substantially more financial,technological,marketing,personnel and research and development resources than we have.Therefore,they may be able to respond more quickly than we can to new or changing opportunities,technologies,standards or
197、 end user requirements.If we are unable to compete successfully with these companies,the market share for our products will decrease,and competitive pressures may seriously harm our business.10 Additionally,the market for vehicle detection and LPR is continuously seeking more advanced technological
198、solutions to problems.Technologies such as embedded loop detectors,pressure plates,pneumatic tubes,radars,lasers,magnetometers,acoustics and microwaves that have been used as traffic sensing devices in the past are being enhanced for use in the traffic management industry,and new technologies may be
199、 developed.We are aware of several companies that are developing traffic management devices using machine vision technology or other advanced technology.Floating vehicle and/or radio frequency identification(RFID)tagged license plate initiatives are under consideration and may be implemented.We expe
200、ct to face increasingly competitive product developments,applications and enhancements.New technologies or applications in traffic control systems from other companies may provide our end users with alternatives to our products and could render our solutions noncompetitive or obsolete.If we are unab
201、le to increase the number of our applications and develop and commercialize product enhancements and applications in a timely and cost-effective manner that respond to changing technology and satisfy the needs of our end users,our business and financial results will suffer.We may not achieve our gro
202、wth plans for the expansion of our business.In addition to market penetration,our long-term success depends on our ability to expand our business through new product development,mergers and acquisitions,and/or geographic expansion.New product development requires that we maintain our ability to impr
203、ove existing products,continue to bring innovative products to market in a timely fashion,and adapt products to the needs and standards of current and potential customers.Our products and services may become less competitive or eclipsed by technologies to which we do not have access or which render
204、our solutions obsolete.Geographic expansion will be primarily outside of the U.S.and hence will be disproportionately subject to the risks of international operations discussed in this Annual Report on Form 10-K.Mergers and acquisitions will be accompanied by risks which may include:difficulties ide
205、ntifying suitable acquisition candidates at acceptable costs;unavailability of capital to conduct acquisitions;failure to achieve the financial and strategic goals for the acquired and combined businesses;difficulty assimilating the operations and personnel of the acquired businesses;disruption of o
206、ngoing business and distraction of management from the ongoing business;dilution of existing shareholders and earnings per share;unanticipated,undisclosed or inaccurately assessed liabilities,legal risks and costs;and difficulties retaining our key vendors,customers or employees or those of the acqu
207、ired business.In addition,acquisitions of businesses having a significant presence outside the U.S.will increase our exposure to the risks of international operations discussed in this Annual Report on Form 10-K.Our dependence on third parties for manufacturing and marketing our products may prevent
208、 us from meeting customers needs in a timely manner.We do not have,and do not intend to develop in the near future,internal capabilities to manufacture our products.We have entered into agreements with Econolite and Wireless Technology,Inc.(“WTI”)to manufacture the Autoscope system,the Autoscope rad
209、ar products and related products for sales in North America,the Caribbean and Latin America.We have arrangements with Hansatech EMS Limited(“Hansatech”)in the United Kingdom to manufacture our LPR systems.We work with suppliers,most of whom are overseas,to manufacture the rest of our products.We als
210、o need to comply with the European Unions regulatory RoHS directive restricting the use of certain hazardous substances in electrical and electronic equipment.If Econolite,WTI,Hansatech or our other suppliers are unable to manufacture our products in the future,we may be unable to identify other man
211、ufacturers able to meet product and quality demands in a timely manner or at all.Our inability to find suitable manufacturers for our products could result in delays or reductions in product shipments,which in turn may harm our business reputation and results of operations.In addition,we have grante
212、d Econolite the exclusive right to market the Autoscope video system and related products in North America,the Caribbean and Latin America and the Autoscope radar products in the United States,Canada and Mexico.Consequently,our revenue depends to a significant extent on Econolites marketing efforts.
213、Econolites inability to effectively market the Autoscope video system or the Autoscope radar products,or the disruption or termination of that relationship,could result in reduced revenue and market share for our products.11 We and our third party manufacturers obtain some of the components of our p
214、roducts from a single source,and an interruption in the supply of those components may prevent us from meeting customers needs in a timely manner and could therefore reduce our sales.Although substantially all of the hardware components incorporated into our products are standard electronics compone
215、nts that are available from multiple sources,we and our third party manufacturers obtain some of the components from a single source.The loss or interruption of any of these supply sources could force us or our manufacturers to identify new suppliers,which could increase our costs,reduce our sales a
216、nd profitability,or harm our customer relations by delaying product deliveries.Regulations related to the use of conflict-free minerals may increase our costs and cause us to incur additional expenses.The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve the tr
217、ansparency and accountability of the use by public companies in their products of minerals mined in certain countries and to prevent the sourcing of such“conflict”minerals.As a result,the Securities and Exchange Commission enacted new annual disclosure and reporting requirements for public companies
218、 who use these minerals in their products,which apply to us.Under the final rules,we are required to conduct due diligence to determine the source of any conflict minerals used in our products,and we are required to file our first conflict minerals report with the Securities and Exchange Commission
219、on or before May 31,2014.Although we expect to file the required report on a timely basis,our supply chain is broad-based and complex,and we may not be able to easily verify the origins for all minerals used in our products.To the extent that any information furnished to us by our suppliers is inacc
220、urate or inadequate,we could face reputational and enforcement risks.In addition,the new rules could reduce the number of suppliers who provide components and products containing conflict-free minerals and thus could disrupt our supply chain or that of our manufacturers and increase the cost of the
221、components used in manufacturing our products and the costs of our products to us.Any increased costs and expenses could have a material adverse impact on our financial condition and results of operations.Some of our products are covered by our warranties and,if the cost of fulfilling these warranti
222、es exceeds our warranty allowance,it could adversely affect our financial condition and results of operations.Unanticipated warranty and other costs for defective products could adversely affect our financial condition and results of operations and our reputation.We generally provide a two-year warr
223、anty on our product sales.These warranties require us to repair or replace faulty products,among other customary warranty provisions.Although we monitor our warranty claims and provide an allowance for estimated warranty costs,unanticipated claims in excess of the allowance could have a material adv
224、erse impact on our financial condition and results of operations.Additionally,we rely on our third party manufacturers to fulfill our warranty repair obligations to our customers.Adverse changes in these parties abilities to perform these repairs could cause a delay in repairs or require us to sourc
225、e other parties to perform the repairs and could adversely affect impact our financial condition and results of operations.In addition,the need to repair or replace products with design or manufacturing defects could adversely affect our reputation.We may face increased competition if we fail to ade
226、quately protect our intellectual property rights,and any efforts to protect our intellectual property rights may result in costly litigation.Our success depends in large measure on the protection of our proprietary technology rights.We rely on trade secret,copyright and trademark laws,confidentialit
227、y agreements with employees and third parties,and patents,all of which offer only limited protection.We cannot assure you that the scope of these protective measures will exclude competitors or provide a competitive advantages to us.We also cannot assure you that we will become aware of all instance
228、s in which others develop similar products,duplicate any of our products,or reverse engineer or misappropriate our proprietary technology.If our proprietary technology is misappropriated,our business and financial results could be adversely affected.Litigation may be necessary in the future to enfor
229、ce our intellectual property rights,to protect our trade secrets or to determine the validity and scope of the proprietary rights of others.In addition,we may be the subject of lawsuits by others who claim we violate their intellectual property rights.Intellectual property litigation is very costly
230、and could result in substantial expense and diversions of our resources,either of which could adversely affect our business and financial condition and results of operations.In addition,there may be no effective legal recourse against infringement of our intellectual property by third parties,whethe
231、r due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.We have not applied for patent protection in all countries in which we market and sell our products.Consequently,our proprietary rights in the technology underlying our systems in countries other t
232、han the U.S.will be protected only to the extent that trade secret,copyright or other non-patent protection is available and to the extent we are able to enforce our rights.The laws of other countries in which we market our products may afford little or no effective protection of our proprietary tec
233、hnology,which could harm our business.12 We plan to continue introducing new products and technologies and may not realize the degree or timing of benefits we initially anticipated,which could adversely affect our business and results of operations.We regularly invest substantial amounts in research
234、 and development efforts that pursue advancements in a range of technologies,products and services.Our ability to realize the anticipated benefits of these advancements depends on a variety of factors,including meeting development,production,certification and regulatory approval schedules;the execut
235、ion of internal and external performance plans;the availability of supplier-produced parts and materials;the performance of suppliers and vendors;achieving cost efficiencies;the validation of innovative technologies;and the level of end user interest in new technologies and products.These factors in
236、volve significant risks and uncertainties.We may encounter difficulties in developing and producing these new products and may not realize the degree or timing of benefits initially anticipated.In particular,we cannot predict with certainty whether,when or in what quantities our current or potential
237、 end users will have a demand for products currently in development or pending release.Moreover,as new products are announced,sales of current products may decrease as end users delay making purchases until such new products are available.Any of the foregoing could adversely affect our business and
238、results of operations.Our business could be adversely affected by product liability and commercial litigation.Our products or services may be claimed to cause or contribute to personal injury or property damage to our customers employees or facilities.Additionally,we are,at times,involved in commerc
239、ial disputes with third parties,such as customers,vendors and others.The ensuing claims may arise singularly,in groups of related claims,or in class actions involving multiple claimants.Such claims and litigation are frequently expensive and time-consuming to resolve and may result in substantial li
240、ability to us,which liability and related costs and expenses may not be recoverable through insurance or any other forms of reimbursement.Our business could be affected by various legal and regulatory compliance risks,including those involving antitrust,environmental,anti-bribery or anti-corruption
241、laws and regulations.We are subject to various legal and regulatory requirements and risks in the U.S.and other countries in which we have facilities or sell our products involving compliance with antitrust,environmental,anti-bribery and anti-corruption laws and regulations,including the U.S.Foreign
242、 Corrupt Practices Act and the U.K.Anti-Bribery Act.Although we have internal policies and procedures with the intention of assuring compliance with these laws and regulations,our employees,contractors,agents and licensees involved in our international sales may take actions in violation of such pol
243、icies.For more information,see the discussion in Note 15 of our Notes to Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.Any future adverse development,ruling or settlement could result in charges that could have an adverse effect on our results of operations
244、 or cash flows.We price certain of our products at a premium compared to other technologies.As such,we may not be able to quickly respond to emerging low-cost competitors,and our inability to do so could adversely affect revenue and profitability.We price certain of our products at a premium as comp
245、ared to products using less sophisticated technologies.As the technological sophistication of our competitors and the size of the market increase,competing low-cost developers of machine vision products for traffic are likely to emerge and grow stronger.If end users prefer low-cost alternatives over
246、 our products,our revenue and profitability could be adversely affected.Our revenue could be adversely affected by the emergence of local competitors and local biases in international markets.Our experience indicates that local officials that purchase traffic management products in the international
247、 markets we serve favor products that are developed and manufactured locally.As local competitors to our products emerge,local biases could erode our revenue in Europe and Asia and adversely affect our sales and revenue in those markets.Our failure to predict technological convergence could harm our
248、 business and could reduce our sales.Within our product families,we currently utilize only certain detection technologies available in the ITS field.If we fail to predict convergence of technology preferences in the market for ITS,or fail to identify and acquire complementary businesses or products
249、that broaden our current product offerings,we may not capture certain segments of the market,which could harm our business and reduce our sales.We sell our products internationally and are subject to various risks relating to such international activities,which could harm our international sales and
250、 profitability.Sales outside of the United States,including export sales from our U.S.business locations,accounted for approximately 51%of our total revenue in 2013.By doing business in international markets,we are exposed to risks separate and distinct from those we face in our U.S.operations.Our i
251、nternational business may be adversely affected by changing political and economic conditions in foreign 13 countries.Additionally,fluctuations in currency exchange rates could affect demand for our products or otherwise negatively affect profitability.Engaging in international business inherently i
252、nvolves a number of other difficulties and risks,including:export restrictions and controls relating to technology;pricing pressure that we may experience internationally;exposure to the risk of currency value fluctuations,where payment for products is denominated in a currency other than U.S.dollar
253、s;variability in the U.S.dollar value of foreign currency-denominated assets,earnings and cash flows;required compliance with existing and new foreign regulatory requirements and laws;laws and business practices favoring local companies;longer payment cycles;difficulty of enforcing agreements,includ
254、ing patent and trademarks,and collecting receivables through foreign legal systems;political and economic instability,including volatility in the economic environment of the European Union caused by the ongoing sovereign debt crisis in Europe;tax rates in certain foreign countries that exceed those
255、in the U.S.and the imposition of withholding requirements on foreign earnings;higher danger of terrorist activity,war or civil unrest compared to domestic operations;difficulties and costs of staffing and managing foreign operations;and difficulties in enforcing intellectual property rights.Our expo
256、sure to each of these risks may increase our costs,lengthen our sales cycle and require significant management attention.One or more of these factors may harm our business.Our inability to comply with European and Asian regulatory restrictions over hazardous substances and electronic waste could res
257、trict product sales in those markets and reduce profitability in the future.The European Unions Waste Electrical and Electronic Equipment(“WEEE”)directive makes producers of electrical goods financially responsible for specified collection,recycling,treatment and disposal of past and future covered
258、products.This directive must be enacted and implemented by individual European Union governments,and certain producers will be financially responsible under the WEEE legislation.This may impose requirements on us,which,if we are unable to meet them,could adversely affect our ability to market our pr
259、oducts in European Union countries,and sales revenues and profitability would suffer as a consequence.In addition,the European Parliament has enacted a directive for the restriction of the use of certain hazardous substances in electrical and electronic equipment.This RoHS legislation restricts the
260、use of such substances as mercury,lead,cadmium and hexavalent cadmium.If we are unable to have our products manufactured in compliance with the RoHS directive,we would be unable to market our products in European Union countries,and our revenues and profitability would suffer.In addition,various Asi
261、an governments could adopt their own versions of environment-friendly electronic regulations similar to the European directives,RoHS and WEEE.This could require new and unanticipated manufacturing changes,product testing and certification requirements,thereby increasing cost,delaying sales and lower
262、ing revenue and profitability.Our inability to manage growth effectively could seriously harm our business.Growth and expansion of our business could significantly strain our capital resources as well as the time and abilities of our management personnel.Our ability to manage growth effectively will
263、 require continued improvement of our operational,financial and management systems and the successful training,motivation and management of our employees.If we are unable to manage growth successfully,our business and operating results will suffer.14 Our business operations will be severely disrupte
264、d if we lose key personnel or if we fail to attract and retain qualified personnel.Our technology depends upon the knowledge,experience and skills of our key management and scientific and technical personnel.Additionally,our ability to continue technological developments and to market our products,a
265、nd thereby develop a competitive edge in the marketplace,depends in large part on our ability to attract and retain qualified scientific and technical personnel.Competition for qualified personnel is intense,and we cannot assure you that we will be able to attract and retain the individuals we need,
266、especially if our business expands and requires us to employ additional personnel.In addition,the loss of personnel or our failure to hire additional personnel could materially and adversely affect our business,operating results and ability to expand.The loss of key personnel,or our inability to hir
267、e and retain qualified personnel,would harm our business.We may not be successful in integrating acquired companies into our business,which could materially and adversely affect our financial condition and operating results.Part of our business strategy has been to acquire or invest in companies,pro
268、ducts or technologies that complement our current products,enhance our market coverage or technical capabilities or offer growth opportunities.For any acquisition,a significant amount of managements time and financial resources may be required to complete the acquisition and integrate the acquired b
269、usiness into our existing operations.Even with this investment of management time and financial resources,an acquisition may not produce the revenue,earnings or business synergies anticipated.Acquisitions involve numerous other risks,including the assumption of unanticipated operating problems or le
270、gal liabilities;problems integrating the purchased operations,technologies or products;the diversion of managements attention from our core businesses;restrictions on the manner in which we may use purchased companies or assets imposed by acquisition agreements;adverse effects on existing business r
271、elationships with suppliers and customers;incorrect estimates made in the accounting for acquisitions and amortization of acquired intangible assets that would reduce future reported earnings(such as goodwill impairments);ensuring acquired companies compliance with the requirements of the U.S.federa
272、l securities laws and accounting rules;and the potential loss of customers or key employees of acquired businesses.We cannot assure you that any acquisitions,investments,strategic alliances or joint ventures will be completed or integrated in a timely manner or achieve anticipated synergies,will be
273、structured or financed in a way that will enhance our business or creditworthiness,or will meet our strategic objectives or otherwise be successful.We may be required to recognize impairment charges for long-lived assets.As of December 31,2013,the net carrying value of long-lived assets(property and
274、 equipment,deferred tax assets and other intangible assets)totaled approximately$8.1 million.In accordance with generally accepted accounting principles,we periodically assess these assets to determine if they are impaired.Significant negative industry or economic trends,a significant and sustained
275、decline in our stock price,disruptions to our businesses,significant unexpected or planned changes in our use of assets,divestitures and market capitalization declines may result in impairments to our goodwill and other long-lived assets.Future impairment charges could significantly affect our resul
276、ts of operations in the periods recognized.Our stock is thinly traded and our stock price is volatile.Our common stock is thinly traded,with 3,350,684 shares of our 4,974,847 outstanding shares held by non-affiliates as of February 28,2014.Based on the trading history of our common stock and the nat
277、ure of the market for publicly traded securities of companies in evolving high-tech industries,we believe there are several factors that have caused and are likely to continue to cause the market price of our common stock to fluctuate substantially.The fluctuations may occur on a day-to-day basis or
278、 over a longer period of time.Factors that may cause fluctuations in our stock price include announcements of large orders obtained by us or our competitors,substantial cutbacks in government funding of highway projects or of the potential availability of alternative technologies for use in traffic
279、control and safety,quarterly fluctuations in our financial results or the financial results of our competitors,consolidation among our competitors,fluctuations in stock market prices and volumes,and the volatility of the stock market.Difficult and volatile conditions in the capital,credit and commod
280、ities markets and in the overall economy could continue to adversely affect our financial position,results of operations and cash flows,and we do not know if these conditions will improve in the near future.Our financial position,results of operations and cash flows could continue to be adversely af
281、fected by difficult conditions and significant volatility in the capital,credit and commodities markets and in the overall worldwide economy.Although certain economic conditions in the United States have improved or shown signs of improvement,economic growth has been slow and uneven.In recent years,
282、the weak global economic conditions,particularly in the U.S.and Europe,have negatively affected our sales and profitability.During economic downturns,governmental entities in particular,which constitute most of our end users,reduce or delay their purchase of our products,which has had and may contin
283、ue to have an adverse effect on our business.Any uncertainty about the federal budget in the U.S.could have a negative effect on the U.S.and global economy.The continuing impact that these factors might have on us and our business is uncertain and cannot be estimated at this time.Current economic co
284、nditions have accentuated 15 each of these risks and magnified their potential effect on us and our business.The difficult conditions in these markets and the overall economy affect our business in a number of ways.For example:Although we believe we have sufficient liquidity under our financing arra
285、ngements to run our business,under extreme market conditions,there can be no assurance that such funds would be available or sufficient,and,in such a case,we may not be able to successfully obtain additional financing on favorable terms,or at all.Continuing market volatility has exerted downward pre
286、ssure on our stock price,which could make it more difficult or unfavorable for us to raise additional capital in the future.Economic conditions could result in customers in our markets continuing to experience financial difficulties,including limited liquidity and their inability to obtain financing
287、 or electing to limit spending because of the economy which may result,for example,in customers inability to pay us at all or on a timely basis and in declining tax revenue for our customers that are governmental entities,which in turn could result in decreased sales and earnings for us.We do not kn
288、ow if market conditions or the state of the overall economy will improve in the near future,when improvement will occur or if any improvement will benefit our market segment.Our articles of incorporation and bylaws and Minnesota law may inhibit a takeover that shareholders consider favorable.Provisi
289、ons of our articles of incorporation and bylaws and applicable provisions of Minnesota law may delay or discourage transactions involving an actual or potential change in our control or change in our management,including transactions in which shareholders might otherwise receive a premium for their
290、shares or transactions that our shareholders might otherwise deem to be in their best interests.These provisions:permit our board of directors to issue up to 5,000,000 shares of preferred stock with any rights,preferences and privileges as it may designate,including the right to approve an acquisiti
291、on or other change in our control;provide that the authorized number of directors may be increased by resolution of the board of directors;provide that all vacancies,including newly-created directorships,may,except as otherwise required by law,be filled by the affirmative vote of a majority of direc
292、tors then in office,even if less than a quorum;and eliminate cumulative voting rights,therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election,if they should so choose.Section 302A.671
293、 of the Minnesota Business Corporation Act(“MBCA”)generally limits the voting rights of a shareholder acquiring a substantial percentage of our voting shares in an attempted takeover or otherwise becoming a substantial shareholder of our company unless holders of a majority of the voting power of al
294、l outstanding shares and the disinterested shares approve full voting rights for the substantial shareholder.Section 302A.673 of the MBCA generally limits our ability to engage in any business combination with certain persons who own 10%or more of our outstanding voting stock or any of our associate
295、s or affiliates who at any time in the past four years have owned 10%or more of our outstanding voting stock.These provisions of the MBCA may have the effect of entrenching our management team and may deprive shareholders of the opportunity to sell their shares to potential acquirers at a premium ov
296、er prevailing prices.This potential inability to obtain a control premium could reduce the price of our common stock.In addition,in June 2013,we adopted a shareholder rights plan and declared a dividend to our shareholders of one preferred share purchase right for each outstanding share of common st
297、ock.Generally,the shareholder rights plan provides that if a person or group acquires 20%or more of our outstanding shares of common stock,subject to certain exceptions and under certain circumstances,the rights may be exchanged by us for common stock or the holders of the rights,other than the acqu
298、iring person or group,could acquire additional shares of our capital stock at a discount of the then current market price.Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuing our company.The mere existence of a share
299、holder rights plan often delays or makes a merger,tender offer or other acquisition more difficult to complete.We can issue shares of preferred stock without shareholder approval,which could adversely affect the rights of common shareholders.Our articles of incorporation permit our board of director
300、s to establish the rights,privileges,preferences and restrictions,including voting rights,of future series of our preferred stock and to issue such stock without approval from our shareholders.The rights of holders of our common stock may suffer as a result of the rights granted to holders of prefer
301、red stock that may be issued in the future.16 In addition,we could issue preferred stock to prevent a change in control of our company,depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.We do not intend to declare cash dividends on
302、 our stock in the foreseeable future.We currently intend to retain all future earnings for the operation and expansion of our business and,therefore,do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future.Any payment of cash dividends on our common stock wi
303、ll be at the discretion of our board of directors and will depend upon our operating results,earnings,current and anticipated cash needs,capital requirements,financial condition,future prospects,any contractual restrictions and any other factors deemed relevant by our board of directors.Therefore,sh
304、areholders should not expect to receive dividend income from shares of our common stock.Item 1B.Unresolved Staff Comments None.Item 2.Properties We currently lease and occupy approximately 20,000 square feet in St.Paul,Minnesota for our headquarters.In February 2014,we entered into an amendment to t
305、he lease for our headquarters which expands the leased space to approximately 26,775 square feet,extends the term of the lease to July 2020,and gives us the right to further extend the term of the lease for one additional five-year term.Our office in suburban north London,United Kingdom consists of
306、17,000 square feet of space,and our lease for this space expires at our option in January 2015.We also lease smaller facilities in Canada,Hong Kong,China,Germany,Spain,Romania and Poland.We believe that our current space is generally adequate to meet our current expected needs,and we do not intend t
307、o lease significantly more space in 2014.Item 3.Legal Proceedings We are involved in legal actions and claims relating to various matters.Although we are unable to predict the ultimate outcome of these legal actions and claims,it is the opinion of management that the disposition of these matters,tak
308、en as a whole,will not have a material adverse effect on our Consolidated Financial Statements.Item 4.Mine Safety Disclosures Not applicable.17 PART II Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stoc
309、k is traded on The NASDAQ Capital Market under the symbol“ISNS.”The quarterly high and low sales prices for our common stock for our last two fiscal years are set forth below.QuarterHighLowHighLowFirst7.39$4.78$7.26$6.02$Second8.28 6.50 7.80 4.64 Third7.70 4.62 5.48 4.61 Fourth6.00 4.29 5.30 4.57 20
310、132012 Shareholders As of February 28,2014,there were 19 holders of record of our common stock.The number of holders of record is based upon the actual number of holders registered at such date and does not include holders of shares in“street names”or persons,partnerships,associates,corporations,or
311、other entities identified in security position listings maintained by depositories.Dividends We have never declared or paid a cash dividend on our common stock.We currently intend to retain earnings for use in the operation and expansion of our business,and,consequently,we do not anticipate paying a
312、ny dividends in the foreseeable future.Debt Covenants Our credit agreement includes certain financial covenants,including minimum debt service ratios,minimum cash flow coverage ratios,and other financial measures.These financial covenants may restrict our ability to pay dividends and purchase outsta
313、nding shares of common stock.At December 31,2013 and December 31,2012,we were in compliance with these financial covenants.Information on our debt agreements is included in Item 7 of this Annual Report on Form 10-K.18 Item 6.Selected Financial Data The following table sets forth selected consolidate
314、d financial data for each of the five fiscal years ended December 31,2013.The statement of income and balance sheet data for the years ended and as of December 31,2013,2012,2011,2010 and 2009 are derived from our audited Consolidated Financial Statements.The following information should be read in c
315、onjunction with“Managements Discussion and Analysis of Financial Condition and Results of Operations”and with our Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.Consolidated Statement of Operations Data:Revenue:Product sales$14,6
316、92$12,564$17,475$19,162$12,483 Royalties11,598 12,399 13,046 12,519 12,110 26,290 24,963 30,521 31,681 24,593 Cost of revenue:Product sales9,889 6,706 8,769 7,799 4,297 Restructuring 448 9,889 6,706 9,217 7,799 4,297 Gross profit16,401 18,257 21,304 23,882 20,296 Operating expenses:Selling,marketing
317、 and product support11,768 7,289 10,609 9,807 7,201 General and administrative6,290 5,167 6,315 4,372 3,779 Research and development5,036 4,135 4,424 3,630 3,336 Investigation matter3,723 Amortization of intangible assets 1,554 1,622 1,650 1,218 768 Restructuring 430 287 Goodwill impairment 3,175 11
318、,685 Acquisition related expenses(income)(618)817 28,371 21,818 34,352 19,844 15,084 Income(loss)from operations(11,970)(3,561)(13,048)4,038 5,212 Other income(expense),net6 29 9 (123)7 Income(loss)before income taxes(11,964)(3,532)(13,039)3,915 5,219 Income tax expense(benefit)3,937 (180)(3,022)910
319、 1,354 Net income(loss)$(15,901)$(3,352)$(10,017)$3,005$3,865 Net income(loss)per share:Basic$(3.21)$(0.69)$(2.07)$0.66$0.97 Diluted$(3.21)$(0.69)$(2.07)$0.64$0.95 Weighted average number of common shares outstanding:Basic4,955 4,886 4,834 4,555 3,985 Diluted4,955 4,886 4,834 4,667 4,081 Consolidate
320、d Balance Sheet Data:Total assets$24,385$38,536$41,254$54,356$41,150 Bank debt 4,000 Total shareholders equity18,514 33,980 36,326 46,021 32,713 2009(in thousands,except per share data)2013201220112010 19 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The
321、 following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Selected Financial Data and our financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.Our actual results could differ materia
322、lly from those anticipated in the forward-looking statements included in this discussion as a result of certain factors,including,but not limited to,those discussed in“Risk Factors”and“Information Regarding Forward-Looking Statements”included elsewhere in this Annual Report on Form 10-K.General.We p
323、rovide software based computer enabled detection(“CED”)products and solutions that use advanced signal processing software algorithms to detect and monitor objects in a designated field of view.Our technology analyzes signals from a sophisticated sensor and passes the information along to management
324、 systems,controllers or directly to users.Our core products,the Autoscope Video Vehicle Detection System,Autoscope Radar Detection System and License Plate Recognition(“LPR”)System,operate using our proprietary application software in conjunction with video cameras or radar and commonly available el
325、ectronic components.Our systems are used by traffic managers primarily to improve the flow of vehicle traffic and to enhance safety at intersections,main thoroughfares,freeways and tunnels and by parking and toll managers and law enforcement officials to read license plates for various safety,securi
326、ty,access and enforcement LPR applications.Autoscope video and radar systems are sold to distributors and end users of traffic management products in North America,the Caribbean and Latin America by Econolite Control Products,Inc.(“Econolite”),our exclusive licensee in these regions.We sell LPR syst
327、ems to distributors and end users in North America.We sell all of our systems to distributors and end users in Europe and Asia through our European and Hong Kong subsidiaries,respectively.The majority of our sales are to end users that are funded by government agencies responsible for traffic manage
328、ment or traffic law enforcement.Autoscope Radar Business Model Change.Beginning in 2012,we changed part of our Autoscope radar business model by granting an exclusive license to manufacture and distribute Autoscope radar products in North America to Econolite under terms substantially the same as ou
329、r Autoscope royalty arrangement.In conjunction with this agreement,certain of our sales and marketing employees dedicated to Autoscope radar became employed directly by Econolite.As a result,in 2012,revenue earned from sales of Autoscope radar in North America are in the form of a royalty rather tha
330、n a sale directly to the purchaser,and there is no cost of revenue in 2012 and future periods,as Econolite is now responsible for manufacturing and post-sales support,except for transitional legacy items.Simultaneously with the Autoscope radar changes,we restructured aspects of our North American Au
331、toscope radar and LPR businesses.Most significantly,the assembly of our Autoscope radar product was moved from our Toronto facility to a third party,and our production and administrative support headcount was reduced early in 2012.Trends and Challenges in Our Business We believe the growth in our bu
332、siness can be attributed primarily to the following global trends:worsening traffic caused by increased numbers of vehicles in metropolitan areas without corresponding expansions of road infrastructure and the need to automate safety,security and access applications for automobiles and trucks,which
333、has increased demand for our 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 has increased the ability of our primary end users to implement our products;and general increases in the cost-effectiveness of electronics,which mak
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