Iteris (ITI) Risk Analysis

We believe our revenues growth and future operating results will depend on our ability to complete development of new products and product enhancements, introduce these products and product enhancements in a timely, cost-effective manner, achieve broad market acceptance of these products and product enhancements, and reduce our production costs. During the past few fiscal years we have introduced, and we expect we will continue to introduce, both new and enhanced products. We cannot guarantee the success of these products, and we might not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our existing products. We believe that we must continue to make substantial investments to support ongoing research and development in order to develop new or enhanced products and software to remain competitive. We need to continue to prepare updates for existing products and develop and introduce new products that incorporate the latest technological advancements in outdoor image processing hardware, camera technologies, software and analysis in response to evolving customer requirements. In addition, we are continuing to migrate some of our products to a new platform. We cannot assure you that we will be able to adequately manage product transitions. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technological developments or changing customer requirements or if we cannot adequately manage inventory requirements typically related to new product transitions and introductions. We cannot ensure that any such investments in research and development will lead to any corresponding increase in revenues.

Protecting our customers' data is critical to our business, and if there is unauthorized access, we may incur significant costs or liabilities. In addition, we are required to comply with government contracting requirements and make investments in our systems to protect that data. If we are unable to do so, our customers may lose confidence in us, which would harm our sales, and we may incur significant expenses or liabilities.

Our competitors tend to vary across the various product categories in which we participate. The engineering and consulting market is highly fragmented and is subject to evolving national and regional quality and safety standards. Our competitors vary in size, number, scope and breadth of the products and services they offer, and include large multi-national engineering firms and smaller local or regional firms. Our sensors line of business competes with existing, well-established companies and technologies, both domestically and abroad. Only a portion of the traffic intersection market has adopted advanced above-ground detection technologies, and our future success will depend in part upon gaining broader market acceptance for such technologies. Certain technological barriers to entry make it difficult for new competitors to enter the market with competing video or other technologies; however, we are aware of new market entrants from time to time. Increased competition could result in loss of market share, price reductions and reduced gross margins, any of which could seriously harm our business, financial condition and results of operations. Many of our competitors have greater name recognition and greater financial, technological, marketing and customer service resources than we do. This may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development, promotion, sale and support of their products and services than we can. Consolidations of end users, distributors and manufacturers in our target markets exacerbate this problem. As a result of the foregoing factors, we might not be able to compete effectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations.

A significant portion of our revenues comes from contracts with governmental agencies, either as a general contractor, subcontractor or supplier. We anticipate that revenues from government contracts will remain a significant portion of our revenues. Government business is, in general, subject to special risks and challenges, including: - delays in funding and uncertainty regarding the allocation of funds to state and local agencies from the U.S. federal government, and delays or reductions in other state and local funding dedicated for transportation and ITS projects;- other government personnel or budgetary constraints, including local governments not having sufficient personnel to pursue projects; reaching the current federal debt ceiling; and/or cut-backs, delays or reallocation of government funding, including without limitation, changes in the administration and repeal of government purchasing programs;- audits, litigation or investigations that delay or otherwise negatively impact the funding for certain government projects;- long purchase cycles or approval processes;- competitive bidding and qualification requirements, as well as our ability to replace large contracts once they have been completed;- changes in government policies and political agendas;- maintenance of relationships with key government entities from whom a substantial portion of our revenues is derived;- milestone deliverable requirements and liquidated damage and/or contract termination provisions for failure to meet contract milestone requirements;- performance bond requirements;- potential government shutdowns and related uncertainty with respect to the federal budget and debt ceiling;- adverse weather conditions or other natural or health disasters or developments, such as COVID-19, and evacuations and flooding due to hurricanes, or severe storms, can result in our inability to perform work in affected areas; and - international relations and international conflicts such as the war in Ukraine and the war in the Middle East, or other military operations that could cause the temporary or permanent diversion of government funding from transportation or other infrastructure projects. Governmental budgets and plans are subject to change without warning. Certain risks of selling to governmental entities include dependence on appropriations and administrative allocation of funds, changes in governmental procurement legislation and regulations and other policies that may reflect political developments or agendas, significant changes in contract scheduling, 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 and rescheduling or cancellation in purchase decisions by governmental entities, and the current constraints on government budgets at the federal, state and local level, and the ongoing uncertainty as to the timing and accessibility to government funding could cause our revenues and income to drop substantially or to fluctuate significantly between fiscal periods. In addition, a number of our government contracts are fixed price contracts. As a result, we might not be able to recover any cost overruns we may incur. These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project's requirements. The financial viability of any given project depends in large part on our ability to estimate these costs accurately and complete the project on a timely basis. In the event our costs for these projects exceed the fixed contractual amount, we will be required to bear the excess costs. Such additional costs could adversely affect our financial condition and results of operations. Moreover, certain of our government contracts are subject to termination or renegotiation at the convenience of the government, which could result in a large decline in our revenues in any given period. Our inability to address any of the foregoing concerns or the loss or renegotiation of any material government contract could seriously harm our business, financial condition and results of operations.

Sustained conflict and disruption in Ukraine and the Middle East is likely and although the lengths, impacts and outcomes of the ongoing wars in Ukraine and the Middle East are highly unpredictable, these conflicts could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in government agency budgets and funding preferences as well as increase in cyberattacks and cyber and corporate espionage. To date we have not experienced any material interruptions in our infrastructure, supplies, technology systems or networks needed to support our operations. We are actively monitoring the situations in Ukraine and the Middle East and assessing the potential impacts on our business. The extent and duration of the wars and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time. Any such disruptions may also magnify the impact of other risks described in this Annual Report on Form 10-K.

While we are working to increase our use of AI with initiatives, such as further enhancing our hybrid sensor technologies with integrated AI algorithms to provide precise and detailed detection, tracking and classification of traffic, there is also increasing regulatory scrutiny in the use of machine learning and AI. AI presents risks and challenges that could affect its adoption, such as uncertainty in the legal regulatory environment relating to AI may require significant resources to modify or change our business or product offerings to comply with U.S. and non-U.S. laws, the scale and nature are unknown at this time. For example, on October 30, 2023, the Biden administration issued an Executive Order to, among other things, establish extensive new standards for AI safety and security. Other jurisdictions may decide to adopt similar or more restrictive legislation that may render the use of such technologies challenging or prohibited. These obligations may make it harder for us to use AI in our business, and require us to change our product offerings, or prevent or limit our use of AI. If we cannot use AI, or that use is restricted, our product offerings may be less efficient, or we may be less competitive, which could adversely affect our business, reputation, financial conditions, and results of operations.

The cost of providing our engineering and mobility consulting services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including: - our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;- our ability to forecast demand for our services and thereby maintain an appropriate headcount in our various regions and related professional disciplines;- the timing of new contract awards, the commencement of work under an awarded contract or the completion of large contracts;- the availability of project funding or other project budget issues;- our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and - our ability to match the skill sets of our employees to the needs of the marketplace. An inability to properly and fully utilize our engineering and consulting workforce would reduce our profitability and could have an adverse effect on our results of operations.