AUTOSCOPE TECHNOLOGIES CORP - Quarter Report: 2021 September (Form 10-Q)

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PART I. FINANCIAL INFORMATION	4
Item 1. Financial Statements (Unaudited)	4
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations	5
Condensed Consolidated Statements of Comprehensive Income	6
Condensed Consolidated Statements of Cash Flows	7
Condensed Consolidated Statements of Shareholders' Equity	8
Notes to Condensed Consolidated Financial Statements	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
Item 4. Controls and Procedures	30
PART II. OTHER INFORMATION	31
Item 1. Legal Proceedings	31
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	32
SIGNATURES	33

	Three-Month Period Ended September 30, 2020
	Shares Issued			Common Stock				Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Deficit				Total
Balance, June 30, 2020	5,338,071			$	53			$	24,858			$	(358	)		$	(6,526	)		$	18,027
Stock-based compensation	8,220				—				55				—				—				55
Comprehensive income:
Foreign currency translation adjustment	—				—				—				94				—				94
Net income	—				—				—				—				659				659
Balance, September 30, 2020	5,346,291			$	53			$	24,913			$	(264	)		$	(5,867	)		$	18,835
	Three-Month Period Ended September 30, 2021
	Shares Issued			Common Stock				Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Deficit				Total
Balance, June 30, 2021	5,367,186			$	54			$	25,048			$	(185	)		$	(4,263	)		$	20,654
Stock-based compensation	5,032				—				57				—				—				57
Stock options exercised	—				—				—				—				—				—
Stock for tax withholding	—				—				—				—				—				—
Dividends declared	—				—				—				—				(644	)			(644	)
Comprehensive income:
Foreign currency translation adjustment	—				—				—				(65	)			—				(65)
Net income	—				—				—				—				613				613
Balance, September 30, 2021	5,372,218			$	54			$	25,105			$	(250	)		$	(4,294	)		$	20,615
See accompanying notes to the condensed consolidated financial statements

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Note A: Basis of Presentation

 

On July 21, 2021, a holding company reorganization was completed (the "Reorganization") in which Image Sensing Systems, Inc. ("ISNS") became a wholly-owned subsidiary of the new parent company named "Autoscope Technologies Corporation" ("Autoscope"), which became the successor issuer to ISNS.  As a result of the Reorganization, Autoscope replaced ISNS as the public company trading on the Nasdaq Stock Market under the ticker symbol "AATC," and outstanding shares of ISNS's common stock automatically converted into shares of common stock of Autoscope.  As used in this Quarterly Report on Form 10-Q, the "Company", "we", "us" and "our" or its management or business at any time before the effective date of the Reorganization refer to those of ISNS as the predecessor company and its wholly-owned subsidiaries and thereafter to Autoscope and its wholly-owned subsidiaries, except as otherwise specified or to the extent the context otherwise indicates.  The Reorganization is intended to be a tax-free transaction for U.S. federal income tax purposes for the Company's shareholders.  Autoscope was incorporated on April 23, 2021 under the laws of the State of Minnesota, and ISNS was incorporated in Minnesota on December 20, 1984.  The Company develops and markets video and radar processing products for use in applications such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. We sell our products primarily to distributors and also receive royalties under a license agreement with a manufacturer/distributor for certain of our products. Our products are used primarily by governmental entities.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q, which require the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals considered necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated.

 

Operating results for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC.

Cash Dividend

On April 28, 2021, the Board of Directors of the Company approved a cash dividend of $0.12 per share to shareholders of record on the close of business on May 10, 2021, which was paid to shareholders on May 20, 2021.

On August 10, 2021, the Board of Directors of the Company approved a cash dividend of $0.12 per share to shareholders of record on the close of business on August 23, 2021, which was paid to shareholders on August 30, 2021.

On November 9, 2021, the Board of Directors of the Company approved a cash dividend of $0.12 per share to shareholders of record on the close of business on November 22, 2021, which is payable to shareholders on November 29, 2021.

Summary of Significant Accounting Policies

The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position and may require the application of a higher level of judgment by the Company's management and, as a result, are subject to an inherent degree of uncertainty. 

 

Revenue Recognition  

We recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

 

Revenue disaggregated by revenue source for the three and nine months ended September 30, 2021 and 2020 consists of the following (in thousands); revenue excludes sales and usage-based taxes when or if it has been determined that we are acting as a pass-through agent: 

 

 

Inventories

Inventories are primarily electronic components and finished goods and are valued at the lower of cost or net realizable value determined under the first-in, first-out accounting method.

 

Income Taxes

We record a tax provision for the anticipated tax consequences of our reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.

 

Intangible Assets

We capitalize certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials, services, internal labor and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product's estimated economic selling life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.

Capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value have been expensed in the period in which such a determination is made. Subsequent to reaching technological feasibility for certain software products, we capitalized  no software development costs in the quarter ended September 30, 2021 or the comparable prior year quarter, and $178,000 and $22,000 during the nine-month periods ended September 30, 2021 and 2020, respectively.

Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows and reviewed for impairment. At both September 30, 2021 and 2020, we determined there was no impairment of intangible assets. At both September 30, 2021 and 2020, there were no indefinite-lived intangible assets.

Note C: Fair Value Measurements

 

The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:

	Level 1:	observable inputs such as quoted prices in active markets;
	Level 2:	inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	Level 3:	unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial Instruments not Measured at Fair Value

Certain of our financial instruments are not measured at fair value and are recorded at carrying amounts approximating fair value, based on their short-term nature or variable interest rate. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and other current financial assets and liabilities.

 

Note D: Inventories

 

Inventories consisted of the following (in thousands): 

 

Note E: Operating Leases

The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through November 2022. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

  

Most of these leases include an option to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use ("ROU") assets and lease liabilities because they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.

 

Because most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. We used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate. 

 

The cost components of our operating leases were as follows (in thousands):  

 

Variable lease costs consist primarily of property taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment, which are paid based on actual costs incurred by the lessor.

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Maturities for our lease liabilities for all operating leases were as follows (in thousands) as of September 30, 2021:

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2021:

 

Cash paid for amounts included in the measurement of operating lease liabilities was $160,000 and $193,000 for the nine months ended September 30, 2021 and 2020, respectively, and these amounts are included in operating activities in the condensed consolidated statements of cash flows. There were no operating lease assets obtained in exchange for new operating lease liabilities for the three and nine months ended September 30, 2021 and 2020, except that during the three months ended September 30, 2020, we agreed to a one-year extension of our office space which increased operating lease assets and liabilities by $194,000, and, during the three months ended September 30, 2021, ISNS entered into Amendment XV to Office Lease Agreement (the "Amendment"), which increased operating lease assets and liabilities by $134,000. 

On July 28, 2021 ISNS and Spruce Tree Centre L.L.P. entered into the Amendment, which amended the original Office Lease Agreement dated as of November 24, 1998 by and between ISNS and Spruce Tree (the "Original Lease"), as such Original Lease was subsequently amended (as so amended, the "Lease").  The Amendment was signed by Spruce Tree on July 28, 2021.  The Lease term was to expire on July 31, 2021.  The Amendment, which is effective August 1, 2021, extends the Lease through March 31, 2022.  In addition, the Amendment increases the monthly rent from $16,660 to $16,960 for the period from August 1, 2021 through March 31, 2022.

On August 27, 2021 (the "Effective Date"), ISNS, and TJ&Z Family Limited Partnership, a Minnesota limited partnership ("TJ&Z"), entered into a Purchase Agreement (the "Agreement") under which ISNS is purchasing certain real and personal property (the "Property") from TJ&Z for a total purchase price of $2,050,000, subject to adjustments if certain conditions are not satisfied (the "Purchase Price").  The Property includes land and a building located at 1115 Hennepin Avenue, Minneapolis, Minnesota (the "Real Property").  The Agreement also provides for the sale by TJ&Z to ISNS of all of TJ&Z's interest under a billboard lease for a billboard located on the Real Property, business records related to the Real Property, and certain personal property located on the Real Property, all as described in the Agreement.  The Agreement gives ISNS 60 days after the Effective Date (the "Inspection Period") during which to undertake any studies, tests, investigations, and inspections of the Property.  Effective as of October 26, 2021, ISNS and TJ&Z entered into the First Amendment to purchase Agreement (the "First Amendment") that, among other things, extends the Inspection Period from October 26, 2021 to November 26, 2021, as to certain conditions only.  The First Amendment effectively extends the closing date to December 13, 2021, and requires ISNS to pay $50,000 in earnest money in addition to the $50,000 in earnest money already paid by ISNS under the Agreement.  

The foregoing description of the Agreement and the First Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement and First Amendment filed as Exhibit 10.5 and Exhibit 10.6, respectively, to this Quarterly Report on Form 10-Q and incorporated herein by reference.  

	September 30, 2021
													Weighted
	Gross								Net				Average
	Carrying				Accumulated				Carrying				Useful Life
	Amount				Amortization				Value				(in Years)
Wrong Way development costs	$	228			$	(228	)		$	—			—
Vision development costs		3,106				(1,846	)			1,260			8.0
Echo development costs		1,852				(441	)			1,411			7.0
IntellitraffiQ development costs		468				(380	)			88			4.0
Total	$	5,654			$	(2,895	)		$	2,759			7.0

	December 31, 2020
													Weighted
	Gross								Net				Average
	Carrying				Accumulated				Carrying				Useful Life
	Amount				Amortization				Value				(in Years)
Wrong Way development costs	$	228			$	(228	)		$	—			—
Vision development costs		2,929				(1,553	)			1,376			8.0
Echo development costs		1,852				(242	)			1,610			7.0
IntellitraffiQ development costs		468				(293	)			175			4.0
Total	$	5,477			$	(2,316	)		$	3,161			7.3

	Nine-Month Periods Ended September 30,
	2021				2020
Beginning balance	$	141			$	313
Warranty provisions		30				26
Warranty claims		(35	)			(53	)
Adjustments to preexisting warranties		(5	)			(146	)
Currency		(4	)			2
Ending balance	$	127			$	142

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