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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

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

Autoscope Technologies Corporation

(Exact Name of Registrant as Specified in its Charter)

Minnesota

 

86-3685595

State or Other Jurisdiction of

Incorporation or Organization

 

I.R.S. Employer Identification No.

 

 

 


 

 

1115 Hennepin Avenue

 

 

Minneapolis, MN

 

55403

Address of Principal Executive Offices

 

Zip Code

 

(612) 438-2363

Registrant’s Telephone Number, Including Area Code

                                                                                                                                         

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report


Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value AATC The Nasdaq Capital Market
Preferred Stock Purchase Rights AATC The Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨
Non-accelerated filer x Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨


1



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes     No x

 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 

 

Class

 

Outstanding at August 11, 2022

Common Stock, $0.01 par value per share

 

5,398,887 shares


2


 

AUTOSCOPE TECHNOLOGIES CORPORATION

TABLE OF CONTENTS  

​​​​​​​​​​​​​​​​​​



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 (Loss) 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 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION 34
Item 1. Legal Proceedings 34
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Mine Safety Disclosures 34
Item 5. Other Information 34
Item 6. Exhibits 35
SIGNATURES 36

 

3


PART I. FINANCIAL INFORMATION 
Item 1.         Financial Statements 

Autoscope Technologies Corporation

Condensed Consolidated Balance Sheets

(in thousands)


June 30,

2022

 

December 31,


(Unaudited)

 

2021

ASSETS








Current assets:








Cash and cash equivalents

$

1,933

 


$

8,229

 

Accounts receivable, net of allowance for doubtful accounts of $6 and $18 respectively 


2,762

 



2,369

 

Inventories


1,475

 



1,429

 

Investments in available-for-sale debt securities
425



Investments in equity securities
247



Due from broker

481



Prepaid expenses and other current assets


913

 



355

 

Total current assets

8,236

 



12,382

 




 





Property and equipment:



 





Furniture and fixtures


    136

 



136

 

Leasehold improvements


  6




6

 

Equipment


972

 



994


Real property
2,059


2,059



   3,173

 



3,195


Accumulated depreciation


   997

 



958




2,176

 



2,237

 

 






Operating lease assets, net


9




58


Intangible assets, net 


2,996

 



2,866

 

Deferred income taxes


4,811




4,824

 

Long-term investments in available-for-sale debt securities
3,011



TOTAL ASSETS

$

21,239



$

22,367


 








LIABILITIES AND SHAREHOLDERS' EQUITY








Current liabilities:








Accounts payable

$

      479

 


$

236

 

Deferred revenue
112


107

Warranty


   119

 



128

 

Accrued compensation


     59

 



 132

 

Operating lease obligations
10


59


Current maturities of long-term debt
57


56

Other current liabilities

 

133

 



181

 

Total current liabilities


969

 



 899










Long-term debt
1,645


1,674

TOTAL LIABILITIES


2,614




 2,573

 




 




 

Shareholders' equity:








Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued or outstanding






Common stock, $0.01 par value; 20,000,000 shares authorized, 5,398,887 and 5,378,857


 




  

 issued and outstanding at June 30, 2022 and December 31, 2021, respectively


54

 



   54

 

Additional paid-in capital


 25,452




25,167


Accumulated other comprehensive loss 


(543

)



(288

)

Accumulated deficit


(6,338

)



(5,139

)

Total shareholders' equity


18,625

 



19,794

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

21,239



$

22,367


See accompanying notes to the condensed consolidated financial statements.                             

4


Autoscope Technologies Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

Three-Month
Periods Ended
June 30,


Six-Month
Periods Ended
June 30,
  2022
2021
2022
2021

Revenue:
















Product sales

$ 1,432

$ 1,305

$ 2,366

$ 2,468

Royalties


1,387


2,483


3,205


4,299
 
2,819


3,788


5,571


6,767

Cost of revenue:
















Product sales


719


730


1,230


1,343
  Royalties
105


97


210


190
 
824


827


1,440


1,533

Gross profit


1,995


2,961


4,131


5,234
 














Operating expenses:
















 Selling, general and administrative


1,324


1,516


3,009


2,882

 Research and development


526


541


954


1,037
 
1,850


2,057


3,963


3,919

Income from operations


145


904

168


1,315
Other income
10





21


925
Investment loss
(30 )




(25 )


Interest expense
(18 )




(36 )


Income from operations before income taxes
107


904

128


2,240
Income tax expense
33


152

36


357

Net income

$ 74

$ 752
$ 92

$ 1,883

Net income per share:
















Basic

$ 0.01

$ 0.14
$ 0.02

$ 0.35

Diluted

$ 0.01

$ 0.14
$ 0.02

$ 0.35
 














Weighted average number of common shares outstanding:
















Basic


5,381


5,341


5,371


5,332

Diluted


5,387


5,350


5,373


5,343









See accompanying notes to the condensed consolidated financial statements.









 

5


Autoscope Technologies Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(in thousands)

  


Three-Month Periods Ended

June 30,


Six-Month Periods Ended

June 30,


2022
2021
2022
2021

Net income

$ 74

$ 752

$ 92

$ 1,883

Other comprehensive income:
















Foreign currency translation adjustment


(131 )

18

(193 )

(35 )

Comprehensive income (loss)

$ (57 )
$ 770

$ (101 )
$ 1,848

















See accompanying notes to the condensed consolidated financial statements.                       

 

6


Autoscope Technologies Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands) 

   

Six-Month Periods Ended
June 30,

 

2022

 

2021

Operating activities:

 

 

 


 

 

 

Net income

$

92

 


$

1,883




 




 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:



 




 

Depreciation

 

95

 


 

80

 

Software amortization

 

404

 


 

382

 

        Amortization of deferred finance fees
1



Stock-based compensation

 

268

 


 

107

 

Deferred income tax expense
30


348
Forgiveness income from PPP Loan (Note N)


(931 )
Loss on disposal of assets
5


1
Realized loss on equity investments
53



Unrealized loss on equity investments
3



Investment loss
6



Changes in operating assets and liabilities:

 

 

 


 

 

 

Accounts receivable, net

 

(393

)


 

(1,237

)

Inventories


(46

)


 

47

Prepaid expenses and other current assets

 

(557

)


 

50

Accounts payable

 

244


 

(212

)

Accrued expenses and other current liabilities

 

(126

)


 

191

Net cash provided by (used) for operating activities

 

79


 

709




 




 

Investing activities:

 

 

 


 

 

 

Capitalized software development costs

 

(534

)


 

(178

Purchases of property and equipment

 

(41

)


 

(8

Purchase of equity securities
(795 )


Sale of equity securities
10



Purchase of debt securities
(3,521 )


Net cash used for investing activities 

 

(4,881

)  

 

(186

)

 

 

 

 


 

 

 

Financing activities:

 

 

 

 

 

 

 

Stock for tax withholding 

 

(15

)  

 

(35

)
 Dividends paid
(1,291 )

(644 )
 Proceeds from exercised options
32


8
 Principal payments on long-term debt
(29 )


Net cash used for financing activities

 

(1,303

)  

 

(671

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(191

)


 

(30

)

Change in cash and cash equivalents

 

(6,296

)


 

(178

)

 

 

 

 


 

 

 

Cash and cash equivalents at beginning of period

 

8,229

 


 

8,605

 

Cash and cash equivalents at end of period

$

1,933

 


$

8,427

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

Non-Cash investing and financing activities:

 

 

 

 

 

 

 

Sale of equity securities included in due from broker
481




See accompanying notes to the condensed consolidated financial statements. 


7


AUTOSCOPE TECHNOLOGIES CORPORATION


Condensed Consolidated Statements of Shareholders' Equity

(in thousands, except share data)



Three-Month Period Ended June 30, 2021

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total
 





















Balance, March 31, 2021 (unaudited)
5,354,337


$ 54

$ 24,997

$ (203 )
$ (4,371 )
$ 20,477























Stock-based compensation   12,527





54








54
Stock options exercised 2,000





8








8
Stock for tax withholding
(1,678 )





(11 )







(11 )
Dividends declared











(644 )

(644 )
Comprehensive income:





















Foreign currency translation adjustment








18




18
Net income










752

752
Balance, June 30, 2021 (unaudited) 5,367,186

$ 54

$ 25,048

$ (185 )
$ (4,263 )
$ 20,654
























Three-Month Period Ended June 30, 2022

 

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total

 





















Balance, March 31, 2022 (unaudited) 5,391,488

$ 54

$ 25,396

$ (350 )
$ (5,767 )
$ 19,333























Stock-based compensation 8,304





62








62
Stock for tax withholding (905 )




(6 )







(6 )
Dividends declared












(645 )

(645 )
Transfers of investments from held-to-maturity to available-for-sale classification 








(62 )




(62 )
Comprehensive income:





















Foreign currency translation adjustment








(131 )




(131 )
Net income 











74

74
Balance, June 30, 2022 (unaudited)
5,398,887


$ 54

$ 25,452

$ (543 )
$ (6,338 )
$ 18,625


See accompanying notes to the condensed consolidated financial statements   


8




Six-Month Period Ended June 30, 2021

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total
 





















Balance, December 31, 2020
5,352,626


$ 54

$ 24,968

$ (150 )
$ (5,502 )
$ 19,370























Stock-based compensation   19,562





107








107
Stock options exercised 2,000





8








8
Stock for tax withholding
(7,002 )





(35 )







(35 )
Dividends declared












(644 )

(644 )
Comprehensive income:





















Foreign currency translation adjustment








(35 )




(35 )
Net income










1,883

1,883
Balance, June 30, 2021 (unaudited)  5,367,186

$ 54

$ 25,048

$ (185 )
$ (4,263 )
$ 20,654

























Six-Month Period Ended June 30, 2022

 

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total

 





















Balance, December 31, 2021 5,378,857

$ 54

$ 25,167

$ (288 )
$ (5,139 )
$ 19,794























Stock-based compensation  15,300





268








268
Stock options exercised
7,000





32








32
Stock for tax withholding (2,270 )




(15 )







(15 )
Dividends declared












(1,291

)

(1,291 )
Transfers of investments from held-to-maturity to available-for-sale classification








(62 )




(62 )
Comprehensive income:





















Foreign currency translation adjustment








(193 )




(193 )
Net income 











92

92
Balance, June 30, 2022 (unaudited)
5,398,887


$ 54

$ 25,452

$ (543 )
$ (6,338 )
$ 18,625


See accompanying notes to the condensed consolidated financial statements    


9


AUTOSCOPE TECHNOLOGIES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

June 30, 2022

 

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 six-month periods ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021 as filed with the SEC.

Cash Dividend 

On February 2, 2022, 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 February 21, 2022, which was paid to shareholders on February 28, 2022.

On May 10, 2022, 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 May 23, 2022, which was paid to shareholders on May 30, 2022.  

On August 9, 2022, 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 August 25, 2022, which is payable to shareholders on August 31, 2022. 

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.


10



We determine revenue recognition through the following steps:
Identification of a contract, or contracts, with a customer;
Identification of performance obligations in the contract or contracts;

Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.

 

Revenue disaggregated by revenue source for the three and six months ended June 30, 2022 and 2021 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: 

 


Three Months Ended June 30,
Six Months Ended June 30,

2022
2021

2022
2021
Product sales $ 1,432
$ 1,305
$ 2,366
$ 2,468
Royalties
1,387

2,483

3,205

4,299
Total revenue $ 2,819
$ 3,788
$ 5,571
$ 6,767

 

Product Sales:

Product revenue is generated primarily from the direct sales of our RTMS radar systems worldwide and our Autoscope video systems in Europe and Asia. Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the amount we expect to receive in exchange for those goods or services. 

 

Certain product sales may contain multiple performance obligations for revenue recognition purposes. Multiple performance obligations may include hardware, software, installation services, training, support, and extended warranties.  In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the observable stand-alone prices charged to customers. For performance obligations without observable stand-alone prices charged to customers, we evaluate the adjusted market assessment approach, the expected cost plus margin approach, and stand-alone sales to estimate the stand-alone selling prices.

 

Revenue for services such as maintenance, repair, and technical support is recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. From time to time, our payment terms may vary by the type and location of our customer and the products or services offered. Revenue for extended warranties are deferred until the coverage period and then recognized ratably over the extended warranty term.

 

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

 

We record provisions against sales revenue for estimated returns and allowances in the period when the related revenue is recorded based on historical sales returns and changes in end user demand.

 

Royalties:

Econolite Control Products, Inc. (“Econolite”) is our licensee that sells our Autoscope video system products in the United States, Mexico, Canada and the Caribbean.  The royalty of approximately 50% of the gross profit on licensed products is recognized when the products are shipped or delivered by Econolite to its customers.

 

Practical Expedients and Exemptions:

We generally expense sales commissions when incurred because the amortization periods would have been one year or less.  These costs are recorded within sales and marketing expense.

 

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

11


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 approximately $221,000 and $55,000 in the quarters ended June 30, 2022 and 2021, respectively, and $534,000 and $178,000 during the six-month periods ended June 30, 2022 and 2021, 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 June 30, 2022 and 2021, we determined there was no impairment of intangible assets. At both June 30, 2022 and 2021, there were no indefinite-lived intangible assets.

Investments in Debt Securities 

We classify investments in debt securities on the acquisition date and at each balance sheet date.  At March 31, 2022, all of our investments in debt securities were classified as held-to-maturity.  Held-to-maturity securities are those securities in which the Company has the ability and intent to hold until maturity.  Securities classified as held-to-maturity are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts.  Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security using the straight-line method.


During the quarter ended June 30, 2022, we changed the classification of $3.4 million in fair value of our held-to-maturity debt securities to available-for-sale debt securities due to our sales of some of the held-to-maturity securities and that sale being inconsistent with our former intent to hold the securities to maturity. Thus, as of June 30, 2022, all investments in debt securities were classified as available-for-sale. The difference between the reclassified securities' amortized cost and fair value at the date of transfer of $62,000 was recognized as an unrealized loss recorded as a component of accumulated other comprehensive income.  

Investments in Equity Securities

We carry all investments in equity securities at fair value and record the subsequent changes in values in the Consolidated Statement of Operations as a component of investment gains or losses.

 

12


Note B: Recent Accounting Pronouncements 

 

Accounting pronouncements net yet adopted

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13")."  The amendments in ASU 2016-13 , among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (the “SEC”) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.  The Company is currently evaluating the potential impact of ASU 2016‑13 on our consolidated financial statements.


The adoption of ASU 2016-13 could result in an increase in the allowance for bad debt on the Company's account receivables as a result of changing from an "incurred loss" model, which encompasses allowances for current known losses, to an "expected loss" model, which encompasses allowances for losses expected to be incurred on the Company's receivables.  While we are currently evaluating the potential impact of adopting ASU 2016-13, we expect the impact of adoption to be immaterial. 

 

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.

 

13


Note D: Investments in available-for-sale debt securities


Investments in available-for-sale debt securities as of June 30, 2022 are summarized by type below (in thousands). 



Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value(1)

U.S. government


$ 609

$


$ (6 )
$ 603
Corporate and other taxable bonds

2271


1


(31 )

2,241
Other

635





(43 )

592


$ 3,515

$ 1

$ (80 )
$ 3,436


The amortized cost and estimated fair value of available-for-sale debt securities at June 30, 2022 are summarized below by contractual maturity dates (in thousands). 



Due in one year or less

Due after one year through five years

Mortgage-backed securities

Total

Amortized cost


$ 428

$ 2,677

$ 410

$ 3,515
Fair value(1)

425


2,607


404


3,436

The following table shows the gross unrealized holding losses and fair value of our available-for-sale securities with unrealized holding losses, summarized by type of securities and length of time that individual securities had been in a continuous loss position deemed to be temporary as of June 30, 2022 (in thousands). 



Less than 12 months

12 months or more

Total




Fair value(1)

Gross unrealized losses

Fair value(1)

Gross unrealized losses

Fair value(1)

Gross unrealized losses
U.S. government
$ 603

$ (6 )
$

$

$ 603

$ (6 )
Corporate and other taxable bonds

2,241


(30 )







2,241


(30 )
Other

592


(43 )







592


(43 )


$ 3,436

$ (79 )
$

$

$ 3,436

$ (79 )

We did not consider any of our available-for-sale securities to be impaired as of June 30, 2022. When evaluating for impairment we assess indicators that include but are not limited to, financial performance, changes in underlying credit ratings, market conditions and offers to purchase or sell.



(1) The fair value of the Company's available-for-sale debt securities are determined based upon inputs, other than the quoted prices in active markets, that are observable either directly or indirectly, and are classified as level 2 fair value measurements.

 

14


Note E: Investments in equity securities


Investments in equity securities as of June 30, 2022 are summarized based on the primary industry of the investee in the table below (in thousands).  




Cost Basis

Net Unrealized Gains (Losses)

Fair Value(2)
Banks and finance
$ 250

$ (3 )
$ 247


$ 250

$ (3 )
$ 247


(2) The fair value of the Company's equity investments are determined based on readily available market data, and are classified as level 1 fair value measurements. 

 

Note F: Inventories

 

Inventories consisted of the following (in thousands): 



 June 30, 2022 

 December 31, 2021 

Finished goods

$ 822
$ 1,205
Components   653
  224

Total 

1,475
1,429

 

15


Note G: Operating Leases


The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through March 2023. 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):   

 


Three-Month

Periods Ended June 30,


Six Months Periods Ended June 30,



2022
2021
2022

2021

Operating lease costs $ 4
$ 53
$ 57

$ 108
Variable lease cost
3

51

54

93
Total $ 7
$ 104
$ 111
$ 201

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.


Maturities for our lease liabilities for all operating leases were as follows (in thousands) as of June 30, 2022:



Total
2022 $ 7
2023 
3
2024 and thereafter

Total lease payments
10
Less: Interest
Present value of lease liabilities $ 10

 

 

16


The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 30, 2022:

 


June 30, 2022
Remaining lease term and discount rate:

Weighted average remaining lease term (years) 0.64
Weighted average discount rate 4.75 %


Cash paid for amounts included in the measurement of operating lease liabilities was $57,000 and $107,000 for the six months ended June 30, 2022 and 2021, respectively, and these amounts are included in operating activities in the condensed consolidated statements of cash flows. During the six months ended June 30, 2022, ISNS and Spruce Tree Centre L.L.P. entered into a lease agreement, which increased operating lease assets and operating lease liabilities by $8,400. The Company is using this leased space to hold equipment that supports various traffic cameras in Saint Paul, Minnesota. The lease agreement, effective March 1, 2022, will expire on March 31, 2023. There were no operating lease assets obtained in exchange for new operating lease liabilities for the three months ended June 30, 2022. 


On July 28, 2021, ISNS and Spruce Tree Centre L.L.P. ("Spruce Tree") entered into an amendment (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 Lease term was to expire on July 31, 2021.  The Amendment, which was effective August 1, 2021, extended the Lease through March 31, 2022.  In addition, the Amendment increased 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 "Original Agreement") under which ISNS purchased 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 were not satisfied (the "Purchase Price").  The Property includes land and a building located at 1115 Hennepin Avenue, Minneapolis, Minnesota (the "Real Property").  The Original Agreement also provided 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, as described in the Original Agreement.  The Original Agreement gave 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 on October 26, 2021, ISNS and TJ&Z entered into the First Amendment to Purchase Agreement (the “First Amendment”) that, among other things, extended the Inspection Period from October 26, 2021 to November 26, 2021, as to certain conditions only.  (The Original Agreement, as amended by the First Amendment, is referred to as the "Purchase Agreement.")  The First Amendment effectively extended the closing date to December 13, 2021 and required ISNS to pay $50,000 in earnest money in addition to the $50,000 in earnest money already paid by ISNS under the Original Agreement.  On December 10, 2021, ISNS closed (the "Closing") on the purchase of the Property under the terms of the Purchase Agreement and a loan in the original principal amount of $1,742,500 (the "Loan") from Coulee Bank to ISNS to finance the purchase of the Property. In addition to the $100,000 in earnest money paid by ISNS as described above and the $1,742,500 in Loan proceeds, at the Closing, ISNS paid $230,119 to finance the purchase of the Property and the payment of Closing costs. ISNS fully occupied the Property in February 2022. 

 

The foregoing description of the Purchase 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 Purchase Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 2, 2021 and the First Amendment filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 4, 2021 and incorporated herein by reference.


The following is a schedule of minimum future rental income (in thousands) on the operating lease related to the billboard located on the Company's Minnesota headquarters as of June 30, 2022.


Total
2022 $ 19
2023
38
2024
38
2025
38
2026
38
2027 and thereafter
38
Total minimum future rental income $ 209


The operating lease related to the billboard located on the Real Property is for an initial term of seven years, through December 31, 2027.  The lease automatically renews on an annual basis thereafter, cancellable by either party.     


17



Note H: Intangible Assets

 

Intangible assets consisted of the following (dollars in thousands):            

 

 

June 30, 2022

 

 

 








 



Weighted

 

 

Gross


 




Net


Average

 

 

Carrying


Accumulated


Carrying


Useful Life

 

 

 Amount


 Amortization


 Value


(in Years)

 

Wrong Way development costs

$

228



$

(228

)


$



 

Vision development costs


3,107




(2,163

)


 

944



8.0

 

Echo development costs   


1,852




(638

)


 

1,214



7.0

 

IntellitraffiQ development costs

 

468

   

 

(468

)  

 


   


 

Intellisight development costs
841


(3 )

838

8.0

Total

$

6,496



$

(3,500

)


$

2,996



7.6

 

 

 

December 31, 2021

 


 





 



 



Weighted

 

 

Gross






Net


Average

 

 

Carrying


Accumulated


Carrying


Useful Life

 

 

 Amount


 Amortization


 Value


(in Years)

 

Wrong Way development costs

$

228



$

(228

)


$

 


 

Vision development costs         


3,107




(1,953

)



1,154

 


8.0

 

Echo development costs           

 

1,852

   

 

(506

)  

 

1,346

 

 

7.0

 

IntellitraffiQ development costs
468


(409 )

59

4.0
Intellisight development costs

307





307


Total

$

5,962



$

(3,096

)


$

2,866

 


6.6

 

 

Note I: Warranties 

 

We generally provide a two to three year warranty on product sales. Reserves to honor warranty claims are estimated and recorded at the time of sale based on historical claim information and are analyzed and adjusted periodically based on actual claim trends.

 

Warranty liability and related activity consisted of the following (in thousands):

 

 

Six-Month Periods Ended
June 30,

 

2022


2021

 

 

 



 

 

 

Beginning balance

$

128



$

141

 

Warranty provisions

 

15



 

  24

 

Warranty claims


(6

)


 

(24

)

Adjustments to preexisting warranties


(13

)


 

3

Currency


(5

)


 

(2

)

Ending balance

$

119



$

142

 

 

18



Note J: Stock-Based Compensation

 

We compensate officers, directors, key employees and consultants with stock-based compensation under the Image Sensing Systems, Inc. 2014 Stock Option and Incentive Plan (the "2014 Plan"), which was approved by our shareholders and is administered under the supervision of our Board of Directors. The 2014 Plan and awards granted under the 2014 Plan were assumed by Autoscope in the Reorganization.  Stock option awards are granted at exercise prices equal to the closing price of our stock on the day before the date of grant. Generally, options vest ratably over periods of three to five years from the dates of the grant, beginning one year from the date of grant, and have a contractual term of nine to 10 years.

 

Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period. Stock-based compensation expense included in general and administrative expense for the three-month periods ended June 30, 2022 and 2021 was $62,000 and $54,000, respectively. Stock-based compensation expense included in general and administrative expense for the six-month periods ended June 30, 2022 and 2021 was $114,000 and $107,000, respectively. At June 30, 2022, 612,474 shares were available for grant under the 2014 Plan.

 

Stock Options 

 

A summary of the stock option activity for the first six months of 2022 is as follows:

 

   

Number of

Shares

  Weighted
Average
Exercise
Price per
Share
  Weighted
Average
Remaining
Contractual
Term (in years)
  Aggregate
Intrinsic
Value
Options outstanding at December 31, 2021
    12,000     $ 4.90       1.13     $ 19,860  
Granted
    120,000     $ 6.87           $  
Exercised
    (7,000 )   $ 4.55           $  
Expired
    $           $  
Forfeited
    (2,000 )
$ 7.10           $  




 


                 
Options outstanding at June 30, 2022     123,000  
$ 6.81
    9.40
  $ 3,720
Options exercisable at June 30, 2022     63,000     $ 6.74       9.22
  $ 3,720  


Stock options to purchase 7,000 shares were exercised, no stock options expired, and options to purchase 2,000 shares were forfeited during the six-month period ended June 30, 2022, and options to purchase 2,000 were exercised and 1,000 shares were forfeited during the six-month period ended June 30, 2021. During each of the six-month periods ended June 30, 2022 and 2021, we recognized $154,000 and no stock-based compensation expense related to stock options, respectively. As of June 30, 2022, there was $123,000 of unrecognized compensation cost related to non-vested stock options. 

The fair value of stock options granted under stock-based compensation programs has been estimated as of the date of each grant using the multiple option form of the Black-Scholes valuation model, based on the grant price and assumptions regarding the expected life, stock price volatility, dividends, and risk-free interest rates. Each vesting period of an option is valued separately, with this value being recognized over the vesting period.  The weighted average per share grant date fair value of options to purchase 120,000 shares granted for the quarter ended June 30, 2022 was $2.32. The weighted average assumptions used to determine the fair value of stock options granted during 2022 is as follows:



2022
Expected life (in years)
3.59
Risk-free interest rate
1.44 %
Expected volatility
70.29 %
Dividend yield
6.95 %


 

19



The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant.  We estimate stock volatility based on a historical daily price observation.  The dividend yield assumption is based on the annualized current dividend divided by the share price on the grant date.

 

Restricted Stock Awards and Stock Awards

 

Restricted stock awards are granted under the 2014 Plan at the discretion of the Compensation Committee of our Board of Directors. We issue restricted stock awards to executive officers and key consultants. These awards may contain certain performance conditions or time-based vesting criteria. The restricted stock awards granted to executive officers vest if the various performance or time-based metrics are met. Stock-based compensation is recognized for the number of awards expected to vest at the end of the period and is expensed beginning on the grant date through the end of the vesting period. At the time of vesting of the restricted stock awards, the recipients of common stock may request to receive a net of the number of shares required for employee withholding taxes, which can be withheld up to the relevant jurisdiction's maximum statutory rate. Compensation expense related to any stock awards issued to employees is determined on the grant date based on the publicly-quoted fair market value of our common stock and is charged to earnings on the grant date. 

 

We also issue stock awards as a portion of the annual retainer for each director on a quarterly basis. The stock awards are fully vested at the time of issuance. 

 

The following table summarizes restricted stock award activity for the first six months of 2022:

 


 

Number of
Shares

 

 

Weighted
Average
Grant Date
Fair Value

Awards outstanding December 31, 2021

 

18,597



$

5.72

 

Granted

 

15,300




5.88

 

Vested

 

(24,629

)



5.75

 

Forfeited

 




 

Awards outstanding at June 30, 2022

 

9,268



$

5.90

 

 

As of June 30, 2022, the total stock-based compensation expense related to non-vested awards not yet recognized was $36,000, which is expected to be recognized over a weighted average period of 1.66 years. During the six-month periods ended June 30, 2022 and June 30, 2021, we recognized $114,000 and $107,000, respectively, of stock-based compensation expense related to restricted stock awards.

 

Note K: Income per Common Share 

 

Net income per share is computed by dividing net income (loss) by the daily weighted average number of common shares outstanding during the applicable periods. Diluted net income (loss) per share includes the potentially dilutive effect of common shares subject to outstanding stock options and restricted stock awards using the treasury stock method. Under the treasury stock method, shares subject to certain outstanding stock options and restricted stock awards have been excluded from the calculation of the diluted weighted average shares outstanding because the exercise of those options or the vesting of those restricted stock awards would lead to a net reduction in common shares outstanding. As a result, stock options and restricted stock awards to acquire 120,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended June 30, 2022 and 2021, respectively, and 100,099 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the six-month periods ended June 30, 2022 and 2021, respectively.

 

20


 

A reconciliation of net income per share is as follows (in thousands, except per share data):  

 

 

Three-Month

Periods Ended

June 30,


Six-Month Periods Ended June 30,


  2022
2021
2022
2021
 














Numerator:















Net income
$ 74

$ 752

$ 92

$ 1,883
Denominator:















Weighted average common shares outstanding

5,381


5,341


5,371


5,332
Dilutive potential common shares

6


9


2


11
Shares used in diluted net income per common share calculations

5,387


5,350


5,373


5,343
Basic net income per common share
$ 0.01

$ 0.14

$ 0.02

$ 0.35
Diluted net income per common share
$ 0.01

$ 0.14

$ 0.02

$ 0.35

 

Note L: Segment Information

 

The Company's Chief Executive Officer and management regularly review financial information for the Company's discrete operating segments. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating segments have been aggregated for financial statement purposes and categorized into two reportable segments:  Intersection and Highway.

 

Autoscope video is our machine-vision product line, and revenue consists of royalties (all of which are received from Econolite), as well as a portion of international product sales. Video products are normally sold in the Intersection segment. RTMS is our radar product line, and revenue consists of international and North American product sales. Radar products are normally sold in the Highway segment. All segment revenues are derived from external customers.   

 

Operating expenses and total assets are not allocated to the segments for internal reporting purposes. Due to the changes in how we manage our business, we may reevaluate our segment definitions in the future.    

 

The following tables set forth selected unaudited financial information for each of our reportable segments (in thousands): 


Three Months Ended June 30,
Intersection Highway Total

2022
2021
2022
2021
2022
2021
Revenue
$ 1,456
$ 2,637 $ 1,363 $ 1,151 $ 2,819 $ 3,788
Gross profit 1,305 2,437 690 524 1,995 2,961
Amortization of intangible assets 105 97 99 98 204 195
Intangible assets 1,782 1,364 1,214 1,593 2,996 2,957


Six Months Ended June 30,
Intersection Highway Total

2022
2021
2022
2021
2022
2021
Revenue
$ 3,438
$ 4,529 $ 2,133 $ 2,238 $ 5,571 $ 6,767
Gross profit 3,074 4,161 1,057 1,073 4,131 5,234
Amortization of intangible assets 210 190 194 192 404 382
Intangible assets 1,782 1,364 1,214 1,593 2,996 2,957


21


Note M: Restructuring and Exit Activities


In the third quarter of 2016, in order to streamline our operating and cost structure, we initiated the closure of our wholly-owned subsidiaries, Image Sensing Systems HK Limited (ISS HK) in Hong Kong and Image Sensing Systems (Shenzhen) Limited (ISS WOFE) in China. During 2020, we initiated the closure of Image Sensing Systems EMEA Limited (ISS UK) and Image Sensing Systems Holdings Limited (ISS Holdings). At September 30, 2021, Image Sensing Systems (Shenzhen) Limited was fully closed. We incurred $1,000 and $23,000 for these entities' closure costs in the six-month periods ended June 30, 2022 and June 30, 2021, respectively.  


In the second quarter of 2021, the Company began the process of forming a subsidiary in Chennai, India. Autoscope Technologies India Private Limited ("Autoscope India") was legally formed on October 14, 2021. Autoscope India's operations will solely focus on research and development.  

 

Note N: Long-term Debt

 

Paycheck Protection Program Loan


Under the Paycheck Protection Program ("PPP"), the United States Small Business Administration ("SBA") approved the Company's application to receive a loan in the amount of $923,700 (the "PPP Loan").  The PPP was established under the congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.  The PPP Loan to the Company was made through BMO Harris Bank N.A. (the "Lender"). On April 21, 2020, the Company's Board of Directors approved the PPP Loan, and the Company signed the promissory note (the "Note") evidencing the PPP Loan, which was dated as of April 17, 2020.  The Lender distributed the $923,700 of proceeds of the PPP Loan to the Company on April 222020.

 

The term of the PPP loan was 24 months after the date of the Note (the "Maturity Date").  The annual interest rate on the PPP Loan was 1.00%.  No payments of principal or interest were due during the nine months beginning on the date of the Note (the "Deferred Period").  The Company's obligations under the Note were not secured by a security interest in the Company's assets.  The Note required the Lender's consent if the Company wanted to reorganize, merge, consolidate, or otherwise change its ownership or structure.  The Note contained customary events of default by the Company relating to, among other things, payment defaults and the breach of representations and warranties or other provisions of the Note.  Upon a default by the Company under the Note, the Lender could have accelerated the Company's obligations under the Note and pursued its rights against the Company under applicable law, including by filing suit and obtaining a judgment against the Company.