0000897101-22-001001.txt : 20221116 0000897101-22-001001.hdr.sgml : 20221116 20221116161247 ACCESSION NUMBER: 0000897101-22-001001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20220930 FILED AS OF DATE: 20221116 DATE AS OF CHANGE: 20221116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOSCOPE TECHNOLOGIES CORP CENTRAL INDEX KEY: 0000943034 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 863685595 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35959 FILM NUMBER: 221395297 BUSINESS ADDRESS: STREET 1: 1115 HENNEPIN AVE CITY: MINNEAPOLIS STATE: MN ZIP: 55403 BUSINESS PHONE: 6516037700 MAIL ADDRESS: STREET 1: 1115 HENNEPIN AVE CITY: MINNEAPOLIS STATE: MN ZIP: 55403 FORMER COMPANY: FORMER CONFORMED NAME: IMAGE SENSING SYSTEMS INC DATE OF NAME CHANGE: 19950327 10-Q 1 aatc-20220930.htm FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022 aatc-20220930.htm
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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 September 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 November 16, 2022

Common Stock, $0.01 par value per share

 

5,407,707 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 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION 32
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Mine Safety Disclosures 32
Item 5. Other Information 32
Item 6. Exhibits 33
SIGNATURES 34
 
3


Autoscope Technologies Corporation

(in thousands, except share information)


September 30, 2022 

 

December 31,


(Unaudited)

 

2021

ASSETS








Current assets:








Cash and cash equivalents

$

3,411

 


$

8,229

 

Accounts receivable, net of allowance for doubtful accounts of $11 and $18, respectively 


3,712

 



2,369

 

Inventories


2,468

 



1,429

 

Investments in available-for-sale debt securities
422



Investments in equity securities
245



Prepaid expenses and other current assets


374

 



355

 

Total current assets

10,632

 



12,382

 




 





Property and equipment: 



 





Furniture and fixtures


    135

 



136

 

Leasehold improvements


  6




6

 

Equipment


988

 



994


Real property
2,059


2,059



   3,188

 



3,195


Accumulated depreciation 


   1,033

 



958




2,155

 



2,237

 

 






Operating lease assets, net


5




58


Intangible assets, net 


2,798

 



2,866

 

Deferred income taxes


4,699




4,824

 

Long-term investments in available-for-sale debt securities
1,526



TOTAL ASSETS

$

21,815



$

22,367


  

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY








Current liabilities:








Accounts payable

$

      1,088

 


$

236

 

Deferred revenue
115


107

Warranty


   109

 



128

 

Accrued compensation


     40

 



 132

 

Operating lease obligations
6


59


Current maturities of long-term debt
58


56

Other current liabilities

 

109

 



181

 

Total current liabilities


1,525

 



 899










Commitments and contingencies






Long-term debt
1,631


1,674

TOTAL LIABILITIES


3,156




 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, 5,407,707 and 5,378,857


 




  

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


54

 



   54

 

Additional paid-in capital


 25,513




25,167


Accumulated other comprehensive loss 


(564

)



(288

)

Accumulated deficit


(6,344

)



(5,139

)

Total shareholders' equity


18,659

 



19,794

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

21,815



$

22,367


See accompanying notes to the condensed consolidated financial statements.

4


Autoscope Technologies Corporation

(Unaudited)

(in thousands, except per share data)

 

Three-Month
Periods Ended
September 30,


Nine-Month
Periods Ended
September 30,
  2022
2021
2022
2021

Revenue:
















Product sales

$ 548

$ 805

$ 2,914

$ 3,273

Royalties


2,607


2,467


5,812


6,766
 
3,155


3,272


8,726


10,039

Cost of revenue:
















Product sales


453


480


1,683


1,823
  Royalties
105


105


315


295
 
558


585


1,998


2,118

Gross profit


2,597


2,687


6,728


7,921
 














Operating expenses:
















 Selling, general and administrative


1,220


1,334


4,229


4,216

 Research and development


581


644


1,535


1,681
 
1,801


1,978


5,764


5,897

Income from operations


796


709

964


2,024
Other income
10




29

925
Investment income (loss)
8




(17 )


Interest expense
(18 )




(53 )


Income from operations before income taxes
796


709

923


2,949
Income tax expense
152


96

187


453

Net income

$ 644

$ 613
$ 736

$ 2,496

Net income per share:
















Basic

$ 0.12

$ 0.11
$ 0.14

$ 0.47

Diluted

$ 0.12

$ 0.11
$ 0.14

$ 0.47
 














Weighted average number of common shares outstanding:
















Basic


5,391


5,349


5,378


5,338

Diluted


5,395


5,361


5,387


5,351


See accompanying notes to the condensed consolidated financial statements.









 

5


Autoscope Technologies Corporation

(Unaudited)

(in thousands)

  


Three-Month Periods Ended

September 30,


Nine-Month Periods Ended

September 30,


2022
2021
2022
2021

Net income

$ 644

$ 613

$ 736

$ 2,496

Other comprehensive income:
















Unrealized loss on available for sale debt securities, net of tax
(17 )




(17 )



Foreign currency translation adjustment


(4 )

(65 )

(197 )

(100 )

Comprehensive income

$ 623
$ 548

$ 522
$ 2,396

















See accompanying notes to the condensed consolidated financial statements.                       

 

6


Autoscope Technologies Corporation

(Unaudited)

(in thousands) 

   

Nine-Month Periods Ended
September 30,

 

2022

 

2021

Operating activities:

 

 

 


 

 

 

Net income

$

736

 


$

2,496




 




 

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



 




 

Depreciation

 

119

 


 

112

 

Software amortization

 

602

 


 

579

 

        Amortization of debt issuance costs
2



Stock-based compensation

 

329

 


 

164

 

Deferred income tax expense
147


486
Forgiveness income from PPP Loan (Note N)


(931 )
Loss on disposal of assets
5


1

Realized loss on AFS investments


20



Realized loss on equity investments
53



Unrealized loss on equity investments
5



Noncash investment income
(5 )


Changes in operating assets and liabilities:

 

 

 


 

 

 

Accounts receivable, net

 

(1,343

)


 

(236

)

Inventories


(1,039

)


 

(715

)

Prepaid expenses and other current assets

 

(19

)


 

(87

)

Accounts payable

 

852


 

(380

)

Accrued expenses and other current liabilities

 

(175

)


 

Net cash provided by for operating activities

 

289


 

1,489




 




 

Investing activities:

 

 

 


 

 

 

Capitalized software development costs

 

(534

)


 

(178

Purchases of property and equipment

 

(61

)


 

(8

Purchases of equity securities
(795 )


Sale of equity securities
492



Purchases of debt securities

(3,521

)


Sale of debt securities


1,456


Net cash used for investing activities 

 

(2,963

)  

 

(186

)

 

 

 

 


 

 

 

Financing activities:

 

 

 

 

 

 

 

Stock for tax withholding  

 

(15

)  

 

(35

)
 Dividends paid
(1,941 )

(1,288 )
 Proceeds from exercised options
32


8
 Proceeds from PPP loan




 Principal payments on long-term debt
(43 )


Net cash used for financing activities

 

(1,967

)  

 

(1,315

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(177

)


 

(91

)

Change in cash and cash equivalents

 

(4,818

)


 

(103

)

 

 

 

 


 

 

 

Cash and cash equivalents at beginning of period

 

8,229

 


 

8,605

 

Cash and cash equivalents at end of period

$

3,411

 


$

8,502

 

 

 

 

 

 

 

 

 

Non-Cash investing and financing activities:

 

 

 

 

 

 

 

Cash paid for interest $ 53

$

See accompanying notes to the condensed consolidated financial statements. 

7


AUTOSCOPE TECHNOLOGIES CORPORATION

(in thousands, except share data)



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 (unaudited)
5,367,186


$ 54

$ 25,048

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























Stock-based compensation   5,032





57








57
Dividends declared











(644 )

(644 )
Comprehensive income:





















Foreign currency translation adjustment








(65 )




(65 )
Net income










613

613
Balance, September 30, 2021 (unaudited) 5,372,218

$ 54

$ 25,105

$ (250 )
$ (4,294 )
$ 20,615
























Three-Month Period Ended September 30, 2022

 

Shares

Issued


Common

Stock


Additional

Paid-In

Capital


Accumulated

Other

Comprehensive

Loss


Accumulated

Deficit


Total

 





















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

$ 54

$ 25,452

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























Stock-based compensation 8,820





61








61
Dividends declared












(650 )

(650 )
Comprehensive income:





















Unrealized loss on available for sale debt securities, net of tax 











(17 )




(17 )
Foreign currency translation adjustment








(4 )




(4)
Net income 











644

644
Balance, September 30, 2022 (unaudited)
5,407,707


$ 54

$ 25,513

$ (564 )
$ (6,344 )
$ 18,659


See accompanying notes to the condensed consolidated financial statements   


8




Nine-Month Period Ended September 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   24,594





164








164
Stock options exercised 2,000





8








8
Stock for tax withholding
(7,002 )





(35 )







(35 )
Dividends declared












(1,288 )

(1,288 )
Comprehensive income:





















Foreign currency translation adjustment








(100 )




(100 )
Net income










2,496

2,496
Balance, September 30, 2021 (unaudited)  5,372,218

$ 54

$ 25,105

$ (250 )
$ (4,294 )
$ 20,615
























Nine-Month Period Ended September 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  24,120





329








329
Stock options exercised
7,000





32








32
Stock for tax withholding (2,270 )




(15 )







(15 )
Dividends declared












(1,941

)

(1,941 )
Transfers of investments from held-to-maturity to available-for-sale classification








(62 )




(62 )
Comprehensive income:





















Unrealized loss on available for sale debt securities, net of tax








(17 )




(17 )
Foreign currency translation adjustment








(197 )




(197 )
Net income 











736

736
Balance, September 30, 2022 (unaudited)
5,407,707


$ 54

$ 25,513

$ (564 )
$ (6,344 )
$ 18,659


See accompanying notes to the condensed consolidated financial statements    


9


AUTOSCOPE TECHNOLOGIES CORPORATION

(Unaudited) 

September 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 nine-month periods ended September 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 at 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 at the close of business on 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 at the close of business on August 25, 2022, which was paid to shareholders on August 31, 2022.

On November 8, 2022, the Board of Directors of the Company approved a cash dividend of $0.12 per share to shareholders of record at the close of business on November 28, 2022, which is payable to shareholders on December 5, 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 nine months ended September 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 September 30,
Nine Months Ended September 30,

2022
2021

2022
2021
Product sales $ 548
$ 805
$ 2,914
$ 3,273
Royalties
2,607

2,467

5,812

6,766
Total revenue $ 3,155
$ 3,272
$ 8,726
$ 10,039

 

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 less than one year. 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 did not capitalize any software development cost in the quarters ended September 30, 2022 and 2021, and we capitalized $534,000 and $178,000 of software development costs during the nine-month periods ended September 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 September 30, 2022 and 2021, we determined there was no impairment of intangible assets. At both September 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. 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 during the second quarter of 2022.  As of September 30, 2022, all investments in debt securities were classified as available-for-sale.

 

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 income or loss.

 

12


Note B: Recent Accounting Pronouncements 

 

Accounting pronouncements net yet adopted

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13")."  The amendments adopted 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 Nos 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASUs 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 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 its 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 September 30, 2022 are summarized by type below (in thousands). 



Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value(1)

U.S. government


$ 199

$


$ (3 )
$ 196
Corporate and other taxable bonds

1,214





(28 )

1,186
Other

635





(69 )

566


$ 2,048

$

$ (100 )
$ 1,948


The amortized cost and estimated fair value of available-for-sale debt securities at September 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

$ 1,620

$

$ 2,048
Fair value(1)
 $ 422

 $ 1,526

 $

$ 1,948

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 September 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
$ 196

$ (3 )
$

$

$ 196

$ (3 )
Corporate and other taxable bonds

1,186


(28 )







1,186


(28 )
Other

566


(69 )







566


(69 )


$ 1,948

$ (100 )
$

$

$ 1,948

$ (100 )

We did not consider any of our available-for-sale securities to be impaired as of September 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 September 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

$ (5 )
$ 245


$ 250

$ (5 )
$ 245


(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): 



 September 30, 2022 
 December 31, 2021 

Finished goods

$ 2,018
$ 1,205
Components   450
  224

Total 

2,468
1,429

 

15


Note G: Intangible Assets

 

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

 

 

September 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




(2,267

)


 

840



8.0

 

Echo development costs   


1,852




(706

)


 

1,146



7.0

 

IntellitraffiQ development costs

 

468

   

 

(468

)  

 


   


 

IntelliSight development costs
841


(29 )

812

8.0

Total

$

6,496



$

(3,698

)


$

2,798



  

 

 

 

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

 



 

 

Note H: 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):

 

 

Nine-Month Periods Ended
September 30,

 

2022


2021

 

 

 



 

 

 

Beginning balance

$

128



$

141

 

Warranty provisions

 

18



 

  30

 

Warranty claims


(29

)


 

(35

)  

Adjustments to preexisting warranties


1


 

(5

)

Currency


(9

)


 

(4

)

Ending balance

$

109



$

127

 

 

16



Note I: 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 September 30, 2022 and 2021 was $61,000 and $57,000, respectively. Stock-based compensation expense included in general and administrative expense for the nine-month periods ended September 30, 2022 and 2021 was $329,000 and $164,000, respectively. At September 30, 2022, 603,654 shares were available for grant under the 2014 Plan.

 

Stock Options 

 

A summary of the stock option activity for the first nine 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 September 30, 2022     123,000  
$ 6.81
    9.15
  $ 990
Options exercisable at September 30, 2022     63,000     $ 6.74       8.97
  $ 990  


Stock options to purchase 7,000 shares were exercised, no stock options expired, and options to purchase 2,000 shares were forfeited during the nine-month period ended September 30, 2022, and options to purchase 2,000 shares were exercised and 1,000 shares were forfeited during the nine-month period ended September 30, 2021. During each of the nine-month periods ended September 30, 2022 and 2021, we recognized $163,000 and no stock-based compensation expense related to stock options, respectively. As of September 30, 2022, there was $115,000 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 nine months ended September 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 %


 

17



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 nine months of 2022:

 


 

Number of
Shares

 

 

Weighted
Average
Grant Date
Fair Value

Awards outstanding December 31, 2021

 

18,597



$

5.72

 

Granted

 

24,120




5.60

 

Vested

 

(33,449

)



5.58

 

Forfeited

 




 

Awards outstanding at September 30, 2022

 

9,268



$

5.90

 

 

As of September 30, 2022, the total stock-based compensation expense related to non-vested awards not yet recognized was $29,000, which is expected to be recognized over a weighted average period of 1.49 years. During the nine-month periods ended September 30, 2022 and September 30, 2021, we recognized $166,000 and $164,000, respectively, of stock-based compensation expense related to restricted stock awards.

 

Note J: 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 2,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the three-month periods ended September 30, 2022 and 2021, respectively, and 2,000 and 2,000 weighted common shares have been excluded from the diluted weighted shares outstanding for the nine-month periods ended September 30, 2022 and 2021, respectively.

 

18


 

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

 

 

Three-Month Periods Ended September 30,


Nine-Month Periods Ended September 30,


  2022
2021
2022
2021
 














Numerator:















Net income
$ 644

$ 613

$ 736

$ 2,496
Denominator:















Weighted average common shares outstanding

5,391


5,349


5,378


5,338
Dilutive potential common shares

4


12


9


13
Shares used in diluted net income per common share calculations

5,395


5,361


5,387


5,351
Basic net income per common share
$ 0.12

$ 0.11

$ 0.14

$ 0.47
Diluted net income per common share
$ 0.12

$ 0.11

$ 0.14

$ 0.47

 

Note K: 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 September 30,
Intersection Highway Total

2022
2021
2022
2021
2022
2021
Revenue
$ 2,660
$ 2,677 $ 495 $ 595 $ 3,155 $ 3,272
Gross profit 2,487 2,456 110 231 2,597 2,687
Amortization of intangible assets 105 105 93 95 198 200
Intangible assets 1,652 1,260 1,146 1,499 2,798 2,759


Nine Months Ended September 30,
Intersection Highway Total

2022
2021
2022
2021
2022
2021
Revenue
$ 6,098
$ 7,206 $ 2,628 $ 2,833 $ 8,726 $ 10,039
Gross profit 5,564 6,617 1,164 1,304 6,728 7,921
Amortization of intangible assets 345 293 258 286 602 579
Intangible assets 1,652 1,260 1,146 1,499 2,798 2,759


19


Note L: 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 $10,000 and $23,000 for these entities' closure costs in the nine-month periods ended September 30, 2022 and September 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 M: 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 "PPP 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 PPP 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 PPP Note (the "Deferred Period").  The Company's obligations under the PPP Note were not secured by a security interest in the Company's assets.  The PPP Note required the Lender's consent if the Company wanted to reorganize, merge, consolidate, or otherwise change its ownership or structure.  The PPP 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 PPP Note.  Upon a default by the Company under the PPP Note, the Lender could have accelerated the Company's obligations under the PPP Note and pursued its rights against the Company under applicable law, including by filing suit and obtaining a judgment against the Company.

 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans made under the PPP after 24 weeks if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. On February 2, 2021, the Company was notified by the Lender that the Lender had received payment in full of the PPP Loan from the United States government, and the Company's PPP Loan had been forgiven.  The Company recognized the amount of the PPP Loan principal and accrued interest forgiven totaling approximately $931,000 as other non-operating income in the first quarter of 2021.   


Real Property Bank Loan


On December 10, 2021, ISNS entered into a Business Loan Agreement (the "Loan Agreement") with Coulee Bank (the "Bank") and issued a promissory note to the Bank (the "Note") in the original principal amount of $1,742,500 (the "Loan") to finance the purchase of the Company's Minnesota headquarters located at 1115 Hennepin Avenue, Minneapolis, Minnesota (the "Real Property").

The Note has a term of five years and bears interest at the fixed annual rate of 3.95% unless ISNS defaults under the terms of the Note, in which case a higher interest rate will go into effect calculated as provided in the Note.  The Note is payable in 59 consecutive monthly payments of principal and interest of $10,566, with the first payment due on January 10, 2022 and one final payment consisting of the balance of the entire remaining principal amount together with all accrued and unpaid interest, estimated at $1,438,256, due and payable on December 10, 2026.  There is no prepayment penalty unless ISNS finances the Loan with another lender, in which case ISNS would be obligated to pay a prepayment penalty to the Bank equal to 1% of the unpaid principal.

Upon the occurrence of an event of default under the Loan Agreement, all indebtedness of ISNS to the Bank immediately will become due and payable, all without notice of any kind to ISNS, except that in the case of an event of default of the type described in the "Insolvency" subsection of the Loan Agreement, such acceleration will be automatic and not optional.  In addition, upon a default, the Bank will have all the rights and remedies provided in the or available at law, in equity, or otherwise.

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Under the Mortgage granted by ISNS to the Bank (the "Mortgage") dated as of December 10, 2021, ISNS mortgaged and conveyed to the Bank, with power of sale, all of ISNS's right, title, and interest in and to the Real Property, together with all existing or subsequently erected or affixed buildings and all improvements and fixtures; and all easements, rights of way, and appurtenances.  The events of default under the Mortgage are similar to those under the Loan Agreement and the Note and are in addition to those under the Loan Agreement and the Note.

As provided in the Assignment of Rents between ISNS and the Bank (the "Assignment") dated as of December 10, 2021, ISNS granted to the Bank a continuing security interest in, and conveyed to the Bank, all of ISNS's right, title, and interest in and to the rents from the Real Property.  The Assignment provides that unless and until the Bank exercises its right to collect the rents as provided in the Assignment and so long as there is no default under the Assignment, ISNS may remain in possession and control of and operate and manage the Real Property and collect the rents.  The events of default under the Assignment are similar to those under the Loan Agreement, the Note, and the Mortgage and are in addition to those under the Loan Agreement, the Note, and the Mortgage.  Other than the lease for the billboards on the Real Property, which TJ&Z assigned to ISNS, there are currently no tenants in the Real Property and no leases or other similar agreements with prospective tenants contemplated. 

In connection with the Loan, the Company incurred and capitalized approximately $13,000 of debt issuance costs which will be amortized as additional interest expense over the life of the Loan and are presented as a reduction to the long-term debt balance.  

Long-term Debt Maturities


Maturities of long-term debt, excluding deferred debt issuance costs, for the next five fiscal years are as follows (dollars in thousands): 



Long-term Debt Maturities
2022 $

15

2023
60
2024
63
2025
65
2026
1,496
Total Long-term Debt Maturities

$

1,699


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Note N: Commitments and Contingencies


Litigation

 

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with GAAP, we record a liability in our Consolidated Financial Statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to any c