AUTOSCOPE TECHNOLOGIES CORPORATION Overview
Reorganization. OnJuly 21, 2021 , a holding company reorganization was completed (the "Reorganization") in whichImage 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 theNasdaq Stock Market under the ticker symbol "AATC," and outstanding shares of ISNS's common stock automatically converted into shares of common stock ofAutoscope . As used in this Quarterly Report 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 toAutoscope 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 forU.S. federal income tax purposes for the Company's shareholders.Autoscope was incorporated onApril 23, 2021 under the laws of theState of Minnesota , and ISNS was incorporated inMinnesota onDecember 20, 1984 . General. We are a leading provider of above-ground detection products and solutions for the intelligent transportation systems ("ITS") industry. Our family of products, which we market as Autoscope® video or video products ("Autoscope"), RTMS® radar or radar products ("RTMS"), and IntellitraffiQ® or iQ products, provides end users with the tools needed to optimize traffic flow and enhance driver safety. Our technology analyzes signals from sophisticated sensors and transmits the information to management systems and controllers or directly to users. Our products provide end users with complete solutions for the intersection and transportation markets. Our technology is a process in which software, rather than humans, examines outputs from various types of sophisticated sensors to determine what is happening in a field of view. In the ITS industry, this process is a critical component of managing congestion and traffic flow. In many cities, it is not possible to build roads, bridges and highways quickly enough to accommodate the increasing congestion levels. In 2019, on average,United States commuters lost 99 hours in congestion, which cost motorists$88 billion in time, an average of$1,377 per driver (per INRIX 2019 Global Traffic scorecard). Although during 2020, these figures decreased significantly as a result of COVID-19 related government lockdowns, automobile travel has rebounded in many areas, causing congestion levels to begin returning to previous levels (per INRIX 2020 Global Traffic scorecard). We believe this growing use of vehicles will make our ITS solutions increasingly necessary to complement existing and new roadway infrastructure to manage traffic flow and optimize throughput. We believe our solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install with lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of our products make our solutions well suited for use in ITS markets. We believe the strength of our distribution channels positions us to increase the penetration of our technologydriven solutions in the marketplace. We market our Autoscope video products inthe United States ,Mexico ,Canada and theCaribbean through exclusive agreements withEconolite Control Products, Inc. ("Econolite"), which we believe is the leading distributor of ITS intersection control products in these markets.
We market the RTMS radar systems to a network of distributors globally. On a
limited basis, we may sell directly to the end user. We market our
Autoscope video products outside
The following discussion of period-to-period changes and trends in financial statement results under "Management's Discussion and Analysis of Financial Condition and Results of Operations" aligns with the financial statement presentation discussed above.
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Trends and Challenges in Our Business
We believe the expected growth in our business can be attributed primarily to the following global trends:
º worsening traffic caused by increased numbers of vehicles in metropolitan
areas without corresponding expansions of road infrastructure and the need
to automate safety, security and access applications for automobiles and
trucks, which has increased demand for our products;
º advances in information technology, which have made our products easier to
market, implement and integrate;
º the continued funding allocations for centralized traffic management
services and automated enforcement schemes, which have increased the
ability of our primary end users to implement our products; andº general increases in the cost effectiveness of electronics, which make our
products more affordable for end users.
We believe our continued growth primarily depends upon:
º continued adoption and governmental funding of ITS and other automated
applications for traffic control, safety and enforcement in developed
countries;
º a propensity by traffic engineers to implement lower cost technology-based
solutions rather than civil engineering solutions such as widening
roadways;
º countries in the developing world adopting above-ground detection
technology, such as video or radar, instead of in-pavement loop technology
to manage traffic; and
º our ability to develop new products that provide increasingly accurate
information and enhance the end users' ability to cost-effectively manage
traffic and environmental issues.
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Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchasing decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue among periods. The ongoing economic environment inEurope andthe United States and the COVID-19 pandemic declared inMarch 2020 and the outbreak of new COVID-19 variants are further adding to the unpredictability of purchasing decisions, creating more delays than usual and decreasing governmental budgets, and they are likely to continue to affect our revenue.
Key Financial Terms and Metrics
Revenue. We derive revenue from two sources: (1) royalties received from Econolite for sales of the Autoscope video systems inthe United States ,Mexico ,Canada and theCaribbean and (2) revenue received from the direct sales of our RTMS radar systems and our Autoscope video systems inEurope andAsia . Autoscope video royalties are calculated using a profit sharing model in which the gross profits on sales of product made through Econolite are shared equally with Econolite. This royalty arrangement has the benefit of decreasing our cost of revenues and our selling, marketing and product support expenses because these costs and expenses are borne primarily by Econolite. Although this royalty model has a positive impact on our gross margin, it also negatively impacts our total revenue, which would be higher if all the sales made by Econolite were made directly by us. The royalty arrangement is exclusive under the long-term Manufacturing, Distributing and Technology Agreement dated as ofJune 11, 1991 , as amended (the "Econolite Agreement"), between the Company and Econolite. Cost of Revenue. Software amortization is the sole cost of revenue related to royalties, as virtually all manufacturing, warranty and related costs are incurred by Econolite. Cost of revenue related to product sales consists primarily of the amount charged by our third party contractors to manufacture hardware products, whose costs are influenced mainly by the cost of electronic components. The cost of revenue also includes logistics costs, estimated expenses for product warranties, and inventory obsolescence. The key metric that we follow is achieving certain gross margin percentages on product sales by operating segment. Operating Expenses. Our operating expenses fall into three categories: (1) selling, marketing and product support; (2) general and administrative; and (3) research and development. Selling, marketing and product support expenses consist of various costs related to sales and support of our products, including salaries, benefits and commissions paid to our personnel; commissions paid to third parties; travel, trade show and advertising costs; second-tier technical support for Econolite; and general product support, where applicable. General and administrative expenses consist of certain corporate and administrative functions that support the development and sales of our products and provide an infrastructure to support future growth. These expenses include management, supervisory and staff salaries and benefits; legal and auditing fees; travel; rent; and costs associated with being a public company, such as board of director fees, listing fees and annual reporting expenses. Research and development expenses consist mainly of salaries and benefits for our engineers and third party costs for consulting and prototyping. We measure all operating expenses against our annually approved budget, which is developed with achieving a certain operating margin as a key focus. We also include any restructuring costs in operating expenses.
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Non-GAAP Operating Measures. We provide certain non-GAAP financial information as supplemental information to financial measures calculated and presented in accordance with GAAP (Generally Accepted Accounting Principles inthe United States ). This non-GAAP information excludes the impact of depreciating fixed assets and amortizing intangible assets, and it may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.
Reconciliations of GAAP income from operations to non-GAAP income from operations are as follows (in thousands):
Three-Month Periods Ended Nine-Month Periods Ended
September 30, September 30,
2021 2020 2021 2020
Income from operations $ 709 $ 641 $ 2,024 $ 737
Adjustments to reconcile to non-GAAP income
Amortization of intangible assets 200 187 579 549
Depreciation 32 58 112 176
Non-GAAP income from operations $ 941 $ 886 $ 2,715 $ 1,462
Seasonality. Our quarterly revenues and operating results have varied
significantly in the past due to the seasonality of our business. Our first
quarter generally is the weakest due to weather conditions that make roadway
construction more difficult in parts of North America , Europe and northern Asia .
We expect such seasonality to continue for the foreseeable future. Additionally,
our international revenues regularly contain individually significant sales.
This can result in significant variations of revenue between periods.
Accordingly, we believe that quarter-to-quarter comparisons of our financial
results should not be relied upon as an indication of our future performance. No
assurance can be given that we will be able to achieve or maintain profitability
on a quarterly or annual basis in the future.
Segments. We currently operate in 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 and IntellitraffiQ are our radar product lines, and
revenue consists of sales to external customers. Radar products are normally
sold in the Highway segment. As a result of business model changes and
modifications 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
2021 2020 2021 2020 2021 2020
Revenue $ 2,677 $ 2,502 $ 595 $ 1,248 $ 3,272 $ 3,750
Gross profit 2,456 2,228 231 639 2,687 2,867
Amortization of intangible assets 105 92 95 95 200 187
Intangible assets 1,260 1,468 1,499 1,880 2,759 3,348
Nine Months Ended September 30,
Intersection Highway Total
2021 2020 2021 2020 2021 2020
Revenue $ 7,206 $ 7,217 $ 2,833 $ 3,079 $ 10,039 $ 10,296
Gross profit 6,617 6,530 1,304 1,649 7,921 8,179
Amortization of intangible assets 293 275 286 274 579 549
Intangible assets 1,260 1,468 1,499 1,880 2,759 3,348
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Results of Operations
The following tables set forth, for the periods indicated, certain statements of
operations data as a percent of total revenue and gross profit on product sales
and royalties as a percentage of product sales and royalties, respectively.
Three-Month Periods Ended
September 30,
2021 2020
Product sales 24.6 % 41.0 %
Royalties 75.4 59.0
Total revenue 100.0 100.0
Gross profit - product sales 40.4 48.6
Gross profit - royalties 95.7 95.8
Selling, general and administrative 40.8 37.9
Research and development 19.7 21.4
Income from operations 21.7 17.1
Income tax expense (benefit) 2.9 (0.5)
Net income 18.7 17.6
Nine-Month Periods Ended
September 30,
2021 2020
Product sales 32.6 % 36.5 %
Royalties 67.4 63.5
Total revenue 100.0 100.0
Gross profit - product sales 44.3 51.0
Gross profit - royalties 95.6 95.8
Selling, general and administrative 42.0 47.5
Research and development 16.7 24.7
Income from operations 20.2 7.2
Other income, net 9.2 -
Income tax expense (benefit) 4.5 0.4
Net income 24.9 6.8
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Total revenue decreased to$3.3 million in the three-month period endedSeptember 30, 2021 from$3.8 million in the same period in 2020, a decrease of 12.7%, and decreased to$10.0 million in the first nine months of 2021 from$10.3 million in the same period in 2020, a decrease of 2.5%. Royalty income increased to$2.5 million in the third quarter of 2021 from$2.2 million in the third quarter of 2020, an increase of 11.5%, and increased to$6.8 million in the first nine months of 2021 compared to$6.5 million in the first nine months of 2020, an increase of 3.5% Product sales decreased to$805,000 in the third quarter of 2021 from$1.5 million in the third quarter of 2020, a decrease of 47.7%, and decreased to$3.3 million in the first nine months of 2021 from$3.8 million in the first nine months of 2020, a decrease of 13.0%. The decrease in product sales is primarily the result of labor shortages causing installation delays and impacting project timing.
Revenue for the Intersection segment increased to
Gross margin percent for product sales decreased to 40.4% in the three months endedSeptember 30, 2021 from 48.6% in the three months endedSeptember 30, 2020 . The dollar amount of product sales gross profit decreased$423,000 , or 56.6%, in the three months endedSeptember 30, 2021 compared to the prior year period. Gross margin percent for product sales decreased to 44.3% in the first nine months of 2021 from 51.0% in the first nine months of 2020. Product sales gross profit decreased$468,000 or 24.4% in the nine months endedSeptember 30, 2021 compared to the prior year period. The decrease in product gross margin percent was primarily the result of a reduction in the warranty reserve in the first nine months of 2020 and no comparable reduction in the same period in 2021. Gross margin percent for royalty sales for the three months endedSeptember 30, 2021 decreased to 95.7% from 95.8% in the same period in 2020. Gross profit from royalties increased$242,000 , or 11.4%, in the three months endedSeptember 30, 2021 compared to the prior year period. Gross margin percent for royalty sales for the nine months endedSeptember 30, 2021 decreased to 95.6% from 95.8% in the same period in 2020. Gross profit from royalties decreased$211,000 , or 3.4%, in the nine months endedSeptember 30, 2021 compared to the prior year period. The decrease in royalty gross margin percent was due to slightly higher software amortization expense. Selling, general and administrative expense was$1.3 million , or 40.8% of total revenue, in the third quarter of 2021 compared to$1.4 million , or 37.9% of total revenue, in the third quarter of 2020, and it decreased to$4.2 million , or 42.0% of total revenue, in the first nine months of 2021 compared to$4.9 million , or 47.5% of total revenue, in the first nine months of 2020. The year-over-year decrease for the first nine months is due to the incremental consulting and legal costs incurred in 2020 related to the efforts around evaluating strategic alternatives. The savings realized in the first nine months of 2021 were partially offset by legal and consulting fees associated with the Reorganization. Research and development expense decreased to$644,000 , or 19.7% of total revenue, in the three-month period endedSeptember 30, 2021 , from$804,000 , or 21.4% of total revenue, in the three-month period endedSeptember 30, 2020 , and it decreased to$1.7 million or 16.7% of total revenue, in the nine-month period endedSeptember 30, 2021 from$2.5 million , or 24.7% of total revenue, in the nine-month period endedSeptember 30, 2020 . The decrease was due to higher capitalized software development costs in the nine-month period endedSeptember 30, 2021 of$178,000 compared to capitalized software costs of$22,000 for the same period in 2020. After normalizing for software development costs, overall research and development expenditures decreased in the nine-month period endedSeptember 30, 2021 compared to the same period in the prior year due to lower headcount. During the first nine months of 2021, the Company applied for, and was granted, forgiveness for the Paycheck Protection Program loan principal and accrued interest, totaling$931,000 . When offset by various other expense during the first nine months of 2021, the Company recognized other income of$925,000 .
There was
Consolidated net income was$613,000 , or$0.11 per basic share and diluted share, in the three-month period endedSeptember 30, 2021 compared to a net income of$659,000 , or$0.12 per basic and diluted share, in the comparable prior year period. Consolidated net income was$2.5 million , or$0.47 per basic and diluted share, in the nine-month period endedSeptember 30, 2021 compared to a net income of$698,000 , or$0.13 per basic and diluted share, in the comparable prior year period. 27
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Liquidity and Capital Resources
At
Net cash provided by operating activities remained constant at$1.5 million in the first nine months of 2021 compared to the same period in 2020. To avoid any unforeseen supply chain delays, the Company built up finished goods inventory in the first nine months of 2021. Net cash used for investing activities was$186,000 for the first nine months of 2021 compared to net cash used for investing activities of$134,000 in the same period in 2020. The increase of the amount of net cash used for investing activities in the first nine months of 2021 compared to the prior year period was primarily the result of higher capitalized internal software development costs compared to the prior year period. Net cash used for financing activities was$1.3 million in the first nine months of 2021 compared to net cash provided by financing activities of$918,000 in the same period in 2020 due to two quarterly cash dividends of$0.12 per share to shareholders paid during the nine months endedSeptember 30, 2021 , whereas in the first nine months of 2020, we received the proceeds from the PPP loan and paid no dividends. We believe that cash and cash equivalents on hand atSeptember 30, 2021 and cash provided by operating activities will satisfy our projected working capital needs, investing activities, and other cash requirements for at least one year fromSeptember 30, 2021 .
Off-Balance Sheet Arrangements
We do not participate in transactions or have relationships or other arrangements with an unconsolidated entity, including special purpose and similar entities, or other off-balance sheet arrangements.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The accounting policies used in preparing our interim Condensed Consolidated Financial Statements as of and for the three and nine months endedSeptember 30, 2021 are set forth elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction with those described in our Annual Report on Form 10-K.
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Cautionary Statement:
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events and can be identified by the use of forward-looking words such as "expects," "believes," "may," "will," "should," "intends," "plans," "estimates," or "anticipates" or other comparable terminology. Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the results described in the forward-looking statements. Factors that might cause such differences include, but are not limited to:
º our historical dependence on a single product for most of our revenue;
º budget constraints by governmental entities that purchase our products,
including constraints caused by declining tax revenue;
º the continuing ability of Econolite to pay royalties owed;
º the mix of and margin on the products we sell;
º our dependence on third parties for manufacturing and marketing our
products;º our dependence on single-source suppliers to meet manufacturing needs;
º our failure to secure adequate protection for our intellectual property
rights;
º our inability to develop new applications and product enhancements;
º the potential disruptive effect on the markets we serve of new and emerging
technologies and applications, including vehicle-to-vehicle communications
and autonomous vehicles;
º unanticipated delays, costs and expenses inherent in the development and
marketing of new products;
º our inability to respond to low-cost local competitors;
º our inability to properly manage any growth in revenue and/or production
requirements;
º the influence over our voting stock by affiliates;
º our inability to hire and retain key scientific and technical personnel;
º the effects of legal matters in which we may become involved; º our inability to achieve and maintain effective internal controls; º our inability to successfully integrate any acquisitions; º tariffs and other trade barriers;
º political and economic instability, including continuing volatility in the
economic and political environment of the
º our inability to comply with international regulatory restrictions over
hazardous substances and electronic waste; and
º conditions beyond our control such as war, terrorist attacks, health
epidemics (including the COVID-19 pandemic caused by the coronavirus) and
economic recession.
We caution that the forward-looking statements made in this report or in other announcements made by us are further qualified by the risk factors set forth in Item 1A. of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 29
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