AUTOSCOPE TECHNOLOGIES CORP

Autoscope Technologies Corporation operates in the Intelligent Transportation Systems (ITS) industry, providing above-ground detection technology products for advanced traffic management systems, traffic data collection, and related markets. The ITS market integrates information processing and control electronics into roadway infrastructure to monitor and manage traffic flow, reduce congestion, and enhance driver safety. The company believes that the growing use of vehicles, with United States commuters losing 36 hours a year in congestion in 2021, costing an average of $564 per driver in wasted time ¹, makes ITS solutions increasingly necessary. Key trends driving growth in ITS include the proliferation of traffic, the demographics of urbanization, the melding of large city service domains towards "smart city" initiatives, and the convergence of ITS with adjacent markets like connected vehicles and security/surveillance.

Autoscope Technologies positions itself as a leading provider of above-ground detection products and solutions, asserting that its solutions are technically superior due to higher accuracy, limited false detection, easier installation, lower ownership costs, effective operation in diverse conditions, and the ability to manage inputs from various sensors. The company highlights its proprietary portfolio of complex software algorithms and applications, developed and refined over three decades, as a key competitive strength, allowing its products to capture and analyze objects in diverse weather and lighting conditions while balancing positive and false detections. This technological advantage is believed to command premium pricing. The company also emphasizes its proven ability to develop, enhance, and market new products, citing examples like the Autoscope Solo system and RTMS Radar, including the 2020 introduction of the RTMS Echo. A leading distribution channel is another strength, particularly its exclusive agreement with Econolite Control Products, Inc. ("Econolite") for Autoscope video products in the United States, Mexico, Canada, and the Caribbean, which is believed to be the leading distributor of ITS intersection control products in these markets. The company also maintains a broad product portfolio leveraging its core software-based algorithms and an experienced management and engineering team.

The company's core business model involves generating revenue from two primary sources: royalties received from Econolite for sales of Autoscope video systems in the United States, Mexico, Canada, and the Caribbean, and direct sales of its RTMS radar systems and Autoscope video systems in Europe and Asia. Royalty income is calculated using a profit-sharing model where gross profits on sales of licensed products through Econolite are shared equally. This arrangement reduces the company's cost of revenues and selling, marketing, and product support expenses, as these are primarily borne by Econolite, positively impacting gross margin but negatively impacting total revenue. The primary customer segments are governmental agencies and municipalities, including federal, state, city, and county departments of transportation, as well as port, highway, tunnel, and other transportation authorities.

The company operates in two reportable segments: Intersection and Highway. The Intersection segment primarily sells Autoscope video products, which are machine-vision based and generate revenue from royalties (exclusively from Econolite) and a portion of international product sales. The Autoscope video system processes real-time video input to extract traffic data such as vehicle presence, counts, speed, length, time occupancy, turning movements, and flow rate. Key products include Autoscope Vision, an integrated high-definition camera and machine vision processor, and Autoscope Pn-520, a card-only machine vision processing computer for international markets. For the year ended December 31, 2021, the Intersection segment generated revenue of $9.323 million ² and a gross profit of $8.421 million ³.

The Highway segment primarily sells RTMS radar products, generating revenue from direct sales to external customers in international and North American markets. RTMS radar systems use radar to measure vehicle presence, volume, occupancy, speed, and classification for roadway monitoring. Products include the RTMS Sx-300, a non-intrusive radar system, and the RTMS Echo, launched in 2020, which offers per-vehicle speed calculation, Wi-Fi connectivity, and storage for 1 million individual vehicle records. The RTMS Sx-300 HDCAM also includes a high-definition camera for visual setup confirmation, data capture, and real-time traffic surveillance, with a wrong-way module for driver detection. For the year ended December 31, 2021, the Highway segment generated revenue of $3.919 million ⁴ and a gross profit of $1.814 million ⁵. Additionally, the IntellitraffiQ software provides traffic measurement and data collection for large and small areas, offering an enterprise-level system for monitoring hundreds of sensor locations from a single screen.

For the fiscal year ended December 31, 2021, Autoscope Technologies reported total revenue of $13.242 million ⁶, which remained unchanged from 2020. Gross profit was $10.235 million ⁷, resulting in a gross margin of 77.3% ⁸. Operating income was $2.273 million ⁹, representing an operating margin of 17.2% ¹⁰. Net income for the year was $2.295 million ¹¹, leading to basic and diluted EPS of $0.43 ¹². Net cash provided by operating activities was $2.562 million ¹³. As of December 31, 2021, the company had cash and cash equivalents of $8.229 million ¹⁴. Total current liabilities were $899,000 ¹⁵, and long-term debt, net, was $1.674 million ¹⁶.

Comparing 2021 to 2020, total revenue remained unchanged at $13.2 million ¹⁷. Royalty income increased by 2.3% to $8.5 million ¹⁸ in 2021 from $8.3 million ¹⁹ in 2020. Product sales decreased by 2.5% to $4.7 million ²⁰ in 2021 from $4.8 million ²¹ in 2020, primarily due to labor shortages causing installation delays and impacting project timing. Revenue for both the Intersection and Highway segments remained unchanged at $9.3 million ²² and $3.9 million ²³, respectively. Gross profit for product sales decreased to 44.6% ²⁴ in 2021 from 49.9% ²⁵ in 2020, a decrease of $308,000 ²⁶ or 12.8% ²⁷, attributed to COVID-19 related challenges and labor shortages. Gross profit for royalty sales slightly decreased to 95.3% ²⁸ in 2021 from 95.6% ²⁹ in 2020, but increased by $155,000 ³⁰ or 1.9% ³¹ in absolute terms, with the percentage decrease attributed to increased amortization costs from pedestrian detection software. Selling, marketing, and product support expense decreased to $2.1 million ³² (16.1% of total revenue ³³) in 2021 from $2.5 million ³⁴ (19.3% of total revenue ³⁵) in 2020, primarily due to decreased headcount. General and administrative expense decreased to $3.6 million ³⁶ (27.2% of total revenue ³⁷) in 2021 from $3.9 million ³⁸ (29.6% of total revenue ³⁹) in 2020, partly due to reduced legal and consulting costs related to a terminated strategic review process in 2020. Research and development expense decreased to $2.2 million ⁴⁰ (16.7% of total revenue ⁴¹) in 2021 from $3.3 million ⁴² (25.3% of total revenue ⁴³) in 2020, driven by increased capitalized software development costs of $485,000 ⁴⁴ in 2021 compared to $22,000 ⁴⁵ in 2020, and decreased headcount. Income tax expense was $905,000 ⁴⁶ in 2021, compared to an income tax benefit of $462,000 ⁴⁷ in 2020, due to higher pre-tax income and reduced tax credits. Net income increased to $2.295 million ⁴⁸ in 2021 from $1.063 million ⁴⁹ in 2020.

Significant operational developments during the period include a holding company reorganization completed on July 21, 2021, where Image Sensing Systems, Inc. ("ISNS") became a wholly-owned subsidiary of the new parent company, Autoscope Technologies Corporation, which now trades on Nasdaq under "AATC". On December 10, 2021, ISNS closed on the purchase of real and personal property at 1115 Hennepin Avenue, Minneapolis, Minnesota, for a total purchase price of $2,050,000 ⁵⁰, financed in part by a loan of $1,742,500 ⁵¹ from Coulee Bank. The company fully occupied this property in February 2022 and intends to terminate its lease for its former St. Paul headquarters in March 2022. In the second quarter of 2021, the company began forming a subsidiary in Chennai, India, Autoscope Technologies India Private Limited, which was legally formed on October 14, 2021, and will focus solely on research and development. The company also recognized $931,000 ⁵² in other non-operating income in the first quarter of 2021 due to the forgiveness of its Paycheck Protection Program loan.

Management believes that the expected growth in its business is primarily attributable to several global trends, including worsening traffic congestion due to increased vehicle numbers without corresponding road infrastructure expansion, which increases demand for its products. Advances in information technology are making products easier to market and implement, while continued funding allocations for centralized traffic management services and automated enforcement schemes are increasing the ability of primary end-users to implement the company's products. Additionally, general increases in the cost-effectiveness of electronics are making products more affordable for end-users.

The company's continued growth is expected to depend on the ongoing adoption and governmental funding of ITS and other automated applications for traffic control, safety, and enforcement in developed countries. A key factor is the propensity of traffic engineers to implement lower-cost, technology-based solutions over civil engineering solutions like widening roadways. The company also anticipates growth from countries in the developing world adopting above-ground detection technology, such as video or radar, instead of in-pavement loop technology to manage traffic. Furthermore, the company's ability to develop new products that provide increasingly accurate information and enhance end-users' ability to cost-effectively manage traffic and environmental issues is crucial. Value creation through strategic acquisitions and partnerships that can leverage the company's reputation, assets, and talents is also a focus.

As part of its growth strategy, Autoscope Technologies aims to enhance and extend its technology leadership in ITS by improving product accuracy and functionality, opportunistically expanding into adjacent markets, and expanding its portfolio and channels through licensing. The company expects to leverage its technical leadership in ITS, particularly with its next-generation RTMS radar product, to further differentiate itself from competitors.

The company plans to expand into adjacent markets, driven by the convergence of user needs and expectations within the transportation, safety, surveillance, and broader "smart-city" markets. Its core competency in advanced above-ground detection platforms is expected to enable the deployment of highly accurate and ruggedized systems into these new areas. Recent product introductions and near-term research and development initiatives are intended to position the company as a leading supplier of critical detection components that provide actionable data across incremental markets.

Autoscope Technologies also intends to increase the scope of its distribution and direct sales, particularly by taking advantage of the accelerated adoption of above-ground detection in the developing world. This involves increasing end-user awareness of its products and applications and improving user aptitude, supported by investments in product adjustments for international end-users and sales and marketing expansion, with a focus on its European subsidiaries.

Planned capital allocation includes continued investment in research and development, with approximately $2.2 million ⁵³ and $3.3 million ⁵⁴ invested in 2021 and 2020, respectively, to develop and enhance product technology. The company capitalized $485,000 ⁵⁵ and $22,000 ⁵⁶ in software development costs in 2021 and 2020, respectively. The company also recently financed the purchase of real property for $2,050,000 ⁵⁷ with a loan of $1,742,500 ⁵⁸ at a fixed annual interest rate of 3.950% ⁵⁹, payable in 59 monthly payments of $10,566 ⁶⁰ and a final payment of $1,438,256 ⁶¹ due on December 10, 2026 ⁶². The company commenced paying cash dividends of $0.12 per share ⁶³ quarterly in May 2021 and anticipates continuing to do so, subject to Board approval and financial performance.

Autoscope Technologies faces several material risks. Macroeconomic risks include the potential for governmental entities, which are the primary end-users, to reduce or delay purchases due to budgetary constraints or project delays, leading to severe revenue fluctuations. The ongoing economic environment in Europe and the United States, including inflation and rising interest rates, adds to the unpredictability of purchase decisions. The company's operating costs are generally fixed, while revenue is seasonal, with the first quarter historically being the weakest due to weather conditions, leading to potential disproportionate impacts from revenue shortfalls. Supply chain disruptions, exacerbated by the COVID-19 pandemic, labor shortages, and inflationary pressures, could increase costs, delay product deliveries, and reduce sales, especially given reliance on single-source suppliers for some components. International operations, which accounted for approximately 13% of total revenue in 2021 ⁶⁴ and 16% in 2020 ⁶⁵, expose the company to risks from changing political and economic conditions, currency exchange rate fluctuations (a 10% adverse change in foreign currency rates could have a material effect ⁶⁶), export restrictions, and compliance with foreign regulatory requirements like GDPR. Changes in U.S. trade policies, including tariffs, could also increase costs and affect customer sourcing. The company is also subject to environmental regulations like the European Union's RoHS and WEEE directives, and non-compliance could restrict sales and reduce profitability.

Competitive risks include increasing competition in the ITS industry from companies with substantially more resources, potentially leading to decreased market share if the company cannot respond quickly to new technologies or end-user requirements. The market for vehicle detection continuously seeks advanced technological solutions, and failure to develop new applications and product enhancements in a timely and cost-effective manner could render products noncompetitive or obsolete. The company prices a segment of its product portfolio at a premium, which may make it difficult to respond to emerging low-cost competitors. Local biases in international markets could also erode revenue as local competitors emerge.

Operational risks include the substantial reliance on Econolite for Autoscope video product sales, with royalties from Econolite comprising 64% of revenue in 2021 ⁶⁷ and 63% in 2020 ⁶⁸, and Econolite's accounts receivable representing 60% of total accounts receivable at December 31, 2021 ⁶⁹. Any decrease in Econolite's sales volume or failure to make timely royalty payments would significantly impact financial results. Dependence on third parties for manufacturing and marketing, including Econolite and E.I. Microcircuits, Inc., could lead to delays or reductions in product shipments if these partners are unable to meet demands. The company's growth plans, including new product development, mergers, and acquisitions, carry inherent risks such as difficulties in identifying suitable candidates, capital unavailability, integration challenges, and potential dilution. Product liability and commercial litigation, as well as legal and regulatory compliance risks (antitrust, environmental, anti-bribery, anti-corruption), could result in substantial liabilities. Failure to adequately protect intellectual property rights, including through costly litigation, could also adversely affect the business. The company's stock is thinly traded, with 3,950,867 shares held by non-affiliates as of February 28, 2022 ⁷⁰, making its price volatile. Rising interest rates may affect future financing availability and costs.

Management's overall tone emphasizes the company's position as a leading provider of above-ground detection products for the Intelligent Transportation Systems (ITS) industry, highlighting its commitment to optimizing traffic flow and enhancing driver safety. They believe the company's solutions are technically superior due to high accuracy, ease of installation, and effectiveness in diverse conditions. Management is focused on leveraging global trends such as worsening traffic congestion, advances in information technology, and increased funding for centralized traffic management to drive growth. They explicitly state their belief that the growing use of vehicles will make their ITS solutions increasingly necessary to complement existing and new roadway infrastructure.

Key strategic priorities for the period ahead include enhancing and extending technology leadership in ITS by improving product accuracy and functionality, and opportunistically expanding product offerings into adjacent markets, as well as expanding the portfolio and channels through licensing. Management also prioritizes expanding into adjacent markets like safety, surveillance, and "smart-city" initiatives, leveraging their core competency in advanced above-ground detection platforms. A third strategic priority is to increase the scope of distribution and direct sales, particularly in developing world markets, by increasing end-user awareness and improving user aptitude, supported by investments in product adjustments and sales and marketing expansion, especially in Europe. Finally, management intends to expand through strategic acquisitions and investments, focusing on high-return growth opportunities and acquisitions that can leverage existing assets and infrastructure, with the goal of transforming the company into a group of profitable business lines marketed to a diverse customer base that generates sustainably higher earnings.