Operating Leases

3 Months Ended

Mar. 31, 2022

Note G: Operating Leases

The Company is subject to various non-cancelable operating leases for office space and IT equipment expiring at various dates through March 2023. These leases do not have significant rent escalation, holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

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

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

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

	Three-Month Periods Ended March 31,
	2022		2021
Operating lease costs	$	53	$	55
Variable lease cost		50		43
Total	$	103	$	98

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

Maturities for our lease liabilities for all operating leases were as follows (in thousands) as of March 31, 2022:

	Total
2022	$	12
2023		2
2024 and thereafter		—
Total lease payments		14
Less: Interest		—
Present value of lease liabilities	$	14

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2022:

	March 31, 2022
Remaining lease term and discount rate:
Weighted average remaining lease term (years)	0.87
Weighted average discount rate	4.75	%

Cash paid for amounts included in the measurement of operating lease liabilities was $53,000 and $55,000 for the three months ended March 31, 2022 and 2021, respectively, and these amounts are included in operating activities in the condensed consolidated statements of cash flows. During the three months ended March 31, 2022, ISNS and Spruce Tree Centre L.L.P. entered into a lease agreement which increased operating lease assets and operating lease liabilities by $8,400. The Company is using this leased space to hold equipment that supports various traffic cameras in Saint Paul, Minnesota. The lease agreement, effective March 1, 2022, will expire on March 31, 2023. There were no operating lease assets obtained in exchange for new operating lease liabilities for the three months ended March 31, 2021.

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

On August 27, 2021 (the "Effective Date"), ISNS and TJ&Z Family Limited Partnership, a Minnesota limited partnership ("TJ&Z"), entered into a Purchase Agreement (the "Original Agreement") under which ISNS purchased certain real and personal property (the "Property") from TJ&Z for a total purchase price of $2,050,000, subject to adjustments if certain conditions were not satisfied (the "Purchase Price"). The Property includes land and a building located at 1115 Hennepin Avenue, Minneapolis, Minnesota (the "Real Property"). The Original Agreement also provided for the sale by TJ&Z to ISNS of all of TJ&Z's interest under a billboard lease for a billboard located on the Real Property, as described in the Original Agreement. The Original Agreement gave ISNS 60 days after the Effective Date (the "Inspection Period") during which to undertake any studies, tests, investigations, and inspections of the Property. Effective as of on October 26, 2021, ISNS and TJ&Z entered into the First Amendment to Purchase Agreement (the “First Amendment”) that, among other things, extended the Inspection Period from October 26, 2021 to November 26, 2021, as to certain conditions only. (The Original Agreement, as amended by the First Amendment, is referred to as the "Purchase Agreement.") The First Amendment effectively extended the closing date to December 13, 2021 and required ISNS to pay $50,000 in earnest money in addition to the $50,000 in earnest money already paid by ISNS under the Original Agreement. On December 10, 2021, ISNS closed (the "Closing") on the purchase of the Property under the terms of the Purchase Agreement and a loan in the original principal amount of $1,742,500 (the "Loan") from Coulee Bank to ISNS to finance the purchase of the Property. In addition to the $100,000 in earnest money paid by ISNS as described above and the $1,742,500 in Loan proceeds, at the Closing, ISNS paid $230,119 to finance the purchase of the Property and the payment of Closing costs. ISNS fully occupied the Property in February 2022.

The foregoing description of the Purchase Agreement and the First Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Purchase Agreement filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 2, 2021 and the First Amendment filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 4, 2021 and incorporated herein by reference.

The following is a schedule of minimum future rental income (in thousands) on the operating lease related to the billboard located on the Real Property as of March 31, 2022.

	Total
2022	$	29
2023		38
2024		38
2025		38
2026		38
2027 and thereafter		38
Total minimum future rental income	$	219

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

AUTOSCOPE TECHNOLOGIES CORP 10-Q