REKOR SYSTEMS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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: 001-38338
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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81-5266334
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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7172 Columbia Gateway Drive, Suite 400
Columbia, MD
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21046
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(Address of Principal Executive Offices)
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(Zip Code)
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(410) 762-0800
(Registrant’s Telephone Number, Including Area
Code)
Securities
registered pursuant to Section 12(b) of the Act
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock, $0.0001 par value per share
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REKR
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The
Nasdaq Stock Market
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Securities
Registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
☐
No
☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
☒
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 and posted
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 and post 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.
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
☒
Emerging
growth company
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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.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes
☐
No
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The
aggregate market value of the registrant’s voting and
non-voting common stock held by non-affiliates of the registrant as
of June 30, 2020 was approximately $58.6 million.
As of
March 12, 2021, the Registrant had 40,804,219 shares of common
stock, $0.0001 par value per share outstanding.
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1.
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Business
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4
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Item 1A.
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Risk Factors
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16
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Item 1B.
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Unresolved Staff Comments
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29
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Item 2.
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Properties
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29
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Item 3.
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Legal Proceedings
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30
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Item 4.
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Mine Safety Disclosures
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31
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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32
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Item
6.
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Selected
Financial Data
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34
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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34
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Item 7A.
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Quantitative and Qualitative Disclosures about Market
Risk.
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49
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Item 8.
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Financial Statements and Supplementary Data.
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49
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
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89
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Item 9A.
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Controls and Procedures.
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89
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Item 9B.
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Other Information.
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90
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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90
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Item 11.
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Executive Compensation
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96
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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100
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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102
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Item 14.
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Principal Accountant Fees and Services
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103
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Part IV
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Item 15.
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Exhibits, Financial Statements Schedules
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104
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Item 16.
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Form 10-K Summary.
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106
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2
CERTAIN TERMS
Unless
the context requires otherwise, all references in this Annual
Report on Form 10-K (the “Annual Report”) to
“Rekor Systems, Inc.,” “Rekor,”
“Company,” “we,” “our” and
“us” refer to Rekor Systems, Inc. and its consolidated
subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report contains forward-looking statements within the
meaning of the U.S. federal securities laws. All statements other
than statements of historical facts, such as statements regarding
the objectives of management, timing and likelihood of success of
various activities, future performance of current and prospective
products and services and our future results of operations and
financial position, are forward looking statements and include all
expressions of
the expectations,
hopes, beliefs, intentions, plans, prospects or strategies of the
Company.
These statements involve known and unknown risks,
uncertainties and other important factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by these statements. In some cases, you can identify
forward-looking statements by terms such as “may,”
“might,”
“will,”
“would,”
“could,”
“should,” “plan,” “anticipate,”
“target,” “expect,” “project,”
“intend,” “contemplates,”
“believes,” “estimates,”
“predicts,” “potential”
“possible,”
or
“continue” or the negative of these terms or other
similar expressions. These forward-looking statements
are based on certain assumptions and analyses made
by the management of the Company in light of their respective
experience and perception of historical trends, current conditions
and expected future developments and their potential effects on the
Company as well as other factors they believe are appropriate in
the circumstances. They
speak only as of the date of this
Annual Report and are subject to a number of substantial risks,
uncertainties and assumptions described under the sections entitled
“Risk Factors” and elsewhere in this Annual Report.
Because forward-looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified
and some of which are beyond our control,
actual results or performance to be materially
different from those expressed or implied and
you should not
rely on these forward-looking statements as predictions of future
events.
There can be no assurance that
future developments affecting the Company will be those
anticipated. Should one or more of these risks or uncertainties
materialize or should any of the assumptions being made prove
incorrect, actual results may vary in material respects.
We
undertake no obligation to update any forward-looking statement as
a result of new information, future events or
otherwise.
3
PART I
Overview
We are
a leader in the emerging market for intelligent roadway systems
developed to take advantage of recent developments in
artificial intelligence ("AI"). We have developed advanced vehicle
recognition systems that can extract more accurate and complete
data from existing cameras and sensors. Our systems have also been
designed to take full advantage of the latest technological
advances in new cameras and sensors, edge processing and cloud
computing. We have also developed platforms that enable the
data our systems collect to be analyzed in combination with other
sources and distributed to multiple end users in real time as
actionable intelligence or data collected for long range planning
purposes in full compliance with the security and privacy
requirements of each end user.
These
capabilities are particularly useful to governmental entities and
businesses in solving a wide variety of real-world vehicle-related
operational challenges. Our ability to enhance the results provided
by existing Internet Protocol (“IP”) connected cameras
has enabled significant new uses for vehicle recognition technology
that were not previously available or cost effective. We currently
provide products and services for governmental organizations and
large and small businesses throughout the world. Customers
currently use our products or services in approximately 80
countries in applications that include public safety,
transportation, parking, security, customer experience, operational
efficiency and logistics.
On
March 29, 2019, we announced that our Board of Directors approved
changing the Company’s name to Rekor Systems,
Inc.
Previously, we
provided professional services and staffing solutions to the
government contracting and the aerospace and aviation industries
through our Professional Services Segment. The Professional
Services Segment included our wholly owned subsidiaries AOC Key
Solutions Inc. (“AOC Key Solutions”), Global Technical
Services, Inc. (“GTS” or “TeamGlobal”),
Firestorm Solutions, LLC (Firestorm Solutions”) and Firestorm
Franchising, LLC (“Firestorm Franchising” and, together
with Firestorm Solutions, “Firestorm”). As part of the
development of a new line of products for the public safety and
security markets, we determined that our resources were best
concentrated on vehicle recognition products and services and began
to consider dispositions in our Professional Services Segment.
Concurrently, we reorganized and retooled our product development,
business development and administrative resources to better serve
our Technology Segment. On April 2, 2020, we sold AOC Key
Solutions. As of June 29, 2020, we sold TeamGlobal and determined
that all the remaining operations that comprised our Professional
Services Segment met the criteria to be presented as
discontinued.
Our
continuing operations are conducted by our wholly owned subsidiary,
Rekor Recognition Systems, Inc. (“Rekor Recognition”).
In connection with the development of several new public safety
products, we acquired substantially all the assets of OpenALPR
Technology, Inc. in March 2019. This acquisition (the
“OpenALPR Technology Acquisition”) transferred vehicle
recognition software and associated licenses and proprietary rights
to OpenALPR Software Solutions, LLC (“OpenALPR”), a new
wholly owned subsidiary of Rekor Recognition. OpenALPR’s
vehicle recognition platform, already operating on approximately
6,800 cameras in approximately 80 countries worldwide that cover
approximately 14,000 lanes of roadway, has laid the groundwork for
expansion, enabling multiple deployment mechanisms for our products
and services. Since the Open ALPR Technology Acquisition, our
engineering teams have worked continuously to expand and refine the
Open ALPR platform. In October 2020, we announced the launch of
Rekor One™, an advanced platform that serves as a unifying
source of roadway intelligence for multiple government agencies
across cities, counties and states. The Rekor One™ platform
supports multiple community safety, intelligent roadway and revenue
generation activities that can benefit from the use of our advanced
vehicle recognition software.
Rekor’s
mission is to enable “AI driven decisions” by enhancing
the capabilities in the governmental and commercial sectors with
actionable, real-time insights. We seek to deliver these insights
through an expanding software portfolio that not only addresses the
challenges our customers are currently facing but empowers them to
effectively deal with their evolving needs.
4
Our
core vehicle recognition software currently has the capability to
analyze multi-spectral images and video streams produced by nearly
any IP camera and concurrently extract license plate data by state
or province from approximately 80 countries, together with to the
vehicle’s make, model, color, body type and direction of
travel. Our software is designed to process video streams on the
edge of the network prior to posting results to the Cloud, so that
users are immediately provided usable real-time information for
mission critical public safety and commercial applications. When
combined with speed-optimized code, parallel processing capability
and best-in-class hardware accessories, such as cameras and
communications modules, the software captures license plate data
and vehicle characteristics at extremely high vehicle speeds with a
high degree of accuracy, even in unusually difficult conditions,
such as low lighting, poor weather, extreme camera viewing angles,
and obstructions.
Rekor
One provides governments with a comprehensive vehicle intelligence
system that supports multiple agency-specific missions. With Rekor
One, governments can unify and flexibly expand their existing IP
camera networks, while transforming them into a safe and smart
multi-dimensional roadway network. Since it can interface with
multiple database and operating systems, Rekor One’s industry
leading features allow users to observe security and privacy
protocols that are customized to the needs and requirements of each
end-user department or agency, facilitating high level compliance
with the latest advances in privacy and information security
requirements. Rekor One is designed to permit the cost of a network
to be fractionalized based on relative value to multiple end users.
Each participating agency receives a unique user interface and
dashboard, which draws on Rekor One’s unified vehicle
recognition intelligence to provide data customized to the
agency’s specific needs. This can eliminate redundant systems
and single function applications to increase efficiency and lower
costs.
Prior
to the development of our proprietary vehicle identification
software, we believe that highly accurate results were not
available using a typical IP camera. With the ability to generate
more accurate results with less expensive hardware, we believe the
dynamics of existing roadway and public safety markets are
changing, enabling the creation of increasingly robust networks at
less cost. In addition, we expect our improvements in cost and
accuracy to create competitive advantages in tolling systems and
logistics operations that currently rely on more expensive and
complex radio frequency identification (“RFID”)
systems. We also expect our lower costs, superior camera reading
distance and field of view capabilities, along with the ability to
capture additional vehicle information, such as direction, color,
make model and body type of vehicle, to open opportunities in other
market segments. These opportunities include parking operations,
quick service restaurants, school safety, retail customer loyalty
programs and, particularly, smart cities and smart roadways. Smart
roadway systems, sometimes referred to as smart mobility systems,
smart transport or intelligent transport systems
(“ITS”), inclusive of parking management and guidance,
passenger information and traffic management systems, can optimize
the movement of vehicles to make travel safer and more efficient.
These technologies are expected to enable users to be more
coordinated, better informed and better able to manage transport
networks efficiently.
Business Strategy
Since
2019, we have been focusing on developing and marketing products
and services with vehicle recognition features powered by our AI
based technology. In connection with our shift in resources to
focus on our technology offerings, we completed the final steps of
our announced change in strategic direction in 2020. In the second
quarter, we disposed of and discontinued all operations in our
Professional Services Segment. Accordingly, for our fiscal years
ending December 31, 2020 and 2019, all of the subsidiaries that
were previously presented as part of the Professional Services
Segment have been classified as discontinued operations and not
presented as part of continuing operations.
With
the disposition of all our professional services operations, we
have concentrated on developing our footprint across different
industries that can make use of our advances in vehicle
recognition. We have focused both on improving our product and
service offerings and our ability to penetrate the markets for
these products and services. Current customers are using these
products and services for: a) toll collection and traffic analysis
in the transportation market, b) school and traffic safety and
other law enforcement applications in the public safety market, c)
parking management, d) perimeter management and surveillance in the
private security market and e) vehicle tracking, perimeter security
and warehouse operations in the logistics market. Our efforts to
further penetrate these markets have included strategic partnership
with major market participants, the establishment of reseller
programs for smaller businesses and the implementation of an
eCommerce platform that supports frictionless direct sales to
customers via the Internet.
5
Since
the OpenALPR Technology Acquisition, we have developed a broad
range of vehicle recognition product and service lines, starting
with public safety, parking operations and toll collection and
expanding into criminal justice information sharing, roadway
compliance program operations, auto wash and service, quick service
restaurants and drive-in retail. We shifted from a perpetual
licensing model to a subscription-based model, refined and
rebranded our software to highlight products such as Rekor
Scout™ and Rekor CarCheck™ and released several
packaged hardware products with preloaded versions of our vehicle
recognition engine. We have also launched a robust eCommerce portal
on the OpenALPR.com site, enabling customers to conveniently
purchase Rekor Scout and Rekor CarCheck with just a credit card and
a click. This allows owners to immediately enhance their business
operations while reducing the operating cost for
Rekor.
The ability
of our technology to bring enhanced capabilities to existing
hardware systems, as well as the inclusion of cross-program
interfaces that allow real-time data analysis from a variety of
sources, has also created new opportunities for the use of vehicle
recognition systems. Our recently announced Rekor One
TM
platform and Rekor
Go
TM
app
have been designed to support these new uses by taking full
advantage of the latest advances in data processing and digital
communications. As described below, these efforts are already
producing promising results in connection with our retention by the
State of Oklahoma in its program to identify uninsured motor
vehicles, our pilot program with the North Dakota state parks
system and our selection by MasterCard as a partner in its AI
Powered Drive Through Platform. We expect to continue to find new
opportunities to provide unified, multi-mission support for
governmental programs and to integrate our products and services
into quick service drive through operations and retail customer
loyalty programs.
Recent Developments
Our
most significant developments since January 1, 2020, are described
below:
●
On
February 20, 2021, we advised Iteris Inc. (“Iteris”)
that we were prepared to offer to purchase all of Iteris'
outstanding common stock.
T
he
offer to Iteris was for a combination of cash and common stock
subject to confirmatory diligence and approval of both boards of
directors. On February 26, 2021 we were advised that the board of
directors of Iteris declined our offer.
●
On February 26,
2021, we announced that the State of North Dakota Parks and
Recreation Department selected our Rekor
One™ solution to help state park leadership understand
use patterns and plan for future needs.
●
In February 2021,
we completed an underwritten public offering of 6,126,939 shares of
common stock of the Company at a price to the public of $12.25 per
share. We received aggregate gross proceeds of approximately $75.1
million from the offering, prior to deducting underwriting
discounts and commissions and offering expenses payable by us. We
intend to use these proceeds to increase our product development,
sales and marketing efforts and to consider strategic partnerships
and acquisitions in our target markets. As a result of the
offering, all of our Series A Cumulative Convertible Redeemable
Preferred Stock automatically converted into 899,174 shares of our
common stock. In addition, on February 9, 2021, we issued 517,611
shares of our common stock, due to the automatic conversion of
240,861 shares of Series B Preferred Stock, as a result of the
volume weighted share price of our common stock exceeding certain
thresholds. These automatic conversions resulted in the retirement
of all of our outstanding preferred shares.
●
We continued to
expand our public safety presence in major metropolitan areas of
the United States throughout 2020. In October, we announced that
the Dauphin County, Pennsylvania, District Attorney’s Office
has chosen us to provide vehicle recognition services to support
five different law enforcement jurisdictions. We also signed long
term public safety contracts in 2020 with New Rochelle, New York,
Lauderhill, Florida, and Mt. Juliet and Collierville,
Tennessee.
6
●
On January 7, 2021,
we announced, that the State of Oklahoma has integrated our Rekor
One™ platform across relevant state systems to provide
vehicle information associated with uninsured motorists as part of
the state’s Uninsured Vehicle Enforcement Diversion
(“UVED”) Program, which is operated by the Oklahoma
District Attorneys Council. Oklahoma’s UVED Program uses our
vehicle recognition technology to leverage existing state resources
to ensure that all drivers have at least the minimum required
amount of liability insurance, ultimately leading to safer
roadways. The platform allows for real-time detection of
non-compliant vehicles and instant data consolidation into a
regularly updating insurance system connected to the state’s
enforcement and intervention programs. We assist Oklahoma drivers
by providing a one-stop web portal for uninsured motorists to
easily find non-standard and standard insurance for their vehicle.
With the successful implementation of Oklahoma’s UVED
Program, we have now established a leading position in the
implementation of an innovative program now under active
consideration by a number of other states.
●
On December 15,
2020, we announced, the launch of Rekor Go, an application that
brings the power of accurate vehicle recognition to the mobile
devices of a broad array of commercial users. The app turns a
smartphone into a handheld tool that identifies vehicles and
license plates. The user receives instant confirmation when the
data matches a customer generated “hotlist”
record.
●
On October 12,
2020, we announced the launch of Rekor One™, a new platform
that serves as a unifying source of roadway intelligence for
government agencies across cities, counties and states. The
platform supports multiple community safety, intelligent roadway
and revenue generation activities.
●
On October 6, 2020,
we launched our redesigned eCommerce platform, which allows our
customers to purchase our products and services
online.
●
On September 21,
2020, we elected to voluntarily terminate our At-the-Market Sales
Agreement with B. Riley FBR, (the “Sales Agreement”)
after raising $34,154,000 in aggregate gross proceeds since its
inception in August 2019.
●
On August
31, 2020,
we announced that Mastercard is integrating Rekor’s
proprietary subscription-based Rekor
Edge
vehicle recognition technology into
its
AI Powered Drive Through
Platform
. This new platform can help major quick service
restaurant brands transform their drive through or drive in
interactions through vehicle recognition, voice ordering and other
features developed to exploit the latest developments in artificial
intelligence.
●
On August 6, 2020,
we granted to Verra Mobility a non-exclusive right to resell and
distribute our products to Verra Mobility customers and licensed
certain software to Verra Mobility to be incorporated into Verra
Mobility Products.
●
On July 23, 2020,
James K. McCarthy, Chairman of the Board of Directors (the
“Board”) notified the Board of his intention to retire,
effective immediately. Mr. McCarthy did not advise us of any
disagreement with the Company on any matter relating to its
operations, policies or practices. Effective upon Mr.
McCarthy’s resignation as a director, the size of the Board
was reduced from eight to seven, and Mr. Robert Berman was named
the Executive Chairman of the Board.
●
On July 15, 2020,
approximately 77% of the remaining aggregate principal balance of
our 2019 Promissory Notes as of June 30, 2020, including accreted
interest plus certain fees payable pursuant to the terms of the
2019 Promissory Notes, was redeemed in exchange for common stock at
a rate of $4 per share. On September 16, 2020, we issued a cash
payment to complete the retirement of the remaining aggregate
principal balance of our 2019 Notes, substantially eliminating our
long term debt obligations.
●
In June 2020, we
entered a five-year non-exclusive licensing agreement with Mesa
Technologies, LLC (“Mesa”), for the use of our
intellectual property as part of a school bus stop arm system
(“SBSA”). Mesa has installed over 3,000 photo
enforcement systems world-wide. We expect the agreement to increase
our market penetration in the state, local government and
international markets.
●
In the second
quarter of 2020, we completed the sale or discontinuation of all of
the subsidiaries in our Professional Services Segment. In June, we
completed the sale of TeamGlobal to certain members of TeamGlobal's
management team for approximately $4 million in cash and a secured
note and in April, we completed the sale of AOC Key Solutions to a
Virginia limited liability company owned by the members of AOC Key
Solutions’ management for $4 million.
7
●
In June 2020, we
launched a standalone company named Roker Inc. ("Roker") with
Cygnet Infotech (“Cygnet”) and certain of its
affiliates. Cygnet is a premier product engineering and application
development services firm and we and Cygnet are each contributing
our respective technology stacks in exchange for 50% of the equity
in Roker. In the third quarter of 2020, we each made an initial
cash contribution of $75,000. Roker will be designed to automate
parking enforcement and enable higher revenue recovery for both
public safety institutions and private businesses alike. In January
2021 we made another $75,000 cash contribution in Roker. Our
ownership percentage did not change as a result of this additional
contribution.
●
The spread of the
COVID-19 virus around the world has caused significant volatility
in U.S. and international markets. In response to COVID-19, the
Coronavirus Aid, Relief and Economic Security (“CARES”)
Act was signed into law. The CARES Act, among other things,
includes the Payroll Protection Program which provides forgivable
loans to qualified small businesses, primarily to allow these
businesses to continue to pay their employees. We received $874,000
as a result of the Payroll Protection Program. There continues to
be significant uncertainty about the breadth and duration of
business disruptions related to COVID-19, as well as its impact on
the U.S. and international economies and, as such, we are unable to
determine at this time the full impact it will have impact to our
operations.
●
In March 2020, we
increased our authorized shares of common stock from 30,000,000 to
100,000,000. The increase in authorized shares was done in order to
permit us to raise capital or issue our common stock for other
business purposes.
●
We have also been
active in arranging licensing agreements and strategic
partnerships. In 2020, SecurePark Technologies, a leading parking
solutions company, selected our iP360 Parking and Permit Management
software as a simple, reliable, and affordable solution for their
global clients and Digifort, a global leader in video surveillance
and monitoring, headquartered in Brazil with more than 28,000
customers in 130 countries, became a premier reseller for Watchman
software in Brazil, Latin America, the Pacific Rim and the Middle
East. In addition, we were selected by Brite Computers ("Brite"),
LiveView Technologies, ("LiveView") and Alliance Technology Group
("Alliance") to provide our vehicle recognition systems to their
existing customer bases. Brite is leader in public safety systems
integration and will use us as their sole ALPR solution to their
extensive customer base comprised of law enforcement and state and
local governments. LiveView is a leader in remote security
solutions, which will provide our vehicle recognition systems for
deployment within its full security platform. Alliance will offer
our vehicle recognition solutions to its customer base both as a
standalone solution and as part of an integrated video surveillance
system.
Description of Products and Services
We
currently provide vehicle recognition and data management products
and services to customers in approximately 80 countries. These
products and services, which currently operate in many
installations, include an array of powerful on edge device
capabilities, cross-platform application programming interfaces and
web server access with a self-managed database. Our software
services provide seamless video analysis with a high accuracy rate,
as well as data analytics, and are continuously being enhanced
using a “deep machine learning” convolutional neural
network architecture to classify images.
Current
customers include states, law enforcement agencies, highway
authorities, parking system operators, private security companies,
and wholesale and retail operations supporting logistics, quick
service restaurants and customer loyalty programs. We have entered
into licensing agreements with a number of multi-national parking,
retailing and security systems providers and provide traffic safety
systems for a number of municipalities in North America. Since the
conversion of our sales methodology from perpetual licenses to
software-as-a-service in the second quarter of 2019, we have signed
subscription agreements with a number of municipalities and
governmental agencies for the use of our products and services in
North America and around the world. We continue to sell perpetual
licenses on a limited basis to some of our customers. Through our
eCommerce platform and recently initiated iOS and Android apps, we
also are able to efficiently serve smaller businesses and
individuals.
8
Vehicle Recognition Technology
A key
capability of our core software is its ability to provide precision
vehicle identification results with dramatically less expensive
hardware, including its ability to be used with existing IP cameras
and computer equipment. The software can also support lighter and
smaller equipment that is more adaptable for use in mobile
applications. This can change the economics and dynamics of an
existing market, eliminating the need for more expensive RFID
technology on toll roads, for example, or allowing smart city
programs to incorporate vehicle recognition capabilities into their
operations without replacing existing camera infrastructure. Thus,
our core software has enabled us to develop products and service
that address three traditional governmental concerns: safety,
infrastructure, and revenue generation. In addition, our lower cost
structure supports new applications of vehicle recognition
capabilities, such as supporting retailers’ customer loyalty
programs and facilitating user-controlled parking management, in
combination with ingress and egress control, for small
homeowner’s associations.
Most of
the products and services we have developed are designed to exploit
the unique capabilities of our core vehicle recognition software.
Where competing systems have concentrated on identifying license
plates, Rekor’s software is able to identify the make, type
and color of a vehicle and its direction of travel, among other
characteristics. These characteristics can be combined with other
data and used to develop estimates of vehicle weight and emissions
and provide alerts that are useful in traffic management, roadway
design and maintenance and environmental assessments.
Government Agency Products and Services
Rekor’s
product offerings for the government agency market include public
safety, toll road, program compliance and parking products and
services. Our public safety products include subscriptions for or
purchases of an advanced line of camera systems that seamlessly
captures and processes vehicle data. The cameras are housed in a
sleek, durable enclosure that can be easily mounted to a building
or pole and include software specially designed for the Rekor
Scout
TM
Platform, which identifies and captures red light and school safety
zone traffic violations, provides forensic quality images and data
and supports citation management services. The Rekor
Scout
TM
Platform provides accurate license plate and vehicle recognition on
nearly any IP, traffic, or security camera and can be subscribed to
separately for use with existing camera or sensor systems. Rekor
Scout
TM
displays results on a web-based dashboard that can be accessed from
anywhere by any authorized user. The platform connects to the
National Crime Information Center (“NCIC”) lists and
permits the agency to establish customized hotlists with alerts,
apply customized data retention policies and share data with other
agencies. Rekor’s law enforcement products and services also
include speed trailer and other mobile vehicle recognition devices,
including Rekor Blue, a vehicle recognition smartphone application
for law enforcement customers, that is projected to be released
during 2021.
With
the launch of our Rekor One™ platform, Rekor can now provide
government agencies with a comprehensive vehicle intelligence
system that supports multiple agency-specific missions. Rekor
One™ allows our customers to create a unified system of
sensors that simultaneously provides segmented roadway intelligence
to a variety of agencies. With Rekor One™, an agency will be
able to integrate their existing IP and traffic cameras into a
smart multi-dimensional roadway network that can support long-range
planning as well as provide quicker responses to dangerous
situations. With user dashboards customized per department, each
agency can access the information they need while maintaining full
compliance with their individual security and privacy requirements.
With six patents pending in conjunction with the development of
Rekor One™, we are working to provide government agencies
with significant improvements in the usability as well as the
quality of vehicle recognition data. The patents cover areas that
include privacy enhancements, data analytics, smarter image
processing, advanced vehicle identification techniques, and the
improved aesthetics of roadside equipment.
AutoNotice
™
is a cloud-based financial management application.
AutoNotice
™
provides a plate-based management account system that offers our
customers a multi-tiered database that can assist with most record
management operations. AutoNotice
™
also provides
application programming interface for third-party payment gateways
for credit card transactions to accommodate both phone and web
payments. AutoNotice
™
can
automatically record payments in the system and provide
functionality to research, manage unapplied payments and reconcile
receipts.
Most
recently, our Rekor One™ platform was selected by the State
of Oklahoma to provide vehicle information associated with
uninsured motorists as part of the state’s UVED Program. Use
of the Rekor One platform by Oklahoma’s UVED Program will
help further the state’s mission to decrease the number of
uninsured motorists on the road and keep matters out of the court
systems. Rekor is committed to further these goals and facilitating
the obtainment of fair insurance for motorists through timely
notices and a streamlined process. We anticipate Oklahoma’s
program and the integration of the Rekor One technology will
inspire additional states to follow Oklahoma’s model to
develop similar programs.
9
Another
rapidly developing area that we expect to participate in is the
implementation of “smart city” transportation
management systems, including congestion pricing programs. In May
of 2019, Rekor was selected by Nokia to provide vehicle recognition
solutions for deployment within its Scene IoT analytics platform.
This platform has been designed to analyze video from
interconnected camera networks and detect anomalies that can be
used by public agencies. We will be looking for opportunities to
participate in the development of smart city systems in association
with Nokia in other key participants in this burgeoning
area.
Commercial Products and Services
Customized versions
of Rekor Scout are also offered for the commercial market. The
commercial versions of Rekor Scout include enabled specialized
offerings for the parking, retail and community security markets.
Products and services for the commercial market also include Rekor
CarCheck. Rekor CarCheck provides an API that supports nearly any
programming language, analyzes still images of vehicles from
approximately 80 countries and responds in seconds with license
plate data, as well as vehicle make, body type, and color. Rekor Go
is an app available for iOS and Android devices that can instantly
read license plates and receive alerts when identified vehicles
appear on user generated lists. With a simple live video scan,
anyone from a parking lot attendant to a school crossing guard can
harness powerful license plate recognition and identify vehicles of
interest in real-time using a smart phone.
In
December 2020, we launched Rekor Go™, an application which
brings the power of our license plate recognition technology to
mobile devices. We believe the app, available on both iOS and
Android, is the first on-device license plate recognition app that
captures data while the user is still or moving, operating in
real-time using the device’s live video stream. Captured
plates are instantly compared to a user-generated list, shortening
the time from capture to insight. If an approved or unapproved
plate is detected, the app issues a real-time audible and physical
alert. Rekor Go allows the user to manage alerts, review images of
all reads, and export data that can be downloaded and shared. Rekor
Go’s companion website also allows the user to create and
upload bulk lists. A significant differentiator from other
cloud-based license plate recognition apps is that Rekor Go does
not need to be continuously connected and can be used in areas
where Wi-Fi and cellular service is limited or unreliable. By
accessing accurate and effortless license plate recognition on a
smartphone, individuals and businesses can increase productivity
and revenue and automate tasks in areas such as visitor management,
parking operations (commercial and residential), campus and event
security and asset location and recovery.
At the
end of 2020, we had a portfolio of ten software subscription
services available on the eCommerce platform and the new Rekor Go
app, available for download in the App Store and on Google Play.
This set of product offerings allows us to offer full-scale vehicle
recognition solutions and services directly to public agencies and
commercial or industrial businesses of nearly any size, as well as
serve campus and residential settings.
Our
Markets
The markets
for our products and services are diverse: toll collection and
traffic management; parking management and enforcement; safe and
smart cities and roadways programs; statewide vehicle compliance
programs; government, military, corporate, community and personal
security; wholesale and large retail logistics and customer loyalty
programs, as well as public safety.
During
the early stages of our business development, our efforts were
concentrated primarily on public safety, security and surveillance,
and parking management opportunities. We continue to grow our
footprint in public safety, with the addition of major law
enforcement customers in Lauderhill, Florida, Mt. Juliet, Tennessee
and Collierville, Tennessee, while increasingly expanding our reach
into non-traditional vehicle recognition areas such as statewide
vehicle compliance, roadway intelligence, and customer loyalty.
Recently, our Rekor One™ platform was selected by the State
of Oklahoma to provide vehicle information associated with
uninsured motorists as part of the state’s UVED Program. Use
of the Rekor One platform by Oklahoma’s UVED Program will
help further the state’s mission to decrease the number of
uninsured motorists on the road and keep matters out of the court
system. Rekor is committed to further these goals and is helping
motorists obtain of fair insurance through timely notices and a
streamlined process.
10
We
anticipate Oklahoma’s program and the integration of the
Rekor One technology will inspire additional states to follow
Oklahoma’s model to develop similar programs. In Oklahoma and
other states, opportunities exist to use the Rekor One platform
well beyond insurance compliance, for a comprehensive roadway
intelligence system that benefits multiple agencies within a state,
including departments of transportation, public works, and law
enforcement. By combining compliance modules with service modules,
Rekor One provides both the technology for roadway monitoring as
well as a source of revenue to fund the programs. Our vision is to
provide a single network of sensors that achieve multiple missions,
saving taxpayer dollars while making roadways safer and more
efficient, and allow for future expansion as our AI software
technology evolves.
Another
rapidly developing area that we expect to participate in is the
implementation of customer loyalty programs along with
drive-through and curbside service for retail establishments. Our
primary customer in this endeavor is MasterCard, who is seeking to
expand its reach into quick service restaurants with AI-driven menu
boards. Rekor provides the vehicle recognition component, which is
synchronized with the menu board and customer loyalty program.
MasterCard’s first pilot program customer is White Castle,
where we installed our systems and software at a restaurant in
Indiana. Additional pilot locations are planned for 2021, and we
anticipate optimizing our software so that it can be utilized in a
variety of retail applications. We believe that with COVID-19,
there will be a permanent alteration in the habits of retail
customers, who are now comfortable with contactless options,
whether they are dining, shopping, or getting groceries. Our AI
products and services are designed and prepared to support this
market expansion.
Clients
Our clients in these markets include federal, state and local
government entities worldwide, major retailers, private security
companies, parking management companies, fast-food restaurant
chains and logistics companies. We continue to explore new
applications to further expand this growing client
base.
Sales and Marketing
We
offer our products and services in various markets through a
combination of delivery mechanisms. For existing traffic safety
clients, we provide full turnkey photo enforcement and citation
management services, supported by the deployment of our hardware
and software solutions. The programs are contracted directly with
local and state government agencies. For vehicle recognition
services, we offer a channel business partner program through a
rapidly growing network of reseller partners. Customer agreements
are typically attained through specific proposals we submit in
response to government requests for proposal (“RFP”),
or through reseller negotiations with commercial customers. Our
resellers purchase hardware and software subscriptions from Rekor
and resell them to their end-customers.
We
maintain an in-house staff of channel partner managers, business
development and proposal professionals who are responsible for
identifying opportunities, finding and responding to RFPs, and
growing and supporting our reseller network.
Our
in-house proposal professionals focus on public
sector-specific state, local and federal government
agency-related procurement opportunities and also support our
Partner Program by mining, researching and tracking of funded RFPs
solicitation opportunities and capturing meaningful customer
intelligence to develop successful bid solutions that support our
objectives.
We
launched the Rekor Partner Program (“Partner Program”)
in January 2020 to establish a network of qualified and trusted
business partners who help to deliver our products and services
worldwide. The Partner Program is open to technology solution
providers, resellers, and integrators who want to deliver world
class vehicle recognition solutions to customers in multiple
business segments. These segments include public safety, security
and surveillance, electronic toll collection, parking operations,
banking and insurance, supply chain logistics, traffic management,
and retail customer experience. Each partner is carefully vetted
and selected by Rekor based on several qualifying factors including
industry expertise, customer outreach, financial stability, past
history, and geographic footprint.
11
We
offer three levels of membership, with varying degrees of
commitment and benefits. “Authorized Resellers” and
“Premier Partners” are both resellers who receive a
discount to our MSRP pricing for software and hardware solutions.
They sign and manage their own customer agreements and are
responsible for technology implementation and first level
maintenance and support. Rekor provides an array of services to
program partners including second level technical support, free
training, not-for-resale demo systems at a discount to MSRP, and
assistance with proposal development. The Rekor Ambassador
membership level is for those companies and individuals who desire
to promote and sell Rekor products and services, but do not have
the capability to provide direct customer support. Once approved,
Rekor Ambassadors receive the authorization and support mechanisms
to sell Rekor products and solutions to customers, who sign
agreements directly with Rekor. Customer agreements, technology
implementation, and first and second level maintenance and support
are Rekor’s responsibility.
In
October 2020, we launched an updated eCommerce platform to allow
municipalities and businesses to conveniently purchase a full range
of Rekor's high-value vehicle recognition solutions with just a
credit card and a click. The eCommerce platform enables
self-service sign up and a range of subscription options while also
acting as a funnel directly to sales support if customers need more
information. Our eCommerce platform also includes our first mobile
ALPR application, Rekor Go. Rekor Go brings the power artificial
intelligence driven vehicle and license plate recognition to the
mobile devices of a broad array of commercial users. In January
2021, we began to establish our digital marketing channel to expand
brand awareness and increase traffic to our eCommerce platform
through digital media.
Competition
Our
current emphasis is on products and services that include vehicle
recognition features. There are currently many competitors who
provide products and services of this type. Typically, these
competitors provide camera systems that employ optical character
recognition (“OCR”) software to analyze electronically
captured images and produce license plate information. These
competitors include divisions or subsidiaries of large
multi-national companies, such as Siemens, Motorola, Leonardo,
Bosch and Genetec. Other competitors who rely primarily on OCR
include Alert Systems, Arvoo, CA Traffic, Clearview, HTS, Kapsh,
MAV, Nexcom, ParkingEye, Petards, PIPS Technology, TagMaster and
Tattle. Except in a very limited environment, traditional OCR based
software systems rely on expensive specially designed
cameras.
We
believe that a competitive advantage of our core software is that
it can produce highly accurate data using most of the IP cameras on
the market today. Because our core software can successfully
analyze images produced by the typically lower-cost cameras used in
existing security and surveillance systems, it can be used to add
vehicle identification functionality to those systems without the
need to use specialized equipment. As a result, we are well
positioned to serve this market and can currently provide operators
of existing security systems significant advantages in accuracy,
usability and price that provide us with a competitive edge. In
some cases, however, we have licensed our products and services to
some of the vehicle recognition competitors listed above for use in
camera systems designed for specific applications. We intend to
continue to license our software on a non-exclusive basis
to competitors in the vehicle recognition industry.
Although we believe
there is no competitor that provides a similarly accurate and
cost-effective suite of products and services, we view our
competition in the public safety and security areas as two distinct
categories – traditional OCR-based ALPR companies and newer
software-only companies, some merely deploying OCR based technology
on newer IP cameras and others working to develop software using
various AI processes. These “software only” companies
include ARH, HIK Vision, Inex Tech, Ironyun Analytics, NDIRS,
Neural Labs, Plate Smart and Sighthound. Our vehicle recognition
software has been designed using an AI process commonly referred to
as “machine learning” or more specifically “deep
learning.” This process involves intensive analysis of large
amounts of data using specialized neural network algorithms. For
more than five years, our core software has been continuously
updated through machine learning using millions of images from
around the world. Direct comparisons or head-to-head competitive
studies by several law enforcement customers and independent
engineers have indicated that our software and systems have better
capture rates and a greater degree of accuracy for license plate
identification than other competitors. Another unique advantage of
our software is that, in addition to country, state of origin and
license plate number, it can identify in real-time the vehicle
make, model, color, body type, and direction of
travel.
12
Our
services are increasingly being used in the electronic tolling
industry. There are a number of large, well established
multi-national electronic tolling services companies relying
primarily on RFID technology that have large, long-term contracts
which involve extensive infrastructure installations. In recent
years, automated license plate reading systems have increasingly
replaced manual toll taking for vehicles that are not equipped with
RFID technologies compatible with the toll operator’s system.
We believe that the level of accuracy that can be achieved with our
core software provides us with a competitive edge in connection
with this movement to replace manual systems. We also believe that
direct vehicle recognition should ultimately be recognized as a
more efficient and cost-effective means of toll collection than the
use of RFID systems. We have recently introduced additional pricing
tiers of our Rekor CarCheck product to accommodate the increased
level of interest in leveraging our technology to address backlogs
and streamline real-time processing. While we are not yet in a
position to undertake a full-scale entry into this market, this
recent growth is helping us to evaluate our options as to how best
to proceed.
Competitive Strengths
In the
public safety and vehicle recognition market, we believe we have,
and can further develop, the following competitive
strengths:
●
Higher Accuracy Rates for Vehicle Recognitions.
Most vehicle
recognition systems currently in place are accurate only within
specified parameters of vehicle speed, viewing angles and lighting
conditions. We believe our AI software achieves superior accuracy
rates under broader parameters of vehicle speed, camera viewing
angles and lighting conditions.
●
Ability to Detect Vehicle Make, Model, Body Type and Color.
We believe the ability to determine the make, model, body type and
color of a vehicle, in addition to the number and resident
jurisdiction of a license plate, significantly enhances the value
of our products and services as compared to systems that provide
more limited recognition data and/or lower accuracy
rates.
●
Functionality with any IP Cameras.
The optical character
recognition-based systems marketed by our competitors in the public
safety and vehicle recognition market often require customized
cameras, while our AI software supports images captured by almost
any digital camera that provides images that can be sent over the
internet. This allows us to create products and solutions using
relatively inexpensive, consumer-grade, mass market components that
are readily available, significantly smaller and lighter, and less
expensive than products currently being used.
●
Increased Mobility.
Because of the range and size of the
cameras that can be used with our AI software, Rekor
Recognition’s solutions have significant advantages for use
in mobile applications, such as law enforcement
vehicles.
●
On-device Processing for Smartphones
. With the launch of
Rekor Go, we believe we introduced the first on-device license
plate recognition app for handheld devices, allowing the user to
capture plates and receive real time alerts where Wi-Fi or cellular
service is limited. We expect to bring this technology to
additional industries, first with Rekor Blue™ for law
enforcement in the first half of 2021. Rekor Blue will synchronize
with our existing platforms, creating an expanded vehicle
recognition ecosystem for law enforcement, and allow mobile video
and image capture at much higher speeds.
●
Edge Processing.
The Company’s technology delivers low
latency alerting via defined edge processing with all computing
outside the Cloud happening at the edge of the network, and more
specifically in applications where real-time processing of data is
required. Edge processing on “instant data” that is
real-time data generated by sensors or users
.
●
Cross Agency Functionality.
The Rekor One platform will
support multiple community safety, intelligent roadway and revenue
generation activities. Rekor One will provide government agencies
with a comprehensive vehicle intelligence system that supports
multiple agency-specific missions. With Rekor One, governments will
be able to leverage their existing IP cameras and transform them
into a safe and smart multi-dimensional intelligent roadway
network. By interfacing with multiple databases and operating
systems, Rekor One can allow governmental units to observe security
and privacy protocols and fractionalize costs based on relative end
user value. Each participating agency receives a unique user
interface and dashboard, which draws on Rekor One’s unified
vehicle recognition intelligence to provide data customized to the
agency’s specific needs. This will eliminate redundant
systems and single function applications to help use public funds
wisely.
13
Growth Strategies
Our
vehicle recognition product portfolio sits at the intersection of
the video surveillance, video management software and ALPR markets.
We believe there are significant opportunities within these markets
which could lead to the expansion our business. Growth in vehicle
recognition is being driven by multiple government and law
enforcement applications as well as a broad range of new
applications, such as customer service, tolling and school
security.
In
addition, we believe that growth will be impacted by an increased
demand for improvements in security, public safety and business
intelligence that will in turn lead to increased spending in
infrastructure, government spending on intelligent transportation
systems, deployment of security and surveillance and traffic
enforcement applications.
Rapid
urbanization, increased globalization, and the increased awareness
about the human impact on the planet are all driving factors for
intelligent transportation and the smart highway market.
Additionally, the growing trend toward the adoption of smart cities
is also expected to expand the prospects for the smart highway
market.
We plan
to continue to pursue growth of our Rekor One™ platform
across relevant systems to provide vehicle information to different
state municipalities. The Rekor One platform can be shared among
state agencies to support additional community safety, intelligent
roadway and revenue generation activities. We will look to leverage
our success with our Oklahoma UVED program to other state
governments. Currently, Florida, Tennessee, New York and Texas have
introduced legislation to authorize UVED, and other states may do
the same as the program can be a significant source of new revenue
for cash strapped state budgets.
We use
AI to extract information about the movements of vehicles and other
objects on the roadway for the purpose of enhancing safety,
increasing operational efficiencies, reducing congestion and
improving the environment—this is “AI with a
purpose”. We believe we can play an important role in
enabling intelligent roadways and smart cities.
These
market trends create significant opportunities for us to expand our
market presence while developing relationships with both new
customers and expanding relationships with existing
customers.
Our
current emphasis on growth is to concentrate available resources on
expanding sales of products and services that exploit the
competitive advantages of our vehicle recognition and edge
processing technology. In particular, we are working to further
develop our existing cloud-based subscription services for smaller
clients and to license our technology to original equipment
manufacturers and large government and commercial customers for use
with new and existing security, logistics, traffic management,
vehicle location and customer loyalty systems.
As we work to develop our sales and marketing
capabilities, we expect our efforts with respect to products and
services to be concentrated principally on subscription-based
solutions.
We may also use a portion of our cash on hand and common stock for
acquisitions or strategic investments in complementary businesses,
products, services, or technologies, including companies that might
benefit from the use of our technology. However, we do not have
agreements or commitments to enter into any such acquisitions or
investments at this time. We are looking to be a leader in the
industry through organic growth and accelerate our growth and
expand our capabilities through strategic mergers and
acquisitions.
14
Our History
Rekor Systems, Inc., a Delaware corporation,
formerly known as Novume Solutions, Inc. (“Novume”),
was formed in February 2017 to effectuate the mergers of, and
become a holding company for KeyStone Solutions, Inc.
(“KeyStone”) and Rekor Recognition Systems, Inc.
(“Rekor Recognition”), formerly known as Brekford
Traffic Safety, Inc.
(“Brekford”).
Our
services are currently provided through wholly owned subsidiaries:
Rekor Recognition and as of March 12, 2019, OpenALPR Software
Solutions, LLC (“OpenALPR”).
Previously, we provided professional services and
staffing solutions to the government contracting and the aerospace
and aviation industries through our Professional Services Segment.
The Professional Services Segment included our wholly owned
subsidiaries AOC Key Solutions Inc. (“AOC Key
Solutions”), Global Technical Services, Inc.
(“GTS” or “TeamGlobal”), Firestorm
Solutions, LLC (Firestorm Solutions”) and Firestorm
Franchising, LLC (“Firestorm Franchising” and, together
with Firestorm Solutions, “Firestorm”). As part of the
development of a new line of products for the public safety and
security markets, we determined that our resources were best
concentrated on vehicle recognition products and services and began
to consider dispositions in our Professional Services Segment.
Concurrently, we reorganized and retooled our product development,
business development and administrative resources to better serve
our Technology Segment. On April 2, 2020, we sold AOC Key
Solutions. As of June 29, 2020, we sold Team Global and determined
that all the remaining operations that comprised our Professional
Services Segment met the criteria to be presented as
discontinued.
During
2019, we also disposed of or discontinued our Firestorm operations.
On June 1, 2019, we sold all the interest we had acquired in Secure
Education, LLC, which we acquired on January 1, 2018, and
discontinued operations of BC Management. In connection with these
actions we recognized a write-off of intangible assets of $242,000.
In addition, in June 2019, we discontinued the operations of
Firestorm Franchising, resulting in a write-off of an additional
$1,310,000 in intangible assets related to Firestorm in the second
quarter of 2019.
Acquisitions
On
March 12, 2019, we completed the OpenALPR Technology
Acquisition.
Additional
information concerning the OpenALPR Technology Acquisition and the
restructuring of Firestorm is provided in this Annual Report on
Form 10-K under “Management’s Discussion and Analysis
of Financial Conditions and Results of
Operations.”
Reportable
Segments
As part of our strategic shift, all operations related to the
Professional Services segment have been classified as discontinued
operations. As of January 1, 2020, we have one reportable segment.
Continuing operations are all operations that previously were
reported as part of the Technology Segment.
Employees
As of
February 28, 2021, Rekor had 109 employees, of which 108 were full
time and one was considered part-time. We consider our employee
relations to be good. To date, we have been able to locate and
engage highly qualified employees as needed and do not expect our
growth efforts to be constrained by a lack of qualified personnel.
We will continue to engage additional highly qualified personnel
for our public safety and vehicle recognition markets.
Seasonality
We
generate revenues from licensing and subscriptions to our and
products and services. Therefore, we do not currently anticipate
significant seasonality impact on our revenues. Should our
penetration of tolling and other markets involving per recognition
fees expand, we would expect to become more subject to seasonal
traffic patterns.
15
Insurance and Risk Management
We
maintain insurance covering professional liability and claims
involving bodily injury, property and economic loss. We consider
our present limits of coverage, deductibles, and reserves to be
adequate. Whenever possible, we endeavor to eliminate or reduce the
risk of loss on a project through the use of quality assurance and
control, risk management, workplace safety, and other similar
methods.
Risk
management is an integral part of our project management approach
for fixed-price contracts and our project execution process. We
also evaluate risk through internal risk analyses in which our
management reviews higher-risk projects, contracts, or other
business decisions that require corporate legal and risk management
approval.
Regulation
We are
regulated in some of the fields in which we operate. When working
with governmental agencies and entities, we must comply with laws
and regulations relating to the formation, administration, and
performance of contracts. These laws and regulations contain terms
that, among other things may require certification and disclosure
of all costs or pricing data in connection with various contract
negotiations. We are subject to the laws and regulations that
restrict the use and dissemination of information classified for
national security purposes.
To help
ensure compliance with these laws and regulations, our employees
are sometimes required to complete tailored ethics and other
compliance training relevant to their position and our
operations.
ITEM 1A.
RISK
FACTORS
Risks Relating to Our Corporate Structure and Business
We are currently not profitable, and we may be unable to become
profitable on a quarterly or annual basis.
For the
year ended December 31, 2020, we had a loss from continuing
operations of $13,962,000. We cannot assure that we will be
profitable in the future or that our financial performance will
sustain a sufficient level to completely support operations. Our
ability to become profitable in future periods could be impacted by
government activity and regulation, economic instability and other
items that are not in our control, including the continuing effects
of the COVID-19 pandemic as discussed below. A significant portion
of our expenses are fixed in advance. As such, we generally are
unable to reduce our expenses significantly in the short-term to
compensate for any unexpected delay or decrease in anticipated
revenues or increases in planned investments. In addition, we have
experienced and expect to continue to experience significant
expenses related to acquisitions and the development of new
products and services.
Our strategic
transition to a technology based company focused on vehicle
recognition systems will require us to generate sufficient new
revenues from the vehicle recognition market to support our
business plan while continuing to operate as a public
company.
As a result, we may continue to experience
operating losses and net losses in the future, which would make it
difficult to fund operations and achieve our business plan and
could cause the market price of our common stock to
decline.
We have not been a leading provider of public safety products and
services in the past and do not have the level of established
contacts and existing business relationships that some of our
competitors have.
Although it is
growing, our presence in the public safety, transportation and
parking markets has been limited. As a result of this, although we
believe our products and services have significant competitive
advantages, we may encounter difficulties in establishing
widespread market acceptance of our products in various markets and
regions. Early successes in penetrating these markets and regions
may not be able to be sustained once our ability to compete with
our more established competitors comes to their attention. They may
seek to develop more competitive products before their existing
contracts expire, reduce prices, use to advantage their past
association as a trusted provider and their superior financial and
marketing resources and use other stratagems to this competitive
advantage, which could significantly impact our ability to continue
to grow.
16
We will need to raise additional capital in the future, which may
not be available on acceptable terms, or at all.
We have
experienced fluctuations in earnings and cash flows from operations
from year to year. To support business growth, or if our business
declines, we may need to raise additional capital to support
operations, pursue acquisitions or expand our operations. Such
additional capital may be raised through bank borrowings, or other
debt or equity financings. We cannot assure you that any additional
capital will be available on a timely basis, on acceptable terms,
or at all, and such additional financing may result in further
dilution to our stockholders.
Our
capital requirements will depend on many factors, including, but
not limited to: our ability to increase revenue, reduce net losses
or generate net income; market acceptance of our services, and the
overall level of sales of our services; our need to respond to
technological advancements and our competitors’ introductions
of new products, services or technologies; our ability to control
costs; promptness of customer payments; our ability to successfully
negotiate arrangements with credit providers; and enhancements to
subsidiaries’ infrastructure and systems.
If our
capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If
additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our
stockholders will be reduced, and such securities may have rights,
preferences and privileges senior to our common stock. Additional
equity or debt financing may not be available on favorable terms,
on a timely basis, or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to
continue our operations as planned, develop or enhance our
products, expand our sales and marketing programs, take advantage
of future opportunities or respond to competitive pressures, or we
may be forced to sell assets at prices below their stated
value.
If we experience declining or flat revenues and fail to manage such
declines effectively, we may be unable to execute our business
plans and may experience future weaknesses in operating
results.
To
achieve future growth, we will need to continue to add additional
qualified personnel and invest in additional research and
development and sales and marketing activities, which could lead to
increases in our expenses and future declines in operating results.
In addition, our future expansion is expected to place a
significant strain on our managerial, administrative, operational,
financial and other resources. If we are unable to manage these
activities or any revenue declines successfully, our business,
financial condition and results of operations could be adversely
affected.
If we are unable to attract new customers to our services on a
cost-effective basis, our revenue and results of operations will be
adversely affected.
We must
continue to attract a large number of customers on a cost-effective
basis. We rely on a variety of marketing methods to attract new
customers to our services. Our ability to attract new customers
also depends on the competitiveness of the pricing of our products
and services. If our current marketing initiatives are not
successful or become unavailable, if the cost of such initiatives
were to significantly increase, or if our competitors offer similar
products or services at lower prices, we may not be able to attract
new customers on a cost-effective basis and, as a result, our
revenue and results of operations would be adversely
affected.
If we are unable to retain our existing customers, our revenue and
results of operations would be adversely affected.
Customers have no
obligation to renew their subscriptions after their subscription
period expires, and these subscriptions may not be renewed on the
same or more profitable terms. As a result, our ability to sustain
our revenue base depends in part on subscription renewals. We may
not be able to accurately predict future trends in customer
renewals, and our customers’ renewal rates may decline or
fluctuate because of several factors, including their satisfaction
or dissatisfaction with our products and services, the prices of
our services, the prices of the products and services offered by
our competitors or reductions in our customers’ spending
levels. If our customers do not renew their subscriptions for our
products and services, renew on less favorable terms, or do not
purchase additional functionality or subscriptions, our revenue may
grow more slowly than expected or decline, and our profitability
and gross margins may be harmed.
17
Our sales cycles for commercial and government clients can be long,
unpredictable and require considerable time and expense, which may
cause our operating results to fluctuate.
The
timing of our revenue from sales to commercial and government
clients is difficult to predict. These efforts require us to
educate our clients about the use and benefit of our services,
including the technical capabilities and potential cost savings to
an organization. Commercial clients typically undertake a
significant evaluation and pilot testing process that has in the
past, resulted in lengthy sales cycles, typically several months.
We spend substantial time, effort and money on our commercial sales
efforts without any assurance that these efforts will produce any
sales. In addition, subscriptions are frequently subject to budget
constraints and unplanned administrative, processing and other
delays. If sales expected from a specific client for a particular
reporting period are not realized in that period or at all, our
results could fall short of expectations and our business,
operating results and financial condition could be adversely
affected.
If our efforts to build a strong brand identity are not successful,
we may not be able to attract or retain subscribers and our
operating results may be adversely affected.
We
believe that building and maintaining a strong brand identity plays
an important role in attracting and retaining customers for our
products and users for our services, who may have other options
from which to obtain services. We are currently involved in a major
initiative to establish a new brand for our technology products and
services in the public safety and vehicle recognition markets,
which will require time and expense. In order to build a strong
brand, we believe that we must offer innovative service offerings
that our customers and subscribers’ value, and also market
and promote those service offerings through effective marketing
campaigns, promotions and communications with our customer base.
From time to time, clients and subscribers may express
dissatisfaction with our products and services or react negatively
to our strategic business decisions, such as changes that we make
in pricing, features or service offerings, including the
discontinuance of a free service. To the extent that client
dissatisfaction with our services or strategic business decisions
is widespread or not adequately addressed, our brand identity may
suffer and, as a result, our ability to attract and retain clients
and subscribers may be adversely affected, which could adversely
affect our operating results.
We may not be able to capitalize on potential emerging market
opportunities and new products and services that we introduce may
not generate the revenue and earnings we anticipated, which may
adversely affect our business.
Our
business strategy involves identifying emerging market
opportunities where we can capitalize on successfully developing
and introducing new products and services or enhancing existing
products and services to address those market opportunities. We
have made, and expect to continue to make, investments in research
and development in an effort to capitalize on potential emerging
market opportunities that we have identified in the public safety,
program compliance and vehicle recognition markets. Emerging
markets and opportunities often take time to fully develop, and
they attract a significant number of competitors. If the emerging
markets we have targeted ultimately fail to materialize as we or
others have anticipated or if potential clients choose to adopt
solutions offered by our competitors rather than our own solutions,
we may not be able to generate the revenue and earnings we
anticipated, and our business and results of operations would be
adversely affected.
Industry consolidation may result in increased
competition.
Some of
our competitors have made or may make acquisitions or may enter
into partnerships or other strategic relationships to offer a more
comprehensive service than they had offered individually. In
addition, new entrants not currently considered to be competitors
may enter the market through acquisitions, partnerships or
strategic relationships. We expect these trends to continue as
companies attempt to strengthen or maintain their market positions.
Many of the companies driving this trend have significantly greater
financial, technical and other resources than we do and may be
better positioned to acquire and offer complementary services and
technologies. Such combinations and realignments may create more
compelling service offerings or offer greater pricing flexibility
than we can or may engage in business practices that make it more
difficult for us to compete effectively, including on the basis of
price, sales and marketing programs, technology or service
functionality. These pressures could result in a loss of customers,
reduction in revenues or limitation on our ability to
grow.
18
We may not be able to respond to rapid technological changes in
time to address the needs of our customers, which could have a
material adverse effect on our sales and
profitability.
The
cloud-based services and AI based product markets in which many of
our products and services compete are characterized by rapid
technological change, the frequent introduction of new products and
services and evolving industry standards. Our ability to remain
competitive will depend in large part on our ability to continue to
enhance our existing products and services and develop new service
offerings that keep pace with these markets’ rapid
technological developments. Additionally, to achieve market
acceptance, we must effectively anticipate and offer products and
services that meet changing client demands in a timely manner.
Clients may require features and capabilities that our current
products and services do not have. If we fail to develop products
and services that satisfy customer requirements in a timely and
cost-effective manner, our ability to renew subscriptions with
existing clients and our ability to create or increase demand for
our products and services will be harmed, and our revenue and
results of operations would be adversely affected.
The success of our business will depend, in part, on the continued
services of certain key personnel and our ability to attract and
retain qualified personnel.
The
success of our business will depend, in part, on the continued
services of certain members of our management. In particular, the
loss of the services of Robert A. Berman, as Executive Chairman and
Chief Executive Officer and a director and Matthew Hill, our Chief
Science Officer, could have a material adverse effect on our
business, results of operations, and financial condition. Our
inability to attract and retain qualified personnel could
significantly disrupt our business.
Although we take
prudent steps to retain key personnel, we face competition for
qualified individuals from numerous professional services and
technology companies. For example, our competitors may be able to
attract and retain more qualified professional and technical
personnel by offering more competitive compensation packages. If we
are unable to attract new personnel and retain our current
personnel, we may not be able to develop and maintain our services
at the same levels as our competitors and we may, therefore, lose
potential customers and sales penetration in certain markets.
It may also be difficult to attract
and retain qualified individuals in the timeframe demanded by our
clients. Furthermore, some of our contracts may require us to
employ only individuals who have particular government security
clearance levels. Our failure to attract and retain key individuals
could impair our ability to provide services to our clients and
conduct our business effectively.
Our failure to attract and
retain suitably qualified individuals could have an adverse effect
on our ability to implement our business plan and, as a result, our
ability to compete would decrease, our operating results would
suffer and our revenues would decrease.
We may fail to realize the anticipated benefits of acquisitions
which we consummate, and we may be subject to business
uncertainties.
Uncertainties about
the effect of our recent and planned acquisitions on employees and
customers may have an adverse effect on our Company. These
uncertainties may impair our ability to attract, retain and
motivate key personnel for a period of time after the acquisitions,
and could cause customers, suppliers and others that deal with us
to seek to change existing business relationships with us, which
may have an adverse effect on our Company. Employee retention may
be particularly challenging, as employees may experience
uncertainty about their future roles with the Company.
The
achievement of the benefits expected from integration of acquired
companies may require us to incur significant costs. The incurrence
of any such costs, as well as any unexpected costs or delays, in
connection with such integration, could have a material adverse
effect on our business, operating results or financial
condition.
Our
strategic transition to primarily a technology based business
focused on vehicle recognition systems and intelligent roadways
entails a number of risks, including but not limited to our ability
to generate sufficient revenue and cash flow to successfully
execute our business plan and cover administrative
expenses.
19
We may be required to write-down certain assets after completing
our required annual evaluations, which may affect our reported
financial results.
The
initial determination of the fair value of assets we acquire upon
consummation of an acquisition is based upon an internal
valuation
. We are required to analyze
the carrying value of our acquired intangibles and goodwill on an
annual basis going forward.
After the detailed annual
evaluation of the carrying value of the intangible assets, as
supported by external analysis, we may be required to make
adjustments to our consolidated balance sheet and/or statement of
operations. Any adjustments will affect our reported financial
results.
We may issue notes or other debt securities, or otherwise incur
substantial additional debt which may adversely affect our leverage
and financial condition and thus negatively impact the value of our
stockholders’ investment in the Company.
The
anticipated cash needs of our business could change significantly
as we pursue business opportunities, if our business plans change,
if economic conditions change from those currently prevailing or
from those now anticipated or if other unexpected circumstances
arise that may have a material effect on the cash flow or
profitability of our business. If we require additional capital
resources to grow our business, either internally or through
acquisition, we may need to seek to secure additional debt
financing. We may not be able to obtain financing arrangements on
acceptable terms or in amounts sufficient to meet our needs in the
future.
The
incurrence of debt could have a variety of negative effects,
including: risk of default and foreclosure on our assets if our
operating revenues are insufficient to repay our debt obligations;
acceleration of our obligations to repay the indebtedness and
increased interest payments if we breach covenants that include the
maintenance of certain financial ratios or reserves without a
waiver or renegotiation of that covenant; and limitations on our
ability to borrow additional amounts for expenses, capital
expenditures, acquisitions, debt service requirements, execution of
our strategy and other purposes and other disadvantages compared to
our competitors who have less debt.
Our business has significant working capital needs and if we are
unable to satisfy those needs from cash generated from our
operations, borrowing or sales of equity, our financial condition
will be adversely affected.
We will
require significant amounts of working capital to operate our
business, implement our plans for growth and maintain our
competitive advantages. If we experience a significant and
sustained drop in operating profits, or if there are unanticipated
reductions in cash inflows or increases in cash outlays, we may be
subject to cash shortfalls. If such a shortfall were to occur for
even a brief period, it could have a significant adverse effect on
our business. In particular, we use working capital to pay interest
expenses and expenses relating to our employees and temporary
workers and to satisfy our workers’ compensation liabilities.
Generally, we pay our workers on a biweekly basis while we
generally receive payments from our customers 30 to 60 days
after billing. As a result, we must maintain sufficient cash
availability to pay employees and independent contractors and fund
related payroll liabilities prior to receiving payment from
customers.
We have
derived working capital for our operations primarily through cash
from operating activities from our subsidiaries, issuance of debt,
the sale of non-core subsidiaries, the sale of assets and the sale
of our equity. We believe that our current sources of capital are
adequate to meet our working capital needs. However, our available
sources of capital are limited. If our working capital needs
increase in the future, we may be forced to seek additional sources
of capital, which may not be available on commercially reasonable
terms.
Our operating results may be harmed if we are required to collect
sales or other related taxes for our licensing and subscription
products and services or pay regulatory fees in jurisdictions where
we have not historically done so.
Primarily due to
the nature of our cloud-based services in certain states and
countries, we do not believe we are required to collect sales or
other related taxes from our customers in certain states or
countries. However, one or more other states or countries may seek
to impose sales, regulatory fees or other tax collection
obligations on us, including for past sales by us or our resellers
and other partners. A successful assertion that we should be
collecting sales or other related taxes on our services or paying
regulatory fees could result in substantial tax liabilities for
past sales, discourage customers from purchasing our services or
otherwise harm our business and operating results.
20
We may not qualify for forgiveness of our PPP Loans. We face risks
associated with such PPP Loans.
On
May 26, 2020, the Company entered into a loan agreement with Newtek
Small Business Finance, LLC, which provides for a loan in the
principal amount of $221,000 (the “Rekor PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are
deferred for six months after the date of disbursement. On June 3,
2020, the Company's wholly owned subsidiary, Rekor Recognition
Systems, Inc., entered into a loan agreement with Newtek Small
Business Finance, LLC, which provides for a loan in the principal
amount of $653,000 (the “Rekor Recognition PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor Recognition PPP Loan has a two-year term and bears
interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement. The Rekor PPP Loan and the Rekor Recognition PPP Loan
(collectively the “Loans”) may be prepaid at any time
prior to maturity with no prepayment penalties. The Loans contain
events of default and other provisions customary for a loan of this
type. The Paycheck Protection Program provides that the Loan Notes
may be partially or wholly forgiven if the funds are used for
certain qualifying expenses as described in the CARES Act. The
Company believes it used the entire amount of the Loans for
qualifying expenses and will apply for forgiveness of the Loans in
accordance with the terms of the CARES Act.
Notwithstanding
that, the Company may not qualify for forgiveness of the Loans in
whole or part and may be required to repay such Loans in full. With
respect to any portion of the Loans that are not forgiven, the
Loans will be subject to customary provisions for Loans of this
type, including customary events of default relating to, among
other things, payment defaults, breaches of the provisions of the
PPP Notes and cross-defaults on any other loan with the PPP Lender
or other creditors. In the event the Loans are not forgiven, the
debt service payments on such Loans may negatively affect our
ability to grow our operations, service other debt and/or pay our
expenses as they come due. Furthermore, any default under the Loans
may require us to pay a significant amount of our available cash
and/or cash flow to service such debt, which could have a material
adverse effect on our operations. Any failure of the Loans to be
forgiven pursuant to their terms, and/or our requirement to repay
the Loans in whole or part, could cause the value our common stock
to decline in value. Separately, we face risks associated with the
fact that the Treasury Department and a House oversight
subcommittee has recently requested that certain large public
companies return prior PPP Loans which have been obtained by such
public companies and former Treasury Secretary Steven Mnuchin
warned that public companies receiving loans over $2 million would
be audited and could have potential criminal liability if their
certifications (required to obtain such loans) were untrue. As a
result, we could face penalties in connection with the Loans and/or
negative reactions from the public associated with our Loans,
either of which could cause the value of our common stock to
decline in value.
Improper disclosure of confidential and personal data could result
in liability and harm to our reputation.
Our
handling and storage of the data we collect from some of our
customers, vendors and employees, and our processing of data, which
may include confidential or personally identifiable information,
through the services we provide, may be subject to a variety of
laws and regulations, which have been adopted by various federal,
state and foreign governments to regulate the collection,
distribution, use and storage of personal information of
individuals. Several foreign countries in which we conduct
business, including the European Economic Area (“EEA”)
and Canada, currently have in place, or have recently proposed,
laws or regulations concerning privacy, data protection and
information security, which are more restrictive than those imposed
in the United States. Some of these laws are in their early stages
and we cannot yet determine the impact these revised laws and
regulations, if implemented, may have on our business. However, any
failure or perceived failure by us to comply with these privacy
laws, regulations, policies or obligations or any security incident
that results in the unauthorized release or transfer of personally
identifiable information or other customer data in our possession,
could result in government enforcement actions, litigation, fines
and penalties and/or adverse publicity, all of which could have an
adverse effect on our reputation and business.
21
For
example, the EEA wide General Data Protection Regulation
(“GDPR”) became applicable on May 25, 2018,
replacing the data protection laws of each EEA member state. The
GDPR implemented more stringent operational requirements for
processors and controllers of personal data, including, for
example, expanded disclosures about how personal information is to
be used, limitations on retention of information, increased
requirements to erase an individual’s information upon
request, mandatory data breach notification requirements and higher
standards for data controllers to demonstrate that they have
obtained valid consent for certain data processing activities. It
also significantly increases penalties for non-compliance,
including where we act as a service provider (e.g. data processor).
If our privacy or data security measures fail to comply with
applicable current or future laws and regulations, we may be
subject to litigation, regulatory investigations, enforcement
notices requiring us to change the way we use personal data or our
marketing practices, fines, for example, of up to 20 million
Euros or up to 4% of the total worldwide annual turnover of the
preceding financial year (whichever is higher) under the GDPR, or
other liabilities, as well as negative publicity and a potential
loss of business.
Data
protection regulation remains an area of increased focus in all
jurisdictions and data protection regulations continue to evolve.
There is no assurance that we will be able to meet new requirements
that may be imposed on the transfer of personally identifiable
information from the EU to the United States without incurring
substantial expense or at all. European and/or multi-national
customers may be reluctant to purchase or continue to use our
services due to concerns regarding their data protection
obligations. In addition, we may be subject to claims, legal
proceedings or other actions by individuals or governmental
authorities if they have reason to believe that our data privacy or
security measures fail to comply with current or future laws and
regulations.
Moreover, we must
ensure that certain vendors and customers who have access to such
information also have the appropriate privacy policies, procedures
and protections in place. Although we take customary measures to
protect such information, the continued occurrence of high-profile
data breaches provides evidence of an external environment
increasingly hostile to information security. If our security
measures are breached as a result of third-party action, employee
or subcontractor error, malfeasance or otherwise, and, as a result,
someone obtains unauthorized access to customer data, our
reputation may be damaged, our business may suffer and we could
incur significant liability. Techniques used to obtain unauthorized
access or to sabotage systems change frequently and are growing
increasingly sophisticated. As a result, we may be unable to
anticipate these techniques or to implement adequate preventative
measures.
This
environment demands that we continuously improve our design and
coordination of security controls throughout the Company. Despite
these efforts, it is possible that our security controls over data,
training, and other practices we follow may not prevent the
improper disclosure of personally identifiable or other
confidential information.
If an
actual or perceived breach of our security occurs, we could be
liable under laws and regulations that protect personal or other
confidential data resulting in increases costs or loss of revenues
and the market perception of our services could be
harmed.
Our business could be negatively impacted by cyber and other
security threats or disruptions.
We face
various cyber and other security threats, including attempts to
gain unauthorized access to sensitive information and networks;
insider threats; threats to the security of our facilities and
infrastructure; and threats from terrorist acts or other acts of
aggression. Cyber threats are constant and evolving and include,
but are not limited to, computer viruses, malicious software,
destructive malware, attacks by computer hackers attempts to gain
unauthorized access to data, disruption or denial of service
attacks, and other electronic security breaches that could lead to
disruptions in mission critical systems, unauthorized release or
loss of confidential, personal or otherwise protected information
(ours or that of our employees, customers or subcontractors), and
corruption of data, networks or systems. In addition, we could be
impacted by cyber threats or other disruptions or vulnerabilities
found in products we use or in our partners’ or
customers’ systems that are used in connection with our
business. Our clients and subcontractors face similar threats
and/or they may not be able to detect or deter them, or effectively
to mitigate resulting losses. These threats could damage our
reputation as well as our subcontractor’s ability to perform
and could affect our client’s ability to pay.
22
Although we use
various procedures and controls to monitor and mitigate the risk of
these threats to us, our clients and our partners, there can be no
assurance that these procedures and controls will be sufficient.
The impact of these factors is difficult to predict, but one or
more of them could result in the loss of information or
capabilities, harm to individuals or property, damage to our
reputation and/or require remedial actions or lead to loss of
business, regulatory actions potential liability and financial
loss, any one of which could have a material adverse effect on our
financial position, results of operations and/or cash
flows.
We are dependent upon technology services, and if we experience
damage, service interruptions or failures in our computer and
telecommunications systems, our customer and worker relationships
and our ability to attract new customers may be adversely
affected.
Our
business could be interrupted by damage to or disruption of our
computer, telecommunications equipment, software systems, or
software applications. Our customers’ businesses may be
adversely affected by any system, application or equipment failure
we experience. As a result of any of the foregoing, our
relationships with our customers may be impaired, we may lose
customers, our ability to attract new customers may be adversely
affected and we could be exposed to contractual liability.
Precautions in place to protect us from, or minimize the effect of,
such events may not be adequate.
In
addition, the failure or disruption of mail, communications and/or
utilities could cause an interruption or suspension of our
operations or otherwise harm our business. Our property and
business interruption insurance may be inadequate to compensate us
for all losses that may occur as a result of any system or
operational failure or disruption and, as a result, revenue,
profits and operating results could be adversely
affected.
If we do not keep pace with rapid technological changes and
evolving industry standards, we will not be able to remain
competitive, and the demand for our services will likely
decline.
The
markets in which we operate are in general characterized by the
following factors: changes due to rapid technological advances;
additional qualification requirements related to technological
challenges; and evolving industry standards and changes in the
regulatory and legislative environment. Our future success will
depend upon our ability to anticipate and adapt to changes in
technology and industry standards, and to effectively develop,
introduce, market and gain broad acceptance of new product and
service enhancements incorporating the latest technological
advancements.
We operate in highly competitive industries, some with low barriers
to entry, and may be unable to compete successfully against
existing or new competitors.
Our
business is competitive, and we compete with companies in highly
competitive industries that may have greater name recognition and
financial resources, as well as many independent sole-proprietors
who sell themselves as outsourced resources. We also compete with
providers of outsourcing services, systems integrators, computer
systems consultants and other providers of services. We expect that
the level of competition will remain high, which could limit our
ability to maintain or increase our market share or
profitability.
The
needs of our clients change and evolve regularly. Accordingly, our
success depends on our ability to develop products and services
that address these changing needs of our clients, and to provide
people and technology needed to deliver these services and
solutions. In order to compete effectively in our markets, we must
target our potential customers carefully, continue to improve our
efficiencies and the scope and quality of our services, and rely on
our service quality, innovation, and client relations to provide
services on a cost-effective basis to our clients. Our competitors
may be able to provide clients with different or greater
capabilities or technologies or better contract terms than we can
provide, including technical qualifications, past contract
experience, geographic presence, price and the availability of
qualified professional personnel.
In
addition, heightened competition among our existing competitors,
especially on a price basis, or by new entrants into the market,
could create additional competitive pressures that may reduce our
margins and adversely affect our business. If our competitive
advantages are not compelling or sustainable, then we are unlikely
to increase or sustain profits and our stock price could
decline.
23
A downturn of the U.S. or global economy could result in our
customers using fewer products and services or becoming unable to
pay us for our services on a timely basis or at all, which would
materially adversely affect our business.
Because
demand for our solutions and services are sensitive to changes in
the level of economic activity, our business may suffer during
economic downturns. During periods of weak economic growth or
economic contraction, the demand for outsourced services could
decline. When demand drops, our operating profit could be impacted
unfavorably as we experience a deleveraging of our selling and
administrative expense base because expenses may not decline as
quickly as revenues. In periods of decline, we can only reduce
selling and administrative expenses to a certain level without
negatively impacting the long-term potential of our
business.
Additionally,
during economic downturns government agencies and companies may
slow the rate at which they pay their vendors, or they may become
unable to pay their obligations. If our customers become unable to
pay amounts owed to us, or pay us more slowly, then our cash flow
and profitability may suffer significantly.
We may be exposed to employment-related claims and losses,
including class action lawsuits, which could have a material
adverse effect on our business.
New
employment and labor laws and regulations may be proposed or
adopted that may increase the potential exposure of employers to
employment-related claims and litigation. There can be no assurance
that the corporate policies we have in place to help reduce our
exposure to these risks will be effective or that we will not
experience losses as a result of these risks. There can also be no
assurance that the insurance policies we have purchased to insure
against certain risks will be adequate or that insurance coverage
will remain available on commercially reasonable terms or be
sufficient in amount or scope of coverage.
We are dependent on workers’ compensation insurance coverage
at commercially reasonable terms.
We
provide workers’ compensation insurance for our employees and
temporary workers and are contractually obligated to collateralize
our workers’ compensation obligations under our
workers’ compensation program through irrevocable letters of
credit, surety bonds or cash. A significant portion of our
workers’ compensation program renews annually on September
29
th
of
each year, and as part of the renewal, could be subject to an
increase in collateral. In addition, collateral requirements can be
significant and place pressure on our liquidity and working capital
capacity. Further, we cannot be certain we will be able to obtain
appropriate types or levels of insurance in the future or that
adequate replacement policies will be available on commercially
reasonable terms. Depending on future changes in collateral
requirements, we could be required to seek additional sources of
capital in the future, which may not be available on commercially
reasonable terms, or at all. The loss of our workers’
compensation insurance coverage would prevent us from doing
business in the majority of our markets.
We incur substantial costs as a result of operating as a public
company and our management is required to devote substantial time
to related compliance matters.
As a
public company, we incur significant legal, accounting, and other
expenses. under rules implemented by the United States Securities
and Exchange Commission (“SEC”), and The Nasdaq Stock
Market (“Nasdaq”). These impose various requirements on
public companies, including establishing and maintaining effective
disclosure and financial controls and corporate governance
practices. Our management team will need to devote a substantial
amount of time to these compliance requirements and we may need to
hire additional personnel. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly.
Pursuant to
Section 404 of the Sarbanes-Oxley Act, we are required to
furnish a report by our management on our internal control over
financial reporting. To achieve compliance with Section 404,
we engage in a process to document and evaluate our internal
control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants, and
adopt a detailed work plan to assess and document the adequacy of
internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing
that controls are functioning as documented, and implement a
continuous reporting and improvement process for internal control
over financial reporting.
24
In
addition, changing laws, regulations, and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs, and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations, and standards, and this investment may
result in increased general and administrative expenses and divert
management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with
new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities
related to their application and practice, regulatory authorities
may initiate legal proceedings against us and our business may be
harmed.
As
a public company, complying with applicable rules and regulations
will make it more expensive for us to obtain director and officer
liability insurance, and we may be required to incur substantially
higher costs to obtain and maintain the same or similar
coverage.
Our ability to use our net operating losses to offset future
taxable income may be subject to certain limitations, which could
subject our business to higher tax liability.
We may be limited in the portion of net operating
loss carry forwards that we can offset future taxable income for
U.S. federal and state income tax purposes.
As of December
31, 2020, we had gross federal and state net operating loss
carryforwards, or NOLs, of approximately $33,787,000 and
$26,435,000, net of federal tax effect, respectively. A lack of
future taxable income could adversely affect our ability to use
these NOLs. In addition, future changes in our stock ownership,
including
through acquisitions, could
result in ownership changes under Section 382 of the Internal
Revenue Code and may result in a limitation on the amount of NOL
carry forwards that could be used annually to offset future taxable
income and taxes payable. Our NOLs at December 31, 2020 may also be
impaired under similar provisions of state law, and may expire
unused or underused, which would prevent us from using our NOL
carry forwards to offset future taxable income.
Assertions by a third party that our services and solutions
infringe its intellectual property, whether or not correct, could
subject us to costly and time-consuming litigation or result in
settlements or licensing arrangements that could affect our
short-term or long-term profitability.
There is frequent litigation in the software and
technology industries based on allegations of infringement or other
violations of intellectual property rights. Regardless of the merit
of these claims, they can be time-consuming, result in costly
litigation and diversion of technical and management personnel or
require us to develop a non-infringing technology or enter into
license agreements. Because of the potential for court awards that
are difficult to predict, it is not unusual to find even arguably
unmeritorious claims settled for significant amounts. In addition,
our service agreements may require us to indemnify our customers
from certain third-party intellectual property infringement claims,
which could increase our costs as a result of defending such claims
and may require that we pay damages if there were an adverse ruling
related to any such claims. Competitors may also seek to use these
claims and the pendency of associated litigation as a means of
attempting to discredit us or make potential customers fearful of
using us, which could harm our relationships with our customers,
deter future customers from subscribing to our services or expose
us to further litigation. These costs, monetary or otherwise,
associated with defending against third party allegations of
infringement could have negative effects on our business, financial
condition and operating results.
If our services are used to commit intentional or illegal acts, we
may incur significant liabilities, our services may be perceived as
not secure, and customers may curtail or stop using our
services.
Certain
services offered by us enable customers to capture data from video
images. Although our service agreements require our customers to
comply with all applicable laws, we do not exercise direct control
over use or content of information obtained by our customers
through the use of our services. If our services are used by others
to commit bad or illegal acts, we may become subject to claims and
subject to other potential liabilities. Defending against such
claims could be expensive and time-consuming, and there is a
possibility that we could incur significant liability to entities
who were the harmed of such acts. As a result, our business may
suffer, and our reputation may be damaged.
25
We use a limited number of data centers to deliver our services.
Any disruption of service at these facilities could harm our
business.
Our
cloud-based services are hosted from third-party data center
facilities located in various parts of the United States. We also
use these facilities for some of our development efforts. We do not
control the operation of these facilities. The owners of these data
center facilities have no obligation to renew their agreements with
us on commercially reasonable terms, or at all. If we are unable to
renew these agreements on commercially reasonable terms, we may be
required to transfer to new data center facilities, and we may
incur significant costs and possible service interruption in
connection with doing so. In addition, our operations and
development efforts could be seriously affected by failures or
interruptions in service at these facilities. Any changes in
third-party service levels at these third-party data centers or any
errors, defects, disruptions or other performance problems with our
services related to the non-performance of these facilities could
harm our reputation and may damage our clients’ businesses.
Interruptions in our services might reduce our revenue, cause us to
issue credits to clients, subject us to potential liability, cause
clients to terminate their subscriptions or harm our renewal
rates.
Our
data centers are vulnerable to damage or interruption from human
error, intentional bad acts, pandemics, earthquakes, hurricanes,
floods, fires, war, terrorist attacks, power losses, hardware
failures, systems failures, telecommunications failures and similar
events. The occurrence of a natural disaster, an act of terrorism,
vandalism or other misconduct, a decision to close the facilities
without adequate notice or other unanticipated problems could
result in lengthy interruptions in our services.
Our long-term success depends, in part, on our ability to expand
the sales of our services to customers located outside of the
United States, and thus our business is susceptible to risks
associated with international sales and operations.
We
currently maintain offices and have sales personnel inside of the
United States. However, we plan on expanding our international
operations. Our international expansion efforts may not be
successful. In addition, conducting international operations
subjects us to other risks than those we have generally faced in
the United States. These risks include: localization of our
services and adaptation for local practices, differences in local,
legal standards and regulatory requirements; difficulties in
managing and staffing international operations; fluctuations in
currency exchange rates; dependence on customers, third parties,
and channel partners with whom we do not have extensive experience;
potentially adverse tax consequences, including the complexities of
foreign value-added or other tax systems; reduced or varied
protection for intellectual property rights in some countries; and
increased financial accounting and reporting burdens and
complexities. Operating in international markets also requires
significant management attention and financial resources. The
investment and additional resources required to establish
operations and manage growth in other countries may not produce
desired levels of revenue or profitability.
Our success depends in large part on our ability to protect and
enforce our intellectual property rights.
We rely
on a combination of trade secret, patent, copyright, service mark
and trademark laws, as well as confidentiality procedures and
contractual restrictions, to establish and protect our intellectual
property rights, all of which can provide only limited protection.
In addition, we have not patented significant technologies used to
provide our services. We cannot assure you any future patents that
may be applied for and issued will not be challenged, invalidated
or circumvented. Any patents that may issue in the future from
future patent applications may not provide sufficiently broad
protection or they may not prove to be enforceable in actions
against alleged infringers. Also, we cannot assure you that any
future service mark or trademark registrations will be issued for
pending or future applications or that any registered service marks
or trademarks will be enforceable or provide adequate protection of
our proprietary rights.
We
endeavor to enter into agreements with our employees and
contractors and agreements with parties with whom we do business to
limit access to and disclosure of our proprietary information. The
steps we have taken, however, may not prevent unauthorized use or
the reverse engineering of our technology. Moreover, others may
independently develop technologies that are competitive to ours or
infringe our intellectual property. Enforcement of our intellectual
property rights also depends on our successful legal actions
against these infringers, but these actions may not be successful,
even when our rights have been infringed.
26
Furthermore,
effective patent, trademark, service mark, copyright and trade
secret protection may not be available in every country in which
our services are available. In addition, the legal standards
relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related industries are
uncertain and still evolving.
Material defects or errors in the software that we use to deliver
our services could harm our reputation, result in significant costs
to us and impair our ability to sell our solutions.
The
software applications underlying our products and services are
inherently complex and may contain material defects or errors,
particularly when first introduced or when new versions or
enhancements are released. Any defects that cause interruptions to
the availability of our products and services could result in: a
reduction in sales or delay in market acceptance of our services;
sales credits or refunds to customers; loss of existing customers
and difficulty in attracting new customers; reputational harm; and
diversion of internal resources. The costs incurred in correcting
any material defects or errors in our products and services may be
substantial and could harm our operating results.
Government regulation of the Internet, telecommunications and other
communications technologies could harm our business and operating
results.
As
internet commerce and telecommunications continue to evolve,
increasing regulation by federal, state or foreign governments and
agencies becomes more likely. Any increase in regulation could
affect our clients’ ability to collect and share data,
potentially reducing demand for our products and services. In
addition, taxation of products and services provided over the
Internet or other charges imposed by government agencies or by
private organizations for accessing the Internet or utilizing
telecommunications services may also be imposed. Any regulation
imposing greater fees for internet use or restricting the exchange
of information over the internet could diminish the viability of
our services, which could harm our business and operating
results.
Natural disasters, public health crises, political crises, and
other catastrophic events or other events outside of our control
may damage our business and operating results.
In
the event of natural disasters, public health crises, such as
pandemics and epidemics, political crises, such as terrorism, war,
political instability or other conflict, or other events outside of
our control, our business and operating results could suffer.
Moreover, these types of events could negatively impact consumer
spending in the impacted regions or depending upon the severity,
globally, which could adversely impact our operating
results.
Rekor is unable to predict the extent to which the global COVID-19
coronavirus pandemic may adversely impact our business operations,
financial performance, results of operations and stock
price.
The
COVID-19 coronavirus pandemic and efforts to control its spread
have significantly curtailed the movement of people, goods and
services worldwide, including in many of the regions in which we
sell our products and services and conduct our business operations.
The magnitude and duration of the resulting decline in business
activity cannot currently be estimated with any degree of certainty
and threatens to (1) negatively impact the demand for our products
and services, especially in those locations subject to
“shelter in place” restrictions or similar government
orders, (2) restrict our sales operations and marketing efforts,
and (3) disrupt other important business activities in our various
locations, some of which are also in areas affected by COVID-19.
For example, in response to the COVID-19 pandemic, certain industry
events at which we present and participate certain customer events
have been canceled, postponed or moved to virtual-only experiences;
we are encouraging all of our employees to work remotely; and we
may deem it advisable to similarly alter, postpone or cancel
entirely additional customer, employee or industry events in the
future. Additionally, we may see our services carrying less
revenue-generating traffic in areas subject to “shelter in
place” restrictions or related government orders as the
population of those areas refrain from traveling and normal
commerce activities. Accordingly, we expect the COVID-19 pandemic
to potentially have a negative impact on our sales and our results
of operations in those areas adversely affected by COVID-19, the
size and duration of which we are currently unable to predict.
Additionally, concerns over the economic impact of COVID-19 have
caused extreme volatility in financial and other capital markets
which has and may continue to adversely impact our stock price and
our ability to access capital.
27
Risks relating to our common stock
If securities or industry analysts do not publish research or
publishes inaccurate or unfavorable reports about our business, our
stock price and trading volume could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business, our market and our competitors. We do not
have any control over these analysts. If one or more of the
analysts who cover us downgrade our shares or change their opinion
of our shares, our share price would likely decline. If one or more
of these analysts cease covering us or fail to regularly publish
reports on us, we could lose visibility in the financial markets,
which could cause our share price or trading volume to
decline.
Sales of a substantial number of shares of our common stock may
cause the price of our common stock to decline.
As of
March 12, 2021, we have a total of 40,804,219 shares of common
stock outstanding and 768,140 warrants. Based on shares outstanding
as of March 12, 2021, 9,711,539 shares of common stock, or 23.8%,
are held by our officers, directors and their affiliated entities,
and will be subject to volume limitations under Rule 144 under the
Securities Act and various vesting agreements. In addition,
1,673,333 shares of our common stock that are subject to
outstanding options, restricted stock units and warrants as of
March 12, 2021, will become eligible for sale in the public market
to the extent permitted by the provisions of various vesting
agreements, and Rules 144 and 701 under the Securities
Act.
We
cannot predict what effect, if any, sales of our shares in the
public market or the availability of shares for sale will have on
the market price of our common stock. However, future sales of
substantial amounts of our common stock in the public market,
including shares issued on exercise of outstanding options, or the
perception that such sales may occur, could adversely affect the
market price of our common stock.
We also
expect that significant additional capital may be needed in the
future to continue our planned operations. To raise capital, we may
sell common stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we
determine from time to time. These sales, or the perception in the
market that the holders of a large number of shares intend to sell
shares, could reduce the market price of our common
stock.
Investors may experience future dilution as a result of future
equity offerings.
In
order to raise additional capital, we may in the future offer
additional shares of our common stock or other securities
convertible into or exchangeable for our common stock. We cannot
assure investors that we will be able to sell shares or other
securities in any other offering at a price per share that is equal
to or greater than the price per share paid by investors, and
investors purchasing our shares or other securities in the future
could have rights superior to existing stockholders. The price per
share at which we sell additional shares of our common stock or
other securities convertible into or exchangeable for our common
stock in future transactions may be higher or lower than the price
per share paid by investors.
We do not intend to pay dividends on our common stock for the
foreseeable future.
We have
never declared or paid any cash dividends on our common stock and
do not intend to pay any cash dividends on our common stock in the
foreseeable future. We currently anticipate that for the
foreseeable future we will retain all of our future earnings for
the development, operation and growth of our business and for
general corporate purposes. Any future determination to pay
dividends on our common stock in will be at the discretion of our
Board of Directors. Accordingly, investors must rely on sales of
their common stock after price appreciation, which may never occur,
as the only way to realize any future gains on their
investments.
28
Our executive officers, directors, principal stockholders and their
affiliates will continue to exercise significant influence over our
company, which will limit your ability to influence corporate
matters and could delay or prevent a change in corporate
control.
As of
March 12, 2021, our executive officers, directors, five percent or
greater stockholders and their respective affiliates owned in the
aggregate approximately 23.8% of our common
stock.
These
stockholders have the ability to influence us through this
ownership position and may have a determining role in matters
requiring stockholder approval. For example, these stockholders may
be able to ultimately determine elections of directors, amendments
of our organizational documents, or approval of any merger, sale of
assets, or other major corporate transaction. This may prevent or
discourage unsolicited acquisition proposals or offers for our
common stock that you may feel are in your best interest as one of
our stockholders. The interests of this group of stockholders may
not always coincide with your interests or the interests of other
stockholders and they may act in a manner that advances their best
interests and not necessarily those of other stockholders,
including seeking a premium value for their common stock, and might
affect the prevailing market price for our common
stock.
We are a “smaller reporting company” and, as a result
of the reduced disclosure and governance requirements applicable to
smaller reporting companies, our common stock may be less
attractive to investors.
We are
currently a “smaller reporting company,” meaning that
we are not an investment company, an asset-backed issuer, or a
majority-owned subsidiary of a parent company that is not a
“smaller reporting company,” and have had annual
revenues of less than $100 million and public float of less
than $700 million during the most recently completed fiscal year.
As a “smaller reporting company,” we are subject to
lesser disclosure obligations in our SEC filings compared to other
issuers. Specifically, "smaller reporting companies" are able to
provide simplified executive compensation disclosures in their
filings, are exempt from the provisions of Section 404(b) of
the Sarbanes-Oxley Act requiring that independent registered public
accounting firms provide an attestation report on the effectiveness
of internal control over financial reporting and have certain other
decreased disclosure obligations in their SEC filings, including,
among other things, only being required to provide two years of
audited consolidated financial statements in annual reports.
Decreased disclosures in our SEC filings due to our status a
“smaller reporting company” may make it harder for
investors to analyze our operating results and financial
prospects.
Delaware law and provisions in our certificate of incorporation and
bylaws could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common
stock.
The anti-takeover provisions of the Delaware
General Corporation
Law, or the DGCL, may discourage, delay
or prevent a change of control by prohibiting us from engaging in a
business combination with stockholders owning in excess of 15% of
our outstanding voting stock for a period of three years after the
person becomes an interested stockholder, even if a change of
control would be beneficial to our existing
stockholders. In addition, our certificate of
incorporation and bylaws contain provisions that may make the
acquisition of our company more difficult, including that
:
the request of one or more stockholders holding shares in the
aggregate entitled to cast not less than 35% of the vote at a
meeting is required to call a stockholder meeting. These provisions
could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors of your choosing and
cause us to take certain actions you desire.
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM 2.
PROPERTIES
Our
principal executive offices are located at 7172 Columbia Gateway
Drive, Suite 400, Columbia, Maryland 21046. We do not own any real
property. We currently operate out of three leased locations and
our lease terms range from month-to-month to multiyear commitments.
We do not consider any of our leased properties to be materially
important to us. While we believe it is necessary to maintain
offices through which our services are coordinated, we feel there
are sufficient available office rental properties to adequately
serve our needs should we need to relocate or expand our
operations.
29
ITEM 3.
LEGAL
PROCEEDINGS
On August 19, 2019, we filed suit in the United
States District Court for the Southern District of New York against
three former executives of the Company and Firestorm (the
“Firestorm Principals”)—
Rekor Systems, Inc. v. Suzanne
Loughlin, et al
., Case no.
1:19-cv-07767-VEC. The Complaint alleges that the Firestorm
Principals fraudulently induced the execution of the Membership
Interest Purchase Agreement wherein Firestorm was acquired by
us. The Complaint requests equitable rescission of that
transaction, or, alternatively, monetary
damages.
Following
an initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, we filed a Second Amended Complaint, which the Firestorm
Principals answered together with counterclaims on February 28,
2020. Thereafter, on March 30, we moved to dismiss certain
counterclaims against certain executives named as
counterclaim-defendants, which resulted in the Firestorm Principals
voluntarily dismissing those counterclaims against those
parties. We thereafter filed our response and affirmative
defenses to the Counterclaims on April 22, 2020. On April 27,
2020, the Firestorm Principals filed a Motion for Partial Judgment
on the Pleadings, which we have opposed. In addition, on
December 9, 2019, the Firestorm Principals filed a motion for an
interim award of expenses and attorney’s fees. The
Court denied the Firestorm Principals’ fee advance
motion.
In the year 2020, the Firestorm Principals filed suit in New York
Supreme Court against directors of the Company, alleging breach of
fiduciary duty and libel. We believe that these suits are
without merit and intend to vigorously litigate this
matter.
At
this stage of these litigations, we are unable to render an opinion
regarding the likelihood of a favorable outcome. We intend to
continue vigorously litigating its claims against the Firestorm
Principals and believe that the Firestorm Principals’
remaining counterclaims and suits against Rekor directors and
officers are without merit.
Vigilant Solutions,
LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on
February 21, 2020 against us and certain of our subsidiaries in the
US District Court for the District of Maryland. The complaint
alleged that certain of our products violated a patent held by
Vigilant. On June 10, 2020, we filed an Answer to the complaint
denying the pertinent allegations and asserting substantial
defenses to the allegations contained in the complaint, including
that the patent underlying the complaint is
invalid.
On September 8, 2020, we filed a Petition
for
Inter
Partes
Review at the U.S.
Patent and Trademark Office’s Patent Trial and Appeal Board
(“PTAB”) requesting that the PTAB review and find
unpatentable certain claims of the patent asserted by
Vigilant.
In November of 2020, we and Vigilant Solutions,
LLC agreed to resolve the district court litigation and
Inter
Partes
Review action between
the parties pursuant to a confidential settlement agreement. None
of the obligations imposed by that confidential settlement
agreement are material to the Company.
On January 31, 2020, our wholly owned subsidiary,
OpenALPR, filed a complaint in the US District Court for the
Western District of Pennsylvania against a former customer, Plate
Capture Solutions, Inc. (“PCS”) for breach of software
license agreements pursuant to which software was licensed to PCS.
On June 14, 2020, PCS filed its operative answer to the
Complaint. On June 21, 2020, PCS filed a motion to join us
and another entity, OpenALPR Technology, Inc., as parties to the
litigation and made claims against them for defamation, fraud and
intentional interference with existing and future business
relationships. On July 13, 2020, OpenALPR filed an opposition to
the motion for joinder.
On November 23, 2020, the Court
denied PCS’s Motion for Joinder with prejudice. The case is
currently proceeding between OpenALPR and PCS only and is still in
its early stages. Rekor believes that OpenALPR has substantial
defenses to the claims and intends to vigorously defend the
allegations of those claims.
On
September 18, 2020, Fordham Financial Management, Inc.
(“Fordham”) commenced a lawsuit against us in the
Supreme Court for the State of New York, New York County. Fordham
alleges that we breached an underwriting agreement with it. Fordham
has brought claims for breach of contract, a declaratory judgment,
and attorneys’ fees and expenses, and seeks damages. The
Complaint was served to us on September 25, 2020. The parties have
agreed to extend our time to respond to the Complaint until March
25, 2021 and have agreed that if we file a motion to dismiss, such
motion will be fully briefed and returnable on May 25, 2021 if not
further extended. The parties engaged in a private mediation on
February 24, 2021 but were unable to reach settlement.
30
At
this stage of the Fordham litigation, we are unable to render an
opinion regarding the likelihood of a favorable outcome. We intend
to vigorously litigate this action and believes that the claims
asserted are without merit.
In
addition, from time to time, we may be named as a party to various
other lawsuits, claims and other legal and regulatory proceedings
that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged
personal injury, breach of contract, property damage, infringement
of proprietary rights, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to such
lawsuits, claims and proceedings we accrue reserves when a loss is
probable, and the amount of such loss can be reasonably estimated.
It is our management’s opinion that the outcome of these
proceedings, individually and collectively, will not be material to
our consolidated financial statements as a
whole.
ITEM 4.
MINE SAFETY
DISCLOSURES
Not
applicable.
31
PART II
ITEM 5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is listed on the Nasdaq Capital Market under the
symbol “REKR”.
Holders
As of
February 28, 2021, there were 66 registered holders of record of
our common stock, excluding stockholders for whom shares are held
in “nominee” or “street name.” The actual
number of common stockholders is greater than the number of record
holders, and includes stockholders who are beneficial owners, but
whose shares are held in street name by brokers and other nominees.
This number of holders of record also does not include stockholders
whose shares may be held in trust by other entities
.
Dividend Policy
We have
never declared or paid any cash dividends on our common stock. We
currently do not anticipate paying any cash dividends for the
foreseeable future. Instead, we anticipate that all of our earnings
will be used to provide working capital, to support our operations,
and to finance the growth and development of our business,
including potentially the acquisition of, or investment in,
businesses, technologies or products that complement our existing
business. Any future determination relating to dividend policy will
be made at the discretion of our Board of Directors and will depend
on a number of factors, including, but not limited to, our future
earnings, capital requirements, financial condition, future
prospects, applicable Delaware law, which provides that dividends
are only payable out of surplus or current net profits and other
factors our Board of Directors might deem relevant.
Sales of Unregistered Securities
On
March 12, 2019, as partial consideration for its acquisition of
certain assets of OpenALPR, Rekor issued 600,000 shares of its
common stock to the seller, valued at $397,000. On the same date,
Rekor issued senior secured promissory notes in an aggregate
principal amount of $20,000,000 and warrants to purchase 2,500,000
shares of its common stock, which are immediately exercisable at an
exercise price of $0.74 per share, to certain individuals and
entities.
The
foregoing issuances were issued in reliance upon the exemptions
from registration under the Securities Act of 1933, as amended,
provided by Section 4(a)(2) and Rule 506 of Regulation D
promulgated thereunder.
Note Exchange Agreement
In
an agreement reached on June 30, 2020, the 2019 Lenders of the 2019
Promissory Notes agreed to a redemption of approximately 77% of the
remaining principal balance of the 2019 Promissory Notes as of June
30, 2020. Per the Exchange Agreement, $17,398,000, was redeemed in
exchange for 4,349,497 shares of the Company’s common stock,
at a rate of $4 per share (the “Note Exchange”). At the
time of the Exchange Agreement the net amount of long-term debt
redeemed for common stock was $14,688,000, this included the
existing principal balance subject to conversion, the portion of
the exit fee associated with the notes subject to conversion,
offset by the portion of unamortized issuance costs associated with
the notes subject to conversion. There was also $226,000 related to
the paid-in-kind (“PIK”) interest associated to the
notes subject to conversion that was exchanged as part of the
Exchange Agreements. The difference between the market value of the
shares issued and the net carrying amount of the obligations above,
was recorded as part of debt extinguishments costs in the
accompanying consolidated statement of operations.
On
July 15, 2020, we completed the Note Exchange by issuing its common
stock to the 2019 Lenders in connection with the Note Exchange
Transaction in reliance on Section 3(a)(9) of the Securities Act of
1933, as amended.
32
At-the-Market Agreement
Sales of our common stock under the Sales Agreement were issued and
sold pursuant to the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed with
the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018. For the year ended December 31, 2020, based on
settlement date, we sold 5,216,562 shares of common stock at a
weighted-average selling price of $5.92 per share in accordance
with the Sales Agreement. Net cash provided for the year ended
December 31, 2020 from the Sales Agreement was $29,930,000 after
paying 3.0% or $926,000 related to cash commissions provided to B.
Riley FBR.
On
September 21, 2020, we elected to voluntarily terminate our Sales
Agreement with B. Riley FBR pursuant to the terms of the Sales
Agreement. As of the termination date, we had offered and sold
an aggregate of 6,509,202 shares of common stock pursuant to the
Sales Agreement, which resulted in aggregate gross proceeds of
$34,154,000.
Increase in Authorized Shares
On
January 28, 2020, the Board of Directors of the Company adopted
resolutions of the Board to ratify, approve and recommend
stockholder approval of an amendment to the Company’s Amended
and Restated Certificate of Incorporation, to increase the
authorized number of shares of the Company’s common stock,
par value $0.0001 per share, from 30,000,000 to 100,000,000
(“the Amendment”). On February 21, 2020, we received
approval of the Amendment by written consent in lieu of a meeting
from the holders of a majority of issued and outstanding shares of
the Company’s common stock. On March 18, 2020, the amendment
became effective upon filing the Certificate of Amendment with the
Secretary of State of Delaware.
Public Offering
On
February 9, 2021, we issued and sold 6,126,936 shares of our common
stock (which includes 799,166 shares of common stock sold pursuant
to the exercise of an overallotment option). The net proceeds to
the Company, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company,
were approximately $70.1 million. The shares were sold pursuant to
an underwriting agreement with B. Riley Securities, Inc. and Lake
Street Capital Markets, LLC, as representatives of the several
underwriters named therein and our shelf registration statement on
Form S-3 (Registration Statement No. 333-224423) filed by the
Company with the Securities and Exchange Commission (the
“SEC”) that became effective on April 30, 2018. On
February 4, 2021, a prospectus supplement and accompanying
prospectus were filed with the SEC in connection with the offering
and a related registration statement (File No. 333-252735) was
filed pursuant to Rule 462(b) promulgated under the Securities
Act.
Automatic Conversion of Series A Cumulative Convertible Redeemable
Preferred Stock and Series B Cumulative Convertible Redeemable
Preferred Stock
As
a result of the closing of the Public Offering, all of our issued
and outstanding Series A Cumulative Convertible Redeemable
Preferred Stock, par value $0.0001 per share (the “Series A
Preferred Stock”) and Series B Cumulative Convertible
Redeemable Preferred Stock, par value $0.0001 per share (the
“Series B Preferred Stock”) were automatically
converted pursuant to their respective terms into an aggregate of
1,416,785 shares of our common stock. As a result of the automatic
conversion of the Series A Preferred, the Series A Preferred will
no longer be quoted on the OTC Pink. The Series B Preferred was not
quoted on any trading market.
Use of Proceeds
We have
generated losses since our inception in February 2017 and have
relied on cash on hand, external bank lines of credit, short-term
borrowing arrangements, issuance of debt, the sale of a note, sale
of our non-core subsidiaries, and the sale of common stock to
provide cash for operations. We attribute losses to financing
costs, public company corporate overhead, lower than expected
revenue, and lower gross profit of some of our subsidiaries. Our
proceeds have been primarily used for research and development and
sales and marketing expenses related to new product development and
our strategic shift to develop and promote capabilities of our
technology offerings.
33
ITEM 6.
SELECTED FINANCIAL
DATA
As a
“smaller reporting company” as defined by Item 10 of
Regulation S-K, the Company is not required to provide information
required by this Item.
ITEM 7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following management’s discussion and analysis of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related
notes included in this Annual Report and the historical financial
statements of Rekor Systems, Inc., and the related notes
thereto.
Overview
We are
a leader in the field of vehicle identification and intelligent
roadway management systems developed to exploit the benefits of
recent advances in artificial intelligence (“AI”). In
development for over six years using deep learning algorithms, our
core proprietary software enables the creation of more powerful and
capable vehicle recognition systems that can be deployed at a
fraction of the cost of traditional legacy systems. The software
provides a wider field of view, greater light sensitivity and
recognitions at faster speeds and with higher accuracy rates. It
also includes the ability to identify the color, make and body type
of a vehicle and its direction of travel. These capabilities are
particularly useful to governmental entities and businesses in
solving a wide variety of real-world vehicle related operational
challenges. In addition, the ability to enhance existing Internet
Protocol (“IP”) connected cameras has enabled
significant new uses for vehicle recognition technology that were
not previously available or cost effective. We currently provide
products and services for governmental organizations, for large and
small businesses and for individuals throughout the world.
Customers currently use our products or services in approximately
80 countries in applications that include public safety, security,
customer experience, transportation, parking, operational
efficiencies and logistics.
Rekor’s
vision is to enable “AI Driven Decisions” by enhancing
the capabilities in commercial and government sectors with
actionable, real-time insights. We deliver these insights through
an expanding software portfolio that is being designed not only to
address the challenges our customers are currently facing but
empowers them to effectively deal with their evolving
needs.
General
The
information provided in this discussion and analysis of
Rekor’s financial condition and results of operations covers
the years ended December 31, 2020 and 2019. During 2019,
we
completed the
acquisition of certain assets and assumed certain liabilities of
OpenALPR Technology, Inc. (the “OpenALPR Technology
Acquisition”)
. During 2020 we sold our fully owned
subsidiaries AOC Key Solutions Inc. (“AOC Key
Solutions”) and Global Technical Services Inc.
(“TeamGlobal”). As a result of the dispositions, we
determined in 2020 that all the remaining operations that comprised
our Professional Services Segment met the criteria to be considered
discontinued and they are no longer presented as continuing
operations.
Our
financial results are impacted principally by the demand by clients
for our products and services, the degree to which full-time staff
can be kept occupied in revenue-generating activities and the
success of our sales team in generating client
engagements.
Unexpected
changes in the demand for our products and services can result in
significant variations in revenues, and present a challenge to
optimal hiring, staffing and use of consultants. The volume of work
performed can vary from period to period.
Acquisitions and Dispositions
On
March 12, 2019, we completed the OpenALPR Technology Acquisition
for an aggregate purchase price of $12,397,000, consisting of
$7,000,000 in cash, $5,000,000 related to the issuance of note
payable and $397,000 of stock consideration.
34
On June
1, 2019, we sold all the interest we had acquired in Secure
Education Consultants, LLC, which we acquired on January 1, 2018.
At that time, we also discontinued operations of BC
Management.
On
April 2, 2020, we sold AOC Key Solutions for an aggregate purchase
price of $4,000,000, consisting of $3,400,000 in cash and a
subordinated promissory note in the amount of
$600,000.
On June
29, 2020, we sold TeamGlobal for an aggregate purchase price of
$4,000,000, consisting of $2,300,000 in cash and a secured
promissory note in the amount of $1,700,000.
Opportunities, Trends and Uncertainties
We look
to identify the various trends, market cycles, uncertainties and
other factors that may provide us with opportunities and present
challenges that impact our operations and financial condition from
time to time. Although there are many that we may not or cannot
foresee, we believe that our results of operations and financial
condition for the foreseeable future will be primarily affected by
the following:
●
AI for the Roadway
– We believe that the application
of AI to the analysis of roadway conditions will significantly
affect vehicular travel in the future by assisting in the
intelligent optimization of traffic flows and the identification of
anomalous and unsafe movements – e.g. wrong way vehicles,
stopped vehicles, or/and pedestrian on the roadway. Marketers and
drive-thru retailers with loyalty programs can also benefit from
rapid, lower cost identification of existing and potential
customers in streamlining and accelerating vehicular
flow.
●
Graphic Processing Unit (“GPU”) Improvements
– We expect our business to benefit as a result of more
powerful and affordable GPU hardware that has recently been
developed. These GPUs are more efficient for image processing
because their highly parallel structure makes them more efficient
than general-purpose central processing units (“CPUs”)
for algorithms that process large blocks of data, such as those
produced by video streams. GPUs also provide superior memory
bandwidth and efficiencies as compared to their CPU counterparts.
The most recent versions of our software have been designed to use
the increased GPU speeds to accelerate image recognitions. The GPU
market is predicted to grow as a result of a surge in adoption of
the Internet of Things (“IoT”) by the industrial and
automotive sectors. As GPU manufacturers increase production
volume, we hope to benefit from the reduced cost to manufacture the
hardware included in our products or available to others using our
services.
●
Edge Processing
– Demand for actionable roadway
information continues to grow in parallel with camera resolutions.
Over the last several decades, cameras have evolved from 25K pixels
to 8.3 million pixels and beyond, with each advancement unlocking
new capabilities thereby fueling growth. Further, cellular networks
are optimized for downloading data not for uploading data, and
while speeds have improved over time, what amounts to large
infrastructure changes has resulted in relatively small
improvements to cellular upload speeds. With road-side
deployments experiencing explosive growth in count and density,
scalability has become an obstacle for competition in the
market. All of these factors mean that scalability, latency
and bandwidth concerns require edge processing which are enabled by
the continued growth of the increasingly effective graphic
processing units and continual improvements in efficiency of our AI
algorithms. Edge processing ingests local high definition
(“HD”) video streams and converts the raw video data to
text data, thus reducing the volume of data that needs to be
transferred. Edge processing allows massive scale without the
bandwidth, cost, latency and dependability limitations that would
be experienced with a streaming to the cloud
solution.
●
Adaptability of the Current ALPR Market
– We have made
a considerable investment in our advanced vehicle recognition
systems because we believe their increased accuracy, affordability
and ability to capture additional vehicle data will allow them to
compete effectively with existing providers. Based on published
benchmarks, our software currently outperforms competitors in
almost every metric. However, large users of existing ALPR
technology, such as toll roads, have long-term contracts with
service providers that have made considerable investments in their
existing technologies and may not consider the improvements in
accuracy or reductions in cost sufficient to justify abandoning
their current systems in the near future. In addition, existing
providers may be able to reduce the cost of their current offerings
or elect to reduce prices and accept reduced profitability while
working to develop or secure their own advanced vehicle recognition
systems. As a result, our success in establishing a major position
in these markets will depend on being able to effectively
communicate our presence, develop strong customer relationships,
and maintain leadership in providing the capabilities that
customers want. As with any large market, this will require
considerable effort and resources.
35
●
New and Expanded Uses for Vehicle Recognition Systems
– We believe that reductions in the cost of vehicle
recognition products and services will significantly broaden the
market for these systems. We currently serve a number of users who
could not afford the cost or adapt to, the restrictions of
conventional vehicle recognition systems. These include smaller
municipalities, homeowners’ associations, and organizations
finding new applications such as innovative customer loyalty
programs. We have seen and responded to an increase in the number
of smaller jurisdictions and municipalities that are testing ALPR
systems or that issued requests for proposals to install a network
of ALPR cameras. We also expect the availability of faster, higher
accuracy, lower cost systems to dramatically increase the ability
of crowded urban areas to manage traffic congestion and implement
smart city programs. We do not currently have the resources to
develop all of these entirely new markets by ourselves, so we will
need to rely on affiliations with other partners, who may or may
not realize the significant benefits that we envision from these
new uses.
●
Expansion of Automated Enforcement of Motor Vehicle Laws
– We believe that future legislation will allow for automated
enforcement of motor vehicle regulations, including insurance
requirements, to be expanded as the types of violations authorized
for automated enforcement increase and experience provides
localities with a better understanding of the circumstances where
automated enforcement is beneficial. For example, there are now 17
states that allow for the automatic enforcement of violations by
vehicles that pass a school bus displaying its flashing red lights
and a stop sign. In addition, due to high rates of fatalities and
injuries to law enforcement and other emergency response crews on
roadsides, several states are considering authorizing automated
enforcement of violations where motorists fail to slow down and/or
move over for emergency responders and law enforcement vehicles at
the side of the road. Legislative implementation is a deliberative
and necessarily time-consuming process. However, as states expand
auto enforcement, the market for our products and services should
increase and broaden in the public safety market.
●
Increasing Smart City Market
– Nokia has approved the
use of our OpenALPR software for its smart city offerings. In the
smart cities’ market, real-time vehicle recognition
technologies are widely used for traffic management and public
safety. As a result, we expect to benefit from the growth of this
market.
●
Accelerated Business Development and Marketing
– Our
ability to compete in a large, competitive and rapidly evolving
industry will require us to achieve and maintain a leadership
position. As a result, we have accelerated our business development
marketing and eCommerce activities to increase awareness and market
adoption of our new technology and products within the market. We
anticipate that an increased presence in the market, the continued
development of strategic partnerships and other economies of scale
will significantly reduce the level of costs necessary to support
sales of our products and services. However, the speed at which
these markets grow to the degree of which our products and services
are adopted is uncertain.
●
Sales Cycle
– As many of our products are new to
market, their acceptance and integration into the intended markets
is uncertain and we do not have sufficient historical experience to
accurately predict revenues as a result of their
implementation.
●
COVID 19 -
The spread of a novel strain of COVID-19 around
the world since the first quarter of 2020 has caused significant
volatility in U.S. and international markets. There is significant
uncertainty around the breadth and duration of business disruptions
related to COVID-19, as well as its impact on the U.S. and
international economies and, as such, we are unable to determine
the full impact to our operations.
36
●
Pressure on Government Budgets –
In addition to the
COVID-19 crisis crippling businesses revenues, it has caused
significant strain on government budgets. With less money to spend
and more need for resources, government agencies need affordable,
effective, and scalable solutions for revenue recovery and
discovery. With subscription pricing and a roadway intelligence
platform that accomplishes multiple agency missions from a single
camera source, we are uniquely positioned to provide agencies
force-multiplying tools when money and man-power are limited.
Agencies can be better positioned to identify vehicle registration
fee avoidance, enforce parking and find scofflaws, aid motorists in
acquiring valid insurance, and dynamically price tolls based on
traffic flow. In addition, states adopting UVED programs may be
able to garner significant net cash contributions to their annual
budgets while reducing the number of uninsured vehicles on their
roadways.
●
Unifying Source of Roadway Intelligence with Rekor One™
-
The Rekor One platform will support multiple community
safety, intelligent roadway and revenue generation activities.
Rekor One will provide government agencies with a comprehensive
vehicle intelligence system that supports multiple agency-specific
missions. With Rekor One, governments will be able to leverage
their existing IP cameras and transform them into a safe and smart
multi-dimensional intelligent roadway network. By interfacing with
multiple databases and operating systems, Rekor One can allow
governmental units to observe security and privacy protocols and
fractionalize costs based on relative end user value. Each
participating agency receives a unique user interface and
dashboard, which draws on Rekor One’s unified vehicle
recognition intelligence to provide data customized to the
agency’s specific needs. This will eliminate redundant
systems and single function applications to help use public funds
wisely. The platform will aid in identifying licensing and
registration non-compliance, uninsured motorists and unpaid parking
violations. This will allow agencies to create targeted
intervention programs that result in increased safety as well as
increased revenue recovery. Smart parking and permitting are also
important capabilities that increase government efficiency and
provide better citizen and visitor experience. As part of traffic
management, Rekor One will also support advanced tolling and
congestion pricing as well as parking and other fees.
●
Increased Demand for Contactless Economy Solutions –
Even prior to the COVID-19 crisis, efficient, touch-free shopping
experiences were becoming increasingly present. Now moving beyond
simple tap-to-pay credit card functionality, we can offer
businesses such as retail and quick service restaurants the ability
to have customers pay-by-plate for a complete contactless
experience for curbside pick-up or drive-thru transactions.
Pay-by-plate functionality not only keeps customers and employees
safe, but it also accelerates service time as the technology fully
integrates with existing point of sale (“POS”) and
customer loyalty systems.
●
Necessity for On-Demand Mobile Solutions –
With app
downloads increasing exponentially year-over-year and over 90% of
mobile phone time spent within apps, businesses require a means to
leverage the ever-present smartphones of employees. By developing a
first-of-its-kind iOS and Android app that can read license plates
on-device, we can provide businesses an affordable way to scale by
using existing devices as license plate recognition sensors. Now
businesses can efficiently manage visitors, streamline parking
operations, enhance campus/event security, and even recover costly
assets.
We
believe that recent developments in computing capabilities, such as
GPU advances, and new techniques of analysis, sometimes referred to
broadly as AI, have broadened the market for vehicle recognition
technology and created new opportunities in existing markets. With
our new line of products and services, we are working to actively
exploit these opportunities.
Other
than as discussed above and elsewhere in this Annual Report on Form
10-K, we are not aware of any trends, events or uncertainties that
are likely to have a material effect on our financial
condition.
37
Components of Operating Results
Revenues
We derive our revenues
substantially from license and subscription fees for software and
related products and services. A portion of the subscription fees
are generated through our eCommerce website rather than through
in-person sales. In addition, we derive revenues in connection with
certain citation and collection services in connection with UVED,
automated traffic safety and parking enforcement
services.
Revenue
is recognized upon transfer of control of promised products and
services to our customers, in an amount that reflects the
consideration we expect to receive in exchange for those products
and services. If the consideration promised in the contract
includes a variable amount, for example maintenance fees, we
include an estimate of the amount it expects to receive for the
total transaction price, if it is probable that a significant
reversal of cumulative revenue recognized will not
occur.
Costs of Revenues
Direct
costs of revenues consist primarily of the portion of technical and
non-technical salaries and wages and payroll-related costs incurred
in connection with revenue generating activities. Direct costs of
revenues also include production expenses, sub-consultant services,
and other expenses that are incurred in connection with our revenue
generating activities. Direct costs of revenues exclude the portion
of technical and non-technical salaries and wages related to
marketing efforts, vacations, holidays, and other time not spent
directly generating fees under existing contracts. Such costs are
included in operating expenses. We expense direct costs of revenues
when incurred.
Operating Expenses
Our
operating expenses consist of general and administrative expenses,
sales and marketing and research and development. Personnel costs
are the most significant component of operating expenses and
consist of salaries, benefits, bonuses, payroll taxes and
stock-based compensation expense. Operating expenses also include
depreciation, amortization and impairment of assets.
General and Administrative
General
and administrative expense consists of personnel costs for our
executive, finance, legal, human resources and administrative
departments. Additional expenses include office leases,
professional fees and insurance.
We expect our general and administrative expense
to continue to increase in absolute dollars for the foreseeable
future due to additional costs associated with accounting,
compliance, insurance and investor relations as a public company.
However, we expect our general and administrative expense to
decrease as a percentage of our revenue over the long term,
although our general and administrative expense may fluctuate as a
percentage of our revenue from period to period due to the timing
and extent of these expenses.
Sales and Marketing
Sales
and marketing expenses consist of personnel costs, marketing
programs, travel and entertainment associated with sales and
marketing personnel, expenses for conferences and trade shows. We
intend to make significant investments in our sales and marketing
expenses to grow revenue, further penetrate the market and expand
our customer base. With the release of our Partners Program we
expect our sales and marketing expense to increase in the
future.
38
Research and Development
Research and
development expenses consists of personnel costs, software used to
develop our products and consulting and professional fees for
third-party development resources. Our research and development
expenses support our efforts to continue to add capabilities to and
improve the value of our existing products and services, as well as
develop new products and services.
We
expect our research and development expense to continue to increase
in absolute dollars for the foreseeable future as we continue to
invest in research and development efforts to enhance the
functionality of our AI software. However, we expect our research
and development expense to decrease as a percentage of our revenue
over the long term, although our research and development expense
may fluctuate as a percentage of our revenue from period to period
due to the timing and extent of these expenses.
Other Income (Expense)
Other
income (expense), net consists primarily of interest expense in
connection with our debt arrangements, costs associated with the
extinguishment of our debt arrangements, gains on the sale of
subsidiaries, gains or losses on the sale of fixed assets and
interest income earned on cash and cash equivalents, short-term
investments and note receivables.
Income Tax Provision
Income
tax provision consists primarily of income taxes in certain
domestic jurisdictions in which we conduct business. We have
recorded deferred tax assets for which a full valuation allowance
has been provided, including net operating loss carryforwards and
tax credits. We expect to maintain this full valuation allowance
for the foreseeable future as it is more likely than not that some
or all of those deferred tax assets may not be realized based on
our history of losses.
Results of Operations
Our historical operating results in
dollars are presented below. The results below and the analysis of
operation is solely related to continuing operations and do not
include results of operations from TeamGlobal, AOC Key Solutions
and Firestorm.
The following selected consolidated financial
data should be read in conjunction with the foregoing information
contained in this Item 7 and with the consolidated financial
statements and the notes thereto in Item 8 of Part II,
“Financial Statements and Supplementary Data.” Only
historical operating results are presented below. Historical
results are not necessarily indicative of future
results.
|
|
Year ended December 31,
|
|
|
(dollars in
thousands)
|
2020
|
2019
|
|
Revenue
|
$
9,234
|
$
5,469
|
|
Cost
of revenue
|
3,533
|
1,652
|
|
Gross
profit
|
5,701
|
3,817
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
12,117
|
8,276
|
|
Selling
and marketing expenses
|
2,247
|
1,646
|
|
Research
and development expenses
|
3,185
|
1,429
|
|
Operating
expenses
|
17,549
|
11,351
|
|
|
|
|
|
Loss
from operations
|
(11,848
)
|
(7,534
)
|
|
Other
income (expense):
|
|
|
|
Loss
on extinguishment of debt
|
(3,281
)
|
(1,113
)
|
|
Interest
expense
|
(2,503
)
|
(3,909
)
|
|
Other
income
|
62
|
198
|
|
Gain
on sale of business
|
3,631
|
-
|
|
Total
other expense
|
(2,091
)
|
(4,824
)
|
|
Loss
before income taxes
|
(13,939
)
|
(12,358
)
|
|
Income
tax provision
|
(23
)
|
(47
)
|
|
Net
loss from continuing operations
|
$
(13,962
)
|
$
(12,405
)
|
39
Comparison of the Years Ended December 31, 2020 and
2019
Restructuring
As part
of our shift in strategic direction since 2019, we have focused on
our technology offerings and have disposed of or discontinued
operations in the subsidiaries in our legacy Professional Services
Segment. In April 2020, we completed the Sale of AOC Key Solutions
and in June 2020, we completed the sale of TeamGlobal. As part of
evaluating the future of Firestorm, management decided to sell
Secure Education and transfer the BC Management line of business to
its founder in the second quarter of 2019. In addition, management
determined to discontinue the operation of Firestorm Franchising,
LLC, a division of Firestorm, due to non-performance by
franchisees. The Company has also commenced an action for
rescission of the original purchase of Firestorm.
As a
result, we have completed the final steps of our announced change
in strategic direction to sell lower margin assets and focus on our
core Technology Segment. Beginning in 2020, all of the subsidiaries
that were previously presented as part of Professional Services
operations are classified as discontinued operations and not
presented as part of continuing operations.
Revenue
|
|
Year ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2020
|
2019
|
$
|
%
|
|
Revenue
|
$
9,234
|
$
5,469
|
$
3,765
|
69
%
|
The increase in revenue
for the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily attributable to the expanded
technology offerings,
the
implementation and substantial completion of a perpetual software
license and hardware contract which generated up front revenues
from building infrastructure
and continuing growth in our eCommerce platform as
described below
. Additionally,
revenues attributable to the acquisition of OpenALPR assets were
only included in operations since March 2019. During the year ended
December 31, 2020, revenue attributable to OpenALPR assets was
recognized for the full year compared to only a nine and half a
month period in the corresponding period in
2019.
Additionally,
part of the growth in revenue for the year ended December 31, 2020
was attributable to revenues earned through our eCommerce platform
which organically increased, $426,000 or 97%, to $865,000 from
$439,000 for the year ended December 31, 2019.
Cost of Revenue, Gross Profit and Gross Margin
|
|
Year ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2020
|
2019
|
$ or % Points
|
%
|
|
Cost
of revenue
|
$
3,533
|
$
1,652
|
$
1,881
|
114
%
|
|
Gross
profit
|
5,701
|
3,817
|
1,884
|
49
%
|
|
Gross
margin
|
62
%
|
70
%
|
-8
%
|
-11
%
|
For the year ended
December 31, 2020, compared to the year ended December 31,
2019,
the increase in gross
profit was primarily attributable to the increase in revenue for
the corresponding period.
For the year ended December 31, 2020 the gross
margin decreased to 62%, which was primarily
attributable to building infrastructure in
connection with large software and hardware contracts. These
contracts included construction and assembly of fixtures for our
vehicle recognition cameras and the infrastructure necessary to
support database and communications operations on a shared basis
with other municipalities. In this early stage, the cost of
building the network is higher and the initial margins for such
projects are consequently lower than expected than for future
operations that will be able to use the same
infrastructure.
40
Operating Expenses
|
|
Year ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2020
|
2019
|
$
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
$
12,117
|
$
8,276
|
$
3,841
|
46
%
|
|
Selling
and marketing expenses
|
2,247
|
1,646
|
601
|
37
%
|
|
Research
and development expenses
|
3,185
|
1,429
|
1,756
|
123
%
|
|
Operating
expenses
|
$
17,549
|
$
11,351
|
$
6,198
|
55
%
|
General and Administrative Expenses
The majority of the
increase to general and administrative expenses is attributable to
the increased staffing. For the year ended December 31, 2020
compared to the year ended December 31, 2019, we brought on
additional headcount of the Company to support our growth plan and
build our corporate structure including executives. In addition, we
incurred higher legal costs associated with litigations as
described in Item 3 - Legal Proceedings.
Selling and Marketing Expenses
The increase in the
selling and marketing expenses during the year is mainly
attributable to the increased marketing efforts to promote our
products and services including digital marketing and other sales
efforts. In connection with these efforts there was an increase in
staffing to support the Company’s growth
plan.
Research and Development Expense
The overall increase in research and development expenses is
primarily attributable to the strategic shift to develop new
products and additional software capabilities, as a result of our
increased focus on our technology offerings. This shift took place
at the end of the first quarter of 2019. The increase in our
research and development expenses is mainly attributable to an
increase in headcount and hours associated with the research and
development activities.
Other Expense
|
|
Year ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2020
|
2019
|
$
|
%
|
|
Other
income (expense):
|
|
|
|
|
|
Loss
on extinguishment of debt
|
$
(3,281
)
|
$
(1,113
)
|
$
(2,168
)
|
-195
%
|
|
Interest
expense
|
(2,503
)
|
(3,909
)
|
1,406
|
36
%
|
|
Other
income
|
62
|
198
|
(136
)
|
-69
%
|
|
Gain
on sale of business
|
3,631
|
-
|
3,631
|
100
%
|
|
Total
other expense
|
$
(2,091
)
|
$
(4,824
)
|
$
2,733
|
57
%
|
The decrease in interest expense for the year ended December 31,
2020 compared to the year ended December 31, 2019 is due to the
staged retirement of the 2019 Promissory notes in
2020.
The loss on the extinguishment of debt for the year ended December
31, 2020, was related to the fees associated with the early
extinguishment of the principal balance of our 2019 Promissory
Notes. During 2019, we incurred costs of $1,113,000 associated with
the extinguishment of debt.
In connection with the
sale of AOC Key Solutions and TeamGlobal, we recognized a gain on
the sale of business of $3,631,000 during the year ended December
31, 2020.
41
Income Tax Expense
The income tax provision for the year ended December 31, 2020, was
$23,000, is due primarily to the state taxes, as compared to tax
expense of $47,000 for the year ended December 31, 2019. There is
also approximately $14,000 of additional deferred taxes related to
the goodwill recognized related to the OpenALPR acquisition
recognized in the year ended December 31, 2020. We established a
valuation allowance against deferred tax assets in the fourth
quarter of 2017 and have continued to maintain a full valuation
allowance through the year ended December 31, 2020.
Non-GAAP Measures
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes,
depreciation and amortization. We calculate Adjusted EBITDA as net
loss before interest, taxes, depreciation and amortization,
adjusted for (i) impairment of intangible assets, (ii) loss on
extinguishment of debt, (iii) stock-based compensation, (iv) losses
or gains on sales of subsidiaries, and (v) other unusual or
non-recurring items. EBITDA and Adjusted EBITDA are not
measurements of financial performance or liquidity under accounting
principles generally accepted in the U.S. (“U.S. GAAP”)
and should not be considered as an alternative to net earnings or
cash flow from operating activities as indicators of our operating
performance or as a measure of liquidity or any other measures of
performance derived in accordance with U.S. GAAP. EBITDA and
Adjusted EBITDA are presented because we believe they are
frequently used by securities analysts, investors and other
interested parties in the evaluation of a company’s ability
to service and/or incur debt. However, other companies in our
industry may calculate EBITDA and Adjusted EBITDA differently than
we do.
The following table sets forth the components of the EBITDA and
Adjusted EBITDA for the periods included (dollars in
thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Net
loss
|
$
(13,962
)
|
$
(12,405
)
|
|
Income
taxes
|
23
|
47
|
|
Interest
|
2,503
|
3,909
|
|
Depreciation
and amortization
|
1,961
|
1,377
|
|
EBITDA
|
$
(9,475
)
|
$
(7,072
)
|
|
|
|
|
|
Loss
on extinguishment of debt
|
$
3,281
|
$
1,113
|
|
Share-based
compensation
|
796
|
446
|
|
Gain
on sale of business
|
(3,631
)
|
-
|
|
Loss
on sale of Secure Education
|
-
|
3
|
|
Adjusted
EBITDA
|
$
(9,029
)
|
$
(5,510
)
|
Lease Obligations
At December 31, 2020, we leased building space at the
following locations in the U.S.:
●
Columbia, Maryland – The corporate headquarters
●
Linthicum, Maryland – Storage facility for inventory related
to our technology hardware
●
Orlando, Florida – Florida implementation office
42
We believe our facilities are in good condition and adequate for
their current use. We may improve, replace or reduce facilities as
considered appropriate to meet the needs of our
operations.
Liquidity and Capital Resources
The net
cash flows from operating, investing and financing activities for
the periods below were as follows (dollars in
thousands):
|
|
Year ended December 31,
|
|||
|
|
2020
|
2019
|
Change
|
|
|
|
|
$
|
%
|
|
|
Net
cash used in operating activities - continuing
operations
|
$
(11,175
)
|
$
(7,256
)
|
$
(3,919
)
|
-54
%
|
|
Net
cash provided by (used in) investing activities - continuing
operations
|
5,188
|
(548
)
|
5,736
|
1047
%
|
|
Net
cash provided by financing activities - continuing
operations
|
24,847
|
6,787
|
18,060
|
266
%
|
|
Net
increase (decrease) in cash, cash equivalents and restricted cash
and cash equivalents - continuing operations
|
$
18,860
|
$
(1,017
)
|
$
19,877
|
1954
%
|
Net
cash used in operating activities – continuing operations for
the year ended December 31, 2020 had a net increase of $3,919,000
which was primarily attributable to the increase in the loss from
continuing operations of $1,557,000. Additionally, there were large
non-cash adjustments such as the $3,631,000 gain on the sale of AOC
Key Solutions and TeamGlobal.
The gain on the sale is shown as a decrease in cash flow from
operations and an increase in cash flow from investing activities
to reflect the nature of the transactions. This gain on the sale of
AOC Key Solutions and TeamGlobal was partially offset by an
increase in depreciation, amortization of intangible asset and a
$3,281,000 loss on extinguishment of debt related to the retirement
of the 2019 Promissory Notes.
The net increase of net cash provided by (used in) investment
activities – continuing operations of $5,736,000 was
primarily due to the cash proceeds of the sale of AOC Key Solutions
and TeamGlobal and the cash proceeds from the note receivable
issued in connection with the sale of AOC Key
Solutions.
Net cash provided by financing activities – continuing
operations for the year ended December 31, 2020 increased
$18,060,000 from the prior year ended December 31, 2019. During the
year ended December 31, 2020, $29,930,000 cash was provided by
financing activities related to the issuance of our common stock as
part of the at-the-market agreement. In 2020, this amount was
offset by $7,226,000 of cash outflows related to the modification
and retirement of the 2019 Promissory Notes. During the year ended
December 31, 2019, cash provided by financing activities was
related to the $3,839,000 proceeds from the 2019 Promissory Notes
issued the first quarter of 2019 and $2,949,000 related to the
at-the-market agreement.
For the year ended December 31, 2020 and 2019, we funded our
operations primarily through cash from operating activities from
our subsidiaries, secured borrowing arrangements, issuance of debt,
the sale of our subsidiaries and the sale of equity. As of December
31, 2020, we had unrestricted cash and cash equivalents from
continuing operations of $20,595,000 and working capital of
$18,324,000, as compared to unrestricted cash and cash equivalents
of $1,075,000 and a working capital deficit of $1,786,000 as of
December 31, 2019.
Performance Obligations
Operating assets and liabilities consist primarily of receivables
from billed and unbilled services, accounts payable, accrued
expenses, secured borrowing arrangements, and accrued payroll and
related benefits. The volume of billings and timing of collections
and payments affect these account balances.
As of
December 31, 2020, we had approximately $16,705,000 of contracts
that were closed prior to December 31, 2020 but have a contractual
period beyond December 31, 2020. These contracts generally cover a
term of one to five years, in which the Company will recognize
revenue ratably over the contract term. We currently expect to
recognize approximately 30% of this amount over the succeeding
twelve months, and the remainder is expected to be recognized over
the following five years. On occasion our customers will prepay the
full contract or a substantial portion of the contract. Amounts
related to the prepayment of the contract for a service period that
is not yet met are recorded as part of our contract liabilities
balance.
43
We have
experienced growth of 65% in the remaining value of contracts from
December 31, 2019 through December 31, 2020.
The
table below shows the quarter by quarter growth in contract value
(dollars in thousands):
Series A Preferred Stock
The holders of Rekor Series A Preferred Stock were entitled to
quarterly dividends in the amount of $0.175 (7% per annum) per
share. Dividends accrued quarterly and dividend payments for
declared dividends were due within five business days following the
end of a quarter. Subsequent to the year ended December 31, 2020,
the Series A Preferred Stock and accrued dividends related to the
Series A Preferred Stock were automatically converted into shares
of our common stock, pursuant to the terms of the Series A
Preferred Stock Certificate of Designations.
Series B Preferred Stock
As part of the acquisition of TeamGlobal, we issued 240,861 shares
of $0.0001 par value Series B Preferred Stock. All Series B
Preferred Stock was issued at a price of $10.00 per share with a
conversion price of $5.00 per share. Each Series B Preferred Stock
had an automatic conversion feature based on our common stock share
price. The Series B Preferred Stock was entitled to quarterly cash
dividends of 1.121% (4.484% per annum) per share. Dividends accrued
quarterly and dividend payments for declared dividends were due
within five business days following the end of a quarter.
Subsequent to the year ended December 31, 2020, the Series B
Preferred Stock and accrued dividends related to the Series B
Preferred Stock were converted into shares of our common stock,
pursuant to the terms of the Series B Preferred Stock Certificate
of Designations.
Promissory
Notes
On March 12, 2019, we issued the 2019
Promissory Notes and the March 2019 Warrants to investors,
including OpenALPR Technology, Inc.
(the “2019
Lenders”)
. The
loan was due and payable on March 11, 2021. In March 2020, we
received an extension of the maturity date of the loan until June
12, 2021. In June 2020, we received an extension of the maturity
date of the loan until December 31, 2021. The loan bore interest at
16% per annum, of which at least 10% per annum was required to be
paid in cash. The full remaining portion of all interest, if any,
accrued and was to be paid-in-kind (“PIK”). The notes
also required a premium, if paid before the maturity date, a
$1,000,000 exit fee due at maturity, and compliance with
affirmative, negative and financial covenants.
44
On
June 30, 2020, we entered into the Exchange Agreements with certain
holders of our 2019 Promissory Notes. Under the Exchange
Agreements, approximately $17,398,000 of the 2019 Promissory Notes
was redeemed in exchange for 4,349,497 shares of our common stock,
at a rate of $4 per share (the “Note Exchange”). At the
time of the Note Exchange the net amount of long-term debt redeemed
for common stock was $14,688,000, this included the existing
principal balance subject to conversion, the portion of the exit
fee associated with the notes subject to conversion, offset by the
portion of unamortized issuance costs associated with the notes
subject to conversion. There was also $226,000 related to the PIK
interest associated to the notes subject to conversion that was
exchanged as part of the Note Exchange. The difference between the
market value of the shares issued and the net carrying amount of
the obligations above, was recorded as part of debt extinguishments
costs in the consolidated statement of operations.
On September 16, 2020, we issued a cash payment
for the remaining aggregate principal balance of the 2019
Promissory Notes. As a result of this optional prepayment, the 2019
Promissory Notes, have been fully redeemed pursuant to their terms,
and as a result we have no further obligations under the Note
Purchase Agreement, as amended. As of December 31, 2020, a total
of
81,250
warrants previously issued pursuant to
the Note Purchase Agreement, as amended, remain outstanding
pursuant to their terms.
At-the-Market
Offering
On August 14, 2019, we entered into the Sales Agreement with
B. Riley FBR, Inc. (“B. Riley FBR”) to create an
at-the-market equity program under which we, from time to time
offered and sold shares of our common stock, having an aggregate
offering price of up to $15,000,000, through or to B. Riley FBR.
Subject to the terms and conditions of the Sales Agreement, B.
Riley FBR used its commercially reasonable efforts to sell the
shares of our common stock from time to time, based upon our
instructions. B. Riley FBR was entitled to a commission equal
to 3.0% of the gross proceeds from each sale. We incurred issuance
costs of approximately $226,000 related to legal, accounting, and
other fees in connection with the Sales Agreement. These costs
were charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
consolidated balance sheets.
On August 28, 2020, we filed Amendment No. 1 to
the Sales Agreement dated August 14, 2019 to increase the size
of the market equity program under which we, from time to time
offered and sold shares of our common stock, from an aggregate
offering price of up to $15,000,000 to an amended maximum aggregate
offering price of up to $40,000,000 through or to B. Riley
FBR.
We incurred
issuance costs of approximately $25,000 related to legal fees in
connection with the amendment to the Sales
Agreement.
Sales of the Company’s common
stock under the Sales Agreement were issued and sold pursuant to
the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018.
For the year ended December 31, 2020,
based on settlement date, we sold 5,216,562 shares of common stock
at a weighted-average selling price of $5.92 per share in
accordance with the Sales Agreement. Net cash provided for the year
ended December 31, 2020 from the Sales Agreement was $29,930,000
after paying 3.0% or $926,000 related to cash commissions provided
to B. Riley FBR.
On
September 21, 2020, we elected to voluntarily terminate the Sales
Agreement with B. Riley FBR pursuant to the terms of the Sales
Agreement. As of the termination, we had offered and sold an
aggregate of 6,509,202 shares of common stock pursuant to the Sales
Agreement, which resulted in aggregate gross proceeds of
$34,154,000.
Balance Sheet Arrangements, Contractual Obligations and
Commitments
As of
the date of this Annual Report on Form 10-K, we did not have any
off-balance sheet arrangements that have had or are reasonably
likely to have a material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital
resources or capital expenditures.
45
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations is based upon Rekor’s consolidated financial
statements which have been prepared in accordance US GAAP. The
preparation of these consolidated financial statements requires the
management of Rekor to make estimates and judgments that affect the
reported amounts in our consolidated financial
statements.
We
believe the application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting
policies and estimates are periodically reevaluated, and
adjustments are made when facts and circumstances dictate a change.
Rekor bases its estimates on historical experience and on various
other assumptions that management of Rekor believes to be
reasonable under the circumstances, the results of which form
management’s basis for making judgments about the carrying
values of assets and liabilities that may not be readily apparent
from other sources. Actual results may differ from these estimates
under different assumptions or conditions, or if management made
different judgments or utilized different estimates.
Our
accounting policies are further described in its historical audited
consolidated financial statements and the accompanying notes
included elsewhere in this Form 10-K. We have identified the
following critical accounting policies:
Revenue Recognition
Revenue
is recognized upon transfer of control of promised products and
services to our customers, in an amount that reflects the
consideration we expect to receive in exchange for those products
and services. If the consideration promised in the contract
includes a variable amount, for example maintenance fees related to
hardware, we include an estimate of the amount we expect to receive
for the total transaction price, if it is probable that a
significant reversal of cumulative revenue recognized will not
occur.
We
determine the amount of revenue to be recognized through
application of the following steps:
●
Identify
the contract with a customer
●
Identify
the performance obligations in the contract
●
Determine
the transaction price
●
Allocate
the transaction price to the performance obligations in the
contract
●
Recognize
revenue when or as performance obligations are
satisfied
We
generate revenue from our licensing and subscription agreements and
automated traffic and safety enforcement agreements.
Licensing and subscription revenue
Our
licensing and subscription revenues are derived principally from
fees for technology products and services, including software
licenses and subscriptions, hardware leases and sales, and other
related support services.
Licensing
and subscription services include providing, through a web server,
access to our proprietary vehicle recognition software, a
self-managed database and a powerful, cross-platform application
programming interface.
46
During
the second quarter of 2019, we changed our primary method of
selling software from perpetual software licenses, with associated
maintenance services, to service subscriptions of limited duration.
These subscriptions give the customer access to the use of the
latest version of our software only during the term of the
subscription. Revenue is generally recognized ratably over the
contract term. Our subscription services arrangements are
non-cancelable and do not contain refund-type provisions. Revenues
from our perpetual software licenses are recognized up-front at the
point in time when the software is made available to the
customer.
Automated traffic safety enforcement
Automated
traffic safety enforcement revenues reflect arrangements to provide
traffic safety systems to a number of municipalities in North
America. Revenue is recognized monthly based on the number of
camera systems that are operated, or the number of citations issued
by the relevant municipality. We also install and maintain
public safety systems, which may involve a combination of
installation and lease payments or simply software licenses to use
our software in connection with a previously installed camera
network. Revenue is recognized at various stages of completion of
installation and monthly for lease or license
payments.
For
those contracts that have multiple performance obligations, we
allocate the total transaction price to each performance obligation
based on its relative standalone selling price, which is determined
based on our overall pricing objectives, taking into consideration
market conditions and other factors.
Accounts Receivable
Accounts receivable
are customer obligations due under normal trade terms. We perform
continuing credit evaluations of our clients’ financial
condition, and we generally do not require collateral.
Management reviews
accounts receivable to determine if any receivables will
potentially be uncollectible. Factors considered in the
determination include, among other factors, number of days an
invoice is past due, client historical trends, available credit
rating information, other financial data and the overall economic
environment. Collection agencies may also be used if management so
determines.
We
record an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. We also
record as an additional allowance a certain percentage of aged
accounts receivable, based on historical experience and our
assessment of the general financial conditions affecting its
customer base. If actual collection experience changes, revisions
to the allowance may be required. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance. The balance in the
allowance for doubtful accounts from continuing operations was
$22,000 and $0 as of December 31, 2020 and 2019,
respectively.
Income Taxes
We use
the liability method of accounting for income taxes as set forth in
the authoritative guidance for accounting for income taxes. This
method requires an asset and liability approach for the recognition
of deferred tax assets and liabilities. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Management
has evaluated the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with
respect to such net deferred income tax assets. After considering
all available facts, we fully reserved for our net deferred tax
assets because management believes that it is more likely than not
that their benefits will not be realized in future periods. We will
continue to evaluate net deferred tax assets to determine whether
any changes in circumstances could affect the realization of their
future benefit. If it is determined in future periods that portions
of the net deferred income tax assets satisfy the realization
standard, the valuation allowance will be reduced
accordingly.
47
The
tax effects of uncertain tax positions are recognized in the
consolidated financial statements only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than
50% likelihood of being realized. It is our accounting policy to
account for Accounting Standards Codification (“ASC”)
740-10-25-related penalties and interest as a component of the
income tax provision in the consolidated statements of
operations.
As of
December 31, 2020, and 2019, our evaluation revealed no uncertain
tax positions that would have a material impact on the consolidated
financial statements. The 2017 through 2019 tax years remain
subject to examination by the IRS, as of December 31, 2020. Our
management does not believe that any reasonably possible changes
will occur within the next twelve months that will have a material
impact on the financial statements.
Liquidity and Management’s Plan
For all
annual and interim periods, management will assess going concern
uncertainty in our consolidated financial statements to determine
whether there is sufficient cash on hand and working capital,
including available borrowings on loans, to operate for a period of
at least one year from the date the consolidated financial
statements are issued or available to be issued, which is referred
to as the “look-forward period”, as defined in U.S.
GAAP. As part of this assessment, based on conditions that are
known and reasonably knowable to management, management will
consider various scenarios, forecasts, projections, estimates and
will make certain key assumptions. These assumptions including
among other factors, the expected timing and nature of our programs
and projected cash expenditures, our ability to delay or curtail
these expenditures or programs and our ability to raise additional
capital, if necessary, to the extent management has the proper
authority to execute them and considers it probable that those
implementations can be achieved within the look-forward
period.
We have
generated losses since our inception in February 2017 and have
relied on cash on hand, external bank lines of credit, the sale of
a note, proceeds from the sale of common stock, proceeds from
the private sale of our non-core subsidiaries, proceeds from note
receivables, debt financings and a public offering of our common
stock to support cashflow from operations. We attribute losses to
public company corporate overhead and non-capital expenditures
related to the scaling and development of new products and service
offerings in connection with the focus on the technology of the
Company. As of and for the year ended December 31, 2020, the
Company had a net loss from continuing operations of $13,962,000
and working capital of $18,324,000.
Our net
cash position was increased by $18,860,000 for the year ended
December 31, 2020 due primarily to the net proceeds of $29,930,000
from the At Market Issuance Sales Agreement (the "Sales Agreement")
and the net cash proceeds of $6,300,000 from the sale of AOC Key
Solutions and TeamGlobal, which includes the repayment of the
$600,000 AOC Key Solutions Subordinate Note, offset by the net loss
from operations in the period. As of September 21, 2020, we
voluntarily terminated the Sales Agreement.
On
February 4, 2021, we entered into an underwriting agreement (the
“Underwriting Agreement”) with B. Riley Securities,
Inc. and Lake Street Capital Markets, LLC, as representatives of
the several underwriters named therein (collectively, the
“Underwriters”), pursuant to which we issued and sold,
in a registered public offering by Rekor (the “Public
Offering”), 6,126,936 shares of our common stock (which
included 799,166 shares of common stock sold pursuant to the
exercise of an overallotment option) at an offering price of $12.25
per share of common stock.
In
addition, pursuant to the Underwriting Agreement, we granted the
Underwriters a 30-day option (the “Overallotment
Option”) to purchase up to 799,166 additional shares of
common stock. The Overallotment Option was exercised in full on
February 8, 2021.
Upon
completion of the Underwriting Agreement, we raised over
$70,000,000 in net cash proceeds in February 2021.
We
believe that based on relevant conditions and events that are known
and reasonably knowable, our current forecasts and projections, for
one year from the date of the filing of the consolidated financial
statements in this Yearly Report on Form 10-K, indicate our ability
to continue operations as a going concern for that one-year period.
We are actively monitoring our operations, the cash on hand and
working capital. Should access to funds be unavailable, we will
need to seek out additional sources of funding. Furthermore, we
have contingency plans to reduce or defer expenses and cash outlays
should operations weaken in the look-forward period or additional
financing, if needed, is not available.
48
Our
ability to generate positive operating results and complete the
execution of our business strategy will depend on (i) our ability
to continue the growth of our technology business, (ii) the
continued performance of our contractors, subcontractors and
vendors, (iii) our ability to maintain and build good relationships
with our lenders and financial intermediaries, (iv) our ability to
maintain timely collections from existing customers, and (v) the
stabilization of the world economy and global financial markets. To
the extent that events outside of our control have a significant
negative impact on economic and/or market conditions, they could
affect payments from customers, services and supplies from vendors,
our ability to continue to secure and implement new business, raise
capital, and otherwise, depending on the severity of such impact,
materially adversely affect our operating results.
Our
operations have been affected by the recent and ongoing outbreak of
the coronavirus disease (“COVID-19”) which was declared
a pandemic by the World Health Organization in March 2020. The
impact has resulted in a slowdown in our rate of growth and
includes disruptions in the delivery and installation of equipment,
slower than expected contract approvals and implementation of
projects by our customers, the need for employees to work remotely,
restrictions on travel affecting our ability to attend meetings,
conferences, consultations and installations and otherwise provide
and market our products and services, and disruptions to our
customers' operations which may affect our revenues. We benefited
from the financing under the CARES Act. We continue to evaluate the
potential impact of the pandemic and the ultimate disruption that
may be caused by the outbreak is uncertain. Possible additional
effects may include, but are not limited to, continuing disruption
to our customers and revenue, absenteeism in our labor workforce,
unavailability of products and supplies used in operations, and a
decline in value of assets held by us. As a result, the pandemic
may result in a material adverse impact on our financial position,
operations and cash flow.
New Accounting Pronouncements
See Item 8 of Part II,
“Financial Statements and Supplementary Data — Note 1
— Business and Significant Accounting
Policies”
ITEM 7A.
QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a
“smaller reporting company” as defined by Item 10 of
Regulation S-K, the Company is not required to provide information
required by this Item.
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTRY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Report of Independent Registered Public Accounting
Firm
|
50
|
|
Consolidated Balance Sheets as of December 31, 2020 and
2019
|
52
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2020 and 2019
|
53
|
|
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 2020 and
2019
|
54
|
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2020 and 2019
|
55
|
|
Notes to Consolidated Financial Statements
|
56
|
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
of Rekor Systems, Inc.
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Rekor Systems, Inc. and
Subsidiaries (the “Company”) as of December 31, 2020
and 2019, and the related statements of operations,
stockholders’ equity (deficit), and cash flows for each of
the years in the two-year period ended December 31, 2020, and the
related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of
its operations and its cash flows for each of the years in the
two-year period ended, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The
critical audit matters communicated below are matters arising from
the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved especially
challenging, subjective, or complex judgment. The communication of
a critical audit matter does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Evaluation of standalone selling prices of revenue performance
obligations
As
discussed in Note 1 to the consolidated financial statements, the
Company recognized licensing and subscription revenue of $6.2
million for the year ended December 31, 2020. The Company allocates
value to each distinct performance obligation on a relative
standalone selling price basis. The Company determines standalone
selling price based on pricing objectives, taking into
consideration market conditions and other factors, including the
geographic locations of customers, negotiated discounts from price
lists and selling method.
50
We
identified the evaluation of standalone selling prices for the
Company’s products and services as a critical audit matter.
Subjective auditor judgment was involved in evaluating the
Company’s assumptions regarding market conditions and pricing
practices, including historical sales data and discounts from list
price, where there was no direct observable data
available.
The
following are primary procedures we performed to address this
critical audit matter. We evaluated the Company’s estimated
standalone selling prices, including their compliance with the
Company’s accounting policy, by assessing available, relevant
external information and comparing the estimated standalone selling
prices to internal historical disaggregated sales data, including
discounts from list price. We selected certain customer agreements
and read contract source documents to assess the relevance and
reliability of the historical sales data used by the Company to
estimate standalone selling prices, and tested the mathematical
accuracy of the median or average discount from list price for the
products and services.
/s/
Friedman LLP
We have
served as the Company’s auditor since 2019.
East
Hanover, New Jersey
March
12, 2021
51
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
|
|
December 31,
2020
|
December 31,
2019
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$
20,595
|
$
1,075
|
|
Restricted
cash and cash equivalents
|
412
|
461
|
|
Accounts
receivable, net
|
1,038
|
776
|
|
Inventory
|
1,264
|
302
|
|
Note
receivable, current portion
|
340
|
-
|
|
Other
current assets, net
|
469
|
175
|
|
Current
assets of discontinued operations
|
2
|
7,441
|
|
Total current assets
|
24,120
|
10,230
|
|
Long-term Assets
|
|
|
|
Property
and equipment, net
|
1,047
|
442
|
|
Right-of-use
lease assets, net
|
426
|
283
|
|
Goodwill
|
6,336
|
6,336
|
|
Intangible
assets, net
|
7,038
|
8,244
|
|
Investments
in unconsolidated companies
|
75
|
-
|
|
Note
receivable, long-term
|
1,360
|
-
|
|
Long-term
assets of discontinued operations
|
-
|
3,457
|
|
Total long-term assets
|
16,282
|
18,762
|
|
Total assets
|
$
40,402
|
$
28,992
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$
3,898
|
$
3,678
|
|
Loan
payable, current portion
|
517
|
-
|
|
Lease
liability, short-term
|
253
|
148
|
|
Contract
liabilities
|
1,126
|
749
|
|
Current
liabilities of discontinued operations
|
124
|
5,757
|
|
Total current liabilities
|
5,918
|
10,332
|
|
Long-term Liabilities
|
|
|
|
Notes
payable, long-term
|
980
|
20,409
|
|
Loan
payable, long-term
|
469
|
-
|
|
Lease
liability, long-term
|
188
|
161
|
|
Contract
liabilities, long-term
|
958
|
775
|
|
Deferred
tax liability, long-term
|
24
|
10
|
|
Long
term liabilities of discontinued operations
|
5
|
536
|
|
Total long-term liabilities
|
2,624
|
21,891
|
|
Total liabilities
|
8,542
|
32,223
|
|
Series
A Cumulative Convertible Redeemable Preferred stock, $0.0001 par
value, 505,000 shares authorized and 502,327 shares issued and
outstanding as of December 31, 2020 and December 31, 2019,
respectively
|
6,669
|
5,804
|
|
Commitments and Contingencies
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
Common stock,
$0.0001 par value, 100,000,000 and 30,000,000 shares authorized,
33,013,271 and 21,595,653 shares issued and outstanding as of
December 31, 2020 and December 31, 2019, respectively
|
3
|
2
|
|
Preferred
stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares
designated as Series A and 240,861 shares designated as Series B as
of December 31, 2020 and December 31, 2019,
respectively
|
-
|
-
|
|
Series
B Cumulative Convertible Preferred stock, $0.0001 par value,
240,861 shares authorized, issued and outstanding as of December
31, 2020 and December 31, 2019, respectively
|
-
|
-
|
|
Additional
paid-in capital
|
68,238
|
19,371
|
|
Accumulated
deficit
|
(43,050
)
|
(28,408
)
|
|
Total stockholders’ equity (deficit)
|
25,191
|
(9,035
)
|
|
Total liabilities and stockholders’ equity
(deficit)
|
$
40,402
|
$
28,992
|
The accompanying notes are an integral part of these consolidated
financial statements.
52
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Revenue
|
$
9,234
|
$
5,469
|
|
Cost
of revenue
|
3,533
|
1,652
|
|
Gross
profit
|
5,701
|
3,817
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
12,117
|
8,276
|
|
Selling
and marketing expenses
|
2,247
|
1,646
|
|
Research
and development expenses
|
3,185
|
1,429
|
|
Operating
expenses
|
17,549
|
11,351
|
|
|
|
|
|
Loss
from operations
|
(11,848
)
|
(7,534
)
|
|
Other
income (expense):
|
|
|
|
Loss
on extinguishment of debt
|
(3,281
)
|
(1,113
)
|
|
Interest
expense
|
(2,503
)
|
(3,909
)
|
|
Other
income
|
62
|
198
|
|
Gain
on sale of business
|
3,631
|
-
|
|
Total
other expense
|
(2,091
)
|
(4,824
)
|
|
Loss
before income taxes
|
(13,939
)
|
(12,358
)
|
|
Income
tax provision
|
(23
)
|
(47
)
|
|
Net
loss from continuing operations
|
$
(13,962
)
|
$
(12,405
)
|
|
Net
loss from discontinued operations
|
(220
)
|
(3,479
)
|
|
Net
loss
|
$
(14,182
)
|
$
(15,884
)
|
|
Loss
per common share from continuing operations - basic and
diluted
|
(0.63
)
|
(0.68
)
|
|
Loss
per common share discontinued operations - basic and
diluted
|
(0.01
)
|
(0.17
)
|
|
Loss
per common share - basic and diluted
|
$
(0.64
)
|
$
(0.85
)
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
Basic
and diluted
|
24,192,680
|
20,033,023
|
The accompanying notes are an integral part of these consolidated
financial statements.
53
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
(Dollars in thousands, except share data)
|
|
Shares of Common Stock
|
Common Stock
|
Shares of Series B Preferred Stock
|
Series B Preferred Stock
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Total Stockholders’ Equity (Deficit)
|
|
Balance as of December 31, 2018
|
18,767,619
|
$
2
|
240,861
|
$
-
|
$
15,518
|
$
(12,064
)
|
$
3,456
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
446
|
-
|
446
|
|
Issuance of
warrants in conjunction with notes payable
|
-
|
-
|
-
|
-
|
706
|
-
|
706
|
|
Exercise of
cashless warrants in exchange for common stock
|
815,290
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
116,376
|
-
|
-
|
-
|
103
|
-
|
103
|
|
Common stock
issued in OpenALPR acquisition
|
600,000
|
-
|
-
|
-
|
397
|
-
|
397
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
1,292,730
|
-
|
-
|
-
|
2,949
|
-
|
2,949
|
|
Exercise of
warrants related to series A preferred stock
|
3,638
|
|
|
|
4
|
|
4
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(460
)
|
(460
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(752
)
|
-
|
(752
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(15,884
)
|
(15,884
)
|
|
Balance as of December 31, 2019
|
21,595,653
|
$
2
|
240,861
|
$
-
|
$
19,371
|
$
(28,408
)
|
$
(9,035
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
796
|
-
|
796
|
|
Issuance of
common stock pursuant to Exchange Agreement
|
4,349,497
|
-
|
-
|
-
|
17,325
|
|
17,325
|
|
Exercise of
cashless warrants in exchange for common stock
|
265,563
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
1,189,375
|
-
|
-
|
-
|
880
|
-
|
880
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
5,216,562
|
1
|
-
|
-
|
29,929
|
-
|
29,930
|
|
Exercise of
warrants related to series A preferred stock
|
98,229
|
-
|
-
|
-
|
101
|
-
|
101
|
|
Issuance upon
exercise of stock options
|
298,392
|
-
|
-
|
-
|
701
|
-
|
701
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(460
)
|
(460
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(865
)
|
-
|
(865
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(14,182
)
|
(14,182
)
|
|
Balance as of December 31, 2020
|
33,013,271
|
$
3
|
240,861
|
$
-
|
$
68,238
|
$
(43,050
)
|
$
25,191
|
The accompanying notes are an integral part of these consolidated
financial statements.
54
REKOR SYSTEMS, INC. AND SUBSIDERIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Cash Flows from Operating Activities
|
|
|
|
Net loss from
continuing operations
|
$
(13,962
)
|
$
(12,405
)
|
|
Net loss from
discontinued operations
|
(220
)
|
(3,479
)
|
|
Net
loss
|
(14,182
)
|
(15,884
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Bad
debt expense
|
36
|
-
|
|
Depreciation
|
382
|
323
|
|
Amortization
of right-of-use lease asset
|
211
|
83
|
|
Provision
for deferred taxes
|
14
|
10
|
|
Share-based
compensation
|
796
|
446
|
|
Amortization
of financing costs
|
657
|
1,101
|
|
Amortization
of intangible assets
|
1,368
|
971
|
|
Loss
on extinguishment of debt
|
3,281
|
1,113
|
|
Gain
on sale of AOC Key Solutions
|
(2,619
)
|
-
|
|
Gain
on sale of TeamGlobal
|
(1,012
)
|
-
|
|
Loss
on sale of Secure Education
|
-
|
3
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(298
)
|
(867
)
|
|
Inventory
|
(962
)
|
(229
)
|
|
Other
current assets
|
(294
)
|
(42
)
|
|
Accounts
payable and accrued expenses
|
889
|
1,283
|
|
Contract
liabilities
|
560
|
1,011
|
|
Lease
liability
|
(222
)
|
(57
)
|
|
Net
cash used in operating activities - continuing
operations
|
(11,175
)
|
(7,256
)
|
|
Net
cash used in operating activities - discontinued
operations
|
(3,888
)
|
(14,076
)
|
|
Net
cash used in operating activities
|
(15,063
)
|
(21,332
)
|
|
Cash Flows from Investing Activities
|
|
|
|
Capital
expenditures
|
(1,037
)
|
(798
)
|
|
Proceeds
from sale of Secure Education
|
-
|
250
|
|
Proceeds
from sale of AOC Key Solutions
|
3,400
|
-
|
|
Proceeds
from sale of TeamGlobal
|
2,300
|
-
|
|
Investment in equity investment
|
(75
)
|
-
|
|
Proceeds
from AOC Key Solutions notes receivable
|
600
|
-
|
|
Net
cash provided by (used in) by investing activities - continuing
operations
|
5,188
|
(548
)
|
|
Net
cash used in investing activities - discontinued
operations
|
-
|
(15
)
|
|
Net
cash provided by (used in) investing activities
|
5,188
|
(563
)
|
|
Cash Flows from Financing Activities
|
|
|
|
Proceeds
from PPP loans
|
874
|
-
|
|
Payment of stock issuance costs associated with the Note Exchange
transaction
|
(73
)
|
-
|
|
Repayments
of notes payable
|
(7,266
)
|
-
|
|
Net
proceeds from notes payable
|
-
|
3,839
|
|
Net
proceeds from exercise of options
|
701
|
-
|
|
Net
proceeds from exercise of warrants
|
880
|
103
|
|
Net proceeds from exercise of warrants associated with the Series A
Preferred Stock
|
101
|
4
|
|
Net
proceeds from at-the-market agreement
|
29,930
|
2,949
|
|
Payment
of preferred dividends
|
-
|
(108
)
|
|
Payment
of debt modification costs
|
(300
)
|
-
|
|
Net
cash provided by financing activities - continuing
operations
|
24,847
|
6,787
|
|
Net
cash provided by financing activities - discontinued
operations
|
4,171
|
14,206
|
|
Net
cash provided by financing activities
|
29,018
|
20,993
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
|
18,860
|
(1,017
)
|
|
Net increase
in cash, cash equivalents and restricted cash and cash equivalents
- discontinued operations
|
283
|
115
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents
|
19,143
|
(902
)
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at beginning
of period
|
1,866
|
2,768
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at end of
period
|
$
21,009
|
$
1,866
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted
cash:
|
|
|
|
Cash and cash
equivalents at end of period - continuing
operations
|
$
20,595
|
$
1,075
|
|
Restricted
cash and cash equivalents at end of period - continuing
operations
|
412
|
461
|
|
Cash and cash
equivalents at end of period - discontinued
operations
|
2
|
330
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at end of
period
|
$
21,009
|
$
1,866
|
The accompanying notes are an integral part of these consolidated
financial statements.
55
NOTE 1 – BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Rekor Systems, Inc. (“Rekor”)
(formerly Novume Solutions, Inc.) was formed in February 2017 to
effectuate the mergers of, and become a holding company for
KeyStone Solutions, Inc. (“KeyStone”) and Brekford
Traffic Safety, Inc. (“Brekford”).
On March 29,
2019, the Company announced that its Board of Directors approved
changing the Company’s name to Rekor Systems, Inc.
On April 26, 2019, the Company changed
its name from Novume Solutions, Inc. to Rekor Systems,
Inc.
The
consolidated financial statements include the accounts of Rekor,
the parent company, and its wholly owned subsidiaries Rekor
Recognition Systems, Inc. and OpenALPR Software Solutions, LLC
(collectively, the
“Company”).
The
Company is a leader in the emerging market for intelligent roadway
systems developed to take advantage of recent developments in
artificial intelligence ("AI"). The Company has developed advanced
vehicle recognition systems that can extract more accurate and
complete data from existing cameras and sensors. Rekor’s
systems have also been designed to take full advantage of the
latest technological advances in new cameras and sensors, edge
processing and cloud computing. The Company has also
developed platforms that enable the data its systems collect to be
analyzed in combination with other sources and distributed to
multiple end users in real time as actionable intelligence or
data collected for long range planning purposes in full compliance
with the security and privacy requirements of each end
user.
These
capabilities are particularly useful to governmental entities and
businesses in solving a wide variety of real-world vehicle-related
operational challenges. The Company’s ability to enhance the
results provided by existing Internet Protocol (“IP”)
connected cameras has enabled significant new uses for vehicle
recognition technology that were not previously available or cost
effective. The Company currently provides products and services for
governmental organizations and large and small businesses
throughout the world. Customers currently use the Company’s
products or services in approximately 80 countries in applications
that include public safety, transportation, parking, security,
customer experience, operational efficiency and
logistics.
Previously, the
Company provided professional services and staffing solutions to
the government contracting and the aerospace and aviation
industries through the Company’s Professional Services
Segment. The Professional Services Segment included the
Company’s wholly owned subsidiaries AOC Key Solutions Inc.
(“AOC Key Solutions”), Global Technical Services, Inc.
(“GTS” or “TeamGlobal”), Firestorm
Solutions, LLC (Firestorm Solutions”) and Firestorm
Franchising, LLC (“Firestorm Franchising” and, together
with Firestorm Solutions, “Firestorm”). As part of the
development of a new line of products for the public safety and
security markets, the Company determined that its resources were
best concentrated on vehicle recognition products and services and
began to consider dispositions in our Professional Services
Segment. Concurrently, the Company reorganized and retooled its
product development, business development and administrative
resources to better serve the Company’s direction. On April
2, 2020, the Company sold AOC Key Solutions. As of June 29, 2020,
the Company sold Team Global and determined that all the remaining
operations that comprised its Professional Services Segment met the
criteria to be presented as discontinued.
The
Company’s continuing operations are conducted by its wholly
owned subsidiary, Rekor Recognition Systems, Inc. (“Rekor
Recognition”). In connection with the development of several
new public safety products, we acquired substantially all the
assets of OpenALPR Technology, Inc. in March 2019. This acquisition
(the “OpenALPR Technology Acquisition”) transferred
vehicle recognition software and associated licenses and
proprietary rights to OpenALPR Software Solutions, LLC
(“OpenALPR”), a new wholly owned subsidiary of Rekor
Recognition. OpenALPR’s vehicle recognition platform, already
operating on approximately 6,800 cameras in approximately 80
countries worldwide that cover approximately 14,000 lanes of
roadway, has laid the groundwork for expansion, enabling multiple
deployment mechanisms for our products and services.
Rekor’s
mission is to enable “AI driven decisions” by enhancing
the capabilities in the governmental and commercial sectors with
actionable, real-time insights. We seek to deliver these insights
through an expanding software portfolio that not only addresses the
challenges our customers are currently facing but empowers them to
effectively deal with their evolving needs.
56
Basis of Consolidation
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) and in accordance with the
accounting rules under Regulation S-X, as promulgated by the
Securities and Exchange Commission (“SEC”). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain
prior year amounts have been reclassified to conform with the
current year presentation. Amounts for the year ended December 31,
2019, have been reclassified to conform to the current year
presentation. Due to the sale of TeamGlobal, the sale of AOC Key
Solutions, and the discontinuance of all professional services
activities, certain amounts have been reclassified in order to
conform to the current period presentation. As a result of these
reclassifications there was no impact on the ending balances in the
consolidated balance sheets or consolidated statements of
operations.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
GAAP requires the extensive use of management's estimates.
Management uses estimates and assumptions in preparing consolidated
financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual amounts may differ from these estimates. On an
on-going basis, the Company evaluates its estimates, including
those related to collectability of accounts receivable, fair value
of debt and equity instruments
, income taxes and
evaluation of standalone selling prices in contracts with customers
that contain multiple performance obligations
. The
Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not apparent from other sources. Actual results may differ from
those estimates under different assumptions or
conditions.
Liquidity
For all
annual and interim periods, management will assess going concern
uncertainty in the Company’s consolidated financial
statements to determine whether there is sufficient cash on hand
and working capital, including available borrowings on loans, to
operate for a period of at least one year from the date the
consolidated financial statements are issued, which is referred to
as the “look-forward period”, as defined in U.S. GAAP.
As part of this assessment, based on conditions that are known and
reasonably knowable to management, management will consider various
scenarios, forecasts, projections, estimates and will make certain
key assumptions. These assumptions including among other factors,
the expected timing and nature of the Company’s programs and
projected cash expenditures, its ability to delay or curtail these
expenditures or programs and its ability to raise additional
capital, if necessary, to the extent management has the proper
authority to execute them and considers it probable that those
implementations can be achieved within the look-forward
period.
The
Company has generated losses since its inception in February 2017
and has relied on cash on hand, external bank lines of credit, the
sale of a note, proceeds from the sale of common
stock, proceeds from the private sale of the Company’s
non-core subsidiaries, proceeds from note receivables, debt
financings and a public offering of its common stock to support
cashflow from operations. The Company attributes losses to public
company corporate overhead and non-capital expenditures related to
the scaling and development of new products and service offerings
in connection with the focus on the technology of the Company. As
of and for the year ended December 31, 2020, the Company had a net
loss from continuing operations of $13,962,000 and working capital
of $18,324,000.
57
The
Company's net cash position was increased by $18,860,000 for the
year ended December 31, 2020 primarily due to the net proceeds of
$29,930,000 from the At Market Issuance Sales Agreement (the "Sales
Agreement") and the net cash proceeds of $6,300,000 from the sale
of AOC Key Solutions and TeamGlobal, which includes the repayment
of the $600,000 AOC Key Solutions Subordinate Note, offset by the
net loss from operations in the period. As of September 21, 2020,
the Company voluntarily terminated the Sales Agreement (see Note
14).
Management believes
that based on relevant conditions and events that are known and
reasonably knowable, its current forecasts and projections, for one
year from the date of the filing of the consolidated financial
statements in this Annual Report on Form 10-K, indicate the
Company’s ability to continue operations as a going concern
for that one-year period. The Company is actively monitoring its
operations, the cash on hand and working capital. Should access to
funds be unavailable, the Company will need to seek out additional
sources of funding. Furthermore, the Company has contingency plans
to reduce or defer expenses and cash outlays should operations
weaken in the look-forward period or additional financing, if
needed, is not available.
The
Company's ability to generate positive operating results and
complete the execution of its business strategy will depend on (i)
its ability to continue the growth of its technology business, (ii)
the continued performance of its contractors, subcontractors and
vendors, (iii) its ability to maintain and build good relationships
with its lenders and financial intermediaries, (iv) its ability to
maintain timely collections from existing customers, and (v) the
stabilization of the world economy and global financial markets. To
the extent that events outside of the Company's control have a
significant negative impact on economic and/or market conditions,
they could affect payments from customers, services and supplies
from vendors, its ability to continue to secure and implement new
business, raise capital, and otherwise, depending on the severity
of such impact, materially adversely affect its operating
results.
The
Company’s operations have been affected by the recent and
ongoing outbreak of the coronavirus disease
(“COVID-19”) which was declared a pandemic by the World
Health Organization in March 2020. The impact has resulted in a
slowdown in the Company’s rate of growth and includes
disruptions in the delivery and installation of equipment, slower
than expected contract approvals and implementation of projects by
its customers, the need for employees to work remotely,
restrictions on travel affecting the Company’s ability to
attend meetings, conferences, consultations and installations and
otherwise provide and market its products and services, and
disruptions to its customers' operations which may affect its
revenues. The Company benefited from the financing under the CARES
Act. The Company continues to evaluate the potential impact of the
pandemic and the ultimate disruption that may be caused by the
outbreak is uncertain. Possible additional effects may include, but
are not limited to, continuing disruption to the Company’s
customers and revenue, absenteeism in the Company’s labor
workforce, unavailability of products and supplies used in
operations, and a decline in value of assets held by the Company.
As a result, the pandemic may result in a material adverse impact
on the Company’s financial position, operations and cash
flow.
Rounding
Dollar
amounts, except per share data, in the notes to these consolidated
financial statements are rounded to the closest $1,000, unless
otherwise indicated.
Concentration of Risk
The Company places its temporary cash investments with higher rated
quality financial institutions located in the United States
(“U.S.”). As of December 31, 2020, and 2019, the
Company had deposits from continuing operations totaling
$21,007,000 and $1,536,000, respectively, in one U.S. financial
institution that was federally insured up to $250,000 per
account.
The Company has a
market concentration of revenue and accounts receivable from
continuing operations related to its customer
base.
Company A accounted for 16% of the Company’s total revenues
for the year ended December 31, 2020.
Company B accounted for 17% of the Company’s total revenues
for the year ended December 31, 2019.
58
As of December 31,
2020, accounts receivable from Company C and Company D totaled
$161
,000 or 16%, and $314,000
or 30%, respectively,
of the consolidated
accounts receivable balance. As of December 31, 2019, Company D
accounted for $198,000, or 26% of the consolidated accounts
receivable balance.
No other single customer accounted for more than 10% of the
Company’s consolidated revenue for the year ended
December 31, 2020 and 2019 or consolidated accounts receivable
balance as of December 31, 2020 and 2019.
Cash and Cash Equivalents
Cash subject to
contractual restrictions and not readily available for use is
classified as restricted cash and cash equivalents. The
Company’s restricted cash balances are primarily made up of
cash collected on behalf of certain client jurisdictions.
Restricted cash and cash equivalents for these client jurisdictions
as of December 31, 2020 and 2019 were $412,000
and
$461,000, respectively, and correspond to equal amounts of related
accounts payable and are presented as part of accounts payable and
accrued expenses in the accompanying consolidated balance
sheets.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable
are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its clients’
financial condition, and the Company generally does not require
collateral.
The
timing of revenue recognition, billings and cash collections
results in billed accounts receivable, unbilled accounts
receivables, and contract liabilities on the consolidated balance
sheets. Billed and unbilled accounts receivable are presented as
part of accounts receivable, net, on the consolidated balance
sheets. When billing occurs after services have been provided, such
unbilled amounts will generally be billed and collected within 60
to 120 days but typically no longer than over the next twelve
months. Unbilled accounts receivables of $600,000 and $440,000 were
included in accounts receivable, net, in the consolidated balance
sheets as of December 31, 2020 and December 31, 2019,
respectively.
The
Company maintains an allowance for doubtful accounts at an amount
estimated to be sufficient to cover the risk of collecting less
than full payment of the receivables. At each balance sheet date,
the Company evaluates its receivables and will assess the allowance
for doubtful accounts based on specific customer collection issues
and historical write-off trends. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance.
Based
on the information available, the Company determined that an
allowance for loss of $22,000 and $0 was required at December 31,
2020 and 2019, respectively.
Note Receivables
In connection with the sale of AOC Key Solutions in April 2020, the
Company received a $600,000, five-year promissory note
due March 2025, that carried an interest rate of 8%. Based on the
general market conditions and the credit quality of the buyer at
the time of the sale, the Company determined that the fixed
interest rate approximated the current market rates.
During fiscal year 2020, the full principal balance of the $600,000
note associated with the sale of AOC Key Solutions was paid in
full.
In connection with the sale of TeamGlobal in June 2020, the Company
received a $1,700,000, five and a half year promissory
note due December 2025, that carries an interest rate of 4% and is
secured by a first priority security interest in the shares of
TeamGlobal. Monthly principal payments on the promissory note will
begin in 2021. Based on the general market conditions, the security
interest held by the Company and the credit quality of the buyer at
the time of the sale, the Company determined that the fixed
interest rate approximates the current market rates.
59
Interest income recognized for the year ended December 31, 2020 was
$54,000 and is included as part of other income on the consolidated
statement of operations. Interest income for the year ended
December 31, 2019 was immaterial.
Inventory
Inventory
principally consists of parts and finished goods held temporarily
until installed for service. Inventory is valued at the lower of
cost or net realizable value. The cost is determined by the
first-in, first-out (“FIFO”) method.
Property and Equipment
Property and
equipment are stated at cost or fair value at acquisition date for
assets obtained through business combinations, less accumulated
depreciation. Depreciation expense is classified within the
corresponding operating expense categories on the consolidated
statements of operations.
Depreciation is
recorded on the straight-line basis over the following estimated
lives:
|
Class of assets
|
Useful life
|
|
Furniture and fixtures
|
2 - 10 years
|
|
Office equipment
|
2 - 5 years
|
|
Leasehold improvements
|
Shorter of asset life or lease term
|
|
Automobiles
|
3 - 5 years
|
|
Camera systems
|
3 - 5 years
|
Repairs
and maintenance are expensed as incurred. Expenditures for
additions, improvements and replacements are
capitalized.
Software Development Costs
Research and
development costs to develop software to be sold, leased or
marketed are expensed as incurred up to the point of technological
feasibility for the related software product. Capitalized
internally developed software costs, net, not yet placed in service
were $216,000 and $966,000 as of December 31, 2020 and 2019,
respectively. For the year ended December 31, 2020 and 2019, the
Company placed in service $730,000 and $232,000,
respectively, of capitalized development costs related to
software to be sold, leased or marketed.
Software developed
for internal use, with no substantive plans to market such software
at the time of development, are capitalized during the application
phase and included in intangible assets, net in the consolidated
balance sheets. Costs incurred during the preliminary planning and
evaluation and post implementation stages of the project are
expensed as incurred. Costs incurred during the application
development stage of the project are capitalized. In the year ended
December 31, 2020 and 2019, the Company
capitalized $162,000 and $91,000, respectively, of development
costs related to internal use software.
Intangible Assets
Intangible assets include internally developed capitalized software
and amounts recognized in connection with acquisitions, including
customer relationships, technology and marketing related assets.
Intangible assets, other than software development costs, are
initially valued at fair market value using generally accepted
valuation methods appropriate for the type of intangible asset.
Amortization is recognized on a straight-line basis over the
estimated useful life of the intangible assets. Intangible assets
with definite lives are reviewed for impairment if indicators of
impairment arise.
60
Leases
The Company accounts for its leases in accordance with Accounting
Standard Codification (“ASC”) Topic
842, Leases ("ASC 842"). The Company recognized $921,000
of right of use (“ROU”) operating lease assets and
$951,000 of operating lease liabilities, including noncurrent
operating lease liabilities of $778,000, as a result of adopting
this standard. The difference between ROU operating lease assets
and operating lease liabilities was primarily due to previously
accrued rent expense relating to periods prior to January 1,
2019.
The standard provides several optional practical expedients for use
in transition. The Company elected to use what the Financial
Accounting Standard Board (“FASB”) has deemed the
“package of practical expedients,” which allows the
Company not to reassess the Company’s previous conclusions
about lease identification, lease classification and the accounting
treatment for initial direct costs. ASU 2016-02 also provided
several optional practical expedients for the ongoing accounting
for leases. The Company has elected the short-term lease
recognition exemption for all leases that qualify, meaning that for
leases with terms of twelve months or less, the Company will not
recognize ROU assets or lease liabilities on the Company’s
consolidated balance sheets. Additionally, the Company has elected
to use the practical expedient to not separate lease and non-lease
components for leases of real estate, meaning that for these
leases, the non-lease components are included in the associated ROU
asset and lease liability balances on the Company’s
consolidated balance sheets.
The
Company determines if an arrangement contains a lease and the
classification of that lease, if applicable, at inception.
Operating leases are included in operating lease ROU assets,
operating lease liabilities and operating lease liabilities (net of
current portion) in the consolidated balance sheets. The Company
does not currently have any finance leases.
ROU
assets represent the Company’s right to use an underlying
asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments under the lease.
Operating lease ROU assets and liabilities are recognized at the
lease commencement date based on the present value of lease
payments over the lease term. The implicit rate within the
Company’s operating leases are generally not determinable and
the Company uses its incremental borrowing rate at the lease
commencement date to determine the present value of lease payments.
The determination of the Company’s incremental borrowing rate
requires judgment. The Company determined the incremental borrowing
rate for each lease using the Company’s current borrowing
rate, adjusted for various factors including level of
collateralization and term to align with the terms of the lease.
The operating lease ROU asset also includes any lease prepayments,
offset by lease incentives. Certain of the Company’s leases
include options to extend or terminate the lease. An option to
extend the lease is considered in connection with determining the
ROU asset and lease liability when it is reasonably certain the
Company will exercise that option. An option to terminate is
considered unless it is reasonably certain the Company will not
exercise the option.
Lease
expense for lease payments is recognized on a straight-line basis
over the term of the lease.
Business Combination
Management conducts
a valuation analysis on the tangible and intangible assets acquired
and liabilities assumed at the acquisition date thereof. During the
measurement period, which may be up to one year from
the
acquisition date,
the Company may record adjustments to the fair value of these
tangible and intangible assets
acquired and liabilities assumed,
with the corresponding offset to goodwill. In addition, uncertain
tax positions
and
tax-related valuation allowances are initially established in
connection with a business combination as of the
acquisition date. Upon the
conclusion of the measurement period or final
determination of the fair value of
assets acquired or liabilities assumed, whichever comes first, any
subsequent
adjustments
are recorded to the Company’s consolidated statements of
operations.
Amounts
paid for acquisitions are allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the
date of acquisition. The Company allocates a portion of the
purchase price to the fair value of identifiable intangible assets.
The fair value of identifiable intangible assets is based on
detailed valuations that use information and assumptions provided
by management. The Company allocates any excess purchase price over
the fair value of the net tangible and intangible assets acquired
to goodwill.
61
Equity Method Investments
Investments in
common stock of entities other than the Company’s
consolidated subsidiaries are accounted for under the equity method
in accordance with FASB ASC 323,
Investments – Equity Method and Joint
Ventures.
Under the equity method, the initial investment is
recorded at cost and the investment is subsequently adjusted for
its proportionate share of earnings or losses, including
consideration of basis differences resulting from the difference
between the initial carrying amount of the investment and the
underlying equity in net assets. The difference between the
carrying amount of the investment and the underlying equity in net
assets is primarily attributable to goodwill and other intangible
assets. When the fair value or income information is not readily
determinable the Company has elected to apply the measurement
alternative, and report the investment at cost, less
impairment.
In June
of 2020, the Company announced a joint venture in which the Company
would have a 50 percent equity interest in Roker Inc. In the third
quarter of 2020, the Company contributed $75,000 for its 50 percent
equity interest. This investment is accounted for under the equity
method.
In
February 2017, the Company contributed substantially all of the
assets and certain liabilities related to its vehicle services
business to Global Public Safety (the “GPS Closing”).
After the GPS Closing, the Company continues to own 19.9% of the
units of Global Public Safety. This equity investment does not have
a readily determinable fair value and the Company reports this
investment at cost, less impairment. In 2018, the Company recorded
an impairment of $262,000, related to the investment in Global
Public Safety, effectively reducing the total investment value to
$0.
The
carrying amount of the Company’s investments are included as
part of investments in unconsolidated companies in the consolidated
balance sheets. There were no distributions or earnings received
from either investment in the year ended December 31, 2020 or
2019.
Goodwill
The
excess purchase consideration over the fair value of acquired
assets and liabilities is recorded as goodwill. The Company will
assess goodwill for impairment annually, or more often if
events or changes in circumstances
indicate that it might be impaired, by comparing its carrying value
to the reporting unit’s fair value
. During the years
ended December 31, 2020 and 2019, we had not recognized any
impairment to goodwill from continuing
operations.
Revenue Recognition
The
Company derives its revenues substantially from license and
subscription fees for software and related products and services. A
portion of the subscription fees are generated through the
Company’s eCommerce website rather than through in-person
sales. In addition, the Company derives net revenues in connection
with certain citation and collection services in connection with
the Company’s automated traffic safety and parking
enforcement services.
Revenue
is recognized upon transfer of control of promised products and
services to the Company’s customers, in an amount that
reflects the consideration the Company expects to receive in
exchange for those products and services. If the consideration
promised in the contract includes a variable amount, for example
maintenance fees related to hardware, the Company includes an
estimate of the amount it expects to receive for the total
transaction price, if it is probable that a significant reversal of
cumulative revenue recognized will not occur.
62
The
Company determines the amount of revenue to be recognized through
application of the following steps:
●
Identification
of the contract, or contracts, with a customer
●
Identification
of the performance obligations in the contract
●
Determination
of the transaction price
●
Allocation
of the transaction price to the performance obligations in the
contract
●
Recognition
of revenue when, or as, performance obligations are
satisfied
The
following table presents a summary of revenue (dollars in
thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Revenue
|
|
|
|
Licensing
and subscription revenue
|
$
6,207
|
$
2,066
|
|
Automated
traffic safety enforcement
|
3,027
|
3,403
|
|
Total
revenue
|
$
9,234
|
$
5,469
|
Information about
the
Company’s
revenue in different geographic regions,
which is attributable to the Company’s operations located
primarily in the United States, Canada, and other countries is as
follows (dollars in thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Revenue
|
|
|
|
United
States
|
$
6,498
|
$
4,052
|
|
Canada
|
910
|
654
|
|
Other
|
1,826
|
763
|
|
Total
revenue
|
$
9,234
|
$
5,469
|
For the year ended December 31, 2020, except for the United States,
total revenue in any single country was less than 10% of
consolidated revenue.
Revenues
Licensing and subscription revenue
The
Company's revenues are derived principally from fees for technology
products and services, including software licenses and
subscriptions, hardware leases and sales, and other related support
services.
In
March 2019, the Company acquired substantially all of the assets of
a software development company, OpenALPR Technologies, Inc. The
software acquired from this acquisition and subsequently developed
by the Company have provided the basis for the Company’s
licensing and subscription revenue. Licensing and subscription
services include providing, through a web server, access to the
Company’s proprietary vehicle recognition software, a
self-managed database and a powerful, cross-platform application
programming interface. The Company's proprietary software employs a
convolutional neural network architecture to classify images and
features that include seamless video analysis and data analytics.
Current customers include law enforcement agencies, highway
authorities, parking system operators, private security companies,
and wholesale and retail operations supporting logistics and
customer loyalty programs.
63
Included
in the licensing and subscription revenue is revenue that was
recognized through the Company’s eCommerce platform. For the
year ended December 31, 2020 and 2019, the Company recognized
revenues of $865,000 and $439,000, respectively, for products and
services that were purchased through the Company’s eCommerce
platform.
During
the second quarter of 2019, the Company changed its primary method
of selling its software from perpetual software licenses, with
associated maintenance services, to service subscriptions of
limited duration. These subscriptions give the customer access to
the use of the latest version of the Company's software only during
the term of the subscription. Revenue is generally recognized
ratably over the contract term. The Company’s subscription
services arrangements are non-cancelable and do not contain
refund-type provisions. Revenue from the Company's perpetual
software licenses are recognized up-front at the point in time when
the software is made available to the customer.
Automated traffic safety enforcement
Automated
traffic safety enforcement revenues reflect arrangements to provide
traffic safety systems to a number of municipalities in North
America. These systems include hardware that identifies red light
and school safety zone traffic violations and software that
captures and records forensic images, analyses the images to
provide data and supports citation management services. The Company
also provides an enterprise parking enforcement solution that the
Company licenses to parking management companies and
municipalities. Revenue is recognized monthly based on
the number of camera systems that are operated, or the number of
citations issued by the relevant municipality. The Company
also installs and maintains public safety systems, which may
involve a combination of installation and lease payments or simply
software licenses to use the Company's software in connection with
a previously installed camera network. Revenue is recognized at
various stages of completion of installation and monthly for lease
or license payments.
For
those contracts that have multiple performance obligations, the
Company allocates the total transaction price to each performance
obligation based on its relative standalone selling price, which is
determined based on the Company’s overall pricing objectives,
taking into consideration market conditions and other
factors.
A
performance obligation is a promise in a contract with a customer
to transfer services that are distinct. The performance obligations
that are not yet satisfied or partially satisfied are performance
obligations that are expected to be recognized as revenue in the
future for a contract with a customer which was executed as of a
particular date. On December 31, 2020, the Company had
approximately $16,705,000 of remaining performance obligations not
yet satisfied or partially satisfied. The Company expects to
recognize approximately 30% of this amount over the succeeding
twelve months, and the remainder is expected to be recognized over
the next two to five years thereafter.
When
the Company advance bills clients prior to providing services,
generally such amounts will be earned and recognized in revenue
within the next month to five years, depending on the subscription
or licensing period. These assets and liabilities are reported on
the consolidated balance sheets on a contract-by-contract basis at
the end of each reporting period. Changes in the contract asset and
liability balances during the year ended December 31, 2020, were
not materially impacted by any other factors. Contract liabilities
as of December 31, 2020 and December 31, 2019, were $2,084,000 and
$1,524,000, respectively. All contract liabilities as of December
31, 2020 and December 31, 2019, were attributable to continuing
operations. During the year ended December 31, 2020, $710,000 of
the contract liabilities balance as of December 31, 2019, were
recognized as revenue.
64
The
services due for contract liabilities described above are shown
below as of December 31, 2020 (dollars in thousands):
|
2021
|
$
1,126
|
|
2022
|
430
|
|
2023
|
320
|
|
2024
|
171
|
|
2025
|
37
|
|
Total
|
$
2,084
|
Practical Expedients
Election
‒
Costs to Obtain and Fulfill a
Contract
‒ The Company’s incremental costs to
obtain a contract consist of sales commissions.
The Company elected to use the practical expedient
to expense
costs
to obtain a contract as incurred when
the amortization period would have been one year or less.
As
of December 31, 2020, and 2019, costs incurred to obtain
contracts in excess of one year have been immaterial to
date.
Advertising
The
Company expenses all non-direct response advertising costs as
incurred. Advertising costs for the years ended December 31, 2020
and 2019 were $221,000 and $271,000, respectively, and are included
in sales and marketing expense in the consolidated statement of
operations.
Income Taxes
Income
tax expense consists of U.S. federal and state income taxes. The
Company is required to pay income taxes in certain state
jurisdictions.
The
Company uses the liability method of accounting for income taxes as
set forth in the authoritative guidance for accounting for income
taxes. This method requires an asset and liability approach for the
recognition of deferred tax assets and liabilities. Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The
Company evaluates the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with
respect to such net deferred income tax assets. After considering
all available facts, the Company fully reserved for its net
deferred tax assets, outside of the deferred tax liability related
to the indefinite lived intangible, because management believes
that it is not more likely than not that their benefits will be
realized in future periods. The Company will continue to evaluate
its net deferred tax assets to determine whether any changes in
circumstances could affect the realization of their future benefit.
If it is determined in future periods that portions of the
Company’s net deferred income tax assets satisfy the
realization standard, the valuation allowance will be reduced
accordingly.
The tax
effects of uncertain tax positions are recognized in the
consolidated financial statements only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than
50% likelihood of being realized. It is the Company’s
accounting policy to account for ASC 740-10 related penalties and
interest as a component of the income tax provision in the
consolidated statements of operations and comprehensive
loss.
As of
December 31, 2020, and 2019, the Company’s evaluation
revealed no uncertain tax positions that would have a material
impact on the financial statements. The 2017 through 2019 tax years
remain subject to examination by the IRS, as of December 31, 2020.
The Company does not believe that any reasonably possible changes
will occur within the next twelve months that will have a material
impact on the financial statements.
65
Equity-Based Compensation
The
Company recognizes equity-based compensation costs related to all
share-based payments, including stock options and restricted stock
units (“RSUs”), based on the grant-date fair value of
the award on a straight-line basis over the requisite service
period, net of actual forfeitures. The fair value of RSUs is
measured on the grant date based on the closing fair market value
of the Company’s common stock. The Company estimates the fair
value of stock options using the Black-Scholes option-pricing
model. The use of the Black-Scholes option-pricing model requires
the use of subjective assumptions, including the fair value and
projected volatility of the underlying common stock and the
expected term of the award.
The
fair value of each option granted has been estimated as of the date
of the grant using the Black-Scholes option pricing model with the
following assumptions during the years ended December 31, 2020 and
2019:
|
|
Year ended December 31,
|
||
|
|
2020
|
|
2019
|
|
Risk-free interest rate
|
1.24%
|
|
1.35-3.03%
|
|
Expected term
|
6 years
|
|
5-6 years
|
|
Volatility
|
89.5%
|
|
80.4-89.8%
|
|
Dividend yield
|
0%
|
|
0%
|
|
Estimated annual forfeiture rate at time of grant
|
0%
|
|
0-30%
|
Risk-Free Interest Rate
–
The yield on actively traded
non-inflation indexed U.S. Treasury notes with the same maturity as
the expected term of the underlying grants was used as the average
risk-free interest rate.
Expected Term
–
The expected term of
options granted was determined based on management’s
expectations of the options granted which are expected to remain
outstanding.
Expected Volatility
–
Because the Company’s common stock has only
been publicly traded since late August 2017, there is not a
substantive share price history to calculate volatility and, as
such, the Company has elected to compute its expected volatility
based on the average volatilities of similar entities, as well as,
considering its volatility since becoming
public.
Dividend Yield
–
The Black-Scholes option
pricing model requires an expected dividend yield as an input. The
Company has not issued common stock dividends in the past nor does
the Company expect to issue common stock dividends in the
future.
Forfeiture Rate
–
We account for forfeitures
as they occur.
Series A Cumulative Convertible Redeemable Preferred
Stock
The
Company’s Series A Preferred Stock has certain embedded
features including; a Company put right to convert each share into
common stock at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2019, the Series A Preferred Stock holder put right after
60 months from the issuance date to redeem any or all of the Series
A Preferred Stock at a redemption price of $15 per share plus any
accrued but unpaid dividends, the Company call right after 36
months from the issuance date to redeem all of the Series A
Preferred Stock at a redemption price which increases annually
based on the passage of time beginning in November 2019, and the
Series A Preferred Stock automatic conversion feature based on a
qualified initial public offering in excess of $30,000,000 or a
written agreement by at least two thirds of the Series A Preferred
Stock holders at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2016.
The
Company determined that the shares of Preferred Stock should be
classified as mezzanine equity since they are contingently
redeemable.
The
Company determined that it is probable that the Series A Preferred
Stock will become redeemable, thus the Company will recognize
changes in the redemption value immediately as they occur at the
end of each reporting period as if it were also the redemption date
for the interest and adjust the carrying amount of the Series A
Preferred Stock to the redemption value.
Changes
in the redemption value are recognized in additional paid-in
capital in the consolidated balance sheets
.
66
Long-Term Debt with Detachable Warrants
When the Company issues debt with warrants, the
Company determines the value of the warrants using the
Black-Scholes Option Pricing Model using the stock price on the
date of issuance, the risk free interest rate associated with the
life of the debt, and the estimated volatility of the
Company’s stock. T
he Company treats the
warrants as a debt discount, recorded as a contra-liability against
the debt, and amortizes the balance over the life of the underlying
debt as interest expense in the consolidated statements of
operations.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, restricted cash and cash
equivalents, inventory, accounts receivable and accounts payable
approximate fair value as of December 31, 2020 and December 31,
2019, because of the relatively short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt and long-term receivables approximates fair value as of
December 31, 2020 and December 31, 2019, given management’s
evaluation of the instrument’s current rate compared to
market rates of interest and other factors.
The determination of
fair value is based upon the fair value framework established by
ASC Topic 820,
Fair
Value Measurements and Disclosures
(“ASC
820”). Fair value is defined as the exit price, or the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as
of the measurement date. ASC 820 also establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in
valuing the asset or liability and are developed based on market
data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions
about the factors market participants would use in valuing the
asset or liability. The guidance establishes three levels of inputs
that may be used to measure fair value:
Level 1
–
Quoted
prices in active markets for identical assets or
liabilities.
Level 2
–
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level 3
–
Unobservable
inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or
liabilities.
Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurements. Changes in the observability of valuation inputs may
result in a reclassification of levels for certain securities
within the fair value hierarchy.
The Company’s goodwill and other intangible assets are
measured at fair value at the time of acquisition and analyzed on a
recurring and non-recurring basis for impairment, respectively,
using Level 3 inputs.
The Company has concluded that its Series A Preferred Stock is a
Level 3 financial instrument and that the fair value approximates
the carrying value, which includes the accretion of the discounted
interest component through December 31, 2020.
The Company considers
its note receivables to be Level 3 investments
and that the fair value
approximates the carrying value.
There were no changes in levels during the year ended December 31,
2020.
67
Earnings per Share
Basic
earnings per share, or EPS, is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS
is computed using the weighted average number of common and
potentially dilutive securities outstanding during the period,
except for periods of net loss for which no potentially dilutive
securities are included because their effect would be
anti-dilutive. Potentially dilutive securities consist of common
stock issuable upon exercise of stock options or warrants using the
treasury stock method. Potentially dilutive securities issuable
upon conversion of the Series A Preferred Stock are calculated
using the if-converted method.
The
Company calculates basic and diluted earnings per common share
using the two-class method. Under the two-class method, net
earnings are allocated to each class of common stock and
participating security as if all of the net earnings for the period
had been distributed. Participating securities consist of preferred
stock that contain a nonforfeitable right to receive dividends and
therefore are considered to participate in undistributed earnings
with common stockholders.
Segment Reporting
FASB ASC Topic 280,
Segment
Reporting
, requires
that an enterprise report selected information about reportable
segments in its financial reports issued to its
stockholders.
In
2019, the Company reported its operations in two reportable
segments: the Technology Segment and the Professional Services
Segment.
The two
segments reflected the Company’s separate focus on technology
products and services versus professional
services.
As part of a strategic shift by the Company, all operations related
to the Professional Services segment have been classified as
discontinued operations. As of January 1, 2020, the Company had one
reportable segment. Continuing operations are all operations that
previously were reported as part of the Technology
Segment.
New Accounting Pronouncements
New Accounting Pronouncements Effective in the Year Ended December
31, 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement (Topic
820), Disclosure
Framework-Changes to the Disclosure Requirements for Fair Value
Measurement
(“ASU
2018-13”). ASU 2018-13 modifies the disclosure requirements
for fair value measurements by removing, modifying or adding
certain disclosures. ASU 2018-13 is effective for annual periods
beginning after December 15, 2019 and interim periods within those
annual periods, with early adoption permitted. The amendments on
changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
The Company adopted ASU 2018-13 on January 1, 2020. The adoption of
ASU 2018-13 did not have a material impact on the Company’s
disclosures.
New Accounting Pronouncements Effective in Future
Periods
In January 2020, the FASB issued ASU
2020-01,
Investments-Equity Securities
(Topic 321), Investments-Equity Method and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815)
. The new standard clarifies the interaction of
accounting for the transition into and out of the equity method.
The new standard also clarifies the accounting for measuring
certain purchased options and forward contracts to acquire
investments. The ASU is effective for fiscal years beginning after
December 15, 2020, including interim periods within those fiscal
years. Early adoption is permitted, including adoption in an
interim period. The Company adopted this guidance in the first
quarter of 2021 and does not expect it to have a material impact on
its consolidated financial statements.
68
In June
2016, the FASB issued ASU 2016-13
Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”) which requires the measurement and
recognition of expected credit losses for financial assets held at
amortized cost. ASU 2016-13 replaces the existing incurred loss
impairment model with an expected loss methodology, which will
result in more timely recognition of credit losses. ASU 2016-13 is
effective for annual reporting periods, and interim periods within
those years beginning after December 15, 2022.
Upon adoption of the new standard, the Company
will begin recognizing an allowance for credit losses based on the
estimated lifetime expected credit loss related to the
Company’s financial assets. Based on the Company analysis of
ASU 2016-13 and due to the nature and extent of the Company’s
financial instruments in scope of this ASU (primarily accounts
receivable) and the historical, current and expected credit quality
of the Company’s customers, the Company does not expect this
ASU to have a material impact on its consolidated operations and
balance sheet.
There
are currently no other accounting standards that have been issued,
but not yet adopted, that could have a significant impact on the
Company’s consolidated financial position, results of
operations or cash flows upon adoption.
NOTE 2 – BUSINESS ACQUISITIONS
OpenALPR Technology Acquisition
On March 12, 2019, the Company completed the acquisition of certain
assets and assumed certain liabilities of OpenALPR Technology, Inc.
(the “OpenALPR Technology Acquisition”). Consideration
paid as part of the OpenALPR Technology Acquisition was: $7,000,000
in cash, subject to adjustment after closing; 600,000 shares of
Rekor common stock, valued at $397,000; and $5,000,000 of the 2019
Promissory Notes (see Note 9) principal amount, together with an
accompanying warrant to purchase 625,000 shares of Rekor common
stock, exercisable over a period of five years, at an exercise
price of $0.74 per share, valued at $208,000 (see Note
14).
The purchase price allocation to the assets acquired and
liabilities assumed are based on fair values as of the acquisition
date. Since the OpenALPR Technology Acquisition occurred on March
12, 2019, the results of operations including OpenALPR Technology
Acquisition from the date of acquisition have been included in the
Company’s consolidated statement of operations for year ended
December 31, 2020.
The final purchase price allocation of the OpenALPR Technology
Acquisition is as follows: intangible assets of $7,436,000 and
goodwill of $4,934,000 along with net assets acquired of $415,000,
and contract obligations assumed of $388,000.
The table below shows the breakdown related to the final purchase
price allocation for the OpenALPR Technology Acquisition (dollars
in thousands):
|
Accounts
receivable, net
|
$
381
|
|
Other current
assets, net
|
13
|
|
Property and
equipment, net
|
21
|
|
Contract
liabilities
|
(388
)
|
|
Net assets
acquired
|
27
|
|
Less intangible
assets
|
7,436
|
|
Consideration
paid
|
(12,397
)
|
|
Net goodwill
recorded
|
$
4,934
|
|
|
|
|
Cash
consideration
|
$
7,000
|
|
Note
payable
|
5,000
|
|
Common stock
consideration
|
397
|
|
Total acquisition
consideration
|
$
12,397
|
69
During the year ended December 31, 2019, $2,055,000 of revenue was
attributed to OpenALPR Technology Acquisition. In the current year,
the Company has fully integrated the operations of OpenALPR with
its core operations.
Operations of Combined Entities
The following unaudited pro forma combined financial information
gives effect to the OpenALPR Technology Acquisition as if it was
consummated as of January 1, 2019. This unaudited pro forma
financial information is presented for information purposes only
and is not intended to present actual results that would have been
attained had the acquisition been completed as of January 1,
2019 or to project potential operating results as of any future
date or for any future periods.
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Total
revenue from continuing operations
|
$
9,234
|
$
6,438
|
|
Net
loss from continuing operations
|
(13,962
)
|
(11,597
)
|
|
Basic
and diluted loss per share continuing operations
|
$
(0.63
)
|
$
(0.64
)
|
|
Basic
and diluted number of shares
|
24,192,680
|
20,129,985
|
NOTE 3 – DISCONTINUED OPERATIONS
In September 2019 and March 2020, the Company determined that
TeamGlobal and AOC Key Solutions, respectively, met the criteria
for held for sale accounting because the Company expected to
complete the sale of TeamGlobal and AOC Key Solutions during the
next 12 months as part of a plan to concentrate on the development
of its Technology segment. Historically, TeamGlobal and AOC Key
Solutions have been presented as part of the Company’s legacy
Professional Services segment.
During
the first quarter of 2020, in connection with the Company’s
plan to concentrate on its
Technology segment
, the Company
determined that the remainder of its historical Professionals
Services segment, should be classified as discontinued operations.
As part of this plan Firestorm has also been classified as
discontinued operations and presented as part of discontinued
operations. Previously, Firestorm was not included as part of held
or sale and discontinued operations as it did not meet the
threshold of being considered a strategic shift.
AOC Key Solutions Sale
On April 2, 2020, the Company entered into a Stock
Purchase Agreement (the “AOC Key Solutions Purchase
Agreement”) by and among the Company, AOC Key Solutions, and
PurpleReign, LLC, a Virginia limited liability company owned by the
members of AOC Key Solutions management (the
“
AOC Key
Solutions
Buyer”), by
which the Company agreed to sell AOC Key Solutions, to the
AOC Key Solutions
Buyer.
The
AOC Key Solutions
Buyer agreed to purchase all of the outstanding
equity interests of AOC Key Solutions for a purchase price of
$4,000,000, comprising (i) $3,400,000 in cash, and (ii) a
subordinated promissory note (the “Subordinated Note”)
in the initial principal amount of $600,000.
As
of December 31, 2020, the AOC Key Solutions Subordinated Note had
been paid in full by the AOC Key Solutions Buyer.
70
The table below shows the breakdown related to the AOC Key
Solutions Purchase Agreement (dollars in thousands):
|
Total assets
sold
|
$
4,549
|
|
Total liabilities
assumed
|
3,514
|
|
Net assets
sold
|
1,035
|
|
Closing
cost
|
346
|
|
Consideration paid
(see below)
|
4,000
|
|
Gain on sale
of AOC Key Solutions
|
$
2,619
|
|
|
|
|
Cash
consideration
|
$
3,400
|
|
Note
receivable
|
600
|
|
Total AOC Key
Solution Purchase Agreement consideration
|
$
4,000
|
TeamGlobal Sale
On
June 29, 2020, the Company entered into a Stock Purchase Agreement
(the “TeamGlobal Purchase Agreement”) by and among the
Company, TeamGlobal, and Talent Teams LLC, a Texas limited
liability company owned by the members of TeamGlobal’s
management (the “TeamGlobal Buyer”), pursuant to which
the Company agreed to sell TeamGlobal to the TeamGlobal
Buyer.
Subject
to the terms and conditions of the TeamGlobal Purchase Agreement,
the TeamGlobal Buyer agreed to purchase all of the outstanding
equity interests of TeamGlobal for a purchase price of $4,000,000,
comprising (i) an aggregate of $2,300,000 in cash, and (ii) a
secured promissory note (the “Secured Note”) in the
initial principal amount of $1,700,000, with such Secured Note
secured by a Pledge and Security Agreement (the “Pledge
Agreement”) with respect to all the outstanding shares of
TeamGlobal being acquired by the TeamGlobal Buyer.
The table below shows the breakdown related to the TeamGlobal
Purchase Agreement (dollars in thousands):
|
Total assets
sold
|
$
9,996
|
|
Total liabilities
assumed
|
7,130
|
|
Net assets
sold
|
2,866
|
|
Closing
cost
|
122
|
|
Consideration paid
(see below)
|
4,000
|
|
Gain on sale
of TeamGlobal
|
$
1,012
|
|
|
|
|
Cash
consideration
|
$
2,300
|
|
Note
receivable
|
1,700
|
|
Total
TeamGlobal Purchase Agreement consideration
|
$
4,000
|
The dispositions of AOC Key Solutions and TeamGlobal are a result
of the Company’s strategic decision to concentrate resources
on the development of its legacy Technology Segment and will result
in material changes in the Company's operations and financial
results. As a consequence, the Company is reporting the operating
results and cash flows of TeamGlobal, AOC Key Solutions and
Firestorm as discontinued operations, including for all prior
periods reflected in the consolidated financial statements and
these notes.
Secure Education
On June 1, 2019,
the Company sold all its interest in Secure Education for
consideration of $250,000. As a result of the Secure Education
sale, the Company disposed of $249,000 of net intangible assets,
$58,000 of accounts receivables, and $54,000 of accounts payables.
This resulted in a loss of $3,000 that is presented as part of
general and administrative expenses in the accompanying
consolidated statement of operations.
Pursuant to ASC Topic 205-20,
Presentation of
Financial Statements - Discontinued Operations
, the results of operations from
TeamGlobal, AOC Key Solutions and Firestorm for the years ended
December 31, 2020 and 2019 have been classified as discontinued
operations and presented as part of loss from discontinued
operations in the accompanying consolidated statements of
operations presented herein. The assets and liabilities also have
been classified as discontinued operations under the line captions
of current and long term assets discontinued operations and current
and long term liabilities discontinued operations in the
accompanying consolidated balance sheets as of December 31, 2020
and December 31, 2019.
71
The assets and liabilities classified as discontinued
operations in the Company's consolidated financial statements
as of December 31, 2020 and December 31, 2019 are shown below
(dollars in thousands):
|
|
December 31, 2020
|
December 31, 2019
|
||||||
|
|
Global
|
AOC Key Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key Solutions
|
Firestorm
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
-
|
$
-
|
$
2
|
$
2
|
$
225
|
$
93
|
$
12
|
$
330
|
|
Accounts
receivable, net
|
-
|
-
|
-
|
-
|
2,763
|
4,055
|
-
|
6,818
|
|
Other current
assets, net
|
-
|
-
|
-
|
-
|
238
|
52
|
3
|
293
|
|
Current assets
of discontinued operations
|
-
|
-
|
2
|
2
|
3,226
|
4,200
|
15
|
7,441
|
|
Property and
equipment, net
|
-
|
-
|
-
|
-
|
113
|
41
|
-
|
154
|
|
Right-of-use
lease assets, net
|
-
|
-
|
-
|
-
|
130
|
499
|
-
|
629
|
|
Goodwill
|
-
|
-
|
-
|
-
|
669
|
-
|
-
|
669
|
|
Intangible
assets, net
|
-
|
-
|
-
|
-
|
1,994
|
-
|
-
|
1,994
|
|
Deposits and
other long-term assets
|
-
|
-
|
-
|
-
|
-
|
11
|
-
|
11
|
|
Long-term
assets of discontinued operations
|
-
|
-
|
-
|
-
|
2,906
|
551
|
-
|
3,457
|
|
Total assets
of discontinued operations
|
$
-
|
$
-
|
$
2
|
$
2
|
$
6,132
|
$
4,751
|
$
15
|
$
10,898
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$
-
|
$
-
|
$
31
|
$
31
|
$
461
|
$
1,260
|
$
33
|
$
1,754
|
|
Lines of
credit
|
-
|
-
|
-
|
-
|
1,842
|
1,894
|
-
|
3,736
|
|
Lease
liability, short term
|
-
|
-
|
93
|
93
|
113
|
100
|
54
|
267
|
|
Current
liabilities of discontinued operations
|
-
|
-
|
124
|
124
|
2,416
|
3,254
|
87
|
5,757
|
|
Lease
liability, long term
|
-
|
-
|
5
|
5
|
30
|
467
|
39
|
536
|
|
Long-term
liabilities of discontinued operations
|
-
|
-
|
5
|
5
|
30
|
467
|
39
|
536
|
|
Total
liabilities of discontinued operations
|
$
-
|
$
-
|
$
129
|
$
129
|
$
2,446
|
$
3,721
|
$
126
|
$
6,293
|
The major components of the discontinued operations, net of tax,
are presented in the consolidated statements of operations below
(dollars in thousands):
|
|
Year ended December 31,
|
|||||||
|
|
2020
|
2019
|
||||||
|
|
Global
|
AOC Key Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key Solutions
|
Firestorm
|
Total
|
|
Revenue
|
$
10,510
|
$
3,392
|
$
5
|
$
13,907
|
$
26,207
|
$
12,845
|
$
1,006
|
$
40,058
|
|
Cost of
revenue
|
9,190
|
1,866
|
-
|
11,056
|
22,680
|
6,905
|
501
|
30,086
|
|
Gross
profit
|
1,320
|
1,526
|
5
|
2,851
|
3,527
|
5,940
|
505
|
9,972
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses
|
1,341
|
1,284
|
1
|
2,626
|
3,481
|
4,827
|
1,048
|
9,356
|
|
Selling and
marketing expenses
|
79
|
131
|
-
|
210
|
170
|
528
|
48
|
746
|
|
Impairment of
intangibles
|
-
|
-
|
-
|
-
|
1,022
|
-
|
1,549
|
2,571
|
|
Operating
expenses
|
1,420
|
1,415
|
1
|
2,836
|
4,673
|
5,355
|
2,645
|
12,673
|
|
Income loss
income from operations
|
(100
)
|
111
|
4
|
15
|
(1,146
)
|
585
|
(2,140
)
|
(2,701
)
|
|
Other (income)
expense:
|
|
|
|
|
|
|
|
|
|
Loss on
extinguishment of debt
|
-
|
-
|
-
|
-
|
(31
)
|
(45
)
|
-
|
(76
)
|
|
Interest
expense
|
(167
)
|
(74
)
|
-
|
(241
)
|
(294
)
|
(189
)
|
-
|
(483
)
|
|
Other expense
(income)
|
5
|
1
|
-
|
6
|
(1
)
|
(151
)
|
(67
)
|
(219
)
|
|
Total other
expense
|
(162
)
|
(73
)
|
-
|
(235
)
|
(326
)
|
(385
)
|
(67
)
|
(778
)
|
|
Income (loss)
from discontinued operations
|
(262
)
|
38
|
4
|
(220
)
|
(1,472
)
|
200
|
(2,207
)
|
(3,479
)
|
|
Income tax
provision from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net income
(loss) from discontinued operations
|
$
(262
)
|
$
38
|
$
4
|
$
(220
)
|
$
(1,472
)
|
$
200
|
$
(2,207
)
|
$
(3,479
)
|
72
NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental
disclosures of cash flow information for the years ended
December 31, 2020 and 2019 were as follows (dollars in
thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Cash
paid for interest - continuing operations
|
$
1,211
|
$
2,135
|
|
Cash
paid for interest - discontinued operations
|
241
|
521
|
|
Cash
paid for taxes - continuing operations
|
16
|
-
|
|
Cash
paid for taxes - discontinued operations
|
33
|
12
|
|
Non-cash
investing and financing activities
|
|
|
|
Purchase
of vehicles by issuing loan payable
|
112
|
|
|
Note
received as part of TeamGlobal Sale
|
1,700
|
-
|
|
Paid-in-kind
interest transferred from accrued interest to the principal balance
of the 2019 Promissory Notes
|
1,283
|
-
|
|
Business
combinations, net of cash:
|
|
|
|
OpenALPR
Technology Acquisition:
|
|
|
|
Current
assets
|
-
|
415
|
|
Intangible
assets
|
-
|
7,436
|
|
Goodwill
|
-
|
4,934
|
|
Current
liabilities
|
-
|
(388
)
|
|
Cash
paid acquisition of OpenALPR Technology
|
-
|
(7,000
)
|
|
Note
issued acquisition of OpenALPR Technology
|
-
|
(5,000
)
|
|
Issuance
of common stock
|
-
|
(397
)
|
|
Sale
of Secured Education:
|
|
|
|
Current
assets
|
-
|
(58
)
|
|
Intangible
assets sold
|
-
|
(249
)
|
|
Current
liabilities
|
-
|
54
|
|
Loss
on sale
|
-
|
3
|
|
Financing
activities:
|
|
|
|
Notes
payable - continuing operations
|
-
|
21,000
|
|
Debt
discount financing costs
|
-
|
(2,599
)
|
|
Extinguishment
of debt
|
-
|
(1,113
)
|
|
Repayment
of notes payable and interest expense, net of debt
discount
|
-
|
(2,515
)
|
|
Investment
in OpenALPR Technology
|
-
|
(12,000
)
|
|
Issuance
of warrants in conjunction with notes payable
|
-
|
706
|
|
Accounts
payable
|
-
|
360
|
|
Proceeds
from notes payable
|
-
|
3,839
|
|
Non-cash
Note Exchange transaction
|
|
|
|
Exchange
of accrued interest and stock issuance costs
|
(226
)
|
-
|
|
Debt
extinguishment costs
|
(2,484
)
|
-
|
|
Exchange
of the net principal balance of the 2019 Promissory
Notes
|
(14,688
)
|
-
|
|
Issuance
of common stock
|
17,325
|
-
|
|
Cash
impact of Note Exchange transaction
|
(73
)
|
-
|
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
|
Right-of-use
lease asset
|
354
|
291
|
|
Lease
liability
|
$
(354
)
|
$
(291
)
|
NOTE 5 – INVENTORY
As of December 31, 2020 and 2019, inventory
consisted entirely of
the following (dollars in
thousands):
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Parts
and cameras
|
$
558
|
$
302
|
|
Finished
goods
|
706
|
-
|
|
Total
inventory
|
$
1,264
|
$
302
|
73
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (dollars in
thousands):
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Furniture
and fixtures
|
$
83
|
$
57
|
|
Office
equipment
|
314
|
110
|
|
Camera
systems
|
1,088
|
772
|
|
Vehicles
|
395
|
36
|
|
Leasehold
improvements
|
200
|
122
|
|
Total
|
$
2,080
|
$
1,097
|
|
Less:
accumulated depreciation and amortization
|
(1,033
)
|
(655
)
|
|
Property
and equipment, net from continuing operations
|
$
1,047
|
$
442
|
Depreciation and
amortization related to property and equipment, net from continuing
operations for the years ended December 31, 2020 and 2019 was
$382,000 and $323,000, respectively.
Information about
the
Company’s
total assets in different geographic regions
is as follows (dollars in thousands):
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
United
States
|
$
2,080
|
$
1,027
|
|
Canada
|
-
|
70
|
|
Accumulated
depreciation
|
(1,033
)
|
(655
)
|
|
Property and equipment, net from continuing
operations
|
$
1,047
|
$
442
|
NOTE 7 – LEASES
We have operating
leases for office facilities in various locations throughout the
United States. The Company’s leases have remaining terms of
one to four years.
Certain of the Company’s leases include
options to extend the term of the lease or to terminate the lease
prior to the end of the initial term. When it is reasonably certain
that the Company will exercise the option, the Company will include
the impact of the option in the lease term for purposes of
determining total future lease payments.
Cash paid for amounts included in the measurement of operating
lease liabilities from continuing operations was $251,000 and
$75,000 for the year ended December 31, 2020 and 2019,
respectively.
Operating lease expense
from continuing operations
for
the year ended December 31, 2020 and 2019 was $263,000 and
$184,000
,
respectively, and is part of general and administrative expenses in
the accompanying consolidated statement of
operations.
Supplemental balance sheet information related to leases as of
December 31, 2020 was as follows (dollars in
thousands):
|
Operating
lease right-of-use lease assets from continuing
operations
|
$
426
|
|
|
|
|
Current
portion of lease liability
|
$
253
|
|
Long-term
portion of lease liability
|
188
|
|
Total
lease liability from continuing operations
|
$
441
|
|
|
|
|
Weighted
average remaining lease term - operating leases from continuing
operations
|
2.19
|
|
|
|
|
Weighted
average discount rate - operating leases
|
9
%
|
74
Maturities of operating lease liabilities for continuing operations
at December 31, 2020 were as follows (dollars in
thousands):
|
2021
|
$
278
|
|
2022
|
104
|
|
2023
|
84
|
|
2024
|
18
|
|
Total
lease payments
|
484
|
|
Less
imputed interest
|
43
|
|
Maturities
of lease liabilities
|
$
441
|
NOTE 8 – INTANGIBLE ASSETS
Goodwill
There have been no
changes from December 31, 2019 in the carrying amount of goodwill
of continuing operations for the year ended December 31,
2020.
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2019 to December 31, 2020 (dollars in
thousands):
|
|
December 31, 2019
|
Additions
|
Amortization
|
December 31, 2020
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
Customer
relationships
|
$
396
|
$
-
|
$
(34
)
|
$
362
|
|
Marketing
related
|
230
|
-
|
(71
)
|
159
|
|
Technology
based
|
6,395
|
-
|
(1,034
)
|
5,361
|
|
Internally
capitalized software
|
1,223
|
162
|
(229
)
|
1,156
|
|
Intangible
assets subject to amortization from continuing
operations
|
$
8,244
|
$
162
|
$
(1,368
)
|
$
7,038
|
The following provides a breakdown of identifiable
intangible assets as of December 31, 2020
(dollars in
thousands)
:
|
|
Customer Relationships
|
Marketing Related
|
Technology Based
|
Internally Capitalized Software
|
Total
|
|
Identifiable
intangible assets
|
$
461
|
$
327
|
$
7,206
|
$
1,452
|
$
9,446
|
|
Accumulated
amortization
|
(99
)
|
(168
)
|
(1,845
)
|
(296
)
|
(2,408
)
|
|
Identifiable
intangible assets from continuing operations, net
|
$
362
|
$
159
|
$
5,361
|
$
1,156
|
$
7,038
|
These intangible assets
are being amortized on a straight-line basis over their weighted
average remaining estimated useful life of 3.5 years. Amortization
expense attributable to continuing operations for the year ended
December 31, 2020 and 2019 was $1,368,000 and
$971
,000
, respectively, and is
presented as part of general and administrative expenses in the
accompanying consolidated statements of
operations.
75
As of December 31, 2020,
the estimated annual amortization
expense from continuing operations for each of the next five fiscal
years and thereafter is as follows (dollars in
thousands):
|
2021
|
$
1,551
|
|
2022
|
1,470
|
|
2023
|
1,290
|
|
2024
|
1,060
|
|
2025
|
1,051
|
|
Thereafter
|
400
|
|
Capitalized
software not yet placed in service
|
216
|
|
Total
|
$
7,038
|
NOTE 9 – DEBT
Long-Term Debt
On January 25, 2017, pursuant to the terms of its acquisition of
Firestorm, the Company issued $1,000,000 in the aggregate form of
four unsecured, subordinated promissory notes with interest payable
over five years. The principal amount of one of the notes payable
is $500,000 payable at an interest rate of 2% and the remaining
three notes are evenly divided over the remaining $500,000 and
payable at an interest rate of 7%. The notes mature on January 25,
2022. The aggregate balance of these notes payable was $980,000 and
$961,000, net of unamortized interest, as of December 31, 2020 and
December 31, 2019, respectively, to reflect the amortized fair
value of the notes issued due to the difference in interest rates
of $20,000 and $39,000, respectively.
2018 Promissory Notes
On April 3, 2018, the Company entered into a transaction pursuant
to which an institutional investor (the “2018 Lender”)
loaned $2,000,000 to the Company (the “2018 Promissory
Note”). On March 12, 2019, the $2,000,000 balance due on the
2018 Promissory Note was retired in its entirety in exchange for an
equivalent principal amount of the 2019 Promissory Notes. In
addition, Rekor paid to the 2018 Lender $1,050,000 of consideration
for the re-acquisition by the Company of the Lender’s
participation interest in the Company and $75,000 of interest due
through May 1, 2019. All amounts paid were obtained from the
proceeds of the 2019 Promissory Notes. The consideration of
$1,050,000 for the 2018 Lender’s participation and
unamortized financing costs of $63,000 are recorded as costs in
connection with the loss on the extinguishment of debt of
$1,113,000 for the year ended December 31, 2019.
Paycheck Protection Program Loan
On
May 26, 2020, the Company entered into a loan agreement with Newtek
Small Business Finance, LLC, which provides for a loan in the
principal amount of $221,000 (the “Rekor PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are
deferred for six months after the date of
disbursement.
On
June 3, 2020, the Company’s wholly owned subsidiary, Rekor
Recognition Systems, Inc., entered into a loan agreement with
Newtek Small Business Finance, LLC, which provides for a loan in
the principal amount of $653,000 (the “Rekor Recognition PPP
Loan”) pursuant to the Paycheck Protection Program under the
CARES Act. The Rekor Recognition PPP Loan has a two-year term and
bears interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement.
The Rekor PPP Loan and the Rekor Recognition PPP
Loan (collectively the “Loans”) may be prepaid at any
time prior to maturity with no prepayment penalties. The Loans
contain events of default and other provisions customary for a loan
of this type. The Paycheck Protection Program provides that the
Loans may be partially or wholly forgiven if the funds are used for
certain qualifying expenses as described in the CARES Act. The
Company used the entire Loans amount for qualifying expenses and to
apply for forgiveness of the Loans in accordance with the terms of
the CARES Act.
The current and long-term portion of the
Loans is presented as part of loans payable current portion and
loans payable, long-term, respectively, on the accompanying
consolidated balance sheets.
76
The
Small Business Administration (“SBA”), in consultation
with the Department of Treasury, issued new guidance that creates
uncertainty regarding the qualification requirements for a PPP loan
for public companies. The Company applied for forgiveness with
Newtek Small Business Finance, LLC. The Company's forgiveness
application is still being reviewed.
2019 Promissory Notes
On March 12, 2019, the Company entered
into a note purchase agreement pursuant to which investors,
including OpenALPR Technology, Inc. (the “2019
Lenders”) loaned $20,000,000 to the Company (the “2019
Promissory Notes”) and the Company issued to the 2019 Lenders
warrants to purchase 2,500,000 shares of Rekor common stock (the
“March 2019 Warrants”). The loan bore interest at 16%
per annum, of which at least 10% per annum was required to be paid
in cash. Any remaining interest accrued to be paid at maturity or
earlier redemption. The notes also required a $1,000,000 exit fee
due at maturity, or a premium if paid before the maturity date, and
compliance with affirmative, negative and financial covenants,
including a fixed charge coverage ratio, minimum liquidity and
maximum capital expenditures. Transaction costs included $403,000
for a work fee payable over 10 months, $290,000 in legal fees and a
$200,000 closing fee. As of December 31, 2020, the Company had
settled the full amount of the 2019 Promissory Notes.
The loan was secured by a
security interest in substantially all of the assets of Rekor. The
March 2019 Warrants are exercisable over a period of five years, at
an exercise price of $0.74 per share, and were valued at
$706,000, at the time of
issuance. The warrants were exercisable commencing March 12, 2019
and expire on March 12, 2024. The 2019 Promissory Notes had an
effective interest rate of 24.87%.
As of the first anniversary date of the
commencement of the 2019 Promissory Notes $1,283,000 of the paid-in
kind interest had not been paid by the Company and per the purchase
agreement was added to the principal balance of the 2019 Promissory
Notes in March 2020.
2019 Promissory Note Amendments
On
March 26, 2020, the Company entered into the First Amendment to the
Note Purchase Agreement which effectively extended the maturity
date of the 2019 Promissory Notes
from March 11, 2021 to
June 12,
2021. The Company incurred $100,000 in transaction costs related to
the First Amendment to the Note Purchase Agreement, these costs
were financing costs and deferred over the remaining life of the
loan.
On
April 2, 2020, in connection with the sale of AOC Key
Solutions
, the Company transferred
$2,200,000 to the holders of the 2019 Promissory Notes. $2,000,000
of the funds were used as a prepayment of principal while the other
$200,000 was paid as a premium percentage as the portion of the
2019 Promissory Notes were paid prior to the maturity date. The
premium percentage paid in connection with this transaction is
presented as part of debt extinguishment costs in the accompanying
consolidated statement of operations.
On April 2, 2020, the Company entered into a partial release and
Second Amendment to Note Purchase Agreement (the “Second
Amendment”), by and among the credit parties, the Purchasers
and the Agent. Pursuant to the terms of the Second Amendment, AOC
Key Solutions was released as a credit party and the assets related
to AOC Key Solutions were released as collateral, and the asset
disposition proceeds terms of the Note Purchase Agreement were
amended to reflect the transaction.
On
June 29, 2020, in connection with the TeamGlobal Purchase
Agreement, the Company entered into a Partial Release and Third
Amendment to Note Purchase Agreement (the “Third
Amendment”), by and among the Credit Parties, the Purchasers
and the Agent. Pursuant to the terms of the Third Amendment,
TeamGlobal was released as a credit party and the assets related to
TeamGlobal were released as collateral, the mandatory prepayments
provision of the 2019 Promissory Notes were waived with regard to
the sale of TeamGlobal, and the maturity date of the 2019 Notes
remaining outstanding was extended to December 31,
2021.
77
2019 Promissory Note Retirement
On
June 30, 2020, the Company entered into Exchange Agreements with
certain 2019 Lenders of the Company’s 2019 Promissory Notes.
Subject to the terms and conditions set forth in the Exchange
Agreements, approximately $17,398,000, was redeemed in exchange for
4,349,497 shares of the Company’s common stock, at a rate of
$4 per share, which was the closing price of the common stock on
the date of the Exchange. On July 15, 2020, the Company completed
the Note Exchange. At the time of the Exchange Agreement the net
amount of long-term debt redeemed for common stock was $14,688,000,
this included the existing principal balance subject to conversion,
the portion of the exit fee associated with the notes subject to
conversion, offset by the portion of unamortized issuance costs
associated with the notes subject to conversion. There was also
$226,000 related to the paid-in-kind (“PIK”) interest
associated to the notes subject to conversion that was exchanged as
part of the Exchange Agreements. The difference between the market
value of the shares issued and the net carrying amount of the
obligations above of $2,484,000, was recorded as part of debt
extinguishments costs in the accompanying consolidated statement of
operations. Following the Note Exchange, approximately $4,398,000
aggregate principal amount of the 2019 Promissory Notes remained
outstanding, plus an additional $216,000 related to the exit
fee.
The
Company incurred stock issuance costs of approximately $73,000
related to legal, accounting, and other fees in connection with the
Exchange Agreements. These costs are presented as a reduction to
additional paid-in capital on the accompanying consolidated balance
sheets.
On
September 16, 2020, the Company issued a cash payment of $5,284,000
to complete the retirement of the remaining aggregate principal
balance of the 2019 Promissory Notes. As a result of this optional
prepayment, the 2019 Promissory Notes have been fully redeemed
pursuant to their terms, and as a result the Company has no further
obligations under the Note Purchase Agreement, as amended. The
warrants previously issued pursuant to the Note Purchase Agreement
remain outstanding pursuant to their terms.
Interest Expense
The following table presents the interest expense
related to the contractual interest and the amortization of debt
issuance costs for the Company’s debt arrangements
(dollars in
thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Contractual
interest
|
$
1,846
|
$
2,808
|
|
Amortization
of debt issuance costs
|
657
|
1,101
|
|
Total
interest expense
|
$
2,503
|
$
3,909
|
Debt Extinguishment Costs
For the year ended December 31, 2020, the Company
recognized the following debt extinguishment costs: $200,000
related to an early cash payment in April 2020 related to the 2019
Promissory Notes, $2,484,000 related to the Exchange Agreements
completed in July 2020 and $684,000 related to an early cash
payment in September 2020 to retire the remaining balance of the
2019 Promissory Notes, these costs were offset by the forgiveness
of loans in the amount of $87,000 in the third quarter of 2020.
These costs are presented as part of debt extinguishment costs in
the accompanying consolidated statement of operations, for the year
ended December 31, 2020. For the year ended December 31,
2019,
loss on the
extinguishment of debt of $1,113,000 related to the retirement of
the 2018 Promissory Notes.
78
Schedule of Principal Amounts Due of Debt
The principal amounts due for long-term notes payable are shown
below as of December 31, 2020 (dollars in thousands):
|
2021
|
517
|
|
2022
|
1,432
|
|
2023
|
37
|
|
Total
|
1,986
|
|
|
|
|
Less
unamortized interest
|
(20
)
|
|
Total
notes payable
|
$
1,966
|
|
|
|
|
Loan
payable, current portion
|
$
517
|
|
Loan
payable, long-term
|
469
|
|
Notes
payable, long-term
|
980
|
|
Total
notes payable
|
$
1,966
|
NOTE 10 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC Topic 740.
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, the Company
reviewed both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections and the overall
prospects of the Company’s business.
The
expense from income taxes for the years ended December 31, 2020 and
2019 consists of the following (dollars in thousands):
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
Federal:
|
|
|
|
Deferred
|
$
14
|
$
10
|
|
Total
federal
|
14
|
10
|
|
State:
|
|
|
|
Current
|
9
|
37
|
|
Total
state
|
9
|
37
|
|
Provision
for income taxes
|
$
23
|
$
47
|
79
The
components of deferred income tax assets and liabilities are as
follows at December 31, 2020 and 2019 (dollars in
thousands):
|
|
Year ended December 31,
|
|
|
Deferred
tax assets
|
2020
|
2019
|
|
Net
operating loss
|
$
9,728
|
$
4,724
|
|
163(j)
limitation
|
2,293
|
1,079
|
|
Lease
liabilities
|
159
|
246
|
|
Other
|
148
|
322
|
|
Total
gross deferred tax assets
|
12,238
|
6,371
|
|
|
|
|
|
Valuation
allowance for deferred tax assets
|
(12,215
)
|
(5,813
)
|
|
Total
deferred tax assets
|
113
|
558
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Right-of-use
asset
|
(126
)
|
(202
)
|
|
Goodwill
and intangibles
|
(104
)
|
(328
)
|
|
Fixed
assets
|
93
|
(38
)
|
|
Total
gross deferred tax liabilities
|
(137
)
|
(568
)
|
|
Net
deferred tax liabilities
|
$
(24
)
|
$
(10
)
|
The
difference between the income tax provision computed at the U.S.
Federal statutory rate and the effective tax rate is as follows for
the years ended December 31, 2020 and 2019:
|
|
Year ended December 31,
|
|
|
|
2020
|
2019
|
|
U.S.
statutory federal rate
|
21.0
%
|
21.0
%
|
|
(Decrease)
increase in taxes resulting from:
|
|
|
|
State
income tax rate, net of U.S. Federal benefit
|
11.1
%
|
1.5
%
|
|
Impact
of changes in tax rates
|
7.9
%
|
0.0
%
|
|
True-ups
|
-1.1
%
|
-0.1
%
|
|
Other
|
6.1
%
|
-0.6
%
|
|
Valuation
allowance
|
-45.2
%
|
-22.1
%
|
|
Effective
tax rate
|
-0.2
%
|
-0.3
%
|
The
Company files income tax returns in the United States and in
various state and foreign jurisdictions. No U.S. Federal, state or
foreign income tax audits were in process as of December 31,
2020.
The
Company evaluated the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with
respect to such net deferred income tax assets. After considering
all available facts, the Company fully reserved for its net
deferred tax assets, outside of the deferred tax liability related
to the indefinite lived intangible, because the Company believes
that it is not more likely than not that their benefits will be
realized in future periods. The Company will continue to evaluate
its deferred tax assets to determine whether any changes in
circumstances could affect the realization of their future benefit.
If it is determined in future periods that portions of the
Company’s net deferred income tax assets satisfy the
realization standard, the valuation allowance will be reduced
accordingly.
As of
December 31, 2020, the Company had gross federal and state net
operating loss carryforwards of $33,787,000 and $26,435,000,
respectively, and a valuation allowance of $12,215,000 recorded
against its net deferred tax assets. As of December 31, 2020, Rekor
had net federal and state net operating loss (“NOL”)
carryforwards of $7,096,000 and $2,632,000 respectively. These NOLs
are scheduled to begin to expire in 2034 and $9,728,000 are
grandfathered under the Tax Cuts and Jobs Act; thus, these NOLs are
not subject to the 80 percent limitation. NOLs generated in the
years ended December 31, 2020 and 2019 of $14,726,000 and
$10,249,000, respectively, will be carried forward indefinitely and
are subject to the annual 80 percent limitation.
80
As of
December 31, 2019, Rekor had gross federal and state net operating
loss carryforwards of $19,192,000 and $11,952,000, respectively,
and a valuation allowance of $5,813,000 recorded against its net
deferred tax assets. As of December 31, 2019, Rekor had net federal
and state net operating loss carryforwards of $4,030,000 and
$693,00 respectively.
For the
years ended December 31, 2020 and 2019, the Company did not record
any interest or penalties related to unrecognized tax benefits. It
is the Company’s policy to record interest and penalties
related to unrecognized tax benefits as part of income tax expense.
The 2017 through 2019 tax years remain subject to examination by
the IRS.
NOTE 12 – EMPLOYEE BENEFIT PLAN
On
January 1, 2019, Rekor established the Rekor Systems, Inc. 401(k)
Plan (the “Rekor 401(k) Plan”), a Qualified Automatic
Contribution Arrangement (QACA) safe harbor plan. Employees that
satisfied the eligibility requirements became participants in the
Rekor 401(k) Plan. The Company contributes an amount equal to the
sum of 100% of a participant’s elective deferrals that do not
exceed 1% of participant’s compensation, plus 50% of the
participant’s elective deferrals that exceed 1% of the
participants compensation, but do not exceed 6% of the
participant’s compensation.
Employee contributions are fully vested, and
matching contributions are subject to a two-year service vesting
schedule.
The
amount of contributions recorded from continuing operations by the
Company under these plans during the years ended December 31, 2020
and 2019 were $228,000 and $149,000, respectively.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
On August 19, 2019, the Company filed suit in the
United States District Court for the Southern District of New York
against three former executives of the Company and Firestorm (the
“Firestorm Principals”)—
Rekor Systems, Inc. v. Suzanne
Loughlin, et al
., Case no.
1:19-cv-07767-VEC. The Complaint alleges that the Firestorm
Principals fraudulently induced the execution of the Membership
Interest Purchase Agreement wherein Firestorm was acquired by
the Company. The Complaint requests equitable rescission of
that transaction, or, alternatively, monetary
damages.
Following
an initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, the Company filed a Second Amended Complaint, which the
Firestorm Principals answered together with counterclaims on
February 28, 2020. Thereafter, on March 30, the Company moved
to dismiss certain counterclaims against certain executives named
as counterclaim-defendants, which resulted in the Firestorm
Principals voluntarily dismissing those counterclaims against those
parties. The Company thereafter filed its response and
affirmative defenses to the Counterclaims on April 22, 2020.
On April 27, 2020, the Firestorm Principals filed a Motion for
Partial Judgment on the Pleadings, which the Company has
opposed. In addition, on December 9, 2019, the Firestorm
Principals filed a motion for an interim award of expenses and
attorney’s fees. The Court denied the Firestorm
Principals’ fee advance motion.
In the year 2020, the Firestorm Principals filed suit in New York
Supreme Court against directors of the Company, alleging breach of
fiduciary duty and libel. The Company believes that these
suits are without merit and intends to vigorously litigate this
matter.
At
this stage of these litigations, the Company is unable to render an
opinion regarding the likelihood of a favorable outcome. The
Company intends to continue vigorously litigating its claims
against the Firestorm Principals and believes that the Firestorm
Principals’ remaining counterclaims and suits against Rekor
directors and officers are without merit.
Vigilant Solutions,
LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on
February 21, 2020 against the Company and certain of its
subsidiaries in the US District Court for the District of Maryland.
The complaint alleged that certain of our products violated a
patent held by Vigilant. On June 10, 2020, the Company filed an
Answer to the complaint denying the pertinent allegations and
asserting substantial defenses to the allegations contained in the
complaint, including that the patent underlying the complaint is
invalid.
81
On September 8, 2020, the Company filed a Petition
for
Inter
Partes
Review at the U.S.
Patent and Trademark Office’s Patent Trial and Appeal Board
(“PTAB”) requesting that the PTAB review and find
unpatentable certain claims of the patent asserted by
Vigilant.
In November of 2020, the Company and Vigilant
Solutions, LLC agreed to resolve the district court litigation
and
Inter
Partes
Review action between
the parties pursuant to a confidential settlement agreement. None
of the obligations imposed by that confidential settlement
agreement are material to the Company.
On January 31, 2020, the Company’s wholly
owned subsidiary, OpenALPR, filed a complaint in the US District
Court for the Western District of Pennsylvania against a former
customer, Plate Capture Solutions, Inc. (“PCS”) for
breach of software license agreements pursuant to which software
was licensed to PCS. On June 14, 2020, PCS filed its operative
answer to the Complaint. On June 21, 2020, PCS filed a motion
to join the Company and another entity, OpenALPR Technology, Inc.,
as parties to the litigation and made claims against them for
defamation, fraud and intentional interference with existing and
future business relationships. On July 13, 2020, OpenALPR filed an
opposition to the motion for joinder.
On November 23, 2020,
the Court denied PCS’s Motion for Joinder with prejudice. The
case is currently proceeding between OpenALPR and PCS only, and is
still in its early stages. Rekor believes that OpenALPR has
substantial defenses to the claims and intends to vigorously defend
the allegations of those claims.
On
September 18, 2020, Fordham Financial Management, Inc.
(“Fordham”) commenced a lawsuit against the Company in
the Supreme Court for the State of New York, New York County.
Fordham alleges that the Company breached an underwriting agreement
with Fordham. Fordham has brought claims for breach of contract, a
declaratory judgment, and attorneys’ fees and expenses, and
seeks damages. The Complaint was served to the Company on September
25, 2020. The parties have agreed to extend the Company’s
time to respond to the Complaint until March 25, 2021 and have
agreed that if the Company files a motion to dismiss, such motion
will be fully briefed and returnable on May 25, 2021 if not further
extended. The parties engaged in a private mediation on February
24, 2021 but were unable to reach settlement.
At
this stage of the Fordham litigation, the Company is unable to
render an opinion regarding the likelihood of a favorable outcome.
The Company intends to vigorously litigate this action and believes
that the claims asserted are without merit.
In
addition, from time to time, the Company may be named as a party to
various other lawsuits, claims and other legal and regulatory
proceedings that arise in the ordinary course of business. These
actions typically seek, among other things, compensation for
alleged personal injury, breach of contract, property damage,
infringement of proprietary rights, punitive damages, civil
penalties or other losses, or injunctive or declaratory relief.
With respect to such lawsuits, claims and proceedings the Company
accrues reserves when a loss is probable, and the amount of such
loss can be reasonably estimated. It is the Company’s opinion
that the outcome of these proceedings, individually and
collectively, will not be material to the Company’s
consolidated financial statements as a whole.
NOTE 14 – STOCKHOLDERS’
(DEFICIT)
EQUITY
Common Stock
Effective March 18,
2019, the Company has adopted and approved an amendment to increase
the number of authorized shares of common stock from 30,000,000 to
100,000,000,
$0.0001 par
value
. The rights and privileges terms of the additional
authorized shares of common stock are identical to those of the
currently outstanding shares of common stock. However, because the
holders of common stock do not have preemptive rights to purchase
or subscribe for any new issuances of common stock, the subsequent
potential issuance of additional shares of common stock will reduce
the current stockholders’ percentage ownership interest in
the total outstanding shares of common stock. The Amendment and the
creation of additional shares of authorized common stock will not
alter current stockholders’ relative rights and limitations.
As of December 31, 2020 and
2019, the issued and outstanding common shares of Rekor were
33,013,271 and
21,595,653
, respectively.
82
For the
year ended December 31, 2020 and 2019, the Company issued 298,392
and 0 shares of Rekor common stock related to the exercise of
common stock options, respectively.
On February 15, 2019, the Company entered into Amendment No. 1 to
the OpenALPR Purchase Agreement, pursuant to which the Company
agreed to issue 600,000 shares of Rekor common stock as partial
consideration for the OpenALPR Technology Acquisition. On March 12,
2019, the Company issued 600,000 shares of Rekor common stock as
part of the consideration for the OpenALPR Technology
Acquisition.
During the third quarter of 2020, the
Company issued 4,349,497 shares of Rekor common stock as part of
the Exchange Agreements
with
certain 2019 Lenders of the Company’s 2019 Promissory
Notes.
The Company
incurred stock issuance costs of approximately $73,000 related to
legal, accounting, and other fees in connection with the Exchange
Agreement. These costs are presented as a reduction to
additional paid-in capital on the accompanying consolidated balance
sheets.
At-the-Market Offering
On August 14, 2019, the Company entered into the Sales
Agreement with B. Riley FBR, Inc. (“B. Riley FBR”)
to create an at-the-market equity program under which the Company
from time to time offered and sold shares of its common stock,
having an aggregate offering price of up to $15,000,000, through or
to B. Riley FBR. Subject to the terms and conditions of the Sales
Agreement, B. Riley FBR would use its commercially reasonable
efforts to sell the shares of the Company’s common stock from
time to time, based upon the Company’s instructions. B.
Riley FBR was entitled to a commission equal to 3.0% of the
gross proceeds from each sale. The Company incurred issuance costs
of approximately $226,000 related to legal, accounting, and other
fees in connection with the Sales Agreement. These costs were
charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
accompanying consolidated balance sheets.
On August 28, 2020, the Company filed Amendment
No. 1 to the Sales Agreement dated August 14, 2019 to increase
the size of the market equity program under which the Company from
time to time offered and sold shares of its common stock, from an
aggregate offering price of up to $15,000,000 to an amended maximum
aggregate offering price of up to $40,000,000 through or to B.
Riley FBR.
The
Company incurred issuance costs of approximately $25,000 related to
legal fees in connection with the amendment to the Sales
Agreement. These costs were charged against the gross proceeds
of the Sales Agreement and presented as a reduction to additional
paid-in capital on the accompanying consolidated balance
sheets.
Sales of the Company’s common
stock under the Sales Agreement were issued and sold pursuant to
the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018.
For the year ended December 31, 2020,
based on settlement date, the Company sold 5,216,562 shares of
common stock at a weighted-average selling price of $5.92 per share
in accordance with the Sales Agreement. Net cash provided for the
year ended December 31, 2020 from the Sales Agreement was
$29,930,000 after paying 3.0% or $926,000 related to cash
commissions provided to B. Riley FBR.
For the year ended December 31, 2019, based on the settlement date,
the Company sold 1,292,730 shares of common stock at a
weighted-average selling price of $2.53 per share in accordance
with the Sales Agreement. Net cash provided from the Sales
Agreement was $2,949,000 after paying $226,000 related to the
issuance cost, as well as, 3.0% or $98,000 related to cash
commissions provided to B. Riley FBR.
On
September 21, 2020, the Company elected to voluntarily terminate
its Sales Agreement with B. Riley FBR pursuant to the terms of the
Sales Agreement. As of the termination date, the Company had
offered and sold an aggregate of 6,509,292 shares of common stock
pursuant to the Sales Agreement, which resulted in aggregate gross
proceeds of $34,154,000.
83
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of
preferred stock, $0.0001 par value. The Company’s preferred
stock may be entitled to preference over the common stock with
respect to the distribution of assets of the Company in the event
of liquidation, dissolution or winding-up of the Company, whether
voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for
the purpose of the winding-up of its affairs. The authorized but
unissued shares of the preferred stock may be divided into, and
issued in, designated series from time to time by one or more
resolutions adopted by the Board of Directors of the Company. The
Board of Directors of the Company, in its sole discretion, has the
power to determine the relative powers, preferences and rights of
each series of preferred stock.
Series A Cumulative Convertible Redeemable Preferred
Stock
Of the 2,000,000 authorized shares of
preferred stock, 505,000 shares are designated as $0.0001 par value
Series A Cumulative Convertible Redeemable Preferred Stock (the
“Series A Preferred Stock”). The holders of Series A
Preferred Stock have a right to convert each share into common
stock at an initial conversion price and a specified conversion
price which increases annually based on the passage of time
beginning in November 2019. The holders of Series A Preferred Stock
also have a put right after 60 months from the issuance date to
redeem any or all of the Series A Preferred Stock at a redemption
price of $15.00 per share plus any accrued but unpaid dividends.
The Company has a call right after 36 months from the issuance date
to redeem all of the Series A Preferred Stock at a redemption price
which increases annually based on the passage of time which began
in November 2019. The Series A Preferred Stock contains an
automatic conversion feature based on a qualified initial public
offering in excess of $30,000,000 or a written agreement by at
least two-thirds of the holders of Series A Preferred Stock at an
initial conversion price and a specified price which increases
annually based on the passage of time beginning in November
2016.
Based on the terms of the Series A Preferred Stock,
the Company concluded that the Series A Preferred Stock should be
classified as mezzanine equity in the accompanying consolidated
balance sheets as of December 31, 2020 and 2019.
Rekor
adjusts the value of the Series A Preferred Stock to redemption
value at the end of each reporting period. The adjustment to the
redemption value is recorded through additional paid in capital of
$865,000 and $752,000 for the years ended December 31, 2020 and
2019, respectively.
As of
December 31, 2020, and 2019, 502,327 shares of Series A Preferred
Stock were issued and outstanding.
The
holders of Series A Preferred Stock are entitled to quarterly cash
dividends of $0.175 (7% per annum) per share. Dividends accrue
quarterly and dividend payments for declared dividends are due
within five business days following the end of a quarter.
F
or the year ended December
31, 2020 and 2019, the Company did not pay cash dividends to
shareholders of record of Series A Preferred Stock. Accrued
dividends payable to Series A Preferred Stock shareholders were
$952,000 and $551,000 as of December 31, 2020 and 2019,
respectively, and are presented as part of the accounts payable and
accrued expenses on the accompanying consolidated balance
sheets.
See
Note 17 for additional details related to the conversion of the
Series A Preferred Stock.
Series B Cumulative Convertible Preferred Stock
Of the
2,000,000 authorized shares of preferred stock, 240,861 shares are
designated as $0.0001 par value Rekor Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). As
part of the Global Merger, the Company issued 240,861 shares of
$0.0001 par value Series B Preferred Stock. All Series B Preferred
Stock was issued at a price of $10.00 per share as part of the
acquisition of the Global Merger. The Series B Preferred Stock has
a conversion price of $5.00 per share. Each Series B Preferred
Stock has an automatic conversion feature based on the share price
of Rekor.
The
Series B Preferred Stock is entitled to quarterly cash dividends of
1.121% (4.484% per annum) per share. Dividends accrue quarterly and
dividend payments for declared dividends are due within five
business days following the end of a quarter. F
or the year ended December 31, 2020 the
Company did not pay cash dividends and for the year ended December
31, 2019 the Company paid $108,000 of cash dividends to
shareholders of record of Series B Preferred Stock. Accrued
dividends payable to Series B Preferred Stock shareholders were
$167,000 and $54,000 as of December 31, 2020 and 2019 and are
presented as part of the accounts payable and accrued expenses on
the accompanying consolidated balance sheets.
See Note 17 for
additional details related to the conversion of the Series B
Preferred Stock.
84
Warrants
The Company had warrants outstanding that are exercisable into a
total of 925,845 and 2,251,232 shares of Rekor common stock as of
December 31, 2020 and December 31, 2019, respectively.
As part of a Regulation A Offering in
fiscal year 2016 and 2017, the Company issued warrants to the
holders of Series A Preferred Stock. The exercise price for these
warrants is $1.03 and they are exercisable into a total of 141,789
and 240,017 shares of Rekor common stock as of December 31, 2020
and December 31, 2019, respectively. The warrants expire on
November 23, 2023.
For the year ended December 31, 2019,
7,500 of the outstanding warrants were exercised and converted into
3,638 shares of the Company's common stock. For the year ended
December 31, 2020, 202,500 of the outstanding warrants were
exercised and converted into 98,229 shares of the Company’s
common stock.
As part of the acquisition of Firestorm on January 24, 2017, the
Company issued: warrants to purchase 315,627 shares of its common
stock, exercisable over a period of five years, at an exercise
price of $2.5744 per share; and warrants to purchase 315,627 shares
of its common stock, exercisable over a period of five years, at an
exercise price of $3.6083 per share (the “Firestorm
Warrants”). The expiration date of the Firestorm Warrants is
January 24, 2022. As of December 31, 2020, and 2019, there were
631,254 Firestorm Warrants outstanding.
Pursuant to its acquisition of Secure Education Consultants on
January 1, 2018, the Company issued: warrants to purchase 33,333
shares of its common stock, exercisable over a period of five
years, at an exercise price of $5.44 per share; and warrants to
purchase 33,333 shares of its common stock, exercisable over a
period of five years, at an exercise price of $6.53 per share (the
“Secure Education Warrants”). The expiration date of
the Secure Education Warrants is January 1, 2023. As of December
31, 2020, and 2019, there were 66,666 Secure Education Warrants
outstanding.
On November 1, 2018, in connection with an underwritten public
offering of its common stock, the Company issued to the
underwriters warrants to purchase 206,250 shares of its common
stock, exercisable over a period of five years, at an exercise
price of $1.00 per share. These warrants are exercisable commencing
April 27, 2019 and expire on October 29, 2023. During the year
ended December 31, 2020, 11,551 warrants were exercised in cashless
transactions resulting in the issuance of 8,659 shares of common
stock. During the year ended December 31, 2019, 189,813 warrants
were exercised in cash and cashless transactions resulting in the
issuance of 148,279 shares of common stock. As of December 31,
2020, and 2019, 4,886 and 16,437 warrants related to the 2018
underwritten public offering remain outstanding,
respectively.
On March 12, 2019, in connection with
the 2019 Promissory Notes, the Company issued warrants to purchase
2,500,000 shares of its common stock, which are immediately
exercisable at an exercise price of $0.74 per share, to certain
individuals and entities.
Of the
2,500,000 warrants, 625,000
were issued
as partial consideration
for the OpenALPR Technology Acquisition.
During the year ended December 31,
2020, 1,480,625 warrants were exercised in cash and cashless
transactions resulting in the issuance of 1,446,279 shares of
common stock.
During
the year ended December 31, 2019, 963,125 warrants were exercised
in cash and cashless transactions resulting in the issuance of
783,387 shares of common stock.
As of December 31, 2020 and 2019,
81,250 and 1,561,875 warrants related to the 2019 Promissory Notes
remain outstanding, respectively.
NOTE 15 – EQUITY INCENTIVE PLAN
In
August 2017, the Company approved and adopted the 2017 Equity Award
Plan (the “2017 Plan”) which replaced the 2016 Equity
Award Plan (the “2016 Plan”). The 2017 Plan permits the
granting of stock options, stock appreciation rights, restricted
and unrestricted stock awards, phantom stock, performance awards
and other stock-based awards for the purpose of attracting and
retaining quality employees, directors and consultants. Maximum
awards available under the 2017 Plan were initially set at
3,000,000 shares.
85
Stock Options
Stock options granted under the 2017 Plan may be either incentive
stock options (“ISOs”) or non-qualified stock options
(“NSOs”). ISOs may be granted to employees and NSOs may
be granted to employees, directors, or consultants. Stock options
are granted at exercise prices as determined by the Board of
Directors. The vesting period is generally three years with a
contractual term of ten years.
Stock compensation
expense related to stock options for the years ended December 31,
2020 and 2019 was $313,000 and $446,000, respectively,
and is presented as part of
general and administrative expenses in the accompanying
consolidated statements of operations.
A
summary of stock option activity under the Company’s 2017
Plan for the years ended December 31, 2020 and 2019 is as
follows:
|
|
Number of Shares
Subject to Option
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
balance at January 1, 2019
|
1,227,557
|
$
2.13
|
8.39
|
|
-
|
|
Granted
|
870,549
|
1.03
|
8.76
|
|
|
|
Forfeited
|
(111,537
)
|
1.95
|
-
|
|
|
|
Canceled
|
(331,187
)
|
2.05
|
-
|
|
|
|
Outstanding
balance at December 31, 2019
|
1,655,383
|
$
1.68
|
8.33
|
|
$
3,256
|
|
Granted
|
20,000
|
4.32
|
-
|
(1
)
|
|
|
Exercised
|
(298,392
)
|
2.35
|
-
|
|
|
|
Forfeited
|
(88,841
)
|
3.17
|
-
|
|
|
|
Canceled
|
(44,896
)
|
2.13
|
-
|
|
|
|
Outstanding
balance at December 31, 2020
|
1,243,254
|
$
1.44
|
7.57
|
|
$
7,827
|
|
Exercisable
at December 31, 2020
|
849,908
|
$
1.62
|
7.20
|
|
$
5,339
|
(1) All shares granted in the current year were forfeited in the
current year.
The weighted
average grant date fair value of options granted for the years
ended December 31, 2020 and 2019 was $3.18 and $0.52, respectively.
The intrinsic value of the stock options granted during the years
ended December 31, 2020 and 2019, was $75,000 and $2,172,000,
respectively. The total fair value of shares that became vested
after grant during the years ended December 31, 2020 and 2019 was
$316,000 and $408,000, respectively.
As of
December 31, 2020, there was $180,000 of unrecognized stock
compensation expense related to unvested stock options granted
under the 2017 Plan that will be recognized over a weighted average
period of 1.43 years.
Restricted Stock Units
Stock compensation
expense related to RSU’s for the years ended December 31,
2020 was $483,000
and was presented as part of general
and administrative expenses in the accompanying consolidated
statements of operations. There were no RSU’s outstanding
during the year ended December 31, 2019.
86
A summary of RSU activity under the
Company’s 2017 Plan for
years ended December 31, 2020
and 2019 is as follows:
|
|
Number of
Shares
|
Weighted Average
Unit Price
|
Weighted Average
Remaining Contractual Term (Years)
|
|
Outstanding
balance at January 1, 2020
|
-
|
$
-
|
-
|
|
Granted
|
488,834
|
4.44
|
2.12
|
|
Forfeited
|
(8,850
)
|
3.75
|
-
|
|
Outstanding
balance at December 31, 2020
|
479,984
|
$
4.45
|
2.12
|
The grant date fair value is based on the estimated fair value of
the Company’s common stock on the date of grant. All RSUs
granted vest upon the satisfaction of a service-based vesting
condition.
As of December 31, 2020, there was
$1,640,000 of unrecognized stock compensation expense related to
unvested RSUs granted under the 2017 Plan that will be recognized
over an average remaining period of 2.12
years.
NOTE 16 – LOSS PER SHARE
The
following table provides information relating to the calculation of
loss per common share (dollars in thousands, except per share
data):
|
|
Year ended
December 31,
|
|
|
|
2020
|
2019
|
|
Basic and diluted
loss per share
|
|
|
|
Net
loss from continuing operations
|
$
(13,962
)
|
$
(12,405
)
|
|
Less:
preferred stock accretion
|
(865
)
|
(752
)
|
|
Less:
preferred stock dividends
|
(460
)
|
(460
)
|
|
Net
loss attributable to shareholders from continuing
operations
|
(15,287
)
|
(13,617
)
|
|
Net loss from
discontinued operations
|
(220
)
|
(3,479
)
|
|
Net loss
attributable to shareholders
|
$
(15,507
)
|
$
(17,096
)
|
|
Weighted
average common shares outstanding - basic and diluted
|
24,192,680
|
20,033,023
|
|
Basic
and diluted loss per share from continuing operations
|
$
(0.63
)
|
$
(0.68
)
|
|
Basic
and diluted loss per share from discontinued
operations
|
(0.01
)
|
(0.17
)
|
|
Basic and diluted
loss per share
|
$
(0.64
)
|
$
(0.85
)
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
4,051,601
|
5,602,841
|
As the Company had a net loss for the year ended December 31, 2020,
the following 4,051,601 potentially dilutive securities were
excluded from diluted loss per share: 925,845 for outstanding
warrants, 887,461 related to the Series A Preferred Stock, 515,057
related to the Series B Preferred Stock, 1,243,254 related to
outstanding options and 479,984 related to outstanding
RSUs.
As the Company had a net loss for the year ended December 31, 2019,
the following 5,602,841 potentially dilutive securities were
excluded from diluted loss per share: 2,491,249 for outstanding
warrants, 974,487 related to the Series A Preferred Stock, 481,722
related to the Series B Preferred Stock and 1,655,383 related to
outstanding options.
87
(Loss) Earnings Per Share under Two –
Class Method
The Series A Preferred Stock and Series B Preferred Stock have
the non-forfeitable right to participate on an as converted basis
at the conversion rate then in effect in any common stock dividends
declared and, as such, is considered a participating security. The
Series A Preferred Stock and Series B Preferred Stock are
included in the computation of basic and diluted loss per share
pursuant to the two-class method. Holders of the Series A Preferred
Stock and Series B Preferred Stock do not participate in
undistributed net losses because they are not contractually
obligated to do so.
NOTE 17 – SUBSEQUENT EVENTS
Public Offering
On
February 9, 2021, the Company issued and sold 6,126,936 shares of
its common stock (which includes 799,166 shares of common stock
sold pursuant to the exercise of an overallotment option). The net
proceeds to the Company, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by the
Company, were approximately $70.1 million. The shares were sold
pursuant to an underwriting agreement with B. Riley Securities,
Inc. and Lake Street Capital Markets, LLC, as representatives of
the several underwriters named therein and our shelf registration
statement on Form S-3 (Registration Statement No. 333-224423) filed
by the Company with the SEC that became effective on April 30,
2018. On February 4, 2021, a prospectus supplement and accompanying
prospectus were filed with the SEC in connection with the offering
and a related registration statement (File No. 333-252735) was
filed pursuant to Rule 462(b) promulgated under the Securities
Act.
Automatic Conversion of Series A Cumulative Convertible Redeemable
Preferred Stock and Series B Cumulative Convertible Redeemable
Preferred Stock
As
a result of the closing of the Public Offering, all of the
Company’s issued and outstanding Series A Preferred Stock was
automatically converted and Series B Preferred Stock was converted
pursuant to their respective terms into an aggregate of 1,416,785
shares of the Company’s common stock. As a result of the
automatic conversion of the Series A Preferred, the Series A
Preferred will no longer be quoted on the OTC Pink. The Series B
Preferred was not quoted on any trading market.
Offer To Purchase Iteris
On
February 20, 2021, the Company advised Iteris Inc.
(“Iteris”) that it was prepared to offer to purchase
all of Iteris’ outstanding common stock.
The
offer to Iteris was for a combination of cash and common stock
subject to confirmatory diligence and approval of both boards of
directors. On February 26, 2021, the Company was advised that the
board of directors of Iteris declined the offer by the
Company.
88
ITEM 9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A
.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
carried out an evaluation under the supervision and with the
participation of management, including our principal executive
officer and principal financial officer, of the effectiveness of
our disclosure controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e) of the
Exchange Act) as of the end of the period covered by this Annual
Report.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as
amended (the “Securities Exchange Act”) is recorded,
processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information we are required to
disclose in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management as
appropriate to allow timely decisions regarding required
disclosure.
Based
on management’s review, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective at December
31, 2020.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f). Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
purposes in accordance with U.S. GAAP and includes those
policies and procedures that: (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect our
transactions and dispositions of our assets; (ii) provide
reasonable assurance that our transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. GAAP and that our receipts and
expenditures are being made only in accordance with authorizations;
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our consolidated
financial statements.
Under the supervision and with the participation with our
management, including our Chief Executive Officer and Chief
Financial Officer, we assessed the effectiveness of our internal
control over financial reporting as of the end of the period
covered by this report based on the framework in “Internal
Control—Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based upon this assessment, management concluded
that our internal control over financial reporting was effective as
of December 31, 2020.
In
designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met.
Attestation Report of Registered Public Accounting
Firm
This
Annual Report does not include an attestation report of our
independent registered public accounting firm because
non-accelerated filers are not required to provide such a
report.
Changes to Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
during our most recent fiscal year that have materially affected,
or are reasonably likely to materially affect, our internal control
over financial reporting.
89
ITEM 9B.
OTHER
INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE
OFFICERS AND COPORATE GOVERNANCE
The
following table sets forth our directors and executive
officers.
|
Name
|
|
Age
|
|
Position
|
|
Executive Officer
|
|
|
|
|
|
Robert A. Berman
|
|
61
|
|
President and Chief Executive Officer and Executive Chairman of the
Board (Effective July 2020)
|
|
Eyal Hen
|
|
48
|
|
Chief Financial Officer
|
|
Riaz Latifullah
|
|
64
|
|
Executive Vice President, Corporate Development
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
James K. McCarthy
|
|
69
|
|
Chairman of the Board and Strategic Advisor (Retired July
2020)
|
|
Paul A. de Bary
|
|
74
|
|
Lead Director
|
|
Glenn Goord
|
|
69
|
|
Director
|
|
David Hanlon
|
|
76
|
|
Director
|
|
Christine J. Harada
|
|
48
|
|
Director
|
|
Richard Nathan, Ph. D.
|
|
76
|
|
Director
|
|
Steven D. Croxton
|
|
53
|
|
Director
|
Directors
Robert Berman
has served as our
President and Chief Executive Officer and a member of our Board of
Directors since March 2016. In July 2020 Mr. Berman was appointed
to be the Company’s Executive Chairman upon the
recommendation of the Company’s Governance Committee. Since
January 2000, Mr. Berman has served as the General Partner of Avon
Road Partners, L.P., a limited partnership investing in real estate
and the broadcast media industry. From 2006 through March 2015, Mr.
Berman held the office of Chairman and Chief Executive Officer at
Cinium Financial Services Corporation, a privately-held specialty
finance company, and its predecessor, Upper Hudson Holdings, LLC.
Prior to Cinium, Mr. Berman was Chief Executive Officer of Empire
Resorts, Inc., a NASDAQ-listed gaming company, from
2002-2005. We believe Mr. Berman is qualified to serve on our
Board of Directors due to his extensive executive leadership and
management experience, his experience in private equity and with
public companies, and his understanding of financial markets and
mergers and acquisitions.
James K. McCarthy
retired as the
Chairman of the Board of Directors of the Company in July 2020.
Prior to Mr. McCarthy resignation, he served as the Chairman of our
Board of Directors since March 2016 and as Strategic Advisor to our
Company since April 2018. Mr. McCarthy served as our Chief Strategy
Officer from March 2016 to March 2017.
90
Richard Nathan, Ph.D
., has served on
our Board of Directors since March 2016. From April 2016 until his
retirement in February 2018, Dr. Nathan served as our Chief
Operating Officer. Prior to that, Dr. Nathan was the Chief
Executive Officer of AOC Key Solutions, where he worked for over 17
years. Dr. Nathan has over 45 years of corporate management,
program management and business and proposal development experience
and experience managing service and technical contracts for federal
departments and agencies and state governments. Dr. Nathan holds a
BS in Chemistry from the Massachusetts Institute of Technology and
a PhD in Chemistry from the Polytechnic Institute of Brooklyn. We
believe Dr. Nathan is qualified to serve on our board of directors
due to his technical background and executive leadership
experience.
Glenn Goord
has served on our Board of
Directors since March 2016. From 1996 until his retirement in 2006,
Mr. Goord served as Commissioner of the New York State Department
of Correctional Services (“NYSDCS”), where he oversaw
the state prison system. Mr. Goord received the Carl Robison Award,
the highest honor bestowed by the Middle Atlantic States
Correctional Association, in 1997. In 1998 he received the Charles
Evans Hughes Award for public service from the Albany based Capital
Area Chapter for the American Society for Public Administration
(ASPA). In 2002, ASPA awarded Mr. Goord its highest honor, the
Governor Alfred E. Smith Award, for his direction of the
NYSDCA’s efforts to aid New York City following the September
11, 2001 terrorist attack. Mr. Goord holds a BA in Psychology from
Fairleigh Dickinson University. We believe Mr. Goord is qualified
to serve on our board of directors due to his experience with
government operations and procurement.
Paul A. de Bary
has served on our Board
of Directors since January 2017 and as Lead Director since November
2017. Mr. de Bary has previously served as a partner in a Wall
Street law firm and a managing director for several broker dealers,
where he provided investment banking and financial advisory
services to governmental units and private businesses. He has
served as a director, general counsel or CFO for several public
companies and currently serves as chair of the Board of Ethics of
the Town of Greenwich, Connecticut. Mr. de Bary is a member of the
American Bar Association, the New York State Bar Association and
the Association of the Bar of the City of New York. Mr. de Bary
holds a JD, an MBA and an A.B. from Columbia University. We believe
Mr. de Bary is qualified to serve on our board of directors due to
his legal and investment experience and his experience as a member
of several boards of directors, including those of public
companies.
Christine J. Harada
has served on our
Board of Directors since August 2017. Ms. Harada has over 20 years
of experience leading government and management consulting
organizations. From November 2015 to January 2017, she served as
the Federal Chief Sustainability Officer. Prior to that role, Ms.
Harada was the Acting Chief of Staff of the U.S. General Services
Administration (“GSA”) from March 2015 through November
2015. While at the GSA, Ms. Harada also served as Associate
Administrator, Government-wide Policy and Chief Acquisition Officer
for the GSA from June 2014 through February 2015. Ms.
Harada’s private sector experience includes serving as Global
Manager, Transformation/Large Scale Change Practice at the Boston
Consulting Group from May 2013 through June 2014, and her tenure as
a principal at Booz Allen Hamilton from January 2004 through April
2013. Ms. Harada holds an M.A., in International Studies from the
Lauder Institute and an MBA, Finance from the Wharton School at the
University of Pennsylvania. She also holds an M.S. in
Aeronautics/Astronautics from Stanford University and a B.S.
Aeronautics/Astronautics from the Massachusetts Institute of
Technology. We believe Ms. Harada is qualified to serve on our
board of directors due to her knowledge of the operations of the
federal government and of corporate best practices.
David Hanlon
has served on our Board of
Directors since November 2018. Mr. Hanlon is a founding principal
of Executive Hospitality Partners, a strategic and asset management
firm. Since 2008, he has served as Chief Executive Officer of
Hanlon Investments which provides project development consulting
services to casinos, hotels and resorts. Mr. Hanlon has served as a
member of Cornell University’s Industry Advisory Board, as
well as on the Board of Directors of the Cornell Football
Association and was elected to be a lifetime member of the Cornell
University Administrative Advisory Board. He was also an advisor to
the Wharton Entrepreneurial Program. Mr. Hanlon holds a B.S. in
Hotel Administration from Cornell, an MBA in Finance and an M.S. in
Accounting from the Wharton School at the University of
Pennsylvania and graduated from the Advanced Management Program at
the Harvard Business School. We believe Mr. Hanlon is qualified to
serve on our board of directors due to his leadership and executive
management experience and experience serving on public company
boards of directors.
91
Steven D. Croxton
, is Managing Director
of Rice, Voelker, LLC and has more than 30 years’ experience
in investment and commercial banking. During his career, Mr.
Croxton has been involved in financing and advisory transactions
totaling more than $35 billion for a variety of public and private
corporations. He has previously served on the Board of Directors of
Peninsula Gaming, LLC, and has held leadership roles with
responsibilities related to investment, corporate, and
international banking. Mr. Croxton earned a B.S. in Finance from
Louisiana State University, and a Master of International
Management from the American Graduate School of International
Management (now Thunderbird School of Global Management), and holds
FINRA Series 7, 24, 63, and 79 licenses. We believe Mr. Croxton is
qualified to serve on our board of directors due to his in-depth
knowledge of the capital markets, as well as extensive background
in financing and advisory of public corporations.
Executive Officers
Robert A. Berman, Chief Executive
Officer,
President and Executive Chairman of the Board The
biography for Robert A. Berman is set forth above in the section
entitled “Directors.”
Eyal Hen, Chief Financial Officer
- Mr.
Hen has more than 17 years’ experience as a global finance
and business management executive in corporate environments, most
recently with VAYA Pharma Inc. and Ormat Technologies, Inc. (NYSE:
ORA). His expertise working as a finance executive in the public
markets, where he oversaw financial reporting, compliance
initiatives, investor communications, and financing, will be
instrumental as the Company continues its growth. Mr. Hen holds a
BA in Economics and Accounting from Ben Gurion University (Israel)
and an MBA from the University of Phoenix.
Riaz Latifullah, Executive Vice President,
Corporate Development
- Mr. Latifullah serves as Executive
Vice President, Corporate Development. On May 1, 2018, Mr.
Latifullah was appointed as our Principal Financial and Accounting
Officer, a role he assumed on an interim basis upon the resignation
of our former Chief Financial Officer. Prior to joining Rekor, Mr.
Latifullah served as the Chief Financial Officer of the American
Grandparents Association / Grandparents.com. Mr. Latifullah spent
13 years with AARP, a non-profit organization that advocates on
behalf of people over age 50. With AARP he served as Vice
President, Financial Management, Senior Director Strategic Markets
and Director Brand Operations. As an in-house entrepreneur with
AARP he created and launched five start-up operations bringing
significant changes to the organization. In other positions before
AARP Mr. Latifullah served as General Manager for TV on the WEB, an
Internet video production company, a Government Relations
Representative for the U.S. Merchant Marine Academy Alumni
Foundation and an Investment Banking Associate for Ryan, Lee and
Company. Mr. Latifullah holds an MBA from Stanford University, an
MSE in Naval Architecture and Marine Engineering from the
University of Michigan and a BS in Marine Engineering from the U.S.
Merchant Marine Academy.
Independence of Directors
Our
Board is currently comprised of seven members, five of whom are
independent directors. As of December 31, 2020, Richard Nathan and
Robert A. Berman were not independent directors. Richard Nathan
became an independent director on March 1, 2021.
The
Board, upon recommendation of the Governance Committee, unanimously
determined that each of our five non-employee directors is
“independent,” as such term is defined in the Nasdaq
Stock Market Rules (“Stock Market Rules”).
The
definition of “independent director” included in the
Stock Market Rules includes a series of objective tests, such as
that the director is not an employee of the Company, has not
engaged in various types of specified business dealings with the
Company, and does not have an affiliation with an organization that
has had specified business dealings with the Company. Consistent
with the Company’s Corporate Governance Principles, the
Board’s determination of independence is made in accordance
with the Stock Market Rules, as the Board has not adopted
supplemental independence standards. As required by the Stock
Market Rules, the Board also has made a subjective determination
with respect to each director that such director has no material
relationship with the Company (either directly or as a partner,
shareholder or officer of an organization that has a relationship
with the Company), even if the director otherwise satisfies the
objective independence tests included in the definition of an
“independent director” included in the Stock Market
Rules.
92
In
determining that each individual who served as a member of the
Board is independent, the Board considered that, in the ordinary
course of business, transactions may occur between the Company and
entities with which some of our directors are affiliated. The Board
unanimously determined that the relationships discussed in Item 13
below were not material. No unusual discounts or terms were
extended.
There
are no family relationships among any of our directors or executive
officers.
Committees of the Board
Our
Board has three standing committees: Audit, Compensation, and
Governance. Each of the committees is solely comprised of and
chaired by independent directors, each of whom the Board has
affirmatively determined is independent pursuant to the Stock
Market Rules. Each of the committees operates pursuant to its
charter. The committee Charters are reviewed annually by the
Governance Committee. If appropriate, and in consultation with the
chairs of the other committees, the Corporate Governance Committee
proposes revisions to the charters.
The responsibilities of each standing committee
are described in more detail below. From time to time, the Board of
Directors may also appoint special committees for specific
purposes. The Board has also chartered an Executive Committee to
serve in the event that our Chief Executive Officer is unable to
discharge duties for a limited period of time. The charters for the
three standing committees are available on the Company's website
at
www.rekor.ai
by following the link to
“Investors” and then to “Corporate
Governance.”
The
Chair and members of each standing committee are summarized in the
table below:
|
Name
|
|
Audit Committee
|
|
Compensation Committee
|
|
Corporate Governance Committee
|
|
Special Committee
|
|
|
|
|
|
|
|
|
|
|
|
Paul A. de Bary - (Independent)
|
|
Chair
|
|
-
|
|
Member
|
|
Member
|
|
Glenn Goord- (Independent)
|
|
Member
|
|
Chair
|
|
-
|
|
-
|
|
David Hanlon - (Independent)
|
|
-
|
|
Member
|
|
Member
|
|
Chair
|
|
Christine J. Harada - (Independent)
|
|
Member
|
|
Member
|
|
Chair
|
|
Member
|
|
Steven D. Croxton - (Independent)
|
|
Member
|
|
Member
|
|
-
|
|
-
|
Audit Committee
We have
an Audit Committee comprised of directors who are
“independent” within the meaning of Nasdaq Rule
5605(b)(1). The Audit Committee assists our Board in overseeing the
financial reporting process and maintaining the integrity of our
financial statements, and of our financial reporting processes and
systems of internal audit controls, and our compliance with legal
and regulatory requirements. The Audit Committee is responsible for
reviewing the qualifications, independence and performance of our
independent registered public accounting firm and review our
internal controls, financial management practices and investment
functions and compliance with financial legal and regulatory
requirements. The Audit Committee is also responsible for
performing risk and risk management assessments as well as
preparing any report of the Audit Committee that may be required by
the proxy rules of the SEC to be included in the
Corporation’s annual proxy statement. Our Board has
identified and appointed Paul de Bary as its “audit committee
financial expert,” as defined by the SEC in Item 407 of
Regulation S-K. Mr. de Bary serves as the Chair of the Audit
Committee, and is joined on the committee by Ms. Harada, Mr.
Croxton, and Mr. Goord.
Compensation Committee
We have
a Compensation Committee comprised of members who are
“Non-Employee Directors” within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) and “outside directors”
within the meaning of Section 162(m) of the Code. They are also
“independent” directors within the meaning of NASDAQ
Rule 5605(b)(1). The Compensation Committee is responsible for
overseeing the establishment and maintenance of our overall
compensation and incentive programs to discharge the Board’s
responsibilities relating to compensation of our executive officers
and directors, including establishing criteria for evaluating
performance and setting appropriate levels of compensation, and to
produce an annual report on executive compensation for inclusion in
the Corporation’s proxy statement in accordance with the
rules and regulations of the SEC. The Compensation Committee
advises and makes recommendations to our Board on all matters
concerning director compensation. Mr. Goord serves as Chair of the
Compensation Committee and is joined by Ms. Harada, Mr. Croxton and
Mr. Hanlon.
93
Corporate Governance Committee
Our
Board has a Governance Committee that (1) reviews and recommends
improvements to our governance guidelines and corporate policies;
(2) monitors compliance with our Code of Conduct; (3) trains new
members of the Board of Directors; (4) reviews the performance of
the Board of Directors and its various committees and makes
recommendations intended to improve that performance, (5) evaluates
and makes recommendations concerning changes in the charters of the
various Committees of the Board of Directors, (6) evaluates the
performance of the Chief Executive Officer of the Corporation, (7)
oversees the development and implementation of succession planning
for Corporation senior management positions; (8) identifies and
recommends candidates for nomination as members of the Board of
Directors and its committees; and (9) such other matters as may be
required to ensure compliance with applicable federal and state
laws or the requirements of any exchange on which the Company
maintains a listing for its securities. The committee is required
to be comprised of entirely “independent” directors
within the meaning of NASDAQ Rule 5605(b)(1). Ms. Harada currently
serves as the Chair of the Governance Committee and is joined on
the committee by Mr. Hanlon and Mr. de Bary.
Compensation of Rekor Directors
The
following table provides the total compensation for each person who
served as a non-employee member of our Board of Directors during
fiscal year 2020, including all compensation awarded to, earned by
or paid to each person who served as a non-employee director for
some portion or all of fiscal year 2020:
|
|
Fees earned or paid in cash
|
Total
|
|
Name
|
($)
|
($)
|
|
Paul
de Bary
|
$
76,000
|
$
76,000
|
|
Glenn
Goord
|
48,500
|
48,500
|
|
Christine
Harada
|
57,250
|
57,250
|
|
Richard
Nathan, Ph. D.
|
33,500
|
33,500
|
|
David
Hanlon
|
45,250
|
45,250
|
|
Steven
D. Croxton
|
38,500
|
38,500
|
For the year ended December 31, 2021 our
non-employee directors are compensated for their services as
follows:
|
|
|
Board Meeting Fee
|
Committee Meeting Fee
|
||
|
|
Annual Fee
|
In Person
|
Telephonic
|
In Person
|
Telephonic
|
|
Position
|
($) (1)
|
($)
|
($)
|
($)
|
($)
|
|
Board
Member
|
25,000
|
1,000
|
500
|
500
|
250
|
|
Audit
Committee Chair
|
20,000
|
1,500
|
500
|
500
|
250
|
|
Compensation
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Governance
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Special
Committee
|
-
|
500
|
250
|
500
|
250
|
|
Lead
Director
|
10,000
|
-
|
-
|
-
|
-
|
(1) Payments are made on a quarterly
basis.
94
On
November 5, 2020, our Board of Directors approved the following
changes to the board compensation fee structure beginning on
January 1, 2021:
|
|
|
Board Meeting Fee
|
Committee Meeting Fee
|
||
|
|
Annual Fee
|
In Person
|
Telephonic
|
In Person
|
Telephonic
|
|
Position
|
($) (1)
|
($)
|
($)
|
($)
|
($)
|
|
Board
Member
|
50,000
|
1,000
|
500
|
500
|
250
|
|
Audit
Committee Chair
|
30,000
|
1,500
|
500
|
500
|
250
|
|
Compensation
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Governance
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Special
Committee
|
-
|
500
|
250
|
500
|
250
|
|
Lead
Director
|
10,000
|
-
|
-
|
-
|
-
|
(1) Payments are made on a quarterly basis.
Directors who are
officers or employees of Rekor or its subsidiaries do not receive
any compensation for service on our Board, but employee directors
will be reimbursed for expenses incurred in attending meetings of
our Board or any committees thereof.
Code of Ethics
We have
adopted a Code of Conduct, which serves as our Code of Ethics,
which applies to all of our employees, including our Chief
Executive Officer and our Chief Financial Officer. Our Code of
Conduct is available on our website at www.rekor.ai. If we amend or
grant a waiver of one or more of the provisions of our Code of
Conduct, we intend to satisfy the requirements under Item 5.05 of
Item 8-K regarding the disclosure of amendments to or waivers from
provisions of our Code of Conduct that apply to our Principal
Executive and Principal Financial Officer by posting the required
information on our website at the above address. Our website is not
part of this Annual Report on Form 10-K.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the
Company’s directors, executive officers, and shareholders who
own more than 10% of the Company’s stock to file forms with
the SEC to report their ownership of the Company’s stock and
any changes in ownership. The Company assists its directors and
executives by identifying reportable transactions of which it is
aware and preparing and filing the forms on their behalf. All
persons required to file forms with the SEC must also send copies
of the forms to the Company. We have reviewed all forms provided to
us. Based on that review and on written information given to us by
our executive officers and directors, we believe that all Section
16(a) filings during the past fiscal year were filed on a timely
basis.
95
ITEM 11.
EXECUTIVE
COMPENSATION
This
section discusses material components of our 2020 compensation
program for our named executive officers identified in the 2020
Summary Compensation Table below.
2020 Summary Compensation Table
|
Name/Capacities in which compensation was
received
|
|
Year
|
Base Salary
|
|
Bonus
|
Equity incentive awards
|
|
All other compensation
(3)
|
Total
|
|
Robert
Berman
|
|
2020
|
$
495,000
|
|
$
-
|
$
-
|
|
$
24,826
|
$
519,826
|
|
Chief
Executive Officer
|
|
2019
|
453,205
|
(1)
|
-
|
46,605
|
(2)
|
18,194
|
518,004
|
|
Eyal
Hen
|
|
2020
|
371,667
|
(4)
|
15,000
|
237,000
|
(6)
|
19,862
|
643,529
|
|
Chief Financial
Officer
|
|
2019
|
202,074
|
(5)
|
-
|
26,415
|
(7)
|
2,488
|
230,977
|
|
Riaz
Latifullah
|
|
2020
|
305,000
|
|
25,000
|
-
|
|
25,260
|
355,260
|
|
EVP Corporate
Development
|
|
2019
|
289,680
|
(8)
|
-
|
10,566
|
(9)
|
17,700
|
317,946
|
(1)
In
2019, we increased Mr. Berman’s base salary from $395,000 to
$495,000 per year effective May 15, 2019.
(2)
Amount
represents the fair value of the issuance of 100,000 stock options
to Mr. Berman on May 8, 2019.
(3)
Amount
represents 401(k) matching and health insurance
contributions.
(4)
In
2020, we increased Mr. Hen’s base salary from $335,000 to
$375,000 per year effective February 3, 2020.
(5)
Mr.
Hen has served as Chief Financial Officer since May 15,
2019.
(6)
Amount
represents the fair value of the issuance of 50,000 restricted
stock units to Mr. Hen on February 21, 2020.
(7)
Amount
represents the fair value of the issuance of 50,000 stock options
to Mr. Hen on May 15, 2019.
(8)
In
2019, we increased Mr. Latifullah’s base salary from $285,000
to $305,000 per year effective May 15, 2019.
(9)
Amount
represents the fair value of the issuance of 20,000 stock options
to Mr. Latifullah on May 8, 2019.
Narrative
Disclosure to Summary Compensation Table
The
primary components of our compensation program for named executive
officers include salary, cash incentive compensation and equity
incentive awards.
Base
Salary
We pay
our executive officers a base salary as the fixed component of our
compensation program for named executive officers.
Equity Incentive Awards
In
August 2017, the Company approved and adopted the 2017 Equity Award
Plan (the “2017 Plan”). The purpose of the 2017 Plan is
to promote the interests of Rekor (including its subsidiaries and
affiliates, if any) and its stockholders by using equity interests
in Rekor to attract, retain and motivate its management,
nonemployee directors and other eligible persons and to encourage
and reward their contributions to our performance and
profitability. The 2017 Plan permits the granting of stock options,
stock appreciation rights, restricted and unrestricted stock
awards, phantom stock, performance awards and other stock-based
awards for the purpose of attracting and retaining quality
employees, directors and consultants. The 2017 Plan reserved
3,000,000 shares of our common stock for future grants from time to
time under awards administered by our Board of
Directors.
96
Rekor
has also designed the 2017 Plan to include a number of provisions
that Rekor’s management believes promote best practices by
reinforcing the alignment of equity compensation arrangements for
nonemployee directors, officers, employees, consultants and
stockholders’ interests. These provisions include, but are
not limited to, the following:
No Discounted Awards
. Awards that have
an exercise price cannot be granted with an exercise price less
than the fair market value on the grant date.
No Repricing Without Stockholder
Approval
. Rekor cannot, without stockholder approval, reduce
the exercise price of an award (except for adjustments in
connection with a Rekor recapitalization), and at any time when the
exercise price of an award is above the market value of Rekor
common stock, Rekor cannot, without stockholder approval, cancel
and re-grant or exchange such award for cash, other awards or a new
award at a lower (or no) exercise price.
No Evergreen Provision
. There is no
evergreen feature under which the shares of common stock authorized
for issuance under the 2017 Plan can be automatically
replenished.
No Automatic Grants
. The 2017 Plan does
not provide for “reload” or other automatic grants to
recipients.
No Transferability.
Awards generally
may not be transferred, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order,
unless approved by the Administrator.
No Tax Gross-Ups.
The 2017 Plan does
not provide for any tax gross-ups.
No Liberal Change-in-Control
Definition.
The change-in-control definition contained in
the 2017 Plan is not a “liberal” definition that would
be activated on mere stockholder approval of a
transaction.
“Double-trigger” Change in Control
Vesting.
If awards granted under the 2017 Plan are assumed
by a successor in connection with a change in control of Rekor,
such awards will not automatically vest and pay out solely as a
result of the change in control, unless otherwise expressly set
forth in an award agreement.
No Dividends on Unearned Performance
Awards
. The 2017 Plan prohibits the current payment of
dividends or dividend equivalent rights on unearned
performance-based awards.
Limitation on Amendments.
No
amendments to the 2017 Plan may be made without stockholder
approval if any such amendment would materially increase the number
of shares reserved or the per-participant award limitations under
the 2017 Plan, diminish the prohibitions on repricing stock options
or stock appreciation rights, or otherwise constitute a material
change requiring stockholder approval under applicable laws,
policies or regulations or the applicable listing or other
requirements of the principal exchange on which Rekor’s
shares are traded.
Clawbacks.
Awards based on the
satisfaction of financial metrics that are subsequently reversed,
due to a financial statement restatement or reclassification, are
subject to forfeiture.
When making an award under the 2017 Plan, the Administrator may
designate the award as “qualified performance-based
compensation,” which means that performance criteria must be
satisfied in order for an employee to be paid the award. Qualified
performance-based compensation may be made in the form of
restricted common stock, restricted stock units, common stock
options, performance shares, performance units or other stock
equivalents. The 2017 Plan includes the performance criteria the
Administrator has adopted, subject to stockholder approval, for a
“qualified performance-based compensation”
award.
97
Outstanding Equity Awards at Fiscal Year-End
The
following table sets forth information with respect to unexercised
stock options, stock that has not vested, and equity incentive plan
awards held by our named executive officers at December 31,
2020.
|
|
|
|
Option Awards
(3)
|
Restricted Stock Awards
(3)
|
|||||
|
Name
|
|
Grant Date
|
Number of Securities Underlying Unexercised Option -
Exercisable
|
Number of Securities Underlying Unexercised Options -
Unexercisable
|
|
Option Exercise Price
|
Option Expiration Date
|
Number of Shares that Have Not Vested
|
Market Value of Shares of Stock that Have not
Vested
(2)
|
|
Robert
Berman
|
|
5/8/19
|
16,667
|
33,333
|
(1)
|
1.00
|
5/8/29
|
-
|
-
|
|
|
|
5/8/19
|
16,667
|
33,333
|
(1)
|
1.50
|
5/8/29
|
-
|
-
|
|
Eyal
Hen
|
|
2/21/20
|
|
|
|
|
|
50,000
(1)
|
403,500
|
|
|
|
5/15/19
|
16,667
|
33,333
|
(1)
|
0.78
|
5/15/29
|
-
|
-
|
|
Riaz
Latifullah
|
|
5/8/19
|
6,667
|
13,333
|
(1)
|
0.80
|
5/8/29
|
-
|
-
|
|
|
|
12/31/16
|
174,595
|
-
|
|
1.42
|
12/31/26
|
-
|
-
|
(1)
The
options and awards vest in equal annual installments over three
years.
(2)
Represents
the market value of the restricted stock award or restricted stock
unit based on the closing price of our common stock of $8.07 per
share on December 31, 2020.
(3)
All
of the options and restricted stock unit awards listed in the table
were granted under our 2017 Equity Award Plan.
Employment Agreements and Potential Payments Upon Termination or
Change in Control
We have
entered into employment agreements with our executives in
connection with his or her commencement of employment with
us.
Berman Employment Agreement
The
Employment Agreement entered into May 15, 2019 with Robert Berman
(“Berman Employment Agreement”) provides that Mr.
Berman will serve as our Chief Executive Officer and President. The
agreement has a term of five years with automatically renewing
one-year terms thereafter. This agreement supersedes Mr.
Berman’s previous employment agreement which otherwise would
have expired by its terms on March 31, 2022. Mr. Berman’s
base salary is $495,000 per annum, and he is eligible for a bonus
as determined by our Compensation Committee. Mr. Berman is also
eligible to receive all such other benefits as are provided to
other management employees.
Mr. Berman
was granted options to purchase 100,000 shares of common stock of
the Company with an exercise price per share as follows: 50,000
shares at $1.00 and 50,000 shares at $1.50.
In the
event of a “Change of Control”, as defined in the
Berman Employment Agreement, whether during the initial term or
thereafter, we shall have the right to terminate the Berman
Employment Agreement. Mr. Berman is eligible to receive two times
his base salary then in effect if his employment with the Company
is terminated within 120 days of a change in control (as such is
defined in the Berman Employment Agreement).
Mr.
Berman also agreed as consideration for entering into the Berman
Employment Agreement, that for the period during his employment and
for twelve months thereafter, (i) he will not compete with the
Company in the “Geographic Area”, as defined in the
Berman Employment Agreement, and (ii) he will not solicit any of
our existing employees, suppliers or customers.
98
Hen Employment Agreement
The
Employment Agreement with Eyal Hen (the “Hen Employment
Agreement”) provides that Mr. Hen will serve as our Chief
Financial Officer for an initial three-year term that began on May
15, 2019, subject to automatic extension. His base salary of
$335,000 per annum and will be eligible for a bonus as determined
by the Board of Directors of the Company (the “Board”)
in its sole discretion. Mr. Hen is also eligible to receive all
such other benefits as are provided to other management
employees.
Mr. Hen
was granted options to purchase 50,000 shares of common stock of
the Company, $0.0001 par value per share (“ Common
Stock”), pursuant to the Company’s 2017 Equity Award
Plan (the “2017 Plan”), which will vest in three equal
annual installments on the first (May 15, 2020), second (May 15,
2021), and third (May 15, 2022) anniversaries of the grant date, at
a strike price of $0.78 per share, the closing price of the
Company’s Common Stock on May 15, 2019.
Mr. Hen
is eligible to receive two times his base salary then in effect if
his employment with the Company is terminated within 120 days of a
change of control (as such term is defined in the Hen Employment
Agreement).
Mr. Hen
also agreed as consideration for entering into the Hen Employment
Agreement, that for the period during his employment and for twelve
months thereafter, (i) he will not compete with the Company in the
“Geographic Area”, as defined in the Hen Employment
Agreement, and (ii) he will not solicit any of our existing
employees, suppliers or customers.
Riaz Latifullah Employment Agreement
The
employment agreement with Riaz Latifullah (the “Latifullah
Employment Agreement”) provides that Mr. Latifullah shall be
Executive Vice President of Corporate Development, effective May
15, 2019, for an initial term to end on April 7, 2022, subject to
automatic extension. Mr. Latifullah’s annual base salary is
$305,000, and he will be eligible for a bonus as determined by the
Board in its sole discretion. Mr. Latifullah is also eligible to
receive all such other benefits as are provided to other management
employees.
On May
8, 2019, pursuant to the Latifullah Employment Agreement, Mr.
Latifullah was granted options to purchase 20,000 shares of common
stock, pursuant to the 2017 Plan, which will vest in three equal
annual installments on the first (May 8, 2020), second (May 8,
2021), and third (May 8, 2022) anniversaries of the grant date, at
a strike price of $0.80 per share, the closing price of the
Company’s common stock on May 8, 2019.
Mr.
Latifullah is eligible to receive two times his base salary then in
effect if Mr. Latifullah’s employment with the Company is
terminated within 120 days of a change of control (as such term is
defined in the Latifullah Employment Agreement).
Mr.
Latifullah also agreed as consideration for entering into the
Latifullah Employment Agreement, that for the period during his
employment and for twelve months thereafter, (i) he will not
compete with the Company in the “Geographic Area”, as
defined in the Latifullah Employment Agreement, and (ii) he will
not solicit any of our existing employees, suppliers or
customers.
Matthew Hill Employment Agreement
On
November 14, 2018, concurrent with the execution of the OpenALPR
Purchase Agreement, the Company entered into an employment
agreement with Matthew Hill (the “Hill Employment
Agreement”) which became effective as of March 12, 2019, the
closing date of the OpenALPR Purchase Agreement, pursuant to which
Mr. Hill began serving as Rekor’s Chief Science Officer. The
Hill Employment Agreement provides for a term of three years unless
earlier terminated pursuant to the terms thereof which term renews
for additional one-year terms until terminated upon ninety days
advance notice. Mr. Hill will earn an annual base salary of
$165,000.
99
Either
party may terminate the Hill Employment Agreement with or without
cause with notice as contemplated by the Hill Employment Agreement,
provided however, if Mr. Hill resigns, he shall provide the Company
with at least six months prior written notice. The Hill Employment
Agreement provides for the payment of severance under certain
circumstances as outlined therein.
Mr. Hill also
agreed that, for the period during his employment and for one year
thereafter, he will not compete with Rekor in the “Restricted
Territory”, as defined in Exhibit A to the Hill Employment
Agreement, and he will not solicit any of Rekor’s existing
employees, suppliers or customers.
Securities authorized for issuance under equity compensation
plans
The
following table provides information about our equity compensation
plans as of December 31, 2020.
Equity Compensation Plan Information
|
|
Number of securities to be issued upon exercise of outstanding
options and restricted stock units
|
Weighted-average exercise price of outstanding options and
restricted stock units
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
1,723,238
|
$
1.44
|
964,372
|
|
Total
|
1,723,238
|
$
1.44
|
964,372
|
ITEM 12.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth, as March 12, 2021, information
concerning the beneficial ownership of our common stock by, each
person or group of persons known to beneficially own more than 5%
of the outstanding shares of our common stock, each person who
is our executive officer or director, and all such executive
officers and directors as a group. Beneficial ownership and
percentage ownership are determined in accordance with the rules of
the SEC. Under these rules, beneficial ownership generally includes
any shares as to which the individual or entity has sole or shared
voting power or investment power and includes any shares that an
individual or entity has the right to acquire beneficial ownership
of within 60 days of March 12, 2021 through the exercise of any
option, warrant, conversion privilege or similar right. In
computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of our common stock
that could be issued upon the exercise of outstanding options and
warrants that are exercisable within 60 days of March 12, 2021 are
considered to be outstanding. These shares, however, are not
considered outstanding when computing the percentage ownership of
any other person.
100
To our
knowledge, except as indicated in the footnotes to the following
table, all beneficial owners named in this table have sole voting
and investment power with respect to all shares shown as
beneficially owned by them. Percentage of ownership is based on
40,804,219 shares of common stock outstanding as of March 12,
2021.
|
|
Shares Beneficially Owned
|
||
|
Name and address of beneficial owner (1)
|
Number of Shares beneficially owned (2)
|
|
Percent of class
|
|
Directors and Named Executive Officers
|
|
|
|
|
Robert
A. Berman
|
5,754,608
|
(3
)
|
14.1
%
|
|
Richard
Nathan
|
1,625,104
|
(4
)
|
4.0
%
|
|
Matthew
Hill
|
1,586,669
|
(5
)
|
3.9
%
|
|
Paul
de Bary
|
137,834
|
(6
)
|
*
|
|
Glenn
Goord
|
166,334
|
(7
)
|
*
|
|
Christine
Harada
|
80,334
|
(8
)
|
*
|
|
David
Hanlon
|
80,334
|
(8
)
|
*
|
|
Steven
Croxton
|
57,834
|
(9
)
|
*
|
|
Eyal
Hen
|
34,559
|
(10
)
|
*
|
|
Riaz
Latifullah
|
187,929
|
(11
)
|
*
|
|
All
directors and named executive officers as a group (11
persons)
|
9,711,539
|
|
23.8
%
|
|
5% or Greater Shareholders
|
|
|
|
|
Avon
Road Partners, L.P.
|
2,940,104
|
(3
)
|
7.2
%
|
|
Rekor
Holdings LLC
|
2,725,836
|
(3
)
|
6.7
%
|
|
Superius
Securities Group Inc Profit Sharing Plan
|
1,799,015
|
(12
)
|
4.4
%
|
|
Cedarview
Capital Management, LP
|
545,330
|
(13
)
|
1.3
%
|
*
Less than 1%
(1)
Unless
otherwise indicated, the address of those listed is c/o Rekor
Systems, Inc., 7172 Columbia Gateway Drive, Suite 400, Columbia, MD
21046. Unless otherwise indicated, all shares are owned directly by
the beneficial owner
(2)
Based
on 40,804,219 shares of our common stock issued and outstanding as
of the March 12, 2021.
(3)
As the general partner and Manager of Avon Road
Partners, L.P. and Rekor Holdings LLC, respectively, Mr. Berman may
be deemed to be the beneficial owner of 5,754,608 shares of Rekor
Systems, Inc. common stock, or 1
4.1%
of the class of securities. He may be deemed to
share with Avon Road (and not with any third-party) the power to
vote or direct the vote of and to dispose or direct the disposition
of the 2,940,104 shares of Rekor Systems, Inc. common stock
beneficially owned by Avon Road, or
8.9%
of the class of securities. He may also be deemed
to share with Rekor Holdings LLC (and not with any third-party) the
power to vote or direct the vote of and to dispose or direct the
disposition of the 2,725,836 shares of Rekor Systems, Inc. common
stock beneficially owned by Rekor Holdings LLC, or 8.3% of the
class of securities. It also consists of options to purchase 66,668
shares of our common stock exercisable within 60 days of March 12,
2021. Based on the Schedule 13D/A Amendment No. 5 filed with the
SEC by Avon Road, Rekor Holdings LLC and Mr. Berman on December 18,
2020.
(4)
Consists
of 1,610,920 shares of our common stock, a Unit Warrant to purchase
4,849 shares of our common stock exercisable within 60 days of
March 12, 2021 and RSU's to purchase 9,335 shares of our common
stock exercisable within 60 days of March 12, 2021.
(5)
Consists
of 1,586,669 shares of Rekor Systems, Inc. common
stock.
(6)
Consists of RSU's
and options to purchase 117,834 shares of our common stock
exercisable within 60 days of March 12, 2021, and 20,000 shares of
our common stock.
(7)
Consists of RSU's
and options to purchase 80,334 shares of our common stock
exercisable within 60 days of March 12, 2021, and 86,000 shares of
our common stock.
(8)
Consists of RSU's
and options to purchase 80,334 shares of our common stock
exercisable within 60 days of March 12, 2021.
101
(9)
Consists of RSU's
and options to purchase 57,834 shares of our common stock
exercisable within 60 days of March 12, 2021.
(10)
Mr. Hen serves as
our Chief Financial Officer and Principal Financial and Accounting
Officer since May 15, 2019 and consists of RSU's and options to
purchase 34,559 shares of our common stock exercisable within 60
days of March 12, 2021, and 1,225 shares of our common
stock.
(11)
Consists of options
to purchase 187,929 shares of our common stock exercisable within
60 days of March 12, 2021.
(12)
Based on the
Schedule 13G/A Amendment No. 2 as filed with the Securities and
Exchange Commission on February 4, 2021, reporting beneficial
ownership of 5.45% based on 32,974,257 shares issued and
outstanding. The address of the reporting person is 94 Grand Ave,
Englewood, NJ 07631.
(13)
Based on the
Schedule 13G/A Amendment No. 1 as filed with the Securities and
Exchange Commission on February 16, 2021, reporting beneficial
ownership of 1.36% based on 39,844,106 shares issued and
outstanding. The address of the reporting person is One Penn Plaza,
45th Floor, New York, New York 10119
ITEM 13
.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In
addition to the Chief Executive Officer and director compensation
arrangements discussed above under “Compensation of Rekor
Directors” and “Executive Compensation,” the
following is a description of each transaction since January 1,
2017
and
any currently proposed transaction in which: we have been or are to
be a participant; the amount involved exceeded or will exceed
the lesser of $120,000 or one percent of the average of our total
assets at year-end for the last two completed fiscal years; and any
of our directors, executive officers, holders of more than five
percent of our capital stock, or
any immediate family member
of, or person sharing the household with, any of these individuals,
had or will have a direct or indirect material
interest.
Avon Road Note Purchase Agreement
On
March 16, 2016, we entered into a Subordinated Note and
Warrant Purchase Agreement (the “Avon Road Note Purchase
Agreement”) pursuant to which we agreed to issue up to
$1,000,000 in subordinated debt (the “Avon Road Note”)
and warrants to purchase up to 242,493 shares of our common stock
(the “Avon Road Subordinated Note Warrants”). The
exercise price for the Avon Road Subordinated Note Warrants is
$1.031 per share of common stock. Subordinated notes with a
face amount of $500,000 and Avon Road Subordinated Note Warrants to
purchase 121,247 shares of our common stock have been issued
pursuant to the Avon Road Note Purchase Agreement to Avon Road, an
affiliate of Robert Berman, Rekor’s Chief Executive Officer
and a member of our Board of Directors. The Avon Road Subordinated
Note Warrants expired on March 16, 2019.
The
Avon Road Note accrued simple interest on the unpaid principal of
the note at a rate equal to the lower of (a) 9% per
annum, or (b) the highest rate permitted by applicable law.
Interest was payable monthly with a maturity date of March 16,
2019. The effective interest rate of the Avon Road Note was 12.9%.
On October 23, 2018, the maturity date of this note was extended to
March 16, 2020. On March 12, 2019, the $500,000 balance due on the
Avon Road Note was retired in its entirety.
102
ITEM 14.
PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The
Audit Committee reviews and pre-approves both audit and all
permissible non-audit services provided by our independent
registered public accounting firm.
Friedman LLP
(“Friedman”) has served as our principal auditor since
June 2019. BD & Company, Inc. (“BD & Company”)
provided principal auditor services from May 2017 through June
2019.
The
Audit Committee has considered whether the provision of services,
other than services rendered in connection with the audit of our
annual financial statements, is compatible with maintaining
Friedman’s independence. The Audit Committee has determined
that the rendering of non-audit services by BD & Company during
2019 was compatible with maintaining the firm’s
independence.
Aggregate fees
billed or incurred related to the following years for professional
services rendered by Friedman for 2020 and 2019 are set forth
below.
|
|
Year ended
December 31,
|
|
|
|
2020
|
2019
|
|
|
(Dollars in
thousands)
|
|
|
Audit
fees
|
$
204
|
$
179
|
|
All other
fees
|
16
|
13
|
|
Total
|
$
220
|
$
192
|
Aggregate fees
billed or incurred related to the following years for professional
services rendered by BD & Company for 2020 and 2019 are set
forth below.
|
|
Year ended
December 31,
|
|
|
|
2020
|
2019
|
|
|
(Dollars in
thousands)
|
|
|
Audit
fees
|
$
-
|
$
130
|
|
Tax
fees
|
67
|
42
|
|
All other
fees
|
8
|
102
|
|
Total
|
$
75
|
$
274
|
Audit
Fees for 2020 and 2019 include fees associated with the audits of
the annual financial statements and the quarterly reviews of the
unaudited interim financial statements included in the
Company’s Annual and Quarterly Reports on Form 10-K and 10-Q,
respectively. Audit-related fees for 2020 primarily include costs
associated with SEC filings and the supplemental audit and
disclosure documents. Tax fees for 2020 and 2019 include fees
associated with the preparation and reviews of tax returns,
advising on the impact of local tax laws and tax planning. All
other fees for 2020 include fees associated with the sale of our
non-core subsidiaries and 401k services. All other fees for 2019
include fees associated with the Sales Agreement with B. Riley, SOX
support and transition costs from BD & Company to Friedman. In
June 2019, BD & Company became our tax provision and tax return
preparer, and the fees associated with these services are presented
as tax fees in the table above.
103
PART IV
ITEM 15.
EXHIBITS, FINANCIAL
STATEMENTS SCHEDULES
(a)
(1) List Financial Statements
See
Index to Financial Statements in Part II, Item 8 of this annual
report.
(2) List of Financial Statements Schedules
All
applicable schedule information is included in our Financial
Statements in Part II, Item 8 of this annual
report.
(b) Exhibits Index.
We hereby file, as exhibits to this Annual Report, those exhibits
listed on the Exhibit Index immediately following the signature
page hereto.
|
|
|
|
|
Incorporated by Reference
|
|
|
||||||
|
Exhibit Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
FilingDate
|
|
Filed/
FurnishedHerewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Amended and Restated Agreement and Plan of Merger dated July 12,
2017, by and among Novume Solutions, Inc., KeyStone Solutions,
Inc., Brekford Traffic Safety, Inc., KeyStone Merger Sub, LLC, and
Brekford Merger Sub, Inc.
|
|
S-4/A
|
|
333-216014
|
|
2.1
|
|
7/13/17
|
|
|
|
|
|
|
Amended
and Restated Certificate of Incorporation of Novume Solutions, Inc.
as filed with the Secretary of State of Delaware on August 21,
2017
|
|
8-K
|
|
333-216014
|
|
3.1
|
|
8/25/17
|
|
|
|
|
|
Certificate
of Amendment to Certificate of Incorporation of Novume Solutions,
Inc. as filed with the Secretary of State of Delaware on April 30,
2019
|
|
8-K
|
|
001-38338
|
|
3.1
|
|
4/30/19
|
|
|
|
|
|
Second
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Rekor Systems, Inc., dated March 18,
2020
|
|
8-K
|
|
001-38338
|
|
3.1
|
|
3/18/20
|
|
|
|
3.
5
|
|
Amended
and Restated Bylaws of Rekor Systems, Inc.
|
|
8-K
|
|
001-38338
|
|
3.2
|
|
4/30/19
|
|
|
|
|
Form of
Common Stock Purchase Warrant issued by Novume Solutions, Inc. on
January 25, 2017
|
|
S-4/A
|
|
333-216014
|
|
4.3
|
|
6/9/17
|
|
|
|
|
|
Form of
Common Stock Purchase Warrant issued by Novume Solutions, Inc. on
January 25, 2017
|
|
S-4/A
|
|
333-216014
|
|
4.4
|
|
6/9/17
|
|
|
|
|
|
Form of
Warrant issued by Novume Solutions, Inc. on March 12,
2019
|
|
8-K
|
|
001-38338
|
|
4.1
|
|
3/18/19
|
|
|
|
|
|
Unsecured
Subordinated Promissory Note issued to Harry Rhulen by Novume
Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.2
|
|
10/3/17
|
|
|
|
|
|
|
Unsecured
Subordinated Promissory Note issued to Suzanne Loughlin by Novume
Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.3
|
|
10/3/17
|
|
|
104
|
|
|
Unsecured
Subordinated Promissory Note issued to James Satterfield by Novume
Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.4
|
|
10/3/17
|
|
|
|
|
|
Unsecured
Subordinated Promissory Note issued to Lancer Financial Group, Inc.
by Novume Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.5
|
|
10/3/17
|
|
|
|
|
Form of
Senior Secured Note issued by Novume Solutions, Inc. on March 12,
2019
|
|
8-K
|
|
001-38338
|
|
4.2
|
|
3/18/19
|
|
|
|
|
|
|
Note
Purchase Agreement, dated as of March 12, 2019, by and among Novume
Solutions, Inc., Cedarview Capital Management, LP, the Guarantors
from time to time party thereto, U.S. Bank National Association,
and the Purchasers from time to time party thereto
|
|
8-K
|
|
001-38338
|
|
4.3
|
|
3/18/19
|
|
|
|
|
|
Registration
Rights Agreement, dated as of October 1, 2017, by and among Novume
Solutions, Inc., G&W Ventures Inc. and Paul
Milligan
|
|
8-K
|
|
000-55833
|
|
4.1
|
|
10/4/17
|
|
|
|
|
2017
Equity Award Plan of Novume Solutions, Inc.
|
|
S-8
|
|
333-220864
|
|
4.7
|
|
10/6/17
|
|
|
|
|
|
Employment
Agreement, dated as of March 16, 2016, by and between KeyStone
Solutions, Inc. and Robert A. Berman
|
|
1-A
|
|
024-10551
|
|
6.1
|
|
5/12/16
|
|
|
|
|
|
Employment
Agreement, dated August 1, 2016, by and between KeyStone Solutions,
Inc. and Riaz Latifullah
|
|
1-A/A
|
|
024-10551
|
|
6.11
|
|
9/2/16
|
|
|
|
|
|
|
Restated,
Amended and Supplemental Employment Agreement, dated as of August
28, 2017, by and between Novume Solutions, Inc. and Riaz
Latifullah
|
|
8-K
|
|
333-216014
|
|
10.2
|
|
8/29/17
|
|
|
|
|
|
Second
Restated, Amended and Supplemental Employment Agreement, dated as
of March 29, 2018, by and between Novume Solutions, Inc. and Riaz
Latifullah
|
|
10-K
|
|
001-38338
|
|
10.24
|
|
4/12/18
|
|
|
|
|
Employment
Agreement, dated as of November 14, 2018, by and between Novume
Solutions, Inc. and Matthew Hill
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
11/15/18
|
|
|
|
|
|
|
Assignment
and Assumption Agreement, dated as of October 1, 2017, by and
between KeyStone Solutions LLC and Novume Solutions,
Inc.
|
|
8-K
|
|
000-55833
|
|
10.1
|
|
10/3/17
|
|
|
|
|
|
General
Continuing Guaranty, dated as of October 4, 2017, by and between
Wells Fargo Bank, National Association and Novume Solutions, Inc.
for Global Technical Services, Inc.
|
|
8-K
|
|
000-55833
|
|
10.1
|
|
10/4/17
|
|
|
|
|
|
General
Continuing Guaranty, dated as of October 4, 2017, by and between
Wells Fargo Bank, National Association and Novume Solutions, Inc.
for Global Contract Professionals, Inc.
|
|
8-K
|
|
000-55833
|
|
10.2
|
|
10/4/17
|
|
|
105
|
|
|
Security
Agreement, dated as of April 3, 2018, by and between Brekford
Traffic Safety, Inc. and Cedarview Opportunities Master Fund,
LP
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
4/9/18
|
|
|
|
|
|
Asset
Purchase Agreement, dated as of November 14, 2018, by and among
Novume Solutions, Inc., OpenALPR Technology, Inc. and Matthew
Hill
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
11/15/18
|
|
|
|
|
|
Amendment
No. 1 to Purchase Agreement, dated as of February 15, 2019, by and
among Novume Solutions, Inc., OpenALPR Technology, Inc. and Matthew
Hill
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
3/18/19
|
|
|
|
|
|
Amendment
No. 2 to Purchase Agreement, dated as of March 12, 2019, by and
among Novume Solutions, Inc., OpenALPR Technology, Inc. and Matthew
Hill
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
3/18/19
|
|
|
|
|
|
Management
Services Agreement, dated as of October 9, 2018, by and between
Novume Solutions, Inc. and OpenALPR Technologies, Inc.
|
|
10-Q
|
|
001-38338
|
|
10.2
|
|
11/13/18
|
|
|
|
|
Sublease
effective January 1, 2019 by and between BlueWater Federal
Solutions, Inc and AOC Key Solutions, Inc.
|
|
10-K
|
|
001-38338
|
|
10.17
|
|
4/11/19
|
|
|
|
|
|
Form of
Novume Solutions, Inc. Incentive Stock Option Award
Agreement
|
|
10-K
|
|
001-38338
|
|
10.18
|
|
4/11/19
|
|
|
|
|
|
Form of
Novume Solutions, Inc. Non-Qualified Stock Option Award
Agreement
|
|
10-K
|
|
001-38338
|
|
10.19
|
|
4/11/19
|
|
|
|
|
|
Employment
Agreement with Eyal Hen effective May 15, 2019
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
5/21/19
|
|
|
|
|
|
Employment
Agreement with Robert Berman effective May 15, 2019
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
5/21/19
|
|
|
|
|
|
Employment
Agreement with Riaz Latifullah effective May 15, 2019
|
|
8-K
|
|
001-38338
|
|
10.3
|
|
5/21/19
|
|
|
|
|
|
Form of
Rekor Systems, Inc. Restricted Stock Unit Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Amendment to Note Purchase Agreement, dated March 26, 2020, by and
among the Company, the Purchasers from time to time party thereto
and the Agent.
|
|
8-K
|
|
001-38338
|
|
10.25
|
|
3/26/20
|
|
|
|
|
|
Limited
Waiver, dated as of March 26, 2020, by and among the Company and
the undersigned Purchasers.
|
|
8-K
|
|
001-38338
|
|
10.26
|
|
3/26/20
|
|
|
|
|
|
Subsidiaries
of Rekor Systems, Inc.
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Consent
of Friedman LLP., Independent Registered Public Accounting
Firm
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Section
1350 Certification of Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
**
|
|
|
|
Section
1350 Certification of Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
**
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
*
|
Filed
herewith.
|
|
**
|
Furnished
herewith.
|
|
#
|
Indicates
management contract or compensatory plan.
|
|
^
|
Confidential
treatment has been granted with respect to redacted portions of
this exhibit. Redacted portions of this exhibit have been filed
separately with the SEC.
|
ITEM 16.
FORM 10-K
SUMMARY
None.
106
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
|
Rekor
Systems, Inc.
|
|
|
|
|
|
|
|
/s/
Robert A. Berman
|
|
|
Name:
|
Robert
A. Berman
|
|
|
Title:
|
President
and Chief Executive Officer
Principal
Executive Officer
|
|
|
Date:
|
March 12,
2021
|
|
|
|
/s/ Eyal
Hen
|
|
|
Name:
|
Eyal
Hen
|
|
|
Title:
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
Date:
|
March 12,
2021
|
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Robert A.
Berman
Robert A. Berman
|
|
Chief
Executive Officer
(Principal
Executive Officer), Chairman of the Board and Director
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ Eyal
Hen
Eyal Hen
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ Richard
Nathan
Dr. Richard Nathan
|
|
Director
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ Glenn
Goord
Glenn Goord
|
|
Director
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ Paul de
Bary
Paul de Bary
|
|
Director
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ Christine J.
Harada
Christine J. Harada
|
|
Director
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ David
Hanlon
David Hanlon
|
|
Director
|
|
March 12, 2021
|
|
|
|
|
|
|
|
/s/ Steven D.
Croxton
Steven D. Croxton
|
|
Director
|
|
March 12, 2021
|
107
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementry DataNote 1 Business and Significant Accounting PoliciesNote 2 Business AcquisitionsNote 3 Discontinued OperationsNote 4 Supplemental Disclosures Of Cash Flow InformationNote 5 InventoryNote 6 - Property and Equipment, NetNote 7 LeasesNote 8 Intangible AssetsNote 9 DebtNote 10 Income TaxesNote 12 Employee Benefit PlanNote 13 Commitments and ContingenciesNote 14 Stockholders (deficit) EquityNote 14 StockholdersNote 15 Equity Incentive PlanNote 16 Loss Per ShareNote 17 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NoneItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Coporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statements SchedulesItem 16. Form 10-k Summary