REKOR SYSTEMS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2019
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)
|
Delaware
|
|
81-5266334
|
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification No.)
|
7172 Columbia Gateway Drive, Suite 400
Columbia, MD
(Address principal executive offices)
21046
(Zip Code)
(410) 762-0800
(Registrant’s telephone number, including area
code)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past
90 days. Yes
☒
No
☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit 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.
|
Large
accelerated filer
☐
|
Accelerated
filer
☐
|
|
Non-accelerated
filer
☒
|
Smaller
reporting company
☒
|
|
|
Emerging
growth company
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes
☐
No
☒
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common
Stock, $0.0001 par value per share
|
REKR
|
The
Nasdaq Stock Market
|
As of
November 14, 2019, the Registrant had 21,033,005 shares of common
stock, $0.0001 par value per share outstanding.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q (the “Quarterly Report”)
contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve
substantial risks and uncertainties including particularly
statements regarding our future results of operations and financial
position, business strategy, prospective products and services,
timing and likelihood of success, plans and objectives of
management for future operations, and future results of current and
anticipated products and services. These statements involve
uncertainties, such as known and unknown risks, and are dependent
on other important factors that may cause our actual results,
performance or achievements to be materially different from the
future results, performance or achievements we express or imply. In
some cases, you can identify forward-looking statements by terms
such as “may,” “will,”
“should,” “expect,” “plan,”
“anticipate,” “could,”
“intend,” “target,” “project,”
“contemplates,” “believes,”
“estimates,” “predicts,”
“potential” or “continue” or the negative
of these terms or other similar expressions. These forward-looking
statements speak only as of the date of this Quarterly Report and
are subject to a number of risks, uncertainties and assumptions
described under the sections in our Annual Report on Form 10-K for
the year ended December 31, 2018 entitled “Risk
Factors” and elsewhere in this Quarterly Report.
Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements. Readers are urged to carefully review and consider the
various disclosures made in this Form 10-Q and in other documents
we file from time to time with the SEC that disclose risks and
uncertainties that may affect our business. The forward-looking
statements in this Form 10-Q do not reflect the potential impact of
any divestitures, mergers, acquisitions, or other business
combinations that had not been completed as of the date of this
filing.
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, you should not rely on these forward-looking statements as
predictions of future events. We undertake no obligation to update
any forward-looking statement as a result of new information,
future events or otherwise.
2
Table of Content
REKOR SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
|
PART I
- FINANCIAL INFORMATION
|
4
|
|
|
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
36
|
||
|
52
|
||
|
52
|
||
|
|
|
|
|
PART II
- OTHER INFORMATION
|
54
|
|
|
54
|
||
|
54
|
||
|
54
|
||
|
55
|
||
|
55
|
||
|
55
|
||
|
56
|
||
|
|
|
|
|
57
|
||
3
PART I FINANCIAL INFORMATION
I
TEM 1. FINANCIAL
STATEMENTS
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
|
ASSETS
|
September 30,
2019
|
December 31,
2018
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$
1,273
|
$
2,069
|
|
Restricted
cash and cash equivalents
|
708
|
609
|
|
Accounts
receivable, net
|
4,714
|
2,976
|
|
Inventory
|
385
|
73
|
|
Other
current assets, net
|
106
|
167
|
|
Current
assets held for sale
|
3,529
|
2,636
|
|
Total current assets
|
10,715
|
8,530
|
|
Property
and equipment, net
|
1,712
|
1,291
|
|
Right-of-use
lease assets, net
|
761
|
-
|
|
Goodwill
|
6,336
|
1,402
|
|
Intangible
assets, net
|
7,300
|
2,627
|
|
Deposits
and other long-term assets
|
13
|
51
|
|
Long-term
assets held for sale
|
3,986
|
4,154
|
|
Total assets
|
$
30,823
|
$
18,055
|
|
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$
5,568
|
$
3,437
|
|
Short-term
borrowings
|
1,558
|
566
|
|
Notes
payable, current portion
|
-
|
2,469
|
|
Lease
liability, short-term
|
296
|
-
|
|
Contract
liabilities
|
720
|
207
|
|
Current
liabilities held for sale
|
2,680
|
1,895
|
|
Total current liabilities
|
10,822
|
8,574
|
|
Notes
payable
|
20,076
|
875
|
|
Lease
liability, long-term
|
673
|
-
|
|
Deferred
rent
|
-
|
8
|
|
Contract
liabilities, long term
|
775
|
-
|
|
Long
term liabilities held for sale
|
179
|
90
|
|
Total liabilities
|
$
32,525
|
$
9,547
|
|
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001
par value, 505,000 shares authorized and 502,327 shares issued and
outstanding as of September 30, 2019 and December 31, 2018,
respectively
|
5,606
|
5,052
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
Stockholders' (Deficit) Equity
|
|
|
|
Common stock,
$0.0001 par value, 30,000,000 shares authorized, 20,406,489 and
18,767,619 shares issued and outstanding as of September 30, 2019
and December 31, 2018, respectively
|
2
|
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 September 30, 2019 and December 31, 2018,
respectively
|
|
|
|
Series
B Cumulative Convertible Preferred stock, $0.0001 par value,
240,861 shares authorized, issued and outstanding as of September
30, 2019 and December 31, 2018, respectively
|
-
|
-
|
|
Additional
paid-in capital
|
16,526
|
15,518
|
|
Accumulated
deficit
|
(23,836
)
|
(12,064
)
|
|
Total stockholders’ (deficit) equity
|
(7,308
)
|
3,456
|
|
Total liabilities and stockholders’ (deficit)
equity
|
$
30,823
|
$
18,055
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
For the Three Months ended September 30,
|
For the Nine Months ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Revenue:
|
|
|
|
|
|
Technology
|
$
1,536
|
$
892
|
$
3,962
|
$
2,639
|
|
Professional
Services
|
3,447
|
5,015
|
10,922
|
12,632
|
|
Total
revenue
|
4,983
|
5,907
|
14,884
|
15,271
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
Technology
|
390
|
405
|
1,152
|
1,101
|
|
Professional
Services
|
1,842
|
2,561
|
5,868
|
6,433
|
|
Total
cost of revenue
|
2,232
|
2,966
|
7,020
|
7,534
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
Technology
|
1,146
|
487
|
2,810
|
1,538
|
|
Professional
Services
|
1,605
|
2,454
|
5,054
|
6,199
|
|
Gross
profit
|
2,751
|
2,941
|
7,864
|
7,737
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
3,039
|
2,954
|
10,435
|
9,953
|
|
Selling
and marketing expenses
|
1,343
|
297
|
2,012
|
1,095
|
|
Research
and development expenses
|
450
|
5
|
757
|
127
|
|
Impairment
of intangibles
|
-
|
-
|
1,549
|
-
|
|
Operating
expenses
|
4,832
|
3,256
|
14,753
|
11,175
|
|
|
|
|
|
|
|
Loss
from operations
|
(2,081
)
|
(315
)
|
(6,889
)
|
(3,438
)
|
|
Other
income (expense):
|
|
|
|
|
|
Loss
on extinguishment of debt
|
(45
)
|
-
|
(1,158
)
|
-
|
|
Interest
expense
|
(1,228
)
|
(214
)
|
(2,832
)
|
(412
)
|
|
Other
income (expense)
|
(102
)
|
1
|
(99
)
|
201
|
|
Total
other expense
|
(1,375
)
|
(213
)
|
(4,089
)
|
(211
)
|
|
Loss
before income taxes
|
(3,456
)
|
(528
)
|
(10,978
)
|
(3,649
)
|
|
Income
tax provision
|
-
|
-
|
-
|
-
|
|
Net
loss from continuing operations
|
$
(3,456
)
|
$
(528
)
|
$
(10,978
)
|
(3,649
)
|
|
Income
(loss) from operations held for sale
|
(160
)
|
47
|
(415
)
|
52
|
|
Income
tax provision from operations held for sale
|
(12
)
|
(22
)
|
(35
)
|
(22
)
|
|
Net
income (loss) from operations held for sale
|
(172
)
|
25
|
(450
)
|
30
|
|
Net
loss
|
$
(3,628
)
|
$
(503
)
|
$
(11,428
)
|
$
(3,619
)
|
|
Loss
per common share from continuing operations - basic and
diluted
|
$
(0.19
)
|
$
(0.06
)
|
$
(0.61
)
|
$
(0.31
)
|
|
Income
(loss) per common share from operations held for sale - basic and
diluted
|
(0.01
)
|
0.01
|
(0.02
)
|
-
|
|
Loss
per common share - basic and diluted
|
$
(0.20
)
|
$
(0.05
)
|
$
(0.63
)
|
$
(0.31
)
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
Basic
and diluted
|
19,878,518
|
14,542,362
|
19,592,679
|
14,524,030
|
The accompanying notes are an integral part of these u
n
audited condensed consolidated financial
statements.
5
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT)
EQUITY
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
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 June 30, 2019
|
19,382,185
|
$
2
|
240,861
|
$
-
|
$
16,496
|
$
(20,094
)
|
$
(3,596
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
76
|
-
|
76
|
|
Exercise of
cashless warrants in exchange for common stock
|
813,975
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
103,125
|
-
|
-
|
-
|
103
|
-
|
103
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
103,566
|
-
|
-
|
-
|
38
|
-
|
38
|
|
Exercise of
warrants related to series A preferred stock
|
3,638
|
-
|
-
|
-
|
4
|
-
|
4
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(114
)
|
(114
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(191
)
|
-
|
(191
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,628
)
|
(3,628
)
|
|
Balance as of September 30, 2019
|
20,406,489
|
$
2
|
240,861
|
$
-
|
$
16,526
|
$
(23,836
)
|
$
(7,308
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
14,535,695
|
$
1
|
240,861
|
$
-
|
$
12,655
|
$
(9,247
)
|
$
3,409
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
87
|
-
|
87
|
|
Issuance upon
exercise of stock option
|
10,000
|
-
|
-
|
-
|
16
|
-
|
16
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(115
)
|
(115
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(167
)
|
-
|
(167
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(503
)
|
(503
)
|
|
Balance as of September 30, 2018
|
14,545,695
|
$
1
|
240,861
|
$
-
|
$
12,591
|
$
(9,865
)
|
$
2,727
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
18,767,619
|
$
2
|
240,861
|
$
-
|
$
15,518
|
$
(12,064
)
|
$
3,456
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
314
|
-
|
314
|
|
Issuance of
warrants in conjunction with notes payable
|
-
|
-
|
-
|
-
|
706
|
-
|
706
|
|
Exercise of
cashless warrants in exchange for common stock
|
828,541
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
103,125
|
-
|
-
|
-
|
103
|
-
|
103
|
|
Common stock
issued in OpenALPR acquisition
|
600,000
|
-
|
-
|
-
|
397
|
-
|
397
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
103,566
|
-
|
-
|
-
|
38
|
-
|
38
|
|
Exercise of
warrants related to series A preferred stock
|
3,638
|
-
|
-
|
-
|
4
|
-
|
4
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(344
)
|
(344
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(554
)
|
-
|
(554
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(11,428
)
|
(11,428
)
|
|
Balance as of September 30, 2019
|
20,406,489
|
$
2
|
240,861
|
$
-
|
$
16,256
|
$
(28,836
)
|
$
(7,308
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
14,463,364
|
$
1
|
240,861
|
$
-
|
$
12,343
|
$
(5,834
)
|
$
6,510
|
|
Cumulative
effect adjustment of adopting ASU 2014-09
|
-
|
-
|
-
|
-
|
-
|
(67
)
|
(67
)
|
|
Balance as of January 1, 2018
|
14,463,364
|
1
|
240,861
|
-
|
12,343
|
(5,901
)
|
6,443
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
296
|
-
|
296
|
|
Issuance of
warrants
|
-
|
-
|
-
|
-
|
123
|
-
|
123
|
|
Net common
stock issued in Secure Education Consultants
acquisition
|
33,333
|
-
|
-
|
-
|
163
|
-
|
163
|
|
Issuance
related to note payable
|
35,000
|
-
|
-
|
-
|
126
|
-
|
126
|
|
Issuance upon
exercise of stock options
|
13,998
|
-
|
-
|
-
|
23
|
-
|
23
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(345
)
|
(345
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(483
)
|
-
|
(483
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,619
)
|
(3,619
)
|
|
Balance as of September 30, 2018
|
14,545,695
|
$
1
|
240,861
|
$
-
|
$
12,591
|
$
(9,865
)
|
$
2,727
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial
statements.
6
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED
S
TATEMENTS OF
CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2019
|
2018
|
|
Cash Flows from Operating Activities
|
|
|
|
Net
loss
|
$
(11,428
)
|
$
(3,619
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
295
|
236
|
|
Amortization
of right-of-use lease asset
|
158
|
-
|
|
Share-based
compensation
|
314
|
296
|
|
Amortization
of financing costs
|
768
|
69
|
|
Deferred
rent
|
-
|
(11
)
|
|
Change
in fair value of derivative liability
|
-
|
(77
)
|
|
Amortization
of intangible assets
|
965
|
557
|
|
Impairment
of intangible assets
|
1,549
|
-
|
|
Loss
on extinguishment of debt
|
1,158
|
-
|
|
Loss
on abandonment of lease
|
70
|
-
|
|
Loss
on sale of Secure Education
|
3
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(2,487
)
|
(106
)
|
|
Inventory
|
(312
)
|
31
|
|
Deposits
|
38
|
-
|
|
Other
current assets
|
74
|
33
|
|
Accounts
payable and accrued expenses
|
1,628
|
953
|
|
Contract
liabilities
|
900
|
(20
)
|
|
Lease
liability
|
(28
)
|
-
|
|
Net
cash used in operating activities - continuing
operations
|
(6,335
)
|
(1,658
)
|
|
Net
cash (used in) provided by operating activities - held for sale
operations
|
(2,920
)
|
560
|
|
Net
cash used in operating activities
|
(9,255
)
|
(1,098
)
|
|
Cash Flows from Investing Activities
|
|
|
|
Proceeds
from sale of note receivable
|
-
|
1,475
|
|
Proceeds
from sale of Secure Education
|
250
|
-
|
|
Capital
expenditures
|
(656
)
|
(1,007
)
|
|
Net
cash (used in) provided by investing activities - continuing
operations
|
(406
)
|
468
|
|
Net
cash provided by investing activities - held for sale
operations
|
-
|
51
|
|
Net
cash (used in) provided by investing activities
|
(406
)
|
519
|
|
Cash Flows from Financing Activities
|
|
|
|
Proceeds
from short-term borrowings
|
2,315
|
-
|
|
Repayments
of short-term borrowings
|
(296
)
|
(1,025
)
|
|
Net
proceeds from notes payable
|
3,839
|
2,000
|
|
Net
proceeds from exercise of options
|
-
|
23
|
|
Net
proceeds from exercise of warrants
|
103
|
-
|
|
Net proceeds from exercise of warrants associated to series A
preferred stock
|
4
|
-
|
|
Net
proceeds from at-the-market agreement
|
38
|
-
|
|
Payment
of preferred dividends
|
(108
)
|
(345
)
|
|
Net
cash provided by financing activities - continuing
operations
|
5,895
|
653
|
|
Net
cash provided by (used in) financing activities - held for sale
operations
|
3,205
|
(547
)
|
|
Net
cash provided by financing activities
|
9,100
|
106
|
|
Net decrease
in cash, cash equivalents and restricted cash and cash equivalents
- continuing operations
|
(846
)
|
(537
)
|
|
Net increase
in cash, cash equivalents and restricted cash and cash equivalents
- held for sale operations
|
285
|
64
|
|
Net decrease
in cash, cash equivalents and restricted cash and cash
equivalents
|
(561
)
|
(473
)
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at beginning
of period
|
2,768
|
1,957
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at end of
period
|
$
2,207
|
$
1,484
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted
cash:
|
|
|
|
Cash and cash
equivalents at end of period - continuing
operations
|
$
1,273
|
$
1,393
|
|
Restricted
cash and cash equivalents at end of period - continuing
operations
|
708
|
-
|
|
Cash and cash
equivalents at end of period - held for sale
operations
|
226
|
91
|
|
Cash, cash
equivalents and restricted cash at end of
period
|
$
2,207
|
$
1,484
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
7
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSO
L
IDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
These
unaudited condensed consolidated interim financial statements of
Rekor Systems, Inc. and its subsidiaries (collectively, the
“Company”) have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”) for interim financial statements. Accordingly,
they do not contain all information and notes required by U.S. GAAP
for annual financial statements. In the opinion of management,
these unaudited condensed consolidated interim financial statements
reflect all adjustments, which include normal recurring
adjustments, necessary for a fair statement of the Company’s
consolidated financial position as of September 30, 2019, the
consolidated results of operations, consolidated statements of
shareholders’ (deficit) equity and consolidated statements of
cash flows for the three and nine months ended September 30, 2019
and 2018.
The
financial data and other information disclosed in the notes to the
unaudited condensed consolidated financial statements related to
these periods are unaudited. The results for the three and nine
months ended September 30, 2019 are not necessarily indicative of
the results to be expected for the year ending December 31,
2019.
These
unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018. The
unaudited condensed consolidated balance sheet data as of December
31, 2018 was derived from the Company’s audited consolidated
financial statements for the year ended December 31, 2018 but does
not include all disclosures required by U.S. GAAP for annual
financial statements.
Dollar
amounts, except per share data, in the notes to these financial
statements are rounded to the closest $1,000.
Certain
prior year amounts have been reclassified to conform with the
current year presentation. Beginning in the second quarter of 2019,
sales and marketing expenses and research and development expenses
have been presented separately from general and administrative
expenses on the unaudited condensed consolidated statements of
operations, whereas in prior periods these amounts were included in
one caption titled "selling, general and administrative expenses."
Amounts for the first quarter of 2019 and for the period ending
December 31, 2018, have been reclassified to conform to the current
year presentation.
Rekor Systems, Inc. (the “Company” or
“Rekor”), (formerly Novume Solutions, Inc.) was formed
in February 2017 to effectuate the mergers of, and become a holding
company for KeyStone Solutions, LLC. (“KeyStone”) and
Brekford Traffic Safety, Inc. (“Brekford”).
On
February 28, 2019, the Company changed the name of its wholly owned
subsidiary, Brekford Traffic Safety, Inc. to Rekor Recognition
Systems, Inc. (“Rekor Recognition”). On April 26, 2019,
the Company changed its name from Novume Solutions, Inc. to Rekor
Systems, Inc.
In
March 2019, Rekor acquired certain assets and certain liabilities
of OpenALPR Technology, Inc. (such assets and liabilities being
referred to herein as “OpenALPR Technology”) through
its subsidiary, OpenALPR Software Solutions, LLC
(“OpenALPR”). The financial information in this
Quarterly Report only includes OpenALPR in the results of
operations beginning as of March 12, 2019 (see Note
4).
8
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the third quarter of 2019, the Company
began to separately report the results of
Global Technical
Services, Inc. and Global Contract Professionals, Inc. (together
“Global”), the Company’s wholly owned
subsidiaries
, including substantially
all of the assets and liabilities comprising Global, as operations
held for sale. The Company is reporting the operating results and
cash flows of Global as operations held for sale, and thus they
have been excluded from continuing operations and segment results
for all periods presented. Prior to the third quarter of 2019, the
operating results for Global were presented in the Professional
Services segment. The assets and liabilities of Global are
presented as current and long-term assets and liabilities held for
sale in the unaudited condensed consolidated balance sheets and its
results are presented as income (loss) from operations held for
sale in the unaudited condensed consolidated statement of
operations. In cases where the carrying value amount exceeds the
fair value, less costs to sell, an impairment loss is recognized.
Due to the held for sale classification of Global, certain amounts
have been reclassified in order to conform to the current period
presentation. See Note 16 for additional information regarding the
Company's held for sale operations.
Use of Estimates
Management uses
estimates and assumptions in preparing 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, and
income taxes. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances. These 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.
Going Concern Assessment
For all
annual and interim periods, management will assess going concern
uncertainty in the Company’s unaudited condensed 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
unaudited
condensed 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 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 August 2017 and
has relied on cash on hand, secured borrowing arrangements, the
sale of a note, debt financing, and public offering of its common
stock, including its on-going At-the-Market Issuance Sales
Agreement (the "Sales Agreement") offering as disclosed below, to
support cash flows from operations. As of and for the nine months
ended September 30, 2019, the Company had a net loss from
continuing operations of $11,428,000 and a working capital deficit
of $107,000. The Company's net cash position was decreased by
$561,000 for the nine months ended September 30, 2019 due to the
net loss from operations, offset by the proceeds of $20,000,000
senior secured notes, of which $5,000,000 was issued as a note
payable to the seller, offset by $7,000,000 of cash paid for the
acquisition of OpenALPR, and approximately $6,227,000 related to
the extinguishment of debt and associated fees related to acquiring
new debt (see Note 7).
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 unaudited condensed
consolidated financial statements in this Quarterly Report on Form
10-Q, 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. Additionally, as of September 30, 2019, the Company
believes it has access to raise up to $14,706,000 through the Sales
Agreement (see Note 9).
The Company will
continue to raise capital through the Sales Agreement to help fund
operations
. Should access to those funds be unavailable, the
Company will need to seek out additional sources of funding.
Furthermore, t
he
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.
9
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Intangible Assets
In
applying the acquisition method of accounting, amounts assigned to
identifiable assets and liabilities acquired were based on
estimated fair values as of the date of acquisition, with the
remainder recorded as goodwill. Identifiable
intangible assets are initially valued at fair value using
generally accepted valuation methods appropriate for the type
of intangible asset. Identifiable intangible assets
with definite lives are amortized over their estimated useful lives
and are reviewed for impairment, if indicators of impairment
arise. Intangible assets with indefinite lives are tested
for impairment within one year of acquisitions or annually and
whenever indicators of impairment exist. The Company is currently
in the process of its annual impairment test. The fair value of
intangible assets is compared with their carrying values, and an
impairment loss would be recognized for the amount by which a
carrying amount exceeds its fair value.
During
the second quarter of 2019 the Company wrote-off $1,549,000 of
intangible assets associated with the Company's wholly owned
subsidiaries Firestorm Solutions, LLC and Firestorm Franchising LLC
(collectively, “Firestorm”), and BC Management, Inc.
(“BC Management”) (see Note 5).
Revenue Recognition
The
Company derives its revenues substantially from two sources: (1)
subscription revenues for software licenses, technology products
and services, and (2) and professional services to
clients.
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, 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.
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
subscription revenues for software licenses, technology products
and services revenues are comprised of fees that provide customers
with access to the software licenses and related support and
updates during the term of the arrangement. Revenue is generally
recognized ratably over the contract term. During the second
quarter of 2019, the Company changed its method of selling in the
Technology Segment from perpetual software licenses to monthly
service subscriptions. This change is expected to impact the
Company's revenue in the short term. However, the amount of
contract revenue received over the long term impact is expected to
be relatively consistent.
The Company’s subscription
services arrangements are non-cancelable and do not contain
refund-type provisions.
The Company’s professional services contracts recognize
revenue based on a time and materials or
fixed fees basis. These revenues are recognized as the services are
rendered for
time and materials contracts, on a proportional performance basis for fixed price contracts,
or ratably over the contact term for fixed price contracts with
subscription services.
10
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
timing of revenue recognition, billings and cash collections
results in billed accounts receivable, unbilled receivables
(included within accounts receivable, net), and contract
liabilities (deferred revenue) on the unaudited condensed
consolidated balance sheets. When billings occur after the work has
been performed, 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 receivables of $963,000 and
$824,000 were included in accounts receivable, net, in the
unaudited condensed consolidated balance sheets as of September 30,
2019 and December 31, 2018, respectively. Additionally, unbilled
receivables of $469,000 and $301,000 were included in current
assets held for sale in the
unaudited
condensed consolidated balance sheets as of September 30, 2019 and
December 31, 2018, respectively.
When
the Company advance bill clients prior to the work being performed,
generally, such amounts will be earned and recognized in revenue
within the next six months to five years, depending on the
subscription or licensing period. These assets and liabilities are
reported on the unaudited condensed consolidated balance sheet on a
contract-by-contract basis at the end of each reporting period.
Changes in the contract asset and liability balances during the
nine months ended September 30, 2019 were not materially impacted
by any other factors. Contract liabilities from the period ended
September 30, 2019 and December 31, 2018 were $1,495,000 and
$207,000 respectively. All contract liabilities as of September 30,
2019 and December 31, 2018 were attributable to continued
operations. During the nine months ended September 30, 2019 all of
the contract liabilities balance as of December 31, 2018 was
recognized as revenue.
The
services due for contract liabilities described above are shown
below as of September 30, 2019 (dollars in thousands):
|
2019
|
$
246
|
|
2020
|
544
|
|
2021
|
223
|
|
2022
|
200
|
|
2023
|
189
|
|
Thereafter
|
93
|
|
Total
|
$
1,495
|
Segment Reporting
The Financial
Accounting Standards Board (“FASB”) Accounting Standard
Codification (“ASC”) Topic 280,
Segment
Reporting
, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
Beginning
with the first quarter of 2019, the Company changed its operating
and reportable segments from one segment to two
segments
: the Technology
Segment and the Professional Services Segment.
The two segments
reflect the Company’s separate focus on technology products
and services versus professional services. (See Note
3).
The Technology Segment is responsible for the activities in
developing technology and distributing and licensing products and
services with vehicle recognition features. In connection with this
effort in March 2019, the Company acquired OpenALPR Technology (See
Note 4). The Professional Services Segment is responsible for the
activities that provide professional services for government
contracting market, as well as staffing services for the aerospace
and aviation markets.
11
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash, Cash Equivalents and Restricted Cash and Cash
Equivalents
The Company considers all highly liquid debt instruments purchased
with the maturity of three months or less to be 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 September 30, 2019 and December 31, 2018 were
$708,000
and
$609,000, respectively, and correspond to equal amounts of related
accounts payable and are presented as part of accounts payable and
accrued expenses in the accompanying unaudited condensed
consolidated balance sheets.
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed
consolidated balance sheets for cash and cash equivalents,
restricted cash and cash equivalents, inventory, accounts
receivable and accounts payable approximate fair value as of
September 30, 2019 and December 31, 2018 because of the relatively
short-term maturity of these financial instruments. The carrying
amount reported for long-term debt approximates fair value as of
September 30, 2019 and December 31, 2018 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
Accounting Standards Codification (“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 2 and 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 September 30, 2019. There were no
changes in levels during the three and nine months ended September
30, 2019 and 2018.
Concentrations of Credit Risk
The Company places its temporary cash investments with higher rated
quality financial institutions located in the United States
(“U.S.”). As of September 30, 2019 and December 31,
2018, the Company had deposits from continuing operations totaling
$1,981,000 and $2,678,000 from continuing operations, respectively,
in two and three U.S. financial institutions that were federally
insured up to $250,000 per account, respectively.
12
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has a market concentration of revenue and accounts
receivable, from continuing operations, in its Professional
Services Segment related to its customer base.
Company A accounted for 21% and 17% of the Company’s total
revenues for the nine months ended September 30, 2019 and 2018,
respectively, and 17% and 22% of the Company’s total revenue
for the three months ended September 30, 2019 and 2018,
respectively.
Company B accounted for 16% and less than 10% of the
Company’s total revenues for the nine months ended September
30, 2019 and 2018, respectively, and 12% and 11% of the
Company’s total revenue for the three months ended September
30, 2019 and 2018, respectively.
As of September 30, 2019, accounts receivable from Company A
totaled $902,000 or 19% of the unaudited condensed consolidated
accounts receivable balance. As of December 31, 2018, Company A and
Company B accounted for $1,043,000, or 35%, and $483,000, or 16%,
respectively, of the
unaudited
condensed consolidated accounts receivable
balance.
No other single customer accounted for more than 10% of the
Company’s
unaudited
condensed consolidated revenue for the nine months
ended September 30, 2019 or
unaudited
condensed consolidated accounts receivable balance
as of September 30, 2019.
13
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements effective in the nine months ended
September 30, 2019
In February 2016, the
FASB issued Accounting Standards Update
(“
ASU”)
No. 2016-02,
Leases
(Topic 842)
(“ASU
2016-02”)
.
ASU
2016-02 requires lessees to recognize lease assets and lease
liabilities on the balance sheet and requires expanded disclosures
about leasing arrangements. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018 and interim periods in
fiscal years beginning after December 15, 2018, with early adoption
permitted. In July 2018, the FASB issued ASU No.
2018-11,
Leases
(Topic 842): Targeted Improvements
(“ASU
2018-11”). ASU 2018-11 provides entities another option for
transition,
allowing entities to
not apply the new standard in the comparative periods they present
in their financial statements in the year of adoption. Effective
January 1, 2019, the Company adopted ASU 2016-02, as amended, which
requires lessees to recognize a right-of-use (“ROU”)
lease assets and lease liability on the balance sheet for most
lease arrangements and expands disclosures about leasing
arrangements for both lessees and lessors, among other items. The
Company adopted ASU 2016-02 using the optional transition method
whereby the Company applied the new lease requirements under ASU
2016-02 through a cumulative-effect adjustment, which after
completing the Company’s implementation analysis, resulted in
no adjustment to its January 1, 2019 beginning retained earnings
balance. On January 1, 2019, the Company recognized $921,000 of ROU
operating lease assets and $951,000 of operating lease liabilities,
including noncurrent operating lease liabilities of $728,000, 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 new standard provides
several optional practical expedients for use in transition. The
Company elected to use what the 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. The ASU also provides 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 unaudited condensed
consolidated balance sheet. 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
unaudited
condensed
consolidated balance sheet. The comparative
periods have not been restated for the adoption of
ASU 2016-02.
In June 2018, the FASB
issued ASU No. 2018-07,
Compensation
– Stock Compensation (Topic 718)
,
Improvements
to Nonemployee Share-Based Payment Accounting
(“ASU
2018-07”), which is intended to simplify aspects of
share-based compensation issued to non-employees by making the
guidance consistent with the accounting for employee share-based
compensation. ASU 2018-07 is effective for annual
periods
beginning after December 15, 2018 and
interim periods within
those annual periods, with early adoption permitted but no earlier
than an entity’s adoption date of Topic 606. The Company
adopted the provisions of ASU 2018-07 effective January 1, 2019.
Adopting ASU 2018-07 had no impact on the Company’s
unaudited
condensed
consolidated financial statements and
related disclosures.
In May 2017, the FASB
issued ASU No. 2017-09,
Compensation
- Stock Compensation: Scope of Modification
Accounting
(“ASU
2017-09”), which provides guidance about which changes to the
terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award.
ASU 2017-09
is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the
adoptio
n date. Early adoption
is permitted. The Company adopted ASU 2017-09 in 2018 and the
impact of the adoption was not material to its
unaudited
condensed
consolidated financial statements and
related disclosures.
New accounting pronouncements not yet
effective
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, 2019. The
Company is currently in the process of evaluating the impact of the
adoption of ASU 2016-13 on its
unaudited
condensed
consolidated financial
statements.
In August 2018, the FASB issued ASU No.
2018-13,
Fair Value Measurement (Topic
820), Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement
(“ASU 2018-13”), which 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 averageof 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 is currently
evaluating the effect that ASU 2018-13 will have on its
consolidated financial statements and related
disclosures.
14
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2017, the FASB issued ASU No.
2017-04,
Intangibles - Goodwill and
Other: Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). To
simplify the subsequent measurement of goodwill, ASU 2017-04
requires only a single-step quantitative test to identify and
measure impairment based on the excess of a reporting unit's
carrying amount over its fair value. A qualitative assessment may
still be completed first for an entity to determine if a
quantitative impairment test is necessary. ASU 2017-04 is effective
for fiscal year 2021 and is to be adopted on a prospective basis.
Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company will test goodwill for impairment within one year of
the acquisition or annually as of October 1, and whenever
indicators of impairment exist. The Company is currently evaluating
the effect that ASU 2017-04 will have on its financial statements
and related disclosures.
The Company does not believe that any recently issued, but not yet
effective, accounting standards could have a material effect on the
accompanying financial statements. As new accounting pronouncements
are issued, the Company will adopt those that are applicable under
the circumstances.
NOTE 3 – BUSINESS SEGMENTS
FASB ASC Topic
280,
Segment
Reporting
, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
Beginning
with the first quarter of 2019, the Company changed its operating
and reportable segments from one segment to two
segments
: the Technology
Segment and the Professional Services Segment.
The two segments
reflect the Company’s separate focus on technology products
and services versus professional services.
The Company
provides
general corporate
services to its segments; however, these services are not
considered when making operating decisions and assessing segment
performance. These services are reported under “Corporate
Services” below and these include costs associated with
executive management, financing activities and public company
compliance.
Summarized financial information concerning the Company’s
reportable segments is presented below (dollars in
thousands):
|
|
Technology
|
Professional Services
|
Corporate Services
|
Consolidated
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
Revenues
|
$
1,536
|
$
3,447
|
$
-
|
$
4,983
|
|
Gross
profit
|
1,146
|
1,605
|
-
|
2,751
|
|
Income
(loss) from operations
|
(722
)
|
365
|
(1,724
)
|
(2,081
)
|
|
Loss
from operations held for sale
|
-
|
(21
)
|
-
|
(21
)
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
Revenues
|
$
892
|
$
5,015
|
$
-
|
$
5,907
|
|
Gross
profit
|
487
|
2,454
|
-
|
2,941
|
|
Income
(loss) from operations
|
(83
)
|
446
|
(678
)
|
(315
)
|
|
Income
from operations held for sale
|
-
|
77
|
-
|
77
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
Revenues
|
$
3,962
|
$
10,922
|
$
-
|
$
14,884
|
|
Gross
profit
|
2,810
|
5,054
|
-
|
7,864
|
|
Loss
from operations*
|
(1,312
)
|
(1,606
)
|
(3,971
)
|
(6,889
)
|
|
Loss
from operations held for sale
|
-
|
(177
)
|
-
|
(177
)
|
|
*
Including intangible assets impairment
|
-
|
1,549
|
-
|
1,549
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
Revenues
|
$
2,639
|
$
12,632
|
$
-
|
$
15,271
|
|
Gross
profit
|
1,538
|
6,199
|
-
|
7,737
|
|
Loss
from operations
|
(332
)
|
(48
)
|
(3,058
)
|
(3,438
)
|
|
Income
from operations held for sale
|
-
|
148
|
-
|
148
|
15
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – ACQUISITIONS
Secure Education Consultants Acquisition
On January 1, 2018, the Company completed its acquisition of
certain assets of Secure Education Consultants through Firestorm.
Consideration paid as part of this acquisition included: $100,000
in cash; 33,333 shares of Rekor common stock valued at $163,000;
warrants to purchase 33,333 shares of Rekor common stock,
exercisable over a period of five years, at an exercise price of
$5.44 per share, valued at $66,000; and warrants to purchase 33,333
of Rekor common stock, exercisable over a period of five years, at
an exercise price of $6.53 per share, valued at
$57,000.
The Company has completed its analysis of the purchase price
allocation. The Company recorded $386,000 of customer relationships
to intangible assets.
The table below shows the final breakdown related to the Secure
Education acquisition (dollars in thousands):
|
Cash
paid
|
$
100
|
|
Common
stock issued
|
163
|
|
Warrants
issued at $5.44
|
66
|
|
Warrants
issued at $6.53
|
57
|
|
Total
consideration
|
386
|
|
Less
intangible assets and intellectual property
|
(386
)
|
|
Net
goodwill recorded
|
$
-
|
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
unaudited condensed consolidated statement of
operations.
OpenALPR Acquisition
On November 14, 2018, the Company entered into an Asset Purchase
Agreement (the “OpenALPR Purchase Agreement”) by and
among the Company, OpenALPR Technology, Inc. and Matthew Hill
pursuant to which the Company agreed to purchase all of the assets
of OpenALPR Technology Inc. and its subsidiaries, except for
certain excluded assets, and assumed certain liabilities as
provided for in the OpenALPR Purchase Agreement. The Company agreed
to pay $15,000,000, subject to certain adjustments, provided that
OpenALPR Technology, Inc. could elect to receive up to 1,000,000
shares of the Company’s common stock, par value, $0.0001 per
share, in lieu of up to $5,000,000 in cash valued at a price per
share of $5.00.
On February 15, 2019, the Company entered into Amendment No. 1 to
the OpenALPR Purchase Agreement, pursuant to which the parties
agreed to amend the Base Purchase Price to $7,000,000, subject to
adjustment after closing, issue a promissory note in the amount of
$5,000,000, and issue 600,000 shares of Rekor common stock as
consideration for the acquisition of OpenALPR Technology’s
assets.
On March 8, 2019, the Company entered into Amendment No. 2 to the
OpenALPR Asset Purchase Agreement which eliminated the working
capital adjustment set forth in the OpenALPR Asset Purchase
Agreement, as amended, and replaced it with an adjustment for
prepaid maintenance contracts.
16
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 12, 2019, the Company completed the acquisition of the of
OpenALPR Technology and assumed certain assets and liabilities (the
“OpenALPR Acquisition”). Consideration paid as part of
the OpenALPR 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 7) 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 9).
The purchase price allocation to the assets acquired and
liabilities assumed based on fair values as of the acquisition
date. Since the acquisition of the OpenALPR Technology occurred on
March 12, 2019, the results of operations for OpenALPR from the
date of acquisition have been included in the Company’s
unaudited
condensed consolidated statement of operations for
the three and nine-months ended September 30, 2019.
The final purchase price allocation, completed in the second
quarter of 2019, resulted in adjustments to intangible assets of
approximately $4,934,000, since the Company's previous estimates as
of March 31, 2019, and primarily related to fair value adjustments
to technology-based intangible assets. The final purchase price
allocation of the acquisition of OpenALPR 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):
|
Assets
acquired
|
$
415
|
|
Liabilities
acquired
|
(388
)
|
|
Net
assets acquired
|
27
|
|
Less
intangible assets
|
7,436
|
|
Consideration
paid (see below)
|
(12,397
)
|
|
Net
Goodwill recorded
|
$
4,934
|
|
|
|
|
Cash
consideration
|
$
7,000
|
|
Notes
payable
|
5,000
|
|
Common
stock consideration
|
397
|
|
Total
acquisition consideration
|
$
12,397
|
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.
17
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operations of Combined Entities
The following unaudited pro forma combined financial information
gives effect to the acquisition of Secure Education and OpenALPR
Technology as if they were consummated as of January 1, 2018.
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, 2018 (the beginning of the earliest
period presented) or to project potential operating results as of
any future date or for any future periods.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
(Dollars in thousands, except per share data)
|
(Dollars in thousands, except per share data)
|
||
|
Revenues
from continuing operations
|
$
4,983
|
$
6,352
|
$
15,853
|
$
16,472
|
|
Net
loss from continuing operations
|
(3,456
)
|
(104
)
|
(10,170
)
|
(2,817
)
|
|
Basic
and diluted loss per share
|
$
(0.19
)
|
$
(0.03
)
|
$
(0.56
)
|
$
(0.24
)
|
|
Basic
and diluted number of shares
|
19,878,518
|
15,142,362
|
19,761,363
|
15,124,030
|
NOTE 5 – INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill by reportable business
segment for the nine months ended September 30,
2019 were as follows (dollars in thousands):
|
|
Segment
|
Balance as of
December 31,
2018
|
Open ALPR
Acquisition
|
Balance as of
September 30,
2019
|
|
Goodwill
from continuing operations
|
Technology
|
$
1,402
|
$
4,934
|
$
6,336
|
|
Goodwill
from held for sale operations
|
Professional
Services
|
1,691
|
-
|
1,691
|
|
Total
goodwill
|
|
$
3,093
|
$
4,934
|
$
8,027
|
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2018 to September 30, 2019 (dollars in
thousands):
|
|
Balance as of
December 31,
2018
|
Additions
|
Amortization
|
Impairment
|
Sale of BCM
|
Balance as of
September 30,
2019
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
|
|
Customer
relationships
|
$
2,475
|
$
90
|
$
(363
)
|
$
(1,549
)
|
$
(249
)
|
$
404
|
|
Marketing
related
|
69
|
223
|
(45
)
|
-
|
-
|
247
|
|
Technology
based
|
83
|
7,123
|
(557
)
|
-
|
-
|
6,649
|
|
Intangible
assets subject to amortization from continuing
operations
|
2,627
|
7,436
|
(965
)
|
(1,549
)
|
(249
)
|
7,300
|
|
Intangible
assets subject to amortization from held for sale
operations
|
2,208
|
-
|
(214
)
|
-
|
-
|
1,994
|
|
Total
intangible assets subject to amortization
|
$
4,835
|
$
7,436
|
$
(1,179
)
|
$
(1,549
)
|
$
(249
)
|
$
9,294
|
18
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following provides a breakdown of identifiable intangible
assets as of September 30, 2019 (dollars in
thousands):
|
|
Customer Relationships
|
Marketing Related
|
Technology Based
|
Total
|
|
Identifiable
intangible assets
|
$
461
|
$
327
|
$
7,207
|
$
7,995
|
|
Accumulated
amortization
|
(57
)
|
(80
)
|
(558
)
|
(695
)
|
|
Identifiable
intangible assets from continuing operations, net
|
404
|
247
|
6,649
|
7,300
|
|
Identifiable
intangible assets from operations held for sale, net
|
1,685
|
309
|
-
|
1,994
|
|
Identifiable
intangible assets, net
|
$
2,089
|
$
556
|
$
6,649
|
$
9,294
|
With the acquisition of OpenALPR Technology, the Company identified
technology-based intangible assets of $11,845,000 in its
preliminary purchase price allocation. The final purchase price
allocation, completed in the second quarter of 2019, resulted in
adjustments to intangible assets of approximately $4,934,000, since
the Company's previous estimates as of March 31, 2019, and
primarily related to fair value adjustments to technology-based
intangible assets. The final purchase price allocation of the
acquisition of OpenALPR is as follows: technology-based intangible
assets of $7,123,000, marketing-related intangible assets of
$223,000, customer-related intangible assets of $90,000 and
goodwill of $4,934,000 along with net assets acquired of
$27,000.
These intangible assets are being amortized on a straight-line
basis over their weighted average estimated useful life of 6.7
years. Amortization expense attributable to continuing operations
for the three months ended September 30, 2019 and 2018 was $280,000
and $127,000, respectively, and for the nine months ended September
30, 2019 and 2018 was $965,000 and $557,000, respectively, and is
presented as part of general and administrative expenses in the
accompanying
unaudited
condensed consolidated statements of operations.
Amortization expense attributable to operations held for sale for
the three months ended September 30, 2019 and 2018 was $72,000,
respectively, and for the nine months ended September 30, 2019 and
2018 was $214,000, and is presented as part of income (loss) from
operations held for sale in the accompanying
unaudited
condensed consolidated statements of
operations.
Firestorm, the Company's wholly owned subsidiary, provided services
related to crisis management, crisis communications, emergency
response, and business continuity and other emergency, crisis and
disaster preparedness initiatives. Its fully owned subsidiary, BC
Management was an executive search firm for business continuity,
disaster recovery, crisis management and risk management
professionals and a provider of business continuity research with
annual studies covering compensation assessments, program maturity
effectiveness, event impact management reviews, IT resiliency and
critical supply analyses. Its other wholly owned subsidiary, Secure
Education was comprised of an expert team of highly trained, former
U.S. Secret Service Agents and assists clients by designing
customized plans, conducting security assessments, delivering
training, and responding to critical incidents.
On June 1, 2019, the Company completed the sale of Secure
Education, which included $249,000 of intangible assets (see Note
4).
On June 28, 2019 the
Company discontinued the operations of
BC
Management
, resulting in an
impairment of $242,000 of intangible assets related to its
acquisition in December 2018. The discontinued operation of
BC
Management
does not constitute a
significant strategic shift that will have a material impact on the
Company’s ongoing operations and financial
results.
On June 30, 2019, the Company recorded an intangible assets
impairment of $1,307,000 of customer relationship intangible assets
from the Firestorm acquisition. In the second quarter of 2019, the
Company evaluated the performance of all the franchisees of
Firestorm Franchising, LLC and notified them of the termination of
their agreements on the basis of non-performance. The discontinued
operation of Firestorm Franchising, LLC does not constitute a
significant strategic shift that will have a material impact on the
Company's ongoing operations and financial results.
As of September 30, 2019, the estimated annual amortization expense
from continuing operations for each of the next five fiscal years
and thereafter is as follows (dollars in thousands):
|
2019
|
$
287
|
|
2020
|
1,150
|
|
2021
|
1,141
|
|
2022
|
1,117
|
|
2023
|
1,096
|
|
Thereafter
|
2,509
|
|
Total
|
$
7,300
|
19
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental disclosures of cash flow information for
the nine months ended September 30, 2019 and 2018 were as
follows:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2019
|
2018
|
|
|
(Dollars in thousands)
|
|
|
Cash
paid for interest - continuing operations
|
$
1,544
|
$
298
|
|
Cash
paid for interest - held for sale
operations
|
220
|
96
|
|
Cash
paid for taxes - held for sale operations
|
12
|
-
|
|
Non-cash
investing and financing activities
|
|
|
|
Property
and equipment - continuing operations
|
39
|
-
|
|
Accounts
payable - continuing operations
|
(39
)
|
-
|
|
Property
and equipment - held for sale operations
|
-
|
32
|
|
Notes
payable - held for sale operations
|
-
|
(32
)
|
|
Proceeds
from short-term borrowing arrangement transferred to settle line of
credit
|
312
|
-
|
|
Repayment
of line of credit
|
(312
)
|
-
|
|
Business
combinations, net of cash
|
|
|
|
Current
assets
|
415
|
-
|
|
Intangible
assets
|
7,436
|
386
|
|
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
)
|
(163
)
|
|
Issuance
of common stock warrants
|
-
|
(123
)
|
|
Sale
of Secured Education
|
|
|
|
Current
assets
|
(58
)
|
-
|
|
Intangible
assets sold
|
(250
)
|
-
|
|
Current
liabilities
|
54
|
-
|
|
Loss
on sale
|
3
|
-
|
|
Financing
|
|
|
|
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
|
|
|
Common
stock issued in connection with note payable
|
-
|
126
|
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
|
Right-of-use
lease asset
|
1,212
|
-
|
|
Deferred
rent
|
30
|
-
|
|
Lease
liability
|
$
(1,242
)
|
$
-
|
For the nine months
ended September 30, 2019 and 2018, the Company paid cash dividends
of $0 and $264,000, respectively, to shareholders of record of
Series A Preferred Stock
. Accrued dividends
payable to Series A Preferred Stock
shareholders were
$440,000 and $176,000 as of September 30
, 2019 and December 31,
2018, respectively, and is presented as part of accounts payable
and accrued expenses on the accompanying
unaudited
condensed consolidated balance
sheets.
20
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months
ended September 30, 2019 and 2018, the Company paid cash dividends
of $108,000 and $81,000, respectively, to shareholders of record of
Series B Preferred Stock.
Accrued dividends
payable to Series B Preferred Stock shareholders were $27,000 and
$54,000 as of September 30, 2019 and December 31, 2018,
respectively, and is presented as part of accounts payable and
accrued expenses on the accompanying
unaudited
condensed consolidated balance
sheets.
NOTE 7 – DEBT
Short-Term Borrowings
On August 9,
2019,
Global, entered an
agreement with an
unrelated third party, LSQ Funding Group, L.C. (“LSQ”),
pursuant to which Global sells its accounts receivable to LSQ and
LSQ advances Global 90% of the value of the receivable. Global can
advance up to $10,000,000 at one time. The term of the agreement is
for 12 months and automatically renews for additional 12-month
periods. The agreement is presented as secured borrowings, as the
accounts receivable are sold with recourse back to Global, meaning
that Global bears the risk of non-payment by the account debtor.
The funded amount of accounts receivables that LSQ has provided to
Global was $1,629,000 as of September 30, 2019 and is presented as
part of current liabilities held for sale on the
unaudited
condensed consolidated balance sheets. To secure
its obligations to LSQ, Global has granted a first priority
security interest in Global’s accounts receivable and
proceeds thereof. As of September 30, 2019, there were
approximately $2,515,000 of receivables that are subject to
collateral as part of this agreement. The receivables held as
collateral are presented in assets held for sale on the
unaudited
condensed consolidated balance
sheets.
On August 9,
2019,
AOC Key Solutions, Inc. (“AOC”), the
Company’s wholly owned subsidiary, also
entered into an
agreement with LSQ, as
an unrelated third party, pursuant to which AOC sells its accounts
receivable to LSQ and LSQ advances AOC 90% of the value of the
receivable. AOC can advance up to $5,000,000 at one time. The term
of the agreement is for 12 months and automatically renews for
additional 12-month periods. The agreement is presented as secured
borrowings, as the accounts receivable are sold with recourse back
to the Company, meaning that AOC bears the risk of non-payment by
the account debtor. The funded amount of accounts receivables that
LSQ has provided fund to AOC was $1,558,000 as of September 30,
2019 and is presented as part of short-term borrowings on the
unaudited
condensed consolidated balance sheets. To secure
its obligations to LSQ, AOC has granted a first priority security
interest in the AOC’s accounts receivable and proceeds
thereof. As of September 30, 2019, there were approximately
$2,451,000 of receivables that are subject to collateral as part of
this agreement. The receivables held as collateral are presented in
the accounts receivable, net on the
unaudited
condensed consolidated balance
sheets.
During the three and
nine months ended September
30
, 2019, the Company
recorded $33,000, in interest expense, related to the agreement
with LSQ. Additionally, during the three and nine months ended
September 30, 2019, the Company recorded $80,000 in interest
expense from operations held for sale, related to the agreement
with LSQ.
Global had revolving
lines of credit with Wells Fargo Bank National Association
(“WFB”) (“Wells Fargo Credit
Facilities”).
WFB agreed to advance
to
Global
90% of all
eligible accounts with a maximum facility amount of $5,000,000.
Interest was payable under the
Wells Fargo Credit
Facilities
at a monthly rate equal
to the Three-Month LIBOR, (as such term is defined under the Wells
Fargo Credit Facilities), in effect from time to time plus 3%, plus
an additional margin of 3%
. Payment of the
revolving lines of credit was secured by the accounts receivable of
Global. The term of the Wells Fargo Credit Facilities was through
December 31, 2019
, with automatic
renewal terms of 12 months
. In August 2019,
Global entered in a payoff and termination agreement with WFB in
which Global paid WFB $1,477,000 to retire all indebtedness and
obligation to WFB. As part of payoff of the debt Global recognized
$31,000 of costs in excess of the net carrying amount of the
outstanding debt, which is presented in the loss on extinguishment
of debt on the
unaudited
condensed consolidated statement of operations.
The principal balance as of September 30, 2019 and December 31,
2018 was $0 and $1,095,000, respectively.
21
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November
2017,
AOC,
entered
into an Account Purchase Agreement and related agreements (the
“AOC Wells Agreement”) with WFB. Pursuant to the AOC
Wells Agreement,
AOC Key
Solutions
agreed to sell and
assign to WFB all of its Accounts (as such term is defined in
Article 9 of the Uniform Commercial Code), constituting accounts
arising out of sales of Goods (as such term is defined in Article 9
of the Uniform Commercial Code) or rendition of services that WFB
deemed to be eligible for borrowing under the AOC Wells Agreement.
WFB agreed to advance to
AOC Key
Solutions
90% of all eligible
accounts with a maximum facility amount of $3,000,000. Interest was
payable under the AOC Wells Agreement at a monthly rate equal to
the Daily One Month LIBOR, (as such term was defined under the AOC
Wells Agreement), in effect from time to time plus 5%. The AOC
Wells Agreement also provided for a deficit interest rate equal to
the then applicable interest rate plus 50% and a default interest
rate equal to the then applicable interest rate or deficit interest
rate, plus 50%. The initial term of the AOC Wells Agreement ran
through December 31, 2018 (the “Initial Term”), with
automatic renewal terms of 12 months (the “Renewal
Term”), commencing on the first day after the last day of the
Initial Term.
The current term of the
AOC Wells Agreement ran through December 31, 2019. AOC Key
Solutions
was able to terminate
the AOC Wells Agreement upon at least 60 days’ prior written
notice, but no more than 120 days’ written notice, prior to
and effective as of the last day of the Initial Term or the Renewal
Term, as the case may be.
In August 2019, AOC
entered in a payoff and termination agreement with WFB in which AOC
paid WFB $341,000 to retire all indebtedness and obligation to WFB.
As part of payoff of the debt AOC recognized $45,000 of costs in
excess of the net carrying amount of the outstanding debt, which is
presented in the loss on extinguishment of debt on the
unaudited
condensed consolidated statement of operations.
The principal balance as of September 30, 2019 and December 31,
2018 was $0 and $566,000, respectively.
Long-Term Debt
On March 16, 2016, the Company entered into a Subordinated
Note and Warrant Purchase Agreement (the “Avon Road Note
Purchase Agreement”) pursuant to which $500,000 in
subordinated debt (the "Avon Road Note") was issued by the Company
to Avon Road Partners, L.P. (“Avon Road”), an affiliate
of Robert Berman, the Company’s President and CEO and a
member of the Company’s Board of Directors. The Avon Road
Subordinated Note Warrants had an expiration date of March 16,
2019. The warrants associated to this agreement were exercised in
2017.
On March 12, 2019, the $500,000 balance due on the Avon Road Note
was retired in its entirety in exchange for an equivalent principal
amount of the 2019 Promissory Notes (see below).
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 balance of these notes payable was $956,000 and $938,000,
net of unamortized interest, as of September 30, 2019 and December
31, 2018, respectively, to reflect the amortized fair value of the
notes issued due to the difference in interest rates of $44,000 and
$62,000, respectively.
22
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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”).
The loan was originally due and payable on May 1, 2019 and bore
interest at 15% per annum, with a minimum of 15% interest payable
if the loan is repaid prior to May 1, 2019. In addition, the
Company issued 35,000 shares of common stock to the 2018 Lender,
which shares contained piggy-back registration rights. If the
shares were not registered on the next selling shareholder
registration statement, the Company would have been obligated to
issue an additional 15,000 shares to the 2018 Lender. Upon the sale
of Rekor Recognition Systems, Inc. (“Rekor
Recognition”),
the company’s wholly owned
subsidiary,
or its assets, the 2018
Lender was entitled to receive 7% of any proceeds received by the
Company or Rekor Recognition in excess of $5,000,000 (the
“Lender’s Participation”). In addition,
commencing January 1, 2020, the 2018 Lender was to be paid 7% of
Rekor Recognition’s earnings before interest, taxes,
depreciation and amortization, less any capital expenditures, which
amount was to be credited for any payments that might ultimately be
paid to the 2018 Lender as its Lender’s Participation, if
any. At April 3, 2018, the fair value of shares issued was
$126,000. On October 24, 2018, the Company and Rekor Recognition
entered a note amendment with the 2018 Lender by which the maturity
date of the note was extended to May 1, 2020 (the “2018
Promissory Note Amendment”). The 2018 Promissory Note
Amendment further provided for payment of interest through May 1,
2019, if the principal was repaid before May 1, 2019. At October
24, 2018, an additional $62,500 fee was paid as consideration for
extending the maturity date to May 1, 2020 and designated as
financing costs related to the 2018 Promissory Note Amendment.
Amortized financing cost for the three months ended September 30,
2019 and 2018 was determined to be $0 and $29,000, respectively,
and for the nine months ended September 30, 2019 and 2018 was
determined to be $31,000 and $58,000, respectively. Amortized
financing cost is presented as part of interest expense in the
accompanying
unaudited
condensed consolidated statement of operations.
The 2018 Promissory Note had an effective interest rate of 19.5%.
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 (see
below). 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 and $75,000 of interest due through
May 1, 2019. All amounts paid were obtained from the proceeds of
the 2019 Promissory Notes. The 2018 Lender consideration of
$1,050,000 for the 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 nine
months ended September 30, 2019.
2019 Promissory Notes
On March 12, 2019, the
Company entered into a note purchase agreement pursuant to which
investors, including OpenALPR Technology, Inc. (see Note 4) (the
“2019 Lenders”) loaned $20,000,000 to Rekor (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”)(See Note 4). The loan
is due and payable on March 11, 2021 and bears interest at 16% per
annum, of which at least 10% per annum is required to be paid in
cash. Any remaining interest accrues to be paid at maturity or
earlier redemption. The notes also require 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. The fixed charge coverage ratio
covenant related to this note has been deferred through December
31, 2019. Transaction costs included $403,000 for a work fee
payable over 10 months, $290,000 in legal fees and a $200,000
closing fee. The loan is 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 are valued at
$706,000
.
The warrants were exercisable commencing March 12, 2019 and expire
on March 12, 2024.
Amortized financing
cost for the three and nine months ended September 30, 2019 were
$328,000 and $719,000, respectively, and are included in interest
expense on the unaudited condensed consolidated statement of
operations.
The 2019 Promissory Notes has an effective
interest rate of 24.87%.
23
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The principal amounts due for long-term notes payable described
above are shown below as of September 30, 2019 (dollars in
thousands):
|
2019
|
$
-
|
|
2020
|
-
|
|
2021
|
21,000
|
|
2022
|
1,000
|
|
2023
|
-
|
|
Thereafter
|
-
|
|
Total
|
$
22,000
|
|
|
|
|
Less
unamortized interest
|
(44
)
|
|
Less
unamortized financing costs
|
(1,880
)
|
|
Notes
payable
|
$
20,076
|
NOTE 8 – 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, management
reviews 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 2017 Tax Cut and Jobs Act ("2017 Act") changed U.S. tax law and
included various provisions that impacted the Company. The 2017 Act
affected the Company by changing U.S. tax rates, increasing the
Company’s ability to utilize accumulated net operating losses
generated after December 31, 2017, and impacted the estimates of
deferred tax assets and liabilities.
The Company’s income tax provision for the nine months ended
September 30, 2019 and 2018 was $35,000 and $22,000, respectively.
The increase in the tax expense is primarily related to state
minimum taxes and the state of Texas gross receipts tax. The
Company established a valuation allowance against deferred tax
assets during 2017 and has continued to maintain a full valuation
allowance through the nine months ended September 30, 2019. The
Company’s income tax provision for the three months ended
September 30, 2019 and 2018 was $12,000 and $22,000,
respectively.
The tax
provision
for the nine months
ended September 30, 2019 and 2018, was fully attributable to
operations that are classified as held for sale.
The Company files income tax returns in the United States and in
various states. No U.S. Federal, state or foreign income tax audits
were in process as of September 30, 2019.
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, the Company fully reserved for its
net deferred tax assets because management believes that it is
more-likely-than-not that their benefits will not 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.
For the nine months ended September 30, 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 2015 through 2018 tax years remain subject to
examination by the Internal Revenue Service.
24
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – STOCKHOLDERS’ (DEFICIT) EQUITY
Common Stock
The Company is authorized to issue 30,000,000 shares of common
stock, $0.0001 par value. As of September 30, 2019, and December
31, 2018, the issued and outstanding common shares of Rekor were
20,406,489 and 18,767,619, respectively.
In January 2018, the Company issued 33,333 shares of Rekor common
stock as consideration as part of its acquisition of Secure
Education.
In April 2018, the Company issued 35,000 shares of Rekor common
stock as additional consideration to the 2018 Lender in connection
with the 2018 Promissory Note.
On November 1, 2018, the Company issued 4,125,000 shares of common
stock through an underwritten public offering at a public offering
price of $0.80 per share. Net proceeds to the Company was
approximately $2,800,000. In addition, the Company granted
underwriters a 45-day option to purchase up to 618,750 additional
shares of common stock to cover over-allotment, if any. The
underwriters did not exercise this option and the options were
cancelled. As part of the consideration to the underwriters, the
Company issued to the underwriters warrants to purchase an
aggregate of 206,250 shares of common stock, exercisable over a
period of five years, at an exercise price of $1.00 per share. As
of September 30, 2019, the underwriter warrants had an estimated
value of approximately $200,000 and became exercisable commencing
April 27, 2019 and expire on October 29, 2023.
For the nine months
ended September 30, 2018, the Company issued 1
3,998
shares of
Rekor common stock related to the exercise of common stock options.
There were no stock options exercised for the nine months ended
September 30, 2019.
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 acquisition of the OpenALPR Technology. On
March 12, 2019, the Company issued 600,000 shares of Rekor common
stock as part of the consideration for the acquisition of the
OpenALPR Technology.
For the nine months
ended September 30, 2019 and 2018, the Company issued
1,638,870
and 82,331
shares of
Rekor common stock, respectively. Out of these, 931,666 shares of
Rekor common stock were issued in exchange for cash and cashless
exercise of 1,149,806 warrants during 2019, 600,000 shares were
issued in connection the acquisition of OpenALPR, 3,638 shares were
issued as part of the exercise of warrants related to series A
preferred stock and 103,566 shares were issued in connection with
the Sales Agreement.
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 may offer and sell 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 will 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 will be entitled to
a commission equal to 3.0% of the gross proceeds from each sale.
The Company incurred issuance costs of approximately $256,000
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 unaudited condensed consolidated balance
sheets.
Sales of the Company’s common stock under the Sales Agreement
are to be 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. In September 2019, based on settlement date,
the Company sold 103,566 shares of common stock at a
weighted-average selling price of $2.84 per share in accordance
with the Sales Agreement. Net cash provided from the Sales
Agreement was $29,000 after paying $256,000 related to the issuance
costs stated above, as well as, 3.0% or $9,000 related to cash
commissions provided to B. Riley FBR. As of September 30, 2019,
$14,706,000 remained available for sale under the Sales
Agreement.
25
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
are entitled to quarterly dividends of 7.0% per annum per share.
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 beginning 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 temporary equity in the accompanying
unaudited
condensed consolidated balance sheets as of
September 30, 2019 and December 31, 2018.
The Company 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 was recorded through
additional-paid-in-capital of $191,000 and $167,000 for the three
months ended September 30, 2019 and 2018, respectively and $554,000
and $483,000 for the nine months ended September 30, 2019 and 2018,
respectively.
As of September 30, 2019, and December 31, 2018, 502,327 shares of
Series A Preferred Stock were issued and outstanding,
respectively.
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.
For the nine months
ended September 30, 2019 and 2018, the Company paid cash dividends
of $0 and $264,000, respectively, to shareholders of record of
Series A Preferred Stock
. Accrued dividends
payable to Series A Preferred Stock shareholders were $440,000 and
$176,000 as of September 30, 2019 and December 31, 2018,
respectively, and are presented as part of the accounts payables
and accrued expenses on the accompanying
unaudited
condensed consolidated balance
sheets.
26
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). 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 the Company. The holders of Series B
Preferred Stock are 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. Accrued dividends
payable to Series B Preferred Stock shareholder were $27,000 and
$54,000 as of September 30, 2019 and December 31, 2018,
respectively and are included in accrued expenses on the
accompanying
unaudited
condensed consolidated balance
sheets.
Warrants
The Company had warrants outstanding that are exercisable into a
total of 2,251,232 and 1,214,491 shares of Rekor common stock as of
September 30, 2019 and December 31, 2018,
respectively.
As part of its
acquisition of Brekford on August 29, 2017, the Company assumed
Brekford’s obligations with respect to the Brekford
Warrants.
The exercise price for
the
Brekford
Warrants
was $7.50 and they expired on March 31, 2020. Effective October 16,
2018, the Company entered into exchange agreements with holders of
the
Brekford
Warrants
pursuant to which the Company issued to the holders an aggregate of
96,924 shares of common stock in exchange for the return of the
warrants to the Company for cancellation. As of September 30, 2019,
and December 31, 2018, no
Brekford
Warrants
were outstanding.
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 240,015 and 243,655 shares of Rekor
common stock as of September 30, 2019 and December 31, 2018,
respectively. The warrants expire on November 23, 2023.
In August 2019, 7,500 of the
outstanding warrants were exercised and converted into 3,638 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 September 30, 2019, and December 31, 2018,
there were 631,254 Firestorm Warrants outstanding.
Pursuant to its acquisition of BC Management on December 31, 2017,
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 “BC
Management Warrants”). The expiration date of the BC
Management Warrants was December 31, 2022. As of December 31, 2018,
there were 66,666 BC Management Warrants outstanding. The BC
Management Warrants were surrendered on May 17, 2019, due to the
discontinuance of operations of BC Management, and as of September
30, 2019 there were no BC Management Warrants
outstanding.
Pursuant to its acquisition of Secure Education 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 September 30, 2019,
and December 31, 2018, there were 66,666 Secure Education Warrants
outstanding.
27
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 have a value of
approximately $200,000 and are exercisable commencing April 27,
2019 and expire on October 29, 2023. During the nine months ended
September 30, 2019, 186,681 warrants were exercised in cash and
cashless transactions resulting in the issuance of 148,279 shares
of common stock. As of September 30, 2019, and December 31, 2018,
16,437 and 206,250 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 (see Note 7).
Of
the
2,500,000 warrants,
625,000
were issued
as partial
consideration for its acquisition of the OpenALPR Technology (see
Note 4).
During the nine months
ended September 30, 2019, 963,125 warrants were exercised in
cashless transactions resulting in the issuance of 783,387 shares
of common stock.
As of September 30,
2019, 1,536,875 warrants related to the 2019 Promissory Notes
remain outstanding.
NOTE 10 – RESTRUCTURING
In June 2019, the Company
implemented a new organizational structure and plan to improve
operating results by reducing operating costs by eliminating
redundant positions, and the Company initiated restructuring and
transition activities to improve operational efficiency, reduce
costs and better position the Company to drive future revenue
growth. For the nine months ended September 30, 2019, the Company
recorded $333,000 of charges, related to one-time employee
termination benefits, in connection with these activities. These
charges were related to the Professional Services Segment and are
included as part of general and administrative expenses in the
accompanying
unaudited
condensed consolidated statement of operations. As
of September 30, 2019, the remaining liability related to the
restructuring activities was $253,000 and is presented as part of
accounts payable and accrued expenses in the accompanying
unaudited
condensed consolidated balance sheets. The amounts
due are expected to be paid within the next 12 months.
NOTE 11 – COMMON STOCK OPTION AGREEMENT
On March 16, 2016, two stockholders of the Company entered
into an option agreement with Avon Road (collectively, the
“Avon Road Parties”). Under the terms of this agreement
Avon Road paid the stockholders $10,000 each (a total of $20,000)
for the right to purchase, on a simultaneous and pro-rata basis, up
to 4,318,856 shares of Rekor’s common stock owned by those
two shareholders at $0.52 per share, which was determined to be the
fair value. The option agreement had a two-year term which would
have expired on March 16, 2018. On September 7, 2017, the Avon
Road Parties entered into an amended and restated option agreement
which extended the right to exercise the option up to and including
March 21, 2019 (the “Amended and Restated Option
Agreement”). Pursuant to the Amended and Restated Option
Agreement, on December 10, 2018, Avon Road exercised the option to
purchase 4,318,856 shares of Rekor’s common
stock.
28
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – OPERATING LEASES
The Company leases facilities for office space in various locations
throughout the United States. The office leases have remaining
lease terms of one to five years, some of which include options to
terminate within one year.
Effective January 1, 2019, the Company adopted Topic 842, as
amended, which requires lessees to recognize a ROU asset and lease
liability on the balance sheet for most lease arrangements and
expands disclosures about leasing arrangements for both lessees and
lessors, among other items. The Company adopted ASU 2016-02 using
the optional transition method whereby the Company applied the new
lease requirements under ASU 2016-02 through a cumulative-effect
adjustment, which after completing its implementation analysis,
resulted in no adjustment to the Company’s January 1, 2019
beginning retained earnings balance. On January 1, 2019, the
Company recognized $921,000 of ROU operating lease assets and
$951,000 of operating lease liabilities, including noncurrent
operating lease liabilities of $728,000 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. As part of adopting ASU 2016-02, the Company elected several
practical expedients as discussed in Note 2. The comparative
periods have not been restated for the adoption of
ASU 2016-02.
Operating lease expense
from continuing operations
for
the three months ended September 30, 2019 and 2018 was $85,000 and
$180,000, and for the nine months ended September 30, 2019 and 2018
was $268,000 and $516,000, respectively, and is part of general and
administrative expenses in the accompanying
unaudited
condensed consolidated statement of
operations.
Cash paid for amounts included in the measurement of operating
lease liabilities from continuing operations was $48,000 and
$56,000 for the three and nine months ended September 30, 2019,
respectively.
During the third quarter of 2019 the Company performed an
assessment and determined that one of its operating leases met the
criteria to be classified as a lease abandonment. For the three and
nine months ended September 30, 2019 the Company recognized $70,000
of expense related to the loss of lease abandonment which is
included in other expenses in the
unaudited
condensed consolidated statement of
operations.
On May 9, 2019, the Company entered into a sublease agreement to
lease office space in Columbia, Maryland expiring on August 31,
2021. The Company recognized $291,000 of ROU operating lease assets
and $291,000 of operating lease liabilities, including noncurrent
operating lease liabilities of $232,000.
29
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental balance sheet information related to leases as of
September 30, 2019 was as follows (dollars in
thousands):
|
Operating
lease right-of-use lease assets from continuing
operations
|
$
761
|
|
Operating
lease right-of-use lease assets from operations held for
sale
|
154
|
|
Total
operating lease right-of-use assets
|
$
915
|
|
|
|
|
Lease
liability, short-term
|
$
296
|
|
Lease
liability, long-term
|
673
|
|
Lease
liability from operations held for sale
|
169
|
|
Total
operating lease liabilities
|
$
1,138
|
|
|
|
|
Weighted
average remaining lease term - operating leases from continuing
operations
|
3.8
|
|
|
|
|
Weighted
average discount rate - operating leases
|
9
%
|
Maturities of lease liabilities were as follows (dollars in
thousands):
|
2019
(October to December)
|
$
156
|
|
2020
|
451
|
|
2021
|
319
|
|
2022
|
158
|
|
2023
|
159
|
|
2024
|
81
|
|
Total
lease payments
|
1,324
|
|
Less
imputed interest
|
186
|
|
Maturities
of lease liabilities
|
$
1,138
|
30
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Firestorm
On June 25, 2019, the Company sent a letter to three former
executives of the Company and Firestorm (the Firestorm Principals).
The letter described the Company's position that, because the
Company believes that the Firestorm Principals fraudulently induced
the execution of the Membership Interest Purchase Agreement
pursuant to which Firestorm was acquired by the Company, the entire
Membership Interest Purchase Agreement and the transactions
contemplated thereby, including the issuance of the warrants, are
subject to rescission.
On
August 17, 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). The Complaint alleges that the Firestorm Principals
fraudulently induced the execution of the Membership Interest
Purchase Agreement pursuant to which Firestorm was acquired by the
Company, and seeks rescission of the Membership Interest Purchase
Agreement and certain transactions contemplated thereby, including
the issuance of notes and warrants to the Firestorm Principals. On
October 9, 2019, the Company filed an Amended Complaint. On
November 4, 2019, the Firestorm Principals filed an answer to the
Amended Complaint and asserted counterclaims against the Company,
Firestorm, and certain executives of the
Company.
NOTE 14 – 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.
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 to four years with
a contractual term of ten years.
The 2017 Plan is administered by the Administrator, which is
currently the Board of Directors of the Company. The Administrator
has the exclusive authority, subject to the terms and conditions
set forth in the 2017 Plan, to determine all matters relating to
awards under the 2017 Plan, including the selection of individuals
to be granted an award, the type of award, the number of shares of
Rekor common stock subject to an award, and all terms, conditions,
restrictions and limitations, if any, including, without
limitation, vesting, acceleration of vesting, exercisability,
termination, substitution, cancellation, forfeiture, or repurchase
of an award and the terms of any instrument that evidences the
award.
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.
31
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of stock option activity under the Company’s 2017
Plan for the nine months ended September 30, 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 December 31, 2018
|
1,227,557
|
$
2.13
|
8.39
|
-
|
|
Granted
|
862,049
|
1.02
|
9.43
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
Forfeited
|
(66,930
)
|
2.62
|
-
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Canceled
|
(315,520
)
|
1.96
|
-
|
|
|
Outstanding
balance at September 30, 2019
|
1,707,156
|
$
1.68
|
8.57
|
$
1,407
|
|
Exercisable
at September 30, 2019
|
776,963
|
$
1.67
|
7.88
|
$
575
|
Stock compensation
expense for the three months ended September 30, 2019 and 2018 was
$76,000 and $87,000, respectively, and for the nine months ended
September 30, 2019 and 2018 was $314,000 and $296,000,
respectively, and is presented as part of general and
administrative expenses in the accompanying unaudited condensed
consolidated statements of operations. The weighted average grant
date fair value of options granted, to employees and non-employees,
for the nine months ended September 30, 2019 was $0.52. The
intrinsic value of the stock options granted during the nine months
ended September 30, 2019 was
$1,030,00
0. No options were
granted for the nine months ended September 30, 2018. The total
fair value of options that are vested as of September 30, 2019 and
2018 was $684,000 and $735,000, respectively.
As of September 30,
2019, there was $634,000 of unrecognized stock compensation expense
related to unvested stock options granted under the 2017 Plan that
will be recognized over an average remaining period of
1.77
years.
32
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss per common share:
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
(Dollars in
thousands, except per share data)
|
(Dollars in
thousands, except per share data)
|
||
|
Basic and diluted
loss per share
|
|
|
|
|
|
Net
loss from continuing operations
|
$
(3,456
)
|
$
(528
)
|
$
(10,978
)
|
$
(3,649
)
|
|
Less:
preferred stock accretion
|
(191
)
|
(167
)
|
(554
)
|
(483
)
|
|
Less:
preferred stock dividends
|
(114
)
|
(115
)
|
(344
)
|
(345
)
|
|
Net
loss attributable to shareholders from continuing
operations
|
(3,761
)
|
(810
)
|
(11,876
)
|
(4,477
)
|
|
Net income (loss)
from operations held for sale
|
(172
)
|
25
|
(450
)
|
30
|
|
Net
loss attributable to shareholders
|
$
(3,993
)
|
$
(785
)
|
$
(12,326
)
|
$
(4,447
)
|
|
Weighted
average common shares outstanding - basic and diluted
|
19,878,518
|
14,542,362
|
19,592,679
|
14,524,030
|
|
Basic
and diluted loss per share from continuing operations
|
$
(0.19
)
|
$
(0.06
)
|
$
(0.61
)
|
$
(0.31
)
|
|
Basic
and diluted (loss) earnings per share from operations held for
sale
|
(0.01
)
|
0.01
|
(0.02
)
|
-
|
|
Basic
and diluted loss per share
|
$
(0.20
)
|
$
(0.05
)
|
$
(0.63
)
|
$
(0.31
)
|
|
Common stock equivalents excluded due to anti-dilutive
effect
|
5,400,047
|
2,675,906
|
5,400,047
|
2,690,768
|
As the Company had a net loss for the three and nine months ended
September 30, 2019, the following 5,400,047 potentially dilutive
securities were excluded from diluted loss per share: 2,251,232 for
outstanding warrants, 959,937 related to the Series A Preferred
Stock, 481,722 related to the Series B Preferred Stock and
1,707,156 related to outstanding options.
As the Company had a
net loss for the three and nine months ended September 30, 2018,
the following potentially 2,675,906 and 2,690,768 dilutive
securities, respectively, were excluded from diluted loss per
share: 917,950 for outstanding warrants, 974,487
related
to the Series A Preferred Stock, 481,722 related to the Series B
Preferred Stock and 301,747
and
316,609 related to outstanding options.
Loss 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.
33
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
16 – HELD FOR SALE OPERATIONS
In September 2019, the Company determined that the Global business
met the criteria for held for sale accounting because it expects to
complete the sale of Global during the next 12 months.
Historically, Global has been presented as part of the Professional
Services Segment.
This pending disposition is a result of the Company’s
strategic decision to concentrate resources on the development of
its 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 Global
as held for sale, including for all prior periods reflected in the
unaudited condensed consolidated financial statements and these
notes.
Pursuant to ASC Topic 205-20, Presentation of Financial Statements
- Discontinued Operations, the results of operations from Global
for the three and nine months ended September, 2019 and 2018 has
been classified as held for sale and presented as part of income
(loss) from operations held for sale in the accompanying unaudited
condensed consolidated statements of operations presented herein.
The assets and liabilities also have been classified as held for
sale under the line captions of current assets held for sale and
current liabilities held for sale in the Company's unaudited
condensed consolidated balance sheets as of September 30, 2019 and
December 31, 2018.
The assets and liabilities classified as held for sale
operations in the Company's unaudited condensed consolidated
financial statements as of September 30, 2019 and December 31, 2018
are shown below (dollars in thousands).
|
|
September
30,
2019
|
December
31,
2018
|
|
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
226
|
$
90
|
|
Accounts
receivable, net
|
2,981
|
2,289
|
|
Other
current assets, net
|
322
|
257
|
|
Total
current assets
|
3,529
|
2,636
|
|
Property
and equipment, net
|
138
|
176
|
|
Right-of-use
lease assets, net
|
154
|
-
|
|
Goodwill
|
1,691
|
1,691
|
|
Intangible
assets, net
|
1,994
|
2,208
|
|
Deposits
and other long-term assets
|
9
|
79
|
|
Total
assets held for sale
|
$
7,515
|
$
6,790
|
|
LIABILITIES
|
|
|
|
Accounts
payable and accrued expenses
|
$
942
|
$
800
|
|
Short-term
borrowings
|
1,623
|
1,095
|
|
Lease
liability, short term
|
110
|
-
|
|
Other
liabilities, current portion
|
5
|
-
|
|
Total
current liabilities held for sale
|
2,680
|
1,895
|
|
Other
long-term liabilities
|
120
|
90
|
|
Lease
liability, long term
|
59
|
-
|
|
Total
liabilities held for sale
|
$
2,859
|
$
1,985
|
34
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The major components of the operations held for sale, net of tax,
are presented in the unaudited condensed consolidated statements of
operations below (dollars in thousands).
|
|
For the Three Months ended September 30,
|
For the Nine Months ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
|
|
|
|
|
Revenue
|
$
6,205
|
$
7,242
|
$
20,260
|
$
21,435
|
|
Cost
of revenue
|
5,378
|
6,263
|
17,551
|
18,694
|
|
Gross
profit
|
827
|
979
|
2,709
|
2,741
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
755
|
809
|
2,744
|
2,352
|
|
Selling
and marketing expenses
|
93
|
93
|
142
|
241
|
|
Operating
expenses
|
848
|
902
|
2,886
|
2,593
|
|
Income
(loss) from operations
|
(21
)
|
77
|
(177
)
|
148
|
|
Other
income (expense):
|
|
|
|
|
|
Loss
on extinguishment of debt
|
(31
)
|
-
|
(31
)
|
-
|
|
Interest
expense
|
(108
)
|
(30
)
|
(209
)
|
(96
)
|
|
Other
income
|
-
|
-
|
2
|
-
|
|
Total
other expense
|
(139
)
|
(30
)
|
(238
)
|
(96
)
|
|
Income
(loss) from operations held for sale
|
(160
)
|
47
|
(415
)
|
52
|
|
Income
tax provision from operations held for sale
|
(12
)
|
(22
)
|
(35
)
|
(22
)
|
|
Net
income (loss) from operations held for sale
|
$
(172
)
|
$
25
|
$
(450
)
|
$
30
|
NOTE 17- SUBSEQUENT EVENTS
As of
November 14, 2019, the Company sold an additional 626,516 shares of
common stock.
35
I
TEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report
on Form 10-Q (the “Quarterly Report”) contains
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve substantial
risks and uncertainties including particularly statements regarding
our future results of operations and financial position, business
strategy, prospective products and services, timing and likelihood
of success, plans and objectives of management for future
operations, and future results of current and anticipated products
and services. These statements involve uncertainties, such as known
and unknown risks, and are dependent on other important factors
that may cause our actual results, performance or achievements to
be materially different from the future results, performance or
achievements we express or imply. In some cases, you can identify
forward-looking statements by terms such as “may,”
“will,” “should,” “expect,”
“plan,” “anticipate,” “could,”
“intend,” “target,” “project,”
“contemplates,” “believes,”
“estimates,” “predicts,”
“potential” or “continue” or the negative
of these terms or other similar expressions. These forward-looking
statements speak only as of the date of this Quarterly Report and
are subject to a number of risks, uncertainties, and assumptions
described under the sections in our Annual Report on Form 10-K for
the year ended December 31, 2018 entitled “Risk
Factors” and elsewhere in this Quarterly Report.
Given these
risks and uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. Readers are urged to
carefully review and consider the various disclosures made in this
Form 10-Q and in other documents we file from time to time with the
Securities and Exchange Commission (the "SEC") that disclose risks
and uncertainties that may affect our business. The forward-looking
statements in this Form 10-Q do not reflect the potential impact of
any divestitures, mergers, acquisitions, or other business
combinations that had not been completed as of the date of this
filing.
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, you should not rely on these forward-looking
statements as predictions of future events. We undertake no
obligation to update any forward-looking statement as a result of
new information, future events or otherwise.
Specific factors that might cause actual results to differ from our
expectations include, but are not limited to:
●
significant risks,
uncertainties and other considerations discussed in this
report;
●
operating risks,
including supply chain, equipment or system failures, cyber and
other malicious attacks and other events that could affect the
amounts and timing of revenues and expenses;
●
reputational risks
affecting customer confidence or willingness to do business with
us;
●
financial market
conditions and the results of financing efforts;
●
our ability to
successfully identify, integrate and complete acquisitions and
dispositions;
●
our ability to
access the public markets for debt or equity capital
quickly;
●
political, legal,
regulatory, governmental, administrative and economic conditions
and developments in the United States (“U.S.”), and
other countries in which we operate and, in particular, the impact
of recent and future federal, state and local regulatory
proceedings and changes, including legislative and regulatory
initiatives associated with our Technology Segment
products;
●
risks and
uncertainty with respect to our internal control over financial
reporting, including material weaknesses in our current control
which may adversely affect the accuracy and reliability of our
financial statements;
●
current and future
litigation;
●
competition from
other companies with an established position in the market we enter
or who are seeking to enter markets we already serve;
●
our failure to
successfully develop products using our technology that are
accepted by the markets we serve or tend to serve or the
development of new technologies that change the nature of our
business or provide our customers with products or services
superior to or less expensive than ours; and
●
the inability of
our strategic plans and goals to expand our geographic markets,
customer base and product and service offerings.
36
Investors are cautioned that these forward-looking statements are
inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from
those described herein. Other than as required by law, we undertake
no obligation to update forward-looking statements even though our
situation may change in the future. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements.
The following discussion and analysis of our financial condition
and results of operations should be read together with our
condensed consolidated financial statements and related notes
included elsewhere in this report and the “Risk
Factors” section of our Annual Report on Form 10-K for the
year ended December 31, 2018 (the “2018 Annual Report”)
and any updates contained herein as well as those set forth in our
reports and other filings made with the SEC.
General
Overview
We currently provide products and services for governmental
organizations and large and small businesses throughout the world.
Customers are currently using our products or services in over 70
countries, with offerings for the government contracting,
aerospace, public safety, security, transportation, financial
services and logistics industries. As part of the development of a
new line of products for the public safety and security markets,
earlier this year, we acquired industry leading vehicle recognition
software and expanded the scope of these products. In keeping with
the increasing emphasis and management attention on technology
development this recent acquisition represents, we have reorganized
our financial reporting into two business segments: The Technology
Segment and the Professional Services Segment. These two segments
reflect our separate focus on technology products and services
versus professional services.
Technology Segment.
We have been working
since 2017 to develop and field-test a line of mobile products and
related services for use by law enforcement and other public safety
entities. These operations are conducted by Rekor Recognition
Systems, Inc., our wholly owned subsidiary, (formerly named
Brekford Traffic Safety, Inc. and herein referred to as
“Rekor Recognition”). In connection with this effort,
in March 2019, we acquired substantially all assets of OpenALPR
Technology, Inc. (“OpenALPR Technology”). These assets,
consisting principally of vehicle recognition technology, are now
held in OpenALPR Software Solutions, LLC (“OpenALPR”) a
new wholly owned subsidiary of Rekor
Recognition.
The
technology we acquired currently has the capability to analyze
images produced by almost any Internet Protocol camera and identify
license plates from over 70 countries, as well as the make, model
and color of the vehicle. Our new line of public safety equipment
employs this technology. As a result, ownership of the rights to
the technology allows us to protect what we believe are significant
competitive advantages for this new line of products. In addition,
due to the advantages we see in the accuracy and speed of this
technology, as well as its ability to be used with many widely
available camera systems, we also believe that this technology can
be used more broadly in the global vehicle recognition system
market and serve other large markets in the transportation,
security and logistics areas. We continue to develop additional
capabilities to the technology as part of our research and
development efforts.
A key capability of the OpenALPR technology is its ability to
provide precision vehicle identification results with dramatically
less expensive and existing cameras and computer equipment,
including mobile equipment. This can change the dynamics of an
existing market, eliminating the need for 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. In
addition, the lower cost structure has allowed for new applications
of vehicle recognition capabilities, such as supporting
retailers’ customer loyalty programs and providing ingress
and egress control for small homeowner’s associations.
We
also operate "FirstSight", a program designed to help schools by
giving them the tools to be prepared for, and respond to disruptive
events and create secure environments.
Thus, we believe that the development of lower cost vehicle
recognition capabilities will significantly expand the markets
available to our Technology Segment.
37
The Technology Segment, which includes Rekor Recognition and
OpenALPR, will be responsible for our activities in developing
technology and distributing and licensing products and services
with vehicle recognition features. Current customers are using
these products and services for: a) toll collection and traffic
analysis in the transportation market, b) school and traffic
safety, parking and other law enforcement applications in the
public safety market, c) perimeter management and surveillance in
the private security market, d) asset recovery in the financial
services industry, e) operations and customer loyalty programs in
the parking management market and f) vehicle tracking, perimeter
security and warehouse operations in the logistics market. In
addition, on June 26, 2019, we announced that we were selected by
Nokia to provide vehicle recognition solutions for deployment
within the Nokia Scene Internet of Things ("IoT") analytics
platform. Our solutions will be offered to Nokia’s worldwide
customer-base for use within Nokia smart city
offerings.
Professional Services Segment.
We provide professional
services and staffing solutions to the government contracting and
the aerospace and aviation industries. The Professional Services
Segment includes AOC Key Solutions, Inc. ("AOC Key Solutions");
Global Technical Services, Inc. ("GTS"); Global Contract
Professionals, Inc. ("GCP," and together with GTS, "Global"); and
Firestorm Solutions, LLC and Firestorm Franchising, LLC (together,
"Firestorm"). Currently, as a leading provider of support services
to the federal government contracting market, AOC Key
Solutions’ primary clients are companies that serve the
federal government. However, in support of our Technology Segment,
we have recently been active in the state and local government
contracting market. We provide professional services that offer
scalable and compliant outsourced support for our government
contractor clients. We help these clients capture business by
winning government contracts and performing their contract
requirements. Global also provides specialized staffing services
primarily in the aerospace and aviation industries. In connection
with our internal reorganization, we are actively engaged in
evaluating, reconfiguring, selling, and discontinuing various
business assets or entities in the Professional Services Segment.
As part of this process, we have discontinued the operations of
Firestorm Franchising, LLC and recently determined to sell
Global.
On March 29, 2019, we announced that our Board of Directors
approved changing the Company's name to Rekor Systems, Inc. This
name change is a result of our recent acquisition of the OpenALPR
Technology and increased focus on technology products and services,
and aligns with the renaming of Brekford Traffic Safety, Inc. to
Rekor Recognition Systems, Inc. In connection with this name
change, we changed:
●
the ticker symbol
for our common stock on the Nasdaq Stock Market to
“REKR” and the CUSIP number for the Common Stock to
759419 104;
●
the ticker symbol
for our Series A Preferred Stock on the OTC Markets OTCQB exchange
to “REKRP” and the CUSIP number for our Series A
Preferred Stock to 759419 203; and
●
the ticker symbol
for warrants on the OTC Markets OTCQB exchange to
“REKRW” and the CUSIP number for the warrants to 759419
112.
As part of
our strategic shift in fiscal year 2019, we are focusing on its
Technology Segment.
During the
third quarter of 2019, we began to separately report the results
of
Global, our wholly owned subsidiaries
, including substantially all of the assets and
liabilities comprising Global, as held for sale operations. We are
reporting the operating results and cash flows of the Global as
held for sale operations, and thus they have been excluded from
continuing operations and segment results for all periods
presented. Prior to the third quarter of 2019, the operating
results for Global were presented in the Professional Services
segment. The assets and liabilities of Global are presented as
current and long-term assets and liabilities of businesses held for
sale in the unaudited condensed consolidated balance sheets.
As of November 14, 2019, we have received several non-binding
offers and indications of interest for the purchase of Global which
we are in the process of evaluating. No assurance can be given as
to the certainty of the entry into or the subsequent closing any of
these proposed transactions regarding the purchase of
Global.
38
Recent Developments
The most significant developments in our company and business since
January 1, 2019 are described below:
●
In October 2019, we
commenced a contract with the U.S. Air Force. During the nine
months ended September 30, 2019, we received orders for software
licenses and products from several significant new customers,
including the U.S. Department of Defense and a northern California
law enforcement agency. We also received significant additional
orders from existing customers, including VG8 JV S.A.
(“VeroGo”), which has expanded its licenses for our
vehicle recognition software to a total of 1,785 cameras at
locations throughout Brazil for the next five years, Tire Profiles,
LLC, which uses vehicle recognition to ensure proper product
selection, and SECURIX, LLC, a provider of insurance verification
and compliance information. In addition, on June 26, 2019 we
announced that our vehicle identification systems will be offered
to Nokia’s worldwide customer-base for use within
Nokia’s smart city offerings.
●
In August 2019, we launched Rekor Public Safety Network
(“RPSN”). RPSN is a network which any state or local
law enforcement agency participating in the RPSN will be able to
access real time data from any part of the network at no additional
cost. We are initially launching the network by aggregating vehicle
data from customers in over 30 states. With thousands of automatic
license plate reading cameras currently in service that capture
approximately 150 million plate reads per month, the network is
expected to be live in 2020.
●
In August 2019, we entered into an At-the-Market Issuance 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 may offer and sell shares of our common stock, having an
aggregate offering price of up to $15,000,000, through or to B.
Riley FBR.
●
In June 2019, we implemented a new organizational structure and
plan to improve operating results by reducing operating costs by
eliminating redundant positions, and we initiated restructuring and
transition activities to improve operational efficiency, reduce
costs and better position our business to drive future revenue
growth.
●
In June 2019, we
sent a letter to three of our former executives (the Firestorm
Principals). The letter described our position that, because we
believe that the Firestorm Principals fraudulently induced the
execution of the Membership Interest Purchase Agreement pursuant to
which we acquired Firestorm, the entire Membership Interest
Purchase Agreement and the transactions contemplated thereby,
including the issuance of the warrants, are subject to rescission.
On
August 17, 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).
The Complaint alleges that the Firestorm Principals fraudulently
induced the execution of the Membership Interest Purchase Agreement
pursuant to which Firestorm was acquired by us, and seeks
rescission of the Membership Interest Purchase Agreement and
certain transactions contemplated thereby, including the issuance
of notes and warrants to the Firestorm Principals. On October 9,
2019, we filed an Amended Complaint. On November 4, 2019, the
Firestorm Principals filed an answer to the Amended Complaint and
asserted counterclaims against us, Firestorm, and certain of our
executives.
●
Following
completion of the OpenALPR acquisition, we launched several new
service and product lines. In May 2019, we announced the launch of
Numerus™, a cloud-based electronic tolling solution
collecting (“ETC”) product and an agreement to provide
this service to the E-470 Public Highway Authority in Colorado.
Additionally, we announced the launch of the Rekor Edge™
line, an all-in-one camera and vehicle recognition system designed
for the public safety and private security markets.
●
In March 2019, we
completed our acquisition the OpenALPR Technology, Inc. and assumed
certain assets and liabilities for total consideration of
$12,397,000 funded with $7,000,000 in cash and $5,000,000 of the
promissory notes, together with an accompanying warrant to purchase
625,000 shares of our common stock exercisable over a period of
five years and 600,000 shares of our common stock, valued at
$397,000. This acquisition was funded through the issuance of an
additional $15,000,000 in promissory notes to investors, who were
also issued warrants to purchase 1,875,000 shares of our common
stock. The promissory notes are due and payable on March 11, 2021,
and bear interest at 16% per annum, of which at least 10% per annum
is required to be paid in cash, with any remaining portion not paid
in cash continuing to accrue.
●
The founders of our
Firestorm subsidies, who had assumed various positions within
Rekor, resigned as of the end of 2018. Since then, we have been
re-evaluating Firestorm’s operations. We operate Firestorm's
FirstSign
TM
program, which was
launched in January of 2019. During the second quarter of 2019, we
arranged for the personnel acquired by Firestorm in connection with
two small recent acquisitions to separate and discontinued their
activities, resulting in a write-off of intangible assets of
$242,000. In the second quarter of 2019, management evaluated the
performance of all the franchisees of Firestorm Franchising, LLC
and notified them of the termination of their agreements on the
basis of non-performance. In connection with these actions,
management determined to write-off an additional $1,310,000 in
intangible assets related to Firestorm in the second quarter of
2019.
39
Trends and Uncertainties
Different trends, factors and uncertainties, including market
cycles, may impact our operations and financial condition,
including many that are unforeseeable. However, we believe that our
results of operations and financial condition for the foreseeable
future will be primarily affected by trends, factors and
uncertainties discussed in our 2018 Annual Report under “Part
II - Item 7 – Management Discussion and Analysis of Financial
Condition and Results of Operations”, in addition to the
information set forth in this Quarterly Report on Form 10-Q. The
trends, factors and uncertainties that we are most focused on at
the current time are:
●
Graphic Processing Unit (“GPU”)
Improvements
–
We believe that our business will benefit as a result of more
powerful and affordable GPU hardware that has recently been
developed. These GPUs are very efficient at image processing
because their highly parallel structure makes them more efficient
than general-purpose central procession units (“CPUs”)
for algorithms where the processing of large blocks of data is done
in parallel. GPUs also provide superior memory bandwidth, and
efficiency over CPU counterparts. The most recent versions of our
software have been designed to use the increased GPU speeds to
accelerate the ability of software to process image recognitions.
The GPU market is predicted to grow as a result of a surge in
adoption by the Internet of Things (“IoT”) in
industrial and automotive sectors. As GPU manufacturers increase
production volume, we hope to reduce the cost to manufacture our
hardware.
●
Adaptability of the Current ALPR Market
–
We have made a considerable investment in advanced
vehicle recognition systems because we believe with increased
accuracy and affordability, our systems will be able to compete
effectively with existing providers. Based on published benchmarks,
our software currently outperforms competitors in almost every
metric. However, existing large users of ALPR Technology, such as
toll roads, 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
elect to reduce the cost of their current offerings 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.
●
New Uses for Vehicle Recognition
Systems
– We believe that our ability to sustain and
increase the revenues of our Technology Segment through significant
reductions in the cost of vehicle recognition products will
significantly broaden the market for these systems. We currently
serve a number of users who could not afford, or adapt to, the
restrictions of conventional vehicle recognition systems. These
include small municipalities, retailers, homeowners’
associations, and large organizations finding new applications such
as innovative customer loyalty programs. We also expect the ability
of lower cost systems that provide precision results from a broader
field of view, with faster processing, to dramatically increase the
ability of crowded urban areas to manage traffic congestion and
implement safe cities 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.
●
Increased Adoption of Automatic Enforcement of
Motor Vehicle Laws
–
We believe the number of states
that enact legislation to allow for auto-enforcement of certain
motor vehicle regulations will continue to increase. 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 stop sign. As more states take a similar
auto-enforcement approach, the market for our School Bus Stop-Arm
camera will increase and broaden our public safety
market.
●
More municipalities are considering ALPR
systems
–
We
have seen an increase in the number of jurisdictions and
municipalities that are testing ALPR systems or have issued
requests for proposals (“RFPs”) to install a network of
ALPR cameras. We will respond to RFPs that can take advantage of
our ALPR software and hardware.
●
Increasing Smart City Market
– Nokia has approved the use of our OpenALPR software for its
smart city offerings. According to a research report “Smart
Cities Market by Smart Transportation (Type, Solutions and
Services), Smart Buildings (Type, Solutions and Services), Smart
Utilities (Type, Solutions and Services), Smart Citizen Services,
and Region - Global Forecast to 2023”), published by
MarketsandMarkets, the global market for smart cities is expected
to grow from $308.0 billion in 2018 to $717.2 billion by 2023, at a
compound annual growth rate of 18.4% during the forecast period. In
the smart cities market, real-time vehicle recognition technologies
are widely used for public safety. As a result, if Nokia is
successful in its efforts, we expect to benefit from this
service.
40
●
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 and marketing activities
within the Technology Segment to increase awareness and market
adoption of our new technology and products within the market.
However, the speed at which these markets grow, and our products
and services are adopted is uncertain.
●
Ability to Scale and Balance Production to
Meet Demand
– While we have lined up manufacturing
capabilities for our products, we are unproven in our ability to
deliver large volumes of products at our high-quality
standards.
●
Sales Cycle
– As many of our
products are market disruptors, 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.
●
U.S. Government Spending –
In
July 2019, the White House and bi-partisan congressional
negotiators announced they had reached agreement on a two-year
federal budget. The proposed plan would raise federal spending by
$320 billion over existing caps previously imposed by the Budget
Control Act of 2011. Absent a new agreement, the 2011 legislation
would have automatically triggered deep spending cuts next year
under a process known as sequestration. Instead, the recent
agreement would increase spending on domestic and military
programs, partially funded by $77.4 billion in spending cuts from
other budget categories. Additional provisions of the
announcement would allow the government to continue to borrow, most
likely averting a debt ceiling fiscal crisis. On August 2, 2019,
the President signed the two-year budget agreement which wards off
automatic spending cuts and suspends the debt ceiling through July
2021. Agreement on the July spending plan is intended to result in
more funding consistency and may reduce the possibility of another
government shutdown until after the 2020 elections. Many
contractors have geared up for the anticipated increases in
spending. We believe this agreement will reduce government spending
seasonality and this has begun to lead to a stronger fourth quarter
in 2019 and a more robust first quarter in 2020.
We believe that recent developments in computing capabilities, such
as GPU advances, and new techniques of analysis, sometimes referred
to broadly as artificial intelligence or “AI”, have
broadened the market for vehicle identification technology and
created new opportunities in existing markets. With Rekor’s
new line of products and services, our Technology Segment is
working to actively exploit these opportunities. With our
FirstSight
TM
program, we are
also pursuing opportunities created by AI in the school safety
area. With the anticipated continuation of a stable economic
outlook for the government contracting, we believe that the outlook
for the operations of our subsidiaries in the Professional Services
Segment remains positive.
Other than as discussed above and elsewhere in this Quarterly
Report on Form 10-Q, we are not aware of any trends, events or
uncertainties that are likely to have a material effect on our
financial condition.
41
Revenues
We generate our revenues substantially from two sources: (1)
subscription revenues for software licenses, technology products
and services and (2) professional services to clients. Our revenues
are subject to seasonal variation, as more fully described in
“Seasonality” below.
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 we expect to receive in 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:
●
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
subscription revenues for software licenses, technology products
and services revenues are comprised of fees that provide customers
with access to the software licenses and related support and
updates during the term of the arrangement. Revenue is generally
recognized ratably over the contract term. During the second
quarter of 2019, we changed our method of selling in the Technology
Segment from perpetual software licenses to monthly service
subscriptions. This change is expected to impact our revenue in the
short term. However, the amount of contract revenue received over
the long term is expected to be relatively consistent.
Our subscription services
arrangements are non-cancelable and do not contain refund-type
provisions.
The professional services contracts recognize
revenue based on a time and materials or
fixed fees basis. These revenues are recognized as the services are
rendered for
time and materials contracts, on a proportional performance basis for fixed price contracts,
or ratably over the contact term for fixed price contracts with
subscription services.
Seasonality
Revenues attributable to our Professional Services Segment are
subject to the number of business days on which the revenue is
generated by our staff and consultants. There are typically fewer
business workdays available in the fourth quarter of the
year. The staff utilization rate can also be affected by
seasonal variations in the demand for services from clients. Since
earnings may be affected by these seasonal variations, results for
any quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year.
Cost of Revenues
Direct costs of revenues consist primarily of that portion of
technical and non-technical salaries and wages and payroll-related
costs incurred in connection with fee generating projects. Direct
costs of revenues also include production expenses, sub-consultant
services, and other expenses that are incurred in connection with
our fee generating projects. Direct costs of revenues exclude that
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.
42
Cash, Cash Equivalent and Restricted Cash and Cash
Equivalents
Our cash and cash equivalents from continuing operations decreased
to $1,273,000 as of September 30, 2019 from $2,069,000 as of
December 31, 2018. This decreased was primarily attributable to
proceeds from short-term borrowings and financing offset by cash
used in operating activities during the nine months ended September
30, 2019. Our restricted cash and cash equivalents increased to
$708,000 as of September 30, 2019 from $609,000 as of December 31,
2018. The increase is primarily attributable to the timing of cash
collections of behalf of client jurisdictions which use our license
plate recognition software in speed and red-light
cameras.
Critical Accounting Estimates and Assumptions
A comprehensive discussion of our critical accounting estimates and
assumptions is included in the “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” section in our Annual Report on Form 10-K for the
year ended December 31, 2018.
New Accounting Pronouncement
See Note 2 to our unaudited condensed consolidated financial
statements set forth in Item 1 of this quarterly report for
information regarding new accounting pronouncements.
43
Results of Operations
Our historical operating results in dollars and as a percentage of
total revenues are presented below. The results below and the
analysis of operation is solely related to continuing
operations.
|
|
For the
Three Months ended September 30,
|
For the
Nine Months ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Revenue:
|
(Dollars in thousands)
|
(Dollars in thousands)
|
||
|
Technology
|
$
1,536
|
$
892
|
$
3,962
|
$
2,639
|
|
Professional
Services
|
3,447
|
5,015
|
10,922
|
12,632
|
|
Total
revenue
|
4,983
|
5,907
|
14,884
|
15,271
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
Technology
|
390
|
405
|
1,152
|
1,101
|
|
Professional
Services
|
1,842
|
2,561
|
5,868
|
6,433
|
|
Total
cost of revenue
|
2,232
|
2,966
|
7,020
|
7,534
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
Technology
|
1,146
|
487
|
2,810
|
1,538
|
|
Professional
Services
|
1,605
|
2,454
|
5,054
|
6,199
|
|
Gross
profit
|
2,751
|
2,941
|
7,864
|
7,737
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
3,039
|
2,954
|
10,435
|
9,953
|
|
Selling
and marketing expenses
|
1,343
|
297
|
2,012
|
1,095
|
|
Research
and development expenses
|
450
|
5
|
757
|
127
|
|
Impairment
of intangibles
|
-
|
-
|
1,549
|
-
|
|
Operating
expenses
|
4,832
|
3,256
|
14,753
|
11,175
|
|
|
|
|
|
|
|
Loss
from operations
|
(2,081
)
|
(315
)
|
(6,889
)
|
(3,438
)
|
|
Other
income (expense):
|
|
|
|
|
|
Loss
on extinguishment of debt
|
(45
)
|
-
|
(1,158
)
|
-
|
|
Interest
expense
|
(1,228
)
|
(214
)
|
(2,832
)
|
(412
)
|
|
Other
income (expense)
|
(102
)
|
1
|
(99
)
|
201
|
|
Total
other expense
|
(1,375
)
|
(213
)
|
(4,089
)
|
(211
)
|
|
Loss
before income taxes
|
(3,456
)
|
(528
)
|
(10,978
)
|
(3,649
)
|
|
Income
tax provision
|
-
|
-
|
-
|
-
|
|
Net
loss from continuing operations
|
$
(3,456
)
|
$
(528
)
|
$
(10,978
)
|
$
(3,649
)
|
|
Income
(loss) from operations held for sale
|
(160
)
|
47
|
(415
)
|
52
|
|
Income
tax provision from operations held for sale
|
(12
)
|
(22
)
|
(35
)
|
(22
)
|
|
Net
income (loss) from operations held for sale
|
(172
)
|
25
|
(450
)
|
30
|
|
Net
loss
|
$
(3,628
)
|
$
(503
)
|
$
(11,428
)
|
$
(3,619
)
|
44
Comparison of the Three and Nine Months Ended September 30, 2019
and the Three and Nine Months Ended September 30, 2018
Total Revenue
|
|
For the Three Months ended September 30,
|
Change
|
For the Nine Months ended September 30,
|
Change
|
||||
|
(dollars in
thousands)
|
2019
|
2018
|
$
|
%
|
2019
|
2018
|
$
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Technology
|
$
1,536
|
$
892
|
$
644
|
72
%
|
$
3,962
|
2,639
|
$
1,323
|
50
%
|
|
Professional
Services
|
3,447
|
5,015
|
(1,568
)
|
-31
%
|
10,922
|
12,632
|
(1,710
)
|
-14
%
|
|
Total revenue
from continuing operations
|
$
4,983
|
$
5,907
|
$
(924
)
|
-16
%
|
$
14,884
|
$
15,271
|
$
(387
)
|
-3
%
|
As part of our strategic shift in 2019, we are focusing on our
Technology Segment and management has been evaluating plans for our
Professional Services Segment businesses AOC Key Solutions, Global
and Firestorm. As part of evaluating the future of Firestorm,
management decided to sell or transfer the Secure Education and BC
Management lines of business to their founders in the second
quarter of 2019 and classify Global as held for sale. In addition,
management determined to discontinue the operation of Firestorm
Franchising, LLC, a division of Firestorm, due to non-performance
by the franchisees. As a result of these changes, the Professional
Services Segment revenue was expected to decrease compared to the
corresponding periods in 2018.
The increase in revenue in the Technology Segment was primarily
attributable to the acquisition of OpenALPR in March 2019. During
the three months ended September 30, 2019, total revenue
attributable to OpenALPR was approximately $509,000 compared to no
revenue recognized in the corresponding period in 2018.
Additionally, $169,000 of the increase in revenue was attributable
to the completion of two software and implementation projects in
Canada. During the nine months ended September 30, 2019, total
revenue attributable to OpenALPR was approximately $1,332,000
compared to no revenue recognized in the corresponding period in
2018. For information concerning pro-forma revenues attributable to
OpenALPR during 2018, see Note 4 to the financial statements
included in this report.
The decrease in revenues in the Professional Services Segment was
primarily attributable to the repositioning of Firestorm. In the
three months ended September 30, 2019, revenue related to Firestorm
decreased $1,055,000 from $1,104,000 for the three months ended
September 30, 2018 to $49,000 for the three months ended September
30, 2019. The additional decrease of $513,000 is attributable to a
decrease in our professional services revenue related to creating
proposals for clients. During the nine months ended September 30,
2019, revenue related to Firestorm decreased $1,286,000 from
$2,292,000 for the nine months ended September 30, 2018 to
$1,006,000 for the nine months ended September 30, 2019. The
additional decrease of $424,000 is attributable to a decrease in
our professional services revenue related to creating proposals for
clients.
Cost of Revenue, Gross Profit and Gross Margin
|
|
For the Three Months ended September 30,
|
Change
|
For the Nine Months ended September 30,
|
Change
|
||||
|
|
||||||||
| (dollars in thousands) |
2019
|
2018
|
$ or %
Points
|
%
|
2019
|
2018
|
$ or %
Points
|
%
|
|
Cost of
revenue:
|
|
|
|
|
|
|
|
|
|
Technology
|
$
390
|
$
405
|
$
(15
)
|
-4
%
|
$
1,152
|
$
1,101
|
$
51
|
5
%
|
|
Professional
Services
|
1,842
|
2,561
|
(719
)
|
-28
%
|
5,868
|
6,433
|
(565
)
|
-9
%
|
|
Total cost of
revenue
|
2,232
|
2,966
|
(734
)
|
-25
%
|
7,020
|
7,534
|
(514
)
|
-7
%
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
Technology
|
1,146
|
487
|
659
|
135
%
|
2,810
|
1,538
|
1,272
|
83
%
|
|
Professional
Services
|
1,605
|
2,454
|
(849
)
|
-35
%
|
5,054
|
6,199
|
(1,145
)
|
-18
%
|
|
Gross
profit
|
$
2,751
|
$
2,941
|
$
(190
)
|
-6
%
|
$
7,864
|
$
7,737
|
$
127
|
2
%
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
Technology
|
75
%
|
55
%
|
20
%
|
37
%
|
71
%
|
58
%
|
13
%
|
22
%
|
|
Professional
Services
|
47
%
|
49
%
|
-2
%
|
-5
%
|
46
%
|
49
%
|
-3
%
|
-6
%
|
|
Gross
margin
|
55
%
|
50
%
|
18
%
|
35
%
|
53
%
|
51
%
|
10
%
|
19
%
|
45
The increase in gross
profit in the Technology Segment was primarily attributable to the
inclusion of OpenALPR since its acquisition in March 2019. The
revenues associated with OpenALPR are primarily related to software
where we realize a higher margin as there are less labor costs
incurred.
The decrease in the cost of revenues and gross profit in the
Professional Services Segment was primarily related to the
repositioning of Firestorm lines of business. During the three
months ended September 30, 2019, the cost of revenue and gross
profit associated with Firestorm decreased $495,000 and $559,000,
respectively. During the nine months ended September 30, 2019, the
cost of revenue and gross profit associated with Firestorm
decreased $348,000 and $939,000, respectively.
Operating
Expenses
|
|
For the
Three Months ended September 30,
|
Change
|
For the Nine Months ended September 30,
|
Change
|
||||
|
(dollars in
thousands)
|
2019
|
2018
|
$
|
%
|
2019
|
2018
|
$
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses
|
$
3,039
|
$
2,954
|
$
85
|
3
%
|
$
10,435
|
$
9,953
|
$
482
|
5
%
|
|
Selling and marketing
expenses
|
1,343
|
297
|
1,046
|
352
%
|
2,012
|
1,095
|
917
|
84
%
|
|
Research and
development expenses
|
450
|
5
|
445
|
8,900
%
|
757
|
127
|
630
|
496
%
|
|
Impairment of
intangibles
|
-
|
-
|
-
|
-
|
1,549
|
-
|
1,549
|
-
|
|
Operating
expenses
|
$
4,832
|
$
3,256
|
$
1,576
|
48
%
|
$
14,753
|
$
11,175
|
$
3,578
|
32
%
|
General and Administrative Expenses
During the three months ended September 30, 2019, amortization
expenses related to intangible assets increased by $97,000 compared
to the three months ended September 30, 2018 due to the OpenALPR
acquisition. Additionally, professional services fees and overhead
salary fees increased by $528,000 and $300,000 which were incurred
in conjunction with strategic initiatives such as the consulting
fees associated to our remediation plan of our internal
controls.
During the nine months ended September 30, 2019, amortization
expenses related to intangible assets increased by $408,000
compared to the nine months ended September 30, 2018 due to the
OpenALPR acquisition. Additionally, professional services fees
increased by $370,000 which were incurred in conjunction with
strategic initiatives in the current period. The majority of the
remaining increase to general and administrative expenses is
attributable to increase in the Technology Segment due the
acquisition of OpenALPR along with increased staffing.
Selling and Marketing Expenses
The increase in the selling and marketing expenses during the year
related to the Technology Segment can be attributable to the
acquisition of OpenALPR and the increased marketing efforts to
promote our products including trade shows, digital marketing, and
other sales and marketing activities mainly for developing our
Technology Segment. The overall increase in selling and marketing
expenses was partially offset by a decrease in selling and
marketing expenses related to the Professional Services Segment due
to the realignment of Firestorm in the current year.
46
Research and Development Expense
The overall increase in research and development expenses is
primarily attributable to new product development and the strategic
shift to develop additional capabilities for the OpenALPR software
in 2019, as a result of focusing on the Technology
Segment.
Impairment of Intangibles
In June 2019, we discontinued the operations of BC Management and
terminated agreements of all franchisees of Firestorm Franchising,
LLC on the basis of non-performance. As a result, we re-evaluated
the intangible assets related to these subsidiaries and recognized
$1,549,000 in impairment charges related to intangible assets. The
loss is presented as impairment of intangibles on the unaudited
condensed consolidated statement of operations.
Other Expense
|
|
For the Three Months
ended September 30,
|
Change
|
For the Nine Months
ended September 30,
|
Change
|
||||
|
(dollars in
thousands)
|
2019
|
2018
|
$
|
%
|
2019
|
2018
|
$
|
%
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment
of debt
|
$
(45
)
|
$
-
|
$
(45
)
|
0
%
|
(1,158
)
|
$
-
|
$
(1,158
)
|
0
%
|
|
Interest
expense
|
(1,228
)
|
(214
)
|
(1,014
)
|
-474
%
|
(2,832
)
|
(412
)
|
(2,420
)
|
-587
%
|
|
Other
income (expense)
|
(102
)
|
1
|
(103
)
|
-10,300
%
|
(99
)
|
201
|
(300
)
|
-149
%
|
|
Total other
expense
|
$
(1,375
)
|
(213
)
|
(1,162
)
|
-546
%
|
(4,089
)
|
(211
)
|
(3,878
)
|
-1,838
%
|
The increase in other expenses is primarily attributable to an
increase in interest expense related to the $20,000,000 2019
Promissory Note. Additionally, the increase in other expenses was
attributable to fees associated with the extinguishment of debt of
$45,000 and $1,158,000 during the three and nine months ended
September 30, 2019, respectively.
47
Income Tax Provision
The income tax provision for the three and nine months ended
September 30, 2019, was $12,000 and $35,000, respectively, and is
due primarily to the state taxes, including the state of Texas
gross receipts tax, as compared to tax expense of $22,000 for the
three and nine months ended September 30, 2018. The expense related
to the income tax provision is fully attributable to our operations
held for sale. 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 three
months ended September 30, 2019.
Non-GAAP Measures: EBITDA and Adjusted EBITDA
We calculate EBITDA as net income (loss) before interest, taxes,
depreciation and amortization. We calculate Adjusted EBITDA as net
income (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 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 cash flow from operating
activities or as a measure of liquidity or as an alternative to net
earnings as indicators of our operating performance 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 set forth the components of the EBITDA and
Adjusted EBITDA for the periods included:
|
|
For the Three Months ended September 30,
|
For the Nine Months ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
(Dollars in thousands)
|
(Dollars in thousands)
|
||
|
Net
loss from continuing operations
|
$
(3,456
)
|
$
(528
)
|
$
(10,978
)
|
$
(3,649
)
|
|
Interest
|
1,228
|
214
|
2,832
|
412
|
|
Depreciation
and amortization
|
503
|
269
|
1,418
|
793
|
|
EBITDA
|
$
(1,725
)
|
$
(45
)
|
$
(6,728
)
|
$
(2,444
)
|
|
|
|
|
|
|
|
Impairment
of intangible assets
|
-
|
-
|
1,549
|
-
|
|
Loss
on extinguishment of debt
|
45
|
-
|
1,158
|
-
|
|
Share-based
compensation
|
76
|
87
|
314
|
296
|
|
Restructuring
charges
|
-
|
-
|
333
|
-
|
|
Loss
on sale of Secure Education
|
-
|
-
|
3
|
-
|
|
Adjusted EBITDA
|
$
(1,604
)
|
$
42
|
$
(3,371
)
|
$
(2,148
)
|
The
following activities have impacted our Adjusted EBITDA from
continuing operations balance as of September 30, 2019. In March
2019, we recorded costs in connection with the extinguishment of
its $2,000,000 2018 Promissory Note of $1,113,000. In July 2019, we
recorded costs in connection with the extinguishment of its line of
credit with Wells Fargo of $45,000. In June we initiated
restructuring and transition activities to improve operational
efficiency, reduce costs and better position us to drive future
revenue growth. In connection with these activities, we recorded
$333,000 of charges related to these restructuring activities.
Additionally, in June, we discontinued the operations of BC
Management, Inc. (“BC Management”) and terminated
agreements of all franchisees of Firestorm Franchising, LLC on the
basis of non-performance. As a result, we re-evaluated the
intangible assets related to these subsidiaries and recognized
$1,549,000 in impairment charges related to intangible
assets.
Lease Obligations
During 2018 and 2019, we leased office space in Chantilly, Virginia
under the terms of a ten-year lease expiring October 31, 2019. The
lease contained one five-year renewal option. The lease terms
included an annual increase in base rent and expenses of 2.75%,
which have been amortized ratably over the lease term.
During this same period, we subleased a portion of the office space
in Chantilly, Virginia with an initial term of two years, with
eight one-year options for the subtenant to renew the lease through
October 31, 2019. This sublease provided for annual increases in
base rent and expenses of 2.90%. The initial term ended October 31,
2011 and the subtenant exercised the renewal options through 2014.
On April 7, 2015, the sublease was amended to sublease more space
to the subtenant and change the rental calculation. The sublease
provided for an offset of $0 and $46,000 to rent expense for the
three months ended September 30, 2019 and 2018, respectively, and
$0 and $137,000 for the nine months ended September 30, 2019 and
2018, respectively.
48
Effective December 31, 2018, we terminated the original lease
agreement for the Chantilly, Virginia space, and on January 1,
2019, we entered into a new agreement as sublessor for a portion of
the original space occupied in this location. This sublease
includes annual increases in base rent and expenses of 2.75% and
expires on June 30, 2024, with a right to renew subject to the
sublessor renewing its lease.
We also lease office space in: New Orleans, Louisiana on a
month-to-month basis which we vacated on July 31, 2019; Roswell,
Georgia under a lease expiring in January 2022; and Fort Worth,
Texas under a lease expiring in March 2021. In addition, we leased
office space from Global Public Safety on a month-to-month basis
expiring August 2019 and we also leased separate space under an
operating lease which expired on June 30, 2019. Furthermore, we
leased office space in Grand Rapids, Michigan under a lease which
expired on April 30, 2019.
On May 9, 2019, we entered into a sublease agreement to lease
office space in Columbia, Maryland and expiring on August 31, 2021.
This sublease includes annual increases in base rent and expenses
of 4.0%. We recognized $291,000 of right-of-use (“ROU”)
operating lease assets and $291,000 of operating lease liabilities,
including noncurrent operating lease liabilities of
$232,000.
Operating lease expense
from continuing operations
for
the three months ended September 30, 2019 and 2018 was $85,000 and
$180,000, respectively, and for the nine months ended September 30,
2019 and 2018 was $268,000 and $516,000, respectively, and is part
of general and administrative expenses in the accompanying
unaudited condensed consolidated statement of
operations.
Effective January 1,
2019, we adopted Accounting Standards Update (“ASU”)
2016-02,
Leases
(Topic
842), as amended, which requires lessees to recognize a
right-of-use (“ROU”) lease assets, and lease liability
on the balance sheet for most lease arrangements and expands
disclosures about leasing arrangements for both lessees and
lessors, among other items. We adopted ASU 2016-02 using the
optional transition method whereby we applied the new lease
requirements under ASU 2016-02 through a cumulative-effect
adjustment, which after completing our implementation analysis,
resulted in no adjustment to our January 1, 2019 beginning retained
earnings balance. On January 1, 2019, we recognized $921,000 of ROU
operating lease assets and $951,000 of operating lease liabilities,
including noncurrent operating lease liabilities of $728,000 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. As part of our adoption, we
elected the following practical expedients: we have not reassessed
whether any expired or existing contracts are or contain leases; we
have not reassessed lease classifications for any expired or
existing leases; we have not reassessed initial direct costs for
any existing leases; and we have not separated lease and non-lease
components. The adoption of the standard did not have a material
impact on our operating results or cash flows as of January 1,
2019. The comparative periods have not been restated for the
adoption of ASU 2016-02.
Cash paid for amounts included in the measurement of operating
lease liabilities from continuing operations was $48,000 and
$56,000 for the three and nine months ended September 30, 2019,
respectively.
49
Liquidity and Capital Resources
The following table sets forth the components of our cash flows for
the period included:
|
|
For the
Nine Months Ended September 30,
|
|||
|
|
2019
|
2018
|
Change
|
|
|
|
(Dollars
in thousands)
|
$
|
%
|
|
|
Net
cash used in operating activities - continuing
operations
|
$
(6,335
)
|
$
(1,658
)
|
$
(4,677
)
|
-282
%
|
|
Net
cash (used in) provided by investing activities - continuing
operations
|
(406
)
|
468
|
(874
)
|
-187
%
|
|
Net
cash provided by financing activities - continuing
operations
|
5,895
|
653
|
5,242
|
803
%
|
|
Net
decrease in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
|
$
(846
)
|
$
(537
)
|
$
(309
)
|
-58
%
|
Net cash used in operating activities – continuing operations
for the nine months ended September 30, 2019 had a net decrease of
$4,677,000 which was primarily due to an increase in net loss from
continuing operations to $10,978,000 for the nine months ended
September 30, 2019, as compared to $3,646,000 for the nine months
ended September 30, 2018. This was partially offset by (i) an
impairment of intangible assets in the amount of $1,549,000 from
Firestorm, (ii) $1,158,000 loss on extinguishment of debt we
incurred in the first and third quarter of 2019, (iii) an increase
in amortization of intangible assets of $965,000 in the nine months
ended September 30, 2019, as compared to $557,000 in the nine
months ended September 30, 2018, and (iv) an increase in contract
liabilities of $900,000 in the nine months ended September 30,
2019, as compared to a $20,000 decrease in the nine months ended
September 30, 2018, mainly a result of $800,000 we received from a
customer for a five-year software license.
The net decrease of net cash (used in) provided by investment
activities – continuing operations of $874,000 was primarily
due to proceeds from sale of note receivable in the amount of
$1,475,000 we sold during the nine months ended September 30, 2018.
This was partially offset by proceeds of $250,000 from the sale of
Secure Education to a third party and a reduction in capital
expenditures during the nine months ended September 30,
2019.
Net cash used in
financing activities – continuing operations for the nine
months ended September 30, 2019 increased $5,242,000 from the prior
nine-month period ended September 30, 2018. The increase was
primarily due to (i) proceeds of $3,839,000 from the 2019
Promissory Notes issued the first quarter of 2019, (ii) proceeds
from the at-the-market agreement, and (iii) proceeds of $2,315,000
from the secured borrowing arrangement with
LSQ Funding Group, L.C.
(“LSQ”)
. This was partially
offset by the repayment of the Wells Fargo line of
credit.
During 2019 and 2018, we funded our operations primarily through
cash from operating activities from our subsidiaries, revolving
lines of credit, issuance of debt, sale of notes and the sale of
equity. As of September 30, 2019, we had unrestricted cash and cash
equivalents from continuing operations of $1,273,000 and working
capital deficit of $107,000, as compared to unrestricted cash and
cash equivalents of $2,069,000 and working capital deficit of
$44,000 as of December 31, 2018.
Operating assets and liabilities consist primarily of receivables
from billed and unbilled services, accounts payable, accrued
expenses, current portion of long-term debt and secured borrowing
arrangements, and accrued payroll and related benefits. The volume
of billings and timing of collections and payments affect these
account balances.
Series A Preferred Stock
The holders of Rekor Series A Preferred Stock are entitled to
quarterly dividends in the amount 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.
For the nine months
ended September 30, 2019 and 2018, we paid cash dividends of $0 and
$264,000, respectively, to shareholders of record of Series A
Preferred Stock
. Accrued dividends
payable to Series A Preferred Stock shareholders were $440,000 and
$176,000 as of September 30, 2019 and December 31, 2018,
respectively, and are presented as part of the accounts payables
and accrued expenses on the accompanying unaudited condensed
consolidated balance sheets.
50
Series B Preferred Stock
As part of the acquisition of Global, 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 has an
automatic conversion feature based on the common stock 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. As of
September 30, 2019, we paid $108,000 related to accrued dividends
for Series B Preferred Stock shareholders. Accrued dividends
payable to Series B Preferred Stock shareholders were $27,000 and
$54,000 as of September 30, 2019 and December 31, 2018,
respectively.
Short-Term Borrowing
On August 9, 2019, Global Technical Services,
Inc. and Global Contract Professionals, Inc, (together "Global"),
our wholly owned subsidiaries, entered an agreement with an
unrelated third party, LSQ, pursuant to which Global sells its
accounts receivable to LSQ and LSQ advances Global 90% of the value
of the receivable. Global can advance up to $10,000,000 at one
time. The term of the agreement is for 12 months and automatically
renews for additional 12-month periods. The agreement is presented
as secured borrowings, as the accounts receivable are sold with
recourse back to Global, meaning that Global bears the risk of
non-payment by the account debtor. The funded amount of accounts
receivables that LSQ has provided to Global was $1,629,000 as of
September 30, 2019 and is presented as part of current liabilities
held for sale on the unaudited condensed consolidated balance
sheets. To secure its obligations to LSQ, Global has granted a
first priority security interest in Global's accounts receivable
and proceeds thereof. As of September 30, 2019, there were
approximately $2,515,000 of receivables that are subject to
collateral as part of this agreement. The receivables held as
collateral are presented in assets held for sale on the unaudited
condensed consolidated balance sheets.
On August 9, 2019,
AOC Key Solutions, Inc. ("AOC"), our wholly owned subsidiary, also
entered into an agreement with LSQ, as an unrelated third party,
pursuant to which AOC sells its accounts receivable to LSQ and LSQ
advances AOC 90% of the value of the receivable. AOC can advance up
to $5,000,000 at one time. The term of the agreement is for 12
months and automatically renews for additional 12-month periods.
The agreement is presented as secured borrowings, as the accounts
receivable are sold with recourse back to AOC, meaning that AOC
bears the risk of non-payment by the account debtor. The funded
amount of accounts receivables that LSQ has provided fund to AOC
was $1,588,000 as of September 30, 2019 and is presented as part of
the short-term borrowings on the unaudited condensed consolidated
balance sheets. To secure its obligations to LSQ, AOC has granted a
first priority security interest in the AOC’s accounts
receivable and proceeds thereof. As of September 30, 2019, there
were approximately $2,451,000 of receivables that are subject to
collateral as part of this agreement. The receivables held as
collateral are presented in the accounts receivable, net on the
unaudited
condensed consolidated balance sheets.
During the
three and nine months ended September 30, 2019, we recorded
$33,000, in interest expense from continuing operations, related to
the agreement with LSQ. Additionally, during the three and nine
months ended September 30, 2019, we recorded $80,000 in interest
expense from operations held for sale, related to the agreement
with LSQ.
Promissory
Notes
On March 12, 2019, we issued the 2019 Promissory Notes and the
March 2019 Warrants. The loan is due and payable on March 11, 2021
and bears interest at 16% per annum, of which at least 10% per
annum is required to be paid in cash. The full remaining portion of
all interest, if any, accrues and is to be paid-in-kind. The notes
also require 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. The covenants
related to this note were deferred until September 2019.
Transaction costs were approximately $403,000 for a work fee
payable over 10 months, $290,000 in legal fees and a $200,000
closing fee. The loan is 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 are valued at $706,000. The warrants were
exercisable commencing March 12, 2019 and expire on March 12, 2024.
The 2019 Promissory Notes have an effective interest rate of
24.87%. On March 12, 2019, we retired the entire $500,000 balance
due on a promissory note issued under a March 16, 2016 Subordinated
Note and Warrant Purchase Agreement with Avon Road Partners, L.P.
(“Avon Road”), an affiliate of Robert Berman,
Rekor’s President and CEO and a member of our Board of
Directors. Under this agreement, we also issued to Avon Road,
warrants to purchase 121,247 shares of our common stock. These
warrants were exercised on December 11, 2017 for proceeds of
$125,000 and none of these warrants were outstanding as of
September 30, 2019 and December 31, 2018. The promissory note to
Avon Road was extinguished on March 12, 2019 from proceeds of the
2019 Promissory Notes. Amortized financing cost for the three
and nine months ended September 30, 2019 were $328,000 and
$719,000, respectively, and are included in interest expense on the
unaudited
condensed consolidated statement of operations.
The 2019 Promissory Notes resulting in the following detailed
transaction (dollars in thousands):
|
Financing:
|
|
|
Notes
payable, includes exit fee
|
$
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, includes $7,000,000 cash paid and
$5,000,000 note assumed by seller
|
(12,000
)
|
|
Issuance
of warrants in conjunction with notes payable
|
706
|
|
Accounts
Payable
|
360
|
|
Net
cash proceeds from notes payable
|
$
3,839
|
51
Public
Offering
On November 1, 2018, we issued 4,125,000 shares of common stock
through an underwritten public offering at a public offering price
of $0.80 per share. Net proceeds to us were approximately
$2,800,000. In addition, we granted underwriters a 45-day option to
purchase up to 618,750 additional shares of common stock to cover
over-allotment, if any. The underwriters did not exercise this
option and the options were cancelled. As part of this transaction,
we also issued to the underwriters warrants to purchase an
aggregate of 206,250 shares of common stock, exercisable over a
period of five years, at an exercise price of $1.00 per share. The
warrants are exercisable commencing April 27, 2019 and expire on
October 29, 2023. During the nine months ended September 30, 2019,
1,149,860 warrants were exercised in cash and cashless transactions
and converted into 931,666 shares of common stock.
At-the-Market
Offering
On August 14, 2019, we entered into an At Market Issuance
Sales Agreement (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 may offer
and sell 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 will
use its commercially reasonable efforts to sell the shares of our
common stock from time to time, based upon our instructions. B.
Riley FBR will be entitled to a commission equal to 3.0% of
the gross proceeds from each sale. We incurred issuance costs of
approximately $256,000 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 unaudited condensed consolidated balance
sheets.
Sales of our common stock under the Sales Agreement are to be
issued and sold pursuant to our 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. In September 2019, based on settlement date,
we sold 103,566 shares of common stock at a weighted-average
selling price of $2.84 per share in accordance with the Sales
Agreement.
Net
cash provided from the Sales Agreement was $29,000 after paying
$256,000 related to the issuance costs stated above, as well as,
3.0% or $9,000 related to cash commissions provided to B. Riley
FBR.
As of September 30, 2019, $14,706,000 remained available for sale
under the Sales Agreement.
We have generated losses since our inception in August 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, at-the-market agreement and the sale of common stock to
provide cash for operations. We attribute losses to merger costs,
financing costs, public company corporate overhead, lower than
expected revenue, and lower gross profit of some of our
subsidiaries. For the nine months ended September 30, 2019, we
incurred a net loss from continuing operations of approximately
$10,978,000 and used approximately $6,335,000 in net cash from
operating activities from continuing operations. We had total cash
and cash equivalents from continuing operations of approximately
$1,273,000 as of September 30, 2019 and a working capital deficit
of $107,000.
No additional sources of capital have been obtained or committed
through the date of this Quarterly Report on Form 10-Q. There are
currently no anticipated changes in the mix and relative cost of
capital resources. Although certain of our subsidiaries are
profitable, due to the operating costs associated with being a
public company and expenses related to product development and
commercialization costs at other subsidiaries, we anticipate that
we may operate at a loss in the near-term, however, we anticipate
this trend reversing during 2020.
As of September 30, 2019, we did not have any material commitments
for capital expenditures.
I
TEM 3. QUANTITAIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10
of Regulation S-K, Rekor is not required to provide information
required by this Item.
I
TEM 4. CONTROLS
AND PROCEDURES
Limitations on Effectiveness of Controls and
Procedures
In designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
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 Quarterly
Report on Form 10-Q. Based on this review, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were not effective at the
reasonable assurance level as of September 30, 2019.
52
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is
defined in Rule 13a-15(f) of the Exchange Act.
Our management assessed the effectiveness of our internal control
over financial reporting as of September 30, 2019, based on the
criteria set forth in “Internal Control – Integrated
Framework (2013)” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment
and due to the material weaknesses described below, our management
concluded that, as of September 30, 2019, our internal control over
financial reporting was not effective.
Management Progress on Addressing Material Weakness
We
identified material
weaknesses for the years ended December 31, 2018 and 2017, which
were related to our internal control over financial
reporting
. To address the
material weaknesses, we hired a Chief Financial Officer, formed a
disclosure control committee, educated our Board of Directors on
SEC filings and triggering events for financial reporting,
implemented a financial reporting timetable, reviewed procedures
for draft documents, implemented monthly certification of financial
reports, tracked monthly financial activity, and had our executives
review financial results and budgets. In addition, we augmented our
accounting reporting staff by hiring an accounting manager and are
realigning our accounting staff in order to strengthen internal
controls over financial reporting as well as hiring an accounting
firm to map our risks and initiate improved internal control
processes. As part of these efforts, which are ongoing, we have
mapped significant controls, implemented new control processes and,
have improved the design and operational effectiveness of our
control processes and systems for financial reporting, however, our
management concluded that as of September 30, 2019, the material
weaknesses identified for the years ended December 31, 2018 and
2017 had not been remediated. As of September 30, 2019, the we have
implemented a remediation plan to remediate the material weakness
as of December 31, 2019. Otherwise, there was no change in our
internal control over financial reporting during the quarter ended
September 30, 2019 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
53
PART II – OTHER INFORMATION
I
TEM 1. LEGAL
PROCEEDINGS
We may from time to time be subject to various legal proceedings
and claims, either asserted or unasserted, which arise in the
ordinary course of business. While the outcome of these claims
cannot be predicted with certainty, we do not believe that the
outcome of any of these legal matters will have a material adverse
effect on our results of operations or financial condition.
Other
than the matter described in the paragraph below, as of September
30, 2019, we were not aware of any material legal proceedings or
claims.
On
August 17, 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).
The Complaint alleges that the Firestorm Principals fraudulently
induced the execution of the Membership Interest Purchase Agreement
pursuant to which Firestorm was acquired by us, and seeks
rescission of the Membership Interest Purchase Agreement and
certain transactions contemplated thereby, including the issuance
of notes and warrants to the Firestorm Principals. On October 9,
2019, we filed an Amended Complaint. On November 4, 2019, the
Firestorm Principals filed an answer to the Amended Complaint and
asserted counterclaims against us, Firestorm, and certain of our
executives.
I
TEM 1A. RISK
FACTORS
There have been no material changes to the risk factors disclosed
in “Risk Factors” in our Annual Report on Form 10-K as
filed with the SEC on April 11, 2019.
I
TEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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.
Public Offering and Shelf Registration
In November 2018, Rekor completed a public offering of its common
stock (the “Offering”) and issued and sold 4,125,000
shares of its common stock at a public offering price of $0.80 per
share.
The offer and sale of all of the shares in the Offering was
registered under the Securities Act pursuant to a registration
statement on Form S-3 (File No. 333-224423) (the “S-3
Registration Statement”), which was declared effective by the
SEC on April 30, 2018, a preliminary prospectus supplement to the
S-3 Registration Statement filed with the SEC on October 25, 2018
(the “Preliminary Prospectus Supplement”), a free
writing prospectus filed with the SEC on October 24, 2018 (the
“Free Writing Prospectus”), and a final prospectus
supplement to the S-3 Registration Statement filed with the SEC on
October 31, 2018 (the “Final Prospectus Supplement” and
the S-3 Registration Statement as supplemented by the Preliminary
Prospectus Supplement and the Final Prospectus Supplement, together
with the Free Writing Prospectus, the “Registration
Statement”). Under the Registration Statement, Rekor
registered 4,125,000 shares of common stock and 618,750 shares of
common stock issuable upon exercise of the underwriters’
option to purchase additional shares of common stock at a public
offering price of $0.80 per share for a registered aggregate
offering price of approximately $3,800,000. Following the sale of
the shares in connection with the closing of the Offering on
November 1, 2018, the Offering terminated. The Offering commenced
on October 24, 2018 and did not terminate until the sale of all of
the shares offered. ThinkEquity, a division of Fordham Financial
Management, Inc. and The Benchmark Company, LLC acted as joint
book-running managers of the Offering.
54
Rekor received aggregate gross proceeds from the Offering of
approximately $3,300,000, and aggregate net proceeds of
approximately $2,800,000 after deducting underwriting discounts and
commissions of $200,000 and offering expenses of $300,000, for
total expenses, including underwriting discounts and commissions of
$500,000. No payments for such expenses were made directly or
indirectly to any of Rekor’s officers, directors, or their
associates, any persons owning 10% or more of any class of
Rekor’s equity securities or any of Rekor’s
affiliates.
There has been no material change in Rekor’s planned use of
the net proceeds from the Offering as described in the Final
Prospectus Supplement.
At-the-Market Agreement
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 may
offer and sell 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 will use its commercially reasonable efforts to sell the
shares of our common stock from time to time, based upon our
instructions. B. Riley FBR will be entitled to a commission
equal to 3.0% of the gross proceeds from each sale. We incurred
issuance costs of approximately $256,000 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 unaudited condensed consolidated balance
sheets.
Sales of our common stock under the Sales Agreement are to be
issued and sold pursuant to our 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. In September 2019, based on settlement date,
we sold 103,566 shares of common stock at a weighted-average
selling price of $2.84 per share in accordance with the Sales
Agreement.
Net
cash provided from the Sales Agreement was $29,000 after paying
$256,000 related to the issuance costs stated above, as well as,
3.0% or $9,000 related to cash commissions provided to B. Riley
FBR.
As of September 30, 2019, $14,706,000 remained
available for sale under the Sales Agreement.
Use of Proceeds
We have generated losses since our inception in August 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, and the sale of common stock to provide cash for operations.
We attribute losses to merger costs, 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 to the OpenALPR software in
2019.
I
TEM 3. DEFAULTS UPON
SENIOR SECURITIES
None.
I
TEM 4. MINE SAFETY
DISCLOSURES
Not applicable.
I
TEM 5. OTHER
INFORMATION
None.
55
I
TEM 6.
EXHIBITS
(a)
Exhibits
|
|
|
|
|
Incorporated by Reference
|
|
|
||||||
|
Exhibit Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Filed/
Furnished
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Designations of Series A Cumulative Convertible
Redeemable Preferred Stock as filed with the Secretary of State of
Delaware on August 25, 2017
|
|
8-K
|
|
333-216014
|
|
4.1
|
|
8/25/17
|
|
|
|
|
|
Certificate of Designations of Novume Series B Cumulative
Convertible Preferred Stock as filed with the Secretary of State of
Delaware on August 21, 2017
|
|
8-K
|
|
000-55833
|
|
4.2
|
|
10/4/17
|
|
|
|
|
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
of Novume Solutions, Inc. as filed with the Secretary of State of
Delaware on April 26, 2019
|
|
8-K
|
|
001-38338
|
|
3.1
|
|
4/30/19
|
|
|
|
|
|
Amended
and Restated Bylaws of Rekor Systems, Inc.
|
|
8-K
|
|
001-38338
|
|
3.2
|
|
4/30/19
|
|
|
|
|
|
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.
56
S
IGNATURES
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:
|
Chief
Executive Officer,
Director
(Principal
Executive Officer and Authorized Signatory)
|
|
|
|
Date:
|
November
14, 2019
|
|
|
|
|
|
|
|
|
|
/s/
Eyal Hen
|
|
|
|
Name:
|
Eyal
Hen
|
|
|
|
Title:
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
Date:
|
November
14, 2019
|
|
57
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 General, Basis Of Presentation, and Summary Of Significant Accounting PoliciesNote 2 New Accounting PronouncementsNote 3 Business SegmentsNote 4 AcquisitionsNote 5 Intangible AssetsNote 6 Supplemental Disclosures Of Cash Flow InformationNote 7 DebtNote 8 Income TaxesNote 9 Stockholders (deficit) EquityNote 10 RestructuringNote 11 Common Stock Option AgreementNote 12 Operating LeasesNote 13 Commitments and ContingenciesNote 14 Equity Incentive PlanNote 15 Loss Per ShareNote 16 Held For Sale OperationsNote 17- Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitaive and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits