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 March 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to
Commission File Number: 001-38338
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
|
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
May 13, 2020, the Registrant had 22,869,494 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, 2019 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.
Table of Content
REKOR SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
|
PART I
- FINANCIAL INFORMATION
|
3
|
|
|
3
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7
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||
|
31
|
||
|
45
|
||
|
45
|
||
|
|
|
|
|
PART II
- OTHER INFORMATION
|
46
|
|
|
46
|
||
|
46
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||
|
47
|
||
|
48
|
||
|
48
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||
|
48
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||
|
48
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||
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|
|
|
|
49
|
||
2
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)
|
|
March
31,
2020
|
December
31,
2019
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and cash
equivalents
|
$
1,087
|
$
1,075
|
|
Restricted cash
and cash equivalents
|
415
|
461
|
|
Accounts
receivable, net
|
737
|
776
|
|
Inventory
|
488
|
302
|
|
Other current
assets, net
|
388
|
175
|
|
Current assets
held for sale and discontinued operations
|
7,408
|
7,441
|
|
Total current assets
|
10,523
|
10,230
|
|
Property and
equipment, net
|
480
|
442
|
|
Right-of-use lease
assets, net
|
383
|
283
|
|
Goodwill
|
6,336
|
6,336
|
|
Intangible assets,
net
|
7,993
|
8,244
|
|
Long-term assets
held for sale and discontinued operations
|
3,407
|
3,457
|
|
Total assets
|
$
29,122
|
$
28,992
|
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
|
|
|
Current Liabilities
|
|
|
|
Accounts payable
and accrued expenses
|
$
3,264
|
$
3,678
|
|
Lease liability,
short-term
|
231
|
148
|
|
Contract
liabilities
|
799
|
749
|
|
Current
liabilities held for sale and discontinued operations
|
5,787
|
5,757
|
|
Total current liabilities
|
10,081
|
10,332
|
|
Notes
payable
|
21,922
|
20,409
|
|
Lease liability,
long-term
|
172
|
161
|
|
Contract
liabilities, long term
|
775
|
775
|
|
Deferred tax
liability
|
10
|
10
|
|
Long term
liabilities held for sale and discontinued operations
|
502
|
536
|
|
Total liabilities
|
33,462
|
32,223
|
|
Series A
Cumulative Convertible Redeemable Preferred stock, $0.0001 par
value, 505,000 shares authorized and 502,327 shares issued and
outstanding as of March 31, 2020 and December 31, 2019,
respectively
|
6,010
|
5,804
|
|
Commitments and Contingencies
|
|
|
|
Stockholders' Deficit
|
|
|
|
Common stock,
$0.0001 par value, 100,000,000 and 30,000,000 shares authorized,
22,786,757 and 21,595,653 shares issued and outstanding as of March
31, 2020 and December 31, 2019, 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 March
31, 2020 and December 31, 2019, respectively
|
|
|
|
Series B
Cumulative Convertible Preferred stock, $0.0001 par value, 240,861
shares authorized, issued and outstanding as of March 31, 2020 and
December 31, 2019, respectively
|
-
|
-
|
|
Additional paid-in
capital
|
21,959
|
19,371
|
|
Accumulated
deficit
|
(32,311
)
|
(28,408
)
|
|
Total stockholders’ deficit
|
(10,350
)
|
(9,035
)
|
|
Total liabilities and stockholders’ deficit
|
$
29,122
|
$
28,992
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Revenue
|
$
1,595
|
$
1,010
|
|
Cost of
Revenue
|
494
|
490
|
|
Gross
profit
|
1,101
|
520
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General and
administrative expenses
|
2,791
|
1,543
|
|
Selling and
marketing expenses
|
371
|
158
|
|
Research and
development expenses
|
543
|
5
|
|
Operating
expenses
|
3,705
|
1,706
|
|
|
|
|
|
Loss from
operations
|
(2,604
)
|
(1,186
)
|
|
Other income
(expense):
|
|
|
|
Loss on
extinguishment of debt
|
-
|
(1,113
)
|
|
Interest
expense
|
(1,163
)
|
(209
)
|
|
Other
income
|
-
|
2
|
|
Total other
expense
|
(1,163
)
|
(1,320
)
|
|
Loss before income
taxes
|
(3,767
)
|
(2,506
)
|
|
Income tax
provision
|
(7
)
|
(12
)
|
|
Net loss from
continuing operations
|
$
(3,774
)
|
$
(2,518
)
|
|
Net loss from held
for sale and discontinued operations
|
(14
)
|
(357
)
|
|
Net
loss
|
$
(3,788
)
|
$
(2,875
)
|
|
Loss per common
share from continuing operations - basic and diluted
|
(0.19
)
|
(0.15
)
|
|
Loss per common
share from held for sale and discontinued operations - basic and
diluted
|
-
|
(0.02
)
|
|
Loss per common
share - basic and diluted
|
$
(0.19
)
|
$
(0.17
)
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
|
|
Basic and
diluted
|
21,929,768
|
18,800,496
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
DEFICIT
(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 December 31, 2019
|
21,595,653
|
2
|
240,861
|
-
|
19,371
|
(28,408
)
|
(9,035
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
171
|
-
|
171
|
|
Exercise of
cashless warrants in exchange for common stock
|
43,218
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
555,000
|
-
|
-
|
-
|
411
|
-
|
411
|
|
Issuance of common
stock pursuant to at the market offering, net
|
536,730
|
-
|
-
|
-
|
2,169
|
-
|
2,169
|
|
Exercise of
warrants related to series A preferred stock
|
36,862
|
-
|
-
|
-
|
38
|
-
|
38
|
|
Issuance upon
exercise of stock options
|
1,294
|
-
|
-
|
-
|
5
|
-
|
5
|
|
Preferred stock
dividends
|
-
|
-
|
-
|
-
|
-
|
(115
)
|
(115
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(206
)
|
-
|
(206
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,788
)
|
(3,788
)
|
|
Balance as of March 31, 2020
|
22,768,757
|
$
2
|
240,861
|
$
-
|
$
21,959
|
$
(32,311
)
|
$
(10,350
)
|
|
Balance as of December 31, 2018
|
18,767,619
|
$
2
|
240,861
|
$
-
|
$
15,518
|
$
(12,064
)
|
$
3,456
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
63
|
-
|
63
|
|
Issuance of
warrants in conjunction with notes payable
|
-
|
-
|
-
|
-
|
706
|
-
|
706
|
|
Common stock
issued in OpenALPR acquisition
|
600,000
|
-
|
-
|
-
|
397
|
-
|
397
|
|
Preferred stock
dividends
|
-
|
-
|
-
|
-
|
-
|
(115
)
|
(115
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(179
)
|
-
|
(179
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(2,875
)
|
(2,875
)
|
|
Balance as of March 31, 2019
|
19,367,619
|
$
2
|
240,861
|
$
-
|
$
16,505
|
$
(15,054
)
|
$
1,453
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial
statements.
5
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Cash Flows from Operating Activities
|
|
|
|
Net loss from
continuing operations
|
$
(3,774
)
|
$
(2,518
)
|
|
Net loss from held
for sale and discontinued operations
|
(14
)
|
(357
)
|
|
Net
loss
|
(3,788
)
|
(2,875
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
78
|
69
|
|
Amortization
of right-of-use lease asset
|
32
|
-
|
|
Share-based
compensation
|
171
|
63
|
|
Amortization
of financing costs
|
330
|
92
|
|
Amortization
of intangible assets
|
313
|
129
|
|
Loss
on extinguishment of debt
|
-
|
1,113
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
39
|
7
|
|
Inventory
|
(186
)
|
(47
)
|
|
Other
current assets
|
(213
)
|
(80
)
|
|
Accounts
payable and accrued expenses
|
754
|
(326
)
|
|
Contract
liabilities
|
(38
)
|
(32
)
|
|
Lease
liability
|
50
|
-
|
|
Net
cash used in operating activities - continuing
operations
|
(2,444
)
|
(1,530
)
|
|
Net
cash provided by (used in) operating activities - held for sale and
discontinued operations
|
452
|
(440
)
|
|
Net
cash used in operating activities
|
(1,992
)
|
(1,970
)
|
|
Cash Flows from Investing Activities
|
|
|
|
Capital
expenditures
|
(178
)
|
(308
)
|
|
Net
cash used in by investing activities - continuing
operations
|
(178
)
|
(308
)
|
|
Net
cash used in investing activities - held for sale and discontinued
operations
|
-
|
-
|
|
Net
cash used in investing activities
|
(178
)
|
(308
)
|
|
Cash Flows from Financing Activities
|
|
|
|
Net
proceeds from notes payable
|
-
|
3,839
|
|
Net
proceeds from exercise of options
|
5
|
-
|
|
Net
proceeds from exercise of warrants
|
411
|
-
|
|
Net proceeds from exercise of warrants associated to series A
preferred stock
|
38
|
-
|
|
Net
proceeds from at-the-market agreement
|
2,169
|
-
|
|
Payment
of debt modification costs
|
(100
)
|
-
|
|
Net
cash provided by financing activities - continuing
operations
|
2,523
|
3,839
|
|
Net
cash provided by (used in) financing activities - held for sale and
discontinued operations
|
(556
)
|
723
|
|
Net
cash provided by financing activities
|
1,967
|
4,562
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
|
(99
)
|
2,001
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents - held for sale and discontinued
operations
|
(104
)
|
283
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents
|
(203
)
|
2,284
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at beginning
of period
|
1,866
|
2,767
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at end of
period
|
$
1,663
|
$
5,051
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted
cash:
|
|
|
|
Cash and cash
equivalents at end of period - continuing operations
|
$
1,087
|
$
4,125
|
|
Restricted cash
and cash equivalents at end of period - continuing
operations
|
415
|
577
|
|
Cash and cash
equivalents at end of period - held for sale and discontinued
operations
|
161
|
349
|
|
Cash, cash
equivalents and restricted cash at end of period
|
$
1,663
|
$
5,051
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
R
EKOR SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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
unaudited condensed consolidated financial position as of March 31,
2020, the unaudited condensed consolidated results of operations,
consolidated statements of shareholders’ deficit and
unaudited condensed consolidated statements of cash flows for the
three months ended March 31, 2020 and 2019.
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 months ended
March 31, 2020 are not necessarily indicative of the results to be
expected for the year ending December 31, 2020.
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, 2019. The
year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of
America.
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. Amounts for the first quarter of 2020 and for the
period ending December 31, 2019, have been reclassified to conform
to the current year presentation. Due to the held for sale
classification of Global and AOC Key Solutions, as well as, the
discontinuance of all professional services activities, certain
amounts have been reclassified in order to conform to the current
period presentation.
Rekor
Systems, Inc. (the “Company” or “Rekor”),
was formed in February 2017. The Company is a leader in the field
of vehicle identification and management systems driven by advances
in artificial intelligence ("AI"). In development for over five
years using AI processes, including deep machine learning
algorithms, the Company’s core software enables the creation
of more powerful and capable vehicle recognition systems that can
be deployed at a fraction of the cost of traditional vehicle
recognition systems. The software enables a wider field of view,
greater light sensitivity, recognitions at faster speeds and the
ability to identify the color, make and type of a vehicle as well
as direction of travel. These capabilities are particularly useful
in solving a wide variety of real-world roadway and vehicle related
challenges. In addition, the reductions in cost have opened up a
number of new uses for vehicle recognition technology that were not
previously cost effective.
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.
7
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. During the first quarter of 2020, the Company began
to separately report the results of AOC Key Solutions, Inc.
(“AOC Key Solutions”), the Company’s wholly owned
subsidiary, including substantially all of the assets and
liabilities comprising AOC Key Solutions, as operations held for
sale. Additionally, during the first quarter of 2020, in connection
with the Company’s plan to sell AOC Key Solutions and Global,
the Company determined that all of the Professionals Services
segment should be classified as held for sale or discontinued
operations. The Company reported Firestorm Solutions, LLC
(“Firestorm Solutions”) and Firestorm Franchising, LLC
(“Firestorm Franchising” and together with Firestorm
Solutions, “Firestorm”) as part of held for sale and
discontinued operations. This strategic shift by the Company was
done to focus on its technology offerings and
products.
The
Company is reporting the operating results and cash flows of
Global, AOC Key Solutions and Firestorm as held for sale and
discontinued operations, and thus they have been excluded from
continuing operations for all periods presented. Prior to the
Company’s decision to sell Global and AOC Key Solutions, the
operating results for these subsidiaries were presented in the
Professional Services segment. Prior to the Company’s
decision to discontinue the operations of its Professional Services
segment, the operating results of Firestorm were presented in the
Professional Services segment. The assets and liabilities of
Global, AOC Key Solutions and Firestorm are presented as current
and long-term assets and liabilities held for sale and discontinued
operations in the unaudited condensed consolidated balance sheets
and its results are presented as loss from held for sale and
discontinued operations in the unaudited condensed consolidated
statement of operations.
On
April 2, 2020, the Company entered into an agreement with the
members of AOC Key Solutions’ management to sell AOC Key
Solutions. This transaction closed on April 2, 2020, subsequent to
the execution of the sales agreement and is further discussed in
the Company’s Subsequent Event Note 13.
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 February 2017
and has relied on cash on hand, external bank lines of credit, the
sale of a note, proceeds from the sale of common stock, debt
financings and a public offering of its common stock to support
cashflow from operations. The Company attributes losses to merger
and acquisition costs, public company corporate overhead and
non-capital expenditures. As of and for the three months ended
March 31, 2020, the Company had a net loss from continuing
operations of $3,774,000 and a working capital deficit of
$1,179,000. The Company's net cash position was decreased by
$34,000 for the three months ended March 31, 2020 due to the net
loss from operations, offset by the net proceeds of $2,169,000 from
the At-the-Market Agreement and the net proceeds from the issuance
of common stock in connection with exercise of warrants and stock
options of $454,000.
8
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 2020, the Company has access
to raise up to $9,490,000 through the
At Market Issuance Sales
Agreement (the “Sales Agreement”)
. As of April
30, 2020, the Company has $9,490,000 available for sale under the
Sales Agreement. 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, the Company has contingency plans
to reduce or defer expenses and cash outlays should operations
weaken in the look-forward period or additional financing, if
needed, is not available.
The
Company's ability to generate positive operating results and
complete the execution of its business strategy will depend on (i)
its ability to maintain timely collections from existing customers,
as well as continue the growth of its technology business, (ii)
timely completion of the disposition of the businesses in its
Professional Services Segment, (iii) the continued performance of
its contractors, subcontractors and vendors, (iv) its ability to
maintain and build good relationships with its lenders and
financial intermediaries, (v) its ability to meet debt covenants or
obtain waivers in case of noncompliance and (vi) the stabilization
of the world economy and global financial markets. To the extent
that events outside of the Company's control have a significant
negative impact on economic and/or market conditions, they could
affect payments from customers, services and supplies from vendors,
its ability to continue to secure new business, raise capital,
complete the sale of its assets held for sale in a timely fashion
and otherwise, depending on the severity of such impact, materially
adversely affect its operating results.
The
Company’s operations have been affected by the recent and
ongoing outbreak of the coronavirus disease
(“COVID-19”) which was declared a pandemic by the World
Health Organization in March 2020. The impact includes the need for
employees to work remotely, restrictions on travel affecting the
Company’s ability to attend meetings, conferences,
consultations and installations and otherwise provide and market
its products and services, and disruptions to its customers'
operations which may affect its revenues. The Company also expects
to benefit from the availability of financing under the CARES Act
(see Note 13). The ultimate disruption which may be caused by the
outbreak is uncertain; however, it may result in a material adverse
impact on the Company’s financial position, operations and
cash flows. Possible effects may include, but are not limited to,
disruption to the Company’s customers and revenue,
absenteeism in the Company’s labor workforce, unavailability
of products and supplies used in operations, and a decline in value
of assets held by the Company.
Use of Estimates
The
preparation of financial statements in conformity with GAAP
requires the extensive use of management's 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, the results of which form the
basis for making judgments about the carrying value of assets and
liabilities that are not apparent from other sources. Actual
results may differ from those estimates under different assumptions
or conditions.
Goodwill and Intangible Assets
Goodwill
represents the excess of the fair value of consideration
transferred in a business combination over the fair value of
tangible and intangible assets acquired, net of the fair value of
liabilities assumed. Goodwill is tested for impairment within one
year of acquisitions or annually as of October 1, and whenever
indicators of impairment exist. In testing goodwill for
impairment, the Company may elect to utilize a qualitative
assessment to evaluate whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If
the Company’s qualitative assessment indicates that goodwill
impairment is more likely than not, the Company will perform a
two-step impairment test. The Company will test goodwill for
impairment under the two-step impairment test by first comparing
the book value of net assets to the fair value of the reporting
units. If the fair value is determined to be less than the book
value or qualitative factors indicate that it is more likely than
not that goodwill is impaired, a second step is performed to
compute the amount of impairment as the difference between the
estimated fair value of goodwill and the carrying value. The
Company estimates the fair value of the reporting units using
discounted cash flows. Forecasts of future cash flows are based on
the Company’s best estimate of future net sales and operating
expenses, based primarily on expected growth and general economic
conditions.
9
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Except for goodwill, the Company does not have any
intangible assets with indefinite useful lives.
Fair Value of Financial Instruments
The carrying amounts reported in the 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 March 31, 2020 and December 31, 2019
because of the relatively short-term maturity of these financial
instruments. The carrying amount reported for long-term debt
approximates fair value as of March 31, 2020 and December 31, 2019
given management’s evaluation of the instrument’s
current rate compared to market rates of interest and other
factors.
The determination of fair
value is based upon the fair value framework established by
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 March 31, 2020. There were no changes in
levels during the three months ended March 31, 2020.
Revenue Recognition
The
Company derives its revenues substantially from license and
subscription fees for software and related products and
services.
Revenue is
recognized upon transfer of control of promised products and
services to the Company’s customers, in an amount that
reflects the consideration the Company expects to receive in
exchange for those products and services. If the consideration
promised in the contract includes a variable amount, for example
maintenance fees, 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.
10
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company determines the amount of revenue to be recognized through
application of the following steps:
●
Identification of
the contract, or contracts, with a customer
●
Identification of
the performance obligations in the contract
●
Determination of
the transaction price
●
Allocation of the
transaction price to the performance obligations in the
contract
●
Recognition of
revenue when, or as, performance obligations are
satisfied
The
following table presents a summary of revenue (dollars in
thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Revenue
|
|
|
|
Automated traffic
safety enforcement
|
$
745
|
$
817
|
|
Licensing and
subscription revenue
|
850
|
193
|
|
Total
revenue
|
$
1,595
|
$
1,010
|
Revenues
The
revenues for technology products and services are from fees that
provide customers with software licenses and related support and
service fees for various public safety services.
In
March 2019, the Company acquired substantially all of the assets of
a software development company, OpenALPR Technologies, Inc. The
software acquired from this acquisition and subsequently developed
by the Company have provided the basis for the Company’s
licensing and subscription revenue. Licensing and subscription
services include those products which operate in many installation
locations with a high accuracy rate, which include a web server, a
self-managed database, and access to a powerful, cross-platform
application programming interface. The Company's proprietary
software employs a convolutional neural network architecture to
classify images and features that include seamless video analysis
and data analytics. Current customers include law enforcement
agencies, highway authorities, parking system operators, private
security companies, and wholesale and retail operations supporting
logistics and customer loyalty programs. During the second quarter
of 2019, the Company changed its method of selling its software
from perpetual software licenses, with associated maintenance
services, to service subscriptions of limited duration. These
subscriptions give the customer a license to use the latest version
of the Company's software only during the term of the subscription.
Revenue is generally recognized ratably over the contract term.
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 is expected to be relatively consistent. The
Company’s subscription services arrangements are
non-cancelable and do not contain refund-type provisions. Revenue
is recognized ratably over the licensing or subscription
term.
Automated traffic
safety enforcement revenues reflect arrangements to provide traffic
safety systems to a number of municipalities in North America.
These systems include hardware that identifies red light and school
safety zone traffic violations and software that captures and
records forensic images, analyses the images to provide data and
supports citation management services. The Company also provides an
enterprise parking enforcement solution that the Company licenses
to parking management companies and
municipalities. Revenue is recognized monthly based on
the number of camera systems that are operated, or the number of
citations issued by the relevant municipality.
11
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For
those contracts that have multiple performance obligations, the
Company allocates the total transaction price to each performance
obligation based on its relative standalone selling price, which is
determined based on the Company’s overall pricing objectives,
taking into consideration market conditions and other
factors.
A performance obligation is a promise in a contract with a customer
to transfer services that are distinct. The performance obligations
that are not yet satisfied or partially satisfied are performance
obligations that are expected to be recognized as revenue in the
future for a contract with a customer which was executed as of a
particular date. At March 31, 2020, the Company had approximately
$13,831,000 of remaining performance obligations not yet satisfied
or partially satisfied. The Company expects to recognize
approximately 34% of this amount over the succeeding twelve months,
and the remainder is expected to be recognized over the next two to
four years thereafter.
The
timing of revenue recognition, billings and cash collections
results in billed accounts receivable, unbilled accounts
receivables, and contract liabilities on the unaudited condensed
consolidated balance sheets. Billed and unbilled accounts
receivable are presented as part of accounts receivable, net, on
the unaudited condensed consolidated balance sheets. When billings
occurs after services have been provided, such unbilled amounts
will generally be billed and collected within 60 to 120 days but
typically no longer than over the next twelve months. Unbilled
accounts receivables of $247,000 and $440,000 were included in
accounts receivable, net, in the unaudited condensed consolidated
balance sheets as of March 31, 2020 and December 31, 2019,
respectively. Additionally, unbilled accounts receivables of
$1,751,000 and $346,000 were included in current assets held for
sale and discontinued operations in the unaudited condensed
consolidated balance sheets as of March 31, 2020 and December 31,
2019, respectively.
When
the Company advance bills clients prior to providing services,
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 sheets on
a contract-by-contract basis at the end of each reporting period.
Changes in the contract asset and liability balances during the
three months ended March 31, 2020 were not materially impacted by
any other factors. Contract liabilities from the period ended March
31, 2020 and December 31, 2019 were $1,574,000 and $1,524,000,
respectively. All contract liabilities as of March 31, 2020 and
December 31, 2019 were attributable to continued operations. During
the three months ended March 31, 2020 $243,000 of the contract
liabilities balance as of December 31, 2019 were recognized as
revenue.
The
services due for contract liabilities described above are shown
below as of March 31, 2020 (dollars in thousands):
|
2020
|
$
717
|
|
2021
|
297
|
|
2022
|
270
|
|
2023
|
195
|
|
2024
|
95
|
|
Total
|
$
1,574
|
Practical Expedients Election
‒
Costs to Obtain and Fulfill a
Contract
‒ The Company’s incremental costs to
obtain a contract consist of sales commissions. The Company elected
to use the practical expedient to expense costs to obtain a
contract as incurred when the amortization period would have been
one year or less. As of March 31, 2020, and December 31, 2019,
costs incurred to obtain contracts in excess of one year have been
immaterial to date.
12
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment Reporting
The FASB ASC Topic
280,
Segment
Reporting
, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
In 2019, the
Company changed its operating and reportable segments from one
segment to two segments
: the Technology Segment
and the Professional Services Segment.
The two segments reflected
the Company’s separate focus on technology products and
services versus professional services.
As part of a strategic shift by the Company, all operations related
to the Professional Services segment have been classified as held
or sale and discontinued as of 2020. As of January 1, 2020, the
Company had one reportable segment. Continuing operations are all
operations that previously were reported as part of the Technology
Segment.
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 March 31, 2020 and
December 31, 2019 were $415,000 and $461,000, respectively, and
correspond to equal amounts of related accounts payable and are
presented as part of accounts payable and accrued expenses in the
accompanying unaudited
condensed
consolidated balance
sheets.
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 March 31, 2020 and December 31, 2019,
the Company had deposits from continuing operations totaling
$1,502,000 and $1,536,000, respectively, in one U.S. financial
institution that was federally insured up to $250,000 per
account.
The Company has a market concentration of revenue and accounts
receivable from continuing operations related to its customer
base.
Company A accounted for 17% and less than 10% of the
Company’s total revenues for the three months ended March 31,
2020 and 2019, respectively.
Company B accounted for 13% and 27% of the Company’s total
revenues for the three months ended March 31, 2020 and 2019,
respectively.
Company C accounted for less than 10% and 12% of the
Company’s total revenues for the three months ended March 31,
2020 and 2019, respectively.
As of March 31, 2020,
accounts receivable from Company A totaled $140
,000 or 19%
of the
unaudited
condensed
consolidated accounts
receivable balance. As of December 31, 2019, Company A accounted
for $198,000 or 26% 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
three month period ended March 31, 2020 or unaudited condensed
consolidated accounts receivable balance as of March 31,
2020.
13
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Significant Accounting Policies
Additional
significant accounting policies of the Company are also described
in Note 1 of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019.
New Accounting Pronouncements Effective in the Three Months ended
March 31, 2020
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820),
Disclosure Framework-Changes to the Disclosure Requirements for
Fair Value Measurement
(“ASU 2018-13”). This ASU
modifies the disclosure requirements for fair value measurements by
removing, modifying or adding certain disclosures. ASU 2018-13 is
effective for annual periods beginning after December 15, 2019 and
interim periods within those annual periods, with early adoption
permitted. The amendments on changes in unrealized gains and
losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the
narrative description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. The Company adopted ASU
2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not
have a material impact on the Company’s
disclosures.
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 2 - ACQUISITIONS
OpenALPR Technology Acquisition
On March 12, 2019, the Company completed the acquisition of certain
assets and assumed certain liabilities of OpenALPR Technology, Inc.
(the “OpenALPR Technology Acquisition”). Consideration
paid as part of the OpenALPR Technology Acquisition was: $7,000,000
in cash, subject to adjustment after closing; 600,000 shares of
Rekor common stock, valued at $397,000; and $5,000,000 of the 2019
Promissory Notes 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.
The purchase price allocation to the assets acquired and
liabilities assumed based on fair values as of the acquisition
date. Since the OpenALPR Technology Acquisition occurred on March
12, 2019, the results of operations including OpenALPR Technology
Acquisition from the date of acquisition have been included in the
Company’s unaudited condensed consolidated statement of
operations for the three months ended March 31, 2020.
14
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The final purchase price allocation of the OpenALPR Technology
Acquisition is as follows: intangible assets of $7,436,000 and
goodwill of $4,934,000 along with net assets acquired of $415,000,
and contract obligations assumed of $388,000.
The table below shows the breakdown related to the final purchase
price allocation for the OpenALPR Technology Acquisition (dollars
in thousands):
|
Accounts
receivable, net
|
$
381
|
|
Other current
assets, net
|
13
|
|
Property and
equipment, net
|
21
|
|
Contract
liabilities
|
(388
)
|
|
Net assets
acquired
|
27
|
|
Less intangible
assets
|
7,436
|
|
Consideration
paid
|
(12,397
)
|
|
Net goodwill
recorded
|
$
4,934
|
|
|
|
|
Cash
consideration
|
$
7,000
|
|
Note
payable
|
5,000
|
|
Common stock
consideration
|
397
|
|
Total acquisition
consideration
|
$
12,397
|
Operations of Combined Entities
The following unaudited pro forma combined financial information
gives effect to the OpenALPR Technology Acquisition as if it was
consummated as of January 1, 2019. This unaudited pro forma
financial information is presented for information purposes only
and is not intended to present actual results that would have been
attained had the acquisition been completed as of January 1,
2019 or to project potential operating results as of any future
date or for any future periods.
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(Dollars in
thousands, except per share data)
|
|
|
Revenue from
continuing operations
|
$
1,595
|
$
1,979
|
|
Net loss from
continuing operations
|
(3,774
)
|
(1,710
)
|
|
Basic and diluted
loss per share continuing operations
|
$
(0.19
)
|
$
(0.10
)
|
|
Basic and diluted
number of shares
|
21,929,768
|
19,367,619
|
15
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – HELD FOR SALE AND DISCONTINUED
OPERATIONS
In September 2019 and March 2020, the Company determined that
Global and AOC Key Solutions, respectively, met the criteria for
held for sale accounting because it expects to complete the sale of
Global and AOC Key Solutions during the next 12 months.
Historically, Global and AOC Key Solutions have been presented as
part of the Professional Services Segment.
On
April 2, 2020, AOC Key Solutions was sold pursuant to a purchase
and sale agreement as further detailed in Note
13.
During
the first quarter of 2020, in connection with the Company’s
plan to sell AOC Key Solutions and Global, the Company determined
that all of the historical Professionals Services Segment, not
subject to sale, should be classified as discontinued operations.
As part of this plan Firestorm has also been classified as
discontinued operations and presented as part of held for sale and
discontinued operations. Previously, Firestorm was not included as
part of held or sale and discontinued operations as it did not meet
the threshold of being considered a strategic shift.
The pending dispositions
are 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, AOC Key Solutions and
Firestorm as held for sale and discontinued operations, 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,
AOC Key Solutions and Firestorm for the three months ended March
31, 2020 and 2019 have been classified as held for sale and
discontinued operations and presented as part of loss from held for
sale and discontinued operations in the accompanying unaudited
condensed consolidated statements of operations presented herein.
The assets and liabilities also have been classified as held for
sale and discontinued operations under the line captions of current
and long term assets held for sale and discontinued operations and
current and long term liabilities held for sale and discontinued
operations in the accompanying unaudited condensed consolidated
balance sheets as of March 31, 2020 and December 31,
2019.
The assets and liabilities classified as held for sale and
discontinued operations in the Company's unaudited condensed
consolidated financial statements as of March 31, 2020 and December
31, 2019 are shown below (dollars in thousands).
|
|
March 31,
2020
|
December 31,
2019
|
||||||
|
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
37
|
$
118
|
$
6
|
$
161
|
$
225
|
$
93
|
$
12
|
$
330
|
|
Accounts receivable,
net
|
3,183
|
3,866
|
-
|
7,049
|
2,763
|
4,055
|
-
|
6,818
|
|
Other current assets,
net
|
157
|
41
|
-
|
198
|
238
|
52
|
3
|
293
|
|
Current assets held for sale and
discontinued operations
|
3,377
|
4,025
|
6
|
7,408
|
3,226
|
4,200
|
15
|
7,441
|
|
Property and equipment,
net
|
113
|
37
|
-
|
150
|
113
|
41
|
-
|
154
|
|
Right-of-use lease assets,
net
|
105
|
477
|
-
|
582
|
130
|
499
|
-
|
629
|
|
Goodwill
|
669
|
-
|
-
|
669
|
669
|
-
|
-
|
669
|
|
Intangible assets,
net
|
1,994
|
-
|
-
|
1,994
|
1,994
|
-
|
-
|
1,994
|
|
Deposits and other long-term
assets
|
-
|
12
|
-
|
12
|
-
|
11
|
-
|
11
|
|
Long-term assets held for sale and
discontinued operations
|
2,881
|
526
|
-
|
3,407
|
2,906
|
551
|
-
|
3,457
|
|
Total assets held for sale and
discontinued operations
|
$
6,258
|
$
4,551
|
$
6
|
$
10,815
|
$
6,132
|
$
4,751
|
$
15
|
$
10,898
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
$
724
|
$
1,572
|
$
29
|
$
2,325
|
$
461
|
$
1,260
|
$
33
|
$
1,754
|
|
Lines of credit
|
1,776
|
1,404
|
-
|
3,180
|
1,842
|
1,894
|
-
|
3,736
|
|
Lease liability, short
term
|
115
|
103
|
64
|
282
|
113
|
100
|
54
|
267
|
|
Current liabilities held for sale
and discontinued operations
|
2,615
|
3,079
|
93
|
5,787
|
2,416
|
3,254
|
87
|
5,757
|
|
Other long-term
liabilities
|
33
|
-
|
-
|
33
|
-
|
-
|
-
|
-
|
|
Lease liability, long
term
|
-
|
439
|
30
|
469
|
30
|
467
|
39
|
536
|
|
Long-term liabilities held for sale
and discontinued operations
|
33
|
439
|
30
|
502
|
30
|
467
|
39
|
536
|
|
Total liabilities held for sale and
discontinued operations
|
$
2,648
|
$
3,518
|
$
123
|
$
6,289
|
$
2,446
|
$
3,721
|
$
126
|
$
6,293
|
16
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The major components of the held for sale and discontinued
operations, net of tax, are presented in the unaudited condensed
consolidated statements of operations below (dollars in
thousands):
|
|
Three Months
Ended March 31,
|
|||||||
|
|
2020
|
2019
|
||||||
|
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
|
Revenue
|
$
6,305
|
$
3,392
|
$
-
|
$
9,697
|
$
7,058
|
$
2,878
|
$
680
|
$
10,616
|
|
Cost of
revenue
|
5,476
|
1,866
|
-
|
7,342
|
6,146
|
1,592
|
295
|
8,033
|
|
Gross
profit
|
829
|
1,526
|
-
|
2,355
|
912
|
1,286
|
385
|
2,583
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses
|
762
|
1,284
|
(4
)
|
2,042
|
971
|
1,115
|
508
|
2,594
|
|
Selling and
marketing expenses
|
39
|
131
|
-
|
170
|
82
|
125
|
63
|
270
|
|
Operating
expenses
|
801
|
1,415
|
(4
)
|
2,212
|
1,053
|
1,240
|
571
|
2,864
|
|
Income loss income
from operations
|
28
|
111
|
4
|
143
|
(141
)
|
46
|
(186
)
|
(281
)
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
(90
)
|
(74
)
|
-
|
(164
)
|
(48
)
|
(31
)
|
-
|
(79
)
|
|
Other
expense
|
5
|
2
|
-
|
7
|
1
|
2
|
-
|
3
|
|
Total other
expense
|
(85
)
|
(72
)
|
-
|
(157
)
|
(47
)
|
(29
)
|
-
|
(76
)
|
|
Income (loss) from
held for sale and discontinued operations
|
(57
)
|
39
|
4
|
(14
)
|
(188
)
|
17
|
(186
)
|
(357
)
|
|
Income tax
provision from held for sale and discontinued
operations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net income (loss)
from held for sale and discontinued operations
|
$
(57
)
|
$
39
|
$
4
|
$
(14
)
|
$
(188
)
|
$
17
|
$
(186
)
|
$
(357
)
|
17
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental disclosures of cash flow information for
the three months ended March 31, 2020 and 2019 were as follows
(dollars in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Cash paid for
interest - continuing operations
|
$
506
|
$
119
|
|
Cash paid for
interest - held for sale and discontinued operations
|
106
|
148
|
|
Non-cash financing
- paid-in-kind interest transferred to the principal balance of the
2019 Promissory Notes
|
(1,283
)
|
-
|
|
Non-cash operating
- paid-in-kind interest transferred to the principal balance of the
2019 Promissory Notes
|
1,283
|
-
|
|
Current
assets
|
-
|
415
|
|
Intangible
assets
|
-
|
7,436
|
|
Goodwill
|
-
|
4,934
|
|
Current
liabilities
|
-
|
(388
)
|
|
Cash paid
acquisition of OpenALPR Technology
|
-
|
(7,000
)
|
|
Note issued
acquisition of OpenALPR Technology
|
-
|
(5,000
)
|
|
Issuance of common
stock
|
-
|
(397
)
|
|
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
|
|
Adoption of ASC-842
Lease Accounting:
|
|
|
|
Right-of-use lease
asset
|
132
|
921
|
|
Deferred
rent
|
-
|
30
|
|
Lease
liability
|
$
(132
)
|
$
(951
)
|
NOTE 5 – OPERATING LEASES
We have operating leases
for office facilities in various locations throughout the United
States. The Company’s leases have remaining terms of one
to five years.
Certain of the Company’s
leases include options to extend the term of the lease or to
terminate the lease prior to the end of the initial term. When it
is reasonably certain that the Company will exercise the option,
the Company will include the impact of the option in the lease term
for purposes of determining total future lease
payments.
18
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating lease expense
from continuing operations
for
the three months ended March 31, 2020 and 2019 was $48,000 and
$25,000, 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 $0 for
the three months ended March 31, 2020 and 2019.
Supplemental balance sheet information related to leases as of
March 31, 2020 was as follows (dollars in
thousands):
|
Operating lease
right-of-use lease assets from continuing operations
|
$
383
|
|
Operating lease
right-of-use lease assets from held for sale and discontinued
operations
|
582
|
|
Total operating
lease right-of-use assets
|
$
965
|
|
|
|
|
Lease liability,
short-term
|
$
231
|
|
Lease liability,
long-term
|
172
|
|
Lease liability
from held for sale and discontinued operations
|
751
|
|
Total
operating lease liabilities
|
$
1,154
|
|
|
|
|
Weighted Average
Remaining Lease Term - operating leases from continuing
operations
|
2.1
|
|
|
|
|
Weighted Average
Discount Rate - operating leases
|
9
%
|
Maturities of lease liabilities were as follows (dollars in
thousands):
|
2020 (remainder
2020)
|
$
442
|
|
2021
|
412
|
|
2022
|
177
|
|
2023
|
178
|
|
2024
|
100
|
|
Total lease
payments
|
1,309
|
|
Less imputed
interest
|
(155
)
|
|
Maturities of lease
liabilities
|
$
1,154
|
19
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – INTANGIBLE ASSETS
Goodwill
There have been no changes from December 31, 2019 in the carrying
amount of goodwill for the three months ended March
31, 2020.
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2019 to March 31, 2020 (dollars in
thousands):
|
|
December
31,
2019
|
Additions
|
Amortization
|
March
31,
2020
|
|
Intangible assets
subject to amortization from continuing operations
|
|
|
|
|
|
Customer
relationships
|
$
396
|
$
-
|
$
(9
)
|
$
387
|
|
Marketing
related
|
230
|
-
|
(17
)
|
213
|
|
Technology
based
|
6,395
|
-
|
(256
)
|
6,139
|
|
Internally
developed capitalized software
|
1,223
|
62
|
(31
)
|
1,254
|
|
Intangible assets
subject to amortization from continuing operations
|
8,244
|
62
|
(313
)
|
7,993
|
|
Intangible assets
from held for sale and discontinued operations
|
1,994
|
-
|
-
|
1,994
|
|
Total intangible
assets
|
$
10,238
|
$
62
|
$
(313
)
|
$
9,987
|
The following provides a breakdown of identifiable intangible
assets as of March 31, 2020 (dollars in thousands):
|
|
Customer
Relationships
|
Marketing
Related
|
Technology
Based
|
Internally
Developed Capitalized Software
|
Total
|
|
Identifiable
intangible assets
|
$
461
|
$
327
|
$
7,206
|
$
1,352
|
$
9,346
|
|
Accumulated
amortization
|
(74
)
|
(114
)
|
(1,067
)
|
(98
)
|
(1,353
)
|
|
Identifiable
intangible assets from continuing operations, net
|
387
|
213
|
6,139
|
1,254
|
7,993
|
|
Identifiable
intangible assets from held for sale and discontinued operations,
net
|
1,685
|
309
|
-
|
-
|
1,994
|
|
Identifiable
intangible assets, net
|
$
2,072
|
$
522
|
$
6,139
|
$
1,254
|
$
9,987
|
These intangible assets are being amortized on a straight-line
basis over their weighted average estimated useful life of 6.0
years. Amortization expense attributable to continuing operations
for the three months ended March 31, 2020 and 2019 was $313,000 and
$129,000, respectively, and is presented as part of general and
administrative expenses in the accompanying unaudited condensed
consolidated statements of operations. Amortization expense
attributable to held for sale and discontinued operations for the
three months ended March 31, 2020 and 2019 was $0 and $241,000,
respectively, and is presented as part of income (loss) from held
for sale and discontinued operations in the accompanying unaudited
condensed consolidated statements of operations.
20
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 2020, the estimated annual amortization expense
from continuing operations for each of the next five fiscal years
and thereafter is as follows (dollars in thousands):
|
2020
|
$
964
|
|
2021
|
1,274
|
|
2022
|
1,193
|
|
2023
|
1,105
|
|
2024
|
1,060
|
|
Thereafter
|
1,451
|
|
Capitalized
software not yet placed in service
|
946
|
|
Total
|
$
7,993
|
NOTE 7 – DEBT
Long-Term Debt
On January 25, 2017, pursuant to the terms of its acquisition of
Firestorm, the Company issued $1,000,000 in the aggregate form of
four unsecured, subordinated promissory notes with interest payable
over five years. The principal amount of one of the notes payable
is $500,000 payable at an interest rate of 2% and the remaining
three notes are evenly divided over the remaining $500,000 and
payable at an interest rate of 7%. The notes mature on January 25,
2022. The aggregate balance of these notes payable was $966,000 and
$961,000, net of unamortized interest, as of March 31, 2020 and
December 31, 2019, respectively, to reflect the amortized fair
value of the notes issued due to the difference in interest rates
of $34,000 and $39,000, respectively.
On April 3, 2018, the Company entered into a transaction pursuant
to which an institutional investor (the “2018 Lender”)
loaned $2,000,000 to the Company (the “2018 Promissory
Note”). On March 12, 2019, the $2,000,000 balance due on the
2018 Promissory Note was retired in its entirety in exchange for an
equivalent principal amount of the 2019 Promissory Notes (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 three
months ended March 31, 2019.
2019 Promissory Notes
On March 12, 2019, the Company entered
into a note purchase agreement pursuant to which investors,
including OpenALPR Technology, Inc. (the “2019
Lenders”) loaned $20,000,000 to the Company (the “2019
Promissory Notes”) and the Company issued to the 2019 Lenders
warrants to purchase 2,500,000 shares of Rekor common stock (the
“March 2019 Warrants”). The loan 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. As of March 31, 2020, the Company had
a waiver in place for the fixed charge coverage ratio covenant
related to this note until May 31, 2020.
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 were valued at
$706,000, at the time of issuance. The
warrants were exercisable commencing March 12, 2019 and expire on
March 12, 2024.
As of the anniversary date of the commencement of the 2019
Promissory Notes $1,283,000 of the paid-in kind interest had not
been paid by the Company and per the purchase agreement has been
added to the principal balance of the 2019 Promissory Notes as of
March 31, 2020.
21
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
March 26, 2020, the Company entered into the First Amendment to
Note Purchase Agreement which effectively extended the maturity
date of the 2019 Promissory Notes
from March 11, 2021
to
June 12, 2021. The Company incurred $100,000 in
transaction costs related to the First Amendment to Note Purchase
Agreement, these costs are financing costs and deferred over the
remaining life of the loan.
Amortized financing costs for the three months ended March 31, 2020
and 2019 were $325,000 and $68,000, respectively, and are included
in interest expense on the unaudited condensed consolidated
statement of operations. The 2019 Promissory Notes have an
effective interest rate of 24.87%.
The principal amounts due for long-term notes payable described
above are shown below as of March 31, 2020 (dollars in
thousands):
|
2020
|
$
-
|
|
2021
|
22,283
|
|
2022
|
1,000
|
|
2023
|
-
|
|
2024
|
-
|
|
Thereafter
|
-
|
|
Total
|
23,283
|
|
|
|
|
Less unamortized
interest
|
(34
)
|
|
Less unamortized
financing costs
|
(1,327
)
|
|
Notes
payable
|
$
21,922
|
Short-Term Borrowings
On August 9, 2019,
AOC Key
Solutions, entered into an
agreement with LSQ Funding Group, L.C.
(“LSQ”), as an unrelated third party, pursuant to which
AOC Key Solutions sells its accounts receivable to LSQ and LSQ
advances AOC Key Solutions 90% of the value of the receivable. AOC
Key Solutions 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 Key Solutions bears the risk of
non-payment by the account debtor. The funded amount of accounts
receivables that LSQ has provided to AOC Key Solutions was
$1,404,000 and $1,894,000 as of March 31, 2020 and December 31,
2019, respectively, and is presented as part of current liabilities
held for sale and discontinued operations on the unaudited
condensed
consolidated balance sheets. To secure
its obligations to LSQ, AOC Key Solutions has granted a first
priority security interest in the AOC Key Solutions accounts
receivable and proceeds thereof. As of March 31, 2020 and December
31, 2019, there were approximately $2,070,000 and $2,714,000 of
receivables that are subject to collateral as part of this
agreement. The receivables held as collateral are presented as part
of current assets held for sale and discontinued operations on the
unaudited condensed consolidated balance
sheets.
On August 9, 2019,
Global,
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 $1,776,000 and
$1,842,000 as of March 31, 2020 and December 31, 2019,
respectively, and is presented as part of current liabilities held
for sale and discontinued operations 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
March 31, 2020 and December 31, 2019, there were approximately
$2,625,000 and $2,455,000, respectively, of receivables that are
subject to collateral as part of this agreement. The receivables
held as collateral are presented in current assets held for sale
and discontinued operations on the unaudited condensed consolidated
balance sheets.
22
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three months ended March 31,
2020, the Company recorded
$164,000
, in interest expense from held for
sale and discontinued operations, related to the agreement with
LSQ.
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, the Company
reviewed both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections and the overall
prospects of the Company’s business.
The Company’s income
tax provision for the three months ended March 31, 2020 and 2019
was $7,000 and $12,000, respectively. The Company established a
valuation allowance against deferred tax assets during 2017 and has
continued to maintain a full valuation allowance,
outside of
the deferred tax liability related to the indefinite lived
intangible,
through the three months
ended March 31, 2020.
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 March 31, 2020.
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,
outside of the deferred tax liability related to the indefinite
lived intangible,
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 three months ended March 31, 2020 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 2016 through 2018 tax years remain subject to
examination by the Internal Revenue Service.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
On
August 19, 2019, the Company filed suit in the United States
District Court for the Southern District of New York against three
former executives of the Company and Firestorm (the
“Firestorm Principals”)—Rekor Systems, Inc. v.
Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. The
Complaint alleges that the Firestorm Principals fraudulently
induced the execution of the Membership Interest Purchase
Agreement wherein Firestorm was acquired by the Company.
The Complaint requests equitable rescission of that
transaction, or, alternatively, monetary damages.
Following an
initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, the Company filed a Second Amended Complaint, which the
Firestorm Principals answered together with counterclaims on
February 28, 2020. Thereafter, on March 30, 2020, the Company
moved to dismiss certain counterclaims against certain executives
named as counterclaim-defendants, which resulted in the Firestorm
Principals voluntarily dismissing those counterclaims against those
parties. The Company thereafter filed its response and
affirmative defenses to the Counterclaims on April 22, 2020.
On April 27, 2020, the Firestorm Principals filed a Motion for
Partial Judgment on the Pleadings, which the Company will be
opposing.
The
Company intends to continue vigorously litigating its claims
against the Firestorm Principals and believes that the Firestorm
Principals’ remaining counterclaims are without
merit.
23
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Vigilant Solutions,
LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on
February 21, 2020 against the Company and certain of its
subsidiaries in the US District Court for the District of Maryland.
The complaint alleges that certain of the Company’s products
violate a patent held by Vigilant. The Company has retained counsel
to investigate the claims made in the complaint and our
investigation into these matters is ongoing. Nevertheless, based on
a review of the complaint, the Company believes that it has
substantial defenses to the allegations contained in the complaint
and that the validity of the patent underlying the complaint is
subject to challenge. The Company intends to vigorously defend the
allegations of the Vigilant complaint.
On
January 31, 2020, the Company wholly owned subsidiary, OpenALPR
filed a complaint in the US District Court for the Western District
of Pennsylvania against a former customer, Plate Capture Solutions,
Inc. (“PCS”) for breach of software license agreements
pursuant to which software to was licensed to PCS. On February 19,
2020 PCS filed an answer, counterclaim and joinder in the case,
among other things, seeking to join the Company as a party to the
litigation and making counterclaims for defamation, fraud and
intentional interference with existing and future business
relationships. The Company believes that it has substantial
defenses to the counterclaims and intend to vigorously defend the
allegations of the counterclaims.
In addition, from time to time, the
Company is named as a party to various other lawsuits, claims and
other legal and regulatory proceedings that arise in the ordinary
course of the Company’s business. These actions typically
seek, among other things, compensation for alleged personal injury,
breach of contract, property damage, punitive damages, civil
penalties or other losses, or injunctive or declaratory relief.
With respect to such lawsuits, claims and proceedings, the Company
accrues reserves when a loss is probable, and the amount of such
loss can be reasonably estimated. It is the opinion of the
Company’s management that the outcome of these proceedings,
individually and collectively, will not be material to
the Company’s unaudited condensed consolidated financial
statements as a whole.
NOTE 10 – STOCKHOLDERS’ DEFICIT
Common Stock
The
Company has adopted and approved an amendment to increase the
number of authorized shares of common stock from 30,000,000 to
100,000,000,
$0.0001 par value,
which was effective March 18, 2020. The rights and privileges terms
of the additional authorized shares of common stock will be
identical to those of the currently outstanding shares of common
stock. However, because the holders of common stock do not have
preemptive rights to purchase or subscribe for any new issuances of
common stock, the subsequent potential issuance of additional
shares of common stock will reduce the current stockholders’
percentage ownership interest in the total outstanding shares of
common stock. The Amendment and the creation of additional shares
of authorized common stock will not alter current
stockholders’ relative rights and limitations.
As of March 31, 2020, and
December 31, 2019, the issued and outstanding common shares of
Rekor were 22,768,757 and
21,595,653
,
respectively.
For the three months ended
March 31, 2020, the Company issued 1,294
shares of Rekor common
stock related to the exercise of common stock options. There were
no stock options exercised for the three months ended March 31,
2019.
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 Acquisition.
For the
three months ended March 31, 2020 and 2019, the Company issued
1,173,104 and 600,000 shares of Rekor common stock, respectively.
Of the shares issued in the
three months ended March 31, 2020, 598,218 shares of Rekor common
stock were issued in exchange for cash and cashless exercise of
607,517 warrants, 36,862 shares were issued as part of the exercise
of warrants related to series A preferred stock and 536,730 shares
were issued in connection with the Sales
Agreement.
24
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $226,000 related to legal, accounting, and
other fees in connection with the Sales Agreement. These costs
were charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
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.
For the three months ended March 31,
2020, based on settlement date, the Company sold 536,730 shares of
common stock at a weighted-average selling price of $4.15 per share
in accordance with the Sales Agreement. Net cash provided for the
three months ended March 31, 2020 from the Sales Agreement was
$2,169,000 after paying 3.0% or $67,000 related to cash commissions
provided to B. Riley FBR. As of March 31, 2020, $9,490,000 remained
available for sale under the Sales Agreement.
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 which began in November 2019. The
Series A Preferred Stock contains an automatic conversion feature
based on a qualified initial public offering in excess of
$30,000,000 or a written agreement by at least two-thirds of the
holders of Series A Preferred Stock at an initial conversion price
and a specified price which increases annually based on the passage
of time beginning in November 2016.
Based on the terms of
the Series A Preferred Stock, the Company concluded that the Series
A Preferred Stock should be classified as temporary equity in the
accompanying unaudited condensed consolidated balance sheets as of
March 31, 2020 and December 31, 2019.
Rekor
adjusts the value of the Series A Preferred Stock to redemption
value at the end of each reporting period. The adjustment to the
redemption value is recorded through additional paid in capital of
$206,000 and $179,000 for the three months ended March 31, 2020 and
2019, respectively.
As of
March 31, 2020, and December 31, 2019, 502,327 shares of Series A
Preferred Stock were issued and outstanding.
25
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
holders of Series A Preferred Stock are entitled to quarterly cash
dividends of $0.175 (7% per annum) per share. Dividends accrue
quarterly and dividend payments for declared dividends are due
within five business days following the end of a quarter.
F
or the three months ended
March 31, 2020 and 2019 the Company did not pay cash dividends to
shareholders of record of Series A Preferred Stock. Accrued
dividends payable to Series A Preferred Stock shareholders were
$649,000 and $551,000 as of March 31, 2020 and December 31, 2019,
respectively, and are presented as part of the accounts payable and
accrued expenses on the accompanying unaudited condensed
consolidated.
Series B Cumulative Convertible Preferred Stock
Of the
2,000,000 authorized shares of preferred stock, 240,861 shares are
designated as $0.0001 par value Rekor Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). As
part of the Global Merger, the Company issued 240,861 shares of
$0.0001 par value Series B Preferred Stock. All Series B Preferred
Stock was issued at a price of $10.00 per share as part of the
acquisition of the Global Merger. The Series B Preferred Stock has
a conversion price of $5.00 per share. Each Series B Preferred
Stock has an automatic conversion feature based on the share price
of Rekor.
The
Series B Preferred Stock is entitled to quarterly cash dividends of
1.121% (4.484% per annum) per share. Dividends accrue quarterly and
dividend payments for declared dividends are due within five
business days following the end of a quarter. F
or the three months ended March 31,
2020 and 2019, the Company did not pay cash dividends to
shareholders of record of Series B Preferred Stock. Accrued
dividends payable to Series B Preferred Stock shareholders were
$82,000 and $54,000 as of March 31, 2020 and December 31, 2019,
respectively, and are presented as part of the accounts payable and
accrued expenses on the accompanying unaudited
condensed
consolidated balance
sheets.
Warrants
The Company had warrants outstanding that are exercisable into a
total of 1,846,870 and 2,251,232 shares of Rekor common stock as of
March 31, 2020 and December 31, 2019, respectively.
As part of a Regulation A Offering in
fiscal year 2016 and 2017, the Company issued warrants to the
holders of Series A Preferred Stock. The exercise price for these
warrants is $1.03 and they are exercisable into a total of 203,155
and 240,017 shares of Rekor common stock as of March 31, 2020 and
December 31, 2019, 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. In the three months ended March 31, 2020, 76,000 of
the outstanding warrants were exercised and converted into 36,862
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 March 31, 2020 and December 31, 2019, there
were 631,254 Firestorm Warrants outstanding.
Pursuant to its acquisition of Secure Education Consultants on
January 1, 2018, the Company issued: warrants to purchase 33,333
shares of its common stock, exercisable over a period of five
years, at an exercise price of $5.44 per share; and warrants to
purchase 33,333 shares of its common stock, exercisable over a
period of five years, at an exercise price of $6.53 per share (the
“Secure Education Warrants”). The expiration date of
the Secure Education Warrants is January 1, 2023. As of March 31,
2020, and December 31, 2019, there were 66,666 Secure Education
Warrants outstanding.
On November 1, 2018, in connection with
an underwritten public offering of its common stock, the Company
issued to the underwriters warrants to purchase 206,250 shares of
its common stock, exercisable over a period of five years, at an
exercise price of $1.00 per share. These warrants are exercisable
commencing April 27, 2019 and expire on October 29, 2023. During
the year ended December 31, 2019, 189,813 warrants were exercised
in cash and cashless transactions resulting in the issuance of
148,279 shares of common stock. During the three months ended March
31, 2020, 6,292 warrants were exercised and converted into 4,657
shares of the Company’s common stock. As of March 31, 2020
and December 31, 2019, 7,670 and 16,437 warrants related to the
2018 underwritten public offering remain outstanding,
respectively.
26
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 12, 2019, in connection with
the 2019 Promissory Notes, the Company issued warrants to purchase
2,500,000 shares of its common stock, which are immediately
exercisable at an exercise price of $0.74 per share, to certain
individuals and entities.
Of the
2,500,000 warrants, 625,000
were issued
as partial consideration
for the OpenALPR Technology Acquisition.
During the year ended December 31,
2019, 963,125 warrants were exercised in cash and cashless
transactions resulting in the issuance of 783,387 shares of common
stock.
During the
three months ended March 31, 2020, 598,750 warrants were exercised
in cash and cashless transactions resulting in the issuance of
591,758 shares of common stock As of March 31, 2020 and December
31, 2019, 938,125 and 1,536,875 warrants related to the 2019
Promissory Notes remain outstanding,
respectively.
NOTE 11 – 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 compensation expense for the three months ended March 31,
2020 and 2019 was $171,000 and $63,000, respectively, and is
presented as part of general and administrative expenses in the
accompanying unaudited condensed consolidated statements of
operations.
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.
27
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 three months ended March 31, 2020 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, 2019
|
1,655,383
|
$
1.68
|
8.33
|
$
3,224
|
|
Granted
|
20,000
|
4.32
|
9.91
|
|
|
Exercised
|
(1,294
)
|
3.81
|
|
|
|
Forfeited
|
(3,146
)
|
1.42
|
|
|
|
Canceled
|
(36,684
)
|
1.82
|
|
|
|
Outstanding Balance
at March 31, 2020
|
1,634,259
|
$
1.71
|
8.17
|
$
2,854
|
|
Exercisable at
March 31, 2020
|
1,050,452
|
$
1.79
|
6.59
|
$
1,743
|
The weighted average grant
date fair value of options granted, to employees and non-employees,
for the three months ended March 31, 2020 and 2019 was $0.31 and
$0.68, respectively. The intrinsic value of the stock options
granted during the three months ended March 31, 2020 and 2019
was
$
0
and $3,000, respectively. The total fair value of options that
vested in the three months ended March 31, 2020 and 2019 was
$40,000 and $513,000, respectively.
As of March 31, 2020, there
was $368,000 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
1.52
years.
Restricted Stock Units
A summary of RSU activity under the Company’s 2017 Plan for
the three months ended March 31, 2020 is as follows:
|
|
Number of
Shares
|
Weighted Average
Unit Price
|
Weighted Average
Remaining Contractual Term (Years)
|
Aggregate
Intrinsic Value
|
|
Outstanding Balance
at December 31, 2019
|
-
|
$
-
|
-
|
$
-
|
|
Granted
|
334,450
|
4.06
|
2.75
|
|
|
Vested
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding Balance
at March 31, 2020
|
334,450
|
$
4.06
|
2.75
|
$
-
|
The grant date fair value was based on the estimated fair value of
our common stock on the date of grant. All RSUs granted vest upon
the satisfaction of a service-based vesting condition.
As of March 31, 2020, there
was $1,317,000 of unrecognized stock compensation expense related
to unvested RSUs granted under the 2017 Plan that will be
recognized over an average remaining period of
2.75
years.
Compensation expense for restricted stock and RSUs is recognized on
a straight-line basis over the requisite service period. There were
not RSUs issued in fiscal year 2019.
28
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss per common share:
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Basic and diluted
loss per share
|
|
|
|
Net
loss from continuing operations
|
$
(3,774
)
|
$
(2,518
)
|
|
Less:
preferred stock accretion
|
(206
)
|
(179
)
|
|
Less:
preferred stock dividends
|
(115
)
|
(115
)
|
|
Net
loss attributable to shareholders from continuing
operations
|
(4,095
)
|
(2,812
)
|
|
Net loss from held
for sale and discontinued operations
|
(14
)
|
(357
)
|
|
Net
loss attributable to shareholders
|
$
(4,109
)
|
$
(3,169
)
|
|
Weighted
average common shares outstanding - basic and diluted
|
21,929,768
|
18,800,496
|
|
Basic
and diluted loss per share from continuing operations
|
$
(0.19
)
|
$
(0.15
)
|
|
Basic
and diluted loss per share from held for sale and discontinued
operations
|
-
|
(0.02
)
|
|
Basic
and diluted loss per share
|
$
(0.19
)
|
$
(0.17
)
|
|
Common stock equivalents excluded due to anti-dilutive
effect
|
5,293,838
|
6,316,157
|
As the Company had a net loss for the three months ended March 31,
2020, the following 5,293,838 potentially dilutive securities were
excluded from diluted loss per share: 1,846,870 for outstanding
warrants, 974,487 related to the Series A Preferred Stock, 481,722
related to the Series B Preferred Stock, 1,656,309 related to
outstanding options and 334,450 related to outstanding
RSUs.
As the
Company had a net loss for the three months ended March 31, 2019,
the following 6,316,157 potentially dilutive securities were
excluded from diluted loss per share: 3,714,491 for outstanding
warrants, 974,487 related to the Series A Preferred Stock, 481,722
related to the Series B Preferred Stock and 1,145,457 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.
29
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13- SUBSEQUENT EVENTS
AOC Key Solutions Sale
On
April 2, 2020, the Company entered into a Stock Purchase Agreement
(the “Purchase Agreement”) by and among the Company,
AOC Key Solutions and PurpleReign, LLC, a Virginia limited
liability company owned by a member of AOC Key Solution’s
management (the “Buyer”), pursuant to which the Company
agreed to sell AOC Key Solutions.
Subject to the
terms and conditions of the Purchase Agreement, the Buyer agreed to
purchase all of the outstanding equity interests of AOC Key
Solutions for a purchase price of $4,000,000, comprising (i)
$3,400,000 in cash, and (ii) a subordinated promissory note (the
“Subordinated Note”) in the initial principal amount of
$600,000 (the “Transaction”). The Transaction closed
concurrently with execution of the Purchase Agreement.
2019 Promissory Notes
On
April 2, 2020, the Company transferred $2,200,000 to the holders of
the 2019 Promissory Notes. $2,000,000 of the funds were used as a
prepayment of principal while the other $200,000 was paid as
premium percentage as the portion of the 2019 Promissory Notes were
paid prior to the maturity date.
On April 2, 2020, the Company entered into a partial release and
Second Amendment to Note Purchase Agreement (the “Second
Amendment”), by and among the Credit Parties, the Purchasers
and the Agent. Pursuant to the terms of the Second Amendment, AOC
Key Solutions was released as a Credit Party and the assets related
to AOC Key Solutions were released as collateral, and the Asset
Disposition Proceeds terms of the Note Purchase Agreement were
amended to reflect the transaction.
Global PPP Loan
On May
5, 2020, Global, entered into a promissory note with BOKF, NA,
d/b/a Bank of Oklahoma, which provides for a loan in the principal
amount of $5,005,000 (the “Global PPP Loan Note”)
pursuant to the Paycheck Protection Program under the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES
Act”). The Global PPP Loan Note has a two-year term and bears
interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement. The Global PPP Loan Note may be prepaid at any time
prior to maturity with no prepayment penalties. The Global PPP Loan
Note contains events of default and other provisions customary for
a loan of this type. The Paycheck Protection Program provides that
the Global PPP Loan Note may be partially or wholly forgiven if the
funds are used for certain qualifying expenses as described in the
CARES Act. Global intends to use the entire Global PPP Loan Note
amount for qualifying expenses and to apply for forgiveness of the
loan in accordance with the terms of the CARES
Act.
The
Small Business Administration (“SBA”), in consultation
with the Department of Treasury, issued new guidance that creates
uncertainty regarding the qualification requirements for a PPP loan
for public companies. The Company will review the new guidance at
the time of issuance and determine whether it remains eligible for
the PPP Loan at that time.
30
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, 2019 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 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.
●
risks associated
with the spread of a novel strain of coronavirus
(“COVID-19”) around the world in the first quarter of
2020, which has caused significant volatility in U.S. and
international markets and has created significant uncertainty
around the breadth and duration of business disruptions related to
COVID-19, as well as its impact on the U.S. and international
economies.
31
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
unaudited 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, 2019 (the “2019 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
are a leader in the field of vehicle identification and management
systems driven by leading edge advances in artificial intelligence
("AI"). In development for over five years using AI processes,
including machine learning algorithms, our core software enables
the creation of more powerful and capable vehicle recognition
systems that can be deployed at a fraction of the cost of
traditional vehicle recognition systems. The software enables a
wider field of view, greater light sensitivity, recognitions at
faster speeds and higher accuracy rates, in addition to the ability
to identify the color, make and type of a vehicle and its direction
of travel. These capabilities are particularly useful in solving a
wide variety of real-world roadway and vehicle related challenges.
In addition, the reductions in cost have opened up a number of new
uses for vehicle recognition technology that were not previously
cost effective. We currently provide products and services for
governmental organizations, for large and small businesses and for
individuals throughout the world. Customers are currently using our
products or services in over 70 countries, with offerings for smart
cities, public safety, security, transportation, parking and
logistics.
As part
of the development of a new line of products for the public safety
and security markets, we acquired industry leading vehicle
recognition software in March 2019. In connection with this
acquisition, we determined that our resources are best concentrated
on vehicle recognition products and services and have reorganized
and retooled our product development, business development and
administrative resources, with increasing emphasis on the
technology area. Our Board of Directors has also authorized
management to explore opportunities for the sale of our
professional services businesses. On April 2, 2020, we sold our
wholly owned subsidiary, AOC Key Solutions, Inc. (“AOC Key
Solutions”).
Our
operations are conducted by our wholly owned subsidiary, Rekor
Recognition Systems, Inc. (“Rekor Recognition”).
Formerly named Brekford Traffic Safety, Inc., Rekor Recognition has
been involved in the public safety business since 1996. In
connection with the development of several new public safety
products, we determined to acquire substantially all the assets of
OpenALPR Technology, Inc. This acquisition (the “OpenALPR
Technology Acquisition”), completed in March 2019,
transferred vehicle recognition software and associated licenses
and proprietary rights to OpenALPR Software Solutions, LLC
(“OpenALPR”), a new wholly owned subsidiary of Rekor
Recognition. OpenALPR’s vehicle recognition platform, already
operating in more than 12,000 cameras in over 70 countries
worldwide, has laid the groundwork for the expansion of our product
line, enabling multiple deployment mechanisms.
Since
the OpenALPR Technology Acquisition, we have expanded our vehicle
recognition product and service lines into a much broader range of
customer segments, starting with public safety. We shifted from a
perpetual licensing model to a subscription-based model, rebranded
the software suites as “Watchman” and
“Car-Check” and released several packaged
hardware/software solutions with preloaded versions of each of
these vehicle recognition engines. By the end of 2019, we had a
portfolio of more than 10 products, permitting us to offer
full-scale vehicle recognition services for nearly any large or
small public agency, commercial or residential
setting.
Our
software currently has the capability to analyze multi-spectral
images and/or video streams produced by nearly any Internet
Protocol security camera and concurrently extract license plate
data by state from more than 70 countries, in addition to the
vehicle’s make, color, type and direction of travel. When
combined with speed optimized code, parallel processing capability
and best-in-class accessories, such as cameras and communications
modules, the software captures license plate data and vehicle
characteristics at extremely high vehicle speeds with a high degree
of accuracy, even in unusually difficult conditions, such as low
lighting, poor weather, extreme camera viewing angles, and
obstructions.
32
Prior
to the development of our vehicle identification software, highly
accurate results were not available using a typical Internet
Protocol camera. We believe that the ability to use less expensive
hardware will change the dynamics of the existing public safety
market, enabling the creation of increasingly robust networks with
cameras at more locations. In addition, we expect the cost
advantages and high degree of accuracy to create competitive
advantages in tolling systems and logistics operations that
currently rely on complex radio frequency identification (RFID)
systems. We also expect the lower costs, superior distance and
field of view capabilities and the ability to capture additional
vehicle information, such as direction, color, make and type of
vehicle, to open opportunities in other market segments, such as
parking operations, school safety and retail customer loyalty
programs; and particularly smart cities and smart roadways. Smart
roadway systems, sometimes referred to as smart transport or
intelligent transport systems (“ITS”), inclusive of
parking management and guidance, passenger
information
and traffic management systems, can optimize the movement of
vehicles to make travel safer and more efficient. These
technologies are expected to enable users to be more coordinated,
better informed, and make safer and smarter use of transport
networks.
Our
vision is to enable “AI Driven Decisions.” We intend to
evolve beyond vehicle recognition for public safety markets into
the recognition and analysis of vehicle activities (inclusive of
motion and behaviors), to develop systems to identify unsafe
situations (
e.g.
wrong way
driving, pedestrian on roadway, etc.) and optimize traffic flows,
and to develop numerous other data driven applications around
vehicle knowledge.
As of
2020 the we have determined that all of the subsidiaries that
comprised the Professional Services Segment met the criteria to be
presented at either held for sale or discontinued operations. We
have provided professional services and staffing solutions to the
government contracting and the aerospace and aviation industries.
The Professional Services Segment included AOC Key Solutions;
Global Technical Services, Inc. (“GTS”); Global
Contract Professionals, Inc. (“GCP”, and together with
GTS, “Global”); and Firestorm Solutions, LLC (Firestorm
Solutions”) and Firestorm Franchising, LLC (“Firestorm
Franchising” and together with Firestorm Solutions,
“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. We provide professional services that offer
scalable and compliant outsourced support for our government
contractor clients. We help these clients to win government
contracts and capture new businesses. Global provides specialized
staffing services, primarily in the aerospace and aviation
industries. In connection with our reorganization and focus on
technology products and services, 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 discontinued the operations of
Firestorm Franchising and have determined to sell Global and AOC
Key Solutions. In March 2020, we received a proposal from the
current management of AOC Key Solutions to purchase that
subsidiary, and consummated the sale of AOC Key Solutions on April
2, 2020.
Recent Developments
The most significant developments in our company and business since
January 1, 2020 are described below:
●
In May 2020, we and
the New Rochelle Police Department entered into a five-year,
$225,000 subscription agreement for our Watchman vehicle
recognition software. The New Rochelle Police Department is the
7th largest in the state of New York and serves more than
78,000 citizens.
●
In 2020, the spread of COVID-19 around the world in the first
quarter of 2020 has caused significant volatility in U.S. and
international markets. There is significant uncertainty around the
breadth and duration of business disruptions related to COVID-19,
as well as its impact on the U.S. and international economies and,
as such, we are unable to determine if it will have a material
impact to our operations.
●
In response to COVID-19, the Coronavirus Aid, Relief and Economic
Security (“CARES”) Act was signed into law. The CARES
Act, among other things, provides cash payments to certain
individuals and has various programs for businesses. In particular,
it includes the Payroll Protection Program which provides
forgivable loans to qualified small businesses, primarily to allow
these businesses to continue to pay their employees. One of our
subsidiaries received $5,005,000 as a result of the Payroll
Protection Program.
●
On April 2, 2020,
we entered into a Stock Purchase Agreement with, AOC Key Solutions,
Inc., our wholly owned subsidiary, and PurpleReign, LLC, a Virginia
limited liability company owned by the members of AOC Key
Solutions’ management, pursuant to which we agreed to sell
AOC Key Solutions.
33
●
Since January 2020,
we have been selected by Brite Computers ("Brite"),
LiveView Technologies, ("LiveView"), and Alliance Technology
Group ("Alliance") to provide our vehicle recognition systems
to their existing customer base. Brite is leader in public
safety systems integration and will use us as their sole ALPR
solution to their extensive customer base comprised of law
enforcement and state and local governments. LiveView is a leader
in remote security solutions, which will provide our vehicle
recognition systems for deployment within its full security
platform. Alliance will offer our vehicle recognition solutions to
its customer base both as a standalone solution and as part of an
integrated video surveillance system. In addition, we announced
that Digifort, a global leader in video surveillance and
monitoring, headquartered in Brazil with more than 28,000 customers
in 130 countries, will be a premier reseller for Watchman
software in Brazil, Latin America, the Pacific Rim and the
Middle East.
●
In March 2020, we
increased our authorized shares of common stock from 30,000,000 to
100,000,000. The increase in authorized shares was done in order to
permit us to raise capital or issue our common stock for other
business purposes.
●
In February 2020,
the City of Lauderhill, Florida, selected our Rekor Edge vehicle
recognition cameras and Watchman software use in its public safety
program. As a result, on March 5, 2020 we signed an agreement with
the City of Lauderhill for $1.79 million and contract to provide
services for a five-year term. The construction phase is in
progress as planned.
●
In February 2020,
SecurePark Technologies, a leading software-as-a-service
(“SaaS”) based parking solutions company, selected our
iP360 Parking and Permit Management software as a simple, reliable,
and affordable solution for their global clients.
●
In January 2020, we
launched our new Watchman Home product which can turn nearly any
existing home security camera into a license plate recognition
device (without loss of the original security camera functionality)
by simply installing the Watchman Home software. Furthermore,
Watchman Home can be integrated into smart home systems and
automatically recognizes permitted authorized vehicles and works
with internet-connected devices to monitor and control systems and
appliances remotely.
●
In January 2020,
the Mt. Juliet Police Department in Tennessee selected Rekor to
roll out the community’s Automated License Plate Recognition
(“ALPR”) program which the department is terming,
“Guardian Shield.” The Guardian Shield program was
initiated to enhance the community’s safety by providing an
additional tool to law enforcement. 40% of the cameras are
operational and the other percentage of cameras are under
construction as planned.
Opportunities, 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 2019 Annual Report under “Part
II - Item 7 – Management’s 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 opportunities, trends, and uncertainties that we are most
focused on at the current time are:
●
AI for the Roadway
– We believe
that the application of AI to the analysis roadway condition will
significantly affect vehicular travel in the future by assisting in
the intelligent optimization of traffic flows and the
identification of anomalous and unsafe movements – e.g. wrong
way, stopped vehicle, pedestrian on the roadway. Marketers and
drive-thru retailers with loyalty programs can benefit from the
rapid identification of existing and potential customers and
streamlining vehicular flow.
●
Graphic Processing Unit (“GPU”)
Improvements
– We expect our business to benefit as a
result of more powerful and affordable GPU hardware that has
recently been developed. These GPUs are more efficient for image
processing because their highly parallel structure makes them more
efficient than general-purpose central procession units
(“CPUs”) for algorithms that process large blocks of
data, such as those produced by video streams. GPUs also provide
superior memory bandwidth and efficiencies as compared to their CPU
counterparts. The most recent versions of our software have been
designed to use the increased GPU speeds to accelerate image
recognitions. The GPU market is predicted to grow as a result of a
surge in adoption of the Internet of Things (“IoT”) by
the industrial and automotive sectors. As GPU manufacturers
increase production volume, we hope to benefit from the reduced
cost to manufacture the hardware included in our products or
available to others using our services.
34
●
Adaptability of the Current ALPR Market
– We have made a considerable investment in our advanced
vehicle recognition systems because we believe their increased
accuracy and affordability will allow them to compete effectively
with existing providers. Based on published benchmarks, our
software currently outperforms competitors in almost every metric.
However, large users of existing ALPR Technology, such as toll
roads, have long-term contracts with service providers that have
made considerable investments in their existing technologies and
may not consider the improvements in accuracy or reductions in cost
sufficient to justify abandoning their current systems in the near
future. In addition, existing providers may be able to reduce the
cost of their current offerings or elect to reduce prices and
accept reduced profitability while working to develop or secure
their own advanced vehicle recognition systems. As a result, our
success in establishing a major position in these markets will
depend on being able to effectively communicate our presence,
develop strong customer relationships, and maintain leadership in
providing the capabilities that customers want. As with any large
market, this will require considerable effort and
resources.
●
New and Expanded Uses for Vehicle Recognition
Systems
– We believe that reductions in the cost of
vehicle recognition products and services will significantly
broaden the market for these systems. We currently serve a number
of users who could not afford the cost or adapt to, the
restrictions of conventional vehicle recognition systems. These
include smaller municipalities, homeowners’ associations, and
organizations finding new applications such as innovative customer
loyalty programs. We have seen and responded to an increase in the
number of smaller jurisdictions and municipalities that are testing
ALPR systems or that issued requests for proposals to install a
network of ALPR cameras. We also expect the availability of faster,
higher accuracy, lower cost systems to dramatically increase the
ability of crowded urban areas to manage traffic congestion and
implement smart city programs. We do not currently have the
resources to develop all of these entirely new markets by
ourselves, so we will need to rely on affiliations with other
partners, who may or may not realize the significant benefits that
we envision from these new uses.
●
Expansion of Automated Enforcement of Motor
Vehicle Laws
– We believe that future legislation will
allow for auto enforcement of motor vehicle regulations to be
expanded as the types of violations authorized for automated
enforcement increase and experience provides localities with a
better understanding of the circumstances where automated
enforcement is beneficial. For example, there are now 17 states
that allow for the automatic enforcement of violations by vehicles
that pass a school bus displaying its flashing red lights and a
stop sign. In addition, due to high rates of fatalities and
injuries to law enforcement and other emergency response crews on
roadsides, several states are considering authorizing automated
enforcement of violations where motorists fail to slow down and/or
move over for emergency responders and law enforcement vehicles at
the side of the road. Legislative implementation is a deliberative
and necessarily time-consuming process. However, as states expand
auto enforcement, the market for our products and services should
increase and broaden in the public safety market
●
Increasing Smart City Market
–
Nokia has approved the use of our OpenALPR software for its smart
city offerings. In the smart city’s market, real-time vehicle
recognition technologies are widely used for traffic management and
public safety. As a result, we expect to benefit from the growth of
this market.
●
Accelerated Business Development and
Marketing
– Our ability to compete in a large,
competitive and rapidly evolving industry will require us to
achieve and maintain a leadership position. As a result, we have
accelerated our business development and marketing activities to
increase awareness and market adoption of our new technology and
products within the market. However, the speed at which these
markets grow to the degree of which our products and services are
adopted is uncertain.
●
Ability to Scale and Balance Production to
Meet Demand
– While we have arranged 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 new to market, their acceptance and integration into
the intended markets is uncertain and we do not have sufficient
historical experience to accurately predict revenues as a result of
their implementation.
35
●
COVID 19 -
The spread of a novel strain
of COVID-19 around the world in the first quarter of 2020 has
caused significant volatility in U.S. and international markets.
There is significant uncertainty around the breadth and duration of
business disruptions related to COVID-19, as well as its impact on
the U.S. and international economies and, as such, we are unable to
determine if it will have a material impact to our
operations
We
believe that recent developments in computing capabilities, such as
GPU advances, and new techniques of analysis, sometimes referred to
broadly as AI, have broadened the market for vehicle recognition
technology and created new opportunities in existing markets. With
our new line of products and services, we are working to actively
exploit these opportunities. 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.
Revenues
We generate our revenues substantially from licensing and
subscription revenues for software and related products and
services.
Revenue is recognized upon transfer of control of promised products
and services to our customers, in an amount that reflects the
consideration we expect to receive in exchange for those products
and services. If the consideration promised in the contract
includes a variable amount, for example maintenance fees, we
include an estimate of the amount 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 from software licenses, technology products
and services 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 from perpetual software licenses
to monthly service subscriptions. This change is expected to impact
our revenue in the short term as we will now recognize revenue
ratably over the contract period rather than at a point in time
when the customer takes possession of the license. The amount of
contract revenue received over the long term is not expected to
decline.
Our
subscription services arrangements are non-cancelable and do not
contain refund-type provisions.
36
Costs 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 revenue generating activities. Direct
costs of revenues also include production expenses, sub-consultant
services, and other expenses that are incurred in connection with
our revenue generating activities. Direct costs of revenues exclude
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.
Operating Expenses
Our
operating expenses consist of general and administrative expenses,
sales and marketing and research and development. Personnel costs
are the most significant component of operating expenses and
consist of salaries, benefits, bonuses, payroll taxes and
stock-based compensation expense. Operating expenses also include
depreciation, amortization and impairment of assets.
General and Administrative
General and
administrative expense consists of personnel costs for our
executive, finance, legal, human resources and administrative
departments. Additional expenses include travel and entertainment,
professional fees and insurance.
We
expect our general and administrative expense to continue to
increase in absolute dollars for the foreseeable future due to
additional costs associated with accounting, compliance, insurance
and investor relations as a public company. However, we expect our
general and administrative expense to decrease as a percentage of
our revenue over the long term, although our general and
administrative expense may fluctuate as a percentage of our revenue
from period to period due to the timing and extent of these
expenses.
Sales and Marketing
Sales
and marketing expenses consist of personnel costs, marketing
programs, travel and entertainment associated with sales and
marketing personnel, expenses for conferences and trade shows. We
intend to make significant investments in our sales and marketing
expenses to grow revenue, further penetrate the market and expand
our customer base. With the release of our Partners Program we
expect our sales and marketing expense to increase in the
future.
Research and Development
Research and
development expenses consists of personnel costs, software used to
develop our products and consulting and professional fees for
third-party development resources. Our research and development
expenses support our efforts to continue to add capabilities to our
existing products and the strategic shift to develop additional
capabilities and improve our AI software.
We
expect our research and development expense to continue to increase
in absolute dollars for the foreseeable future as we continue to
invest in research and development efforts to enhance the
functionality of our AI software. However, we expect our research
and development expense to decrease as a percentage of our revenue
over the long term, although our research and development expense
may fluctuate as a percentage of our revenue from period to period
due to the timing and extent of these expenses.
Other Income (Expense)
Other
income (expense) net consists primarily of interest expense in
connection with our debt arrangements, costs associated with the
extinguishment of our debt arrangements, gains and losses on the
sale of fixed assets and interest income earned on cash and cash
equivalents and short-term investments.
37
Income Tax Provision
Income
tax provision consists primarily of income taxes in certain
domestic jurisdictions in which we conduct business. We have
recorded deferred tax assets for which a full valuation allowance
has been provided, including net operating loss carryforwards and
tax credits. We expect to maintain this full valuation allowance
for the foreseeable future as it is more likely than not that some
or all of those deferred tax assets may not be realized based on
our history of losses.
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, 2019.
New Accounting Pronouncement
See Note 1 to our unaudited condensed consolidated financial
statements set forth in Item 1 of this quarterly report for
information regarding new accounting pronouncements.
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
and do not include operation from Global, AOC Key Solutions or
Firestorm.
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Revenue
|
$
1,595
|
$
1,010
|
|
Cost of
Revenue
|
494
|
490
|
|
Gross
profit
|
1,101
|
520
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General and
administrative expenses
|
2,791
|
1,543
|
|
Selling and
marketing expenses
|
371
|
158
|
|
Research and
development expenses
|
543
|
5
|
|
Operating
expenses
|
3,705
|
1,706
|
|
|
|
|
|
Loss from
operations
|
(2,604
)
|
(1,186
)
|
|
Other income
(expense):
|
|
|
|
Loss on
extinguishment of debt
|
-
|
(1,113
)
|
|
Interest
expense
|
(1,163
)
|
(209
)
|
|
Other
income
|
-
|
2
|
|
Total other
expense
|
(1,163
)
|
(1,320
)
|
|
Loss before income
taxes
|
(3,767
)
|
(2,506
)
|
|
Income tax
provision
|
(7
)
|
(12
)
|
|
Net loss from
continuing operations
|
$
(3,774
)
|
$
(2,518
)
|
38
Comparison of the Three Months Ended March 31, 2020 and the Three
Months Ended March 31, 2019
Restructuring
As part
of our shift in strategic direction in 2019, we are focusing on our
Technology Segment and management has been evaluating the
disposition of the subsidiaries in our Professional Services
Segment: AOC Key Solutions, Global and Firestorm. As part of
evaluating the future of Firestorm, management decided to sell
Secure Education and transfer the BC Management line of business to
its founder in the second quarter of 2019. In addition, management
determined to discontinue the operation of Firestorm Franchising,
LLC, a division of Firestorm, due to non-performance by
franchisees.
Also,
in June 2019, our Board of Directors authorized the sale of Global.
As a result, management has been negotiating with potential buyers
and has determined that Global should be classified as held for
sale. Accordingly, results of operations for Global have not been
included in the comparisons shown below for either 2020 or 2019. In
January 2020, the Board of Directors authorized the sale of AOC Key
Solutions and in April 2020, we completed the Sale of AOC Key
Solutions.
Beginning in 2020,
all of the subsidiaries that were previously presented as part of
Professional Services operations are classified as held for sale
and discontinued operations and not presented as part of continuing
operations.
Total Revenue
|
|
Three Months
Ended March 31,
|
Change
|
||
|
(dollars in
thousands)
|
2020
|
2019
|
$
|
%
|
|
Revenue
|
$
1,595
|
$
1,010
|
$
585
|
58
%
|
|
|
|
|
|
|
The increase in revenue was primarily attributable to the
acquisition of OpenALPR in March 2019. During the three months
ended March 31, 2020, revenue attributable to OpenALPR was
recognized for the full three month period compared to only half a
month of revenue recognized in the corresponding period in
2019.
Cost of Revenue, Gross Profit and Gross Margin
|
|
Three Months
Ended March 31,
|
Change
|
||
|
(dollars in
thousands)
|
2020
|
2019
|
$ or %
Points
|
%
|
|
Cost of
revenue
|
$
494
|
$
490
|
$
4
|
1
%
|
|
Gross
profit
|
1,101
|
520
|
581
|
112
%
|
|
Gross
margin
|
69
%
|
51
%
|
18
%
|
34
%
|
The increase in gross
profit was primarily attributable to the inclusion of OpenALPR
since its acquisition in March 2019.
We realize higher margins
from the revenues associated with software and licensing since
there are less labor costs incurred.
39
Operating
Expenses
|
|
Three Months
Ended March 31,
|
Change
|
||
|
(dollars in
thousands)
|
2020
|
2019
|
$
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
General and
administrative expenses
|
$
2,791
|
$
1,543
|
$
1,248
|
81
%
|
|
Selling and
marketing expenses
|
371
|
158
|
213
|
135
%
|
|
Research and
development expenses
|
543
|
5
|
538
|
10760
%
|
|
Operating
expenses
|
$
3,705
|
$
1,706
|
$
1,999
|
117
%
|
General and Administrative Expenses
The majority of the increase to general and administrative expenses
is attributable to the increased staffing. For the three months
ended March 31, 2020 compared to the three months ended March 31,
2019, we brought on additional officers and executives of the
Company to support our growth plan and build our corporate
structure.
Selling and Marketing Expenses
The increase in the selling and marketing expenses during the year
is attributable mainly to the increased marketing efforts to
promote our products and services including trade shows, digital
marketing, and other sales. In connection with these efforts there
was an increase in staffing to support the Company’s growth
plan.
Research and Development Expense
The overall increase in research and development expenses is
primarily attributable to the strategic shift to develop new
products and additional software capabilities, as a result of our
increased focus on our technology offerings. This shift took place
at the end of the first quarter of 2019. The increase in our
research and development expenses is mainly attributable to an
increase in headcount and hours associated with the research and
development activities.
Other Expense
|
|
Three Months
Ended March 31,
|
Change
|
||
|
(dollars in
thousands)
|
2020
|
2019
|
$
|
%
|
|
Other income
(expense):
|
|
|
|
|
|
Loss on
extinguishment of debt
|
$
-
|
$
(1,113
)
|
$
1,113
|
100
%
|
|
Interest
expense
|
(1,163
)
|
(209
)
|
(954
)
|
-456
%
|
|
Other
income
|
-
|
2
|
(2
)
|
-100
%
|
|
Total other
expense
|
$
(1,163
)
|
$
(1,320
)
|
$
157
|
-12
%
|
The increase in interest
expense is primarily attributable the 2019 Promissory Notes, which
commenced in March of 2019. Additionally, the decrease in other
expenses was attributable to costs associated with the
extinguishment of debt of $1,113,000 which occurred in the three
months ended March 31, 2019.
Income Tax Expense
The income tax provision for the three months ended March 31, 2020,
was $7,000, is due primarily to the state taxes, as compared to tax
expense of $12,000 for the three months ended March 31, 2019. 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 March 31,
2020.
40
Non-GAAP Measures: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes,
depreciation and amortization. We calculate Adjusted EBITDA as net
loss before interest, taxes, depreciation and amortization,
adjusted for (i) impairment of intangible assets, (ii) loss on
extinguishment of debt, (iii) stock-based compensation, (iv) losses
on sales of subsidiaries, and (v) other unusual or non-recurring
items. EBITDA and Adjusted EBITDA are not measurements of financial
performance or liquidity under accounting principles generally
accepted in the U.S. (“U.S. GAAP”) and should not be
considered as an alternative to net earnings or cash flow from
operating activities as indicators of our operating performance or
as a measure of liquidity or any other measures of performance
derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA
are presented because we believe they are frequently used by
securities analysts, investors and other interested parties in the
evaluation of a company’s ability to service and/or incur
debt. However, other companies in our industry may calculate EBITDA
and Adjusted EBITDA differently than we do.
The following table sets forth the components of the EBITDA and
Adjusted EBITDA for the periods included (dollars in
thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Net
loss
|
(3,774
)
|
(2,518
)
|
|
Income
taxes
|
7
|
12
|
|
Interest
|
1,163
|
209
|
|
Depreciation and
amortization
|
423
|
198
|
|
EBITDA
|
(2,181
)
|
(2,099
)
|
|
|
|
|
|
Loss on
extinguishment of debt
|
-
|
1,113
|
|
Share-based
compensation
|
171
|
63
|
|
Adjusted
EBITDA
|
(2,010
)
|
(923
)
|
In
March 2019, we recorded costs in connection with the extinguishment
of the $2,000,000 2018 Promissory Note of $1,113,000.
Lease Obligations
At March 31, 2020, we leased building space at the
following locations in the U.S.:
●
Columbia, Maryland – The corporate headquarters
●
Linthicum, Maryland – Storage facility for inventory related
to our technology hardware
●
Chantilly, Virginia – The corporate office of AOC Key
Solution
●
Fort Worth, Texas – The corporate office of Global
entities
41
We believe our facilities are in good condition and adequate for
their current use. We may improve, replace or reduce facilities as
considered appropriate to meet the needs of our
operations.
Liquidity and Capital Resources
Our operations and ability to raise capital resources may be
affected by the recent and ongoing outbreak of COVID-19 which was
declared a pandemic by the World Health Organization in March 2020.
The ultimate disruption which may be caused by the outbreak is
uncertain; however, it may result in a material adverse impact on
our balance sheet, operations and cash flows.
On May
5, 2020, our wholly owned subsidiary, Global, entered into a
promissory note with BOKF, NA, d/b/a Bank of Oklahoma, which
provides for a loan in the principal amount of $5,005,000 (the
“Global PPP Loan Note”) pursuant to the Paycheck
Protection Program under the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”). The Global PPP Loan
Note has a two-year term and bears interest at a rate of 1.0% per
annum. Monthly principal and interest payments are deferred for six
months after the date of disbursement. The Global PPP Loan Note may
be prepaid at any time prior to maturity with no prepayment
penalties. The Global PPP Loan Note contains events of default and
other provisions customary for a loan of this type. The Paycheck
Protection Program provides that the Global PPP Loan Note may be
partially or wholly forgiven if the funds are used for certain
qualifying expenses as described in the CARES Act. Global intends
to use the entire Global PPP Loan Note amount for qualifying
expenses and to apply for forgiveness of the loan in accordance
with the terms of the CARES Act.
The following table sets forth the components of our cash flows for
the period included (dollars in thousands):
|
|
Three Months
Ended March 31,
|
|||
|
|
2020
|
2019
|
Change
|
|
|
|
|
$
|
%
|
|
|
Net cash used in
operating activities - continuing operations
|
$
(2,444
)
|
$
(1,530
)
|
$
914
|
60
%
|
|
Net cash used in
investing activities - continuing operations
|
(178
)
|
(308
)
|
(130
)
|
-42
%
|
|
Net cash provided
by financing activities - continuing operations
|
2,523
|
3,839
|
(1,316
)
|
-34
%
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
|
$
(99
)
|
$
2,001
|
$
(2,100
)
|
-105
%
|
Net cash used in operating activities – continuing operations
for the three months ended March 31, 2020 had a net increase of
$914,000 which was primarily due to an increase in net loss from
continuing operations to $3,774,000 for the three months ended
March 31, 2020, as compared to $2,518,000 for the three months
ended March 31, 2019. The increase in the net loss from continuing
operations was mainly due to increased general and administrative
costs related to increased headcount to help support our strategic
shift to become more technology focused. This amount was partially
offset by an increase in debt financing costs related to the 2019
Promissory Notes, as well as, an increase in amortization of
intangible assets related to the OpenALPR Technology
Acquisition.
The net decrease of net cash used in investment activities –
continuing operations of $130,000 was primarily due to increased
spending in the three months ended March 31, 2019 compared to the
three months ended March 21, 2020.
Net cash provided by financing activities – continuing
operations for the three months ended March 31, 2020 decreased
$1,316,000 from the prior three month period ended March 31, 2019.
During the three months ended March 31, 2020 cash provided by
financing activities was related to the issuance of stock as part
of the at-the-market agreement and issuance of common stock in
connection with the exercises of stock options and warrants during
the period. During the three months ended March 31, 2019 cash
provided by financing activities was $3,839,000 from the 2019
Promissory Notes issued the first quarter of 2019.
42
During 2020 and 2019, we funded our operations primarily through
cash from operating activities from our subsidiaries, secured
borrowing arrangements, issuance of debt, and the sale of equity.
As of March 31, 2020, we had unrestricted cash and cash equivalents
from continuing operations of $1,502,000 and working capital
deficit of $1,179,000, as compared to unrestricted cash and cash
equivalents of $1,536,000 and working capital deficit of $1,786,000
as of December 31, 2019.
Operating assets and liabilities consist primarily of receivables
from billed and unbilled services, accounts payable, accrued
expenses, secured borrowing arrangements, and accrued payroll and
related benefits. The volume of billings and timing of collections
and payments affect these account balances.
As of
March 31, 2020, we had approximately $13,831,000 of licensing and
subscription contracts that were closed prior to March 31, 2020,
but have a contractual subscription period beyond March 31, 2020.
These subscription contracts generally cover a term of one to five
years, in which the Company will recognize revenue ratably over the
contract term. On occasion our customers will prepay the full
contract or a substantial portion of the contract. Amounts related
to the prepayment of the subscription contract for a service period
that is not yet met are recorded as part of our contract
liabilities balance. We currently expect to recognize approximately
34% of this amount over the succeeding twelve months, and the
remainder is expected to be recognized over the following four
years.
As of
April 30, 2020, we had approximately $13,828,000 of licensing and
subscription contracts that were closed prior to April 30, 2020,
but, have a contractual subscription period beyond April 30, 2020.
The table below represents growth from March 31, 2019, or 86% and
86% through March 31, 2020 and April 30, 2020,
respectively.
The
table below shows the quarter by quarter growth in the unaudited
remaining contract value of licensing and subscription contracts
(dollars in thousands):
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.
43
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 our common stock share price.
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.
Promissory
Notes
On March 12, 2019, we issued the 2019 Promissory Notes and the
March 2019 Warrants. The loan was due and payable on March 11,
2021. In March 2020, we received an extension of the maturity date
of the loan until June 12, 2021. The loan 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 2019 Promissory Notes resulting in the following detailed
transaction (dollars in thousands):
|
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
|
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 $226,000 related to legal, accounting, and other fees
in connection with the Sales Agreement. These costs were
charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
unaudited condensed consolidated balance
sheets.
Sales of our 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.
For the three months ended March 31,
2020, based on settlement date, we sold 536,730 shares of common
stock at a weighted-average selling price of $4.15 per share in
accordance with the Sales Agreement. Net cash provided for the
three months ended March 31, 2020 from the Sales Agreement was
$2,169,000 after paying 3.0% or $67,000 related to cash commissions
provided to B. Riley FBR. As of March 31, 2020, $9,490,000 remained
available for sale under the Sales Agreement.
44
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. 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.
As of March 31, 2020, 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 3.
I
TEM 4. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
carried out an evaluation under the supervision and with the
participation of management, including our principal executive
officer and principal financial officer, of the effectiveness of
our disclosure controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e) of the
Exchange Act) as of the end of the period covered by this
report.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as
amended (the “Securities Exchange Act”) is recorded,
processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information we are required to
disclose in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management as
appropriate to allow timely decisions regarding required
disclosure.
Based
on management’s review, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective at March 31, 2020.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f). Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of unaudited condensed consolidated financial
statements for external purposes in accordance with U.S. GAAP
and includes those policies and procedures that: (i) pertain to the
maintenance of records that in reasonable detail accurately and
fairly reflect our transactions and dispositions of our assets;
(ii) provide reasonable assurance that our transactions are
recorded as necessary to permit preparation of financial statements
in accordance with U.S. GAAP and that our receipts and
expenditures are being made only in accordance with authorizations;
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our unaudited
condensed consolidated financial statements.
Under the supervision and with the participation with our
management, including our Chief Executive Officer and Chief
Financial Officer, we assessed the effectiveness of our internal
control over financial reporting as of the end of the period
covered by this report based on the framework in “Internal
Control—Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based upon this assessment, management concluded
that our internal control over financial reporting was effective as
of March 31, 2020.
In
designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met.
Changes to Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
45
PART II – OTHER INFORMATION
I
TEM 1. LEGAL
PROCEEDINGS
On
August 19, 2019, we filed suit in the United States District Court
for the Southern District of New York against three former
executives of the Company and Firestorm (the “Firestorm
Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin,
et al., Case no. 1:19-cv-07767-VEC. The Complaint alleges
that the Firestorm Principals fraudulently induced the execution of
the Membership Interest Purchase Agreement wherein Firestorm
was acquired by us. The Complaint requests equitable
rescission of that transaction, or, alternatively, monetary
damages.
Following an
initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, we filed a Second Amended Complaint, which the Firestorm
Principals answered together with counterclaims on February 28,
2020. Thereafter, on March 30, we moved to dismiss certain
counterclaims against certain executives named as
counterclaim-defendants, which resulted in the Firestorm Principals
voluntarily dismissing those counterclaims against those
parties. We thereafter filed our response and affirmative
defenses to the Counterclaims on April 22. On April 27, the
Firestorm Principals filed a Motion for Partial Judgment on the
Pleadings, which we will be opposing.
We
intend to continue vigorously litigating its claims against the
Firestorm Principals, and believe that the Firestorm
Principals’ remaining counterclaims are without
merit.
Vigilant Solutions,
LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on
February 21, 2020 against us and certain of our subsidiaries in the
US District Court for the District of Maryland. The complaint
alleges that certain of our products violate a patent held by
Vigilant. We have retained counsel to investigate the claims made
in the complaint and our investigation into these matters is
ongoing. Nevertheless, based on a review of the complaint, we
believe that we have substantial defenses to the allegations
contained in the complaint and that the validity of the patent
underlying the complaint is subject to challenge. We intend to
vigorously defend the allegations of the Vigilant
complaint.
On
January 31, 2020, our wholly owned subsidiary, OpenALPR filed a
complaint in the US District Court for the Western District of
Pennsylvania against a former customer, Plate Capture Solutions,
Inc. (“PCS”) for breach of software license agreements
pursuant to which software to was licensed to PCS. On February 19,
2020 PCS filed an answer, counterclaim and joinder in the case,
among other things, seeking to join us as a party to the litigation
and making counterclaims for defamation, fraud and intentional
interference with existing and future business relationships. We
believe that we have substantial defenses to the counterclaims and
intend to vigorously defend the allegations of the
counterclaims.
In
addition, from time to time, we may be named as a party to various
other lawsuits, claims and other legal and regulatory proceedings
that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged
personal injury, breach of contract, property damage, infringement
of proprietary rights, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to such
lawsuits, claims and proceedings we accrue reserves when a loss is
probable, and the amount of such loss can be reasonably estimated.
It is our management’s opinion that the outcome of these
proceedings, individually and collectively, will not be material to
our consolidated financial statements as a
whole.
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 March 30, 2020, except for the following
supplemental risk factor. We encourage investors to review the risk
factors and uncertainties relating to our business disclosed in
that Form 10-K, as well as those contained in Part 1, Item 2,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations, above.
46
Rekor is unable to predict the extent to which the global COVID-19
pandemic may adversely impact our business operations, financial
performance, results of operations and stock price.
The
coronavirus COVID-19 pandemic and efforts to control its spread
have significantly curtailed the movement of people, goods and
services worldwide, including in many of the regions in which we
sell our products and services and conduct our business operations.
The magnitude and duration of the resulting decline in business
activity cannot currently be estimated with any degree of certainty
and threatens to (1) negatively impact the demand for our products
and services, especially in those locations subject to
“shelter in place” restrictions or similar government
orders, (2) restrict our sales operations and marketing efforts,
and (3) disrupt other important business activities in our various
locations, some of which are also in areas affected by COVID-19.
For example, in response to the COVID-19 pandemic, certain industry
events at which we present and participate certain customer events
have been canceled, postponed or moved to virtual-only experiences;
we are encouraging all of our employees to work remotely; and we
may deem it advisable to similarly alter, postpone or cancel
entirely additional customer, employee or industry events in the
future. Additionally, we may see our services carrying less
revenue-generating traffic in areas subject to “shelter in
place” restrictions or related government orders as the
population of those areas refrain from traveling and normal
commerce activities. Accordingly, we expect the COVID-19 pandemic
to potentially have a negative impact on our sales and our results
of operations in those areas adversely affected by COVID-19, the
size and duration of which we are currently unable to predict.
Additionally, concerns over the economic impact of COVID-19 have
caused extreme volatility in financial and other capital markets
which has and may continue to adversely impact our stock price and
our ability to access capital.
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.
At-the-Market Agreement
Sales of our 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.
For the three months ended March 31,
2020, based on settlement date, we sold 536,730 shares of common
stock at a weighted-average selling price of $4.15 per share in
accordance with the Sales Agreement. Net cash provided for the
three months ended March 31, 2020 from the Sales Agreement was
$2,169,000 after paying 3.0% or $67,000 related to cash commissions
provided to B. Riley FBR. As of March 31, 2020, $9,490,000 remained
available for sale under the Sales Agreement.
Increase in Authorized Shares
On
January 28, 2020, the Board of Directors of the Company adopted
resolutions of the Board to ratify, approve and recommend
stockholder approval of an amendment to the Company’s Amended
and Restated Certificate of Incorporation, to increase the
authorized number of shares of the Company’s common stock,
par value $0.0001 per share, from 30,000,000 to 100,000,000
(“the Amendment”). On February 21, 2020, the Company
received approval of the Amendment by written consent in lieu of a
meeting from the holders of a majority of issued and outstanding
shares of the Company’s common stock. On March 18, 2020 the
amendment became effective upon filing the Certificate of Amendment
with the Secretary of State of Delaware.
47
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, sale of subsidiaries and the sale of common stock to provide
cash for operations. We attribute losses to merger and acquisition
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.
I
TEM 3. DEFAULTS UPON
SENIOR SECURITIES
None.
I
TEM 4. MINE SAFETY
DISCLOSURES
Not applicable.
I
TEM 5. OTHER
INFORMATION
None.
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
|
|
|
|
|
|
Second
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of Rekor Systems, Inc. as filed with the Secretary of
State of Delaware on March 18, 2020
|
|
8-K
|
|
001-38338
|
|
3.1
|
|
3/18/20
|
|
|
|
|
|
Amended
and Restated Bylaws of Rekor Systems, Inc.
|
|
8-K
|
|
001-38338
|
|
3.2
|
|
4/30/19
|
|
|
|
|
|
Global Technical Services - PPP Loan
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
5/5/20
|
|
|
|
|
|
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.
48
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:
|
May 13,
2020
|
|
|
|
|
|
|
|
|
|
/s/
Eyal Hen
|
|
|
|
Name:
|
Eyal
Hen
|
|
|
|
Title:
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
Date:
|
May 13,
2020
|
|
49
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 General, Basis Of Presentation, and Summary Of Significant Accounting PoliciesNote 2 - AcquisitionsNote 3 Held For Sale and Discontinued OperationsNote 4 Supplemental Disclosures Of Cash Flow InformationNote 5 Operating LeasesNote 6 Intangible AssetsNote 7 DebtNote 8 Income TaxesNote 9 Commitments and ContingenciesNote 10 Stockholders DeficitNote 11 Equity Incentive PlanNote 12 Loss Per ShareNote 13- 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