REKOR SYSTEMS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 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
November 9, 2020, the Registrant had 32,974,257 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 divestiture, merger,
acquisition, or other business combination 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 September 30, 2020
|
4
|
||
|
4
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
32
|
||
|
46
|
||
|
47
|
||
|
|
|
|
|
48
|
||
|
48
|
||
|
49
|
||
|
50
|
||
|
51
|
||
|
51
|
||
|
51
|
||
|
51
|
||
|
|
|
|
|
52
|
||
P
ART I FINANCIAL
INFORMATION
REKOR SYSTEMS, INC. AND SUBSIDIARIES
C
ONDENSED CONSOLIDATED BALANCE
SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
September 30, 2020
|
December 31, 2019
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and cash
equivalents
|
$
24,154
|
$
1,075
|
|
Restricted
cash and cash equivalents
|
573
|
461
|
|
Accounts
receivable, net
|
966
|
776
|
|
Inventory
|
591
|
302
|
|
Note
receivable, current portion
|
255
|
-
|
|
Other current
assets, net
|
361
|
175
|
|
Current assets
of discontinued operations
|
3
|
7,441
|
|
Total current assets
|
26,903
|
10,230
|
|
Long-term Assets
|
|
|
|
Property and
equipment, net
|
554
|
442
|
|
Right-of-use
lease assets, net
|
276
|
283
|
|
Goodwill
|
6,336
|
6,336
|
|
Intangible
assets, net
|
7,429
|
8,244
|
|
Investments in
unconsolidated companies
|
75
|
-
|
|
Note
receivable, long-term
|
1,445
|
-
|
|
Long-term
assets of discontinued operations
|
-
|
3,457
|
|
Total long-term assets
|
16,115
|
18,762
|
|
Total assets
|
$
43,018
|
$
28,992
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$
3,834
|
$
3,678
|
|
Loan payable,
current portion
|
370
|
-
|
|
Lease
liability, short-term
|
232
|
148
|
|
Contract
liabilities
|
1,234
|
749
|
|
Current
liabilities of discontinued operations
|
114
|
5,757
|
|
Total current liabilities
|
5,784
|
10,332
|
|
Long-term Liabilities
|
|
|
|
Notes payable,
long-term
|
976
|
20,409
|
|
Loan payable,
long-term
|
504
|
-
|
|
Lease
liability, long-term
|
60
|
161
|
|
Contract
liabilities, long-term
|
936
|
775
|
|
Other
long-term liabilities
|
10
|
10
|
|
Long term
liabilities of discontinued operations
|
14
|
536
|
|
Total long-term liabilities
|
2,500
|
21,891
|
|
Total liabilities
|
8,284
|
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 September 30, 2020 and December 31, 2019,
respectively
|
6,442
|
5,804
|
|
Commitments and Contingencies
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
Common stock, $0.0001 par value,
100,000,000 and 30,000,000 shares authorized, 32,911,854 and
21,595,653 shares issued and outstanding as of September 30, 2020
and December 31, 2019, respectively
|
3
|
2
|
|
Preferred
stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares
designated as Series A and 240,861 shares designated as Series B as
of September 30, 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 September 30, 2020
and December 31, 2019, respectively
|
-
|
-
|
|
Additional
paid-in capital
|
68,117
|
19,371
|
|
Accumulated
deficit
|
(39,828
)
|
(28,408
)
|
|
Total stockholders’ equity (deficit)
|
28,292
|
(9,035
)
|
|
Total liabilities and stockholders’ equity
(deficit)
|
$
43,018
|
$
28,992
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
REKOR SYSTEMS, INC. AND SUBSIDIARIES
C
ONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenue
|
$
2,126
|
$
1,536
|
$
6,399
|
$
3,962
|
|
Cost
of revenue
|
984
|
390
|
2,753
|
1,152
|
|
Gross
profit
|
1,142
|
1,146
|
3,646
|
2,810
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
3,168
|
2,600
|
8,896
|
6,259
|
|
Selling
and marketing expenses
|
560
|
587
|
1,356
|
1,081
|
|
Research
and development expenses
|
781
|
450
|
2,143
|
757
|
|
Operating
expenses
|
4,509
|
3,637
|
12,395
|
8,097
|
|
|
|
|
|
|
|
Loss
from operations
|
(3,367
)
|
(2,491
)
|
(8,749
)
|
(5,287
)
|
|
Other
income (expense):
|
|
|
|
|
|
Loss
on extinguishment of debt
|
(3,081
)
|
-
|
(3,281
)
|
(1,113
)
|
|
Interest
expense
|
(218
)
|
(1,182
)
|
(2,468
)
|
(2,724
)
|
|
Other
income
|
6
|
157
|
27
|
123
|
|
Gain
on sale of business
|
-
|
-
|
3,631
|
-
|
|
Total
other expense
|
(3,293
)
|
(1,025
)
|
(2,091
)
|
(3,714
)
|
|
Loss
before income taxes
|
(6,660
)
|
(3,516
)
|
(10,840
)
|
(9,001
)
|
|
Income
tax provision
|
(7
)
|
(12
)
|
(20
)
|
(35
)
|
|
Net
loss from continuing operations
|
$
(6,667
)
|
$
(3,528
)
|
$
(10,860
)
|
$
(9,036
)
|
|
Net
loss from discontinued operations
|
(2
)
|
(100
)
|
(215
)
|
(2,392
)
|
|
Net
loss
|
$
(6,669
)
|
$
(3,628
)
|
$
(11,075
)
|
$
(11,428
)
|
|
Loss
per common share from continuing operations - basic and
diluted
|
(0.26
)
|
(0.19
)
|
(0.52
)
|
(0.51
)
|
|
Loss
per common share discontinued operations - basic and
diluted
|
-
|
(0.01
)
|
(0.01
)
|
(0.12
)
|
|
Loss
per common share - basic and diluted
|
$
(0.26
)
|
$
(0.20
)
|
$
(0.53
)
|
$
(0.63
)
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
Basic
and diluted
|
26,907,069
|
19,878,518
|
22,781,807
|
19,592,679
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
REKOR SYSTEMS,
INC. AND SUBSIDIARIES
C
ONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY (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 June 30, 2020
|
22,942,546
|
$
2
|
240,861
|
$
-
|
$
22,180
|
$
(33,044
)
|
$
(10,862
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
202
|
-
|
202
|
|
Issuance of
common stock pursuant to Exchange Agreement
|
4,349,497
|
-
|
-
|
-
|
17,325
|
-
|
17,325
|
|
Exercise of
cashless warrants in exchange for common stock
|
171,522
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
625,000
|
-
|
-
|
-
|
463
|
-
|
463
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
4,677,595
|
1
|
-
|
-
|
27,752
|
-
|
27,753
|
|
Exercise of
warrants related to series A preferred stock
|
16,214
|
-
|
-
|
-
|
17
|
-
|
17
|
|
Issuance upon
exercise of stock options
|
129,480
|
-
|
-
|
-
|
398
|
-
|
398
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(115
)
|
(115
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(220
)
|
-
|
(220
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(6,669
)
|
(6,669
)
|
|
Balance as of September 30, 2020
|
32,911,854
|
$
3
|
240,861
|
$
-
|
$
68,117
|
$
(39,828
)
|
$
28,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
19,382,185
|
$
2
|
240,861
|
$
-
|
$
16,496
|
$
(20,094
)
|
$
(3,596
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
76
|
-
|
76
|
|
Exercise of
cashless warrants in exchange for common stock
|
813,975
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
103,125
|
-
|
-
|
-
|
103
|
-
|
103
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
103,566
|
-
|
-
|
-
|
38
|
-
|
38
|
|
Exercise of
warrants related to series A preferred stock
|
3,638
|
-
|
-
|
-
|
4
|
-
|
4
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(114
)
|
(114
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(191
)
|
-
|
(191
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,628
)
|
(3,628
)
|
|
Balance as of September 30, 2019
|
20,406,489
|
$
2
|
240,861
|
$
-
|
$
16,526
|
$
(23,836
)
|
$
(7,308
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
21,595,653
|
$
2
|
240,861
|
$
-
|
$
19,371
|
$
(28,408
)
|
$
(9,035
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
539
|
-
|
539
|
|
Issuance of
common stock pursuant to Exchange Agreement
|
4,349,497
|
-
|
-
|
-
|
17,325
|
-
|
17,325
|
|
Exercise of
cashless warrants in exchange for common stock
|
214,740
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
1,180,000
|
-
|
-
|
-
|
874
|
-
|
874
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
5,216,562
|
1
|
-
|
-
|
29,929
|
-
|
29,930
|
|
Exercise of
warrants related to series A preferred stock
|
74,177
|
-
|
-
|
-
|
77
|
-
|
77
|
|
Issuance upon
exercise of stock options
|
281,225
|
-
|
-
|
-
|
640
|
-
|
640
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(345
)
|
(345
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(638
)
|
-
|
(638
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(11,075
)
|
(11,075
)
|
|
Balance as of September 30, 2020
|
32,911,854
|
$
3
|
240,861
|
$
-
|
$
68,117
|
$
(39,828
)
|
$
28,292
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
18,767,619
|
$
2
|
240,861
|
$
-
|
$
15,518
|
$
(12,064
)
|
$
3,456
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
314
|
-
|
314
|
|
Issuance of
warrants in conjunction with notes payable
|
-
|
-
|
-
|
-
|
706
|
-
|
706
|
|
Exercise of
cashless warrants in exchange for common stock
|
828,541
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
103,125
|
-
|
-
|
-
|
103
|
-
|
103
|
|
Common stock
issued in OpenALPR acquisition
|
600,000
|
-
|
-
|
-
|
397
|
-
|
397
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
103,566
|
-
|
-
|
-
|
38
|
-
|
38
|
|
Exercise of
warrants related to series A preferred stock
|
3,638
|
-
|
-
|
-
|
4
|
-
|
4
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(344
)
|
(344
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(554
)
|
-
|
(554
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(11,428
)
|
(11,428
)
|
|
Balance as of September 30, 2019
|
20,406,489
|
$
2
|
240,861
|
$
-
|
$
16,526
|
$
(23,836
)
|
$
(7,308
)
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial
statements.
6
REKOR SYSTEMS, INC. AND SUBSIDIARIES
C
ONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
Nine Months ended September 30,
|
||
|
|
2020
|
|
2019
|
|
Cash Flows from Operating Activities
|
|
|
|
|
Net loss from
continuing operations
|
$
(10,860)
|
|
$
(9,036)
|
|
Net loss from
discontinued operations
|
(215)
|
|
(2,392)
|
|
Net
loss
|
(11,075)
|
|
(11,428)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
Bad
debt expense
|
36
|
|
-
|
|
Depreciation
|
270
|
|
243
|
|
Amortization
of right-of-use lease asset
|
139
|
|
51
|
|
Share-based
compensation
|
539
|
|
314
|
|
Amortization
of financing costs
|
653
|
|
768
|
|
Amortization
of intangible assets
|
977
|
|
663
|
|
Loss
on extinguishment of debt
|
3,281
|
|
1,113
|
|
Gain
on sale of AOC Key Solutions
|
(2,619)
|
|
-
|
|
Gain
on sale of TeamGlobal
|
(1,012)
|
|
-
|
|
Loss
on sale of Secure Education
|
-
|
|
3
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Accounts
receivable
|
(226)
|
|
(910)
|
|
Inventory
|
(289)
|
|
(312)
|
|
Other
current assets
|
(186)
|
|
57
|
|
Accounts
payable and accrued expenses
|
940
|
|
1,676
|
|
Contract
liabilities
|
646
|
|
982
|
|
Lease
liability
|
(149)
|
|
(6)
|
|
Net
cash used in operating activities - continuing
operations
|
(7,860)
|
|
(4,394)
|
|
Net
cash used in operating activities - discontinued
operations
|
(3,884)
|
|
(4,861)
|
|
Net
cash used in operating activities
|
(11,744)
|
|
(9,255)
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Capital
expenditures
|
(544)
|
|
(656)
|
|
Proceeds
from sale of Secure Education
|
-
|
|
250
|
|
Proceeds
from sale of AOC Key Solutions
|
3,400
|
|
-
|
|
Proceeds
from sale of TeamGlobal
|
2,300
|
|
-
|
|
Investment in equity investment
|
(75)
|
|
-
|
|
Proceeds
from AOC Key Solutions notes receivable
|
600
|
|
-
|
|
Net
cash provided by (used in) by investing activities - continuing
operations
|
5,681
|
|
(406)
|
|
Net
cash used in investing activities - discontinued
operations
|
-
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
5,681
|
|
(406)
|
|
Cash Flows from Financing Activities
|
|
|
|
|
Proceeds
from PPP loan
|
874
|
|
-
|
|
Payment of
stock issuance costs associated with Note Exchange
transaction
|
(73)
|
|
-
|
|
Repayments
of notes payable
|
(7,266)
|
|
-
|
|
Net
proceeds from notes payable
|
-
|
|
3,839
|
|
Net
proceeds from exercise of options
|
640
|
|
-
|
|
Net
proceeds from exercise of warrants
|
874
|
|
103
|
|
Net proceeds from exercise of warrants associated to series A
preferred stock
|
77
|
|
4
|
|
Net
proceeds from at-the-market agreement
|
29,930
|
|
38
|
|
Payment
of preferred dividends
|
-
|
|
(108)
|
|
Payment
of debt modification costs
|
(300)
|
|
-
|
|
Net
cash provided by financing activities - continuing
operations
|
24,756
|
|
3,876
|
|
Net
cash provided by financing activities - discontinued
operations
|
4,171
|
|
5,224
|
|
Net
cash provided by financing activities
|
28,927
|
|
9,100
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
|
22,577
|
|
(924)
|
|
Net increase
in cash, cash equivalents and restricted cash and cash equivalents
- discontinued operations
|
287
|
|
363
|
|
Net increase
(decrease) in cash, cash equivalents and restricted cash and cash
equivalents
|
22,864
|
|
(561)
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at beginning
of period
|
1,866
|
|
2,768
|
|
Cash, cash
equivalents and restricted cash and cash equivalents at end of
period
|
$
24,730
|
|
$
2,207
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted
cash:
|
|
|
|
|
Cash and cash
equivalents at end of period - continuing
operations
|
$
24,154
|
|
$
885
|
|
Restricted
cash and cash equivalents at end of period - continuing
operations
|
573
|
|
708
|
|
Cash and cash
equivalents at end of period - discontinued
operations
|
3
|
|
614
|
|
Cash, cash
equivalents and restricted cash at end of
period
|
$
24,730
|
|
$
2,207
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial
statements.
7
REKOR
SYSTEMS, INC. AND SUBSIDIARIES
N
OTES 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 September
30, 2020, the unaudited condensed consolidated results of
operations, unaudited condensed consolidated statements of
shareholders’ equity (deficit) and unaudited condensed
consolidated statements of cash flows for the three and nine month
periods ended September 30, 2020 and 2019.
The
financial data and other information disclosed in these notes are
unaudited. The results for the three and nine months ended
September 30, 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 U.S. GAAP.
Dollar
amounts, except per share data, in the notes to these unaudited
condensed consolidated financial statements are rounded to the
closest $1,000.
The
Company was formed in February 2017 and is currently a leader in
the field of artificial intelligence ("AI") enabled vehicle
identification and management systems. In development for over six
years using 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 legacy systems. The software provides a wider field
of view, greater light sensitivity and recognitions at faster
speeds with higher accuracy rates. It also includes the ability to
identify the color, make and type of a vehicle and its direction of
travel. These capabilities are particularly useful to governmental
entities and businesses in solving a wide variety of real-world
vehicle related operational challenges. In addition, the reduction
in cost, increased number and improved performance of internet
protocol connected cameras has presented significant new uses for
vehicle recognition technology that were not previously available
or cost effective.
In
March 2019, through its subsidiary, OpenALPR Software Solutions,
LLC (“OpenALPR”), Rekor acquired certain assets and
certain liabilities of OpenALPR Technology, Inc. (such assets and
liabilities being referred to herein as “OpenALPR
Technology”). The financial information in this Quarterly
Report only includes OpenALPR in the results of operations
beginning as of March 12, 2019.
During
the third quarter of 2019, the Company began to separately report
the results of Global Technical Services, Inc.
(“TeamGlobal”), the Company’s wholly owned
subsidiary, as operations held for sale. TeamGlobal provides
skilled technical professionals and maintenance and modification
specialists to the aerospace and aviation maintenance industries.
On June 29, 2020, the Company sold
TeamGlobal
to certain members of TeamGlobal's management team and began to
separately report the results of TeamGlobal as discontinued
operations. See Note 3.
During
the first quarter of 2020, the Company began to separately report
the results of AOC Key Solutions, Inc. (“AOC Key
Solutions”) another of the Company’s wholly owned
subsidiaries as operations held for sale. On April 2, 2020, the
Company sold AOC Key Solutions to a member of AOC Key
Solutions’ management and began to separately report the
results of AOC Key Solutions as discontinued operations. See Note
3.
During
the first quarter of 2020, the Board of Directors of the Company
approved a strategic shift by the Company to focus on its
technology services and products. In addition to the contemplated
sale of AOC Key Solutions and TeamGlobal, the Company determined to
present the operations of Firestorm Solutions, LLC
(“Firestorm Solutions”) and Firestorm Franchising, LLC
(“Firestorm Franchising” and together with Firestorm
Solutions, “Firestorm”) as discontinued operations.
Prior to the Company’s decision to sell TeamGlobal and AOC
Key Solutions, and discontinue the operations of Firestorm, the
assets, liabilities and operating results for these subsidiaries
were presented in the Professional Services segment. As a result of
the decision, the Company determined that all of the Professionals
Services segment should be classified as discontinued
operations.
Since
the Company is reporting the historical operating results and cash
flows of the Company’s Professional Services segment as
discontinued operations, they have been excluded from continuing
operations for all periods presented. The assets and liabilities of
the Professional Services segment are presented as current and
long-term assets and liabilities of discontinued operations in the
unaudited condensed consolidated balance sheets and its results are
presented as a loss from discontinued operations in the unaudited
condensed consolidated statement of operations.
8
Reclassification
Certain
prior year amounts have been reclassified to conform with the
current year presentation. Amounts for the three and nine month
periods ending September 30, 2019 and the year ending December 31,
2019, have been reclassified to conform to the current year
presentation. Due to the sale of TeamGlobal, the sale of AOC Key
Solutions, and the discontinuance of all professional services
activities, certain amounts have been reclassified in order to
conform to the current period presentation.
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, proceeds from the private sale of the Company’s
non-core subsidiaries, proceeds from note receivables, debt
financings and a public offering of its common stock to support
cashflow from operations. The Company attributes losses to public
company corporate overhead and non-capital expenditures related to
the scaling and development of new products and service offerings
in connection with the focus on the technology of the Company. As
of and for the nine months ended September 30, 2020, the Company
had a net loss from continuing operations of $10,860,000 and
working capital of $21,230,000.
The
Company's net cash position was increased by $22,577,000 for the
nine months September 30, 2020 due primarily to the net proceeds of
$29,930,000 from the At Market Issuance Sales Agreement (the "Sales
Agreement") and the net cash proceeds of $6,300,000 from the sale
of AOC Key Solutions and TeamGlobal, which includes the repayment
of the $600,000 AOC Key Solutions Subordinate Note, offset by the
net loss from operations in the period. As of September 21, 2020,
the Company voluntarily terminated the Sales Agreement (see Note
10).
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. Should access to funds be unavailable, the Company will
need to seek out additional sources of funding. Furthermore, the
Company has contingency plans to reduce or defer expenses and cash
outlays should operations weaken in the look-forward period or
additional financing, if needed, is not available.
The
Company's ability to generate positive operating results and
complete the execution of its business strategy will depend on (i)
its ability to continue the growth of its technology business, (ii)
the continued performance of its contractors, subcontractors and
vendors, (iii) its ability to maintain and build good relationships
with its lenders and financial intermediaries, (iv) its ability to
maintain timely collections from existing customers, and (v) the
stabilization of the world economy and global financial markets. To
the extent that events outside of the Company's control have a
significant negative impact on economic and/or market conditions,
they could affect payments from customers, services and supplies
from vendors, its ability to continue to secure and implement new
business, raise capital, and otherwise, depending on the severity
of such impact, materially adversely affect its operating
results.
The
Company’s operations have been affected by the recent and
ongoing outbreak of the coronavirus disease
(“COVID-19”) which was declared a pandemic by the World
Health Organization in March 2020. The impact has resulted in a
slowdown in the Company’s rate of growth and includes
disruptions in the delivery and installation of equipment, slower
than expected contract approvals and implementation of projects by
its customers, the need for employees to work remotely,
restrictions on travel affecting the Company’s ability to
attend meetings, conferences, consultations and installations and
otherwise provide and market its products and services, and
disruptions to its customers' operations which may affect its
revenues. The Company benefited from the financing under the CARES
Act. The Company continues to evaluate the potential impact of the
pandemic and the ultimate disruption that may be caused by the
outbreak is uncertain. Possible additional effects may include, but
are not limited to, continuing disruption to the Company’s
customers and revenue, absenteeism in the Company’s labor
workforce, unavailability of products and supplies used in
operations, and a decline in value of assets held by the Company.
As a result, the pandemic may result in a material adverse impact
on the Company’s financial position, operations and cash
flow.
9
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires the extensive use of management 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.
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.
Equity Method Investments
Investments in
common stock of entities other than the Company’s
consolidated subsidiaries are accounted for under the equity method
in accordance with FASB ASC 323,
Investments – Equity Method and Joint
Ventures.
Under the equity method, the initial investment is
recorded at cost and the investment is subsequently adjusted for
its proportionate share of earnings or losses, including
consideration of basis differences resulting from the difference
between the initial carrying amount of the investment and the
underlying equity in net assets. The difference between the
carrying amount of the investment and the underlying equity in net
assets is primarily attributable to goodwill and other intangible
assets. When the fair value or income information is not readily
determinable the Company has elected to apply the measurement
alternative, and report the investment at cost, less
impairment.
In June
of 2020, the Company announced a joint venture in which the Company
would have a 50 percent equity interest in Roker Inc. In the third
quarter of 2020, the Company contributed $75,000 for its 50 percent
equity interest. This investment is accounted for under the equity
method.
In
February 2017, the Company contributed substantially all of the
assets and certain liabilities related to its vehicle services
business to Global Public Safety (the “GPS Closing”).
After the GPS Closing, the Company continues to own 19.9% of the
units of Global Public Safety. This equity investment does not have
a readily determinable fair value and the Company has elected to
report this investment at cost, less impairment. In 2018, the
Company recorded an impairment of $262,000, related to the
investment in Global Public Safety, effectively reducing the total
investment value to $0.
The
carrying amount of the Company’s investments are included as
part of investments in unconsolidated companies in the unaudited
condensed consolidated balance sheets.
10
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 September 30, 2020 and December 31,
2019 because of the relatively short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt and long-term receivables approximates fair value as of
September 30, 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 3 inputs.
The Company has concluded that its Series A Preferred Stock is a
Level 3 financial instrument and that the fair value approximates
the carrying value, which includes the accretion of the discounted
interest component through September 30, 2020. There were no
changes in levels during the nine months ended September 30,
2020.
The Company considers its note
receivables to be Level 3 investments
and that the fair value
approximates the carrying value
.
Note Receivables
In connection with the sale of AOC Key Solutions in April 2020, the
Company received a $600,000, five-year promissory note
due March 2025, that carries an interest rate of 8%. Based on the
general market conditions and the credit quality of the buyer at
the time of the sale, the Company determined that the fixed
interest rate approximates the current market rates.
In September 2020, the full principal balance of the $600,000 note
associated with the sale of AOC Key Solutions was paid in
full.
In connection with the sale of TeamGlobal in June 2020, the Company
received a $1,700,000, five and a half year promissory
note due December 2025, that carries an interest rate of 4% and is
secured by a first priority security interest in the shares of
TeamGlobal. Monthly principal payments on the promissory note will
begin in 2021. Based on the general market conditions, the security
interest held by the Company and the credit quality of the buyer at
the time of the sale, the Company determined that the fixed
interest rate approximates the current market rates.
Interest income recognized for the three and nine months ended
September 30, 2020 was $19,000 and $31,000, respectively, and is
included as part of other income on the unaudited condensed
consolidated statement of operations. Interest income for the three
and nine months ended September 30, 2019 was
immaterial.
11
Revenue Recognition
The
Company derives its revenues substantially from license and
subscription fees for software and related products and services. A
portion of the subscription fees are generated through the
Company’s eCommerce website rather than though in-person
sales. In addition, the Company derives net revenues in connection
with certain citation and collection services in connection with
the Company’s automated traffic safety and parking
enforcement services.
Revenue
is recognized upon transfer of control of promised products and
services to the Company’s customers, in an amount that
reflects the consideration the Company expects to receive in
exchange for those products and services. If the consideration
promised in the contract includes a variable amount, for example
maintenance fees, the Company includes an estimate of the amount it
expects to receive for the total transaction price, if it is
probable that a significant reversal of cumulative revenue
recognized will not occur.
The
Company determines the amount of revenue to be recognized through
application of the following steps:
●
Identification
of the contract, or contracts, with a customer
●
Identification
of the performance obligations in the contract
●
Determination
of the transaction price
●
Allocation
of the transaction price to the performance obligations in the
contract
●
Recognition
of revenue when, or as, performance obligations are
satisfied
The
following table presents a summary of revenue (dollars in
thousands):
|
|
Three
Months ended September 30,
|
Nine
Months ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenue
|
|
|
|
|
|
Licensing
and subscription revenue
|
$
1,341
|
$
575
|
$
4,122
|
$
1,386
|
|
Automated
traffic safety enforcement
|
785
|
961
|
2,277
|
2,576
|
|
Total
revenue
|
$
2,126
|
$
1,536
|
$
6,399
|
$
3,962
|
12
Revenues
Licensing and subscription revenue
The
Company's revenues are derived principally from fees for technology
products and services, including software licenses and
subscriptions, hardware leases and sales, and other related support
services.
In
March 2019, the Company acquired substantially all of the assets of
a software development company, OpenALPR Technologies, Inc. The
software acquired from this acquisition and subsequently developed
by the Company have provided the basis for the Company’s
licensing and subscription revenue. Licensing and subscription
services include providing, through a web server, access to the
Company’s proprietary vehicle recognition software, a
self-managed database and a powerful, cross-platform application
programming interface. The Company's proprietary software employs a
convolutional neural network architecture to classify images and
features that include seamless video analysis and data analytics.
Current customers include law enforcement agencies, highway
authorities, parking system operators, private security companies,
and wholesale and retail operations supporting logistics and
customer loyalty programs.
Included
in the licensing and subscription revenue is revenue that was
recognized through the Company’s eCommerce platform. For the
three and nine months ended September 30, 2020, the Company
recognized revenues of $235,000 and $621,000, respectively, for
products and services that were purchased through the
Company’s eCommerce platform. For the three and nine months
ended September 30, 2019, the Company recognized revenues of
$167,000 and $280,000, respectively, for products and services that
were purchased through the Company’s eCommerce
platform.
During
the second quarter of 2019, the Company changed its primary method
of selling its software from perpetual software licenses, with
associated maintenance services, to service subscriptions of
limited duration. These subscriptions give the customer access to
the use of the latest version of the Company's software only during
the term of the subscription. Revenue is generally recognized
ratably over the contract term. The Company’s subscription
services arrangements are non-cancelable and do not contain
refund-type provisions. Revenue from the Company's perpetual
software licenses are recognized up-front at the point in time when
the software is made available to the customer.
Automated traffic safety
enforcement
Automated traffic
safety enforcement revenues reflect arrangements to provide traffic
safety systems to a number of municipalities in North America.
These systems include hardware that identifies red light and school
safety zone traffic violations and software that captures and
records forensic images, analyses the images to provide data and
supports citation management services. The Company also provides an
enterprise parking enforcement solution that the Company licenses
to parking management companies and
municipalities. Revenue is recognized monthly based on
the number of camera systems that are operated, or the number of
citations issued by the relevant municipality.
The Company also installs and maintains public
safety systems, which may involve a combination of installation and
lease payments or simply software licenses to use the Company's
software in connection with a previously installed camera network.
Revenue is recognized at various stages of completion of
installation and monthly for lease or license
payments.
For
those contracts that have multiple performance obligations, the
Company allocates the total transaction price to each performance
obligation based on its relative standalone selling price, which is
determined based on the Company’s overall pricing objectives,
taking into consideration market conditions and other
factors.
A performance obligation is a promise in a contract with a customer
to transfer services that are distinct. The performance obligations
that are not yet satisfied or partially satisfied are performance
obligations that are expected to be recognized as revenue in the
future for a contract with a customer which was executed as of a
particular date. On September 30, 2020, the Company had
approximately $16,459,000 of remaining performance obligations not
yet satisfied or partially satisfied. The Company expects to
recognize approximately 27% of this amount over the succeeding
twelve months, and the remainder is expected to be recognized over
the next two to five 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 billing
occurs after services have been provided, such unbilled amounts
will generally be billed and collected within 60 to 120 days but
typically no longer than over the next twelve months. Unbilled
accounts receivables of $488,000 and $440,000 were included in
accounts receivable, net, in the unaudited condensed consolidated
balance sheets as of September 30, 2020 and December 31, 2019,
respectively.
13
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
nine months ended September 30, 2020 were not materially impacted
by any other factors. Contract liabilities as of September 30, 2020
and December 31, 2019 were $2,170,000 and $1,524,000, respectively.
All contract liabilities as of September 30, 2020 and December 31,
2019 were attributable to continuing operations. During the nine
months ended September 30, 2020 $622,000 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 September 30, 2020 (dollars in thousands):
|
2020
|
$
607
|
|
2021
|
750
|
|
2022
|
368
|
|
2023
|
275
|
|
2024
|
160
|
|
Thereafter
|
10
|
|
Total
|
$
2,170
|
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 September 30, 2020, and December 31, 2019,
costs incurred to obtain contracts in excess of one year have been
immaterial to date.
Segment Reporting
The Financial Accounting Standard Board
(“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
discontinued operations. As of January 1, 2020, the Company had one
reportable segment. Continuing operations are all operations that
previously were reported as part of the Technology
Segment.
Cash, Cash Equivalents and Restricted Cash and Cash
Equivalents
The Company considers all highly liquid debt instruments purchased
with the maturity of three months or less to be cash
equivalents.
Cash subject to contractual
restrictions and not readily available for use is classified as
restricted cash and cash equivalents. The Company’s
restricted cash balances are primarily made up of cash collected on
behalf of certain client jurisdictions. Restricted cash and cash
equivalents for these client jurisdictions as of September 30, 2020
and December 31, 2019 were $573,000 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 September 30, 2020 and December 31,
2019, the Company had deposits from continuing operations totaling
$24,727,000 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.
14
Customer A accounted for 17% and less
than 10% of the Company’s total revenues for the three months
ended September 30, 2020 and 2019, respectively.
Customer A accounted for
20% and less than 10% of the Company’s total revenues for the
nine months ended September 30, 2020 and 2019,
respectively.
Customer B accounted for less than 10% and 14% of the
Company’s total revenues for the three months ended September
30, 2020 and 2019, respectively. Customer B accounted for less than
10% and 18% of the Company’s total revenues for the nine
months ended September 30, 2020 and 2019,
respectively.
As of September 30, 2020, accounts
receivable from Customer C and Customer D totaled 19
% and
16%
of the unaudited
condensed
consolidated
accounts receivable balance. As of December 31, 2019, Customer C
accounted for 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 and nine month period ended September 30, 2020 and 2019
or unaudited condensed consolidated accounts receivable balance as
of September 30, 2020 and December 31, 2019.
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 Nine Months ended
September 30, 2020
In
August 2018, the FASB issued Accounting Standards Update
(“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.
New Accounting Pronouncements Effective in Future
Periods
In
January 2020, the FASB issued ASU 2020-01,
Investments-Equity Securities (Topic 321),
Investments-Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815)
. The new standard
clarifies the interaction of accounting for the transition into and
out of the equity method. The new standard also clarifies the
accounting for measuring certain purchased options and forward
contracts to acquire investments. The ASU is effective for fiscal
years beginning after December 15, 2020, including interim periods
within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The Company will adopt this guidance
in the first quarter of 2021 and does not expect it to have a
material impact on its consolidated financial
statements.
The Company does not believe that any recently issued, but not yet
effective, accounting standards, other than the standard discussed
above, 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.
15
The purchase price allocation to the assets acquired and
liabilities assumed are based on fair values as of the acquisition
date. Since the OpenALPR Technology Acquisition occurred on March
12, 2019, the results of operations including OpenALPR Technology
Acquisition from the date of acquisition have been included in the
Company’s unaudited condensed consolidated statement of
operations for the three and nine months ended September 30,
2020.
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 informational 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 September 30,
|
Nine Months ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Total
revenue from continuing operations
|
$
2,126
|
$
1,536
|
$
6,399
|
$
4,931
|
|
Net
loss from continuing operations
|
(6,667
)
|
(3,528
)
|
(10,860
)
|
(8,228
)
|
|
Basic
and diluted loss per share from continuing operations
|
$
(0.26
)
|
$
(0.19
)
|
$
(0.52
)
|
$
(0.46
)
|
|
Basic
and diluted number of shares
|
26,907,069
|
19,878,518
|
22,781,807
|
19,761,363
|
NOTE 3 – DISCONTINUED OPERATIONS
In September 2019 and March 2020, the Company determined that
TeamGlobal and AOC Key Solutions, respectively, met the criteria
for held for sale accounting because the Company expected to
complete the sale of TeamGlobal and AOC Key Solutions during the
next 12 months as part of a plan to concentrate on the development
of its Technology segment. Historically, TeamGlobal and AOC Key
Solutions have been presented as part of the Company’s
Professional Services segment.
During
the first quarter of 2020, in connection with the Company’s
plan to concentrate on its
Technology segment
, the Company
determined that the remainder of its historical Professionals
Services segment, should be classified as discontinued operations.
As part of this plan Firestorm has also been classified as
discontinued operations and presented as part of discontinued
operations. Previously, Firestorm was not included as part of held
or sale and discontinued operations as it did not meet the
threshold of being considered a strategic shift.
16
AOC Key Solutions Sale
On April 2, 2020, the Company entered into a Stock
Purchase Agreement (the “AOC Key Solutions Purchase
Agreement”) by and among the Company, AOC Key Solutions, and
PurpleReign, LLC, a Virginia limited liability company owned by the
members of AOC Key Solutions management (the
“
AOC Key
Solutions
Buyer”), by
which the Company agreed to sell AOC Key Solutions, to the
AOC Key Solutions
Buyer.
The
AOC Key Solutions
Buyer agreed to purchase all of the outstanding
equity interests of AOC Key Solutions for a purchase price of
$4,000,000, comprising (i) $3,400,000 in cash, and (ii) a
subordinated promissory note (the “Subordinated Note”)
in the initial principal amount of $600,000.
As
of September 30, 2020, the AOC Key Solutions Subordinated Note had
been paid in full by the AOC Key Solutions Buyer.
The table below shows the breakdown related to the AOC Key
Solutions Purchase Agreement (dollars in thousands):
|
Total assets
sold
|
$
4,549
|
|
Total liabilities
assumed
|
3,514
|
|
Net assets
sold
|
1,035
|
|
Closing
cost
|
346
|
|
Consideration
received (see below)
|
4,000
|
|
Gain on sale
of AOC Key Solutions
|
$
2,619
|
|
|
|
|
Cash
consideration
|
$
3,400
|
|
Note
receivable
|
600
|
|
Total AOC Key
Solution Purchase Agreement consideration
|
$
4,000
|
TeamGlobal Sale
On
June 29, 2020, the Company entered into a Stock Purchase Agreement
(the “TeamGlobal Purchase Agreement”) by and among the
Company, TeamGlobal, and Talent Teams LLC, a Texas limited
liability company owned by the members of TeamGlobal’s
management (the “TeamGlobal Buyer”), pursuant to which
the Company agreed to sell TeamGlobal to the TeamGlobal
Buyer.
Subject
to the terms and conditions of the TeamGlobal Purchase Agreement,
the TeamGlobal Buyer agreed to purchase all of the outstanding
equity interests of TeamGlobal for a purchase price of $4,000,000,
comprising (i) an aggregate of $2,300,000 in cash, and (ii) a
secured promissory note (the “Secured Note”) in the
initial principal amount of $1,700,000, with such Secured Note
secured by a Pledge and Security Agreement (the “Pledge
Agreement”) with respect to all the outstanding shares of
TeamGlobal being acquired by the TeamGlobal Buyer.
The table below shows the breakdown related to the TeamGlobal
Purchase Agreement (dollars in thousands):
|
Total assets
sold
|
$
9,996
|
|
Total liabilities
assumed
|
7,130
|
|
Net assets
sold
|
2,866
|
|
Closing
cost
|
122
|
|
Consideration
received (see below)
|
4,000
|
|
Gain on sale
of TeamGlobal
|
$
1,012
|
|
|
|
|
Cash
consideration
|
$
2,300
|
|
Note
receivable
|
1,700
|
|
Total
TeamGlobal Purchase Agreement consideration
|
$
4,000
|
17
The dispositions of AOC Key Solutions
and TeamGlobal are a result of the Company’s strategic
decision to concentrate resources on the development of its
Technology Segment and will result in material changes in the
Company's operations and financial results. As a consequence, the
Company is reporting the operating results and cash flows of
TeamGlobal, AOC Key Solutions and Firestorm as discontinued
operations, including for all prior periods reflected in the
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
TeamGlobal, AOC Key Solutions and Firestorm for the three and nine
months ended September 30, 2020 and 2019 have been classified as
discontinued operations and presented as part of loss from
discontinued operations in the accompanying unaudited condensed
consolidated statements of operations presented herein. The assets
and liabilities also have been classified as discontinued
operations under the line captions of current and long term assets
discontinued operations and current and long term liabilities
discontinued operations in the accompanying unaudited condensed
consolidated balance sheets as of September 30, 2020 and December
31, 2019.
The assets and liabilities classified as discontinued
operations in the Company's unaudited condensed consolidated
financial statements as of September 30, 2020 and December 31, 2019
are shown below (dollars in thousands):
|
|
September
30. 2020
|
December
31, 2020
|
||||||
|
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
-
|
$
-
|
$
3
|
$
3
|
$
225
|
$
93
|
$
12
|
$
330
|
|
Accounts
receivable, net
|
-
|
-
|
-
|
-
|
2,763
|
4,055
|
-
|
6,818
|
|
Other
current assets, net
|
-
|
-
|
-
|
-
|
238
|
52
|
3
|
293
|
|
Current
assets of discontinued operations
|
-
|
-
|
3
|
3
|
3,226
|
4,200
|
15
|
7,441
|
|
Property
and equipment, net
|
-
|
-
|
-
|
-
|
113
|
41
|
-
|
154
|
|
Right-of-use
lease assets, net
|
-
|
-
|
-
|
-
|
130
|
499
|
-
|
629
|
|
Goodwill
|
-
|
-
|
-
|
-
|
669
|
-
|
-
|
669
|
|
Intangible
assets, net
|
-
|
-
|
-
|
-
|
1,994
|
-
|
-
|
1,994
|
|
Deposits
and other long-term assets
|
-
|
-
|
-
|
-
|
-
|
11
|
-
|
11
|
|
Long-term
assets of discontinued operations
|
-
|
-
|
-
|
-
|
2,906
|
551
|
-
|
3,457
|
|
Total
assets of discontinued operations
|
$
-
|
$
-
|
$
3
|
$
3
|
$
6,132
|
$
4,751
|
$
15
|
$
10,898
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$
-
|
$
-
|
$
31
|
$
31
|
$
461
|
$
1,260
|
$
33
|
$
1,754
|
|
Lines
of credit
|
-
|
-
|
-
|
-
|
1,842
|
1,894
|
-
|
3,736
|
|
Lease
liability, short term
|
-
|
-
|
83
|
83
|
113
|
100
|
54
|
267
|
|
Current
liabilities of discontinued operations
|
-
|
-
|
114
|
114
|
2,416
|
3,254
|
87
|
5,757
|
|
Lease
liability, long term
|
-
|
-
|
14
|
14
|
30
|
467
|
39
|
536
|
|
Long-term
liabilities of discontinued operations
|
-
|
-
|
14
|
14
|
30
|
467
|
39
|
536
|
|
Total
liabilities of discontinued operations
|
$
-
|
$
-
|
$
128
|
$
128
|
$
2,446
|
$
3,721
|
$
126
|
$
6,293
|
18
The major components of the discontinued operations, net of tax,
are presented in the unaudited condensed consolidated statements of
operations below (dollars in thousands):
|
|
Three
Months ended September 30,
|
|||||||
|
|
2020
|
2019
|
||||||
|
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
|
Revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
$
6,205
|
$
3,397
|
$
50
|
$
9,652
|
|
Cost
of revenue
|
-
|
-
|
-
|
-
|
5,378
|
1,836
|
6
|
7,220
|
|
Gross
profit
|
-
|
-
|
-
|
-
|
827
|
1,561
|
44
|
2,432
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
-
|
-
|
2
|
2
|
850
|
1,073
|
25
|
1,948
|
|
Selling
and marketing expenses
|
-
|
-
|
-
|
-
|
(1
)
|
138
|
-
|
137
|
|
Operating
expenses
|
-
|
-
|
2
|
2
|
849
|
1,211
|
25
|
2,085
|
|
Income
loss income from operations
|
-
|
-
|
(2
)
|
(2
)
|
(22
)
|
350
|
19
|
347
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
-
|
-
|
-
|
-
|
(31
)
|
(46
)
|
-
|
(77
)
|
|
Interest
expense
|
-
|
-
|
-
|
-
|
(107
)
|
(47
)
|
-
|
(154
)
|
|
Other
expense
|
-
|
-
|
-
|
-
|
-
|
(154
)
|
(62
)
|
(216
)
|
|
Total
other expense
|
-
|
-
|
-
|
-
|
(138
)
|
(247
)
|
(62
)
|
(447
)
|
|
Income
(loss) from discontinued operations
|
-
|
-
|
(2
)
|
(2
)
|
(160
)
|
103
|
(43
)
|
(100
)
|
|
Income
tax provision from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net
income (loss) from discontinued operations
|
$
-
|
$
-
|
$
(2
)
|
$
(2
)
|
$
(160
)
|
$
103
|
$
(43
)
|
$
(100
)
|
|
|
Nine
Months ended September 30,
|
|||||||
|
|
2020
|
2019
|
||||||
|
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
|
Revenue
|
$
10,510
|
$
3,392
|
$
5
|
$
13,907
|
$
20,260
|
$
9,916
|
$
1,005
|
$
31,181
|
|
Cost
of revenue
|
9,190
|
1,866
|
-
|
11,056
|
17,551
|
5,367
|
501
|
23,419
|
|
Gross
profit
|
1,320
|
1,526
|
5
|
2,851
|
2,709
|
4,549
|
504
|
7,762
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
1,341
|
1,284
|
(2
)
|
2,623
|
2,745
|
3,634
|
1,017
|
7,396
|
|
Selling
and marketing expenses
|
79
|
131
|
-
|
210
|
142
|
412
|
48
|
602
|
|
Impairment
of intangibles
|
-
|
-
|
-
|
-
|
-
|
-
|
1,549
|
1,549
|
|
Operating
expenses
|
1,420
|
1,415
|
(2
)
|
2,833
|
2,887
|
4,046
|
2,614
|
9,547
|
|
Income
loss income from operations
|
(100
)
|
111
|
7
|
18
|
(178
)
|
503
|
(2,110
)
|
(1,785
)
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
-
|
-
|
-
|
-
|
(31
)
|
(46
)
|
-
|
(77
)
|
|
Interest
expense
|
(166
)
|
(74
)
|
-
|
(240
)
|
(208
)
|
(108
)
|
-
|
(316
)
|
|
Other
income (expense)
|
5
|
2
|
-
|
7
|
2
|
(151
)
|
(65
)
|
(214
)
|
|
Total
other expense
|
(161
)
|
(72
)
|
-
|
(233
)
|
(237
)
|
(305
)
|
(65
)
|
(607
)
|
|
Income
(loss) from discontinued operations
|
(261
)
|
39
|
7
|
(215
)
|
(415
)
|
198
|
(2,175
)
|
(2,392
)
|
|
Income
tax provision from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net
income (loss) from discontinued operations
|
$
(261
)
|
$
39
|
$
7
|
$
(215
)
|
$
(415
)
|
$
198
|
$
(2,175
)
|
$
(2,392
)
|
19
NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental disclosures of cash flow information for
the nine months ended September 30, 2020 and 2019 were as follows
(dollars in thousands):
|
|
Nine
Months ended September 30,
|
|
|
|
2020
|
2019
|
|
Cash
paid for interest - continuing operations
|
$
1,211
|
$
839
|
|
Cash
paid for interest - discontinued operations
|
241
|
184
|
|
Cash
paid for taxes - continuing operations
|
-
|
-
|
|
Cash
paid for taxes - discontinued operations
|
-
|
11
|
|
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
|
-
|
|
Note
received as part of TeamGlobal Sale
|
1,700
|
-
|
|
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
|
|
Note Exchange transaction
(1)
|
|
|
|
Exchange
of accrued interest
|
(226
)
|
-
|
|
Debt
extinguishment costs
|
(2,484
)
|
-
|
|
Exchange
of the net principal balance of the 2019 Promissory
Notes
|
(14,688
)
|
-
|
|
Issuance
of common stock
|
17,325
|
-
|
|
Payment
of stock issuance costs associated with Note Exchange
transaction
|
(73
)
|
-
|
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
|
Right-of-use
lease asset
|
132
|
291
|
|
Lease
liability
|
$
(132
)
|
$
(291
)
|
(1)
See Note 7 for additional information
related to the Note Exchange
transaction.
NOTE 5 – OPERATING LEASES
The Company has operating leases for
office facilities in various locations throughout the United
States. The Company’s leases have remaining terms of one
to four years.
Certain of the Company’s
leases include options to extend the term of the lease or to
terminate the lease prior to the end of the initial term. When it
is reasonably certain that the Company will exercise the option,
the Company will include the impact of the option in the lease term
for purposes of determining total future lease
payments.
Operating lease expense
from continuing operations
for
the three months ended September 30, 2020 and 2019 was $72,000 and
$57,000, and for the nine months ended September 30, 2020 and 2019
was $175,000 and $131,000, 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 $64,000 and
$168,000 for the three and nine months ended September 30,
2020.
20
Supplemental balance sheet information related to leases as of
September 30, 2020 was as follows (dollars in
thousands):
|
Operating
lease right-of-use lease assets from continuing
operations
|
$
276
|
|
|
|
|
Current
portion of lease liability
|
$
232
|
|
Long-term
portion of lease liability
|
60
|
|
Total
lease liability from continuing operations
|
$
292
|
|
|
|
|
Weighted
average remaining lease term - operating leases from continuing
operations
|
1.78
|
|
|
|
|
Weighted
average discount rate - operating leases
|
9
%
|
|
|
|
|
2020
|
$
63
|
|
2021
|
195
|
|
2022
|
19
|
|
2023
|
19
|
|
2024
|
18
|
|
Total
lease payments
|
314
|
|
Less
imputed interest
|
22
|
|
Maturities
of lease liabilities
|
$
292
|
NOTE 6 – INTANGIBLE ASSETS
Goodwill
There have been no changes from December 31, 2019 in the carrying
amount of goodwill of continuing operations for
the nine months ended September 30,
2020.
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2019 to September 30, 2020 (dollars in
thousands):
|
|
Customer
Relationships
|
Marketing
Related
|
Technology
Based
|
Internally
Capitalized Software
|
Total
|
|
Identifiable
intangible assets
|
$
461
|
$
327
|
$
7,206
|
$
1,452
|
$
9,446
|
|
Accumulated
amortization
|
(90
)
|
(150
)
|
(1,583
)
|
(194
)
|
(2,017
)
|
|
Identifiable
intangible assets from continuing operations, net
|
$
371
|
$
177
|
$
5,623
|
$
1,258
|
$
7,429
|
21
The following provides a breakdown of identifiable intangible
assets as of September 30, 2020 (dollars in
thousands):
|
|
December
31, 2019
|
Additions
|
Amortization
|
September
30, 2020
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
Customer
relationships
|
$
396
|
$
-
|
$
(25
)
|
$
371
|
|
Marketing
related
|
230
|
-
|
(53
)
|
177
|
|
Technology
based
|
6,395
|
-
|
(772
)
|
5,623
|
|
Internally
capitalized software
|
1,223
|
162
|
(127
)
|
1,258
|
|
Intangible
assets subject to amortization from continuing
operations
|
$
8,244
|
$
162
|
$
(977
)
|
$
7,429
|
These intangible assets are being
amortized on a straight-line basis over their weighted average
estimated useful life of 5.5 years. Amortization expense
attributable to continuing operations for the three months ended
September
30, 2020 and 2019 was $343,000 and
$302,000, respectively, and for the nine months ended September 30,
2020 and 2019 was $977,000 and $663,000, respectively and is
presented as part of general and administrative expenses in the
accompanying unaudited condensed consolidated statements of
operations.
As of September 30, 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
|
$
343
|
|
2021
|
1,362
|
|
2022
|
1,281
|
|
2023
|
1,148
|
|
2024
|
1,060
|
|
Thereafter
|
1,452
|
|
Capitalized
software not yet placed in service
|
783
|
|
Total
|
$
7,429
|
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 $976,000 and
$961,000, net of unamortized interest, as of September 30, 2020 and
December 31, 2019, respectively, to reflect the amortized fair
value of the notes issued due to the difference in interest rates
of $24,000 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 interest in the Company and $75,000 of
interest due through May 1, 2019. All amounts paid were obtained
from the proceeds of the 2019 Promissory Notes. The consideration
of $1,050,000 for the 2018 Lender’s participation and
unamortized financing costs of $63,000 are recorded as costs in
connection with the loss on the extinguishment of debt of
$1,113,000 for the nine months ended September 30,
2019.
22
The principal amounts due for long-term notes payable described
above are shown below as of September 30, 2020 (dollars in
thousands):
|
2020
|
$
46
|
|
2021
|
442
|
|
2022
|
1,386
|
|
2023
|
-
|
|
2024
|
-
|
|
Thereafter
|
-
|
|
Total
|
1,874
|
|
|
|
|
Less
unamortized interest
|
(24
)
|
|
Total
debt
|
$
1,850
|
|
|
|
|
Loan
payable, current portion
|
$
370
|
|
Loan
payable, long-term
|
504
|
|
Notes
payable, long-term
|
976
|
|
Total
debt
|
$
1,850
|
Amortized financing costs for the three months ended September 30,
2020 and 2019 were $43,000 and $328,000, respectively, and for the
nine months ended September 30, 2020 and 2019 were $653,000 and
$768,000, respectively, and are included in interest expense on the
unaudited condensed consolidated statement of
operations.
Paycheck Protection Program Loan
On
May 26, 2020, the Company entered into a loan agreement with Newtek
Small Business Finance, LLC, which provides for a loan in the
principal amount of $221,000 (the “Rekor PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are
deferred for six months after the date of
disbursement.
On
June 3, 2020, the Company’s wholly owned subsidiary, Rekor
Recognition Systems, Inc., entered into a loan agreement with
Newtek Small Business Finance, LLC, which provides for a loan in
the principal amount of $653,000 (the “Rekor Recognition PPP
Loan”) pursuant to the Paycheck Protection Program under the
CARES Act. The Rekor Recognition PPP Loan has a two-year term and
bears interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement.
The Rekor PPP Loan and the Rekor Recognition PPP
Loan (collectively the “Loans”) may be prepaid at any
time prior to maturity with no prepayment penalties. The Loans
contain events of default and other provisions customary for a loan
of this type. The Paycheck Protection Program provides that the
Loans may be partially or wholly forgiven if the funds are used for
certain qualifying expenses as described in the CARES Act. The
Company intends to use the entire Loans amount for qualifying
expenses and to apply for forgiveness of the Loans in accordance
with the terms of the CARES Act.
The current and long-term
portion of the Loans is presented as part of loans payable current
portion and loans payable, long-term, respectively, on the
unaudited condensed consolidated balance sheets.
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 apply for forgiveness once
Newtek Small Business Finance, LLC begins to accept
applications.
23
2019 Promissory Notes
On March 12, 2019, the Company entered
into a note purchase agreement pursuant to which investors,
including OpenALPR Technology, Inc. (the “2019
Lenders”) loaned $20,000,000 to the Company (the “2019
Promissory Notes”) and the Company issued to the 2019 Lenders
warrants to purchase 2,500,000 shares of Rekor common stock (the
“March 2019 Warrants”). The loan bore interest at 16%
per annum, of which at least 10% per annum was required to be paid
in cash. Any remaining interest accrued to be paid at maturity or
earlier redemption. The notes also required a $1,000,000 exit fee
due at maturity, or a premium if paid before the maturity date, and
compliance with affirmative, negative and financial covenants,
including a fixed charge coverage ratio, minimum liquidity and
maximum capital expenditures. As of September 30, 2020, the Company
had settled the full amount of the 2019 Promissory Notes.
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 was secured by a security
interest in substantially all of the assets of Rekor. The March
2019 Warrants are exercisable over a period of five years, at an
exercise price of $0.74 per share, and were valued at
$706,000, at the time of
issuance. The warrants were exercisable commencing March 12, 2019
and expire on March 12, 2024. The 2019 Promissory Notes had an
effective interest rate of 24.87%.
As of the anniversary date of the
commencement of the 2019 Promissory Notes $1,283,000 of the paid-in
kind interest had not been paid by the Company and per the purchase
agreement was added to the principal balance of the 2019 Promissory
Notes in March 2020.
2019 Promissory Note Amendments
On
March 26, 2020, the Company entered into the First Amendment to
Note Purchase Agreement which effectively extended the maturity
date of the 2019 Promissory Notes
from March 11, 2021 to
June 12,
2021. The Company incurred $100,000 in transaction costs related to
the First Amendment to the Note Purchase Agreement, these costs
were financing costs and deferred over the remaining life of the
loan.
On
April 2, 2020, in connection with the sale of AOC Key
Solutions
, the Company transferred
$2,200,000 to the holders of the 2019 Promissory Notes. $2,000,000
of the funds were used as a prepayment of principal while the other
$200,000 was paid as premium percentage as the portion of the 2019
Promissory Notes were paid prior to the maturity date. The premium
percentage paid in connection with this transaction is presented as
part of debt extinguishment costs in the unaudited condensed
consolidated statement of operations.
On April 2, 2020, the Company entered into a partial release and
Second Amendment to Note Purchase Agreement (the “Second
Amendment”), by and among the Credit Parties, the Purchasers
and the Agent. Pursuant to the terms of the Second Amendment, AOC
Key Solutions was released as a Credit Party and the assets related
to AOC Key Solutions were released as collateral, and the Asset
Disposition Proceeds terms of the Note Purchase Agreement were
amended to reflect the transaction.
On
June 29, 2020, in connection with the TeamGlobal Purchase
Agreement, the Company entered into a Partial Release and Third
Amendment to Note Purchase Agreement (the “Third
Amendment”), by and among the Credit Parties, the Purchasers
and the Agent. Pursuant to the terms of the Third Amendment,
TeamGlobal was released as a credit party and the assets related to
TeamGlobal were released as collateral, the mandatory prepayments
provision of the 2019 Promissory Notes were waived with regard to
the sale of TeamGlobal, and the maturity date of the 2019 Notes
remaining outstanding was extended to December 31,
2021.
2019 Promissory Note Retirement
On
June 30, 2020, the Company entered into Exchange Agreements with
certain 2019 Lenders of the Company’s 2019 Promissory Notes.
Subject to the terms and conditions set forth in the Exchange
Agreements, approximately $17,398,000, was redeemed in exchange for
4,349,497 shares of the Company’s common stock, at a rate of
$4 per share. On July 15, 2020, the Company completed the Note
Exchange. At the time of the Exchange Agreement the net amount of
long-term debt redeemed for common stock was $14,688,000, this
included the existing principal balance subject to conversion, the
portion of the exit fee associated with the notes subject to
conversion, offset by the portion of unamortized issuance costs
associated with the notes subject to conversion. There was also
$226,000 related to the PIK interest associated to the notes
subject to conversion that was exchanged as part of the Exchange
Agreements. The difference between the market value of the shares
issued and the net carrying amount of the obligations above, was
recorded as part of debt extinguishments costs in the unaudited
condensed consolidated statement of operations. Following the Note
Exchange, approximately $4,398,000 aggregate principal amount of
the 2019 Promissory Notes remained outstanding, plus an additional
$216,000 related to the exit fee.
The
Company incurred stock issuance costs of approximately $73,000
related to legal, accounting, and other fees in connection with the
Exchange Agreements. These costs are presented as a reduction to
additional paid-in capital on the unaudited condensed consolidated
balance sheets.
24
On
September 16, 2020, the Company issued a cash payment to complete
the retirement of the remaining aggregate principal balance of 2019
Notes. As a result of this optional prepayment, the 2019 Promissory
Notes have been fully redeemed pursuant to their terms, and as a
result the Company has no further obligations under the Note
Purchase Agreement, as amended. The warrants previously issued
pursuant to the Note Purchase Agreement remain outstanding pursuant
to their terms.
For
the three and nine months ended September 30, 2020, the Company
recognized the following debt extinguishment costs: $200,000
related to an early cash payment in April 2020 related to the 2019
Promissory Notes, $2,484,000 related to the Exchange Agreements
completed in July 2020 2019 Promissory Notes and $684,000 related
to an early cash payment in September 2020 to retire the remaining
balance of the 2019 Promissory Notes, these costs were offset by
the forgiveness of loans in the amount of $87,000 in the third
quarter of 2020. These costs are presented as part of debt
extinguishment costs in the unaudited condensed consolidated
statement of operations, for the three and nine months ended
September 30, 2020.
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 and nin
e months ended September 30,
2020 was
$7,000 and
$20,000, respectively. The Company’s income tax provision for
the three and nine months ended September 30, 2019 was $12,000 and
$35,000, 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 nine months
ended September 30, 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 September 30, 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 nine months ended September 30, 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.
25
On
August 19, 2019, the Company filed suit in the United States
District Court for the Southern District of New York against three
former executives of the Company and Firestorm (the
“Firestorm Principals”)—
Rekor Systems, Inc. v. Suzanne Loughlin, et
al
., Case no. 1:19-cv-07767-VEC. The Complaint alleges
that the Firestorm Principals fraudulently induced the execution of
the Membership Interest Purchase Agreement wherein Firestorm
was acquired by the Company. The Complaint requests equitable
rescission of that transaction, or, alternatively, monetary
damages.
Following an
initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, the Company filed a Second Amended Complaint, which the
Firestorm Principals answered together with counterclaims on
February 28, 2020. Thereafter, on March 30, the Company moved
to dismiss certain counterclaims against certain executives named
as counterclaim-defendants, which resulted in the Firestorm
Principals voluntarily dismissing those counterclaims against those
parties. The Company thereafter filed its response and
affirmative defenses to the Counterclaims on April 22. On
April 27, the Firestorm Principals filed a Motion for Partial
Judgment on the Pleadings, which the Company has opposed. In
addition, on December 9, 2019, the Firestorm Principals filed a
motion for an interim award of expenses and attorney’s
fees. That motion was fully briefed as of February 21,
2020. It remains
sub
judice
, and no argument has been scheduled upon
it.
In the year 2020, the Firestorm Principals filed suit in New York
Supreme Court in Sullivan County against directors of the Company,
alleging breach of fiduciary duty and libel. The Company
believes that this suit is without merit and intend to vigorously
litigate this matter.
At this
stage of these litigations, the Company is unable to render an
opinion regarding the likelihood of a favorable outcome. The
Company intends to continue vigorously litigating its claims
against the Firestorm Principals and believes that the Firestorm
Principals’ remaining counterclaims and suits against Rekor
directors and officers are without merit.
Vigilant Solutions, LLC, a subsidiary
of Motorola Solutions, Inc., filed a complaint on February 21, 2020
against the Company and certain of the Company’s subsidiaries
in the US District Court for the District of Maryland. The
complaint alleged that certain of the Company’s products
violated a patent held by Vigilant. On June 10, 2020, the Company
filed an Answer to the complaint denying the pertinent allegations
and asserting substantial defenses to the allegations contained in
the complaint, including that the patent underlying the complaint
is invalid.
On September 23, 2020, the Company filed a
Motion to Stay Pending
Inter
Partes
Review in light of a Petition for
Inter Partes
Review filed by the
Company and certain subsidiaries against Vigilant in the U.S.
Patent and Trademark Office (as discussed below). Vigilant opposed
the Motion.
On
September 8, 2020, the Company and certain of the Company’s
subsidiaries that were defendants in the Vigilant Solutions, LLC
Litigation discussed above filed a Petition for
Inter Partes
Review at the U.S. Patent
and Trademark Office’s Patent Trial and Appeal Board
(“PTAB”) requesting that the PTAB review and find
unpatentable certain claims of the patent asserted by Vigilant in
the Vigilant Solutions, LLC Litigation. The PTAB was expected to
decide whether to institute review in March or April
2021.
In
November of 2020, Rekor and Vigilant Solutions, LLC agreed to
resolve the district court litigation and intellectual property
rights action between the parties pursuant to a confidential
settlement agreement. The Company will have no material effect from
its obligations under the agreement.
On
January 31, 2020, the Company’s wholly owned subsidiary,
OpenALPR, filed a complaint in the US District Court for the
Western District of Pennsylvania against a former customer, Plate
Capture Solutions, Inc. (“PCS”) for breach of software
license agreements pursuant to which software was licensed to PCS.
On June 14, 2020, PCS filed its operative answer to the
Complaint. On June 21, 2020, PCS filed a motion to join the
Company and another entity, OpenALPR Technology, Inc., as parties
to the litigation and made claims against them for defamation,
fraud and intentional interference with existing and future
business relationships. On July 13, 2020, OpenALPR filed an
opposition to the motion for joinder. The parties are currently
awaiting the Court’s decision on joinder. Nevertheless, the
Company believes that it has substantial defenses to the claims and
intend to vigorously defend the allegations of those
claims.
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.
26
NOTE 10 – STOCKHOLDERS’ EQUITY (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 are identical to those of the currently outstanding shares of
common stock. However, because the holders of common stock do not
have preemptive rights to purchase or subscribe for any new
issuances of common stock, the subsequent potential issuance of
additional shares of common stock will reduce the current
stockholders’ percentage ownership interest in the total
outstanding shares of common stock. The Amendment and the creation
of additional shares of authorized common stock will not alter
current stockholders’ relative rights and limitations.
As of September 30, 2020,
and December 31, 2019, the issued and outstanding common shares of
Rekor were 32,911,854 and
21,595,653
, respectively.
For the three and nine months ended September 30, 2020, the Company
issued 129,480 and 281,225 shares of Rekor common stock related to
the exercise of common stock options, respectively. For the three
and nine months ended September 30, 2019, the Company issued no
shares of Rekor common stock related to the exercise of common
stock options.
During the third quarter of 2020, the
Company issued 4,349,497 shares of Rekor common stock as part of
the Exchange Agreements
with
certain 2019 Lenders of the Company’s 2019 Promissory
Notes.
The Company
incurred stock issuance costs of approximately $73,000 related to
legal, accounting, and other fees in connection with the Exchange
Agreement. These costs are presented as a reduction to
additional paid-in capital on the unaudited condensed consolidated
balance sheets.
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.
At-the-Market Offering
On August 14, 2019, the Company entered into the Sales
Agreement with B. Riley FBR, Inc. (“B. Riley FBR”)
to create an at-the-market equity program under which the Company
from time to time offered and sold shares of its common stock,
having an aggregate offering price of up to $15,000,000, through or
to B. Riley FBR. Subject to the terms and conditions of the Sales
Agreement, B. Riley FBR would use its commercially reasonable
efforts to sell the shares of the Company’s common stock from
time to time, based upon the Company’s instructions. B.
Riley FBR was entitled to a commission equal to 3.0% of the
gross proceeds from each sale. The Company incurred issuance costs
of approximately $226,000 related to legal, accounting, and other
fees in connection with the Sales Agreement. These costs were
charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
unaudited condensed consolidated balance sheets.
On August 28, 2020, the Company filed Amendment
No. 1 to the Sales Agreement dated August 14, 2019 to increase
the size of the market equity program under which the Company from
time to time offered and sold shares of its common stock, from an
aggregate offering price of up to $15,000,000 to an amended maximum
aggregate offering price of up to $40,000,000 through or to B.
Riley FBR.
The
Company incurred issuance costs of approximately $25,000 related to
legal fees in connection with the amendment to the Sales
Agreement. These costs were charged against the gross proceeds
of the Sales Agreement and presented as a reduction to additional
paid-in capital on the unaudited condensed consolidated balance
sheets.
Sales of the Company’s common
stock under the Sales Agreement were issued and sold pursuant to
the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018.
For the nine months ended September 30,
2020, based on settlement date, the Company sold 5,216,562 shares
of common stock at a weighted-average selling price of $5.92 per
share in accordance with the Sales Agreement. Net cash provided for
the nine months ended September 30, 2020 from the Sales Agreement
was $29,930,000 after paying 3.0% or $926,000 related to cash
commissions provided to B. Riley FBR.
On
September 21, 2020, the Company elected to voluntarily terminate
its Sales Agreement with B. Riley FBR pursuant to the terms of the
Sales Agreement. As of the termination date, the Company had
offered and sold an aggregate of 6,509,202 shares of common stock
pursuant to the Sales Agreement, which resulted in aggregate gross
proceeds of $34,154,000.
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.
27
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
September 30, 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
$220,000 and $191,000 for the three months ended September 30, 2020
and 2019, respectively,
and $638,000
and $554,000 for the nine months ended September 30, 2020 and 2019,
respectively.
As of
September 30, 2020, and December 31, 2019, 502,327 shares of Series
A Preferred Stock were issued and outstanding.
The
holders of Series A Preferred Stock are entitled to quarterly cash
dividends of $0.175 (7% per annum) per share. Dividends accrue
quarterly and dividend payments for declared dividends are due
within five business days following the end of a quarter.
F
or the three and nine
months ended September 30, 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 $849,000 and $551,000 as of September 30, 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 TeamGlobal 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 TeamGlobal 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. The Company paid
$108,000 in cash dividends to the Series B Preferred shareholders
in June 2019, The Company did not pay any cash dividends to the
Series B Preferred shareholders for the nine months ended September
30, 2020
. Accrued dividends
payable to Series B Preferred Stock shareholders were $138,000 and
$54,000 as of September 30, 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 1,004,155 and 2,251,232 shares of Rekor common stock as of
September 30, 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 165,840
and 240,017 shares of Rekor common stock as of September 30, 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 nine months ended September 30,
2020, 152,927 of the outstanding warrants were exercised and
converted into 74,177 shares of the Company’s common
stock.
28
As part of the acquisition of Firestorm on January 24, 2017, the
Company issued: warrants to purchase 315,627 shares of its common
stock, exercisable over a period of five years, at an exercise
price of $2.5744 per share; and warrants to purchase 315,627 shares
of its common stock, exercisable over a period of five years, at an
exercise price of $3.6083 per share (the “Firestorm
Warrants”). The expiration date of the Firestorm Warrants is
January 24, 2022. As of September 30, 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 September
30, 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 nine months ended
September 30, 2020, 10,417 warrants were exercised and converted
into 7,704 shares of the Company’s common stock. As of
September 30, 2020 and December 31, 2019, 6,020 and 16,437 warrants
related to the 2018 underwritten public offering remain
outstanding, respectively.
On March 12, 2019, in connection with
the 2019 Promissory Notes, the Company issued warrants to purchase
2,500,000 shares of its common stock, which were 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
nine months ended September 30, 2020, 1,415,000 warrants were
exercised in cash and cashless transactions resulting in the
issuance of 1,387,036 shares of common stock. As of September 30,
2020 and December 31, 2019, 134,375 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 September 30, 2020 and 2019 was
$202,000 and $76,000, respectively, and for the nine months ended
September 30, 2020 and 2019 was $539,000 and $314,000,
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.
29
A
summary of stock option activity under the Company’s 2017
Plan for the nine months ended September 30, 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
|
9.41
|
|
|
Exercised
|
(281,225
)
|
2.28
|
|
|
|
Forfeited
|
(62,175
)
|
3.07
|
|
|
|
Canceled
|
(44,062
)
|
2.15
|
|
|
|
Outstanding
Balance at September 30, 2020
|
1,287,921
|
$
1.50
|
7.84
|
$
5,193
|
|
Exercisable
at September 30, 2020
|
799,550
|
$
1.48
|
7.46
|
$
3,324
|
The weighted average grant date fair
value of options granted, to employees and non-employees, for the
nine
months ended September 30, 2020 and
2019 was $3.18 and $0.52, respectively. The intrinsic value of the
stock options granted during the nine months ended September 30,
2020 and 2019 was
$29,000
and $1,030,000, respectively. The total
fair value of options that vested in the nine months ended
September 30, 2020 and 2019 was $154,000 and $735,000,
respectively.
As of September 30, 2020, there was
$282,000 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
1.71
years.
Restricted Stock Units
A summary of RSU activity under the Company’s 2017 Plan for
the nine months ended September 30, 2020 is as
follows:
|
|
Number of
Shares
|
Weighted Average
Unit Price
|
Weighted Average
Remaining Contractual Term (Years)
|
|
Outstanding
Balance at December 31, 2019
|
-
|
$
-
|
-
|
|
Granted
|
413,634
|
4.12
|
1.79
|
|
Vested
|
-
|
-
|
-
|
|
Forfeited
|
(3,900
)
|
3.81
|
-
|
|
Outstanding
Balance at September 30, 2020
|
409,734
|
$
4.12
|
1.79
|
The grant date fair value was based on the estimated fair value of
the Company’s common stock on the date of grant. All RSUs
granted vest upon the satisfaction of a service-based vesting
condition.
As of September 30, 2020, there was
$1,352,000 of unrecognized stock compensation expense related to
unvested RSUs granted under the 2017 Plan that will be recognized
over an average remaining period of 1.79
years.
Compensation expense for restricted stock and RSUs is recognized on
a straight-line basis over the requisite service period. There were
no RSUs issued in fiscal year 2019.
30
NOTE 12 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss per common share:
|
|
Three Months
ended September 30,
|
Nine Months
ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(Dollars in
thousands, except per share data)
|
(Dollars in
thousands, except per share data)
|
||
|
Basic and diluted
loss per share
|
|
|
|
|
|
Net
loss from continuing operations
|
$
(6,667
)
|
$
(3,528
)
|
$
(10,860
)
|
$
(9,036
)
|
|
Less:
preferred stock accretion
|
(220
)
|
(191
)
|
(638
)
|
(554
)
|
|
Less:
preferred stock dividends
|
(115
)
|
(114
)
|
(345
)
|
(344
)
|
|
Net
loss attributable to shareholders from continuing
operations
|
(7,002
)
|
(3,833
)
|
(11,843
)
|
(9,934
)
|
|
Net loss from
discontinued operations
|
(2
)
|
(100
)
|
(215
)
|
(2,392
)
|
|
Net loss
attributable to shareholders
|
$
(7,004
)
|
$
(3,933
)
|
$
(12,058
)
|
$
(12,326
)
|
|
Weighted
average common shares outstanding - basic and diluted
|
26,907,069
|
19,878,518
|
22,781,807
|
19,592,679
|
|
Basic
and diluted loss per share from continuing operations
|
$
(0.26
)
|
$
(0.19
)
|
$
(0.52
)
|
$
(0.51
)
|
|
Basic
and diluted loss per share from discontinued
operations
|
-
|
(0.01
)
|
(0.01
)
|
(0.12
)
|
|
Basic and diluted
loss per share
|
$
(0.26
)
|
$
(0.20
)
|
$
(0.53
)
|
$
(0.63
)
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
4,134,979
|
5,400,047
|
4,134,979
|
5,400,047
|
As the Company had a net loss for the three and nine months ended
September 30, 2020, the following 4,134,979 potentially dilutive
securities were excluded from diluted loss per share: 1,004,155 for
outstanding warrants, 923,844 related to the Series A Preferred
Stock, 509,325 related to the Series B Preferred Stock, 1,287,921
related to outstanding options and 409,734 related to outstanding
RSUs.
As the Company had a net loss for the
three and nine months ended September 30, 2019, the
following
5,400,047 potentially
dilutive securities were excluded from diluted loss per share:
2,251,232 for outstanding warrants, 959,937 related to the Series A
Preferred Stock, 481,722 related to the Series B Preferred Stock
and 1,707,156 related to outstanding options.
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.
31
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 and our Quarterly Report’s
for the quarters ended March 31, 2020 and June 30, 2020, 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;
●
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 pandemics and other global health emergencies, such as the
spread of a novel strain of coronavirus (“COVID-19”)
around the world since 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.
●
risks associated
with cyberattacks on international, national, local and Company
information infrastructure by rogue businesses or criminal elements
or by agents of governments engaged in asymmetric disruptions for
competitive economic or military reasons.
32
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”), our Quarterly Report’s for the quarters ended
March 31, 2020 and June 30, 2020, 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 artificial intelligence ("AI") enabled
vehicle identification and intelligent roadway management systems.
In development for over six years using 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 legacy systems. The software
provides a wider field of view, greater light sensitivity and
recognitions at faster speeds and with higher accuracy rates. It
also includes the ability to identify the color, make and type of a
vehicle and its direction of travel. These capabilities are
particularly useful to governmental entities and businesses in
solving a wide variety of real-world vehicle related operational
challenges. In addition, the reduction in cost, increased number
and improved performance of internet protocol connected cameras has
enabled significant new uses for vehicle recognition technology
that were not previously available or cost effective. We currently
provide products and services for governmental organizations, for
large and small businesses and for individuals throughout the
world. Customers currently use our products or services in over 70
countries, in applications that include public safety, security,
customer experience, transportation, parking, operational
efficiencies and logistics.
Previously, we
provided professional services and staffing solutions to the
government contracting and the aerospace and aviation industries
through our Professional Services Segment. The Professional
Services Segment included our wholly owned subsidiaries AOC Key
Solutions Inc. (“AOC Key Solutions”).;Global Technical
Services, Inc. (“GTS” or “TeamGlobal”),
Firestorm Solutions, LLC (Firestorm Solutions”) and Firestorm
Franchising, LLC (“Firestorm Franchising” and, together
with Firestorm Solutions, “Firestorm”). As part of the
development of a new line of products for the public safety and
security markets, we determined that our resources were best
concentrated on vehicle recognition products and services and began
to consider dispositions in our Professional Services Segment.
Concurrently, we reorganized and retooled our product development,
business development and administrative resources to better serve
our Technology Segment. On April 2, 2020, we sold AOC Key
Solutions. As of June 29, 2020, we sold Team Global and determined
that all the remaining operations that comprised our Professional
Services Segment met the criteria to be presented as
discontinued.
Our
continuing operations are conducted by our wholly owned subsidiary,
Rekor Recognition Systems, Inc. (“Rekor Recognition”).
In connection with the development of several new public safety
products, we 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 on more than 6,200 cameras that cover over 8,600 lanes of
roadway in 56 countries worldwide, has laid the groundwork for
expansion, enabling multiple deployment mechanisms for our products
and services.
Our
core vehicle recognition software currently has the capability to
analyze multi-spectral images and video streams produced by nearly
any Internet Protocol security camera and concurrently extract
license plate data by state from more than 85 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.
Since
the OpenALPR Technology Acquisition, we have grown our vehicle
recognition product and service lines into a much broader range of
customer segments, starting with public safety and expanding into
parking operations, auto wash and service, and quick service
restaurants and retail. We shifted from a perpetual licensing model
to a subscription-based model, rebranded OpenALPR to highlight
software products such as “Watchman” and
“CarCheck” and released several packaged hardware and
software solutions with preloaded versions of each of these vehicle
recognition engines. We have also launched a robust eCommerce
portal on the OpenALPR.com site, enabling customers to conveniently
purchase Watchman and CarCheck vehicle recognition solutions with
just a credit card and a click. This allows owners to immediately
enhance their business operations while reducing the cost of
service for Rekor. Additional services will be added in the future.
By the end of 2020, we expect to have a portfolio of (16 products),
including 9 unique products, each with several sub-lines.
Completion of this complete set of product offerings allows us to
offer full-scale software and hardware vehicle recognition
solutions and services for public agencies and commercial or
industrial businesses of nearly any size, as well as serve campus
and residential settings.
33
Additionally, the
recent launch of our Rekor One™ platform will provide
government agencies with a comprehensive vehicle intelligence
system that supports multiple agency-specific missions and
addresses three major governmental concern: Infrastructure, Safety,
and Revenue. By interfacing with multiple databases and operating
systems, Rekor One will allow governmental units to observe
security and privacy protocols and fractionalize costs based on
relative end-user value. With the Rekor One platform, an agency
will be able to integrate their existing IP and traffic
cameras into a smart multi-dimensional roadway network, providing
intelligence that supports both long range planning and quicker
responses to dangerous situations. With user dashboards customized
per department, each agency can access the information they need
while maintaining full compliance with their individual security
and privacy requirements. This single interconnected platform can
eliminate the need for redundant systems and single-function
equipment. Rekor One’s proprietary technology has six patents
pending, demonstrating innovation in vehicle recognition and its
applications for government agencies. The patents cover areas that
include privacy enhancements, the intelligent use of data, smarter
image processing, advanced vehicle identification techniques, and
the improved aesthetics of roadside equipment.
Prior
to the development of our vehicle identification software, highly
accurate results were not available using a typical Internet
Protocol camera. We believe that Rekor’s ability to generate
results with less expensive hardware is changing the dynamics of
the existing public safety market, enabling the creation of
increasingly robust networks with cameras at more locations. In
addition, we expect our improvements in cost and accuracy to create
competitive advantages in tolling systems and logistics operations
that currently rely on complex radio frequency identification
(RFID) systems. We also expect our lower costs, superior distance
and field of view capabilities, along with the ability to capture
additional vehicle information, such as direction, color, make and
type of vehicle, to open opportunities in other market segments.
These opportunities include 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 smarter use of
transport networks.
Rekor’s
vision is to enable “AI Driven Decisions” by enhancing
the capabilities in commercial and government sectors with
actionable, real-time insights. We deliver these insights through
an expanding software portfolio that not only addresses the
challenges our customers are currently facing but empowers them to
effectively deal with their evolving
needs.
Recent Developments
The most significant developments in our company and business since
January 1, 2020 are described below:
●
On
November 9, 2020, we announced that the State of Oklahoma will
integrate our Rekor One™ platform across the state to provide
vehicle information associated with uninsured motorists as part of
the state's Uninsured Vehicle Enforcement Diversion Program
(“UVED Program”), which is operated by the Oklahoma
District Attorneys Council.
●
On
October 22, 2020, we announced that the Dauphin County,
Pennsylvania, District Attorney’s Office has chosen us to
provide vehicle recognition services to support five different law
enforcement jurisdictions. The engagement, which totals $525,000
over five years, includes 30 new edge cameras and one in-vehicle
Automatic License Plate Recognition (ALPR) system.
●
On
October 12, 2020, we announced the launch of Rekor One™, a
new platform that will serve as a unifying source of roadway
intelligence for government agencies across cities, counties and
states. The platform will support multiple community safety,
intelligent roadway and revenue generation activities.
●
On
October 6, 2020, we launched our redesigned eCommerce platform,
which will allow our customers to purchase our products and
services online.
●
On
September 9, 2020, we announced Rekor Go, a mobile application that
will bring the power of accurate Automatic License Plate
Recognition (APLR) to commercial users in a broad array of markets
later this fall.
●
On
August 28, 2020, we increased the maximum
aggregate offering price through our At-the-Market
Agreement (“Sales Agreement”) up to $40,000,000. On
September 21, 2020, the Company elected to voluntarily terminate
the Sales Agreement after raising $34,154,000 in aggregate gross
proceeds (which included $7,882,000 from prior sales under the
Sales Agreement).
●
On
August 6, 2020,
we granted to Verra
Mobility a non-exclusive right to resell and distribute our
products to Verra Mobility customers and licensed certain software
to Verra Mobility to be incorporated into Verra Mobility
Products.
●
On July
23, 2020, James K. McCarthy, Chairman of the Board of Directors
notified our Board of Directors (the “Board”) of his
intention to retire from our Board, effective immediately. Mr.
McCarthy did not advise us of any disagreement with the Company on
any matter relating to its operations, policies or practices.
Effective upon Mr. McCarthy’s resignation as a director, the
size of the Board was reduced from eight to seven, and Mr. Robert
Berman was named the Executive Chairman of the Board.
34
●
In June
2020, we entered a five-year non-exclusive licensing agreement with
Mesa Technologies, LLC (“Mesa”), for the use of our
intellectual property as part of a school bus stop arm system
(“SBSA”). Mesa has installed over 3,000 photo
enforcement systems world-wide. We expect the agreement to increase
our market penetration in the state, local government, and
international markets.
●
In June
2020, certain 2019 Lenders agreed to a redemption of approximately
77% of the remaining principal balance of the 2019 Promissory Notes
as of June 30, 2020. The settlement was completed on July 15, 2020,
with 77% of the aggregate principal amount of the 2019 Promissory
Notes, including accreted interest plus certain fees payable
pursuant to the terms of the 2019 Promissory Notes, redeemed in
exchange for common stock at a rate of $4 per share. The 2019
Lenders also agreed that the maturity of the 2019 Promissory Notes
will be extended until December 31, 2021.
On September 16, 2020, the Company issued a cash
payment to complete the retirement of the remaining aggregate
principal balance of 2019 Notes.
●
In June
2020, we completed the sale of
TeamGlobal to certain members of TeamGlobal's
management team for approximately $4M in cash and a secured
note.
●
In June
2020, we launched a standalone Company with Cygnet Infotech, a
premier product engineering and application development services
firm along with affiliates of Cygnet, named Roker Inc. ("Roker").
Roker will be designed to automate parking enforcement and enable
higher revenue recovery for both public safety institutions and
private businesses alike. We and Cygnet are each contributing our
respective technology stacks in exchange for equity in Roker. In
the third quarter of 2020, we made an initial investment of $75,000
for 50% of the venture.
●
The spread of COVID-19 around the world since the first half of
2020 has caused significant volatility in U.S. and international
markets. There continues to be significant uncertainty about the
breadth and duration of business disruptions related to COVID-19,
as well as its impact on the U.S. and international economies and,
as such, we are unable to determine at this time the full impact it
will have impact to our operations.
●
In 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.
The Company received
$874,000 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 for $4 million.
●
In the
first quarter of 2020, Digifort, a global leader in video
surveillance and monitoring, headquartered in Brazil with more than
28,000 customers in 130 countries, became a premier reseller for
Watchman software in Brazil, Latin America, the Pacific Rim and the
Middle East. In addition, we were selected by Brite Computers
("Brite"), LiveView Technologies, ("LiveView"), and Alliance
Technology Group ("Alliance") to provide our vehicle recognition
systems to their existing customer bases. Brite is leader in
public safety systems integration and will use us as their sole
ALPR solution to their extensive customer base comprised of law
enforcement and state and local governments. LiveView is a leader
in remote security solutions, which will provide our vehicle
recognition systems for deployment within its full security
platform. Alliance will offer our vehicle recognition solutions to
its customer base both as a standalone solution and as part of an
integrated video surveillance system.
35
●
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 for 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.
●
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, 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.
Opportunities, Trends and Uncertainties
Different trends, factors and uncertainties, including market
cycles, may impact our operations and financial conditions,
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 of 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 processing units (“CPUs”)
for algorithms that process large blocks of data, such as those
produced by video streams. GPUs also provide superior memory
bandwidth and efficiencies as compared to their CPU counterparts.
The most recent versions of our software have been designed to use
the increased GPU speeds to accelerate image recognitions. The GPU
market is predicted to grow as a result of a surge in adoption of
the Internet of Things (“IoT”) by the industrial and
automotive sectors. As GPU manufacturers increase production
volume, we hope to benefit from the reduced cost to manufacture the
hardware included in our products or available to others using our
services.
●
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.
36
●
Expansion of Automated Enforcement of Motor Vehicle Laws
– We believe that future legislation will allow for automated
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. We anticipate
that an increased presence in the market, the continued development
of strategic partnerships and other economies of scale will
significantly reduce the level of costs necessary to support sales
of our products and services. However, the speed at which these
markets grow to the degree of which our products and services are
adopted is uncertain.
●
Sales Cycle
– As many of our products are new to
market, their acceptance and integration into the intended markets
is uncertain and we do not have sufficient historical experience to
accurately predict revenues as a result of their
implementation.
●
COVID 19 -
The spread of a novel strain of COVID-19 around
the world since the first quarter of 2020 has caused significant
volatility in U.S. and international markets. There is significant
uncertainty around the breadth and duration of business disruptions
related to COVID-19, as well as its impact on the U.S. and
international economies and, as such, we are unable to determine
the full impact to our operations.
●
Pressure on Government Budgets –
In addition to the COVID-19 crisis crippling businesses revenues,
it has caused significant strain on government budgets. With less
money to spend and more need for resources, government agencies
need affordable, effective, and scalable solutions for revenue
recovery and discovery. With subscription pricing and a roadway
intelligence platform that accomplishes multiple agency missions
from a single camera source, we are uniquely positioned to provide
agencies force-multiplying tools when money and man-power are
limited. Agencies can be better positioned to identify vehicle
registration fee avoidance, enforce parking and find scofflaws, aid
motorists in acquiring valid insurance, and dynamically price tolls
based on traffic flow.
●
Increased Demand for Contactless Economy
Solutions –
Even prior to the COVID-19 crisis,
efficient, touch-free shopping experiences were becoming
increasingly present. Now moving beyond simple tap-to-pay credit
card functionality, we can offer businesses such as retail and
quick service restaurants the ability to have customers
pay-by-plate for a complete contactless experience for curbside
pick-up or drive-thru transactions. Pay-by-plate functionality not
only keeps customers and employees safe, it accelerates service
time as the technology fully integrates with existing POS and
customer loyalty systems.
●
Necessity for On-Demand Mobile Solutions –
With app
downloads increasing exponentially year-over-year and over 90% of
mobile phone time spent within apps, businesses require a means to
leverage the ever-present smartphones of employees. By developing a
first-of-its-kind iOS and Android app that can read license plates
on-device, we can provide businesses an affordable way to scale by
utilizing existing devices as license plate recognition sensors.
Now businesses can efficiently manage visitors, streamline parking
operations, enhance campus/event security, and even recover costly
assets.
We
believe that recent developments in computing capabilities, such as
GPU advances, and new techniques of analysis, sometimes referred to
broadly as AI, have broadened the market for vehicle recognition
technology and created new opportunities in existing markets. With
our new line of products and services, we are working to actively
exploit these opportunities.
Other than as discussed above and elsewhere in this 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.
37
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 perpetual software licenses and related
products consist of fees that give customers a permanent license to
use of software and receive related support and updates during the
term of the arrangement. Revenue from our perpetual software
licenses is recognized up-front at the point in time when the
software is made available to the customer. During the second
quarter of 2019, we changed our primary method of selling software
from perpetual software licenses, with associated maintenance
services, to service subscriptions that give customers access to
the use of the current version of the service for a period limited
duration. This change is expected to impact our revenue in the
short term as we begin to recognize the bulk of our revenue from
subscriptions 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, however.
Our subscription services
arrangements are non-cancelable and do not contain refund-type
provisions, although the change to service subscriptions result in
an increase in credit risk.
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.
38
Research and Development
Research and
development expenses consists of personnel costs, software used to
develop our products and consulting and professional fees for
third-party development resources. Our research and development
expenses support our efforts to continue to add capabilities to and
improve the value of our existing products and services, as well as
develop new products and services.
We
expect our research and development expense to continue to increase
in absolute dollars for the foreseeable future as we continue to
invest in research and development efforts to enhance the
functionality of our AI software. However, we expect our research
and development expense to decrease as a percentage of our revenue
over the long term, although our research and development expense
may fluctuate as a percentage of our revenue from period to period
due to the timing and extent of these expenses.
Other Income (Expense)
Other
income (expense) net consists primarily of interest expense in
connection with our debt arrangements, costs associated with the
extinguishment of our debt arrangements, gains and losses on the
sale of fixed assets and interest income earned on cash and cash
equivalents and short-term investments.
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.
39
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 results of operations from TeamGlobal, AOC Key
Solutions and Firestorm.
|
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenue
|
$
2,126
|
$
1,536
|
$
6,399
|
$
3,962
|
|
Cost
of revenue
|
984
|
390
|
2,753
|
1,152
|
|
Gross
profit
|
1,142
|
1,146
|
3,646
|
2,810
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
3,168
|
2,600
|
8,896
|
6,259
|
|
Selling
and marketing expenses
|
560
|
587
|
1,356
|
1,081
|
|
Research
and development expenses
|
781
|
450
|
2,143
|
757
|
|
Operating
expenses
|
4,509
|
3,637
|
12,395
|
8,097
|
|
|
|
|
|
|
|
Loss
from operations
|
(3,367
)
|
(2,491
)
|
(8,749
)
|
(5,287
)
|
|
Other
income (expense):
|
|
|
|
|
|
Loss
on extinguishment of debt
|
(3,081
)
|
-
|
(3,281
)
|
(1,113
)
|
|
Interest
expense
|
(218
)
|
(1,182
)
|
(2,468
)
|
(2,724
)
|
|
Other
income
|
6
|
157
|
27
|
123
|
|
Gain
on sale of business
|
-
|
-
|
3,631
|
-
|
|
Total
other expense
|
(3,293
)
|
(1,025
)
|
(2,091
)
|
(3,714
)
|
|
Loss
before income taxes
|
(6,660
)
|
(3,516
)
|
(10,840
)
|
(9,001
)
|
|
Income
tax provision
|
(7
)
|
(12
)
|
(20
)
|
(35
)
|
|
Net
loss from continuing operations
|
$
(6,667
)
|
$
(3,528
)
|
$
(10,860
)
|
$
(9,036
)
|
Comparison of the Three and Nine Months ended September 30, 2020
and the Three and Nine Months ended September 30, 2019
Restructuring
As part
of our shift in strategic direction since 2019, we are focusing on
our Technology Segment and have disposed of or discontinued
operations in the subsidiaries in our Professional Services
Segment. In April 2020, we completed the Sale of AOC Key Solutions
and in June 2020, we completed the sale of TeamGlobal. As part of
evaluating the future of Firestorm, management decided to sell
Secure Education and transfer the BC Management line of business to
its founder in the second quarter of 2019. In addition, management
determined to discontinue the operation of Firestorm Franchising,
LLC, a division of Firestorm, due to non-performance by
franchisees. The Company has also commenced an action for
rescission of the original purchase of Firestorm.
As a
result. we have completed the final steps our announced change in
strategic direction to sell lower margin assets and focus on our
core technology segment. Beginning in 2020, all of the subsidiaries
that were previously presented as part of Professional Services
operations are classified as discontinued operations and not
presented as part of continuing operations.
Total Revenue
|
|
Three
Months ended September 30,
|
Change
|
Nine
Months ended September 30,
|
Change
|
||||
|
(dollars
in thousands)
|
2020
|
2019
|
$
|
%
|
2020
|
2019
|
$
|
%
|
|
Revenue
|
$
2,126
|
$
1,536
|
$
590
|
38
%
|
$
6,399
|
$
3,962
|
$
2,437
|
62
%
|
40
The increase in revenue for the three
months ended September 30, 2020 compared to the three months ended
September 30, 2019, was a result of additional products the Company
offered during the period and
the implementation of a large
software and hardware contract in Florida which generated up front
revenues from building infrastructure.
Additionally,
part of the growth in revenue for the three months ended September
30, 2020 was attributable to revenues earned through our eCommerce
platform which organically increased, $68,000 or 41%, to $235,000
from $167,000 for the three months ended September 30,
2019.
The increase in revenue for the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 was
primarily attributable to the expanded technology offerings and
large contracts stated above, as well as the fact that revenue
attributable to the acquisition of OpenALPR assets has only been
included in operations since March 2019. During the nine months
ended September 30, 2020, revenue attributable to OpenALPR assets
was recognized for the full nine month period compared to only a
six and half a month period in the corresponding period in
2019.
Additionally, part
of the growth in revenue for the nine months ended September 30,
2020 was attributable to revenues earned through our eCommerce
platform which organically increased, $341,000 or 122%, to $621,000
from $280,000 for the nine months ended September 30,
2019.
Cost of Revenue, Gross Profit and Gross Margin
|
|
Three Months ended September 30,
|
Change
|
Nine Months ended September 30,
|
Change
|
||||
|
(dollars
in thousands)
|
2020
|
2019
|
$ or % Points
|
%
|
2020
|
2019
|
$ or % Points
|
%
|
|
Cost
of revenue
|
$
984
|
$
390
|
$
594
|
152
%
|
$
2,753
|
$
1,152
|
$
1,601
|
139
%
|
|
Gross
profit
|
1,142
|
1,146
|
(4
)
|
0
%
|
3,646
|
2,810
|
836
|
30
%
|
|
Gross
margin
|
54
%
|
75
%
|
-21
%
|
-28
%
|
57
%
|
71
%
|
-14
%
|
-20
%
|
For the
three months ended September 30, 2020, compared to the three months
ended September 30, 2019, the decrease in gross profit was
primarily attributable to building infrastructure in connection
with large software and hardware contracts for the corresponding
period.
For the
nine months ended September 30, 2020, compared to the nine months
ended September 30, 2019, the increase in gross profit was
primarily attributable to the increase in revenue for the
corresponding period.
For the
three and nine months ended September 30, 2020 the gross margin
decreased to 54% and 57%, respectively, which was primarily
attributable to building infrastructure in connection with large
software and hardware contracts. These contracts included
construction and assembly of fixtures for our vehicle recognition
cameras and the infrastructure necessary to support database and
communications operations on a shared basis with other
municipalities. As this early stage, the cost of building the
network is higher and the initial margins for such projects are
consequently lower than expected than for future operations that
will be able to use the same infrastructure.
Operating Expenses
|
|
Three
Months ended September 30,
|
Change
|
Nine
Months ended September 30,
|
Change
|
||||
|
(dollars
in thousands)
|
2020
|
2019
|
$
|
%
|
2020
|
2019
|
$
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
$
3,168
|
$
2,600
|
$
568
|
22
%
|
$
8,896
|
$
6,259
|
$
2,637
|
42
%
|
|
Selling
and marketing expenses
|
560
|
587
|
(27
)
|
-5
%
|
1,356
|
1,081
|
275
|
25
%
|
|
Research
and development expenses
|
781
|
450
|
331
|
74
%
|
2,143
|
757
|
1,386
|
183
%
|
|
Operating
expenses
|
$
4,509
|
$
3,637
|
$
872
|
24
%
|
$
12,395
|
$
8,097
|
$
4,298
|
53
%
|
General and Administrative Expenses
The majority of the increase to general and administrative expenses
is attributable to the increased staffing. For the three and nine
months ended September 30, 2020 compared to the three and nine
months ended September 30, 2019, we brought on additional officers
and executives of the Company to support our growth plan and build
our corporate structure.
41
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 digital marketing and
other sales efforts. In connection with these efforts there was an
increase in staffing to support the Company’s growth
plan.
Research and Development Expense
The overall increase in research and development expenses is
primarily attributable to the strategic shift to develop new
products and additional software capabilities, as a result of our
increased focus on our technology offerings. This shift took place
at the end of the first quarter of 2019. The increase in our
research and development expenses is mainly attributable to an
increase in headcount and hours associated with the research and
development activities.
Other Expense
|
|
Three Months ended September 30,
|
Change
|
Nine Months ended September 30,
|
Change
|
||||
|
(dollars
in thousands)
|
2020
|
2019
|
$
|
%
|
2020
|
2019
|
$
|
%
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
$
(3,081
)
|
$
-
|
$
(3,081
)
|
-100
%
|
$
(3,281
)
|
$
(1,113
)
|
$
(2,168
)
|
-195
%
|
|
Interest
expense
|
(218
)
|
(1,182
)
|
964
|
82
%
|
(2,468
)
|
(2,724
)
|
256
|
9
%
|
|
Other
income
|
6
|
157
|
(151
)
|
-96
%
|
27
|
123
|
(96
)
|
-78
%
|
|
Gain
on sale of business
|
-
|
-
|
-
|
-
|
3,631
|
-
|
3,631
|
100
%
|
|
Total
other expense
|
$
(3,293
)
|
$
(1,025
)
|
$
(2,268
)
|
-221
%
|
$
(2,091
)
|
$
(3,714
)
|
$
1,623
|
44
%
|
The decrease in interest expense for the three and nine months
ended September 30, 2020 compared to the three and nine months
ended September 30, 2019 is due to the staged retirement of the
2019 Promissory notes in 2020.
The
loss on the extinguishment of debt in for the three and nine months
ended September 30, 2020, was related to the fees associated with
the early extinguishment of the principal balance of our 2019
Promissory Notes.
During
2019, we incurred costs of $1,113,000 associated with the
extinguishment of debt.
In
connection with the sale of AOC Key Solutions and TeamGlobal, we
recognized a gain on the sale of business of $3,631,000 during the
nine months ended September 30, 2020.
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
or gains on sales of subsidiaries, and (v) other unusual or
non-recurring items. EBITDA and Adjusted EBITDA are not
measurements of financial performance or liquidity under accounting
principles generally accepted in the U.S. (“U.S. GAAP”)
and should not be considered as an alternative to net earnings or
cash flow from operating activities as indicators of our operating
performance or as a measure of liquidity or any other measures of
performance derived in accordance with U.S. GAAP. EBITDA and
Adjusted EBITDA are presented because we believe they are
frequently used by securities analysts, investors and other
interested parties in the evaluation of a company’s ability
to service and/or incur debt. However, other companies in our
industry may calculate EBITDA and Adjusted EBITDA differently than
we do.
42
The following table sets forth the components of the EBITDA and
Adjusted EBITDA for the periods included (dollars in
thousands):
|
|
Three
Months ended September 30,
|
Nine
Months ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Net
loss
|
$
(6,667
)
|
$
(3,528
)
|
$
(10,860
)
|
$
(9,036
)
|
|
Income
taxes
|
7
|
12
|
20
|
35
|
|
Interest
|
218
|
1,182
|
2,468
|
2,724
|
|
Depreciation
and amortization
|
497
|
418
|
1,386
|
957
|
|
EBITDA
|
$
(5,945
)
|
$
(1,916
)
|
$
(6,986
)
|
$
(5,320
)
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
$
3,081
|
$
-
|
$
3,281
|
$
1,113
|
|
Share-based
compensation
|
202
|
76
|
539
|
314
|
|
Gain
on sale of business
|
-
|
-
|
(3,631
)
|
-
|
|
Loss
on sale of Secure Education
|
-
|
3
|
-
|
3
|
|
Adjusted
EBITDA
|
$
(2,662
)
|
$
(1,837
)
|
$
(6,797
)
|
$
(3,890
)
|
Lease Obligations
As of September 30, 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
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 26, 2020 and June 3, 2020, we entered into
two loan agreements with Newtek Small Business Finance, LLC, which
provided loans in the principal amount of $221,000 (the
“Rekor PPP Loan”) and $653,000 (the “Rekor
Recognition PPP Loan”), respectively, pursuant to the
Paycheck Protection Program under the CARES Act. Each 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
Paycheck Protection Program provides that the notes may be
partially or wholly forgiven if the funds are used for certain
qualifying expenses as described in the CARES Act. We intend to use
the entire note amount for qualifying expenses and to apply for
forgiveness of the loan in accordance with the terms of the CARES
Act.
43
2019 Promissory Notes
On March 12, 2019, we issued the 2019
Promissory Notes and the March 2019 Warrants to investors,
including OpenALPR Technology, Inc.
(the “2019
Lenders”)
. The
loan was due and payable on March 11, 2021. In March 2020, we
received an extension of the maturity date of the loan until June
12, 2021. In June 2020, we received an extension of the maturity
date of the loan until December 31, 2021. The loan bore interest at
16% per annum, of which at least 10% per annum was required to be
paid in cash. The full remaining portion of all interest, if any,
accrued and was to be paid-in-kind. The notes also required a
premium, if paid before the maturity date, a $1,000,000 exit fee
due at maturity, and compliance with affirmative, negative and
financial covenants.
On
June 30, 2020, we entered into the Exchange Agreements with certain
holders of our 2019 Promissory Notes. Under the Exchange
Agreements, approximately $17,398,000 of the 2019 Promissory Notes
was redeemed in exchange for 4,349,497 shares of our common stock,
at a rate of $4 per share (the “Note Exchange”). At the
time of the Exchange Agreement the net amount of long-term debt
redeemed for common stock was $14,688,000, this included the
existing principal balance subject to conversion, the portion of
the exit fee associated with the notes subject to conversion,
offset by the portion of unamortized issuance costs associated with
the notes subject to conversion. There was also $226,000 related to
the PIK interest associated to the notes subject to conversion that
was exchanged as part of the Exchange Agreements. The difference
between the market value of the shares issued and the net carrying
amount of the obligations above, was recorded as part of debt
extinguishments costs in the unaudited condensed consolidated
statement of operations.
On
September 16, 2020, we issued a cash payment for the remaining
aggregate principal balance of 2019 Promissory Notes. As a result
of this optional prepayment, the 2019 Promissory Notes, have been
fully redeemed pursuant to their terms, and as a result we have no
further obligations under the Note Purchase Agreement, as amended.
The warrants previously issued pursuant to the Note Purchase
Agreement, as amended, remain outstanding pursuant to their
terms.
The following table sets forth the components of our cash flows for
the period included (dollars in thousands):
|
|
Nine
Months ended September 30,
|
|||
|
|
2020
|
2019
|
Change
|
|
|
|
|
|
$
|
%
|
|
Net
cash used in operating activities - continuing
operations
|
$
(7,860
)
|
$
(4,394
)
|
$
(3,466
)
|
-79
%
|
|
Net
cash provided by (used in) investing activities - continuing
operations
|
5,681
|
(406
)
|
6,087
|
1499
%
|
|
Net
cash provided by financing activities - continuing
operations
|
24,756
|
3,876
|
20,880
|
539
%
|
|
Net
increase (decrease) in cash, cash equivalents and restricted cash
and cash equivalents - continuing operations
|
$
22,577
|
$
(924
)
|
$
23,501
|
2543
%
|
Net
cash used in operating activities – continuing operations for
the nine months ended September 30, 2020 had a net decrease of
$3,466,000 which was primarily due to the $3,631,000 gain on the
sale of AOC Key Solutions and TeamGlobal. The gain on the sale is
shown as a decrease in cash flow from operations and an increase in
cash flow from investing activities to reflect the nature of the
transactions. This gain on the sale of AOC Key Solutions and
TeamGlobal was partially offset by increase in depreciation,
amortization of intangible asset and a $3,281,000 loss on
extinguishment of debt related to the retirement of the 2019
Promissory Notes.
The net
increase of net cash provided by (used in) investment activities
– continuing operations of $6,087,000 was primarily due to
the cash proceeds of the sale of AOC Key Solutions and TeamGlobal
and the cash proceeds from the note receivable issued in connection
with the sale of AOC Key Solutions.
Net
cash provided by financing activities – continuing operations
for the nine months ended September 30, 2020 increased $20,880,000
from the prior nine month period ended September 30, 2019. During
the nine months ended September 30, 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.
In 2020, this amount was offset by $7,226,000 of cash outflows
related to the modification and retirement of the 2019 Promissory
Notes. During the nine months ended September 30, 2019 cash
provided by financing activities was related to the $3,839,000
proceeds from the 2019 Promissory Notes issued the first quarter of
2019.
During
2020 and 2019, we funded our operations primarily through cash from
operating activities from our subsidiaries, secured borrowing
arrangements, issuance of debt, the sale of our subsidiaries and
the sale of equity. As of September 30, 2020, we had unrestricted
cash and cash equivalents from continuing operations of $24,154,000
and working capital of $21,230,000, as compared to unrestricted
cash and cash equivalents of $1,075,000 and a working capital
deficit of $1,786,000 as of December 31, 2019.
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.
44
As of
September 30, 2020, we had approximately $16,459,000 of licensing
and subscription contracts that were closed prior to September 30,
2020 but have a contractual subscription period beyond September
30, 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. We currently expect to recognize
approximately 27% of this amount over the succeeding twelve months,
and the remainder is expected to be recognized over the following
four years. 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 have
experienced growth of 69% in the unaudited remaining contract value
of licensing and subscription contracts from September 30, 2019
through September 30, 2020.
The
table below shows the quarter by quarter growth is such contract
value (dollars in thousands):
45
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.
Series B Preferred Stock
As part of the acquisition of TeamGlobal, we issued 240,861 shares
of $0.0001 par value Series B Preferred Stock. All Series B
Preferred Stock was issued at a price of $10.00 per share with a
conversion price of $5.00 per share. Each Series B Preferred Stock
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.
At-the-Market
Offering
On August 14, 2019, we entered into the Sales Agreement with
B. Riley FBR, Inc. (“B. Riley FBR”) to create an
at-the-market equity program under which we, from time to time
offered and sold shares of our common stock, having an aggregate
offering price of up to $15,000,000, through or to B. Riley FBR.
Subject to the terms and conditions of the Sales Agreement, B.
Riley FBR used its commercially reasonable efforts to sell the
shares of our common stock from time to time, based upon our
instructions. B. Riley FBR was entitled to a commission equal
to 3.0% of the gross proceeds from each sale. We incurred issuance
costs of approximately $226,000 related to legal, accounting, and
other fees in connection with the Sales Agreement. These costs
were charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
unaudited condensed consolidated balance sheets.
On August 28, 2020, we filed Amendment No. 1 to
the Sales Agreement dated August 14, 2019 to increase the size
of the market equity program under which we, from time to time
offered and sold shares of our common stock, from an aggregate
offering price of up to $15,000,000 to an amended maximum aggregate
offering price of up to $40,000,000 through or to B. Riley
FBR.
We incurred
issuance costs of approximately $25,000 related to legal fees in
connection with the amendment to the Sales
Agreement.
Sales of the Company’s common
stock under the Sales Agreement were issued and sold pursuant to
the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018.
For the nine months ended September 30,
2020, based on settlement date, we sold 5,216,562 shares of common
stock at a weighted-average selling price of $5.92 per share in
accordance with the Sales Agreement. Net cash provided for the nine
months ended September 30, 2020 from the Sales Agreement was
$29,930,000 after paying 3.0% or $926,000 related to cash
commissions provided to B. Riley FBR.
On
September 21, 2020, we elected to voluntarily terminate its Sales
Agreement with B. Riley FBR pursuant to the terms of the Sales
Agreement. As of the termination, we had offered and sold an
aggregate of 6,509,202 shares of common stock pursuant to the Sales
Agreement, which resulted in aggregate gross proceeds of
$34,154,000.
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 September 30, 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.
46
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 as of September
30, 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 September 30, 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.
47
P
ART 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 have opposed. In addition, on December 9,
2019, the Firestorm Principals filed a motion for an interim award
of expenses and attorney’s fees. That motion was fully
briefed as of February 21, 2020. It remains
sub judice
, and no argument has been
scheduled upon it.
In the year 2020, the Firestorm Principals filed suit in New York
Supreme Court in Sullivan County against directors of the Company,
alleging breach of fiduciary duty and libel. We believe that
this suit is without merit and intend to vigorously litigate this
matter.
At this
stage of these litigations, we are unable to render an opinion
regarding the likelihood of a favorable outcome. We intend to
continue vigorously litigating its claims against the Firestorm
Principals, and believe that the Firestorm Principals’
remaining counterclaims and suits against Rekor directors and
officers are without merit.
Vigilant Solutions, LLC, a subsidiary
of Motorola Solutions, Inc., filed a complaint on February 21, 2020
against us and certain of our subsidiaries in the US District Court
for the District of Maryland. The complaint alleged that certain of
our products violated a patent held by Vigilant. On June 10, 2020,
we filed an Answer to the complaint denying the pertinent
allegations and asserting substantial defenses to the allegations
contained in the complaint, including that the patent underlying
the complaint is invalid.
On September 23, 2020, we filed a
Motion to Stay Pending
Inter
Partes
Review in light of a Petition for
Inter Partes
Review filed by us and
certain subsidiaries against Vigilant in the U.S. Patent and
Trademark Office (as discussed below). Vigilant opposed the Motion.
On
September 8, 2020, we and certain of our subsidiaries that were
defendants in the Vigilant Solutions, LLC Litigation discussed
above filed a Petition for
Inter
Partes
Review at the U.S. Patent and Trademark
Office’s Patent Trial and Appeal Board (“PTAB”)
requesting that the PTAB review and find unpatentable certain
claims of the patent asserted by Vigilant in the Vigilant
Solutions, LLC Litigation. The PTAB was expected to decide whether
to institute review in March or April
2021.
In
November of 2020, we and Vigilant Solutions, LLC agreed to resolve
the district court litigation and intellectual property rights
action between the parties pursuant to a confidential settlement
agreement. We will have no material effect from its obligations
under the agreement.
On
January 31, 2020, our wholly owned subsidiary, OpenALPR, filed a
complaint in the US District Court for the Western District of
Pennsylvania against a former customer, Plate Capture Solutions,
Inc. (“PCS”) for breach of software license agreements
pursuant to which software was licensed to PCS. On June 14, 2020,
PCS filed its operative answer to the Complaint. On June 21,
2020, PCS filed a motion to join us and another entity, OpenALPR
Technology, Inc., as parties to the litigation and made claims
against them for defamation, fraud and intentional interference
with existing and future business relationships. On July 13, 2020,
OpenALPR filed an opposition to the motion for joinder. The parties
are currently awaiting the Court’s decision on joinder.
Nevertheless, we believe that we have substantial defenses to the
claims and intend to vigorously defend the allegations of those
claims.
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.
48
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, and in our Quarterly Report
on Form 10-Q as filed with the SEC on May 13, 2020, except for the
following supplemental risk factors. We encourage investors to
review the risk factors and uncertainties relating to our business
disclosed in that Form 10-K and Form 10-Q, as well as those
contained in Part 1, Item 2, Management’s Discussion and
Analysis of Financial Condition and Results of Operations,
above.
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.
We may not qualify for forgiveness of our PPP Loan. We face risks
associated with such PPP Loan
As set
forth above in Note 7 - Debt - Paycheck Protection Program Loan, on
May 26, 2020, the Company entered into a loan agreement with Newtek
Small Business Finance, LLC, which provides for a loan in the
principal amount of $221,000 (the “Rekor PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are
deferred for six months after the date of disbursement. On June 3,
2020, the Company's wholly owned subsidiary, Rekor Recognition
Systems, Inc., entered into a loan agreement with Newtek Small
Business Finance, LLC, which provides for a loan in the principal
amount of $653,000 (the “Rekor Recognition PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor Recognition PPP Loan has a two-year term and bears
interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement. The Rekor PPP Loan and the Rekor Recognition PPP Loan
(collectively the “Loans”) may be prepaid at any time
prior to maturity with no prepayment penalties. The Loans contain
events of default and other provisions customary for a loan of this
type. The Paycheck Protection Program provides that the Loan Notes
may be partially or wholly forgiven if the funds are used for
certain qualifying expenses as described in the CARES Act. The
Company intends to use the entire Loans amount for qualifying
expenses and to apply for forgiveness of the Loans in accordance
with the terms of the CARES Act.
Notwithstanding
that, the Company may not qualify for forgiveness of the Loans in
whole or part and may be required to repay such Loans in full. With
respect to any portion of the Loans that are not forgiven, the
Loans will be subject to customary provisions for Loans of this
type, including customary events of default relating to, among
other things, payment defaults, breaches of the provisions of the
PPP Notes and cross-defaults on any other loan with the PPP Lender
or other creditors. In the event the Loans are not forgiven, the
debt service payments on such Loans may negatively affect our
ability to grow our operations, service other debt and/or pay our
expenses as they come due. Furthermore, any default under the Loans
may require us to pay a significant amount of our available cash
and/or cash flow to service such debt, which could have a material
adverse effect on our operations. Any failure of the Loans to be
forgiven pursuant to their terms, and/or our requirement to repay
the Loans in whole or part, could cause the value our common stock
to decline in value. Separately, we face risks associated with the
fact that the Treasury Department and a House oversight
subcommittee has recently requested that certain large public
companies return prior PPP Loans which have been obtained by such
public companies and Treasury Secretary Steven Mnuchin has warned
that public companies receiving loans over $2 million would be
audited and could have potential criminal liability if their
certifications (required to obtain such loans) were untrue. As a
result, we could face penalties in connection with the Loans and/or
negative reactions from the public associated with our Loans,
either of which could cause the value of our common stock to
decline in value.
49
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 were issued and
sold pursuant to the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018. For the nine months ended September 30, 2020,
based on settlement date, we sold 5,216,562 shares of common stock
at a weighted-average selling price of $5.92 per share in
accordance with the Sales Agreement. Net cash provided for the nine
months ended September 30, 2020 from the Sales Agreement was
$29,930,000 after paying 3.0% or $926,000 related to cash
commissions provided to B. Riley FBR.
On
September 21, 2020, we elected to voluntarily terminate its Sales
Agreement with B. Riley FBR pursuant to the terms of the Sales
Agreement. As of the termination date, we had offered and sold
an aggregate of 6,509,202 shares of common stock pursuant to the
Sales Agreement, which resulted in aggregate gross proceeds of
$34,154,000.
Increase in Authorized Shares
On
January 28, 2020, the Board of Directors of the Company adopted
resolutions of the Board to ratify, approve and recommend
stockholder approval of an amendment to the Company’s Amended
and Restated Certificate of Incorporation, to increase the
authorized number of shares of the Company’s common stock,
par value $0.0001 per share, from 30,000,000 to 100,000,000
(“the Amendment”). On February 21, 2020, 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.
Note Exchange Agreement
In
an agreement reached on June 30, 2020, the 2019 Lenders of the 2019
Promissory Notes agreed to a redemption of approximately 77% of the
remaining principal balance of the 2019 Promissory Notes as of June
30, 2020. Per the Exchange Agreement, $17,398,000, was redeemed in
exchange for 4,349,497 shares of the Company’s common stock,
at a rate of $4 per share (the “Note Exchange”). At the
time of the Exchange Agreement the net amount of long-term debt
redeemed for common stock was $14,688,000, this included the
existing principal balance subject to conversion, the portion of
the exit fee associated with the notes subject to conversion,
offset by the portion of unamortized issuance costs associated with
the notes subject to conversion. There was also $226,000 related to
the PIK interest associated to the notes subject to conversion that
was exchanged as part of the Exchange Agreements. The difference
between the market value of the shares issued and the net carrying
amount of the obligations above, was recorded as part of debt
extinguishments costs in the unaudited condensed consolidated
statement of operations.
On
July 15, 2020, the Company completed the Note Exchange by issuing
its common stock to the 2019 Lenders in connection with the Note
Exchange Transaction in reliance on Section 3(a)(9) of the
Securities Act of 1933, as amended.
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.
50
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
|
|
|
|
|
|
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.
51
S
IGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
|
|
|
Rekor
Systems, Inc.
|
|
|
|
|
/s/
Robert A. Berman
|
|
|
|
Name:
|
Robert
A. Berman
|
|
|
|
Title:
|
Chief
Executive Officer,
Director
(Principal
Executive Officer and Authorized Signatory)
|
|
|
|
Date:
|
November
9, 2020
|
|
|
|
|
|
|
|
|
|
/s/
Eyal Hen
|
|
|
|
Name:
|
Eyal
Hen
|
|
|
|
Title:
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
Date:
|
November
9, 2020
|
|
52
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 General, Basis Of Presentation, and Summary Of Significant Accounting PoliciesNote 2 AcquisitionsNote 3 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 Equity (deficit)Note 11 Equity Incentive PlanNote 12 Loss Per ShareItem 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