REKOR SYSTEMS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period
from to
Commission File Number: 001-38338
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
81-5266334
|
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification No.)
|
7172 Columbia Gateway Drive, Suite 400
Columbia, MD
(Address principal executive offices)
21046
(Zip Code)
(410) 762-0800
(Registrant’s telephone number, including area
code)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past
90 days. Yes
☒
No
☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes
☒
No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer
☐
|
Accelerated
filer
☐
|
|
Non-accelerated
filer
☒
|
Smaller
reporting company
☒
|
|
|
Emerging
growth company
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes
☐
No
☒
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common
Stock, $0.0001 par value per share
|
REKR
|
The
Nasdaq Stock Market
|
As of
May 10, 2021, the Registrant had 40,994,510 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, 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
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 MARCH 31, 2021
|
PART I
- FINANCIAL INFORMATION
|
4
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
4
|
|
|
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
4
|
|
|
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
5
|
|
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DEFICIT)
|
6
|
|
|
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
7
|
|
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
8
|
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
31
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
45
|
|
|
ITEM
4. CONTROLS AND PROCEDURES
|
45
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
46
|
|
|
ITEM
1. LEGAL PROCEEDINGS
|
46
|
|
|
ITEM
1A. RISK FACTORS
|
47
|
|
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
47
|
|
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
|
47
|
|
|
ITEM
4. MINE SAFETY DISCLOSURES
|
47
|
|
|
ITEM
5. OTHER INFORMATION
|
47
|
|
|
ITEM
6. EXHIBITS
|
48
|
|
|
|
|
|
|
SIGNATURES
|
49
|
|
P
ART I FINANCIAL
INFORMATION
REKOR SYSTEMS, INC. AND SUBSIDIARIES
C
ONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
March
31,
2021
|
December
31,
2020
|
|
ASSETS
|
|
|
|
Current
Assets
|
|
|
|
Cash and cash
equivalents
|
$
62,845
|
$
20,595
|
|
Restricted cash and
cash equivalents
|
1,005
|
412
|
|
Short-term
investments
|
23,996
|
-
|
|
Accounts receivable,
net
|
2,474
|
1,038
|
|
Inventory
|
1,101
|
1,264
|
|
Note receivable,
current portion
|
340
|
340
|
|
Other current assets,
net
|
626
|
469
|
|
Current assets of
discontinued operations
|
1
|
2
|
|
Total
current assets
|
92,388
|
24,120
|
|
Long-term
Assets
|
|
|
|
Property and equipment,
net
|
1,337
|
1,047
|
|
Right-of-use lease
assets, net
|
352
|
426
|
|
Goodwill
|
6,336
|
6,336
|
|
Intangible assets,
net
|
6,633
|
7,038
|
|
Investments in
unconsolidated companies
|
74
|
75
|
|
Note receivable,
long-term
|
1,275
|
1,360
|
|
Total
long-term assets
|
16,007
|
16,282
|
|
Total
assets
|
$
108,395
|
$
40,402
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts payable and
accrued expenses
|
$
4,712
|
$
3,898
|
|
Notes payable, current
portion
|
985
|
-
|
|
Loan payable, current
portion
|
625
|
517
|
|
Lease liability,
short-term
|
199
|
253
|
|
Contract
liabilities
|
1,497
|
1,126
|
|
Current liabilities of
discontinued operations
|
128
|
124
|
|
Total
current liabilities
|
8,146
|
5,918
|
|
Long-term
Liabilities
|
|
|
|
Notes payable,
long-term
|
-
|
980
|
|
Loan payable,
long-term
|
350
|
469
|
|
Lease liability,
long-term
|
167
|
188
|
|
Contract liabilities,
long-term
|
910
|
958
|
|
Deferred tax liability,
long-term
|
27
|
24
|
|
Long term liabilities
of discontinued operations
|
-
|
5
|
|
Total
long-term liabilities
|
1,454
|
2,624
|
|
Total
liabilities
|
9,600
|
8,542
|
|
Series A Cumulative
Convertible Redeemable Preferred stock, $0.0001 par value;
authorized: 505,000 shares authorized at March 31, 2021 and
December 31, 2020; issued and outstanding: 0 and 502,327 shares
issued and outstanding at March 31, 2021 and December 31,
2020
|
-
|
6,669
|
|
Commitments
and Contingencies
|
|
|
|
Stockholders'
Equity
|
|
|
|
Common stock, $0.0001 par value;
authorized; 100,000,000 shares; issued: 40,972,238 shares at March
31, 2021 and 33,013,271 at December 31, 2020; outstanding:
40,952,877 shares at March 31, 2021 and 33,013,271 at December 31,
2020
|
4
|
3
|
|
Preferred stock,
$0.0001 par value, 2,000,000 authorized, 505,000 shares designated
as Series A and 240,861 shares designated as Series B as of March
31, 2021 and December 31, 2020, respectively
|
|
|
|
Series B Cumulative
Convertible Preferred stock, $0.0001 par value; authorized: 240,861
shares authorized at March 31, 2021 and December 31, 2020; issued
and outstanding: 0 and 240,861 shares issued and outstanding at
March 31, 2021 and December 31, 2020
|
-
|
-
|
|
Treasury stock, 19,361
and 0 shares as of March 31, 2021 and December 31, 2020,
respectively
|
(319
)
|
-
|
|
Additional paid-in
capital
|
147,615
|
68,238
|
|
Accumulated other
comprehensive income
|
2
|
-
|
|
Accumulated
deficit
|
(48,507
)
|
(43,050
)
|
|
Total
stockholders’ equity
|
98,795
|
25,191
|
|
Total
liabilities and stockholders’ equity
|
$
108,395
|
$
40,402
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
REKOR SYSTEMS, INC. AND SUBSIDIARIES
(Dollars in thousands, except share amounts)
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2021
|
2020
|
|
Revenue
|
$
4,216
|
$
1,595
|
|
Cost
of revenue
|
1,962
|
494
|
|
Gross
profit
|
2,254
|
1,101
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
5,403
|
2,791
|
|
Selling
and marketing expenses
|
937
|
371
|
|
Research
and development expenses
|
1,222
|
543
|
|
Operating
expenses
|
7,562
|
3,705
|
|
|
|
|
|
Loss
from operations
|
(5,308
)
|
(2,604
)
|
|
Other
income (expense):
|
|
|
|
Interest
expense
|
(32
)
|
(1,163
)
|
|
Other
income
|
16
|
-
|
|
Total
other expense
|
(16
)
|
(1,163
)
|
|
Loss
before income taxes
|
(5,324
)
|
(3,767
)
|
|
Income
tax provision
|
(3
)
|
(7
)
|
|
Equity
in loss of investee
|
(76
)
|
-
|
|
Net
loss from continuing operations
|
(5,403
)
|
(3,774
)
|
|
Net
loss from discontinued operations
|
(3
)
|
(14
)
|
|
Net
loss
|
$
(5,406
)
|
$
(3,788
)
|
|
Comprehensive
loss:
|
|
|
|
Net
loss from continuing operations
|
(5,403
)
|
(3,774
)
|
|
Change
in unrealized gain on short-term investments
|
2
|
-
|
|
Total
comprehensive loss from continuing operations
|
(5,401
)
|
(3,774
)
|
|
Total
comprehensive loss
|
$
(5,404
)
|
$
(3,788
)
|
|
Loss
per common share from continuing operations - basic and
diluted
|
(0.15
)
|
(0.19
)
|
|
Loss
per common share discontinued operations - basic and
diluted
|
-
|
-
|
|
Loss
per common share - basic and diluted
|
$
(0.15
)
|
$
(0.19
)
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
Basic
and diluted
|
35,944,355
|
21,929,768
|
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 Treasury Stock
|
Treasury
Stock at Cost
|
Shares
of Series B Preferred Stock
|
Series B
Preferred Stock
|
Additional
Paid-In Capital
|
Accumulated
Other Comprehensive Income
|
Accumulated
Deficit
|
Total
Stockholders’ Equity (Deficit)
|
|
Balance as of December 31, 2019
|
21,595,653
|
$
2
|
-
|
$
-
|
240,861
|
$
-
|
$
19,371
|
$
-
|
$
(28,408
)
|
$
(9,035
)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
171
|
-
|
-
|
171
|
|
Exercise of
cashless warrants in exchange for common stock
|
43,218
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
555,000
|
-
|
-
|
-
|
-
|
-
|
411
|
-
|
-
|
411
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
536,730
|
-
|
-
|
-
|
-
|
-
|
2,169
|
-
|
-
|
2,169
|
|
Exercise of
warrants related to series A preferred stock
|
36,862
|
-
|
-
|
-
|
-
|
-
|
38
|
-
|
-
|
38
|
|
Issuance upon
exercise of stock options
|
1,294
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
-
|
5
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(115
)
|
(115
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(206
)
|
-
|
-
|
(206
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,788
)
|
(3,788
)
|
|
Balance as of March 31, 2020
|
22,768,757
|
$
2
|
-
|
$
-
|
240,861
|
$
-
|
$
21,959
|
$
-
|
$
(32,311
)
|
$
(10,350
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
33,013,271
|
$
3
|
-
|
$
-
|
240,861
|
$
-
|
$
68,238
|
$
-
|
$
(43,050
)
|
$
25,191
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
781
|
-
|
-
|
781
|
|
Exercise of
cashless warrants in exchange for common stock
|
47,612
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
52,013
|
-
|
-
|
-
|
-
|
-
|
294
|
-
|
-
|
294
|
|
Exercise of
warrants related to series A preferred stock
|
95,864
|
-
|
-
|
-
|
-
|
-
|
99
|
-
|
-
|
99
|
|
Public
underwriting
|
6,126,939
|
1
|
-
|
-
|
-
|
-
|
70,124
|
-
|
-
|
70,125
|
|
Conversion of
series A preferred stock
|
899,174
|
-
|
-
|
-
|
-
|
-
|
7,775
|
-
|
-
|
7,775
|
|
Conversion of
series B preferred stock
|
517,611
|
-
|
-
|
-
|
(240,861
)
|
-
|
179
|
-
|
-
|
179
|
|
Issuance upon
exercise of stock options
|
65,402
|
-
|
-
|
-
|
-
|
-
|
226
|
-
|
-
|
226
|
|
Issuance upon
vesting of restricted stock units
|
134,991
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Shares
withheld upon vesting of restricted stock units
|
-
|
-
|
(19,361
)
|
(319
)
|
-
|
-
|
-
|
-
|
-
|
(319
)
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(51
)
|
(51
)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(101
)
|
-
|
-
|
(101
)
|
|
Change in
unrealized gain on short-term investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
-
|
2
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,406
)
|
(5,406
)
|
|
Balance as of March 31, 2021
|
40,952,877
|
$
4
|
(19,361
)
|
$
(319
)
|
-
|
$
-
|
$
147,615
|
$
2
|
$
(48,507
)
|
$
98,795
|
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)
|
|
Three
Months ended March 31,
|
|
|
|
2021
|
2020
|
|
Cash Flows from Operating Activities
|
|
|
|
Net
loss from continuing operations
|
$
(5,403
)
|
$
(3,774
)
|
|
Net
loss from discontinued operations
|
(3
)
|
(14
)
|
|
Net
loss
|
(5,406
)
|
(3,788
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Bad debt expense
|
24
|
-
|
|
Depreciation
|
131
|
78
|
|
Amortization of right-of-use lease asset
|
74
|
32
|
|
Provision for deferred taxes
|
3
|
7
|
|
Share-based compensation
|
781
|
171
|
|
Amortization of financing costs
|
5
|
330
|
|
Amortization of intangible assets
|
409
|
313
|
|
Loss due to change in value of equity
investments
|
76
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(1,460
)
|
39
|
|
Inventory
|
163
|
(186
)
|
|
Other
current assets
|
(157
)
|
(213
)
|
|
Accounts
payable and accrued expenses
|
1,947
|
747
|
|
Contract
liabilities
|
323
|
(38
)
|
|
Lease
liability
|
(75
)
|
50
|
|
Net
cash used in operating activities - continuing
operations
|
(3,159
)
|
(2,444
)
|
|
Net
cash (used in) provided by operating activities - discontinued
operations
|
(4
)
|
452
|
|
Net
cash used in operating activities
|
(3,163
)
|
(1,992
)
|
|
Cash Flows from Investing Activities
|
|
|
|
Short-term
investment activity, net
|
(23,994
)
|
-
|
|
Capital
expenditures
|
(425
)
|
(178
)
|
|
Investment
in unconsolidated company
|
(75
)
|
-
|
|
Payment
of notes payable
|
(11
)
|
-
|
|
Proceeds
from notes receivable
|
85
|
-
|
|
Net
cash used in investing activities - continuing
operations
|
(24,420
)
|
(178
)
|
|
Cash Flows from Financing Activities
|
|
|
|
Proceeds
from public offering
|
70,125
|
-
|
|
Net
proceeds from exercise of options
|
226
|
5
|
|
Net
proceeds from exercise of warrants
|
294
|
411
|
|
Net
proceeds from exercise of warrants associated with the Series A
Preferred Stock
|
99
|
38
|
|
Net
proceeds from at-the-market agreement
|
-
|
2,169
|
|
Repurchases
of common stock
|
(319
)
|
-
|
|
Payment
of debt modification costs
|
-
|
(100
)
|
|
Net
cash provided by financing activities - continuing
operations
|
70,425
|
2,523
|
|
Net
used in financing activities - discontinued operations
|
-
|
(556
)
|
|
Net
cash provided by financing activities
|
70,425
|
1,967
|
|
Net
increase (decrease) in cash, cash equivalents and restricted cash
and cash equivalents - continuing operations
|
42,846
|
(99
)
|
|
Net
decrease in cash, cash equivalents and restricted cash and cash
equivalents - discontinued operations
|
(4
)
|
(104
)
|
|
Net
increase (decrease) in cash, cash equivalents and restricted cash
and cash equivalents
|
42,842
|
(203
)
|
|
Cash,
cash equivalents and restricted cash and cash equivalents at
beginning of period
|
21,009
|
1,866
|
|
Cash,
cash equivalents and restricted cash and cash equivalents at end of
period
|
$
63,851
|
$
1,663
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted
cash:
|
|
|
|
Cash
and cash equivalents at end of period - continuing
operations
|
$
62,845
|
$
1,087
|
|
Restricted
cash and cash equivalents at end of period - continuing
operations
|
1,005
|
415
|
|
Cash
and cash equivalents at end of period - discontinued
operations
|
1
|
161
|
|
Cash,
cash equivalents and restricted cash and cash equivalents at end of
period
|
$
63,851
|
$
1,663
|
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 March 31,
2021, 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 month periods ended March 31, 2021 and
2020.
The
financial data and other information disclosed in these notes are
unaudited. The results for the three months ended March 31, 2021
are not necessarily indicative of the results to be expected for
the year ending December 31, 2021.
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, 2020. 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 is a leader in the emerging market for intelligent roadway
systems developed to take advantage of recent developments in
artificial intelligence ("AI"). The Company has developed advanced
vehicle recognition systems that can extract more accurate and
complete data from existing cameras and sensors. Rekor’s
systems have also been designed to take full advantage of the
latest technological advances in new cameras and sensors, edge
processing and cloud computing. The Company has also
developed platforms that enable the data its systems collect to be
analyzed in combination with other sources and distributed to
multiple end users in real time as actionable intelligence or
data collected for long range planning purposes in full compliance
with the security and privacy requirements of each end
user.
These
capabilities are particularly useful to governmental entities and
businesses in solving a wide variety of real-world vehicle-related
operational challenges. The ability to enhance the results provided
by existing Internet Protocol (“IP”) connected cameras
has enabled significant new uses for vehicle recognition technology
that were not previously available or cost effective. The Company
provides products and services for governmental organizations and
large and small businesses throughout the world. Customers use the
Company’s products or services in approximately 80 countries
in applications that include public safety, transportation,
parking, security, customer experience, operational efficiency and
logistics.
Rekor’s
mission is to enable “AI driven decisions” by enhancing
the capabilities in the governmental and commercial sectors with
actionable, real-time insights. We seek to deliver these insights
through an expanding software portfolio that not only addresses the
challenges our customers are currently facing but empowers them to
effectively deal with their evolving needs.
8
Use of Estimates
The
preparation of consolidated financial statements in conformity with
GAAP requires the extensive use of management's estimates.
Management uses estimates and assumptions in preparing consolidated
financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and reported revenues and
expenses. Actual amounts may differ from these estimates. On an
on-going basis, the Company evaluates its estimates, including
those related to collectability of accounts receivable, fair value
of debt and equity instruments, income taxes and determination of
standalone selling prices in contracts with customers that contain
multiple performance obligations. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not apparent from
other sources. Actual results may differ from those estimates under
different assumptions or conditions.
Liquidity
For
all annual and interim periods, management will assess going
concern uncertainty in the Company’s 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, 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 and estimates and will make
certain key assumptions. These assumptions include among other
factors, its ability to raise additional capital, if necessary, the
expected timing and nature of the Company’s programs and
projected cash expenditures and its ability to delay or curtail
these programs or expenditures to the extent management has the
proper authority to do so and considers it probable that those
implementations can be achieved within the look-forward
period.
The
Company has generated losses since its inception 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 non-capital expenditures related to the
scaling of existing products, development of new products and
service offerings and marketing efforts associated with these
products. As of and for the three months ended March 31, 2021, the
Company had a comprehensive loss from continuing operations of
$5,401,000 and working capital of $84,369,000.
The Company's net cash position, from continuing
operations, was increased by $42,846,000 for the three months ended
March 31, 2021 primarily due to the net proceeds of $70,125,000
from the completion of the Public Offering (see NOTE 9 -
STOCKHOLDERS’ EQUITY
(DEFICIT)
for details on the
Public Offering).
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.
9
Goodwill
The
excess purchase consideration over the fair value of acquired
assets and liabilities is recorded as goodwill. The Company will
assess goodwill for impairment annually, or more often if
events or changes in circumstances
indicate that it might be impaired, by comparing its carrying value
to the reporting unit’s fair value
. During the three
months ended March 31, 2021 and 2020, we have not recognized any
impairment to goodwill from continuing
operations.
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.
(“Roker”). In the third quarter of 2020 and the first
quarter of 2021, the Company contributed $75,000 for its 50 percent
equity interest for a total investment of $150,000. This investment
is accounted for under the equity method. During the three months
ended March 31, 2021 the Company recognized a loss in its
unconsolidated investments of $76,000.
In
February 2017, the Company contributed substantially all of the
assets and certain liabilities related to its vehicle services
business to Global Public Safety (the “GPS Closing”).
After the GPS Closing, the Company continues to own 19.9% of the
units of Global Public Safety. This equity investment does not have
a readily determinable fair value and the Company reports this
investment at cost, less impairment. In 2018, the Company recorded
an impairment of $262,000, related to its 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. There were no distributions
or earnings received from either investment in the three months
ended March 31, 2021 or 2020.
Short-Term Investments
Short-term
investments consist of U.S Treasury Bills. Short-term investments
have maturities of greater than three months but less than a year
from the balance sheet date. Short-term investments are carried at
fair value and presented as short-term investments on the unaudited
condensed consolidated balance sheets. Unrealized gains on
investment securities are included in unrealized gain on short-term
investments in the unaudited condensed consolidated statements of
operations.
Treasury Stock
Treasury
stock is recorded at acquisition cost. Upon disposition of treasury
shares gains and losses are recorded as increases or decreases to
additional paid-in capital with losses in excess of previously
recorded gains charged directly to retained earnings.
10
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed
consolidated balance sheets for cash and cash equivalents,
restricted cash and cash equivalents, short-term investments,
accounts receivable and accounts payable approximate fair value as
of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020,
given management’s evaluation of the instrument’s
current rate compared to market rates of interest and other
factors.
The determination of
fair value is based upon the fair value framework established by
ASC Topic 820,
Fair
Value Measurements and Disclosures
(“ASC
820”). Fair value is defined as the exit price, or the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as
of the measurement date. ASC 820 also establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in
valuing the asset or liability and are developed based on market
data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions
about the factors market participants would use in valuing the
asset or liability. The guidance establishes three levels of inputs
that may be used to measure fair value:
Level 1
–
Quoted
prices in active markets for identical assets or
liabilities.
Level 2
–
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level 3
–
Unobservable
inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or
liabilities.
Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurements. Changes in the observability of valuation inputs may
result in a reclassification of levels for certain securities
within the fair value hierarchy.
The Company’s goodwill and other intangible assets are
measured at fair value at the time of acquisition and analyzed on a
recurring and non-recurring basis for impairment, respectively,
using Level 3 inputs.
The Company considers
its note receivables to be Level 3 investments
and that the fair value
approximates the carrying value.
There were no changes in levels during the three months ended March
31, 2021.
Note Receivables
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 began
in January 2021. Based on 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 current market rates.
Interest income recognized for the three months ended March 31,
2021 and 2020 was $16,000 and $0, respectively, and is included as
part of other income on the unaudited condensed consolidated
statement of operations.
11
Revenue Recognition
The
Company derives its revenues substantially from license and
subscription fees for software and related products and services,
hardware leases and sales, and other
related support services
. A portion of the subscription fees
are generated through the Company’s eCommerce website rather
than through in-person sales. In addition, the Company derives net
revenues in connection with certain citation and collection
services in connection with the Company’s automated traffic
solutions and parking enforcement services.
Revenue
is recognized upon transfer of control of promised products and
services to the Company’s customers, in an amount that
reflects the consideration the Company expects to receive in
exchange for those products and services. If the consideration
promised in the contract includes a variable amount, for example
maintenance fees related to hardware, the Company includes an
estimate of the amount it expects to receive for the total
transaction price, if it is probable that a significant reversal of
cumulative revenue recognized will not occur.
The Company
determines the amount of revenue to be recognized through
application of the following steps:
●
Identification
of the contract, or contracts, with a customer
●
Identification
of the performance obligations in the contract
●
Determination
of the transaction price
●
Allocation
of the transaction price to the performance obligations in the
contract
●
Recognition
of revenue when, or as, performance obligations are
satisfied
The
following table presents a summary of revenue (dollars in
thousands):
|
|
Three
Months ended March 31,
|
|
|
|
2021
|
2020
|
|
Revenue
|
|
|
|
Licensing
and subscription revenue
|
$
3,301
|
$
850
|
|
Automated
traffic safety solutions
|
915
|
745
|
|
Total
revenue
|
$
4,216
|
$
1,595
|
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.
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.
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 is recognized
up-front at the point in time when the software is made available
to the customer and the customer is deemed to have a right to use
the software.
12
Automated traffic safety solutions
Automated
traffic safety solutions 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, analyzes the images to
provide data and supports citation management services. In the
first quarter of 2021, the Company launched its Uninsured Vehicle
Enforcement Diversion (“UVED”) Program which includes
hardware that identifies uninsured motor
vehicles. Revenue is recognized monthly based on the
number of camera systems that are operated, or revenue is
recognized based on the number of citations collected 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.
Revenue by Customer Type
The
following table presents a summary of revenue by customer type
(dollars in thousands):
|
|
Three
Months ended March 31,
|
|
|
|
2021
|
2020
|
|
Revenue
|
|
|
|
Commercial
customers
|
$
3,105
|
$
791
|
|
Government
customers
|
1,111
|
804
|
|
Total
revenue
|
$
4,216
|
$
1,595
|
Included
in commercial customers is revenue that is considered eCommerce
revenue. eCommerce revenue is defined by the Company as revenue
earned through the Company’s eCommerce platform as well as
revenue recognized from its CarCheck product. CarCheck is an
application programing interface (“API”) service that
analyzes still images of vehicles and responds with license plate
data, as well as vehicle make, model, color, and direction of
travel.
For
the three months ended March 31, 2021 and 2020, the Company
recognized eCommerce revenues of $442,000 and $177,000,
respectively, which is included in licensing and subscription
revenue.
Performance obligations
A
performance obligation is a promise in a contract with a customer
to perform services that are distinct. 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. This may result
in a deferral or acceleration of revenue recognized relative to
cash received.
Where
performance obligations for a contract with a customer are not yet
satisfied or have only been partially satisfied as of a particular
date, they are expected to be recognized as revenue in the future.
On March 31, 2021, the Company had approximately $16,186,000 of
remaining performance obligations not yet satisfied or partially
satisfied. The Company expects to recognize approximately 32% of
this amount as revenue over the succeeding twelve months, and the
remainder is expected to be recognized over the next two to four
years thereafter.
13
Unbilled accounts receivable
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 $595,000 and $600,000 were included in
accounts receivable, net, in the unaudited condensed consolidated
balance sheets as of March 31, 2021 and December 31, 2020,
respectively.
Contract liabilities
When
the Company advance bills clients prior to providing services,
generally such amounts will be earned and recognized in revenue
within the next six months to five years, depending on the
subscription or licensing period. These assets and liabilities are
reported on the unaudited condensed consolidated balance sheets on
a contract-by-contract basis at the end of each reporting period.
Changes in the contract asset and liability balances during the
three months ended March 31, 2021 were not materially impacted by
any other factors. Contract liabilities as of March 31, 2021 and
December 31, 2020 were $2,407,000 and $2,084,000, respectively. All
contract liabilities as of March 31, 2021 and December 31, 2020
were attributable to continuing operations. During the three months
ended March 31, 2021 $389,000 of the contract liabilities balance
as of December 31, 2020 was recognized as revenue.
The
services due for contract liabilities described above are shown
below as of March 31, 2021 (dollars in thousands):
|
2021
|
$
1,290
|
|
2022
|
553
|
|
2023
|
342
|
|
2024
|
182
|
|
2025
|
39
|
|
Thereafter
|
1
|
|
Total
|
$
2,407
|
Costs to Obtain and Fulfill a Contract
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 election to expense costs to obtain
a contract as incurred when the amortization period would have been
one year or less.
In
connection with the Company’s uninsured vehicle enforcement
diversion program, the Company installs hardware and software at no
additional charge to the end customer. The costs associated with
these hardware and software installations are expected to be
recouped by the Company over the course of the estimated contract
period and thus are capitalized as a cost to fulfill a customer
contract and amortized over the estimated contract period. As of
March 31, 2021 the Company has capitalized $204,000 of such
fulfillment costs, of which $199,000 are presented as part of
property and equipment, net in the unaudited condensed consolidated
balance sheets. A
s of
December 31, 2020 costs incurred to fulfill contracts in
excess of one year had been immaterial.
14
Cash and Cash Equivalents, and Restricted Cash and Cash
Equivalents
The Company considers all highly liquid debt instruments, including
Treasury Bills purchased with a maturity of three months or less,
to be cash equivalents.
Cash subject to contractual
restrictions and not readily available for use is classified as
restricted cash and cash equivalents. The Company’s
restricted cash balances are primarily made up of cash collected on
behalf of certain client jurisdictions. Restricted cash and cash
equivalents for these client jurisdictions as of March 31, 2021 and
December 31, 2020 were $1,005,000 and $412,000, 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 highly rated
quality financial institutions that are federally insured up to
$250,000 per account, located in the United States
(“U.S.”). As of March 31, 2021 and December 31, 2020,
the Company had deposits from continuing operations totaling
$63,850,000 in two U.S. financial institutions and $21,007,000 in
one U.S. financial institution, respectively.
The Company has a market concentration of revenue and accounts
receivable from continuing operations related to its customer
base.
Company A accounted for 40% and less than 10% of the
Company’s total revenues for the three months ended March 31,
2021 and 2020, respectively.
Company B accounted for less than 10% and 17% of the
Company’s total revenues for the three months ended March 31,
2021 and 2020, respectively.
Company C accounted for less than 10% and 13% of the
Company’s total revenues for the three months ended March 31,
2021 and 2020, respectively.
As of March 31,
2021, accounts receivable from Company A totaled
53
%
of the unaudited
condensed consolidated accounts receivable balance. As of December
31, 2020, Company A and Company B accounted for 43% and 20%,
respectively, of the unaudited condensed consolidated accounts
receivable balance.
No other single customer accounted for more than 10% of the
Company’s unaudited condensed consolidated revenues for the
three months ended March 31, 2021 and 2020 or the unaudited
condensed consolidated accounts receivable balance as of March 31,
2021 and December 31, 2020.
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, 2020.
New Accounting Pronouncements Effective in the Three Months ended
March 31, 2021
In January 2020, the FASB issued ASU
2020-01,
Investments-Equity Securities
(Topic 321), Investments-Equity Method and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815)
. The new standard clarifies the interaction of
accounting for the transition into and out of the equity method.
The new standard also clarifies the accounting for measuring
certain purchased options and forward contracts to acquire
investments. The ASU is effective for fiscal years beginning after
December 15, 2020, including interim periods within those fiscal
years. Early adoption is permitted, including adoption in an
interim period. The Company adopted this guidance in the first
quarter of 2021. The adoption of ASU 2020-01 did not have a
material impact on the Company’s unaudited condensed
consolidated financial statements or
notes.
15
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic
740)
:
Simplifying the
Accounting for Income Taxes
(“ASU 2019-12”). ASU 2019-12
eliminated previously allowed exceptions and clarified existing
guidance in the accounting for income taxes, including in the areas
of franchise taxes, the tax basis of goodwill and interim period
effects of changes in tax laws. The Company adopted this guidance
in the first quarter of 2021. The adoption of ASU 2019-12 did not
have a material impact on the Company’s unaudited condensed
consolidated financial statements or notes.
New Accounting Pronouncements Effective in Future
Periods
In June 2016, the FASB issued ASU
2016-13
Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
(“ASU
2016-13”) which requires the measurement and recognition of
expected credit losses for financial assets held at amortized cost.
ASU 2016-13 replaces the existing incurred loss impairment model
with an expected loss methodology, which will result in more timely
recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years,
beginning after December 15, 2022. Upon adoption of the new
standard, the Company will begin recognizing an allowance for
credit losses based on the estimated lifetime expected credit loss
related to the Company’s financial assets. Due to the nature
and extent of the Company’s financial instruments (primarily
accounts receivable and a note receivable) currently within the
scope of this ASU and based on the Company’s analysis of ASU
2016-13 and the historical, current and expected credit quality of
the Company’s customers, the Company does not expect this ASU
to have a material impact on its unaudited condensed consolidated
statement of operations and balance sheets.
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 unaudited
condensed consolidated financial statements. As new accounting
pronouncements are issued, the Company will adopt those that are
applicable under the circumstances.
NOTE 2 – 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 had been presented as part of the Company’s legacy
Professional Services segment.
During
the first quarter of 2020, in connection with the Company’s
plan to concentrate on its
Technology segment
, the Company
determined that the remainder of its historical Professional
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
for sale and discontinued operations as it did not meet the
applicable criteria.
AOC Key Solutions Sale
On April 2, 2020, the Company entered into a Stock
Purchase Agreement (the “AOC Key Solutions Purchase
Agreement”) by and among the Company, AOC Key Solutions, and
PurpleReign, LLC, a Virginia limited liability company owned by the
members of AOC Key Solutions management (the
“
AOC Key
Solutions
Buyer”), by
which the Company agreed to sell AOC Key Solutions, to the
AOC Key Solutions
Buyer.
The
AOC Key Solutions
Buyer agreed to purchase all of the outstanding
equity interests of AOC Key Solutions for a purchase price of
$4,000,000, comprising (i) $3,400,000 in cash, and (ii) a
subordinated promissory note (the “Subordinated Note”)
in the initial principal amount of $600,000.
As
of December 31, 2020, the AOC Key Solutions Subordinated Note had
been paid in full by the AOC Key Solutions Buyer.
16
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 dispositions of AOC Key Solutions
and TeamGlobal are the 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 months
ended March 31, 2021 and 2020 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 March 31, 2021 and December 31,
2020.
The assets and liabilities classified as discontinued
operations in the Company's unaudited condensed consolidated
financial statements as of March 31, 2021 and December 31, 2020 are
shown below (dollars in thousands):
|
|
March
31, 2021
|
December
31, 2020
|
|
|
Firestorm
|
Firestorm
|
|
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
1
|
$
2
|
|
Current
assets of discontinued operations
|
1
|
2
|
|
Total
assets of discontinued operations
|
$
1
|
$
2
|
|
LIABILITIES
|
|
|
|
Accounts
payable and accrued expenses
|
$
30
|
$
31
|
|
Lease
liability, short term
|
98
|
93
|
|
Current
liabilities of discontinued operations
|
128
|
124
|
|
Lease
liability, long term
|
-
|
5
|
|
Long-term
liabilities of discontinued operations
|
-
|
5
|
|
Total
liabilities of discontinued operations
|
$
128
|
$
129
|
17
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 March 31,
|
||||
|
|
2021
|
2020
|
|||
|
|
Firestorm
|
Global
|
AOC Key
Solutions
|
Firestorm
|
Total
|
|
Revenue
|
$
-
|
$
6,305
|
$
3,392
|
$
-
|
$
9,697
|
|
Cost
of revenue
|
-
|
5,476
|
1,866
|
-
|
7,342
|
|
Gross
profit
|
-
|
829
|
1,526
|
-
|
2,355
|
|
Operating
expenses:
|
|
|
|
|
|
|
General
and administrative expenses
|
3
|
762
|
1,284
|
(4
)
|
2,042
|
|
Selling
and marketing expenses
|
-
|
39
|
131
|
-
|
170
|
|
Operating
expenses
|
3
|
801
|
1,415
|
(4
)
|
2,212
|
|
Income
loss income from operations
|
(3
)
|
28
|
111
|
4
|
143
|
|
Other
(income) expense:
|
|
|
|
|
|
|
Interest
expense
|
-
|
(90
)
|
(74
)
|
-
|
(164
)
|
|
Other
expense (income)
|
-
|
5
|
2
|
-
|
7
|
|
Total
other (income) expense
|
-
|
(85
)
|
(72
)
|
-
|
(157
)
|
|
Income
(loss) from discontinued operations
|
(3
)
|
(57
)
|
39
|
4
|
(14
)
|
|
Income
tax provision from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
|
Net
income (loss) from discontinued operations
|
$
(3
)
|
$
(57
)
|
$
39
|
$
4
|
$
(14
)
|
18
NOTE 3 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental disclosures of cash flow information for
the three months ended March 31, 2021 and 2020 were as follows
(dollars in thousands):
|
|
Three
Months ended March 31,
|
|
|
|
2021
|
2020
|
|
Cash
paid for interest - continuing operations
|
$
-
|
$
506
|
|
Cash
paid for taxes - continuing operations
|
-
|
-
|
|
Non-cash
investing and financing activities
|
|
|
|
Paid-in-kind
interest transferred from accrued interest to the principal balance
of the 2019 Promissory Notes
|
-
|
1,283
|
|
Financing
activities:
|
|
|
|
Series
A Cumulative Convertible Redeemable Preferred stock dividends
included in accounts payable and accrued expenses, settled in
common stock
|
(1,005
)
|
-
|
|
Series
A Cumulative Convertible Redeemable Preferred stock included in
temporary equity, settled in common stock
|
(6,770
)
|
-
|
|
Series
B Cumulative Convertible Preferred stock dividends included in
accounts payable and accrued expenses, settled in common
stock
|
(179
)
|
-
|
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
|
Right-of-use
lease asset
|
-
|
132
|
|
Lease
liability
|
$
-
|
$
(132
)
|
NOTE 4 – OPERATING LEASES
We have operating
leases for office facilities in various locations throughout the
United States. The Company’s leases have remaining terms of
one to 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 March 31, 2021 and 2020 was $89,000 and
$48,000, 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 $85,000 and
$48,000 for the three months ended March 31, 2021 and 2020,
respectively.
In the first quarter of 2021, the Company entered into a new lease
agreement for its new headquarters. The lease commencement
agreement and date are expected to occur in the third quarter of
2021. As the Company does not have access to the building until the
lease commencement agreement is executed, the Company has not
recognized the lease as of March 31, 2021.
19
Supplemental balance sheet information related to leases as of
March 31, 2021 was as follows (dollars in
thousands):
|
Operating
lease right-of-use lease assets from continuing
operations
|
$
352
|
|
|
|
|
Current
portion of lease liability
|
$
199
|
|
Long-term
portion of lease liability
|
167
|
|
Total
lease liability from continuing operations
|
$
366
|
|
|
|
|
Weighted
average remaining lease term - operating leases from continuing
operations
|
2.11
|
|
|
|
|
Weighted
average discount rate - operating leases
|
9
%
|
|
|
|
|
2021
|
$
193
|
|
2022
|
104
|
|
2023
|
84
|
|
2024
|
19
|
|
Total
lease payments
|
$
400
|
|
Less
imputed interest
|
34
|
|
Maturities
of lease liabilities
|
$
366
|
20
NOTE 5 – INTANGIBLE ASSETS
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2020 to March 31, 2021 (dollars in
thousands):
|
|
December 31,
2020
|
Additions
|
Amortization
|
March 31,
2021
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
Customer
relationships
|
$
362
|
$
-
|
$
(8
)
|
$
354
|
|
Marketing
related
|
159
|
-
|
(18
)
|
141
|
|
Technology
based
|
5,361
|
4
|
(262
)
|
5,103
|
|
Internally
capitalized software
|
1,156
|
-
|
(121
)
|
1,035
|
|
Intangible
assets subject to amortization from continuing
operations
|
$
7,038
|
$
4
|
$
(409
)
|
$
6,633
|
The following provides a breakdown of identifiable intangible
assets as of March 31, 2021 (dollars in
thousands):
|
|
Customer Relationships
|
Marketing Related
|
Technology Based
|
Internally Capitalized Software
|
Total
|
|
Identifiable
intangible assets
|
$
461
|
$
327
|
$
7,210
|
$
1,452
|
$
9,450
|
|
Accumulated
amortization
|
(107
)
|
(186
)
|
(2,107
)
|
(417
)
|
(2,817
)
|
|
Identifiable
intangible assets from continuing operations, net
|
$
354
|
$
141
|
$
5,103
|
$
1,035
|
$
6,633
|
These intangible assets are being amortized on a straight-line
basis over their estimated useful life. Amortization expense
attributable to continuing operations for the three months ended
March 31, 2021 and 2020 was $409,000 and $313,000, respectively,
and is presented as part of general and administrative expenses in
the accompanying unaudited condensed consolidated statements of
operations.
As of March 31, 2021, the estimated impact on continuing operations
from annual amortization from for intangible assets for each of the
next five fiscal years and thereafter is as follows (dollars in
thousands):
|
2021
|
$
1,216
|
|
2022
|
1,543
|
|
2023
|
1,363
|
|
2024
|
1,060
|
|
2025
|
1,051
|
|
Thereafter
|
400
|
|
Total
|
$
6,633
|
21
NOTE 6 – 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 $985,000 and
$980,000, net of unamortized interest, as of March 31, 2021 and
December 31, 2020, respectively, to reflect the amortized fair
value of the notes issued due to the difference in interest rates
of $15,000 and $20,000, respectively.
Paycheck Protection Program Loan
On
May 26, 2020, the Company entered into a loan agreement with Newtek
Small Business Finance, LLC, which provides for a loan in the
principal amount of $221,000 (the “Rekor PPP Loan”)
pursuant to the Paycheck Protection Program under the CARES Act.
The Rekor PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are
deferred for six months after the date of
disbursement.
On
June 3, 2020, the Company’s wholly owned subsidiary, Rekor
Recognition Systems, Inc., entered into a loan agreement with
Newtek Small Business Finance, LLC, which provides for a loan in
the principal amount of $653,000 (the “Rekor Recognition PPP
Loan”) pursuant to the Paycheck Protection Program under the
CARES Act. The Rekor Recognition PPP Loan has a two-year term and
bears interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement.
The Rekor PPP Loan and the Rekor Recognition PPP
Loan (collectively the “Loans”) may be prepaid at any
time prior to maturity with no prepayment penalties. The Loans
contain events of default and other provisions customary for a loan
of this type. The Paycheck Protection Program provides that the
Loans may be partially or wholly forgiven if the funds are used for
certain qualifying expenses as described in the CARES Act. The
Company used the entire Loans amount for qualifying expenses and
has to applied for forgiveness of the Loans in accordance with the
terms of the CARES Act.
The current and long-term portions
of the Loans are presented as part of loans payable current portion
and loans payable, long-term, respectively, on the accompanying
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 applied for forgiveness with
Newtek Small Business Finance, LLC. The Company's forgiveness
application is being reviewed.
2019 Promissory Notes
On March 12, 2019, the Company entered
into a note purchase agreement pursuant to which investors,
including OpenALPR Technology, Inc. (the “2019
Lenders”) loaned $20,000,000 to the Company (the “2019
Promissory Notes”) and the Company issued to the 2019 Lenders
warrants to purchase 2,500,000 shares of Rekor common stock (the
“March 2019 Warrants”). The loan bore interest at 16%
per annum, of which at least 10% per annum was required to be paid
in cash. Any remaining interest accrued to be paid at maturity or
earlier upon 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 and minimum liquidity and
maximum capital expenditures covenants. Transaction costs included
$403,000 for a work fee payable over 10 months, $290,000 in legal
fees and a $200,000 closing fee. As of December 31, 2020, the
Company had settled the full amount of the 2019 Promissory
Notes.
The loan was
secured by a security interest in substantially all of the assets
of Rekor. The March 2019 Warrants are exercisable over a period of
five years, at an exercise price of $0.74 per share, and were
valued at
$706,000,
at the time of issuance. The warrants became exercisable commencing
March 12, 2019 and expire on March 12, 2024. The 2019 Promissory
Notes had an effective interest rate of 24.87%.
22
As of the first anniversary date of the
commencement of the 2019 Promissory Notes $1,283,000 of the paid-in
kind interest had not been paid in cash 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 Retirement
On
June 30, 2020, the Company entered into Exchange Agreements with
certain 2019 Lenders of the Company’s 2019 Promissory Notes.
Subject to the terms and conditions set forth in the Exchange
Agreements, approximately $17,398,000 was redeemed in exchange for
4,349,497 shares of the Company’s common stock, at a rate of
$4 per share, which was the closing price of the common stock on
the date of the Exchange. On July 15, 2020, the Company completed
the Note Exchange. At the time of the Exchange Agreement the net
amount of long-term debt redeemed for common stock was $14,688,000.
This included the existing principal balance subject to conversion,
the portion of the exit fee associated with the which notes subject
to conversion, offset by the portion of unamortized issuance costs
associated with the notes subject to conversion. There was also
$226,000 related to the paid-in-kind (“PIK”) interest
associated with the notes subject to conversion that was exchanged
as part of the Exchange Agreements. The difference between the
market value of the shares issued and the net carrying amount of
the obligations above of $2,484,000 was recorded as part of debt
extinguishments costs in the accompanying consolidated statement of
operations. Following the Note Exchange, approximately $4,398,000
aggregate principal amount of the 2019 Promissory Notes remained
outstanding, plus an additional $216,000 related to the exit
fee.
The
Company incurred stock issuance costs of approximately $73,000
related to legal, accounting, and other fees in connection with the
Exchange Agreements. These costs are presented as a reduction to
additional paid-in capital on the accompanying consolidated balance
sheets.
On
September 16, 2020, the Company issued a cash payment of $5,284,000
to complete the retirement of the remaining aggregate principal
balance of the 2019 Promissory Notes. As a result of this optional
prepayment, the 2019 Promissory Notes have been fully redeemed
pursuant to their terms, and as a result the Company has no further
obligations under the Note Purchase Agreement, as amended. The
warrants previously issued pursuant to the Note Purchase Agreement
remain outstanding pursuant to their terms.
Interest Expense
The following table presents the interest expense
related to the contractual interest and the amortization of debt
issuance costs for the Company’s debt arrangements
(dollars in
thousands):
|
|
Three
Months ended March 31,
|
|
|
|
2021
|
2020
|
|
Contractual
interest
|
$
27
|
$
833
|
|
Amortization
of debt issuance costs
|
5
|
330
|
|
Total
interest expense
|
$
32
|
$
1,163
|
23
Schedule of Principal Amounts Due of Debt
The principal amounts due for long-term notes payable are shown
below as of March 31, 2021 (dollars in thousands):
|
2021
|
$
506
|
|
2022
|
1,432
|
|
2023
|
37
|
|
Total
|
1,975
|
|
|
|
|
Less
unamortized interest
|
(15
)
|
|
Total
notes payable
|
$
1,960
|
|
|
|
|
Loan
payable, current portion
|
$
625
|
|
Loan
payable, long-term
|
350
|
|
Notes
payable, current portion
|
985
|
|
Total
notes payable
|
$
1,960
|
NOTE 7 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC Topic 740.
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, the Company
reviewed both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections, and the overall
prospects of the Company’s business.
The Company’s income tax
provision for the three
months ended March 31, 2021 and 2020
was
$3,000 and $7,000,
respectively. The Company established a valuation allowance against
deferred tax assets during 2017 and has continued to maintain a
full valuation allowance,
outside of the deferred tax
liability related to the indefinite lived intangible,
through the three months ended March
31, 2021.
The Company files income tax returns in the United States and in
various states. No U.S. Federal, state or foreign income tax audits
were in process as of March 31, 2021.
24
The
Company evaluated the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with
respect to such net deferred income tax assets. After considering
all available facts, the Company fully reserved for its net
deferred tax assets, outside of the deferred tax liability related
to the indefinite lived intangible, because the Company believes
that it is not more likely than not that their benefits will be
realized in future periods. The Company will continue to evaluate
its deferred tax assets to determine whether any changes in
circumstances could affect the realization of their future benefit.
If it is determined in future periods that portions of the
Company’s net deferred income tax assets satisfy the
realization standard, the valuation allowance will be reduced
accordingly.
For the three months ended March 31,
2021 the Company did not record any interest or penalties related
to unrecognized tax benefits. It is the Company’s policy to
record interest and penalties related to unrecognized tax benefits
as part of income tax expense.
The 2017 through 2019 tax
years remain subject to examination by the
Internal Revenue
Service.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
On August 19, 2019, the Company filed suit in the
United States District Court for the Southern District of New York
against three former executives of the Company who were founders of
Firestorm (the “Firestorm
Principals”)—
Rekor Systems, Inc. v. Suzanne
Loughlin, et al
., Case no.
1:19-cv-07767-VEC. The Complaint alleges that the Firestorm
Principals fraudulently induced the execution of the Membership
Interest Purchase Agreement wherein Firestorm was acquired by
the Company. The Complaint requests equitable rescission of
that transaction, or, alternatively, monetary
damages.
Following
an initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, the Company filed a Second Amended Complaint, which the
Firestorm Principals answered together with counterclaims on
February 28, 2020. Thereafter, on March 30, the Company moved
to dismiss certain counterclaims against certain executives named
as counterclaim-defendants, which resulted in the Firestorm
Principals voluntarily dismissing those counterclaims against those
parties. The Company thereafter filed its response and
affirmative defenses to the Counterclaims on April 22, 2020.
On April 27, 2020, the Firestorm Principals filed a Motion for
Partial Judgment on the Pleadings, which the Company has
opposed. In addition, on December 9, 2019, the Firestorm
Principals filed a motion for an interim award of expenses and
attorney’s fees. The Court denied the Firestorm
Principals’ fee advance motion.
On April 27, 2021,
the Firestorm Principals filed a notice of motion for partial
summary judgment, seeking summary judgment on several of the
Company's claims and the Firestorm Principals' counterclaims, along
with supporting declarations and exhibits. The Court held a
conference call with the parties to address the proposed motion for
partial summary judgment on April 30, 2021, and has not yet decided
whether to allow the proposed motion to
proceed.
In the year 2020, the Firestorm Principals filed various suits in
New York, Delaware and Virginia Courts against directors of the
Company, alleging breach of fiduciary duty and libel. The
Company believes that these suits are without merit and intends to
vigorously litigate this matter.
At
this stage of these litigations, the Company is unable to render an
opinion regarding the likelihood of a favorable outcome. The
Company intends to continue vigorously litigating its claims
against the Firestorm Principals and believes that the Firestorm
Principals’ remaining counterclaims and suits against Rekor
directors and officers are without merit.
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 and
counter claims against OpenALPR for defamation, fraud and
intentional interference with existing and future business
relationships. On July 13, 2020, OpenALPR filed an opposition to
the motion for joinder.
On November 23, 2020, the Court
denied PCS’s Motion for Joinder with prejudice. The case is
currently proceeding between OpenALPR and PCS only, and is still in
its early stages. Rekor believes that OpenALPR has substantial
defenses to the counter claims and intends to vigorously defend the
allegations of those counter claims.
25
On
September 18, 2020, Fordham Financial Management, Inc.
(“Fordham”) commenced a lawsuit against the Company in
the Supreme Court for the State of New York, New York County.
Fordham alleges that the Company breached an underwriting agreement
with Fordham. Fordham has brought claims for breach of contract, a
declaratory judgment, and attorneys’ fees and expenses, and
seeks damages.
The Complaint was
served on the Company on September 25, 2020. Fordham agreed to
extend the Company’s time to respond to the Complaint until
June 23, 2021, pending the outcome of a private mediation on
February 24, 2021, which was unsuccessful.
At this stage of
the Fordham litigation, the Company is unable to render an opinion
regarding the likelihood of a favorable outcome. However, the
Company maintains that Fordham’s claims have no merit. To
that end it intends to vigorously litigate this action, to include
its pursuit of counterclaims against Fordham for fraud and breach
of contract, among other causes of
action.
In
addition, from time to time, the Company may be named as a party to
various other lawsuits, claims and other legal and regulatory
proceedings that arise in the ordinary course of business. These
actions typically seek, among other things, compensation for
alleged personal injury, breach of contract, property damage,
infringement of proprietary rights, punitive damages, civil
penalties or other losses, or injunctive or declaratory relief.
With respect to such lawsuits, claims and proceedings the Company
accrues reserves when a loss is probable, and the amount of such
loss can be reasonably estimated. It is the Company’s opinion
that the outcome of these proceedings, individually and
collectively, will not be material to the Company’s
consolidated financial statements as a whole.
NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
Effective March 18,
2020, the Company adopted and approved an amendment to increase the
number of authorized shares of common stock from 30,000,000 to
100,000,000,
$0.0001 par
value
. The rights and privileges terms of the additional
authorized shares of common stock are identical to those of the
currently outstanding shares of common stock. However, because the
holders of common stock do not have preemptive rights to purchase
or subscribe for any new issuances of common stock, the subsequent
potential issuance of additional shares of common stock will reduce
the current stockholders’ percentage ownership interest in
the total outstanding shares of common stock. The Amendment and the
creation of additional shares of authorized common stock will not
alter current stockholders’ relative rights and
limitations.
Public Offering
On
February 9, 2021, the Company issued and sold 6,126,939 shares of
its common stock (which includes 799,166 shares of common stock
sold pursuant to the exercise of an overallotment option) (the
“Public Offering”). The net proceeds to the Company,
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company, were
approximately $70,125,000. The shares were sold pursuant to an
underwriting agreement with B. Riley Securities, Inc. and Lake
Street Capital Markets, LLC, as representatives of the several
underwriters named therein under our shelf registration statement
on Form S-3 (Registration Statement No. 333-224423) filed by the
Company with the SEC that became effective on April 30, 2018. On
February 4, 2021, a prospectus supplement and accompanying
prospectus were filed with the SEC in connection with the offering
and a related registration statement (File No. 333-252735) was
filed pursuant to Rule 462(b) promulgated under the Securities
Act.
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.
26
Series A Cumulative Convertible Redeemable Preferred
Stock
Of the 2,000,000 authorized shares of preferred stock, 505,000
shares were 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
were entitled to quarterly dividends of 7.0% per annum per share.
The holders of Series A Preferred Stock had a right to convert each
share into common stock at an initial conversion price and a
specified conversion price which increased annually based on the
passage of time beginning in November 2019. The holders of Series A
Preferred Stock also had 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 had a call right after 36 months from
the issuance date to redeem all of the Series A Preferred Stock at
a redemption price which increased annually based on the passage of
time which began in November 2019. The Series A Preferred Stock
contained 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 increased 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 December 31, 2020.
Rekor
adjusted 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
$101,000 and $206,000 for the three months ended March 31, 2021 and
2020, respectively
.
The
holders of Series A Preferred Stock were entitled to quarterly cash
dividends of $0.175 (7% per annum) per share. Dividends accrued
quarterly and dividend payments for declared dividends were due
within five business days following the end of a quarter.
F
or the three months ended
March 31, 2021 and 2020 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 $0
and $952,000 as of March 31, 2021 and December 31, 2020,
respectively, and are presented as part of the accounts payable and
accrued expenses on the accompanying unaudited condensed
consolidated balance sheets.
As
a result of the closing of the Public Offering in the first quarter
of 2021, all of the issued and outstanding Series A Preferred Stock
was converted pursuant to the original terms of the agreement into
899,174 shares of the Company’s common stock.
Series B Cumulative Convertible Preferred Stock
Of the
2,000,000 authorized shares of preferred stock, 240,861 shares are
designated as $0.0001 par value Rekor Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). As
part of the 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
had a conversion price of $5.00 per share. Each Series B Preferred
Stock had an automatic conversion feature based on the share price
of Rekor.
The
Series B Preferred Stock was entitled to quarterly cash dividends
of 1.121% (4.484% per annum) per share. Dividends accrued quarterly
and dividend payments for declared dividends were due within five
business days following the end of a quarter. The Company did not
pay any cash dividends to the Series B Preferred shareholders for
the three months ended March 31, 2021 or 2020
. Accrued dividends payable to Series B
Preferred Stock shareholders were $0 and $167,000 as of March 31,
2021 and December 31, 2020, respectively, and are presented as part
of the accounts payable and accrued expenses on the accompanying
unaudited
condensed
consolidated balance
sheets.
27
As
a result of the
volume
weighted average share price of the Company's common stock being
over $7.50 for thirty consecutive days, in the first quarter of
2021
,
all of the Company’s issued and outstanding Series B
Preferred Stock was converted pursuant to the original terms of the
agreement into 517,611 shares of the Company’s common
stock.
Warrants
A
summary of the warrant activity for the Company for the period
ended March 31, 2021 is as follows:
|
|
Series A Preferred Stock Warrants (1)
|
Firestorm Warrants (2)
|
Secure Education Warrants (3)
|
2018 Public Offering Warrants (4)
|
2019 Promissory Note Warrants (5)
|
Total
|
|
Active
warrants January 1, 2021
|
141,789
|
631,254
|
66,666
|
4,886
|
68,750
|
913,345
|
|
Exercised
warrants
|
(95,864
)
|
-
|
(48,888
)
|
(1,175
)
|
(53,125
)
|
(199,052
)
|
|
Outstanding
warrants March 31, 2021
|
45,925
|
631,254
|
17,778
|
3,711
|
15,625
|
714,293
|
|
Weighted
average strike price of outstanding warrants
|
$
1.03
|
$
3.09
|
$
5.86
|
$
1.00
|
$
0.74
|
$
2.96
|
|
Shares
of common stock issued during the three months ended March 31,
2021
|
95,864
|
-
|
48,888
|
1,083
|
49,654
|
195,489
|
(1)
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 “Series A Preferred Stock Warrants”). The
exercise price for these warrants is $1.03. The expiration date of
the Series A Preferred Stock Warrants is November 8,
2023.
(2)
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.
(3)
Pursuant to the Company’s 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.
(4)
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 (the “2018 Public Offering Warrants”),
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.
(5)
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 (the “2019 Promissory
Note Warrants”), 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. As of May 10, 2021 all warrants
were exercised.
28
NOTE 10 – EQUITY INCENTIVE PLAN
In
August 2017, the Company approved and adopted the 2017 Equity Award
Plan (the “2017 Plan”) which replaced the 2016 Equity
Award Plan (the “2016 Plan”). The 2017 Plan permits the
granting of stock options, stock appreciation rights, restricted
and unrestricted stock awards, phantom stock, performance awards
and other stock-based awards for the purpose of attracting and
retaining quality employees, directors and consultants. Maximum
awards available under the 2017 Plan were initially set at
3,000,000 shares.
Stock Options
Stock options granted under the 2017 Plan may be either incentive
stock options (“ISOs”) or non-qualified stock options
(“NSOs”). ISOs may be granted to employees and NSOs may
be granted to employees, directors, or consultants. Stock options
are granted at exercise prices as determined by the Board of
Directors. The vesting period is generally three years with a
contractual term of ten years.
Stock compensation
expense related to stock options for the three months ended March
31, 2021 and 2020 was $30,000 and $130,000, respectively,
and is presented as part of
general and administrative expenses in the accompanying unaudited
condensed consolidated statements of
operations.
A
summary of stock option activity under the Company’s 2017
Plan for the period ended March 31, 2021 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, 2020
|
1,243,254
|
$
1.44
|
7.57
|
$
7,827
|
|
Exercised
|
(65,402
)
|
3.47
|
-
|
|
|
Forfeited
|
(10,000
)
|
0.80
|
-
|
|
|
Outstanding
Balance at March 31, 2021
|
1,167,852
|
$
1.33
|
7.34
|
$
20,701
|
|
Exercisable
at March 31, 2021
|
810,339
|
$
1.44
|
6.99
|
$
14,658
|
As of
March 31, 2021, there was $145,000 of unrecognized stock
compensation expense related to unvested stock options granted
under the 2017 Plan that will be recognized over a weighted average
period of 1.19 years.
Restricted Stock Units
Stock compensation
expense related to RSU’s for the three months ended March 31,
2021 and 2020 was $751,000 and $41,000, respectively,
and was presented as part
of general and administrative expenses in the unaudited condensed
consolidated statements of operations.
29
A summary of RSU activity under the Company’s 2017 Plan for
the three months ended March 31, 2021 is as follows:
|
|
Number of
Shares
|
Weighted Average
Unit Price
|
Weighted Average
Remaining Contractual Term (Years)
|
|
Outstanding
Balance at December 31, 2020
|
479,984
|
$
4.45
|
2.12
|
|
Granted
|
285,040
|
14.10
|
1.71
|
|
Vested
|
(155,869)
(1)
|
5.69
|
-
|
|
Forfeited
|
(54,550
)
|
2.90
|
-
|
|
Outstanding
Balance at March 31, 2021
|
554,605
|
$
9.21
|
2.01
|
(1)
Included in the vested shares are
19,361 shares which were withheld to cover a portion of the
employee withholding taxes. Additionally, 1,517 shares vested at
the end of the period but had not yet been
issued.
The grant date fair value is based on the estimated fair value of
the Company’s common stock on the date of grant. All RSUs
granted vest upon the satisfaction of a service-based vesting
condition.
As of March 31, 2021, there was
$4,747,000 of unrecognized stock compensation expense related to
unvested RSUs granted under the 2017 Plan that will be recognized
over an average remaining period of 2.01
years.
NOTE 11 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss per common share:
|
|
Three Months ended
March 31,
|
|
|
|
2021
|
2020
|
|
|
(Dollars in
thousands, except per share data)
|
|
|
Basic and diluted
loss per share
|
|
|
|
Net
loss from continuing operations
|
$
(5,403
)
|
$
(3,774
)
|
|
Less:
preferred stock accretion
|
(101
)
|
(206
)
|
|
Less:
preferred stock dividends
|
(51
)
|
(115
)
|
|
Net
loss attributable to shareholders from continuing
operations
|
$
(5,555
)
|
$
(4,095
)
|
|
Net loss from
discontinued operations
|
(3
)
|
(14
)
|
|
Net loss
attributable to shareholders
|
$
(5,558
)
|
$
(4,109
)
|
|
Weighted
average common shares outstanding - basic and diluted
|
35,944,355
|
21,929,768
|
|
Basic
and diluted loss per share from continuing operations
|
(0.15
)
|
(0.19
)
|
|
Basic
and diluted loss per share from discontinued
operations
|
-
|
-
|
|
Basic and diluted
loss per share
|
$
(0.15
)
|
$
(0.19
)
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
2,436,750
|
5,293,838
|
As the Company had a net loss for the three months ended March 31,
2021, the following 2,436,750 potentially dilutive securities were
excluded from diluted loss per share: 714,293 for outstanding
warrants, 1,167,852 related to outstanding options and 554,605
related to outstanding RSUs.
30
As the Company had a net loss for the three months ended March 31,
2020, the following 5,293,838 potentially dilutive securities were
excluded from diluted loss per share: 1,846,870 for outstanding
warrants, 974,487 related to the Series A Preferred Stock, 481,722
related to the Series B Preferred Stock, 1,656,309 related to
outstanding options and 334,450 related to outstanding
RSUs.
NOTE 12 – SUBSEQUENT EVENTS
Simple Agreement for Future Equity
(“SAFE”)
In
April 2021, in exchange for $1,000,000 the Company entered into a
SAFE with Roker that allows the Company to participate in future
equity financings, of Roker, through a share-settled redemption of
the amount invested (such notional being the “invested
amount”). Alternatively, upon the occurrence of a change of
control or an initial public offering (other than a qualified
financing), the Company has the option to receive either (i) cash
payment equal to the invested amount under the SAFE, or (ii) a
number of shares of common stock equal to the invested amount
divided by the liquidity price set forth in the applicable
SAFE.
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, 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;
31
●
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;
●
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 markets 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 intend 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;
●
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; and
●
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.
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, 2020 (the “2020 Annual Report”)
and any updates contained herein as well as those set forth in our
reports and other filings made with the SEC.
32
General
Overview
We are
a leader in the emerging market for intelligent roadway systems
developed to take advantage of recent advances in artificial
intelligence ("AI"). We have developed advanced vehicle recognition
systems that can extract more accurate and complete data from
existing cameras and sensors. Our systems have also been designed
to take full advantage of the latest technological advances in new
cameras and sensors, edge processing, and cloud computing. We
have also developed platforms that enable the data our systems
collect to be analyzed in combination with other sources and
distributed to multiple end users in real time as actionable
intelligence or data collected for long range planning purposes in
full compliance with the security and privacy requirements of each
end user.
These
capabilities are particularly useful to governmental entities and
businesses in solving a wide variety of real-world vehicle-related
operational challenges. Our ability to enhance the results provided
by existing Internet Protocol (“IP”) connected cameras
has enabled significant new uses for vehicle recognition technology
that were not previously available or cost effective. We currently
provide products and services for governmental organizations and
large and small businesses throughout the world. Customers
currently use our products or services in approximately 80
countries in applications that include public safety,
transportation, parking, security, customer experience, operational
efficiency and logistics.
Our
continuing operations are conducted by our wholly owned subsidiary,
Rekor Recognition Systems, Inc. (“Rekor Recognition”).
In connection with the development of several new public safety
products, we acquired substantially all the assets of OpenALPR
Technology, Inc. in March 2019. This acquisition (the
“OpenALPR Technology Acquisition”) transferred vehicle
recognition software and associated licenses and proprietary rights
to OpenALPR Software Solutions, LLC (“OpenALPR”), a new
wholly owned subsidiary of Rekor Recognition. OpenALPR’s
vehicle recognition platform, already operating on approximately
6,800 cameras in approximately 80 countries worldwide that cover
approximately 14,000 lanes of roadway, has laid the groundwork for
expansion, enabling multiple deployment mechanisms for our products
and services. Since the Open ALPR Technology Acquisition, our
engineering teams have worked continuously to expand and refine the
Open ALPR platform. In October 2020, we announced the launch of
Rekor One™, an advanced platform that serves as a unifying
source of roadway intelligence for multiple government agencies
across cities, counties and states. The Rekor One™ platform
supports multiple community safety, intelligent roadway and revenue
generation activities that can benefit from the use of our advanced
vehicle recognition software.
Rekor’s
mission is to enable “AI driven decisions” by enhancing
the capabilities in the governmental and commercial sectors with
actionable, real-time insights. We seek to deliver these insights
through an expanding software portfolio that not only addresses the
challenges our customers are currently facing but empowers them to
effectively deal with their evolving needs.
Our
core vehicle recognition software currently has the capability to
analyze multi-spectral images and video streams produced by nearly
any IP camera and concurrently extract license plate data by state
or province from approximately 80 countries, together with the
vehicle’s make, model, color, body type and direction of
travel. Our software is designed to process video streams on the
edge of the network prior to posting results to the Cloud, so that
users are immediately provided usable real-time information for
mission critical public safety and commercial applications. When
combined with speed-optimized code, parallel processing capability
and best-in-class hardware accessories, such as cameras and
communications modules, the software captures license plate data
and vehicle characteristics at extremely high vehicle speeds with a
high degree of accuracy, even in unusually difficult conditions,
such as low lighting, poor weather, extreme camera viewing angles,
and obstructions.
33
Rekor
One provides governments with a comprehensive vehicle intelligence
system that supports multiple agency-specific missions. With Rekor
One, governments can unify and flexibly expand their existing IP
camera networks, while transforming them into a safe and smart
multi-dimensional roadway network. Since it can interface with
multiple database and operating systems, Rekor One’s industry
leading features allow users to observe security and privacy
protocols that are customized to the needs and requirements of each
end-user department or agency, facilitating high level compliance
with the latest advances in privacy and information security
requirements. Rekor One is designed to permit the cost of a network
to be fractionalized based on relative value to multiple end users.
Each participating agency receives a unique user interface and
dashboard, which draw on Rekor One’s unified vehicle
recognition intelligence to provide data customized to the
agency’s specific needs. This eliminates redundant systems
and single function applications which in turn increases efficiency
and lowers costs.
Prior
to the development of our proprietary vehicle identification
software, we believe that highly accurate results were not
available using a typical IP camera. With the ability to generate
more accurate results with less expensive hardware, we believe the
dynamics of existing roadway and public safety markets are
changing, enabling the creation of increasingly robust networks at
lower cost. In addition, we expect our improvements in cost and
accuracy to create competitive advantages in tolling systems and
logistics operations that currently rely on more expensive and
complex radio frequency identification (“RFID”)
systems. We also expect our lower costs, superior camera reading
distance and field of view capabilities, along with the ability to
capture additional vehicle information, such as direction, color,
make model and body type of vehicle, to open opportunities in other
market segments. These opportunities include parking operations,
quick service restaurants, school safety, retail customer loyalty
programs and, particularly, smart cities and smart roadways. Smart
roadway systems, sometimes referred to as smart mobility systems,
smart transport or intelligent transport systems
(“ITS”), inclusive of parking management and guidance,
passenger information and traffic management systems, can optimize
the movement of vehicles to make travel safer and more efficient.
These technologies are expected to enable users to be more
coordinated, better informed, and better able to manage transport
networks efficiently.
Recent Developments
The most significant developments in our company and business since
January 1, 2021 are described below:
●
On
February 26, 2021, we announced that the State of North Dakota
Parks and Recreation Department selected our Rekor One™
solution to help state park leadership understand use patterns and
plan for future needs.
●
In
February 2021, we completed an underwritten public offering of
6,126,939 shares of common stock of the Company at a price to the
public of $12.25 per share. We received aggregate gross proceeds of
approximately $75.1 million from the offering, prior to deducting
underwriting discounts and commissions and offering expenses
payable by us. We intend to use these proceeds to increase our
product development, sales and marketing efforts and to consider
strategic partnerships and acquisitions in our target markets. As a
result of the offering, all of our Series A Cumulative Convertible
Redeemable Preferred Stock automatically converted into 899,174
shares of our common stock. In addition, on February 9, 2021, we
issued 517,611 shares of our common stock, due to the automatic
conversion of 240,861 shares of Series B Preferred Stock, as a
result of the volume weighted share price of our common stock
exceeding certain thresholds. These automatic conversions resulted
in the retirement of all of our outstanding preferred
shares.
●
On
January 7, 2021, we announced that the State of Oklahoma had
integrated our Rekor One™ platform across relevant state
systems to provide vehicle information associated with uninsured
motorists as part of the state’s Uninsured Vehicle
Enforcement Diversion (“UVED”) Program, which is
operated by the Oklahoma District Attorneys Council.
Oklahoma’s UVED Program uses our vehicle recognition
technology to leverage existing state resources to ensure that all
drivers have at least the minimum required amount of liability
insurance, ultimately leading to safer roadways. The platform
allows for real-time detection of non-compliant vehicles and
instant data consolidation into a regularly updating insurance
system connected to the state’s enforcement and intervention
programs. We assist Oklahoma drivers by providing a one-stop web
portal for uninsured motorists to easily find non-standard and
standard insurance for their vehicle. With the successful
implementation of Oklahoma’s UVED Program, we have now
established a leading position in the implementation of an
innovative program now under active consideration by a number of
other states.
Opportunities, Trends and Uncertainties
We look
to identify the various trends, market cycles, uncertainties and
other factors that may provide us with opportunities and present
challenges that impact our operations and financial condition from
time to time. Although there are many that we may not or cannot
foresee, we believe that our results of operations and financial
condition for the foreseeable future will be primarily affected by
the following:
●
AI for the Roadway
– We believe that the application
of AI to the analysis of roadway conditions will significantly
affect vehicular travel in the future by assisting in the
intelligent optimization of traffic flows and the identification of
anomalous and unsafe movements – e.g. wrong way vehicles,
stopped vehicles, or/and pedestrian on the roadway. Marketers and
drive-thru retailers with loyalty programs can also benefit from
rapid, lower cost identification of existing and potential
customers in streamlining and accelerating vehicular
flow.
34
●
Graphic Processing Unit (“GPU”) Improvements
– We expect our business to benefit as a result of more
powerful and affordable GPU hardware that has recently been
developed. These GPUs are more efficient for image processing
because their highly parallel structure makes them more efficient
than general-purpose central processing units (“CPUs”)
for algorithms that process large blocks of data, such as those
produced by video streams. GPUs also provide superior memory
bandwidth and efficiencies as compared to their CPU counterparts.
The most recent versions of our software have been designed to use
the increased GPU speeds to accelerate image recognitions. The GPU
market is predicted to grow as a result of a surge in adoption of
the Internet of Things (“IoT”) by the industrial and
automotive sectors. As GPU manufacturers increase production
volume, we hope to benefit from the reduced cost to manufacture the
hardware included in our products or available to others using our
services.
●
Edge Processing
– Demand for actionable roadway
information continues to grow in parallel with camera resolutions.
Over the last several decades, cameras have evolved from 25K pixels
to 8.3 million pixels and beyond, with each advancement unlocking
new capabilities thereby fueling growth. Further, cellular networks
are optimized for downloading data not for uploading data, and
while speeds have improved over time, what amounts to large
infrastructure changes has resulted in relatively small
improvements to cellular upload speeds. With road-side deployments
experiencing explosive growth in count and density, scalability has
become an obstacle for competition in the market. All of these
factors mean that scalability, latency and bandwidth concerns
require edge processing which are enabled by the continued growth
of the increasingly effective graphic processing units and
continual improvements in efficiency of our AI algorithms. Edge
processing ingests local high definition (“HD”) video
streams and converts the raw video data to text data, thus reducing
the volume of data that needs to be transferred. Edge processing
allows massive scale without the bandwidth, cost, latency and
dependability limitations that would be experienced with a
streaming to the cloud solution.
●
Adaptability of the Current ALPR Market
– We have made
a considerable investment in our advanced vehicle recognition
systems because we believe their increased accuracy, affordability
and ability to capture additional vehicle data will allow them to
compete effectively with existing providers. Based on published
benchmarks, our software currently outperforms competitors in
almost every metric. However, large users of existing ALPR
technology, such as toll roads, have long-term contracts with
service providers that have made considerable investments in their
existing technologies and may not consider the improvements in
accuracy or reductions in cost sufficient to justify abandoning
their current systems in the near future. In addition, existing
providers may be able to reduce the cost of their current offerings
or elect to reduce prices and accept reduced profitability while
working to develop or secure their own advanced vehicle recognition
systems. As a result, our success in establishing a major position
in these markets will depend on being able to effectively
communicate our presence, develop strong customer relationships,
and maintain leadership in providing the capabilities that
customers want. As with any large market, this will require
considerable effort and resources.
●
New and Expanded Uses for Vehicle Recognition Systems
– We believe that reductions in the cost of vehicle
recognition products and services will significantly broaden the
market for these systems. We currently serve a number of users who
could not afford the cost or adapt to, the restrictions of
conventional vehicle recognition systems. These include smaller
municipalities, homeowners’ associations, and organizations
finding new applications such as innovative customer loyalty
programs. We have seen and responded to an increase in the number
of smaller jurisdictions and municipalities that are testing ALPR
systems or that issued requests for proposals to install a network
of ALPR cameras. We also expect the availability of faster, higher
accuracy, lower cost systems to dramatically increase the ability
of crowded urban areas to manage traffic congestion and implement
smart city programs. We do not currently have the resources to
develop all of these entirely new markets by ourselves, so we will
need to rely on affiliations with other partners, who may or may
not realize the significant benefits that we envision from these
new uses.
●
Expansion of Automated Enforcement of Motor Vehicle Laws
– We believe that future legislation will allow for automated
enforcement of motor vehicle regulations, including insurance
requirements, to be expanded as the types of violations authorized
for automated enforcement increase and experience provides
localities with a better understanding of the circumstances where
automated enforcement is beneficial. For example, there are now 17
states that allow for the automatic enforcement of violations by
vehicles that pass a school bus displaying its flashing red lights
and a stop sign. In addition, due to high rates of fatalities and
injuries to law enforcement and other emergency response crews on
roadsides, several states are considering authorizing automated
enforcement of violations where motorists fail to slow down and/or
move over for emergency responders and law enforcement vehicles at
the side of the road. Legislative implementation is a deliberative
and necessarily time-consuming process. However, as states expand
auto enforcement, the market for our products and services should
increase and broaden in the public safety market.
●
Increasing Smart City Market
– Nokia has approved the
use of our OpenALPR software for its smart city offerings. In the
smart cities’ market, real-time vehicle recognition
technologies are widely used for traffic management and public
safety. As a result, we expect to benefit from the growth of this
market.
●
Accelerated Business Development and Marketing
– Our
ability to compete in a large, competitive and rapidly evolving
industry will require us to achieve and maintain a leadership
position. As a result, we have accelerated our business development
marketing and eCommerce activities to increase awareness and market
adoption of our new technology and products within the market. We
anticipate that an increased presence in the market, the continued
development of strategic partnerships and other economies of scale
will significantly reduce the level of costs necessary to support
sales of our products and services. However, the speed at which
these markets grow to the degree of which our products and services
are adopted is uncertain.
●
Sales Cycle
– As many of our products are new to
market, their acceptance and integration into the intended markets
is uncertain and we do not have sufficient historical experience to
accurately predict revenues as a result of their
implementation.
35
●
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 regulations and find scofflaws, aid
motorists in acquiring valid insurance, and dynamically price tolls
based on traffic flow. In addition, states adopting UVED programs
may be able to garner significant net cash contributions to their
annual budgets while reducing the number of uninsured vehicles on
their roadways.
●
Unifying Source of Roadway Intelligence with Rekor One™
-
The Rekor One platform will support multiple community
safety, intelligent roadway and revenue generation activities.
Rekor One will provide government agencies with a comprehensive
vehicle intelligence system that supports multiple agency-specific
missions. With Rekor One, governments will be able to leverage
their existing IP cameras and transform them into a safe and smart
multi-dimensional intelligent roadway network. By interfacing with
multiple databases and operating systems, Rekor One can allow
governmental units to observe security and privacy protocols and
fractionalize costs based on relative end user value. Each
participating agency receives a unique user interface and
dashboard, which draws on Rekor One’s unified vehicle
recognition intelligence to provide data customized to the
agency’s specific needs. This will eliminate redundant
systems and single function applications to help use public funds
wisely. The platform will aid in identifying licensing and
registration non-compliance, uninsured motorists and unpaid parking
violations. This will allow agencies to create targeted
intervention programs that result in increased safety as well as
increased revenue recovery. Smart parking and permitting are also
important capabilities that increase government efficiency and
provide better citizen and visitor experience. As part of traffic
management, Rekor One will also support advanced tolling and
congestion pricing as well as parking and other fees.
●
Increased Demand for Contactless Economy Solutions –
Even prior to the COVID-19 crisis, efficient, touch-free shopping
experiences were becoming increasingly present. Now moving beyond
simple tap-to-pay credit card functionality, we can offer
businesses such as retail and quick service restaurants the ability
to have customers pay-by-plate for a complete contactless
experience for curbside pick-up or drive-thru transactions.
Pay-by-plate functionality not only keeps customers and employees
safe, but it also accelerates service time as the technology fully
integrates with existing point of sale (“POS”) and
customer loyalty systems.
●
Necessity for On-Demand Mobile Solutions –
With app
downloads increasing exponentially year-over-year and over 90% of
mobile phone time spent within apps, businesses require a means to
leverage the ever-present smartphones of employees. By developing a
first-of-its-kind iOS and Android app that can read license plates
on-device, we can provide businesses an affordable way to scale by
using existing devices as license plate recognition sensors. Now
businesses can efficiently manage visitors, streamline parking
operations, enhance campus/event security, and even recover costly
assets.
●
American Jobs Plan
(“AJP”)
- Through the AJP, President Biden is
calling on Congress to make a national investment in the transit
systems in the United States. As originally proposed, the plan
calls for investing over $2 trillion during the next eight years.
The plan estimates that there is a backlog of up to $1 trillion in
needed repairs for roads, bridges, rail and other components of the
United States’ transit system and notes that the United
States has one of the highest traffic fatality rates in the
industrialized world. Estimating that delays caused by traffic
congestion alone cost over $160 billion per year and that motorists
are forced to pay over $1,000 every year in wasted time and fuel,
the plan proposes the expenditure of $115 billion for improvements
that include funding to improve air quality, limit greenhouse gas
emissions, and reduce congestion, crashes and fatalities. We
believe that the ability of our Rekor One platform to perform
multiple missions simultaneously and cost effectively, including
real time system wide traffic monitoring, revenue collection and
delivery of safety, emissions and maintenance information,
positions the Company well to emerge as a technology leader in this
proposed transformation of the transportation infrastructure
nationwide.
36
Components of Operating Results
Revenues
We derive our revenues
substantially from license and subscription fees for software and
related products and services. A portion of the subscription fees
are generated through our eCommerce website rather than through
in-person sales. In addition, we derive revenues in connection with
certain citation and collection services in connection with UVED,
automated traffic safety and parking enforcement
services.
Revenue
is recognized upon transfer of control of promised products and
services to our customers, in an amount that reflects the
consideration we expect to receive in exchange for those products
and services. If the consideration promised in the contract
includes a variable amount, for example maintenance fees, we
include an estimate of the amount we expect to receive for the
total transaction price, if it is probable that a significant
reversal of cumulative revenue recognized will not
occur.
Costs of Revenues
Direct
costs of revenues consist primarily of the portion of technical and
non-technical salaries and wages and payroll-related costs incurred
in connection with revenue generating activities. Direct costs of
revenues also include production expenses, sub-consultant services,
and other expenses that are incurred in connection with our revenue
generating activities. Direct costs of revenues exclude the portion
of technical and non-technical salaries and wages related to
marketing efforts, vacations, holidays, and other time not spent
directly generating fees under existing contracts. Such costs are
included in operating expenses. We expense direct costs of revenues
when incurred.
Operating Expenses
Our
operating expenses consist of general and administrative expenses,
sales and marketing and research and development. Personnel costs
are the most significant component of operating expenses and
consist of salaries, benefits, bonuses, payroll taxes and
stock-based compensation expense. Operating expenses also include
depreciation, amortization and impairment of assets.
General and Administrative
General
and administrative expense consists of personnel costs for our
executive, finance, legal, human resources and administrative
departments. Additional expenses include office leases,
professional fees and insurance.
We expect our general and administrative expense
to continue to increase in absolute dollars for the foreseeable
future due to additional costs associated with accounting,
compliance, insurance and investor relations as a public company.
However, we expect our general and administrative expense to
decrease as a percentage of our revenue over the long term,
although our general and administrative expense may fluctuate as a
percentage of our revenue from period to period due to the timing
and extent of these expenses.
37
Sales and Marketing
Sales
and marketing expenses consist of personnel costs, marketing
programs, travel and entertainment associated with sales and
marketing personnel, expenses for conferences and trade shows. We
intend to make significant investments in our sales and marketing
expenses to grow revenue, further penetrate the market and expand
our customer base. With the release of our Partners Program we
expect our sales and marketing expense to increase in the
future.
Research and Development
Research and
development expenses consists of personnel costs, software used to
develop our products and consulting and professional fees for
third-party development resources. Our research and development
expenses support our efforts to continue to add capabilities to and
improve the value of our existing products and services, as well as
develop new products and services.
We
expect our research and development expense to continue to increase
in absolute dollars for the foreseeable future as we continue to
invest in research and development efforts to enhance the
functionality of our AI software. However, we expect our research
and development expense to decrease as a percentage of our revenue
over the long term, although our research and development expense
may fluctuate as a percentage of our revenue from period to period
due to the timing and extent of these expenses.
Other Income (Expense)
Other
income (expense), net consists primarily of interest expense in
connection with our debt arrangements, costs associated with the
extinguishment of our debt arrangements, gains on the sale of
subsidiaries, gains or losses on the sale of fixed assets, and
interest income earned on cash and cash equivalents, short-term
investments and note receivables.
Income Tax Provision
Income
tax provision consists primarily of income taxes in certain
domestic jurisdictions in which we conduct business. We have
recorded deferred tax assets for which a full valuation allowance
has been provided, including net operating loss carryforwards and
tax credits. We expect to maintain this full valuation allowance
for the foreseeable future as it is more likely than not that some
or all of those deferred tax assets may not be realized based on
our history of losses.
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, 2020.
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.
38
Results of Operations
Our historical operating results in dollars are presented below.
The results below and the analysis of operation is solely related
to continuing operations and do not include results of discontinued
operations from TeamGlobal, AOC Key Solutions and
Firestorm.
|
|
Three
months ended March 31,
|
|
|
(dollars in
thousands)
|
2021
|
2020
|
|
Revenue
|
$
4,216
|
$
1,595
|
|
Cost
of revenue
|
1,962
|
494
|
|
Gross
profit
|
2,254
|
1,101
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
5,403
|
2,791
|
|
Selling
and marketing expenses
|
937
|
371
|
|
Research
and development expenses
|
1,222
|
543
|
|
Operating
expenses
|
7,562
|
3,705
|
|
|
|
|
|
Loss
from operations
|
(5,308
)
|
(2,604
)
|
|
Other
income (expense):
|
|
|
|
Interest
expense
|
(32
)
|
(1,163
)
|
|
Other
income
|
16
|
-
|
|
Total
other expense
|
(16
)
|
(1,163
)
|
|
Loss
before income taxes
|
(5,324
)
|
(3,767
)
|
|
Income
tax provision
|
(3
)
|
(7
)
|
|
Equity
in loss of investee
|
(76
)
|
-
|
|
Net
loss from continuing operations
|
(5,403
)
|
(3,774
)
|
|
Net
loss from discontinued operations
|
(3
)
|
(14
)
|
|
Net
loss
|
$
(5,406
)
|
$
(3,788
)
|
|
Comprehensive
loss:
|
|
|
|
Net
loss from continuing operations
|
(5,403
)
|
(3,774
)
|
|
Change
in unrealized gain on short-term investments
|
2
|
-
|
|
Total
comprehensive loss from continuing operations
|
(5,401
)
|
(3,774
)
|
|
Total
comprehensive loss
|
$
(5,404
)
|
$
(3,788
)
|
39
Comparison of the Three Months ended March 31, 2021 and the Three
Months ended March 31, 2020
Total Revenue
|
|
Three
Months ended March 31,
|
Change
|
||
|
(dollars
in thousands)
|
2021
|
2020
|
$
|
%
|
|
Revenue
|
$
4,216
|
$
1,595
|
$
2,621
|
164
%
|
The increase in revenue for the three
months ended March 31, 2021 compared to the three months ended
March 31, 2020, was a result of additional products and programs
the Company offered, increases in our direct sales and Partners
Program sales. In the first quarter of 2021, we initiated services
for Oklahoma’s UVED Program which has issued over 25,000
notices of non-compliance and generated revenue of $245,000 revenue
in the current quarter. We also had significant growth in our
eCommerce revenue
which is
defined as revenue recognized through our eCommerce platform as
well as our solutions in the tolling industry. For the three months
ended March 31, 2021 and 2020, the Company recognized revenues of
$442,000 and $177,000, respectively, for eCommerce revenue. The
remainder of the increase was attributable to increased sales of
hardware and software subscriptions through our Partners Program
and direct sales channels.
Cost of Revenue, Gross Profit and Gross Margin
|
|
Three Months ended March 31,
|
Change
|
||
|
(dollars
in thousands)
|
2021
|
2020
|
$ or % Points
|
%
|
|
Cost
of revenue
|
$
1,962
|
$
494
|
$
1,468
|
297
%
|
|
Gross
profit
|
2,254
|
1,101
|
1,153
|
105
%
|
|
Gross
margin
|
53
%
|
69
%
|
-16
%
|
-23
%
|
For the
three months ended March 31, 2021, compared to the three months
ended March 31, 2020, the increase in gross profit was attributable
to the increase in revenue.
For the
three months ended March 31, 2021 the gross margin decreased to 53%
from 69% for the three months ended March 31, 2020, respectively,
which was attributable to the sale of hardware which occurred
during the three months ended March 31, 2021. Hardware sales
typically have lower margins than software sales which is why our
gross margin percent decreased.
Operating Expenses
|
|
Three Months ended March 31,
|
Change
|
||
|
(dollars
in thousands)
|
2021
|
2020
|
$
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
$
5,403
|
$
2,791
|
$
2,612
|
94
%
|
|
Selling
and marketing expenses
|
937
|
371
|
566
|
153
%
|
|
Research
and development expenses
|
1,222
|
543
|
679
|
125
%
|
|
Operating
expenses
|
$
7,562
|
$
3,705
|
$
3,857
|
104
%
|
40
General and Administrative Expenses
The majority of the increase to general and administrative expenses
is attributable to increased headcount and equity award expenses.
Additionally, for the three months ended March 31, 2021 compared to
the three months ended March 31, 2020, we saw an increase in
professional fees mainly associated with our merger and acquisition
initiatives.
Selling and Marketing Expenses
The increase in selling and marketing expenses during the year is
attributable mainly to 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 development of new products and
additional software capabilities, as a result of our increased
focus on technology offerings. The increase in research and
development expenses is mainly attributable to an increase in
headcount and hours associated with research and development
activities.
Other Expense
|
|
Three Months ended March 31,
|
Change
|
||
|
(dollars
in thousands)
|
2021
|
2020
|
$
|
%
|
|
Other
income (expense):
|
|
|
|
|
|
Interest
expense
|
$
(32
)
|
$
(1,163
)
|
$
1,131
|
97
%
|
|
Other
income
|
16
|
-
|
16
|
100
%
|
|
Total
other expense
|
$
(16
)
|
$
(1,163
)
|
$
1,147
|
99
%
|
The decrease in interest expense for the three months ended March
31, 2021 compared to the three months ended March 31, 2020 is due
to the retirement of the 2019 Promissory notes in
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, (v) losses associated with
equity method investments, (vi) merger and acquisition transaction
costs and (vii) 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.
41
The following table sets forth the components of the EBITDA and
Adjusted EBITDA for the periods included (dollars in
thousands):
|
|
Three
Months ended March 31,
|
|
|
|
2021
|
2020
|
|
Total
comprehensive loss from continuing operations
|
$
(5,401
)
|
$
(3,774
)
|
|
Income
taxes
|
3
|
7
|
|
Interest
|
32
|
1,163
|
|
Depreciation
and amortization
|
614
|
423
|
|
EBITDA
|
$
(4,752
)
|
$
(2,181
)
|
|
|
|
|
|
Share-based
compensation
|
781
|
171
|
|
Loss
due to change in value of equity investments
|
76
|
-
|
|
One-time
consulting fees
|
776
|
-
|
|
Adjusted
EBITDA
|
$
(3,119
)
|
$
(2,010
)
|
Lease Obligations
At March 31, 2021, we leased building space at the
following locations in the U.S.:
●
Columbia, Maryland – The corporate headquarters
●
Linthicum, Maryland – Storage facility for inventory related
to our technology hardware
●
Orlando, Florida – Florida implementation office
We believe our facilities are in good condition and adequate for
their current use. We expect to improve, replace and increase
facilities as considered appropriate to meet the needs of our
planned operations.
42
Liquidity and Capital Resources
The following table sets forth the components of our cash flows for
the period included (dollars in thousands):
|
|
Three
Months ended March 31,
|
|||
|
|
2021
|
2020
|
Change
|
|
|
|
|
$
|
%
|
|
|
Net
cash used in operating activities - continuing
operations
|
$
(3,159
)
|
$
(2,444
)
|
$
(715
)
|
-29
%
|
|
Net
cash used in investing activities - continuing
operations
|
(24,420
)
|
(178
)
|
(24,242
)
|
-13,619
%
|
|
Net
cash provided by financing activities - continuing
operations
|
70,425
|
2,523
|
67,902
|
2,691
%
|
|
Net
increase (decrease) in cash, cash equivalents and restricted cash
and cash equivalents - continuing operations
|
$
42,846
|
$
(99
)
|
$
42,945
|
43,379
%
|
Net
cash used in operating activities – continuing operations for
the three months ended March 31, 2021 had a net increase of
$715,000, w
hich was attributable to
the increase in the loss from continuing operations of
$1,627,000
. This amount was partially offset by an increase
to share-based compensation expense, a non-cash adjustment, which
increased $610,000 from $171,000 to $781,000, respectively, for the
three months ended March 31, 2021 compared to the three months
ended March 31, 2020.
The net
increase in net cash used in investment activities –
continuing operations of $24,242,000 was primarily due to an
increase in short-term investments of $23,994,000 which was
invested in U.S. Treasury Bills that have maturity dates over three
months but, less than a year.
Net
cash provided by financing activities – continuing operations
for the three months ended March 31, 2021 increased $67,902,000
from the prior three month period ended March 31, 2020. In the
current year, through our Public Offering, we received
net proceeds, after deducting the underwriting
discounts and commissions and offering expenses payable by us, of
$70,125,000.
For the three months
ended March 31, 2021 and 2020, we funded our operations primarily
through cash from operating activities from our subsidiaries and
the sale of equity. As of March 31, 2021, we had unrestricted cash
and cash equivalents from continuing operations of $62,845,000,
$23,996,000 short-term investments and working capital of
$84,369,000, as compared to unrestricted cash and cash equivalents
of $20,595,000 and working capital of $18,324,000 as of December
31, 2020.
Performance Obligations
Operating assets and liabilities consist primarily of receivables
from billed and unbilled services, accounts payable, accrued
expenses, secured borrowing arrangements, and accrued payroll and
related benefits. The volume of billings and timing of collections
and payments affect these account balances.
As of
March 31, 2021, we had approximately $16,186,000 of contracts that
were closed prior to March 31, 2021 but have a contractual period
beyond March 31, 2021. These contracts generally cover a term of
one to five years, in which the Company will recognize revenue
ratably over the contract term. We currently expect to recognize
approximately 32% 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 contract for a service period that is not yet met
are recorded as part of our contract liabilities
balance.
43
We have
experienced growth of 17% in the remaining value of contracts from
March 31, 2020 through March 31, 2021.
The
table below shows the quarter by quarter growth in contract value
(dollars in thousands):
Public
Offering
On
February 9, 2021, we issued and sold 6,126,939 shares of our common
stock (which included 799,166 shares of common stock sold pursuant
to the exercise of an overallotment option) (the “Public
Offering”). The net proceeds to us, after deducting the
underwriting discounts and commissions and offering expenses
payable by the us, were approximately $70,125,000.
Series A Preferred Stock
The holders of Rekor Series A Preferred
Stock were entitled to quarterly dividends in the amount of $0.175
(7% per annum) per share. Dividends accrued quarterly and dividend
payments for declared dividends were due within five business days
following the end of a quarter.
As a
result of the closing of the Public Offering, all of our issued and
outstanding Series A Preferred Stock was automatically converted
pursuant to its terms into 899,174 shares of our common
stock.
Series B Preferred Stock
As part of the acquisition of
TeamGlobal, we issued 240,861 shares of $0.0001 par value Series B
Preferred Stock. All Series B Preferred Stock was issued at a price
of $10.00 per share with a conversion price of $5.00 per share.
Each Series B Preferred Stock had an automatic conversion feature
based on our common stock share price. The Series B Preferred Stock
was entitled to quarterly cash dividends of 1.121% (4.484% per
annum) per share. Dividends accrued quarterly and dividend payments
for declared dividends were due within five business days following
the end of a quarter.
As a
result of the closing of the Public Offering, all of our issued and
outstanding Series B Preferred Stock was converted pursuant to its
terms into 517,611 shares of our common stock.
As of March 31, 2021, we did not have any material commitments for
capital expenditures.
44
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.
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 March
31, 2021.
Changes to Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
45
On August 19, 2019, we filed suit in the United
States District Court for the Southern District of New York against
three former executives of the Company and Firestorm (the
“Firestorm Principals”)—
Rekor Systems, Inc. v. Suzanne
Loughlin, et al
., Case no.
1:19-cv-07767-VEC. The Complaint alleges that the Firestorm
Principals fraudulently induced the execution of the Membership
Interest Purchase Agreement wherein Firestorm was acquired by
us. The Complaint requests equitable rescission of that
transaction, or, alternatively, monetary
damages.
Following
an initial amended complaint, answer and counterclaims, and
defendants’ motion for judgment on the pleadings, on January
30, 2020, we filed a Second Amended Complaint, which the Firestorm
Principals answered together with counterclaims on February 28,
2020. Thereafter, on March 30, we moved to dismiss certain
counterclaims against certain executives named as
counterclaim-defendants, which resulted in the Firestorm Principals
voluntarily dismissing those counterclaims against those
parties. We thereafter filed our response and affirmative
defenses to the Counterclaims on April 22, 2020. On April 27,
2020, the Firestorm Principals filed a Motion for Partial Judgment
on the Pleadings, which we have opposed. In addition, on
December 9, 2019, the Firestorm Principals filed a motion for an
interim award of expenses and attorney’s fees. The
Court denied the Firestorm Principals’ fee advance
motion.
On April 27, 2021, the Firestorm Principals filed a notice of
motion for partial summary judgment, seeking summary judgment on
several of our claims and the Firestorm Principals' counterclaims,
along with supporting declarations and exhibits. The Court held a
conference call with the parties to address the proposed motion for
partial summary judgment on April 30, 2021, and has not yet decided
whether to allow the proposed motion to
proceed.
In the year 2020, the Firestorm Principals filed suits in New York,
Delaware and Virginia Courts against directors of the Company,
alleging breach of fiduciary duty and libel. We believe that
these suits are without merit and intend to vigorously litigate
this matter.
At
this stage of these litigations, we are unable to render an opinion
regarding the likelihood of a favorable outcome. We intend to
continue vigorously litigating its claims against the Firestorm
Principals and believe that the Firestorm Principals’
remaining counterclaims and suits against Rekor directors and
officers are without merit.
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 and counterclaims against
OpenALPR for defamation, fraud and intentional interference with
existing and future business relationships. On July 13, 2020,
OpenALPR filed an opposition to the motion for joinder.
On
November 23, 2020, the Court denied PCS’s Motion for Joinder
with prejudice. The case is currently proceeding between OpenALPR
and PCS only and is still in its early stages. Rekor believes that
OpenALPR has substantial defenses to the counter claims and intends
to vigorously defend the allegations of those counter
claims.
On
September 18, 2020, Fordham Financial Management, Inc.
(“Fordham”) commenced a lawsuit against us in the
Supreme Court for the State of New York, New York County. Fordham
alleges that we breached an underwriting agreement with it. Fordham
has brought claims for breach of contract, a declaratory judgment,
and attorneys’ fees and expenses, and seeks damages.
The
Complaint was served to us on September 25, 2020. Fordham agreed to
extend our time to respond to the Complaint until June 23, 2021,
pending the outcome of a private mediation on February 24, 2021,
which was unsuccessful.
At this
stage of the Fordham litigation, we are unable to render an opinion
regarding the likelihood of a favorable outcome. However, we
maintain that Fordham’s claims have no merit. To that end we
intend to vigorously litigate this action, to include its pursuit
of counterclaims against Fordham for fraud and breach of contract,
among other causes of action.
46
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.
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 12, 2021. We encourage investors to
review the risk factors and uncertainties relating to our business
disclosed in that Form 10-K, as well as those contained in Part 1,
Item 2, Management’s Discussion and Analysis of Financial
Condition and Results of Operations, above.
Note Exchange Agreement
In
an agreement reached on June 30, 2020, the 2019 Lenders of the 2019
Promissory Notes agreed to a redemption of approximately 77% of the
remaining principal balance of the 2019 Promissory Notes as of June
30, 2020. Per the Exchange Agreement, $17,398,000, was redeemed in
exchange for 4,349,497 shares of the Company’s common stock,
at a rate of $4 per share (the “Note Exchange”). At the
time of the Exchange Agreement the net amount of long-term debt
redeemed for common stock was $14,688,000. This included the
existing principal balance subject to conversion, the portion of
the exit fee associated with the notes subject to conversion,
offset by the portion of unamortized issuance costs associated with
the notes subject to conversion. There was also $226,000 related to
the paid-in-kind (“PIK”) interest associated to the
notes subject to conversion that was exchanged as part of the
Exchange Agreements. The difference between the market value of the
shares issued and the net carrying amount of the obligations above
was recorded as part of debt extinguishments costs in the
accompanying consolidated statement of operations.
On
July 15, 2020, we completed the Note Exchange by issuing our 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.
Automatic Conversion of Series A Cumulative Convertible Redeemable
Preferred Stock and Series B Cumulative Convertible Redeemable
Preferred Stock
As
a result of the closing of the Public Offering, all of our issued
and outstanding Series A Cumulative Convertible Redeemable
Preferred Stock, par value $0.0001 per share (the “Series A
Preferred Stock”) and Series B Cumulative Convertible
Redeemable Preferred Stock, par value $0.0001 per share (the
“Series B Preferred Stock”) were automatically
converted pursuant to their respective terms into an aggregate of
1,416,785 shares of our common stock. As a result of the automatic
conversion of the Series A Preferred, the Series A Preferred is no
longer quoted on the OTC Pink. The Series B Preferred was not
quoted on any trading market.
Use of Proceeds
We have
generated losses since our inception in February 2017 and have
relied on cash on hand, external bank lines of credit, short-term
borrowing arrangements, issuance of debt, the sale of a note, sale
of our non-core subsidiaries, and the sale of common stock to
provide cash for operations. We attribute losses to financing
costs, public company corporate overhead, lower than expected
revenue, and lower gross profit of some of our subsidiaries. Our
proceeds have been primarily used for research and development and
sales and marketing expenses related to new product development and
our strategic shift to develop and promote capabilities of our
technology offerings.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
Not applicable.
None.
47
(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
|
|
|
|
|
10.1
|
|
Agreement
of Lease by and between 6721 Gateway, LLC and Rekor Systems, Inc.
dated March 25, 2021.
|
|
|
|
|
|
|
|
|
|
*
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Section
1350 Certification of Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
**
|
|
|
|
Section
1350 Certification of Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
**
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
* Filed
herewith.
**
Furnished herewith.
48
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.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Robert A. Berman
|
|
|
|
Name:
|
Robert
A. Berman
|
|
|
|
Title:
|
President
and Chief Executive Officer
Principal
Executive Officer
|
|
|
|
Date:
|
May 10,
2021
|
|
|
|
|
|
|
|
|
By:
|
/s/
Eyal Hen
|
|
|
|
Name:
|
Eyal
Hen
|
|
|
|
Title:
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
Date:
|
May 10,
2021
|
|
49
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 General, Basis Of Presentation, and Summary Of Significant Accounting PoliciesNote 2 Discontinued OperationsNote 3 Supplemental Disclosures Of Cash Flow InformationNote 4 Operating LeasesNote 5 Intangible AssetsNote 6 DebtNote 7 Income TaxesNote 8 Commitments and ContingenciesNote 9 Stockholders Equity (deficit)Note 10 Equity Incentive PlanNote 11 Loss Per ShareNote 12 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitaive and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits