NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
These
unaudited condensed consolidated interim financial statements of
Rekor Systems, Inc. and its subsidiaries (collectively, the
“Company”) have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”) for interim financial statements. Accordingly,
they do not contain all information and notes required by U.S. GAAP
for annual financial statements. In the opinion of management,
these unaudited condensed consolidated interim financial statements
reflect all adjustments, which include normal recurring
adjustments, necessary for a fair statement of the Company’s
consolidated financial position as of September 30, 2019, the
consolidated results of operations, consolidated statements of
shareholders’ (deficit) equity and consolidated statements of
cash flows for the three and nine months ended September 30, 2019
and 2018.
The
financial data and other information disclosed in the notes to the
unaudited condensed consolidated financial statements related to
these periods are unaudited. The results for the three and nine
months ended September 30, 2019 are not necessarily indicative of
the results to be expected for the year ending December 31,
2019.
These
unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018. The
unaudited condensed consolidated balance sheet data as of December
31, 2018 was derived from the Company’s audited consolidated
financial statements for the year ended December 31, 2018 but does
not include all disclosures required by U.S. GAAP for annual
financial statements.
Dollar
amounts, except per share data, in the notes to these financial
statements are rounded to the closest $1,000.
Certain
prior year amounts have been reclassified to conform with the
current year presentation. Beginning in the second quarter of 2019,
sales and marketing expenses and research and development expenses
have been presented separately from general and administrative
expenses on the unaudited condensed consolidated statements of
operations, whereas in prior periods these amounts were included in
one caption titled "selling, general and administrative expenses."
Amounts for the first quarter of 2019 and for the period ending
December 31, 2018, have been reclassified to conform to the current
year presentation.
Rekor Systems, Inc. (the “Company” or
“Rekor”), (formerly Novume Solutions, Inc.) was formed
in February 2017 to effectuate the mergers of, and become a holding
company for KeyStone Solutions, LLC. (“KeyStone”) and
Brekford Traffic Safety, Inc. (“Brekford”). On
February 28, 2019, the Company changed the name of its wholly owned
subsidiary, Brekford Traffic Safety, Inc. to Rekor Recognition
Systems, Inc. (“Rekor Recognition”). On April 26, 2019,
the Company changed its name from Novume Solutions, Inc. to Rekor
Systems, Inc.
In
March 2019, Rekor acquired certain assets and certain liabilities
of OpenALPR Technology, Inc. (such assets and liabilities being
referred to herein as “OpenALPR Technology”) through
its subsidiary, OpenALPR Software Solutions, LLC
(“OpenALPR”). The financial information in this
Quarterly Report only includes OpenALPR in the results of
operations beginning as of March 12, 2019 (see Note
4).
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the third quarter of 2019, the Company
began to separately report the results of Global Technical
Services, Inc. and Global Contract Professionals, Inc. (together
“Global”), the Company’s wholly owned
subsidiaries, including substantially
all of the assets and liabilities comprising Global, as operations
held for sale. The Company is reporting the operating results and
cash flows of Global as operations held for sale, and thus they
have been excluded from continuing operations and segment results
for all periods presented. Prior to the third quarter of 2019, the
operating results for Global were presented in the Professional
Services segment. The assets and liabilities of Global are
presented as current and long-term assets and liabilities held for
sale in the unaudited condensed consolidated balance sheets and its
results are presented as income (loss) from operations held for
sale in the unaudited condensed consolidated statement of
operations. In cases where the carrying value amount exceeds the
fair value, less costs to sell, an impairment loss is recognized.
Due to the held for sale classification of Global, certain amounts
have been reclassified in order to conform to the current period
presentation. See Note 16 for additional information regarding the
Company's held for sale operations.
Use of Estimates
Management uses
estimates and assumptions in preparing financial statements. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual amounts may differ
from these estimates. On an on-going basis, the Company evaluates
its estimates, including those related to collectability of
accounts receivable, fair value of debt and equity instruments, and
income taxes. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances. These form the basis for making
judgments about the carrying value of assets and liabilities that
are not apparent from other sources. Actual results may differ from
those estimates under different assumptions or
conditions.
Going Concern Assessment
For all
annual and interim periods, management will assess going concern
uncertainty in the Company’s unaudited condensed consolidated
financial statements to determine whether there is sufficient cash
on hand and working capital, including available borrowings on
loans, to operate for a period of at least one year from the date
the unaudited
condensed consolidated financial statements are issued or available
to be issued, which is referred to as the “look-forward
period”, as defined in U.S. GAAP. As part of this assessment,
based on conditions that are known and reasonably knowable to
management, management will consider various scenarios, forecasts,
projections, estimates and will make certain key assumptions. These
assumptions including among other factors, the expected timing and
nature of the Company’s programs and projected cash
expenditures, its ability to delay or curtail these expenditures or
programs and its ability to raise additional capital, if necessary,
to the extent management has the proper authority to execute them
and considers it probable that those implementations can be
achieved within the look-forward period.
The
Company has generated losses since its inception in August 2017 and
has relied on cash on hand, secured borrowing arrangements, the
sale of a note, debt financing, and public offering of its common
stock, including its on-going At-the-Market Issuance Sales
Agreement (the "Sales Agreement") offering as disclosed below, to
support cash flows from operations. As of and for the nine months
ended September 30, 2019, the Company had a net loss from
continuing operations of $11,428,000 and a working capital deficit
of $107,000. The Company's net cash position was decreased by
$561,000 for the nine months ended September 30, 2019 due to the
net loss from operations, offset by the proceeds of $20,000,000
senior secured notes, of which $5,000,000 was issued as a note
payable to the seller, offset by $7,000,000 of cash paid for the
acquisition of OpenALPR, and approximately $6,227,000 related to
the extinguishment of debt and associated fees related to acquiring
new debt (see Note 7).
Management believes
that based on relevant conditions and events that are known and
reasonably knowable, its current forecasts and projections, for one
year from the date of the filing of the unaudited condensed
consolidated financial statements in this Quarterly Report on Form
10-Q, indicate the Company’s ability to continue operations
as a going concern for that one-year period. The Company is
actively monitoring its operations, the cash on hand and working
capital. Additionally, as of September 30, 2019, the Company
believes it has access to raise up to $14,706,000 through the Sales
Agreement (see Note 9). The Company will
continue to raise capital through the Sales Agreement to help fund
operations. Should access to those funds be unavailable, the
Company will need to seek out additional sources of funding.
Furthermore, 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.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Intangible Assets
In
applying the acquisition method of accounting, amounts assigned to
identifiable assets and liabilities acquired were based on
estimated fair values as of the date of acquisition, with the
remainder recorded as goodwill. Identifiable
intangible assets are initially valued at fair value using
generally accepted valuation methods appropriate for the type
of intangible asset. Identifiable intangible assets
with definite lives are amortized over their estimated useful lives
and are reviewed for impairment, if indicators of impairment
arise. Intangible assets with indefinite lives are tested
for impairment within one year of acquisitions or annually and
whenever indicators of impairment exist. The Company is currently
in the process of its annual impairment test. The fair value of
intangible assets is compared with their carrying values, and an
impairment loss would be recognized for the amount by which a
carrying amount exceeds its fair value.
During
the second quarter of 2019 the Company wrote-off $1,549,000 of
intangible assets associated with the Company's wholly owned
subsidiaries Firestorm Solutions, LLC and Firestorm Franchising LLC
(collectively, “Firestorm”), and BC Management, Inc.
(“BC Management”) (see Note 5).
Revenue Recognition
The
Company derives its revenues substantially from two sources: (1)
subscription revenues for software licenses, technology products
and services, and (2) and professional services to
clients.
Revenue
is recognized upon transfer of control of promised products and
services to the Company’s customers, in an amount that
reflects the consideration the Company expects to receive in
exchange for those products and services. If the consideration
promised in the contract includes a variable amount, for example
maintenance fees, the Company includes an estimate of the amount it
expects to receive for the total transaction price, if it is
probable that a significant reversal of cumulative revenue
recognized will not occur.
The
Company determines the amount of revenue to be recognized through
application of the following steps:
●
Identification of
the contract, or contracts, with a customer
●
Identification of
the performance obligations in the contract
●
Determination of
the transaction price
●
Allocation of the
transaction price to the performance obligations in the
contract
●
Recognition of
revenue when, or as, performance obligations are
satisfied
The
subscription revenues for software licenses, technology products
and services revenues are comprised of fees that provide customers
with access to the software licenses and related support and
updates during the term of the arrangement. Revenue is generally
recognized ratably over the contract term. During the second
quarter of 2019, the Company changed its method of selling in the
Technology Segment from perpetual software licenses to monthly
service subscriptions. This change is expected to impact the
Company's revenue in the short term. However, the amount of
contract revenue received over the long term impact is expected to
be relatively consistent. The Company’s subscription
services arrangements are non-cancelable and do not contain
refund-type provisions.
The Company’s professional services contracts recognize
revenue based on a time and materials or
fixed fees basis. These revenues are recognized as the services are
rendered for
time and materials contracts, on a proportional performance basis for fixed price contracts,
or ratably over the contact term for fixed price contracts with
subscription services.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
timing of revenue recognition, billings and cash collections
results in billed accounts receivable, unbilled receivables
(included within accounts receivable, net), and contract
liabilities (deferred revenue) on the unaudited condensed
consolidated balance sheets. When billings occur after the work has
been performed, such unbilled amounts will generally be billed and
collected within 60 to 120 days but typically no longer than over
the next twelve months. Unbilled receivables of $963,000 and
$824,000 were included in accounts receivable, net, in the
unaudited condensed consolidated balance sheets as of September 30,
2019 and December 31, 2018, respectively. Additionally, unbilled
receivables of $469,000 and $301,000 were included in current
assets held for sale in the unaudited
condensed consolidated balance sheets as of September 30, 2019 and
December 31, 2018, respectively.
When
the Company advance bill clients prior to the work being performed,
generally, such amounts will be earned and recognized in revenue
within the next six months to five years, depending on the
subscription or licensing period. These assets and liabilities are
reported on the unaudited condensed consolidated balance sheet on a
contract-by-contract basis at the end of each reporting period.
Changes in the contract asset and liability balances during the
nine months ended September 30, 2019 were not materially impacted
by any other factors. Contract liabilities from the period ended
September 30, 2019 and December 31, 2018 were $1,495,000 and
$207,000 respectively. All contract liabilities as of September 30,
2019 and December 31, 2018 were attributable to continued
operations. During the nine months ended September 30, 2019 all of
the contract liabilities balance as of December 31, 2018 was
recognized as revenue.
The
services due for contract liabilities described above are shown
below as of September 30, 2019 (dollars in thousands):
2019
|
$246
|
2020
|
544
|
2021
|
223
|
2022
|
200
|
2023
|
189
|
Thereafter
|
93
|
Total
|
$1,495
|
Segment Reporting
The Financial
Accounting Standards Board (“FASB”) Accounting Standard
Codification (“ASC”) Topic 280, Segment
Reporting, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
Beginning
with the first quarter of 2019, the Company changed its operating
and reportable segments from one segment to two
segments: the Technology
Segment and the Professional Services Segment. The two segments
reflect the Company’s separate focus on technology products
and services versus professional services. (See Note
3).
The Technology Segment is responsible for the activities in
developing technology and distributing and licensing products and
services with vehicle recognition features. In connection with this
effort in March 2019, the Company acquired OpenALPR Technology (See
Note 4). The Professional Services Segment is responsible for the
activities that provide professional services for government
contracting market, as well as staffing services for the aerospace
and aviation markets.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash, Cash Equivalents and Restricted Cash and Cash
Equivalents
The Company considers all highly liquid debt instruments purchased
with the maturity of three months or less to be cash
equivalents.
Cash subject to
contractual restrictions and not readily available for use is
classified as restricted cash and cash equivalents. The
Company’s restricted cash balances are primarily made up of
cash collected on behalf of certain client jurisdictions.
Restricted cash and cash equivalents for these client jurisdictions
as of September 30, 2019 and December 31, 2018 were
$708,000 and
$609,000, respectively, and correspond to equal amounts of related
accounts payable and are presented as part of accounts payable and
accrued expenses in the accompanying unaudited condensed
consolidated balance sheets.
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed
consolidated balance sheets for cash and cash equivalents,
restricted cash and cash equivalents, inventory, accounts
receivable and accounts payable approximate fair value as of
September 30, 2019 and December 31, 2018 because of the relatively
short-term maturity of these financial instruments. The carrying
amount reported for long-term debt approximates fair value as of
September 30, 2019 and December 31, 2018 given management’s
evaluation of the instrument’s current rate compared to
market rates of interest and other factors.
The determination of
fair value is based upon the fair value framework established by
Accounting Standards Codification (“ASC”) Topic
820, Fair
Value Measurements and Disclosures (“ASC
820”). Fair value is defined as the exit price, or the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as
of the measurement date. ASC 820 also establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in
valuing the asset or liability and are developed based on market
data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions
about the factors market participants would use in valuing the
asset or liability. The guidance establishes three levels of inputs
that may be used to measure fair value:
Level 1 –
Quoted
prices in active markets for identical assets or
liabilities.
Level 2 –
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level 3 –
Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurements. Changes in the observability of valuation inputs may
result in a reclassification of levels for certain securities
within the fair value hierarchy.
The Company’s goodwill and other intangible assets are
measured at fair value at the time of acquisition and analyzed on a
recurring and non-recurring basis for impairment, respectively,
using Level 2 and Level 3 inputs.
The Company has concluded that its Series A Preferred Stock is a
Level 3 financial instrument and that the fair value approximates
the carrying value, which includes the accretion of the discounted
interest component through September 30, 2019. There were no
changes in levels during the three and nine months ended September
30, 2019 and 2018.
Concentrations of Credit Risk
The Company places its temporary cash investments with higher rated
quality financial institutions located in the United States
(“U.S.”). As of September 30, 2019 and December 31,
2018, the Company had deposits from continuing operations totaling
$1,981,000 and $2,678,000 from continuing operations, respectively,
in two and three U.S. financial institutions that were federally
insured up to $250,000 per account, respectively.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has a market concentration of revenue and accounts
receivable, from continuing operations, in its Professional
Services Segment related to its customer base.
Company A accounted for 21% and 17% of the Company’s total
revenues for the nine months ended September 30, 2019 and 2018,
respectively, and 17% and 22% of the Company’s total revenue
for the three months ended September 30, 2019 and 2018,
respectively.
Company B accounted for 16% and less than 10% of the
Company’s total revenues for the nine months ended September
30, 2019 and 2018, respectively, and 12% and 11% of the
Company’s total revenue for the three months ended September
30, 2019 and 2018, respectively.
As of September 30, 2019, accounts receivable from Company A
totaled $902,000 or 19% of the unaudited condensed consolidated
accounts receivable balance. As of December 31, 2018, Company A and
Company B accounted for $1,043,000, or 35%, and $483,000, or 16%,
respectively, of the
unaudited condensed consolidated accounts receivable
balance.
No other single customer accounted for more than 10% of the
Company’s
unaudited condensed consolidated revenue for the nine months
ended September 30, 2019 or
unaudited condensed consolidated accounts receivable balance
as of September 30, 2019.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements effective in the nine months ended
September 30, 2019
In February 2016, the
FASB issued Accounting Standards Update (“ASU”)
No. 2016-02, Leases
(Topic 842) (“ASU
2016-02”). ASU
2016-02 requires lessees to recognize lease assets and lease
liabilities on the balance sheet and requires expanded disclosures
about leasing arrangements. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018 and interim periods in
fiscal years beginning after December 15, 2018, with early adoption
permitted. In July 2018, the FASB issued ASU No.
2018-11, Leases
(Topic 842): Targeted Improvements (“ASU
2018-11”). ASU 2018-11 provides entities another option for
transition, allowing entities to
not apply the new standard in the comparative periods they present
in their financial statements in the year of adoption. Effective
January 1, 2019, the Company adopted ASU 2016-02, as amended, which
requires lessees to recognize a right-of-use (“ROU”)
lease assets and lease liability on the balance sheet for most
lease arrangements and expands disclosures about leasing
arrangements for both lessees and lessors, among other items. The
Company adopted ASU 2016-02 using the optional transition method
whereby the Company applied the new lease requirements under ASU
2016-02 through a cumulative-effect adjustment, which after
completing the Company’s implementation analysis, resulted in
no adjustment to its January 1, 2019 beginning retained earnings
balance. On January 1, 2019, the Company recognized $921,000 of ROU
operating lease assets and $951,000 of operating lease liabilities,
including noncurrent operating lease liabilities of $728,000, as a
result of adopting this standard. The difference between ROU
operating lease assets and operating lease liabilities was
primarily due to previously accrued rent expense relating to
periods prior to January 1, 2019. The new standard provides
several optional practical expedients for use in transition. The
Company elected to use what the FASB has deemed the “package
of practical expedients,” which allows the Company not to
reassess the Company’s previous conclusions about lease
identification, lease classification and the accounting treatment
for initial direct costs. The ASU also provides several optional
practical expedients for the ongoing accounting for leases. The
Company has elected the short-term lease recognition exemption for
all leases that qualify, meaning that for leases with terms of
twelve months or less, the Company will not recognize ROU assets or
lease liabilities on the Company’s unaudited condensed
consolidated balance sheet. Additionally, the Company has elected
to use the practical expedient to not separate lease and non-lease
components for leases of real estate, meaning that for these
leases, the non-lease components are included in the associated ROU
asset and lease liability balances on the Company’s
unaudited
condensed consolidated balance sheet. The comparative
periods have not been restated for the adoption of
ASU 2016-02.
In June 2018, the FASB
issued ASU No. 2018-07, Compensation
– Stock Compensation (Topic 718), Improvements
to Nonemployee Share-Based Payment Accounting (“ASU
2018-07”), which is intended to simplify aspects of
share-based compensation issued to non-employees by making the
guidance consistent with the accounting for employee share-based
compensation. ASU 2018-07 is effective for annual
periods
beginning after December 15, 2018 and interim periods within
those annual periods, with early adoption permitted but no earlier
than an entity’s adoption date of Topic 606. The Company
adopted the provisions of ASU 2018-07 effective January 1, 2019.
Adopting ASU 2018-07 had no impact on the Company’s
unaudited
condensed consolidated financial statements and
related disclosures.
In May 2017, the FASB
issued ASU No. 2017-09, Compensation
- Stock Compensation: Scope of Modification
Accounting (“ASU
2017-09”), which provides guidance about which changes to the
terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award.
ASU 2017-09
is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the
adoption date. Early adoption
is permitted. The Company adopted ASU 2017-09 in 2018 and the
impact of the adoption was not material to its unaudited
condensed consolidated financial statements and
related disclosures.
New accounting pronouncements not yet
effective
In
June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”) which requires the
measurement and recognition of expected credit losses for financial
assets held at amortized cost. ASU 2016-13 replaces the existing
incurred loss impairment model with an expected loss methodology,
which will result in more timely recognition of credit losses. ASU
2016-13 is effective for annual reporting periods, and interim
periods within those years beginning after December 15, 2019. The
Company is currently in the process of evaluating the impact of the
adoption of ASU 2016-13 on its unaudited
condensed consolidated financial
statements.
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic
820), Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”), which modifies the
disclosure requirements for fair value measurements by removing,
modifying or adding certain disclosures. ASU 2018-13 is effective
for annual periods beginning after December 15, 2019 and interim
periods within those annual periods, with early adoption permitted.
The amendments on changes in unrealized gains and losses, the range
and weighted averageof significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. The Company is currently
evaluating the effect that ASU 2018-13 will have on its
consolidated financial statements and related
disclosures.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2017, the FASB issued ASU No.
2017-04, Intangibles - Goodwill and
Other: Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). To
simplify the subsequent measurement of goodwill, ASU 2017-04
requires only a single-step quantitative test to identify and
measure impairment based on the excess of a reporting unit's
carrying amount over its fair value. A qualitative assessment may
still be completed first for an entity to determine if a
quantitative impairment test is necessary. ASU 2017-04 is effective
for fiscal year 2021 and is to be adopted on a prospective basis.
Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company will test goodwill for impairment within one year of
the acquisition or annually as of October 1, and whenever
indicators of impairment exist. The Company is currently evaluating
the effect that ASU 2017-04 will have on its financial statements
and related disclosures.
The Company does not believe that any recently issued, but not yet
effective, accounting standards could have a material effect on the
accompanying financial statements. As new accounting pronouncements
are issued, the Company will adopt those that are applicable under
the circumstances.
NOTE 3 – BUSINESS SEGMENTS
FASB ASC Topic
280, Segment
Reporting, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
Beginning
with the first quarter of 2019, the Company changed its operating
and reportable segments from one segment to two
segments: the Technology
Segment and the Professional Services Segment. The two segments
reflect the Company’s separate focus on technology products
and services versus professional services.
The Company
provides general corporate
services to its segments; however, these services are not
considered when making operating decisions and assessing segment
performance. These services are reported under “Corporate
Services” below and these include costs associated with
executive management, financing activities and public company
compliance.
Summarized financial information concerning the Company’s
reportable segments is presented below (dollars in
thousands):
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
Revenues
|
$1,536
|
$3,447
|
$-
|
$4,983
|
Gross
profit
|
1,146
|
1,605
|
-
|
2,751
|
Income
(loss) from operations
|
(722)
|
365
|
(1,724)
|
(2,081)
|
Loss
from operations held for sale
|
-
|
(21)
|
-
|
(21)
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
Revenues
|
$892
|
$5,015
|
$-
|
$5,907
|
Gross
profit
|
487
|
2,454
|
-
|
2,941
|
Income
(loss) from operations
|
(83)
|
446
|
(678)
|
(315)
|
Income
from operations held for sale
|
-
|
77
|
-
|
77
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
Revenues
|
$3,962
|
$10,922
|
$-
|
$14,884
|
Gross
profit
|
2,810
|
5,054
|
-
|
7,864
|
Loss
from operations*
|
(1,312)
|
(1,606)
|
(3,971)
|
(6,889)
|
Loss
from operations held for sale
|
-
|
(177)
|
-
|
(177)
|
*
Including intangible assets impairment
|
-
|
1,549
|
-
|
1,549
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
Revenues
|
$2,639
|
$12,632
|
$-
|
$15,271
|
Gross
profit
|
1,538
|
6,199
|
-
|
7,737
|
Loss
from operations
|
(332)
|
(48)
|
(3,058)
|
(3,438)
|
Income
from operations held for sale
|
-
|
148
|
-
|
148
|
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – ACQUISITIONS
Secure Education Consultants Acquisition
On January 1, 2018, the Company completed its acquisition of
certain assets of Secure Education Consultants through Firestorm.
Consideration paid as part of this acquisition included: $100,000
in cash; 33,333 shares of Rekor common stock valued at $163,000;
warrants to purchase 33,333 shares of Rekor common stock,
exercisable over a period of five years, at an exercise price of
$5.44 per share, valued at $66,000; and warrants to purchase 33,333
of Rekor common stock, exercisable over a period of five years, at
an exercise price of $6.53 per share, valued at
$57,000.
The Company has completed its analysis of the purchase price
allocation. The Company recorded $386,000 of customer relationships
to intangible assets.
The table below shows the final breakdown related to the Secure
Education acquisition (dollars in thousands):
Cash
paid
|
$100
|
Common
stock issued
|
163
|
Warrants
issued at $5.44
|
66
|
Warrants
issued at $6.53
|
57
|
Total
consideration
|
386
|
Less
intangible assets and intellectual property
|
(386)
|
Net
goodwill recorded
|
$-
|
On June 1, 2019, the Company sold all its interest in Secure
Education for consideration of $250,000. As a result of the Secure
Education sale, the Company disposed of $249,000 of net intangible
assets, $58,000 of accounts receivables, and $54,000 of accounts
payables. This resulted in a loss of $3,000 that is presented as
part of general and administrative expenses in the accompanying
unaudited condensed consolidated statement of
operations.
OpenALPR Acquisition
On November 14, 2018, the Company entered into an Asset Purchase
Agreement (the “OpenALPR Purchase Agreement”) by and
among the Company, OpenALPR Technology, Inc. and Matthew Hill
pursuant to which the Company agreed to purchase all of the assets
of OpenALPR Technology Inc. and its subsidiaries, except for
certain excluded assets, and assumed certain liabilities as
provided for in the OpenALPR Purchase Agreement. The Company agreed
to pay $15,000,000, subject to certain adjustments, provided that
OpenALPR Technology, Inc. could elect to receive up to 1,000,000
shares of the Company’s common stock, par value, $0.0001 per
share, in lieu of up to $5,000,000 in cash valued at a price per
share of $5.00.
On February 15, 2019, the Company entered into Amendment No. 1 to
the OpenALPR Purchase Agreement, pursuant to which the parties
agreed to amend the Base Purchase Price to $7,000,000, subject to
adjustment after closing, issue a promissory note in the amount of
$5,000,000, and issue 600,000 shares of Rekor common stock as
consideration for the acquisition of OpenALPR Technology’s
assets.
On March 8, 2019, the Company entered into Amendment No. 2 to the
OpenALPR Asset Purchase Agreement which eliminated the working
capital adjustment set forth in the OpenALPR Asset Purchase
Agreement, as amended, and replaced it with an adjustment for
prepaid maintenance contracts.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 12, 2019, the Company completed the acquisition of the of
OpenALPR Technology and assumed certain assets and liabilities (the
“OpenALPR Acquisition”). Consideration paid as part of
the OpenALPR Acquisition was: $7,000,000 in cash, subject to
adjustment after closing; 600,000 shares of Rekor common stock,
valued at $397,000; and $5,000,000 of the 2019 Promissory Notes
(see Note 7) principal amount, together with an accompanying
warrant to purchase 625,000 shares of Rekor common stock,
exercisable over a period of five years, at an exercise price of
$0.74 per share, valued at $208,000 (see Note 9).
The purchase price allocation to the assets acquired and
liabilities assumed based on fair values as of the acquisition
date. Since the acquisition of the OpenALPR Technology occurred on
March 12, 2019, the results of operations for OpenALPR from the
date of acquisition have been included in the Company’s
unaudited condensed consolidated statement of operations for
the three and nine-months ended September 30, 2019.
The final purchase price allocation, completed in the second
quarter of 2019, resulted in adjustments to intangible assets of
approximately $4,934,000, since the Company's previous estimates as
of March 31, 2019, and primarily related to fair value adjustments
to technology-based intangible assets. The final purchase price
allocation of the acquisition of OpenALPR is as follows: intangible
assets of $7,436,000 and goodwill of $4,934,000 along with net
assets acquired of $415,000, and contract obligations assumed of
$388,000.
The table below shows the breakdown related to the final purchase
price allocation for the OpenALPR Technology acquisition (dollars
in thousands):
Assets
acquired
|
$415
|
Liabilities
acquired
|
(388)
|
Net
assets acquired
|
27
|
Less
intangible assets
|
7,436
|
Consideration
paid (see below)
|
(12,397)
|
Net
Goodwill recorded
|
$4,934
|
|
|
Cash
consideration
|
$7,000
|
Notes
payable
|
5,000
|
Common
stock consideration
|
397
|
Total
acquisition consideration
|
$12,397
|
Hill Employment Agreement
On November 14, 2018, concurrent with the execution of the OpenALPR
Purchase Agreement, the Company entered into an employment
agreement with Matthew Hill (the “Hill Employment
Agreement”) which became effective as of March 12, 2019, the
closing date of the OpenALPR Purchase Agreement.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operations of Combined Entities
The following unaudited pro forma combined financial information
gives effect to the acquisition of Secure Education and OpenALPR
Technology as if they were consummated as of January 1, 2018.
This unaudited pro forma financial information is presented for
information purposes only and is not intended to present actual
results that would have been attained had the acquisition been
completed as of January 1, 2018 (the beginning of the earliest
period presented) or to project potential operating results as of
any future date or for any future periods.
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
(Dollars in thousands, except per share data)
|
Revenues
from continuing operations
|
$4,983
|
$6,352
|
$15,853
|
$16,472
|
Net
loss from continuing operations
|
(3,456)
|
(104)
|
(10,170)
|
(2,817)
|
Basic
and diluted loss per share
|
$(0.19)
|
$(0.03)
|
$(0.56)
|
$(0.24)
|
Basic
and diluted number of shares
|
19,878,518
|
15,142,362
|
19,761,363
|
15,124,030
|
NOTE 5 – INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill by reportable business
segment for the nine months ended September 30,
2019 were as follows (dollars in thousands):
|
Segment
|
Balance as of
December 31,
2018
|
|
Balance as of
September 30,
2019
|
Goodwill
from continuing operations
|
Technology
|
$1,402
|
$4,934
|
$6,336
|
Goodwill
from held for sale operations
|
Professional
Services
|
1,691
|
-
|
1,691
|
Total
goodwill
|
|
$3,093
|
$4,934
|
$8,027
|
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2018 to September 30, 2019 (dollars in
thousands):
|
Balance as of
December 31,
2018
|
|
|
|
|
Balance as of
September 30,
2019
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
|
Customer
relationships
|
$2,475
|
$90
|
$(363)
|
$(1,549)
|
$(249)
|
$404
|
Marketing
related
|
69
|
223
|
(45)
|
-
|
-
|
247
|
Technology
based
|
83
|
7,123
|
(557)
|
-
|
-
|
6,649
|
Intangible
assets subject to amortization from continuing
operations
|
2,627
|
7,436
|
(965)
|
(1,549)
|
(249)
|
7,300
|
Intangible
assets subject to amortization from held for sale
operations
|
2,208
|
-
|
(214)
|
-
|
-
|
1,994
|
Total
intangible assets subject to amortization
|
$4,835
|
$7,436
|
$(1,179)
|
$(1,549)
|
$(249)
|
$9,294
|
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following provides a breakdown of identifiable intangible
assets as of September 30, 2019 (dollars in
thousands):
|
|
|
|
|
Identifiable
intangible assets
|
$461
|
$327
|
$7,207
|
$7,995
|
Accumulated
amortization
|
(57)
|
(80)
|
(558)
|
(695)
|
Identifiable
intangible assets from continuing operations, net
|
404
|
247
|
6,649
|
7,300
|
Identifiable
intangible assets from operations held for sale, net
|
1,685
|
309
|
-
|
1,994
|
Identifiable
intangible assets, net
|
$2,089
|
$556
|
$6,649
|
$9,294
|
With the acquisition of OpenALPR Technology, the Company identified
technology-based intangible assets of $11,845,000 in its
preliminary purchase price allocation. The final purchase price
allocation, completed in the second quarter of 2019, resulted in
adjustments to intangible assets of approximately $4,934,000, since
the Company's previous estimates as of March 31, 2019, and
primarily related to fair value adjustments to technology-based
intangible assets. The final purchase price allocation of the
acquisition of OpenALPR is as follows: technology-based intangible
assets of $7,123,000, marketing-related intangible assets of
$223,000, customer-related intangible assets of $90,000 and
goodwill of $4,934,000 along with net assets acquired of
$27,000.
These intangible assets are being amortized on a straight-line
basis over their weighted average estimated useful life of 6.7
years. Amortization expense attributable to continuing operations
for the three months ended September 30, 2019 and 2018 was $280,000
and $127,000, respectively, and for the nine months ended September
30, 2019 and 2018 was $965,000 and $557,000, respectively, and is
presented as part of general and administrative expenses in the
accompanying
unaudited condensed consolidated statements of operations.
Amortization expense attributable to operations held for sale for
the three months ended September 30, 2019 and 2018 was $72,000,
respectively, and for the nine months ended September 30, 2019 and
2018 was $214,000, and is presented as part of income (loss) from
operations held for sale in the accompanying
unaudited condensed consolidated statements of
operations.
Firestorm, the Company's wholly owned subsidiary, provided services
related to crisis management, crisis communications, emergency
response, and business continuity and other emergency, crisis and
disaster preparedness initiatives. Its fully owned subsidiary, BC
Management was an executive search firm for business continuity,
disaster recovery, crisis management and risk management
professionals and a provider of business continuity research with
annual studies covering compensation assessments, program maturity
effectiveness, event impact management reviews, IT resiliency and
critical supply analyses. Its other wholly owned subsidiary, Secure
Education was comprised of an expert team of highly trained, former
U.S. Secret Service Agents and assists clients by designing
customized plans, conducting security assessments, delivering
training, and responding to critical incidents.
On June 1, 2019, the Company completed the sale of Secure
Education, which included $249,000 of intangible assets (see Note
4).
On June 28, 2019 the
Company discontinued the operations of BC
Management, resulting in an
impairment of $242,000 of intangible assets related to its
acquisition in December 2018. The discontinued operation of
BC
Management does not constitute a
significant strategic shift that will have a material impact on the
Company’s ongoing operations and financial
results.
On June 30, 2019, the Company recorded an intangible assets
impairment of $1,307,000 of customer relationship intangible assets
from the Firestorm acquisition. In the second quarter of 2019, the
Company evaluated the performance of all the franchisees of
Firestorm Franchising, LLC and notified them of the termination of
their agreements on the basis of non-performance. The discontinued
operation of Firestorm Franchising, LLC does not constitute a
significant strategic shift that will have a material impact on the
Company's ongoing operations and financial results.
As of September 30, 2019, the estimated annual amortization expense
from continuing operations for each of the next five fiscal years
and thereafter is as follows (dollars in thousands):
2019
|
$287
|
2020
|
1,150
|
2021
|
1,141
|
2022
|
1,117
|
2023
|
1,096
|
Thereafter
|
2,509
|
Total
|
$7,300
|
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental disclosures of cash flow information for
the nine months ended September 30, 2019 and 2018 were as
follows:
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
Cash
paid for interest - continuing operations
|
$1,544
|
$298
|
Cash
paid for interest - held for sale operations
|
220
|
96
|
Cash
paid for taxes - held for sale operations
|
12
|
-
|
Non-cash
investing and financing activities
|
|
|
Property
and equipment - continuing operations
|
39
|
-
|
Accounts
payable - continuing operations
|
(39)
|
-
|
Property
and equipment - held for sale operations
|
-
|
32
|
Notes
payable - held for sale operations
|
-
|
(32)
|
Proceeds
from short-term borrowing arrangement transferred to settle line of
credit
|
312
|
-
|
Repayment
of line of credit
|
(312)
|
-
|
Business
combinations, net of cash
|
|
|
Current
assets
|
415
|
-
|
Intangible
assets
|
7,436
|
386
|
Goodwill
|
4,934
|
-
|
Current
liabilities
|
(388)
|
-
|
Cash
paid acquisition of OpenALPR Technology
|
(7,000)
|
-
|
Note
issued acquisition of OpenALPR Technology
|
(5,000)
|
|
Issuance
of common stock
|
(397)
|
(163)
|
Issuance
of common stock warrants
|
-
|
(123)
|
Sale
of Secured Education
|
|
|
Current
assets
|
(58)
|
-
|
Intangible
assets sold
|
(250)
|
-
|
Current
liabilities
|
54
|
-
|
Loss
on sale
|
3
|
-
|
Financing
|
|
|
Notes
payable - continuing operations
|
21,000
|
|
Debt
discount financing costs
|
(2,599)
|
-
|
Extinguishment
of debt
|
(1,113)
|
-
|
Repayment
of notes payable and interest expense, net of debt
discount
|
(2,515)
|
-
|
Investment
in OpenALPR Technology
|
(12,000)
|
-
|
Issuance
of warrants in conjunction with notes payable
|
706
|
|
Accounts
Payable
|
360
|
-
|
Proceeds
from notes payable
|
3,839
|
|
Common
stock issued in connection with note payable
|
-
|
126
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
Right-of-use
lease asset
|
1,212
|
-
|
Deferred
rent
|
30
|
-
|
Lease
liability
|
$(1,242)
|
$-
|
For the nine months
ended September 30, 2019 and 2018, the Company paid cash dividends
of $0 and $264,000, respectively, to shareholders of record of
Series A Preferred Stock. Accrued dividends
payable to Series A Preferred Stock shareholders were
$440,000 and $176,000 as of September 30, 2019 and December 31,
2018, respectively, and is presented as part of accounts payable
and accrued expenses on the accompanying
unaudited condensed consolidated balance
sheets.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months
ended September 30, 2019 and 2018, the Company paid cash dividends
of $108,000 and $81,000, respectively, to shareholders of record of
Series B Preferred Stock. Accrued dividends
payable to Series B Preferred Stock shareholders were $27,000 and
$54,000 as of September 30, 2019 and December 31, 2018,
respectively, and is presented as part of accounts payable and
accrued expenses on the accompanying
unaudited condensed consolidated balance
sheets.
NOTE 7 – DEBT
Short-Term Borrowings
On August 9,
2019, Global, entered an agreement with an
unrelated third party, LSQ Funding Group, L.C. (“LSQ”),
pursuant to which Global sells its accounts receivable to LSQ and
LSQ advances Global 90% of the value of the receivable. Global can
advance up to $10,000,000 at one time. The term of the agreement is
for 12 months and automatically renews for additional 12-month
periods. The agreement is presented as secured borrowings, as the
accounts receivable are sold with recourse back to Global, meaning
that Global bears the risk of non-payment by the account debtor.
The funded amount of accounts receivables that LSQ has provided to
Global was $1,629,000 as of September 30, 2019 and is presented as
part of current liabilities held for sale on the
unaudited condensed consolidated balance sheets. To secure
its obligations to LSQ, Global has granted a first priority
security interest in Global’s accounts receivable and
proceeds thereof. As of September 30, 2019, there were
approximately $2,515,000 of receivables that are subject to
collateral as part of this agreement. The receivables held as
collateral are presented in assets held for sale on the
unaudited condensed consolidated balance
sheets.
On August 9,
2019, AOC Key Solutions, Inc. (“AOC”), the
Company’s wholly owned subsidiary, also entered into an agreement with LSQ, as
an unrelated third party, pursuant to which AOC sells its accounts
receivable to LSQ and LSQ advances AOC 90% of the value of the
receivable. AOC can advance up to $5,000,000 at one time. The term
of the agreement is for 12 months and automatically renews for
additional 12-month periods. The agreement is presented as secured
borrowings, as the accounts receivable are sold with recourse back
to the Company, meaning that AOC bears the risk of non-payment by
the account debtor. The funded amount of accounts receivables that
LSQ has provided fund to AOC was $1,558,000 as of September 30,
2019 and is presented as part of short-term borrowings on the
unaudited condensed consolidated balance sheets. To secure
its obligations to LSQ, AOC has granted a first priority security
interest in the AOC’s accounts receivable and proceeds
thereof. As of September 30, 2019, there were approximately
$2,451,000 of receivables that are subject to collateral as part of
this agreement. The receivables held as collateral are presented in
the accounts receivable, net on the
unaudited condensed consolidated balance
sheets.
During the three and
nine months ended September 30, 2019, the Company
recorded $33,000, in interest expense, related to the agreement
with LSQ. Additionally, during the three and nine months ended
September 30, 2019, the Company recorded $80,000 in interest
expense from operations held for sale, related to the agreement
with LSQ.
Global had revolving
lines of credit with Wells Fargo Bank National Association
(“WFB”) (“Wells Fargo Credit
Facilities”). WFB agreed to advance
to Global
90% of all
eligible accounts with a maximum facility amount of $5,000,000.
Interest was payable under the Wells Fargo Credit
Facilities at a monthly rate equal
to the Three-Month LIBOR, (as such term is defined under the Wells
Fargo Credit Facilities), in effect from time to time plus 3%, plus
an additional margin of 3%. Payment of the
revolving lines of credit was secured by the accounts receivable of
Global. The term of the Wells Fargo Credit Facilities was through
December 31, 2019, with automatic
renewal terms of 12 months. In August 2019,
Global entered in a payoff and termination agreement with WFB in
which Global paid WFB $1,477,000 to retire all indebtedness and
obligation to WFB. As part of payoff of the debt Global recognized
$31,000 of costs in excess of the net carrying amount of the
outstanding debt, which is presented in the loss on extinguishment
of debt on the
unaudited condensed consolidated statement of operations.
The principal balance as of September 30, 2019 and December 31,
2018 was $0 and $1,095,000, respectively.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November
2017, AOC,
entered
into an Account Purchase Agreement and related agreements (the
“AOC Wells Agreement”) with WFB. Pursuant to the AOC
Wells Agreement, AOC Key
Solutions agreed to sell and
assign to WFB all of its Accounts (as such term is defined in
Article 9 of the Uniform Commercial Code), constituting accounts
arising out of sales of Goods (as such term is defined in Article 9
of the Uniform Commercial Code) or rendition of services that WFB
deemed to be eligible for borrowing under the AOC Wells Agreement.
WFB agreed to advance to AOC Key
Solutions 90% of all eligible
accounts with a maximum facility amount of $3,000,000. Interest was
payable under the AOC Wells Agreement at a monthly rate equal to
the Daily One Month LIBOR, (as such term was defined under the AOC
Wells Agreement), in effect from time to time plus 5%. The AOC
Wells Agreement also provided for a deficit interest rate equal to
the then applicable interest rate plus 50% and a default interest
rate equal to the then applicable interest rate or deficit interest
rate, plus 50%. The initial term of the AOC Wells Agreement ran
through December 31, 2018 (the “Initial Term”), with
automatic renewal terms of 12 months (the “Renewal
Term”), commencing on the first day after the last day of the
Initial Term. The current term of the
AOC Wells Agreement ran through December 31, 2019. AOC Key
Solutions was able to terminate
the AOC Wells Agreement upon at least 60 days’ prior written
notice, but no more than 120 days’ written notice, prior to
and effective as of the last day of the Initial Term or the Renewal
Term, as the case may be. In August 2019, AOC
entered in a payoff and termination agreement with WFB in which AOC
paid WFB $341,000 to retire all indebtedness and obligation to WFB.
As part of payoff of the debt AOC recognized $45,000 of costs in
excess of the net carrying amount of the outstanding debt, which is
presented in the loss on extinguishment of debt on the
unaudited condensed consolidated statement of operations.
The principal balance as of September 30, 2019 and December 31,
2018 was $0 and $566,000, respectively.
Long-Term Debt
On March 16, 2016, the Company entered into a Subordinated
Note and Warrant Purchase Agreement (the “Avon Road Note
Purchase Agreement”) pursuant to which $500,000 in
subordinated debt (the "Avon Road Note") was issued by the Company
to Avon Road Partners, L.P. (“Avon Road”), an affiliate
of Robert Berman, the Company’s President and CEO and a
member of the Company’s Board of Directors. The Avon Road
Subordinated Note Warrants had an expiration date of March 16,
2019. The warrants associated to this agreement were exercised in
2017.
On March 12, 2019, the $500,000 balance due on the Avon Road Note
was retired in its entirety in exchange for an equivalent principal
amount of the 2019 Promissory Notes (see below).
On January 25, 2017, pursuant to the terms of its acquisition of
Firestorm, the Company issued $1,000,000 in the aggregate form of
four unsecured, subordinated promissory notes with interest payable
over five years. The principal amount of one of the notes payable
is $500,000 payable at an interest rate of 2% and the remaining
three notes are evenly divided over the remaining $500,000 and
payable at an interest rate of 7%. The notes mature on January 25,
2022. The balance of these notes payable was $956,000 and $938,000,
net of unamortized interest, as of September 30, 2019 and December
31, 2018, respectively, to reflect the amortized fair value of the
notes issued due to the difference in interest rates of $44,000 and
$62,000, respectively.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On April 3, 2018, the
Company entered into a transaction pursuant to which an
institutional investor (the “2018 Lender”) loaned
$2,000,000 to the Company (the “2018 Promissory Note”).
The loan was originally due and payable on May 1, 2019 and bore
interest at 15% per annum, with a minimum of 15% interest payable
if the loan is repaid prior to May 1, 2019. In addition, the
Company issued 35,000 shares of common stock to the 2018 Lender,
which shares contained piggy-back registration rights. If the
shares were not registered on the next selling shareholder
registration statement, the Company would have been obligated to
issue an additional 15,000 shares to the 2018 Lender. Upon the sale
of Rekor Recognition Systems, Inc. (“Rekor
Recognition”), the company’s wholly owned
subsidiary, or its assets, the 2018
Lender was entitled to receive 7% of any proceeds received by the
Company or Rekor Recognition in excess of $5,000,000 (the
“Lender’s Participation”). In addition,
commencing January 1, 2020, the 2018 Lender was to be paid 7% of
Rekor Recognition’s earnings before interest, taxes,
depreciation and amortization, less any capital expenditures, which
amount was to be credited for any payments that might ultimately be
paid to the 2018 Lender as its Lender’s Participation, if
any. At April 3, 2018, the fair value of shares issued was
$126,000. On October 24, 2018, the Company and Rekor Recognition
entered a note amendment with the 2018 Lender by which the maturity
date of the note was extended to May 1, 2020 (the “2018
Promissory Note Amendment”). The 2018 Promissory Note
Amendment further provided for payment of interest through May 1,
2019, if the principal was repaid before May 1, 2019. At October
24, 2018, an additional $62,500 fee was paid as consideration for
extending the maturity date to May 1, 2020 and designated as
financing costs related to the 2018 Promissory Note Amendment.
Amortized financing cost for the three months ended September 30,
2019 and 2018 was determined to be $0 and $29,000, respectively,
and for the nine months ended September 30, 2019 and 2018 was
determined to be $31,000 and $58,000, respectively. Amortized
financing cost is presented as part of interest expense in the
accompanying
unaudited condensed consolidated statement of operations.
The 2018 Promissory Note had an effective interest rate of 19.5%.
On March 12, 2019, the $2,000,000 balance due on the 2018
Promissory Note was retired in its entirety in exchange for an
equivalent principal amount of the 2019 Promissory Notes (see
below). In addition, Rekor paid to the 2018 Lender $1,050,000 of
consideration for the re-acquisition by the Company of the
Lender’s Participation and $75,000 of interest due through
May 1, 2019. All amounts paid were obtained from the proceeds of
the 2019 Promissory Notes. The 2018 Lender consideration of
$1,050,000 for the Lender’s Participation and unamortized
financing costs of $63,000 are recorded as costs in connection with
the loss on the extinguishment of debt of $1,113,000 for the nine
months ended September 30, 2019.
2019 Promissory Notes
On March 12, 2019, the
Company entered into a note purchase agreement pursuant to which
investors, including OpenALPR Technology, Inc. (see Note 4) (the
“2019 Lenders”) loaned $20,000,000 to Rekor (the
“2019 Promissory Notes”) and the Company issued to the
2019 Lenders warrants to purchase 2,500,000 shares of Rekor common
stock (the “March 2019 Warrants”)(See Note 4). The loan
is due and payable on March 11, 2021 and bears interest at 16% per
annum, of which at least 10% per annum is required to be paid in
cash. Any remaining interest accrues to be paid at maturity or
earlier redemption. The notes also require a $1,000,000 exit fee
due at maturity, or a premium if paid before the maturity date, and
compliance with affirmative, negative and financial covenants,
including a fixed charge coverage ratio, minimum liquidity and
maximum capital expenditures. The fixed charge coverage ratio
covenant related to this note has been deferred through December
31, 2019. Transaction costs included $403,000 for a work fee
payable over 10 months, $290,000 in legal fees and a $200,000
closing fee. The loan is secured by a security interest in
substantially all of the assets of Rekor. The March 2019 Warrants
are exercisable over a period of five years, at an exercise price
of $0.74 per share, and are valued at $706,000.
The warrants were exercisable commencing March 12, 2019 and expire
on March 12, 2024. Amortized financing
cost for the three and nine months ended September 30, 2019 were
$328,000 and $719,000, respectively, and are included in interest
expense on the unaudited condensed consolidated statement of
operations. The 2019 Promissory Notes has an effective
interest rate of 24.87%.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The principal amounts due for long-term notes payable described
above are shown below as of September 30, 2019 (dollars in
thousands):
2019
|
$-
|
2020
|
-
|
2021
|
21,000
|
2022
|
1,000
|
2023
|
-
|
Thereafter
|
-
|
Total
|
$22,000
|
|
|
Less
unamortized interest
|
(44)
|
Less
unamortized financing costs
|
(1,880)
|
Notes
payable
|
$20,076
|
NOTE 8 – INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic
740. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, management
reviews both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections and the overall
prospects of the Company’s business.
The 2017 Tax Cut and Jobs Act ("2017 Act") changed U.S. tax law and
included various provisions that impacted the Company. The 2017 Act
affected the Company by changing U.S. tax rates, increasing the
Company’s ability to utilize accumulated net operating losses
generated after December 31, 2017, and impacted the estimates of
deferred tax assets and liabilities.
The Company’s income tax provision for the nine months ended
September 30, 2019 and 2018 was $35,000 and $22,000, respectively.
The increase in the tax expense is primarily related to state
minimum taxes and the state of Texas gross receipts tax. The
Company established a valuation allowance against deferred tax
assets during 2017 and has continued to maintain a full valuation
allowance through the nine months ended September 30, 2019. The
Company’s income tax provision for the three months ended
September 30, 2019 and 2018 was $12,000 and $22,000,
respectively. The tax
provision for the nine months
ended September 30, 2019 and 2018, was fully attributable to
operations that are classified as held for sale.
The Company files income tax returns in the United States and in
various states. No U.S. Federal, state or foreign income tax audits
were in process as of September 30, 2019.
Management has evaluated the recoverability of the net deferred
income tax assets and the level of the valuation allowance required
with respect to such net deferred income tax assets. After
considering all available facts, the Company fully reserved for its
net deferred tax assets because management believes that it is
more-likely-than-not that their benefits will not be realized in
future periods. The Company will continue to evaluate its deferred
tax assets to determine whether any changes in circumstances could
affect the realization of their future benefit. If it is determined
in future periods that portions of the Company’s net deferred
income tax assets satisfy the realization standard, the valuation
allowance will be reduced accordingly.
For the nine months ended September 30, 2019 the Company did not
record any interest or penalties related to unrecognized tax
benefits. It is the Company’s policy to record interest and
penalties related to unrecognized tax benefits as part of income
tax expense. The 2015 through 2018 tax years remain subject to
examination by the Internal Revenue Service.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – STOCKHOLDERS’ (DEFICIT) EQUITY
Common Stock
The Company is authorized to issue 30,000,000 shares of common
stock, $0.0001 par value. As of September 30, 2019, and December
31, 2018, the issued and outstanding common shares of Rekor were
20,406,489 and 18,767,619, respectively.
In January 2018, the Company issued 33,333 shares of Rekor common
stock as consideration as part of its acquisition of Secure
Education.
In April 2018, the Company issued 35,000 shares of Rekor common
stock as additional consideration to the 2018 Lender in connection
with the 2018 Promissory Note.
On November 1, 2018, the Company issued 4,125,000 shares of common
stock through an underwritten public offering at a public offering
price of $0.80 per share. Net proceeds to the Company was
approximately $2,800,000. In addition, the Company granted
underwriters a 45-day option to purchase up to 618,750 additional
shares of common stock to cover over-allotment, if any. The
underwriters did not exercise this option and the options were
cancelled. As part of the consideration to the underwriters, the
Company issued to the underwriters warrants to purchase an
aggregate of 206,250 shares of common stock, exercisable over a
period of five years, at an exercise price of $1.00 per share. As
of September 30, 2019, the underwriter warrants had an estimated
value of approximately $200,000 and became exercisable commencing
April 27, 2019 and expire on October 29, 2023.
For the nine months
ended September 30, 2018, the Company issued 13,998
shares of
Rekor common stock related to the exercise of common stock options.
There were no stock options exercised for the nine months ended
September 30, 2019.
On February 15, 2019, the Company entered into Amendment No. 1 to
the OpenALPR Purchase Agreement, pursuant to which the Company
agreed to issue 600,000 shares of Rekor common stock as partial
consideration for the acquisition of the OpenALPR Technology. On
March 12, 2019, the Company issued 600,000 shares of Rekor common
stock as part of the consideration for the acquisition of the
OpenALPR Technology.
For the nine months
ended September 30, 2019 and 2018, the Company issued
1,638,870 and 82,331
shares of
Rekor common stock, respectively. Out of these, 931,666 shares of
Rekor common stock were issued in exchange for cash and cashless
exercise of 1,149,806 warrants during 2019, 600,000 shares were
issued in connection the acquisition of OpenALPR, 3,638 shares were
issued as part of the exercise of warrants related to series A
preferred stock and 103,566 shares were issued in connection with
the Sales Agreement.
At-the-Market Offering
On August 14,
2019, the Company entered into the Sales Agreement with B. Riley
FBR, Inc. (“B.
Riley FBR”) to create an at-the-market equity program
under which the Company from time to time may offer and sell shares
of its common stock, having an aggregate offering price of up to
$15,000,000, through or to B. Riley FBR. Subject to the terms and
conditions of the Sales Agreement, B. Riley FBR will use its
commercially reasonable efforts to sell the shares of the
Company’s common stock from time to time, based upon the
Company’s instructions. B. Riley FBR will be entitled to
a commission equal to 3.0% of the gross proceeds from each sale.
The Company incurred issuance costs of approximately $256,000
related to legal, accounting, and other fees in connection with the
Sales Agreement. These
costs were charged against the gross proceeds of the Sales
Agreement and presented as a reduction to additional paid-in
capital on the unaudited condensed consolidated balance
sheets.
Sales of the Company’s common stock under the Sales Agreement
are to be issued and sold pursuant to the Company’s shelf
registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018. In September 2019, based on settlement date,
the Company sold 103,566 shares of common stock at a
weighted-average selling price of $2.84 per share in accordance
with the Sales Agreement. Net cash provided from the Sales
Agreement was $29,000 after paying $256,000 related to the issuance
costs stated above, as well as, 3.0% or $9,000 related to cash
commissions provided to B. Riley FBR. As of September 30, 2019,
$14,706,000 remained available for sale under the Sales
Agreement.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of
preferred stock, $0.0001 par value. The Company’s preferred
stock may be entitled to preference over the common stock with
respect to the distribution of assets of the Company in the event
of liquidation, dissolution or winding-up of the Company, whether
voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for
the purpose of the winding-up of its affairs. The authorized but
unissued shares of the preferred stock may be divided into, and
issued in, designated series from time to time by one or more
resolutions adopted by the Board of Directors of the Company. The
Board of Directors of the Company, in its sole discretion, has the
power to determine the relative powers, preferences and rights of
each series of preferred stock.
Series A Cumulative Convertible Redeemable Preferred
Stock
Of the 2,000,000 authorized shares of preferred stock, 505,000
shares are designated as $0.0001 par value Series A Cumulative
Convertible Redeemable Preferred Stock (the “Series A
Preferred Stock”). The holders of Series A Preferred Stock
are entitled to quarterly dividends of 7.0% per annum per share.
The holders of Series A Preferred Stock have a right to convert
each share into common stock at an initial conversion price and a
specified conversion price which increases annually based on the
passage of time beginning in November 2019. The holders of Series A
Preferred Stock also have a put right after 60 months from the
issuance date to redeem any or all of the Series A Preferred Stock
at a redemption price of $15.00 per share plus any accrued but
unpaid dividends. The Company has a call right after 36 months from
the issuance date to redeem all of the Series A Preferred Stock at
a redemption price which increases annually based on the passage of
time beginning in November 2019. The Series A Preferred Stock
contains an automatic conversion feature based on a qualified
initial public offering in excess of $30,000,000 or a written
agreement by at least two-thirds of the holders of Series A
Preferred Stock at an initial conversion price and a specified
price which increases annually based on the passage of time
beginning in November 2016. Based on the terms of the Series A
Preferred Stock, the Company concluded that the Series A Preferred
Stock should be classified as temporary equity in the accompanying
unaudited condensed consolidated balance sheets as of
September 30, 2019 and December 31, 2018.
The Company adjusts the value of the Series A Preferred Stock to
redemption value at the end of each reporting period. The
adjustment to the redemption value was recorded through
additional-paid-in-capital of $191,000 and $167,000 for the three
months ended September 30, 2019 and 2018, respectively and $554,000
and $483,000 for the nine months ended September 30, 2019 and 2018,
respectively.
As of September 30, 2019, and December 31, 2018, 502,327 shares of
Series A Preferred Stock were issued and outstanding,
respectively.
The holders of Series A
Preferred Stock are entitled to quarterly cash dividends of $0.175
(7% per annum) per share. Dividends accrue quarterly and dividend
payments for declared dividends are due within five business days
following the end of a quarter. For the nine months
ended September 30, 2019 and 2018, the Company paid cash dividends
of $0 and $264,000, respectively, to shareholders of record of
Series A Preferred Stock. Accrued dividends
payable to Series A Preferred Stock shareholders were $440,000 and
$176,000 as of September 30, 2019 and December 31, 2018,
respectively, and are presented as part of the accounts payables
and accrued expenses on the accompanying
unaudited condensed consolidated balance
sheets.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Series B Cumulative Convertible Preferred Stock
Of the 2,000,000 authorized shares of preferred stock, 240,861
shares are designated as $0.0001 par value Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). The
Series B Preferred Stock has a conversion price of $5.00 per share.
Each Series B Preferred Stock has an automatic conversion feature
based on the share price of the Company. The holders of Series B
Preferred Stock are entitled to quarterly cash dividends of 1.121%
(4.484% per annum) per share. Dividends accrue quarterly and
dividend payments for declared dividends are due within five
business days following the end of a quarter. Accrued dividends
payable to Series B Preferred Stock shareholder were $27,000 and
$54,000 as of September 30, 2019 and December 31, 2018,
respectively and are included in accrued expenses on the
accompanying
unaudited condensed consolidated balance
sheets.
Warrants
The Company had warrants outstanding that are exercisable into a
total of 2,251,232 and 1,214,491 shares of Rekor common stock as of
September 30, 2019 and December 31, 2018,
respectively.
As part of its
acquisition of Brekford on August 29, 2017, the Company assumed
Brekford’s obligations with respect to the Brekford
Warrants. The exercise price for
the Brekford
Warrants
was $7.50 and they expired on March 31, 2020. Effective October 16,
2018, the Company entered into exchange agreements with holders of
the Brekford
Warrants
pursuant to which the Company issued to the holders an aggregate of
96,924 shares of common stock in exchange for the return of the
warrants to the Company for cancellation. As of September 30, 2019,
and December 31, 2018, no Brekford
Warrants
were outstanding.
As part of a Regulation A Offering in fiscal year 2016 and 2017,
the Company issued warrants to the holders of Series A Preferred
Stock. The exercise price for these warrants is $1.03 and they are
exercisable into a total of 240,015 and 243,655 shares of Rekor
common stock as of September 30, 2019 and December 31, 2018,
respectively. The warrants expire on November 23, 2023.
In August 2019, 7,500 of the
outstanding warrants were exercised and converted into 3,638 shares
of the Company's common stock.
As part of the acquisition of Firestorm on January 24, 2017, the
Company issued: warrants to purchase 315,627 shares of its common
stock, exercisable over a period of five years, at an exercise
price of $2.5744 per share; and warrants to purchase 315,627 shares
of its common stock, exercisable over a period of five years, at an
exercise price of $3.6083 per share (the “Firestorm
Warrants”). The expiration date of the Firestorm Warrants is
January 24, 2022. As of September 30, 2019, and December 31, 2018,
there were 631,254 Firestorm Warrants outstanding.
Pursuant to its acquisition of BC Management on December 31, 2017,
the Company issued: warrants to purchase 33,333 shares of its
common stock, exercisable over a period of five years, at an
exercise price of $5.44 per share; and warrants to purchase 33,333
shares of its common stock, exercisable over a period of five
years, at an exercise price of $6.53 per share (the “BC
Management Warrants”). The expiration date of the BC
Management Warrants was December 31, 2022. As of December 31, 2018,
there were 66,666 BC Management Warrants outstanding. The BC
Management Warrants were surrendered on May 17, 2019, due to the
discontinuance of operations of BC Management, and as of September
30, 2019 there were no BC Management Warrants
outstanding.
Pursuant to its acquisition of Secure Education on January 1, 2018,
the Company issued: warrants to purchase 33,333 shares of its
common stock, exercisable over a period of five years, at an
exercise price of $5.44 per share; and warrants to purchase 33,333
shares of its common stock, exercisable over a period of five
years, at an exercise price of $6.53 per share (the “Secure
Education Warrants”). The expiration date of the Secure
Education Warrants is January 1, 2023. As of September 30, 2019,
and December 31, 2018, there were 66,666 Secure Education Warrants
outstanding.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On November 1, 2018, in connection with an underwritten public
offering of its common stock, the Company issued to the
underwriters warrants to purchase 206,250 shares of its common
stock, exercisable over a period of five years, at an exercise
price of $1.00 per share. These warrants have a value of
approximately $200,000 and are exercisable commencing April 27,
2019 and expire on October 29, 2023. During the nine months ended
September 30, 2019, 186,681 warrants were exercised in cash and
cashless transactions resulting in the issuance of 148,279 shares
of common stock. As of September 30, 2019, and December 31, 2018,
16,437 and 206,250 warrants related to the 2018 underwritten public
offering remain outstanding, respectively.
On March 12, 2019, in
connection with the 2019 Promissory Notes, the Company issued
warrants to purchase 2,500,000 shares of its common stock, which
are immediately exercisable at an exercise price of $0.74 per
share, to certain individuals and entities (see Note 7).
Of
the 2,500,000 warrants,
625,000 were issued
as partial
consideration for its acquisition of the OpenALPR Technology (see
Note 4). During the nine months
ended September 30, 2019, 963,125 warrants were exercised in
cashless transactions resulting in the issuance of 783,387 shares
of common stock. As of September 30,
2019, 1,536,875 warrants related to the 2019 Promissory Notes
remain outstanding.
NOTE 10 – RESTRUCTURING
In June 2019, the Company
implemented a new organizational structure and plan to improve
operating results by reducing operating costs by eliminating
redundant positions, and the Company initiated restructuring and
transition activities to improve operational efficiency, reduce
costs and better position the Company to drive future revenue
growth. For the nine months ended September 30, 2019, the Company
recorded $333,000 of charges, related to one-time employee
termination benefits, in connection with these activities. These
charges were related to the Professional Services Segment and are
included as part of general and administrative expenses in the
accompanying
unaudited condensed consolidated statement of operations. As
of September 30, 2019, the remaining liability related to the
restructuring activities was $253,000 and is presented as part of
accounts payable and accrued expenses in the accompanying
unaudited condensed consolidated balance sheets. The amounts
due are expected to be paid within the next 12 months.
NOTE 11 – COMMON STOCK OPTION AGREEMENT
On March 16, 2016, two stockholders of the Company entered
into an option agreement with Avon Road (collectively, the
“Avon Road Parties”). Under the terms of this agreement
Avon Road paid the stockholders $10,000 each (a total of $20,000)
for the right to purchase, on a simultaneous and pro-rata basis, up
to 4,318,856 shares of Rekor’s common stock owned by those
two shareholders at $0.52 per share, which was determined to be the
fair value. The option agreement had a two-year term which would
have expired on March 16, 2018. On September 7, 2017, the Avon
Road Parties entered into an amended and restated option agreement
which extended the right to exercise the option up to and including
March 21, 2019 (the “Amended and Restated Option
Agreement”). Pursuant to the Amended and Restated Option
Agreement, on December 10, 2018, Avon Road exercised the option to
purchase 4,318,856 shares of Rekor’s common
stock.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – OPERATING LEASES
The Company leases facilities for office space in various locations
throughout the United States. The office leases have remaining
lease terms of one to five years, some of which include options to
terminate within one year.
Effective January 1, 2019, the Company adopted Topic 842, as
amended, which requires lessees to recognize a ROU asset and lease
liability on the balance sheet for most lease arrangements and
expands disclosures about leasing arrangements for both lessees and
lessors, among other items. The Company adopted ASU 2016-02 using
the optional transition method whereby the Company applied the new
lease requirements under ASU 2016-02 through a cumulative-effect
adjustment, which after completing its implementation analysis,
resulted in no adjustment to the Company’s January 1, 2019
beginning retained earnings balance. On January 1, 2019, the
Company recognized $921,000 of ROU operating lease assets and
$951,000 of operating lease liabilities, including noncurrent
operating lease liabilities of $728,000 as a result of adopting
this standard. The difference between ROU operating lease assets
and operating lease liabilities was primarily due to previously
accrued rent expense relating to periods prior to January 1,
2019. As part of adopting ASU 2016-02, the Company elected several
practical expedients as discussed in Note 2. The comparative
periods have not been restated for the adoption of
ASU 2016-02.
Operating lease expense
from continuing operations for
the three months ended September 30, 2019 and 2018 was $85,000 and
$180,000, and for the nine months ended September 30, 2019 and 2018
was $268,000 and $516,000, respectively, and is part of general and
administrative expenses in the accompanying
unaudited condensed consolidated statement of
operations.
Cash paid for amounts included in the measurement of operating
lease liabilities from continuing operations was $48,000 and
$56,000 for the three and nine months ended September 30, 2019,
respectively.
During the third quarter of 2019 the Company performed an
assessment and determined that one of its operating leases met the
criteria to be classified as a lease abandonment. For the three and
nine months ended September 30, 2019 the Company recognized $70,000
of expense related to the loss of lease abandonment which is
included in other expenses in the
unaudited condensed consolidated statement of
operations.
On May 9, 2019, the Company entered into a sublease agreement to
lease office space in Columbia, Maryland expiring on August 31,
2021. The Company recognized $291,000 of ROU operating lease assets
and $291,000 of operating lease liabilities, including noncurrent
operating lease liabilities of $232,000.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental balance sheet information related to leases as of
September 30, 2019 was as follows (dollars in
thousands):
Operating
lease right-of-use lease assets from continuing
operations
|
$761
|
Operating
lease right-of-use lease assets from operations held for
sale
|
154
|
Total
operating lease right-of-use assets
|
$915
|
|
|
Lease
liability, short-term
|
$296
|
Lease
liability, long-term
|
673
|
Lease
liability from operations held for sale
|
169
|
Total
operating lease liabilities
|
$1,138
|
|
|
Weighted
average remaining lease term - operating leases from continuing
operations
|
3.8
|
|
|
Weighted
average discount rate - operating leases
|
9%
|
Maturities of lease liabilities were as follows (dollars in
thousands):
2019
(October to December)
|
$156
|
2020
|
451
|
2021
|
319
|
2022
|
158
|
2023
|
159
|
2024
|
81
|
Total
lease payments
|
1,324
|
Less
imputed interest
|
186
|
Maturities
of lease liabilities
|
$1,138
|
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Firestorm
On June 25, 2019, the Company sent a letter to three former
executives of the Company and Firestorm (the Firestorm Principals).
The letter described the Company's position that, because the
Company believes that the Firestorm Principals fraudulently induced
the execution of the Membership Interest Purchase Agreement
pursuant to which Firestorm was acquired by the Company, the entire
Membership Interest Purchase Agreement and the transactions
contemplated thereby, including the issuance of the warrants, are
subject to rescission. On
August 17, 2019, the Company filed suit in the United States
District Court for the Southern District of New York against three
former executives of the Company and Firestorm (the Firestorm
Principals). The Complaint alleges that the Firestorm Principals
fraudulently induced the execution of the Membership Interest
Purchase Agreement pursuant to which Firestorm was acquired by the
Company, and seeks rescission of the Membership Interest Purchase
Agreement and certain transactions contemplated thereby, including
the issuance of notes and warrants to the Firestorm Principals. On
October 9, 2019, the Company filed an Amended Complaint. On
November 4, 2019, the Firestorm Principals filed an answer to the
Amended Complaint and asserted counterclaims against the Company,
Firestorm, and certain executives of the
Company.
NOTE 14 – EQUITY INCENTIVE PLAN
In August 2017, the Company approved and adopted the 2017 Equity
Award Plan (the “2017 Plan”) which replaced the 2016
Equity Award Plan (the “2016 Plan”). The 2017 Plan
permits the granting of stock options, stock appreciation rights,
restricted and unrestricted stock awards, phantom stock,
performance awards and other stock-based awards for the purpose of
attracting and retaining quality employees, directors and
consultants. Maximum awards available under the 2017 Plan were
initially set at 3,000,000 shares.
Stock Options
Stock options granted under the 2017 Plan may be either incentive
stock options (“ISOs”) or non-qualified stock options
(“NSOs”). ISOs may be granted to employees and NSOs may
be granted to employees, directors, or consultants. Stock options
are granted at exercise prices as determined by the Board of
Directors. The vesting period is generally three to four years with
a contractual term of ten years.
The 2017 Plan is administered by the Administrator, which is
currently the Board of Directors of the Company. The Administrator
has the exclusive authority, subject to the terms and conditions
set forth in the 2017 Plan, to determine all matters relating to
awards under the 2017 Plan, including the selection of individuals
to be granted an award, the type of award, the number of shares of
Rekor common stock subject to an award, and all terms, conditions,
restrictions and limitations, if any, including, without
limitation, vesting, acceleration of vesting, exercisability,
termination, substitution, cancellation, forfeiture, or repurchase
of an award and the terms of any instrument that evidences the
award.
When making an award under the 2017 Plan, the Administrator may
designate the award as “qualified performance-based
compensation,” which means that performance criteria must be
satisfied in order for an employee to be paid the award. Qualified
performance-based compensation may be made in the form of
restricted common stock, restricted stock units, common stock
options, performance shares, performance units or other stock
equivalents. The 2017 Plan includes the performance criteria the
Administrator has adopted, subject to stockholder approval, for a
“qualified performance-based compensation”
award.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of stock option activity under the Company’s 2017
Plan for the nine months ended September 30, 2019 is as
follows:
|
Number of Shares
Subject to Option
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term (Years)
|
Aggregate
Intrinsic Value
|
Outstanding
balance at December 31, 2018
|
1,227,557
|
$2.13
|
8.39
|
-
|
Granted
|
862,049
|
1.02
|
9.43
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeited
|
(66,930)
|
2.62
|
-
|
|
Expired
|
-
|
-
|
-
|
|
Canceled
|
(315,520)
|
1.96
|
-
|
|
Outstanding
balance at September 30, 2019
|
1,707,156
|
$1.68
|
8.57
|
$1,407
|
Exercisable
at September 30, 2019
|
776,963
|
$1.67
|
7.88
|
$575
|
Stock compensation
expense for the three months ended September 30, 2019 and 2018 was
$76,000 and $87,000, respectively, and for the nine months ended
September 30, 2019 and 2018 was $314,000 and $296,000,
respectively, and is presented as part of general and
administrative expenses in the accompanying unaudited condensed
consolidated statements of operations. The weighted average grant
date fair value of options granted, to employees and non-employees,
for the nine months ended September 30, 2019 was $0.52. The
intrinsic value of the stock options granted during the nine months
ended September 30, 2019 was $1,030,000. No options were
granted for the nine months ended September 30, 2018. The total
fair value of options that are vested as of September 30, 2019 and
2018 was $684,000 and $735,000, respectively.
As of September 30,
2019, there was $634,000 of unrecognized stock compensation expense
related to unvested stock options granted under the 2017 Plan that
will be recognized over an average remaining period of
1.77 years.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss per common share:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
(Dollars in
thousands, except per share data)
|
(Dollars in
thousands, except per share data)
|
Basic and diluted
loss per share
|
|
|
|
|
Net
loss from continuing operations
|
$(3,456)
|
$(528)
|
$(10,978)
|
$(3,649)
|
Less:
preferred stock accretion
|
(191)
|
(167)
|
(554)
|
(483)
|
Less:
preferred stock dividends
|
(114)
|
(115)
|
(344)
|
(345)
|
Net
loss attributable to shareholders from continuing
operations
|
(3,761)
|
(810)
|
(11,876)
|
(4,477)
|
Net income (loss)
from operations held for sale
|
(172)
|
25
|
(450)
|
30
|
Net
loss attributable to shareholders
|
$(3,993)
|
$(785)
|
$(12,326)
|
$(4,447)
|
Weighted
average common shares outstanding - basic and diluted
|
19,878,518
|
14,542,362
|
19,592,679
|
14,524,030
|
Basic
and diluted loss per share from continuing operations
|
$(0.19)
|
$(0.06)
|
$(0.61)
|
$(0.31)
|
Basic
and diluted (loss) earnings per share from operations held for
sale
|
(0.01)
|
0.01
|
(0.02)
|
-
|
Basic
and diluted loss per share
|
$(0.20)
|
$(0.05)
|
$(0.63)
|
$(0.31)
|
Common stock equivalents excluded due to anti-dilutive
effect
|
5,400,047
|
2,675,906
|
5,400,047
|
2,690,768
|
As the Company had a net loss for the three and nine months ended
September 30, 2019, the following 5,400,047 potentially dilutive
securities were excluded from diluted loss per share: 2,251,232 for
outstanding warrants, 959,937 related to the Series A Preferred
Stock, 481,722 related to the Series B Preferred Stock and
1,707,156 related to outstanding options.
As the Company had a
net loss for the three and nine months ended September 30, 2018,
the following potentially 2,675,906 and 2,690,768 dilutive
securities, respectively, were excluded from diluted loss per
share: 917,950 for outstanding warrants, 974,487 related
to the Series A Preferred Stock, 481,722 related to the Series B
Preferred Stock and 301,747 and
316,609 related to outstanding options.
Loss Per Share under Two – Class Method
The Series A Preferred Stock and Series B Preferred Stock have
the non-forfeitable right to participate on an as converted basis
at the conversion rate then in effect in any common stock dividends
declared and, as such, is considered a participating security. The
Series A Preferred Stock and Series B Preferred Stock are
included in the computation of basic and diluted loss per share
pursuant to the two-class method. Holders of the Series A Preferred
Stock and Series B Preferred Stock do not participate in
undistributed net losses because they are not contractually
obligated to do so.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
16 – HELD FOR SALE OPERATIONS
In September 2019, the Company determined that the Global business
met the criteria for held for sale accounting because it expects to
complete the sale of Global during the next 12 months.
Historically, Global has been presented as part of the Professional
Services Segment.
This pending disposition is a result of the Company’s
strategic decision to concentrate resources on the development of
its Technology Segment and will result in material changes in the
Company's operations and financial results. As a consequence, the
Company is reporting the operating results and cash flows of Global
as held for sale, including for all prior periods reflected in the
unaudited condensed consolidated financial statements and these
notes.
Pursuant to ASC Topic 205-20, Presentation of Financial Statements
- Discontinued Operations, the results of operations from Global
for the three and nine months ended September, 2019 and 2018 has
been classified as held for sale and presented as part of income
(loss) from operations held for sale in the accompanying unaudited
condensed consolidated statements of operations presented herein.
The assets and liabilities also have been classified as held for
sale under the line captions of current assets held for sale and
current liabilities held for sale in the Company's unaudited
condensed consolidated balance sheets as of September 30, 2019 and
December 31, 2018.
The assets and liabilities classified as held for sale
operations in the Company's unaudited condensed consolidated
financial statements as of September 30, 2019 and December 31, 2018
are shown below (dollars in thousands).
|
|
|
ASSETS
|
|
|
Cash
and cash equivalents
|
$226
|
$90
|
Accounts
receivable, net
|
2,981
|
2,289
|
Other
current assets, net
|
322
|
257
|
Total
current assets
|
3,529
|
2,636
|
Property
and equipment, net
|
138
|
176
|
Right-of-use
lease assets, net
|
154
|
-
|
Goodwill
|
1,691
|
1,691
|
Intangible
assets, net
|
1,994
|
2,208
|
Deposits
and other long-term assets
|
9
|
79
|
Total
assets held for sale
|
$7,515
|
$6,790
|
LIABILITIES
|
|
|
Accounts
payable and accrued expenses
|
$942
|
$800
|
Short-term
borrowings
|
1,623
|
1,095
|
Lease
liability, short term
|
110
|
-
|
Other
liabilities, current portion
|
5
|
-
|
Total
current liabilities held for sale
|
2,680
|
1,895
|
Other
long-term liabilities
|
120
|
90
|
Lease
liability, long term
|
59
|
-
|
Total
liabilities held for sale
|
$2,859
|
$1,985
|
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The major components of the operations held for sale, net of tax,
are presented in the unaudited condensed consolidated statements of
operations below (dollars in thousands).
|
For the Three Months ended September 30,
|
For the Nine Months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$6,205
|
$7,242
|
$20,260
|
$21,435
|
Cost
of revenue
|
5,378
|
6,263
|
17,551
|
18,694
|
Gross
profit
|
827
|
979
|
2,709
|
2,741
|
Operating
expenses:
|
|
|
|
|
General
and administrative expenses
|
755
|
809
|
2,744
|
2,352
|
Selling
and marketing expenses
|
93
|
93
|
142
|
241
|
Operating
expenses
|
848
|
902
|
2,886
|
2,593
|
Income
(loss) from operations
|
(21)
|
77
|
(177)
|
148
|
Other
income (expense):
|
|
|
|
|
Loss
on extinguishment of debt
|
(31)
|
-
|
(31)
|
-
|
Interest
expense
|
(108)
|
(30)
|
(209)
|
(96)
|
Other
income
|
-
|
-
|
2
|
-
|
Total
other expense
|
(139)
|
(30)
|
(238)
|
(96)
|
Income
(loss) from operations held for sale
|
(160)
|
47
|
(415)
|
52
|
Income
tax provision from operations held for sale
|
(12)
|
(22)
|
(35)
|
(22)
|
Net
income (loss) from operations held for sale
|
$(172)
|
$25
|
$(450)
|
$30
|
NOTE 17- SUBSEQUENT EVENTS
As of
November 14, 2019, the Company sold an additional 626,516 shares of
common stock.