NOTE 1 – BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Rekor Systems, Inc. (the “Company” or
“Rekor”), formally known as Novume Solutions, Inc.
(Novume), was formed in February 2017 to effectuate the mergers of,
and become a holding company for KeyStone Solutions, Inc.
(“KeyStone”) and Rekor Recognition Systems, Inc.
(“Rekor Recognition”), formally known as Brekford
Traffic Safety, Inc.
(“Brekford”).
On
February 28, 2019, the Company renamed Brekford to Rekor
Recognition Systems, Inc. For narrative purposes, all references to
Brekford before February 28, 2019 are to Brekford Traffic Safety,
Inc. and to Rekor Recognitions Systems, Inc. on and after February
28, 2019.
Rekor
is a leader in the field of vehicle identification and management
systems driven by leading edge advances in artificial intelligence
("AI"). In development for over five years using AI processes,
including machine learning algorithms, the Company’s core
software enables the creation of more powerful and capable vehicle
recognition systems that can be deployed at a fraction of the cost
of traditional vehicle recognition systems. The software enables a
wider field of view, greater light sensitivity, recognitions at
faster speeds and the ability to identify the color, make and type
of a vehicle as well as direction of travel. These capabilities are
particularly useful in solving a wide variety of real-world roadway
and vehicle related challenges. In addition, the reductions in cost
have opened up a number of new uses for vehicle recognition
technology that were not previously cost effective. The Company
currently provides products and services for governmental
organizations, for large and small businesses and for individuals
throughout the world. Customers are currently using the
Company’s products or services in over 70 countries, with
offerings for smart cities, public safety, security,
transportation, parking and logistics.
Currently, the
Company’s business activities also include providing
professional services in the government contracting, aviation and
aerospace industries. As part of the development of a new line of
products for the public safety and security markets, the Company
acquired industry leading vehicle recognition software in March
2019. In connection with this acquisition, the Company determined
that its resources are best concentrated on vehicle recognition
products and services and have reorganized and retooled its product
development, business development and administrative resources,
with increasing emphasis on the technology area. The Board of
Directors has also authorized management to explore opportunities
for the sale of the Company’s professional services
businesses. In keeping with the shift in resources and strategic
direction that this represents, the Company has reorganized its
financial reporting into two business segments: the Technology
Segment and the Professional Services Segment. This reporting
segmentation reflects the Company’s separate focus on and
expectations for technology products and services versus
professional services.
On
March 29, 2019, the Company announced that its Board of Directors
approved changing the Company’s name to Rekor Systems, Inc.
This name change was a result of the Company’s increased
focus on technology products and services, and aligns with the
renaming of Brekford Traffic Safety, Inc. to Rekor Recognition
Systems, Inc. In connection with this name change, the Company
changed:
●
the ticker symbol
for the Company’s common stock on the Nasdaq Stock Market to
“REKR” and the CUSIP number for the common stock to
759419 104;
●
the ticker symbol
for Company’s Series A Preferred Stock on the OTC Markets
OTCQB exchange to “REKRP” and the CUSIP number for
Company’s Series A Preferred Stock to 759419 203;
and
●
the ticker symbol
for warrants on the OTC Markets OTCQB exchange to
“REKRW” and the CUSIP number for the warrants to 759419
112.
Technology Segment. The
Technology Segment operations are conducted by the Company’s
wholly owned subsidiary, Rekor Recognition Systems, Inc.
(“Rekor Recognition”). Formerly named Brekford Traffic
Safety, Inc., Rekor Recognition has been involved in the public
safety business since 1996. In connection with the development of
several new public safety products, Rekor Recognition determined to
acquire substantially all the assets of OpenALPR Technology, Inc.
This acquisition (the “OpenALPR Technology
Acquisition”), completed in March 2019, transferred vehicle
recognition software and associated licenses and proprietary rights
to OpenALPR Software Solutions, LLC (“OpenALPR”), a new
wholly owned subsidiary of Rekor Recognition. OpenALPR’s
vehicle recognition platform, already operating in more than 12,000
cameras in over 70 countries worldwide, has laid the groundwork for
the expansion of the Company’s product lines, enabling
multiple deployment mechanisms.
Since
the OpenALPR Technology Acquisition, the Company has expanded its
vehicle recognition product and service lines into a much broader
range of customer segments, starting with public safety. The
Company shifted from a perpetual licensing model to a
subscription-based model, rebranded the software suites as
“Watchman” and “Car-Check” and released
several packaged hardware and software solutions with preloaded
versions of each of these vehicle recognition engines. By the end
of 2019, the Company had a portfolio of more than ten products,
permitting it to offer full-scale vehicle recognition services for
nearly any large or small public agency, commercial or residential
setting.
Rekor’s
software currently has the capability to analyze multi-spectral
images and/or video streams produced by nearly any Internet
Protocol security camera and concurrently extract license plate
data by state from more than 70 countries, in addition to the
vehicle’s make, color, type and direction of travel. When
combined with speed optimized code, parallel processing capability
and best-in-class accessories, such as cameras and communications
modules, the software captures license plate data and vehicle
characteristics at extremely high vehicle speeds with a high degree
of accuracy, even in unusually difficult conditions, such as low
lighting, poor weather, extreme camera viewing angles, and
obstructions.
Prior
to the development of the Company’s vehicle identification
software, highly accurate results were not available using a
typical Internet Protocol camera. The Company believes that the
ability to use less expensive hardware will change the dynamics of
the existing public safety market, enabling the creation of
increasingly robust networks with cameras at more locations. In
addition, the Company expects the cost advantages and high degree
of accuracy to create competitive advantages in tolling systems and
logistics operations that currently rely on complex radio frequency
identification (“RFID”)
systems. The Company also expects the lower costs, superior
distance and field of view capabilities and the ability to capture
additional vehicle information, such as direction, color, make and
type of vehicle, to open opportunities in other market segments,
such as parking operations, school safety and retail customer
loyalty programs; and particularly smart cities and smart roadways.
Smart roadway systems, sometimes referred to as smart transport or
intelligent transport systems (“ITS”), inclusive of
parking management and guidance, passenger information,
and traffic management systems, can optimize the movement of
vehicles to make travel safer and more efficient. These
technologies are expected to enable users to be more coordinated,
better informed, and make safer and smarter use of transport
networks.
The
Company’s vision is “AI with a Purpose.” The
Company intends to evolve beyond vehicle recognition for public
safety markets into the recognition and analysis of vehicle
activities (inclusive of motion and behaviors), to develop systems
to identify unsafe situations (e.g. wrong way driving, pedestrian
on roadway, etc.) and optimize traffic flows, and develop numerous
other data driven applications centered around vehicle
knowledge.
Professional Services Segment.
The Company has provided professional services and staffing
solutions to the government contracting and the aerospace and
aviation industries. The Professional Services Segment includes AOC
Key Solutions, Inc. (“AOC Key Solutions”); Global
Technical Services, Inc. (“GTS”); Global Contract
Professionals, Inc. (“GCP”, and together with GTS,
“Global”); and Firestorm Solutions, LLC (Firestorm
Solutions”) and Firestorm Franchising, LLC (“Firestorm
Franchising” and together with Firestorm Solutions,
“Firestorm”). Currently, as a leading provider of
support services to the federal government contracting market, AOC
Key Solutions’ primary clients are companies that serve the
federal government. However, in support of the Technology Segment,
the Company has recently been active in the state and local
government contracting market. The Company provides professional
services that offer scalable and compliant outsourced support for
its government contractor clients. The Company helps these clients
to win government contracts and capture new businesses. Global
provides specialized staffing services, primarily in the aerospace
and aviation industries. In connection with the Company’s
reorganization and focus on technology products and services, it is
actively engaged in evaluating, reconfiguring, selling, and
discontinuing various business assets or entities in the
Professional Services Segment. As part of this
process, the Company discontinued the operations of Firestorm
Franchising and has determined to sell Global and AOC Key
Solutions. The Company has identified several potential buyers for
Global and is in negotiations with one of them. In March 2020, the
Company received a proposal from the current management of AOC Key
Solutions to purchase that subsidiary, which is being considered by
its Board of Directors. AOC Key Solutions did not meet the held for
sale criteria as of December 31, 2019 and thus AOC Key Solutions
was not presented as part of operations held for sale in the
financial statements and notes to the financial statements
presented as of December 31, 2019.
Basis of Consolidation
The
consolidated financial statements include the accounts of Rekor
Systems, Inc., the parent company, and its wholly owned
subsidiaries AOC Key Solutions, Inc., Rekor Recognition Systems,
Inc., Novume Media, Inc., Firestorm Solutions, LLC, Firestorm
Franchising, LLC, Global Technical Services, Inc., Global Contract
Professionals, Inc. and OpenALPR Software Solutions, LLC
(collectively, the “Company”).
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) and in accordance with the
accounting rules under Regulation S-X, as promulgated by the
Securities and Exchange Commission (“SEC”). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain
amounts in the prior year's financial statements have been
reclassified to conform to the current year's 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 consolidated statements of
operations, whereas in prior periods these amounts were included in
one caption titled selling, general and administrative expenses.
Amounts for the period ending December 31, 2018, have been
reclassified to conform to the current year
presentation.
In the
opinion of management, all adjustments necessary for a fair
presentation for the periods presented have been reflected as
required by Regulation S-X, Rule 10-01. All necessary adjustments
are of a normal, recurring nature.
Held for Sale Operations
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 consolidated balance sheets and its results are
presented as income (loss) from operations held for sale in the
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.
Interest
on debt that is expected to be assumed by the buyer as a result of
the sale transaction has be allocated to operations that are
classified as held for sale. The Company does not expect to assume
debt as a result of the sale of Global. For the years ended
December 31, 2019 and 2018 interest allocated to operations held
for sale was $294,000 and $117,000, respectively.
Long-lived
assets and intangible assets to be sold will be recovered through
sale and not through future operations. Therefore, long-lived
assets are not depreciated or amortized once they are classified as
held for sale.
See
Note 3 for additional information regarding the Company's held for
sale operations.
Going Concern Assessment
Beginning with the
year ended December 31, 2018 and all annual and interim
periods thereafter, management will assess going concern
uncertainty in the Company’s consolidated financial
statements to determine whether there is sufficient cash on hand
and working capital, including available borrowings on loans and
external bank lines of credit, to operate for a period of at least
one year from the date the consolidated financial statements are
issued or available to be issued, which is referred to as the
“look-forward period”, as defined in 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, including the timing and nature of projected cash
expenditures or programs, its ability to delay or curtail
expenditures or programs and its ability to raise additional
capital, if necessary, among other factors. Based on this
assessment, as necessary or applicable, management makes certain
assumptions around implementing curtailments or delays in the
nature and timing of programs and expenditures to the extent it
deems it probable that those implementations can be achieved and
that management has the proper authority to execute them within the
look-forward period.
The
Company has generated losses since its inception in February 2017
and has relied on cash on hand, external bank lines of credit, the
sale of a note, proceeds from common stock, debt financing and a
public offering of its common stock to support cashflow from
operations. The Company attributes losses to merger costs, public
company corporate overhead and non-capital expenditures consequent
to the Company's change in strategic direction. As of and for the
year ended December 31, 2019, the Company had a net loss from
continuing operations of $14,412,000 and a working capital deficit
of $912,000. The Company's net cash position was decreased by
$902,000 for the year ended December 31, 2019 due to the net loss
from operations, offset by the net proceeds of $3,839,000 from
senior secured notes, the net proceeds of $2,949,000 from the
At-the-Market Agreement and the net proceeds from the secured
borrowing arrangement of $5,463,000.
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 consolidated financial
statements in this Annual Report on Form 10-K, 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 December 31, 2019, the Company believes it has access to raise
up to $11,727,000 through the At Market Issuance
Sales Agreement (the “Sales Agreement”). As of
March 30, 2020, the Company has $9,655,000 available for sale under
the Sales Agreement. The Company will continue to raise capital
through the Sales Agreement to help fund operations. Should access
to those funds be unavailable, the Company will need to seek out
additional sources of funding. Furthermore, the Company has contingency plans to reduce
or defer expenses and cash outlays should operations weaken in the
look-forward period or additional financing, if needed, is not
available.
The Company's
ability to generate positive operating results and complete the
execution of its business strategy will depend on (i) its
ability to maintain timely collections from existing customers in,
as well as continue the growth of, its Technology Segment, (ii)
timely completion of the disposition of the businesses in
its
Professional Services Segment, (iii) the continued performance of
its
contractors, subcontractors and vendors, (iv) its
ability to maintain and build good relationships with its
lenders and financial intermediaries, (v) its
ability to meet debt covenants or obtain waivers in case of
noncompliance and (vi) the stability of the world economy and
global financial markets. To the extent that events outside of the
Company's control have a significant negative impact on economic
and/or market conditions, they could affect payments from
customers, services and supplies from vendors, its
ability to continue to secure new business, raise capital, complete
the sale of its
assets held for sale in a timely fashion and otherwise, depending
on the severity of such impact, materially adversely affect
its
operating results.
Rounding
Dollar
amounts, except per share data, in the notes to these financial
statements are rounded to the closest $1,000, unless otherwise
indicated.
Concentration of Risk
The Company places its temporary cash investments with higher rated
quality financial institutions located in the United States
(“U.S.”). As of December 31, 2019, and 2018, the
Company had deposits from continuing operations totaling $1,641,000
and $2,678,000, respectively, in one and three U.S. financial
institutions that were federally insured up to $250,000 per
account, respectively.
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 20% and 19% of the Company’s total
revenues for the years ended December 31, 2019 and 2018,
respectively.
Company B accounted for 17% and less than 10% of the
Company’s total revenues for the years ended December 31,
2019 and 2018, respectively.
As of December 31,
2019, accounts receivable from Company A and Company B totaled
$813,000 or 17%, and $1,320,000
or 27%, respectively, of the 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 consolidated accounts receivable
balance.
No other single customer accounted for more than 10% of the
Company’s consolidated revenue for the year ended
December 31, 2019 or consolidated accounts receivable balance
as of December 31, 2019.
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 December 31, 2019 and 2018 were $461,000 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 consolidated balance
sheets.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable
are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its clients’
financial condition, and the Company generally does not require
collateral.
The
Company maintains an allowance for doubtful accounts at an amount
estimated to be sufficient to cover the risk of collecting less
than full payment of the receivables. At each balance sheet date,
the Company evaluates its receivables and assess the allowance for
doubtful accounts based on specific customer collection issues and
historical write-off trends. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance.
Based
on the information available, the Company determined that an
allowance for loss of $48,000 and $24,000 was required at December
31, 2019 and 2018, respectively.
Inventory
Inventory
principally consists of parts held temporarily until installed for
service. Inventory is valued at the lower of cost or market value.
The cost is determined by the lower of first-in, first-out
(“FIFO”) method, while market value is determined by
replacement cost for components and replacement parts.
Property and Equipment
Property and
equipment are stated at cost or fair value at acquisition date for
assets obtained through business combinations, less accumulated
depreciation. Depreciation expense is classified within the
corresponding operating expense categories on the consolidated
statements of operations.
Depreciation is
recorded on the straight-line basis over the following estimated
lives:
Class of assets
|
Useful life
|
Furniture and fixtures
|
2 - 10 years
|
Office equipment
|
2 - 5 years
|
Leasehold improvements
|
Shorter of asset life or lease term
|
Automobiles
|
3 - 5 years
|
Camera systems
|
3 years
|
Repairs
and maintenance are expensed as incurred. Expenditures for
additions, improvements and replacements are
capitalized.
Software Development Costs
Research and
development costs to develop software to be sold, leased or
marketed are expensed as incurred up to the point of technological
feasibility for the related software product. Capitalized
internally developed software costs, net, not yet placed in service
were $966,000 and $829,000 as of December 31, 2019 and 2018,
respectively. In 2019, the Company placed in
service $232,000 of capitalized development costs related
to software to be sold, leased or marketed.
Software developed
for internal use, with no substantive plans to market such software
at the time of development, are capitalized and included in
intangible assets, net in the consolidated balance sheets. Costs
incurred during the preliminary planning and evaluation and post
implementation stages of the project are expensed as
incurred. Costs incurred during the application development
stage of the project are capitalized. In 2019, the Company
capitalized $91,000 of development costs related to
internal use software. In 2018, capitalized costs related to
software developed for internal use were immaterial.
Leases
On January 1, 2019 the Company
adopted Accounting Standard Codification (“ASC”) Topic
842, Leases ("ASC 842"), using the optional transition
method whereby the Company applied the new lease requirements under
Accounting Standards Update (“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 right of use
(“ROU”) operating lease assets and $951,000 of
operating lease liabilities, including noncurrent operating lease
liabilities of $778,000, 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 Financial
Accounting Standard Board (“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 provided 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 consolidated
balance sheets. 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 consolidated
balance sheets. The comparative periods have not been restated for
the adoption of ASU 2016-02.
The
Company determines if an arrangement contains a lease and the
classification of that lease, if applicable, at inception.
Operating leases are included in operating lease ROU assets,
operating lease liabilities and operating lease liabilities (net of
current portion) in the consolidated balance sheets. The Company
does not currently have any finance leases.
ROU
assets represent the Company’s right to use an underlying
asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments under the lease.
Operating lease ROU assets and liabilities are recognized at the
lease commencement date based on the present value of lease
payments over the lease term. The implicit rate within the
Company’s operating leases are generally not determinable and
the Company uses its incremental borrowing rate at the lease
commencement date to determine the present value of lease payments.
The determination of the Company’s incremental borrowing rate
requires judgment. The Company determined the incremental borrowing
rate for each lease using the Company’s current borrowing
rate, adjusted for various factors including level of
collateralization and term to align with the terms of the lease.
The operating lease ROU asset also includes any lease prepayments,
offset by lease incentives. Certain of the Company’s leases
include options to extend or terminate the lease. An option to
extend the lease is considered in connection with determining the
ROU asset and lease liability when it is reasonably certain the
Company will exercise that option. An option to terminate is
considered unless it is reasonably certain the Company will not
exercise the option.
Lease
expense for lease payments is recognized on a straight-line basis
over the term of the lease.
Business Combination
Management conducts
a valuation analysis on the tangible and intangible assets acquired
and liabilities assumed at the acquisition date thereof. During the
measurement period, which may be up to one year from
the acquisition date,
the Company may record adjustments to the fair value of these
tangible and intangible assets acquired and liabilities assumed,
with the corresponding offset to goodwill. In addition, uncertain
tax positions and
tax-related valuation allowances are initially established in
connection with a business combination as of the acquisition date. Upon the
conclusion of the measurement period or final determination of the fair value of
assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments
are recorded to the Company’s consolidated statements of
operations.
Amounts
paid for acquisitions are allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the
date of acquisition. The Company allocates a portion of the
purchase price to the fair value of identifiable intangible assets.
The fair value of identifiable intangible assets is based on
detailed valuations that use information and assumptions provided
by management. The Company allocates any excess purchase price over
the fair value of the net tangible and intangible assets acquired
to goodwill.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the fair value of consideration
transferred in a business combination over the fair value of
tangible and intangible assets acquired, net of the fair value of
liabilities assumed. Goodwill is tested for impairment within one
year of acquisitions or annually as of October 1, and whenever
indicators of impairment exist. In testing goodwill for
impairment, the Company may elect to utilize a qualitative
assessment to evaluate whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If
the Company’s qualitative assessment indicates that goodwill
impairment is more likely than not, the Company will perform a
two-step impairment test. The Company will test goodwill for
impairment under the two-step impairment test by first comparing
the book value of net assets to the fair value of the reporting
units. If the fair value is determined to be less than the book
value or qualitative factors indicate that it is more likely than
not that goodwill is impaired, a second step is performed to
compute the amount of impairment as the difference between the
estimated fair value of goodwill and the carrying value. The
Company estimates the fair value of the reporting units using
discounted cash flows. Forecasts of future cash flows are based on
the Company’s best estimate of future net sales and operating
expenses, based primarily on expected growth and general economic
conditions. Based on the annual
impairment test the Company concluded that the fair value of each
of its reporting units exceeded its respective carrying
value.
Identifiable
intangible assets are initially valued at fair value using
generally accepted valuation methods appropriate for the type
of intangible asset. Identifiable intangible assets
with definite lives are amortized over their estimated useful lives
and are reviewed for impairment if indicators of impairment
arise. Except for goodwill, the
Company does not have any intangible assets with indefinite useful
lives.
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, Firestorm Franchising LLC,
Secure Education Consultants and BC Management, Inc. (collectively,
“Firestorm”).
In the
fourth quarter of 2019, the Company recorded non-deductible
goodwill impairment charge of $1,022,000, related to the Company’s Global subsidiaries,
which are classified as operations held for sale. The impairment
charges were non-cash in nature and did not affect the
Company’s liquidity, cash flows, borrowing capability or
operations; nor did it impact the debt covenants under the
Company’s debt agreements. See Note 8 “Intangible
Assets” for information regarding the Company’s goodwill impairment
charges.
Revenue Recognition
The
Company derives its revenues substantially from two sources: (1)
license and subscription fees for software and related products and
services, and (2) 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
following table presents a summary of revenue:
|
|
|
|
|
Technology
|
|
|
Automated
traffic safety enforcement
|
$3,403
|
$3,413
|
Licensing
and subscription revenue
|
2,066
|
-
|
Other
revenue
|
-
|
109
|
Total
Technology revenue
|
5,469
|
3,522
|
Professional
Services
|
|
|
Consulting
and technical support services
|
13,827
|
16,435
|
Franchising
Services
|
24
|
97
|
Total
Professional Services revenue
|
13,851
|
16,532
|
Total
revenue
|
$19,320
|
$20,054
|
Technology Revenues
The
revenues for technology products and services are from fees that
provide customers with software licenses and related support and
service fees for various public safety services.
In
March 2019, the Company acquired substantially all of the assets of
a software development company, OpenALPR Technologies, Inc. The
software acquired from this acquisition and subsequently developed
by the Company have provided the basis for the Company’s
licensing and subscription revenue. Licensing and subscription,
include services which operate in many installations with a high
accuracy rate, include a web server, self-managed database, and
access to a powerful, cross-platform application programming
interface. The software employs a convolutional neural network
architecture to classify images and features include seamless video
analysis and data analytics. Current customers include law
enforcement agencies, highway authorities, parking system
operators, private security companies, and wholesale and retail
operations supporting logistics and customer loyalty programs.
During the second quarter of 2019, the Company changed its method
of selling in the Technology Segment from perpetual software
licenses, with associated maintenance services, to service
subscriptions of limited duration. These subscriptions give the
customer a license to use the latest version of the software only
during the term of the subscription. Revenue is generally
recognized ratably over the contract term. This change is expected
to impact the Company's revenue in the short term. However, the
amount of contract revenue received over the long-term impact is
expected to be relatively consistent. The Company’s
subscription services arrangements are non-cancelable and do not
contain refund-type provisions. Revenue is recognized ratably over
the licensing or subscription term.
Automated traffic
safety enforcement arrangements provide traffic safety systems to a
number of municipalities in North America. These systems include
hardware that identifies red light and school safety zone traffic
violations and software that captures and records forensic images,
analyses the images to provide data and supports citation
management services. The Company also provides an enterprise
parking enforcement solution that the Company licenses to parking
management companies and municipalities. Revenue is
recognized monthly based on the number of camera systems that are
operated, or the number of citations issued by the relevant
municipality.
Professional Services Revenues
Consulting and
Technical Support Services is primarily comprised of government
contracting support services that assist government contractors
with critical aspects of their business. These services include
market intelligence and opportunity identification; capture and
strategic advisory; proposal strategy and development; teaming
support; and managed human capital services. The Company’s
services also help commercially focused firms gain entry into the
government contracting market. 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 contract term for fixed price contracts with
subscription services.
For
those contracts that have multiple performance obligations, the
Company allocates the total transaction price to each performance
obligation based on its relative standalone selling price, which is
determined based on the Company’s overall pricing objectives,
taking into consideration market conditions and other
factors.
A
performance obligation is a promise in a contract with a customer
to transfer services that are distinct. The performance obligations
that are not yet satisfied or partially satisfied are performance
obligations that are expected to be recognized as revenue in the
future for a contract with a customer which was executed as of a
particular date. At December 31, 2019, the Company had
approximately $10,102,000 of remaining performance obligations not
yet satisfied or partially satisfied related to its Technology
Segment. The Company expects to recognize approximately 46% of this
amount over the succeeding twelve months, and the remainder is
expected to be recognized over the next two to four years
thereafter.
The
timing of revenue recognition, billings and cash collections
results in billed accounts receivable, unbilled accounts
receivables, and contract liabilities on the consolidated balance
sheets. Billed and unbilled accounts receivable are presented as
part of accounts receivable, net on the 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 accounts receivables of $488,000 and $295,000 were
included in accounts receivable, net, in the consolidated balance
sheets as of December 31, 2019 and December 31, 2018, respectively.
Additionally, unbilled accounts receivables of $298,000 and
$830,000 were included in current assets held for sale in the
consolidated balance sheets as of December 31, 2019 and December
31, 2018, respectively.
When
the Company advance bills 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 consolidated balance sheets on a
contract-by-contract basis at the end of each reporting period.
Changes in the contract asset and liability balances during the
year ended December 31, 2019 were not materially impacted by any
other factors. Contract liabilities from the year ended December
31, 2019 and December 31, 2018 were $1,524,000 and $207,000,
respectively. All contract liabilities as of December 31, 2019 and
December 31, 2018 were attributable to continued operations. During
the year ended December 31, 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 December 31, 2019 (dollars in thousands):
2020
|
$774
|
2021
|
243
|
2022
|
219
|
2023
|
191
|
2024
|
97
|
Total
|
$1,524
|
Practical Expedients
Election ‒ Costs to Obtain and Fulfill a
Contract ‒ The Company’s incremental costs to
obtain a contract consist of sales commissions. The Company elected to use the practical expedient
to expense costs
to obtain a contract as incurred when
the amortization period would have been one year or less. As
of December 31, 2019, and 2018, costs incurred to obtain
contracts in excess of one year have been immaterial to
date.
Advertising
The
Company expenses all non-direct-response advertising costs as
incurred. Advertising costs for the years ended December 31, 2019
and 2018 were $350,000 and $248,000, respectively, and are included
in sales and marketing expense in the consolidated statement of
operations.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP
requires the extensive use of management's estimates. Management
uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual amounts
may differ from these estimates. On an on-going basis, the Company
evaluates its estimates, including those related to collectability
of accounts receivable, fair value of debt and equity instruments
and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value
of assets and liabilities that are not apparent from other sources.
Actual results may differ from those estimates under different
assumptions or conditions.
Income
Taxes
Income
tax expense consists of U.S. federal and state income taxes. The
Company is required to pay income taxes in certain state
jurisdictions. Historically, AOC Key Solutions and Global initially
elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, neither AOC Key
Solutions nor Global paid federal corporate income tax, and in most
instances state income tax, on its taxable income. AOC Key
Solutions revoked its S-Corporation election upon the
March 15, 2016 merger with KeyStone and Global revoked its S
Corporation election upon the acquisition by Rekor, and are
therefore, subject to corporate income taxes. Firestorm is a
single-member LLC with KeyStone as the sole member.
The
Company uses the liability method of accounting for income taxes as
set forth in the authoritative guidance for accounting for income
taxes. This method requires an asset and liability approach for the
recognition of deferred tax assets and liabilities. Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company evaluates the recoverability of the
net deferred income tax assets and the level of the valuation
allowance required with respect to such net deferred income tax
assets. After considering all available facts, the Company fully
reserved for its net deferred tax assets, outside of the deferred
tax liability related to the indefinite lived intangible, because
management believes that it is not more likely than not that their
benefits will be realized in future periods. The Company will
continue to evaluate its net 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.
The
tax effects of uncertain tax positions are recognized in the
consolidated financial statements only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than
50% likelihood of being realized. It is the Company’s
accounting policy to account for ASC 740-10-related penalties and
interest as a component of the income tax provision in the
consolidated statements of operations and comprehensive
loss.
As of
December 31, 2019, and 2018, the Company’s evaluation
revealed no uncertain tax positions that would have a material
impact on the financial statements. The 2016 through 2018 tax years
remain subject to examination by the IRS, as of December 31, 2019.
The Company does not believe that any reasonably possible changes
will occur within the next twelve months that will have a material
impact on the financial statements.
Equity-Based
Compensation
The
Company recognizes equity-based compensation based on the
grant-date fair value of the award on a straight-line basis over
the requisite service period, net of estimated forfeitures. The
Company estimates the fair value of stock options using the
Black-Scholes option-pricing model. The use of the Black-Scholes
option-pricing model requires the use of subjective assumptions,
including the fair value and projected volatility of the underlying
common stock and the expected term of the award.
The
fair value of each option granted has been estimated as of the date
of the grant using the Black-Scholes option pricing model with the
following assumptions during the years ended December 31, 2019 and
2018:
|
|
|
|
|
Risk-free
interest rate
|
1.35-3.03%
|
3.03%
|
Expected
term
|
5-6 years
|
5 years
|
Volatility
|
80.4-89.8%
|
88.5%
|
Dividend
yield
|
0%
|
0%
|
Estimated
annual forfeiture rate at time of grant
|
0-30%
|
0%
|
Risk-Free Interest Rate – The yield on actively traded
non-inflation indexed U.S. Treasury notes with the same maturity as
the expected term of the underlying grants was used as the average
risk-free interest rate.
Expected Term – The expected term of
options granted was determined based on management’s
expectations of the options granted which are expected to remain
outstanding.
Expected Volatility – Because the Company’s common stock has only
been publicly traded since late August 2017, there is not a
substantive share price history to calculate volatility and, as
such, the Company has elected to compute its expected volatility
based on the average volatilities of similar entities, as well as,
considering its volatility since becoming
public.
Dividend Yield – The Black-Scholes option
pricing model requires an expected dividend yield as an input. The
Company has not issued common stock dividends in the past nor does
the Company expect to issue common stock dividends in the
future.
Forfeiture Rate – This is the estimated
percentage of equity grants that are expected to be forfeited or
cancelled on an annual basis before becoming fully vested. The
Company estimates the forfeiture rate based on past turnover data,
level of employee receiving the equity grant, and vesting terms,
and revises the rate if subsequent information indicates that the
actual number of instruments that will vest is likely to differ
from the estimate. The cumulative effect on current and prior
periods of a change in the estimated number of awards likely to
vest is recognized in compensation cost in the period of the
change.
Series A Cumulative Convertible Redeemable Preferred
Stock
The
Company’s Series A Preferred Stock has certain embedded
features including; a Company put right to convert each share into
common stock at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2019, the Series A Preferred Stock holder 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 per share plus any
accrued but unpaid dividends, the Company 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, and the
Series A Preferred Stock 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 Series A Preferred
Stock holders at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2016.
The
Company determined that the shares of Preferred Stock should be
classified as mezzanine equity since they are contingently
redeemable.
The
Company determined that it is probable that the Series A Preferred
Stock will become redeemable, thus the Company will recognize
changes in the redemption value immediately as they occur at the
end of each reporting period as if it were also the redemption date
for the interest and adjust the carrying amount of the Series A
Preferred Stock to the redemption value.
Long-Term
Debt with Detachable Warrants
When the Company issues debt with warrants, the
Company determines the value of the warrants using the
Black-Scholes Option Pricing Model using the stock price on the
date of issuance, the risk free interest rate associated with the
life of the debt, and the estimated volatility of the
Company’s stock. The Company treats the
warrants as a debt discount, recorded as a contra-liability against
the debt, and amortizes the balance over the life of the underlying
debt as interest expense in the consolidated statements of
operations.
Fair
Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, restricted cash and cash
equivalents, inventory, accounts receivable and accounts payable
approximate fair value as of December 31, 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 December 31, 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
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 December 31, 2019. There were no changes
in levels during the years ended December 31, 2019 and
2018.
Earnings
per Share
Basic
earnings per share, or EPS, is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS
is computed using the weighted average number of common and
potentially dilutive securities outstanding during the period,
except for periods of net loss for which no potentially dilutive
securities are included because their effect would be
anti-dilutive. Potentially dilutive securities consist of common
stock issuable upon exercise of stock options or warrants using the
treasury stock method. Potentially dilutive securities issuable
upon conversion of the Series A Preferred Stock are calculated
using the if-converted method.
The
Company calculates basic and diluted earnings per common share
using the two-class method. Under the two-class method, net
earnings are allocated to each class of common stock and
participating security as if all of the net earnings for the period
had been distributed. Participating securities consist of preferred
stock that contain a nonforfeitable right to receive dividends and
therefore are considered to participate in undistributed earnings
with common stockholders.
Segment Reporting
The FASB ASC Topic
280, Segment
Reporting, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
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 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. 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.
New Accounting Pronouncements
New Accounting Pronouncements Effective in the Year Ended December
31, 2019
In February 2016, the
FASB issued ASU 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.
The Company
has included the impact of this standard as part of its leasing
accounting policy above.
In June 2018, the FASB
issued ASU 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
consolidated financial statements and related
disclosures.
In August 2018, the FASB issued ASU
2018-15, Intangibles – Goodwill
and Other – Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”). The
amendments align the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal-use software license). The
accounting for the service element of a hosting arrangement that is
a service contract is not affected by these amendments. The
provisions may be adopted prospectively or retrospectively. This
ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15,
2019. Early adoption is permitted, and the Company early
adopted the ASU during the third quarter of 2019, effective July 1,
2019 on a prospective basis. In connection with the adoption of ASU
2018-15, the Company capitalized $91,000 of implementation costs
relating to a new financial accounting and reporting system that
went live in October 2019.
In January 2017, the FASB issued ASU
2017-04, Intangibles - Goodwill and
Other: Simplifying the Test for Goodwill Impairment.
To simplify the subsequent measurement
of goodwill, the update 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. The update 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 adopted the standard on January 1, 2019,
and it did not have an impact on the Company’s financial
position, results of operations, or cash flows.
New Accounting Pronouncements Effective in Future
Periods
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic
820), Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”). This ASU modifies the
disclosure requirements for fair value measurements by removing,
modifying or adding certain disclosures. ASU 2018-13 is effective
for annual periods beginning after December 15, 2019 and interim
periods within those annual periods, with early adoption permitted.
The amendments on changes in unrealized gains and losses, the range
and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. The new standard is expected
to impact to Company’s disclosures but is not anticipated to
impact on the Company’s operations, balance sheet or cash
flows.
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. Upon adoption of the new standard on January 1,
2020, the Company will begin recognizing an allowance for credit
losses based on the estimated lifetime expected credit loss related
to the Company’s financial assets. Based on the Company
analysis of ASU 2016-13 and due to the nature and extent of the
Company’s financial instruments in scope of this ASU
(primarily accounts receivable) and the historical, current and
expected credit quality of the Company’s customers, the
Company does not expect this ASU to have a material impact on its
consolidated operations and balance sheet.
There
are currently no other accounting standards that have been issued,
but not yet adopted, that could have a significant impact on the
Company’s consolidated financial position, results of
operations or cash flows upon adoption.
NOTE 2 – BUSINESS 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 recorded $386,000 of customer relationships to
intangible assets.
The table below shows the final breakdown related to the Secure
Education Consultants 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 and intellectual property
|
(386)
|
Net
goodwill recorded
|
$-
|
On June 1, 2019, the Company sold all its interest in Secure
Education Consultants for consideration of $250,000. As a result of
the Secure Education Consultants 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 consolidated statement of operations.
OpenALPR Technology Acquisition
On March 12, 2019, the Company completed the acquisition of certain
assets and assumed certain liabilities of OpenALPR Technology, Inc.
(the “OpenALPR Technology Acquisition”). Consideration
paid as part of the OpenALPR Technology Acquisition was: $7,000,000
in cash, subject to adjustment after closing; 600,000 shares of
Rekor common stock, valued at $397,000; and $5,000,000 of the 2019
Promissory Notes (see Note 9) 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
14).
The purchase price allocation to the assets acquired and
liabilities assumed based on fair values as of the acquisition
date. Since the OpenALPR Technology Acquisition occurred on March
12, 2019, the results of operations including OpenALPR Technology
Acquisition from the date of acquisition have been included in the
Company’s consolidated statement of operations for the year
ended December 31, 2019.
The final purchase price allocation of the OpenALPR Technology
Acquisition is as follows: intangible assets of $7,436,000 and
goodwill of $4,934,000 along with net assets acquired of $415,000,
and contract obligations assumed of $388,000.
The table below shows the breakdown related to the final purchase
price allocation for the OpenALPR Technology Acquisition (dollars
in thousands):
Accounts
receivable, net
|
$381
|
Other current
assets, net
|
13
|
Property and
equipment, net
|
21
|
Contract
liabilities
|
(388)
|
Net assets
acquired
|
27
|
Less intangible
assets
|
7,436
|
Consideration
paid
|
(12,397)
|
Net goodwill
recorded
|
$4,934
|
|
|
Cash
consideration
|
$7,000
|
Note
payable
|
5,000
|
Common stock
consideration
|
397
|
Total acquisition
consideration
|
$12,397
|
During the year ended December 31, 2019, $2,055,000 of
revenue
was attributed to OpenALPR Technology Acquisition, which was
reported in the consolidated income statement under the Technology
Segment.
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 Technology Acquisition.
Operations of Combined Entities
The following unaudited pro forma combined financial information
gives effect to the
OpenALPR Technology Acquisition as if it was
consummated as of January 1, 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 or to project potential operating results as of any future
date or for any future periods.
|
|
|
|
|
|
(Dollars
in thousands, except per share data)
|
Revenue:
|
|
|
Technology
|
$6,438
|
$5,235
|
Professional
Services
|
13,851
|
16,532
|
Total
revenue from continuing operations
|
20,289
|
21,767
|
Net
loss from continuing operations
|
(13,604)
|
(4,721)
|
Basic
and diluted earnings (loss) per share
|
$(0.74)
|
$(0.36)
|
Basic
and diluted number of shares
|
20,129,985
|
16,009,014
|
NOTE 3 – OPERATIONS HELD FOR SALE
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.
The pending dispositions are a result of the Company’s
strategic decision to concentrate resources on the development of
its Technology Segment and will result in material changes in the
Company's operations and financial results. As a consequence, the
Company is reporting the operating results and cash flows of Global
as held for sale, including for all prior periods reflected in
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 year ended December, 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 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 accompanying consolidated
balance sheets as of December 31, 2019 and December 31,
2018.
The assets and liabilities classified as held for sale
operations in the accompanying consolidated financial
statements as of December 31, 2019 and December 31, 2018 are shown
below (dollars in thousands):
|
|
|
|
|
ASSETS
|
|
|
Cash
and cash equivalents
|
$225
|
$90
|
Accounts
receivable, net
|
2,763
|
2,289
|
Other
current assets, net
|
238
|
257
|
Current
assets held for sale
|
3,226
|
2,636
|
Property
and equipment, net
|
113
|
176
|
Right-of-use
lease assets, net
|
130
|
-
|
Goodwill
|
669
|
1,691
|
Intangible
assets, net
|
1,994
|
2,208
|
Deposits
and other long-term assets
|
-
|
79
|
Total
long-term assets held for sale
|
2,906
|
4,154
|
Total
assets held for sale
|
$6,132
|
$6,790
|
LIABILITIES
|
|
|
Accounts
payable and accrued expenses
|
$461
|
$800
|
Short-term
borrowings
|
1,842
|
1,095
|
Lease
liability, short-term
|
113
|
-
|
Total
current liabilities held for sale
|
2,416
|
1,895
|
Other
long-term liabilities
|
-
|
90
|
Lease
liability, long-term
|
30
|
-
|
Total
long-term liabilities held for sale
|
30
|
90
|
Total
liabilities held for sale
|
$2,446
|
$1,985
|
The major components of the operations held for sale, net of tax,
are presented in the consolidated statements of operations below
(dollars in thousands):
|
|
|
|
|
Revenue
|
$26,207
|
$28,508
|
Cost
of revenue
|
22,680
|
24,788
|
Gross
profit
|
3,527
|
3,720
|
Operating
expenses:
|
|
|
General
and administrative expenses
|
3,481
|
3,634
|
Selling
and marketing expenses
|
170
|
-
|
Impairment
of intangibles
|
1,022
|
-
|
Operating
expenses
|
4,673
|
3,634
|
Income
(loss) from operations
|
(1,146)
|
86
|
Other
income (expense):
|
|
|
Loss
on extinguishment of debt
|
(31)
|
-
|
Interest
expense
|
(294)
|
(117)
|
Other
income (expense)
|
(1)
|
37
|
Total
other expense
|
(326)
|
(80)
|
Income
(loss) from operations held for sale
|
(1,472)
|
6
|
Income
tax provision from operations held for sale
|
-
|
-
|
Net
income (loss) from operations held for sale
|
$(1,472)
|
$6
|
NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental
disclosures of cash flow information for the years ended
December 31, 2019 and 2018 was as follows (dollars in
thousands):
|
|
|
|
|
Cash
paid for interest - continuing operations
|
$2,331
|
$362
|
Cash
paid for interest - held for sale operations
|
325
|
117
|
Cash
paid for taxes - continuing operations
|
-
|
-
|
Cash
paid for taxes - held for sale operations
|
12
|
14
|
Notes
payable for equipment purchase - held for sale
operations
|
-
|
32
|
Proceeds
from short-term borrowing arrangement transfer to settle line of
credit
|
312
|
-
|
Issuance
of common stock for the extinguishment of warrants
|
-
|
134
|
Common
stock issued in connection with note payable
|
-
|
126
|
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 Secure Education Consultants:
|
|
|
Current
assets
|
(58)
|
-
|
Intangible
assets sold
|
(249)
|
-
|
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
|
-
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
Right-of-use
lease asset
|
1,286
|
-
|
Deferred
rent
|
31
|
-
|
Lease
liability
|
$(1,317)
|
$-
|
NOTE 5 – INVENTORY
As of December 31, 2019 and December 31, 2018,
inventory consisted entirely of parts of $302,000 and
$73,000, respectively.
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (dollars in
thousands):
|
|
|
|
|
Furniture
and fixtures
|
$62
|
$158
|
Office
equipment
|
300
|
545
|
Camera
systems
|
772
|
635
|
Vehicles
|
36
|
36
|
Leasehold
improvements
|
120
|
16
|
Total
|
1,290
|
1,390
|
Less:
accumulated depreciation and amortization
|
(807)
|
(928)
|
Property
and equipment, net from continuing operations
|
483
|
462
|
Property
and equipment, net from operation held for sale
|
113
|
176
|
Property
and equipment, net
|
$596
|
$638
|
Depreciation and
amortization related to property and equipment, net from continuing
operations for the years ended December 31, 2019 and 2018 was
$348,000 and $309,000, respectively. During the year ended December
31, 2019, the Company disposed of property and equipment with a
book value of $469,000 that was fully depreciated at the time of
disposal.
Depreciation and
amortization related to property and equipment, net from operations
held for sale for the years ended December 31, 2019 and 2018 was
$38,000 and $33,000, respectively. For property and equipment that
is classified as held for sale, the Company ceases depreciation at
the time of the held for sale classifications as the assets are
deemed to be held at fair value.
NOTE 7 – LEASES
We have operating
leases for office facilities in various locations throughout the
United States. The Company’s leases have remaining terms of
one to five years. Certain of the Company’s leases include
options to extend the term of the lease or to terminate the lease
prior to the end of the initial term. When it is reasonably certain
that the Company will exercise the option, the Company will include
the impact of the option in the lease term for purposes of
determining total future lease payments.
Cash paid for amounts included in the measurement of operating
lease liabilities from continuing operations was $163,000 for the
year ended December 31, 2019. Included in this amount is $13,000
related to prepaid rent for one of the Company’s leased
properties. Cash paid for amounts included in the measurement of
operating lease liabilities from operations held for sale was
$131,000 for the year ended December 31, 2019. Included in this
amount is $10,000 related to prepaid rent for one of the
Company’s leased properties.
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 year
ended December 31, 2019 the Company recognized $70,000 of expense
related to the loss of lease abandonment which is included in other
expenses in the consolidated statement of operations.
Operating lease expense
from continuing operations for
the year ended December 31, 2019 and 2018 was $353,000 and
$667,000,
respectively, and is part of general and administrative expenses in
the accompanying consolidated statement of
operations.
Operating lease expense
from operations held for sale for
the year ended December 31, 2019 and 2018 was $134,000 and
$124,000,
respectively, and is part of income (loss) for operations held for
sale in the accompanying consolidated statement of
operations.
Supplemental balance sheet information related to leases as of
December 31, 2019 was as follows (dollars in
thousands):
Operating
lease right-of-use lease assets from continuing
operations
|
$782
|
Operating
lease right-of-use lease assets from operations held for
sale
|
130
|
Total
operating lease right-of-use assets
|
$912
|
|
|
Lease
liability, short-term
|
$302
|
Lease
liability, long-term
|
667
|
Lease
liability from operations held for sale
|
143
|
Total
operating lease liabilities
|
$1,112
|
|
|
Weighted
Average Remaining Lease Term - operating leases from continuing
operations
|
3.4
|
|
|
Weighted
Average Discount Rate - operating leases
|
9%
|
Maturities of operating lease liabilities for continuing operations
and operations held for sale at December 31, 2019 were as follows
(dollars in thousands):
2020
|
$498
|
2021
|
337
|
2022
|
177
|
2023
|
178
|
2024
|
100
|
Total
lease payments
|
1,290
|
Less
imputed interest
|
(178)
|
Maturities
of lease liabilities
|
$1,112
|
NOTE 8 – INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill by reportable business
segment for the year ended December 31,
2019 were as follows (dollars in thousands):
|
Segment
|
|
OpenALPR
Technology Acquisition
|
|
|
Goodwill
from continuing operations
|
Technology
|
$1,402
|
$4,934
|
$-
|
$6,336
|
Goodwill
from held for sale operations
|
Professional
Services
|
1,691
|
-
|
(1,022)
|
669
|
Total
goodwill
|
|
$3,093
|
$4,934
|
$(1,022)
|
$7,005
|
In
the fourth quarter of 2019 the Company operations that are
presented as held for sale, Global, incurred an impairment charge
as it was determined by the Company that its carrying value was
below its implied fair value.
As a result of the
determination to classify Global as held for sale, the Company
performed an impairment analysis with respect to the carrying value
of goodwill in Global in connection with the preparation of the
Company’s financial statements for the year ended December
31, 2019. The results of the goodwill impairment analysis indicated
that the estimated fair value of Global was less than its carrying
value; therefore, the Company applied Step 2 of the goodwill
impairment test. The results of Step 2 indicated that the carrying
value of the goodwill associated with Global exceeded its implied
fair value, resulting in a $1,022,000 non-deductible goodwill
impairment charge which is recorded as part of operation held for
sale within the consolidated statements of operations. The
impairment charge was non-cash in nature and did not affect the
Company’s current liquidity, cash flows, borrowing capability
or operations; nor did it impact the debt covenants under the
Company’s existing debt agreements.
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2018 to December 31, 2019 (dollars in
thousands):
|
|
|
|
|
Sale of Secure Education Consultants
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
|
Customer
relationships
|
$2,475
|
$90
|
$(371)
|
$(1,549)
|
$(249)
|
$396
|
Marketing
related
|
69
|
223
|
(62)
|
-
|
-
|
230
|
Technology
based
|
83
|
7,123
|
(811)
|
-
|
-
|
6,395
|
Internally
developed capitalized software
|
829
|
458
|
(64)
|
-
|
-
|
1,223
|
Intangible
assets subject to amortization from continuing
operations
|
3,456
|
7,894
|
(1,308)
|
(1,549)
|
(249)
|
8,244
|
Intangible
assets subject to amortization from held for sale
operations
|
2,208
|
-
|
(214)
|
-
|
-
|
1,994
|
Total
intangible assets subject to amortization
|
$5,664
|
$7,894
|
$(1,522)
|
$(1,549)
|
$(249)
|
$10,238
|
The following provides a breakdown of identifiable
intangible assets as of December 31, 2019 (dollars in
thousands):
|
|
|
|
Internally
Developed Capitalized Software
|
|
Identifiable
intangible assets
|
$461
|
$327
|
$7,206
|
$1,290
|
$9,284
|
Accumulated
amortization
|
(65)
|
(97)
|
(811)
|
(67)
|
(1,040)
|
Identifiable
intangible assets from continuing operations, net
|
396
|
230
|
6,395
|
1,223
|
8,244
|
Identifiable
intangible assets from operations held for sale, net
|
1,685
|
309
|
-
|
-
|
1,994
|
Identifiable
intangible assets, net
|
$2,081
|
$539
|
$6,395
|
$1,223
|
$10,238
|
With the
OpenALPR Technology Acquisition, the Company
identified 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 6.3 years. Amortization expense
attributable to continuing operations for the year ended December
31, 2019 and 2018 was $1,308,000 and $738,000, respectively, and is
presented as part of general and administrative expenses in the
accompanying consolidated statements of
operations.
Amortization expense attributable to operations held for sale for
the year ended December 31, 2019 and 2018 was $214,000 and
$286,000, respectively, and is presented as part of income (loss)
from operations held for sale in the accompanying 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 Consultants 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
Consultants, which included $249,000 of intangible assets (see Note
2).
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. BC Management was previously included
as part of the Company’s Professional Services Segment. 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 and accordingly are not reported separately from the
Company’s continuing operations.
On June 30, 2019, the Company recorded an intangible asset
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. Firestorm
Franchising is included as part of the Company’s Professional
Services Segment. 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 December 31, 2019, the estimated annual amortization expense for
each of the next five fiscal years and thereafter is as follows
(dollars in thousands):
2020
|
$1,265
|
2021
|
1,254
|
2022
|
1,173
|
2023
|
1,096
|
2024
|
1,060
|
Thereafter
|
1,450
|
Capitalized
software not yet placed in service
|
946
|
Total
|
$8,244
|
NOTE 9 – DEBT
Short-Term Borrowings
On August 9, 2019,
AOC Key Solutions, entered into an agreement with LSQ Funding
Group, L.C. (“LSQ”), as an unrelated third party,
pursuant to which AOC Key
Solutions sells its accounts receivable to LSQ and LSQ
advances AOC Key
Solutions 90% of the value of the receivable. AOC Key
Solutions can advance up to $5,000,000 at one time. The term
of the agreement is for 12 months and automatically renews for
additional 12-month periods. The agreement is presented as secured
borrowings, as the accounts receivable are sold with recourse back
to the Company, meaning that AOC Key
Solutions bears the risk of non-payment by the account
debtor. The funded amount of accounts receivables that LSQ has
provided to AOC Key
Solutions was $1,894,000 as of December 31, 2019 and is
presented as part of secured borrowings on the consolidated balance sheets.
To secure its obligations to LSQ, AOC Key
Solutions has granted a first priority security interest in
the AOC
Key Solutions accounts receivable and proceeds thereof. As
of December 31, 2019, there were approximately $2,714,000 of
receivables that are subject to collateral as part of this
agreement. The receivables held as collateral are presented as part
of accounts receivable, net on the consolidated balance
sheets.
On August 9, 2019,
Global, entered an agreement with an unrelated
third party, LSQ, pursuant to which Global sells its accounts
receivable to LSQ and LSQ advances Global 90% of the value of the
receivable. Global can advance up to $10,000,000 at one time. The
term of the agreement is for 12 months and automatically renews for
additional 12-month periods. The agreement is presented as secured
borrowings, as the accounts receivable are sold with recourse back
to Global, meaning that Global bears the risk of non-payment by the
account debtor. The funded amount of accounts receivables that LSQ
has provided to Global was $1,842,000 as of December 31, 2019 and
is presented as part of current liabilities held for sale on the
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
December 31, 2019, there were approximately $2,455,000 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 consolidated balance
sheets.
During the year ended
December 31, 2019, the Company recorded $112,000, in interest expense from
continuing operations, related to the agreement with LSQ.
Additionally, during the year ended December 31, 2019, the Company
recorded $169,000 in interest expense from operations held for
sale, related to the agreement with LSQ.
In November 2017,
AOC Key
Solutions, entered into an Account
Purchase Agreement and related agreements (the “AOC Wells
Agreement”) with Wells Fargo Bank National Association
(“WFB”) (“Wells Fargo Credit Facilities”).
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 Key
Solutions entered in a payoff and termination agreement with
WFB in which AOC Key Solutions paid WFB $341,000 to retire all
indebtedness and obligation to WFB. As part of payoff of the debt
AOC Key
Solutions 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 consolidated statement of
operations. The principal balance as of December 31, 2019 and 2018
was $0 and $566,000, respectively.
Global had revolving lines
of credit with WFB. 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 account receivables 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 as loss from operations held
for sale on the consolidated statement of operations. The principal
balance as of December 31, 2019 and 2018 was $0 and $1,095,000,
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. 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 aggregate balance of these notes payable was $961,000 and
$938,000, net of unamortized interest, as of December 31, 2019 and
December 31, 2018, respectively, to reflect the amortized fair
value of the notes issued due to the difference in interest rates
of $39,000 and $62,000, respectively.
On April 3, 2018, the
Company entered into a transaction pursuant to which an
institutional investor (the “2018 Lender”) loaned
$2,000,000 to the Company (the “2018 Promissory Note”).
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 was 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. On 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. On 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 year ended December 31, 2019 and
2018 was determined to be $31,000 and $96,000, respectively.
Amortized financing cost is presented as part of interest expense
in the accompanying 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 year
ended December 31, 2019.
On March 12, 2019, the
Company entered into a note purchase agreement pursuant to which
investors, including OpenALPR Technology, Inc. (see Note 2) (the
“2019 Lenders”) loaned $20,000,000 to the Company (the
“2019 Promissory Notes”) and the Company issued to the
2019 Lenders warrants to purchase 2,500,000 shares of Rekor common
stock (the “March 2019 Warrants”). The loan 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. As of December 31, 2019, the Company
had a waiver in place for the fixed charge coverage ratio covenant
related to this note until May 31, 2020. Transaction costs included
$403,000 for a work fee payable over 10 months, $290,000 in legal
fees and a $200,000 closing fee. The loan is secured by a security
interest in substantially all of the assets of Rekor. The March
2019 Warrants are exercisable over a period of five years, at an
exercise price of $0.74 per share, and were valued at
$706,000, at
the time of issuance. The warrants were
exercisable commencing March 12, 2019 and expire on March 12, 2024.
Amortized financing costs for the year ended December 31, 2019 were
$1,047,000 and are included in interest expense on the consolidated
statement of operations. The 2019 Promissory Notes have an
effective interest rate of 24.87%.
The principal amounts due for long-term notes payable described
above are shown below as of December 31, 2019 (dollars in
thousands):
2020
|
$-
|
2021
|
21,000
|
2022
|
1,000
|
2023
|
-
|
2024
|
-
|
Thereafter
|
-
|
Total
|
22,000
|
|
|
Less
unamortized interest
|
(39)
|
Less
unamortized financing costs
|
(1,552)
|
Notes
payable
|
$20,409
|
NOTE 10 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC Topic 740.
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, the Company
reviewed both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections and the overall
prospects of the Company’s business.
The
expense from income taxes for the years ended December 31, 2019 and
2018 consists of the following (dollars in thousands):
|
|
|
|
|
Current:
|
|
|
State
|
$37
|
$29
|
Deferred:
|
|
|
Federal
|
10
|
83
|
State
|
-
|
(83)
|
Expense
from income taxes
|
$47
|
$29
|
The
components of deferred income tax assets and liabilities are as
follows at December 31, 2019 and 2018 (dollars in
thousands):
|
|
|
|
|
Deferred
tax assets:
|
|
|
Amortizable
start-up costs
|
$-
|
$34
|
Accrual
and others
|
322
|
241
|
Lease
Liabilities
|
246
|
-
|
Interest
expense carryforward
|
1,079
|
147
|
Net
operating loss carryforward
|
4,724
|
2,518
|
Valuation
allowance
|
(5,813)
|
(2,308)
|
Total
deferred tax assets
|
558
|
632
|
Deferred
tax liabilities:
|
|
|
Goodwill
and Intangibles
|
(328)
|
(551)
|
Right-of-Use
Asset
|
(202)
|
-
|
Fixed
assets
|
(38)
|
(81)
|
Total
deferred tax assets (liabilities), net
|
$(10)
|
$-
|
The
difference between the income tax provision computed at the U.S.
Federal statutory rate and the effective tax rate is as follows for
the years ended December 31, 2019 and 2018:
|
|
|
|
|
U.S.
statutory federal rate
|
21.0%
|
21.0%
|
(Decrease)
increase in taxes resulting from:
|
|
|
State
income tax rate, net of U.S. Federal benefit
|
1.5%
|
2.9%
|
Impact
of changes in tax rates
|
0.0%
|
(0.1)%
|
True-ups
|
(0.1)%
|
(5.7)%
|
Other
|
(0.6)%
|
(1.6)%
|
Valuation
allowance
|
(22.1)%
|
(17.0)%
|
Effective
tax rate
|
(0.3)%
|
(0.5)%
|
The
Company files income tax returns in the United States and in
various state and foreign jurisdictions. No U.S. Federal, state or
foreign income tax audits were in process as of December 31,
2019.
The
Company evaluated the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with
respect to such net deferred income tax assets. After considering
all available facts, the Company fully reserved for its net
deferred tax assets, outside of the deferred tax liability related to
the indefinite lived intangible, because the Company
believes that it is not more likely than not that their benefits
will be realized in future periods. The Company will continue to
evaluate its deferred tax assets to determine whether any changes
in circumstances could affect the realization of their future
benefit. If it is determined in future periods that portions of the
Company’s net deferred income tax assets satisfy the
realization standard, the valuation allowance will be reduced
accordingly.
At
December 31, 2019, Rekor had gross federal and state net operating
loss carryforwards of $19,192,000 and $11,952,000, respectively,
and a valuation allowance of $5,813,000 recorded against its net
deferred tax assets. At December 31, 2019, Rekor had net federal
and state net operating loss carryforwards of $4,030,000 and
$693,00 respectively. These NOLs are scheduled to begin to expire
in 2034 and $4,724,000 are grandfathered under the Tax Cuts and
Jobs Act; thus, these NOLs are not subject to the 80 percent
limitation. NOLs generated in 2019 and 2018 of $10,249,000 and
$4,195,000, respectively, will be carried forward indefinitely and
are subject to the annual 80 percent limitation.
At
December 31, 2018, Rekor had gross federal and state net operating
loss carryforwards of $9,733,000 and $474,000, respectively, and a
valuation allowance of $2,308,000 recorded against its net deferred
tax assets. At December 31,
2019, Rekor had net federal and state net operating loss
carryforwards of $2,044,000 and $474,00
respectively.
For the
years ended December 31, 2019 and 2018, the Company did not record
any interest or penalties related to unrecognized tax benefits. It
is the Company’s policy to record interest and penalties
related to unrecognized tax benefits as part of income tax expense.
The 2016 through 2018 tax years remain subject to examination by
the IRS.
NOTE 11 – 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 year ended December
31, 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 consolidated statement of operations.
As of December 31, 2019, the remaining liability related to the
restructuring activities was $155,000 and is presented as part of
accounts payable and accrued expenses in the accompanying
consolidated balance sheets. The amounts due are expected to be
paid within the next 12 months.
NOTE 12 – EMPLOYEE BENEFIT PLAN
AOC Key
Solutions had a defined contribution savings plan under Section
401(k) of the Internal Revenue Code (the “Code”) (the
“AOC 401(k) Plan”) which was amended on January 1,
2013, as required by the Code. Pursuant to the amended AOC 401(k)
Plan, AOC Key Solutions would make nondiscretionary “safe
harbor” matching contributions for all participants of 100%
of the participant’s salary deferrals up to 3%, and 50% of
deferrals up to the next 2%, of the participant’s
compensation.
Rekor
Recognition had a defined contribution savings plan under Section
401(k) of the Code (the “Rekor Recognition 401(k)
Plan”). The Rekor Recognition 401(k) Plan was a defined
contribution plan, which covered substantially all U.S.-based
employees who had completed three months of service. The Rekor
Recognition 401(k) Plan provided that Rekor Recognition would match
50% of the participant salary deferrals up to 3% of a
participant’s compensation for all participants.
Global
also maintained a 401(k) plan (the “Global 401(k)
Plan”), which was amended September 15, 2014. However, Global
had not historically made matching contributions to the Global
401(k) Plan.
On
January 1, 2019, Rekor established the Rekor Systems, Inc. 401(k)
Plan (the “Rekor 401(k) Plan”), a Qualified Automatic
Contribution Arrangement (QACA) safe harbor plan, and the AOC
401(k) Plan, the Rekor Recognition 401(k) Plan, and the GCP 401(k)
Plan were amended and merged into the Rekor 401(k) Plan. Employees
that satisfied the eligibility requirements became participants in
the Rekor 401(k) Plan. Rekor contributes an amount equal to the sum
of 100% of a participant’s elective deferrals that do not
exceed 1% of participant’s compensation, plus 50% of the
participant’s elective deferrals that exceed 1% of the
participants compensation, but do not exceed 6% of the
participant’s compensation. Employee contributions are fully vested, and
matching contributions are subject to a two-year service vesting
schedule.
The
amount of contributions recorded by the Company under these plans
during the years ended December 31, 2019 and 2018 were $515,000 and
$159,000, respectively.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
On August 19, 2019, the Company
filed suit in the United States District Court for the Southern
District of New York against three former executives of the Company
and Firestorm (the Firestorm Principals). 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 13, 2019, the Firestorm
Principals filed an answer to the Amended Complaint and asserted
counterclaims against the Company, Firestorm, and certain
executives of the Company. On December 16, the Firestorm Principals
filed a Motion for Judgment on the Pleadings. On January 30, 2020,
the Company filed a Second Amended Complaint. The Firestorm
Principals responded to the Second Amended Complaint on February
28, 2020. The Company’s deadline for responding to the
Firestorm Principals’ counterclaims is March 30, 2020. The
Company intends to vigorously litigate this action and believes
that the Firestorm Principals’ counterclaims are without
merit.
In
addition, from time to time, the Company is named as a party to
various other lawsuits, claims and other legal and regulatory
proceedings that arise in the ordinary course of the
Company’s business. These actions typically seek, among other
things, compensation for alleged personal injury, breach of
contract, property damage, punitive damages, civil penalties or
other losses, or injunctive or declaratory relief. With respect to
such lawsuits, claims and proceedings, the Company accrues reserves
when a loss is probable, and the amount of such loss can be
reasonably estimated. It is the opinion of the Company’s
management that the outcome of these proceedings, individually and
collectively, will not be material to the Company’s
consolidated financial statements as a whole.
NOTE 14 – STOCKHOLDERS’ (DEFICIT)
EQUITY
Common Stock
As of
December 31, 2019, the Company is authorized to issue 30,000,000
shares of common stock, $0.0001 par value. As of December 31, 2019,
and December 31, 2018, the issued and outstanding common shares of
Rekor were 21,595,653 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 Consultants.
In
April 2018, the Company issued 35,000 shares of Rekor common stock
as additional consideration to the 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 $2,797,000. 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. The
underwriter warrants became exercisable commencing April 27, 2019
and expire on October 29, 2023.
For the
year ended December 31, 2019 and 2018, the Company issued 0 and
13,998 shares of Rekor common stock related to the exercise of
common stock options, respectively.
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 OpenALPR Technology Acquisition. On March 12,
2019, the Company issued 600,000 shares of Rekor common stock as
part of the consideration for the OpenALPR Technology
Acquisition.
For the
year ended December 31, 2019 and 2018, the Company issued 2,828,034
and 4,304,255 shares of Rekor common stock, respectively.
Of the shares
issued in the year ended December 31, 2019, 931,666 shares of Rekor
common stock were issued in exchange for cash and cashless exercise
of 1,152,938 warrants, 600,000 shares were issued in connection
with the OpenALPR Technology Acquisition, 3,638 shares were issued
as part of the exercise of warrants related to series A preferred
stock and 1,292,730 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 $226,000 related to legal, accounting, and
other fees in connection with the Sales Agreement. These costs
were charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
consolidated balance sheets.
Sales of the Company’s common stock under the Sales Agreement
are to be issued and sold pursuant to the Company’s shelf
registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018. For the year ended December 31, 2019, based on
settlement date, the Company sold 1,292,730 shares of common stock
at a weighted-average selling price of $2.53 per share in
accordance with the Sales Agreement. Net cash provided from the
Sales Agreement was $2,949,000 after paying $226,000 related to the
issuance costs stated above, as well as, 3.0% or $98,000 related to
cash commissions provided to B. Riley FBR. As of December 31, 2019,
$11,727,000 remained available for sale under the Sales
Agreement.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of
preferred stock, $0.0001 par value. The Company’s preferred
stock may be entitled to preference over the common stock with
respect to the distribution of assets of the Company in the event
of liquidation, dissolution or winding-up of the Company, whether
voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for
the purpose of the winding-up of its affairs. The authorized but
unissued shares of the preferred stock may be divided into, and
issued in, designated series from time to time by one or more
resolutions adopted by the Board of Directors of the Company. The
Board of Directors of the Company, in its sole discretion, has the
power to determine the relative powers, preferences and rights of
each series of preferred stock
Series A Cumulative Convertible Redeemable Preferred
Stock
Of the 2,000,000 authorized
shares of preferred stock, 505,000 shares are designated as $0.0001
par value Series A Cumulative Convertible Redeemable Preferred
Stock (the “Series A Preferred Stock”). The holders of
Series A Preferred Stock are entitled to quarterly dividends of
7.0% per annum per share. The holders of Series A Preferred Stock
have a right to convert each share into common stock at an initial
conversion price and a specified conversion price which increases
annually based on the passage of time beginning in November 2019.
The holders of Series A Preferred Stock also have a put right after
60 months from the issuance date to redeem any or all of the Series
A Preferred Stock at a redemption price of $15.00 per share plus
any accrued but unpaid dividends. The Company has a call right
after 36 months from the issuance date to redeem all of the Series
A Preferred Stock at a redemption price which increases annually
based on the passage of time 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 consolidated balance sheets as of December 31, 2019
and 2018.
Rekor
adjusts the value of the Series A Preferred Stock to redemption
value at the end of each reporting period. The adjustment to the
redemption value is recorded through additional paid in capital of
$752,000 and $655,000 for the years ended December 31, 2019 and
2018, respectively.
As of
December 31, 2019, and 2018, 502,327 shares of Series A Preferred
Stock were issued and outstanding.
The
holders of Series A Preferred Stock are entitled to quarterly cash
dividends of $0.175 (7% per annum) per share. Dividends accrue
quarterly and dividend payments for declared dividends are due
within five business days following the end of a quarter.
For the year
ended December 31, 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 $551,000 and $176,000
as of December 31, 2019 and 2018, respectively, and are presented
as part of the accounts payable and accrued expenses on the
accompanying consolidated balance sheets.
Series B Cumulative Convertible Preferred Stock
Of the
2,000,000 authorized shares of preferred stock, 240,861 shares are
designated as $0.0001 par value Rekor Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). As
part of the Global Merger, the Company issued 240,861 shares of
$0.0001 par value Series B Preferred Stock. All Series B Preferred
Stock was issued at a price of $10.00 per share as part of the
acquisition of the Global Merger. The Series B Preferred Stock has
a conversion price of $5.00 per share. Each Series B Preferred
Stock has an automatic conversion feature based on the share price
of Rekor.
The
Series B Preferred Stock is entitled to quarterly cash dividends of
1.121% (4.484% per annum) per share. Dividends accrue quarterly and
dividend payments for declared dividends are due within five
business days following the end of a quarter. For the year ended December
31, 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 $54,000 as of
December 31, 2019 and 2018 and are presented as part of the
accounts payable and accrued expenses on the accompanying
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
December 31, 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 December 31, 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
240,017 and 243,655 shares of Rekor common stock as of December 31,
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 December 31, 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 December
31, 2019 there were no BC Management Warrants
outstanding.
Pursuant to its acquisition of Secure Education Consultants on
January 1, 2018, the Company issued: warrants to purchase 33,333
shares of its common stock, exercisable over a period of five
years, at an exercise price of $5.44 per share; and warrants to
purchase 33,333 shares of its common stock, exercisable over a
period of five years, at an exercise price of $6.53 per share (the
“Secure Education Warrants”). The expiration date of
the Secure Education Warrants is January 1, 2023. As of December
31, 2019, and December 31, 2018, there were 66,666 Secure Education
Warrants outstanding.
On November 1, 2018, in connection with an underwritten public
offering of its common stock, the Company issued to the
underwriters warrants to purchase 206,250 shares of its common
stock, exercisable over a period of five years, at an exercise
price of $1.00 per share. These warrants are exercisable commencing
April 27, 2019 and expire on October 29, 2023. During the year
ended December 31, 2019, 189,813 warrants were exercised in cash
and cashless transactions resulting in the issuance of 148,279
shares of common stock. As of December 31, 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. Of the 2,500,000 warrants,
625,000 were issued
as partial
consideration for the OpenALPR Technology
Acquisition. During the year ended
December 31, 2019, 963,125 warrants were exercised in cash and
cashless transactions resulting in the issuance of 783,387 shares
of common stock. As of December 31, 2019,
1,536,875 warrants related to the 2019 Promissory Notes remain
outstanding.
NOTE 15 – 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.
Rekor
has also designed the 2017 Plan to include a number of provisions
that Rekor’s management believes promote best practices by
reinforcing the alignment of equity compensation arrangements for
nonemployee directors, officers, employees, consultants and
stockholders’ interests. These provisions include, but are
not limited to, the following:
No Discounted Awards. Awards that have
an exercise price cannot be granted with an exercise price less
than the fair market value on the grant date.
No Repricing Without Stockholder
Approval. Rekor cannot, without stockholder approval, reduce
the exercise price of an award (except for adjustments in
connection with a Rekor recapitalization), and at any time when the
exercise price of an award is above the market value of Rekor
common stock, Rekor cannot, without stockholder approval, cancel
and re-grant or exchange such award for cash, other awards or a new
award at a lower (or no) exercise price.
No Evergreen Provision. There is no
evergreen feature under which the shares of common stock authorized
for issuance under the 2017 Plan can be automatically
replenished.
No Automatic Grants. The 2017 Plan does
not provide for “reload” or other automatic grants to
recipients.
No Transferability. Awards generally
may not be transferred, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order,
unless approved by the Administrator.
No Tax Gross-Ups. The 2017 Plan does
not provide for any tax gross-ups.
No Liberal Change-in-Control
Definition. The change-in-control definition contained in
the 2017 Plan is not a “liberal” definition that would
be activated on mere stockholder approval of a
transaction.
“Double-trigger” Change in Control
Vesting. If awards granted under the 2017 Plan are assumed
by a successor in connection with a change in control of Rekor,
such awards will not automatically vest and pay out solely as a
result of the change in control, unless otherwise expressly set
forth in an award agreement.
No Dividends on Unearned Performance
Awards. The 2017 Plan prohibits the current payment of
dividends or dividend equivalent rights on unearned
performance-based awards.
Limitation on Amendments. No
amendments to the 2017 Plan may be made without stockholder
approval if any such amendment would materially increase the number
of shares reserved or the per-participant award limitations under
the 2017 Plan, diminish the prohibitions on repricing stock options
or stock appreciation rights, or otherwise constitute a material
change requiring stockholder approval under applicable laws,
policies or regulations or the applicable listing or other
requirements of the principal exchange on which Rekor’s
shares are traded.
Clawbacks. Awards based on the
satisfaction of financial metrics that are subsequently reversed,
due to a financial statement restatement or reclassification, are
subject to forfeiture.
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.
A
summary of stock option activity under the Company’s 2017
Plan for the years ended December 31, 2019 and 2018 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 January 1, 2018
|
1,695,375
|
$2.19
|
9.26
|
|
Granted
|
48,499
|
0.73
|
9.85
|
|
Exercised
|
(13,998)
|
1.68
|
9.50
|
|
Forfeited
|
(450,633)
|
1.82
|
-
|
|
Expired
|
(51,686)
|
1.36
|
-
|
|
Outstanding
Balance at December 31, 2018
|
1,227,557
|
2.13
|
8.39
|
-
|
Granted
|
870,549
|
1.03
|
8.76
|
|
Forfeited
|
(111,537)
|
1.95
|
-
|
|
Canceled
|
(331,186)
|
2.05
|
-
|
|
Outstanding
Balance at December 31, 2019
|
1,655,383
|
$1.68
|
8.33
|
$3,256
|
Exercisable
at December 31, 2019
|
999,831
|
$1.84
|
6.66
|
$1,684
|
Stock
compensation expense for the year ended December 31, 2019 and 2018
was $446,000 and $465,000, respectively, and is included in general
and administrative expenses in the accompanying consolidated
statements of operations. The weighted average grant date fair
value of options granted for the years ended December 31, 2019 and
2018 was $0.52 and $0.73, respectively. The intrinsic value of the
stock options granted during the years ended December 31, 2019 and
2018, was $2,172,000 and $0, respectively. The total fair value of
shares that became vested after grant during the years ended
December 31, 2019 and 2018 was $408,000 and $325,000,
respectively.
As of
December 31, 2019, there was $486,000 of unrecognized stock
compensation expense related to unvested stock options granted
under the 2017 Plan that will be recognized over a weighted average
period of 1.64 years.
NOTE 16 – LOSS PER SHARE
The
following table provides information relating to the calculation of
loss per common share (dollars in thousands, except per share
data):
|
Year Ended December
31, 2019
|
|
|
|
Basic and diluted
loss per share
|
|
|
Net
loss from continuing operations
|
$(14,412)
|
$(5,709)
|
Less:
preferred stock accretion
|
(752)
|
(655)
|
Less:
preferred stock dividends
|
(460)
|
(460)
|
Net
loss attributable to shareholders from continuing
operations
|
(15,624)
|
(6,824)
|
Net income (loss)
from operations held for sale
|
(1,472)
|
6
|
Net loss
attributable to shareholders
|
$(17,096)
|
$(6,818)
|
Weighted
average common shares outstanding - basic and diluted
|
20,033,023
|
15,409,014
|
Basic
and diluted loss per share from continuing operations
|
$(0.78)
|
$(0.44)
|
Basic
and diluted (loss) earnings per share from operations held for
sale
|
(0.07)
|
-
|
Basic and diluted
loss per share
|
$(0.85)
|
$(0.44)
|
Common stock
equivalents excluded due to anti-dilutive effect
|
5,602,841
|
3,898,257
|
As the Company had a net loss
for the year ended December 31, 2019, the following 5,602,841
potentially dilutive securities were excluded from diluted loss per
share: 2,491,249 for outstanding warrants, 974,487 related to the
Series A Preferred Stock, 481,722 related to the Series B Preferred
Stock and 1,655,383 related to outstanding
options.
As the
Company had a net loss for the year ended December 31, 2018, the
following 3,898,257 potentially dilutive securities were excluded
from diluted loss per share as the Company had a net loss:
1,214,491 for outstanding warrants, 974,487 related to the Series A
Preferred Stock, 481,722 related to the Series B Preferred Stock
and 1,227,557 related to outstanding options.
(Loss) Earnings 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.
NOTE 17 – 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.
Transfer prices
between the operating segments were determined on current market
values or cost plus markup of the seller’s business
segment.
Summarized financial information concerning the Company’s
reportable segments is presented below (dollars in
thousands):
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
Revenues
|
$5,469
|
$13,874
|
$-
|
$(23)
|
$19,320
|
Gross
profit
|
3,817
|
6,468
|
-
|
(23)
|
10,262
|
Loss
from operations*
|
(2,259)
|
(1,560)
|
(5,293)
|
23
|
(9,089)
|
Loss
from operations held for sale (including impairment of goodwill of
$1,022,000)
|
-
|
(1,146)
|
-
|
-
|
(1,146)
|
*
Including intangible assets impairment
|
-
|
1,549
|
-
|
-
|
1,549
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
Revenues
|
$3,522
|
$16,532
|
$-
|
$-
|
$20,054
|
Gross
profit
|
1,880
|
8,196
|
-
|
-
|
10,076
|
Loss
from operations
|
(832)
|
(381)
|
(3,910)
|
-
|
(5,123)
|
Income
from operations held for sale
|
-
|
86
|
-
|
-
|
86
|
Information about
the
Company’s revenue in different geographic regions,
which is attributable to the Company’s operations located
primarily in the United States, Canada, and other countries is as
follows (dollars in thousands):
|
|
|
2019
|
|
2019
|
|
|
|
|
United
States
|
$4,052
|
$3,449
|
$13,851
|
$16,357
|
Canada
|
654
|
73
|
-
|
78
|
Other
|
763
|
-
|
-
|
97
|
Total
Revenue
|
$5,469
|
$3,522
|
$13,851
|
$16,532
|
Except for the United States and Canada, total revenue in any
single country was less than 10% of consolidated
revenue.
Additional information relating to
the
Company’s business
segments is as follows (dollars in thousands):
|
|
|
|
|
Assets:
|
|
|
Technology
|
$16,625
|
$4,294
|
Professional
services
|
5,726
|
5,510
|
Corporate
services
|
509
|
1,461
|
Total
assets from continuing operations
|
22,860
|
11,265
|
Assets
from operations held for sale
|
6,132
|
6,790
|
Total
assets
|
$28,992
|
$18,055
|
Information about
the
Company’s total assets in different geographic regions
is as follows (dollars in thousands):
|
|
|
|
|
United
States
|
$1,220
|
$1,320
|
Canada
|
70
|
70
|
Accumulated
Depreciation
|
(807)
|
(928)
|
Total
property and equipment, net
|
$483
|
$462
|
Long-lived
assets by segment is as follows (dollars in
thousands):
|
|
|
|
|
Technology
|
$14,875
|
$3,122
|
Professional
Services
|
540
|
2,195
|
Corporate
|
430
|
3
|
Consolidated
|
$15,845
|
$5,320
|
Total
net additions to long-lived assets by segment are as follows
(dollars in thousands):
|
|
|
|
|
Technology
|
$12,998
|
$1,013
|
Professional
Services
|
701
|
376
|
Corporate
|
564
|
-
|
Consolidated
|
$14,263
|
$1,389
|
Depreciation and amortization expense are allocated to all segments
based on usage. Total depreciation and amortization expense,
by segment, is as follows (dollars in thousands):
|
|
|
|
|
Technology
|
$1,245
|
$322
|
Professional
Services
|
485
|
725
|
Corporate
|
137
|
-
|
Consolidated
|
$1,867
|
$1,047
|
NOTE 18 – SUBSEQUENT EVENTS
Issuance of Additional Stock
As of
March 30, 2020, the Company sold an additional 536,730 shares of
common stock through its At-the-Market Sales
Agreement.
Held for Sale Operations
Subsequent to year-end, the
Board of Directors approved the plan to sale AOC Key
Solutions. As
such, the Company determined that the AOC Key Solutions
business met
the criteria for held for sale accounting because it expects to
complete the sale of AOC Key Solutions during the next 12 months.
Historically, AOC Key Solutions has been presented as part
of the Professional Services Segment. As of December 31,
2019, AOC Key Solutions has been presented as part
of continuing operations.
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.
On March 16, 2020, the
Company received an offer of $4M to purchase AOC Key
Solutions. The
offer has been made by current AOC Key Solutions
management. The
offer is currently being evaluated by members of the Company's
Board of Directors who are not related parties. The Company cannot
assure that this transaction will be closed in a timely fashion or
at all.
Increase in the Authorized Number of Shares of the Company’s
Common Stock
The
Company has adopted and approved an amendment to increase the
number of authorized shares of common stock from 30,000,000 to
100,000,000, which was effective March 18, 2020. The rights and
privileges terms of the additional authorized shares of common
stock will be identical to those of the currently outstanding
shares of common stock. However, because the holders of common
stock do not have preemptive rights to purchase or subscribe for
any new issuances of common stock, the subsequent potential
issuance of additional shares of common stock will reduce the
current stockholders’ percentage ownership interest in the
total outstanding shares of common stock. The Amendment and the
creation of additional shares of authorized common stock will not
alter current stockholders’ relative rights and
limitations.
Commitments and Contingencies Subsequent to Year-end
Vigilant Solutions, LLC, a subsidiary of Motorola Solutions, Inc.,
filed a complaint on February 21, 2020 against the Company and
certain of its subsidiaries in the US District Court for the
District of Maryland. The complaint alleges that certain of the
Company’s products violate a patent held by Vigilant. The
Company has retained counsel to investigate the claims made in the
complaint and the investigation into these matters is ongoing.
Nevertheless, based on a review of the complaint, the Company
believes that it has substantial defenses to the allegations
contained in the complaint and that the validity of the patent
underlying the complaint is subject to challenge. The Company
intends to vigorously defend the allegations of the Vigilant
complaint.
On January 31, 2020, the Company’s wholly owned subsidiary,
OpenALPR filed a complaint in the US District Court for the Western
District of Pennsylvania against a former customer, Plate Capture
Solutions, Inc. (“PCS”) for breach of software license
agreements pursuant to which software to was licensed to PCS. On
February 19, 2020 PCS filed an answer, counterclaim and joinder in
the case, among other things, seeking to join the Company as a
party to the litigation and making counterclaims for defamation,
fraud and intentional interference with existing and future
business relationships. The Company believe that it has substantial
defenses to the counterclaims and intend to vigorously defend the
allegations of the counterclaims.
2019 Promissory Notes
In
March 2020, the Company extended the maturity date of the 2019
Promissory Notes, from March 11, 2021 to June 12, 2021.
Additionally, in March 2020, the Company received a waiver to defer
the fixed charge coverage ratio covenant related to the 2019
Promissory Notes until May 31, 2020.
Other
Items
The
spread of a novel strain of coronavirus (COVID-19) around the world
in the first quarter of 2020 has caused significant volatility in
U.S. and international markets. There is significant uncertainty
around the breadth and duration of business disruptions related to
COVID-19, as well as its impact on the U.S. and international
economies and, as such, the Company is unable to determine if it
will have a material impact to its operations.