UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to
Commission File Number: 001-38338
Rekor Systems, Inc. | ||
(Exact name of registrant as specified in its charter) |
Delaware | 81-5266334 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
6721 Columbia Gateway Drive, Suite 400
Columbia, MD
(Address principal executive offices)
21046
(Zip Code)
(410) 762-0800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.0001 par value per share | REKR | The Nasdaq Stock Market |
As of November 9, 2020,15, 2021, the Registrant had 32,974,25743,977,218 shares of common stock, $0.0001 par value per share outstanding.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties, including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 20192020 entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestiture, merger, acquisition, or other business combination that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
2 |
Table of Content
REKOR SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SeptemberSEPTEMBER 30, 2020
Table of Contents |
REKOR SYSTEMS, INC. AND SUBSIDIARIES
(Dollars in thousands, except share amounts)
(Unaudited)
September 30, 2020 | December 31, 2019 | |
ASSETS | ||
Current Assets | ||
Cash and cash equivalents | $24,154 | $1,075 |
Restricted cash and cash equivalents | 573 | 461 |
Accounts receivable, net | 966 | 776 |
Inventory | 591 | 302 |
Note receivable, current portion | 255 | - |
Other current assets, net | 361 | 175 |
Current assets of discontinued operations | 3 | 7,441 |
Total current assets | 26,903 | 10,230 |
Long-term Assets | ||
Property and equipment, net | 554 | 442 |
Right-of-use lease assets, net | 276 | 283 |
Goodwill | 6,336 | 6,336 |
Intangible assets, net | 7,429 | 8,244 |
Investments in unconsolidated companies | 75 | - |
Note receivable, long-term | 1,445 | - |
Long-term assets of discontinued operations | - | 3,457 |
Total long-term assets | 16,115 | 18,762 |
Total assets | $43,018 | $28,992 |
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | ||
Current Liabilities | ||
Accounts payable and accrued expenses | $3,834 | $3,678 |
Loan payable, current portion | 370 | - |
Lease liability, short-term | 232 | 148 |
Contract liabilities | 1,234 | 749 |
Current liabilities of discontinued operations | 114 | 5,757 |
Total current liabilities | 5,784 | 10,332 |
Long-term Liabilities | ||
Notes payable, long-term | 976 | 20,409 |
Loan payable, long-term | 504 | - |
Lease liability, long-term | 60 | 161 |
Contract liabilities, long-term | 936 | 775 |
Other long-term liabilities | 10 | 10 |
Long term liabilities of discontinued operations | 14 | 536 |
Total long-term liabilities | 2,500 | 21,891 |
Total liabilities | 8,284 | 32,223 |
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 6,442 | 5,804 |
Commitments and Contingencies | ||
Stockholders' Equity (Deficit) | ||
Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 32,911,854 and 21,595,653 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 3 | 2 |
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of September 30, 2020 and December 31, 2019, respectively | - | - |
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | - | - |
Additional paid-in capital | 68,117 | 19,371 |
Accumulated deficit | (39,828) | (28,408) |
Total stockholders’ equity (deficit) | 28,292 | (9,035) |
Total liabilities and stockholders’ equity (deficit) | $43,018 | $28,992 |
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||
ASSETS | ||||||||
Current assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 35,102 |
|
| $ | 20,595 |
|
Restricted cash and cash equivalents |
|
| 1,063 |
|
|
| 412 |
|
Accounts receivable, net |
|
| 2,434 |
|
|
| 1,038 |
|
Inventory |
|
| 1,822 |
|
|
| 1,264 |
|
Note receivable, current portion |
|
| 340 |
|
|
| 340 |
|
Other current assets, net |
|
| 2,156 |
|
|
| 469 |
|
Current assets of discontinued operations |
|
| 1 |
|
|
| 2 |
|
Total current assets |
|
| 42,918 |
|
|
| 24,120 |
|
Long-term assets |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 8,614 |
|
|
| 1,047 |
|
Right-of-use lease assets, net |
|
| 6,256 |
|
|
| 426 |
|
Goodwill |
|
| 49,860 |
|
|
| 6,336 |
|
Intangible assets, net |
|
| 22,768 |
|
|
| 7,038 |
|
Investments in unconsolidated companies |
|
| 0 |
|
|
| 75 |
|
Note receivable, long-term |
|
| 1,105 |
|
|
| 1,360 |
|
SAFE investment |
|
| 1,000 |
|
|
| 0 |
|
Other long-term assets |
|
| 127 |
|
|
| 0 |
|
Total long-term assets |
|
| 89,730 |
|
|
| 16,282 |
|
Total assets |
| $ | 132,648 |
|
| $ | 40,402 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 6,492 |
|
| $ | 1,772 |
|
Notes payable, current portion |
|
| 994 |
|
|
| 0 |
|
Loan payable, current portion |
|
| 911 |
|
|
| 517 |
|
Lease liability, short-term |
|
| 101 |
|
|
| 253 |
|
Contract liabilities |
|
| 2,738 |
|
|
| 1,126 |
|
Other current liabilities |
|
| 3,478 |
|
|
| 2,126 |
|
Current liabilities of discontinued operations |
|
| 129 |
|
|
| 124 |
|
Total current liabilities |
|
| 14,843 |
|
|
| 5,918 |
|
Long-term Liabilities |
|
|
|
|
|
|
|
|
Notes payable, long-term |
|
| 0 |
|
|
| 980 |
|
Loan payable, long-term |
|
| 46 |
|
|
| 469 |
|
Lease liability, long-term |
|
| 9,994 |
|
|
| 188 |
|
Contract liabilities, long-term |
|
| 978 |
|
|
| 958 |
|
Deferred tax liability, long-term |
|
| 34 |
|
|
| 24 |
|
Long-term liabilities of discontinued operations |
|
| 0 |
|
|
| 5 |
|
Total long-term liabilities |
|
| 11,052 |
|
|
| 2,624 |
|
Total liabilities |
|
| 25,895 |
|
|
| 8,542 |
|
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value; authorized: 505,000 shares authorized at September 30, 2021 and December 31, 2020; issued and outstanding; 0 and 502,327 shares issued and outstanding at September 30, 2021 and December 31, 2020 |
|
| - |
|
|
| 6,669 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; authorized; 100,000,000 shares; issued: 43,948,281, shares at September 30, 2021 and 33,013,271 at December 31, 2020; outstanding: 43,967,642 shares at September 30, 2021 and 33,013,271 at December 31, 2020 |
|
| 4 |
|
|
| 3 |
|
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of September 30, 2021 and December 31, 2020, respectively |
|
| 0 |
|
|
| 0 |
|
Series B Cumulative Convertible Preferred stock, 0.0001 par value; authorized: 240,861 shares authorized at September 30, 2021 and December 31, 2020; issued and outstanding; 0 and 240,861 shares issued and outstanding at September 30, 2021 and December 31, 2020 |
|
| 0 |
|
|
| 0 |
|
Treasury stock, 19,361 and 0 shares as of September 30, 2021 and December 31, 2020, respectively |
|
| (319 | ) |
|
| 0 |
|
Additional paid-in capital |
|
| 169,944 |
|
|
| 68,238 |
|
Accumulated other comprehensive income |
|
| 6 |
|
|
| 0 |
|
Accumulated deficit |
|
| (62,882 | ) |
|
| (43,050 | ) |
Total stockholders equity |
|
| 106,753 |
|
|
| 25,191 |
|
Total liabilities and stockholders equity |
| $ | 132,648 |
|
| $ | 40,402 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4 |
Table of Contents |
REKOR SYSTEMS, INC. AND SUBSIDIARIES
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months ended September 30, | Nine Months ended September 30, | |||
2020 | 2019 | 2020 | 2019 | |
Revenue | $2,126 | $1,536 | $6,399 | $3,962 |
Cost of revenue | 984 | 390 | 2,753 | 1,152 |
Gross profit | 1,142 | 1,146 | 3,646 | 2,810 |
Operating expenses: | ||||
General and administrative expenses | 3,168 | 2,600 | 8,896 | 6,259 |
Selling and marketing expenses | 560 | 587 | 1,356 | 1,081 |
Research and development expenses | 781 | 450 | 2,143 | 757 |
Operating expenses | 4,509 | 3,637 | 12,395 | 8,097 |
Loss from operations | (3,367) | (2,491) | (8,749) | (5,287) |
Other income (expense): | ||||
Loss on extinguishment of debt | (3,081) | - | (3,281) | (1,113) |
Interest expense | (218) | (1,182) | (2,468) | (2,724) |
Other income | 6 | 157 | 27 | 123 |
Gain on sale of business | - | - | 3,631 | - |
Total other expense | (3,293) | (1,025) | (2,091) | (3,714) |
Loss before income taxes | (6,660) | (3,516) | (10,840) | (9,001) |
Income tax provision | (7) | (12) | (20) | (35) |
Net loss from continuing operations | $(6,667) | $(3,528) | $(10,860) | $(9,036) |
Net loss from discontinued operations | (2) | (100) | (215) | (2,392) |
Net loss | $(6,669) | $(3,628) | $(11,075) | $(11,428) |
Loss per common share from continuing operations - basic and diluted | (0.26) | (0.19) | (0.52) | (0.51) |
Loss per common share discontinued operations - basic and diluted | - | (0.01) | (0.01) | (0.12) |
Loss per common share - basic and diluted | $(0.26) | $(0.20) | $(0.53) | $(0.63) |
Weighted average shares outstanding | ||||
Basic and diluted | 26,907,069 | 19,878,518 | 22,781,807 | 19,592,679 |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
|
Cost of revenue, excluding depreciation and amortization |
|
| 1,402 |
|
|
| 979 |
|
|
| 4,705 |
|
|
| 2,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 6,813 |
|
|
| 2,676 |
|
|
| 16,094 |
|
|
| 7,518 |
|
Selling and marketing expenses |
|
| 1,125 |
|
|
| 560 |
|
|
| 3,044 |
|
|
| 1,356 |
|
Research and development expenses |
|
| 2,000 |
|
|
| 781 |
|
|
| 4,741 |
|
|
| 2,143 |
|
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 2,169 |
|
|
| 1,386 |
|
Operating expenses |
|
| 10,868 |
|
|
| 4,514 |
|
|
| 26,048 |
|
|
| 12,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (9,655 | ) |
|
| (3,367 | ) |
|
| (19,648 | ) |
|
| (8,749 | ) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
| 0 |
|
|
| (3,081 | ) |
|
| 0 |
|
|
| (3,281 | ) |
Interest expense |
|
| (21 | ) |
|
| (218 | ) |
|
| (72 | ) |
|
| (2,468 | ) |
Gain on the sale of business |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3,631 |
|
Other income |
|
| 66 |
|
|
| 6 |
|
|
| 103 |
|
|
| 27 |
|
Total other income (expense) |
|
| 45 |
|
|
| (3,293 | ) |
|
| 31 |
|
|
| (2,091 | ) |
Loss before income taxes |
|
| (9,610 | ) |
|
| (6,660 | ) |
|
| (19,617 | ) |
|
| (10,840 | ) |
Income tax provision |
|
| (3 | ) |
|
| (7 | ) |
|
| (10 | ) |
|
| (20 | ) |
Equity in loss of investee |
|
| 0 |
|
|
| 0 |
|
|
| (150 | ) |
|
| 0 |
|
Net loss from continuing operations |
|
| (9,613 | ) |
|
| (6,667 | ) |
|
| (19,777 | ) |
|
| (10,860 | ) |
Net loss from discontinued operations |
|
| 0 |
|
|
| (2 | ) |
|
| (4 | ) |
|
| (215 | ) |
Net loss |
|
| (9,613 | ) |
|
| (6,669 | ) |
|
| (19,781 | ) |
|
| (11,075 | ) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
| (9,613 | ) |
|
| (6,667 | ) |
|
| (19,777 | ) |
|
| (10,860 | ) |
Change in unrealized gain on short-term investments |
|
| 3 |
|
|
| 0 |
|
|
| 6 |
|
|
| 0 |
|
Total comprehensive loss from continuing operations |
|
| (9,610 | ) |
|
| (6,667 | ) |
|
| (19,771 | ) |
|
| (10,860 | ) |
Total comprehensive loss |
| $ | (9,610 | ) |
| $ | (6,669 | ) |
| $ | (19,775 | ) |
| $ | (11,075 | ) |
Loss per common share from continuing operations - basic and diluted |
|
| (0.23 | ) |
|
| (0.26 | ) |
|
| (0.52 | ) |
|
| (0.52 | ) |
Loss per common share discontinued operations - basic and diluted |
|
| 0.00 |
|
|
| (0.00 | ) |
|
| (0.00 | ) |
|
| (0.01 | ) |
Loss per common share - basic and diluted |
| $ | (0.23 | ) |
| $ | (0.26 | ) |
| $ | (0.52 | ) |
| $ | (0.53 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 41,938,863 |
|
|
| 26,907,069 |
|
|
| 38,357,167 |
|
|
| 22,781,807 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(Dollars in thousands, except share amounts)
(Unaudited)
Shares of Common Stock | Common Stock | Shares of Series B Preferred Stock | Series B Preferred Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | |
Balance as of June 30, 2020 | 22,942,546 | $2 | 240,861 | $- | $22,180 | $(33,044) | $(10,862) |
Stock-based compensation | - | - | - | - | 202 | - | 202 |
Issuance of common stock pursuant to Exchange Agreement | 4,349,497 | - | - | - | 17,325 | - | 17,325 |
Exercise of cashless warrants in exchange for common stock | 171,522 | - | - | - | - | - | - |
Exercise of warrants in exchange for common stock | 625,000 | - | - | - | 463 | - | 463 |
Issuance of common stock pursuant to at the market offering, net | 4,677,595 | 1 | - | - | 27,752 | - | 27,753 |
Exercise of warrants related to series A preferred stock | 16,214 | - | - | - | 17 | - | 17 |
Issuance upon exercise of stock options | 129,480 | - | - | - | 398 | - | 398 |
Preferred stock dividends | - | - | - | - | - | (115) | (115) |
Accretion of Series A preferred stock | - | - | - | - | (220) | - | (220) |
Net loss | - | - | - | - | - | (6,669) | (6,669) |
Balance as of September 30, 2020 | 32,911,854 | $3 | 240,861 | $- | $68,117 | $(39,828) | $28,292 |
Balance as of June 30, 2019 | 19,382,185 | $2 | 240,861 | $- | $16,496 | $(20,094) | $(3,596) |
Stock-based compensation | - | - | - | - | 76 | - | 76 |
Exercise of cashless warrants in exchange for common stock | 813,975 | - | - | - | - | - | - |
Exercise of warrants in exchange for common stock | 103,125 | - | - | - | 103 | - | 103 |
Issuance of common stock pursuant to at the market offering, net | 103,566 | - | - | - | 38 | - | 38 |
Exercise of warrants related to series A preferred stock | 3,638 | - | - | - | 4 | - | 4 |
Preferred stock dividends | - | - | - | - | - | (114) | (114) |
Accretion of Series A preferred stock | - | - | - | - | (191) | - | (191) |
Net loss | - | - | - | - | - | (3,628) | (3,628) |
Balance as of September 30, 2019 | 20,406,489 | $2 | 240,861 | $- | $16,526 | $(23,836) | $(7,308) |
Balance as of December 31, 2019 | 21,595,653 | $2 | 240,861 | $- | $19,371 | $(28,408) | $(9,035) |
Stock-based compensation | - | - | - | - | 539 | - | 539 |
Issuance of common stock pursuant to Exchange Agreement | 4,349,497 | - | - | - | 17,325 | - | 17,325 |
Exercise of cashless warrants in exchange for common stock | 214,740 | - | - | - | - | - | - |
Exercise of warrants in exchange for common stock | 1,180,000 | - | - | - | 874 | - | 874 |
Issuance of common stock pursuant to at the market offering, net | 5,216,562 | 1 | - | - | 29,929 | - | 29,930 |
Exercise of warrants related to series A preferred stock | 74,177 | - | - | - | 77 | - | 77 |
Issuance upon exercise of stock options | 281,225 | - | - | - | 640 | - | 640 |
Preferred stock dividends | - | - | - | - | - | (345) | (345) |
Accretion of Series A preferred stock | - | - | - | - | (638) | - | (638) |
Net loss | - | - | - | - | - | (11,075) | (11,075) |
Balance as of September 30, 2020 | 32,911,854 | $3 | 240,861 | $- | $68,117 | $(39,828) | $28,292 |
Balance as of December 31, 2018 | 18,767,619 | $2 | 240,861 | $- | $15,518 | $(12,064) | $3,456 |
Stock-based compensation | - | - | - | - | 314 | - | 314 |
Issuance of warrants in conjunction with notes payable | - | - | - | - | 706 | - | 706 |
Exercise of cashless warrants in exchange for common stock | 828,541 | - | - | - | - | - | - |
Exercise of warrants in exchange for common stock | 103,125 | - | - | - | 103 | - | 103 |
Common stock issued in OpenALPR acquisition | 600,000 | - | - | - | 397 | - | 397 |
Issuance of common stock pursuant to at the market offering, net | 103,566 | - | - | - | 38 | - | 38 |
Exercise of warrants related to series A preferred stock | 3,638 | - | - | - | 4 | - | 4 |
Preferred stock dividends | - | - | - | - | - | (344) | (344) |
Accretion of Series A preferred stock | - | - | - | - | (554) | - | (554) |
Net loss | - | - | - | - | - | (11,428) | (11,428) |
Balance as of September 30, 2019 | 20,406,489 | $2 | 240,861 | $- | $16,526 | $(23,836) | $(7,308) |
|
| Shares of Common Stock |
|
| Common Stock |
|
| Shares of Treasury Stock |
|
| Treasury Stock at Cost |
|
| Shares of Series B Preferred Stock |
|
| Series B Preferred Stock |
|
| Additional Paid-In Capital |
|
| Accumulated |
|
| Accumulated Deficit |
|
| Total Stockholders Equity (Deficit) |
| ||||||||||
Balance as of June 30, 2021 |
|
| 41,012,766 |
|
| $ | 4 |
|
|
| (19,361 | ) |
| $ | (319 | ) |
|
| - |
|
| $ | 0 |
|
| $ | 148,754 |
|
| $ | 3 |
|
| $ | (53,269 | ) |
| $ | 95,173 |
|
Stock-based compensation |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 694 |
|
|
| 0 |
|
|
| 0 |
|
|
| 694 |
|
Exercise of warrants related to series A preferred stock |
|
| 1,213 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 1 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1 |
|
Shares issued as part of the Waycare Acquisition |
|
| 2,784,474 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 20,287 |
|
|
| 0 |
|
|
| 0 |
|
|
| 20,287 |
|
Issuance upon exercise of stock options |
|
| 130,380 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 208 |
|
|
| 0 |
|
|
| 0 |
|
|
| 208 |
|
Issuance upon vesting of restricted stock units |
|
| 19,448 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Change in unrealized gain on short-term investments |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 3 |
|
|
| 0 |
|
|
| 3 |
|
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (9,613 | ) |
|
| (9,613 | ) |
Balance as of September 30, 2021 |
|
| 43,948,281 |
|
| $ | 4 |
|
|
| (19,361 | ) |
| $ | (319 | ) |
|
| - |
|
| $ | 0 |
|
| $ | 169,944 |
|
| $ | 6 |
|
| $ | (62,882 | ) |
| $ | 106,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2020 |
|
| 22,942,546 |
|
| $ | 2 |
|
|
| - |
|
| $ | 0 |
|
|
| 240,861 |
|
| $ | 0 |
|
| $ | 22,180 |
|
| $ | 0 |
|
| $ | (33,044 | ) |
| $ | (10,862 | ) |
Stock-based compensation |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 202 |
|
|
| 0 |
|
|
| 0 |
|
|
| 202 |
|
Issuance of common stock pursuant to Exchange Agreement |
|
| 4,349,497 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 17,325 |
|
|
| 0 |
|
|
| 0 |
|
|
| 17,325 |
|
Exercise of cashless warrants in exchange for common stock |
|
| 171,522 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Exercise of warrants in exchange for common stock |
|
| 625,000 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 463 |
|
|
| 0 |
|
|
| 0 |
|
|
| 463 |
|
Issuance of common stock pursuant to at the market offering, net |
|
| 4,677,595 |
|
|
| 1 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 27,752 |
|
|
| 0 |
|
|
| 0 |
|
|
| 27,753 |
|
Exercise of warrants related to series A preferred stock |
|
| 16,214 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 17 |
|
|
| 0 |
|
|
| 0 |
|
|
| 17 |
|
Issuance upon exercise of stock options |
|
| 129,480 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 398 |
|
|
| 0 |
|
|
| 0 |
|
|
| 398 |
|
Preferred stock dividends |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (115 | ) |
|
| (115 | ) |
Accretion of Series A preferred stock |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| (220 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (220 | ) |
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (6,669 | ) |
|
| (6,669 | ) |
Balance as of September 30, 2020 |
|
| 32,911,854 |
|
| $ | 3 |
|
|
| - |
|
| $ | 0 |
|
|
| 240,861 |
|
| $ | 0 |
|
| $ | 68,117 |
|
| $ | 0 |
|
| $ | (39,828 | ) |
| $ | 28,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020 |
|
| 33,013,271 |
|
| $ | 3 |
|
|
| - |
|
| $ | 0 |
|
|
| 240,861 |
|
| $ | 0 |
|
| $ | 68,238 |
|
| $ | 0 |
|
| $ | (43,050 | ) |
| $ | 25,191 |
|
Stock-based compensation |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 2,600 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,600 |
|
Exercise of cashless warrants in exchange for common stock |
|
| 62,921 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Exercise of warrants in exchange for common stock |
|
| 54,235 |
|
|
| 0 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0 |
|
|
| 307 |
|
|
| 0 |
|
|
| 0 |
|
|
| 307 |
|
Exercise of warrants related to series A preferred stock |
|
| 97,805 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 101 |
|
|
| 0 |
|
|
| 0 |
|
|
| 101 |
|
Public underwriting |
|
| 6,126,939 |
|
|
| 1 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 70,124 |
|
|
| 0 |
|
|
| 0 |
|
|
| 70,125 |
|
Shares issued as part of the Waycare Acquisition |
|
| 2,784,474 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 20,287 |
|
|
| 0 |
|
|
| 0 |
|
|
| 20,287 |
|
Conversion of series A preferred stock |
|
| 899,174 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 7,775 |
|
|
| 0 |
|
|
| 0 |
|
|
| 7,775 |
|
Conversion of series B preferred stock |
|
| 517,611 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| (240,861 | ) |
|
| 0 |
|
|
| 179 |
|
|
| 0 |
|
|
| 0 |
|
|
| 179 |
|
Issuance upon exercise of stock options |
|
| 195,782 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 434 |
|
|
| 0 |
|
|
| 0 |
|
|
| 434 |
|
Issuance upon vesting of restricted stock units |
|
| 196,069 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Shares withheld upon vesting of restricted stock units |
|
| - |
|
|
| 0 |
|
|
| (19,361 | ) |
|
| (319 | ) |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (319 | ) |
Preferred stock dividends |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (51 | ) |
|
| (51 | ) |
Accretion of Series A preferred stock |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| (101 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (101 | ) |
Change in unrealized gain on short-term investments |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 6 |
|
|
| 0 |
|
|
| 6 |
|
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (19,781 | ) |
|
| (19,781 | ) |
Balance as of September 30, 2021 |
|
| 43,948,281 |
|
| $ | 4 |
|
|
| (19,361 | ) |
| $ | (319 | ) |
|
| - |
|
| $ | 0 |
|
| $ | 169,944 |
|
| $ | 6 |
|
| $ | (62,882 | ) |
| $ | 106,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019 |
|
| 21,595,653 |
|
| $ | 2 |
|
|
| - |
|
| $ | 0 |
|
|
| 240,861 |
|
| $ | 0 |
|
| $ | 19,371 |
|
| $ | 0 |
|
| $ | (28,408 | ) |
| $ | (9,035 | ) |
Stock-based compensation |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 539 |
|
|
| 0 |
|
|
| 0 |
|
|
| 539 |
|
Issuance of common stock pursuant to Exchange Agreement |
|
| 4,349,497 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 17,325 |
|
|
| 0 |
|
|
| 0 |
|
|
| 17,325 |
|
Exercise of cashless warrants in exchange for common stock |
|
| 214,740 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Exercise of warrants in exchange for common stock |
|
| 1,180,000 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 874 |
|
|
| 0 |
|
|
| 0 |
|
|
| 874 |
|
Issuance of common stock pursuant to at the market offering, net |
|
| 5,216,562 |
|
|
| 1 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 29,929 |
|
|
| 0 |
|
|
| 0 |
|
|
| 29,930 |
|
Exercise of warrants related to series A preferred stock |
|
| 74,177 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 77 |
|
|
| 0 |
|
|
| 0 |
|
|
| 77 |
|
Issuance upon exercise of stock options |
|
| 281,225 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 640 |
|
|
| 0 |
|
|
| 0 |
|
|
| 640 |
|
Preferred stock dividends |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (345 | ) |
|
| (345 | ) |
Accretion of Series A preferred stock |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| (638 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (638 | ) |
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (11,075 | ) |
|
| (11,075 | ) |
Balance as of September 30, 2020 |
|
| 32,911,854 |
|
| $ | 3 |
|
|
| - |
|
| $ | 0 |
|
|
| 240,861 |
|
| $ | 0 |
|
| $ | 68,117 |
|
| $ | 0 |
|
| $ | (39,828 | ) |
| $ | 28,292 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(Dollars in thousands)
(Unaudited)
Nine Months ended September 30, | |||
2020 | 2019 | ||
Cash Flows from Operating Activities | |||
Net loss from continuing operations | $ (10,860) | $ (9,036) | |
Net loss from discontinued operations | (215) | (2,392) | |
Net loss | (11,075) | (11,428) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||
Bad debt expense | 36 | - | |
Depreciation | 270 | 243 | |
Amortization of right-of-use lease asset | 139 | 51 | |
Share-based compensation | 539 | 314 | |
Amortization of financing costs | 653 | 768 | |
Amortization of intangible assets | 977 | 663 | |
Loss on extinguishment of debt | 3,281 | 1,113 | |
Gain on sale of AOC Key Solutions | (2,619) | - | |
Gain on sale of TeamGlobal | (1,012) | - | |
Loss on sale of Secure Education | - | 3 | |
Changes in operating assets and liabilities: | |||
Accounts receivable | (226) | (910) | |
Inventory | (289) | (312) | |
Other current assets | (186) | 57 | |
Accounts payable and accrued expenses | 940 | 1,676 | |
Contract liabilities | 646 | 982 | |
Lease liability | (149) | (6) | |
Net cash used in operating activities - continuing operations | (7,860) | (4,394) | |
Net cash used in operating activities - discontinued operations | (3,884) | (4,861) | |
Net cash used in operating activities | (11,744) | (9,255) | |
Cash Flows from Investing Activities | |||
Capital expenditures | (544) | (656) | |
Proceeds from sale of Secure Education | - | 250 | |
Proceeds from sale of AOC Key Solutions | 3,400 | - | |
Proceeds from sale of TeamGlobal | 2,300 | - | |
Investment in equity investment | (75) | - | |
Proceeds from AOC Key Solutions notes receivable | 600 | - | |
Net cash provided by (used in) by investing activities - continuing operations | 5,681 | (406) | |
Net cash used in investing activities - discontinued operations | - | - | |
Net cash provided by (used in) investing activities | 5,681 | (406) | |
Cash Flows from Financing Activities | |||
Proceeds from PPP loan | 874 | - | |
Payment of stock issuance costs associated with Note Exchange transaction | (73) | - | |
Repayments of notes payable | (7,266) | - | |
Net proceeds from notes payable | - | 3,839 | |
Net proceeds from exercise of options | 640 | - | |
Net proceeds from exercise of warrants | 874 | 103 | |
Net proceeds from exercise of warrants associated to series A preferred stock | 77 | 4 | |
Net proceeds from at-the-market agreement | 29,930 | 38 | |
Payment of preferred dividends | - | (108) | |
Payment of debt modification costs | (300) | - | |
Net cash provided by financing activities - continuing operations | 24,756 | 3,876 | |
Net cash provided by financing activities - discontinued operations | 4,171 | 5,224 | |
Net cash provided by financing activities | 28,927 | 9,100 | |
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations | 22,577 | (924) | |
Net increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations | 287 | 363 | |
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents | 22,864 | (561) | |
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period | 1,866 | 2,768 | |
Cash, cash equivalents and restricted cash and cash equivalents at end of period | $ 24,730 | $ 2,207 | |
Reconciliation of cash, cash equivalents and restricted cash: | |||
Cash and cash equivalents at end of period - continuing operations | $ 24,154 | $ 885 | |
Restricted cash and cash equivalents at end of period - continuing operations | 573 | 708 | |
Cash and cash equivalents at end of period - discontinued operations | 3 | 614 | |
Cash, cash equivalents and restricted cash at end of period | $ 24,730 | $ 2,207 |
|
| Nine Months ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
|
| ||
Net loss from continuing operations |
| $ | (19,777 | ) |
| $ | (10,860 | ) |
Net loss from discontinued operations |
|
| (4 | ) |
|
| (215 | ) |
Net loss |
|
| (19,781 | ) |
|
| (11,075 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Bad debt expense |
|
| 24 |
|
|
| 36 |
|
Depreciation |
|
| 431 |
|
|
| 270 |
|
Amortization of right-of-use lease asset |
|
| 209 |
|
|
| 139 |
|
Provision for deferred taxes |
|
| 10 |
|
|
| 0 |
|
Share-based compensation |
|
| 2,600 |
|
|
| 539 |
|
Amortization of financing costs |
|
| 14 |
|
|
| 653 |
|
Amortization of intangible assets |
|
| 1,529 |
|
|
| 977 |
|
Loss due to change in value of equity investments |
|
| 150 |
|
|
| 0 |
|
Unrealized gain on short-term investments |
|
| (6 | ) |
|
| 0 |
|
Loss on extinguishment of debt |
|
| 0 |
|
|
| 3,281 |
|
Gain on sale of AOC Key Solutions |
|
| 0 |
|
|
| (2,619 | ) |
Gain on sale of TeamGlobal |
|
| 0 |
|
|
| (1,012 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (936 | ) |
|
| (226 | ) |
Inventory |
|
| (558 | ) |
|
| (289 | ) |
Other current assets |
|
| (1,537 | ) |
|
| (186 | ) |
Other long-term assets |
|
| (127 | ) |
|
| 0 |
|
Accounts payable and accrued expenses and other current liabilities |
|
| 4,275 |
|
|
| 940 |
|
Contract liabilities |
|
| 1,596 |
|
|
| 646 |
|
Lease liability |
|
| (218 | ) |
|
| (149 | ) |
Net cash used in operating activities - continuing operations |
|
| (12,321 | ) |
|
| (7,860 | ) |
Net cash used in by operating activities - discontinued operations |
|
| (4 | ) |
|
| (3,884 | ) |
Net cash used in operating activities |
|
| (12,325 | ) |
|
| (11,744 | ) |
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Cash paid for Waycare acquisition, net |
|
| (40,699 | ) |
|
| 0 |
|
SAFE Investment |
|
| (1,000 | ) |
|
| 0 |
|
Capital expenditures |
|
| (1,618 | ) |
|
| (544 | ) |
Proceeds from sale of AOC Key Solutions |
|
| 0 |
|
|
| 3,400 |
|
Proceeds from sale of TeamGlobal |
|
| 0 |
|
|
| 2,300 |
|
Investment in unconsolidated company |
|
| (75 | ) |
|
| (75 | ) |
Net cash (used in) provided by investing activities - continuing operations |
|
| (43,392 | ) |
|
| 5,081 |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from public offering |
|
| 70,125 |
|
|
| 0 |
|
Proceeds from PPP loans |
|
| 0 |
|
|
| 874 |
|
Payment of notes payable |
|
| (29 | ) |
|
| 0 |
|
Proceeds from notes receivable |
|
| 255 |
|
|
| 600 |
|
Payment of stock issuance costs associated with the Note Exchange transaction |
|
| 0 |
|
|
| (73 | ) |
Repayments of notes payable |
|
| 0 |
|
|
| (7,266 | ) |
Net proceeds from exercise of options |
|
| 434 |
|
|
| 640 |
|
Net proceeds from exercise of warrants |
|
| 307 |
|
|
| 874 |
|
Net proceeds from exercise of warrants associated with the Series A Preferred Stock |
|
| 101 |
|
|
| 77 |
|
Net proceeds from at-the-market agreement |
|
| 0 |
|
|
| 29,930 |
|
Repurchases of common stock |
|
| (319 | ) |
|
| 0 |
|
Payment of debt modification costs |
|
| 0 |
|
|
| (300 | ) |
Net cash provided by financing activities - continuing operations |
|
| 70,874 |
|
|
| 25,356 |
|
Net provided by financing activities - discontinued operations |
|
| 0 |
|
|
| 4,171 |
|
Net cash provided by financing activities |
|
| 70,874 |
|
|
| 29,527 |
|
Net increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations |
|
| 15,161 |
|
|
| 22,577 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations |
|
| (4 | ) |
|
| 287 |
|
Net increase in cash, cash equivalents and restricted cash and cash equivalents |
|
| 15,157 |
|
|
| 22,864 |
|
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
|
| 21,009 |
|
|
| 1,866 |
|
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 36,166 |
|
| $ | 24,730 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash: |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period - continuing operations |
| $ | 35,102 |
|
| $ | 24,154 |
|
Restricted cash and cash equivalents at end of period - continuing operations |
|
| 1,063 |
|
|
| 573 |
|
Cash and cash equivalents at end of period - discontinued operations |
|
| 1 |
|
|
| 3 |
|
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 36,166 |
|
| $ | 24,730 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(Unaudited)
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2020,2021, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity (deficit) and unaudited condensed consolidated statements of cash flows for the three and nine month periods ended September 30, 20202021 and 2019.
On August 18, 2021, the Company completed its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring 100% of the issued and outstanding capital stock of Waycare, which is now a wholly owned subsidiary of the Company. Since the acquisition of Waycare occurred on August 18, 2021, the results of operations for Waycare from the date of acquisition have been included in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2021.
The financial data and other information disclosed in these notes are unaudited. The results for the three and nine months ended September 30, 20202021, are not necessarily indicative of the results to be expected for the year ending December 31, 2020.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. Beginning in the third quarter of 2021, depreciation and amortization is presented separately from cost of revenue, general and administrative expenses, selling and marketing expenses and research and development expenses on the unaudited condensed consolidated statements of operations, whereas in prior periods these amounts were included together with the aforementioned financial statement captions. Additionally, as of September 30, 2021, the Company began to present other current liabilities separately from accounts payable and accrued expenses. Other current liabilities primarily consist of payroll and payroll related accounts. Amounts for the three and nine month period ending September 30, 2020 and the period ended December 31, 2020, have been reclassified to conform to the current year’s presentation.
Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000.
Rekor is a provider of roadway intelligence through intelligent infrastructure. The Company was formed in February 2017delivers integrated solutions, actionable insights, and is currentlypredictions that increase roadway safety with its disruptive technology. With a leader inglobal footprint across 65 countries, the field of artificial intelligence ("AI") enabled vehicle identificationCompany provides actionable and management systems. In development for over six years using machine learning algorithms, the Company’s core software enables the creation of more powerfulreal-time insights to commercial clients, as well as government entities. Rekor’s capabilities appeal to businesses and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional legacy systems. The software provides a wider field of view, greater light sensitivity and recognitions at faster speeds with higher accuracy rates. It also includes the ability to identify the color, make and type of a vehicle and its direction of travel. These capabilities are particularly useful to governmental entities and businesses in solving a wide variety of real-world vehicle relatedmobility and infrastructure-related operational challenges. In addition, the reduction in cost, increased number and improved performance of internet protocol connected cameras has presented significant new uses for vehicle recognition technology that were not previously available or cost effective.
8 |
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Use of TeamGlobal's management team and began to separately report the resultsEstimates
The preparation of TeamGlobal as discontinued operations. See Note 3.
Reclassifications
Certain amounts in the unaudited condensed consolidated statement of operations.
Liquidity
For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, or available to be issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions includinginclude, among other factors, its ability to raise additional capital, if necessary, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these expendituresprograms or programs and its ability to raise additional capital, if necessary,expenditures to the extent management has the proper authority to execute themdo so and considers it probable that those implementations can be achieved within the look-forward period.
The Company has generated losses since its inception in February 2017 and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to public company corporate overhead and non-capital expenditures related to the scaling andof existing products, development of new products and service offerings in connectionand marketing efforts associated with the focus on the technology of the Company.these products and services. As of and for the nine months ended September 30, 2020,2021, the Company had working capital of $28,203,000 and a netcomprehensive loss from continuing operations of $10,860,000 and working capital of $21,230,000.
The Company's netCompany’s cash position was increased by $22,577,000$15,157,000 for the nine months ended September 30, 20202021 primarily due primarily to the net proceeds of $29,930,000$70,125,000 from the At Market Issuance Sales Agreement (the "Sales Agreement") and the net cash proceeds of $6,300,000 from the sale of AOC Key Solutions and TeamGlobal, which includes the repaymentcompletion of the $600,000 AOC Key Solutions Subordinate Note,Public Offering (see NOTE 10 - STOCKHOLDERS’ EQUITY for details on the Public Offering). This amount was offset by the net loss from operationscash outlay of $40,699,000 in connection with the period. Asacquisition of September 21, 2020,Waycare (see NOTE 2 – ACQUISITIONS for details on the Company voluntarily terminated the Sales Agreement (see Note 10)Waycare acquisition).
9 |
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Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections for one year from the date of the filing of the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, indicate the Company’s ability to continue operations as a going concern for at least that one-year period. The Company is actively monitoring its operations, the cash on hand and working capital. Should access to funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.
Goodwill
The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to continue the growth of its technology business, (ii) the continued performance of its contractors, subcontractors and vendors, (iii) its ability to maintain and build good relationships with its lenders and financial intermediaries, (iv) its ability to maintain timely collections from existing customers, and (v) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results.
Equity Method Investments
Investments in the common stock of entities other than the Company’s consolidated subsidiaries are accounted for under the equity method in accordance with FASB ASCthe Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 323, Investments – Equity Method and Joint Ventures.Ventures. Under the equity method, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets. When the fair value or income information is not readily determinable, the Company has elected to apply the measurement alternative, and report the investment at cost, less impairment.
Treasury Stock
Treasury stock is recorded at acquisition cost. Upon disposition of 2020, the Company announced a joint venturetreasury shares gains and losses are recorded as increases or decreases to additional paid-in capital with losses in which the Company would have a 50 percent equity interest in Roker Inc. In the third quarterexcess of 2020, the Company contributed $75,000 for its 50 percent equity interest. This investment is accounted for under the equity method.
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, inventory,short-term investments, accounts receivable and accounts payable approximate fair value as of September 30, 20202021 and December 31, 20192020, because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt and long-term receivables approximates fair value as of September 30, 20202021 and December 31, 20192020, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.
The determination of fair value is based upon the fair value framework established by Accounting Standards Codification (“ASC”)ASC Topic 820,
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.10 |
Table of Contents |
Level 3
–Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 3 inputs.
The Company has concluded thatconsiders its Series A Preferred Stock is anote receivable and Simple Agreement for Future Equity (“SAFE”) investment to be Level 3 financial instrumentinvestments and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through September 30, 2020. value.
There were no changes in levels during the nine months ended September 30, 2020.
Note Receivables
In connection with the sale of TeamGlobal in June 2020, the Company received a $1,700,000, five and a half year promissory note due December 2025, that carries an interest rate of 4%4.0% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note will beginbegan in January 2021. Based on the general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.
Interest income recognized for the three and nine months ended September 30, 2021 was $15,000 and $48,000, respectively, and is included as part of other income on the unaudited condensed consolidated statements of operations. Interest income recognized for the three and nine months ended September 30, 2020 was $19,000 and $31,000, respectively, and is included as part of other income on the unaudited condensed consolidated statement of operations. Interest income for the three and nine months ended September 30, 2019 was immaterial.
Revenue Recognition
The Company derives its revenues substantiallyprimarily from Software as a Service (“SaaS”), subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales and subscription fees for software and related products and services. A portionthe sale of the subscription fees are generated through the Company’s eCommerce website rather than though in-person sales. In addition, the Company derives net revenueshardware in connection with certain citation and collection services in connection with the Company’s automated traffic safety and parking enforcement services.
The Company determines the amount of revenue to be recognized through application of the following steps:
● | Identification of the contract, or contracts, with a customer |
● | Identification of the performance obligations in the contract |
● | Determination of the transaction price |
● | Allocation of the transaction price to the performance obligations in the contract |
● | Recognition of revenue when, or as, performance obligations are satisfied |
The following table presents a summary of revenue (dollars in thousands):
Three Months ended September 30, | Nine Months ended September 30, | |||
2020 | 2019 | 2020 | 2019 | |
Revenue | ||||
Licensing and subscription revenue | $1,341 | $575 | $4,122 | $1,386 |
Automated traffic safety enforcement | 785 | 961 | 2,277 | 2,576 |
Total revenue | $2,126 | $1,536 | $6,399 | $3,962 |
11 |
Table of Contents |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Recurring revenue |
| $ | 1,233 |
|
| $ | 964 |
|
| $ | 3,142 |
|
| $ | 2,876 |
|
Product and service revenue |
|
| 1,382 |
|
|
| 1,162 |
|
|
| 7,963 |
|
|
| 3,523 |
|
Total revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
|
Revenues
Recurring revenue
Recurring revenue is defined as the Company’s SaaS revenue, licensing and subscription revenue,
SaaS revenue represents software products and solutions that provide customers with the right to access the Company’s solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The Company's revenuescontracts with customers are derived principally from feesgenerally for technology products and services, including software licenses and subscriptions, hardware leases and sales, and other related support services.
Subscription revenue includes providing, through a web server, access to the Company’s proprietary vehicle recognition software, a self-managed database, and a powerful cross-platform application programming interface. The Company's proprietary software employs a convolutional neural network architecturesubscription arrangements with customers typically do not provide the customer with the right to classify images and features that include seamless video analysis and data analytics. Current customers include law enforcement agencies, highway authorities, parking system operators, private security companies, and wholesale and retail operations supporting logistics and customer loyalty programs.
eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software which can be purchased online. The Company's contracts with customers are generally for a term of one month with an automatic renewal each month. The Company invoices and receives fees from its customers monthly.
Customer support revenue is associated with perpetual and subscription arrangements. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with software. Customer support consists primarily of technical support. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such licenses for the same duration of time. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract term. The customer benefits evenly throughout the contract period from the Company's perpetual software licenses are recognized up-front atguarantee that the point in time when the software is madecustomer support resources and personnel will be available to them. Revenue for customer support is recognized ratably over the customer.
Product and service revenue
Product and service revenue is defined as the Company’s contactless compliance revenue, implementation revenue, perpetual license sales and hardware sales.
12 |
Table of Contents |
Contactless compliance solutions revenues reflect arrangements to provide traffic safety systems to a number ofseveral 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 analysesand analyzes the images to provide data and supports citation management services. The Company also provides an enterprise parking enforcement solution thatIn the first quarter of 2021, the Company licenseslaunched a new service offering for the State of Oklahoma to parking management companiessupport its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and municipalities.services to identify uninsured motor vehicles, notify owners of non-compliance and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of camera systems that are operated, or the number of citations issuedcollected by the relevant municipality.The
Implementation revenue is incurred when the Company also installs and maintains public safety systems, whichprovides pilot programs to customers. Pilot programs may involve a combination of installation and lease payments or simply software licenses toone-time fee for a defined period in which the customer can use the Company'sCompany’s software in connection with a previously installed camera network. Revenuenetwork or connected vehicle data. At the end of the pilot program, the customer can convert from a pilot program to a subscription model which has a typical term between one and five years. The Company’s pilot program revenue is recognized at various stages of completioncompletion.
In addition to the recurring software sales, the Company will recognize revenue related to the sale of perpetual software licenses. The Company sells perpetual licenses which provide customers the right to use software for an indefinite period in exchange for a one-time license fee, which is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and have significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.
The Company generates revenue through the sale of hardware through its partner program distribution channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company offers hardware installment to customers which ranges from one to six months. The revenue related to the installation and monthlycomponent is recognized at various stages of completion.
Revenue by Customer Type
The following table presents a summary of revenue by customer type (dollars in thousands):
|
| Three Months ended June 30, |
|
| Six Months ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Government customers |
| $ | 1,548 |
|
| $ | 1,254 |
|
| $ | 4,186 |
|
| $ | 4,047 |
|
Commercial customers |
|
| 1,067 |
|
|
| 872 |
|
|
| 6,919 |
|
|
| 2,352 |
|
Total revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
|
Performance obligations
The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for lease or license payments.
Where performance obligations for a contract with a customer to transfer services that are distinct. The performance obligations that are not yet satisfied or have only been partially satisfied are performance obligations that are expectedas of a particular date, the unsatisfied portion is to be recognized as revenue in the future for a contract with a customer which was executed asfuture. As of a particular date. On September 30, 2020,2021, the Company had approximately $16,459,000$23,845,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 27%36.0% of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized over the next two to fivefour years thereafter.
13 |
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Unbilled accounts receivable
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days, but typically no longer than over the next twelve months. Unbilled accounts receivables of $488,000$425,000 and $440,000$600,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 20202021 and December 31, 2019,2020, respectively.
Contract liabilities
When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next sixnine months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine months ended September 30, 20202021 were not materially impacted by any other factors. Contract liabilities as of September 30, 20202021 and December 31, 20192020 were $2,170,000$3,716,000 and $1,524,000,$2,084,000, respectively. All contract liabilities as of September 30, 2020 and December 31, 2019 were attributable to continuing operations. During the nine months ended September 30, 2020 $622,0002021, $920,000 of the contract liabilities balance as of December 31, 2019 were2020 was recognized as revenue.
The services due for contract liabilities described above are shown below as of September 30, 20202021 (dollars in thousands):
2020 | $607 |
2021 | 750 |
2022 | 368 |
2023 | 275 |
2024 | 160 |
Thereafter | 10 |
Total | $2,170 |
2021 |
| $ | 1,068 |
|
2022 |
|
| 1,839 |
|
2023 |
|
| 474 |
|
2024 |
|
| 234 |
|
2025 |
|
| 82 |
|
Thereafter |
|
| 19 |
|
Total |
| $ | 3,716 |
|
Costs to Obtain and Fulfill a Contract
Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient election to expense costs to obtain a contract as incurred when the amortization period would have been one year or less.
In connection with the Company’s services for Oklahoma’s UVED program, the Company installs hardware and software at no additional charge to the end customer. The costs associated with the hardware and software installations are expected to be recouped by the Company over the course of the estimated contract period and thus are capitalized as a cost to fulfill a customer contract and amortized over the estimated contract period. As of September 30, 2020,2021 the Company has capitalized $218,000 of such fulfillment costs, of which $196,000 are presented as part of property and equipment, net in the unaudited condensed consolidated balance sheets. As of December 31, 2019,2020 costs incurred to obtainfulfill contracts in excess of one year havehad been immaterial to date.
Cash and reportable segments from one segment to two segments: the Technology Segment and the Professional Services Segment. The two segments reflected the Company’s separate focus on technology products and services versus professional services.
The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with thea maturity of three months or less, to be cash equivalents.
Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of September 30, 20202021 and December 31, 20192020 were $573,000$1,063,000 and $461,000,$412,000, respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited
14 |
Table of Contents |
Concentrations of Credit Risk
The Company placesdeposits its temporary cash investments with higherhighly rated quality financial institutions that are located in the United States (“U.S.”).and Israel. The United States deposits are federally insured up to $250,000 per account. As of September 30, 2020 and December 31, 2019,2021 the Company had deposits from continuing operations totaling $24,727,000$36,165,000 in three U.S. institutions and $1,536,000, respectively,one Israeli financial institution. As of December 31, 2020 the Company had deposits from continuing operations totaling $21,007,000 in one U.S. financial institution that was federally insured up to $250,000 per account.
The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.
Customer A accounted for 17% and less than 10%10.0% of the Company’s total revenues for the three months ended September 30, 20202021 and 2019,2020, respectively. Customer A accounted for 20%19.0% and less than 10%10.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, and 2019, respectively.
Customer B accounted for less than 10% and 14%10.0% of the Company’s total revenues for the three months ended September 30, 20202021 and 2019,2020, respectively. Customer B accounted for 13.0% and less than 10% and 18%10.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively.
Customer C accounted for less than 10.0% and 2019,17.0% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively.
Customer E accounted for 13.0% and less than 10.0% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer E accounted for less than 10.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2020,2021, accounts receivable from Customer CCompany A and CustomerCompany D totaled 19
No other single customer accounted for more than 10%10.0% of the Company’s unaudited condensed consolidated revenuerevenues for the three and nine month periodmonths ended September 30, 2021 and 2020 and 2019 or the unaudited condensed consolidated accounts receivable balance as of September 30, 20202021 and December 31, 2019.
Significant Accounting Policies
Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
New Accounting Pronouncements Effective in the Nine Monthsmonths ended September 30, 2020
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company will adoptadopted this guidance in the first quarter of 20212021. The adoption of ASU 2020-01 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes.
15 |
Table of Contents |
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 eliminated previously allowed exceptions and clarified existing guidance in the accounting for income taxes, including in the areas of franchise taxes, the tax basis of goodwill and interim period effects of changes in tax laws. The Company adopted this guidance in the first quarter of 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes.
New Accounting Pronouncements Effective in Future Periods
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. Upon adoption of the new standard, the Company will begin recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016-13 and based on the Company’s analysis of ASU 2016-13 and the historical, current and expected credit quality of the Company’s customers, the Company does not expect itASU 2016-13 to have a material impact on its unaudited condensed consolidated financial statements.
The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standardstandards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
NOTE 2 – ACQUISITIONS
On March 12, 2019,August 18, 2021, the Company completed theits acquisition of certain assets and assumed certain liabilities of OpenALPR Technology, Inc. (the “OpenALPR Technology Acquisition”). Consideration paid as partWaycare by acquiring 100.0% of the OpenALPR Technology Acquisition was: $7,000,000 in cash,issued and outstanding capital stock of Waycare. The aggregate purchase price for the shares of Waycare was $61,100,000, less the amount of Waycare’s debt and certain transaction expenses and subject to adjustment after closing; 600,000a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474 shares of Rekorthe Company’s common stock, valued at $397,000; and $5,000,000$20,287,000. As a result of the 2019 Promissory Notes principal amount, together with an accompanying warrant to purchase 625,000 sharestransaction, Waycare has become a wholly-owned subsidiary of Rekor common stock, exercisable over a period of five years, at an exercise price of $0.74 per share, valued at $208,000.
The purchase price allocationhas been preliminarily allocated to the assets acquired and liabilities assumed are based on fair values as of the acquisition date. Since the OpenALPR Technology Acquisitionacquisition of Waycare occurred on March 12, 2019,August 18, 2021, the results of operations including OpenALPR Technology Acquisitionfor Waycare from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2020.
Cash paid |
| $ | 40,813 |
|
Common stock issued |
|
| 20,287 |
|
Total consideration |
| $ | 61,100 |
|
Assets |
|
|
|
|
Cash and cash equivalents |
| $ | 25 |
|
Restricted cash and cash equivalents |
|
| 89 |
|
Accounts receivable |
|
| 472 |
|
Other current assets |
|
| 150 |
|
Property and equipment |
|
| 72 |
|
Acquired technology |
|
| 17,255 |
|
Total assets acquired |
|
| 18,063 |
|
Liabilities |
|
|
|
|
Accounts payable and accrued expenses |
|
| 451 |
|
Contract liabilities |
|
| 36 |
|
Total liabilities assumed |
|
| 487 |
|
Fair value of identifiable net assets acquired |
|
| 17,576 |
|
Goodwill |
| $ | 43,524 |
|
The technology acquired by the Company as part of the acquisition has an estimated useful life of seven years and presented as part of intangible assets, net on the unaudited condensed consolidated balance sheets.
During the three and nine months ended September 30, 2021, $260,000 of revenue was attributed to Waycare, which was reported in the consolidated income statement.
Operations of Combined Entities
The following unaudited pro forma combined financial information gives effect to the OpenALPR Technology Acquisitionacquisition of Waycare as if it was consummated as of January 1, 2019.2020. This unaudited pro forma financial information is presented for informationalinformation purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 20192020 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
Three Months ended September 30, | Nine Months ended September 30, | |||
2020 | 2019 | 2020 | 2019 | |
Total revenue from continuing operations | $2,126 | $1,536 | $6,399 | $4,931 |
Net loss from continuing operations | (6,667) | (3,528) | (10,860) | (8,228) |
Basic and diluted loss per share from continuing operations | $(0.26) | $(0.19) | $(0.52) | $(0.46) |
Basic and diluted number of shares | 26,907,069 | 19,878,518 | 22,781,807 | 19,761,363 |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Dollars in thousands except for per share data) |
|
| (Dollars in thousands except for per share data) |
| ||||||||||
Total revenue from continuing operations |
| $ | 2,834 |
|
| $ | 2,499 |
|
| $ | 13,050 |
|
| $ | 7,491 |
|
Net loss from continuing operations |
|
| (10,186 | ) |
|
| (4,347 | ) |
|
| (21,629 | ) |
|
| (11,840 | ) |
Basic and diluted loss per share continuing operations |
| $ | (0.23 | ) |
| $ | (0.27 | ) |
| $ | (0.54 | ) |
| $ | (0.59 | ) |
Basic and diluted number of shares |
|
| 44,723,337 |
|
|
| 29,691,543 |
|
|
| 41,141,641 |
|
|
| 25,566,281 |
|
NOTE 3 – DISCONTINUED OPERATIONS
Investments in Unconsolidated Companies
In February 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own 19.9% of the units of Global Public Safety. This equity investment does not have a readily determinable fair value and the Company reports this investment at cost, less impairment. As of September 201930, 2021 and MarchDecember 31, 2020 the investment in Global Public Safety had a value of $0.
17 |
Table of Contents |
In June 2020, the Company determined that TeamGlobal and AOC Key Solutions, respectively, met the criteria for held for sale accounting becauseannounced a joint venture in which the Company expected to completewould have a 50 percent equity interest in Roker Inc. (“Roker”). In the salethird quarter of TeamGlobal2020 and AOC Key Solutions during the next 12first quarter of 2021, the Company contributed $75,000 for its 50 percent equity interest for a total investment of $150,000. This investment is accounted for under the equity method. During the three and nine months ended September 30, 2021, the Company recognized a loss in its unconsolidated investments of $0 and $150,000, respectively.
The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets. There were no distributions or earnings received from either investment in the three or nine months ended September 30, 2021 and 2020.
Roker SAFE
In April 2021, in exchange for $1,000,000 the Company entered into a planSAFE with Roker (the “Roker SAFE”). The Roker SAFE allows the Company to concentrateparticipate in future equity financings of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company has the option to receive either (i) cash payment equal to the invested amount under the SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the Roker SAFE. The Company’s investment in the Roker SAFE is recorded on the developmentcost method of its Technology segment. Historically, TeamGlobalaccounting and AOC Key Solutions have been presentedincluded under SAFE investment on the unaudited condensed consolidated balance sheets and is shown as partlong-term, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment the Company’s Professional Services segment.
NOTE 4 – DISCONTINUED OPERATIONS
During the first quarter of 2020, in connection with the Company’s plan to concentrate on its Technology segment,, the Company determined that all of the remainder of its historical ProfessionalsProfessional Services segment should be classified as discontinued operations. As part of this plan TeamGlobal, AOC Key Solutions and Firestorm has also beenwere classified as discontinued operations and presented as part of discontinued operations. Previously, Firestorm was not included as part of held or sale and discontinued operations as it did not meet the threshold of being considered a strategic shift.
AOC Key Solutions Sale
On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions management (the “
The
AOC Key SolutionsBuyer agreed to purchase all of the outstanding equity interests of AOC Key Solutions for a purchase price of $4,000,000, comprising (i) $3,400,000 in cash, and (ii) a subordinated promissory note (the “Subordinated Note”) in the initial principal amount of $600,000.As of September 30,December 31, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.
TeamGlobal Sale
On June 29, 2020, the Company entered into a Stock Purchase Agreement (the “TeamGlobal Purchase Agreement”) by and among the Company, TeamGlobal, and Talent Teams LLC, a Texas limited liability company owned by the members of TeamGlobal’s management (the “TeamGlobal Buyer”), pursuant to which the Company agreed to sell TeamGlobal to the TeamGlobal Buyer.
Subject to the terms and conditions of the TeamGlobal Purchase Agreement, the TeamGlobal Buyer agreed to purchase all of the outstanding equity interests of TeamGlobal for a purchase price of $4,000,000, comprising (i) an aggregate of $2,300,000 in cash, and (ii) a secured promissory note (the “Secured Note”) in the initial principal amount of $1,700,000, with such Secured Note secured by a Pledge and Security Agreement (the “Pledge Agreement”) with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer.
The dispositions of AOC Key Solutions and TeamGlobal are athe 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'sCompany’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of TeamGlobal, AOC Key Solutions and Firestorm as discontinued operations, including for all prior periods reflected in the unaudited
Pursuant to ASC Topic 205-20,
Presentation of Financial Statements - Discontinued Operations, the results of operations from TeamGlobal, AOC Key Solutions and Firestorm for the three and nine months ended September 30,The assets and liabilities classified as discontinued operations in the Company'sCompany’s unaudited condensed consolidated financial statements as of September 30, 20202021 and December 31, 20192020 are shown below (dollars in thousands):
September 30. 2020 | December 31, 2020 | |||||||
Global | AOC Key Solutions | Firestorm | Total | Global | AOC Key Solutions | Firestorm | Total | |
ASSETS | ||||||||
Cash and cash equivalents | $- | $- | $3 | $3 | $225 | $93 | $12 | $330 |
Accounts receivable, net | - | - | - | - | 2,763 | 4,055 | - | 6,818 |
Other current assets, net | - | - | - | - | 238 | 52 | 3 | 293 |
Current assets of discontinued operations | - | - | 3 | 3 | 3,226 | 4,200 | 15 | 7,441 |
Property and equipment, net | - | - | - | - | 113 | 41 | - | 154 |
Right-of-use lease assets, net | - | - | - | - | 130 | 499 | - | 629 |
Goodwill | - | - | - | - | 669 | - | - | 669 |
Intangible assets, net | - | - | - | - | 1,994 | - | - | 1,994 |
Deposits and other long-term assets | - | - | - | - | - | 11 | - | 11 |
Long-term assets of discontinued operations | - | - | - | - | 2,906 | 551 | - | 3,457 |
Total assets of discontinued operations | $- | $- | $3 | $3 | $6,132 | $4,751 | $15 | $10,898 |
LIABILITIES | ||||||||
Accounts payable and accrued expenses | $- | $- | $31 | $31 | $461 | $1,260 | $33 | $1,754 |
Lines of credit | - | - | - | - | 1,842 | 1,894 | - | 3,736 |
Lease liability, short term | - | - | 83 | 83 | 113 | 100 | 54 | 267 |
Current liabilities of discontinued operations | - | - | 114 | 114 | 2,416 | 3,254 | 87 | 5,757 |
Lease liability, long term | - | - | 14 | 14 | 30 | 467 | 39 | 536 |
Long-term liabilities of discontinued operations | - | - | 14 | 14 | 30 | 467 | 39 | 536 |
Total liabilities of discontinued operations | $- | $- | $128 | $128 | $2,446 | $3,721 | $126 | $6,293 |
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||
ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 1 |
|
| $ | 2 |
|
Current assets of discontinued operations |
|
| 1 |
|
|
| 2 |
|
Total assets of discontinued operations |
| $ | 1 |
|
| $ | 2 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 30 |
|
| $ | 31 |
|
Lease liability, short term |
|
| 99 |
|
|
| 93 |
|
Current liabilities of discontinued operations |
|
| 129 |
|
|
| 124 |
|
Lease liability, long term |
|
| 0 |
|
|
| 5 |
|
Long-term liabilities of discontinued operations |
|
| 0 |
|
|
| 5 |
|
Total liabilities of discontinued operations |
| $ | 129 |
|
| $ | 129 |
|
The major components of the discontinued operations, net of tax, are presented in the unaudited condensed consolidated statements of operations below (dollars in thousands):
Three Months ended September 30, | ||||||||
2020 | 2019 | |||||||
Global | AOC Key Solutions | Firestorm | Total | Global | AOC Key Solutions | Firestorm | Total | |
Revenue | $- | $- | $- | $- | $6,205 | $3,397 | $50 | $9,652 |
Cost of revenue | - | - | - | - | 5,378 | 1,836 | 6 | 7,220 |
Gross profit | - | - | - | - | 827 | 1,561 | 44 | 2,432 |
Operating expenses: | ||||||||
General and administrative expenses | - | - | 2 | 2 | 850 | 1,073 | 25 | 1,948 |
Selling and marketing expenses | - | - | - | - | (1) | 138 | - | 137 |
Operating expenses | - | - | 2 | 2 | 849 | 1,211 | 25 | 2,085 |
Income loss income from operations | - | - | (2) | (2) | (22) | 350 | 19 | 347 |
Other expense: | ||||||||
Loss on extinguishment of debt | - | - | - | - | (31) | (46) | - | (77) |
Interest expense | - | - | - | - | (107) | (47) | - | (154) |
Other expense | - | - | - | - | - | (154) | (62) | (216) |
Total other expense | - | - | - | - | (138) | (247) | (62) | (447) |
Income (loss) from discontinued operations | - | - | (2) | (2) | (160) | 103 | (43) | (100) |
Income tax provision from discontinued operations | - | - | - | - | - | - | - | - |
Net income (loss) from discontinued operations | $- | $- | $(2) | $(2) | $(160) | $103 | $(43) | $(100) |
Nine Months ended September 30, | ||||||||
2020 | 2019 | |||||||
Global | AOC Key Solutions | Firestorm | Total | Global | AOC Key Solutions | Firestorm | Total | |
Revenue | $10,510 | $3,392 | $5 | $13,907 | $20,260 | $9,916 | $1,005 | $31,181 |
Cost of revenue | 9,190 | 1,866 | - | 11,056 | 17,551 | 5,367 | 501 | 23,419 |
Gross profit | 1,320 | 1,526 | 5 | 2,851 | 2,709 | 4,549 | 504 | 7,762 |
Operating expenses: | ||||||||
General and administrative expenses | 1,341 | 1,284 | (2) | 2,623 | 2,745 | 3,634 | 1,017 | 7,396 |
Selling and marketing expenses | 79 | 131 | - | 210 | 142 | 412 | 48 | 602 |
Impairment of intangibles | - | - | - | - | - | - | 1,549 | 1,549 |
Operating expenses | 1,420 | 1,415 | (2) | 2,833 | 2,887 | 4,046 | 2,614 | 9,547 |
Income loss income from operations | (100) | 111 | 7 | 18 | (178) | 503 | (2,110) | (1,785) |
Other income (expense): | ||||||||
Loss on extinguishment of debt | - | - | - | - | (31) | (46) | - | (77) |
Interest expense | (166) | (74) | - | (240) | (208) | (108) | - | (316) |
Other income (expense) | 5 | 2 | - | 7 | 2 | (151) | (65) | (214) |
Total other expense | (161) | (72) | - | (233) | (237) | (305) | (65) | (607) |
Income (loss) from discontinued operations | (261) | 39 | 7 | (215) | (415) | 198 | (2,175) | (2,392) |
Income tax provision from discontinued operations | - | - | - | - | - | - | - | - |
Net income (loss) from discontinued operations | $(261) | $39 | $7 | $(215) | $(415) | $198 | $(2,175) | $(2,392) |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||||||||||
|
| Firestorm |
|
| Firestorm |
|
| Firestorm |
|
| Global |
|
| AOC Key Solutions |
|
| Firestorm |
|
| Total |
| |||||||
Revenue |
| $ | 0 |
|
| $ | - |
|
| $ | 0 |
|
| $ | 10,510 |
|
| $ | 3,392 |
|
| $ | 5 |
|
| $ | 13,907 |
|
Cost of revenue |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 9,190 |
|
|
| 1,866 |
|
|
| - |
|
|
| 11,056 |
|
Gross profit |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,320 |
|
|
| 1,526 |
|
|
| 5 |
|
|
| 2,851 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 0 |
|
|
| 2 |
|
|
| - |
|
|
| 1,341 |
|
|
| 1,284 |
|
|
| (2 | ) |
|
| 2,623 |
|
Selling and marketing expenses |
|
| 0 |
|
|
| 0 |
|
|
| 4 |
|
|
| 79 |
|
|
| 131 |
|
|
| 0 |
|
|
| 210 |
|
Operating expenses |
|
| 0 |
|
|
| 2 |
|
|
| 4 |
|
|
| 1,420 |
|
|
| 1,415 |
|
|
| (2 | ) |
|
| 2,833 |
|
Income loss income from operations |
|
| 0 |
|
|
| (2 | ) |
|
| (4 | ) |
|
| (100 | ) |
|
| 111 |
|
|
| 7 |
|
|
| 18 |
|
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (166 | ) |
|
| (74 | ) |
|
| 0 |
|
|
| (240 | ) |
Other expense (income) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 5 |
|
|
| 2 |
|
|
| 0 |
|
|
| 7 |
|
Total other (income) expense |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (161 | ) |
|
| (72 | ) |
|
| 0 |
|
|
| (233 | ) |
Net income (loss) from discontinued operations |
| $ | 0 |
|
| $ | (2 | ) |
| $ | (4 | ) |
| $ | (261 | ) |
| $ | 39 |
|
| $ | 7 |
|
| $ | (215 | ) |
19 |
Table of Contents |
NOTE 45 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the nine months ended September 30, 20202021 and 20192020 were as follows (dollars in thousands):
Nine Months ended September 30, | ||
2020 | 2019 | |
Cash paid for interest - continuing operations | $1,211 | $839 |
Cash paid for interest - discontinued operations | 241 | 184 |
Cash paid for taxes - continuing operations | - | - |
Cash paid for taxes - discontinued operations | - | 11 |
Non-cash financing - Paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes | (1,283) | - |
Non-cash operating - Paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes | 1,283 | - |
Note received as part of TeamGlobal Sale | 1,700 | - |
Financing: | ||
Notes payable - continuing operations | - | 21,000 |
Debt discount financing costs | - | (2,599) |
Extinguishment of debt | - | (1,113) |
Repayment of notes payable and interest expense, net of debt discount | - | (2,515) |
Investment in OpenALPR Technology | - | (12,000) |
Issuance of warrants in conjunction with notes payable | - | 706 |
Accounts Payable | - | 360 |
Proceeds from notes payable | - | 3,839 |
Note Exchange transaction (1) | ||
Exchange of accrued interest | (226) | - |
Debt extinguishment costs | (2,484) | - |
Exchange of the net principal balance of the 2019 Promissory Notes | (14,688) | - |
Issuance of common stock | 17,325 | - |
Payment of stock issuance costs associated with Note Exchange transaction | (73) | - |
Adoption of ASC-842 Lease Accounting: | ||
Right-of-use lease asset | 132 | 291 |
Lease liability | $(132) | $(291) |
|
| Nine Months ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash paid for interest - continuing operations |
| $ | 0 |
|
| $ | 1,211 |
|
Note received as part of TeamGlobal Sale |
|
| 0 |
|
|
| 1,700 |
|
Paid-in-kind interest transferred from accrued interest to the principal balance of the 2019 Promissory Notes |
|
| 0 |
|
|
| 1,283 |
|
Increase in accounts payable and accrued expenses related to purchases of property and equipment |
|
| 2,479 |
|
|
| 0 |
|
Fair market value of shares issued in connection with the acquisition of Waycare |
|
| 20,287 |
|
|
| 0 |
|
Non-cash Note Exchange transaction |
|
|
|
|
|
|
|
|
Exchange of accrued interest and stock issuance costs |
|
| 0 |
|
|
| (226 | ) |
Debt extinguishment costs |
|
| 0 |
|
|
| (2,484 | ) |
Exchange of the net principal balance of the 2019 Promissory Notes |
|
| 0 |
|
|
| (14,688 | ) |
Issuance of common stock |
|
| 0 |
|
|
| 17,325 |
|
Cash impact of Note Exchange transaction |
|
| 0 |
|
|
| (73 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock |
|
| (1,005 | ) |
|
| 0 |
|
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock |
|
| (6,770 | ) |
|
| 0 |
|
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock |
|
| (179 | ) |
|
| 0 |
|
New Leases under ASC-842 |
|
|
|
|
|
|
|
|
Right-of-use lease asset |
|
| 6,039 |
|
|
| 132 |
|
Lease incentive recognized in property and equipment, net |
|
| 3,833 |
|
|
| 0 |
|
Lease liability |
| $ | (9,872 | ) |
| $ | (132 | ) |
NOTE 56 – OPERATING LEASES
We have operating leases for office facilities in various locations throughout the United States.States and Israel. The Company’s leases have remaining terms of one to four years.
Operating lease expense from continuing operations
Operating lease right-of-use lease assets from continuing operations | $276 |
Current portion of lease liability | $232 |
Long-term portion of lease liability | 60 |
Total lease liability from continuing operations | $292 |
Weighted average remaining lease term - operating leases from continuing operations | 1.78 |
Weighted average discount rate - operating leases | 9% |
2020 | $63 |
2021 | 195 |
2022 | 19 |
2023 | 19 |
2024 | 18 |
Total lease payments | 314 |
Less imputed interest | 22 |
Maturities of lease liabilities | $292 |
Customer Relationships | Marketing Related | Technology Based | Internally Capitalized Software | Total | |
Identifiable intangible assets | $461 | $327 | $7,206 | $1,452 | $9,446 |
Accumulated amortization | (90) | (150) | (1,583) | (194) | (2,017) |
Identifiable intangible assets from continuing operations, net | $371 | $177 | $5,623 | $1,258 | $7,429 |
December 31, 2019 | Additions | Amortization | September 30, 2020 | |
Intangible assets subject to amortization from continuing operations | ||||
Customer relationships | $396 | $- | $(25) | $371 |
Marketing related | 230 | - | (53) | 177 |
Technology based | 6,395 | - | (772) | 5,623 |
Internally capitalized software | 1,223 | 162 | (127) | 1,258 |
Intangible assets subject to amortization from continuing operations | $8,244 | $162 | $(977) | $7,429 |
Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $245,000 and $168,000 for the nine months ended September 30, 2021 and 2020, respectively.
In the third quarter of 2021, the Company entered into a lease agreement for its new headquarters. As part of the lease agreement there were $3,833,000 in lease incentives provided to the Company which were used to update and the structure of the leased space and furnish the leased space.
Supplemental balance sheet information related to leases as of September 30, 2021 was as follows (dollars in thousands):
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Operating lease right-of-use lease assets from continuing operations |
| $ | 6,256 |
|
|
|
|
|
|
Current portion of lease liability |
| $ | 101 |
|
Long-term portion of lease liability |
|
| 9,994 |
|
Total lease liability from continuing operations |
| $ | 10,095 |
|
|
|
|
|
|
Weighted average remaining lease term - operating leases from continuing operations |
|
| 9.80 |
|
|
|
|
|
|
Weighted average discount rate - operating leases |
|
| 9.0 | % |
|
|
|
|
|
2021 |
| $ | 33 |
|
2022 |
|
| 525 |
|
2023 |
|
| 1,618 |
|
2024 |
|
| 1,579 |
|
2025 |
|
| 1,596 |
|
Thereafter |
|
| 11,443 |
|
Total lease payments |
| $ | 16,794 |
|
Less imputed interest |
|
| 6,699 |
|
Maturities of lease liabilities |
| $ | 10,095 |
|
NOTE 7 – INTANGIBLE ASSETS
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from December 31, 2020 to September 30, 2021 (dollars in thousands):
|
| December 31, 2020 |
|
| Additions |
|
| Amortization |
|
| September 30, 2021 |
| ||||
Intangible assets subject to amortization from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Customer relationships |
| $ | 362 |
|
| $ | 0 |
|
| $ | (25 | ) |
| $ | 337 |
|
Marketing related |
|
| 159 |
|
|
| 0 |
|
|
| (51 | ) |
|
| 108 |
|
Technology based |
|
| 5,361 |
|
|
| 17,255 |
|
|
| (1,089 | ) |
|
| 21,527 |
|
Internally capitalized software |
|
| 1,156 |
|
|
| 4 |
|
|
| (364 | ) |
|
| 796 |
|
Intangible assets subject to amortization from continuing operations |
| $ | 7,038 |
|
| $ | 17,259 |
|
| $ | (1,529 | ) |
| $ | 22,768 |
|
The following provides a breakdown of identifiable intangible assets as of September 30, 2021 (dollars in thousands):
|
| Customer Relationships |
|
| Marketing Related |
|
| Technology Based |
|
| Internally Capitalized Software |
|
| Total |
| |||||
Identifiable intangible assets |
| $ | 461 |
|
| $ | 327 |
|
| $ | 24,465 |
|
| $ | 1,452 |
|
| $ | 26,705 |
|
Accumulated amortization |
|
| (124 | ) |
|
| (219 | ) |
|
| (2,938 | ) |
|
| (656 | ) |
|
| (3,937 | ) |
Identifiable intangible assets from continuing operations, net |
| $ | 337 |
|
| $ | 108 |
|
| $ | 21,527 |
|
| $ | 796 |
|
| $ | 22,768 |
|
These intangible assets are being amortized on a straight-line basis over their estimated useful life. Amortization expense attributable to continuing operations for the three months ended September 30, 2021 and 2020 was $713,000 and $343,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $1,529,000 and $977,000, respectively and is presented as part of depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations.
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As of September 30, 2020,2021, the estimated impact on continuing operations from annual amortization expense from continuing operationsintangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):
2020 | $343 |
2021 | 1,362 |
2022 | 1,281 |
2023 | 1,148 |
2024 | 1,060 |
Thereafter | 1,452 |
Capitalized software not yet placed in service | 783 |
Total | $7,429 |
2021 |
| $ | 1,017 |
|
2022 |
|
| 4,008 |
|
2023 |
|
| 3,828 |
|
2024 |
|
| 3,525 |
|
2025 |
|
| 3,516 |
|
Thereafter |
|
| 6,874 |
|
Total |
| $ | 22,768 |
|
NOTE 78 – DEBT
Firestorm Notes
On January 25, 2017, pursuant to the terms of itsthe Company’s 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%2.0% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7%7.0%. The notes mature on January 25, 2022. The aggregate balance of these notes payable was $976,000$994,000 and $961,000,$980,000, net of unamortized interest, as of September 30, 20202021 and December 31, 2019,2020, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $24,000$6,000 and $39,000,$20,000, respectively.
2020 | $46 |
2021 | 442 |
2022 | 1,386 |
2023 | - |
2024 | - |
Thereafter | - |
Total | 1,874 |
Less unamortized interest | (24) |
Total debt | $1,850 |
Loan payable, current portion | $370 |
Loan payable, long-term | 504 |
Notes payable, long-term | 976 |
Total debt | $1,850 |
Paycheck Protection Program Loan
On May 26, 2020, the Company entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $221,000 (the “Rekor PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for sixnine months after the date of disbursement.
On June 3, 2020, the Company’s wholly owned subsidiary, Rekor Recognition Systems, Inc., entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $653,000 (the “Rekor Recognition PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor Recognition PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for sixnine months after the date of disbursement.
The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to useused the entire Loans amount for qualifying expenses and has to applyapplied for forgiveness of the Loans in accordance with the terms of the CARES Act.
In October 2021, the Company was informed the Loans forgiveness was processed by the Small Business Administration (“SBA”), and the Company’s Loans have been fully forgiven. The Loans are now considered paid in consultation with the Department of Treasury, issued new guidance that creates uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company will apply for forgiveness once Newtek Small Business Finance, LLC begins to accept applications.
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2019 Promissory Notes
On March 12, 2019, the Company entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology, Inc. (the “2019 Lenders”) loaned $20,000,000 to the Company (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”). The loan bore interest at 16% per annum, of which at least 10%10.0% per annum was required to be paid in cash. Any remaining interest accrued to be paid at maturity or earlier upon redemption. The notes also required a $1,000,000 exit fee due at maturity, or a premium if paid before the maturity date, and compliance with affirmative, negative and financial covenants, including a fixed charge coverage ratio and minimum liquidity and maximum capital expenditures. As of September 30, 2020, the Company had settled the full amount of the 2019 Promissory Notes.expenditures covenants. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. As of December 31, 2020, the Company had settled the full amount of the 2019 Promissory Notes. The loan was secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and were valued at $706,000, at the time of issuance. The warrants werebecame exercisable commencing March 12, 2019 and expire on March 12, 2024. The 2019 Promissory Notes had an effective interest rate of 24.87%.
As of the first anniversary date of the commencement of the 2019 Promissory Notes $1,283,000 of the paid-in kind interest had not been paid in cash by the Company and per the purchase agreement was added to the principal balance of the 2019 Promissory Notes in March 2020.
2019 Promissory Note Retirement
On June 30, 2020, the Company entered into Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes. Subject to the terms and conditions set forth in the Exchange Agreements, approximately $17,398,000 was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share.share, which was the closing price of the common stock on the date of the Exchange Agreements. On July 15, 2020, the Company completed the Note Exchange. At the time of the Exchange Agreement the net amount of long-term debt redeemed for common stock was $14,688,000, this$14,688,000. This included the existing principal balance subject to conversion, the portion of the exit fee associated with the which notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $226,000 related to the PIKpaid-in-kind (“PIK”) interest associated towith the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above of $2,484,000 was recorded as part of debt extinguishments costs in the unaudited condensedaccompanying consolidated statementstatements of operations. Following the Note Exchange, approximately $4,398,000 aggregate principal amount of the 2019 Promissory Notes remained outstanding, plus an additional $216,000 related to the exit fee.
The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreements. These costs are presented as a reduction to additional paid-in capital on the unaudited condensedaccompanying consolidated balance sheets.
On September 16, 2020, the Company issued a cash payment of $5,284,000 to complete the retirement of the remaining aggregate principal balance of the 2019 Promissory Notes. As a result of this optional prepayment, the 2019 Promissory Notes have been fully redeemed pursuant to their terms, and as a result the Company has no further obligations under the Note Purchase Agreement, as amended. The warrants previously issued pursuant to the Note Purchase Agreement remain outstanding pursuant to their terms.
Interest Expense
The following table presents the three and nine months ended September 30, 2020, the Company recognized the following debt extinguishment costs: $200,000 related to an early cash payment in April 2020interest expense related to the 2019 Promissory Notes, $2,484,000 related tocontractual interest and the Exchange Agreements completed in July 2020 2019 Promissory Notes and $684,000 related to an early cash payment in September 2020 to retire the remaining balance of the 2019 Promissory Notes, these costs were offset by the forgiveness of loans in the amount of $87,000 in the third quarter of 2020. These costs are presented as partamortization of debt extinguishmentissuance costs in the unaudited condensed consolidated statement of operations, for the three and nine months endedCompany’s debt arrangements (dollars in thousands):
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Contractual interest |
| $ | 17 |
|
| $ | 176 |
|
| $ | 58 |
|
| $ | 1,815 |
|
Amortization of debt issuance costs |
|
| 4 |
|
|
| 42 |
|
|
| 14 |
|
|
| 653 |
|
Total interest expense |
| $ | 21 |
|
| $ | 218 |
|
| $ | 72 |
|
| $ | 2,468 |
|
23 |
Table of Contents |
Schedule of Principal Amounts Due of Debt
The principal amounts due for long-term notes payable are shown below as of September 30, 2020.
2021 |
| $ | 489 |
|
2022 |
|
| 1,432 |
|
2023 |
|
| 36 |
|
Total |
|
| 1,957 |
|
|
|
|
|
|
Less unamortized interest |
|
| (6 | ) |
Total notes payable |
| $ | 1,951 |
|
|
|
|
|
|
Loan payable, current portion |
| $ | 911 |
|
Loan payable, long-term |
|
| 46 |
|
Notes payable, current portion |
|
| 994 |
|
Total notes payable |
| $ | 1,951 |
|
NOTE 89 – INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business.
The Company established a valuation allowance against deferred tax assets during 2017 and has continued to maintain a full valuation allowance,
outside of the deferred tax liability related to the indefinite lived intangible, through theThe Company files income tax returns in the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of September 30, 2020.
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, becauseFor the nine months ended September 30, 20202021 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 20162017 through 20182019 tax years remain subject to examination by the Internal Revenue Service.
NOTE 910 – 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 andwho were founders of Firestorm (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company. The Complaint requests equitable rescission of that transaction, or, alternatively, monetary damages.
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Following an initial amended complaint, answer and counterclaims, and defendants’ motion for judgment on the pleadings, on January 30, 2020, the Company filed a Second Amended Complaint, which the Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, the Company moved to dismiss certain counterclaims against certain executivesdirectors and officers named as counterclaim-defendants, which resulted in the Firestorm Principals voluntarily dismissing thosethe counterclaims against those parties. The Company thereafter filed its response and affirmative defenses to the Counterclaims on April 22.22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which the Company has opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. ThatWith respect to the Firestorm Principals’ motion was fully briefed asfor judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.
On April 27, 2021, the Firestorm Principals filed a notice of Februarymotion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, along with supporting declarations and exhibits. After the Court decided to allow the proposed motion to proceed, the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed their opposition to the partial summary judgment motion on June 21, 2020. It remains sub judice, and no argument has been scheduled upon it.
In the year 2020, the Firestorm Principals filed suitvarious suits in New York, Supreme Court in Sullivan CountyDelaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. The Company believes thatdefendants in the suits moved to dismiss the amended complaint. At this suit is without meritstage of these litigations, suits against two of the directors have been dismissed and intendone has been permitted to vigorously litigate this matter.
At this stage of these litigations, the Company is unable to render an opinion regarding the likelihood of a favorable outcome. The Company intends to continue vigorously litigating its claims against the Firestorm Principals and believes that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.
On January 31, 2020, the Company’s wholly owned subsidiary, OpenALPR, filed a complaint in the US District Court for the Western District of Pennsylvania against a former customer, Plate Capture Solutions, Inc. (“PCS”) for breach of software license agreements pursuant to which software was licensed to PCS. On June 14, 2020, PCS filed its operative answer to the Complaint. On June 21, 2020, PCS filed a motion to join the Company and another entity, OpenALPR Technology, Inc., as parties to the litigation and made claims against them and counter claims against OpenALPR for defamation, fraud and intentional interference with existing and future business relationships. On July 13, 2020, OpenALPR filed an opposition to the motion for joinder. On November 23, 2020, the court denied PCS’s Motion for Joinder with prejudice. On August 30, 2021, OpenALPR and PCS filed a joint stipulation of dismissal with prejudice, and the court ordered dismissal of the case with prejudice on August 31, 2021. The parties are currently awaiting the Court’s decision on joinder. Nevertheless,Company considers this matter closed.
On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company believesin the Supreme Court for the State of New York, New York County. Fordham alleges that the Company breached an underwriting agreement with Fordham. Fordham has brought claims for breach of contract, a declaratory judgment, and attorneys’ fees and expenses, and seeks damages. The Complaint was served on the Company on September 25, 2020. The Company issued a motion to dismiss counterclaims on June 23, 2021, Rekor’s opposition has been filed and Fordham’s reply will be due on August 19, 2021. The Court granted Fordham’s motion to dismiss Rekor’s counterclaims on October 21, 2021.
At this stage of the Fordham litigation, the Company is unable to render an opinion regarding the likelihood of a favorable outcome. However, the Company maintains that Fordham’s claims have no merit. To that end it intends to vigorously litigate this action.
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In June 2021, a putative shareholder class action lawsuit (captioned Miller v. Rekor Systems, Inc. et al.) was filed in in the United States District Court for the District of Maryland, naming as defendants Rekor Systems, Inc. and certain of its officers. It alleges violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 related to Rekor’s automatic license plate recognition technology and uninsured vehicle enforcement diversion related business and seeks damages on behalf of shareowners who acquired Rekor stock between April 12, 2019 and May 25, 2021. In November 2021, the plaintiff filed an order of dismissal, seeking to voluntarily dismiss without prejudice the Lawsuit that it has substantial defenses tohad filed against the claimsCompany and intend to vigorously defend the allegationsseveral of those claims.
In addition, from time to time, the Company ismay be 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, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the opinion of the Company’s managementopinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s unaudited condensed consolidated financial statements as a whole.
NOTE 1011 – STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
Effective March 18, 2020, the Company has adopted and approved an amendment to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000, $0.0001$0.0001 par value, which was effective March 18, 2020.value. The rights and privileges terms of the additional authorized shares of common stock are identical to those of the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe for any new issuances of common stock, the subsequent potential issuance of additional shares of common stock will reduce the current stockholders’ percentage ownership interest in the total outstanding shares of common stock. The Amendment and the creation of additional shares of authorized common stock will not alter current stockholders’ relative rights and limitations.As
Form S-3 Registration Statement
On September 13, 2021 the Company filed a Form S-3 Registration Statement SEC, using a “shelf” registration process. By using a shelf registration statement, the Company may sell securities from time to time and in one or more offerings up to a total dollar amount of September 30, 2020, and December 31, 2019,$350,000,000.
Waycare Acquisition
In connection with the acquisition as described in NOTE 2 – ACQUISITIONS, the Company issued and outstanding common2,784,474 shares of Rekor were 32,911,854 and
Public Offering
On March 12, 2019,February 9, 2021, the Company issued 600,000 shares of Rekor common stock as part of the consideration for the acquisition of the OpenALPR Technology Acquisition.
26 |
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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 arewere 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 arewere entitled to quarterly dividends of 7.0% per annum per share. The holders of Series A Preferred Stock have a right to convert each share into common stock at an initial conversion price and a specified conversion price which increases annually based on the passage of time beginning in November 2019. The holders of Series A Preferred Stock also have a put right after 60 months from the issuance date to redeem any or all of the Series A Preferred Stock at a redemption price of $15.00 per share plus any accrued but unpaid dividends. The Company has a call right after 36 months from the issuance date to redeem all of the Series A Preferred Stock at a redemption price which increases annually based on the passage of time which began in November 2019. The Series A Preferred Stock contains an automatic conversion feature based on a qualified initial public offering in excess of $30,000,000 or a written agreement by at least two-thirds of the holders of Series A Preferred Stock at an initial conversion price and a specified price which increases annually based on the passage of time beginning in November 2016.
Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019.
Rekor adjustsadjusted the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value iswas recorded through additional paid in capital of $220,000$0 and $191,000$220,000 for the three months ended September 30, 2021 and 2020, respectively, and 2019, respectively, $101,000 and $638,000 and $554,000 for the nine months ended September 30, 2021 and 2020, respectively.
As a result of the closing of the Public Offering in the first quarter of 2021, all of the issued and 2019, respectively.
Series B Cumulative Convertible Preferred Stock
Of the 2,000,000 authorized shares of preferred stock, 240,861 shares arewere designated as $0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the "Series“Series B Preferred Stock"Stock”). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $0.0001 par value Series B Preferred Stock. All Series B Preferred Stock was issued at a price of $10.00 per share as part of the acquisition of the TeamGlobal Merger.TeamGlobal. The Series B Preferred Stock hashad a conversion price of $5.00 per share. Each Series B Preferred Stock hashad an automatic conversion feature based on the share price of Rekor.
As a result of the volume weighted average share price of the Company’s common stock being over $7.50 for thirty consecutive days, in the first quarter of 2021, all of the Company’s issued and outstanding Series B Preferred Stock is entitled to quarterly cash dividends of 1.121% (4.484% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. The Company paid $108,000 in cash dividendswas converted pursuant to the Series B Preferred shareholders in June 2019, The Company did not pay any cash dividends to the Series B Preferred shareholders for the nine months ended September 30, 2020. Accrued dividends payable to Series B Preferred Stock shareholders were $138,000 and $54,000 as of September 30, 2020 and December 31, 2019, respectively, and are presented as partoriginal terms of the accounts payable and accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
Warrants
A summary of the acquisition of Firestorm on January 24, 2017,warrant activity for the Company issued: warrants to purchase 315,627 shares of its common stock, exercisable over afor the period of five years, at an exercise price of $2.5744 per share; and warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $3.6083 per share (the “Firestorm Warrants”). The expiration date of the Firestorm Warrants is January 24, 2022. As of September 30, 2020 and December 31, 2019, there were 631,254 Firestorm Warrants outstanding.
|
| Series A Preferred Stock Warrants (1) |
|
| Firestorm Warrants (2) |
|
| Secure Education Warrants (3) |
|
| 2018 Public Offering Warrants (4) |
|
| 2019 Promissory Note Warrants (5) |
|
| Total |
| ||||||
Active warrants January 1, 2021 |
|
| 141,789 |
|
|
| 631,254 |
|
|
| 66,666 |
|
|
| 4,886 |
|
|
| 68,750 |
|
|
| 913,345 |
|
Exercised warrants |
|
| (97,805 | ) |
|
| - |
|
|
| (51,110 | ) |
|
| (1,381 | ) |
|
| (68,750 | ) |
|
| (219,046 | ) |
Outstanding warrants September 30, 2021 |
|
| 43,984 |
|
|
| 631,254 |
|
|
| 15,556 |
|
|
| 3,505 |
|
|
| - |
|
|
| 694,299 |
|
Weighted average strike price of outstanding warrants |
| $ | 1.03 |
|
| $ | 3.09 |
|
| $ | 6.06 |
|
| $ | 1.00 |
|
| $ | 0 |
|
| $ | 3.02 |
|
Shares of common stock issued during the three months ended September 30, 2021 |
|
| 97,805 |
|
|
| - |
|
|
| 51,110 |
|
|
| 1,280 |
|
|
| 64,766 |
|
|
| 214,961 |
|
27 |
Table of Contents |
(1) | As part of a Regulation A Offering in fiscal year 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the “Series A Preferred Stock Warrants”). The exercise price for these warrants is $1.03. The expiration date of the Series A Preferred Stock Warrants is November 8, 2023. |
(2) | As part of the acquisition of Firestorm on January 24, 2017, the Company issued warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $2.5744per 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. The Company has rejected requests from the holders of the Firestorm Warrants to exercise them pending resolution of pending litigation (see NOTE - 10 COMMITMENTS AND CONTINGENCIES). |
(3) | Pursuant to the Company’s acquisition of Secure Education Consultants on January 1, 2018, the Company issued warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $5.44 per share, and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $6.53 per share (the “Secure Education Warrants”). The expiration date of the Secure Education Warrants is January 1, 2023. |
(4) | On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock (the “2018 Public Offering Warrants”), exercisable over a period of five years, at an exercise price of $1.00 per share. These warrants were exercisable commencing April 27, 2019 and expire on October 29, 2023. |
(5) | On March 12, 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock (the “2019 Promissory Note Warrants”), which were immediately exercisable at an exercise price of $0.74 per share, to certain individuals and entities. Of the 2,500,000 warrants, 625,000 were issued as partial consideration for the OpenALPR Technology Acquisition. |
NOTE 12 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock, which were immediately exercisable at an exercise price of $0.74 per share, to certain individuals and entities. Of the 2,500,000 warrants, 625,000 were issued as partial consideration for the OpenALPR Technology Acquisition. During the year ended December 31, 2019, 963,125 warrants were exercised in cash and cashless transactions resulting in the issuance of 783,387 shares of common stock. During the nine months ended September 30, 2020, 1,415,000 warrants were exercised in cash and cashless transactions resulting in the issuance of 1,387,036 shares of common stock. As of September 30, 2020 and December 31, 2019, 134,375 and 1,536,875 warrants related to the 2019 Promissory Notes remain outstanding, respectively.
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.
Stock compensation expense related to stock options for the three months ended September 30, 2021 and 2020 was $30,000 and $63,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $90,000 and $208,000, respectively, and is administered by the Administrator, which is currently the Boardpresented as part of Directors of the Company. The Administrator has the exclusive authority, subject to the termsgeneral and conditions set forthadministrative expenses in the 2017 Plan, to determine all matters relating to awards under the 2017 Plan, including the selectionaccompanying unaudited condensed consolidated statements 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.
A summary of stock option activity under the Company’s 2017 Plan for the nine monthsperiod ended September 30, 20202021 is as follows:
Number of Shares Subject to Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding Balance at December 31, 2019 | 1,655,383 | $1.68 | 8.33 | $3,224 |
Granted | 20,000 | 4.32 | 9.41 | |
Exercised | (281,225) | 2.28 | ||
Forfeited | (62,175) | 3.07 | ||
Canceled | (44,062) | 2.15 | ||
Outstanding Balance at September 30, 2020 | 1,287,921 | $1.50 | 7.84 | $5,193 |
Exercisable at September 30, 2020 | 799,550 | $1.48 | 7.46 | $3,324 |
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Table of Contents |
|
| Number of Shares Subject to Option |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term (Years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding Balance at December 31, 2020 |
|
| 1,291,753 |
|
| $ | 1.44 |
|
|
| 7.57 |
|
| $ | 7,827 |
|
Exercised |
|
| (195,782 | ) |
|
| 2.24 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (13,000 | ) |
|
| 0.90 |
|
|
|
|
|
|
|
|
|
Outstanding Balance at September 30, 2021 |
|
| 1,082,971 |
|
|
| 1.40 |
|
|
| 6.52 |
|
| $ | 10,313 |
|
Exercisable at September 30, 2021 |
|
| 887,806 |
|
| $ | 1.48 |
|
|
| 6.30 |
|
| $ | 8,472 |
|
As of September 30, 2020,2021, there was $282,000$82,000 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over ana weighted average remaining period of 1.71
Restricted Stock Units
Stock compensation expense related to RSU’s for the three months ended September 30, 2021 and 2020 was $664,000 and $139,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $2,510,000 and $331,000, respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
Pursuant to the terms of the Waycare purchase agreement, the Company reserved for issuance to Waycare’s continuing employees an aggregate of 686,248 restricted stock units, which were issued on October 28, 2021 pursuant to the terms of the Company’s 2017 Equity Award Plan, as amended. The restricted stock units are subject to customary vesting schedules and are intended to incentivize the continued performance of Waycare’s employees.
A summary of RSU activity under the Company’s 2017 Plan for the nine months ended September 30, 20202021 is as follows:
Number of Shares | Weighted Average Unit Price | Weighted Average Remaining Contractual Term (Years) | |
Outstanding Balance at December 31, 2019 | - | $- | - |
Granted | 413,634 | 4.12 | 1.79 |
Vested | - | - | - |
Forfeited | (3,900) | 3.81 | - |
Outstanding Balance at September 30, 2020 | 409,734 | $4.12 | 1.79 |
|
| Number of Shares |
|
| Weighted Average Unit Price |
|
| Weighted Average Remaining Contractual Term (Years) |
| |||
Outstanding Balance at December 31, 2020 |
|
| 479,984 |
|
| $ | 4.45 |
|
|
| 2.12 |
|
Granted |
|
| 482,040 |
|
|
| 12.36 |
|
|
| 1.86 |
|
Vested |
|
| (215,430 | ) |
|
| 7.43 |
|
|
|
|
|
Forfeited |
|
| (93,940 | ) |
|
| 5.74 |
|
|
|
|
|
Outstanding Balance at September 30, 2021 |
|
| 652,654 |
|
| $ | 9.12 |
|
|
| 1.92 |
|
The grant date fair value wasis based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition.
As of September 30, 2020,2021, there was $1,352,000$4,552,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.79
NOTE 1213 – LOSS PER SHARE
The following table provides information relating to the calculation of loss per common share:
Three Months ended September 30, | Nine Months ended September 30, | |||
2020 | 2019 | 2020 | 2019 | |
(Dollars in thousands, except per share data) | (Dollars in thousands, except per share data) | |||
Basic and diluted loss per share | ||||
Net loss from continuing operations | $(6,667) | $(3,528) | $(10,860) | $(9,036) |
Less: preferred stock accretion | (220) | (191) | (638) | (554) |
Less: preferred stock dividends | (115) | (114) | (345) | (344) |
Net loss attributable to shareholders from continuing operations | (7,002) | (3,833) | (11,843) | (9,934) |
Net loss from discontinued operations | (2) | (100) | (215) | (2,392) |
Net loss attributable to shareholders | $(7,004) | $(3,933) | $(12,058) | $(12,326) |
Weighted average common shares outstanding - basic and diluted | 26,907,069 | 19,878,518 | 22,781,807 | 19,592,679 |
Basic and diluted loss per share from continuing operations | $(0.26) | $(0.19) | $(0.52) | $(0.51) |
Basic and diluted loss per share from discontinued operations | - | (0.01) | (0.01) | (0.12) |
Basic and diluted loss per share | $(0.26) | $(0.20) | $(0.53) | $(0.63) |
Common stock equivalents excluded due to anti-dilutive effect | 4,134,979 | 5,400,047 | 4,134,979 | 5,400,047 |
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|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Dollars in thousands, except per share data) |
|
| (Dollars in thousands, except per share data) |
| ||||||||||
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss from continuing operations |
| $ | (9,613 | ) |
| $ | (6,667 | ) |
| $ | (19,777 | ) |
| $ | (10,860 | ) |
Less: preferred stock accretion |
|
| 0 |
|
|
| (220 | ) |
|
| (101 | ) |
|
| (638 | ) |
Less: preferred stock dividends |
|
| 0 |
|
|
| (115 | ) |
|
| (51 | ) |
|
| (345 | ) |
Net loss attributable to shareholders from continuing operations |
| $ | (9,613 | ) |
| $ | (7,002 | ) |
| $ | (19,929 | ) |
| $ | (11,843 | ) |
Net loss from discontinued operations |
|
| 0 |
|
|
| (2 | ) |
|
| (4 | ) |
|
| (215 | ) |
Net loss attributable to shareholders |
| $ | (9,613 | ) |
| $ | (7,004 | ) |
| $ | (19,933 | ) |
| $ | (12,058 | ) |
Weighted average common shares outstanding - basic and diluted |
|
| 41,938,863 |
|
|
| 26,907,069 |
|
|
| 38,357,167 |
|
|
| 22,781,807 |
|
Basic and diluted loss per share from continuing operations |
| $ | (0.23 | ) |
| $ | (0.26 | ) |
| $ | (0.52 | ) |
| $ | (0.52 | ) |
Basic and diluted loss per share from discontinued operations |
|
| 0.00 |
|
|
| (0.00 | ) |
|
| (0.00 | ) |
|
| (0.01 | ) |
Basic and diluted loss per share |
| $ | (0.23 | ) |
| $ | (0.26 | ) |
| $ | (0.52 | ) |
| $ | (0.53 | ) |
Common stock equivalents excluded due to anti-dilutive effect |
|
| 2,429,924 |
|
|
| 4,134,979 |
|
|
| 2,429,924 |
|
|
| 4,134,979 |
|
As the Company had a net loss for the three and nine months ended September 30, 2021, the following 2,429,924 potentially dilutive securities were excluded from diluted loss per share: 694,299 for outstanding warrants, 1,082,971 related to outstanding options and 652,654 related to outstanding RSUs.
As the Company had a net loss for the three and nine months ended September 30, 2020, the following 4,134,979 potentially dilutive securities were excluded from diluted loss per share: 1,004,155 for outstanding warrants, 923,844 related to the Series A Preferred Stock, 509,325 related to the Series B Preferred Stock, 1,287,921 related to outstanding options and 409,734 related to outstanding RSUs.
NOTE 14 – SUBSEQUENT EVENTS
Forgiveness of PPP Loans
In October 2021, the Company hadwas informed the Loans, as described in NOTE 8 – DEBT, forgiveness was processed by the Small Business Administration (“SBA”) and the Company’s Loans have been fully forgiven. These Loans are now considered paid in full by SBA.
S-8 Amendment to the 2017 Plan
The Company previously filed a net lossRegistration Statement on Form S-8 (File No. 333-220864) with the SEC in connection with the registration of an aggregate of 3,000,000 shares of the Company’s common stock, to be issued under the 2017 Plan. Pursuant to General Instruction E of Form S-8, the Company filed a registration statement on Form S-8 solely to register an additional 4,368,733 shares of its common stock available for issuance under the three2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and nine months endedby the Company’s stockholders on September 30, 2019,14, 2021 at the following
Form S-3 Registration Statement Resale Shares
On October 29, 2021 the Company filed a prospectus related to the Series A Preferred Stock, 481,722 relatedresale from time to time of up to 2,186,931 shares (the “Resale Shares”) of our common stock, by the selling stockholders in connection with the acquisition.
The Company issued the Resale Shares to the Series B Preferred Stock and 1,707,156 related to outstanding options.
30 |
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 20192020 and our Quarterly Report’sReports for the quartersquarter’s ended March 31, 20202021 and June 30, 2020,2021, entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the "SEC"“SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
Specific factors that might cause actual results to differ from our expectations include, but are not limited to:
● | significant risks, uncertainties and other considerations discussed in this report; |
● | operating risks, including supply chain, equipment or system failures, cyber and other malicious attacks and other events that could affect the amounts and timing of revenues and expenses; | ||
● | reputational risks affecting customer confidence or willingness to do business with us; |
● | financial market conditions and the results of financing efforts; |
● | our ability to successfully identify, integrate and complete acquisitions and dispositions, including the integration of the Waycare Acquisition; |
● | our ability to access the public markets for debt or equity capital; |
● | political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives associated with our products; |
● | current and future litigation; |
● | competition from other companies with an established position in the markets we have recently entered or are seeking to enter or from other companies who are seeking to enter markets we already serve; |
● | our failure to successfully develop products using our technology that are accepted by the markets we serve or intend to serve or the development of new technologies that change the nature of our business or provide our customers with products or services superior to or less expensive than ours; |
● | the inability of our strategic plans and goals to expand our geographic markets, customer base and product and service offerings; |
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● | risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020 which has caused significant volatility in U.S. and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies; and |
● | risks associated with cyberattacks on international, national, local and Company information infrastructure by rogue businesses or criminal elements or by agents of governments engaged in asymmetric disruptions for competitive, economic, or military reasons. |
Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Other than as required by law, we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 20192020 (the “2019“2020 Annual Report”), our Quarterly Report’sReports for the quarters ended March 31, 20202021 and June 30, 2020,2021 and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.
General
Overview
Rekor Systems, Inc. develops innovative products and services for the intelligent infrastructure market and is working to drive the world to be safer, smarter, and more efficient. As a leader inprovider of comprehensive, continuous and real-time roadway intelligence, Rekor delivers integrated solutions, actionable insights and predictions that increase roadway safety, increase efficiency and better protect the fieldenvironment. With a global footprint across 65 countries, we provide actionable and real-time insights to commercial clients, as well as government entities.
Our vision is to provide innovations that improve the lives, safety and well-being of artificial intelligence ("AI") enabled vehicle identificationpeople using AI and intelligent roadway management systems. In development for over six years using machine learning algorithms, our core software enables the creation of more powerfulother advanced technologies. Our capabilities appeal to businesses and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional legacy systems. The software provides a wider field of view, greater light sensitivity and recognitions at faster speeds and with higher accuracy rates. It also includes the ability to identify the color, make and type of a vehicle and its direction of travel. These capabilities are particularly useful to governmental entities and businesses in solving a wide variety of real-world vehicle relatedmobility and infrastructure-related operational challenges. In addition,Using the reduction in cost, increased number and improved performance of internet protocol connected cameras has enabled significant new uses for vehicle recognitionlatest technology that were not previously available or cost effective. We currently providegathers and collates comprehensive data and transforms this data into actionable insights, the Company delivers useable solutions that empower smart cities and intelligent roadways. Our suite of solutions is seamless, easy to use, and can tie directly into customer workflows, providing value directly to users in their daily operations. Our products and services for governmental organizations, for largecontribute to building environmentally friendly cities and small businessesroadways that leverage our insights to operate more efficiently and for individuals throughout the world.sustainably. Customers currentlycan operate our technology on existing systems or use our products or services in over 70 countries, in applications that include public safety, security, customer experience, transportation, parking, operational efficienciesadvanced sensors and logistics.
Rekor aggregates data using mobile and mounted optical sensors with on-device (“edge”) processing, as well as through the acquisition of several new public safety products, we determined to acquire substantially all the assets of OpenALPR Technology, Inc. This acquisition (the “OpenALPR Technology Acquisition”), completed in March 2019, transferred vehicle recognition softwaredata feeds from third party vendors such as connected vehicles, weather, construction, and associated licenses and proprietary rights to OpenALPR Software Solutions, LLC (“OpenALPR”), a new wholly owned subsidiary of Rekor Recognition. OpenALPR’s vehicle recognition platform, already operating on more than 6,200 cameras that cover over 8,600 lanes of roadway in 56 countries worldwide, has laid the groundwork for expansion, enabling multiple deployment mechanisms for our products and services.
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Rekor One™ is our single source platform for intelligent infrastructure. Rekor One provides government agencies with real-time roadway intelligence using cutting edge artificial intelligence and machine learning technology that can be significantly enhanced using our proprietary advanced sensors. The result is a powerful analytics platform that delivers a comprehensive picture of vehicles, traffic, incidents and more within a particular jurisdiction. Rekor One’s actionable insights improve operations, auto washenable better informed decision making, and service, and quick service restaurants and retail. We shifted from a perpetual licensing model to a subscription-based model, rebranded OpenALPR to highlight software products such as “Watchman” and “CarCheck” and released several packagedallow for more strategic allocation of resources. The solution is hardware and software solutions with preloaded versions of each of these vehicle recognition engines. We have also launched a robust eCommerce portal on the OpenALPR.com site, enabling customersagnostic, allowing for seamless integration without interrupting existing systems in place. Our platform was built to conveniently purchase Watchman and CarCheck vehicle recognition solutions with just a credit card and a click. This allows owners to immediately enhance their business operations while reducing the cost of service for Rekor. Additional services will be added in the future. By the end of 2020, we expect to have a portfolio of (16 products), including 9 unique products, each with several sub-lines. Completion of this complete set of product offerings allowsallow us to offer full-scale software and hardware vehicle recognition solutions and services for public agencies and commercial or industrial businesses of nearly any size, as well as serve campus and residential settings.
· | Traffic and Congestion Forecasting | |
· | Cross-Agency Incident Management | |
· | Electric Vehicle Monitoring | |
· | Commercial Vehicle and Tonnage Monitoring | |
· | Environmental Impact | |
· | On-Demand Traffic View | |
· | Contactless Compliance | |
· | License Plate Recognition & Vehicle Recognition for Public Safety |
Ultimately, we seek to the development of our vehicle identification software, highly accurate results were not available using a typical Internet Protocol camera. We believe that Rekor’s ability to generate results with less expensive hardware is changing the dynamics of the existing public safety market, enabling the creation of increasingly robust networks with cameras at more locations. In addition, we expect our improvements in cost and accuracy to create competitive advantages in tolling systems and logistics operations that currently rely on complex radio frequency identification (RFID) systems. We also expect our lower costs, superior distance and field of view capabilities, along with the ability to capture additional vehicle information, such as direction, color, make and type of vehicle, to open opportunities in other market segments. These opportunities include parking operations, school safety and retail customer loyalty programs and, particularly, smart cities and smart roadways. Smart roadway systems, sometimes referred to as smart transport or intelligent transport systems (“ITS”), inclusive of parking management and guidance, passenger information and traffic management systems, can optimize the movement of vehicles to make travel safer and more efficient. These technologies are expected to enable users to be more coordinated, better informed, and make smarter use of transport networks.
Our vehicle recognition solution has the capability to analyze multi-spectral images and video streams using AI trained algorithms and concurrently extract license plate data by state or province from approximately 80 countries, together with the vehicle’s make, model, color, body type, and direction of travel. When combined with speed-optimized code, parallel processing capability and best-in-class hardware accessories, such as optical sensors and communications modules, the solution captures license plate data and vehicle characteristics at extremely high vehicle speeds with a high degree of accuracy. It is also able to effectively operate in unusually difficult conditions, such as low lighting, poor weather, extreme camera viewing angles, and obstructions.
Our incident management solution also uses artificial intelligence and machine learning to detect anomalies in regular traffic patterns. A jurisdiction will be broken down into sections of roadway that are then analyzed methodically by our platform. Historical incident information will be fed into the system from multiple sources. This data contains clues that the algorithm can use to identify when a roadway is most likely to exhibit high crash risk, is displaying irregular patterns of traffic, or there might be an incident on the road. Based on current variables at play and the knowledge the system has gained, our platform displays these insights on the live map for agencies to assess and respond to proactively. Each insight and its outcomes are used in the machine learning algorithms to improve the accuracy of our modeling.
It is with this advanced technology and breadth of use-cases across multiple industries that we seek to address issues of aging infrastructure, increasing traffic congestion, and depletion of natural resources, by providing customers with the ability to collect, analyze and communicate actionable roadway and community intelligence in an accurate, real-time, and cost-effective manner. We provide actionable and differentiated answers on a single platform that is built to serve multiple missions.
Our operations are conducted by our wholly owned subsidiary, Rekor Recognition Systems, Inc. (“Rekor Recognition”) and Waycare. In October 2020, we announced the launch of Rekor One™, an advanced platform that serves as a unifying source of roadway intelligence for multiple government agencies across cities, counties, and states. Rekor One™ next generation operating system purpose built for the intelligent infrastructure industry. Using patented AI and Machine learning, our operating system joins many disparate data points and transforms them into purpose-built solutions that provide a more complete picture of the roadway. This technology disrupts the 100-year-old intelligent transportation systems (“ITS”) legacy systems that exist today and brings real-time solutions to customers, all unified under a single platform that helps municipalities and businesses make the world safer, smarter, and more efficient.
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Recent Developments
The most significant developments in our company and business since January 1, 20202021 are described below:
· | On October 22, 2021, we announced that our Waycare subsidiary was honored with a Nevada Traffic Safety Project of the Year Award for its part in Nevada’s “Road to Zero” program. The Nevada Highway Patrol (NHP) and the Regional Transportation Commission of Southern Nevada (RTC) were joint recipients of the award. The accolade, which was announced October 18 at the 2021 Nevada Traffic Safety Summit in Las Vegas, recognizes individuals and organizations that have made an outstanding effort to eliminate serious injury and fatal crashes on Nevada roadways. | |
· | On October 19, 2021, we announced that the City of Chattanooga, Tennessee (or the “City”) has selected our Rekor One™ platform to provide traffic analytics in support of its Smart Corridor+ infrastructure initiative. With a total area of 144.6 square miles and a population of 181,099, the City will be using Rekor One as part of a pilot program to capture and analyze traffic data to help the City discover new approaches for battling traffic congestion, improve forecasting, estimate emissions from real-time data, and increase public safety. | |
· | On October 11, 2021, we announced that our wholly owned subsidiary, Waycare Technologies (“Waycare”) was selected for a strategic research initiative by Volvo Cars to ascertain how artificial intelligence can be used to enable predictive awareness in a smart city context. This marks the first deployment in Europe for the company’s crash prediction technology. The six-month pilot test, beginning in October 2021, involves the Waycare technology being used for AI-based crash prediction in Volvo Cars’ hometown of Gothenburg, Sweden. Volvo Cars is leading the research project for Drive Sweden’s AI Aware program, which investigates and tests central traffic control that supports connected and automated vehicles. The test will be performed in conjunction with the Swedish Transport Administration (“STA”) and the Gothenburg Traffic Management Center (“TMC”). | |
· | On October 5, 2021, we announced that we have partnered with the world’s leading Weather Intelligence Platform, Tomorrow.io. The partnership will enable data integration to provide transportation agencies increased visibility into weather-related challenges impacting traffic conditions. Government agencies and other field users will benefit from predictive insights to identify high risk zones and routes and enable proactive operational decisions to increase road safety prior to weather impact. | |
· | On October 4, 2021, we announced that three Mid-Atlantic customers will deploy Rekor solutions to improve public safety in their respective municipalities. With each of these customers, Rekor’s technology met or exceeded rigorous performance requirements necessary to support public safety missions including being a turnkey, cloud-based solution that is not dependent on proprietary infrastructure. | |
· | On September 30, 2021, we announced that our wholly owned subsidiary Waycare has collaborated with the Toyota Mobility Foundation (“TMF”) to reduce traffic congestion and incidents in Bangkok, Thailand. The deployment, which is expected to run for a year, targets Thailand’s oldest and busiest road—Rama IV Road in Bangkok. | |
· | On September 21, 2021, we announced that our wholly owned subsidiary Waycare launched a Road Safety Pilot with the Utah Department of Transportation (“UDOT”) and Utah Department of Public Safety (“DPS”). The pilot, which launched in July 2021, will focus on major corridors in the Salt Lake City region along Interstates 15, 215, and 80, as well as Utah State Route 201. The agencies will leverage the Company's solutions to enable quicker, more efficient incident management and mitigation strategies, in addition to improving its collaboration and reporting capabilities. | |
· | On September 9, 2021, we announced that our wholly owned subsidiary Waycare has been selected by the Louisiana Department of Transportation and Development (“LaDOTD”) for a pilot program to help reduce congestion and collisions in the Baton Rouge area and promote speed harmonization for a safer driving experience. The initial deployment, which kicked off July 15, 2021, focuses on some of the region’s most dangerous sections of highway: Interstate 10 (“I-10”) and Interstate 12 (“I-12”). |
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● | On August 19, 2021, we announced the successful closing of the acquisition of Waycare Technologies Ltd. a privately held company focused on optimizing traffic management systems using predictive analytics. Pursuant to the purchase agreement the Company provided $61,000,000 in total consideration consisting of a combination of cash and common stock and acquired 100% of the issued and outstanding capital stock of Waycare from its stockholders. | |||||
● | In July 2021, we announced the selection of or Rekor One™ vehicle recognition system by the City of Albany, New York, in partnership with the Albany Police Department. Rekor was selected after a competitive bid process in June 2021 to help maintain the safety and security of the community and its citizens. |
● | In July 2021, we announced that Wisconsin’s Waukesha County has selected the Rekor One™ vehicle recognition system for implementation at eight of its public park entrances. The solution was selected after a competitive bid process in early 2021, to help maintain the security of each location and to ensure entrance fee compliance. | |
● | On February 26, 2021, we announced that the State of North Dakota Parks and Recreation Department selected our Rekor One™ solution to help state park leadership understand use patterns and plan for future needs. |
● | In February 2021, we completed an underwritten public offering of 6,126,939 shares of common stock of the Company at a price to the public of $12.25 per share. We received aggregate gross proceeds of approximately $75.1 million from the offering, prior to deducting underwriting discounts and commissions and offering expenses payable by us. We intend to use these proceeds to increase our product development, sales and marketing efforts and to consider strategic partnerships and acquisitions in our target markets. As a result of the offering, all of our Series A Cumulative Convertible Redeemable Preferred Stock automatically converted into 899,174 shares of our common stock. In addition, on February 9, 2021, we issued 517,611 shares of our common stock, due to the automatic conversion of 240,861 shares of Series B Preferred Stock, as a result of the volume weighted share price of our common stock exceeding certain thresholds. These automatic conversions resulted in the retirement of all of our outstanding preferred shares. |
● | On January 7, 2021, we announced that the State of Oklahoma had integrated our Rekor One™ platform across relevant state systems to provide vehicle information associated with uninsured motorists as part of the state’s Uninsured Vehicle Enforcement Diversion (“UVED”) Program, which is operated by the Oklahoma District Attorneys Council. Oklahoma’s UVED Program uses our vehicle recognition technology to leverage existing state resources to ensure that all drivers have at least the minimum required amount of liability insurance, ultimately leading to safer roadways. The platform allows for real-time detection of non-compliant vehicles and instant data consolidation into a regularly updating insurance system connected to the state’s enforcement and intervention programs. We assist Oklahoma drivers by providing a one-stop web portal for uninsured motorists to easily find non-standard and standard insurance for their vehicles. With the successful implementation of Oklahoma’s UVED Program, we have now established a leading position in the implementation of an innovative program under active consideration by a number of other states. |
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Opportunities, Trends and Uncertainties
We look to identify the various trends, factors and uncertainties, including market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial conditions, includingcondition from time to time. Although there are many that are unforeseeable. However,we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by trends, factors and uncertainties discussed in our 2019 Annual Report under “Part II - Item 7 – Management’s Discussion and Analysisthe following:
● | Growing Smart City Market – According to a United Nation’s report, about two-thirds of the world population will live in urban areas by 2050. Our cities are getting larger, our commute longer, roads bigger and the impact on the environment and the quality of life is worse than ever been. This trend requires forward-thinking officials to manage assets and resources more efficiently than they have in the past. We believe that advancements in “big data”, connected devices and artificial intelligence will allow for ITS solutions and applications that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life. We believe our data-driven, artificial intelligence aided solutions provide the necessary tools to more effectively tackle the challenges cities and communities are facing today and over the coming decades. | |
● | AI for Infrastructure – We believe that the application of AI to the analysis of infrastructure, including roadways and roadway conditions will significantly affect vehicular travel in the future. As vehicles move towards full automation, there is a need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g. wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway. Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating vehicular flow as well as data around the vehicles on the roadway. | |
● | Connected Vehicle Data – Today’s vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is an untapped resource for cities and transportation agencies alike. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and cities gain more visibility on their roads, supplementing the existing city infrastructure and providing untapped transportation information in more rural areas, that are not currently available from the current ITS infrastructure. Our utilization and greater use of cellular-enabled connected vehicle data can be another step towards vehicle safety as the Federal Communications Commissions and the U.S. Department of Transportation sort out the next iteration in connectivity. |
● | New and Expanded Uses for Vehicle Recognition Systems – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We currently serve a number of users who could not afford the cost or adapt to, the restrictions of conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions and municipalities that are testing automated license plate recognition (“ALPR”) systems or that issued requests for proposals to install a network of ALPR cameras. We also expect the availability of faster, higher accuracy, lower cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs. | |
● | Adaptability of the Current ALPR Market – We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. Based on published benchmarks, our software currently outperforms competitors in almost every metric. However, large users of existing ALPR technology, such as toll roads, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop or secure their advanced vehicle recognition systems. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources. |
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● | Expansion of Automated Enforcement of Motor Vehicle Laws – We believe that future legislation will allow for automated enforcement of motor vehicle regulations, including insurance requirements, to be expanded as the types of violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where automated enforcement is beneficial. In addition, due to high rates of fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states are considering authorizing automated enforcement of violations where motorists fail to slow down and/or move over for emergency responders and law enforcement vehicles at the side of the road. Legislative implementation is a deliberative and necessarily time-consuming process. However, as states expand auto enforcement, the market for our products and services should increase and broaden in the public safety market. | |
● | Graphic Processing Unit (“GPU”) Improvements – We expect our business to benefit from more powerful and affordable GPU hardware that has recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams. GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognition. The GPU market is predicted to grow as a result of a surge in the adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors. As GPU manufacturers increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services. |
● | Edge Processing – Demand for actionable roadway information continues to grow in parallel with camera resolutions. Over the last several decades, cameras have evolved from 25K pixels to 8.3 million pixels and beyond, with each advancement unlocking new capabilities thereby fueling growth. Further, cellular networks are optimized for downloading data not for uploading data, and while speeds have improved over time, what amounts to large infrastructure changes has resulted in relatively small improvements to cellular upload speeds. With road-side deployments experiencing explosive growth in count and density, scalability has become an obstacle for competition in the market. All of these factors mean that scalability, latency and bandwidth concerns require edge processing which are enabled by the continued growth of the increasingly effective graphic processing units and continual improvements in the efficiency of our AI algorithms. Edge processing ingests local high definition (“HD”) video streams and converts the raw video data to text data, thus reducing the volume of data that needs to be transferred. Edge processing allows massive scale without the bandwidth, cost, latency and dependability limitations that would be experienced with streaming to the cloud solution. | |
● | Accelerated Business Development and Marketing – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a leadership position. As a result, we have accelerated our business development marketing and eCommerce activities to increase awareness and market adoption of our new technology and products within the market. We anticipate that an increased presence in the market, the continued development of strategic partnerships and other economies of scale will significantly reduce the level of costs necessary to support sales of our products and services. However, the speed at which these markets grow to the degree to which our products and services are adopted is uncertain. |
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● | COVID 19- The spread of a novel strain of COVID-19 around the world since the first quarter of 2020 has caused significant volatility in U.S. and international markets. Despite the roll-out of vaccinations, there continues to be significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, we are unable to determine the full impact to our operations. However, we have also seen a positive impact of COVID-19 on the technology sector, in which we are competing. The pandemic has accelerated adoption of technology across businesses by several years. According to a McKinsey Global Survey of executives, their companies have accelerated the digitization of their customer and supply-chain interactions and of their internal operations by three to four years. Funding for digital initiatives has increased, creating opportunities for innovate solution providers such as Rekor. |
● | Pressure on Government Budgets– COVID-19 has caused significant strain on government budgets. With less money to spend and more need for resources, government agencies need affordable, effective, and scalable solutions for revenue recovery and discovery. With subscription pricing and an intelligent infrastructure platform that accomplishes multiple agency missions, we are uniquely positioned to provide agencies force-multiplying tools when money and human resources are limited. Agencies can be better positioned to improve public safety, manage resources more effectively, and make an impact on their citizens quality of life with limited capital expenditure. In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of noncompliant vehicles on their roadways. | |
● | American Jobs Plan (“AJP”) - Through the AJP, President Biden is calling on Congress to make a national investment in the transit systems in the United States. The current legislative text provides approximately $1 trillion in total spending, with approximately $550 billion in new spending over the five year period between 2022 and 2026. This includes more than $50 billion annually during this period on surface transportation. It also includes $250 million in funding, for each year 2022-2026, for transportation infrastructure finance and innovation; $50 million in funding, for each year 2022-2026, for congestion relief; more than $2 billion over the five year period for charging and fueling infrastructure; $147 million in funding, for each year 2022-2026, for highway research and development; $110 million in funding, for each year 2022-2026, for technology innovation and deployment; and $110 million in funding, for each year 2022-2026, for intelligent transportation systems. The Senate has passed this legislation and it is now awaiting action in the House. We believe that our offerings with Rekor One, and its ability to provide a comprehensive offering of solutions position the Company well to emerge as a technology leader in this proposed transformation and development of this nascent and rapidly expanding market of intelligent infrastructure. |
Components of Financial Condition andOperating Results of Operations”, in addition to the information set forth in this Quarterly Report on Form 10-Q. The opportunities, trends, and uncertainties that we are most focused on at the current time are:
Revenues
We believe that the application of AI to the analysis of roadway condition will significantly affect vehicular travel in the future by assisting in the intelligent optimization of traffic flows and the identification of anomalous and unsafe movements – e.g. wrong way, stopped vehicle, pedestrian on the roadway. Marketers and drive-thru retailers with loyalty programs can benefit from the rapid identification of existing and potential customers and streamlining vehicular flow.
Costs of Revenues
Direct costs of revenues consist primarily of thatthe portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with revenue generating activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and other expenses that are incurred in connection with our revenue generating activities. Direct costs of revenues exclude thatthe portion of technical and non-technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts. Such costs are included in operating expenses. We expense direct costs of revenues when incurred.
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Operating Expenses
Our operating expenses consist of general and administrative expenses, sales and marketing, and research and development.development and depreciation and amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expense.expenses. Operating expenses also include depreciation, amortization and impairment of assets.
General and Administrative
General and administrative expense consistsconsist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include travel and entertainment,office leases, professional fees and insurance.
We expect our general and administrative expenseexpenses to continue to increase in absolute dollars for the foreseeable future due to additional costs associated with accounting, compliance, insurance and investor relations as a public company. However, we expect our general and administrative expense to decrease as a percentage of our revenue over the long term, although our general and administrative expenseexpenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Sales and Marketing
Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base. With the release of our Partners Program we expect our sales and marketing expense to increase in the future.
Research and Development
Research and development expenses consists of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services.
We expect our research and development expenseexpenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our AI software.solutions. However, we expect our research and development expenseexpenses to decrease as a percentage of our revenue over the long term, although our research and development expense may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Depreciation and Amortization
Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of right-of-use assets, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.
Other Income (Expense)
Other income (expense) net consists primarily of interest expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains andon the sale of subsidiaries, gains or losses on the sale of fixed assets, and interest income earned on cash and cash equivalents, short-term investments and short-term investments.
Income Tax Provision
Income tax provision consists primarily of income taxes in certain domestic jurisdictions in which we conduct business. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.
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Critical Accounting Estimates and Assumptions
A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2019.
New Accounting Pronouncement
See Note 1 to our unaudited condensed consolidated financial statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.
Results of Operations
Our historical operating results in dollars and as a percentage of total revenues are presented below. The results below and the analysis of operation is solely related to continuing operations and dodoes not includeconsider the results of operations from TeamGlobal, AOC Key Solutions and Firestorm.
Three Months ended September 30, | Nine Months ended September 30, | |||
2020 | 2019 | 2020 | 2019 | |
Revenue | $2,126 | $1,536 | $6,399 | $3,962 |
Cost of revenue | 984 | 390 | 2,753 | 1,152 |
Gross profit | 1,142 | 1,146 | 3,646 | 2,810 |
Operating expenses: | ||||
General and administrative expenses | 3,168 | 2,600 | 8,896 | 6,259 |
Selling and marketing expenses | 560 | 587 | 1,356 | 1,081 |
Research and development expenses | 781 | 450 | 2,143 | 757 |
Operating expenses | 4,509 | 3,637 | 12,395 | 8,097 |
Loss from operations | (3,367) | (2,491) | (8,749) | (5,287) |
Other income (expense): | ||||
Loss on extinguishment of debt | (3,081) | - | (3,281) | (1,113) |
Interest expense | (218) | (1,182) | (2,468) | (2,724) |
Other income | 6 | 157 | 27 | 123 |
Gain on sale of business | - | - | 3,631 | - |
Total other expense | (3,293) | (1,025) | (2,091) | (3,714) |
Loss before income taxes | (6,660) | (3,516) | (10,840) | (9,001) |
Income tax provision | (7) | (12) | (20) | (35) |
Net loss from continuing operations | $(6,667) | $(3,528) | $(10,860) | $(9,036) |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
|
Cost of revenue, excluding depreciation and amortization |
|
| 1,402 |
|
|
| 979 |
|
|
| 4,705 |
|
|
| 2,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 6,813 |
|
|
| 2,676 |
|
|
| 16,094 |
|
|
| 7,518 |
|
Selling and marketing expenses |
|
| 1,125 |
|
|
| 560 |
|
|
| 3,044 |
|
|
| 1,356 |
|
Research and development expenses |
|
| 2,000 |
|
|
| 781 |
|
|
| 4,741 |
|
|
| 2,143 |
|
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 2,169 |
|
|
| 1,386 |
|
Operating expenses |
|
| 10,868 |
|
|
| 4,514 |
|
|
| 26,048 |
|
|
| 12,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (9,655 | ) |
|
| (3,367 | ) |
|
| (19,648 | ) |
|
| (8,749 | ) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
| - |
|
|
| (3,081 | ) |
|
| - |
|
|
| (3,281 | ) |
Interest expense |
|
| (21 | ) |
|
| (218 | ) |
|
| (72 | ) |
|
| (2,468 | ) |
Gain on the sale of business |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,631 |
|
Other income |
|
| 66 |
|
|
| 6 |
|
|
| 103 |
|
|
| 27 |
|
Total other income (expense) |
|
| 45 |
|
|
| (3,293 | ) |
|
| 31 |
|
|
| (2,091 | ) |
Loss before income taxes |
|
| (9,610 | ) |
|
| (6,660 | ) |
|
| (19,617 | ) |
|
| (10,840 | ) |
Income tax provision |
|
| (3 | ) |
|
| (7 | ) |
|
| (10 | ) |
|
| (20 | ) |
Equity in loss of investee |
|
| - |
|
|
| - |
|
|
| (150 | ) |
|
| - |
|
Net loss from continuing operations |
|
| (9,613 | ) |
|
| (6,667 | ) |
|
| (19,777 | ) |
|
| (10,860 | ) |
Net loss from discontinued operations |
|
| - |
|
|
| (2 | ) |
|
| (4 | ) |
|
| (215 | ) |
Net loss |
|
| (9,613 | ) |
|
| (6,669 | ) |
|
| (19,781 | ) |
|
| (11,075 | ) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
| (9,613 | ) |
|
| (6,667 | ) |
|
| (19,777 | ) |
|
| (10,860 | ) |
Change in unrealized gain on short-term investments |
|
| 3 |
|
|
| - |
|
|
| 6 |
|
|
| - |
|
Total comprehensive loss from continuing operations |
|
| (9,610 | ) |
|
| (6,667 | ) |
|
| (19,771 | ) |
|
| (10,860 | ) |
Total comprehensive loss |
| $ | (9,610 | ) |
| $ | (6,669 | ) |
| $ | (19,775 | ) |
| $ | (11,075 | ) |
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Comparison of the Three and Nine Monthsmonths ended September 30, 20202021 and the Three and Nine Monthsmonths ended September 30, 2019
Total Revenue
Three Months ended September 30, | Change | Nine Months ended September 30, | Change | |||||
(dollars in thousands) | 2020 | 2019 | $ | % | 2020 | 2019 | $ | % |
Revenue | $2,126 | $1,536 | $590 | 38% | $6,399 | $3,962 | $2,437 | 62% |
|
| Three Months ended September 30, |
|
| Change |
|
| Nine Months ended September 30, |
|
| Change |
| ||||||||||||||||||||
(dollars in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||||||
Revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 489 |
|
|
| 23 | % |
| $ | 11,105 |
|
| $ | 6,399 |
|
| $ | 4,706 |
|
|
| 74 | % |
The increase in revenue for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, was a result of additional products the Company offered during the period and
Three Months ended September 30, | Change | Nine Months ended September 30, | Change | |||||
(dollars in thousands) | 2020 | 2019 | $ or % Points | % | 2020 | 2019 | $ or % Points | % |
Cost of revenue | $984 | $390 | $594 | 152% | $2,753 | $1,152 | $1,601 | 139% |
Gross profit | 1,142 | 1,146 | (4) | 0% | 3,646 | 2,810 | 836 | 30% |
Gross margin | 54% | 75% | -21% | -28% | 57% | 71% | -14% | -20% |
Three Months ended September 30, | Change | Nine Months ended September 30, | Change | |||||
(dollars in thousands) | 2020 | 2019 | $ | % | 2020 | 2019 | $ | % |
Operating expenses: | ||||||||
General and administrative expenses | $3,168 | $2,600 | $568 | 22% | $8,896 | $6,259 | $2,637 | 42% |
Selling and marketing expenses | 560 | 587 | (27) | -5% | 1,356 | 1,081 | 275 | 25% |
Research and development expenses | 781 | 450 | 331 | 74% | 2,143 | 757 | 1,386 | 183% |
Operating expenses | $4,509 | $3,637 | $872 | 24% | $12,395 | $8,097 | $4,298 | 53% |
In 2021, we initiated services for Oklahoma’s UVED Program which has generated revenue of $345,000 and $975,000 during the Companythree and nine months ended September 30, 2021.
During the three and nine months ended September 30, 2021, $260,000 of revenue was attributed to Waycare.
Additionally, during the nine months ended September 30, 2021, we had a higher volume of agreements with significant customers in which the revenue recognition was bifurcated into point in time revenue recognition related to the sale of hardware and perpetual licenses, as well as recurring revenue recognition related to the software and customer support fees.
Cost of Revenue, Excluding Depreciation and Amortization
|
| Three Months ended September 30, |
|
| Change |
|
| Nine Months ended September 30, |
|
| Change |
| ||||||||||||||||||||
(dollars in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||||||
Cost of revenue, excluding depreciation and amortization |
| $ | 1,402 |
|
| $ | 979 |
|
| $ | 423 |
|
|
| 43 | % |
| $ | 4,705 |
|
| $ | 2,745 |
|
| $ | 1,960 |
|
|
| 71 | % |
For the three and nine months ended September 30, 2021, cost of revenue, excluding depreciation and amortization increased by $423,000 and $1,960,000 compared to the corresponding prior periods. The increase was primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our growth planincrease in revenue.
Operating Expenses
|
| Three Months ended September 30, |
|
| Change |
|
| Nine Months ended September 30, |
|
| Change |
| ||||||||||||||||||||
(dollars in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
General and administrative expenses |
| $ | 6,813 |
|
| $ | 2,676 |
|
| $ | 4,137 |
|
|
| 155 | % |
| $ | 16,094 |
|
| $ | 7,518 |
|
| $ | 8,576 |
|
|
| 114 | % |
Selling and marketing expenses |
|
| 1,125 |
|
|
| 560 |
|
|
| 565 |
|
|
| 101 | % |
|
| 3,044 |
|
|
| 1,356 |
|
|
| 1,688 |
|
|
| 124 | % |
Research and development expenses |
|
| 2,000 |
|
|
| 781 |
|
|
| 1,219 |
|
|
| 156 | % |
|
| 4,741 |
|
|
| 2,143 |
|
|
| 2,598 |
|
|
| 121 | % |
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 433 |
|
|
| 87 | % |
|
| 2,169 |
|
|
| 1,386 |
|
|
| 783 |
|
|
| 56 | % |
Operating expenses |
| $ | 10,868 |
|
| $ | 4,514 |
|
| $ | 6,354 |
|
|
| 141 | % |
| $ | 26,048 |
|
| $ | 12,403 |
|
| $ | 13,645 |
|
|
| 110 | % |
General and buildAdministrative Expenses
The majority of the increase in general and administrative expenses is attributable to increased headcount and equity award expenses. Additionally, for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, we saw an increase in professional fees mainly associated with our corporate structure.
Selling and Marketing Expenses
The increase in the selling and marketing expenses during the year is attributable mainly to the increased marketing efforts to promote our products and services including digital marketing and other sales efforts. In connection with these efforts, there was an increase in staffing to support the Company’s growth plan.
Research and Development Expense
The overall increase in research and development expenses is primarily attributable to the strategic shift to developdevelopment of new products and additional software capabilities, as a result of our increased focus on our technology offerings. This shift took place at the end of the first quarter of 2019. The increase in our research and development expenses is mainly attributable to an increase in headcount and hours associated with the research and development activities.
41 |
Table of Contents |
Depreciation and Amortization
The increase in depreciation and amortization during the year is attributable primarily to increased technology-based intangible assets that were acquired as part of our acquisition of Waycare.
Other Expense
Three Months ended September 30, | Change | Nine Months ended September 30, | Change | |||||
(dollars in thousands) | 2020 | 2019 | $ | % | 2020 | 2019 | $ | % |
Other income (expense): | ||||||||
Loss on extinguishment of debt | $(3,081) | $- | $(3,081) | -100% | $(3,281) | $(1,113) | $(2,168) | -195% |
Interest expense | (218) | (1,182) | 964 | 82% | (2,468) | (2,724) | 256 | 9% |
Other income | 6 | 157 | (151) | -96% | 27 | 123 | (96) | -78% |
Gain on sale of business | - | - | - | - | 3,631 | - | 3,631 | 100% |
Total other expense | $(3,293) | $(1,025) | $(2,268) | -221% | $(2,091) | $(3,714) | $1,623 | 44% |
|
| Three Months ended September 30, |
|
| Change |
|
| Nine Months ended September 30, |
|
| Change |
| ||||||||||||||||||||
(dollars in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loss on extinguishment of debt |
| $ | - |
|
| $ | (3,081 | ) |
| $ | 3,081 |
|
|
| -100 | % |
| $ | - |
|
| $ | (3,281 | ) |
| $ | 3,281 |
|
|
| -100 | % |
Interest expense |
|
| (21 | ) |
|
| (218 | ) |
| $ | 197 |
|
|
| 90 | % |
|
| (72 | ) |
|
| (2,468 | ) |
|
| 2,396 |
|
|
| 97 | % |
Gain on the sale of business |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0 | % |
|
| - |
|
|
| 3,631 |
|
|
| (3,631 | ) |
|
| -100 | % |
Other income |
|
| 66 |
|
|
| 6 |
|
|
| 60 |
|
| 1000 | % |
|
| 103 |
|
|
| 27 |
|
|
| 76 |
|
|
| 281 | % | |
Total other income (expense) |
| $ | 45 |
|
| $ | (3,293 | ) |
| $ | 3,338 |
|
|
| -101 | % |
| $ | 31 |
|
| $ | (2,091 | ) |
| $ | 2,122 |
|
|
| -101 | % |
The decrease in interest expense and debt extinguishment costs for the three and nine months ended September 30, 20202021 compared to the three and nine months ended September 30, 20192020 is due to the staged retirement of the 2019 Promissory notes in 2020.
Additionally, during the nine months ended September 30, 2020.
Non-GAAP Measures: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and (v)acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S. (“U.S. GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company’s ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.
The following table sets forth the components of the EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):
Three Months ended September 30, | Nine Months ended September 30, | |||
2020 | 2019 | 2020 | 2019 | |
Net loss | $(6,667) | $(3,528) | $(10,860) | $(9,036) |
Income taxes | 7 | 12 | 20 | 35 |
Interest | 218 | 1,182 | 2,468 | 2,724 |
Depreciation and amortization | 497 | 418 | 1,386 | 957 |
EBITDA | $(5,945) | $(1,916) | $(6,986) | $(5,320) |
Loss on extinguishment of debt | $3,081 | $- | $3,281 | $1,113 |
Share-based compensation | 202 | 76 | 539 | 314 |
Gain on sale of business | - | - | (3,631) | - |
Loss on sale of Secure Education | - | 3 | - | 3 |
Adjusted EBITDA | $(2,662) | $(1,837) | $(6,797) | $(3,890) |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Total comprehensive loss from continuing operations |
| $ | (9,610 | ) |
| $ | (6,667 | ) |
| $ | (19,771 | ) |
| $ | (10,860 | ) |
Income taxes |
|
| 3 |
|
|
| 7 |
|
|
| 10 |
|
|
| 20 |
|
Interest |
|
| 21 |
|
|
| 218 |
|
|
| 72 |
|
|
| 2,468 |
|
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 2,169 |
|
|
| 1,386 |
|
EBITDA |
| $ | (8,656 | ) |
| $ | (5,945 | ) |
| $ | (17,520 | ) |
| $ | (6,986 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
| $ | - |
|
| $ | 3,081 |
|
| $ | - |
|
| $ | 3,281 |
|
Share-based compensation |
|
| 694 |
|
|
| 202 |
|
|
| 2,600 |
|
|
| 539 |
|
Gain on sale of business |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,631 | ) |
Loss due to change in value of equity investments |
|
| - |
|
|
| - |
|
|
| 150 |
|
|
| - |
|
One-time consulting fees |
|
| 1,249 |
|
|
| - |
|
|
| 2,025 |
|
|
| - |
|
Adjusted EBITDA |
| $ | (6,713 | ) |
| $ | (2,662 | ) |
| $ | (12,745 | ) |
| $ | (6,797 | ) |
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of September 30, 2020,revenue, excluding depreciation and amortization. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we leased building space atcan gain efficiencies through the following locations in the U.S.:
42 |
Table of Contents |
The following table sets forth the components of our cash flowsthe Adjusted Gross Profit and Adjusted Gross Margin for the period included (dollars in thousands):
Nine Months ended September 30, | ||||
2020 | 2019 | Change | ||
$ | % | |||
Net cash used in operating activities - continuing operations | $(7,860) | $(4,394) | $(3,466) | -79% |
Net cash provided by (used in) investing activities - continuing operations | 5,681 | (406) | 6,087 | 1499% |
Net cash provided by financing activities - continuing operations | 24,756 | 3,876 | 20,880 | 539% |
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations | $22,577 | $(924) | $23,501 | 2543% |
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands, except percentages) |
|
| (in thousands, except percentages) |
| ||||||||||
Revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
|
Cost of revenue, excluding depreciation and amortization |
|
| 1,402 |
|
|
| 979 |
|
|
| 4,705 |
|
|
| 2,745 |
|
Adjusted Gross Profit |
| $ | 1,213 |
|
| $ | 1,147 |
|
| $ | 6,400 |
|
| $ | 3,654 |
|
Adjusted Gross Margin |
|
| 46.4 | % |
|
| 54.0 | % |
|
| 57.6 | % |
|
| 57.1 | % |
Adjusted Gross Margin, for the nine months ended September 30, 2021 and 2020 hadincreased to 57.6% from 57.1%, respectively, and Adjusted Gross Margin for the three months ended September 30, 2021 and 2020 decreased to 46.4% from 54.0%, respectively. The fluctuations in Adjusted Gross Margin were driven primarily by our mix of software and hardware sales. Software sales will carry a net decreasehigher margin than hardware sales as there are fewer human costs associated with software sales. Additionally, as part of $3,466,000our planned go-to-market strategy, we offer our customers short-term pilot programs which was primarilyrange from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to lay the $3,631,000 gain onfoundation for our solutions.
Key Performance Indicators
We regularly review several indicators, including the sale of AOC Key Solutionsfollowing key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and TeamGlobal. The gain on the sale is shown as a decrease inmake strategic decisions.
Recurring Revenue Growth
Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operationsoperations. This visibility enables us to better manage and invest in our business.
|
| Three Months ended September 30, |
|
| Change |
|
| Nine Months ended September 30, |
|
| Change |
| ||||||||||||||||||||
(dollars in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||||||
Recurring revenue |
| $ | 1,233 |
|
| $ | 964 |
|
| $ | 269 |
|
|
| 28 | % |
| $ | 3,142 |
|
| $ | 2,876 |
|
| $ | 266 |
|
|
| 9 | % |
As we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in future periods to continue to increase as we move to market our suite of products through our Rekor One™ platform.
Total Contract Value
The total contract value of contracts won in the current period provides us visibility into our future operating results and cash flows from operations. There are certain assumptions that we make when determining the total contract value of an increase in cash flow from investing activitiesagreement, such as, success rate of renewal periods, cancellations and usage estimates. For the nine months ended September 30, 2021 we won contracts valued at $7,663,000, compared to reflect the nature$3,682,000 of the transactions. This gain on the sale of AOC Key Solutions and TeamGlobal was partially offset by increase in depreciation, amortization of intangible asset and a $3,281,000 loss on extinguishment of debt related to the retirement of the 2019 Promissory Notes.
43 |
Table of Contents |
Unsatisfied Performance Obligations
As of September 30, 2020, we had unrestricted cash and cash equivalents from continuing operations of $24,154,000 and working capital of $21,230,000, as compared to unrestricted cash and cash equivalents of $1,075,000 and a working capital deficit of $1,786,000 as of December 31, 2019.
Lease Obligations
At September 30, 2021, we leased building space at the following locations in the unaudited remaining contract valueU.S. and Israel:
● | Columbia, Maryland – The corporate headquarters |
● | Linthicum, Maryland |
● | Orlando, Florida | |
● | Tel Aviv, Israel |
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of licensingour planned operations.
Liquidity and subscription contracts from September 30, 2019 through September 30, 2020.
The following table below showssets forth the quarter by quarter growth is such contract valuecomponents of our cash flows for the period included (dollars in thousands):
|
| Nine Months ended September 30, |
| |||||||||||||
|
| 2021 |
|
| 2020 |
|
| Change |
| |||||||
|
|
|
|
|
|
|
| $ |
| % | ||||||
Net cash used in operating activities - continuing operations |
| $ | (12,321 | ) |
| $ | (7,860 | ) |
| $ | (4,461 | ) |
|
| -57 | % |
Net cash (used in) provided by investing activities - continuing operations |
|
| (43,392 | ) |
|
| 5,081 |
|
|
| (48,473 | ) |
|
| -954 | % |
Net cash provided by financing activities - continuing operations |
|
| 70,874 |
|
|
| 25,356 |
|
|
| 45,518 |
|
|
| 180 | % |
Net increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations |
| $ | 15,161 |
|
| $ | 22,577 |
|
| $ | (7,416 | ) |
|
| -33 | % |
Net cash used in the amount of $0.175 (7% per annum) per share. Dividends accrue quarterly and dividend paymentsoperating activities – continuing operations for declared dividends are due within five business days following the end of a quarter.
The net increase in net cash used in investment activities – continuing operations of $48,473,000 was primarily due to the net cash outlay in relation to the acquisition of Waycare of $40,699,000 and the $1,000,000 SAFE investment in Roker. During the nine months ended September 30, 2020, the cash provided by investing activities from continuing operations was primarily due to the cash proceeds of the sale of AOC Key Solutions and TeamGlobal.
Net cash provided by financing activities – continuing operations for the nine months ended September 30, 2021 increased $45,518,000 from the Sales Agreement was $29,930,000prior nine month period ended September 30, 2020. In the current year, through our Public Offering, we received net proceeds, after paying 3.0% or $926,000 relateddeducting the underwriting discounts and commissions and offering expenses payable by us, of $70,125,000.
For the three and nine months ended September 30, 2021 and 2020, we funded our operations primarily through cash from operating activities, the sale of our subsidiaries and the sale of equity. As of September 30, 2021, we had cash and cash equivalents from continuing operations of $35,102,000 and working capital of $28,203,000, as compared to cash commissions provided to B. Riley FBR.
44 |
Table of Contents |
Public Offering
On September 21, 2020,February 9, 2021, we elected to voluntarily terminate its Sales Agreement with B. Riley FBR pursuant to the terms of the Sales Agreement. As of the termination, we had offeredissued and sold an aggregate6,126,939 shares of 6,509,202our common stock (which included 799,166 shares of common stock sold pursuant to the Sales Agreement, which resulted in aggregate grossexercise of an overallotment option) (the “Public Offering”). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by the us, were approximately $70,125,000.
Waycare Acquisition
On August 18, 2021, we entered into a share purchase agreement (the “Purchase Agreement”) by and among the Company, Waycare, the sellers of $34,154,000.
As of September 30, 2020,2021, we did not have any materialhad commitments for capital expenditures.
ITEM 3. QUANTITAIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, Rekor is not required to provide information required by this Item 3.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Based on management’s review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.
Changes to Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company andwho were founders of Firestorm (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al.al., Case no. 1:19-cv-07767-VEC. The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by us.the Company. The Complaint requests equitable rescission of that transaction, or, alternatively, monetary damages.
Following an initial amended complaint, answer and counterclaims, and defendants’ motion for judgment on the pleadings, on January 30, 2020, we filed a Second Amended Complaint, which the Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, we moved to dismiss certain counterclaims against certain executivesdirectors and officers named as counterclaim-defendants, which resulted in the Firestorm Principals voluntarily dismissing thosethe counterclaims against those parties. We thereafterThereafter we filed our response and affirmative defenses to the Counterclaims on April 22.22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which we have opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. ThatWith respect to the Firestorm Principals’ motion was fully briefed asfor judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.
On April 27, 2021, the Firestorm Principals filed a notice of Februarymotion for partial summary judgment, seeking summary judgment on several of our claims and the Firestorm Principals’ counterclaims, along with supporting declarations and exhibits. After the Court decided to allow the proposed motion to proceed, we, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed their opposition to the partial summary judgment motion on June 21, 2020. It remains sub judice, and no argument has been scheduled upon it.
In the year 2020, the Firestorm Principals filed suitvarious suits in New York, Supreme Court in Sullivan CountyDelaware and Virginia against our directors of the Company,and officers, alleging breach of fiduciary duty and libel. We believe thatThe defendants in the suits moved to dismiss the amended complaint. At this suit is without meritstage of these litigations, suits against two of the directors have been dismissed and intendone has been permitted to vigorously litigate this matter.
At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome. WeThe we intend to continue vigorously litigating its claims against the Firestorm Principals and believe that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.
On January 31, 2020, our wholly owned subsidiary, OpenALPR, filed a complaint in the US District Court for the Western District of Pennsylvania against a former customer, Plate Capture Solutions, Inc. (“PCS”) for breach of software license agreements pursuant to which software was licensed to PCS. On June 14, 2020, PCS filed its operative answer to the Complaint. On June 21, 2020, PCS filed a motion to join us and another entity, OpenALPR Technology, Inc., as parties to the litigation and made claims against them and counter claims against OpenALPR for defamation, fraud and intentional interference with existing and future business relationships. On July 13, 2020, OpenALPR filed an opposition to the motion for joinder. The parties are currently awaitingOn November 23, 2020, the Court’s decisioncourt denied PCS’s Motion for Joinder with prejudice. On August 30, 2021, OpenALPR and PCS filed a joint stipulation of dismissal with prejudice, and the court ordered dismissal of the case with prejudice on joinder. Nevertheless, we believeAugust 31, 2021. We consider this matter closed.
On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against us in the Supreme Court for the State of New York, New York County. Fordham alleges that we breached an underwriting agreement with Fordham. Fordham has brought claims for breach of contract, a declaratory judgment, and attorneys’ fees and expenses, and seeks damages. The Complaint was served to us on September 25, 2020. We issued a motion to dismiss counterclaims on June 23, 2021, our opposition has been filed and Fordham’s reply will be due on August 19, 2021. The Court granted Fordham’s motion to dismiss our counterclaims on October 21, 2021.
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At this stage of the Fordham litigation, we are unable to render an opinion regarding the likelihood of a favorable outcome. However, we maintain that Fordham’s claims have substantial defenses to the claims andno merit. To that end we intend to vigorously defendlitigate this action.
In June 2021, a putative shareholder class action lawsuit (captioned Miller v. Rekor Systems, Inc. et al.) was filed in in the allegationsUnited States District Court for the District of those claims.
In addition, from time to time, we may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings we accrue reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is our management’s opinion that the outcome of these proceedings, individually and collectively, will not be material to our consolidated financial statements as a whole.
Other than the risk factors listed below, there have been no material changes to the risk factors disclosed in “Risk Factors” in our Annual Report on Form 10-K as filed with the SEC on March 30, 2020,12, 2021, and in our Quarterly ReportReports on Form 10-Q as filed with the SEC on May 13, 2020, except for the following supplemental risk factors.10, 2021 and August 16, 2021. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K and Form 10-Q, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.
We rely, in part, on third party date providers and existing camera networks to grow our business. If we are unable to predictenter into agreements with third party data providers or successfully maintain them, our growth may be adversely impacted.
We rely, in part, on access the extentthird party data and access to whichexisting camera networks to grow our business. The majority of the global COVID-19 pandemicthird party data agreements allow us to access connected vehicle data, existing camera networks or other data services, thereby increasing the data points used in our solutions.
Any agreement we enter into with a third party may adversely impactnot be on favorable terms, and the expected benefits and growth from these agreements may not materialize as planned. Despite our past experience, opportunities to grow our business operations, financialthrough third party data may not be available to us in the future.
The market for our Rekor One platform is new and unproven, and may decline or experience limited growth and is dependent in part on data consumers continuing to adopt its platform and use its services.
The market for an ecosystem that connects government agencies, service providers and, ultimately, drivers is relatively new and some aspects of it are unproven. Therefore, it is subject to a number of risks and uncertainties. We believe that our future success will significantly depend in large part on the growth, if any, of this market. The use of advanced vehicle recognition systems and marketplace data to obtain data on vehicles, drivers and the environment is still relatively new and consumers may not recognize the need for, or benefits of, our platform and solutions. Moreover, if they do not recognize the need for and benefits of our platform and solutions, they may decide to adopt alternative services to satisfy some portion of their business needs.
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In order to grow its business and extend our market position, we intend to focus on educating potential customers about the benefits of its services and platform, expanding the range of our services and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our platform and solutions address depends upon a number of factors, including the cost, performance and perceived value associated with them. The market for our platform and solutions could fail to grow significantly or there could be a reduction in demand for its services as a result of a lack of acceptance, technological challenges, competing services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth, or demand for its services decreases, then its business, results of operations, and stock price.
Our internal investments and effortsgo-to-market strategy may place downward pressure on our operating margins.
To increase our revenue growth, we continue to control its spread have significantly curtailed the movement of people, goods and services worldwide, includinginvest in many of the regions in which we sell our products and services and conduct our business, operations. The magnitudeincluding investments into new markets as part of our go-to-market strategy and durationinvestment in continued innovation and product development to expand the suite of solutions we provide to our customers. Our operating margins may experience downward pressure in the resulting decline in business activity cannot currently be estimated with any degreeshort term as a result of certainty and threatensthese investments. Furthermore, our investments may not produce the expected results. If we are unable to (1) negatively impact the demand forsuccessfully execute our products and services, especially in those locations subject to “shelter in place” restrictions or similar government orders, (2) restrict our sales operations and marketing efforts, and (3) disrupt other important business activitiesgo-to-market strategy, we may experience decreases in our various locations, some of which are also in areas affected by COVID-19. For example, in response to the COVID-19 pandemic, certain industry events at which we presentrevenues and participate certain customer events have been canceled, postponed or moved to virtual-only experiences; we are encouraging all of our employees to work remotely; and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Additionally, we may see our services carrying less revenue-generating traffic in areas subject to “shelter in place” restrictions or related government orders as the population of those areas refrain from traveling and normal commerce activities. Accordingly, we expect the COVID-19 pandemic to potentially have a negative impact on our sales and our results of operations in those areas adversely affected by COVID-19, the size and duration of which we are currently unable to predict. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital.
Note Exchange Agreement
In an agreement reached on June 30, 2020, the 2019 Lenders of the 2019 Promissory Notes agreed to a redemption of approximately 77% of the remaining principal balance of the 2019 Promissory Notes as of June 30, 2020. Per the Exchange Agreement, $17,398,000, was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share (the “Note Exchange”). At the time of the Exchange Agreement the net amount of long-term debt redeemed for common stock was $14,688,000, this$14,688,000. This included the existing principal balance subject to conversion, the portion of the exit fee associated with the notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $226,000 related to the PIKpaid-in-kind (“PIK”) interest associated to the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above was recorded as part of debt extinguishments costs in the unaudited condensedaccompanying consolidated statementstatements of operations.
On July 15, 2020, the Companywe completed the Note Exchange by issuing itsour common stock to the 2019 Lenders in connection with the Note Exchange Transaction in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.
Automatic Conversion of Series A Cumulative Convertible Redeemable Preferred Stock and Series B Cumulative Convertible Redeemable Preferred Stock
As a result of the closing of the Public Offering, all of our issued and outstanding Series A Cumulative Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) and Series B Cumulative Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”) were automatically converted pursuant to their respective terms into an aggregate of 1,416,785 shares of our common stock. As a result of the automatic conversion of the Series A Preferred, the Series A Preferred is no longer quoted on the OTC Pink. The Series B Preferred was not quoted on any trading market.
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Waycare Acquisition
On August 18, 2021, the Company completed its acquisition of Waycare by acquiring 100% of the issued and outstanding shares of Waycare. As a result of the acquisition, Waycare is a wholly owned subsidiary of the Company. The aggregate purchase price for the shares of Waycare was $61,100,000, less the amount of Waycare’s debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474 shares of the Company’s common stock, valued at $20,287,000. As a result of the transaction, Waycare became a wholly-owned subsidiary of the Company. Additionally, pursuant to the terms of the Waycare purchase agreement, the Company reserved for issuance to Waycare’s continuing employees an aggregate of 686,248 restricted stock units, which were issued on October 28, 2021 pursuant to the terms of the Company’s 2017 Equity Award Plan, as amended. The restricted stock units are subject to customary vesting schedules and are intended to incentivize the continued performance of Waycare’s employees.
Use of Proceeds
We have generated losses since our inception in August 2017 and have relied on cash on hand, external bank lines of credit, short-term borrowing arrangements, issuance of debt, the sale of a note, sale of our non-core subsidiaries, and the sale of common stock to provide cash for operations. We attribute losses to merger and acquisition costs, financing costs, public company corporate overhead, lower than expected revenue, and lower gross profit of some of our subsidiaries. Our proceeds have been primarily used for research and development and sales and marketing expenses related to new product development and our strategic shift to develop and promote capabilities to the OpenALPR software.
None.
Not applicable.
None.
(a) Exhibits
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/ Furnished Herewith | ||||||
Amended and Restated Certificate of Incorporation of Novume Solutions, Inc. as filed with the Secretary of State of Delaware on August 21, 2017 | 8-K | 333-216014 | 3.1 | 8/25/17 | ||||||||
Certificate of Designations of Series A Cumulative Convertible Redeemable Preferred Stock as filed with the Secretary of State of Delaware on August 25, 2017 | 8-K | 333-216014 | 4.1 | 8/25/17 | ||||||||
Certificate of Designations of Novume Series B Cumulative Convertible Preferred Stock as filed with the Secretary of State of Delaware on August 21, 2017 | 8-K | 000-55833 | 4.2 | 10/4/17 | ||||||||
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Novume Solutions, Inc. as filed with the Secretary of State of Delaware on April 26, 2019 | 8-K | 001-38338 | 3.1 | 4/30/19 | ||||||||
Second Certificate of Amendment to Amended and Restated Certificate of Incorporation of Rekor Systems, Inc. as filed with the Secretary of State of Delaware on March 18, 2020 | 8-K | 001-38338 | 3.1 | 3/18/20 | ||||||||
Amended and Restated Bylaws of Rekor Systems, Inc. | 8-K | 001-38338 | 3.2 | 4/30/19 | ||||||||
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | * | |||||||||||
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | * | |||||||||||
Section 1350 Certification of Chief Executive Officer | ** | |||||||||||
Section 1350 Certification of Chief Financial Officer | ** | |||||||||||
101.INS | XBRL Instance Document | * | ||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | * | ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | * |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Rekor Systems, Inc. | ||||
By: | /s/ Robert A. Berman | |||
Name: | Robert A. Berman | |||
Title: | President and Chief Executive Officer Principal Executive Officer | |||
Date: | November | |||
By: | /s/ Eyal Hen | |||
Name: | Eyal Hen | |||
Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | |||
Date: | November 15, 2021 |
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