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, 2021March 31, 2022
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’sRegistrant’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 15, 2021,May 16, 2022, the Registrant had 43,977,21846,486,596 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, 20202021 entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestiture, merger, acquisition, or other business combination that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
Table of Content
REKOR SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021March 31, 2022
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
|
| September 30, 2021 |
|
| December 31, 2020 |
| March 31, 2022 | December 31, 2021 | ||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||
Current assets |
|
|
|
|
| |||||||||||
Cash and cash equivalents |
| $ | 35,102 |
| $ | 20,595 |
| $ | 14,606 | $ | 25,796 | |||||
Restricted cash and cash equivalents |
| 1,063 |
| 412 |
| 987 | 804 | |||||||||
Accounts receivable, net |
| 2,434 |
| 1,038 |
| 1,455 | 1,173 | |||||||||
Inventory |
| 1,822 |
| 1,264 |
| 1,228 | 1,194 | |||||||||
Note receivable, current portion |
| 340 |
| 340 |
| 368 | 340 | |||||||||
Other current assets, net |
| 2,156 |
| 469 |
| 1,966 | 1,374 | |||||||||
Current assets of discontinued operations |
|
| 1 |
|
|
| 2 |
| 1 | 1 | ||||||
Total current assets |
|
| 42,918 |
|
|
| 24,120 |
| 20,611 | 30,682 | ||||||
Long-term assets |
|
|
|
|
| |||||||||||
Property and equipment, net |
| 8,614 |
| 1,047 |
| 10,168 | 9,929 | |||||||||
Right-of-use lease assets, net |
| 6,256 |
| 426 |
| 9,548 | 6,163 | |||||||||
Goodwill |
| 49,860 |
| 6,336 |
| 53,451 | 53,451 | |||||||||
Intangible assets, net |
| 22,768 |
| 7,038 |
| 20,405 | 21,406 | |||||||||
Investments in unconsolidated companies |
| 0 |
| 75 |
| |||||||||||
Note receivable, long-term |
| 1,105 |
| 1,360 |
| 935 | 1,020 | |||||||||
SAFE investment |
| 1,000 |
| 0 |
| 1,400 | 1,250 | |||||||||
Other long-term assets |
|
| 127 |
|
|
| 0 |
| ||||||||
Deposits | 3,578 | 1,978 | ||||||||||||||
Total long-term assets |
|
| 89,730 |
|
|
| 16,282 |
| 99,485 | 95,197 | ||||||
Total assets |
| $ | 132,648 |
|
| $ | 40,402 |
| $ | 120,096 | $ | 125,879 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
Current liabilities |
|
|
|
|
| |||||||||||
Accounts payable and accrued expenses |
| $ | 6,492 |
| $ | 1,772 |
| $ | 4,337 | $ | 7,087 | |||||
Notes payable, current portion |
| 994 |
| 0 |
| 1,000 | 998 | |||||||||
Loan payable, current portion |
| 911 |
| 517 |
| 37 | 37 | |||||||||
Lease liability, short-term |
| 101 |
| 253 |
| 676 | 229 | |||||||||
Contract liabilities |
| 2,738 |
| 1,126 |
| 2,189 | 2,437 | |||||||||
Other current liabilities |
| 3,478 |
| 2,126 |
| 3,074 | 2,904 | |||||||||
Current liabilities of discontinued operations |
|
| 129 |
|
|
| 124 |
| 129 | 129 | ||||||
Total current liabilities |
|
| 14,843 |
|
|
| 5,918 |
| 11,442 | 13,821 | ||||||
Long-term Liabilities |
|
|
|
|
| |||||||||||
Notes payable, long-term |
| 0 |
| 980 |
| |||||||||||
Loan payable, long-term |
| 46 |
| 469 |
| 28 | 37 | |||||||||
Lease liability, long-term |
| 9,994 |
| 188 |
| 14,259 | 10,061 | |||||||||
Contract liabilities, long-term |
| 978 |
| 958 |
| 878 | 835 | |||||||||
Deferred tax liability, long-term |
| 34 |
| 24 |
| 38 | 38 | |||||||||
Long-term liabilities of discontinued operations |
|
| 0 |
|
|
| 5 |
| ||||||||
Total long-term liabilities |
|
| 11,052 |
|
|
| 2,624 |
| 15,203 | 10,971 | ||||||
Total liabilities |
|
| 25,895 |
|
|
| 8,542 |
| 26,645 | 24,792 | ||||||
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 |
| ||||||||||
Common stock, $0.0001 par value; authorized; 100,000,000 shares; issued: 44,949,939, shares as of March 31, 2022 and 44,007,257 as of December 31, 2021; outstanding: 44,908,417 shares as of March 31, 2022 and 43,987,896 as of December 31, 2021 | 4 | 4 | ||||||||||||||
Treasury stock, 41,522 and 19,361 shares as of March 31, 2022 and December 31, 2021, respectively | (417 | ) | (319 | ) | ||||||||||||
Additional paid-in capital |
| 169,944 |
| 68,238 |
| 176,348 | 171,285 | |||||||||
Accumulated other comprehensive income |
| 6 |
| 0 |
| |||||||||||
Accumulated deficit |
|
| (62,882 | ) |
|
| (43,050 | ) | (82,484 | ) | (69,883 | ) | ||||
Total stockholders equity |
|
| 106,753 |
|
|
| 25,191 |
| ||||||||
Total liabilities and stockholders equity |
| $ | 132,648 |
|
| $ | 40,402 |
| ||||||||
Total stockholders’ equity | 93,451 | 101,087 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 120,096 | $ | 125,879 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| Three Months Ended March 31, | |||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| 2022 | 2021 | ||||||||||
Revenue |
| $ | 2,615 |
| $ | 2,126 |
| $ | 11,105 |
| $ | 6,399 |
| $ | 3,608 | $ | 4,216 | |||||||
Cost of revenue, excluding depreciation and amortization |
| 1,402 |
| 979 |
| 4,705 |
| 2,745 |
| 1,983 | 1,922 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
| |||||||||||||||
General and administrative expenses |
| 6,813 |
| 2,676 |
| 16,094 |
| 7,518 |
| 7,388 | 4,829 | |||||||||||||
Selling and marketing expenses |
| 1,125 |
| 560 |
| 3,044 |
| 1,356 |
| 1,352 | 937 | |||||||||||||
Research and development expenses |
| 2,000 |
| 781 |
| 4,741 |
| 2,143 |
| 4,092 | 1,222 | |||||||||||||
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 2,169 |
|
|
| 1,386 |
| 1,399 | 614 | ||||||
Operating expenses |
|
| 10,868 |
|
|
| 4,514 |
|
|
| 26,048 |
|
|
| 12,403 |
| ||||||||
Total operating expenses | 14,231 | 7,602 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Loss from operations |
|
| (9,655 | ) |
|
| (3,367 | ) |
|
| (19,648 | ) |
|
| (8,749 | ) | (12,606 | ) | (5,308 | ) | ||||
Other income (expense): |
|
|
|
|
|
|
|
|
| |||||||||||||||
Loss on extinguishment of debt |
| 0 |
| (3,081 | ) |
| 0 |
| (3,281 | ) | ||||||||||||||
Interest expense |
| (21 | ) |
| (218 | ) |
| (72 | ) |
| (2,468 | ) | (9 | ) | (32 | ) | ||||||||
Gain on the sale of business |
| 0 |
| 0 |
| 0 |
| 3,631 |
| |||||||||||||||
Other income |
|
| 66 |
|
|
| 6 |
|
|
| 103 |
|
|
| 27 |
| 14 | 16 | ||||||
Total other income (expense) |
|
| 45 |
|
|
| (3,293 | ) |
|
| 31 |
|
|
| (2,091 | ) | 5 | (16 | ) | |||||
Loss before income taxes |
|
| (9,610 | ) |
|
| (6,660 | ) |
|
| (19,617 | ) |
|
| (10,840 | ) | ||||||||
Loss before income taxes and equity method investments | (12,601 | ) | (5,324 | ) | ||||||||||||||||||||
Income tax provision |
| (3 | ) |
| (7 | ) |
| (10 | ) |
| (20 | ) | 0 | (3 | ) | |||||||||
Equity in loss of investee |
|
| 0 |
|
|
| 0 |
|
|
| (150 | ) |
|
| 0 |
| 0 | (76 | ) | |||||
Net loss from continuing operations |
| (9,613 | ) |
| (6,667 | ) |
| (19,777 | ) |
| (10,860 | ) | (12,601 | ) | (5,403 | ) | ||||||||
Net loss from discontinued operations |
|
| 0 |
|
|
| (2 | ) |
|
| (4 | ) |
|
| (215 | ) | 0 | (3 | ) | |||||
Net loss |
|
| (9,613 | ) |
|
| (6,669 | ) |
|
| (19,781 | ) |
|
| (11,075 | ) | $ | (12,601 | ) | $ | (5,406 | ) | ||
Comprehensive loss: |
|
|
|
|
|
|
|
|
| |||||||||||||||
Net loss from continuing operations |
| (9,613 | ) |
| (6,667 | ) |
| (19,777 | ) |
| (10,860 | ) | (12,601 | ) | (5,403 | ) | ||||||||
Change in unrealized gain on short-term investments |
|
| 3 |
|
|
| 0 |
|
|
| 6 |
|
|
| 0 |
| 0 | 2 | ||||||
Total comprehensive loss from continuing operations |
|
| (9,610 | ) |
|
| (6,667 | ) |
|
| (19,771 | ) |
|
| (10,860 | ) | (12,601 | ) | (5,401 | ) | ||||
Total comprehensive loss |
| $ | (9,610 | ) |
| $ | (6,669 | ) |
| $ | (19,775 | ) |
| $ | (11,075 | ) | $ | (12,601 | ) | $ | (5,404 | ) | ||
Loss per common share from continuing operations - basic and diluted |
| (0.23 | ) |
| (0.26 | ) |
| (0.52 | ) |
| (0.52 | ) | (0.29 | ) | (0.15 | ) | ||||||||
Loss per common share discontinued operations - basic and diluted |
|
| 0.00 |
|
|
| (0.00 | ) |
|
| (0.00 | ) |
|
| (0.01 | ) | 0 | (0.00 | ) | |||||
Loss per common share - basic and diluted |
| $ | (0.23 | ) |
| $ | (0.26 | ) |
| $ | (0.52 | ) |
| $ | (0.53 | ) | $ | (0.29 | ) | $ | (0.15 | ) | ||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
| |||||||||||||||
Basic and diluted |
|
| 41,938,863 |
|
|
| 26,907,069 |
|
|
| 38,357,167 |
|
|
| 22,781,807 |
| 44,087,911 | 35,944,355 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’SHAREHOLDERS’ EQUITY (DEFICIT)
(Dollars in thousands, except share amounts)
(Unaudited)
|
| Shares of Common Stock |
|
| Common Stock |
|
| Shares of Treasury Stock |
|
| Treasury Stock at Cost |
|
| Shares of Series B Preferred Stock |
|
| Series B Preferred Stock |
|
| Additional Paid-In Capital |
|
| Accumulated |
|
| Accumulated Deficit |
|
| Total Stockholders Equity (Deficit) |
| Shares of Common Stock | Common Stock | Shares of Treasury Stock | Treasury Stock at Cost | Shares of Series B Preferred Stock | Series B Preferred Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2021 |
| 41,012,766 |
| $ | 4 |
| (19,361 | ) |
| $ | (319 | ) |
| - |
| $ | 0 |
| $ | 148,754 |
| $ | 3 |
| $ | (53,269 | ) |
| $ | 95,173 |
| |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 43,987,896 | $ | 4 | (19,361 | ) | $ | (319 | ) | 0 | $ | 0 | $ | 171,285 | $ | 0 | $ | (69,883 | ) | $ | 101,087 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| - |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 694 |
| 0 |
| 0 |
| 694 |
| - | 0 | - | 0 | - | 0 | 1,900 | 0 | 0 | 1,900 | |||||||||||||||||||||||||||||||||||||||||||||||||
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 of common stock pursuant to at the market offering, net | 728,452 | 0 | 0 | 0 | 0 | 0 | 3,134 | 0 | 0 | 3,134 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance upon exercise of stock options |
| 130,380 |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 208 |
| 0 |
| 0 |
| 208 |
| 12,971 | 0 | 0 | 0 | 0 | 0 | 29 | 0 | 0 | 29 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance upon vesting of restricted stock units |
| 19,448 |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 179,098 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Change in unrealized gain on short-term investments |
| - |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 0 |
| 3 |
| 0 |
| 3 |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld upon vesting of restricted stock units | 0 | 0 | (22,161 | ) | (98 | ) | 0 | 0 | 0 | 0 | 0 | (98 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (9,613 | ) |
|
| (9,613 | ) | - | 0 | - | 0 | - | 0 | 0 | 0 | (12,601 | ) | (12,601 | ) | ||||||||||||||||||||||||||||
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 March 31, 2022 | 44,908,417 | $ | 4 | (41,522 | ) | $ | (417 | ) | 0 | $ | 0 | $ | 176,348 | $ | 0 | $ | (82,484 | ) | $ | 93,451 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020 |
| 33,013,271 |
| $ | 3 |
| - |
| $ | 0 |
| 240,861 |
| $ | 0 |
| $ | 68,238 |
| $ | 0 |
| $ | (43,050 | ) |
| $ | 25,191 |
| 33,013,271 | $ | 3 | 0 | $ | 0 | 240,861 | $ | 0 | $ | 68,238 | $ | 0 | $ | (43,050 | ) | $ | 25,191 | |||||||||||||||||||||||||||||||||
Stock-based compensation |
| - |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 2,600 |
| 0 |
| 0 |
| 2,600 |
| - | 0 | - | 0 | - | 0 | 781 | 0 | 0 | 781 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of cashless warrants in exchange for common stock |
| 62,921 |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 47,612 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants in exchange for common stock |
| 54,235 |
| 0 |
| - |
| - |
| - |
| 0 |
| 307 |
| 0 |
| 0 |
| 307 |
| 52,013 | 0 | 0 | 0 | 0 | 0 | 294 | 0 | 0 | 294 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants related to series A preferred stock |
| 97,805 |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 101 |
| 0 |
| 0 |
| 101 |
| 95,864 | 0 | 0 | 0 | 0 | 0 | 99 | 0 | 0 | 99 | |||||||||||||||||||||||||||||||||||||||||||||||||
Public underwriting |
| 6,126,939 |
| 1 |
| - |
| 0 |
| - |
| 0 |
| 70,124 |
| 0 |
| 0 |
| 70,125 |
| 6,126,939 | 1 | 0 | 0 | 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 |
| 899,174 | 0 | 0 | 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 |
| 517,611 | 0 | 0 | 0 | (240,861 | ) | 0 | 179 | 0 | 0 | 179 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance upon exercise of stock options |
| 195,782 |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 434 |
| 0 |
| 0 |
| 434 |
| 65,402 | 0 | 0 | 0 | 0 | 0 | 226 | 0 | 0 | 226 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance upon vesting of restricted stock units |
| 196,069 |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 134,991 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld upon vesting of restricted stock units |
| - |
| 0 |
| (19,361 | ) |
| (319 | ) |
| - |
| 0 |
| 0 |
| 0 |
| 0 |
| (319 | ) | 0 | 0 | (19,361 | ) | (319 | ) | 0 | 0 | 0 | 0 | 0 | (319 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends |
| - |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 0 |
| 0 |
| (51 | ) |
| (51 | ) | - | 0 | - | 0 | - | 0 | 0 | 0 | (51 | ) | (51 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Accretion of Series A preferred stock |
| - |
| 0 |
| - |
| 0 |
| - |
| 0 |
| (101 | ) |
| 0 |
| 0 |
| (101 | ) | - | 0 | - | 0 | - | 0 | (101 | ) | 0 | 0 | (101 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Change in unrealized gain on short-term investments |
| - |
| 0 |
| - |
| 0 |
| - |
| 0 |
| 0 |
| 6 |
| 0 |
| 6 |
| - | 0 | - | 0 | - | 0 | 0 | 2 | 0 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (19,781 | ) |
|
| (19,781 | ) | - | 0 | - | 0 | - | 0 | 0 | 0 | (5,406 | ) | (5,406 | ) | ||||||||||||||||||||||||||||
Balance as of September 30, 2021 |
|
| 43,948,281 |
|
| $ | 4 |
|
|
| (19,361 | ) |
| $ | (319 | ) |
|
| - |
|
| $ | 0 |
|
| $ | 169,944 |
|
| $ | 6 |
|
| $ | (62,882 | ) |
| $ | 106,753 |
| ||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2021 | 40,952,877 | $ | 4 | (19,361 | ) | $ | (319 | ) | 0 | $ | 0 | $ | 147,615 | $ | 2 | $ | (48,507 | ) | $ | 98,795 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
| Nine Months ended September 30, |
| Three Months Ended March 31, | ||||||||||||
|
| 2021 |
|
| 2020 |
| 2022 | 2021 | ||||||||
Cash Flows from Operating Activities |
|
|
|
|
| |||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net loss from continuing operations |
| $ | (19,777 | ) |
| $ | (10,860 | ) | $ | (12,601 | ) | $ | (5,403 | ) | ||
Net loss from discontinued operations |
|
| (4 | ) |
|
| (215 | ) | 0 | (3 | ) | |||||
Net loss |
| (19,781 | ) |
| (11,075 | ) | (12,601 | ) | (5,406 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| |||||||||||
Bad debt expense |
| 24 |
| 36 |
| 0 | 24 | |||||||||
Depreciation |
| 431 |
| 270 |
| 298 | 131 | |||||||||
Amortization of right-of-use lease asset |
| 209 |
| 139 |
| 100 | 74 | |||||||||
Provision for deferred taxes |
| 10 |
| 0 |
| 0 | 3 | |||||||||
Share-based compensation |
| 2,600 |
| 539 |
| 1,900 | 781 | |||||||||
Amortization of financing costs |
| 14 |
| 653 |
| 2 | 5 | |||||||||
Amortization of intangible assets |
| 1,529 |
| 977 |
| 1,001 | 409 | |||||||||
Loss due to change in value of equity investments |
| 150 |
| 0 |
| 0 | 76 | |||||||||
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 | ) | 637 | (1,460 | ) | |||||||
Inventory |
| (558 | ) |
| (289 | ) | (34 | ) | 163 | |||||||
Other current assets |
| (1,537 | ) |
| (186 | ) | (592 | ) | (157 | ) | ||||||
Other long-term assets |
| (127 | ) |
| 0 |
| ||||||||||
Accounts payable and accrued expenses and other current liabilities |
| 4,275 |
| 940 |
| |||||||||||
Deposits | (323 | ) | 0 | |||||||||||||
Accounts payable, accrued expenses and other current liabilities | (2,580 | ) | 1,947 | |||||||||||||
Contract liabilities |
| 1,596 |
| 646 |
| (205 | ) | 323 | ||||||||
Lease liability |
|
| (218 | ) |
|
| (149 | ) | 241 | (75 | ) | |||||
Net cash used in operating activities - continuing operations |
|
| (12,321 | ) |
|
| (7,860 | ) | (12,156 | ) | (3,159 | ) | ||||
Net cash used in by operating activities - discontinued operations |
|
| (4 | ) |
|
| (3,884 | ) | ||||||||
Net cash used in operating activities - discontinued operations | 0 | (4 | ) | |||||||||||||
Net cash used in operating activities |
|
| (12,325 | ) |
|
| (11,744 | ) | (12,156 | ) | (3,163 | ) | ||||
Cash Flows from Investing Activities |
|
|
|
|
| |||||||||||
Cash paid for Waycare acquisition, net |
| (40,699 | ) |
| 0 |
| ||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||
SAFE Investment |
| (1,000 | ) |
| 0 |
| (150 | ) | 0 | |||||||
Capital expenditures |
| (1,618 | ) |
| (544 | ) | (1,814 | ) | (425 | ) | ||||||
Proceeds from sale of AOC Key Solutions |
| 0 |
| 3,400 |
| |||||||||||
Proceeds from sale of TeamGlobal |
| 0 |
| 2,300 |
| |||||||||||
Short-term investment activity, net | 0 | (23,994 | ) | |||||||||||||
Investment in unconsolidated company |
|
| (75 | ) |
|
| (75 | ) | 0 | (75 | ) | |||||
Net cash (used in) provided by investing activities - continuing operations |
|
| (43,392 | ) |
|
| 5,081 |
| (1,964 | ) | (24,494 | ) | ||||
Cash Flows from Financing Activities |
|
|
|
|
| |||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Proceeds from public offering |
| 70,125 |
| 0 |
| 0 | 70,125 | |||||||||
Proceeds from PPP loans |
| 0 |
| 874 |
| |||||||||||
Payment of notes payable |
| (29 | ) |
| 0 |
| ||||||||||
Proceeds from notes receivable |
| 255 |
| 600 |
| 57 | 85 | |||||||||
Payment of stock issuance costs associated with the Note Exchange transaction |
| 0 |
| (73 | ) | |||||||||||
Repayments of notes payable |
| 0 |
| (7,266 | ) | |||||||||||
Repayments of loans payable | (9 | ) | (11 | ) | ||||||||||||
Net proceeds from exercise of options |
| 434 |
| 640 |
| 29 | 226 | |||||||||
Net proceeds from exercise of warrants |
| 307 |
| 874 |
| 0 | 294 | |||||||||
Net proceeds from exercise of warrants associated with the Series A Preferred Stock |
| 101 |
| 77 |
| 0 | 99 | |||||||||
Net proceeds from at-the-market agreement |
| 0 |
| 29,930 |
| 3,134 | 0 | |||||||||
Repurchases of common stock |
| (319 | ) |
| 0 |
| (98 | ) | (319 | ) | ||||||
Payment of debt modification costs |
|
| 0 |
|
|
| (300 | ) | ||||||||
Net cash provided by financing activities - continuing operations |
|
| 70,874 |
|
|
| 25,356 |
| 3,113 | 70,499 | ||||||
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 |
| (11,007 | ) | 42,846 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations |
|
| (4 | ) |
|
| 287 |
| ||||||||
Net decrease in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations | 0 | (4 | ) | |||||||||||||
Net increase in cash, cash equivalents and restricted cash and cash equivalents |
| 15,157 |
|
| 22,864 |
| (11,007 | ) | 42,842 | |||||||
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
|
| 21,009 |
|
|
| 1,866 |
| 26,601 | 21,009 | ||||||
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 36,166 |
|
| $ | 24,730 |
| $ | 15,594 | $ | 63,851 | ||||
|
|
|
|
|
| |||||||||||
Reconciliation of cash, cash equivalents and restricted cash: |
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of period - continuing operations |
| $ | 35,102 |
| $ | 24,154 |
| $ | 14,606 | $ | 62,845 | |||||
Restricted cash and cash equivalents at end of period - continuing operations |
| 1,063 |
| 573 |
| 987 | 1,005 | |||||||||
Cash and cash equivalents at end of period - discontinued operations |
|
| 1 |
|
|
| 3 |
| 1 | 1 | ||||||
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 36,166 |
|
| $ | 24,730 |
| $ | 15,594 | $ | 63,851 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1– GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2021,March 31, 2022, 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, 2021 March 31, 2022 and 2020.
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, 2021,March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2021.2022.
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-K10-K for the year ended December 31, 2020.2021. 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.$1,000.
Rekor is a provider of roadwayglobal leader in intelligent infrastructure focused on addressing the world’s most critical challenges across transportation management, public safety, and key commercial markets. With a real-time intelligence through intelligent infrastructure. Theplatform driven by deep access to data, AI-powered software, and smart optical devices at-the-edge, the Company delivers integrated solutions, actionablecombines its industry expertise and advanced proprietary technologies to deliver insights and predictions that increase roadway safety, with its disruptive technology. With a global footprint across 65 countries, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
On August 18, 2021, the Company provides actionablecompleted its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring 100% of the issued and real-time insights to commercial clients, as well as government entities. Rekor’s capabilities appeal to businesses and governmental entities in solvingoutstanding capital stock of Waycare, which is now a wide varietywholly-owned subsidiary of real-world mobility and infrastructure-related operational challenges. Currently, customers use the Company’s solutions for a multitude of applications, including roadway safety and incident management, traffic and infrastructure analytics, sustainability and green initiatives, public safety and contactless compliance.Company.
8 |
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. Actual amounts may differ from these estimates. On an on-goingongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.conditions
Reclassifications
Reclassifications
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, 2020March 31, 2021 and the period ended December 31, 2020,2021, have been reclassified to conform to the current year’s presentation.
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, capital raises and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, if necessary, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.
The Company has generated losses since its inception and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflowcash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the ninethree months ended September 30, 2021,March 31, 2022, the Company had working capital from continuing operations of $28,203,000$9,297,000 and a comprehensive loss from continuing operations of $19,771,000.$12,601,000.
The Company’s cash increaseddecreased by $15,157,000$11,007,000 for the ninethree months ended September 30, 2021March 31, 2022 primarily due to the net proceedsloss from continuing operations of $70,125,000 from the completion of the Public Offering (see NOTE 10 - STOCKHOLDERS’ EQUITY for details on the Public Offering).$12,601,000. This amount was offset by the net cash outlayproceeds of $40,699,000 in connection with$3,134,000 from the acquisition of Waycare2022 Sales Agreement (see NOTE 2 – ACQUISITIONS10 - STOCKHOLDERS’ EQUITY for details on the Waycare acquisition)2022 Sales Agreement).
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,10-Q, indicate the Company’s ability to continue operations as a going concern for at least that one-yearone-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 orif additional financing if needed, is not available.
Goodwill
The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. As if September 30, 2021 theThe Company has not completedperforms its annual impairment assessment.assessment on October 1, or more frequently, when events or circumstances indicate impairment may have occurred. During the ninethree months ended September 30, 2021 March 31, 2022 and 2020, we have 2021, the Company did not recognized recognize any impairment to goodwill from continuing operations.
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 the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 323, Investments – Equity Method and Joint Ventures. Under the equity method, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets. When the fair value or income information is not readily determinable, the Company has elected to apply the measurement alternative, and report the investment at cost, less impairment.
Treasury Stock
Treasury stock is recorded at acquisition cost. Upon disposition of treasury shares gains and losses are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value as of September 30, 2021March 31, 2022 and December 31, 2020,2021, 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, 2021March 31, 2022 and December 31, 2020,2021, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.
The determination of fair value is based upon the fair value framework established by ASC Topic 820,Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1– Quoted prices in active markets for identical assets or liabilities.
Level 2– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 3 inputs.
The Company considers its note receivable and Simple Agreement for Future Equity (“SAFE”) investment to be Level 3 investments and that the fair value approximates the carrying value.
There were no changes in levels during the ninethree months ended September 30, 2021.March 31, 2022.
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 4.0% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note began in January 2021. Based on general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates current market rates.
Interest income recognized for the three 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.
Revenue Recognition
The Company derives its revenues primarily from Software as a Service (“SaaS”), subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales and the sale of software, hardware and related services, including customer support and implementation services and management services in connection with its softwareour traffic safety solutions. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
TheTo determine revenue recognition for arrangements that the Company determines are within the amountscope of revenue to be recognized through application ofASC 606, the Company performs the followingfive 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, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 | 2021 | |||||||||||||
Recurring revenue |
| $ | 1,233 |
| $ | 964 |
| $ | 3,142 |
| $ | 2,876 |
| $ | 1,695 | $ | 864 | |||||||
Product and service revenue |
|
| 1,382 |
|
|
| 1,162 |
|
|
| 7,963 |
|
|
| 3,523 |
| 1,913 | 3,352 | ||||||
Total revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
| $ | 3,608 | $ | 4,216 |
Revenues
Recurring revenue
Recurring revenue is defined asincludes the Company’s SaaS revenue, licensing and subscription revenue, eCommerce revenue and customer support revenue. The Company generates recurring revenue from long-term contracts with customers that include fixed recurring revenue orprovide periodic payments and short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is drivengenerated by the Company’s go-to-market model, which includes a combination of direct sales, partner-assisted sales, and eCommerce sales.
Recurring revenues are generated through the Company’s SaaS revenue represents software products and solutions that providemodel, where the Company provides customers with the right to access the Company’s software 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 contracts with customers are generally for a term of one to five years. The payment for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these solutionsarrangements ratably over the term of the contractual agreement.
SubscriptionThe Company also currently receives recurring revenues under contracts entered into using a subscription model for bundled hardware and software over a period. Payments for these subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing, through a web server, access to the Company’s proprietary vehicle recognition software solutions, a self-managed database, and a powerful cross-platform application programming interface. The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the Company’s software or servicessolutions over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, theany fixed consideration related to recurring revenuethe arrangement is generally recognized as recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided.
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.online and activated through a digital key. 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 licenses and long-term 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 supportarrangements and 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.product updates. 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 guarantee that the customer support resources and personnel will be available to them. 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 a long-term license for the software. 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. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the maintenance term,customer support obligation, in line with how the Company believes services are provided.
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.
Contactless compliance solutions revenues reflect arrangements to provide traffic safety systems to several municipalitiesjurisdictions 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 and analyzes the images to provide data and supportssupport citation management services. In the first quarter of 2021, the Company launched a new service offering for the State of Oklahoma to support its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and 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 citations collected by the relevant municipality.jurisdiction.
Implementation revenue is incurredrecognized when the Company provides pilot programs to customers. Pilot programs may involve a one-timeone-time fee for a defined period in which the customer can use the Company’s software in connection with a previously installed camera network 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 completion.
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-timeone-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.channels and direct sales. 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 component 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, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| 2022 | 2021 | ||||||||||
Government customers |
| $ | 1,548 |
| $ | 1,254 |
| $ | 4,186 |
| $ | 4,047 |
| $ | 2,003 | $ | 3,105 | |||||||
Commercial customers |
|
| 1,067 |
|
|
| 872 |
|
|
| 6,919 |
|
|
| 2,352 |
| 1,605 | 1,111 | ||||||
Total revenue |
| $ | 2,615 |
|
| $ | 2,126 |
|
| $ | 11,105 |
|
| $ | 6,399 |
| $ | 3,608 | $ | 4,216 |
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 several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation. When the Company recognizes revenue due to the sale of hardware or perpetual software licenses, the impact on the overall unsatisfied performance obligations is relatively small as the Company satisfies most of its performance obligations at the point in time that the control of the hardware or software has transferred to the customer.
Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future. As of September 30, 2021,March 31,2022, the Company hadhad approximately $23,845,000$21,288,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 36.0%41% of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter.
Unbilled accounts receivable
The timing of revenue recognition, billings and cash collections resultsresult 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 $425,000$400,000 and $600,000 $415,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 2021March 31, 2022 and December 31, 2020,2021, 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 nine 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 ninethree months ended September 30, 2021March 31, 2022 were not materially impacted by any other factors. Contract liabilities as of September 30, 2021March 31, 2022 and December 31, 2020 were $3,716,0002021 were $3,067,000 and $2,084,000, respectively.$3,272,000, respectively. During the ninethree months ended September 30, 2021, $920,000March 31, 2022, $949,000 of the contract liabilities balance as of December 31, 20202021 was recognized as revenue.
The services due for contract liabilities described above are shown below as of September 30, 2021March 31, 2022 (dollars in thousands):
2021 |
| $ | 1,068 |
| ||||
2022 |
| 1,839 |
| |||||
2022, remaining | $ | 1,927 | ||||||
2023 |
| 474 |
| 651 | ||||
2024 |
| 234 |
| 303 | ||||
2025 |
| 82 |
| 124 | ||||
2026 | 56 | |||||||
Thereafter |
|
| 19 |
| 6 | |||
Total |
| $ | 3,716 |
| $ | 3,067 |
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. TheWhen the amortization period would be one year or less, the Company electedelects to use the practical expedient election to expense the costs to obtain a contract as incurred when the amortization period would have been one year or less.they are incurred.
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, 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, 2020 costs incurred to fulfill contracts in excess of one year had been immaterial.
Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents
The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with a maturity of three months or less, to be cash equivalents.
Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of September 30, 2021March 31, 2022 and December 31, 20202021 were $1,063,000$987,000 and $412,000, respectively,$804,000, respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets.
Concentrations of Credit Risk
The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to $250,000$250,000 per account. As of September 30,March 31, 2022 and December 31, 2021, the Company had deposits from continuing operations totaling $36,165,000$15,593,000 and $26,600,000, respectively, in three U.S. financial institutions and 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.
The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.
Customer A accounted for less than 10.0%10% and 40% of the Company’s total revenues for the three months ended September 30, 2021 March 31, 2022 and 2020,2021, respectively. Customer A
No other single customer accounted for 19.0% and lessmore than 10.0%10% of the Company’s totalunaudited condensed consolidated revenues for the ninethree months ended September 30, 2021 March 31, 2022 and 2020, respectively.
Customer B accounted for less than 10.0% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer B accounted for 13.0% and less than 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 17.0% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer C accounted for less than 10.0% and 20.0% of the Company’s total revenues for the nine 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, 2021, accounts receivable from Company A and Company D totaled 18.0% and 14.0%March 31, 2022, 0 single customer accounted for more than 10% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2020, Company A and2021, Company B accounted for 43.0% and 20.0%, respectively,13% of the unaudited condensed consolidated accounts receivable balance.
No other single customer accounted for more than 10.0%10% of the Company’s unaudited condensed consolidated revenues for the three and nine months ended September 30, 2021 and 2020 or the unaudited condensed consolidated accounts receivable balance as of September 30, 2021 and December 31, 2020.2021.
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-K10-K for the year ended December 31, 2020.2021.
New Accounting Pronouncements Effective in the Nine months ended September 30, 2021
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“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. 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 adopted this guidance in the first quarter of 2021. The adoption of ASU 2020-01 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes.
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 2016-13Accounting Standards Update ("ASU") 2016-13Financial Instruments-Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-132016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-132016-13 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 2016-132016-13 and based on the Company’s analysis of ASU 2016-132016-13 and the historical, current and expected credit quality of the Company’s customers, the Company does not expect ASU 2016-132016-13 to have a material impact on its unaudited condensed consolidated statements of operations and balance sheets.
The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standards 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 August 18, 2021, the Company completed its acquisition of Waycare by acquiring 100.0%100% of the issued and outstanding capital stock of Waycare. The aggregate purchase price for the shares of Waycare was $61,100,000,$60,171,000, 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$39,884,000 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 has become a wholly-owned subsidiary of the Company.
The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. 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 consolidated statement of operations for the three and nine months ended September 30, 2021. The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands):
Cash paid |
| $ | 40,813 |
| $ | 39,884 | ||
Common stock issued |
|
| 20,287 |
| 20,287 | |||
Total consideration |
| $ | 61,100 |
| ||||
Total Consideration | $ | 60,171 | ||||||
Assets |
|
|
| |||||
Cash and cash equivalents |
| $ | 25 |
| $ | 25 | ||
Restricted cash and cash equivalents |
| 89 |
| 89 | ||||
Accounts receivable |
| 472 |
| 486 | ||||
Other current assets |
| 150 |
| 150 | ||||
Property and equipment |
| 72 |
| 72 | ||||
Acquired technology |
|
| 17,255 |
| 16,897 | |||
Total assets acquired |
|
| 18,063 |
| 17,719 | |||
Liabilities |
|
|
| |||||
Accounts payable and accrued expenses |
| 451 |
| 794 | ||||
Contract liabilities |
|
| 36 |
| 36 | |||
Deferred tax liability | 3,833 | |||||||
Total liabilities assumed |
|
| 487 |
| 4,663 | |||
Fair value of identifiable net assets acquired |
|
| 17,576 |
| 13,056 | |||
Goodwill |
| $ | 43,524 |
| $ | 47,115 |
The technology acquired by the Company as part of the acquisition has an estimated useful life of seven years and is 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 acquisition of Waycare as if it was consummated as of January 1, 2020. 2021. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020 (the2021 (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, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 | 2021 | |||||||||||||
|
| (Dollars in thousands except for per share data) |
| (Dollars in thousands except for per share data) |
| (Dollars in thousands, except per share data) | ||||||||||||||||||
Total revenue from continuing operations |
| $ | 2,834 |
| $ | 2,499 |
| $ | 13,050 |
| $ | 7,491 |
| $ | 3,608 | $ | 4,599 | |||||||
Net loss from continuing operations |
| (10,186 | ) |
| (4,347 | ) |
| (21,629 | ) |
| (11,840 | ) | $ | (12,601 | ) | $ | (6,183 | ) | ||||||
Basic and diluted loss per share continuing operations |
| $ | (0.23 | ) |
| $ | (0.27 | ) |
| $ | (0.54 | ) |
| $ | (0.59 | ) | ||||||||
Basic and diluted loss per share from continuing operations | $ | (0.29 | ) | $ | (0.17 | ) | ||||||||||||||||||
Basic and diluted number of shares |
| 44,723,337 |
| 29,691,543 |
| 41,141,641 |
| 25,566,281 |
| 44,087,911 | 38,728,829 |
NOTE 3– INVESTMENTS
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 30, 2021March 31, 2022 and December 31, 20202021 the investment in Global Public Safety had a value of $0.
In June 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. (“Roker”). In the third quarter of 2020 and the first quarter of 2021, the Company contributed $75,000 for its 50 percent equity interest for a total investment of $150,000. This investment is accounted for under the equity method. During the three and nine months ended September 30, March 31, 2022 and 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 no0 distributions or earnings received from either investment in the three or nine months ended September 30, 2021 March 31, 2022 and 2020.2021.
Roker SAFE
In April 2021, in exchange for $1,000,000 the Company entered into a SAFE with Roker (the “Roker SAFE”). In October 2021and March 2022, the Company invested an additional $250,000 and $150,000, respectively, in the Roker SAFE. The Roker SAFE allows the Company to participate in future equity financings of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company has the option to receive either (i) cash payment equal to the invested amount under the SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the Roker SAFE. The Company’s investment in the Roker SAFE is recorded on the cost method of accounting and included under SAFE investment on the unaudited condensed consolidated balance sheets and is shown as long-term, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment the Company will review the investment for impairment.No factors indicative of impairment were identified during the three months ended March 31, 2022.
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 historical Professional Services segment should be classified as discontinued operations. As part of this plan TeamGlobal, AOC Key Solutions and Firestorm were classified as discontinued operations and presented as part of discontinued operations.
AOC Key Solutions Sale
On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions management (the “AOC Key Solutions Buyer”), by which the Company agreed to sell AOC Key Solutions, to the AOC Key Solutions Buyer.
The AOC Key Solutions Buyer agreed to purchase all of the outstanding equity interests of AOC Key Solutions for a purchase price of $4,000,000, comprising (i) $3,400,000 in cash, and (ii) a subordinated promissory note (the “Subordinated Note”) in the initial principal amount of $600,000.
As of December 31, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.
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 with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer.
The dispositions of AOC Key Solutions and TeamGlobal are the result of the Company’s strategic decision to concentrate resources on the development of its Technology Segment and will result in material changes in the Company’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of TeamGlobal, AOC Key Solutions and Firestorm as discontinued operations, including for all prior periods reflected in the unaudited condensed consolidated financial statements and these notes.
Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations from TeamGlobal, AOC Key Solutions and Firestorm for the three and nine months ended September 30, 2021 and 2020 have been classified as discontinued operations and presented as part of loss from discontinued operations in the accompanying unaudited condensed consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets discontinued operations and current and long term liabilities discontinued operations in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020.
The assets and liabilities classified as discontinued operations in the Company’s unaudited condensed consolidated financial statements as of September 30, 2021 and December 31, 2020 are shown below (dollars in thousands):
|
| 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, |
|
| 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 | ) |
NOTE 5 4– SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the ninethree months ended September 30, 2021 March 31, 2022 and 20202021 were as follows (dollars in thousands):
|
| 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 | ) |
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Cash paid for interest | $ | 0 | $ | 0 | ||||
Cash paid for taxes | 5 | 0 | ||||||
Financing activities: | ||||||||
Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock | 0 | (1,005 | ) | |||||
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock | 0 | (6,770 | ) | |||||
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock | 0 | (179 | ) | |||||
New Leases under ASC-842: | ||||||||
Recognition of operating lease - right-of-use lease asset | 3,485 | 0 | ||||||
Lease incentive recognized in other current assets, net | 919 | 0 | ||||||
Recognition of operating lease - lease liability | $ | (4,404 | ) | $ | 0 |
NOTE 6 5– OPERATING LEASES
We haveThe Company has operating leases for office facilities in various locations throughout the United States and Israel. The Company’s leases have remaining terms of one to fourten years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.
Operating lease expense from continuing operations for the three months ended September 30, 2021 March 31, 2022 and 20202021 was $105,000$411,000 and $72,000, and for the nine months ended September 30, 2021 and 2020 was $278,000 and $175,000,$89,000, respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $245,000$25,000 and $168,000 for$85,000 for the ninethree months ended September 30, 2021 March 31, 2022 and 2020,2021, respectively.
In the thirdfirst quarter of 2021,2022, the Company entered into a lease agreement for its new headquarters.Israeli operations. As part of the lease agreement, there were $3,833,000$919,000 in lease incentives provided to the Company which werewill be 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, 2021March 31, 2022 was as follows (dollars in thousands):
Operating lease right-of-use lease assets | $ | 9,548 | ||
Current portion of lease liability | $ | 676 | ||
Long-term portion of lease liability | 14,259 | |||
Total lease liability | $ | 14,935 | ||
Weighted average remaining lease term - operating leases (years) | 9.88 | |||
Weighted average discount rate - operating leases | 9.0 | % | ||
2022, remaining | $ | 837 | ||
2023 | 2,293 | |||
2024 | 2,254 | |||
2025 | 2,271 | |||
2026 | 2,306 | |||
Thereafter | 13,628 | |||
Total lease payments | $ | 23,589 | ||
Less imputed interest | 8,654 | |||
Maturities of lease liabilities | $ | 14,935 |
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 6– INTANGIBLE ASSETS
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from December 31, 20202021 to September 30, 2021March 31, 2022 (dollars in thousands):
|
| December 31, 2020 |
|
| Additions |
|
| Amortization |
|
| September 30, 2021 |
| December 31, 2021 | Additions | Amortization | March 31, 2022 | ||||||||||||||||
Intangible assets subject to amortization from continuing operations |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Intangible assets subject to amortization | ||||||||||||||||||||||||||||||||
Customer relationships |
| $ | 362 |
| $ | 0 |
| $ | (25 | ) |
| $ | 337 |
| $ | 328 | $ | 0 | $ | (8 | ) | $ | 320 | |||||||||
Marketing related |
| 159 |
| 0 |
| (51 | ) |
| 108 |
| 97 | 0 | (10 | ) | 87 | |||||||||||||||||
Technology based |
| 5,361 |
| 17,255 |
| (1,089 | ) |
| 21,527 |
| 20,304 | 0 | (860 | ) | 19,444 | |||||||||||||||||
Internally capitalized software |
|
| 1,156 |
|
|
| 4 |
|
|
| (364 | ) |
|
| 796 |
| 677 | 0 | (123 | ) | 554 | |||||||||||
Intangible assets subject to amortization from continuing operations |
| $ | 7,038 |
|
| $ | 17,259 |
|
| $ | (1,529 | ) |
| $ | 22,768 |
| ||||||||||||||||
Intangible assets subject to amortization | $ | 21,406 | $ | 0 | $ | (1,001 | ) | $ | 20,405 |
The following provides a breakdown of identifiable intangible assets as of September 30, 2021March 31, 2022 (dollars in thousands):
|
| Customer Relationships |
|
| Marketing Related |
|
| Technology Based |
|
| Internally Capitalized Software |
|
| Total |
| Customer Relationships | Marketing Related | Technology Based | Internally Capitalized Software | Total | ||||||||||||||||||||
Identifiable intangible assets |
| $ | 461 |
| $ | 327 |
| $ | 24,465 |
| $ | 1,452 |
| $ | 26,705 |
| $ | 461 | $ | 327 | $ | 24,107 | $ | 1,452 | $ | 26,347 | ||||||||||||||
Accumulated amortization |
|
| (124 | ) |
|
| (219 | ) |
|
| (2,938 | ) |
|
| (656 | ) |
|
| (3,937 | ) | (141 | ) | (240 | ) | (4,663 | ) | (898 | ) | (5,942 | ) | ||||||||||
Identifiable intangible assets from continuing operations, net |
| $ | 337 |
|
| $ | 108 |
|
| $ | 21,527 |
|
| $ | 796 |
|
| $ | 22,768 |
| ||||||||||||||||||||
Identifiable intangible assets, net | $ | 320 | $ | 87 | $ | 19,444 | $ | 554 | $ | 20,405 |
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 March 31, 2022 and 20202021 was $713,000$1,001,000 and $343,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $1,529,000 and $977,000, respectively$409,000, respectively and is presented as part of depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations.
As of September 30, 2021,March 31, 2022, the estimated impact on continuing operations from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):
2021 |
| $ | 1,017 |
| ||||
2022 |
| 4,008 |
| |||||
2022, remaining | $ | 2,953 | ||||||
2023 |
| 3,828 |
| 3,777 | ||||
2024 |
| 3,525 |
| 3,474 | ||||
2025 |
| 3,516 |
| 3,465 | ||||
2026 | 2,653 | |||||||
Thereafter |
|
| 6,874 |
| 4,083 | |||
Total |
| $ | 22,768 |
| $ | 20,405 |
NOTE 8 7– DEBT
Firestorm Notes
On January 25, 2017, pursuant to the terms of the 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 2.0% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7.0%. The notes mature on January 25, 2022. The aggregate balance of these notes payablepayable was $994,000$1,000,000 and $980,000,$998,000, net of unamortized interest, as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest ratesrates of $6,000$0 and $20,000, respectively.$2,000, respectively. The Company is not paying current interest on these notes and does did not expect to pay the principal due in January 2022 as the Company has requested rescission in connection with the Firestorm acquisition and is currently in litigation with the sellers (see NOTE 10-9- COMMITMENTS AND CONTINGENCIES)
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 nine 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 nine months after the date of disbursement.
The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company used the entire Loans amount for qualifying expenses and has to applied for forgiveness of the Loans in accordance with the terms of the CARES Act. The Loans are presented in loan payable, current portion on the accompanying unaudited consolidated balance sheets.
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 full by SBA.
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 10.0% 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 covenants. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. As of December 31, 2020, the Company had settled the full amount of the 2019 Promissory Notes. The loan was secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and were valued at $706,000, at the time of issuance. The warrants became exercisable commencing March 12, 2019 and expire on March 12, 2024. The 2019 Promissory Notes had an effective interest rate of 24.87%.
As
2019 Promissory Note Retirement
On June 30, 2020, the Company entered into Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes. Subject to the terms and conditions set forth in the Exchange Agreements, approximately $17,398,000 was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share, which was the closing price of the common stock on the date of the Exchange 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 included the existing principal balance subject to conversion, the portion of the exit fee associated with the which notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $226,000 related to the paid-in-kind (“PIK”) interest associated with the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above of $2,484,000 was recorded as part of debt extinguishments costs in the accompanying consolidated statements of operations. Following the Note Exchange, approximately $4,398,000 aggregate principal amount of the 2019 Promissory Notes remained outstanding, plus an additional $216,000 related to the exit fee.
The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreements. These costs are presented as a reduction to additional paid-in capital on the accompanying consolidated balance sheets.
On September 16, 2020, the Company issued a cash payment of $5,284,000 to complete the retirement of the remaining aggregate principal balance of the 2019 Promissory Notes. As a result of this optional prepayment, the 2019 Promissory Notes have been fully redeemed pursuant to their terms, and as a result the Company has no further obligations under the Note Purchase Agreement, as amended. The warrants previously issued pursuant to the Note Purchase Agreement remain outstanding pursuant to their terms.
Interest Expense
The following table presents the interest expense related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands):
|
| Three Months ended September 30, |
| Nine Months ended September 30, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 | 2021 | |||||||||||||
Contractual interest |
| $ | 17 |
| $ | 176 |
| $ | 58 |
| $ | 1,815 |
| $ | 7 | $ | 27 | |||||||
Amortization of debt issuance costs |
|
| 4 |
|
|
| 42 |
|
|
| 14 |
|
|
| 653 |
| 2 | 5 | ||||||
Total interest expense |
| $ | 21 |
|
| $ | 218 |
|
| $ | 72 |
|
| $ | 2,468 |
| $ | 9 | $ | 32 |
21 |
Schedule of Principal Amounts Due of Debt
The principal amounts due for long-term notes payable are shown below as of September 30, 2021March 31, 2022 (dollars in thousands):
2021 |
| $ | 489 |
| ||||
2022 |
| 1,432 |
| |||||
2022, remaining | $ | 1,028 | ||||||
2023 |
|
| 36 |
| 37 | |||
Total |
| 1,957 |
| |||||
|
|
|
| |||||
Less unamortized interest |
|
| (6 | ) | ||||
Total notes payable |
| $ | 1,951 |
| $ | 1,065 | ||
|
|
|
| |||||
Loan payable, current portion |
| $ | 911 |
| $ | 37 | ||
Loan payable, long-term |
| 46 |
| 28 | ||||
Notes payable, current portion |
|
| 994 |
| 1,000 | |||
Total notes payable |
| $ | 1,951 |
| $ | 1,065 |
NOTE 9 8– INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business.
The Company established a valuation allowance against deferred tax assets during 2017 and has continued to maintain a full valuation allowance, outside of the deferred tax liability related to the indefinite lived intangible, through the three months ended September 30, 2021.March 31, 2022.
The Company files income tax returns in the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of September 30, 2021.March 31, 2022.
The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangible, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.
For the ninethree months ended September 30, March 31, 2022 and 2021, the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The 20172018 through 20192020 tax years remain subject to examination by the Internal Revenue Service.
NOTE 10 9– COMMITMENTS AND CONTINGENCIES
On August 19, 2019, the Company filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of Firestorm (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no.1:19-cv-07767-VEC. The19-cv-07767-VEC. On January 30, 2020, the Company filed a Second Amended Complaint alleges(the “Complaint’) alleging that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company. The Complaint also alleges claims for breach of fiduciary duty, violations of the Computer Fraud and Abuse Act (“CFAA”), conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of thatthe acquisition transaction or, alternatively,and monetary damages.
Following an initial amended complaint, answer and counterclaims, and defendants’ motion for judgment on the pleadings, on January 30, 2020, the Company filed a Second Amended Complaint, which theThe Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, the Company moved to dismiss certainthe counterclaims against certain directors and officers named as counterclaim-defendants, which resultedresulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. TheThereafter the Company thereafter filed its response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which the Company has opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for 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 In April 27, 2021, the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, along with supporting declarations and exhibits. After the Court decided to allow the proposed motion to proceed,which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed theirits opposition to the partial summary judgment motion on June 21, 2021. The Firestorm Principals filed their reply in support of their partial summary judgment motion on July 9, 2021.On March 14, 2022, the Court issued an opinion and order which denied summary judgment to the Firestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment to the Firestorm Principals on their breach of warrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. In March 2022, the Court granted summary judgment to the Firestorm Principals on our CFAA claims, based on recent case law clarifying that such claims do not apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment on our CFAA, conversion, and trespass to chattels claims against one defendant because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on one breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $25,500 amount at issue could not be set off by or recouped from our damages in this case.
In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. The defendants in the suits moved to dismiss the amended complaint. At this stage of these litigations, the suits against two of the directors have been dismissed and one has been permitted to proceed. On September 28, 2021, the Court issued an order denying the motion to dismiss. On October 21, 2021, the Delaware Action defendants filed a motion for reconsideration of the Court’s Septemberdismissal order; that reconsideration motion was denied on February 28, 2021 order.2022. On March 16, 2022, the court in the Virginia Action dismissed the breach of fiduciary duty claim without prejudice (so it can be refiled in Delaware Chancery Court) and denied the motion with respect to the defamation claim on jurisdictional grounds. The defamation claim will now be challenged on substantive grounds.
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 ownedwholly-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 claimscounterclaims 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 Company considers this matter closed.
On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company in the Supreme Court for the State of New York, New York County. Fordham alleges that the Company breached an underwriting agreement with Fordham. Fordham has brought claims for breach of contract, a declaratory judgment, and attorneys’ fees and expenses, and seeks damages. The Complaint was served on the Company on September 25, 2020. 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 21,23, 2021.On November 29, 2021, the Company filed a notice of appeal with the Appellate Division and a motion to reargue that decision and order, arguing that the court misunderstood the nature and purpose of the prospectus supplement, which was actually prepared by the plaintiff after it set the prices for the 2018 offering. On March 3, 2022, the court denied the motion to reargue. In doing so, however, the court clarified that the dismissal was without prejudice, which would permit the Company to refashion the counterclaims in the future. Meanwhile, the Company’s deadline to perfect its concurrent appeal in the appellate division is May 30, 2022.
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.
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)10(b) and 20(a)20(a) and Rule 10b-510b-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 the class action lawsuit without prejudice the Lawsuit that it had filed against the Company and several of its executives.prejudice. This matter was voluntarily dismissed without prejudice.
In addition, from time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the Company’s opinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole.
NOTE 11 10– STOCKHOLDERS’ STOCKHOLDERS’ EQUITY
Common Stock
Effective March 18, 2020, the Company adopted and approved an amendment to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000, $0.0001 par value. The rights and privileges terms of the additional authorized shares of common stock are identical to those of the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe forto 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.
Form S-3 Registration StatementAt-the-Market Offering
On September 13, 2021February 24,2022, the Company filed a Form S-3 Registration Statement SEC, using a “shelf” registration process. By using a shelf registration statement,entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company may sell securities from time to time may offer and in one or more offeringssell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a total dollar amountcommission equal to 3.0% of $350,000,000.the gross proceeds from each sale. The Company incurred issuance costs of approximately $169,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.
For the three months ended March 31, 2022, based on the settlement date, the Company sold 728,452 shares of common stock at a weighted-average selling price of $4.67 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $3,134,000 after paying $169,000related to the issuance cost, as well as, 3.0% or $102,000 related to cash commissions provided to the Agent.
Waycare Acquisition
In connection with the acquisition as described in NOTE 2– ACQUISITIONS, the Company issued2,784,474 shares of the Company’s common stock as part of the consideration.
2021Public Offering
On February 9, 2021, the Company issued and sold 6,126,939 shares of its common stock (which includes 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the “Public“2021 Public Offering”). The net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, were approximately $70,125,000. The shares were sold pursuant to an underwriting agreement with B. Riley Securities, Inc. and Lake Street Capital Markets, LLC, as representatives of the several underwriters named therein under the Company’s shelf registration statement on Form S-3 (Registration Statement No. 333-224423) filed by the Company with the SEC that became effective on April 30, 2018. On February 4, 2021, a prospectus supplement and accompanying prospectus were filed with the SEC in connection with the offering and a related registration statement (File No. 333-252735) was filed pursuant to Rule 462(b) promulgated under the Securities Act.
24 |
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 were designated as $0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock were entitled to quarterly dividends of 7.0% per annum per share.
Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2020.sheets.
Rekor adjusted the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value was recorded through additional paid in capitalpaid-in capital of $0 and $220,000$101,000 for the the three months ended September 30, 2021 March 31, 2022 and 2020, respectively, and $101,000 and $638,000 for the nine months ended September 30, 2021 and 2020,, respectively.
As a result of the closing of the 2021Public Offering in the first quarter of 2021, all of the issued and outstanding Series A Preferred Stock was converted pursuant to the original terms of the agreement into 899,174 shares of the Company’s common stock.
Series B Cumulative Convertible Preferred Stock
Of the 2,000,000 authorized shares of preferred stock, 240,861 shares were designated as $0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $0.0001 par value Series B Preferred Stock. All Series B Preferred Stock was issued at a price of $10.00 per share as part of the acquisition of TeamGlobal. The Series B Preferred Stock had a conversion price of $5.00 per share. Each Series B Preferred Stock had an automatic conversion feature based on the share price of Rekor.
As a result of the volume weighted average share price of the Company’s common stock being over $7.50 for thirty consecutive days, in the first quarter of 2021, all of the Company’s issued and outstanding Series B Preferred Stock was converted pursuant to the original terms of the agreement into 517,611 shares of the Company’s common stock.
Warrants
A summary of the warrant activity for the Company for the period ended September 30, 2021March 31, 2022 is as follows:
|
| Series A Preferred Stock Warrants (1) |
|
| Firestorm Warrants (2) |
|
| Secure Education Warrants (3) |
|
| 2018 Public Offering Warrants (4) |
|
| 2019 Promissory Note Warrants (5) |
|
| Total |
| ||||||
Active warrants January 1, 2021 |
|
| 141,789 |
|
|
| 631,254 |
|
|
| 66,666 |
|
|
| 4,886 |
|
|
| 68,750 |
|
|
| 913,345 |
|
Exercised warrants |
|
| (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 |
|
Series A Preferred Stock Warrants (1) | Firestorm Warrants (2) | Secure Education Warrants (3) | 2018 Public Offering Warrants (4) | Total | ||||||||||||||||
Active warrants as of January 1, 2022 | 41,996 | 631,254 | 15,556 | 3,505 | 692,311 | |||||||||||||||
Exercised warrants | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Outstanding warrants as of March 31, 2022 | 41,996 | 631,254 | 15,556 | 3,505 | 692,311 | |||||||||||||||
Weighted average strike price of outstanding warrants as of March 31, 2022 | $ | 1.03 | $ | 3.09 | $ | 6.06 | $ | 1.00 | $ | 3.02 |
( |
| As part of a Regulation A Offering in fiscal |
| 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 |
| 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. |
| 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 |
|
|
NOTE 12 11– EQUITY INCENTIVE PLAN
In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at 3,000,000 shares. In October 2021, the Company announced it had registered an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan.Stock Options
Stock Options
Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three years with a contractual term of ten years.
Stock compensation expense related to stock options for the three months ended September 30, 2021 March 31, 2022 and 2020 was2021 was $28,000 and $30,000, and $63,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $90,000 and $208,000, respectively,respectively, and is presented, based on the awardees operating department, as part of general administrative, selling and administrativemarketing and research and development expenses in the accompanying unaudited condensed consolidated statements of operations.
A summary of stock option activity under the Company’s 2017 Plan for the period ended September 30, 2021March 31, 2022 is as follows:
|
| Number of Shares Subject to Option |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term (Years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding Balance at December 31, 2020 |
|
| 1,291,753 |
|
| $ | 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 |
|
Number of Shares Subject to Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding Balance as of December 31, 2021 | 1,012,336 | $ | 1.28 | 6.50 | $ | 5,002,000 | ||||||||||
Exercised | (12,971 | ) | 2.26 | |||||||||||||
Forfeited | (2,500 | ) | 0.80 | |||||||||||||
Outstanding balance as of March 31, 2022 | 996,865 | $ | 1.27 | 6.30 | $ | 3,063,000 | ||||||||||
Exercisable as of March 31, 2022 | 842,530 | $ | 1.30 | 6.15 | $ | 2,602,000 |
As of September 30, 2021,March 31, 2022, there was $82,000 $19,000 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over a weighted average period of 0.690.23 years.
Restricted Stock Units
Stock compensation expense related to RSU’s for the three months ended September 30, 2021 March 31, 2022 and 2020 was $664,0002021 was $1,872,000 and $139,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $2,510,000 and $331,000, respectively,$751,000, respectively, and is presented, based on the awardees operating department, as part of general administrative, selling and administrativemarketing and research and development 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 ninethree months ended September 30, 2021March 31, 2022 is as follows:
|
| Number of Shares |
| Weighted Average Unit Price |
| Weighted Average Remaining Contractual Term (Years) |
| 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 |
| ||||||||||||
Outstanding balance as of December 31, 2021 | 1,347,879 | $ | 10.94 | 2.20 | ||||||||||||||||||||
Granted |
| 482,040 |
| 12.36 |
| 1.86 |
| 1,085,680 | 4.62 | 2.48 | ||||||||||||||
Vested |
| (215,430 | ) |
| 7.43 |
|
|
| (201,259 | ) | 9.21 | |||||||||||||
Forfeited |
|
| (93,940 | ) |
|
| 5.74 |
|
|
|
|
| (63,256 | ) | 11.29 | |||||||||
Outstanding Balance at September 30, 2021 |
|
| 652,654 |
|
| $ | 9.12 |
|
|
| 1.92 |
| ||||||||||||
Outstanding balance as of March 31, 2022 | 2,169,044 | $ | 8.07 | 2.33 |
The grant date fair value is based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition.
As of September 30, 2021, thereMarch 31, 2022, there was $4,552,000$15,030,000 of unrecognizedunrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining periodperiod of 1.922.20 years.
NOTE 13 12– LOSS PER SHARE
The following table provides information relating to the calculation of loss per common share:
|
| Three Months ended September 30, |
| Nine Months ended September 30, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 | 2021 | |||||||||||||
|
| (Dollars in thousands, except per share data) |
| (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 | ) | $ | (12,601 | ) | $ | (5,403 | ) | ||
Less: preferred stock accretion |
| 0 |
| (220 | ) |
| (101 | ) |
| (638 | ) | 0 | (101 | ) | ||||||||||
Less: preferred stock dividends |
|
| 0 |
|
|
| (115 | ) |
|
| (51 | ) |
|
| (345 | ) | 0 | (51 | ) | |||||
Net loss attributable to shareholders from continuing operations |
| $ | (9,613 | ) |
| $ | (7,002 | ) |
| $ | (19,929 | ) |
| $ | (11,843 | ) | $ | (12,601 | ) | $ | (5,555 | ) | ||
Net loss from discontinued operations |
|
| 0 |
|
|
| (2 | ) |
|
| (4 | ) |
|
| (215 | ) | ||||||||
Net loss attributable to shareholders from discontinued operations | 0 | (3 | ) | |||||||||||||||||||||
Net loss attributable to shareholders |
| $ | (9,613 | ) |
| $ | (7,004 | ) |
| $ | (19,933 | ) |
| $ | (12,058 | ) | $ | (12,601 | ) | $ | (5,558 | ) | ||
Weighted average common shares outstanding - basic and diluted |
| 41,938,863 |
| 26,907,069 |
| 38,357,167 |
| 22,781,807 |
| 44,087,911 | 35,944,355 | |||||||||||||
Basic and diluted loss per share from continuing operations |
| $ | (0.23 | ) |
| $ | (0.26 | ) |
| $ | (0.52 | ) |
| $ | (0.52 | ) | $ | (0.29 | ) | $ | (0.15 | ) | ||
Basic and diluted loss per share from discontinued operations |
|
| 0.00 |
|
|
| (0.00 | ) |
|
| (0.00 | ) |
|
| (0.01 | ) | 0 | 0 | ||||||
Basic and diluted loss per share |
| $ | (0.23 | ) |
| $ | (0.26 | ) |
| $ | (0.52 | ) |
| $ | (0.53 | ) | $ | (0.29 | ) | $ | (0.15 | ) | ||
Common stock equivalents excluded due to anti-dilutive effect |
|
| 2,429,924 |
|
|
| 4,134,979 |
|
|
| 2,429,924 |
|
|
| 4,134,979 |
| ||||||||
Common stock equivalents excluded due to the anti-dilutive effect | 3,858,220 | 2,436,750 |
As the Company had a net loss for the three and nine months ended September 30, 2021,March 31, 2022, the following 2,429,924following 3,858,220 potentially dilutive securities were excluded from diluted loss per share: 694,299692,311 for outstanding warrants, 1,082,971996,865 related to outstanding options and 652,6542,169,044 related to outstanding RSUs.
As the Company had a net loss for the three and nine months ended September 30, 2020,March 31, 2021, the following 4,134,9792,436,750 potentially dilutive securities were excluded from diluted loss per share: 1,004,155714,293 for outstanding warrants, 923,844 related to the Series A Preferred Stock, 509,325 related to the Series B Preferred Stock, 1,287,9211,167,852 related to outstanding options and 409,734554,605 related to outstanding RSUs.
NOTE 14 13– SUBSEQUENT EVENTS
Forgiveness of PPP Loans
In October 2021, the Company was 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 PlanAt-the-Market Issuance Sales Agreement
The Company previously filed a Registration 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 4,368,7331,521,755 shares of its common stock availablein exchange for issuancenet cash of $4,928,000 under the 2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and by the Company’s stockholders on September 14, 2021 at the Company’s annual meeting.2022 Sales Agreement.
Form S-3 Registration Statement Resale Shares
On October 29, 2021 the Company filed a prospectus related to the resale from time to time
The Company issued the Resale Shares to the selling stockholders on August 18, 2021, as a portion of the purchase price consideration. The Company registered the Resale Shares on behalf of the selling stockholders pursuant to the Waycare purchase agreement.
ITEM 2.MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 2020 and our Quarterly Reports for the quarter’s ended March 31, 2021 and June 30, 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”) 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; |
● | 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, 20202021 (the “2020“2021 Annual Report”), our Quarterly Reports for the quarters ended March 31, 2021 and June 30, 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 productsWe are a global leader in the development and services for theimplementation of intelligent infrastructure marketfocused on addressing critical challenges across transportation management, public safety, and is workingkey commercial markets. With a real-time intelligence platform driven by deep access to drive the worlddata, AI-powered software, and smart optical devices at-the-edge, we combine our industry expertise and advanced proprietary technologies to bedeliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more efficient. As a provider 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 environment. 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 people using AI and other advanced technologies. Our capabilities appeal to businesses and governmental entities in solving a wide variety of real-world mobility and infrastructure-related operational challenges. Using the latest technology that gathers and collates comprehensive data and transforms this data into actionable insights, the Company delivers useable solutions that empower smartconnected 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. Ourcommunities. We provide products and services contributeacross 80 countries as we deliver transformative mission-critical intelligent infrastructure solutions and services for government agencies and commercial clients in the United States and around the world.
Digital Divide
Society is increasingly digital, automated, and information flows occur in real-time. Technological advancements in the past decade have transformed the way people connect, interact, and transact with others and with the world around them. Infrastructure is the backbone of a functioning economy: people, vehicles, materials, and information all require 24/7 mobility, something that depends on well-maintained, synchronized networks and systems. Unfortunately, many areas of the world are faced with aging and legacy infrastructure today resulting from decades of neglect and underinvestment, particularly in the sectors of transportation, mobility, and public safety. The cost, complexity and interdependency of these systems have made many organizations slow to building environmentally friendlyadopt advances in technology. This creates a digital divide between what is made possible by technology, and the current reality of infrastructure today.
Continued population growth and increased urbanization present unprecedented economic, mobility, public safety, and environmental challenges to cities, states, and metropolitan areas. Today’s challenges cannot be solved by simply replicating existing approaches and adding more legacy technology. For the ongoing mobility transformation to keep up with fast-changing global dynamics requires inventive approaches. Enhancements in data collection, analytics and communications can be employed.
Smarter, data-driven solutions can make better use of existing infrastructure, rather than tearing it up and starting over. Roads, bridges, tunnels, and residential areas have much “to tell us” about how to optimally serve the public with an efficient, safe, and healthy living environment if we tap into the data it can provide and exploit that knowledge intelligently. Successful approaches will leverage AI-powered software, smart devices, data, and solutions that can integrate into existing infrastructure and workflows. We see this as the path to intelligence-driven infrastructure and one that gives us a clear market advantage.
Bridging the Divide
Spurred by the 2021 Infrastructure Investment and Jobs Act in the United States, we expect the world to see a once-in-a-generation surge of investment in infrastructure and competitiveness. The bill allocates $550 billion in new spending, spread out over five years, to rebuild roads, bridges and rails, and airports, in addition to providing high-speed internet access and addressing climate concerns. As part of this, federal, state, and local governments are prioritizing strategic investments dedicated to improving existing transportation management and increasing public safety through modern, efficient and connected infrastructure. Officials are also planning for roadways of the future that leveragecan account for connected and autonomous vehicles. With these investments, we estimate an addressable global intelligent infrastructure market of $148 billion by 2026.
With access to multiple sources of data and our insightsaward winning AI-driven innovations, we believe we have established a leadership position in intelligent infrastructure solutions that puts us at the center of this emerging opportunity. With our advanced technology and domain expertise, we have developed solutions that address diverse use cases across a number of public and private sector segments. Using our proprietary centralized platform to operate more efficiently and sustainably. Customers can operatemaximize the value of our technology to customers, we are well positioned to help governments and businesses collect, analyze and turn infrastructure data into insights with new products and services that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.
Intelligence-Driven Innovation
As described below, we have concentrated on existing systems or usedeveloping our advanced sensorsintelligent infrastructure solutions to work through a single integrated platform, which creates a unique, market-advantaged position for us. The volume, variety, velocity, and third-partyveracity of data that we capture and apply to our proprietary artificial intelligence and machine learning models provide us with an even greater advantage. From the very beginning, we have been collecting, aggregating, cleansing, extracting, transforming, and using data to create a holistic view ofbuild and improve our models.
Today, we can look at the roadway and infrastructure. Currently, customers useextract and process a deeply detailed picture of the environment and what is moving in that environment with an unmatched level of accuracy in our solutions for a variety of applications, including roadway safetyinferences, predictive analytics, and incident management, traffic and infrastructure analytics, sustainability and green initiatives, public safety and contactless compliance.insights. We create safer communitiesare rapidly growing the geographic area connected by providing government agencies withsmart optical IoT devices at-the-edge to the technology they need to effectively protect and serve their citizens and provide businesses with solutions to improve customer experience, enhance revenue, reduce operating costs and drive operational efficiency.
Rekor aggregates data using mobile and mounted optical sensors with on-device (“edge”) processing, as well as through the acquisition of data feeds from third party vendors such as connected vehicles, weather, construction, and traffic data. Our tech stack, with its open architecture allows seamless integration with any Internet Protocol (“IP”) optical device, reducingof our Rekor One intelligence platform. In addition to digitizing existing infrastructure by capturing real-time data from new and existing roadway devices, our platform enables us to extend the scope of our knowledge via proprietary algorithms that pull the data and process it through our models. This reduces our clients’ need to invest in legacy system upgrades and affordinggives them the ability to gain additional value from existing infrastructure. Our advanced sensors use edge processing to capture, store,Beyond this, we are augmenting our data through a growing network of data partners. This provides multiple trillions of additional data points that unlock further real-time and process real-timepredictive operational insights about what is happening in a given transportation environment at every moment. Example data close to the source, allowing them to provide almost instant actionable insightssources from the roadway. We use artificial intelligenceour partner network include mobility, navigation, and machine learning to process the large amountstraffic applications, in-vehicle data, connected, autonomous vehicles (“CAV”) datasets, weather, supply chain, event management, and a rapidly growing list of informationcustomer-provided and crowd-sourced data. The more data we capture and integrateinject into our machine learning models, the smarter and more accurate they become. Due to the incredible strength and accuracy of our models, we can extract more data from the roadways than ever before possible, and generate rich multi-dimensional insights for our customers about what is happening in real-time. In addition, we use itAI-driven predictive analytics to provide tailored solutions toforecast what will happen in the next five minutes, in 12 or 24 hours, and even days and months into the future. From these insights, customers can make better informed proactive decisions and achieve improved operational efficiency through a more strategic allocation of resources. All of this is facilitated by our clients. Our sophisticatedproprietary Rekor One™ intelligence platform.
Fueled by Data and proprietary personally identifiable information (“PII”) filter de-identifies relevant data in an irreversible way so that it is incorporated intoArtificial Intelligence
At the core of all our intelligent infrastructure platform in full compliance withsolutions is the securityRekor One intelligence platform. Fueled by rich data and privacy requirementspowered by AI, Rekor One is purpose-built to be a single source of each end user. Authorized entitiestruth and insights serving multiple customer segments and multiple missions. From Rekor One, we can also leverage our operational data to improvesimultaneously deliver vertical-specific solutions for traffic management, public safety, and institute contactless compliance programs.commercial markets.
With the Rekor One platform as our foundation, we collect and transform data into information, and information into knowledge to give governments and businesses a comprehensive picture of roadways, vehicles, traffic, incidents, and more. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
Built on the foundation of Rekor One, we deliver vertical-specific solutions for traffic management, public safety, and commercial markets.
Example use-cases we can support include:
● | Traffic management and analytics | |
● | Predictive traffic congestion modeling and forecasting | |
● | Roadway monitoring and incident detection and response | |
● | Support systems for integrated corridor management | |
● | Electric vehicle adoption and charge station planning | |
● | Commercial vehicle and tonnage monitoring and analysis | |
● | Real-time emissions analysis, sustainability, and green initiatives | |
● | Live and archival HD video management and traffic surveillance | |
● | Law enforcement and intelligence-based policing | |
● | Contactless compliance and enforcement | |
● | Vehicle and license plate recognition for public safety |
Rekor One™The Road Ahead
We believe the world is at an inflection point. In the next five years, governments will make significant investments to improve aging infrastructure, roadway conditions, and public safety via modern, efficient, and connected infrastructure. Recent technological developments such as artificial intelligence, the internet of things, edge- and cloud-based computing, and advances in rich data management have put us in a unique position to help revolutionize mobility through intelligent infrastructure and close the gap between rapidly evolving technology and aging, legacy infrastructure. These are not just our single source platform for intelligent infrastructure. Rekor One provides government agencies with real-time roadway intelligenceaspirational goals, but things we’re working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it 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 picturepackaging it to provide real-time insights and long-term solutions for intelligent infrastructure, we sustainably help governments and businesses address both issues of vehicles, traffic, incidentsaging infrastructure and more within a particular jurisdiction. Rekor One’s actionable insights improve operations, enable better informed decision making,the unprecedented mobility, public safety, economic, and allow for more strategic allocation of resources. The solution is hardware and software agnostic, allowing for seamless integration without interrupting existing systems in place. Our platform was built to allow us to create custom applications for an array of use cases. Some use cases used today include:
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Ultimately, we seek to deliver insights through an expanding software portfolio that not only addresses theenvironmental challenges our customers are currently facing but also empowers them to effectively deal with their evolving challenges in the future.they face.
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 operateWe believe our leadership 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 thisintelligent infrastructure solutions, advanced technology, and breadth of use-casesuse 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 intelligenceputs us in an accurate, real-time,advantaged market position at the forefront of developing a new economy and cost-effective manner. Wepoised to unlock massive gains as we provide actionablegovernments and differentiated answers on a single platformbusinesses with new products and services that is builtuse trillions of intelligent infrastructure interactions to serve multiple missions.increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people.
Our operations are conducted by our wholly owned subsidiary,wholly-owned subsidiaries, 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 systemsWaycare Technologies, Ltd. (“ITS”Waycare”) 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.
Recent Developments.
The most significant developments in our company and business since January 1, 2021 are described below:
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Opportunities, Trends and Uncertainties
We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:
● | Growing Smart City Market – According to a United | |
● | AI for Infrastructure – We believe that the application of AI to the analysis of | |
● | Connected Vehicle Data – Today’s new 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 |
● | 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 | |
● | Adaptability of the |
● | Expansion of Automated Enforcement of Motor Vehicle Laws – We | |
● | Graphic Processing Unit |
● | Edge Processing – Demand for actionable roadway information continues to grow in parallel with camera resolutions. Over the last several decades, cameras have evolved | |
● | 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 visible 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. |
● | 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 |
● | 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 with 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 | |
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●$200 million annually for a “Safe Streets and Roads for All” program that would make competitive grants for state projects that significantly reduce or eliminate transportation-related fatalities. ●$150 million for the current administration to establish a grant program to modernize state data collection systems ●$500 million for the Strengthening Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that improve transportation efficiency and safety |
Components of Operating Results
Revenues
We derive revenues substantially from Software-as-a-Service products (“SaaS”), licensing and subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales, and the sale of software, hardware and related services.
Software sales include subscriptions for the use of our software as a service (“SaaS”) and software licenses. SaaS revenues are treated as recurring revenue and provided both through negotiated agreements with larger governmental and commercial customers and through subscriptions from smaller customers. License sales are typically term agreements, including agreements for perpetual licenses, that may include maintenance obligations for software updates that keep up with changes in connectionvehicle models and license plate designs.
Hardware is sold through direct sales or subscriptions and is typically sold with a software subscription or license arrangement. Revenue from direct sales is generally recognized when the hardware is delivered, or installation is completed in accordance with the terms of the contract. Subscription revenues may include hardware and software subscriptions and are recognized as recurring revenue throughout the term of the lease agreement.
Our related services include customer support and implementation services, as well as management services such as violation notices, billing and collections, website portals and call centers related to programs that employ our software solutions. Revenue is recognized upon transferIn addition, we engage in pilot programs with governmental and commercial entities that include extension or renewal features that may result in recurring revenues and/or additional point-in-time revenues at the completion of control of promised products and services to our customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.pilot program.
Costs of revenues, excluding depreciation and amortization
Direct costs of revenues consist primarily of the portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with revenue generatingrevenue-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 generatingrevenue-generating activities. Direct costs of revenues exclude the portion of technical and non-technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts. Such costs are included in operating expenses. We expense direct costs of revenues when incurred.
Operating Expenses
Our operating expenses consist of general and administrative expenses, sales and marketing, research and 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 expenses. Operating expenses also include depreciation, amortization and impairment of assets.
General and Administrative
General and administrative expenseexpenses consist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include office leases, professional fees and insurance.
We expect our general and administrative expenses to continue to increase in absolute dollarsremain high for the foreseeable future due to additionalthe costs associated with our growth and the costs of 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 ourOur general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.
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.
Research and Development
Research and development expenses consistsconsist 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 expenses 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 solutions. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenseexpenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.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) consists primarily of interest expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed assets, and interest income earned on cash and cash equivalents, short-term investments and note receivables.
Income Tax Provision
Income tax provision consists primarily of income taxes in certain domestic jurisdictions in which we conduct business. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.
Critical Accounting Estimates and Assumptions
A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
New Accounting Pronouncements
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 are presented below. The analysis of operation is solely related to continuing operations and does not consider the results of discontinued operations.
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| Three Months ended September 30, |
| Nine Months ended September 30, |
| Three Months Ended March 31, | ||||||||||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
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| 2020 |
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Revenue |
| $ | 2,615 |
| $ | 2,126 |
| $ | 11,105 |
| $ | 6,399 |
| $ | 3,608 | $ | 4,216 | |||||||
Cost of revenue, excluding depreciation and amortization |
| 1,402 |
| 979 |
| 4,705 |
| 2,745 |
| 1,983 | 1,922 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
| |||||||||||||||
General and administrative expenses |
| 6,813 |
| 2,676 |
| 16,094 |
| 7,518 |
| 7,388 | 4,907 | |||||||||||||
Selling and marketing expenses |
| 1,125 |
| 560 |
| 3,044 |
| 1,356 |
| 1,352 | 937 | |||||||||||||
Research and development expenses |
| 2,000 |
| 781 |
| 4,741 |
| 2,143 |
| 4,092 | 1,222 | |||||||||||||
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 2,169 |
|
|
| 1,386 |
| 1,399 | 536 | ||||||
Operating expenses |
|
| 10,868 |
|
|
| 4,514 |
|
|
| 26,048 |
|
|
| 12,403 |
| ||||||||
Total operating expenses | 14,231 | 7,602 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Loss from operations |
| (9,655 | ) |
| (3,367 | ) |
| (19,648 | ) |
| (8,749 | ) | (12,606 | ) | (5,308 | ) | ||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
| |||||||||||||||
Loss on extinguishment of debt |
| - |
| (3,081 | ) |
| - |
| (3,281 | ) | ||||||||||||||
Interest expense |
| (21 | ) |
| (218 | ) |
| (72 | ) |
| (2,468 | ) | (9 | ) | (32 | ) | ||||||||
Gain on the sale of business |
| - |
| - |
| - |
| 3,631 |
| |||||||||||||||
Other income |
|
| 66 |
|
|
| 6 |
|
|
| 103 |
|
|
| 27 |
| 14 | 16 | ||||||
Total other income (expense) |
|
| 45 |
|
|
| (3,293 | ) |
|
| 31 |
|
|
| (2,091 | ) | 5 | (16 | ) | |||||
Loss before income taxes |
|
| (9,610 | ) |
|
| (6,660 | ) |
|
| (19,617 | ) |
|
| (10,840 | ) | ||||||||
Loss before income taxes and equity method investments | (12,601 | ) | (5,324 | ) | ||||||||||||||||||||
Income tax provision |
| (3 | ) |
| (7 | ) |
| (10 | ) |
| (20 | ) | - | (3 | ) | |||||||||
Equity in loss of investee |
|
| - |
|
|
| - |
|
|
| (150 | ) |
|
| - |
| - | (76 | ) | |||||
Net loss from continuing operations |
| (9,613 | ) |
| (6,667 | ) |
| (19,777 | ) |
| (10,860 | ) | $ | (12,601 | ) | $ | (5,403 | ) | ||||||
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 | ) |
Comparison of the Three and Nine months ended September 30, 2021March 31, 2022 and the Three and Nine months ended September 30, 2020March 31, 2021
Total Revenue
|
| Three Months ended September 30, |
| Change |
| Nine Months ended September 30, |
| Change |
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| $ |
| % |
| 2021 |
| 2020 |
| $ |
| % |
| |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
Revenue |
| $ | 2,615 |
| $ | 2,126 |
| $ | 489 |
| 23 | % |
| $ | 11,105 |
| $ | 6,399 |
| $ | 4,706 |
| 74 | % | $ | 3,608 | $ | 4,216 | $ | (608 | ) | -14 | % |
The increasedecrease in revenue for the three and nine months ended September 30, 2021,March 31, 2022, compared to the three and nine months ended September 30, 2020,March 31, 2021, was a result of additional productsa decrease in product and programsservice revenue in the current period. As part of our change in selling strategy, we offered, increases in our directhave focused on a sales model that employs contracts with recurring revenue. We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and Partners Program sales.
In 2021, we initiated services for Oklahoma’s UVED Programsoftware licenses which has generated revenue of $345,000 and $975,000 during the three and nine months ended September 30, 2021.
are generally more difficult to predict. During the three and nine months ended September 30,March 31, 2021, $260,000there was one customer who accounted for $1,673,000 of revenue was attributed to Waycare.
Additionally, during the nine months ended September 30, 2021, we hadas a higher volumeresult of agreements with significant customers in which the revenue recognition was bifurcated into point in time revenue recognition related to thea one-time sale of hardware and perpetual licenses, as well assoftware. The decrease in one-time sale revenues during the three months ended March 31, 2022, was partially offset by an $831,000 increase in recurring revenue recognition relatedduring the period. The increase in recurring revenue is primarily attributable to our Waycare acquisition and our current land and expand strategy, which involves expanding the softwareservices and customer support fees.solutions we provide to existing customers, and also facilitating cooperation between our existing customers and new customers as part of a broader information network.
Cost of Revenue, Excluding Depreciation and Amortization
|
| Three Months ended September 30, |
| Change |
| Nine Months ended September 30, |
| Change |
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| $ |
| % |
| 2021 |
| 2020 |
| $ |
| % |
| |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue, excluding depreciation and amortization |
| $ | 1,402 |
| $ | 979 |
| $ | 423 |
| 43 | % |
| $ | 4,705 |
| $ | 2,745 |
| $ | 1,960 |
| 71 | % | $ | 1,983 | $ | 1,922 | $ | 61 | 3 | % |
For the three and nine months ended September 30, 2021,March 31, 2022, cost of revenue, excluding depreciation and amortization increased by $423,000 and $1,960,000$61,000 compared to the corresponding prior periods. The increase wasperiods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our increase in revenue.new go-to-market strategy.
Operating Expenses
|
| Three Months ended September 30, |
| Change |
| Nine Months ended September 30, |
| Change |
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| $ |
| % |
| 2021 |
| 2020 |
| $ |
| % |
| |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
General and administrative expenses |
| $ | 6,813 |
| $ | 2,676 |
| $ | 4,137 |
| 155 | % |
| $ | 16,094 |
| $ | 7,518 |
| $ | 8,576 |
| 114 | % | $ | 7,388 | $ | 4,829 | $ | 2,559 | 53 | % | ||||||||||||||||
Selling and marketing expenses |
| 1,125 |
| 560 |
| 565 |
| 101 | % |
| 3,044 |
| 1,356 |
| 1,688 |
| 124 | % | 1,352 | 937 | 415 | 44 | % | |||||||||||||||||||||||||
Research and development expenses |
| 2,000 |
| 781 |
| 1,219 |
| 156 | % |
| 4,741 |
| 2,143 |
| 2,598 |
| 121 | % | 4,092 | 1,222 | 2,870 | 235 | % | |||||||||||||||||||||||||
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 433 |
|
|
| 87 | % |
|
| 2,169 |
|
|
| 1,386 |
|
|
| 783 |
|
|
| 56 | % | 1,399 | 614 | 785 | 128 | % | |||||||||||
Operating expenses |
| $ | 10,868 |
|
| $ | 4,514 |
|
| $ | 6,354 |
|
|
| 141 | % |
| $ | 26,048 |
|
| $ | 12,403 |
|
| $ | 13,645 |
|
|
| 110 | % | ||||||||||||||||
Total operating expenses | $ | 14,231 | $ | 7,602 | $ | 6,629 | 87 | % |
General and Administrative Expenses
The majority of the increase in general and administrative expenses is attributable to increased headcount and equity award expenses. Additionally, forduring the three and nine months ended September 30, 2021March 31, 2022 compared to the three and nine months ended September 30, 2020, we sawMarch 31, 2021, were primarily due to a $2,319,000 increase in personnel costs related to an increase in professional fees mainly associated with our merger and acquisition initiatives.headcount, including a $473,000 increase in stock-based compensation.
Selling and Marketing Expenses
The increase in selling and marketing expenses during the year isthree months ended March 31, 2022, compared to the three months ended March 31, 2021, was attributable mainly to increased marketing efforts to promote our products and services including digital marketing and other sales efforts. In connection with these efforts, there was an increase in staffing to support the Company’sour growth plan.plan which led to a $513,000 increase in personnel costs, including a $125,000 increase in stock-based compensation.
Research and Development Expense
The overall increase in research and development expenses isduring the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily attributable to the development of new products and additional software capabilities, mainly as a result of our increased focus on technology offerings. The increase in research and development expenses is mainly attributable to an increase in headcount and hours associated with research and development activities. In the current period, there was an increase in staffing to support the Company’s new products which led to a $1,811,000 increase in personnel costs, including a $476,000 increase in stock-based compensation.
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) |
| 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 | % |
Three Months Ended March 31, | Change | |||||||||||||||
(Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | $ | (9 | ) | $ | (32 | ) | $ | 23 | 72 | % | ||||||
Other income, net | 14 | 16 | (2 | ) | -13 | % | ||||||||||
Total other income (expense) | $ | 5 | $ | (16 | ) | $ | 21 | 131 | % |
The decrease in interestInterest expense and debt extinguishment costs for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 is due to the retirement of the 2019 Promissory notes in 2020.other income remained consistent period over period.
Additionally, during the nine months ended September 30, 2020, we sold our non-core businesses which resulted in a gain of $3,631,000.
Non-GAAP Measures: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S. (“U.S. GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company’s ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.
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, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 | 2021 | |||||||||||||
Total comprehensive loss from continuing operations |
| $ | (9,610 | ) |
| $ | (6,667 | ) |
| $ | (19,771 | ) |
| $ | (10,860 | ) | ||||||||
Net loss from continuing operations | $ | (12,601 | ) | $ | (5,403 | ) | ||||||||||||||||||
Income taxes |
| 3 |
| 7 |
| 10 |
| 20 |
| - | 3 | |||||||||||||
Interest |
| 21 |
| 218 |
| 72 |
| 2,468 |
| 9 | 32 | |||||||||||||
Depreciation and amortization |
|
| 930 |
|
|
| 497 |
|
|
| 2,169 |
|
|
| 1,386 |
| 1,399 | 614 | ||||||
EBITDA |
| $ | (8,656 | ) |
| $ | (5,945 | ) |
| $ | (17,520 | ) |
| $ | (6,986 | ) | $ | (11,193 | ) | $ | (4,754 | ) | ||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Loss on extinguishment of debt |
| $ | - |
| $ | 3,081 |
| $ | - |
| $ | 3,281 |
| |||||||||||
Share-based compensation |
| 694 |
| 202 |
| 2,600 |
| 539 |
| $ | 1,900 | $ | 781 | |||||||||||
Gain on sale of business |
| - |
| - |
| - |
| (3,631 | ) | |||||||||||||||
Loss due to change in value of equity investments |
| - |
| - |
| 150 |
| - |
| - | 76 | |||||||||||||
One-time consulting fees |
|
| 1,249 |
|
|
| - |
|
|
| 2,025 |
|
|
| - |
| ||||||||
Adjusted EBITDA |
| $ | (6,713 | ) |
| $ | (2,662 | ) |
| $ | (12,745 | ) |
| $ | (6,797 | ) | $ | (9,293 | ) | $ | (3,897 | ) |
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of 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 can gain efficiencies through the adoption of our technology and successfully cross-selling and upselling our current and future offerings. However, our ability to improve Adjusted Gross Margin over timeovertime is not guaranteed and could be impacted by the factors affecting our performance. We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.
The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:
|
| Three Months ended September 30, |
| Nine Months ended September 30, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 | 2021 | |||||||||||||
|
| (in thousands, except percentages) |
| (in thousands, except percentages) |
| (Dollars in thousands, except percentages) | ||||||||||||||||||
Revenue |
| $ | 2,615 |
| $ | 2,126 |
| $ | 11,105 |
| $ | 6,399 |
| $ | 3,608 | $ | 4,216 | |||||||
Cost of revenue, excluding depreciation and amortization |
|
| 1,402 |
|
|
| 979 |
|
|
| 4,705 |
|
|
| 2,745 |
| 1,983 | 1,922 | ||||||
Adjusted Gross Profit |
| $ | 1,213 |
|
| $ | 1,147 |
|
| $ | 6,400 |
|
| $ | 3,654 |
| $ | 1,625 | $ | 2,294 | ||||
Adjusted Gross Margin |
|
| 46.4 | % |
|
| 54.0 | % |
|
| 57.6 | % |
|
| 57.1 | % | 45.0 | % | 54.4 | % |
Adjusted Gross Margin, for the nine months ended September 30, 2021 and 2020 increased to 57.6% from 57.1%, respectively, and Adjusted Gross Margin, for the three months ended September 30,March 31, 2022 and 2021 and 2020 decreased to 46.4%45.0% from 54.0%54.4%, respectively. The fluctuationsrespectively. Fluctuations in Adjusted Gross Margin were drivenare primarily by ourthe result of the mix of software and hardware sales.sales experienced in the quarter. Software sales will carry a higher margin than hardware sales as there are fewer human costs associated with software sales. Additionally,sales, while hardware sales are typically associated with a software component which increases our performance obligations and provides higher margin recurring revenue in the future. However, as part of our planned go-to-market strategy, we offer ourhave recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to layestablish the foundation for our solutions.program, which will not be incurred again if the pilot program is converted into a long-term program.
Key Performance Indicators
We regularly review several indicators, including the following key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make 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 operations. 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 | % |
Three Months Ended March 31, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
Recurring revenue | $ | 1,695 | $ | 864 | $ | 831 | 96 | % |
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 agreement, such as the success rate of renewal periods, cancellations and usage estimates. For the ninethree months ended September 30, 2021March 31, 2022 we won contracts valuedvalued at $7,663,000,$1,525,000, compared to $3,682,000$2,531,000 of contracts won for the ninethree months ended September 30, 2020.March 31, 2021. This growthdecline represents a $3,981,000$1,006,000 or 108% growth,40% decline, period over period.
Unsatisfied Performance Obligations
As of September 30, 2021,March 31, 2022, we had approximately $23,845,000approximately $21,288,000 of contracts that were closed prior to September 30, 2021March 31, 2022 but have a contractual period beyond September 30,March 31, 2022. This represents a decline of $1,299,000 or 6% compared to $22,587,000 of performance obligations as of December 31, 2021. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately 36%41% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.
Lease ObligationsThe decrease in total contract value and performance obligations is partially related to our go-to-market strategy. Our go-to-market strategy involves entering into pilot programs that require low initial commitments by our customers in the short term and develop into larger commitments over time. This helps grow our pipeline and demand for our products. As pilot programs convert into longer term and larger scale contracts, we expect to see our KPIs improve.
At September 30, 2021,Lease Obligations
As of March 31, 2022, we leased building space at the following locations in the U.S. and Israel:
● | Columbia, Maryland – The corporate headquarters |
● | Linthicum, Maryland |
● | Orlando, Florida | |
● | Tel Aviv, Israel | |
● | Los Angeles, California |
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of our planned operations.
Liquidity and Capital Resources
The following table sets forth the components 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 |
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| $ | (7,416 | ) |
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| -33 | % |
Three Months Ended March 31, | ||||||||||||||||
2022 | 2021 | Change | ||||||||||||||
$ | % | |||||||||||||||
Net cash used in operating activities | $ | (12,156 | ) | $ | (3,159 | ) | $ | (8,997 | ) | -285 | % | |||||
Net cash used in investing activities | (1,964 | ) | (24,494 | ) | 22,530 | 92 | % | |||||||||
Net cash provided by financing activities | 3,113 | 70,499 | (67,386 | ) | -96 | % | ||||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents | $ | (11,007 | ) | $ | 42,846 | $ | (53,853 | ) | -126 | % |
Net cash used in operating activities – continuing operations for the ninethree months ended September 30, 2021March 31, 2022 had a net decrease of $4,461,000,$8,997,000, which was attributable to the increase in the loss from continuing operations of $8,871,000.$12,601,000. This amount was partially offset by an increase in share-based compensation expense, a non-cash adjustment, which increased $2,061,000 from $2,600,000$1,119,000 to $1,900,000 for the ninethree months ended September 30, 2021March 31, 2022 compared to $539,000$781,000 for the ninethree months ended September 30, 2020.March 31, 2021. This increase is due to the number of equity incentive shares that were issued as well as the increase in our stock price. Additionally, for the nine months ended September 30, 2020, there was a $3,631,000 gain on the sale of AOC Key Solutionsto employees and TeamGlobal. The gain on the sale is shown as a decrease in cash flow from operations and an increase in cash flow from investing activities to reflect the nature of the transactions.directors.
The net increasedecrease in net cash used in investmentinvesting activities – continuing operations of $48,473,000$22,530,000 was primarily due to a decrease in short-term investments that were previously made in during 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 ninethree months ended September 30, 2020, the cash provided by investing activities from continuing operations was primarily due to the cash proceedsMarch 31, 2021, of the sale of AOC Key Solutions and TeamGlobal.$23,994,000 which were previously invested in U.S. Treasury Bills that have maturity dates over three months, but less than a year.
Net cash provided by financing activities – continuing operations for the ninethree months ended September 30, 2021 increased $45,518,000March 31, 2022 decreased by $67,386,000 from the prior ninethree month period ended September 30, 2020.March 31, 2022. During the three months ended March 31, 2022, as part of our 2022 Sales Agreement, we received net proceeds after deducting the underwriting discounts and commissions and offering expenses payable by us, of $3,134,000. In the current year,prior comparable quarterly period, through our 2021 Public Offering, we received net proceeds, after deducting the underwriting discounts and commissions and offering expenses payable by us, of $70,125,000.
For the three and nine months ended September 30,March 31, 2022 and 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,March 31, 2022, we had cash and cash equivalents from continuing operations of $35,102,000$15,593,000 and working capital of $28,203,000,$9,297,000, as compared to cash and cash equivalents of $20,595,000$26,600,000 and working capital of $18,324,000$16,989,000 as of December 31, 2020.2021.
2021 Public Offering
On February 9, 2021, we issued and sold 6,126,939 shares of our common stock (which included 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the “Public“2021 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 Waycare named in the Purchase Agreement (the “Sellers”) and Shareholder Representative Services LLC, solely in its capacity as the representative of the Sellers, pursuant to which we acquired 100% of the issued and outstanding capital stock of Waycare from the Sellers (the “Acquisition”). 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 our common stock, valued at $20,287,000. As a result of the transaction, Waycare became our wholly-owned subsidiary.
As
On February 24, 2022, we entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which we from time to time may offer and sell shares of September 30, 2021, we had commitmentsour common stock, par value $0.0001 per share, having an aggregate offering price of up to purchase $2,479,000$50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately $169,000 related to legal, accounting, and other fees in propertyconnection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and equipment. This commitment has been recognized and recorded in our financial statementspresented as of September 30, 2021.a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.
For the three months ended March 31, 2022, based on the settlement date, we sold 728,452 shares of common stock at a weighted-average selling price of $4.67 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $3,134,000 after paying $169,000 related to the issuance cost, as well as, 3.0% or $102,000 related to cash commissions provided to the Agent.
As of March 31, 2022, we did not have any material commitments for capital expenditures.
ITEM 3. QUANTITATIVE 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 the information required by this Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Based on management’s review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.March 31, 2022.
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 who were founders of Firestormtwo related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. On January 30, 2020, we filed a Second Amended Complaint (the “Complaint”). 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 also alleges claims for breach of fiduciary duty, violations of the Computer Fraud and Abuse Act (“CFAA”), conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of thatthe acquisition transaction or, alternatively,and 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 theThe Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, we moved to dismiss certain counterclaims against certain directors and officers named as counterclaim-defendants, which resultedresulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter wethe Company filed ourits response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which we have opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for 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 motion for partial summary judgment, seeking summary judgment on several of ourthe Company’s claims and the Firestorm Principals’ counterclaims, along with supporting declarations and exhibits. Afterwhich the Court decided to allow the proposed motion to proceed, we,Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed their oppositionopposed. On March 14, 2022, the Court issued an opinion and order which denied summary judgment to the partialFirestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment motion on June 21, 2021. Theto the Firestorm Principals filedon their reply in supportbreach of their partialwarrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. The Court granted summary judgment motionto the Firestorm Principals on July 9, 2021.our CFAA claims, based on recent case law clarifying that such claims do not apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment on our CFAA, conversion, and trespass to chattels claims against one defendant because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on one breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $25,500 amount at issue could not be set off by or recouped from our damages in the case.
In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against our directors and officers, alleging breach of fiduciary duty and libel. The defendants in the suits moved to dismiss the amended complaint.these complaints. At this stage of these litigations, suits against two of the directors have been dismissed and one has been permitted to proceed.dismissed. On September 28, 2021, the Court issued an order denying the motion to dismiss.dismiss one of the actions in Delaware. On October 21, 2021, the Delaware Action defendants filed a motion for reconsideration of the Court’s Septemberdismissal order; that reconsideration motion was denied on February 28, 2021 order.2022. On March 16, 2022, the court in the Virginia Action dismissed the breach of fiduciary duty claim without prejudice (so it can be refiled in Delaware Chancery Court) and denied the motion with respect to the defamation claim on jurisdictional grounds. The defamation claim will now be challenged on substantive grounds.
At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome. The weWe 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 ownedwholly-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 claimscounterclaims 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. 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 21,23, 2021. On November 29, 2021, the Company filed a notice of appeal with the Appellate Division and a motion to reargue that decision and order, arguing that the court misunderstood the nature and purpose of the prospectus supplement, which was actually prepared by plaintiff after it set the prices for the 2018 offering. On March 3, 2022, the court denied the motion to reargue. In doing so, however, the court clarified that the dismissal was without prejudice, which would permit the Company to refashion the counterclaims. Meanwhile, the Company’s deadline to perfect its concurrent appeal in the appellate division is May 30, 2022.
At this stage of the Fordham litigation, we are unable to render an opinion regarding the likelihood of a favorable outcome. However, we maintain that Fordham’s claims have no merit. To that end we intend to vigorously litigate this action.
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 our automatic license plate recognition technology and uninsured vehicle enforcement diversion related business and seekssought damages on behalf of shareowners who acquired our stock between April 12, 2019 and May 25, 2021. The court has appointed a lead plaintiff. In November 2021, the plaintiff filed an order of dismissal, seeking to voluntarily dismiss without prejudice the Lawsuit that it had filed against us and several of our executives.prejudice. This matter was voluntarily dismissed without prejudice.
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 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, thereThere have been no material changes to the risk factors disclosed in “Risk Factors” in our Annual Report on Form 10-K as filed with the SEC on March 12, 2021, and in our Quarterly Reports on Form 10-Q as filed with the SEC on May 10, 2021 and August 16, 2021.31, 2022. 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 enter into agreements with third party data providers or successfully maintain them, our growth may be adversely impacted.
We rely, in part, on access the third party data and access to existing camera networks to grow our business. The majority of the third 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 not 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 through 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.
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 financial condition could be adversely affected.
Our internal investments and go-to-market strategy may place downward pressure on our operating margins.
To increase our revenue growth, we continue to invest in our business, including investments into new markets as part of our go-to-market strategy and investment 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 short term as a result of these investments. Furthermore, our investments may not produce the expected results. If we are unable to successfully execute our go-to-market strategy, we may experience decreases in our revenues and operating margins.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Note Exchange Agreement
In an agreement reached on June 30, 2020, the 2019 Lenders of the 2019 Promissory Notes agreed to a redemption of approximately 77% of the remaining principal balance of the 2019 Promissory Notes as of June 30, 2020. Per the Exchange Agreement, $17,398,000, was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share (the “Note Exchange”). At the time of the Exchange Agreement the net amount of long-term debt redeemed for common stock was $14,688,000. This included the existing principal balance subject to conversion, the portion of the exit fee associated with the notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $226,000 related to the paid-in-kind (“PIK”) interest associated to the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above was recorded as part of debt extinguishments costs in the accompanying consolidated statements of operations.
On July 15, 2020, we completed the Note Exchange by issuing our common stock to the 2019 Lenders in connection with the Note Exchange Transaction in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.
Automatic Conversion of Series A Cumulative Convertible Redeemable Preferred Stock and Series B Cumulative Convertible Redeemable Preferred Stock
As a result of the closing of the 2021 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.
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 ownedwholly-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 and have relied on cash on hand, external bank lines of credit, short-term borrowing arrangements, issuance of debt, the sale of a note, sale of our non-core subsidiaries, and the sale of common stock to provide cash for operations. We attribute losses to financing costs, public company corporate overhead, lower than expected revenue, and lower gross profit of some of our subsidiaries. Our proceeds have been primarily used for research and development and sales and marketing expenses related to new product development and our strategic shift to develop and promote the capabilities of our technology offerings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
(a) Exhibits
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104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** Furnished herewith.
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 | ||
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Principal Executive Officer | ||
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By: | /s/ Eyal Hen | ||
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Title: | Chief Financial Officer
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