• Filing Date: 2020-05-13
  • Form Type: 10-Q
  • Description: Quarterly report
v3.20.1
GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3 Months Ended
Mar. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of March 31, 2020, the unaudited condensed consolidated results of operations, consolidated statements of shareholders’ deficit and unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019.

 

The financial data and other information disclosed in the notes to the unaudited condensed consolidated financial statements related to these periods are unaudited. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Dollar amounts, except per share data, in the notes to these financial statements are rounded to the closest $1,000.

 

Certain prior year amounts have been reclassified to conform with the current year presentation. Amounts for the first quarter of 2020 and for the period ending December 31, 2019, have been reclassified to conform to the current year presentation. Due to the held for sale classification of Global and AOC Key Solutions, as well as, the discontinuance of all professional services activities, certain amounts have been reclassified in order to conform to the current period presentation.

 

Rekor Systems, Inc. (the “Company” or “Rekor”), was formed in February 2017. The Company is a leader in the field of vehicle identification and management systems driven by advances in artificial intelligence ("AI"). In development for over five years using AI processes, including deep machine learning algorithms, the Company’s core software enables the creation of more powerful and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional vehicle recognition systems. The software enables a wider field of view, greater light sensitivity, recognitions at faster speeds and the ability to identify the color, make and type of a vehicle as well as direction of travel. These capabilities are particularly useful in solving a wide variety of real-world roadway and vehicle related challenges. In addition, the reductions in cost have opened up a number of new uses for vehicle recognition technology that were not previously cost effective. 

 

In March 2019, Rekor acquired certain assets and certain liabilities of OpenALPR Technology, Inc. (such assets and liabilities being referred to herein as “OpenALPR Technology”) through its subsidiary, OpenALPR Software Solutions, LLC (“OpenALPR”). The financial information in this Quarterly Report only includes OpenALPR in the results of operations beginning as of March 12, 2019.

 

During the third quarter of 2019, the Company began to separately report the results of Global Technical Services, Inc. and Global Contract Professionals, Inc. (together “Global”), the Company’s wholly owned subsidiaries, including substantially all of the assets and liabilities comprising Global, as operations held for sale. During the first quarter of 2020, the Company began to separately report the results of AOC Key Solutions, Inc. (“AOC Key Solutions”), the Company’s wholly owned subsidiary, including substantially all of the assets and liabilities comprising AOC Key Solutions, as operations held for sale. Additionally, during the first quarter of 2020, in connection with the Company’s plan to sell AOC Key Solutions and Global, the Company determined that all of the Professionals Services segment should be classified held for sale or discontinued operations. The Company reported Firestorm Solutions, LLC (“Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and together with Firestorm Solutions, “Firestorm”) as part of held for sale and discontinued operations. This strategic shift by the Company was done to focus on its technology offerings and products.

 

The Company is reporting the operating results and cash flows of Global, AOC Key Solutions and Firestorm as held for sale and discontinued operations, and thus they have been excluded from continuing operations for all periods presented. Prior to the Company’s decision to sell Global and AOC Key Solutions, the operating results for these subsidiaries were presented in the Professional Services segment. Prior to the Company’s decision to discontinue the operations of its Professional Services segment, the operating results of Firestorm were presented in the Professional Services segment. The assets and liabilities of Global, AOC Key Solutions and Firestorm are presented as current and long-term assets and liabilities held for sale and discontinued in the unaudited condensed consolidated balance sheets and its results are presented as loss from held for sale and discontinued operations in the unaudited condensed consolidated statement of operations.

 

On April 2, 2020, the Company entered into an agreement with the members of AOC Key Solutions’ management to sell AOC Key Solutions. This transaction closed on April 2, 2020 subsequent to to the execution of the sales agreement and is further discussed in the Company’s subsequent events footnote.

 

Going Concern Assessment

 

For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions. These assumptions including among other factors, the expected timing and nature of the Company’s programs and projected cash expenditures, its ability to delay or curtail these expenditures or programs and its ability to raise additional capital, if necessary, to the extent management has the proper authority to execute them and considers it probable that those implementations can be achieved within the look-forward period.

 

The Company has generated losses since its inception in February 2017 and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to merger and acquisition costs, public company corporate overhead and non-capital expenditures. As of and for the three months ended March 31, 2020, the Company had a net loss from continuing operations of $3,774,000 and a working capital deficit of $1,179,000. The Company's net cash position was decreased by $34,000 for the three months ended March 31, 2020 due to the net loss from operations, offset by the net proceeds of $2,169,000 from the At-the-Market Agreement and the net proceeds from the issuance of common stock in connection with exercise of warrants and stock options of $454,000.

 

Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections, for one year from the date of the filing of the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, indicate the Company’s ability to continue operations as a going concern for that one-year period. The Company is actively monitoring its operations, the cash on hand and working capital. Additionally, as of March 31, 2020, the Company has access to raise up to $9,490,000 through the At Market Issuance Sales Agreement (the “Sales Agreement”). As of April 30, 2020, the Company has $9,490,000 available for sale under the Sales Agreement. The Company will continue to raise capital through the Sales Agreement to help fund operations. Should access to those funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.

 

The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to maintain timely collections from existing customers, as well as continue the growth of its technology business, (ii) timely completion of the disposition of the businesses in its Professional Services Segment, (iii) the continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with its lenders and financial intermediaries, (v) its ability to meet debt covenants or obtain waivers in case of noncompliance and (vi) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure new business, raise capital, complete the sale of its assets held for sale in a timely fashion and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

 

The Company’s operations have been affected by the recent and ongoing outbreak of the coronavirus disease (“COVID-19”) which was declared a pandemic by the World Health Organization in March 2020. The impact includes the need for employees to work remotely, restrictions on travel affecting the Company’s ability to attend meetings, conferences, consultations and installations and otherwise provide and market its products and services, and disruptions to its customers' operations which may affect its revenues. The Company also expects to benefit from the availability of financing under the CARES Act (see Note 13). The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by the Company.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the extensive use of management's estimates. Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual amounts may differ from these estimates. On an on-going basis, the Company evaluates its estimates, including those related to collectability of accounts receivable, fair value of debt and equity instruments and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. 

 

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair value of tangible and intangible assets acquired, net of the fair value of liabilities assumed. Goodwill is tested for impairment within one year of acquisitions or annually as of October 1, and whenever indicators of impairment exist. In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, the Company will perform a two-step impairment test. The Company will test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, based primarily on expected growth and general economic conditions.

 

Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Except for goodwill, the Company does not have any intangible assets with indefinite useful lives.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, inventory, accounts receivable and accounts payable approximate fair value as of March 31, 2020 and December 31, 2019 because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value as of March 31, 2020 and December 31, 2019 given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

 

The determination of fair value is based upon the fair value framework established by Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1  Quoted prices in active markets for identical assets or liabilities.

 

Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 

The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 2 and Level 3 inputs.

 

The Company has concluded that its Series A Preferred Stock is a Level 3 financial instrument and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through March 31, 2020. There were no changes in levels during the three months ended March 31, 2020.

 

Revenue Recognition

 

The Company derives its revenues substantially from license and subscription fees for software and related products and services.

 

Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. If the consideration promised in the contract includes a variable amount, for example maintenance fees, the Company includes an estimate of the amount it expects to receive for the total transaction price, if it is probable that a significant reversal of cumulative revenue recognized will not occur.

 

The Company determines the amount of revenue to be recognized through application of the following steps:

 

Identification of the contract, or contracts, with a customer

 

Identification of the performance obligations in the contract

 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when, or as, performance obligations are satisfied

 

The following table presents a summary of revenue (dollars in thousands):

 

    Three Months Ended March 31,  
    2020     2019  
Revenue            
Automated traffic safety enforcement   $ 745     $ 817  
Licensing and subscription revenue     850       193  
Total revenue   $ 1,595     $ 1,010  

 

Revenues

 

The revenues for technology products and services are from fees that provide customers with software licenses and related support and service fees for various public safety services.

 

In March 2019, the Company acquired substantially all of the assets of a software development company, OpenALPR Technologies, Inc. The software acquired from this acquisition and subsequently developed by the Company have provided the basis for the Company’s licensing and subscription revenue. Licensing and subscription services, include inclode those products which operate in many installation locations with a high accuracy rate, which include a web server, a self-managed database, and access to a powerful, cross-platform application programming interface. The Company’s proprietary software employs a convolutional neural network architecture to classify images and features that include seamless video analysis and data analytics. Current customers include law enforcement agencies, highway authorities, parking system operators, private security companies, and wholesale and retail operations supporting logistics and customer loyalty programs. During the second quarter of 2019, the Company changed its method of selling its software from perpetual software licenses, with associated maintenance services, to service subscriptions of limited duration. These subscriptions give the customer a license to use the latest version of the Company’s software only during the term of the subscription. Revenue is generally recognized ratably over the contract term. This change is expected to impact the Company's revenue in the short term. However, the amount of contract revenue received over the long-term is expected to be relatively consistent. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Revenue is recognized ratably over the licensing or subscription term.

 

Automated traffic safety enforcement revenues reflect arrangements to provide traffic safety systems to a number of municipalities in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images, analyses the images to provide data and supports citation management services. The Company also provides an enterprise parking enforcement solution that the Company licenses to parking management companies and municipalities.  Revenue is recognized monthly based on the number of camera systems that are operated, or the number of citations issued by the relevant municipality.

 

For those contracts that have multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors.

 

  A performance obligation is a promise in a contract with a customer to transfer services that are distinct. The performance obligations that are not yet satisfied or partially satisfied are performance obligations that are expected to be recognized as revenue in the future for a contract with a customer which was executed as of a particular date. At March 31, 2020, the Company had approximately $13,831,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 34% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter.

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the 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 billings 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 $247,000 and $440,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively. Additionally, unbilled accounts receivables of $1,751,000 and $346,000 were included in current assets held for sale and discontinued in the unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively.

 

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the three months ended March 31, 2020 were not materially impacted by any other factors. Contract liabilities from the period ended March 31, 2020 and December 31, 2019 were $1,574,000 and $1,524,000, respectively. All contract liabilities as of March 31, 2020 and December 31, 2019 were attributable to continued operations. During the three months ended March 31, 2020 $243,000 of the contract liabilities balance as of December 31, 2019 were recognized as revenue.

 

The services due for contract liabilities described above are shown below as of March 31, 2020 (dollars in thousands):

 

2020   $ 717  
2021     297  
2022     270  
2023     195  
2024     95  
Total   $ 1,574  

 

Practical Expedients ElectionCosts to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. As of March 31, 2020, and December 31, 2019, costs incurred to obtain contracts in excess of one year have been immaterial to date.

 

Segment Reporting

 

The FASB ASC Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. In 2019, the Company changed its operating and reportable segments from one segment to two segments: the Technology Segment and the Professional Services Segment. The two segments reflected the Company’s separate focus on technology products and services versus professional services.

 

As part of a strategic shift by the Company, all operations related to the Professional Services segment have been classified as held or sale and discontinued as of 2020. As of January 1, 2020, the Company has one reportable segment. Continuing operations are all operations that previously were reported as part of the Technology Segment.

  

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents 

 

The Company considers all highly liquid debt instruments purchased with the maturity of three months or less to be cash equivalents.

 

Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of March 31, 2020 and December 31, 2019 were $415,000 and $461,000, respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets. 

 

Concentrations of Credit Risk

 

The Company places its temporary cash investments with higher rated quality financial institutions located in the United States (“U.S.”). As of March 31, 2020 and December 31, 2019, the Company had deposits from continuing operations totaling $1,502,000 and $1,536,000, respectively, in one U.S. financial institution that was federally insured up to $250,000 per account.

 

The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.

 

Company A accounted for 17% and less than 10% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

Company B accounted for 13% and 27% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

Company C accounted for less than 10% and 12% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

As of March 31, 2020, accounts receivable from Company A totaled $140,000 or 19% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2019, Company A accounted for $198,000 or 26% of the unaudited condensed consolidated accounts receivable balance.

 

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenue for the three month period ended March 31, 2020 or unaudited condensed consolidated accounts receivable balance as of March 31, 2020.

 

Significant Accounting Policies

 

Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 

 

New Accounting Pronouncements Effective in the Three Months ended March 31, 2020

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s disclosures.

 

The Company does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.