• Filing Date: 2020-11-09
  • Form Type: 10-Q
  • Description: Quarterly report
v3.20.2
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2020
Nov. 09, 2020
Cover [Abstract]    
Entity Registrant Name Rekor Systems, Inc.  
Entity Central Index Key 0001697851  
Document Type 10-Q  
Document Period End Date Sep. 30, 2020  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Is Entity's Reporting Status Current? Yes  
Entity Filer Category Non-accelerated Filer  
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   32,974,257
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2020  
Entity Interactive Data Current Yes  
Entity Incorporation State Country Code DE  
Entity File Number 001-38338  
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2020
Dec. 31, 2019
CURRENT ASSETS    
Cash and cash equivalents $ 24,154 $ 1,075
Restricted cash and cash equivalents 573 461
Accounts receivable, net 966 776
Inventory 591 302
Notes receivable, current portion 255 0
Other current assets, net 361 175
Current assets of discontinued operations 3 7,441
Total current assets 26,903 10,230
LONG-TERM ASSETS    
Property and equipment, net 554 442
Right-of-use lease assets, net 276 283
Goodwill 6,336 6,336
Intangible assets, net 7,429 8,244
Investments in unconsolidated companies 75 0
Notes receivable, long-term 1,445 0
Long- term assets of discontinued operations 0 3,457
Total long-term assets 16,115 18,762
Total assets 43,018 28,992
CURRENT LIABILITIES    
Accounts payable and accrued expenses 3,834 3,678
Loans payable, current portion 370 0
Lease liability, short-term 232 148
Contract liabilities 1,234 749
Current liabilities of discontinued operations 114 5,757
Total current liabilities 5,784 10,332
LONG-TERM LIABILITIES    
Notes payable, long-term 976 20,409
Loan payable, long-term 504 0
Lease liability, long term 60 161
Contract liabilities, long term 936 775
Other long-term liabilities 10 10
Long term liabilities held for sale and discontinued operations 14 536
Total long-term liabilities 2,500 21,891
Total liabilities 8,284 32,223
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 6,442 5,804
Commitment and Contingencies
STOCKHOLDERS' EQUITY (DEFICIT)    
Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 32,911,854 and 21,595,653 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 3 2
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of September 30, 2020 and December 31, 2019, respectively 0 0
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 0 0
Additional paid-in capital 68,117 19,371
Accumulated deficit (39,828) (28,408)
Total stockholders' equity (deficit) 28,292 (9,035)
Total liabilities and stockholders' equity (deficit) $ 43,018 $ 28,992
v3.20.2
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2020
Dec. 31, 2019
Common stock, par value $ .0001 $ 0.0001
Common stock, authorized 100,000,000 30,000,000
Common stock, issued 32,911,854 21,595,653
Common stock, outstanding 32,911,854 21,595,653
Series A    
Preferred stock, par value $ .0001 $ 0.0001
Preferred stock, authorized 505,000 505,000
Preferred stock, issued 502,327 502,327
Preferred stock, outstanding 502,327 502,327
Series B    
Preferred stock, par value $ 0.0001 $ 0.0001
Preferred stock, authorized 240,861 240,861
Preferred stock, issued 240,861 240,861
Preferred stock, outstanding 240,861 240,861
v3.20.2
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Income Statement [Abstract]        
Revenue $ 2,126 $ 1,536 $ 6,399 $ 3,962
Cost of revenue 984 390 2,753 1,152
Gross profit 1,142 1,146 3,646 2,810
OPERATING EXPENSES:        
General and administrative expenses 3,168 2,600 8,896 6,259
Selling and marketing expenses 560 587 1,356 1,081
Research and development expenses 781 450 2,143 757
Operating expenses 4,509 3,637 12,395 8,097
Loss from operations (3,367) (2,491) (8,749) (5,287)
Other income (expense):        
Loss on extinguishment of debt (3,081) 0 (3,281) (1,113)
Interest expense (218) (1,182) (2,468) (2,724)
Other income 6 157 27 123
Gain on sale of business 0 0 3,631 0
Total other expense (3,293) (1,025) (2,091) (3,714)
Loss before income taxes (6,660) (3,516) (10,840) (9,001)
Income tax provision (7) (12) (20) (35)
Net loss from continuing operations (6,667) (3,528) (10,860) (9,036)
Net loss from discontinued operations (2) (100) (215) (2,392)
Net loss $ (6,669) $ (3,628) $ (11,075) $ (11,428)
Loss per common share from continuing operations - basic and diluted $ (.26) $ (0.19) $ (.52) $ (0.51)
Loss per common share from held for sale and discontinued operations - basic and diluted .00 (0.01) (0.01) (0.12)
Loss per common share - basic and diluted $ (0.26) $ (0.20) $ (.53) $ (0.63)
Weighted average shares outstanding        
Basic and diluted 26,907,069 19,878,518 22,781,807 19,592,679
v3.20.2
Condensed Consolidated Statements of Changes in Stockholders' (Deficit) Equity - USD ($)
$ in Thousands
Common Stock
Series B
Additional Paid-In Capital
Accumulated Deficit
Total
Beginning balance, shares at Dec. 31, 2018 18,767,619 240,861      
Beginning balance, amount at Dec. 31, 2018 $ 2 $ 0 $ 15,518 $ (12,064) $ 3,456
Stock-based compensation     314   314
Issuance of common stock pursuant to exchange agreement, amount         0
Issuance of warrants in conjunction with notes payable     706   706
Exercise of cashless warrants in exchange for common stock 828,541        
Exercise of warrants in exchange for common stock 103,125        
Exercise of warrants in exchange for common stock, amount     103   103
Common stock issued in OpenALPR Technology acquisition, shares 600,000        
Common stock issued in OpenALPR Technology acquisition, amount     397   397
Issuance of common stock pursuant to at the market offering net, shares 103,566        
Issuance of common stock pursuant to at the market offering net, amount     38   38
Exercise of warrants related to series A preferred stock, shares 3,638        
Exercise of warrants related to series A preferred stock, amount     4   4
Preferred stock dividends       (344) (344)
Accretion of Series A preferred stock     (554)   (554)
Net loss (11,428) (11,428)
Ending balance, shares at Sep. 30, 2019 20,406,489 240,861      
Ending balance, amount at Sep. 30, 2019 $ 2 $ 0 16,526 (23,836) (7,308)
Beginning balance, shares at Jun. 30, 2019 19,382,185 240,861      
Beginning balance, amount at Jun. 30, 2019 $ 2 $ 0 16,496 (20,094) (3,596)
Stock-based compensation     76   76
Exercise of cashless warrants in exchange for common stock 813,975        
Exercise of warrants in exchange for common stock 103,125        
Exercise of warrants in exchange for common stock, amount     103   103
Issuance of common stock pursuant to at the market offering net, shares 103,566        
Issuance of common stock pursuant to at the market offering net, amount     38   38
Exercise of warrants related to series A preferred stock, shares 3,638        
Exercise of warrants related to series A preferred stock, amount     4   4
Preferred stock dividends       (114) (114)
Accretion of Series A preferred stock     (191)   (191)
Net loss (3,628) (3,628)
Ending balance, shares at Sep. 30, 2019 20,406,489 240,861      
Ending balance, amount at Sep. 30, 2019 $ 2 $ 0 16,526 (23,836) (7,308)
Beginning balance, shares at Dec. 31, 2019 21,595,653 240,861      
Beginning balance, amount at Dec. 31, 2019 $ 2 $ 0 19,731 (28,408) (9,035)
Stock-based compensation     539   539
Issuance of common stock pursuant to exchange agreement, shares 4,349,497        
Issuance of common stock pursuant to exchange agreement, amount     17,325   17,325
Exercise of cashless warrants in exchange for common stock 214,740        
Exercise of warrants in exchange for common stock 1,180,000        
Exercise of warrants in exchange for common stock, amount     874   874
Issuance of common stock pursuant to at the market offering net, shares 5,216,562        
Issuance of common stock pursuant to at the market offering net, amount $ 1   29,929   29,930
Exercise of warrants related to series A preferred stock, shares 74,177        
Exercise of warrants related to series A preferred stock, amount     77   77
Issuance upon exercise of stock options, shares 281,225        
Issuance upon exercise of stock options, amount     640   640
Preferred stock dividends       (345) (345)
Accretion of Series A preferred stock     (638)   (638)
Net loss (11,075) (11,075)
Ending balance, shares at Sep. 30, 2020 32,911,854 240,861      
Ending balance, amount at Sep. 30, 2020 $ 3 $ 0 68,117 (39,828) 28,292
Beginning balance, shares at Jun. 30, 2020 22,942,546 240,861      
Beginning balance, amount at Jun. 30, 2020 $ 2 $ 0 22,180 (33,044) (10,862)
Stock-based compensation     202   202
Issuance of common stock pursuant to exchange agreement, shares 4,349,497        
Issuance of common stock pursuant to exchange agreement, amount     17,325   17,325
Exercise of cashless warrants in exchange for common stock 171,522        
Exercise of warrants in exchange for common stock 625,000        
Exercise of warrants in exchange for common stock, amount     463   463
Issuance of common stock pursuant to at the market offering net, shares 4,677,595        
Issuance of common stock pursuant to at the market offering net, amount $ 1   27,752   27,753
Exercise of warrants related to series A preferred stock, shares 16,214        
Exercise of warrants related to series A preferred stock, amount     17   17
Issuance upon exercise of stock options, shares 129,480        
Issuance upon exercise of stock options, amount     398   398
Preferred stock dividends       (115) (115)
Accretion of Series A preferred stock     (220)   (220)
Net loss (6,669) (6,669)
Ending balance, shares at Sep. 30, 2020 32,911,854 240,861      
Ending balance, amount at Sep. 30, 2020 $ 3 $ 0 $ 68,117 $ (39,828) $ 28,292
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES    
Net loss from continuing operations $ (10,860) $ (9,036)
Net loss from discontinued operations (215) (2,392)
Net loss (11,075) (11,428)
Adjustments to reconcile net loss to net cash used in operating activities:    
Bad debt expense 36 0
Depreciation 270 243
Amortization of right-of-use lease asset 139 51
Share-based compensation 539 314
Amortization of financing costs 653 768
Amortization of intangible assets 977 663
Loss on extinguishment of debt 3,281 1,113
Gain on sale of AOC Key Solutions (2,619) 0
Gain on sale of Team Global (1,012) 0
Loss on sale of Secure Education 0 3
Changes in operating assets and liabilities    
Accounts receivable (226) (910)
Inventory (289) (312)
Other current assets (186) 57
Accounts payable and accrued expenses 940 1,676
Contract liabilities 646 982
Lease liability (149) (6)
Net cash used in operating activities - continuing operations (7,860) (4,394)
Net cash used in operating activities - discontinued operations (3,884) (4,861)
Net cash used in operating activities (11,744) (9,255)
CASH FLOWS FROM INVESTING ACTIVITIES    
Capital expenditures (544) (656)
Proceeds from sale of Secure Education 0 250
Proceeds from sale of AOC Key Solutions 3,400 0
Proceeds from sale of Team Global 2,300 0
Investment in equity investment (75) 0
Proceeds from AOC Key Solutions note receivable 600 0
Net cash provided by (used in) by investing activities - continuing operations 5,681 (406)
Net cash used in investing activities - discontinued operations 0 0
Net cash provided by (used in) investing activities 5,681 (406)
CASH FLOWS FROM FINANCING ACTIVITIES    
Proceeds from PPP loan 874 0
Payment of stock issuance costs associated with Note Exchange transaction (73) 0
Repayments of notes payable (7,266) 0
Net proceeds from notes payable 0 3,839
Net proceeds from exercise of options 640 0
Net proceeds from exercise of warrants 874 103
Net proceeds from exercise of warrants associated to series A preferred stock 77 4
Net proceeds from at-the-market agreement 29,930 38
Payment of preferred dividends 0 (108)
Payment of debt modification costs (300) 0
Net cash provided by financing activities - continuing operations 24,756 3,876
Net cash provided by financing activities - discontinued operations 4,171 5,224
Net cash provided by financing activities 28,927 9,100
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations 22,577 (924)
Net increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations 287 363
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents 22,864 (561)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period 1,866 2,768
Cash, cash equivalents and restricted cash and cash equivalents at end of period 24,730 2,207
Reconciliation of cash, cash equivalents and restricted cash:    
Cash and cash equivalents at end of period - continuing operations 24,154 885
Restricted cash and cash equivalents at end of period - continuing operations 573 708
Cash and cash equivalents at end of period - discontinued operations 3 614
Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 24,730 $ 2,207
v3.20.2
GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 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 September 30, 2020, 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, 2020 and 2019.

 

The financial data and other information disclosed in these notes are unaudited. The results for the three and nine months ended September 30, 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 U.S. GAAP.

 

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

 

The Company was formed in February 2017 and is currently a leader in the field of artificial intelligence ("AI") enabled vehicle identification and management systems. In development for over six years using 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 legacy systems. The software provides a wider field of view, greater light sensitivity and recognitions at faster speeds with higher accuracy rates. It also includes the ability to identify the color, make and type of a vehicle and its direction of travel. These capabilities are particularly useful to governmental entities and businesses in solving a wide variety of real-world vehicle related operational challenges. In addition, the reduction in cost, increased number and improved performance of internet protocol connected cameras has presented significant new uses for vehicle recognition technology that were not previously available or cost effective.

 

In March 2019, through its subsidiary, OpenALPR Software Solutions, LLC (“OpenALPR”), Rekor acquired certain assets and certain liabilities of OpenALPR Technology, Inc. (such assets and liabilities being referred to herein as “OpenALPR Technology”). 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. (“TeamGlobal”), the Company’s wholly owned subsidiary, as operations held for sale. TeamGlobal provides skilled technical professionals and maintenance and modification specialists to the aerospace and aviation maintenance industries. On June 29, 2020, the Company sold TeamGlobal to certain members of TeamGlobal's management team and began to separately report the results of TeamGlobal as discontinued operations. See Note 3.

 

During the first quarter of 2020, the Company began to separately report the results of AOC Key Solutions, Inc. (“AOC Key Solutions”) another of the Company’s wholly owned subsidiaries as operations held for sale. On April 2, 2020, the Company sold AOC Key Solutions to a member of AOC Key Solutions’ management and began to separately report the results of AOC Key Solutions as discontinued operations. See Note 3.

 

During the first quarter of 2020, the Board of Directors of the Company approved a strategic shift by the Company to focus on its technology services and products. In addition to the contemplated sale of AOC Key Solutions and TeamGlobal, the Company determined to present the operations of Firestorm Solutions, LLC (“Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and together with Firestorm Solutions, “Firestorm”) as discontinued operations. Prior to the Company’s decision to sell TeamGlobal and AOC Key Solutions, and discontinue the operations of Firestorm, the assets, liabilities and operating results for these subsidiaries were presented in the Professional Services segment. As a result of the decision, the Company determined that all of the Professionals Services segment should be classified as discontinued operations.

 

Since the Company is reporting the historical operating results and cash flows of the Company’s Professional Services segment as discontinued operations, they have been excluded from continuing operations for all periods presented. The assets and liabilities of the Professional Services segment are presented as current and long-term assets and liabilities of discontinued operations in the unaudited condensed consolidated balance sheets and its results are presented as a loss from discontinued operations in the unaudited condensed consolidated statement of operations.

 

Reclassification 

 

Certain prior year amounts have been reclassified to conform with the current year presentation. Amounts for the three and nine month periods ending September 30, 2019 and the year ending December 31, 2019, have been reclassified to conform to the current year presentation. Due to the sale of TeamGlobal, the sale of AOC Key Solutions, and the discontinuance of all professional services activities, certain amounts have been reclassified in order to conform to the current period presentation.

 

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, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to public company corporate overhead and non-capital expenditures related to the scaling and development of new products and service offerings in connection with the focus on the technology of the Company. As of and for the nine months ended September 30, 2020, the Company had a net loss from continuing operations of $10,860,000 and working capital of $21,230,000.

  

The Company's net cash position was increased by $22,577,000 for the nine months September 30, 2020 due primarily to the net proceeds of $29,930,000 from the At Market Issuance Sales Agreement (the "Sales Agreement") and the net cash proceeds of $6,300,000 from the sale of AOC Key Solutions and TeamGlobal, which includes the repayment of the $600,000 AOC Key Solutions Subordinate Note, offset by the net loss from operations in the period. As of September 21, 2020, the Company voluntarily terminated the Sales Agreement (see Note 10).

 

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. Should access to funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.

 

The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to continue the growth of its technology business, (ii) the continued performance of its contractors, subcontractors and vendors, (iii) its ability to maintain and build good relationships with its lenders and financial intermediaries, (iv) its ability to maintain timely collections from existing customers, and (v) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

 

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 has resulted in a slowdown in the Company’s rate of growth and includes disruptions in the delivery and installation of equipment, slower than expected contract approvals and implementation of projects by its customers, 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 benefited from the financing under the CARES Act. The Company continues to evaluate the potential impact of the pandemic and the ultimate disruption that may be caused by the outbreak is uncertain. Possible additional effects may include, but are not limited to, continuing 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. As a result, the pandemic may result in a material adverse impact on the Company’s financial position, operations and cash flow.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the extensive use of management 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.

 

Equity Method Investments

 

Investments in common stock of entities other than the Company’s consolidated subsidiaries are accounted for under the equity method in accordance with FASB 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.

 

In June of 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. In the third quarter of 2020, the Company contributed $75,000 for its 50 percent equity interest. This investment is accounted for under the equity method.

 

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 has elected to report this investment at cost, less impairment. In 2018, the Company recorded an impairment of $262,000, related to the investment in Global Public Safety, effectively reducing the total investment value to $0.

 

The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets.

 

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 September 30, 2020 and December 31, 2019 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, 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 3 inputs.

 

The Company has concluded that its Series A Preferred Stock is a Level 3 financial instrument and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through September 30, 2020. There were no changes in levels during the nine months ended September 30, 2020.

 

The Company considers its note receivables to be Level 3 investments and that the fair value approximates the carrying value.

 

Note Receivables

 

In connection with the sale of AOC Key Solutions in April 2020, the Company received a $600,000, five-year promissory note due March 2025, that carries an interest rate of 8%. Based on the general market conditions and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.

 

In September 2020, the full principal balance of the $600,000 note associated with the sale of AOC Key Solutions was paid in full.

 

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% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note will begin in 2021. Based on the general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.

 

Interest income recognized for the three and nine months ended September 30, 2020 was $19,000 and $31,000, respectively, and is included as part of other income on the unaudited condensed consolidated statement of operations. Interest income for the three and nine months ended September 30, 2019 was immaterial.

  

Revenue Recognition

 

The Company derives its revenues substantially from license and subscription fees for software and related products and services. A portion of the subscription fees are generated through the Company’s eCommerce website rather than though in-person sales. In addition, the Company derives net revenues in connection with certain citation and collection services in connection with the Company’s automated traffic safety and parking enforcement 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 September 30,     Nine Months ended September 30,  
    2020     2019     2020     2019  
Revenue                        
Licensing and subscription revenue   $ 1,341     $ 575     $ 4,122     $ 1,386  
Automated traffic safety enforcement     785       961       2,277       2,576  
Total revenue   $ 2,126     $ 1,536     $ 6,399     $ 3,962  

 

Revenues

 

Licensing and subscription revenue

 

The Company's revenues are derived principally from fees for technology products and services, including software licenses and subscriptions, hardware leases and sales, and other related support 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 providing, through a web server, access to the Company’s proprietary vehicle recognition software, a self-managed database and a powerful, cross-platform application programming interface. The Company's proprietary software employs a convolutional neural network 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.

 

Included in the licensing and subscription revenue is revenue that was recognized through the Company’s eCommerce platform. For the three and nine months ended September 30, 2020, the Company recognized revenues of $235,000 and $621,000, respectively, for products and services that were purchased through the Company’s eCommerce platform. For the three and nine months ended September 30, 2019, the Company recognized revenues of $167,000 and $280,000, respectively, for products and services that were purchased through the Company’s eCommerce platform.

 

During the second quarter of 2019, the Company changed its primary method of selling its software from perpetual software licenses, with associated maintenance services, to service subscriptions of limited duration. These subscriptions give the customer access to the use of the latest version of the Company's software only during the term of the subscription. Revenue is generally recognized ratably over the contract term. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Revenue from the Company's perpetual software licenses are recognized up-front at the point in time when the software is made available to the customer.

  

Automated traffic safety enforcement 

 

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. The Company also installs and maintains public safety systems, which may involve a combination of installation and lease payments or simply software licenses to use the Company's software in connection with a previously installed camera network. Revenue is recognized at various stages of completion of installation and monthly for lease or license payments.

 

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. On September 30, 2020, the Company had approximately $16,459,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 27% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the next two to five 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 billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled accounts receivables of $488,000 and $440,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 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 nine months ended September 30, 2020 were not materially impacted by any other factors. Contract liabilities as of September 30, 2020 and December 31, 2019 were $2,170,000 and $1,524,000, respectively. All contract liabilities as of September 30, 2020 and December 31, 2019 were attributable to continuing operations. During the nine months ended September 30, 2020 $622,000 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 September 30, 2020 (dollars in thousands):

 

2020   $ 607  
2021     750  
2022     368  
2023     275  
2024     160  
Thereafter     10  
Total   $ 2,170  

 

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 September 30, 2020, and December 31, 2019, costs incurred to obtain contracts in excess of one year have been immaterial to date.

 

Segment Reporting

 

The Financial Accounting Standard Board (“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 discontinued operations. As of January 1, 2020, the Company had 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 September 30, 2020 and December 31, 2019 were $573,000 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 September 30, 2020 and December 31, 2019, the Company had deposits from continuing operations totaling $24,727,000 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.

 

Customer A accounted for 17% and less than 10% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively. Customer A accounted for 20% and less than 10% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

 

Customer B accounted for less than 10% and 14% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively. Customer B accounted for less than 10% and 18% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

 

As of September 30, 2020, accounts receivable from Customer C and Customer D totaled 19% and 16% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2019, Customer C accounted for 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 and nine month period ended September 30, 2020 and 2019 or unaudited condensed consolidated accounts receivable balance as of September 30, 2020 and December 31, 2019.

 

Significant Accounting Policies

 

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

 

New Accounting Pronouncements Effective in the Nine Months ended September 30, 2020

 

In August 2018, the FASB issued Accounting Standards Update (“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.

 

New Accounting Pronouncements Effective in Future Periods

 

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). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company will adopt this guidance in the first quarter of 2021 and does not expect it to have a material impact on its consolidated financial statements.

 

The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standard discussed above, 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.

 

v3.20.2
ACQUISITIONS
9 Months Ended
Sep. 30, 2020
Business Combinations [Abstract]  
ACQUISITION

OpenALPR Technology Acquisition

 

On March 12, 2019, the Company completed the acquisition of certain assets and assumed certain liabilities of OpenALPR Technology, Inc. (the “OpenALPR Technology Acquisition”). Consideration paid as part of the OpenALPR Technology Acquisition was: $7,000,000 in cash, subject to adjustment after closing; 600,000 shares of Rekor common stock, valued at $397,000; and $5,000,000 of the 2019 Promissory Notes principal amount, together with an accompanying warrant to purchase 625,000 shares of Rekor common stock, exercisable over a period of five years, at an exercise price of $0.74 per share, valued at $208,000.

 

The purchase price allocation to the assets acquired and liabilities assumed are based on fair values as of the acquisition date. Since the OpenALPR Technology Acquisition occurred on March 12, 2019, the results of operations including OpenALPR Technology Acquisition from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2020.

 

The table below shows the breakdown related to the final purchase price allocation for the OpenALPR Technology Acquisition (dollars in thousands):

 

Accounts receivable, net   $ 381  
Other current assets, net     13  
Property and equipment, net     21  
Contract liabilities     (388 )
Net assets acquired     27  
Less intangible assets     7,436  
Consideration paid     (12,397 )
Net goodwill recorded   $ 4,934  
         
Cash consideration   $ 7,000  
Note payable     5,000  
Common stock consideration     397  
Total acquisition consideration   $ 12,397  

 

Operations of Combined Entities

 

The following unaudited pro forma combined financial information gives effect to the OpenALPR Technology Acquisition as if it was consummated as of January 1, 2019. This unaudited pro forma financial information is presented for informational purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2019 or to project potential operating results as of any future date or for any future periods.

 

    Three Months ended September 30,     Nine Months ended September 30,  
    2020     2019     2020     2019  
Total revenue from continuing operations   $ 2,126     $ 1,536     $ 6,399     $ 4,931  
Net loss from continuing operations     (6,667 )     (3,528 )     (10,860 )     (8,228 )
Basic and diluted loss per share from continuing operations   $ (0.26 )   $ (0.19 )   $ (0.52 )   $ (0.46 )
Basic and diluted number of shares     26,907,069       19,878,518       22,781,807       19,761,363  

 

v3.20.2
DISCONTINUED OPERATIONS
9 Months Ended
Sep. 30, 2020
Discontinued Operations and Disposal Groups [Abstract]  
DISCONTINUED OPERATIONS

In September 2019 and March 2020, the Company determined that TeamGlobal and AOC Key Solutions, respectively, met the criteria for held for sale accounting because the Company expected to complete the sale of TeamGlobal and AOC Key Solutions during the next 12 months as part of a plan to concentrate on the development of its Technology segment. Historically, TeamGlobal and AOC Key Solutions have been presented as part of the Company’s Professional Services segment.

 

During the first quarter of 2020, in connection with the Company’s plan to concentrate on its Technology segment, the Company determined that the remainder of its historical Professionals Services segment, should be classified as discontinued operations. As part of this plan Firestorm has also been classified as discontinued operations and presented as part of discontinued operations. Previously, Firestorm was not included as part of held or sale and discontinued operations as it did not meet the threshold of being considered a strategic shift.

 

AOC Key Solutions Sale

 

On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions management (the “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 September 30, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.

 

The table below shows the breakdown related to the AOC Key Solutions Purchase Agreement (dollars in thousands):

 

Total assets sold   $ 4,549  
Total liabilities assumed     3,514  
 Net assets sold     1,035  
 Closing cost     346  
 Consideration received (see below)     4,000  
 Gain on sale of AOC Key Solutions   $ 2,619  
         
 Cash consideration   $ 3,400  
 Note receivable     600  
 Total AOC Key Solution Purchase Agreement consideration   $ 4,000  

 

TeamGlobal Sale

 

On June 29, 2020, the Company entered into a Stock Purchase Agreement (the “TeamGlobal Purchase Agreement”) by and among the Company, TeamGlobal, and Talent Teams LLC, a Texas limited liability company owned by the members of TeamGlobal’s management (the “TeamGlobal Buyer”), pursuant to which the Company agreed to sell TeamGlobal to the TeamGlobal Buyer.

 

Subject to the terms and conditions of the TeamGlobal Purchase Agreement, the TeamGlobal Buyer agreed to purchase all of the outstanding equity interests of TeamGlobal for a purchase price of $4,000,000, comprising (i) an aggregate of $2,300,000 in cash, and (ii) a secured promissory note (the “Secured Note”) in the initial principal amount of $1,700,000, with such Secured Note secured by a Pledge and Security Agreement (the “Pledge Agreement”) with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer.

 

The table below shows the breakdown related to the TeamGlobal Purchase Agreement (dollars in thousands):

 

Total assets sold   $ 9,996  
Total liabilities assumed     7,130  
 Net assets sold     2,866  
 Closing cost     122  
 Consideration received (see below)     4,000  
 Gain on sale of TeamGlobal   $ 1,012  
         
 Cash consideration   $ 2,300  
 Note receivable     1,700  
 Total TeamGlobal Purchase Agreement consideration   $ 4,000  

 

The dispositions of AOC Key Solutions and TeamGlobal are a result of the Company’s strategic decision to concentrate resources on the development of its Technology Segment and will result in material changes in the Company's operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of 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, 2020 and 2019 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, 2020 and December 31, 2019.

 

The assets and liabilities classified as discontinued operations in the Company's unaudited condensed consolidated financial statements as of September 30, 2020 and December 31, 2019 are shown below (dollars in thousands): 

 

    September 30. 2020     December 31, 2020  
    Global     AOC Key Solutions     Firestorm     Total     Global     AOC Key Solutions     Firestorm     Total  
ASSETS                                                
Cash and cash equivalents   $ -     $ -     $ 3     $ 3     $ 225     $ 93     $ 12     $ 330  
Accounts receivable, net     -       -       -       -       2,763       4,055       -       6,818  
Other current assets, net     -       -       -       -       238       52       3       293  
Current assets of discontinued operations     -       -       3       3       3,226       4,200       15       7,441  
Property and equipment, net     -       -       -       -       113       41       -       154  
Right-of-use lease assets, net     -       -       -       -       130       499       -       629  
Goodwill     -       -       -       -       669       -       -       669  
Intangible assets, net     -       -       -       -       1,994       -       -       1,994  
Deposits and other long-term assets     -       -       -       -       -       11       -       11  
Long-term assets of discontinued operations     -       -       -       -       2,906       551       -       3,457  
Total assets of discontinued operations   $ -     $ -     $ 3     $ 3     $ 6,132     $ 4,751     $ 15     $ 10,898  
LIABILITIES                                                                
Accounts payable and accrued expenses   $ -     $ -     $ 31     $ 31     $ 461     $ 1,260     $ 33     $ 1,754  
Lines of credit     -       -       -       -       1,842       1,894       -       3,736  
Lease liability, short term     -       -       83       83       113       100       54       267  
Current liabilities of discontinued operations     -       -       114       114       2,416       3,254       87       5,757  
Lease liability, long term     -       -       14       14       30       467       39       536  
Long-term liabilities of discontinued operations     -       -       14       14       30       467       39       536  
Total liabilities of discontinued operations   $ -     $ -     $ 128     $ 128     $ 2,446     $ 3,721     $ 126     $ 6,293  

 

The major components of the discontinued operations, net of tax, are presented in the unaudited condensed consolidated statements of operations below (dollars in thousands):

 

    Three Months ended September 30,  
    2020     2019  
    Global     AOC Key Solutions     Firestorm     Total     Global     AOC Key Solutions     Firestorm     Total  
Revenue   $ -     $ -     $ -     $ -     $ 6,205     $ 3,397     $ 50     $ 9,652  
Cost of revenue     -       -       -       -       5,378       1,836       6       7,220  
Gross profit     -       -       -       -       827       1,561       44       2,432  
Operating expenses:                                                                
General and administrative expenses     -       -       2       2       850       1,073       25       1,948  
Selling and marketing expenses     -       -       -       -       (1 )     138       -       137  
Operating expenses     -       -       2       2       849       1,211       25       2,085  
Income loss income from operations     -       -       (2 )     (2 )     (22 )     350       19       347  
Other expense:                                                                
Loss on extinguishment of debt     -       -       -       -       (31 )     (46 )     -       (77 )
Interest expense     -       -       -       -       (107 )     (47 )     -       (154 )
Other expense     -       -       -       -       -       (154 )     (62 )     (216 )
Total other expense     -       -       -       -       (138 )     (247 )     (62 )     (447 )
Income (loss) from discontinued operations     -       -       (2 )     (2 )     (160 )     103       (43 )     (100 )
Income tax provision from discontinued operations     -       -       -       -       -       -       -       -  
Net income (loss) from discontinued operations   $ -     $ -     $ (2 )   $ (2 )   $ (160 )   $ 103     $ (43 )   $ (100 )

 

    Nine Months ended September 30,  
    2020     2019  
    Global     AOC Key Solutions     Firestorm     Total     Global     AOC Key Solutions     Firestorm     Total  
Revenue   $ 10,510     $ 3,392     $ 5     $ 13,907     $ 20,260     $ 9,916     $ 1,005     $ 31,181  
Cost of revenue     9,190       1,866       -       11,056       17,551       5,367       501       23,419  
Gross profit     1,320       1,526       5       2,851       2,709       4,549       504       7,762  
Operating expenses:                                                                
General and administrative expenses     1,341       1,284       (2 )     2,623       2,745       3,634       1,017       7,396  
Selling and marketing expenses     79       131       -       210       142       412       48       602  
Impairment of intangibles     -       -       -       -       -       -       1,549       1,549  
Operating expenses     1,420       1,415       (2 )     2,833       2,887       4,046       2,614       9,547  
Income loss income from operations     (100 )     111       7       18       (178 )     503       (2,110 )     (1,785 )
Other income (expense):                                                                
Loss on extinguishment of debt     -       -       -       -       (31 )     (46 )     -       (77 )
Interest expense     (166 )     (74 )     -       (240 )     (208 )     (108 )     -       (316 )
Other income (expense)     5       2       -       7       2       (151 )     (65 )     (214 )
Total other expense     (161 )     (72 )     -       (233 )     (237 )     (305 )     (65 )     (607 )
Income (loss) from discontinued operations     (261 )     39       7       (215 )     (415 )     198       (2,175 )     (2,392 )
Income tax provision from discontinued operations     -       -       -       -       -       -       -       -  
Net income (loss) from discontinued operations   $ (261 )   $ 39     $ 7     $ (215 )   $ (415 )   $ 198     $ (2,175 )   $ (2,392 )

 

v3.20.2
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
9 Months Ended
Sep. 30, 2020
Supplemental Cash Flow Information [Abstract]  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

   Supplemental disclosures of cash flow information for the nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands):

 

    Nine Months ended September 30,  
    2020     2019  
Cash paid for interest - continuing operations   $ 1,211     $ 839  
Cash paid for interest - discontinued operations     241       184  
Cash paid for taxes - continuing operations     -       -  
Cash paid for taxes - discontinued operations     -       11  
Non-cash financing - Paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes     (1,283 )     -  
Non-cash operating - Paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes     1,283       -  
Note received as part of TeamGlobal Sale     1,700       -  
Financing:                
Notes payable - continuing operations     -       21,000  
Debt discount financing costs     -       (2,599 )
Extinguishment of debt     -       (1,113 )
Repayment of notes payable and interest expense, net of debt discount     -       (2,515 )
Investment in OpenALPR Technology     -       (12,000 )
Issuance of warrants in conjunction with notes payable     -       706  
Accounts Payable     -       360  
Proceeds from notes payable     -       3,839  
Note Exchange transaction (1)                
Exchange of accrued interest     (226 )     -  
Debt extinguishment costs     (2,484 )     -  
Exchange of the net principal balance of the 2019 Promissory Notes     (14,688 )     -  
Issuance of common stock     17,325       -  
Payment of stock issuance costs associated with Note Exchange transaction     (73 )     -  
Adoption of ASC-842 Lease Accounting:                
Right-of-use lease asset     132       291  
Lease liability   $ (132 )   $ (291 )

  

(1) See Note 7 for additional information related to the Note Exchange transaction.

 

v3.20.2
OPERATING LEASES
9 Months Ended
Sep. 30, 2020
Leases [Abstract]  
OPERATING LEASES

The Company has operating leases for office facilities in various locations throughout the United States. The Company’s leases have remaining terms of one to four 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, 2020 and 2019 was $72,000 and $57,000, and for the nine months ended September 30, 2020 and 2019 was $175,000 and $131,000, respectively, and is part of general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations.

 

Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $64,000 and $168,000 for the three and nine months ended September 30, 2020.

 

Supplemental balance sheet information related to leases as of September 30, 2020 was as follows (dollars in thousands): 

 

Operating lease right-of-use lease assets from continuing operations   $ 276  
         
Current portion of lease liability   $ 232  
Long-term portion of lease liability     60  
Total lease liability from continuing operations   $ 292  
         
Weighted average remaining lease term - operating leases from continuing operations     1.78  
         
Weighted average discount rate - operating leases     9 %
         
2020   $ 63  
2021     195  
2022     19  
2023     19  
2024     18  
Total lease payments     314  
Less imputed interest     22  
Maturities of lease liabilities   $ 292  

 

v3.20.2
INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
INTAGIBLE ASSETS

Goodwill

 

There have been no changes from December 31, 2019 in the carrying amount of goodwill of continuing operations for the nine months ended September 30, 2020.

 

Intangible Assets Subject to Amortization

 

The following summarizes the change in intangible assets from December 31, 2019 to September 30, 2020 (dollars in thousands):     

 

    Customer Relationships     Marketing Related     Technology Based     Internally Capitalized Software     Total  
Identifiable intangible assets   $ 461     $ 327     $ 7,206     $ 1,452     $ 9,446  
Accumulated amortization     (90 )     (150 )     (1,583 )     (194 )     (2,017 )
Identifiable intangible assets from continuing operations, net   $ 371     $ 177     $ 5,623     $ 1,258     $ 7,429  

 

 

The following provides a breakdown of identifiable intangible assets as of September 30, 2020 (dollars in thousands):

 

    December 31, 2019     Additions     Amortization     September 30, 2020  
Intangible assets subject to amortization from continuing operations                        
Customer relationships   $ 396     $ -     $ (25 )   $ 371  
Marketing related     230       -       (53 )     177  
Technology based     6,395       -       (772 )     5,623  
Internally capitalized software     1,223       162       (127 )     1,258  
Intangible assets subject to amortization from continuing operations   $ 8,244     $ 162     $ (977 )   $ 7,429  

 

These intangible assets are being amortized on a straight-line basis over their weighted average estimated useful life of 5.5 years. Amortization expense attributable to continuing operations for the three months ended September 30, 2020 and 2019 was $343,000 and $302,000, respectively, and for the nine months ended September 30, 2020 and 2019 was $977,000 and $663,000, respectively and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

 

As of September 30, 2020, the estimated annual amortization expense from continuing operations for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

  

2020   $ 343  
2021     1,362  
2022     1,281  
2023     1,148  
2024     1,060  
Thereafter     1,452  
Capitalized software not yet placed in service     783  
Total   $ 7,429  

 

v3.20.2
DEBT
9 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
DEBT

Long-Term Debt

 

On January 25, 2017, pursuant to the terms of its acquisition of Firestorm, the Company issued $1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $500,000 payable at an interest rate of 2% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7%. The notes mature on January 25, 2022. The aggregate balance of these notes payable was $976,000 and $961,000, net of unamortized interest, as of September 30, 2020 and December 31, 2019, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $24,000 and $39,000, respectively.

 

On April 3, 2018, the Company entered into a transaction pursuant to which an institutional investor (the “2018 Lender”) loaned $2,000,000 to the Company (the “2018 Promissory Note”). On March 12, 2019, the $2,000,000 balance due on the 2018 Promissory Note was retired in its entirety in exchange for an equivalent principal amount of the 2019 Promissory Notes (see below). In addition, Rekor paid to the 2018 Lender $1,050,000 of consideration for the re-acquisition by the Company of the Lender’s participation interest in the Company and $75,000 of interest due through May 1, 2019. All amounts paid were obtained from the proceeds of the 2019 Promissory Notes. The consideration of $1,050,000 for the 2018 Lender’s participation and unamortized financing costs of $63,000 are recorded as costs in connection with the loss on the extinguishment of debt of $1,113,000 for the nine months ended September 30, 2019.

 

The principal amounts due for long-term notes payable described above are shown below as of September 30, 2020 (dollars in thousands):

 

2020   $ 46  
2021     442  
2022     1,386  
2023     -  
2024     -  
Thereafter     -  
Total     1,874  
         
Less unamortized interest     (24 )
Total debt   $ 1,850  
         
Loan payable, current portion   $ 370  
Loan payable, long-term     504  
Notes payable, long-term     976  
Total debt   $ 1,850  

 

Amortized financing costs for the three months ended September 30, 2020 and 2019 were $43,000 and $328,000, respectively, and for the nine months ended September 30, 2020 and 2019 were $653,000 and $768,000, respectively, and are included in interest expense on the unaudited condensed consolidated statement of operations.

 

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 six 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 six months after the date of disbursement.

 

The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the entire Loans amount for qualifying expenses and to apply for forgiveness of the Loans in accordance with the terms of the CARES Act. The current and long-term portion of the Loans is presented as part of loans payable current portion and loans payable, long-term, respectively, on the unaudited condensed consolidated balance sheets.

  

The Small Business Administration (“SBA”), in consultation with the Department of Treasury, issued new guidance that creates uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company will apply for forgiveness once Newtek Small Business Finance, LLC begins to accept applications.

 

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% per annum was required to be paid in cash. Any remaining interest accrued to be paid at maturity or earlier 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, minimum liquidity and maximum capital expenditures. As of September 30, 2020, the Company had settled the full amount of the 2019 Promissory Notes. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. The loan 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 were exercisable commencing March 12, 2019 and expire on March 12, 2024. The 2019 Promissory Notes had an effective interest rate of 24.87%.

 

As of the anniversary date of the commencement of the 2019 Promissory Notes $1,283,000 of the paid-in kind interest had not been paid by the Company and per the purchase agreement was added to the principal balance of the 2019 Promissory Notes in March 2020. 

  

2019 Promissory Note Amendments

 

On March 26, 2020, the Company entered into the First Amendment to Note Purchase Agreement which effectively extended the maturity date of the 2019 Promissory Notes from March 11, 2021 to June 12, 2021. The Company incurred $100,000 in transaction costs related to the First Amendment to the Note Purchase Agreement, these costs were financing costs and deferred over the remaining life of the loan.

 

On April 2, 2020, in connection with the sale of AOC Key Solutions, the Company transferred $2,200,000 to the holders of the 2019 Promissory Notes. $2,000,000 of the funds were used as a prepayment of principal while the other $200,000 was paid as premium percentage as the portion of the 2019 Promissory Notes were paid prior to the maturity date. The premium percentage paid in connection with this transaction is presented as part of debt extinguishment costs in the unaudited condensed consolidated statement of operations.

 

On April 2, 2020, the Company entered into a partial release and Second Amendment to Note Purchase Agreement (the “Second Amendment”), by and among the Credit Parties, the Purchasers and the Agent. Pursuant to the terms of the Second Amendment, AOC Key Solutions was released as a Credit Party and the assets related to AOC Key Solutions were released as collateral, and the Asset Disposition Proceeds terms of the Note Purchase Agreement were amended to reflect the transaction.

 

On June 29, 2020, in connection with the TeamGlobal Purchase Agreement, the Company entered into a Partial Release and Third Amendment to Note Purchase Agreement (the “Third Amendment”), by and among the Credit Parties, the Purchasers and the Agent. Pursuant to the terms of the Third Amendment, TeamGlobal was released as a credit party and the assets related to TeamGlobal were released as collateral, the mandatory prepayments provision of the 2019 Promissory Notes were waived with regard to the sale of TeamGlobal, and the maturity date of the 2019 Notes remaining outstanding was extended to December 31, 2021.

 

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. 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 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 PIK interest associated to the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above, was recorded as part of debt extinguishments costs in the unaudited condensed consolidated statement of operations. Following the Note Exchange, approximately $4,398,000 aggregate principal amount of the 2019 Promissory Notes remained outstanding, plus an additional $216,000 related to the exit fee.

 

The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreements. These costs are presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

 

On September 16, 2020, the Company issued a cash payment to complete the retirement of the remaining aggregate principal balance of 2019 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.

 

For the three and nine months ended September 30, 2020, the Company recognized the following debt extinguishment costs: $200,000 related to an early cash payment in April 2020 related to the 2019 Promissory Notes, $2,484,000 related to the Exchange Agreements completed in July 2020 2019 Promissory Notes and $684,000 related to an early cash payment in September 2020 to retire the remaining balance of the 2019 Promissory Notes, these costs were offset by the forgiveness of loans in the amount of $87,000 in the third quarter of 2020. These costs are presented as part of debt extinguishment costs in the unaudited condensed consolidated statement of operations, for the three and nine months ended September 30, 2020.

 

v3.20.2
INCOME TAXES
9 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
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’s income tax provision for the three and nine months ended September 30, 2020 was $7,000 and $20,000, respectively. The Company’s income tax provision for the three and nine months ended September 30, 2019 was $12,000 and $35,000, respectively. 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 nine months ended September 30, 2020.

 

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, 2020.

 

Management has evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangible, because management believes that it is more-likely-than-not that their benefits will not be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.

 

For the nine months ended September 30, 2020 the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The 2016 through 2018 tax years remain subject to examination by the Internal Revenue Service.

 

v3.20.2
COMMITMENTS AND CONTINGENCIES
9 Months Ended
Sep. 30, 2020
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES

On August 19, 2019, the Company filed suit in the United States District Court for the Southern District of New York against three former executives of the Company and Firestorm (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC.  The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company.  The Complaint requests equitable rescission of that transaction, or, alternatively, monetary damages.

 

Following an initial amended complaint, answer and counterclaims, and defendants’ motion for judgment on the pleadings, on January 30, 2020, the Company filed a Second Amended Complaint, which the Firestorm Principals answered together with counterclaims on February 28, 2020.  Thereafter, on March 30, the Company moved to dismiss certain counterclaims against certain executives named as counterclaim-defendants, which resulted in the Firestorm Principals voluntarily dismissing those counterclaims against those parties.  The Company thereafter filed its response and affirmative defenses to the Counterclaims on April 22.  On April 27, 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.  That motion was fully briefed as of February 21, 2020.  It remains sub judice, and no argument has been scheduled upon it.

 

In the year 2020, the Firestorm Principals filed suit in New York Supreme Court in Sullivan County against directors of the Company, alleging breach of fiduciary duty and libel.  The Company believes that this suit is without merit and intend to vigorously litigate this matter.

 

At this stage of these litigations, the Company is unable to render an opinion regarding the likelihood of a favorable outcome.  The Company intends to continue vigorously litigating its claims against the Firestorm Principals and believes that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.

 

Vigilant Solutions, LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on February 21, 2020 against the Company and certain of the Company’s subsidiaries in the US District Court for the District of Maryland. The complaint alleged that certain of the Company’s products violated a patent held by Vigilant. On June 10, 2020, the Company filed an Answer to the complaint denying the pertinent allegations and asserting substantial defenses to the allegations contained in the complaint, including that the patent underlying the complaint is invalid. On September 23, 2020, the Company filed a Motion to Stay Pending Inter Partes Review in light of a Petition for Inter Partes Review filed by the Company and certain subsidiaries against Vigilant in the U.S. Patent and Trademark Office (as discussed below). Vigilant opposed the Motion.

 

On September 8, 2020, the Company and certain of the Company’s subsidiaries that were defendants in the Vigilant Solutions, LLC Litigation discussed above filed a Petition for Inter Partes Review at the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (“PTAB”) requesting that the PTAB review and find unpatentable certain claims of the patent asserted by Vigilant in the Vigilant Solutions, LLC Litigation. The PTAB was expected to decide whether to institute review in March or April 2021. 

 

In November of 2020, Rekor and Vigilant Solutions, LLC agreed to resolve the district court litigation and intellectual property rights action between the parties pursuant to a confidential settlement agreement. The Company will have no material effect from its obligations under the agreement.

 

On January 31, 2020, the Company’s wholly owned subsidiary, OpenALPR, filed a complaint in the US District Court for the Western District of Pennsylvania against a former customer, Plate Capture Solutions, Inc. (“PCS”) for breach of software license agreements pursuant to which software was licensed to PCS. On June 14, 2020, PCS filed its operative answer to the Complaint.  On June 21, 2020, PCS filed a motion to join the Company and another entity, OpenALPR Technology, Inc., as parties to the litigation and made claims against them for defamation, fraud and intentional interference with existing and future business relationships. On July 13, 2020, OpenALPR filed an opposition to the motion for joinder. The parties are currently awaiting the Court’s decision on joinder. Nevertheless, the Company believes that it has substantial defenses to the claims and intend to vigorously defend the allegations of those claims.

 

 In addition, from time to time, the Company is named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of the Company’s business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings, the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the opinion of the Company’s management that the outcome of these proceedings, individually and collectively, will not be material to the Company’s unaudited condensed consolidated financial statements as a whole.

 

v3.20.2
STOCKHOLDERS' DEFICIT
9 Months Ended
Sep. 30, 2020
Stockholders' Equity Attributable to Parent [Abstract]  
STOCKHOLDERS' DEFICIT

Common Stock

 

The Company has adopted and approved an amendment to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000, $0.0001 par value, which was effective March 18, 2020. The rights and privileges terms of the additional authorized shares of common stock are identical to those of the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe for any new issuances of common stock, the subsequent potential issuance of additional shares of common stock will reduce the current stockholders’ percentage ownership interest in the total outstanding shares of common stock. The Amendment and the creation of additional shares of authorized common stock will not alter current stockholders’ relative rights and limitations. As of September 30, 2020, and December 31, 2019, the issued and outstanding common shares of Rekor were 32,911,854 and 21,595,653, respectively.

 

For the three and nine months ended September 30, 2020, the Company issued 129,480 and 281,225 shares of Rekor common stock related to the exercise of common stock options, respectively. For the three and nine months ended September 30, 2019, the Company issued no shares of Rekor common stock related to the exercise of common stock options.

 

During the third quarter of 2020, the Company issued 4,349,497 shares of Rekor common stock as part of the Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes. The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreement. These costs are presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

 

On March 12, 2019, the Company issued 600,000 shares of Rekor common stock as part of the consideration for the acquisition of the OpenALPR Technology Acquisition. 

 

At-the-Market Offering

 

On August 14, 2019, the Company entered into the Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) to create an at-the-market equity program under which the Company from time to time offered and sold shares of its common stock, having an aggregate offering price of up to $15,000,000, through or to B. Riley FBR. Subject to the terms and conditions of the Sales Agreement, B. Riley FBR would use its commercially reasonable efforts to sell the shares of the Company’s common stock from time to time, based upon the Company’s instructions. B. Riley FBR was entitled to a commission equal to 3.0% of the gross proceeds from each sale. The Company incurred issuance costs of approximately $226,000 related to legal, accounting, and other fees in connection with the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

 

On August 28, 2020, the Company filed Amendment No. 1 to the Sales Agreement dated August 14, 2019 to increase the size of the market equity program under which the Company from time to time offered and sold shares of its common stock, from an aggregate offering price of up to $15,000,000 to an amended maximum aggregate offering price of up to $40,000,000 through or to B. Riley FBR. The Company incurred issuance costs of approximately $25,000 related to legal fees in connection with the amendment to the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

 

Sales of the Company’s common stock under the Sales Agreement were issued and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No 333-224423), previously filed with the Securities and Exchange Commission (“SEC”) on April 24, 2018 and declared effective by the SEC on April 30, 2018. For the nine months ended September 30, 2020, based on settlement date, the Company sold 5,216,562 shares of common stock at a weighted-average selling price of $5.92 per share in accordance with the Sales Agreement. Net cash provided for the nine months ended September 30, 2020 from the Sales Agreement was $29,930,000 after paying 3.0% or $926,000 related to cash commissions provided to B. Riley FBR.

 

On September 21, 2020, the Company elected to voluntarily terminate its Sales Agreement with B. Riley FBR pursuant to the terms of the Sales Agreement.  As of the termination date, the Company had offered and sold an aggregate of 6,509,202 shares of common stock pursuant to the Sales Agreement, which resulted in aggregate gross proceeds of $34,154,000.

 

Preferred Stock

 

The Company is authorized to issue up to 2,000,000 shares of preferred stock, $0.0001 par value. The Company’s preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into, and issued in, designated series from time to time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the power to determine the relative powers, preferences and rights of each series of preferred stock.

 

Series A Cumulative Convertible Redeemable Preferred Stock

 

Of the 2,000,000 authorized shares of preferred stock, 505,000 shares are designated as $0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock are entitled to quarterly dividends of 7.0% per annum per share. The holders of Series A Preferred Stock have a right to convert each share into common stock at an initial conversion price and a specified conversion price which increases annually based on the passage of time beginning in November 2019. The holders of Series A Preferred Stock also have a put right after 60 months from the issuance date to redeem any or all of the Series A Preferred Stock at a redemption price of $15.00 per share plus any accrued but unpaid dividends. The Company has a call right after 36 months from the issuance date to redeem all of the Series A Preferred Stock at a redemption price which increases annually based on the passage of time which began in November 2019. The Series A Preferred Stock contains an automatic conversion feature based on a qualified initial public offering in excess of $30,000,000 or a written agreement by at least two-thirds of the holders of Series A Preferred Stock at an initial conversion price and a specified price which increases annually based on the passage of time beginning in November 2016. Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019.

  

Rekor adjusts the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value is recorded through additional paid in capital of $220,000 and $191,000 for the three months ended September 30, 2020 and 2019, respectively, and $638,000 and $554,000 for the nine months ended September 30, 2020 and 2019, respectively.

 

As of September 30, 2020, and December 31, 2019, 502,327 shares of Series A Preferred Stock were issued and outstanding.

 

The holders of Series A Preferred Stock are entitled to quarterly cash dividends of $0.175 (7% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. For the three and nine months ended September 30, 2020 and 2019 the Company did not pay cash dividends to shareholders of record of Series A Preferred Stock. Accrued dividends payable to Series A Preferred Stock shareholders were $849,000 and $551,000 as of September 30, 2020 and December 31, 2019, respectively, and are presented as part of the accounts payable and accrued expenses on the accompanying unaudited condensed consolidated.

 

Series B Cumulative Convertible Preferred Stock

 

Of the 2,000,000 authorized shares of preferred stock, 240,861 shares are designated as $0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock"). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $0.0001 par value Series B Preferred Stock. All Series B Preferred Stock was issued at a price of $10.00 per share as part of the acquisition of the TeamGlobal Merger. The Series B Preferred Stock has a conversion price of $5.00 per share. Each Series B Preferred Stock has an automatic conversion feature based on the share price of Rekor.

 

The Series B Preferred Stock is entitled to quarterly cash dividends of 1.121% (4.484% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. The Company paid $108,000 in cash dividends to the Series B Preferred shareholders in June 2019, The Company did not pay any cash dividends to the Series B Preferred shareholders for the nine months ended September 30, 2020. Accrued dividends payable to Series B Preferred Stock shareholders were $138,000 and $54,000 as of September 30, 2020 and December 31, 2019, respectively, and are presented as part of the accounts payable and accrued expenses on the accompanying unaudited condensed consolidated balance sheets.

 

Warrants

 

The Company had warrants outstanding that are exercisable into a total of 1,004,155 and 2,251,232 shares of Rekor common stock as of September 30, 2020 and December 31, 2019, respectively.

  

As part of a Regulation A Offering in fiscal year 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock. The exercise price for these warrants is $1.03 and they are exercisable into a total of 165,840 and 240,017 shares of Rekor common stock as of September 30, 2020 and December 31, 2019, respectively. The warrants expire on November 23, 2023. In August 2019, 7,500 of the outstanding warrants were exercised and converted into 3,638 shares of the Company's common stock. In the nine months ended September 30, 2020, 152,927 of the outstanding warrants were exercised and converted into 74,177 shares of the Company’s common stock.

 

As part of the acquisition of Firestorm on January 24, 2017, the Company issued: warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $2.5744 per share; and warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $3.6083 per share (the “Firestorm Warrants”). The expiration date of the Firestorm Warrants is January 24, 2022. As of September 30, 2020 and December 31, 2019, there were 631,254 Firestorm Warrants outstanding.

  

Pursuant to its acquisition of Secure Education Consultants on January 1, 2018, the Company issued: warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $5.44 per share; and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $6.53 per share (the “Secure Education Warrants”). The expiration date of the Secure Education Warrants is January 1, 2023. As of September 30, 2020, and December 31, 2019, there were 66,666 Secure Education Warrants outstanding.

 

On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock, exercisable over a period of five years, at an exercise price of $1.00 per share. These warrants are exercisable commencing April 27, 2019 and expire on October 29, 2023. During the year ended December 31, 2019, 189,813 warrants were exercised in cash and cashless transactions resulting in the issuance of 148,279 shares of common stock. During the nine months ended September 30, 2020, 10,417 warrants were exercised and converted into 7,704 shares of the Company’s common stock. As of September 30, 2020 and December 31, 2019, 6,020 and 16,437 warrants related to the 2018 underwritten public offering remain outstanding, respectively. 

 

On March 12, 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock, which were immediately exercisable at an exercise price of $0.74 per share, to certain individuals and entities. Of the 2,500,000 warrants, 625,000 were issued as partial consideration for the OpenALPR Technology Acquisition. During the year ended December 31, 2019, 963,125 warrants were exercised in cash and cashless transactions resulting in the issuance of 783,387 shares of common stock. During the nine months ended September 30, 2020, 1,415,000 warrants were exercised in cash and cashless transactions resulting in the issuance of 1,387,036 shares of common stock. As of September 30, 2020 and December 31, 2019, 134,375 and 1,536,875 warrants related to the 2019 Promissory Notes remain outstanding, respectively.

 

v3.20.2
EQUITY INCENTIVE PLAN
9 Months Ended
Sep. 30, 2020
Equity [Abstract]  
EQUITY INCENTIVE PLAN

In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at 3,000,000 shares.

 

Stock compensation expense for the three months ended September 30, 2020 and 2019 was $202,000 and $76,000, respectively, and for the nine months ended September 30, 2020 and 2019 was $539,000 and $314,000, respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

 

Stock Options

 

Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three to four years with a contractual term of ten years.

 

The 2017 Plan is administered by the Administrator, which is currently the Board of Directors of the Company. The Administrator has the exclusive authority, subject to the terms and conditions set forth in the 2017 Plan, to determine all matters relating to awards under the 2017 Plan, including the selection of individuals to be granted an award, the type of award, the number of shares of Rekor common stock subject to an award, and all terms, conditions, restrictions and limitations, if any, including, without limitation, vesting, acceleration of vesting, exercisability, termination, substitution, cancellation, forfeiture, or repurchase of an award and the terms of any instrument that evidences the award.

 

When making an award under the 2017 Plan, the Administrator may designate the award as “qualified performance-based compensation,” which means that performance criteria must be satisfied in order for an employee to be paid the award. Qualified performance-based compensation may be made in the form of restricted common stock, restricted stock units, common stock options, performance shares, performance units or other stock equivalents. The 2017 Plan includes the performance criteria the Administrator has adopted, subject to stockholder approval, for a “qualified performance-based compensation” award.

 

 A summary of stock option activity under the Company’s 2017 Plan for the nine months ended September 30, 2020 is as follows:

 

    Number of Shares Subject to Option     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term (Years)     Aggregate Intrinsic Value  
Outstanding Balance at December 31, 2019     1,655,383     $ 1.68       8.33     $ 3,224  
     Granted     20,000       4.32       9.41          
     Exercised     (281,225 )     2.28                  
     Forfeited     (62,175 )     3.07                  
 Canceled     (44,062 )     2.15                  
Outstanding Balance at September 30, 2020     1,287,921     $ 1.50       7.84     $ 5,193  
Exercisable at September 30, 2020     799,550     $ 1.48       7.46     $ 3,324  

 

The weighted average grant date fair value of options granted, to employees and non-employees, for the nine months ended September 30, 2020 and 2019 was $3.18 and $0.52, respectively. The intrinsic value of the stock options granted during the nine months ended September 30, 2020 and 2019 was $29,000 and $1,030,000, respectively. The total fair value of options that vested in the nine months ended September 30, 2020 and 2019 was $154,000 and $735,000, respectively.

 

As of September 30, 2020, there was $282,000 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over an average remaining period of 1.71 years.

 

Restricted Stock Units

 

A summary of RSU activity under the Company’s 2017 Plan for the nine months ended September 30, 2020 is as follows:

 

    Number of Shares     Weighted Average Unit Price     Weighted Average Remaining Contractual Term (Years)  
Outstanding Balance at December 31, 2019     -     $ -       -  
      Granted     413,634       4.12       1.79  
      Vested     -       -       -  
      Forfeited     (3,900 )     3.81       -  
Outstanding Balance at September 30, 2020     409,734     $ 4.12       1.79  

 

 

The grant date fair value was based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition.

 

As of September 30, 2020, there was $1,352,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.79 years.

 

Compensation expense for restricted stock and RSUs is recognized on a straight-line basis over the requisite service period. There were no RSUs issued in fiscal year 2019.

   

v3.20.2
LOSS PER SHARE
9 Months Ended
Sep. 30, 2020
Earnings Per Share [Abstract]  
LOSS PER SHARE

The following table provides information relating to the calculation of loss per common share:

 

    Three Months ended September 30,     Nine Months ended September 30,  
    2020     2019     2020     2019  
    (Dollars in thousands, except per share data)     (Dollars in thousands, except per share data)  
Basic and diluted loss per share                        
    Net loss from continuing operations   $ (6,667 )   $ (3,528 )   $ (10,860 )   $ (9,036 )
    Less: preferred stock accretion     (220 )     (191 )     (638 )     (554 )
    Less: preferred stock dividends     (115 )     (114 )     (345 )     (344 )
        Net loss attributable to shareholders from continuing operations     (7,002 )     (3,833 )     (11,843 )     (9,934 )
Net loss from discontinued operations     (2 )     (100 )     (215 )     (2,392 )
Net loss attributable to shareholders   $ (7,004 )   $ (3,933 )   (12,058 )   (12,326 )
    Weighted average common shares outstanding - basic and diluted     26,907,069       19,878,518       22,781,807       19,592,679  
        Basic and diluted loss per share from continuing operations   $ (0.26 )   $ (0.19 )   $ (0.52 )   $ (0.51 )
        Basic and diluted loss per share from discontinued operations     -       (0.01 )     (0.01 )     (0.12 )
Basic and diluted loss per share   $ (0.26 )   $ (0.20 )   $ (0.53 )   $ (0.63 )
            Common stock equivalents excluded due to anti-dilutive effect     4,134,979       5,400,047       4,134,979       5,400,047  

 

As the Company had a net loss for the three and nine months ended September 30, 2020, the following 4,134,979 potentially dilutive securities were excluded from diluted loss per share: 1,004,155 for outstanding warrants, 923,844 related to the Series A Preferred Stock, 509,325 related to the Series B Preferred Stock, 1,287,921 related to outstanding options and 409,734 related to outstanding RSUs.

 

     As the Company had a net loss for the three and nine months ended September 30, 2019, the following 5,400,047 potentially dilutive securities were excluded from diluted loss per share: 2,251,232 for outstanding warrants, 959,937 related to the Series A Preferred Stock, 481,722 related to the Series B Preferred Stock and 1,707,156 related to outstanding options.

 

 Loss Per Share under Two – Class Method

 

The Series A Preferred Stock and Series B Preferred Stock have the non-forfeitable right to participate on an as converted basis at the conversion rate then in effect in any common stock dividends declared and, as such, is considered a participating security. The Series A Preferred Stock and Series B Preferred Stock are included in the computation of basic and diluted loss per share pursuant to the two-class method. Holders of the Series A Preferred Stock and Series B Preferred Stock do not participate in undistributed net losses because they are not contractually obligated to do so.

 

v3.20.2
GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Sep. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Reclassification

Certain prior year amounts have been reclassified to conform with the current year presentation. Amounts for the three and nine month periods ending September 30, 2019 and the year ending December 31, 2019, have been reclassified to conform to the current year presentation. Due to the sale of TeamGlobal, the sale of AOC Key Solutions, and the discontinuance of all professional services activities, certain amounts have been reclassified in order to conform to the current period presentation.

 

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, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to public company corporate overhead and non-capital expenditures related to the scaling and development of new products and service offerings in connection with the focus on the technology of the Company. As of and for the nine months ended September 30, 2020, the Company had a net loss from continuing operations of $10,860,000 and working capital of $21,230,000.

  

The Company's net cash position was increased by $22,577,000 for the nine months September 30, 2020 due primarily to the net proceeds of $29,930,000 from the At Market Issuance Sales Agreement (the "Sales Agreement") and the net cash proceeds of $6,300,000 from the sale of AOC Key Solutions and TeamGlobal, which includes the repayment of the $600,000 AOC Key Solutions Subordinate Note, offset by the net loss from operations in the period. As of September 21, 2020, the Company voluntarily terminated the Sales Agreement (see Note 10).

 

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. Should access to funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.

 

The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to continue the growth of its technology business, (ii) the continued performance of its contractors, subcontractors and vendors, (iii) its ability to maintain and build good relationships with its lenders and financial intermediaries, (iv) its ability to maintain timely collections from existing customers, and (v) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

 

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 has resulted in a slowdown in the Company’s rate of growth and includes disruptions in the delivery and installation of equipment, slower than expected contract approvals and implementation of projects by its customers, 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 benefited from the financing under the CARES Act. The Company continues to evaluate the potential impact of the pandemic and the ultimate disruption that may be caused by the outbreak is uncertain. Possible additional effects may include, but are not limited to, continuing 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. As a result, the pandemic may result in a material adverse impact on the Company’s financial position, operations and cash flow.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the extensive use of management 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.

 

Equity Method Investments

Investments in common stock of entities other than the Company’s consolidated subsidiaries are accounted for under the equity method in accordance with FASB 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.

 

In June of 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. In the third quarter of 2020, the Company contributed $75,000 for its 50 percent equity interest. This investment is accounted for under the equity method.

 

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 has elected to report this investment at cost, less impairment. In 2018, the Company recorded an impairment of $262,000, related to the investment in Global Public Safety, effectively reducing the total investment value to $0.

 

The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets.

 

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 September 30, 2020 and December 31, 2019 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, 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 3 inputs.

 

The Company has concluded that its Series A Preferred Stock is a Level 3 financial instrument and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through September 30, 2020. There were no changes in levels during the nine months ended September 30, 2020.

 

The Company considers its note receivables to be Level 3 investments and that the fair value approximates the carrying value.

 

Note Receivables

In connection with the sale of AOC Key Solutions in April 2020, the Company received a $600,000, five-year promissory note due March 2025, that carries an interest rate of 8%. Based on the general market conditions and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.

 

In September 2020, the full principal balance of the $600,000 note associated with the sale of AOC Key Solutions was paid in full.

 

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% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note will begin in 2021. Based on the general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.

 

Interest income recognized for the three and nine months ended September 30, 2020 was $19,000 and $31,000, respectively, and is included as part of other income on the unaudited condensed consolidated statement of operations. Interest income for the three and nine months ended September 30, 2019 was immaterial.

  

Revenue Recognition

The Company derives its revenues substantially from license and subscription fees for software and related products and services. A portion of the subscription fees are generated through the Company’s eCommerce website rather than though in-person sales. In addition, the Company derives net revenues in connection with certain citation and collection services in connection with the Company’s automated traffic safety and parking enforcement 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 September 30,     Nine Months ended September 30,  
    2020     2019     2020     2019  
Revenue                        
Licensing and subscription revenue   $ 1,341     $ 575     $ 4,122     $ 1,386  
Automated traffic safety enforcement     785       961       2,277       2,576  
Total revenue   $ 2,126     $ 1,536     $ 6,399     $ 3,962  

 

Revenues

 

Licensing and subscription revenue

 

The Company's revenues are derived principally from fees for technology products and services, including software licenses and subscriptions, hardware leases and sales, and other related support 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 providing, through a web server, access to the Company’s proprietary vehicle recognition software, a self-managed database and a powerful, cross-platform application programming interface. The Company's proprietary software employs a convolutional neural network 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.

 

Included in the licensing and subscription revenue is revenue that was recognized through the Company’s eCommerce platform. For the three and nine months ended September 30, 2020, the Company recognized revenues of $235,000 and $621,000, respectively, for products and services that were purchased through the Company’s eCommerce platform. For the three and nine months ended September 30, 2019, the Company recognized revenues of $167,000 and $280,000, respectively, for products and services that were purchased through the Company’s eCommerce platform.

 

During the second quarter of 2019, the Company changed its primary method of selling its software from perpetual software licenses, with associated maintenance services, to service subscriptions of limited duration. These subscriptions give the customer access to the use of the latest version of the Company's software only during the term of the subscription. Revenue is generally recognized ratably over the contract term. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Revenue from the Company's perpetual software licenses are recognized up-front at the point in time when the software is made available to the customer.

  

Automated traffic safety enforcement 

 

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. The Company also installs and maintains public safety systems, which may involve a combination of installation and lease payments or simply software licenses to use the Company's software in connection with a previously installed camera network. Revenue is recognized at various stages of completion of installation and monthly for lease or license payments.

 

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. On September 30, 2020, the Company had approximately $16,459,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 27% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the next two to five 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 billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled accounts receivables of $488,000 and $440,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 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 nine months ended September 30, 2020 were not materially impacted by any other factors. Contract liabilities as of September 30, 2020 and December 31, 2019 were $2,170,000 and $1,524,000, respectively. All contract liabilities as of September 30, 2020 and December 31, 2019 were attributable to continuing operations. During the nine months ended September 30, 2020 $622,000 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 September 30, 2020 (dollars in thousands):

 

2020   $ 607  
2021     750  
2022     368  
2023     275  
2024     160  
Thereafter     10  
Total   $ 2,170  

 

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 September 30, 2020, and December 31, 2019, costs incurred to obtain contracts in excess of one year have been immaterial to date.

 

Segment Reporting

The Financial Accounting Standard Board (“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 discontinued operations. As of January 1, 2020, the Company had 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 September 30, 2020 and December 31, 2019 were $573,000 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 September 30, 2020 and December 31, 2019, the Company had deposits from continuing operations totaling $24,727,000 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.

 

Customer A accounted for 17% and less than 10% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively. Customer A accounted for 20% and less than 10% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

 

Customer B accounted for less than 10% and 14% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively. Customer B accounted for less than 10% and 18% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

 

As of September 30, 2020, accounts receivable from Customer C and Customer D totaled 19% and 16% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2019, Customer C accounted for 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 and nine month period ended September 30, 2020 and 2019 or unaudited condensed consolidated accounts receivable balance as of September 30, 2020 and December 31, 2019.

 

Significant Accounting Policies

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

 

New Accounting Pronouncements Effective in the Nine Months ended September 30, 2020

 

In August 2018, the FASB issued Accounting Standards Update (“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.

 

New Accounting Pronouncements Effective in Future Periods

 

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). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company will adopt this guidance in the first quarter of 2021 and does not expect it to have a material impact on its consolidated financial statements.

 

The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standard discussed above, 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.

 

v3.20.2
GENERAL AND BASIS OF PRESENTATION (Tables)
9 Months Ended
Sep. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Summary of revenue
    Three Months ended September 30,     Nine Months ended September 30,  
    2020     2019     2020     2019  
Revenue                        
Licensing and subscription revenue   $ 1,341     $ 575     $ 4,122     $ 1,386  
Automated traffic safety enforcement     785       961       2,277       2,576  
Total revenue   $ 2,126     $ 1,536     $ 6,399     $ 3,962  
Contract liabilities
2020   $ 607  
2021     750  
2022     368  
2023     275  
2024     160  
Thereafter     10  
Total   $ 2,170  
v3.20.2
ACQUISITION (Tables)
9 Months Ended
Sep. 30, 2020
Business Combinations [Abstract]  
Purchase price allocation
Accounts receivable, net   $ 381  
Other current assets, net     13  
Property and equipment, net     21  
Contract liabilities     (388 )
Net assets acquired     27  
Less intangible assets     7,436  
Consideration paid     (12,397 )
Net goodwill recorded   $ 4,934  
         
Cash consideration   $ 7,000  
Note payable     5,000  
Common stock consideration     397  
Total acquisition consideration   $ 12,397  
Pro-forma financial information
    Three Months ended September 30,     Nine Months ended September 30,  
    2020     2019     2020     2019  
Total revenue from continuing operations   $ 2,126     $ 1,536     $ 6,399     $ 4,931  
Net loss from continuing operations     (6,667 )     (3,528 )     (10,860 )     (8,228 )
Basic and diluted loss per share from continuing operations   $ (0.26 )   $ (0.19 )   $ (0.52 )   $ (0.46 )
Basic and diluted number of shares     26,907,069       19,878,518       22,781,807       19,761,363  
v3.20.2
DISCONTINUED OPERATIONS (Tables)
9 Months Ended
Sep. 30, 2020
Discontinued Operations and Disposal Groups [Abstract]  
AOC Key Solutions Purchase Agreement
Total assets sold   $ 4,549  
Total liabilities assumed     3,514  
 Net assets sold     1,035  
 Closing cost     346  
 Consideration received (see below)     4,000  
 Gain on sale of AOC Key Solutions   $ 2,619  
         
 Cash consideration   $ 3,400  
 Note receivable     600  
 Total AOC Key Solution Purchase Agreement consideration   $ 4,000  
Team Global Purchase Agreement
Total assets sold   $ 9,996  
Total liabilities assumed     7,130  
 Net assets sold     2,866  
 Closing cost     122  
 Consideration received (see below)     4,000  
 Gain on sale of TeamGlobal   $ 1,012  
         
 Cash consideration   $ 2,300  
 Note receivable     1,700  
 Total TeamGlobal Purchase Agreement consideration   $ 4,000  
Discontinued operations

The assets and liabilities classified as discontinued operations in the Company's unaudited condensed consolidated financial statements as of September 30, 2020 and December 31, 2019 are shown below (dollars in thousands): 

 

    September 30. 2020     December 31, 2020  
    Global     AOC Key Solutions     Firestorm     Total     Global     AOC Key Solutions     Firestorm     Total  
ASSETS                                                
Cash and cash equivalents   $ -     $ -     $ 3     $ 3     $ 225     $ 93     $ 12     $ 330  
Accounts receivable, net     -       -       -       -       2,763       4,055       -       6,818  
Other current assets, net     -       -       -       -       238       52       3       293  
Current assets of discontinued operations     -       -       3       3       3,226       4,200       15       7,441  
Property and equipment, net     -       -       -       -       113       41       -       154  
Right-of-use lease assets, net     -       -       -       -       130       499       -       629  
Goodwill     -       -       -       -       669       -       -       669  
Intangible assets, net     -       -       -       -       1,994       -       -       1,994  
Deposits and other long-term assets     -       -       -       -       -       11       -       11  
Long-term assets of discontinued operations     -       -       -       -       2,906       551       -       3,457  
Total assets of discontinued operations   $ -     $ -     $ 3     $ 3     $ 6,132     $ 4,751     $ 15     $ 10,898  
LIABILITIES                                                                
Accounts payable and accrued expenses   $ -     $ -     $ 31     $ 31     $ 461     $ 1,260     $ 33     $ 1,754  
Lines of credit     -       -       -       -       1,842       1,894       -       3,736  
Lease liability, short term     -       -       83       83       113       100       54       267  
Current liabilities of discontinued operations     -       -       114       114       2,416       3,254       87       5,757  
Lease liability, long term     -       -       14       14       30       467       39       536  
Long-term liabilities of discontinued operations     -       -       14       14       30       467       39       536  
Total liabilities of discontinued operations   $ -     $ -     $ 128     $ 128     $ 2,446     $ 3,721     $ 126     $ 6,293  

 

The major components of the discontinued operations, net of tax, are presented in the unaudited condensed consolidated statements of operations below (dollars in thousands):

 

    Three Months ended September 30,  
    2020     2019  
    Global     AOC Key Solutions     Firestorm     Total     Global     AOC Key Solutions     Firestorm     Total  
Revenue   $ -     $ -     $ -     $ -     $ 6,205     $ 3,397     $ 50     $ 9,652  
Cost of revenue     -       -       -       -       5,378       1,836       6       7,220  
Gross profit     -       -       -       -       827       1,561       44       2,432  
Operating expenses:                                                                
General and administrative expenses     -       -       2       2       850       1,073       25       1,948  
Selling and marketing expenses     -       -       -       -       (1 )     138       -       137  
Operating expenses     -       -       2       2       849       1,211       25       2,085  
Income loss income from operations     -       -       (2 )     (2 )     (22 )     350       19       347  
Other expense:                                                                
Loss on extinguishment of debt     -       -       -       -       (31 )     (46 )     -       (77 )
Interest expense     -       -       -       -       (107 )     (47 )     -       (154 )
Other expense     -       -       -       -       -       (154 )     (62 )     (216 )
Total other expense     -       -       -       -       (138 )     (247 )     (62 )     (447 )
Income (loss) from discontinued operations     -