NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
These
unaudited condensed consolidated interim financial statements of
Rekor Systems, Inc. and its subsidiaries (collectively, the
“Company”) have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”) for interim financial statements. Accordingly,
they do not contain all information and notes required by U.S. GAAP
for annual financial statements. In the opinion of management,
these unaudited condensed consolidated interim financial statements
reflect all adjustments, which include normal recurring
adjustments, necessary for a fair statement of the Company’s
unaudited condensed consolidated financial position as of June 30,
2020, the unaudited condensed consolidated results of operations,
consolidated statements of shareholders’ deficit and
unaudited condensed consolidated statements of cash flows for the
three and six month periods ended June 30, 2020 and
2019.
The
financial data and other information disclosed in these notes are
unaudited. The results for the three and six months ended June 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 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 five years using deep machine learning algorithms, the
Company’s core software enables the creation of more powerful
and capable vehicle recognition systems that can be deployed at a
fraction of the cost of traditional vehicle recognition systems.
The software enables a wider field of view, greater light
sensitivity, recognitions at faster speeds and the ability to
identify the color, make and type of a vehicle as well as direction
of travel. These capabilities are particularly useful in solving a
wide variety of real-world roadway and vehicle related challenges.
In addition, the reductions in cost have opened up a number of new
uses for vehicle recognition technology that were not previously
cost effective.
In
March 2019, 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 has 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 period ending June 30,
2020 and for the period 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 our 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 merger and acquisition costs, public company
corporate overhead and non-capital expenditures related to and the
ramp up of new products and services offerings in connection with
the restructuring of the Company. As of and for the six months
ended June 30, 2020, the Company had a net loss from continuing
operations of $4,193,000 and a working capital deficit of
$92,000.
On
June 30, 2020, the Company entered into agreements (the "Exchange
Agreements") with certain 2019 Lenders of the Company’s 2019
Promissory Notes. Under the Exchange Agreements,
approximately $17,398,000 of the 2019 Promissory Notes, would be
redeemed in exchange for 4,349,497 shares of the Company’s
common stock, at a rate of $4 per share (the “Note
Exchange”). On July 15, 2020, the Company completed the
Note Exchange. Of the amount redeemed for common stock, $14,833,000
was related to the existing principal balance, $784,000 was related
to the portion of the exit fee associated with the notes exchanged,
$279,000 was related to the PIK interest associated to the notes
exchanged, and $1,502,000 was in consideration of the premium for
redemption of the 2019 Promissory Notes prior to maturity. The
premium for redemption was not included in the balance of the 2019
Promissory Notes as of June 30, 2020.
As of July 15, 2020, the Note Exchange
has been completed. The following unaudited pro forma combined
financial information gives effect to the Note Exchange as if it
was consummated as of June 30, 2020. 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 transaction been completed as of June 30,
2020 or to project potential operating results as of any future
date or for any future periods. See Note 7 – Debt and
Note 13 – Subsequent Events for additional information
related to the Note Exchange.
|
June
30, 2020 as presented
|
|
|
Accounts
payable and accrued expenses
|
$4,182
|
$(279)
|
$3,903
|
Total current liabilities
|
5,670
|
(279)
|
5,391
|
Notes
payable subject to exchange for stock
|
14,636
|
(14,636)
|
-
|
Notes
payable, long-term
|
5,367
|
-
|
5,367
|
Total liabilities
|
27,243
|
(14,636)
|
12,607
|
Additional
paid-in capital
|
22,180
|
14,915
|
37,095
|
Total stockholders’ (deficit) equity
|
(10,862)
|
14,915
|
4,053
|
Total liabilities and stockholders’ (deficit)
equity
|
$22,603
|
$-
|
$22,603
|
The
Company's net cash position was increased by $567,000 for the six
months June 30, 2020 due primarily to the net proceeds of
$2,177,000 from the At Market Issuance Sales Agreement (the "Sales
Agreement") and the net cash proceeds of $5,700,000 from the sale
of AOC Key Solutions and TeamGlobal. This amount was offset by the
net loss in the period.
Management believes
that based on relevant conditions and events that are known and
reasonably knowable, its current forecasts and projections, for one
year from the date of the filing of the unaudited condensed
consolidated financial statements in this Quarterly Report on Form
10-Q, indicate the Company’s ability to continue operations
as a going concern for that one-year period. The Company is
actively monitoring its operations, the cash on hand and working
capital. Additionally, as of June 30, 2020, the Company had access
to raise up to $9,482,000 through the Sales Agreement, as more fully
described in Note 10. As of July 31, 2020, the Company had
$9,482,000 available for sale under the Sales Agreement. The
Company currently expects to continue to raise capital through the
Sales Agreement to help fund operations as necessary. Should access
to those funds be unavailable, the Company will need to seek out
additional sources of funding. Furthermore, the Company has
contingency plans to reduce or defer expenses and cash outlays
should operations weaken in the look-forward period or additional
financing, if needed, is not available.
The
Company's ability to generate positive operating results and
complete the execution of its business strategy will depend on (i)
its ability to maintain timely collections from existing customers,
as well as continue the growth of its technology business, (ii) 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
meet debt covenants or obtain waivers in case of noncompliance 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 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 includes the need for
employees to work remotely, restrictions on travel affecting the
Company’s ability to attend meetings, conferences,
consultations and installations and otherwise provide and market
its products and services, and disruptions to its customers'
operations which may affect its revenues. The Company benefited
from the financing under the CARES Act. The ultimate disruption
which may be caused by the outbreak is uncertain; however, it may
result in a material adverse impact on the Company’s
financial position, operations and cash flows. Possible effects may
include, but are not limited to, disruption to the Company’s
customers and revenue, absenteeism in the Company’s labor
workforce, unavailability of products and supplies used in
operations, and a decline in value of assets held by the
Company.
Use of Estimates
The
preparation of financial statements in conformity with 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.
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 June 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 June 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 2 and Level 3 inputs.
The Company has concluded that its Series A Preferred Stock is a
Level 3 financial instrument and that the fair value approximates
the carrying value, which includes the accretion of the discounted
interest component through June 30, 2020. There were no changes in
levels during the six months ended June 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 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. 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 recognized for the three and six months ended June 30,
2020 was $12,000 and is included as part of other income on the
unaudited condensed consolidated statement of operations. Interest
income for the three and six months ended June 30, 2019 was
immaterial.
Revenue Recognition
The
Company derives its revenues substantially from license and
subscription fees for software and related products and
services.
Revenue
is recognized upon transfer of control of promised products and
services to the Company’s customers, in an amount that
reflects the consideration the Company expects to receive in
exchange for those products and services. If the consideration
promised in the contract includes a variable amount, for example
maintenance fees, the Company includes an estimate of the amount it
expects to receive for the total transaction price, if it is
probable that a significant reversal of cumulative revenue
recognized will not occur.
The
Company determines the amount of revenue to be recognized through
application of the following steps:
●
Identification
of the contract, or contracts, with a customer
●
Identification
of the performance obligations in the contract
●
Determination
of the transaction price
●
Allocation
of the transaction price to the performance obligations in the
contract
●
Recognition
of revenue when, or as, performance obligations are
satisfied
The
following table presents a summary of revenue (dollars in
thousands):
|
Three
Months ended June 30,
|
Six
Months ended June 30,
|
|
|
|
|
|
Revenue
|
|
|
|
|
Automated
traffic safety enforcement
|
$734
|
$792
|
$1,480
|
$1,609
|
Licensing
and subscription revenue
|
1,943
|
624
|
2,793
|
817
|
Total
revenue
|
$2,677
|
$1,416
|
$4,273
|
$2,426
|
Revenues
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.
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 is recognized ratably over the
licensing or subscription term. 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 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 June 30, 2020, the Company had approximately
$15,237,000 of remaining performance obligations not yet satisfied
or partially satisfied. The Company expects to recognize
approximately 33% of this amount over the succeeding twelve months,
and the remainder is expected to be recognized over the next two to
four years thereafter.
The
timing of revenue recognition, billings and cash collections
results in billed accounts receivable, unbilled accounts
receivables, and contract liabilities on the unaudited condensed
consolidated balance sheets. Billed and unbilled accounts
receivable are presented as part of accounts receivable, net, on
the unaudited condensed consolidated balance sheets. When 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 $442,000 and $440,000 were included in
accounts receivable, net, in the unaudited condensed consolidated
balance sheets as of June 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 six
months ended June 30, 2020 were not materially impacted by any
other factors. Contract liabilities as of June 30, 2020 and
December 31, 2019 were $1,704,000 and $1,524,000, respectively. All
contract liabilities as of June 30, 2020 and December 31, 2019 were
attributable to continued operations. During the six months ended
June 30, 2020 $458,000 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 June 30, 2020 (dollars in thousands):
2020
|
$695
|
2021
|
415
|
2022
|
288
|
2023
|
205
|
2024
|
100
|
Thereafter
|
1
|
Total
|
$1,704
|
Practical Expedients Election ‒
Costs to Obtain and Fulfill a
Contract ‒ The Company’s incremental costs to
obtain a contract consist of sales commissions. The Company elected
to use the practical expedient to expense costs to obtain a
contract as incurred when the amortization period would have been
one year or less. As of June 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 June 30, 2020. 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 June 30, 2020 and
December 31, 2019 were $496,000 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 June 30, 2020 and December 31, 2019,
the Company had deposits from continuing operations totaling
$2,429,000 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 35% and less
than 10% of the Company’s total revenues for the three months
ended June 30, 2020 and 2019, respectively. Customer A accounted for 22% and less
than 10% of the Company’s total revenues for the six months
ended June 30, 2020 and 2019, respectively.
Customer B accounted for less than 10% and 15% of the
Company’s total revenues for the three months ended June 30,
2020 and 2019, respectively. Customer B accounted for less than 10%
and 20% of the Company’s total revenues for the six months
ended June 30, 2020 and 2019, respectively.
As of June 30, 2020, accounts
receivable from Customer A and Customer C totaled 51% and
10% of the unaudited
condensed consolidated
accounts receivable balance. As of December 31, 2019, Customer D
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 six month period ended June 30, 2020 or unaudited
condensed consolidated accounts receivable balance as of June 30,
2020.
Significant Accounting Policies
Additional
significant accounting policies of the Company are also described
in Note 1 of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019.
New Accounting Pronouncements Effective in the Six Months ended
June 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.
The Company does not believe that any recently issued, but not yet
effective, accounting standards could have a material effect on the
accompanying financial statements. As new accounting pronouncements
are issued, the Company will adopt those that are applicable under
the circumstances.
NOTE 2 – ACQUISITIONS
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 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 six months ended June 30,
2020.
The final purchase price allocation of the OpenALPR Technology
Acquisition is as follows: intangible assets of $7,436,000 and
goodwill of $4,934,000 along with net assets acquired of $415,000,
and contract obligations assumed of $388,000.
The table below shows the breakdown related to the final purchase
price allocation for the OpenALPR Technology Acquisition (dollars
in thousands):
Accounts
receivable, net
|
$381
|
Other current
assets, net
|
13
|
Property and
equipment, net
|
21
|
Contract
liabilities
|
(388)
|
Net assets
acquired
|
27
|
Less intangible
assets
|
7,436
|
Consideration
paid
|
(12,397)
|
Net goodwill
recorded
|
$4,934
|
|
|
Cash
consideration
|
$7,000
|
Note
payable
|
5,000
|
Common stock
consideration
|
397
|
Total acquisition
consideration
|
$12,397
|
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 June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
Total
revenue from continuing operations
|
$2,677
|
$1,416
|
$4,273
|
$3,395
|
Net
loss from continuing operations
|
(419)
|
(2,991)
|
(4,193)
|
(4,701)
|
Basic
and diluted loss per share continuing operations
|
$(0.03)
|
$(0.17)
|
$(0.22)
|
$(0.28)
|
Basic
and diluted number of shares
|
22,829,084
|
19,369,399
|
22,224,417
|
19,135,176
|
NOTE 3 – 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 Purchase Agreement
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’s management (the “AOC Key Solutions Buyer”), by which the Company agreed to sell
AOC Key Solutions, to the AOC Key Solutions Buyer.
Subject to the terms and conditions of the AOC Key
Solutions Purchase Agreement, 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.
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
paid (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 Purchase Agreement
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
|
117
|
Consideration
paid (see below)
|
4,000
|
Gain on sale
of TeamGlobal
|
$1,017
|
|
|
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 six
months ended June 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 June 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 June 30, 2020 and December 31, 2019 are
shown below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$-
|
$-
|
$4
|
$4
|
$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
|
-
|
-
|
4
|
4
|
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
|
$-
|
$-
|
$4
|
$4
|
$6,132
|
$4,751
|
$15
|
$10,898
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$-
|
$-
|
$30
|
$30
|
$461
|
$1,260
|
$33
|
$1,754
|
Lines
of credit
|
-
|
-
|
-
|
-
|
1,842
|
1,894
|
-
|
3,736
|
Lease
liability, short term
|
-
|
-
|
74
|
74
|
113
|
100
|
54
|
267
|
Current
liabilities of discontinued operations
|
-
|
-
|
104
|
104
|
2,416
|
3,254
|
87
|
5,757
|
Lease
liability, long term
|
-
|
-
|
21
|
21
|
30
|
467
|
39
|
536
|
Long-term
liabilities of discontinued operations
|
-
|
-
|
21
|
21
|
30
|
467
|
39
|
536
|
Total
liabilities of discontinued operations
|
$-
|
$-
|
$125
|
$125
|
$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 June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$4,205
|
$-
|
$5
|
$4,210
|
$6,997
|
$3,641
|
$275
|
$10,913
|
Cost
of revenue
|
3,714
|
-
|
-
|
3,714
|
6,027
|
1,939
|
200
|
8,166
|
Gross
profit
|
491
|
-
|
5
|
496
|
970
|
1,702
|
75
|
2,747
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
579
|
-
|
-
|
579
|
924
|
1,446
|
412
|
2,782
|
Selling
and marketing expenses
|
40
|
-
|
-
|
40
|
61
|
149
|
57
|
267
|
Impairment
of intangibles
|
-
|
-
|
-
|
-
|
-
|
-
|
1,549
|
1,549
|
Operating
expenses
|
619
|
-
|
-
|
619
|
985
|
1,595
|
2,018
|
4,598
|
Income
loss income from operations
|
(128)
|
-
|
5
|
(123)
|
(15)
|
107
|
(1,943)
|
(1,851)
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
Interest
expense
|
(76)
|
-
|
-
|
(76)
|
(53)
|
(30)
|
-
|
(83)
|
Other
expense (income)
|
-
|
-
|
-
|
-
|
1
|
-
|
(3)
|
(2)
|
Total
other (income) expense
|
(76)
|
-
|
-
|
(76)
|
(52)
|
(30)
|
(3)
|
(85)
|
Income
(loss) from discontinued operations
|
(204)
|
-
|
5
|
(199)
|
(67)
|
77
|
(1,946)
|
(1,936)
|
Income
tax provision from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Net
income (loss) from discontinued operations
|
$(204)
|
$-
|
$5
|
$(199)
|
$(67)
|
$77
|
$(1,946)
|
$(1,936)
|
|
Six
Months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$10,510
|
$3,392
|
$5
|
$13,907
|
$14,055
|
$6,519
|
$955
|
$21,529
|
Cost
of revenue
|
9,190
|
1,866
|
-
|
11,056
|
12,173
|
3,531
|
495
|
16,199
|
Gross
profit
|
1,320
|
1,526
|
5
|
2,851
|
1,882
|
2,988
|
460
|
5,330
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
1,341
|
1,284
|
(4)
|
2,621
|
1,895
|
2,561
|
920
|
5,376
|
Selling
and marketing expenses
|
79
|
131
|
-
|
210
|
143
|
274
|
120
|
537
|
Impairment
of intangibles
|
-
|
-
|
-
|
-
|
-
|
-
|
1,549
|
1,549
|
Operating
expenses
|
1,420
|
1,415
|
(4)
|
2,831
|
2,038
|
2,835
|
2,589
|
7,462
|
Income
loss income from operations
|
(100)
|
111
|
9
|
20
|
(156)
|
153
|
(2,129)
|
(2,132)
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
Interest
expense
|
(166)
|
(74)
|
-
|
(240)
|
(101)
|
(61)
|
-
|
(162)
|
Other
expense (income)
|
5
|
2
|
-
|
7
|
2
|
2
|
(3)
|
1
|
Total
other (income) expense
|
(161)
|
(72)
|
-
|
(233)
|
(99)
|
(59)
|
(3)
|
(161)
|
Income
(loss) from discontinued operations
|
(261)
|
39
|
9
|
(213)
|
(255)
|
94
|
(2,132)
|
(2,293)
|
Income
tax provision from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Net
income (loss) from discontinued operations
|
$(261)
|
$39
|
$9
|
$(213)
|
$(255)
|
$94
|
$(2,132)
|
$(2,293)
|
NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental disclosures of cash flow information for
the six months ended June 30, 2020 and June 30, 2019 were as
follows (dollars in thousands):
|
Six
Months Ended June 30,
|
|
|
|
Cash
paid for interest - continuing operations
|
$994
|
$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
|
-
|
Note
received as part of AOC Key Solutions Sale
|
600
|
-
|
Financing:
|
|
|
Notes
payable - continuing operations
|
-
|
21,000
|
Debt
discount financing costs
|
-
|
(2,599)
|
Extinguishment
of debt
|
-
|
(1,113)
|
Repayment
of notes payable and interest expense, net of debt
discount
|
-
|
(2,515)
|
Investment
in OpenALPR Technology
|
-
|
(12,000)
|
Issuance
of warrants in conjunction with notes payable
|
-
|
706
|
Accounts
Payable
|
-
|
360
|
Proceeds
from notes payable
|
-
|
3,839
|
Adoption
of ASC-842 Lease Accounting:
|
|
|
Right-of-use
lease asset
|
132
|
291
|
Lease
liability
|
$(132)
|
$(291)
|
NOTE 5 – OPERATING LEASES
We have operating leases for office
facilities in various locations throughout the United States. The
Company’s leases have remaining terms of one
to five years. Certain of the Company’s
leases include options to extend the term of the lease or to
terminate the lease prior to the end of the initial term. When it
is reasonably certain that the Company will exercise the option,
the Company will include the impact of the option in the lease term
for purposes of determining total future lease
payments.
Operating lease expense from continuing
operations for
the three months ended June 30, 2020 and 2019 was $56,000 and
$52,000, and for the six months ended June 30, 2020 and 2019 was
$104,000 and $75,000, 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
$104,000 for the three and six months ended June 30,
2020.
Supplemental balance sheet information related to leases as of June
30, 2020 was as follows (dollars in thousands):
Operating
lease right-of-use lease assets from continuing
operations
|
$330
|
|
|
Current
portion of lease liability
|
$231
|
Long-term
portion of lease liability
|
114
|
Total
lease liability from continuing operations
|
$345
|
|
|
Weighted
average remaining lease term - operating leases from continuing
operations
|
1.93
|
|
|
Weighted
average discount rate - operating leases
|
9%
|
|
|
2020
|
$125
|
2021
|
195
|
2022
|
19
|
2023
|
19
|
2024
|
18
|
Total
lease payments
|
376
|
Less
imputed interest
|
31
|
Maturities
of lease liabilities
|
$345
|
NOTE 6 – INTANGIBLE ASSETS
Goodwill
There have been no changes from December 31, 2019 in the carrying
amount of goodwill of continuing operations for
the six months ended June 30, 2020.
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2019 to June 30, 2020 (dollars in
thousands):
|
|
|
|
Internally
Developed Capitalized Software
|
|
Identifiable
intangible assets
|
$461
|
$327
|
$7,206
|
$1,432
|
$9,426
|
Accumulated
amortization
|
(82)
|
(132)
|
(1,321)
|
(140)
|
(1,675)
|
Identifiable
intangible assets from continuing operations, net
|
$379
|
$195
|
$5,885
|
$1,292
|
$7,751
|
The following provides a breakdown of identifiable intangible
assets as of June 30, 2020 (dollars in thousands):
|
|
|
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
Customer
relationships
|
$396
|
$-
|
$(17)
|
$379
|
Marketing
related
|
230
|
-
|
(35)
|
195
|
Technology
based
|
6,395
|
-
|
(510)
|
5,885
|
Internally
capitalized software
|
1,223
|
142
|
(73)
|
1,292
|
Intangible
assets subject to amortization from continuing
operations
|
$8,244
|
$142
|
$(635)
|
$7,751
|
These intangible assets are being amortized on a straight-line
basis over their weighted average estimated useful life of 5.8
years. Amortization expense attributable to continuing operations
for the three months ended June 30, 2020 and 2019 was $321,000 and
$295,000, respectively, and for the six months ended June 30, 2020
and 2019 was $635,000 and $361,000, respectively and is presented
as part of general and administrative expenses in the accompanying
unaudited condensed consolidated statements of
operations.
As of June 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
|
$683
|
2021
|
1,355
|
2022
|
1,274
|
2023
|
1,147
|
2024
|
1,060
|
Thereafter
|
1,449
|
Capitalized
software not yet placed in service
|
783
|
Total
|
$7,751
|
NOTE 7 – 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 $971,000 and
$961,000, net of unamortized interest, as of June 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 $29,000 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 and $75,000 of interest due through
May 1, 2019. All amounts paid were obtained from the proceeds of
the 2019 Promissory Notes. The 2018 Lender consideration of
$1,050,000 for the Lender’s Participation and unamortized
financing costs of $63,000 are recorded as costs in connection with
the loss on the extinguishment of debt of $1,113,000 for the six
months ended June 30, 2019.
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.
On
May 5, 2020, TeamGlobal, entered into a loan agreement with BOKF,
NA, d/b/a Bank of Oklahoma, which provides for a loan in the
principal amount of $5,005,000 (the “TeamGlobal PPP
Loan”) pursuant to the Paycheck Protection Program under the
CARES Act. The TeamGlobal PPP Loan has a two-year term and bears
interest at a rate of 1.0% per annum. The TeamGlobal PPP Loan was
assumed by TeamGlobal as part of the TeamGlobal Purchase
Agreement.
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 review the new guidance at
the time of issuance and determine whether it remains eligible for
the PPP Loan at that time.
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 bears interest at 16%
per annum, of which at least 10% per annum is required to be paid
in cash. Any remaining interest accrues to be paid at maturity or
earlier redemption. The notes also require a $1,000,000 exit fee
due at maturity, or a premium if paid before the maturity date, and
compliance with affirmative, negative and financial covenants,
including a fixed charge coverage ratio, minimum liquidity and
maximum capital expenditures. As of June 30, 2020, the Company had
a waiver in place for the financial covenants related to this note
until December 31, 2021. Transaction costs included $403,000 for
a work fee payable over 10 months, $290,000 in legal fees and a
$200,000 closing fee. The loan is secured by a security interest in
substantially all of the assets of Rekor. The March 2019 Warrants
are exercisable over a period of five years, at an exercise price
of $0.74 per share, and were valued at $706,000, at the time of issuance. The
warrants were exercisable commencing March 12, 2019 and expire on
March 12, 2024.
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.
Amortized financing costs for the three months ended June 30, 2020
and 2019 were $276,000 and $324,000, respectively, and for the six
months ended June 30, 2020 and 2019 were $600,000 and $392,000,
respectively, and are included in interest expense on the unaudited
condensed consolidated statement of operations. The 2019 Promissory
Notes have an effective interest rate of 24.87%.
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 are
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 Exchange Transaction
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. Of the amount redeemed for common
stock, $14,833,000 was related to the existing principal balance,
$784,000 was related to the portion of the exit fee associated with
the notes subject to conversion, $279,000 was related to the PIK
interest associated to the notes subject to conversion, and
$1,502,000 was part of the premium percentage as the portion of the
2019 Promissory Notes were settled prior to the maturity date. The
premium for redemption was not included in the balance of the 2019
Promissory Notes as of June 30, 2020. Following the Note Exchange,
approximately $4,450,000 aggregate principal amount of the 2019
Promissory Notes will remain outstanding, plus an additional
$216,000 related to the exit fee.
As
of June 30, 2020, there was approximately $981,000 and $271,000 of
deferred financing costs subject to the 2019 Promissory Notes which
were subject to the Note Exchange and the 2019 Promissory Notes
which were not subject to the Note Exchange,
respectively.
As
of June 30, 2020, the 2019 Lenders subject to the Note Exchange had
not yet received their shares of the Company’s common stock.
As of June 30, 2020, the Company has separately presented the 2019
Promissory Notes subject to the Note Exchange on its unaudited
condensed consolidated balances sheets. On July 15, 2020, the
Company settled the debt subject to the Note Exchange with shares
of its common stock. See the Note 13 - Subsequent Events for
additional information related to the Note Exchange
Transaction.
The principal amounts due for long-term notes payable described
above are shown below as of June 30, 2020 (dollars in
thousands):
2020
|
$46
|
2021
|
20,725
|
2022
|
1,387
|
2023
|
-
|
2024
|
-
|
Thereafter
|
-
|
Total
|
22,158
|
|
|
Less
unamortized interest
|
(29)
|
Less
unamortized financing costs
|
(1,252)
|
Total
debt
|
$20,877
|
Loans
payable, current portion
|
$251
|
|
623
|
|
5,367
|
Notes
payable to be exchanged for common stock
|
14,636
|
Total
debt
|
$20,877
|
NOTE 8 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC Topic 740.
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, the Company
reviewed both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections and the overall
prospects of the Company’s business.
The Company’s income tax
provision for the three and six months ended June 30, 2020 was
$7,000 and $13,000, respectively. The Company’s income tax
provision for the three and six months ended June 30, 2019 was
$12,000 and $24,000, 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 six
months ended June 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 June 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 six months ended June 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.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
On August 19, 2019, the Company filed suit in the United States
District Court for the Southern District of New York against three
former executives of the Company 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, 2020, 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,
2020. On April 27, 2020, the Firestorm Principals filed a
Motion for Partial Judgment on the Pleadings, which the Company has
opposed. The Company intends to continue vigorously
litigating its claims against the Firestorm Principals and believes
that the Firestorm Principals’ remaining counterclaims are
without merit.
On or about July 3, 2020, the Firestorm Principals filed suit in
New York Supreme Court in Sullivan County against a director of the
Company, alleging breach of fiduciary duty and libel. The
Company believes that this suit is without merit and intends to
vigorously support litigation of this matter.
Vigilant Solutions, LLC, a subsidiary of Motorola Solutions, Inc.,
filed a complaint on February 21, 2020 against the Company and
certain of its subsidiaries in the US District Court for the
District of Maryland. The complaint alleges that certain of the
Company’s products violate a patent held by Vigilant. 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. Fact discovery will continue
until the first quarter of 2021 with expert discovery and
dispositive motions in the second quarter of 2021. The court
has not yet set a trial date.
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 making 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 against the
Company and intends 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.
NOTE 10 – 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 June 30, 2020, and
December 31, 2019, the issued and outstanding common shares of
Rekor were 22,942,546 and 21,595,653, respectively.
For the three and six months ended June
30, 2020, the Company issued 150,451 and 151,745 shares of Rekor
common stock related to the exercise of common stock options. For
the three and six months ended June 30, 2019, the Company issued
14,566 shares of
Rekor common stock related to the exercise of common stock
options.
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 may offer and sell shares of its common stock,
having an aggregate offering price of up to $15,000,000, through or
to B. Riley FBR. Subject to the terms and conditions of the Sales
Agreement, B. Riley FBR will use its commercially reasonable
efforts to sell the shares of the Company’s common stock from
time to time, based upon the Company’s instructions. B.
Riley FBR will be entitled to a commission equal to 3.0% of
the gross proceeds from each sale. The Company incurred issuance
costs of approximately $226,000 related to legal, accounting, and
other fees in connection with the Sales Agreement. These costs
were charged against the gross proceeds of the Sales Agreement and
presented as a reduction to additional paid-in capital on the
unaudited condensed consolidated balance sheets.
Sales of the Company’s common
stock under the Sales Agreement are to be issued and sold pursuant
to the Company’s shelf registration statement
on Form S-3 (File No 333-224423), previously filed
with the Securities and Exchange Commission (“SEC”) on
April 24, 2018 and declared effective by the SEC on
April 30, 2018. For the six months ended June 30, 2020,
based on settlement date, the Company sold 538,967 shares of common
stock at a weighted-average selling price of $4.15 per share in
accordance with the Sales Agreement. Net cash provided for the six
months ended June 30, 2020 from the Sales Agreement was $2,177,000
after paying 3.0% or $67,000 related to cash commissions provided
to B. Riley FBR. As of June 30, 2020, $9,482,000 remained available
for sale under the Sales Agreement.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of
preferred stock, $0.0001 par value. The Company’s preferred
stock may be entitled to preference over the common stock with
respect to the distribution of assets of the Company in the event
of liquidation, dissolution or winding-up of the Company, whether
voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for
the purpose of the winding-up of its affairs. The authorized but
unissued shares of the preferred stock may be divided into, and
issued in, designated series from time to time by one or more
resolutions adopted by the Board of Directors of the Company. The
Board of Directors of the Company, in its sole discretion, has the
power to determine the relative powers, preferences and rights of
each series of preferred stock.
Series A Cumulative Convertible Redeemable Preferred
Stock
Of the 2,000,000 authorized shares of
preferred stock, 505,000 shares are designated as $0.0001 par value
Series A Cumulative Convertible Redeemable Preferred Stock (the
“Series A Preferred Stock”). The holders of Series A
Preferred Stock are entitled to quarterly dividends of 7.0% per
annum per share. The holders of Series A Preferred Stock have a
right to convert each share into common stock at an initial
conversion price and a specified conversion price which increases
annually based on the passage of time beginning in November 2019.
The holders of Series A Preferred Stock also have a put right after
60 months from the issuance date to redeem any or all of the Series
A Preferred Stock at a redemption price of $15.00 per share plus
any accrued but unpaid dividends. The Company has a call right
after 36 months from the issuance date to redeem all of the Series
A Preferred Stock at a redemption price which increases annually
based on the passage of time 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
June 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
$212,000 and $184,000 for the three months ended June 30, 2020 and
2019, respectively, and $418,000 and
$363,000 for the six months ended June 30, 2020 and 2019,
respectively.
As of
June 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 six
months ended June 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 $748,000 and $551,000 as of June 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 six months ended June 30,
2020. Accrued dividends
payable to Series B Preferred Stock shareholders were $110,000 and
$54,000 as of June 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 1,825,769 and 2,251,232 shares of Rekor common stock as of
June 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 182,054
and 240,017 shares of Rekor common stock as of June 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 six months ended June 30, 2020, 119,500 of the
outstanding warrants were exercised and converted into 57,963
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 June 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 June 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 six months ended June
30, 2020, 8,767 warrants were exercised and converted into 6,460
shares of the Company’s common stock. As of June 30, 2020 and
December 31, 2019, 7,670 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
six months ended June 30, 2020, 598,750 warrants were exercised in
cash and cashless transactions resulting in the issuance of 591,758
shares of common stock. As of June 30, 2020 and December 31, 2019,
938,125 and 1,536,875 warrants related to the 2019 Promissory Notes
remain outstanding, respectively.
NOTE 11 – EQUITY INCENTIVE PLAN
In
August 2017, the Company approved and adopted the 2017 Equity Award
Plan (the “2017 Plan”) which replaced the 2016 Equity
Award Plan (the “2016 Plan”). The 2017 Plan permits the
granting of stock options, stock appreciation rights, restricted
and unrestricted stock awards, phantom stock, performance awards
and other stock-based awards for the purpose of attracting and
retaining quality employees, directors and consultants. Maximum
awards available under the 2017 Plan were initially set at
3,000,000 shares.
Stock compensation
expense for the three months ended June 30, 2020 and 2019 was
$166,000 and $175,000, respectively, and for the six months ended
June 30, 2020 and 2019 was $337,000 and $238,000,
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 six months ended June 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
|
9.66
|
-
|
Exercised
|
(151,745)
|
1.60
|
-
|
-
|
Forfeited
|
(44,216)
|
3.38
|
-
|
-
|
Canceled
|
(36,684)
|
1.82
|
-
|
-
|
Outstanding
Balance at June 30, 2020
|
1,442,738
|
$1.67
|
7.77
|
$2,868
|
Exercisable
at June 30, 2020
|
1,056,866
|
$1.68
|
6.30
|
$2,064
|
The weighted average grant date fair
value of options granted, to employees and non-employees, for the
six months ended June 30, 2020 and 2019 was $0.31 and $1.12,
respectively. The intrinsic value of the stock options granted
during the six months ended June 30, 2020 and 2019 was
$0 and $784,000,
respectively. The total fair value of options that vested in the
six months ended June 30, 2020 and 2019 was $124,000 and
$1,604,000, respectively.
As of June 30, 2020, there was $252,000
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 1.53 years.
Restricted Stock Units
A summary of RSU activity under the Company’s 2017 Plan for
the six months ended June 30, 2020 is as follows:
|
|
Weighted Average
Unit Price
|
Weighted Average
Remaining Contractual Term (Years)
|
Aggregate Intrinsic
Value
|
Outstanding
Balance at December 31, 2019
|
-
|
$-
|
-
|
$-
|
Granted
|
351,600
|
4.03
|
2.36
|
|
Vested
|
-
|
-
|
|
|
Forfeited
|
(1,400)
|
-
|
|
|
Outstanding
Balance at June 30, 2020
|
350,200
|
$4.03
|
2.37
|
$-
|
The grant date fair value was based on the estimated fair value of
our common stock on the date of grant. All RSUs granted vest upon
the satisfaction of a service-based vesting condition.
As of June 30, 2020, there was
$1,221,000 of unrecognized stock compensation expense related to
unvested RSUs granted under the 2017 Plan that will be recognized
over an average remaining period of 2.37 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.
NOTE 12 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss per common share:
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
(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
|
$(419)
|
$(2,991)
|
$(4,193)
|
$(5,509)
|
Less:
preferred stock accretion
|
(212)
|
(184)
|
(418)
|
(363)
|
Less:
preferred stock dividends
|
(115)
|
(115)
|
(230)
|
(230)
|
Net
loss attributable to shareholders from continuing
operations
|
(746)
|
(3,290)
|
(4,841)
|
(6,102)
|
Net loss from
discontinued operations
|
(199)
|
(1,936)
|
(213)
|
(2,293)
|
Net loss
attributable to shareholders
|
$(945)
|
$(5,226)
|
(5,054)
|
(8,395)
|
Weighted
average common shares outstanding - basic and diluted
|
22,829,084
|
19,369,399
|
22,224,417
|
19,135,176
|
Basic
and diluted loss per share from continuing operations
|
$(0.03)
|
$(0.17)
|
$(0.22)
|
$(0.32)
|
Basic
and diluted loss per share from discontinued
operations
|
(0.01)
|
(0.10)
|
(0.01)
|
(0.12)
|
Basic and diluted
loss per share
|
$(0.04)
|
$(0.27)
|
$(0.23)
|
$(0.44)
|
Common
stock equivalents excluded due to anti-dilutive effect
|
5,074,916
|
6,918,542
|
5,074,916
|
6,918,542
|
As the Company had a net loss for the three and six months ended
June 30, 2020, the following 5,074,916 potentially dilutive
securities were excluded from diluted loss per share: 1,825,769 for
outstanding warrants, 974,487 related to the Series A Preferred
Stock, 481,722 related to the Series B Preferred Stock, 1,442,738
related to outstanding options and 350,200 related to outstanding
RSUs.
As the Company had a net loss for the
three and six months ended June 30, 2019, the following 6,918,542
potentially dilutive securities were excluded from diluted loss per
share: 3,672,471 for outstanding warrants, 974,487 related to the
Series A Preferred Stock, 481,722 related to the Series B Preferred
Stock and 1,789,862 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.
NOTE 13- SUBSEQUENT EVENTS
Exchange Agreement
In Exchange Agreements reached on June 30, 2020,
certain holders of the 2019 Promissory Notes agreed to a redemption
of approximately 77% of the remaining principal balance of the 2019
Promissory Notes as of June 30, 2020. Per the Exchange Agreements,
$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. Of
the amount redeemed for common stock, $14,833,000 was related to
the existing principal balance, $784,000 was related to the portion
of the exit fee associated with the notes subject to conversion,
$279,000 was related to the PIK interest associated to the notes
subject to conversion, and $1,502,000 was part of the premium
percentage as the portion of the 2019 Promissory Notes were settled
prior to the maturity date. The premium for redemption was not
included in the balance of the 2019 Promissory Notes as of June 30,
2020. Following the Note Exchange, approximately $4,450,000
aggregate principal amount of the 2019 Promissory Notes will remain
outstanding, plus an additional $216,000 related to the exit
fee.
On
July 15, 2020, the Company completed the Note Exchange. As a result
of the Note Exchange, the Company now has approximately 27,292,043
shares of common stock issued and outstanding.
Equity Method Investment
In June
of 2020, the Company announced a joint venture to launch a smart
permit and parking management startup, named Roker Inc. ("Roker"),
in which the Company has a 50 percent equity interest. Roker is
designed to automate
parking enforcement and enable higher revenue recovery for both
public safety institutions and private businesses alike. In July
2020, the Company made an initial investment of $45,000 into the
joint venture.
Departure of Chairman of the Board of
Directors
On
July 23, 2020, James K. McCarthy, Chairman of the Board of
Directors of the Company notified the Company’s Board of
Directors (the “Board”) of his intention to retire from
the Company's Board, effective immediately. Mr. McCarthy did not
advise the Company of any disagreement with the Company on any
matter relating to its operations, policies or
practices.
Effective
upon Mr. McCarthy’s resignation as a director, the size of
the Board has been reduced from eight to seven, and Mr. Robert
Berman has been named the Executive Chairman of the
Board.