Rekor Systems, Inc 10-K for FY2019
Rekor Systems, Inc. (REKR)
10-K
2020-03-30
For: 2019-12-31
View Original
Added on
April 12, 2026
About this 10-K
Rekor Systems, Inc filed this 10-K on March 30, 2020, covering the fiscal year ended December 31, 2019 (FY2019).
Headline figures
Fiscal year ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $19.32M
- down 3.7% from $20.05M a year earlier
- Net loss
- $15.88M
- compared with a net loss of $5.7M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to
Commission File Number: 001-38338
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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81-5266334
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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7172 Columbia Gateway Drive, Suite 400
Columbia, MD
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21046
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(Address of Principal Executive Offices)
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(Zip Code)
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(410) 762-0800
(Registrant’s Telephone Number, Including Area
Code)
Securities
registered pursuant to Section 12(b) of the Act
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock, $0.0001 par value per share
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REKR
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The
Nasdaq Stock Market
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Securities
Registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past
90 days. Yes ☒
No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such
files). Yes ☒
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☒
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Smaller
reporting company ☒
Emerging
growth company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
The
aggregate market value of the registrant’s voting and
non-voting common stock held by non-affiliates of the registrant as
of June 30, 2019 was approximately $18.5 million.
As of
March 30, 2020, the Registrant had 22,768,757 shares of common
stock, $0.0001 par value per share outstanding.
TABLE OF CONTENTS
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PAGE
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PART I
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PART II
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PART
III
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Part
IV
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2
CERTAIN TERMS
Unless the context
requires otherwise, all references in this Annual Report on
Form 10-K (the “Annual Report”) to “Rekor
Systems, Inc.,” “Rekor,” “Company,”
“we,” “our” and “us” refer to
Rekor Systems, Inc. and its consolidated
subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
that involve substantial risks and uncertainties. All statements
other than statements of historical facts contained in this Annual
Report, including statements regarding our future results of
operations and financial position, business strategy, prospective
products and services, timing and likelihood of success, plans and
objectives of management for future operations, and future results
of current and anticipated products and services, are
forward-looking statements. These statements involve known and
unknown risks, uncertainties and other important factors that may
cause our actual results, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking
statements by terms such as “may,” “will,”
“should,” “expect,” “plan,”
“anticipate,” “could,”
“intend,” “target,” “project,”
“contemplates,” “believes,”
“estimates,” “predicts,”
“potential” or “continue” or the negative
of these terms or other similar expressions. These forward-looking
statements speak only as of the date of this Annual Report and are
subject to a number of risks, uncertainties and assumptions
described under the sections in this Annual Report entitled
“Risk Factors” and elsewhere in this Annual Report.
Because forward-looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified
and some of which are beyond our control, you should not rely on
these forward-looking statements as predictions of future events.
We undertake no obligation to update any forward-looking statement
as a result of new information, future events or
otherwise.
PART I
Overview
We
are a leader in the field of vehicle identification and management
systems driven by leading edge advances in artificial intelligence
("AI"). In development for over five years using AI processes,
including machine learning algorithms, our 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 higher accuracy rates, in addition to the ability
to identify the color, make and type of a vehicle and its 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. We currently provide products and services for
governmental organizations, for large and small businesses and for
individuals throughout the world. Customers are currently using our
products or services in over 70 countries, with offerings for smart
cities, public safety, security, transportation, parking and
logistics.
Currently, our
business activities also include providing professional services in
the government contracting, aviation and aerospace industries. As
part of the development of a new line of products for the public
safety and security markets, we acquired industry leading vehicle
recognition software in March 2019. In connection with this
acquisition, we determined that our resources are best concentrated
on vehicle recognition products and services and have reorganized
and retooled our product development, business development and
administrative resources, with increasing emphasis on the
technology area. Our Board of Directors has also authorized
management to explore opportunities for the sale of our
professional services businesses. In keeping with the shift in
resources and strategic direction that this represents, we have
reorganized our financial reporting into two business segments: the
Technology Segment and the Professional Services Segment. This
report segmentation reflects our separate focus on and expectations
for technology products and services versus professional
services.
On
March 29, 2019, we announced that our Board of Directors approved
changing the Company’s name to Rekor Systems, Inc. This name
change was a result of our increased focus on technology products
and services, and aligns with the renaming of Brekford Traffic
Safety, Inc. to Rekor Recognition Systems, Inc. In connection with
this name change, we changed:
●
the ticker symbol
for our common stock on the Nasdaq Stock Market to
“REKR” and the CUSIP number for the common stock to
759419 104;
●
the ticker symbol
for our Series A Preferred Stock on the OTC Markets OTCQB exchange
to “REKRP” and the CUSIP number for our Series A
Preferred Stock to 759419 203; and
●
the ticker symbol
for warrants on the OTC Markets OTCQB exchange to
“REKRW” and the CUSIP number for the warrants to 759419
112.
Technology Segment. The
Technology Segment operations are conducted by our wholly owned
subsidiary, Rekor Recognition Systems, Inc. (“Rekor
Recognition”). Formerly named Brekford Traffic Safety, Inc.,
Rekor Recognition has been involved in the public safety business
since 1996. In connection with the development of several new
public safety products, we determined to acquire substantially all
the assets of OpenALPR Technology, Inc. This acquisition (the
“OpenALPR Technology Acquisition”), completed in March
2019, transferred vehicle recognition software and associated
licenses and proprietary rights to OpenALPR Software Solutions, LLC
(“OpenALPR”), a new wholly owned subsidiary of Rekor
Recognition. OpenALPR’s vehicle recognition platform, already
operating in more than 12,000 cameras in over 70 countries
worldwide, has laid the groundwork for the expansion of our product
line, enabling multiple deployment mechanisms.
Since
the OpenALPR Technology Acquisition, we have expanded our vehicle
recognition product and service lines into a much broader range of
customer segments, starting with public safety. We shifted from a
perpetual licensing model to a subscription-based model, rebranded
the software suites as “Watchman” and
“Car-Check” and released several packaged
hardware/software solutions with preloaded versions of each of
these vehicle recognition engines. By the end of 2019, we had a
portfolio of more than 10 products, permitting us to offer
full-scale vehicle recognition services for nearly any large or
small public agency, commercial or residential
setting.
Our
software currently has the capability to analyze multi-spectral
images and/or video streams produced by nearly any Internet
Protocol security camera and concurrently extract license plate
data by state from more than 70 countries, in addition to the
vehicle’s make, color, type and direction of travel. When
combined with speed optimized code, parallel processing capability
and best-in-class accessories, such as cameras and communications
modules, the software captures license plate data and vehicle
characteristics at extremely high vehicle speeds with a high degree
of accuracy, even in unusually difficult conditions, such as low
lighting, poor weather, extreme camera viewing angles, and
obstructions.
Prior
to the development of our vehicle identification software, highly
accurate results were not available using a typical Internet
Protocol camera. We believe that the ability to use less expensive
hardware will change the dynamics of the existing public safety
market, enabling the creation of increasingly robust networks with
cameras at more locations. In addition, we expect the cost
advantages and high degree of accuracy to create competitive
advantages in tolling systems and logistics operations that
currently rely on complex radio frequency identification (RFID)
systems. We also expect the lower costs, superior distance and
field of view capabilities and the ability to capture additional
vehicle information, such as direction, color, make and type of
vehicle, to open opportunities in other market segments, such as
parking operations, school safety and retail customer loyalty
programs; and particularly smart cities and smart roadways. Smart
roadway systems, sometimes referred to as smart transport or
intelligent transport systems (“ITS”), inclusive of
parking management and guidance, passenger information
and traffic management systems, can optimize the movement of
vehicles to make travel safer and more efficient. These
technologies are expected to enable users to be more coordinated,
better informed, and make safer and smarter use of transport
networks.
Our
vision is “AI with a Purpose.” We intend to evolve
beyond vehicle recognition for public safety markets into the
recognition and analysis of vehicle activities (inclusive of motion
and behaviors), to develop systems to identify unsafe situations
(e.g. wrong way driving, pedestrian on roadway, etc.) and optimize
traffic flows, and to develop numerous other data driven
applications centered around vehicle knowledge.
Professional Services Segment.
We have provided professional services and staffing solutions to
the government contracting and the aerospace and aviation
industries. The Professional Services Segment includes AOC Key
Solutions, Inc. (“AOC Key Solutions”); Global Technical
Services, Inc. (“GTS”); Global Contract Professionals,
Inc. (“GCP”, and together with GTS,
“Global”); and Firestorm Solutions, LLC (Firestorm
Solutions”) and Firestorm Franchising, LLC (“Firestorm
Franchising” and together with Firestorm Solutions,
“Firestorm”). Currently, as a leading provider of
support services to the federal government contracting market, AOC
Key Solutions’ primary clients are companies that serve the
federal government. However, in support of our Technology Segment,
we have recently been active in the state and local government
contracting market. We provide professional services that offer
scalable and compliant outsourced support for our government
contractor clients. We help these clients to win government
contracts and capture new businesses. Global provides specialized
staffing services, primarily in the aerospace and aviation
industries. In connection with our reorganization and focus on
technology products and services, we are actively engaged in
evaluating, reconfiguring, selling, and discontinuing various
business assets or entities in the Professional Services Segment.
As part of this process, we discontinued the operations of
Firestorm Franchising and have determined to sell Global and AOC
Key Solutions. In March 2020, we received a proposal from the
current management of AOC Key Solutions to purchase that
subsidiary.
3
Business Strategy
As part
of our strategic shift in fiscal year 2019, we are focusing on the
Technology Segment and further developing our footprint across
different industries by distributing and licensing products and
services with vehicle recognition features powered by our AI based
technology. Current customers are using these products and services
for: a) toll collection and traffic analysis in the transportation
market, b) school and traffic safety and other law enforcement
applications in the public safety market, c) parking management, d)
perimeter management and surveillance in the private security
market, e) operations and retail customer loyalty programs in the
drive through retail market and f) vehicle tracking, perimeter
security and warehouse operations in the logistics
market.
As a
result of our strategic shift, during the third quarter of 2019, we
determined to sell Global, began to separately report the results
of Global and considered substantially all of the assets and
liabilities comprising Global as held for sale operations. Since we
are reporting the operating results and cash flows of the Global as
held for sale operations, they have been excluded from continuing
operations and segment results for all periods presented. Prior to
the third quarter of 2019, the operating results for Global were
presented in the Professional Services segment. The assets and
liabilities of Global are presented as current and long-term assets
and liabilities of businesses held for sale in the consolidated
balance sheets. Since we adopted a formal plan to sell Global in
September 2019, we have received several non-bindings offers and
indications of interest for the purchase of Global which we are in
the process of evaluating. In March 2020, we received a proposal
from current AOC Key Solutions management to purchase that
subsidiary, which is being evaluated by our Board of Directors. No
assurance can be given as to the certainty of the entry into, or
the subsequent closing any of these proposed transactions regarding
the purchase of Global and AOC Key Solutions.
Recent Developments
Our
most significant developments since January 1, 2019, are described
below:
●
In March of 2020,
we received a proposal from the current management of AOC Key
Solutions to purchase that subsidiary, which we are
evaluating.
●
Since January 2020,
we have been selected by Brite Computers ("Brite"),
LiveView Technologies, ("LiveView"), and Alliance Technology
Group ("Alliance") to provide our vehicle recognition systems
to their existing customer base. Brite is leader in public
safety systems integration and will use us as their sole ALPR
solution to their extensive customer base comprised of law
enforcement and state and local governments. LiveView is a leader
in remote security solutions, which will provide our vehicle
recognition systems for deployment within its full security
platform. Alliance will offer our vehicle recognition solutions to
its customer base both as a standalone solution and as part of an
integrated video surveillance system. In addition, we announced
that Digifort, a global leader in video surveillance and
monitoring, headquartered in Brazil with more than 28,000 customers
in 130 countries, will be a premier reseller for Watchman software in Brazil, Latin
America, the Pacific Rim and the Middle East.
●
In March 2020, we
increased our authorized shares of common stock from 30,000,000 to
100,000,000. The increase in authorized shares was done in order to
permit us to raise capital or issue our common stock for other
business purposes.
●
In February 2020,
the City of Lauderhill, Florida, selected our Rekor Edge vehicle
recognition cameras and Watchman software use in its public safety
program. As a result, on March 5, 2020 we signed an agreement with
the City of Lauderhill for $1.79 million and contract to provide
services for a five-year term.
●
In February 2020,
SecurePark Technologies, a leading software-as-a-service
(“SaaS”)
based parking solutions company, selected our iP360 Parking and
Permit Management software as a simple, reliable, and affordable
solution for their global clients.
●
In January 2020, we
launched our new Watchman Home product which can turn nearly any
existing home security camera into a license plate recognition
device (without loss of the original security camera functionality)
by simply installing the Watchman Home software. Furthermore,
Watchman Home can be integrated into smart home systems and
automatically recognizes permitted authorized vehicles and works
with internet-connected devices to monitor and control systems and
appliances remotely.
●
In January 2020,
the Mt. Juliet Police Department in Tennessee selected Rekor to
roll out the community’s Automated License Plate Recognition
(“ALPR”) program which the department is terming,
“Guardian Shield.” The Guardian Shield program was
initiated to enhance the community’s safety by providing an
additional tool to law enforcement.
●
In October 2019, we
commenced a contract with the U.S. Air Force. Throughout 2019 we
received orders for software licenses and products from several
significant new customers, including the U.S. Department of Defense
and a northern California law enforcement agency. We also received
significant additional orders from existing customers, including
VG8 JV S.A. (“VeroGo”), which has expanded its licenses
for our vehicle recognition software to a total of 1,785 cameras at
locations throughout Brazil for the next five years, Tire Profiles,
LLC, which uses vehicle recognition to ensure proper product
selection, and SECURIX, LLC, a provider of insurance verification
and compliance information. Furthermore, in June 2019, we announced
that our vehicle identification systems will be offered to
Nokia’s worldwide customer-base for use within Nokia’s
smart city offerings.
●
In August 2019, we
announced the development of the Rekor Public Safety Network
(“RPSN”) in 2020. RPSN is a network in which
participating state or local law enforcement agencies will be able
to share real-time data at no additional cost. We expect to
initially launch the network by aggregating vehicle data from
customers in over 30 states. With thousands of cameras currently in
service that capture approximately 150 million plate reads per
month, the network is expected to be live in 2020.
●
In
August
2019, we entered into an At-the-Market Issuance Sales Agreement
with B. Riley FBR, Inc. (“B. Riley FBR”) to create an
at-the-market equity program under which we may from time to time
offer and sell shares of our common stock, having an aggregate
offering price of up to $15,000,000. As of December 31, 2019,
$11,727,000 remained available for sale under the Sales
Agreement.
●
In June 2019, we
implemented a new organizational structure and plan to improve
operating results by reducing operating costs by eliminating
redundant positions, and we initiated restructuring and transition
activities to improve operational efficiency, reduce costs and
better position our business for future growth.
●
On August 19, 2019,
we filed suit in the United States District Court for the Southern
District of New York against three former executives of Rekor and
Firestorm (the "Firestorm Founders"). The complaint alleges that
the Firestorm
Founders fraudulently induced the execution of the
Membership Interest Purchase Agreement pursuant to which Firestorm
was acquired by us, and seeks rescission of the Membership Interest
Purchase Agreement and certain transactions contemplated thereby,
including the issuance of notes and warrants to the Firestorm
Founders. On October 9, 2019, we filed an Amended
Complaint. On November 13, 2019, the Firestorm
Founders filed an answer to the Amended Complaint and
asserted counterclaims against us, Firestorm, and certain
executives of ours. On December 16, the Firestorm
Founders filed a Motion for Judgment on the
Pleadings. On January 30, 2020, we filed a Second Amended
Complaint. The Firestorm Principals responded to the Second Amended
Complaint on February 28, 2020. Our deadline for responding to the
Firestorm
Founders’ counterclaims is March 30, 2020. We
intend to vigorously litigate this action and believe that the
Firestorm
Founders’ counterclaims are without
merit.
●
Following
completion of the OpenALPR Technology Acquisition, we launched
several new service and product lines. In May 2019, we announced
the launch of Numerus™, a cloud-based electronic tolling
solution collecting (“ETC”) product and an agreement to
provide this service to the E-470 Public Highway Authority in
Colorado. Additionally, we announced the launch of the Rekor
Edge™ line, an all-in-one camera and vehicle recognition
system designed for the public safety and private security
markets.
●
In March 2019, we
completed the OpenALPR Technology
Acquisition and assumed certain assets and liabilities for total
consideration of $12,397,000, funded by $7,000,000 in cash and
$5,000,000 of the promissory notes, together with an accompanying
warrant to purchase 625,000 shares of our common stock exercisable
over a period of five years, and 600,000 shares of our common
stock, valued at $397,000. This acquisition was funded through the
issuance of an additional $15,000,000 in promissory notes to
investors, who were also issued warrants to purchase 1,875,000
shares of our common stock. The promissory notes are due and
payable on March 11, 2021, and bear interest at 16% per annum, of
which at least 10% per annum is required to be paid in cash, with
any remaining portion not paid in cash continuing to accrue. In
March 2020, we received an extension on the maturity date of the
promissory notes to June 12, 2021.
●
The Firestorm
Founders, who had assumed various positions within Rekor, resigned
as of the end of 2018. Since then, we have been reevaluating
Firestorm’s operations. We continue to operate Firestorm's
FirstSignt™ program, which was launched in January of 2019.
During the second quarter of 2019, we arranged for the personnel
acquired by Firestorm in connection with two small recent
acquisitions to separate and discontinued their activities,
resulting in a write-off of intangible assets of $242,000. In the
second quarter of 2019, management evaluated the performance of all
the franchisees of Firestorm Franchising and notified them of the
termination of their agreements on the basis of non-performance. In
connection with these actions, management determined to write-off
an additional $1,310,000 in intangible assets related to Firestorm
in the second quarter of 2019. On January 13, 2020, demands for
arbitrations were filed with the American Arbitration Association
against Firestorm Franchising by Avindex, LLC, Brauer Franchising,
LLC, Eido and Cross Solutions, LLC, Novawood, Inc., Resilience,
LLC, and Sangar, LLC (collectively, the Claimants). In each
demand filed, the Claimants listed “unlawful and improper
termination of Franchise” as the description of the
dispute. Firestorm
Franchising’s current deadline to file an answering statement
in these matters was March 18, 2020 and extended to April 1,
2020. We intend to vigorously litigate this action and believe
that the claims asserted are without merit. See “Legal
Proceedings” in Item 3 below.
4
Description of Products and Services
Vehicle
Recognition
and Public Safety Products and Services
In
March 2019, we acquired substantially all of the assets of a
software development company, OpenALPR Technology, Inc., as
indicated above and more fully described below. With this
acquisition, we currently provide vehicle recognition and data
management products and services with respect to over 12,000
cameras to customers in over 70 countries. The products and
services, which operate in many installations with a high accuracy
rate, include access to a web server with a self-managed database
and a powerful, cross-platform application programming interface.
The service provides seamless video analysis and data analytics and
is continuously being developed using a “deep learning”
convolutional neural network architecture to classify images.
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.
A key capability of our AI-based software is its ability to provide
precision vehicle identification results with dramatically less
expensive hardware, including use with existing cameras and
computer equipment. It can support lighter and smaller, as well as
less expensive equipment that is more adaptable for use in mobile
applications. This can change the economics and dynamics of an
existing market, eliminating the need for RFID technology on toll
roads, for example, or allowing smart city programs to incorporate
vehicle recognition capabilities into their operations without
replacing existing camera infrastructure. In addition, our lower
cost structure supports new applications of vehicle recognition
capabilities, such as supporting retailers’ customer loyalty
programs and facilitating user controlled parking management, in
combination with ingress and egress control, for small
homeowner’s associations.
We
provide traffic safety systems for 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, provides forensic quality images and data, and supports
citation management services. We also provide enterprise parking
enforcement solutions that we license to parking management
companies and municipalities. The further development of our
products and services since the OpenALPR Technology acquisition has
allowed us to begin expanding our product and service offerings
throughout the world used by government agencies in other areas of
the world. Since the second quarter of 2019, following the
conversion of our sales methodology from permanent licenses to
software-as-a-service, we have signed agreements with a number of
municipalities and governmental agencies for the use of our
products and services in North America and around the world and
entered into licensing agreements with a number of multi-national
parking, retailing and security systems providers.
Government Contracting Support
Our
government contracting support services assist government
contractors with critical aspects of their business. These services
include market intelligence and opportunity identification; capture
and strategic advisory; proposal strategy and development; teaming
support; and managed human capital services. Our services also help
commercially focused firms gain entry into the government
contracting market.
Specialty Staffing Services
We also
provide quality specialized contract personnel, temp-to-hire
professionals, direct hires, and temporary or seasonal hires to the
Department of Defense and a diverse group of companies in the
aerospace and aviation industry nationally and have been
instrumental in placing highly-skilled technical professionals in
some of the world’s most prestigious engineering firms and
government facilities for over 20 years. Some of the professionals
that we place in the aerospace and aviation industry include:
Federal Aviation Administration (“FAA”) certified
airframe and power plant mechanics; avionics and embedded software
engineers; Federal communications Commission (“FCC”)
certified avionic technicians; licensed aircraft inspectors; flight
test engineers; process/repair engineers; and simulation engineers.
Specialty staffing is a service that most large aviation and
aerospace companies need due to the time-sensitive aspects of their
contracts, and our customers use specialty staffing to fulfill a
variety of roles.
Our Markets
AI Products and Services Markets
The
markets for our AI products and services are diverse: toll
collection and traffic management; parking management and
enforcement; safe and smart cities and roadways programs;
government, military, corporate, community and personal security;
wholesale and large retail logistics and customer loyalty programs,
as well as public safety.
5
Clients
Our
clients in these markets include federal, state and local
government entities worldwide, major retailers, private security
companies, parking management companies, fast food restaurant
chains and logistics companies. We continue to explore new
applications to further expand this growing client
base.
Sales and Marketing
We
offer our products and services in various markets through a
combination of delivery mechanisms. For existing traffic safety
clients, we provide full turnkey photo enforcement and citation
management services, supported by the deployment of our hardware
and software solutions. The programs are contracted directly with
local government agencies, typically on a fixed monthly fee basis.
For vehicle recognition services, we offer both direct contracting
with customers as well as a reseller program through a growing
network of reseller partners. Customer agreements are typically
attained through specific proposals we submit in response to
government requests for proposal (“RFP”), or through
our standard Master Subscription Agreement available to agencies or
commercial customers through direct purchase. Both software and
hardware are sold on a full turnkey subscription basis to our
direct customers. Our resellers purchase equipment or software
subscriptions from Rekor and resell them to their end
customers.
We
maintain an in-house staff of sales and business development
professionals who are responsible for identifying opportunities,
finding and responding to RFPs, and growing and supporting our
reseller network.
We
launched the Rekor Partner Program (“Partner Program”)
in January 2020 to establish a network of qualified and trusted
business partners who will help to deliver our products and
services worldwide. The Partner Program is open to technology
solution providers, resellers, and integrators who want to deliver
world class vehicle recognition solutions to customers in multiple
business segments. These segments include public safety, security
and surveillance, electronic toll collection, parking operations,
banking and insurance, supply chain logistics, traffic management,
and retail customer experience. Each partner is carefully vetted
and selected by Rekor based on several qualifying factors including
industry expertise, customer outreach, financial stability, past
history, and geographic footprint.
We
offer three levels of membership, with varying degrees of
commitment and benefits. “Authorized Resellers” and
“Premier Partners” are both resellers who receive a
discount to our MSRP pricing for software and hardware solutions.
They sign and manage their own customer agreements and are
responsible for technology implementation and first level
maintenance and support. Rekor provides an array of services to
program partners including second level technical support, free
training, not-for-resale demo systems at a discount to MSRP, and
assistance with proposal development. The Rekor Ambassador
membership level is for those companies and individuals who desire
to promote and sell Rekor products and services, but do not have
the capability to provide direct customer support. Once approved,
Rekor Ambassadors receive the authorization and support mechanisms
to sell Rekor products and solutions to customers, who sign
agreements directly with Rekor. Customer agreements, technology
implementation, and first and second level maintenance and support
are Rekor’s responsibility.
Competition
Our
current emphasis is on products and services that include vehicle
recognition features. There are currently many competitors who
provide products and services of this type. Typically, these
competitors provide camera systems that employ optical character
recognition (“OCR”) software to analyze electronically
captured images and produce license plate information. These
competitors include divisions or subsidiaries of large
multi-national companies, such as Siemens, Motorola, Leonardo,
Bosch and Genetec. Other competitors who rely primarily on OCR
include Alert Systems, Arvoo, CA Traffic, Clearview, HTS, Kapsh,
MAV, Nexcom, ParkingEye, Petards, PIPS Technology, TagMaster and
Tattle. Except in a very limited
environment, traditional OCR based software systems rely on
specially designed cameras.
A
competitive advantage of our core software is that it can produce
highly accurate data using most of the IP cameras on the market
today. Since our core software can successfully analyze images
produced by the typically lower-cost cameras used in existing
security and surveillance systems, it can be used to add vehicle
identification functionality to those systems without the need to
use specialized equipment. As a result, we believe that we are well
positioned to serve this market and can currently provide operators
of existing security systems significant advantages in accuracy,
usability and price that provide us with a competitive edge. In
some cases, however, we have licensed our products and services to
some of the vehicle recognition competitors listed above for use in
camera systems specially designed for specific applications. We
intend to continue to license on a non-exclusive basis to
competitors in the vehicle recognition industry.
Although we believe there is no competitor that
provides a similarly accurate and cost effective suite of products
and services, we view our competition in the public safety and
security areas two distinct categories – traditional
OCR-based ALPR companies and newer software-only companies, some
merely deploying OCR based technology on newer Internet Protocol
cameras and others working to develop software using various AI
processes. These software only companies include ARH, HIK
Vision, Inex Tech, NDIRS, Neural Labs, Plate Smart and Sighthound.
Our vehicle recognition software has been designed using an AI
process commonly referred to as “machine learning” or
more specifically “deep learning.” This process
involves intensive analysis of large amounts of data using
specialized neural network algorithms. For more than five years,
our core software has been continuously updated through machine
learning using millions of images from around the world. Direct
comparisons or head-to-head competitive studies by several law
enforcement customers and independent engineers have indicated that
our software and systems have higher capture rates and a higher
degree of accuracy for license plate identification than other
competitors. Another unique advantage of our software is that, it
in addition to country, state and license plate number, it can
identify in real time the vehicle make, color, body type, and
direction of travel.
We are
in the early stages of our business development efforts and have
concentrated primarily on the public safety, security and
surveillance and parking management areas. Our products and
services are also being used in the logistics, banking and
insurance and customer experience areas industries. However, in
most cases we serve primarily as a service provider to other
companies active in these areas. Therefore, our competitors in
these areas are expected to be the other vehicle recognition
software providers listed above.
To a
very limited extent, our services are also currently being used in
the electronic tolling industry. There are a number of large, well
established multi-national electronic tolling services companies,
including Vera Mobility and Conduent. These competitors rely
primarily on RFID technology and have large, long term contracts
that involve extensive infrastructure installations. In recent
years, automated license plate reading systems have increasingly
replaced manual toll taking for vehicles that are not equipped with
RFID technologies compatible with the toll operator’s system.
We believe that the level of accuracy that can be achieved with our
core software provides us with a competitive edge in connection
with this movement to replace manual systems. We also believe that
direct vehicle recognition should ultimately be recognized as a
more efficient and cost effective means of toll collection than the
use of RFID systems. We are not yet in a position to undertake a
full-scale entry into this market, however, and are evaluating our
options as to how best to proceed.
Another
rapidly developing area that we expect to participate in is the
implementation of “smart city” transportation
management systems. In May of 2019, Rekor was selected by Nokia to
provide vehicle recognition solutions for deployment within its
Scene IoT analytics platform. This platform has been designed to
analyze video from interconnected camera networks and detect
anomalies that can be used by public agencies. We will be looking
for opportunities to participate in the development of smart city
systems in association with Nokia in other key participants in this
burgeoning area.
Competitive Strengths
In the
public safety and vehicle recognition market, we believe we have,
and can further develop, the following competitive
strengths:
●
Higher Accuracy Rates for Vehicle
Recognitions. Most vehicle recognition systems currently in
place are accurate only within specified parameters of vehicle
speed, viewing angles and lighting conditions. We believe our AI
software achieves superior accuracy rates under broader parameters
of vehicle speed, viewing angles and lighting
conditions.
●
Ability to Detect Vehicle Make, Body Type and
Color. We believe the ability to determine the make, body
type and color of a vehicle, in addition to the number and resident
jurisdiction of a license plate, significantly enhances the value
of our products and services as compared to systems that provide
more limited recognition data and/or lower accuracy
rates.
●
Functionality with any Internet Protocol
Cameras. The optical character recognition-based systems
marketed by our competitors in the public safety and vehicle
recognition market often require customized cameras, while our AI
software supports images captured by almost any digital camera that
provides images that can be sent over the internet. This allows us
to create products and solutions using relatively inexpensive,
consumer-grade, mass market components that are readily available,
significantly smaller and lighter, and less expensive than products
currently being used.
●
Increased Mobility. Because of the
range and size of the cameras that can be used with our AI
software, Rekor Recognition’s solutions have significant
advantages for use in mobile applications, such as law enforcement
vehicles.
6
Growth Strategies
Our
vehicle recognition product portfolio sits at the intersection of
the video surveillance, video management software and ALPR markets.
We believe there are significant opportunities within these markets
which could lead to the expansion our business. Growth in vehicle
recognition is being driven by multiple government and law
enforcement applications as well as a broad range of new
applications such as customer service, tolling and school
security.
In
addition, we believe that growth will be impacted by an increased
demand for improvements in security, public safety and business
intelligence that will in turn lead to increased spending in
infrastructure, government spending on intelligent transportation
systems, deployment of security and surveillance and traffic
enforcement applications.
Rapid
urbanization, increased globalization, the increased awareness
about the human impact on the planet are all driving factors for
intelligent transportation and the smart highway market.
Additionally, the growing trend toward the adoption of smart cities
is also expected to expand the prospects for the smart highway
market.
We
use AI to extract the identity, characteristics and movements of
vehicles and other objects on the roadway for the purpose of
enhancing safety, increasing operational efficiencies and improving
the experience of people - this is “AI with a purpose”.
We believe we can play an important role in enabling Smart
Roadways/Highways and Cities.
These
market trends create significant opportunities for us to expand our
market presence while developing relationships with both new
customers and expending relationship with existing
customers.
Our
current emphasis on growth is to concentrate available resources on
expanding sales of products and services that exploit the
competitive advantages of our technology. In particular, we are
working to further develop our existing cloud-based subscription
services for smaller clients and to license our technology to
original equipment manufacturers and large government and
commercial customers for use with new and existing security,
logistics, traffic management, vehicle location and customer
loyalty systems.
As we
work to develop our sales and marketing capabilities, we expect our
efforts with respect to products and services in our Technology
Segment to be concentrated principally on subscription-based
solutions.
Government Contracting Support Market
According to the
U.S. Treasury, the total dollar value of federal government
contracts awarded over the last decade has ranged from a high of
approximately $575 billion in fiscal year 2019 to a low of
approximately $440 billion in fiscal year 2015. It is estimated
that the federal government signs over 11 million contracts per
year. This magnitude of spending creates a stable market for
government contracting support services.
According to the
U.S. federal government’s System for Award Management
(“SAM”) database, as of February 2020, there were over
483,000 registered and active government contractors, of which
slightly over 50,000 are in Washington, DC, Maryland and Virginia.
Many of these contractors are in an area commonly known as the
“Beltway” and are in close proximity to the
headquarters of our wholly owned subsidiary, AOC Key Solutions. The
U.S. federal government’s contract spending in Washington,
DC, Maryland and Virginia was more than $119 billion in fiscal year
2019, according to USASpending.gov. This represents over 20% of the
$575 billion of total contract spending in fiscal year 2019. In
addition, the vast majority of out of state contractors maintain
some type of office (headquarters, government relations staff,
marketing personnel, communications experts, and satellite offices)
in the Washington, DC metropolitan area. The sheer size of the
government contracting, locally and nationally, presents growth
opportunities for us.
Because
of the geographic footprint of these clients, there is also a
large, but fragmented, family of service providers for these
government contractors. Although the businesses that provide
resources to the government contracting sector are diverse and
highly fragmented, their clients have many common needs resulting
from the basic qualifications and standard requirements inherent in
the government procurement process.
The
Government Contracting Support industry provides a smorgasbord of
services to companies large, medium, and small. Typically, these
services include contract opportunity identification and tracking,
marketing and business development support, contract capture
support, contract win strategy formulation, contract capture
support, multi-company team creation, technical solution
architecture, provision of staffing, bid and proposal support, and
oral proposal development.
Clients
To be a
government contractor, a company must be able to meet rigid
standards. As a result, our clients are typically well-established,
financially stable businesses with both a reputation for excellence
and high standards and a demonstrated ability to survive and
prosper through innovation and adaptation. Government contractors
range from small privately-owned lifestyle companies to members of
the Fortune 100. Since 1983, we have served thousands of these
entities.
Overall, our
government contracting clients provide government agencies with the
following types of services (list is presented alphabetically and
is only a sampling of the full range of products and services
provided by the private sector): aerospace operations; architect,
engineering, and construction; emergency response; environmental
management; facilities management; human capital support;
independent verification and validation; industrial products and
services; information technology; logistics; military construction;
program management; quality assurance; research and development;
security services; staff augmentation; telecommunications;
training; transportation services; warfighter support; and weapons
program development and support. In turn, we support our clients
providing or seeking to provide these services to the
government.
Marketing and Sales
We
obtain client engagements using a variety of tools, techniques, and
processes. Engagements are obtained primarily through business
development efforts, cross-selling of our services to existing
clients, and maintaining client relationships. We also benefit from
referrals from existing and former clients. Our business
development efforts emphasize lead generation, industry group
networking and corporate visibility via a robust web site and
social media presence. Most of our business development efforts are
led by members of our professional teams, who in most cases are
also responsible for managing projects.
Competition
In the
government contracting industry, the sectors in which we operate
are highly fragmented and characterized by many smaller companies
generally having fewer than ten employees. These companies tend to
focus their operations on local customers or specialized niche
activities. As a result, we compete with many smaller, more
specialized companies that concentrate their resources in
particular areas of expertise.
The
extent of our competition also varies according to sectors and
geographic areas. We compete on quality of service, relevant
experience, staffing capabilities, reputation, geographic presence,
stability, and price. Price differentiation remains an important
element in competitive tendering and is a significant factor in
bidding for contracts.
The
importance of the foregoing factors varies widely based upon the
nature, location, and scale of our clients’ needs. We believe
that certain economies of scale can be realized by service
providers that establish a national presence and reputation for
providing high-quality and cost-effective services. Our ability to
compete successfully depends upon the effectiveness of our
marketing efforts, the strength of our client relationships, our
ability to accurately estimate costs and bid for work, the quality
of the work we perform, and our ability to hire and train qualified
personnel.
Competitive Strengths
We have
a solid reputation for quality service in the government
contracting market. In part, this reputation is based upon our
industry-recognized depth of experience, ability to attract and
retain quality professionals, and expertise across multiple service
sectors. We employ seasoned professionals with a broad array of
specialties, a strong customer service orientation and in many
cases, the required professional certifications and advanced
degrees. As of March 30, 2020, 100% of our management and staff
involved with proposal services were certified by the Association
of Proposal Management Professionals (“APMP”) the
leading industry group in our areas of expertise. The services that
we provide are highly specialized professional services that have
high barriers to entry.
We also
maintain state of the art proposal infrastructure. This
infrastructure includes specially equipped proposal war rooms for
use by our clients when desired. We maintain an in-house production
and graphics development capability. Our competitive strengths are
also bolstered by a secure IT network containing a data base that,
in many cases, dates back to the early 1980s.
In
addition to a robust foundation of in-house professionals, we also
have access to approximately 350 technical and management
consultants who can provide subject matter expertise for unique
projects and who can supplement our workforce based on client
demand. Our combination of niche market experience and
professionals with requisite expertise has enabled us to develop
strong relationships with our core clients. By serving clients on a
long-term basis, we can gain a deep understanding of their overall
business needs as well as the unique technical requirements of
their projects. This increased understanding gives us the
opportunity to provide superior value to our clients by allowing us
to more fully assess and better manage the risks inherent in their
projects.
Growth Strategies
The
universe of providers that service our clients is fragmented and
diverse. Drawing on the insights and experience of our leadership
team, we expect to both increase our contact with, and improve our
understanding of, the needs of the enterprises we serve. We will
then work to further enhance our ability to perform in these areas
by providing material support as well as exchanges of talent and
ideas. By increasing contact with our clients, we will also be
working to enhance our clients’ awareness of these
capabilities across our subsidiaries.
7
Our History
We are
a Delaware corporation that was formed in February 2017 to
effectuate the mergers of, and become a holding company for
KeyStone Solutions, Inc. (“KeyStone”). Our services are currently provided
through seven wholly owned subsidiaries: AOC Key Solutions; Rekor
Recognition; Firestorm; GTS and GCP (collectively referred to as
“Global”); and as of March 12, 2019, OpenALPR.
In 2018, the operations of Novume
Media, Inc. (“Novume Media”) were discontinued.
On February 28, 2019, we changed the name of Brekford Traffic
Safety, Inc. to Rekor Recognition Systems, Inc. For narrative
purposes, all references to Brekford are to Brekford Traffic
Safety, Inc. before February 28, 2019 and under the name Rekor
Recognition Systems, Inc. on and after February 28, 2019. On August
20, 2019, we founded Rekor Public Safety Network, LLC. On January
6, 2020, GCP was merged into GTS with GTS being the surviving
entity.
AOC Key
Solutions was originally organized in 1983. Rekor Recognition was
organized in 1996. The Firestorm Entities were organized in 2005.
The Global Entities were formed in 1989. OpenALPR was organized in
2019.
Acquisitions
On
March 12, 2019, we completed the OpenALPR Technology
Acquisition.
On June
1, 2019, we sold all the interest we had acquired in Secured
Education, LLC, which we acquired on January 1, 2018, and
discontinued operations of BC Management. In connection with these
actions we recognized a write-off of intangible assets of $242,000.
In addition, in June 2019, we discontinued the operations of
Firestorm Franchising, resulting in a write-off of an additional
$1,310,000 in intangible assets related to Firestorm in the second
quarter of 2019.
Additional
information concerning the OpenALPR Technology Acquisition and the
restructuring of Firestorm is provided in this Annual Report on
Form 10-K under “Management’s Discussion and Analysis
of Financial Conditions and Results of
Operations.”
Reportable
Segments
In
2019, we conducted core operations through our primary operating
subsidiaries: OpenALPR, Rekor Recognition, AOC Key Solutions,
Global and Firestorm.
With
the OpenALPR Technology Acquisition in 2019, we changed our operating and reportable segments from
one segment to two segments. The two segments reflect our separate
management focus both on technology products and services and on
professional services. For comparative purposes we have presented
the Technology Segment and the Professional Services Segment for
the year ended December 31, 2019 and 2018.
Employees
As of
March 30, 2020, Rekor had 472 employees, of which 117 were full
time and 355 were project-based staff provided to our clients. We
consider our employee relations to be good. To date, we have been
able to locate and engage highly qualified employees as needed and
do not expect our growth efforts to be constrained by a lack of
qualified personnel. We will continue to engage additional highly
qualified personnel for our public safety and vehicle recognition
markets.
Seasonality
Our
Technology Segment generates revenues from long-term licensing and
subscriptions to our and products and services. Therefore, we do
not presently anticipate significant seasonality impact on our
Technology Segment revenues. Should our
penetration of tolling and other markets involving per recognition
fees expand, we would expect to become more subject to seasonal
traffic patterns.
In our
Professional Services Segment, we generate revenues from fees and
reimbursable expenses for professional services primarily billed on
an hourly rate, time-and-materials (“T&M”) basis.
In the professional services and specialty staffing areas, our
clients are typically invoiced monthly, with revenue recognized as
the services are provided. Currently, T&M contracts represent
substantially all of our client engagements in these areas and do
not provide us with a high degree of predictability of future
period performance. A small portion of our professional services
contracts are fixed-fee engagements which can be invoiced once for
the entire job, or there could be several “progress”
invoices for accomplishing various phases, reaching contractual
milestones or on a periodic basis.
Previously,
Rekor’s financial results have been impacted principally by
the demand by clients for support in the professional services and
specialty staffing areas, the degree to which full-time staff can
be kept occupied in revenue-generating activities, success of the
sales team in generating client engagements, and number of business
days in each quarter. The number of business days on which revenue
is generated by our staff and consultants is affected by the number
of vacation days taken, as well as the number of holidays in each
quarter. There are typically fewer business work days available in
the fourth quarter of the year, which can impact revenues during
that period. The staff utilization rate can also be affected by
seasonal variations in the demand for services from clients. Since
earnings may be affected by these seasonal variations, results for
any quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year. The sale of the
subsidiaries in the Professional Services Segment will result in
the Technology Segment having a greater impact on our results of
operations. In the near term, this is expected to make our results
heavily dependent on opportunities for growth in technology sales.
However, due to the long term nature of our subscription sales
model, we expect the long term effect of these sales to be
stabilizing on our revenue stream.
Unexpected changes
in the demand for our services can result in significant variations
in revenues, and present a challenge to optimal hiring, staffing
and use of consultants. The volume of work performed can vary from
period to period.
Insurance and Risk Management
We
maintain insurance covering professional liability and claims
involving bodily injury, property and economic loss. We consider
our present limits of coverage, deductibles, and reserves to be
adequate. Whenever possible, we endeavor to eliminate or reduce the
risk of loss on a project through the use of quality assurance and
control, risk management, workplace safety, and other similar
methods.
Risk
management is an integral part of our project management approach
for fixed-price contracts and our project execution process. We
also evaluate risk through internal risk analyses in which our
management reviews higher-risk projects, contracts, or other
business decisions that require corporate legal and risk management
approval.
Regulation
We are
regulated in some of the fields in which we operate. When working
with governmental agencies and entities, we must comply with laws
and regulations relating to the formation, administration, and
performance of contracts. These laws and regulations contain terms
that, among other things may require certification and disclosure
of all costs or pricing data in connection with various contract
negotiations. We also work with U.S. federal government contractors
and have staff cleared to work on classified materials. Two of our
leased facilities are cleared for classified material. We are
subject to the laws and regulations that restrict the use and
dissemination of information classified for national security
purposes.
To help
ensure compliance with these laws and regulations, our employees
are sometimes required to complete tailored ethics and other
compliance training relevant to their position and our
operations.
Risks Relating to Our Corporate Structure and Business
We are currently not profitable, and we may be unable to become
profitable on a quarterly or annual basis.
For the
year ended December 31, 2019, we had a loss from continuing
operations before taxes of $14,365,000. We cannot assure that we
will be profitable in the future. Our ability to become profitable
in future periods could be impacted by government activity and
regulation, economic instability and other items that are not in
our control. We cannot assure that our financial performance will
sustain a sufficient level to completely support operations. A
significant portion of our expenses are fixed in advance. As such,
we generally are unable to reduce our expenses significantly in the
short-term to compensate for any unexpected delay or decrease in
anticipated revenues or increases in planned investments. In
addition, we have experienced and expect to continue to experience
significant expenses related to acquisitions and the development of
new products and services. Our
strategic transition to a technology based company focused on
vehicle recognition systems will require us to generate sufficient
revenues from the vehicle recognition market to support our
business plan while continuing to operate as a public
company. As a result, we may continue to experience
operating losses and net losses in the future, which would make it
difficult to fund operations and achieve our business plan and
could cause the market price of our common stock to
decline.
We have not been a leading provider of vehicle recognition devices
in the past and do not have the level of established contacts and
existing business relationships that some of our competitors
have.
Although it is
growing, our presence in the public safety and vehicle recognition
market has been limited and with the acquisition of assets from
OpenALPR has only recently extended beyond the United States and
Canada. As a result of this, although we believe our products and
services have significant competitive advantages, we may encounter
difficulties in establishing widespread market acceptance of our
products in various markets and regions. Early successes in
penetrating these markets and regions may not be able to be
sustained once our ability to compete with our more established
competitors comes to their attention. They may seek to develop more
competitive products before their existing contracts expire, reduce
prices, use to advantage their past association as a trusted
provider and their superior financial and marketing resources and
use other stratagems to this competitive advantage, which could
significantly impact our ability to grow as rapidly as we
expect.
We will need to raise additional capital in the future, which may
not be available on acceptable terms, or at all.
We have
experienced fluctuations in earnings and cash flows from operations
from year to year. To support business growth, or if our business
declines, we may need to raise additional capital to support
operations, pursue acquisitions or expand our operations. Such
additional capital may be raised through bank borrowings, or other
debt or equity financings. We cannot assure you that any additional
capital will be available on a timely basis, on acceptable terms,
or at all, and such additional financing may result in further
dilution to our stockholders.
Our
capital requirements will depend on many factors, including, but
not limited to: our ability to increase revenue, reduce net losses
or generate net income; market acceptance of our services, and the
overall level of sales of our services; our need to respond to
technological advancements and our competitors’ introductions
of new products, services or technologies; our ability to control
costs; promptness of customer payments; our ability to successfully
negotiate arrangements with credit providers; and enhancements to
subsidiaries’ infrastructure and systems; government
procurement.
If our
capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If
additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our
stockholders will be reduced, and such securities may have rights,
preferences and privileges senior to our common stock. Additional
equity or debt financing may not be available on favorable terms,
on a timely basis, or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to
continue our operations as planned, develop or enhance our
products, expand our sales and marketing programs, take advantage
of future opportunities or respond to competitive pressures, or we
may be forced to sell assets at prices below their stated
value.
If we experience declining or flat revenues and fail to manage such
declines effectively, we may be unable to execute our business
plans and may experience future weaknesses in operating
results.
To
achieve future growth, we will need to continue to add additional
qualified personnel and invest in additional research and
development and sales and marketing activities, which could lead to
increases in our expenses and future declines in operating results.
In addition, our future expansion is expected to place a
significant strain on our managerial, administrative, operational,
financial and other resources. If we are unable to manage these
activities or any revenue declines successfully, our business,
financial condition and results of operations could be adversely
affected.
8
If we are unable to attract new customers to our services on a
cost-effective basis, our revenue and results of operations will be
adversely affected.
We must
continue to attract a large number of customers on a cost-effective
basis. We rely on a variety of marketing methods to attract new
customers to our services. Our ability to attract new customers
also depends on the competitiveness of the pricing of our products
and services. If our current marketing initiatives are not
successful or become unavailable, if the cost of such initiatives
were to significantly increase, or if our competitors offer similar
services at lower prices, we may not be able to attract new
customers on a cost-effective basis and, as a result, our revenue
and results of operations would be adversely affected.
If we are unable to retain our existing customers, our revenue and
results of operations would be adversely affected.
With
the addition of OpenALPR, some of the products and services offered
by us are sold pursuant to agreements that are on a short-term
subscription basis. Customers have no obligation to renew their
subscriptions after their subscription period expires, and these
subscriptions may not be renewed on the same or more profitable
terms. As a result, our ability to sustain our revenue base depends
in part on subscription renewals. We may not be able to accurately
predict future trends in customer renewals, and our
customers’ renewal rates may decline or fluctuate because of
several factors, including their satisfaction or dissatisfaction
with our products and services, the prices of our services, the
prices of the products and services offered by our competitors or
reductions in our customers’ spending levels. If our
customers do not renew their subscriptions for our products and
services, renew on less favorable terms, or do not purchase
additional functionality or subscriptions, our revenue may grow
more slowly than expected or decline, and our profitability and
gross margins may be harmed.
Our sales cycles for enterprise and government clients can be long,
unpredictable and require considerable time and expense, which may
cause our operating results to fluctuate.
The
timing of our revenue from sales to enterprise and government
clients is difficult to predict. These efforts require us to
educate our clients about the use and benefit of our services,
including the technical capabilities and potential cost savings to
an organization. Enterprise clients typically undertake a
significant evaluation process that has in the past, resulted in
lengthy sales cycles, typically several months. We spend
substantial time, effort and money on our enterprise sales efforts
without any assurance that these efforts will produce any sales. In
addition, subscriptions are frequently subject to budget
constraints and unplanned administrative, processing and other
delays. If sales expected from a specific client for a particular
reporting period are not realized in that period or at all, our
results could fall short of expectations and our business,
operating results and financial condition could be adversely
affected.
If our efforts to build a strong brand identity are not successful,
we may not be able to attract or retain subscribers and our
operating results may be adversely affected.
We
believe that building and maintaining a strong brand identity plays
an important role in attracting and retaining customers for our
products and users for our services, who may have other options
from which to obtain services. We are currently involved in a major
initiative to establish a new brand for our technology products and
services in the public safety and vehicle recognition markets,
which will require time and expense. In order to build a strong
brand, we believe that we must offer innovative service offerings
that our customers and subscribers’ value, and also market
and promote those service offerings through effective marketing
campaigns, promotions and communications with our customer base.
From time to time, clients and subscribers may express
dissatisfaction with our products and services or react negatively
to our strategic business decisions, such as changes that we make
in pricing, features or service offerings, including the
discontinuance of a free service. To the extent that client
dissatisfaction with our services or strategic business decisions
is widespread or not adequately addressed, our brand identity may
suffer and, as a result, our ability to attract and retain clients
and subscribers may be adversely affected, which could adversely
affect our operating results.
We may not be able to capitalize on potential emerging market
opportunities and new services that we introduce may not generate
the revenue and earnings we anticipated, which may adversely affect
our business.
Our
business strategy involves identifying emerging market
opportunities which we can capitalize on by successfully developing
and introducing new products and services or enhancing existing
products and services designed to address those market
opportunities. We have made, and expect to continue to make,
investments in research and development in an effort to capitalize
on potential emerging market opportunities that we have identified
in the public safety and vehicle recognition markets. Emerging
markets and opportunities often take time to fully develop, and
they attract a significant number of competitors. If the emerging
markets we have targeted ultimately fail to materialize as we or
others have anticipated or if potential clients choose to adopt
solutions offered by our competitors rather than our own solutions,
we may not be able to generate the revenue and earnings we
anticipated, and our business and results of operations would be
adversely affected.
Industry consolidation may result in increased
competition.
Some of
our competitors have made or may make acquisitions or may enter
into partnerships or other strategic relationships to offer a more
comprehensive service than they individually had offered. In
addition, new entrants not currently considered to be competitors
may enter the market through acquisitions, partnerships or
strategic relationships. We expect these trends to continue as
companies attempt to strengthen or maintain their market positions.
Many of the companies driving this trend have significantly greater
financial, technical and other resources than we do and may be
better positioned to acquire and offer complementary services and
technologies. The companies resulting from such combinations may
create more compelling service offerings and may offer greater
pricing flexibility than we can or may engage in business practices
that make it more difficult for us to compete effectively,
including on the basis of price, sales and marketing programs,
technology or service functionality. These pressures could result
in a substantial loss of customers or a reduction in our
revenues.
We may not be able to respond to rapid technological changes in
time to address the needs of our customers, which could have a
material adverse effect on our sales and
profitability.
The
cloud-based services markets in which some of our products and
services compete are characterized by rapid technological change,
the frequent introduction of new products and services and evolving
industry standards. Our ability to remain competitive will depend
in large part on our ability to continue to enhance our existing
products and services and develop new service offerings that keep
pace with these markets’ rapid technological developments.
Additionally, to achieve market acceptance, we must effectively
anticipate and offer products and services that meet changing
client demands in a timely manner. Clients may require features and
capabilities that our current products and services do not have. If
we fail to develop products and services that satisfy customer
requirements in a timely and cost-effective manner, our ability to
renew subscriptions with existing clients and our ability to create
or increase demand for our products and services will be harmed,
and our revenue and results of operations would be adversely
affected.
The success of our business will depend, in part, on the continued
services of certain key personnel and our ability to attract and
retain qualified personnel.
The
success of our business will depend, in part, on the continued
services of certain members of our management. In particular, the
loss of the services of Robert A. Berman, as President and Chief
Executive Officer and a director, Matthew Hill, our Chief Science
Officer and Chris Kadoch, our Chief Technology Officer, could have
a material adverse effect on our business, results of operations,
and financial condition. Our inability to attract and retain
qualified personnel could significantly disrupt our
business.
Although we take
prudent steps to retain key personnel, we face competition for
qualified individuals from numerous professional services and
technology companies. For example, our competitors may be able to
attract and retain more qualified professional and technical
personnel by offering more competitive compensation packages. If we
are unable to attract new personnel and retain our current
personnel, we may not be able to develop and maintain our services
at the same levels as our competitors and we may, therefore, lose
potential customers and sales penetration in certain markets.
It may also be difficult to attract
and retain qualified individuals in the timeframe demanded by our
clients. Furthermore, some of our contracts may require us to
employ only individuals who have particular government security
clearance levels. Our failure to attract and retain key individuals
could impair our ability to provide services to our clients and
conduct our business effectively. Our failure to attract and
retain suitably qualified individuals could have an adverse effect
on our ability to implement our business plan and, as a result, our
ability to compete would decrease, our operating results would
suffer and our revenues would decrease.
We may fail to realize the anticipated benefits of acquisitions
which we consummate, and we may be subject to business
uncertainties.
We
acquired substantially all of the assets of OpenALPR in March 2019.
We are continuing to integrate the operations of OpenALPR that
previously operated independently. There can be no assurance that
we will not encounter significant difficulties in further
integrating operations of OpenALPR or that it will achieve the
results of operations that we expected.
Uncertainties about
the effect of our acquisition on employees and customers may have
an adverse effect on our Company. These uncertainties may impair
our ability to attract, retain and motivate key personnel for a
period of time after the acquisitions, and could cause customers,
suppliers and others that deal with us to seek to change existing
business relationships with us, which may have an adverse effect on
our Company. Employee retention may be particularly challenging, as
employees may experience uncertainty about their future roles with
the Company.
The
achievement of the benefits expected from integration of acquired
companies may require us to incur significant costs. The incurrence
of any such costs, as well as any unexpected costs or delays, in
connection with such integration, could have a material adverse
effect on our business, operating results or financial
condition.
Our strategic
transition to primarily a technology based business focused on
vehicle recognition systems entails a number of risks, including
but not limited to our ability to generate sufficient revenue and
cash flow to successfully execute our business
plan.
9
We may be required to write-down certain assets after completing
our required annual evaluations, which may affect our reported
financial results.
The
initial determination of the fair value of assets we acquire upon
consummation of an acquisition is based upon an internal
valuation. We are required to analyze
the carrying value of our acquired intangibles and goodwill on an
annual basis going forward. After the detailed annual
evaluation of the carrying value of the intangible assets, as
supported by external analysis, we may be required to make
adjustments to our consolidated balance sheet and/or statement of
operations. Any adjustments will affect our reported financial
results.
We may be required to redeem our outstanding shares of Series A
Preferred Stock.
The
holders of our outstanding shares of Series A Preferred Stock
(consisting of 502,327 shares as of December 31, 2019), will have
the right to require the Company to redeem their shares, at any
time from and after November 8, 2021, at a price of $15.00 per
share plus any accrued but unpaid dividends (such accrued but
unpaid Series A Preferred Stock dividends are equal to an aggregate
of $551,000 as of December 31, 2019). In the event that the market
price of our common stock does not exceed the conversion price of
the Series A Preferred Stock at the time of redemption, the holder
of outstanding shares of Series A Preferred Stock are likely to
require us to redeem the shares, which would likely have a material
adverse effect on our liquidity, capital resources and business
prospects.
Our significant debt obligations could impair our liquidity and
financial condition. If we default on our secured debt, the lender
may foreclose on our assets.
As of
December 31, 2019, we (through our wholly owned subsidiary, Global)
had $1,842,000 outstanding under our secured borrowing agreement
with LSQ Funding Group, L.C. (“LSQ”), secured by our
subsidiaries accounts receivables. LSQ agreed to advance Global,
90% of all eligible account receivables with a maximum facility
amount of $10,000,000. If we default on this debt, the lender may
foreclose on its collateral, which would have a material adverse
effect on our business and operations.
As of
December 31, 2019, we (through our wholly owned subsidiary, AOC Key
Solutions) had $1,894,000 outstanding under secured borrowing
agreement with LSQ, secured by our subsidiary’s accounts
receivable. LSQ agreed to advance to our subsidiary, 90% of all
eligible account receivables with a maximum facility amount of
$5,000,000. If we default on this debt, the lender may foreclose on
its collateral, which would have a material adverse effect on our
business and operations.
We also have $1,000,000 of additional
subordinated notes outstanding in connection with our acquisition
of Firestorm.
On
March 12, 2019, Rekor entered into a note purchase agreement (the
“Note Purchase Agreement”) pursuant to which investors
purchased $20,000,000 principal amount of Rekor promissory notes
(the “2019 Promissory Notes”). $2,000,000 of the
proceeds of sale of these Promissory Notes was used to retire in
its entirety the 2018 Promissory Note and $500,000 was used to
retire in its entirety the subordinated note with Avon Road
Partners, L.P. The balance of the proceeds from the sale of the
2019 Promissory Notes were used to finance the OpenALPR Technology
Acquisition and to provide working capital. The Promissory Notes
bear interest at 16% per annum, of which at least 10% per annum is
required to be paid in cash. The full remaining portion of all
interest, if any, accrues and is to be paid at maturity or earlier
redemption. The notes are secured by a security interest in
substantially all of the assets of Rekor. The Note Purchase
Agreement has an effective interest rate of 24.87%. The Promissory
Notes were originally due and payable on March 11, 2021. In March
2020, the maturity date of the Promissory Note was extended to June
12, 2021. If, on maturity of the 2019 Promissory Notes, we are
unable to refinance or otherwise pay the principal and redemption
fee, together with the balance of the accumulated interest on the
2019 Promissory Notes, the holders of the 2019 Promissory Notes may
foreclose on their collateral, which would have a material adverse
effect on our business and operations.
Our
current debt obligations could require us to dedicate a substantial
portion of our cash flow and raise additional capital through
equity sales to fund payments of interest, which reduces the
availability of our cash flow to fund working capital, capital
expenditures and meet other corporate requirements; make it more
difficult for us to satisfy our other obligations; impede us from
obtaining additional financing in the future; impose restrictions
on us with respect to the use of our available cash; place us at a
competitive disadvantage when compared to our competitors who have
less debt; and make us more vulnerable in the event of a downturn
in our business prospects. In addition, unless we are able to
retire or refinance the debt issued pursuant to the Note Purchase
Agreement on or prior to June 12, 2021, we could be held in
default, which would substantially impair the value of our assets
and our common stock.
We have depended on waivers from our 2019 Promissory Note holders
to avoid a default under the Note Purchase Agreement.
The
Note Purchase Agreement under which the 2019 Promissory Note was
issued contains numerous covenants, some of which we have been
unable to comply with. Our ability to avoid default under the Note
Purchase Agreement may depend on our continued ability to obtain
deferrals or waivers of the requirements of these covenants. The
holders of the 2019 Promissory Notes are under no obligation to
grant such waivers and may be entitled to foreclose on their
collateral in the event we fail to cure breaches of our covenants,
which would have a material adverse effect on our business and
operations.
10
We may issue additional notes or other debt securities, or
otherwise incur substantial additional debt which may adversely
affect our leverage and financial condition and thus negatively
impact the value of our stockholders’ investment in the
Company.
The
anticipated cash needs of our business could change significantly
as we pursue business opportunities, if our business plans change,
if economic conditions change from those currently prevailing or
from those now anticipated, or if other unexpected circumstances
arise that may have a material effect on the cash flow or
profitability of our business. If we require additional capital
resources to grow our business, either internally or through
acquisition, we may need to seek to secure additional debt
financing. We may not be able to obtain financing arrangements on
acceptable terms or in amounts sufficient to meet our needs in the
future.
The
incurrence of debt could have a variety of negative effects,
including: default and foreclosure on our assets if our operating
revenues are insufficient to repay our debt obligations;
acceleration of our obligations to repay the indebtedness and
increased interest payments if we breach covenants that include the
maintenance of certain financial ratios or reserves without a
waiver or renegotiation of that covenant; and limitations on our
ability to borrow additional amounts for expenses, capital
expenditures, acquisitions, debt service requirements, execution of
our strategy and other purposes and other disadvantages compared to
our competitors who have less debt.
Our business has significant working capital needs and if we are
unable to satisfy those needs from cash generated from our
operations, borrowing or sales of equity, our financial condition
will be adversely affected.
We will
require significant amounts of working capital to operate our
business, implement our plans for growth and maintain our
competitive advantages. If we experience a significant and
sustained drop in operating profits, or if there are unanticipated
reductions in cash inflows or increases in cash outlays, we may be
subject to cash shortfalls. If such a shortfall were to occur for
even a brief period, it could have a significant adverse effect on
our business. In particular, we use working capital to pay interest
expenses and expenses relating to our employees and temporary
workers and to satisfy our workers’ compensation liabilities.
Generally, we pay our workers on a biweekly basis while we
generally receive payments from our customers 30 to 60 days
after billing. As a result, we must maintain sufficient cash
availability to pay employees and independent contractors and fund
related payroll liabilities prior to receiving payment from
customers.
We have
derived working capital for our operations primarily through cash
from operating activities from our subsidiaries, secured borrowing
arrangements, issuance of debt, the sale of assets and the sale of
our equity. We believe that our current sources of capital are
adequate to meet our working capital needs. However, our available
sources of capital are limited. If our working capital needs
increase in the future, we may be forced to seek additional sources
of capital, which may not be available on commercially reasonable
terms.
Any
future failure to comply with the covenants which may occur under
our promissory notes could result in an event of default which, if
not cured or waived, could trigger increased interest payments or
prepayment obligations which could adversely affect our business,
financial condition and results of operations.
Our operating results may be harmed if we are required to collect
sales or other related taxes for our licensing and subscription
products and services or pay regulatory fees in jurisdictions where
we have not historically done so.
Primarily due to
the nature of our cloud-based services in certain states and
countries, we do not believe we are required to collect sales or
other related taxes from our customers in certain states or
countries. However, one or more other states or countries may seek
to impose sales, regulatory fees or other tax collection
obligations on us, including for past sales by us or our resellers
and other partners. A successful assertion that we should be
collecting sales or other related taxes on our services or paying
regulatory fees could result in substantial tax liabilities for
past sales, discourage customers from purchasing our services or
otherwise harm our business and operating results.
Improper disclosure of confidential and personal data could result
in liability and harm to our reputation.
Our
handling and storage of the data we collect from some of our
employees, customers and vendors, and our processing of data, which
may include confidential or personally identifiable information,
through the services we provide, may be subject to a variety of
laws and regulations, which have been adopted by various federal,
state and foreign governments to regulate the collection,
distribution, use and storage of personal information of
individuals. Several foreign countries in which we conduct
business, including the European Economic Area (“EEA”)
and Canada, currently have in place, or have recently proposed,
laws or regulations concerning privacy, data protection and
information security, which are more restrictive than those imposed
in the United States. Some of these laws are in their early stages
and we cannot yet determine the impact these revised laws and
regulations, if implemented, may have on our business. However, any
failure or perceived failure by us to comply with these privacy
laws, regulations, policies or obligations or any security incident
that results in the unauthorized release or transfer of personally
identifiable information or other customer data in our possession,
could result in government enforcement actions, litigation, fines
and penalties and/or adverse publicity, all of which could have an
adverse effect on our reputation and business.
For
example, the European Economic Area (“EEA”) wide
General Data Protection Regulation (“GDPR”) became
applicable on May 25, 2018, replacing the data protection laws
of each EEA member state. The GDPR implemented more stringent
operational requirements for processors and controllers of personal
data, including, for example, expanded disclosures about how
personal information is to be used, limitations on retention of
information, increased requirements to erase an individual’s
information upon request, mandatory data breach notification
requirements and higher standards for data controllers to
demonstrate that they have obtained valid consent for certain data
processing activities. It also significantly increases penalties
for non-compliance, including where we act as a service provider
(e.g. data processor). If our privacy or data security measures
fail to comply with applicable current or future laws and
regulations, we may be subject to litigation, regulatory
investigations, enforcement notices requiring us to change the way
we use personal data or our marketing practices, fines, for
example, of up to 20 million Euros or up to 4% of the total
worldwide annual turnover of the preceding financial year
(whichever is higher) under the GDPR, or other liabilities, as well
as negative publicity and a potential loss of
business.
Data
protection regulation remains an area of increased focus in all
jurisdictions and data protection regulations continue to evolve.
There is no assurance that we will be able to meet new requirements
that may be imposed on the transfer of personally identifiable
information from the EU to the United States without incurring
substantial expense or at all. European and/or multi-national
customers may be reluctant to purchase or continue to use our
services due to concerns regarding their data protection
obligations. In addition, we may be subject to claims, legal
proceedings or other actions by individuals or governmental
authorities if they have reason to believe that our data privacy or
security measures fail to comply with current or future laws and
regulations.
Moreover, we must
ensure that certain vendors and customers who have access to such
information also have the appropriate privacy policies, procedures
and protections in place. Although we take customary measures to
protect such information, the continued occurrence of high-profile
data breaches provides evidence of an external environment
increasingly hostile to information security. If our security
measures are breached as a result of third-party action, employee
or subcontractor error, malfeasance or otherwise, and, as a result,
someone obtains unauthorized access to customer data, our
reputation may be damaged, our business may suffer and we could
incur significant liability. Techniques used to obtain unauthorized
access or to sabotage systems change frequently and are growing
increasingly sophisticated. As a result, we may be unable to
anticipate these techniques or to implement adequate preventative
measures.
This
environment demands that we continuously improve our design and
coordination of security controls throughout the Company. Despite
these efforts, it is possible that our security controls over data,
training, and other practices we follow may not prevent the
improper disclosure of personally identifiable or other
confidential information.
If an
actual or perceived breach of our security occurs, we could be
liable under laws and regulations that protect personal or other
confidential data resulting in increases costs or loss of revenues
and the market perception of our services could be
harmed.
Our business could be negatively impacted by cyber and other
security threats or disruptions.
We face
various cyber and other security threats, including attempts to
gain unauthorized access to sensitive information and networks;
insider threats; threats to the security of our facilities and
infrastructure; and threats from terrorist acts or other acts of
aggression. Cyber threats are constant and evolving and include,
but are not limited to, computer viruses, malicious software,
destructive malware, attacks by computer hackers attempts to gain
unauthorized access to data, disruption or denial of service
attacks, and other electronic security breaches that could lead to
disruptions in mission critical systems, unauthorized release or
loss of confidential, personal or otherwise protected information
(ours or that of our employees, customers or subcontractors), and
corruption of data, networks or systems. In addition, we could be
impacted by cyber threats or other disruptions or vulnerabilities
found in products we use or in our partners’ or
customers’ systems that are used in connection with our
business. Our clients and subcontractors face similar threats
and/or they may not be able to detect or deter them, or effectively
to mitigate resulting losses. These threats could damage our
reputation as well as our subcontractor’s ability to perform
and could affect our client’s ability to pay.
Although we use
various procedures and controls to monitor and mitigate the risk of
these threats to us, our clients and our partners, there can be no
assurance that these procedures and controls will be sufficient.
The impact of these factors is difficult to predict, but one or
more of them could result in the loss of information or
capabilities, harm to individuals or property, damage to our
reputation and/or require remedial actions or lead to loss of
business, regulatory actions potential liability and financial
loss, any one of which could have a material adverse effect on our
financial position, results of operations and/or cash
flows.
11
We are dependent upon technology services, and if we experience
damage, service interruptions or failures in our computer and
telecommunications systems, our customer and worker relationships
and our ability to attract new customers may be adversely
affected.
Our
business could be interrupted by damage to or disruption of our
computer, telecommunications equipment, software systems, or
software applications. Our customers’ businesses may be
adversely affected by any system, application or equipment failure
we experience. As a result of any of the foregoing, our
relationships with our customers may be impaired, we may lose
customers, our ability to attract new customers may be adversely
affected and we could be exposed to contractual liability.
Precautions in place to protect us from, or minimize the effect of,
such events may not be adequate.
In
addition, the failure or disruption of mail, communications and/or
utilities could cause an interruption or suspension of our
operations or otherwise harm our business. Our property and
business interruption insurance may be inadequate to compensate us
for all losses that may occur as a result of any system or
operational failure or disruption and, as a result, revenue,
profits and operating results could be adversely
affected.
If we do not keep pace with rapid technological changes and
evolving industry standards, we will not be able to remain
competitive, and the demand for our services will likely
decline.
The
markets in which we operate are in general characterized by the
following factors: changes due to rapid technological advances;
additional qualification requirements related to technological
challenges; and evolving industry standards and changes in the
regulatory and legislative environment. Our future success will
depend upon our ability to anticipate and adapt to changes in
technology and industry standards, and to effectively develop,
introduce, market and gain broad acceptance of new product and
service enhancements incorporating the latest technological
advancements.
We operate in highly competitive industries, some with low barriers
to entry, and may be unable to compete successfully against
existing or new competitors.
Our
business is competitive, and we compete with companies in highly
competitive industries that may have greater name recognition and
financial resources, as well as many independent sole-proprietors
who sell themselves as outsourced resources. We also compete with
providers of outsourcing services, systems integrators, computer
systems consultants and other providers of services. We expect that
the level of competition will remain high, which could limit our
ability to maintain or increase our market share or
profitability.
The
needs of our clients change and evolve regularly. Accordingly, our
success depends on our ability to develop services and solutions
that address these changing needs of our clients, and to provide
people and technology needed to deliver these services and
solutions. In order to compete effectively in our markets, we must
target our potential customers carefully, continue to improve our
efficiencies and the scope and quality of our services, and rely on
our service quality, innovation, and client relations to provide
services on a cost-effective basis to our clients. Our competitors
may be able to provide clients with different or greater
capabilities or technologies or better contract terms than we can
provide, including technical qualifications, past contract
experience, geographic presence, price and the availability of
qualified professional personnel.
In
addition, heightened competition among our existing competitors,
especially on a price basis, or by new entrants into the market,
could create additional competitive pressures that may reduce our
margins and adversely affect our business. If our competitive
advantages are not compelling or sustainable, then we are unlikely
to increase or sustain profits and our stock price could
decline.
A downturn of the U.S. or global economy could result in our
customers using fewer products and services or becoming unable to
pay us for our services on a timely basis or at all, which would
materially adversely affect our business.
Because
demand for our solutions and services are sensitive to changes in
the level of economic activity, our business may suffer during
economic downturns. During periods of weak economic growth or
economic contraction, the demand for outsourced services could
decline. When demand drops, our operating profit could be impacted
unfavorably as we experience a deleveraging of our selling and
administrative expense base because expenses may not decline as
quickly as revenues. In periods of decline, we can only reduce
selling and administrative expenses to a certain level without
negatively impacting the long-term potential of our
business.
Additionally,
during economic downturns companies may slow the rate at which they
pay their vendors, or they may become unable to pay their
obligations. If our customers become unable to pay amounts owed to
us, or pay us more slowly, then our cash flow and profitability may
suffer significantly.
We may be exposed to employment-related claims and losses,
including class action lawsuits, which could have a material
adverse effect on our business.
We
typically place or assign personnel in the workplaces of other
businesses. The risks of these activities include possible claims
relating to: wrongful termination or denial of employment; damage
to customer facilities due to negligence; violations of employment
rights related to employment screening or privacy issues;
fraudulent or criminal activity; misappropriation of funds; misuse
of customer proprietary information; inadvertent assignment of
illegal aliens; and discrimination and harassment.
We may
incur fines and other losses or negative publicity with respect to
these claims. In addition, these claims may give rise to
litigation, which could be time-consuming and expensive. New
employment and labor laws and regulations may be proposed or
adopted that may increase the potential exposure of employers to
employment-related claims and litigation. There can be no assurance
that the corporate policies we have in place to help reduce our
exposure to these risks will be effective or that we will not
experience losses as a result of these risks. There can also be no
assurance that the insurance policies we have purchased to insure
against certain risks will be adequate or that insurance coverage
will remain available on commercially reasonable terms or be
sufficient in amount or scope of coverage.
We are dependent on workers’ compensation insurance coverage
at commercially reasonable terms.
We
provide workers’ compensation insurance for our employees and
temporary workers and are contractually obligated to collateralize
our workers’ compensation obligations under our
workers’ compensation program through irrevocable letters of
credit, surety bonds or cash. A significant portion of our
workers’ compensation program renews annually on January 1 of
each year, and as part of the renewal, could be subject to an
increase in collateral. In addition, collateral requirements can be
significant and place pressure on our liquidity and working capital
capacity. Further, we cannot be certain we will be able to obtain
appropriate types or levels of insurance in the future or that
adequate replacement policies will be available on commercially
reasonable terms. Depending on future changes in collateral
requirements, we could be required to seek additional sources of
capital in the future, which may not be available on commercially
reasonable terms, or at all. The loss of our workers’
compensation insurance coverage would prevent us from doing
business in the majority of our markets
Any future Congressional spending cuts, delays in the completion of
the appropriation process or condition that affects the U.S.
Government could adversely impact our operating
results.
If
annual appropriations bills are not enacted on a timely basis for
future fiscal years, the U.S. government may once again operate
under continuing resolution(s), thus abating request for proposal
(“RFP”) processes and restricting new contracts or
program starts and resulting in government slowdowns, or even
shutdowns. The uncertainty regarding the volume of RFPs issued by
the U.S. government could have long-term impacts for our industry
and our Company. Because we generate significant revenues from
clients that bid on contracts with U.S. government agencies, our
operating results could be adversely affected by government
slowdowns or shutdowns, spending caps or changes in national
budgetary priorities. In addition, delays in RFP releases, slow
program starts or uncertainty in the award of contracts or task
orders could adversely impact our operating results.
Any
condition or occurrence that affects society or the U.S. government
can also impact government contractors. Because our Company
maintains a significant presence among government contractors, we
could be adversely affected by a national or international event
that undermines confidence in the government or financial markets.
Any impact on federal spending could have a negative effect on our
revenue and adversely affect our future results.
If our contractors and subcontractors fail to satisfy their
obligations to us or other parties, or if we are unable to maintain
these relationships, our revenue, profitability, and growth
prospects could be adversely affected.
We
depend on contractors and subcontractors in conducting our
business. There is a risk that we may have disputes with our
contractors or subcontractors arising from, among other things, the
quality and timeliness of work performed by the contractor or
subcontractor, client concerns about the contractor or
subcontractor, or our failure to extend existing task orders or
issue new task orders under a contract or subcontract. In addition,
if any of our subcontractors fail to perform the agreed-upon
services, go out of business, or fail to perform on a project, then
our ability to fulfill our obligations as a prime contractor may be
jeopardized and we may be contractually responsible for the work
performed by those contractors or subcontractors. Historically, our
relationship with our contractors and subcontractors have been
good, and we have not experienced any material failure of
performance by our contractors and subcontractors. However, there
can be no assurance that such experience will continue and the
absence of qualified subcontractors with which we have a
satisfactory relationship could adversely affect the quality of our
service and our ability to perform under some of our
contracts.
We
also rely on relationships with other contractors when we act as
their subcontractor or joint venture partner. Our future revenue
and growth prospects could be adversely affected if other
contractors eliminate or reduce their subcontracts or teaming
arrangement relationships with us or if a government agency
terminates or reduces these other contractors’ programs, does
not award them new contracts, or refuses to pay under a
contract.
12
Our Professional Services Segment is directly tied to the success
of our government contracting clients, which are increasingly
reliant on Indefinite Delivery/Indefinite Quantity
(“ID/IQ”) contracts. ID/IQ contracts are not firm
orders for services, and we may generate limited or no revenue from
these contracts which could adversely affect our operating
performance.
ID/IQ
contracts are typically awarded to multiple contractors, and the
award of an ID/IQ contract does not represent a firm order for
services. Generally, under an ID/IQ contract, the government is not
obligated to order a minimum of services or supplies from its
contractor, irrespective of the total estimated contract value. In
effect, an ID/IQ award acts as a “license,” permitting
a government contractor to bid on task orders issued under the
ID/IQ contract, but not guaranteeing the award of individual task
orders. Following an award under a multi-award ID/IQ program, the
customer develops requirements for task orders that are
competitively bid against all of the contract awardees. However,
many contracts also permit the U.S. government to direct work to a
specific contractor. Our clients may not win new task orders under
these contracts for various reasons, including price, past
performance and responsiveness, among others. We support our
government contractor clients both when they compete to get the
umbrella ID/IQ contract and subsequently when we help the winners
of those contracts compete for individual tasks. The proposals for
both stages can be relatively brief and require quick turn-arounds,
thus potentially reducing some opportunities to be awarded
significant turn-key engagements. While it is possible that the
increased importance of winning the umbrella ID/IQ contract will
prompt clients to hire outside firms to prepare their proposals, it
is also likely that government contractors will decide to prepare
ID/IQ proposals without the assistance from outside
experts.
We incur substantial costs as a result of operating as a public
company and our management is required to devote substantial time
to related compliance matters.
As a
public company, we incur significant legal, accounting, and other
expenses. under rules implemented by the United States Securities
and Exchange Commission (“SEC”), and The Nasdaq Stock
Market (“Nasdaq”). These impose various requirements on
public companies, including establishing and maintaining effective
disclosure and financial controls and corporate governance
practices. Our management team will need to devote a substantial
amount of time to these compliance requirements and we may need to
hire additional personnel. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly.
Pursuant to
Section 404 of the Sarbanes-Oxley Act, we are required to
furnish a report by our management on our internal control over
financial reporting. To achieve compliance with Section 404,
we engage in a process to document and evaluate our internal
control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants, and
adopt a detailed work plan to assess and document the adequacy of
internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing
that controls are functioning as documented, and implement a
continuous reporting and improvement process for internal control
over financial reporting.
In
addition, changing laws, regulations, and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs, and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations, and standards, and this investment may
result in increased general and administrative expenses and divert
management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with
new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities
related to their application and practice, regulatory authorities
may initiate legal proceedings against us and our business may be
harmed.
As
a public company, complying with applicable rules and regulations
will make it more expensive for us to obtain director and officer
liability insurance, and we may be required to incur substantially
higher costs to obtain and maintain the same or similar
coverage.
Our ability to use our net operating losses to offset future
taxable income may be subject to certain limitations, which could
subject our business to higher tax liability.
We may be limited in the portion of net operating
loss carry forwards that we can offset future taxable income for
U.S. federal and state income tax purposes. As of December
31, 2019, we had gross federal and state net operating loss
carryforwards, or NOLs, of approximately $19.2 million and $12.0
million, net of federal tax effect, respectively. A lack of future
taxable income could adversely affect our ability to use these
NOLs. In addition, future changes in our stock ownership, including
through acquisitions, could result in
ownership changes under Section 382 of the Internal Revenue Code
and may result in a limitation on the amount of NOL carry forwards
that could be used annually to offset future taxable income and
taxes payable. Our NOLs at December 31, 2019 may also be impaired
under similar provisions of state law, and may expire unused or
underused, which would prevent us from using our NOL carry forwards
to offset future taxable income.
Assertions by a third party that our services and solutions
infringe its intellectual property, whether or not correct, could
subject us to costly and time-consuming litigation or result in
settlements or licensing arrangements that could affect our
short-term or long-term profitability.
There is frequent litigation in the software and
technology industries based on allegations of infringement or other
violations of intellectual property rights. We are currently
involved in a patent infringement lawsuit brought by a third party
(Vigilant Solutions, LLC) as disclosed in more detail below under
“Item
3 – Legal Proceedings”, and may in the future be subject to other
third-party patent infringement or other intellectual
property-related lawsuits as we become increasingly visible and
face more intense competition. Regardless of the merit of these
claims, they can be time-consuming, result in costly litigation and
diversion of technical and management personnel or require us to
develop a non-infringing technology or enter into license
agreements. Because of the potential for court awards that are
difficult to predict, it is not unusual to find even arguably
unmeritorious claims settled for significant amounts. In addition,
our service agreements may require us to indemnify our customers
from certain third-party intellectual property infringement claims,
which could increase our costs as a result of defending such claims
and may require that we pay damages if there were an adverse ruling
related to any such claims. Competitors may also seek to use these
claims and the pendency of associated litigation as a means of
attempting to discredit us or make potential customers fearful of
using us, which could harm our relationships with our customers,
deter future customers from subscribing to our services or expose
us to further litigation. These costs, monetary or otherwise,
associated with defending against third party allegations of
infringement could have negative effects on our business, financial
condition and operating results.
If our services are used to commit intentional or illegal acts, we
may incur significant liabilities, our services may be perceived as
not secure, and customers may curtail or stop using our
services.
Certain
services offered by us enable customers to capture data from video
images. Although our service agreements require our customers to
comply with all applicable laws, we do not exercise direct control
over use or content of information obtained by our customers
through the use of our services. If our services are used by others
to commit bad or illegal acts, we may become subject to claims and
subject to other potential liabilities. Defending against such
claims could be expensive and time-consuming, and there is a
possibility that we could incur significant liability to entities
who were the harmed of such acts. As a result, our business may
suffer, and our reputation may be damaged.
We
use a limited number of data centers to deliver our services. Any
disruption of service at these facilities could harm our
business.
Our
cloud-based services are hosted from third-party data center
facilities located in various parts of the United States. We also
use these facilities for some of our development efforts. We do not
control the operation of these facilities. The owners of these data
center facilities have no obligation to renew their agreements with
us on commercially reasonable terms, or at all. If we are unable to
renew these agreements on commercially reasonable terms, we may be
required to transfer to new data center facilities, and we may
incur significant costs and possible service interruption in
connection with doing so. In addition, our operations and
development efforts could be seriously affected by failures or
interruptions in service at these facilities. Any changes in
third-party service levels at these third-party data centers or any
errors, defects, disruptions or other performance problems with our
services related to the non-performance of these facilities could
harm our reputation and may damage our clients’ businesses.
Interruptions in our services might reduce our revenue, cause us to
issue credits to clients, subject us to potential liability, cause
clients to terminate their subscriptions or harm our renewal
rates.
Our
data centers are vulnerable to damage or interruption from human
error, intentional bad acts, pandemics, earthquakes, hurricanes,
floods, fires, war, terrorist attacks, power losses, hardware
failures, systems failures, telecommunications failures and similar
events. The occurrence of a natural disaster, an act of terrorism,
vandalism or other misconduct, a decision to close the facilities
without adequate notice or other unanticipated problems could
result in lengthy interruptions in our services.
13
Our long-term success depends, in part, on our ability to expand
the sales of our services to customers located outside of the
United States, and thus our business is susceptible to risks
associated with international sales and operations.
We
currently maintain offices and have sales personnel inside of the
United States. However, we plan on expanding our international
operations. Our international expansion efforts may not be
successful. In addition, conducting international operations
subjects us to other risks than those we have generally faced in
the United States. These risks include: localization of our
services and adaptation for local practices, differences in local,
legal standards and regulatory requirements; difficulties in
managing and staffing international operations; fluctuations in
currency exchange rates; dependence on customers, third parties,
and channel partners with whom we do not have extensive experience;
potentially adverse tax consequences, including the complexities of
foreign value-added or other tax systems; reduced or varied
protection for intellectual property rights in some countries; and
increased financial accounting and reporting burdens and
complexities. Operating in international markets also requires
significant management attention and financial resources. The
investment and additional resources required to establish
operations and manage growth in other countries may not produce
desired levels of revenue or profitability.
Our success depends in large part on our ability to protect and
enforce our intellectual property rights.
We rely
on a combination of trade secret, patent, copyright, service mark
and trademark laws, as well as confidentiality procedures and
contractual restrictions, to establish and protect our intellectual
property rights, all of which can provide only limited protection.
In addition, we have not patented significant technologies used to
provide our services. We cannot assure you any future patents that
may be applied for and issued will not be challenged, invalidated
or circumvented. Any patents that may issue in the future from
future patent applications may not provide sufficiently broad
protection or they may not prove to be enforceable in actions
against alleged infringers. Also, we cannot assure you that any
future service mark or trademark registrations will be issued for
pending or future applications or that any registered service marks
or trademarks will be enforceable or provide adequate protection of
our proprietary rights.
We
endeavor to enter into agreements with our employees and
contractors and agreements with parties with whom we do business to
limit access to and disclosure of our proprietary information. The
steps we have taken, however, may not prevent unauthorized use or
the reverse engineering of our technology. Moreover, others may
independently develop technologies that are competitive to ours or
infringe our intellectual property. Enforcement of our intellectual
property rights also depends on our successful legal actions
against these infringers, but these actions may not be successful,
even when our rights have been infringed.
Furthermore,
effective patent, trademark, service mark, copyright and trade
secret protection may not be available in every country in which
our services are available. In addition, the legal standards
relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related industries are
uncertain and still evolving.
Material defects or errors in the software that we use to deliver
our services could harm our reputation, result in significant costs
to us and impair our ability to sell our solutions.
The
software applications underlying our products and services are
inherently complex and may contain material defects or errors,
particularly when first introduced or when new versions or
enhancements are released. Any defects that cause interruptions to
the availability of our products and services could result in: a
reduction in sales or delay in market acceptance of our services;
sales credits or refunds to customers; loss of existing customers
and difficulty in attracting new customers; reputational harm; and
diversion of internal resources. The costs incurred in correcting
any material defects or errors in our products and services may be
substantial and could harm our operating results.
Government
regulation of the Internet, telecommunications and other
communications technologies could harm our business and operating
results.
As
Internet commerce and telecommunications continue to evolve,
increasing regulation by federal, state or foreign governments and
agencies becomes more likely. Any increase in regulation could
affect our clients’ ability to collect and share data,
potentially reducing demand for our products and services. In
addition, taxation of products and services provided over the
Internet or other charges imposed by government agencies or by
private organizations for accessing the Internet or utilizing
telecommunications services may also be imposed. Any regulation
imposing greater fees for Internet use or restricting the exchange
of information over the Internet could diminish the viability of
our services, which could harm our business and operating
results.
Natural disasters, public health crises, political crises, and
other catastrophic events or other events outside of our control
may damage our business and operating results.
In
the event of natural disasters, public health crises, such as
pandemics and epidemics, political crises, such as terrorism, war,
political instability or other conflict, or other events outside of
our control, our business and operating results could suffer.
Moreover, these types of events could negatively impact consumer
spending in the impacted regions or depending upon the severity,
globally, which could adversely impact our operating results. For
example, a widespread health epidemic, such as the outbreak of a
respiratory illness caused by a novel coronavirus first identified
in Wuhan, China caused the World Health Organization declaring a
global emergency on January 30, 2020. At this point, the extent to
which the coronavirus may impact our results is
uncertain.
Risks relating to our common stock
There has been a limited public market for our common stock, the
stock price of our common stock may be volatile or may decline
regardless of our performance, and you may not be able to resell
your shares at or above the public offering price.
Our
common stock was previously quoted on the OTCQX and has been
trading on the Nasdaq since January 10, 2018. There is no
established trading market for some of our securities and there has
been a limited public market for our common stock. The market
prices of the securities of newly listed companies can be highly
volatile. The market price of our common stock may fluctuate
significantly in response to numerous factors, many of which are
beyond our control, including: variations in our results of
operations, cash flows, and other financial metrics
and non-financial metrics, and how those results compare
to analyst expectations; variations in general market, financial
markets, economic, and political conditions in the United States;
failure of securities analysts to initiate or maintain coverage of
us, changes in financial estimates by any securities analysts who
follow our company, or our failure to meet these estimates or the
expectations of investors; sales of shares of our common stock by
us or our stockholders; rumors and market speculation involving us
or other companies in our industry; new laws, regulations, or
executive orders, or new interpretations of existing laws or
regulations applicable to our business; lawsuits threatened or
filed against us, or unfavorable determinations or settlements in
any such suits; and developments or disputes concerning our
intellectual property or our technology, or third-party proprietary
rights.
In
addition, the stock markets have shown the capacity to experience
extreme price and volume fluctuations that can have short- and
long-term effects on the market prices of equity securities of many
companies. Stock prices of many companies have fluctuated in a
manner unrelated or disproportionate to the operating performance
of those companies. In the past, stockholders have instituted
securities class action litigation following periods of market
volatility. If we were to become involved in securities litigation,
it could subject us to substantial costs, divert resources and the
attention of management from our business, and harm our
business.
Our common stock may be delisted from the Nasdaq Capital
Market.
We may
be unable to maintain the listing of our common stock on the
Nasdaq. If, for any reason, Nasdaq should delist our common stock
from trading on its exchange and we are unable to obtain listing on
another national securities exchange or take action to restore our
compliance with the Nasdaq continued listing requirements, a
material adverse effect on our shareholders may occur due to a
reduction in some or all of the following: the market price of our
common shares; the liquidity of our common shares; our ability to
obtain financing for the continuation of our operations; the number
of market makers in our common shares; and the number of
institutional and general investors that will consider investing in
our common shares.
In the
event that our common stock were to be delisted from the Nasdaq, it
may be considered a “penny stock.” Securities
broker-dealers participating in sales of our common stock would
then be subject to the “penny stock” regulations set
forth in Rules 15g-2 through 15g-9 promulgated under the Exchange
Act. Generally, brokers may be less willing to execute transactions
in securities subject to the “penny stock” rules. This
may make it more difficult for investors to dispose of our common
stock and cause a decline in the market value of our
stock.
If securities or industry analysts do not publish research or
publishes inaccurate or unfavorable reports about our business, our
stock price and trading volume could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business, our market and our competitors. We do not
have any control over these analysts. If one or more of the
analysts who cover us downgrade our shares or change their opinion
of our shares, our share price would likely decline. If one or more
of these analysts cease covering us or fail to regularly publish
reports on us, we could lose visibility in the financial markets,
which could cause our share price or trading volume to
decline.
Sales of a substantial number of shares of our common stock may
cause the price of our common stock to decline.
As of
March 30, 2020, we have a total of 22,768,757 shares of common
stock outstanding and 1,846,767 warrants. Based on shares
outstanding as of March 30, 2020, 9,400,959 shares of common stock,
or 41.3%, are held by our officers, directors and their affiliated
entities, and will be subject to volume limitations under Rule 144
under the Securities Act and various vesting agreements. In
addition, 3,583,355 shares of our common stock that are subject to
outstanding options, restricted stock units and warrants as of
March 30, 2020, as well as 843,807 shares issuable upon the
conversion of our Series A Preferred Stock, and 492,561 shares
issuable upon the conversion of our Series B Preferred Stock, will
become eligible for sale in the public market to the extent
permitted by the provisions of various vesting agreements, and
Rules 144 and 701 under the Securities Act.
We
cannot predict what effect, if any, sales of our shares in the
public market or the availability of shares for sale will have on
the market price of our common stock. However, future sales of
substantial amounts of our common stock in the public market,
including shares issued on exercise of outstanding options, or the
perception that such sales may occur, could adversely affect the
market price of our common stock.
We also
expect that significant additional capital may be needed in the
future to continue our planned operations. To raise capital, we may
sell common stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we
determine from time to time. These sales, or the perception in the
market that the holders of a large number of shares intend to sell
shares, could reduce the market price of our common
stock.
Investors may experience future dilution as a result of future
equity offerings.
In
order to raise additional capital, we may in the future offer
additional shares of our common stock or other securities
convertible into or exchangeable for our common stock. We cannot
assure investors that we will be able to sell shares or other
securities in any other offering at a price per share that is equal
to or greater than the price per share paid by investors, and
investors purchasing our shares or other securities in the future
could have rights superior to existing stockholders. The price per
share at which we sell additional shares of our common stock or
other securities convertible into or exchangeable for our common
stock in future transactions may be higher or lower than the price
per share paid by investors.
14
We do not intend to pay dividends on our common stock for the
foreseeable future.
We have
never declared or paid any cash dividends on our common stock and
do not intend to pay any cash dividends on our common stock in the
foreseeable future. Our Series A Preferred Stock and our Series B
Preferred Stock are entitled to quarterly dividends as set forth in
more detail in the section entitled “Description of Capital
Stock.” We currently anticipate that for the foreseeable
future we will retain all of our future earnings for the
development, operation and growth of our business and for general
corporate purposes. Any future determination to pay dividends on
our common stock in will be at the discretion of our Board of
Directors. Accordingly, investors must rely on sales of their
common stock after price appreciation, which may never occur, as
the only way to realize any future gains on their
investments.
Our executive officers, directors, principal stockholders and their
affiliates will continue to exercise significant influence over our
company, which will limit your ability to influence corporate
matters and could delay or prevent a change in corporate
control.
As of
March 30, 2020, our executive officers, directors, five percent or
greater stockholders and their respective affiliates owned in the
aggregate approximately 46.1% of our common
stock.
These
stockholders have the ability to influence us through this
ownership position and may be able to determine all matters
requiring stockholder approval. For example, these stockholders may
be able to control elections of directors, amendments of our
organizational documents, or approval of any merger, sale of
assets, or other major corporate transaction. This may prevent or
discourage unsolicited acquisition proposals or offers for our
common stock that you may feel are in your best interest as one of
our stockholders. The interests of this group of stockholders may
not always coincide with your interests or the interests of other
stockholders and they may act in a manner that advances their best
interests and not necessarily those of other stockholders,
including seeking a premium value for their common stock, and might
affect the prevailing market price for our common
stock.
We are a “smaller reporting company” and, as a result
of the reduced disclosure and governance requirements applicable to
smaller reporting companies, our common stock may be less
attractive to investors.
We are
a “smaller reporting company,” meaning that we are not
an investment company, an asset-backed issuer, or a majority-owned
subsidiary of a parent company that is not a “smaller
reporting company,” have a public float of less than
$250 million or have annual revenues of less than
$100 million and public float of less than $700 million during
the most recently completed fiscal year. As a “smaller
reporting company,” we are subject to lesser disclosure
obligations in our SEC filings compared to other issuers.
Specifically, "smaller reporting companies" are able to provide
simplified executive compensation disclosures in their filings, are
exempt from the provisions of Section 404(b) of the
Sarbanes-Oxley Act requiring that independent registered public
accounting firms provide an attestation report on the effectiveness
of internal control over financial reporting and have certain other
decreased disclosure obligations in their SEC filings, including,
among other things, only being required to provide two years of
audited consolidated financial statements in annual reports.
Decreased disclosures in our SEC filings due to our status a
“smaller reporting company” may make it harder for
investors to analyze our operating results and financial
prospects.
Delaware law and provisions in our certificate of incorporation and
bylaws could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common
stock.
The anti-takeover provisions of the Delaware
General Corporation Law, or the DGCL, may discourage, delay
or prevent a change of control by prohibiting us from engaging in a
business combination with stockholders owning in excess of 15% of
our outstanding voting stock for a period of three years after the
person becomes an interested stockholder, even if a change of
control would be beneficial to our existing stockholders. In addition, our certificate of
incorporation and bylaws contain provisions that may make the
acquisition of our company more difficult, including that:
the request of one or more stockholders holding shares in the
aggregate entitled to cast not less than 35% of the vote at a
meeting is required to call a stockholder meeting. These provisions
could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors of your choosing and
cause us to take certain actions you desire.
Not
applicable.
Our
principal executive offices are located at 7172 Columbia Gateway
Drive, Suite 400, Columbia, Maryland 21046. We do not own any real
property. We currently operate out of five leased locations and our
lease terms range from month-to-month to multiyear commitments. We
do not consider any of our leased properties to be materially
important to us. While we believe it is necessary to maintain
offices through which our services are coordinated, we feel there
are sufficient available office rental properties to adequately
serve our needs should we need to relocate or expand our
operations.
Vigilant Solutions, LLC, a subsidiary of Motorola Solutions, Inc.,
filed a complaint on February 21, 2020 against us and certain of
our subsidiaries in the US District Court for the District of
Maryland. The complaint alleges that certain of our products
violate a patent held by Vigilant. We have retained counsel to
investigate the claims made in the complaint and our investigation
into these matters is ongoing. Nevertheless, based on a review of
the complaint, we believe that we have substantial defenses to the
allegations contained in the complaint and that the validity of the
patent underlying the complaint is subject to challenge. We intend
to vigorously defend the allegations of the Vigilant
complaint.
On January 31, 2020, our wholly owned subsidiary, OpenALPR filed a
complaint in the US District Court for the Western District of
Pennsylvania against a former customer, Plate Capture Solutions,
Inc. (“PCS”) for breach of software license agreements
pursuant to which software to was licensed to PCS. On February 19,
2020 PCS filed an answer, counterclaim and joinder in the case,
among other things, seeking to join us as a party to the litigation
and making counterclaims for defamation, fraud and intentional
interference with existing and future business relationships. We
believe that we have substantial defenses to the counterclaims and
intend to vigorously defend the allegations of the
counterclaims.
On August 19, 2019, we
filed suit in the United States District Court for the Southern
District of New York against three former executives of Rekor and
Firestorm (the Firestorm Principals). The Complaint alleges that
the Firestorm Principals fraudulently induced the execution of the
Membership Interest Purchase Agreement pursuant to which Firestorm
was acquired by us, and seeks rescission of the Membership Interest
Purchase Agreement and certain transactions contemplated thereby,
including the issuance of notes and warrants to the Firestorm
Principals. On October 9, 2019, we filed an Amended
Complaint. On November 4, 2019, the Firestorm Principals
filed an answer to the Amended Complaint and asserted counterclaims
against Rekor, Firestorm, and certain of our executives. On
December 16, the Firestorm Principals filed a Motion for Judgment
on the Pleadings. On January 30, 2020, we filed a Second Amended
Complaint. The Firestorm Principals responded to the Second Amended
Complaint on February 28, 2020. Our deadline for responding to the
Firestorm Principals’ counterclaims is April 2020. We intend
to vigorously litigate this action and believe that the Firestorm
Principals’ counterclaims are without merit.
In
addition, from time to time, we are named as a party to various
other lawsuits, claims and other legal and regulatory proceedings
that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged
personal injury, breach of contract, property damage, infringement
of proprietary rights, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to such
lawsuits, claims and proceedings we accrue reserves when a loss is
probable, and the amount of such loss can be reasonably estimated.
It is our management’s opinion that the outcome of these
proceedings, individually and collectively, will not be
material to our consolidated financial statements as a
whole.
Not
applicable.
15
PART II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is listed on the Nasdaq Capital Market under the
symbol “REKR”.
Holders
As of
February 18, 2020, there were 80 registered holders of record of
our common stock, excluding stockholders for whom shares are held
in “nominee” or “street name.” The actual
number of common stockholders is greater than the number of record
holders, and includes stockholders who are beneficial owners, but
whose shares are held in street name by brokers and other nominees.
This number of holders of record also does not include stockholders
whose shares may be held in trust by other entities.
Dividend Policy
We have
never declared or paid any cash dividends on our common stock and
we have declared and paid cash dividends for our preferred stock.
We currently do not anticipate paying any cash dividends for the
foreseeable future. Instead, we anticipate that all of our earnings
will be used to provide working capital, to support our operations,
and to finance the growth and development of our business,
including potentially the acquisition of, or investment in,
businesses, technologies or products that complement our existing
business. Any future determination relating to dividend policy will
be made at the discretion of our Board of Directors and will depend
on a number of factors, including, but not limited to, our future
earnings, capital requirements, financial condition, future
prospects, applicable Delaware law, which provides that dividends
are only payable out of surplus or current net profits and other
factors our Board of Directors might deem relevant.
Sales of Unregistered Securities
On
March 12, 2019, as partial consideration for its acquisition of
certain assets of OpenALPR, Rekor issued 600,000 shares of its
common stock to the seller, valued at $397,000. On the same date,
Rekor issued senior secured promissory notes in an aggregate
principal amount of $20,000,000 and warrants to purchase 2,500,000
shares of its common stock, which are immediately exercisable at an
exercise price of $0.74 per share, to certain individuals and
entities.
The
foregoing issuances were issued in reliance upon the exemptions
from registration under the Securities Act of 1933, as amended,
provided by Section 4(a)(2) and Rule 506 of Regulation D
promulgated thereunder.
Public Offering and Shelf Registration
In
November 2018, Rekor completed a public offering of its common
stock (the “Offering”) and issued and sold 4,125,000
shares of its common stock at a public offering price of $0.80 per
share.
The
offer and sale of all of the shares in the Offering was registered
under the Securities Act pursuant to a registration statement on
Form S-3 (File No. 333- 224423) (the “S-3 Registration
Statement”), which was declared effective by the SEC on April
30, 2018, a preliminary prospectus supplement to the S-3
Registration Statement filed with the SEC on October 25, 2018 (the
“Preliminary Prospectus Supplement”), a free writing
prospectus filed with the SEC on October 24, 2018 (the “Free
Writing Prospectus”), and a final prospectus supplement to
the S-3 Registration Statement filed with the SEC on October 31,
2018 (the “Final Prospectus Supplement” and the S-3
Registration Statement as supplemented by the Preliminary
Prospectus Supplement and the Final Prospectus Supplement, together
with the Free Writing Prospectus, the “Registration
Statement”). Under the Registration Statement, Rekor
registered 4,125,000 shares of common stock and 618,750 shares of
common stock issuable upon exercise of the underwriters’
option to purchase additional shares of common stock at a public
offering price of $0.80 per share for a registered aggregate
offering price of approximately $3,800,000. Following the sale of
the shares in connection with the closing of the Offering on
November 1, 2018, the Offering terminated. The Offering commenced
on October 24, 2018 and did not terminate until the sale of all of
the shares offered.
Rekor
received aggregate gross proceeds from the Offering of
approximately $3,300,000, and aggregate net proceeds of
approximately $2,800,000 after deducting underwriting discounts and
commissions of $200,000 and offering expenses of $300,000, for
total expenses, including underwriting discounts and commissions of
$500,000. No payments for such expenses were made directly or
indirectly to any of Rekor’s officers, directors, or their
associates, any persons owning 10% or more of any class of
Rekor’s equity securities or any of Rekor’s
affiliates.
There
has been no material change in Rekor’s planned use of the net
proceeds from the Offering as described in the Final Prospectus
Supplement.
At-the-Market Agreement
On
August 14, 2019, we entered into the Sales Agreement with B. Riley
FBR to create an at the market equity program under which we from
time to time may offer and sell shares of our 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 our common stock from time to time,
based upon our instructions. B. Riley FBR will be entitled to a
commission equal to 3.0% of the gross proceeds from each sale. We
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 consolidated balance sheets.
Sales
of our common stock under the Sales Agreement are to be issued and
sold pursuant to our 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. As of December 31, 2019,
based on settlement date, we sold 1,292,730 shares of common stock
at a weighted-average selling price of $2.53 per share in
accordance with the Sales Agreement. Net cash provided from the
Sales Agreement was $2,949,000 after paying $226,000 related to the
issuance costs stated above, as well as, 3.0% or $98,000 related to
cash commissions provided to B. Riley FBR. As of December 31, 2019,
$11,727,000 remained available for sale under the Sales
Agreement.
Use of Proceeds
We have
generated losses since our inception in February 2017 and have
relied on cash on hand, external bank lines of credit, short-term
borrowing arrangements, issuance of debt, the sale of a note, and
the sale of common stock to provide cash for operations. We
attribute losses to merger costs, financing costs, public company
corporate overhead, lower than expected revenue, and lower gross
profit of some of our subsidiaries. Our proceeds have been
primarily used for research and development and sales and marketing
expenses related to new product development and our strategic shift
to develop and promote capabilities to the OpenALPR software in
2019.
As a
“smaller reporting company” as defined by Item 10 of
Regulation S-K, the Company is not required to provide information
required by this Item.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following management’s discussion and analysis of our
financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements
and related notes included in this Annual Report and the historical
financial statements of Rekor Systems, Inc., and the related notes
thereto.
Overview
We are
a leader in the field of advanced vehicle identification and
management systems driven by leading edge advances in artificial
intelligence ("AI"). In development for over five years using AI
processes, including machine learning algorithms, our 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 higher accuracy rates, in addition to the ability
to identify the color, make and type of a vehicle and its 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. We currently provide products and services for
governmental organizations, for large and small businesses and for
individuals throughout the world. Customers are currently using our
products or services in over 70 countries, with offerings for smart
cities, public safety, security, transportation, parking and
logistics.
16
Currently, our
business activities include providing professional services in the
government contracting, aerospace and aviation industries. As part
of the development of a new line of products for the public safety
and security markets, we acquired industry leading vehicle
recognition software in March 2019. In connection with this
acquisition, we determined that our resources are best concentrated
on vehicle recognition products and services and have reorganized
and retooled our product development, business development and
administrative resources, with increasing emphasis on the
technology area. Our Board of Directors has also authorized
management to explore opportunities for the sale of our
professional services businesses. In keeping with the shift in
resources and strategic direction that this represents, we have
reorganized our financial reporting into two business segments: the
Technology Segment and the Professional Services Segment. These two
segments reflect our separate focus on and expectations for
technology products and services versus professional
services.
On
March 29, 2019, we announced that our Board of Directors approved
changing the Company’s name to Rekor Systems, Inc. This name
change was a result of our increased focus on technology products
and services, and aligns with the renaming of Brekford Traffic
Safety, Inc. to Rekor Recognition Systems, Inc. In connection with
this name change, we changed:
●
the ticker symbol
for our common stock on the Nasdaq Stock Market to
“REKR” and the CUSIP number for the common stock to
759419 104;
●
the ticker symbol
for our Series A Preferred Stock on the OTC Markets OTCQB exchange
to “REKRP” and the CUSIP number for our Series A
Preferred Stock to 759419 203; and
●
the ticker symbol
for warrants on the OTC Markets OTCQB exchange to
“REKRW” and the CUSIP number for the warrants to 759419
112.
Technology Segment. The
Technology Segment operations are conducted by our wholly owned
subsidiary, Rekor Recognition Systems, Inc. (“Rekor
Recognition”). Formerly Brekford Traffic Safety, Inc., Rekor
Recognition has been active in the public safety industry since
1996. In connection with the development of several new public
safety products, we determined to acquire substantially all the
assets of OpenALPR Technology, Inc. The OpenALPR Technology
Acquisition, completed in March 2019, transferred vehicle
recognition software and associated licenses and proprietary rights
to OpenALPR Software Solutions, LLC (“OpenALPR”), a new
wholly owned subsidiary of Rekor Recognition, as we have been
focused on developing a line of products to transform the
fundamental concepts of vehicle recognition. OpenALPR’s
vehicle recognition platform, already operating in more than 12,000
cameras in 70 countries worldwide, has laid the groundwork for the
expansion of our product line, enabling multiple deployment
mechanisms.
Since
the OpenALPR Technology Acquisition, we have expanded our vehicle
recognition product and service lines into a much broader range of
customer segments, starting with public safety. We shifted from a
perpetual licensing model to a subscription-based model, rebranded
the software suites as “Watchman” and
“Car-Check” and released several packaged hardware
solutions with each of these vehicle recognition engines. By the
end of 2019, we had a portfolio of more than 10 products,
permitting us to offer full-scale vehicle recognition services for
nearly any large or small public agency, commercial or residential
setting.
Our
vehicle recognition software currently has the capability to
analyze multi-spectral images and/or video streams produced by
nearly any Internet Protocol security camera and concurrently
extract license plate data by state from more than 70 countries, as
well as provide the vehicle’s make, color, type, and
direction of travel. When combined with speed optimized code,
parallel processing capability and best-in-class accessories, such
as cameras and communications modules, Watchman software delivers
vehicle recognition solutions at extremely high-capture rates and
with a high degree of accuracy. Additionally, our multi-spectral
capabilities enable reading of license plates and vehicle
characteristics in unusually difficult conditions (e.g. low
lighting, poor weather, extreme camera viewing angles, and
obstructions).
Prior
to the development of our vehicle identification software, highly
accurate results were not available using a typical Internet
Protocol camera. We believe that the ability to use less expensive
hardware will change the dynamics of the existing public safety
market, enabling the creation of increasingly robust networks with
cameras at more locations. In addition, we expect the cost
advantages and high degree of accuracy to create competitive
advantages compared to electronic tolling systems and logistics
operations that currently rely on RFID systems. We also believe our
lower costs, our distance and field of view capabilities and the
ability to capture additional vehicle information, such as vehicle
direction and color, make and type of vehicle, have opened
opportunities in other market segments such as parking operations,
school safety, retail customer loyalty programs and particularly
smart cities and smart roadways. Smart roadway systems, sometimes
referred to as “smart transport” or “intelligent
transport systems” (“ITS”), inclusive of parking
management and guidance, passenger information, and traffic
management systems, can optimize the movement of vehicles to make
travel safer and more efficient. These technologies are expected to
enable users to be more coordinated, better informed, and make
safer and smarter use of transport networks.
Our
vision is “AI with a Purpose.” We intend to evolve
beyond vehicle recognition for public safety markets into the
recognition and analysis of vehicles activities (inclusive of
motion and behaviors) to identify unsafe situations (e.g. wrong way
driving, pedestrian on roadway, etc.), optimize traffic flows, and
develop numerous other data driven applications centered around
vehicle knowledge.
Professional Services Segment.
We provide professional services and staffing solutions to the
government contracting and the aerospace and aviation industries.
The Professional Services Segment includes AOC Key Solutions, Inc.
(“AOC Key Solutions”); Global Technical Services, Inc.
(“GTS”); Global Contract Professionals, Inc.
(“GCP”, and together with GTS, “Global”);
and Firestorm Solutions, LLC (Firestorm Solutions”) and
Firestorm Franchising, LLC (“Firestorm Franchising” and
together with Firestorm Solutions, “Firestorm”).
Currently, as a leading provider of support services to the federal
government contracting market, AOC Key Solutions’ primary
clients are companies that serve the federal government. However,
in support of our Technology Segment, we have recently been active
in the state and local government contracting market. We provide
professional services that offer scalable and compliant outsourced
support for our government contractor clients. We help these
clients to win government contracts so that they capture new
businesses. Global provides specialized staffing services,
primarily in the aerospace and aviation industries. In connection
with our internal reorganization, we are actively engaged in
evaluating, reconfiguring, selling, and discontinuing various
business assets or entities in the Professional Services Segment.
As part of this process, we have discontinued the operations of
Firestorm Franchising and have determined to sell Global and AOC
Key Solutions.
As part
of our strategic shift in fiscal year 2019, we are focusing on the
Technology Segment and further developing our footprint across
different industries by further developing our AI based
technologies and distributing and licensing products and services
with advanced vehicle recognition features. Current customers are
using these products and services for: a) toll collection and
traffic analysis in the transportation market, b) school and
traffic safety, parking and other law enforcement applications in
the public safety market, c) perimeter management and surveillance
in the private security market, d) operations and retail customer
loyalty programs and e) vehicle tracking, perimeter security and
warehouse operations in the logistics market.
As a
result of our strategic shift, during the third quarter of 2019, we
began to separately report the results of Global and considered
including substantially all of the assets and liabilities
comprising Global as held for sale operations. We are also
reporting the operating results and cash flows of Global as held
for sale operations, and thus they have been excluded from
continuing operations and segment results for all periods
presented. Prior to the third quarter of 2019, the operating
results for Global were presented in the Professional Services
segment. The assets and liabilities of Global are presented as
current and long-term assets and liabilities of businesses held for
sale in the condensed consolidated balance sheets. Since we adopted
a formal plan to sell Global in September 2019, we have received
several non-binding offers and indications of interest for the
purchase of Global which we are in the process of evaluating. In
March of 2020, we also received a proposal from the current
management of AOC Key Solutions to purchase that subsidiary, which
we are also currently evaluating. No assurance can be given as to
the certainty of the entry into, or the subsequent closing any of
these, proposed transactions.
General
The
information provided in this discussion and analysis of
Rekor’s financial condition and results of operations covers
the years ended December 31, 2019 and 2018. During 2019 the Company
completed the OpenALPR Technology Acquisition as more fully
described below.
Our
financial results are impacted principally by the demand by clients
for our products and services, the degree to which full-time staff
can be kept occupied in revenue-generating activities and the
success of our sales team in generating client
engagements.
Unexpected
changes in the demand for our products and services can result in
significant variations in revenues, and present a challenge to
optimal hiring, staffing and use of consultants. The volume of work
performed can vary from period to period.
The
statements of operations and other information provided in this
discussion and analysis of the financial condition and results of
operations of Rekor should be read in conjunction with the Rekor
audited consolidated financial statements and the historical
financial statements of Rekor Recognition, KeyStone, Firestorm and
Global, and the related notes thereto which were filed with the SEC
by either KeyStone or Rekor.
Acquisitions
On
March 12, 2019, we completed the OpenALPR Technology
Acquisition.
On June
1, 2019, we sold all the interest we had acquired in Secure
Education Consultants, LLC, which we acquired on January 1, 2018.
At that time, we also discontinued operations of BC Management. In
connection with these actions we recognized a write-off of
intangible assets of $242,000. In addition, in June 2019, we
discontinued the operations of Firestorm Franchising, resulting in
a write-off of an additional $1,310,000 in intangible assets
related to Firestorm.
17
Opportunities, Trends and Uncertainties
We look
to identify the various trends, market cycles, uncertainties and
other factors that may provide us with opportunities and present
challenges that impact our operations and financial condition from
time to time. Although there are many that we may not or cannot
foresee, we believe that our results of operations and financial
condition for the foreseeable future will be primarily affected by
the following:
●
AI for the Roadway – We believe
that the application of AI to the analysis roadway condition will
significantly affect vehicular travel in the future by assisting in
the intelligent optimization of traffic flows and the
identification of anomalous and unsafe movements – e.g. wrong
way, stopped vehicle, pedestrian on the roadway. Marketers and
drive-thru retailers with loyalty programs can benefit from the
rapid identification of existing and potential customers and
streamlining vehicular flow.
●
Graphic Processing Unit (“GPU”)
Improvements – We expect our business to benefit as a
result of more powerful and affordable GPU hardware that has
recently been developed. These GPUs are more efficient for image
processing because their highly parallel structure makes them more
efficient than general-purpose central procession units
(“CPUs”) for algorithms that process large blocks of
data, such as those produced by video streams. GPUs also provide
superior memory bandwidth and efficiencies as compared to their CPU
counterparts. The most recent versions of our software have been
designed to use the increased GPU speeds to accelerate image
recognitions. The GPU market is predicted to grow as a result of a
surge in adoption of the Internet of Things (“IoT”) by
the industrial and automotive sectors. As GPU manufacturers
increase production volume, we hope to benefit from the reduced
cost to manufacture the hardware included in our products or
available to others using our services.
●
Adaptability of the Current ALPR Market
– We have made a considerable investment in our advanced
vehicle recognition systems because we believe their increased
accuracy and affordability will allow them to compete effectively
with existing providers. Based on published benchmarks, our
software currently outperforms competitors in almost every metric.
However, large users of existing ALPR Technology, such as toll
roads, have long-term contracts with service providers that have
made considerable investments in their existing technologies and
may not consider the improvements in accuracy or reductions in cost
sufficient to justify abandoning their current systems in the near
future. In addition, existing providers may be able to reduce the
cost of their current offerings or elect to reduce prices and
accept reduced profitability while working to develop or secure
their own advanced vehicle recognition systems. As a result, our
success in establishing a major position in these markets will
depend on being able to effectively communicate our presence,
develop strong customer relationships, and maintain leadership in
providing the capabilities that customers want. As with any large
market, this will require considerable effort and
resources.
●
New and Expanded Uses for Vehicle Recognition
Systems – We believe that reductions in the cost of
vehicle recognition products and services will significantly
broaden the market for these systems. We currently serve a number
of users who could not afford the cost or adapt to, the
restrictions of conventional vehicle recognition systems. These
include smaller municipalities, homeowners’ associations, and
organizations finding new applications such as innovative customer
loyalty programs. We have seen and responded to an increase in the
number of smaller jurisdictions and municipalities that are testing
ALPR systems or that issued requests for proposals to install a
network of ALPR cameras. We also expect the availability of faster,
higher accuracy, lower cost systems to dramatically increase the
ability of crowded urban areas to manage traffic congestion and
implement smart city programs. We do not currently have the
resources to develop all of these entirely new markets by
ourselves, so we will need to rely on affiliations with other
partners, who may or may not realize the significant benefits that
we envision from these new uses.
●
Expansion of Automated Enforcement of Motor
Vehicle Laws – We believe that future legislation will
allow for auto enforcement of motor vehicle regulations to be
expanded as the types of violations authorized for automated
enforcement increase and experience provides localities with a
better understanding of the circumstances where automated
enforcement is beneficial. For example, there are now 17 states
that allow for the automatic enforcement of violations by vehicles
that pass a school bus displaying its flashing red lights and a
stop sign. In addition, due to high rates of fatalities and
injuries to law enforcement and other emergency response crews on
roadsides, several states are considering authorizing automated
enforcement of violations where motorists fail to slow down and/or
move over for emergency responders and law enforcement vehicles at
the side of the road. Legislative implementation is a deliberative
and necessarily time-consuming process. However, as states expand
auto enforcement, the market for our products and services should
increase and broaden in the public safety market
●
Increasing Smart City Market –
Nokia has approved the use of our OpenALPR software for its smart
city offerings. According to a research report “Smart Cities
Market by Smart Transportation (Type, Solutions and Services),
Smart Buildings (Type, Solutions and Services), Smart Utilities
(Type, Solutions and Services), Smart Citizen Services, and Region
- Global Forecast to 2023”), published by Markets and
Markets, the global market for smart city technology is expected to
grow from $308.0 billion in 2018 to $717.2 billion by 2023, at a
compound annual growth rate of 18.4% during the forecast period. In
the smart city’s market, real-time vehicle recognition
technologies are widely used for traffic management and public
safety. As a result, we expect to benefit from the growth of this
market.
●
Accelerated Business Development and
Marketing – Our ability to compete in a large,
competitive and rapidly evolving industry will require us to
achieve and maintain a leadership position. As a result, we have
accelerated our business development and marketing activities
within the Technology Segment to increase awareness and market
adoption of our new technology and products within the market.
However, the speed at which these markets grow to the degree of
which our products and services are adopted is
uncertain.
●
Ability to Scale and Balance Production to
Meet Demand – While we have arranged manufacturing
capabilities for our products, we are unproven in our ability to
deliver large volumes of products at our high-quality
standards.
●
Sales Cycle – As many of our
products are new to market, their acceptance and integration into
the intended markets is uncertain and we do not have sufficient
historical experience to accurately predict revenues as a result of
their implementation.
●
U.S. Government Spending – In
July 2019, the White House and bi-partisan congressional
negotiators announced they had reached agreement on a two-year
federal budget. The proposed plan would raise federal spending by
$320 billion over existing caps previously imposed by the Budget
Control Act of 2011. Absent a new agreement, earlier legislation
would have automatically triggered deep spending cuts next year
under a process known as sequestration. Instead, the agreement
allowed the government to continue to borrow and increased spending
on domestic and military programs, partially funded by $77.4
billion in spending cuts from other budget categories. On August 2,
2019, the President signed the two-year budget agreement which
wards off automatic spending cuts and suspends the debt ceiling
through July 2021. Agreement on the July spending plan is intended
to result in more funding consistency and may reduce the
possibility of another government shutdown until after the 2020
elections. Many contractors have geared up for the anticipated
increases in spending. We believe this agreement will reduce
government spending seasonality and this has begun to lead to a
stronger fourth quarter in 2019 and a more robust first quarter in
2020.
We
believe that recent developments in computing capabilities, such as
GPU advances, and new techniques of analysis, sometimes referred to
broadly as AI, have broadened the market for vehicle recognition
technology and created new opportunities in existing markets. With
our new line of products and services, our Technology Segment is
working to actively exploit these opportunities. With the
anticipated continuation of a stable economic outlook for the
government contracting, we believe that the outlook for the
operations of our subsidiaries in the Professional Services Segment
remains positive.
Considerable
uncertainty currently exists concerning the extent of spread,
efficaciousness of countermeasures and severity of the economic
impact of the Covid19 corona virus. This has had, and may continue
to have, a severe impact on the financial markets that we depend on
to fund our operations. If these economic and market conditions
continue for an extended period of time, it could have a
significant impact on our financial performance and ability to
execute our business strategy. Other than as described above and
elsewhere in this Annual Report on Form 10-K, we are not aware of
any trends, events or uncertainties that are likely to have a
material effect on our financial condition.
NeoSystems Merger
We
filed a Registration Statement on Form S-1 with the SEC on January
25, 2018. A significant portion of the proceeds from the proposed
offering were to be used for the planned acquisition of NeoSystems
LLC (“NeoSystems”) under a merger agreement. On March
7, 2018, we received notice of termination of the merger agreement
and subsequently paid NeoSystems $225,000 in required payments,
which was recorded as a selling, general and administrative expense
in the year ended December 31, 2018. No securities were sold in
connection with the offering contemplated by the Registration
Statement on Form S-1 and it was withdrawn on November 26,
2018.
Sale of Note
On
February 13, 2018, Rekor Recognition sold a note receivable from
Global Public Safety, LLC (“Global Public Safety”),
which it had received as part of the purchase price consideration
in connection with the sale of its legacy upfitting business prior
to its acquisition by Rekor as a result of the merger with KeyStone
in 2017. As of December 31, 2017, based on the decision to sell the
note receivable to an unrelated third party, we reclassified the
note receivable balance to a current asset and wrote down $450,000
as other expense, thus reducing the balance to $1,475,000. Rekor
Recognition continues to retain a 19.9% interest in Global Public
Safety.
Promissory Notes
2018 Promissory Note
On
April 3, 2018, we entered into a transaction pursuant to which an
institutional investor (the “Lender”) loaned $2,000,000
to us (the “2018 Promissory Note”). The 2018 Promissory
Note is discussed in further detail in this Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations under the heading “Liquidity and Capital
Resources.”
18
2019 Promissory Note
On
March 12, 2019, we entered into a note purchase agreement pursuant
to which investors (the “2019 Lenders”) loaned us
$20,000,000 in exchange for promissory notes (the “2019
Promissory Notes”) and we issued to the 2019 Lenders warrants
to purchase 2,500,000 shares of our common stock (the “March
2019 Warrants”). The 2019 Lenders included the lender for the
2018 Note, a senior company executive and another entity exchanging
2019 Promissory Notes for related party company indebtedness. The
2019 Promissory Note and March 2019 Warrants are discussed in
further detail this in Management’s Discussion and Analysis
of Financial Conditions and Results of Operations under
“Liquidity and Capital Resources.”
Other
than as discussed above and elsewhere in this Annual Report on Form
10-K, we are not aware of any trends, events or uncertainties that
are likely to have a material effect on our financial
condition.
Public Offering of Common Stock
On
November 1, 2018, we issued 4,125,000 shares of common stock
through an underwritten public offering at a public offering price
of $0.80 per share. Net proceeds were approximately $2.8 million.
In addition, we granted underwriters a 45-day option to purchase up
to 618,750 additional shares of common stock to cover
over-allotment, if any. The underwriters did not exercise this
option and the options were cancelled. As part of this transaction,
we also issued to the underwriter warrants to purchase an aggregate
of 206,250 shares of common stock, exercisable over a period of
five years, at an exercise price of $1.00 per share. The
underwriter warrants had a value of approximately $0.2 million at
issuance and are exercisable commencing April 27, 2019 and expire
on October 29, 2023. As of December 31, 2019, the
underwriter’s had 7,567 unexercised warrants which have an
immaterial value.
At-the-Market Agreement
On
August 14, 2019, we entered into the Sales Agreement with B. Riley
FBR to create an at the market equity program under which we from
time to time may offer and sell shares of our 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 our common stock from time to time,
based upon our instructions. B. Riley FBR is entitled to a
commission equal to 3.0% of the gross proceeds from each sale. We
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 consolidated balance sheets.
Sales
of our common stock under the Sales Agreement are to be issued and
sold pursuant to our 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. As of December 31, 2019,
based on settlement date, we sold 1,292,730 shares of common stock
at a weighted-average selling price of $2.53 per share in
accordance with the Sales Agreement. Net cash provided from the
Sales Agreement was $2,949,000 after paying $226,000 related to the
issuance costs stated above, as well as 3.0% or $98,000 related to
cash commissions provided to B. Riley FBR. As of December 31, 2019,
$11,727,000 remained available for sale under the Sales
Agreement.
Components of Revenues and Expenses
Revenues
We generate our revenues substantially from two sources: (1)
licensing and subscription revenues for software and related
products and services and (2) professional services to
clients.
Revenue is recognized upon transfer of control of promised products
and services to our customers, in an amount that reflects the
consideration we expect to receive in exchange for those products
and services. If the consideration promised in the contract
includes a variable amount, for example maintenance fees, we
include an estimate of the amount we expect to receive in the total
transaction price, if it is probable that a significant reversal of
cumulative revenue recognized will not occur.
We determine 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
subscription revenues from software licenses, technology products
and services are comprised of fees that provide customers with
access to the software licenses and related support and updates
during the term of the arrangement. Revenue is generally recognized
ratably over the contract term. During the second quarter of 2019,
we changed our method of selling in the Technology Segment from
perpetual software licenses to monthly service subscriptions. This
change is expected to impact our revenue in the short term as we
will now recognize revenue ratably over the contract period rather
than at a point in time when the customer takes possession of the
license. The amount of contract revenue received over the long term
is not expected to decline. Our subscription services
arrangements are non-cancelable and do not contain refund-type
provisions.
The professional services contracts recognize
revenue based on a time and materials or
fixed fees basis. These revenues are recognized as the services are
rendered for time and materials contracts, on a proportional
performance basis for fixed price contracts, or ratably over the
contact term for fixed price contracts with subscription
services.
Costs of Revenues
Direct
costs of revenues consist primarily of that portion of technical
and non-technical salaries and wages and payroll-related costs
incurred in connection with revenue generating activities. Direct
costs of revenues also include production expenses, sub-consultant
services, and other expenses that are incurred in connection with
our revenue generating activities. Direct costs of revenues exclude
that portion of technical and non-technical salaries and wages
related to marketing efforts, vacations, holidays, and other time
not spent directly generating fees under existing contracts. Such
costs are included in operating expenses. We expense direct costs
of revenues when incurred.
Operating Expenses
Our
operating expenses consist of general and administrative expenses,
sales and marketing and research and development. Personnel costs
are the most significant component of operating expenses and
consist of salaries, benefits, bonuses, payroll taxes and
stock-based compensation expense. Operating expenses also include
depreciation, amortization and impairment of assets.
General and Administrative
General
and administrative expense consists of personnel costs for our
executive, finance, legal, human resources and administrative
departments. Additional expenses include travel and entertainment,
professional fees and insurance.
We
expect our general and administrative expense to continue to
increase in absolute dollars for the foreseeable future due to
additional costs associated with accounting, compliance, insurance
and investor relations as a public company. However, we expect our
general and administrative expense to decrease as a percentage of
our revenue over the long term, although our general and
administrative expense may fluctuate as a percentage of our revenue
from period to period due to the timing and extent of these
expenses.
Sales and Marketing
Sales
and marketing expenses consist of personnel costs, marketing
programs, travel and entertainment associated with sales and
marketing personnel, expenses for conferences and trade shows. We
intend to make significant investments in our sales and marketing
expenses to grow revenue, further penetrate the market and expand
our customer base. With the release of our Partners Program we
expect our sales and marketing expense to increase in the
future.
19
Research and Development
Research
and development expenses consists of personnel costs, software used
to develop our products and consulting and professional fees for
third-party development resources. Our research and development
expenses support our efforts to continue to add capabilities to our
existing products and the strategic shift to develop additional
capabilities and improve our AI software.
We
expect our research and development expense to continue to increase
in absolute dollars for the foreseeable future as we continue to
invest in research and development efforts to enhance the
functionality of our AI software. However, we expect our research
and development expense to decrease as a percentage of our revenue
over the long term, although our research and development expense
may fluctuate as a percentage of our revenue from period to period
due to the timing and extent of these expenses.
Other Income (Expense)
Other
income (expense) net consists primarily of interest expense in
connection with our debt arrangements, costs associated with the
extinguishment of our debt arrangements, gains and losses on the
sale of fixed assets and interest income earned on cash and cash
equivalents and short-term investments.
Income Tax Provision
Income
tax provision consists primarily of income taxes in certain
domestic jurisdictions in which we conduct business. We have
recorded deferred tax assets for which a full valuation allowance
has been provided, including net operating loss carryforwards and
tax credits. We expect to maintain this full valuation allowance
for the foreseeable future as it is more likely than not that some
or all of those deferred tax assets may not be realized based on
our history of losses.
Results of Operations
The
results and the analysis of operations below is solely related to
continuing operations and do not include results of operations of
our subsidiary, Global, which is being held for sale. The following
selected consolidated financial data should be read in conjunction
with the foregoing information contained in this Item 7 and
with the consolidated financial statements and the notes thereto in
Item 8 of Part II, “Financial Statements and
Supplementary Data.” Only historical operating results are
presented below. Historical results are not necessarily indicative
of future results.
|
|
Year
ended December 31,
|
|
|
|
2019
|
2018
|
|
Revenue:
|
(Dollars
in thousands)
|
|
|
Technology
|
$5,469
|
$3,522
|
|
Professional
Services
|
13,851
|
16,532
|
|
Total
revenue
|
19,320
|
20,054
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
Technology
|
1,652
|
1,642
|
|
Professional
Services
|
7,406
|
8,336
|
|
Total
cost of revenue
|
9,058
|
9,978
|
|
|
|
|
|
Gross
profit:
|
|
|
|
Technology
|
3,817
|
1,880
|
|
Professional
Services
|
6,445
|
8,196
|
|
Gross
profit
|
10,262
|
10,076
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
14,151
|
13,310
|
|
Selling
and marketing expenses
|
2,222
|
1,758
|
|
Research
and development expenses
|
1,429
|
131
|
|
Impairment
of intangibles
|
1,549
|
-
|
|
Operating
expenses
|
19,351
|
15,199
|
|
|
|
|
|
Loss
from operations
|
(9,089)
|
(5,123)
|
|
Other
expense:
|
|
|
|
Loss
on extinguishment of debt
|
(1,158)
|
-
|
|
Interest
expense
|
(4,098)
|
(492)
|
|
Other
expense
|
(20)
|
(65)
|
|
Total
other expense
|
(5,276)
|
(557)
|
|
Loss
before income taxes
|
(14,365)
|
(5,680)
|
|
Income
tax provision
|
(47)
|
(29)
|
|
Net
loss from continuing operations
|
$(14,412)
|
$(5,709)
|
Comparison of the Years Ended December 31, 2019 and
2018
Restructuring
As part
of our shift in strategic direction in 2019, we are focusing on our
Technology Segment and management has been evaluating the
disposition of the subsidiaries in our Professional Services
Segment: AOC Key Solutions, Global and Firestorm. As part of
evaluating the future of Firestorm, management decided to sell
Secure Education and transfer the BC Management line of business to
its founder in the second quarter of 2019. In addition, management
determined to discontinue the operation of Firestorm Franchising,
LLC, a division of Firestorm, due to non-performance by
franchisees. As further discussed under Item 3, “Legal
Proceedings”, above, we have commenced an action to rescind
the original purchase of Firestorm. As a result of these changes,
the Professional Services Segment revenue was expected to decrease
compared to the corresponding periods in 2018.
Also,
in June 2019, our Board of Directors authorized the sale of Global.
As a result, management has been negotiating with potential buyers
and has determined that Global should be classified as held for
sale. Accordingly, results of operations for Global have not been
included in the comparisons shown below for either 2018 or 2019.
The results for our Professional Services Segment are for AOC Key
Solutions and Firestorm. In January 2020, the Board of Directors
authorized the sale of AOC Key Solutions. Therefore, beginning in
2020, it is expected that all Professional Services operations will
be classified as held for sale.
Revenue
|
|
Year
ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2019
|
2018
|
$
|
%
|
|
Revenue:
|
|
|
|
|
|
Technology
|
$5,469
|
$3,522
|
$1,947
|
55%
|
|
Professional
Services
|
13,851
|
16,532
|
(2,681)
|
-16%
|
|
Total
revenue from continuing operations
|
$19,320
|
$20,054
|
$(734)
|
-4%
|
The increase in revenue
in the Technology Segment was primarily attributable to the
acquisition of OpenALPR in March 2019. During the year ended
December 31, 2019, total revenue attributable to software and
licensing was approximately $2,055,000 compared to no revenue
recognized in the corresponding period in 2018. For additional
information concerning pro-forma revenues attributable to software
and licensing see “Technology Revenues” below in this
section and for information concerning pro-forma revenues
attributable to software and licensing during 2018, see Note 2 to
the financial statements included in this report.
Revenue
related to our automated traffic safety enforcement remained fairly
consistent year over year.
The decrease in revenues in the Professional Services Segment was
primarily attributable to the winding down of Firestorm operations.
During the year ended December 31, 2019, revenue related to
Firestorm decreased by $2,324,000 from $3,330,000 for the year
ended December 31, 2018 to $1,006,000 for the year ended December
31, 2019. The additional decrease in revenue is attributable to a
decrease in revenue at AOC Key Solutions related mainly to the
federal government furlough during the first quarter of
2019.
20
Cost of Revenue, Gross Profit and Gross Margin
|
|
Year
ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2019
|
2018
|
$ or %
Points
|
%
|
|
Cost
of revenue:
|
|
|
|
|
|
Technology
|
$1,652
|
$1,642
|
$10
|
1%
|
|
Professional
Services
|
7,406
|
8,336
|
(930)
|
-11%
|
|
Total
cost of revenue
|
9,058
|
9,978
|
(920)
|
-9%
|
|
Gross
profit:
|
|
|
|
|
|
Technology
|
3,817
|
1,880
|
1,937
|
103%
|
|
Professional
Services
|
6,445
|
8,196
|
(1,751)
|
-21%
|
|
Gross
profit
|
$10,262
|
$10,076
|
$186
|
2%
|
|
Gross
margin:
|
|
|
|
|
|
Technology
|
70%
|
53%
|
17%
|
32%
|
|
Professional
Services
|
47%
|
50%
|
-3%
|
-6%
|
|
Gross
margin
|
53%
|
50%
|
3%
|
6%
|
The increase in gross
profit in the Technology Segment was primarily attributable to the
inclusion of OpenALPR since its acquisition in March 2019.
We realize
higher margins from the revenues associated with software and
licensing since there are less labor costs
incurred.
The decrease in the
cost of revenues and gross profit in the Professional Services
Segment was primarily related to the winding down of
Firestorm lines of business and also reflected a decrease in direct
billable labor as a result of the federal government furlough.
During the year ended December 31, 2019, the cost of revenue and
gross profit associated with Firestorm decreased $758,000 and
$1,567,000, respectively.
Operating Expenses
|
|
Year ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2019
|
2018
|
$
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
General
and administrative expenses
|
$14,151
|
$13,310
|
$841
|
6%
|
|
Selling
and marketing expenses
|
2,222
|
1,758
|
464
|
26%
|
|
Research
and development expenses
|
1,429
|
131
|
1,298
|
991%
|
|
Impairment
of intangibles
|
1,549
|
-
|
1,549
|
-
|
|
Operating
expenses
|
$19,351
|
$15,199
|
$4,152
|
27%
|
General and Administrative Expenses
During the year ended December 31, 2019, amortization expenses
related to intangible assets increased by $570,000 compared to the
year ended December 31, 2018 due to the OpenALPR Technology
Acquisition. The majority of the remaining increase to general and
administrative expenses is attributable mainly to the increased
staffing to support the Company’s growth plan in the
Technology Segment.
Selling and Marketing Expenses
The increase in the
selling and marketing expenses during the year is attributable
mainly to the increased marketing efforts to promote our products
and services including trade shows, digital marketing, and other
sales and marketing activities for developing our Technology
Segment and increase staffing to support the Company’s growth
plan. The overall increase in
selling and marketing expenses was partially offset by a decrease
in selling and marketing expenses related to the Professional
Services Segment due to the realignment of Firestorm in the current
year.
Research and Development Expense
The overall increase in research and development expenses is
primarily attributable to the strategic shift to develop new
products and additional software capabilities in 2019, as a result
of our increased focus on the Technology Segment. The increase in
our research and development expenses is mainly attributable to an
increase in headcount and hours associated with the research and
development activities.
Impairment of Intangibles
In June 2019, we discontinued the operations of BC Management and
terminated agreements of all franchisees of Firestorm Franchising,
LLC. As a result, we reevaluated the intangible assets related to
these subsidiaries and recognized $1,549,000 in impairment charges
related to intangible assets. The loss is presented as impairment
of intangibles on the consolidated statement of
operations.
Other Expense
|
|
Year
ended December 31,
|
Change
|
||
|
(dollars
in thousands)
|
2019
|
2018
|
$
|
%
|
|
Other
expense:
|
|
|
|
|
|
Loss
on extinguishment of debt
|
$(1,158)
|
$-
|
$(1,158)
|
-
|
|
Interest
expense
|
(4,098)
|
(492)
|
(3,606)
|
-733%
|
|
Other
expense
|
(20)
|
(65)
|
45
|
69%
|
|
Total
other expense
|
$(5,276)
|
$(557)
|
$(4,719)
|
847%
|
The increase in other
expenses is primarily attributable to an increase in interest
expense related to the 2019 Promissory Note. Additionally, the
increase in other expenses was attributable to costs associated
with the extinguishment of debt of $1,158,000 during the year ended
December 31, 2019.
Income Tax Expense
The income tax provision for the year ended December 31, 2019, was
$47,000, is due primarily to the state taxes, as compared to tax
expense of $29,000 for the year ended December 31, 2018. There is
also approximately $10,000 of deferred taxes related to the
goodwill recognized related to the OpenALPR acquisition. We
established a valuation allowance against deferred tax assets in
the fourth quarter of 2017 and have continued to maintain a full
valuation allowance through the year ended December 31,
2019.
21
Non-GAAP Measures
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes,
depreciation and amortization. We calculate Adjusted EBITDA as net
loss before interest, taxes, depreciation and amortization,
adjusted for (i) impairment of intangible assets, (ii) loss on
extinguishment of debt, (iii) stock-based compensation, (iv) losses
on sales of subsidiaries, and (v) other unusual or non-recurring
items. EBITDA and Adjusted EBITDA are not measurements of financial
performance or liquidity under accounting principles generally
accepted in the U.S. (U.S. GAAP) and should not be considered as an
alternative to net earnings or cash flow from operating activities
as indicators of our operating performance or as a measure of
liquidity or any other measures of performance derived in
accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented
because we believe they are frequently used by securities analysts,
investors and other interested parties in the evaluation of a
company’s ability to service and/or incur debt. However,
other companies in our industry may calculate EBITDA and Adjusted
EBITDA differently than we do.
The following table sets forth the components of the EBITDA and
Adjusted EBITDA for the periods included (dollars in
thousands):
|
|
Year ended December 31,
|
|
|
|
2019
|
2018
|
|
Net
loss
|
$(14,412)
|
$(5,709)
|
|
Income
taxes
|
47
|
29
|
|
Interest
|
4,098
|
495
|
|
Depreciation
and amortization
|
1,867
|
1,047
|
|
EBITDA
|
$(8,400)
|
$(4,138)
|
|
|
|
|
|
Impairment
of intangible assets
|
$1,549
|
$-
|
|
Loss
on extinguishment of debt
|
1,158
|
-
|
|
Share-based
compensation
|
446
|
465
|
|
Restructuring
charges
|
333
|
-
|
|
Loss
on sale of Secure Education
|
3
|
-
|
|
Adjusted
EBITDA
|
$(4,911)
|
$(3,673)
|
The
following activities have impacted our Adjusted EBITDA from
continuing operations as of December 31, 2019. In March 2019, we
recorded costs in connection with the extinguishment of the
$2,000,000 2018 Promissory Note of $1,113,000. In July 2019, we
recorded costs in connection with the extinguishment of our line of
credit with Wells Fargo of $45,000. In June we initiated
restructuring and transition activities to improve operational
efficiency, reduce costs and better position us to drive future
revenue growth. In connection with these activities, we recorded
$333,000 of charges related to these restructuring activities.
Additionally, in June 2019, we discontinued the operations of BC
Management and terminated agreements of all franchisees of
Firestorm Franchising, LLC. As a result, we re-evaluated the
intangible assets related to these subsidiaries and recognized
$1,549,000 in impairment charges related to intangible
assets.
Technology Revenues
Due to
the strategic shift to focus more on our Technology Segment, we
have used additional metrics to measure the revenue growth
associated with our Technology Segment. We calculated our Pro-forma
Technology Segment revenue to include the net sales of OpenALPR
Technology, Inc., as if the OpenALPR Technology Acquisition
occurred as of December 31, 2017. This amount is presented as we
believe comparative segment revenue growth is used by securities analysts,
investors and other interested parties in the evaluation of a
company’s ability to grow.
The
following table sets forth the components of the per-forma
Technology Segment revenue (without the inclusion of OpenALPR
revenue prior to the OpenALPR Technology Acquisition) and pro-forma
Technology Segment revenue (with the inclusion of OpenALPR revenue
prior to the OpenALPR Technology Acquisition) for the periods
indicated (dollars in thousands):
|
|
Year
ended December 31,
|
Change
|
||
|
|
2019
|
2018
|
$
|
%
|
|
Per-forma
Technology Segment Revenue
|
|
|
|
|
|
Automated
traffic safety enforcement
|
$3,403
|
$3,413
|
$(10)
|
0%
|
|
Licensing
and subscription revenue
|
2,066
|
-
|
2,066
|
100%
|
|
Other
|
-
|
109
|
(109)
|
-100%
|
|
Per-forma
Technology Segment Revenue
|
$5,469
|
$3,522
|
$1,947
|
55%
|
|
|
|
|
|
|
|
Pro-forma
Technology Segment Revenue
|
|
|
|
|
|
Automated
traffic safety enforcement
|
$3,403
|
$3,413
|
$(10)
|
0%
|
|
Licensing
and subscription revenue
|
3,035
|
1,713
|
1,322
|
78%
|
|
Other
|
-
|
109
|
(109)
|
-100%
|
|
Pro-forma
Technology Segment Revenue
|
$6,438
|
$5,235
|
$1,203
|
23.0%
|
The following activities have impacted our
Technology Segment revenues as of December 31, 2019. During
the second quarter of 2019, we began to implement a change in our
sales model from perpetual software licenses to periodic service
subscriptions. Under the perpetual license model, we generally
received full payment for a license when the license was issued and
we would receive significantly lower periodic payments subsequently
for maintenance of the license. Under the perpetual license model,
all the revenue associated with a software license was recognized
upon the issuance of the license, which was typically
contemporaneous with cash payment. Under
our new subscription model, the revenue is now recognized ratably
against a contract liability for the paid-for period of the
software subscription. Subscriptions are typically for 36 or 60
months, while payments may be made monthly, yearly or entirely in
advance. This change to the model has resulted in a
$1,317,000 increase in our contract liabilities balance from
$207,000 as of December 31, 2018 to $1,524,000 as of December 31,
2019.
Lease Obligations
At December 31, 2019, we leased building space at the
following locations in the U.S.:
●
Columbia, Maryland – The corporate headquarters
●
Linthicum, Maryland – Storage facility for inventory related
to our technology hardware
●
Chantilly, Virginia – The corporate office of AOC Key
Solution
●
Fort Worth, Texas – The corporate office of Global
entities
We believe our facilities are in good condition and adequate for
their current use. We may improve, replace or reduce facilities as
considered appropriate to meet the needs of our
operations.
22
Liquidity and Capital Resources
The net
cash flows from operating, investing and financing activities for
the periods below were as follows (dollars in
thousands):
|
|
For the
Year Ended December 31,
|
|||
|
|
2019
|
2018
|
Change
|
|
|
(dollars in thousands)
|
|
|
$
|
%
|
|
Net cash used in operating
activities-continuing operations
|
$(11,767)
|
$(3,076)
|
$(8,691)
|
283%
|
|
Net cash (used in) provided by investing
activities - continuing operations
|
(556)
|
472
|
(1,028)
|
-218%
|
|
Net cash provided by financing
activities-continuing operations
|
11,639
|
2,409
|
9,230
|
383%
|
|
Net decrease in cash, cash equivalents and
restricted cash and cash equivalents- continuing
operations
|
$(684)
|
(195)
|
$(489)
|
251%
|
Net cash used in operating activities – continuing operations
for the year ended December 31, 2019 increased by $8,691,000 which
was primarily due to an increase in net loss from continuing
operations to $14,412,000 for the year ended December 31, 2019,
compared to $5,709,000 for the year ended December 31, 2018.
Additionally, as of December 31, 2019 there was $5,101,000 of cash
outflows related to the change in accounts receivable compared to a
$733,000 cash inflow as of December 31, 2018. This change is
related to the timing of our collections. These cash outflows were
partially offset by (i) an impairment of intangible assets in the
amount of $1,549,000 from Firestorm, (ii) $1,158,000 loss on
extinguishment of debt we incurred in the first and third quarter
of 2019, (iii) an increase in amortization of intangible assets of
$1,308,000 in the year ended December 31, 2019, compared to
$738,000 in the year ended December 31, 2018, (iv) an increase in
amortization of deferred financing costs of $1,101,000 in the year
ended December 31, 2019, compared to $94,000 in the year ended
December 31, 2018, and (v) an increase in contract liabilities of
$929,000 in the year ended December 31, 2019, compared to a $22,000
increase in the year ended December 31, 2018, mainly a result of
$800,000 we received from a customer for a five-year software
license.
The net decrease of net cash (used in) provided by investment
activities – continuing operations of $1,028,000 was
primarily due to proceeds from sale of note receivable in the
amount of $1,475,000 received during the year ended December 31,
2018. This was partially offset by proceeds of $250,000 from the
sale of Secure Education to a third party and a reduction in
capital expenditures during the year ended December 31,
2019.
Net cash provided by
financing activities – continuing operations for the year
ended December 31, 2019 increased $9,230,000 from the prior year
ended December 31, 2018. The increase was primarily due to (i)
proceeds of $3,839,000 from the 2019 Promissory Notes, (ii)
proceeds of $2,949,000 from sale of the Company common stock
through the at-the-market agreement, and (iii) proceeds of
$5,463,000 from the secured borrowing arrangement with
LSQ Funding
Group, L.C. (“LSQ”). This was partially
offset by the repayment of the Wells Fargo line of
credit.
During 2019 and 2018, we funded our operations primarily through
cash from operating activities from our subsidiaries, secured
borrowing arrangements, issuance of debt, and the sale of equity.
As of December 31, 2019, we had unrestricted cash and cash
equivalents from continuing operations of $1,180,000 and working
capital deficit of $912,000, as compared to unrestricted cash and
cash equivalents of $2,069,000 and working capital deficit of
$44,000 as of December 31, 2018.
We
believe our existing cash and net cash flow will fund our
operations over the next twelve months.
Operating assets and liabilities consist primarily of receivables
from billed and unbilled services, accounts payable, accrued
expenses, current portion of long-term debt and secured borrowing
arrangements, and accrued payroll and related benefits. The volume
of billings and timing of collections and payments affect these
account balances.
At
December 31, 2019, within the Technology Segment, we had
approximately $10,102,000 of licensing and subscription contracts
that were closed prior to December 31, 2019, but, have a
contractual subscription period beyond December 31, 2019. These
subscription contracts generally cover a term of one to five years,
in which the Company will recognize revenue ratably over the
contract term. On occasion our customers will prepay the full
contract or a substantial portion of the contract. Amounts related
to the prepayment of the subscription contract for a service period
that is not yet met are recorded as part of our contract
liabilities balance. We currently expect to recognize approximately
46% of this amount over the succeeding twelve months, and the
remainder is expected to be recognized over the following four
years.
At
March 20, 2020, within the Technology Segment, we had approximately
$13,833,000 of licensing and subscription contracts that were
closed prior to March 20, 2020, but, have a contractual
subscription period beyond March 20, 2020. The table below
represents growth from December 31, 2018, or 105% and 181% through
December 31, 2019 and March 20, 2020,
respectively.
The
table below shows the quarter by quarter growth in the unaudited
remaining contract value of licensing and subscription contracts in
the Technology Segment (dollars in thousands):
Series A Preferred Stock
The holders of Rekor Series A Preferred Stock are entitled to
quarterly dividends in the amount 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 year ended
December 31, 2019 and 2018, we paid cash dividends of $0 and
$264,000, respectively, to shareholders of record of Series A
Preferred Stock. Accrued dividends
payable to Series A Preferred Stock shareholders were $551,000 and
$176,000 as of December 31, 2019 and December 31, 2018,
respectively, and are presented as part of the accounts payables
and accrued expenses on the consolidated balance
sheets.
Series B Preferred Stock
As part of the
acquisition of Global, we 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 with a conversion price of
$5.00 per share. Each Series B Preferred Stock has an automatic
conversion feature based on our common stock share price. 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. For the years ended
December 31, 2019 and 2018, we paid cash dividends of $108,000 and
$81,000,
respectively, related to accrued dividends for Series B Preferred
Stock shareholders. Accrued dividends payable to Series B Preferred
Stock shareholders were $54,000 as of December 31, 2019 and
December 31, 2018.
Short-Term Borrowing
On
August 9, 2019, our wholly owned subsidiaries, Global Technical
Services, Inc. and Global Contract Professionals, Inc, (together
"Global"), entered an agreement with an unrelated third party, LSQ,
pursuant to which Global sells its accounts receivable to LSQ and
LSQ advances Global 90% of the value of the receivable. Global can
advance up to $10,000,000 at one time. The term of the agreement is
for 12 months and automatically renews for additional 12-month
periods. The agreement is presented as secured borrowings, as the
accounts receivable are sold with recourse back to Global, meaning
that Global bears the risk of non-payment by the account debtor.
The funded amount of accounts receivables that LSQ has provided to
Global was $1,842,000 as of December 31, 2019 and is presented as
part of current liabilities held for sale on the consolidated
balance sheets. To secure its obligations to LSQ, Global has
granted a first priority security interest in Global's accounts
receivable and proceeds thereof. As of December 31, 2019, there
were approximately $2,455,000 of receivables that are subject to
collateral as part of this agreement. The receivables held as
collateral are presented in assets held for sale on the
consolidated balance sheets.
On
August 9, 2019, AOC Key Solutions, also entered into an agreement
with LSQ, as an unrelated third party, pursuant to which AOC Key
Solutions sells its accounts receivable to LSQ and LSQ advances 90%
of the value of the receivable to AOC Key Solutions. AOC Key
Solutions can advance up to $5,000,000 at one time. The term of the
agreement is for 12 months and automatically renews for additional
12-month periods. The agreement is presented as secured borrowings,
as the accounts receivable are sold with recourse back to AOC Key
Solutions, meaning that AOC Key Solutions bears the risk of
non-payment by the account debtor. The funded amount of accounts
receivables that LSQ has provided fund to AOC Key Solutions was
$1,894,000 as of December 31, 2019 and is presented as part of the
short-term borrowings on the consolidated balance sheets. To secure
its obligations to LSQ, AOC Key Solutions has granted a first
priority security interest in the AOC Key Solution’s accounts
receivable and proceeds thereof. As of December 31, 2019, there
were approximately $2,714,000 of receivables that are subject to
collateral as part of this agreement. The receivables held as
collateral are presented in the accounts receivable, net on the
consolidated balance sheets.
During
the year ended December 31, 2019, we recorded $112,000, in interest
expense from continuing operations, related to the agreement with
LSQ. Additionally, during the year ended December 31, 2019, we
recorded $169,000 in interest expense from operations held for
sale, related to the agreement with LSQ.
23
Promissory
Notes
On March 12, 2019, we issued the 2019 Promissory Notes and the
March 2019 Warrants. The loan was due and payable on March 11,
2021. In March 2020, we received an extension of the maturity date
of the loan until June 12, 2021. The loan bears interest at 16% per
annum, of which at least 10% per annum is required to be paid in
cash. The full remaining portion of all interest, if any, accrues
and is to be paid-in-kind. The notes also require a premium, if
paid before the maturity date, a $1,000,000 exit fee due at
maturity, and compliance with affirmative, negative and financial
covenants. The covenants related to this note were deferred until
June 2020. Transaction costs were approximately $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 are valued at $706,000. The warrants were
exercisable commencing March 12, 2019 and expire on March 12, 2024.
The 2019 Promissory Notes have an effective interest rate of
24.87%. On March 12, 2019, we retired the entire $500,000 balance
due on a promissory note issued under a March 16, 2016 Subordinated
Note and Warrant Purchase Agreement with Avon Road Partners, L.P.
(“Avon Road”), an affiliate of Robert Berman,
Rekor’s President and CEO and a member of our Board of
Directors. Under this agreement, we also issued to Avon Road,
warrants to purchase 121,247 shares of our common stock. These
warrants were exercised on December 11, 2017 for proceeds of
$125,000 and none of these warrants were outstanding as of December
31, 2019 and December 31, 2018. The promissory note to Avon Road
was extinguished on March 12, 2019 from proceeds of the 2019
Promissory Notes. Amortized financing cost for the year ended
December 31, 2019 was $1,101,000 and is included in interest
expense on the consolidated statement of operations.
The 2019 Promissory Notes resulting in the following detailed
transaction (dollars in thousands):
|
Financing:
|
|
|
Notes
payable, includes exit fee
|
$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, includes $7,000,000 cash paid and
$5,000,000 note assumed by seller
|
(12,000)
|
|
Issuance
of warrants in conjunction with notes payable
|
706
|
|
Accounts
Payable
|
360
|
|
Net
cash proceeds from notes payable
|
$3,839
|
As of
December 31, 2019, Rekor did not have any material commitments for
capital expenditures.
Balance Sheet Arrangements, Contractual Obligations and
Commitments
As of
the date of this Annual Report on Form 10-K, we did not have any
off-balance sheet arrangements that have had or are reasonably
likely to have a material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital
resources or capital expenditures.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations is based upon Rekor’s consolidated financial
statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”). The preparation of these consolidated
financial statements requires the management of Rekor to make
estimates and judgments that affect the reported amounts in our
consolidated financial statements.
We
believe the application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting
policies and estimates are periodically reevaluated, and
adjustments are made when facts and circumstances dictate a change.
Rekor bases its estimates on historical experience and on various
other assumptions that management of Rekor believes to be
reasonable under the circumstances, the results of which form
management’s basis for making judgments about the carrying
values of assets and liabilities that may not be readily apparent
from other sources. Actual results may differ from these estimates
under different assumptions or conditions, or if management made
different judgments or utilized different estimates.
Rekor’s
accounting policies are further described in its historical audited
consolidated financial statements and the accompanying notes
included elsewhere in this Form 10-K. Rekor has identified the
following critical accounting policies:
Revenue Recognition
We generate our revenues substantially from two sources: (1)
licensing and subscription revenues for software and related
technology products and services and (2) professional services to
clients. Some of our revenues are subject to seasonal variation, as
more fully described in “Seasonality” below.
In some
cases, we have sold software on a long term license basis, that
includes continuing opportunities to contract for maintenance and
support at a relatively low periodic cost. In connection with such
sales, we have deferred revenue recognition to spread it over the
expected life of the contract and have established a contract
liability associated with the contract. Our current sales model is
oriented toward subscription sales.
Revenue is recognized upon transfer of control of promised products
and services to our customers, in an amount that reflects the
consideration we expect to receive in exchange for those products
and services. If the consideration promised in the contract
includes a variable amount, for example maintenance fees, we
include an estimate of the amount we expect to receive in the total
transaction price, if it is probable that a significant reversal of
cumulative revenue recognized will not occur.
The
revenues for technology products and services are from fees that
provide customers with software licenses and related support.
During the second quarter of 2019, we changed our method of selling
in the Technology Segment from perpetual software licenses, with
associated maintenance services, to service subscriptions of
limited duration. These subscriptions give the customer a license
to use the latest version of the software only during the term of
the subscription. Revenue is generally recognized ratably over the
contract term. This change has impacted our revenue in the short
term. However, the amount of contract revenue received over the
long term is not expected to be reduced. Our subscription services
arrangements are non-cancelable and do not contain refund-type
provisions.
The professional services contracts recognize
revenue based on a time and materials or
fixed fees basis. These revenues are recognized as the services are
rendered for time and
materials contracts, on a proportional performance basis for fixed
price contracts, or ratably over the contact term for fixed price
contracts with subscription services.
Accounts Receivable
Accounts receivable
are customer obligations due under normal trade terms. We perform
continuing credit evaluations of its clients’ financial
condition, and we generally do not require collateral.
Management reviews
accounts receivable to determine if any receivables will
potentially be uncollectible. Factors considered in the
determination include, among other factors, number of days an
invoice is past due, client historical trends, available credit
rating information, other financial data and the overall economic
environment. Collection agencies may also be used if management so
determines.
We
record an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. We also
record as an additional allowance a certain percentage of aged
accounts receivable, based on historical experience and our
assessment of the general financial conditions affecting its
customer base. If actual collection experience changes, revisions
to the allowance may be required. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance. The balance in the
allowance for doubtful accounts was $48,000 and $24,000 as of
December 31, 2019 and 2018, respectively and related to the
Professional Services Segment.
24
Income Taxes
We use
the liability method of accounting for income taxes as set forth in
the authoritative guidance for accounting for income taxes. This
method requires an asset and liability approach for the recognition
of deferred tax assets and liabilities. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
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, we fully reserved for our net deferred tax
assets because management believes that it is more likely than not
that their benefits will not be realized in future periods. We will
continue to evaluate net 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 net deferred income tax assets satisfy the realization
standard, the valuation allowance will be reduced
accordingly.
The
tax effects of uncertain tax positions are recognized in the
consolidated financial statements only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than
50% likelihood of being realized. It is our accounting policy to
account for Accounting Standards Codification (“ASC”)
740-10-25-related penalties and interest as a component of the
income tax provision in the consolidated statements of
operations.
As of
December 31, 2019, and 2018, our evaluation revealed no uncertain
tax positions that would have a material impact on the financial
statements. The 2016 through 2018 tax years remain subject to
examination by the IRS, as of December 31, 2019. Our management
does not believe that any reasonably possible changes will occur
within the next twelve months that will have a material impact on
the financial statements.
Going Concern and Management’s Plan
Beginning with the
year ended December 31, 2018 and all annual and interim
periods thereafter, we will assess going concern uncertainty in our
consolidated financial statements to determine whether there is
sufficient cash on hand and working capital, including available
borrowings on loans and external bank lines of credit, to operate
for a period of at least one year from the date the consolidated
financial statements are issued or available to be issued, which is
referred to as the “look-forward period”, as defined in
GAAP. As part of this assessment, based on conditions that are
known and reasonably knowable to us, we will consider various
scenarios, forecasts, projections, estimates and will make certain
key assumptions, including the timing and nature of projected cash
expenditures or programs, our ability to delay or curtail
expenditures or programs and our ability to raise additional
capital, if necessary, among other factors. Based on this
assessment, as necessary or applicable, we make certain assumptions
around implementing curtailments or delays in the nature and timing
of programs and expenditures to the extent we deem probable that
those implementations can be achieved and that we have the proper
authority to execute them within the look-forward
period.
We have
generated losses since inception in February 2017 and have relied
on cash on hand, external bank lines of credit, the sale of notes,
debt financing and sales of common stock to support cashflow from
operations. We attribute losses to restructuring and merger costs,
public company corporate overhead and non-capital expenditures
consequent to our change in strategic direction. As of and for the
year ended December 31, 2019, we had a net loss from continuing
operations of $14,412,000 and a working capital deficit of
$912,000. The cash, cash equivalents and restricted cash and cash
equivalents position was decreased by $684,000 for the year ended
December 31, 2019 due to the net loss from operations, offset by
the net proceeds of $3,839,000 from senior secured notes, the net
proceeds of $2,949,000 from the At-the-Market Agreement and the net
proceeds from the secured borrowing arrangement of
$5,463,000.
We
believe that based on relevant conditions and events that are known
and reasonably knowable, our current forecasts and projections, for
one year from the date of the filing of the consolidated financial
statements in this Annual Report on Form 10-K, indicate our ability
to continue operations as a going concern for that one-year period.
We are actively monitoring our operations, the cash on hand and
working capital. Additionally, as of December 31, 2019, we believe
we have access to raise up to $11,727,000 through the At Market Issuance
Sales Agreement (the “Sales Agreement”). As of
March 30, 2020, we have $9,655,000 available for sale under the
Sales Agreement. We will continue to raise capital through the
Sales Agreement to help fund operations. Should access to those
funds be unavailable, we will need to seek out additional sources
of funding. Furthermore, we have 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.
Our ability to
generate positive operating results and complete the execution of
our business strategy will depend on (i) our ability to maintain
timely collections from existing customers in, as well as continue
the growth of, our Technology Segment, (ii) timely completion of
the disposition of the businesses in our Professional Services
Segment, (iii) the continued performance of our contractors,
subcontractors and vendors, (iv) our ability to maintain and build
good relationships with our lenders and financial intermediaries,
(v) our ability to meet debt covenants or obtain waivers in case of
noncompliance and (vi) the stability of the world economy and
global financial markets. To the extent that events outside of our
control have a significant negative impact on economic and/or
market conditions, they could affect payments from customers,
services and supplies from vendors, our ability to continue to
secure new business, raise capital, complete the sale of our assets
held for sale in a timely fashion and otherwise, depending on the
severity of such impact, materially adversely affect our operating
results.
New Accounting Pronouncements
See Item 8 of Part II,
“Financial Statements and Supplementary Data — Note 1
— Business and Significant Accounting
Policies”
As a
“smaller reporting company” as defined by Item 10 of
Regulation S-K, the Company is not required to provide information
required by this Item.
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Reports
of Independent Registered Public Accounting
Firms
|
27
|
||||||||||
|
Consolidated
Balance Sheets as of December 31, 2019 and 2018
|
29
|
||||||||||
|
Consolidated
Statements of Operations for the Years Ended December 31, 2019
and 2018
|
30
|
||||||||||
|
Consolidated
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2019 and 2018
|
31
|
||||||||||
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2019 and
2018
|
32
|
||||||||||
|
Notes
to Consolidated Financial Statements
|
33
|
||||||||||
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
of Rekor Systems, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheet of Rekor
Systems, Inc. and Subsidiaries (the “Company”) as of
December 31, 2019 and the related consolidated statements of
operations, changes in stockholders’ (deficit) equity, and
cash flows for the year then ended, and the related notes
(collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,
2019, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally
accepted in the United States of America.
We also
have audited the adjustments to the 2018 financial statements to
retrospectively apply the change in accounting for Global Technical
Services, Inc. and Global Contract Professionals, Inc. (together
“Global”), which met the criteria for held for sale
classification during 2019, as described in Notes 1 and 3. In our
opinion, such adjustments are appropriate and have been properly
applied. We were not engaged to audit, review, or apply any
procedures to the 2018 financial statements of the Company other
than with respect to the adjustments and, accordingly, we do not
express an opinion or any other form of assurance on the 2018
financial statements taken as a whole.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audit, we are required to obtain an understanding of
internal control over financial reporting, but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ Friedman LLP
We have
served as the Company’s auditor since
2019.
East
Hanover, New Jersey
March
30, 2020
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Rekor
Systems, Inc.
Opinion on the Financial Statements
We have
audited, before the effects of the adjustments to classify certain
amounts due to the held for sale classification of Global Technical
Services, Inc. and Global Contract Professionals, Inc. (together
“Global”), as described in Notes 1 and 3, the
accompanying consolidated balance sheet of Rekor Systems, Inc. and
its subsidiaries (previously known as Novume Solutions, Inc.) (the
“Company”) as of December 31, 2018, and the related
consolidated statements of operations, stockholders’
(deficit) equity, and cash flows for the year then ended (the 2018
consolidated financial statements before the effects of the
adjustments to classify certain amounts due to the held for sale
classification of Global as described in Notes 1 and 3 are not
presented herein) (collectively referred to as the 2018
consolidated financial statements). In our opinion, the 2018
consolidated financial statements, before the effects of the
adjustments to classify certain amounts due to the held for sale
classification of Global, as described in Notes 1 and 3, present
fairly, in all material respects, the financial position of Rekor
Systems, Inc, as of December 31, 2018, and the results of its
operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States
of America.
We were
not engaged to audit, review, or apply any procedures to the
adjustments to classify certain amounts due to the held for sale
classification of Global, as described in Notes 1 and 3 and,
accordingly, we do not express an opinion or any other form of
assurance about whether such adjustments are appropriate and have
been properly applied. Those adjustments were audited by Friedman
LLP.
Basis for Opinion
These
2018 consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on the Company's 2018 consolidated financial statements
based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 2018 consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audit we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
2018 consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the 2018 consolidated financial statements. We believe that our
audit provides a reasonable basis for our
opinion.
/s/ BD & Company, Inc.
BD
& Company, Inc.
We
served as the Company’s auditor from 2017 through
2018.
Owings
Mills, Maryland
April
11, 2019
28
REKOR SYSTEMS, INC. AND SUBSIDERIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
|
|
December
31, 2019
|
December
31, 2018
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$1,180
|
$2,069
|
|
Restricted
cash and cash equivalents
|
461
|
609
|
|
Accounts
receivable, net
|
4,831
|
2,976
|
|
Inventory
|
302
|
73
|
|
Other
current assets, net
|
230
|
167
|
|
Current
assets held for sale
|
3,226
|
2,636
|
|
Total current assets
|
10,230
|
8,530
|
|
Property
and equipment, net
|
483
|
462
|
|
Right-of-use
lease assets, net
|
782
|
-
|
|
Goodwill
|
6,336
|
1,402
|
|
Intangible
assets, net
|
8,244
|
3,456
|
|
Deposits
and other long-term assets
|
11
|
51
|
|
Long-term
assets held for sale
|
2,906
|
4,154
|
|
Total assets
|
$28,992
|
$18,055
|
|
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$4,971
|
$3,437
|
|
Short-term
borrowings
|
1,894
|
566
|
|
Notes
payable, current portion
|
-
|
2,469
|
|
Lease
liability, short-term
|
302
|
-
|
|
Contract
liabilities
|
749
|
207
|
|
Current
liabilities held for sale
|
2,416
|
1,895
|
|
Total current liabilities
|
10,332
|
8,574
|
|
Notes
payable
|
20,409
|
875
|
|
Lease
liability, long-term
|
667
|
-
|
|
Deferred
rent
|
-
|
8
|
|
Contract
liabilities, long-term
|
775
|
-
|
|
Deferred
tax liability
|
10
|
-
|
|
Long
term liabilities held for sale
|
30
|
90
|
|
Total liabilities
|
32,223
|
9,547
|
|
Series
A Cumulative Convertible Redeemable Preferred stock, $0.0001 par
value, 505,000 shares authorized and 502,327 shares issued and
outstanding as of December 31, 2019 and December 31, 2018,
respectively
|
5,804
|
5,052
|
|
Commitments and Contingencies
|
|
|
|
Stockholders' (Deficit) Equity
|
|
|
|
Common stock,
$0.0001 par value, 30,000,000 shares authorized, 21,595,653 and
18,767,619 shares issued and outstanding as of December 31, 2019
and December 31, 2018, respectively
|
2
|
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 December 31, 2019 and December 31, 2018,
respectively
|
-
|
-
|
|
Series
B Cumulative Convertible Preferred stock, $0.0001 par value,
240,861 shares authorized, issued and outstanding as of December
31, 2019 and December 31, 2018, respectively
|
-
|
-
|
|
Additional
paid-in capital
|
19,371
|
15,518
|
|
Accumulated
deficit
|
(28,408)
|
(12,064)
|
|
Total stockholders’ (deficit) equity
|
(9,035)
|
3,456
|
|
Total liabilities and stockholders’ (deficit)
equity
|
$28,992
|
$18,055
|
The accompanying notes are an integral part of these consolidated
financial statements.
29
REKOR SYSTEMS, INC. AND SUBSIDERIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
|
|
Year
ended December 31,
|
|
|
|
2019
|
2018
|
|
Revenue:
|
|
|
|
Technology
|
$5,469
|
$3,522
|
|
Professional
Services
|
13,851
|
16,532
|
|
Total
revenue
|
19,320
|
20,054
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
Technology
|
1,652
|
1,642
|
|
Professional
Services
|
7,406
|
8,336
|
|
Total
cost of revenue
|
9,058
|
9,978
|
|
|
|
|
|
Gross
profit:
|
|
|
|
Technology
|
3,817
|
1,880
|
|
Professional
Services
|
6,445
|
8,196
|
|
Gross
profit
|
10,262
|
10,076
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
14,151
|
13,310
|
|
Selling
and marketing expenses
|
2,222
|
1,758
|
|
Research
and development expenses
|
1,429
|
131
|
|
Impairment
of intangibles
|
1,549
|
-
|
|
Operating
expenses
|
19,351
|
15,199
|
|
|
|
|
|
Loss
from operations
|
(9,089)
|
(5,123)
|
|
Other
income (expense):
|
|
|
|
Loss
on extinguishment of debt
|
(1,158)
|
-
|
|
Interest
expense
|
(4,098)
|
(492)
|
|
Other
expense
|
(20)
|
(65)
|
|
Total
other expense
|
(5,276)
|
(557)
|
|
Loss
before income taxes
|
(14,365)
|
(5,680)
|
|
Income
tax provision
|
(47)
|
(29)
|
|
Net
loss from continuing operations
|
$(14,412)
|
$(5,709)
|
|
Income
(loss) from operations held for sale (including goodwill impairment
of $1,022,000 in 2019)
|
(1,472)
|
6
|
|
Income
tax provision from operations held for sale
|
-
|
-
|
|
Net
income (loss) from operations held for sale
|
(1,472)
|
6
|
|
Net
loss
|
$(15,884)
|
$(5,703)
|
|
Loss
per common share from continuing operations - basic and
diluted
|
(0.78)
|
(0.44)
|
|
Income
(loss) per common share from operations held for sale - basic and
diluted
|
(0.07)
|
-
|
|
Loss
per common share - basic and diluted
|
$(0.85)
|
$(0.44)
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
Basic
and diluted
|
20,033,023
|
15,409,014
|
The accompanying notes are an integral part of these consolidated
financial statements.
30
REKOR SYSTEMS, INC. AND SUBSIDERIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(Dollars
in thousands, except share data)
|
|
Shares of Common Stock
|
Common Stock
|
Shares of Series B Preferred Stock
|
Series B Preferred Stock
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Total Stockholders’ Equity (Deficit)
|
|
Balance as of December 31, 2017
|
14,463,364
|
$1
|
240,861
|
$-
|
$12,343
|
$(5,834)
|
$6,510
|
|
Cumulative
effect adjustment of adopting ASU 2014-09
|
-
|
-
|
-
|
-
|
-
|
(67)
|
(67)
|
|
Balance as of January 1, 2018
|
14,463,364
|
1
|
240,861
|
-
|
12,343
|
(5,901)
|
6,443
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
465
|
-
|
465
|
|
Issuance of
warrants
|
-
|
-
|
-
|
-
|
123
|
-
|
123
|
|
Issues of
common stock, net of costs
|
4,125,000
|
1
|
-
|
-
|
2,796
|
-
|
2,797
|
|
Issuance of
common stock for the extinguishment of warrants
|
96,924
|
-
|
-
|
-
|
134
|
-
|
134
|
|
Net common
stock issued in Secure Education Consultants
acquisition
|
33,333
|
-
|
-
|
-
|
163
|
-
|
163
|
|
Issuance
related to note payable
|
35,000
|
-
|
-
|
-
|
126
|
-
|
126
|
|
Issuance upon
exercise of stock options
|
13,998
|
-
|
-
|
-
|
23
|
-
|
23
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(460)
|
(460)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(655)
|
-
|
(655)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(5,703)
|
(5,703)
|
|
Balance as of December 31, 2018
|
18,767,619
|
2
|
240,861
|
-
|
15,518
|
(12,064)
|
3,456
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
446
|
-
|
446
|
|
Issuance of
warrants in conjunction with notes payable
|
-
|
-
|
-
|
-
|
706
|
-
|
706
|
|
Exercise of
cashless warrants in exchange for common stock
|
815,290
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Exercise of
warrants in exchange for common stock
|
116,376
|
-
|
-
|
-
|
103
|
-
|
103
|
|
Common stock
issued in OpenALPR acquisition
|
600,000
|
-
|
-
|
-
|
397
|
-
|
397
|
|
Issuance of
common stock pursuant to at the market offering,
net
|
1,292,730
|
-
|
-
|
-
|
2,949
|
-
|
2,949
|
|
Exercise of
warrants related to series A preferred stock
|
3,638
|
-
|
-
|
-
|
4
|
-
|
4
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(460)
|
(460)
|
|
Accretion of
Series A preferred stock
|
-
|
-
|
-
|
-
|
(752)
|
-
|
(752)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(15,884)
|
(15,884)
|
|
Balance as of December 31, 2019
|
21,595,653
|
$2
|
240,861
|
$-
|
$19,371
|
$(28,408)
|
$(9,035)
|
The accompanying notes are an integral part of these consolidated
financial statements.
31
REKOR SYSTEMS, INC. AND SUBSIDERIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Cash Flows from Operating Activities
|
|
|
|
Net
loss from continuing operations
|
$(14,412)
|
$(5,709)
|
|
Net
income (loss) from operations held for sale
|
(1,472)
|
6
|
|
Net
loss
|
(15,884)
|
(5,703)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
348
|
309
|
|
Amortization
of right-of-use lease asset
|
211
|
-
|
|
Share-based
compensation
|
446
|
465
|
|
Amortization
of financing costs
|
1,101
|
94
|
|
Warrant
expense
|
-
|
134
|
|
Deferred
rent
|
-
|
(11)
|
|
Change
in fair value of derivative liability
|
-
|
(78)
|
|
Amortization
of intangible assets
|
1,308
|
738
|
|
Impairment
of intangible assets
|
1,549
|
-
|
|
Impairment
of investment
|
-
|
262
|
|
Allowance
for other receivables
|
-
|
135
|
|
Loss
on extinguishment of debt
|
1,158
|
-
|
|
Loss
on abandonment of lease
|
70
|
-
|
|
Provision
for deferred taxes
|
10
|
-
|
|
Loss
on sale of Secure Education Consultants
|
3
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(5,101)
|
733
|
|
Inventory
|
(229)
|
83
|
|
Deposits
and other long-term assets
|
40
|
(16)
|
|
Other
current assets, net
|
(50)
|
52
|
|
Accounts
payable and accrued expenses
|
954
|
(289)
|
|
Contract
liabilities
|
929
|
22
|
|
Lease
liability
|
(102)
|
-
|
|
Net
cash used in operating activities - continuing
operations
|
(11,767)
|
(3,076)
|
|
Net
cash (used in) provided by operating activities - held for sale
operations
|
(9,565)
|
1,025
|
|
Net
cash used in operating activities
|
(21,332)
|
(2,051)
|
|
Cash Flows from Investing Activities
|
|
|
|
Proceeds
from sale of note receivable
|
-
|
1,475
|
|
Proceeds
from sale of Secure Education Consultants
|
250
|
-
|
|
Capital
expenditures
|
(806)
|
(1,003)
|
|
Net
cash (used in) provided by investing activities - continuing
operations
|
(556)
|
472
|
|
Net
cash used in investing activities - held for sale
operations
|
(7)
|
(77)
|
|
Net
cash (used in) provided by investing activities
|
(563)
|
395
|
|
Cash Flows from Financing Activities
|
|
|
|
Proceeds
from short-term borrowings
|
5,463
|
41,168
|
|
Repayments
of short-term borrowings
|
(611)
|
(43,171)
|
|
Net
proceeds from notes payable
|
3,839
|
2,000
|
|
Net
proceeds from exercise of options
|
-
|
23
|
|
Net
proceeds from exercise of warrants
|
103
|
-
|
|
Net
proceeds from exercise of warrants associated to series A preferred
stock
|
4
|
-
|
|
Net
proceeds from issuance of common stock
|
-
|
2,797
|
|
Net
proceeds from at-the-market agreement
|
2,949
|
-
|
|
Payment
of preferred dividends
|
(108)
|
(345)
|
|
Payment
of financing costs
|
-
|
(63)
|
|
Net
cash provided by financing activities - continuing
operations
|
11,639
|
2,409
|
|
Net
cash provided by financing activities - held for sale
operations
|
9,354
|
58
|
|
Net
cash provided by financing activities
|
20,993
|
2,467
|
|
Net
decrease in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
|
(684)
|
(195)
|
|
Net
increase in cash, cash equivalents and restricted cash and cash
equivalents - held for sale operations
|
(218)
|
1,006
|
|
Net
(decrease) increase in cash, cash equivalents and restricted cash
and cash equivalents
|
(902)
|
811
|
|
Cash,
cash equivalents and restricted cash and cash equivalents at
beginning of period
|
2,768
|
1,957
|
|
Cash,
cash equivalents and restricted cash and cash equivalents at end of
period
|
$1,866
|
$2,768
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted
cash:
|
|
|
|
Cash
and cash equivalents at end of period - continuing
operations
|
$1,180
|
$2,069
|
|
Restricted
cash and cash equivalents at end of period - continuing
operations
|
461
|
609
|
|
Cash
and cash equivalents at end of period - held for sale
operations
|
225
|
90
|
|
Cash,
cash equivalents and restricted cash at end of period
|
$1,866
|
$2,768
|
The accompanying notes are an integral part of these consolidated
financial statements.
32
NOTE 1 – BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Rekor Systems, Inc. (the “Company” or
“Rekor”), formally known as Novume Solutions, Inc.
(Novume), was formed in February 2017 to effectuate the mergers of,
and become a holding company for KeyStone Solutions, Inc.
(“KeyStone”) and Rekor Recognition Systems, Inc.
(“Rekor Recognition”), formally known as Brekford
Traffic Safety, Inc.
(“Brekford”).
On
February 28, 2019, the Company renamed Brekford to Rekor
Recognition Systems, Inc. For narrative purposes, all references to
Brekford before February 28, 2019 are to Brekford Traffic Safety,
Inc. and to Rekor Recognitions Systems, Inc. on and after February
28, 2019.
Rekor
is a leader in the field of vehicle identification and management
systems driven by leading edge advances in artificial intelligence
("AI"). In development for over five years using AI processes,
including 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. The Company
currently provides products and services for governmental
organizations, for large and small businesses and for individuals
throughout the world. Customers are currently using the
Company’s products or services in over 70 countries, with
offerings for smart cities, public safety, security,
transportation, parking and logistics.
Currently, the
Company’s business activities also include providing
professional services in the government contracting, aviation and
aerospace industries. As part of the development of a new line of
products for the public safety and security markets, the Company
acquired industry leading vehicle recognition software in March
2019. In connection with this acquisition, the Company determined
that its resources are best concentrated on vehicle recognition
products and services and have reorganized and retooled its product
development, business development and administrative resources,
with increasing emphasis on the technology area. The Board of
Directors has also authorized management to explore opportunities
for the sale of the Company’s professional services
businesses. In keeping with the shift in resources and strategic
direction that this represents, the Company has reorganized its
financial reporting into two business segments: the Technology
Segment and the Professional Services Segment. This reporting
segmentation reflects the Company’s separate focus on and
expectations for technology products and services versus
professional services.
On
March 29, 2019, the Company announced that its Board of Directors
approved changing the Company’s name to Rekor Systems, Inc.
This name change was a result of the Company’s increased
focus on technology products and services, and aligns with the
renaming of Brekford Traffic Safety, Inc. to Rekor Recognition
Systems, Inc. In connection with this name change, the Company
changed:
●
the ticker symbol
for the Company’s common stock on the Nasdaq Stock Market to
“REKR” and the CUSIP number for the common stock to
759419 104;
●
the ticker symbol
for Company’s Series A Preferred Stock on the OTC Markets
OTCQB exchange to “REKRP” and the CUSIP number for
Company’s Series A Preferred Stock to 759419 203;
and
●
the ticker symbol
for warrants on the OTC Markets OTCQB exchange to
“REKRW” and the CUSIP number for the warrants to 759419
112.
Technology Segment. The
Technology Segment operations are conducted by the Company’s
wholly owned subsidiary, Rekor Recognition Systems, Inc.
(“Rekor Recognition”). Formerly named Brekford Traffic
Safety, Inc., Rekor Recognition has been involved in the public
safety business since 1996. In connection with the development of
several new public safety products, Rekor Recognition determined to
acquire substantially all the assets of OpenALPR Technology, Inc.
This acquisition (the “OpenALPR Technology
Acquisition”), completed in March 2019, transferred vehicle
recognition software and associated licenses and proprietary rights
to OpenALPR Software Solutions, LLC (“OpenALPR”), a new
wholly owned subsidiary of Rekor Recognition. OpenALPR’s
vehicle recognition platform, already operating in more than 12,000
cameras in over 70 countries worldwide, has laid the groundwork for
the expansion of the Company’s product lines, enabling
multiple deployment mechanisms.
Since
the OpenALPR Technology Acquisition, the Company has expanded its
vehicle recognition product and service lines into a much broader
range of customer segments, starting with public safety. The
Company shifted from a perpetual licensing model to a
subscription-based model, rebranded the software suites as
“Watchman” and “Car-Check” and released
several packaged hardware and software solutions with preloaded
versions of each of these vehicle recognition engines. By the end
of 2019, the Company had a portfolio of more than ten products,
permitting it to offer full-scale vehicle recognition services for
nearly any large or small public agency, commercial or residential
setting.
Rekor’s
software currently has the capability to analyze multi-spectral
images and/or video streams produced by nearly any Internet
Protocol security camera and concurrently extract license plate
data by state from more than 70 countries, in addition to the
vehicle’s make, color, type and direction of travel. When
combined with speed optimized code, parallel processing capability
and best-in-class accessories, such as cameras and communications
modules, the software captures license plate data and vehicle
characteristics at extremely high vehicle speeds with a high degree
of accuracy, even in unusually difficult conditions, such as low
lighting, poor weather, extreme camera viewing angles, and
obstructions.
Prior
to the development of the Company’s vehicle identification
software, highly accurate results were not available using a
typical Internet Protocol camera. The Company believes that the
ability to use less expensive hardware will change the dynamics of
the existing public safety market, enabling the creation of
increasingly robust networks with cameras at more locations. In
addition, the Company expects the cost advantages and high degree
of accuracy to create competitive advantages in tolling systems and
logistics operations that currently rely on complex radio frequency
identification (“RFID”)
systems. The Company also expects the lower costs, superior
distance and field of view capabilities and the ability to capture
additional vehicle information, such as direction, color, make and
type of vehicle, to open opportunities in other market segments,
such as parking operations, school safety and retail customer
loyalty programs; and particularly smart cities and smart roadways.
Smart roadway systems, sometimes referred to as smart transport or
intelligent transport systems (“ITS”), inclusive of
parking management and guidance, passenger information,
and traffic management systems, can optimize the movement of
vehicles to make travel safer and more efficient. These
technologies are expected to enable users to be more coordinated,
better informed, and make safer and smarter use of transport
networks.
The
Company’s vision is “AI with a Purpose.” The
Company intends to evolve beyond vehicle recognition for public
safety markets into the recognition and analysis of vehicle
activities (inclusive of motion and behaviors), to develop systems
to identify unsafe situations (e.g. wrong way driving, pedestrian
on roadway, etc.) and optimize traffic flows, and develop numerous
other data driven applications centered around vehicle
knowledge.
Professional Services Segment.
The Company has provided professional services and staffing
solutions to the government contracting and the aerospace and
aviation industries. The Professional Services Segment includes AOC
Key Solutions, Inc. (“AOC Key Solutions”); Global
Technical Services, Inc. (“GTS”); Global Contract
Professionals, Inc. (“GCP”, and together with GTS,
“Global”); and Firestorm Solutions, LLC (Firestorm
Solutions”) and Firestorm Franchising, LLC (“Firestorm
Franchising” and together with Firestorm Solutions,
“Firestorm”). Currently, as a leading provider of
support services to the federal government contracting market, AOC
Key Solutions’ primary clients are companies that serve the
federal government. However, in support of the Technology Segment,
the Company has recently been active in the state and local
government contracting market. The Company provides professional
services that offer scalable and compliant outsourced support for
its government contractor clients. The Company helps these clients
to win government contracts and capture new businesses. Global
provides specialized staffing services, primarily in the aerospace
and aviation industries. In connection with the Company’s
reorganization and focus on technology products and services, it is
actively engaged in evaluating, reconfiguring, selling, and
discontinuing various business assets or entities in the
Professional Services Segment. As part of this
process, the Company discontinued the operations of Firestorm
Franchising and has determined to sell Global and AOC Key
Solutions. The Company has identified several potential buyers for
Global and is in negotiations with one of them. In March 2020, the
Company received a proposal from the current management of AOC Key
Solutions to purchase that subsidiary, which is being considered by
its Board of Directors. AOC Key Solutions did not meet the held for
sale criteria as of December 31, 2019 and thus AOC Key Solutions
was not presented as part of operations held for sale in the
financial statements and notes to the financial statements
presented as of December 31, 2019.
Basis of Consolidation
The
consolidated financial statements include the accounts of Rekor
Systems, Inc., the parent company, and its wholly owned
subsidiaries AOC Key Solutions, Inc., Rekor Recognition Systems,
Inc., Novume Media, Inc., Firestorm Solutions, LLC, Firestorm
Franchising, LLC, Global Technical Services, Inc., Global Contract
Professionals, Inc. and OpenALPR Software Solutions, LLC
(collectively, the “Company”).
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) and in accordance with the
accounting rules under Regulation S-X, as promulgated by the
Securities and Exchange Commission (“SEC”). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain
amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
Beginning in the second quarter of
2019, sales and marketing expenses and research and development
expenses have been presented separately from general and
administrative expenses on the consolidated statements of
operations, whereas in prior periods these amounts were included in
one caption titled selling, general and administrative expenses.
Amounts for the period ending December 31, 2018, have been
reclassified to conform to the current year
presentation.
In the
opinion of management, all adjustments necessary for a fair
presentation for the periods presented have been reflected as
required by Regulation S-X, Rule 10-01. All necessary adjustments
are of a normal, recurring nature.
33
Held for Sale Operations
During the third quarter of 2019, the Company
began to separately report the results of Global Technical
Services, Inc. and Global Contract Professionals, Inc. (together
“Global”), the Company’s wholly owned
subsidiaries, including substantially
all of the assets and liabilities comprising Global, as operations
held for sale. The Company is reporting the operating results and
cash flows of Global as operations held for sale, and thus they
have been excluded from continuing operations and segment results
for all periods presented. Prior to the third quarter of 2019, the
operating results for Global were presented in the Professional
Services Segment. The assets and liabilities of Global are
presented as current and long-term assets and liabilities held for
sale in the consolidated balance sheets and its results are
presented as income (loss) from operations held for sale in the
consolidated statement of operations. In cases where the carrying
value amount exceeds the fair value, less costs to sell, an
impairment loss is recognized. Due to the held for sale
classification of Global, certain amounts have been reclassified in
order to conform to the current period
presentation.
Interest
on debt that is expected to be assumed by the buyer as a result of
the sale transaction has be allocated to operations that are
classified as held for sale. The Company does not expect to assume
debt as a result of the sale of Global. For the years ended
December 31, 2019 and 2018 interest allocated to operations held
for sale was $294,000 and $117,000, respectively.
Long-lived
assets and intangible assets to be sold will be recovered through
sale and not through future operations. Therefore, long-lived
assets are not depreciated or amortized once they are classified as
held for sale.
See
Note 3 for additional information regarding the Company's held for
sale operations.
Going Concern Assessment
Beginning with the
year ended December 31, 2018 and all annual and interim
periods thereafter, management will assess going concern
uncertainty in the Company’s consolidated financial
statements to determine whether there is sufficient cash on hand
and working capital, including available borrowings on loans and
external bank lines of credit, to operate for a period of at least
one year from the date the consolidated financial statements are
issued or available to be issued, which is referred to as the
“look-forward period”, as defined in 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, including the timing and nature of projected cash
expenditures or programs, its ability to delay or curtail
expenditures or programs and its ability to raise additional
capital, if necessary, among other factors. Based on this
assessment, as necessary or applicable, management makes certain
assumptions around implementing curtailments or delays in the
nature and timing of programs and expenditures to the extent it
deems it probable that those implementations can be achieved and
that management has the proper authority to execute them 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 common stock, debt financing and a
public offering of its common stock to support cashflow from
operations. The Company attributes losses to merger costs, public
company corporate overhead and non-capital expenditures consequent
to the Company's change in strategic direction. As of and for the
year ended December 31, 2019, the Company had a net loss from
continuing operations of $14,412,000 and a working capital deficit
of $912,000. The Company's net cash position was decreased by
$902,000 for the year ended December 31, 2019 due to the net loss
from operations, offset by the net proceeds of $3,839,000 from
senior secured notes, the net proceeds of $2,949,000 from the
At-the-Market Agreement and the net proceeds from the secured
borrowing arrangement of $5,463,000.
Management believes
that based on relevant conditions and events that are known and
reasonably knowable, its current forecasts and projections, for one
year from the date of the filing of the consolidated financial
statements in this Annual Report on Form 10-K, 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 December 31, 2019, the Company believes it has access to raise
up to $11,727,000 through the At Market Issuance
Sales Agreement (the “Sales Agreement”). As of
March 30, 2020, the Company has $9,655,000 available for sale under
the Sales Agreement. The Company will continue to raise capital
through the Sales Agreement to help fund operations. Should access
to those funds be unavailable, the Company will need to seek out
additional sources of funding. Furthermore, the Company has contingency plans to reduce
or defer expenses and cash outlays should operations weaken in the
look-forward period or additional financing, if needed, is not
available.
The Company's
ability to generate positive operating results and complete the
execution of its business strategy will depend on (i) its
ability to maintain timely collections from existing customers in,
as well as continue the growth of, its Technology Segment, (ii)
timely completion of the disposition of the businesses in
its
Professional Services Segment, (iii) the continued performance of
its
contractors, subcontractors and vendors, (iv) its
ability to maintain and build good relationships with its
lenders and financial intermediaries, (v) its
ability to meet debt covenants or obtain waivers in case of
noncompliance and (vi) the stability of the world economy and
global financial markets. To the extent that events outside of the
Company's control have a significant negative impact on economic
and/or market conditions, they could affect payments from
customers, services and supplies from vendors, its
ability to continue to secure new business, raise capital, complete
the sale of its
assets held for sale in a timely fashion and otherwise, depending
on the severity of such impact, materially adversely affect
its
operating results.
Rounding
Dollar
amounts, except per share data, in the notes to these financial
statements are rounded to the closest $1,000, unless otherwise
indicated.
Concentration of Risk
The Company places its temporary cash investments with higher rated
quality financial institutions located in the United States
(“U.S.”). As of December 31, 2019, and 2018, the
Company had deposits from continuing operations totaling $1,641,000
and $2,678,000, respectively, in one and three U.S. financial
institutions that were federally insured up to $250,000 per
account, respectively.
The Company has a market concentration of revenue and accounts
receivable, from continuing operations, in its Professional
Services Segment related to its customer base.
Company A accounted for 20% and 19% of the Company’s total
revenues for the years ended December 31, 2019 and 2018,
respectively.
Company B accounted for 17% and less than 10% of the
Company’s total revenues for the years ended December 31,
2019 and 2018, respectively.
As of December 31,
2019, accounts receivable from Company A and Company B totaled
$813,000 or 17%, and $1,320,000
or 27%, respectively, of the consolidated
accounts receivable balance. As of December 31, 2018, Company A and
Company B accounted for $1,043,000, or 35%, and $483,000, or 16%,
respectively, of the consolidated accounts receivable
balance.
No other single customer accounted for more than 10% of the
Company’s consolidated revenue for the year ended
December 31, 2019 or consolidated accounts receivable balance
as of December 31, 2019.
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 December 31, 2019 and 2018 were $461,000 and
$609,000, respectively, and correspond to equal amounts of related
accounts payable and are presented as part of accounts payable and
accrued expenses in the accompanying consolidated balance
sheets.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable
are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its clients’
financial condition, and the Company generally does not require
collateral.
The
Company maintains an allowance for doubtful accounts at an amount
estimated to be sufficient to cover the risk of collecting less
than full payment of the receivables. At each balance sheet date,
the Company evaluates its receivables and assess the allowance for
doubtful accounts based on specific customer collection issues and
historical write-off trends. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance.
Based
on the information available, the Company determined that an
allowance for loss of $48,000 and $24,000 was required at December
31, 2019 and 2018, respectively.
Inventory
Inventory
principally consists of parts held temporarily until installed for
service. Inventory is valued at the lower of cost or market value.
The cost is determined by the lower of first-in, first-out
(“FIFO”) method, while market value is determined by
replacement cost for components and replacement parts.
34
Property and Equipment
Property and
equipment are stated at cost or fair value at acquisition date for
assets obtained through business combinations, less accumulated
depreciation. Depreciation expense is classified within the
corresponding operating expense categories on the consolidated
statements of operations.
Depreciation is
recorded on the straight-line basis over the following estimated
lives:
|
Class of assets
|
Useful life
|
|
Furniture and fixtures
|
2 - 10 years
|
|
Office equipment
|
2 - 5 years
|
|
Leasehold improvements
|
Shorter of asset life or lease term
|
|
Automobiles
|
3 - 5 years
|
|
Camera systems
|
3 years
|
Repairs
and maintenance are expensed as incurred. Expenditures for
additions, improvements and replacements are
capitalized.
Software Development Costs
Research and
development costs to develop software to be sold, leased or
marketed are expensed as incurred up to the point of technological
feasibility for the related software product. Capitalized
internally developed software costs, net, not yet placed in service
were $966,000 and $829,000 as of December 31, 2019 and 2018,
respectively. In 2019, the Company placed in
service $232,000 of capitalized development costs related
to software to be sold, leased or marketed.
Software developed
for internal use, with no substantive plans to market such software
at the time of development, are capitalized and included in
intangible assets, net in the consolidated balance sheets. Costs
incurred during the preliminary planning and evaluation and post
implementation stages of the project are expensed as
incurred. Costs incurred during the application development
stage of the project are capitalized. In 2019, the Company
capitalized $91,000 of development costs related to
internal use software. In 2018, capitalized costs related to
software developed for internal use were immaterial.
Leases
On January 1, 2019 the Company
adopted Accounting Standard Codification (“ASC”) Topic
842, Leases ("ASC 842"), using the optional transition
method whereby the Company applied the new lease requirements under
Accounting Standards Update (“ASU”) 2016-02 through a
cumulative-effect adjustment, which after completing the
Company’s implementation analysis, resulted in no adjustment
to its January 1, 2019 beginning retained earnings balance. On
January 1, 2019, the Company recognized $921,000 of right of use
(“ROU”) operating lease assets and $951,000 of
operating lease liabilities, including noncurrent operating lease
liabilities of $778,000, as a result of adopting this standard. The
difference between ROU operating lease assets and operating lease
liabilities was primarily due to previously accrued rent expense
relating to periods prior to January 1,
2019.
The new standard provides several optional practical expedients for
use in transition. The Company elected to use what the Financial
Accounting Standard Board (“FASB”) has deemed the
“package of practical expedients,” which allows the
Company not to reassess the Company’s previous conclusions
about lease identification, lease classification and the accounting
treatment for initial direct costs. The ASU also provided several
optional practical expedients for the ongoing accounting for
leases. The Company has elected the short-term lease recognition
exemption for all leases that qualify, meaning that for leases with
terms of twelve months or less, the Company will not recognize ROU
assets or lease liabilities on the Company’s consolidated
balance sheets. Additionally, the Company has elected to use the
practical expedient to not separate lease and non-lease components
for leases of real estate, meaning that for these leases, the
non-lease components are included in the associated ROU asset and
lease liability balances on the Company’s consolidated
balance sheets. The comparative periods have not been restated for
the adoption of ASU 2016-02.
The
Company determines if an arrangement contains a lease and the
classification of that lease, if applicable, at inception.
Operating leases are included in operating lease ROU assets,
operating lease liabilities and operating lease liabilities (net of
current portion) in the consolidated balance sheets. The Company
does not currently have any finance leases.
ROU
assets represent the Company’s right to use an underlying
asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments under the lease.
Operating lease ROU assets and liabilities are recognized at the
lease commencement date based on the present value of lease
payments over the lease term. The implicit rate within the
Company’s operating leases are generally not determinable and
the Company uses its incremental borrowing rate at the lease
commencement date to determine the present value of lease payments.
The determination of the Company’s incremental borrowing rate
requires judgment. The Company determined the incremental borrowing
rate for each lease using the Company’s current borrowing
rate, adjusted for various factors including level of
collateralization and term to align with the terms of the lease.
The operating lease ROU asset also includes any lease prepayments,
offset by lease incentives. Certain of the Company’s leases
include options to extend or terminate the lease. An option to
extend the lease is considered in connection with determining the
ROU asset and lease liability when it is reasonably certain the
Company will exercise that option. An option to terminate is
considered unless it is reasonably certain the Company will not
exercise the option.
Lease
expense for lease payments is recognized on a straight-line basis
over the term of the lease.
Business Combination
Management conducts
a valuation analysis on the tangible and intangible assets acquired
and liabilities assumed at the acquisition date thereof. During the
measurement period, which may be up to one year from
the acquisition date,
the Company may record adjustments to the fair value of these
tangible and intangible assets acquired and liabilities assumed,
with the corresponding offset to goodwill. In addition, uncertain
tax positions and
tax-related valuation allowances are initially established in
connection with a business combination as of the acquisition date. Upon the
conclusion of the measurement period or final determination of the fair value of
assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments
are recorded to the Company’s consolidated statements of
operations.
Amounts
paid for acquisitions are allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the
date of acquisition. The Company allocates a portion of the
purchase price to the fair value of identifiable intangible assets.
The fair value of identifiable intangible assets is based on
detailed valuations that use information and assumptions provided
by management. The Company allocates any excess purchase price over
the fair value of the net tangible and intangible assets acquired
to goodwill.
Goodwill
and Other Intangibles
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. Based on the annual
impairment test the Company concluded that the fair value of each
of its reporting units exceeded its respective carrying
value.
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.
During
the second quarter of 2019 the Company wrote-off $1,549,000 of
intangible assets associated with the Company's wholly owned
subsidiaries Firestorm Solutions, LLC, Firestorm Franchising LLC,
Secure Education Consultants and BC Management, Inc. (collectively,
“Firestorm”).
35
In the
fourth quarter of 2019, the Company recorded non-deductible
goodwill impairment charge of $1,022,000, related to the Company’s Global subsidiaries,
which are classified as operations held for sale. The impairment
charges were non-cash in nature and did not affect the
Company’s liquidity, cash flows, borrowing capability or
operations; nor did it impact the debt covenants under the
Company’s debt agreements. See Note 8 “Intangible
Assets” for information regarding the Company’s goodwill impairment
charges.
Revenue Recognition
The
Company derives its revenues substantially from two sources: (1)
license and subscription fees for software and related products and
services, and (2) professional services to clients.
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:
|
|
Year ended December 31,
|
|
|
|
2019
|
2018
|
|
Technology
|
|
|
|
Automated
traffic safety enforcement
|
$3,403
|
$3,413
|
|
Licensing
and subscription revenue
|
2,066
|
-
|
|
Other
revenue
|
-
|
109
|
|
Total
Technology revenue
|
5,469
|
3,522
|
|
Professional
Services
|
|
|
|
Consulting
and technical support services
|
13,827
|
16,435
|
|
Franchising
Services
|
24
|
97
|
|
Total
Professional Services revenue
|
13,851
|
16,532
|
|
Total
revenue
|
$19,320
|
$20,054
|
Technology Revenues
The
revenues for technology products and services are from fees that
provide customers with software licenses and related support and
service fees for various public safety services.
In
March 2019, the Company acquired substantially all of the assets of
a software development company, OpenALPR Technologies, Inc. The
software acquired from this acquisition and subsequently developed
by the Company have provided the basis for the Company’s
licensing and subscription revenue. Licensing and subscription,
include services which operate in many installations with a high
accuracy rate, include a web server, self-managed database, and
access to a powerful, cross-platform application programming
interface. The software employs a convolutional neural network
architecture to classify images and features include seamless video
analysis and data analytics. Current customers include law
enforcement agencies, highway authorities, parking system
operators, private security companies, and wholesale and retail
operations supporting logistics and customer loyalty programs.
During the second quarter of 2019, the Company changed its method
of selling in the Technology Segment from perpetual software
licenses, with associated maintenance services, to service
subscriptions of limited duration. These subscriptions give the
customer a license to use the latest version of the software only
during the term of the subscription. Revenue is generally
recognized ratably over the contract term. This change is expected
to impact the Company's revenue in the short term. However, the
amount of contract revenue received over the long-term impact is
expected to be relatively consistent. The Company’s
subscription services arrangements are non-cancelable and do not
contain refund-type provisions. Revenue is recognized ratably over
the licensing or subscription term.
Automated traffic
safety enforcement arrangements 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.
Professional Services Revenues
Consulting and
Technical Support Services is primarily comprised of government
contracting support services that assist government contractors
with critical aspects of their business. These services include
market intelligence and opportunity identification; capture and
strategic advisory; proposal strategy and development; teaming
support; and managed human capital services. The Company’s
services also help commercially focused firms gain entry into the
government contracting market. These revenues are recognized as the
services are rendered for time and materials contracts, on a
proportional performance basis for fixed price contracts, or
ratably over the contract term for fixed price contracts with
subscription services.
For
those contracts that have multiple performance obligations, the
Company allocates the total transaction price to each performance
obligation based on its relative standalone selling price, which is
determined based on the Company’s overall pricing objectives,
taking into consideration market conditions and other
factors.
A
performance obligation is a promise in a contract with a customer
to transfer services that are distinct. The performance obligations
that are not yet satisfied or partially satisfied are performance
obligations that are expected to be recognized as revenue in the
future for a contract with a customer which was executed as of a
particular date. At December 31, 2019, the Company had
approximately $10,102,000 of remaining performance obligations not
yet satisfied or partially satisfied related to its Technology
Segment. The Company expects to recognize approximately 46% 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 consolidated balance
sheets. Billed and unbilled accounts receivable are presented as
part of accounts receivable, net on the consolidated balance
sheets. When billings occur after the work has been performed, 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 $295,000 were
included in accounts receivable, net, in the consolidated balance
sheets as of December 31, 2019 and December 31, 2018, respectively.
Additionally, unbilled accounts receivables of $298,000 and
$830,000 were included in current assets held for sale in the
consolidated balance sheets as of December 31, 2019 and December
31, 2018, respectively.
When
the Company advance bills clients prior to the work being
performed, 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 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
year ended December 31, 2019 were not materially impacted by any
other factors. Contract liabilities from the year ended December
31, 2019 and December 31, 2018 were $1,524,000 and $207,000,
respectively. All contract liabilities as of December 31, 2019 and
December 31, 2018 were attributable to continued operations. During
the year ended December 31, 2019 all of the contract liabilities
balance as of December 31, 2018 was recognized as
revenue.
36
The
services due for contract liabilities described above are shown
below as of December 31, 2019 (dollars in thousands):
|
2020
|
$774
|
|
2021
|
243
|
|
2022
|
219
|
|
2023
|
191
|
|
2024
|
97
|
|
Total
|
$1,524
|
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 December 31, 2019, and 2018, costs incurred to obtain
contracts in excess of one year have been immaterial to
date.
Advertising
The
Company expenses all non-direct-response advertising costs as
incurred. Advertising costs for the years ended December 31, 2019
and 2018 were $350,000 and $248,000, respectively, and are included
in sales and marketing expense in the consolidated statement of
operations.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP
requires the extensive use of management's estimates. Management
uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual amounts
may differ from these estimates. On an on-going basis, the Company
evaluates its estimates, including those related to collectability
of accounts receivable, fair value of debt and equity instruments
and income taxes. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value
of assets and liabilities that are not apparent from other sources.
Actual results may differ from those estimates under different
assumptions or conditions.
Income
Taxes
Income
tax expense consists of U.S. federal and state income taxes. The
Company is required to pay income taxes in certain state
jurisdictions. Historically, AOC Key Solutions and Global initially
elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, neither AOC Key
Solutions nor Global paid federal corporate income tax, and in most
instances state income tax, on its taxable income. AOC Key
Solutions revoked its S-Corporation election upon the
March 15, 2016 merger with KeyStone and Global revoked its S
Corporation election upon the acquisition by Rekor, and are
therefore, subject to corporate income taxes. Firestorm is a
single-member LLC with KeyStone as the sole member.
The
Company uses the liability method of accounting for income taxes as
set forth in the authoritative guidance for accounting for income
taxes. This method requires an asset and liability approach for the
recognition of deferred tax assets and liabilities. Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company evaluates 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 not more likely than not that their
benefits will be realized in future periods. The Company will
continue to evaluate its net 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.
The
tax effects of uncertain tax positions are recognized in the
consolidated financial statements only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than
50% likelihood of being realized. It is the Company’s
accounting policy to account for ASC 740-10-related penalties and
interest as a component of the income tax provision in the
consolidated statements of operations and comprehensive
loss.
As of
December 31, 2019, and 2018, the Company’s evaluation
revealed no uncertain tax positions that would have a material
impact on the financial statements. The 2016 through 2018 tax years
remain subject to examination by the IRS, as of December 31, 2019.
The Company does not believe that any reasonably possible changes
will occur within the next twelve months that will have a material
impact on the financial statements.
Equity-Based
Compensation
The
Company recognizes equity-based compensation based on the
grant-date fair value of the award on a straight-line basis over
the requisite service period, net of estimated forfeitures. The
Company estimates the fair value of stock options using the
Black-Scholes option-pricing model. The use of the Black-Scholes
option-pricing model requires the use of subjective assumptions,
including the fair value and projected volatility of the underlying
common stock and the expected term of the award.
The
fair value of each option granted has been estimated as of the date
of the grant using the Black-Scholes option pricing model with the
following assumptions during the years ended December 31, 2019 and
2018:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Risk-free
interest rate
|
1.35-3.03%
|
3.03%
|
|
Expected
term
|
5-6 years
|
5 years
|
|
Volatility
|
80.4-89.8%
|
88.5%
|
|
Dividend
yield
|
0%
|
0%
|
|
Estimated
annual forfeiture rate at time of grant
|
0-30%
|
0%
|
Risk-Free Interest Rate – The yield on actively traded
non-inflation indexed U.S. Treasury notes with the same maturity as
the expected term of the underlying grants was used as the average
risk-free interest rate.
Expected Term – The expected term of
options granted was determined based on management’s
expectations of the options granted which are expected to remain
outstanding.
Expected Volatility – Because the Company’s common stock has only
been publicly traded since late August 2017, there is not a
substantive share price history to calculate volatility and, as
such, the Company has elected to compute its expected volatility
based on the average volatilities of similar entities, as well as,
considering its volatility since becoming
public.
Dividend Yield – The Black-Scholes option
pricing model requires an expected dividend yield as an input. The
Company has not issued common stock dividends in the past nor does
the Company expect to issue common stock dividends in the
future.
Forfeiture Rate – This is the estimated
percentage of equity grants that are expected to be forfeited or
cancelled on an annual basis before becoming fully vested. The
Company estimates the forfeiture rate based on past turnover data,
level of employee receiving the equity grant, and vesting terms,
and revises the rate if subsequent information indicates that the
actual number of instruments that will vest is likely to differ
from the estimate. The cumulative effect on current and prior
periods of a change in the estimated number of awards likely to
vest is recognized in compensation cost in the period of the
change.
37
Series A Cumulative Convertible Redeemable Preferred
Stock
The
Company’s Series A Preferred Stock has certain embedded
features including; a Company put right to convert each share into
common stock at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2019, the Series A Preferred Stock holder 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 per share plus any
accrued but unpaid dividends, the Company 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 beginning in November 2019, and the
Series A Preferred Stock 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 Series A Preferred
Stock holders at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2016.
The
Company determined that the shares of Preferred Stock should be
classified as mezzanine equity since they are contingently
redeemable.
The
Company determined that it is probable that the Series A Preferred
Stock will become redeemable, thus the Company will recognize
changes in the redemption value immediately as they occur at the
end of each reporting period as if it were also the redemption date
for the interest and adjust the carrying amount of the Series A
Preferred Stock to the redemption value.
Long-Term
Debt with Detachable Warrants
When the Company issues debt with warrants, the
Company determines the value of the warrants using the
Black-Scholes Option Pricing Model using the stock price on the
date of issuance, the risk free interest rate associated with the
life of the debt, and the estimated volatility of the
Company’s stock. The Company treats the
warrants as a debt discount, recorded as a contra-liability against
the debt, and amortizes the balance over the life of the underlying
debt as interest expense in the consolidated statements of
operations.
Fair
Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, restricted cash and cash
equivalents, inventory, accounts receivable and accounts payable
approximate fair value as of December 31, 2019 and December 31,
2018 because of the relatively short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt approximates fair value as of December 31, 2019 and December
31, 2018 given management’s evaluation of the
instrument’s current rate compared to market rates of
interest and other factors.
The determination of
fair value is based upon the fair value framework established by
ASC Topic 820, Fair
Value Measurements and Disclosures (“ASC
820”). Fair value is defined as the exit price, or the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as
of the measurement date. ASC 820 also establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in
valuing the asset or liability and are developed based on market
data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions
about the factors market participants would use in valuing the
asset or liability. The guidance establishes three levels of inputs
that may be used to measure fair value:
Level 1 –
Quoted
prices in active markets for identical assets or
liabilities.
Level 2 –
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level 3 –
Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurements. Changes in the observability of valuation inputs may
result in a reclassification of levels for certain securities
within the fair value hierarchy.
The Company’s goodwill and other intangible assets are
measured at fair value at the time of acquisition and analyzed on a
recurring and non-recurring basis for impairment, respectively,
using Level 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 December 31, 2019. There were no changes
in levels during the years ended December 31, 2019 and
2018.
Earnings
per Share
Basic
earnings per share, or EPS, is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS
is computed using the weighted average number of common and
potentially dilutive securities outstanding during the period,
except for periods of net loss for which no potentially dilutive
securities are included because their effect would be
anti-dilutive. Potentially dilutive securities consist of common
stock issuable upon exercise of stock options or warrants using the
treasury stock method. Potentially dilutive securities issuable
upon conversion of the Series A Preferred Stock are calculated
using the if-converted method.
The
Company calculates basic and diluted earnings per common share
using the two-class method. Under the two-class method, net
earnings are allocated to each class of common stock and
participating security as if all of the net earnings for the period
had been distributed. Participating securities consist of preferred
stock that contain a nonforfeitable right to receive dividends and
therefore are considered to participate in undistributed earnings
with common stockholders.
Segment Reporting
The FASB ASC Topic
280, Segment
Reporting, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
Beginning
with the first quarter of 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
reflect the Company’s separate focus on technology products
and services versus professional services.
The Technology Segment is responsible for the activities in
developing technology and distributing and licensing products and
services with vehicle recognition features. In connection with this
effort in March 2019, the Company acquired OpenALPR Technology. The
Professional Services Segment is responsible for the activities
that provide professional services for government contracting
market, as well as staffing services for the aerospace and aviation
markets.
New Accounting Pronouncements
New Accounting Pronouncements Effective in the Year Ended December
31, 2019
In February 2016, the
FASB issued ASU 2016-02, Leases
(Topic 842) (“ASU
2016-02”). ASU
2016-02 requires lessees to recognize lease assets and lease
liabilities on the balance sheet and requires expanded disclosures
about leasing arrangements. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018 and interim periods in
fiscal years beginning after December 15, 2018, with early adoption
permitted. In July 2018, the FASB issued ASU No.
2018-11, Leases
(Topic 842): Targeted Improvements (“ASU
2018-11”). ASU 2018-11 provides entities another option for
transition, allowing entities to
not apply the new standard in the comparative periods they present
in their financial statements in the year of adoption.
The Company
has included the impact of this standard as part of its leasing
accounting policy above.
In June 2018, the FASB
issued ASU 2018-07, Compensation
– Stock Compensation (Topic 718), Improvements
to Nonemployee Share-Based Payment Accounting (“ASU
2018-07”), which is intended to simplify aspects of
share-based compensation issued to non-employees by making the
guidance consistent with the accounting for employee share-based
compensation. ASU 2018-07 is effective for annual
periods
beginning after December 15, 2018 and interim periods within
those annual periods, with early adoption permitted but no earlier
than an entity’s adoption date of Topic 606. The Company
adopted the provisions of ASU 2018-07 effective January 1, 2019.
Adopting ASU 2018-07 had no impact on the Company’s
consolidated financial statements and related
disclosures.
38
In August 2018, the FASB issued ASU
2018-15, Intangibles – Goodwill
and Other – Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”). The
amendments align the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal-use software license). The
accounting for the service element of a hosting arrangement that is
a service contract is not affected by these amendments. The
provisions may be adopted prospectively or retrospectively. This
ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15,
2019. Early adoption is permitted, and the Company early
adopted the ASU during the third quarter of 2019, effective July 1,
2019 on a prospective basis. In connection with the adoption of ASU
2018-15, the Company capitalized $91,000 of implementation costs
relating to a new financial accounting and reporting system that
went live in October 2019.
In January 2017, the FASB issued ASU
2017-04, Intangibles - Goodwill and
Other: Simplifying the Test for Goodwill Impairment.
To simplify the subsequent measurement
of goodwill, the update requires only a single-step quantitative
test to identify and measure impairment based on the excess of a
reporting unit's carrying amount over its fair value. A qualitative
assessment may still be completed first for an entity to determine
if a quantitative impairment test is necessary. The update is
effective for fiscal year 2021 and is to be adopted on a
prospective basis. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company will test goodwill
for impairment within one year of the acquisition or annually as
of October 1, and whenever indicators of impairment
exist. The Company adopted the standard on January 1, 2019,
and it did not have an impact on the Company’s financial
position, results of operations, or cash flows.
New Accounting Pronouncements Effective in Future
Periods
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic
820), Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”). This ASU modifies the
disclosure requirements for fair value measurements by removing,
modifying or adding certain disclosures. ASU 2018-13 is effective
for annual periods beginning after December 15, 2019 and interim
periods within those annual periods, with early adoption permitted.
The amendments on changes in unrealized gains and losses, the range
and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. The new standard is expected
to impact to Company’s disclosures but is not anticipated to
impact on the Company’s operations, balance sheet or cash
flows.
In June
2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”) which requires the measurement and
recognition of expected credit losses for financial assets held at
amortized cost. ASU 2016-13 replaces the existing incurred loss
impairment model with an expected loss methodology, which will
result in more timely recognition of credit losses. ASU 2016-13 is
effective for annual reporting periods, and interim periods within
those years beginning after December 15, 2019. Upon adoption of the new standard on January 1,
2020, the Company will begin recognizing an allowance for credit
losses based on the estimated lifetime expected credit loss related
to the Company’s financial assets. Based on the Company
analysis of ASU 2016-13 and due to the nature and extent of the
Company’s financial instruments in scope of this ASU
(primarily accounts receivable) and the historical, current and
expected credit quality of the Company’s customers, the
Company does not expect this ASU to have a material impact on its
consolidated operations and balance sheet.
There
are currently no other accounting standards that have been issued,
but not yet adopted, that could have a significant impact on the
Company’s consolidated financial position, results of
operations or cash flows upon adoption.
NOTE 2 – BUSINESS ACQUISITIONS
Secure Education Consultants Acquisition
On January 1, 2018, the Company completed its acquisition of
certain assets of Secure Education Consultants through Firestorm.
Consideration paid as part of this acquisition included: $100,000
in cash; 33,333 shares of Rekor common stock valued at $163,000;
warrants to purchase 33,333 shares of Rekor common stock,
exercisable over a period of five years, at an exercise price of
$5.44 per share, valued at $66,000; and warrants to purchase 33,333
of Rekor common stock, exercisable over a period of five years, at
an exercise price of $6.53 per share, valued at
$57,000.
The Company recorded $386,000 of customer relationships to
intangible assets.
The table below shows the final breakdown related to the Secure
Education Consultants acquisition (dollars in
thousands):
|
Cash
paid
|
$100
|
|
Common
stock issued
|
163
|
|
Warrants
issued, at $5.44
|
66
|
|
Warrants
issued, at $6.53
|
57
|
|
Total
consideration
|
386
|
|
Less
intangible and intellectual property
|
(386)
|
|
Net
goodwill recorded
|
$-
|
On June 1, 2019, the Company sold all its interest in Secure
Education Consultants for consideration of $250,000. As a result of
the Secure Education Consultants sale, the Company disposed of
$249,000 of net intangible assets, $58,000 of accounts receivables,
and $54,000 of accounts payables. This resulted in a loss of $3,000
that is presented as part of general and administrative expenses in
the accompanying consolidated statement of operations.
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 (see Note 9) 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 (see Note
14).
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 consolidated statement of operations for the year
ended December 31, 2019.
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
|
During the year ended December 31, 2019, $2,055,000 of
revenue
was attributed to OpenALPR Technology Acquisition, which was
reported in the consolidated income statement under the Technology
Segment.
39
Hill Employment Agreement
On November 14, 2018, concurrent with the execution of the OpenALPR
Purchase Agreement, the Company entered into an employment
agreement with Matthew Hill (the “Hill Employment
Agreement”) which became effective as of March 12, 2019, the
closing date of the
OpenALPR Technology Acquisition.
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, 2018. This unaudited pro forma
financial information is presented for information purposes only
and is not intended to present actual results that would have been
attained had the acquisition been completed as of January 1,
2018 or to project potential operating results as of any future
date or for any future periods.
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(Dollars
in thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
Technology
|
$6,438
|
$5,235
|
|
Professional
Services
|
13,851
|
16,532
|
|
Total
revenue from continuing operations
|
20,289
|
21,767
|
|
Net
loss from continuing operations
|
(13,604)
|
(4,721)
|
|
Basic
and diluted earnings (loss) per share
|
$(0.74)
|
$(0.36)
|
|
Basic
and diluted number of shares
|
20,129,985
|
16,009,014
|
NOTE 3 – OPERATIONS HELD FOR SALE
In September 2019, the Company determined that the Global business
met the criteria for held for sale accounting because it expects to
complete the sale of Global during the next 12 months.
Historically, Global has been presented as part of the Professional
Services Segment.
The pending dispositions 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 Global
as held for sale, including for all prior periods reflected in
consolidated financial statements and these notes.
Pursuant to ASC Topic 205-20, Presentation of Financial Statements
- Discontinued Operations, the results of operations from Global
for the year ended December, 2019 and 2018 has been classified as
held for sale and presented as part of income (loss) from
operations held for sale in the accompanying consolidated
statements of operations presented herein. The assets and
liabilities also have been classified as held for sale under the
line captions of current assets held for sale and current
liabilities held for sale in the accompanying consolidated
balance sheets as of December 31, 2019 and December 31,
2018.
The assets and liabilities classified as held for sale
operations in the accompanying consolidated financial
statements as of December 31, 2019 and December 31, 2018 are shown
below (dollars in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$225
|
$90
|
|
Accounts
receivable, net
|
2,763
|
2,289
|
|
Other
current assets, net
|
238
|
257
|
|
Current
assets held for sale
|
3,226
|
2,636
|
|
Property
and equipment, net
|
113
|
176
|
|
Right-of-use
lease assets, net
|
130
|
-
|
|
Goodwill
|
669
|
1,691
|
|
Intangible
assets, net
|
1,994
|
2,208
|
|
Deposits
and other long-term assets
|
-
|
79
|
|
Total
long-term assets held for sale
|
2,906
|
4,154
|
|
Total
assets held for sale
|
$6,132
|
$6,790
|
|
LIABILITIES
|
|
|
|
Accounts
payable and accrued expenses
|
$461
|
$800
|
|
Short-term
borrowings
|
1,842
|
1,095
|
|
Lease
liability, short-term
|
113
|
-
|
|
Total
current liabilities held for sale
|
2,416
|
1,895
|
|
Other
long-term liabilities
|
-
|
90
|
|
Lease
liability, long-term
|
30
|
-
|
|
Total
long-term liabilities held for sale
|
30
|
90
|
|
Total
liabilities held for sale
|
$2,446
|
$1,985
|
40
The major components of the operations held for sale, net of tax,
are presented in the consolidated statements of operations below
(dollars in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Revenue
|
$26,207
|
$28,508
|
|
Cost
of revenue
|
22,680
|
24,788
|
|
Gross
profit
|
3,527
|
3,720
|
|
Operating
expenses:
|
|
|
|
General
and administrative expenses
|
3,481
|
3,634
|
|
Selling
and marketing expenses
|
170
|
-
|
|
Impairment
of intangibles
|
1,022
|
-
|
|
Operating
expenses
|
4,673
|
3,634
|
|
Income
(loss) from operations
|
(1,146)
|
86
|
|
Other
income (expense):
|
|
|
|
Loss
on extinguishment of debt
|
(31)
|
-
|
|
Interest
expense
|
(294)
|
(117)
|
|
Other
income (expense)
|
(1)
|
37
|
|
Total
other expense
|
(326)
|
(80)
|
|
Income
(loss) from operations held for sale
|
(1,472)
|
6
|
|
Income
tax provision from operations held for sale
|
-
|
-
|
|
Net
income (loss) from operations held for sale
|
$(1,472)
|
$6
|
NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental
disclosures of cash flow information for the years ended
December 31, 2019 and 2018 was as follows (dollars in
thousands):
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Cash
paid for interest - continuing operations
|
$2,331
|
$362
|
|
Cash
paid for interest - held for sale operations
|
325
|
117
|
|
Cash
paid for taxes - continuing operations
|
-
|
-
|
|
Cash
paid for taxes - held for sale operations
|
12
|
14
|
|
Notes
payable for equipment purchase - held for sale
operations
|
-
|
32
|
|
Proceeds
from short-term borrowing arrangement transfer to settle line of
credit
|
312
|
-
|
|
Issuance
of common stock for the extinguishment of warrants
|
-
|
134
|
|
Common
stock issued in connection with note payable
|
-
|
126
|
|
Business
combinations, net of cash:
|
|
|
|
Current
assets
|
415
|
-
|
|
Intangible
assets
|
7,436
|
386
|
|
Goodwill
|
4,934
|
-
|
|
Current
liabilities
|
(388)
|
-
|
|
Cash
paid acquisition of OpenALPR Technology
|
(7,000)
|
-
|
|
Note
issued acquisition of OpenALPR Technology
|
(5,000)
|
|
|
Issuance
of common stock
|
(397)
|
(163)
|
|
Issuance
of common stock warrants
|
-
|
(123)
|
|
Sale
of Secure Education Consultants:
|
|
|
|
Current
assets
|
(58)
|
-
|
|
Intangible
assets sold
|
(249)
|
-
|
|
Current
liabilities
|
54
|
-
|
|
Loss
on sale
|
3
|
-
|
|
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
|
1,286
|
-
|
|
Deferred
rent
|
31
|
-
|
|
Lease
liability
|
$(1,317)
|
$-
|
41
NOTE 5 – INVENTORY
As of December 31, 2019 and December 31, 2018,
inventory consisted entirely of parts of $302,000 and
$73,000, respectively.
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (dollars in
thousands):
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Furniture
and fixtures
|
$62
|
$158
|
|
Office
equipment
|
300
|
545
|
|
Camera
systems
|
772
|
635
|
|
Vehicles
|
36
|
36
|
|
Leasehold
improvements
|
120
|
16
|
|
Total
|
1,290
|
1,390
|
|
Less:
accumulated depreciation and amortization
|
(807)
|
(928)
|
|
Property
and equipment, net from continuing operations
|
483
|
462
|
|
Property
and equipment, net from operation held for sale
|
113
|
176
|
|
Property
and equipment, net
|
$596
|
$638
|
Depreciation and
amortization related to property and equipment, net from continuing
operations for the years ended December 31, 2019 and 2018 was
$348,000 and $309,000, respectively. During the year ended December
31, 2019, the Company disposed of property and equipment with a
book value of $469,000 that was fully depreciated at the time of
disposal.
Depreciation and
amortization related to property and equipment, net from operations
held for sale for the years ended December 31, 2019 and 2018 was
$38,000 and $33,000, respectively. For property and equipment that
is classified as held for sale, the Company ceases depreciation at
the time of the held for sale classifications as the assets are
deemed to be held at fair value.
NOTE 7 – 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.
Cash paid for amounts included in the measurement of operating
lease liabilities from continuing operations was $163,000 for the
year ended December 31, 2019. Included in this amount is $13,000
related to prepaid rent for one of the Company’s leased
properties. Cash paid for amounts included in the measurement of
operating lease liabilities from operations held for sale was
$131,000 for the year ended December 31, 2019. Included in this
amount is $10,000 related to prepaid rent for one of the
Company’s leased properties.
During the third quarter of 2019 the Company performed an
assessment and determined that one of its operating leases met the
criteria to be classified as a lease abandonment. For the year
ended December 31, 2019 the Company recognized $70,000 of expense
related to the loss of lease abandonment which is included in other
expenses in the consolidated statement of operations.
Operating lease expense
from continuing operations for
the year ended December 31, 2019 and 2018 was $353,000 and
$667,000,
respectively, and is part of general and administrative expenses in
the accompanying consolidated statement of
operations.
Operating lease expense
from operations held for sale for
the year ended December 31, 2019 and 2018 was $134,000 and
$124,000,
respectively, and is part of income (loss) for operations held for
sale in the accompanying consolidated statement of
operations.
Supplemental balance sheet information related to leases as of
December 31, 2019 was as follows (dollars in
thousands):
|
Operating
lease right-of-use lease assets from continuing
operations
|
$782
|
|
Operating
lease right-of-use lease assets from operations held for
sale
|
130
|
|
Total
operating lease right-of-use assets
|
$912
|
|
|
|
|
Lease
liability, short-term
|
$302
|
|
Lease
liability, long-term
|
667
|
|
Lease
liability from operations held for sale
|
143
|
|
Total
operating lease liabilities
|
$1,112
|
|
|
|
|
Weighted
Average Remaining Lease Term - operating leases from continuing
operations
|
3.4
|
|
|
|
|
Weighted
Average Discount Rate - operating leases
|
9%
|
Maturities of operating lease liabilities for continuing operations
and operations held for sale at December 31, 2019 were as follows
(dollars in thousands):
|
2020
|
$498
|
|
2021
|
337
|
|
2022
|
177
|
|
2023
|
178
|
|
2024
|
100
|
|
Total
lease payments
|
1,290
|
|
Less
imputed interest
|
(178)
|
|
Maturities
of lease liabilities
|
$1,112
|
42
NOTE 8 – INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill by reportable business
segment for the year ended December 31,
2019 were as follows (dollars in thousands):
|
|
Segment
|
December 31, 2018
|
OpenALPR
Technology Acquisition
|
Impairment
|
December 31, 2019
|
|
Goodwill
from continuing operations
|
Technology
|
$1,402
|
$4,934
|
$-
|
$6,336
|
|
Goodwill
from held for sale operations
|
Professional
Services
|
1,691
|
-
|
(1,022)
|
669
|
|
Total
goodwill
|
|
$3,093
|
$4,934
|
$(1,022)
|
$7,005
|
In
the fourth quarter of 2019 the Company operations that are
presented as held for sale, Global, incurred an impairment charge
as it was determined by the Company that its carrying value was
below its implied fair value.
As a result of the
determination to classify Global as held for sale, the Company
performed an impairment analysis with respect to the carrying value
of goodwill in Global in connection with the preparation of the
Company’s financial statements for the year ended December
31, 2019. The results of the goodwill impairment analysis indicated
that the estimated fair value of Global was less than its carrying
value; therefore, the Company applied Step 2 of the goodwill
impairment test. The results of Step 2 indicated that the carrying
value of the goodwill associated with Global exceeded its implied
fair value, resulting in a $1,022,000 non-deductible goodwill
impairment charge which is recorded as part of operation held for
sale within the consolidated statements of operations. The
impairment charge was non-cash in nature and did not affect the
Company’s current liquidity, cash flows, borrowing capability
or operations; nor did it impact the debt covenants under the
Company’s existing debt agreements.
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from
December 31, 2018 to December 31, 2019 (dollars in
thousands):
|
|
December 31, 2018
|
Additions
|
Amortization
|
Impairment
|
Sale of Secure Education Consultants
|
December 31, 2019
|
|
Intangible
assets subject to amortization from continuing
operations
|
|
|
|
|
|
|
|
Customer
relationships
|
$2,475
|
$90
|
$(371)
|
$(1,549)
|
$(249)
|
$396
|
|
Marketing
related
|
69
|
223
|
(62)
|
-
|
-
|
230
|
|
Technology
based
|
83
|
7,123
|
(811)
|
-
|
-
|
6,395
|
|
Internally
developed capitalized software
|
829
|
458
|
(64)
|
-
|
-
|
1,223
|
|
Intangible
assets subject to amortization from continuing
operations
|
3,456
|
7,894
|
(1,308)
|
(1,549)
|
(249)
|
8,244
|
|
Intangible
assets subject to amortization from held for sale
operations
|
2,208
|
-
|
(214)
|
-
|
-
|
1,994
|
|
Total
intangible assets subject to amortization
|
$5,664
|
$7,894
|
$(1,522)
|
$(1,549)
|
$(249)
|
$10,238
|
The following provides a breakdown of identifiable
intangible assets as of December 31, 2019 (dollars in
thousands):
|
|
Customer
Relationships
|
Marketing
Related
|
Technology
Based
|
Internally
Developed Capitalized Software
|
Total
|
|
Identifiable
intangible assets
|
$461
|
$327
|
$7,206
|
$1,290
|
$9,284
|
|
Accumulated
amortization
|
(65)
|
(97)
|
(811)
|
(67)
|
(1,040)
|
|
Identifiable
intangible assets from continuing operations, net
|
396
|
230
|
6,395
|
1,223
|
8,244
|
|
Identifiable
intangible assets from operations held for sale, net
|
1,685
|
309
|
-
|
-
|
1,994
|
|
Identifiable
intangible assets, net
|
$2,081
|
$539
|
$6,395
|
$1,223
|
$10,238
|
With the
OpenALPR Technology Acquisition, the Company
identified technology-based intangible assets of $7,123,000,
marketing-related intangible assets of $223,000, customer-related
intangible assets of $90,000 and goodwill of $4,934,000 along with
net assets acquired of $27,000.
These intangible assets
are being amortized on a straight-line basis over their weighted
average estimated useful life of 6.3 years. Amortization expense
attributable to continuing operations for the year ended December
31, 2019 and 2018 was $1,308,000 and $738,000, respectively, and is
presented as part of general and administrative expenses in the
accompanying consolidated statements of
operations.
Amortization expense attributable to operations held for sale for
the year ended December 31, 2019 and 2018 was $214,000 and
$286,000, respectively, and is presented as part of income (loss)
from operations held for sale in the accompanying consolidated
statements of operations.
Firestorm, the Company's wholly owned subsidiary, provided services
related to crisis management, crisis communications, emergency
response, and business continuity and other emergency, crisis and
disaster preparedness initiatives. Its fully owned subsidiary, BC
Management was an executive search firm for business continuity,
disaster recovery, crisis management and risk management
professionals and a provider of business continuity research with
annual studies covering compensation assessments, program maturity
effectiveness, event impact management reviews, IT resiliency and
critical supply analyses. Its other wholly owned subsidiary, Secure
Education Consultants was comprised of an expert team of highly
trained, former U.S. Secret Service Agents and assists clients by
designing customized plans, conducting security assessments,
delivering training, and responding to critical
incidents.
On June 1, 2019, the Company completed the sale of Secure Education
Consultants, which included $249,000 of intangible assets (see Note
2).
On June 28, 2019 the
Company discontinued the operations of BC
Management, resulting in an
impairment of $242,000 of intangible assets related to its
acquisition in December 2018. BC Management was previously included
as part of the Company’s Professional Services Segment. The
discontinued operation of BC Management
does not
constitute a significant strategic shift that will have a material
impact on the Company’s ongoing operations and financial
results and accordingly are not reported separately from the
Company’s continuing operations.
On June 30, 2019, the Company recorded an intangible asset
impairment of $1,307,000 of customer relationship intangible assets
from the Firestorm acquisition. In the second quarter of 2019, the
Company evaluated the performance of all the franchisees of
Firestorm Franchising, LLC and notified them of the termination of
their agreements on the basis of non-performance. Firestorm
Franchising is included as part of the Company’s Professional
Services Segment. The discontinued operation of Firestorm
Franchising, LLC does not constitute a significant strategic shift
that will have a material impact on the Company's ongoing
operations and financial results.
43
As
of December 31, 2019, the estimated annual amortization expense for
each of the next five fiscal years and thereafter is as follows
(dollars in thousands):
|
2020
|
$1,265
|
|
2021
|
1,254
|
|
2022
|
1,173
|
|
2023
|
1,096
|
|
2024
|
1,060
|
|
Thereafter
|
1,450
|
|
Capitalized
software not yet placed in service
|
946
|
|
Total
|
$8,244
|
NOTE 9 – DEBT
Short-Term Borrowings
On August 9, 2019,
AOC Key Solutions, entered into an agreement with LSQ Funding
Group, L.C. (“LSQ”), as an unrelated third party,
pursuant to which AOC Key
Solutions sells its accounts receivable to LSQ and LSQ
advances AOC Key
Solutions 90% of the value of the receivable. AOC Key
Solutions can advance up to $5,000,000 at one time. The term
of the agreement is for 12 months and automatically renews for
additional 12-month periods. The agreement is presented as secured
borrowings, as the accounts receivable are sold with recourse back
to the Company, meaning that AOC Key
Solutions bears the risk of non-payment by the account
debtor. The funded amount of accounts receivables that LSQ has
provided to AOC Key
Solutions was $1,894,000 as of December 31, 2019 and is
presented as part of secured borrowings on the consolidated balance sheets.
To secure its obligations to LSQ, AOC Key
Solutions has granted a first priority security interest in
the AOC
Key Solutions accounts receivable and proceeds thereof. As
of December 31, 2019, there were approximately $2,714,000 of
receivables that are subject to collateral as part of this
agreement. The receivables held as collateral are presented as part
of accounts receivable, net on the consolidated balance
sheets.
On August 9, 2019,
Global, entered an agreement with an unrelated
third party, LSQ, pursuant to which Global sells its accounts
receivable to LSQ and LSQ advances Global 90% of the value of the
receivable. Global can advance up to $10,000,000 at one time. The
term of the agreement is for 12 months and automatically renews for
additional 12-month periods. The agreement is presented as secured
borrowings, as the accounts receivable are sold with recourse back
to Global, meaning that Global bears the risk of non-payment by the
account debtor. The funded amount of accounts receivables that LSQ
has provided to Global was $1,842,000 as of December 31, 2019 and
is presented as part of current liabilities held for sale on the
consolidated balance sheets. To secure its obligations to LSQ,
Global has granted a first priority security interest in
Global’s accounts receivable and proceeds thereof. As of
December 31, 2019, there were approximately $2,455,000 of
receivables that are subject to collateral as part of this
agreement. The receivables held as collateral are presented in
assets held for sale on the consolidated balance
sheets.
During the year ended
December 31, 2019, the Company recorded $112,000, in interest expense from
continuing operations, related to the agreement with LSQ.
Additionally, during the year ended December 31, 2019, the Company
recorded $169,000 in interest expense from operations held for
sale, related to the agreement with LSQ.
In November 2017,
AOC Key
Solutions, entered into an Account
Purchase Agreement and related agreements (the “AOC Wells
Agreement”) with Wells Fargo Bank National Association
(“WFB”) (“Wells Fargo Credit Facilities”).
Pursuant to the AOC Wells Agreement, AOC Key Solutions
agreed to sell
and assign to WFB all of its Accounts (as such term is defined in
Article 9 of the Uniform Commercial Code), constituting accounts
arising out of sales of Goods (as such term is defined in Article 9
of the Uniform Commercial Code) or rendition of services that WFB
deemed to be eligible for borrowing under the AOC Wells Agreement.
WFB agreed to advance to AOC Key Solutions
90% of all
eligible accounts with a maximum facility amount of $3,000,000.
Interest was payable under the AOC Wells Agreement at a monthly
rate equal to the Daily One Month LIBOR, (as such term was defined
under the AOC Wells Agreement), in effect from time to time plus
5%. The AOC Wells Agreement also provided for a deficit interest
rate equal to the then applicable interest rate plus 50% and a
default interest rate equal to the then applicable interest rate or
deficit interest rate, plus 50%. The initial term of the AOC Wells
Agreement ran through December 31, 2018 (the “Initial
Term”), with automatic renewal terms of 12 months (the
“Renewal Term”), commencing on the first day after the
last day of the Initial Term. The current term of the AOC
Wells Agreement ran through December 31, 2019. AOC Key
Solutions was able to terminate the
AOC Wells Agreement upon at least 60 days’ prior written
notice, but no more than 120 days’ written notice, prior to
and effective as of the last day of the Initial Term or the Renewal
Term, as the case may be. In August 2019,
AOC Key
Solutions entered in a payoff and termination agreement with
WFB in which AOC Key Solutions paid WFB $341,000 to retire all
indebtedness and obligation to WFB. As part of payoff of the debt
AOC Key
Solutions recognized $45,000 of costs in excess of the net
carrying amount of the outstanding debt, which is presented in the
loss on extinguishment of debt on the consolidated statement of
operations. The principal balance as of December 31, 2019 and 2018
was $0 and $566,000, respectively.
Global had revolving lines
of credit with WFB. WFB agreed to advance
to Global 90% of all eligible
accounts with a maximum facility amount of $5,000,000. Interest was
payable under the Wells Fargo Credit
Facilities at a monthly rate equal to
the Three-Month LIBOR, (as such term is defined under the Wells
Fargo Credit Facilities), in effect from time to time plus 3%, plus
an additional margin of 3%. Payment of the revolving
lines of credit was secured by the account receivables of Global.
The term of the Wells Fargo Credit Facilities was through December
31, 2019, with automatic renewal
terms of 12 months. In August 2019, Global
entered in a payoff and termination agreement with WFB in which
Global paid WFB $1,477,000 to retire all indebtedness and
obligation to WFB. As part of payoff of the debt Global recognized
$31,000 of costs in excess of the net carrying amount of the
outstanding debt, which is presented as loss from operations held
for sale on the consolidated statement of operations. The principal
balance as of December 31, 2019 and 2018 was $0 and $1,095,000,
respectively.
Long-Term Debt
On March 16, 2016, the
Company entered into a Subordinated Note and Warrant Purchase
Agreement (the “Avon Road Note Purchase Agreement”)
pursuant to which $500,000 in subordinated debt (the "Avon Road
Note") was issued by the Company to Avon Road Partners, L.P.
(“Avon Road”), an affiliate of Robert Berman, the
Company’s President and CEO and a member of the
Company’s Board of Directors. On March 12, 2019, the $500,000
balance due on the Avon Road Note was retired in its entirety in
exchange for an equivalent principal amount of the 2019 Promissory
Notes (see below).
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 $961,000 and
$938,000, net of unamortized interest, as of December 31, 2019 and
December 31, 2018, respectively, to reflect the amortized fair
value of the notes issued due to the difference in interest rates
of $39,000 and $62,000, 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”).
The loan was originally due and payable on May 1, 2019 and bore
interest at 15% per annum, with a minimum of 15% interest payable
if the loan was repaid prior to May 1, 2019. In addition, the
Company issued 35,000 shares of common stock to the 2018 Lender,
which shares contained piggy-back registration rights. If the
shares were not registered on the next selling shareholder
registration statement, the Company would have been obligated to
issue an additional 15,000 shares to the 2018 Lender. Upon the sale
of Rekor Recognition Systems, Inc. (“Rekor
Recognition”), the company’s wholly owned
subsidiary, or
its assets, the 2018 Lender was entitled to receive 7% of any
proceeds received by the Company or Rekor Recognition in excess of
$5,000,000 (the “Lender’s Participation”). In
addition, commencing January 1, 2020, the 2018 Lender was to be
paid 7% of Rekor Recognition’s earnings before interest,
taxes, depreciation and amortization, less any capital
expenditures, which amount was to be credited for any payments that
might ultimately be paid to the 2018 Lender as its Lender’s
Participation, if any. On April 3, 2018, the fair value of shares
issued was $126,000. On October 24, 2018, the Company and Rekor
Recognition entered a note amendment with the 2018 Lender by which
the maturity date of the note was extended to May 1, 2020 (the
“2018 Promissory Note Amendment”). The 2018 Promissory
Note Amendment further provided for payment of interest through May
1, 2019, if the principal was repaid before May 1, 2019. On October
24, 2018, an additional $62,500 fee was paid as consideration for
extending the maturity date to May 1, 2020 and designated as
financing costs related to the 2018 Promissory Note Amendment.
Amortized financing cost for the year ended December 31, 2019 and
2018 was determined to be $31,000 and $96,000, respectively.
Amortized financing cost is presented as part of interest expense
in the accompanying consolidated statement of operations. The 2018
Promissory Note had an effective interest rate of
19.5%.
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 year
ended December 31, 2019.
On March 12, 2019, the
Company entered into a note purchase agreement pursuant to which
investors, including OpenALPR Technology, Inc. (see Note 2) (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 is due and
payable on March 11, 2021 and 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 December 31, 2019, the Company
had a waiver in place for the fixed charge coverage ratio covenant
related to this note until May 31, 2020. 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.
Amortized financing costs for the year ended December 31, 2019 were
$1,047,000 and are included in interest expense on the consolidated
statement of operations. The 2019 Promissory Notes have an
effective interest rate of 24.87%.
44
The principal amounts due for long-term notes payable described
above are shown below as of December 31, 2019 (dollars in
thousands):
|
2020
|
$-
|
|
2021
|
21,000
|
|
2022
|
1,000
|
|
2023
|
-
|
|
2024
|
-
|
|
Thereafter
|
-
|
|
Total
|
22,000
|
|
|
|
|
Less
unamortized interest
|
(39)
|
|
Less
unamortized financing costs
|
(1,552)
|
|
Notes
payable
|
$20,409
|
NOTE 10 – 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
expense from income taxes for the years ended December 31, 2019 and
2018 consists of the following (dollars in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Current:
|
|
|
|
State
|
$37
|
$29
|
|
Deferred:
|
|
|
|
Federal
|
10
|
83
|
|
State
|
-
|
(83)
|
|
Expense
from income taxes
|
$47
|
$29
|
The
components of deferred income tax assets and liabilities are as
follows at December 31, 2019 and 2018 (dollars in
thousands):
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Deferred
tax assets:
|
|
|
|
Amortizable
start-up costs
|
$-
|
$34
|
|
Accrual
and others
|
322
|
241
|
|
Lease
Liabilities
|
246
|
-
|
|
Interest
expense carryforward
|
1,079
|
147
|
|
Net
operating loss carryforward
|
4,724
|
2,518
|
|
Valuation
allowance
|
(5,813)
|
(2,308)
|
|
Total
deferred tax assets
|
558
|
632
|
|
Deferred
tax liabilities:
|
|
|
|
Goodwill
and Intangibles
|
(328)
|
(551)
|
|
Right-of-Use
Asset
|
(202)
|
-
|
|
Fixed
assets
|
(38)
|
(81)
|
|
Total
deferred tax assets (liabilities), net
|
$(10)
|
$-
|
The
difference between the income tax provision computed at the U.S.
Federal statutory rate and the effective tax rate is as follows for
the years ended December 31, 2019 and 2018:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
U.S.
statutory federal rate
|
21.0%
|
21.0%
|
|
(Decrease)
increase in taxes resulting from:
|
|
|
|
State
income tax rate, net of U.S. Federal benefit
|
1.5%
|
2.9%
|
|
Impact
of changes in tax rates
|
0.0%
|
(0.1)%
|
|
True-ups
|
(0.1)%
|
(5.7)%
|
|
Other
|
(0.6)%
|
(1.6)%
|
|
Valuation
allowance
|
(22.1)%
|
(17.0)%
|
|
Effective
tax rate
|
(0.3)%
|
(0.5)%
|
The
Company files income tax returns in the United States and in
various state and foreign jurisdictions. No U.S. Federal, state or
foreign income tax audits were in process as of December 31,
2019.
The
Company evaluated the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with
respect to such net deferred income tax assets. After considering
all available facts, the Company fully reserved for its net
deferred tax assets, outside of the deferred tax liability related to
the indefinite lived intangible, because the Company
believes that it is not more likely than not that their benefits
will be realized in future periods. The Company will continue to
evaluate its deferred tax assets to determine whether any changes
in circumstances could affect the realization of their future
benefit. If it is determined in future periods that portions of the
Company’s net deferred income tax assets satisfy the
realization standard, the valuation allowance will be reduced
accordingly.
At
December 31, 2019, Rekor had gross federal and state net operating
loss carryforwards of $19,192,000 and $11,952,000, respectively,
and a valuation allowance of $5,813,000 recorded against its net
deferred tax assets. At December 31, 2019, Rekor had net federal
and state net operating loss carryforwards of $4,030,000 and
$693,00 respectively. These NOLs are scheduled to begin to expire
in 2034 and $4,724,000 are grandfathered under the Tax Cuts and
Jobs Act; thus, these NOLs are not subject to the 80 percent
limitation. NOLs generated in 2019 and 2018 of $10,249,000 and
$4,195,000, respectively, will be carried forward indefinitely and
are subject to the annual 80 percent limitation.
45
At
December 31, 2018, Rekor had gross federal and state net operating
loss carryforwards of $9,733,000 and $474,000, respectively, and a
valuation allowance of $2,308,000 recorded against its net deferred
tax assets. At December 31,
2019, Rekor had net federal and state net operating loss
carryforwards of $2,044,000 and $474,00
respectively.
For the
years ended December 31, 2019 and 2018, 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 IRS.
NOTE 11 – RESTRUCTURING
In June 2019, the Company implemented a new organizational
structure and plan to improve operating results by reducing
operating costs by eliminating redundant positions, and the Company
initiated restructuring and transition activities to improve
operational efficiency, reduce costs and better position the
Company to drive future revenue growth. For the year ended December
31, 2019, the Company recorded $333,000 of charges, related to
one-time employee termination benefits, in connection with these
activities. These charges were related to the Professional Services
Segment and are included as part of general and administrative
expenses in the accompanying consolidated statement of operations.
As of December 31, 2019, the remaining liability related to the
restructuring activities was $155,000 and is presented as part of
accounts payable and accrued expenses in the accompanying
consolidated balance sheets. The amounts due are expected to be
paid within the next 12 months.
NOTE 12 – EMPLOYEE BENEFIT PLAN
AOC Key
Solutions had a defined contribution savings plan under Section
401(k) of the Internal Revenue Code (the “Code”) (the
“AOC 401(k) Plan”) which was amended on January 1,
2013, as required by the Code. Pursuant to the amended AOC 401(k)
Plan, AOC Key Solutions would make nondiscretionary “safe
harbor” matching contributions for all participants of 100%
of the participant’s salary deferrals up to 3%, and 50% of
deferrals up to the next 2%, of the participant’s
compensation.
Rekor
Recognition had a defined contribution savings plan under Section
401(k) of the Code (the “Rekor Recognition 401(k)
Plan”). The Rekor Recognition 401(k) Plan was a defined
contribution plan, which covered substantially all U.S.-based
employees who had completed three months of service. The Rekor
Recognition 401(k) Plan provided that Rekor Recognition would match
50% of the participant salary deferrals up to 3% of a
participant’s compensation for all participants.
Global
also maintained a 401(k) plan (the “Global 401(k)
Plan”), which was amended September 15, 2014. However, Global
had not historically made matching contributions to the Global
401(k) Plan.
On
January 1, 2019, Rekor established the Rekor Systems, Inc. 401(k)
Plan (the “Rekor 401(k) Plan”), a Qualified Automatic
Contribution Arrangement (QACA) safe harbor plan, and the AOC
401(k) Plan, the Rekor Recognition 401(k) Plan, and the GCP 401(k)
Plan were amended and merged into the Rekor 401(k) Plan. Employees
that satisfied the eligibility requirements became participants in
the Rekor 401(k) Plan. Rekor contributes an amount equal to the sum
of 100% of a participant’s elective deferrals that do not
exceed 1% of participant’s compensation, plus 50% of the
participant’s elective deferrals that exceed 1% of the
participants compensation, but do not exceed 6% of the
participant’s compensation. Employee contributions are fully vested, and
matching contributions are subject to a two-year service vesting
schedule.
The
amount of contributions recorded by the Company under these plans
during the years ended December 31, 2019 and 2018 were $515,000 and
$159,000, respectively.
NOTE 13 – 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). The Complaint alleges
that the Firestorm Principals fraudulently induced the execution of
the Membership Interest Purchase Agreement pursuant to which
Firestorm was acquired by the Company, and seeks rescission of the
Membership Interest Purchase Agreement and certain transactions
contemplated thereby, including the issuance of notes and warrants
to the Firestorm Principals. On October 9, 2019, the Company filed
an Amended Complaint. On November 13, 2019, the Firestorm
Principals filed an answer to the Amended Complaint and asserted
counterclaims against the Company, Firestorm, and certain
executives of the Company. On December 16, the Firestorm Principals
filed a Motion for Judgment on the Pleadings. On January 30, 2020,
the Company filed a Second Amended Complaint. The Firestorm
Principals responded to the Second Amended Complaint on February
28, 2020. The Company’s deadline for responding to the
Firestorm Principals’ counterclaims is March 30, 2020. The
Company intends to vigorously litigate this action and believes
that the Firestorm Principals’ counterclaims are without
merit.
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
consolidated financial statements as a whole.
NOTE 14 – STOCKHOLDERS’ (DEFICIT)
EQUITY
Common Stock
As of
December 31, 2019, the Company is authorized to issue 30,000,000
shares of common stock, $0.0001 par value. As of December 31, 2019,
and December 31, 2018, the issued and outstanding common shares of
Rekor were 21,595,653 and 18,767,619, respectively.
In
January 2018, the Company issued 33,333 shares of Rekor common
stock as consideration as part of its acquisition of Secure
Education Consultants.
In
April 2018, the Company issued 35,000 shares of Rekor common stock
as additional consideration to the Lender in connection with the
2018 Promissory Note.
On November 1, 2018, the Company issued 4,125,000 shares of common
stock through an underwritten public offering at a public offering
price of $0.80 per share. Net proceeds to the Company was
approximately $2,797,000. In addition, the Company granted
underwriters a 45-day option to purchase up to 618,750 additional
shares of common stock to cover over-allotment, if any. The
underwriters did not exercise this option and the options were
cancelled. As part of the consideration to the underwriters, the
Company issued to the underwriters warrants to purchase an
aggregate of 206,250 shares of common stock, exercisable over a
period of five years, at an exercise price of $1.00 per share. The
underwriter warrants became exercisable commencing April 27, 2019
and expire on October 29, 2023.
For the
year ended December 31, 2019 and 2018, the Company issued 0 and
13,998 shares of Rekor common stock related to the exercise of
common stock options, respectively.
On February 15, 2019, the Company entered into Amendment No. 1 to
the OpenALPR Purchase Agreement, pursuant to which the Company
agreed to issue 600,000 shares of Rekor common stock as partial
consideration for the OpenALPR Technology Acquisition. On March 12,
2019, the Company issued 600,000 shares of Rekor common stock as
part of the consideration for the OpenALPR Technology
Acquisition.
For the
year ended December 31, 2019 and 2018, the Company issued 2,828,034
and 4,304,255 shares of Rekor common stock, respectively.
Of the shares
issued in the year ended December 31, 2019, 931,666 shares of Rekor
common stock were issued in exchange for cash and cashless exercise
of 1,152,938 warrants, 600,000 shares were issued in connection
with the OpenALPR Technology Acquisition, 3,638 shares were issued
as part of the exercise of warrants related to series A preferred
stock and 1,292,730 shares were issued in connection with the Sales
Agreement.
46
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
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 year ended December 31, 2019, based on
settlement date, the Company sold 1,292,730 shares of common stock
at a weighted-average selling price of $2.53 per share in
accordance with the Sales Agreement. Net cash provided from the
Sales Agreement was $2,949,000 after paying $226,000 related to the
issuance costs stated above, as well as, 3.0% or $98,000 related to
cash commissions provided to B. Riley FBR. As of December 31, 2019,
$11,727,000 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 beginning 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 consolidated balance sheets as of December 31, 2019
and 2018.
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
$752,000 and $655,000 for the years ended December 31, 2019 and
2018, respectively.
As of
December 31, 2019, and 2018, 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 year
ended December 31, 2019 and 2018, the Company paid cash dividends
of $0 and $264,000, respectively, to shareholders of record of
Series A Preferred Stock. Accrued dividends payable
to Series A Preferred Stock shareholders were $551,000 and $176,000
as of December 31, 2019 and 2018, respectively, and are presented
as part of the accounts payable and accrued expenses on the
accompanying consolidated balance sheets.
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 Global 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 Global 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. For the year ended December
31, 2019 and 2018, the Company paid cash dividends of $108,000 and
$81,000, respectively, to shareholders of record of Series B
Preferred Stock. Accrued dividends payable
to Series B Preferred Stock shareholders were $54,000 as of
December 31, 2019 and 2018 and are presented as part of the
accounts payable and accrued expenses on the accompanying
consolidated balance sheets.
Warrants
The Company had warrants outstanding that are exercisable into a
total of 2,251,232 and 1,214,491 shares of Rekor common stock as of
December 31, 2019 and December 31, 2018, respectively.
As part of its acquisition
of Brekford on August 29, 2017, the Company assumed
Brekford’s obligations with respect to the Brekford
Warrants. The exercise price for
the Brekford
Warrants was
$7.50 and they expired on March 31, 2020. Effective October 16,
2018, the Company entered into exchange agreements with holders of
the Brekford
Warrants
pursuant to which the Company issued to the holders an aggregate of
96,924 shares of common stock in exchange for the return of the
warrants to the Company for cancellation. As of December 31, 2019,
and December 31, 2018, no Brekford
Warrants were
outstanding.
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
240,017 and 243,655 shares of Rekor common stock as of December 31,
2019 and December 31, 2018, 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.
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 December 31, 2019, and December 31, 2018,
there were 631,254 Firestorm Warrants outstanding.
Pursuant to its acquisition of BC Management on December 31, 2017,
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 “BC
Management Warrants”). The expiration date of the BC
Management Warrants was December 31, 2022. As of December 31, 2018,
there were 66,666 BC Management Warrants outstanding. The BC
Management Warrants were surrendered on May 17, 2019, due to the
discontinuance of operations of BC Management, and as of December
31, 2019 there were no BC Management 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 December
31, 2019, and December 31, 2018, 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. As of December 31, 2019, and December 31,
2018, 16,437 and 206,250 warrants related to the 2018 underwritten
public offering remain outstanding, respectively.
47
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
are 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. As of December 31, 2019,
1,536,875 warrants related to the 2019 Promissory Notes remain
outstanding.
NOTE 15 – 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 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.
Rekor
has also designed the 2017 Plan to include a number of provisions
that Rekor’s management believes promote best practices by
reinforcing the alignment of equity compensation arrangements for
nonemployee directors, officers, employees, consultants and
stockholders’ interests. These provisions include, but are
not limited to, the following:
No Discounted Awards. Awards that have
an exercise price cannot be granted with an exercise price less
than the fair market value on the grant date.
No Repricing Without Stockholder
Approval. Rekor cannot, without stockholder approval, reduce
the exercise price of an award (except for adjustments in
connection with a Rekor recapitalization), and at any time when the
exercise price of an award is above the market value of Rekor
common stock, Rekor cannot, without stockholder approval, cancel
and re-grant or exchange such award for cash, other awards or a new
award at a lower (or no) exercise price.
No Evergreen Provision. There is no
evergreen feature under which the shares of common stock authorized
for issuance under the 2017 Plan can be automatically
replenished.
No Automatic Grants. The 2017 Plan does
not provide for “reload” or other automatic grants to
recipients.
No Transferability. Awards generally
may not be transferred, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order,
unless approved by the Administrator.
No Tax Gross-Ups. The 2017 Plan does
not provide for any tax gross-ups.
No Liberal Change-in-Control
Definition. The change-in-control definition contained in
the 2017 Plan is not a “liberal” definition that would
be activated on mere stockholder approval of a
transaction.
“Double-trigger” Change in Control
Vesting. If awards granted under the 2017 Plan are assumed
by a successor in connection with a change in control of Rekor,
such awards will not automatically vest and pay out solely as a
result of the change in control, unless otherwise expressly set
forth in an award agreement.
No Dividends on Unearned Performance
Awards. The 2017 Plan prohibits the current payment of
dividends or dividend equivalent rights on unearned
performance-based awards.
Limitation on Amendments. No
amendments to the 2017 Plan may be made without stockholder
approval if any such amendment would materially increase the number
of shares reserved or the per-participant award limitations under
the 2017 Plan, diminish the prohibitions on repricing stock options
or stock appreciation rights, or otherwise constitute a material
change requiring stockholder approval under applicable laws,
policies or regulations or the applicable listing or other
requirements of the principal exchange on which Rekor’s
shares are traded.
Clawbacks. Awards based on the
satisfaction of financial metrics that are subsequently reversed,
due to a financial statement restatement or reclassification, are
subject to forfeiture.
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 years ended December 31, 2019 and 2018 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 January 1, 2018
|
1,695,375
|
$2.19
|
9.26
|
|
|
Granted
|
48,499
|
0.73
|
9.85
|
|
|
Exercised
|
(13,998)
|
1.68
|
9.50
|
|
|
Forfeited
|
(450,633)
|
1.82
|
-
|
|
|
Expired
|
(51,686)
|
1.36
|
-
|
|
|
Outstanding
Balance at December 31, 2018
|
1,227,557
|
2.13
|
8.39
|
-
|
|
Granted
|
870,549
|
1.03
|
8.76
|
|
|
Forfeited
|
(111,537)
|
1.95
|
-
|
|
|
Canceled
|
(331,186)
|
2.05
|
-
|
|
|
Outstanding
Balance at December 31, 2019
|
1,655,383
|
$1.68
|
8.33
|
$3,256
|
|
Exercisable
at December 31, 2019
|
999,831
|
$1.84
|
6.66
|
$1,684
|
Stock
compensation expense for the year ended December 31, 2019 and 2018
was $446,000 and $465,000, respectively, and is included in general
and administrative expenses in the accompanying consolidated
statements of operations. The weighted average grant date fair
value of options granted for the years ended December 31, 2019 and
2018 was $0.52 and $0.73, respectively. The intrinsic value of the
stock options granted during the years ended December 31, 2019 and
2018, was $2,172,000 and $0, respectively. The total fair value of
shares that became vested after grant during the years ended
December 31, 2019 and 2018 was $408,000 and $325,000,
respectively.
As of
December 31, 2019, there was $486,000 of unrecognized stock
compensation expense related to unvested stock options granted
under the 2017 Plan that will be recognized over a weighted average
period of 1.64 years.
48
NOTE 16 – LOSS PER SHARE
The
following table provides information relating to the calculation of
loss per common share (dollars in thousands, except per share
data):
|
|
Year Ended December
31, 2019
|
|
|
|
2019
|
2018
|
|
Basic and diluted
loss per share
|
|
|
|
Net
loss from continuing operations
|
$(14,412)
|
$(5,709)
|
|
Less:
preferred stock accretion
|
(752)
|
(655)
|
|
Less:
preferred stock dividends
|
(460)
|
(460)
|
|
Net
loss attributable to shareholders from continuing
operations
|
(15,624)
|
(6,824)
|
|
Net income (loss)
from operations held for sale
|
(1,472)
|
6
|
|
Net loss
attributable to shareholders
|
$(17,096)
|
$(6,818)
|
|
Weighted
average common shares outstanding - basic and diluted
|
20,033,023
|
15,409,014
|
|
Basic
and diluted loss per share from continuing operations
|
$(0.78)
|
$(0.44)
|
|
Basic
and diluted (loss) earnings per share from operations held for
sale
|
(0.07)
|
-
|
|
Basic and diluted
loss per share
|
$(0.85)
|
$(0.44)
|
|
Common stock
equivalents excluded due to anti-dilutive effect
|
5,602,841
|
3,898,257
|
As the Company had a net loss
for the year ended December 31, 2019, the following 5,602,841
potentially dilutive securities were excluded from diluted loss per
share: 2,491,249 for outstanding warrants, 974,487 related to the
Series A Preferred Stock, 481,722 related to the Series B Preferred
Stock and 1,655,383 related to outstanding
options.
As the
Company had a net loss for the year ended December 31, 2018, the
following 3,898,257 potentially dilutive securities were excluded
from diluted loss per share as the Company had a net loss:
1,214,491 for outstanding warrants, 974,487 related to the Series A
Preferred Stock, 481,722 related to the Series B Preferred Stock
and 1,227,557 related to outstanding options.
(Loss) Earnings 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 17 – BUSINESS SEGMENTS
FASB ASC Topic 280,
Segment
Reporting, requires that an
enterprise report selected information about reportable segments in
its financial reports issued to its stockholders.
Beginning with
the first quarter of 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 reflect
the Company’s separate focus on technology products and
services versus professional services.
The Company provides
general
corporate services to its segments; however, these services are not
considered when making operating decisions and assessing segment
performance. These services are reported under “Corporate
Services” below and these include costs associated with
executive management, financing activities and public company
compliance.
Transfer prices
between the operating segments were determined on current market
values or cost plus markup of the seller’s business
segment.
Summarized financial information concerning the Company’s
reportable segments is presented below (dollars in
thousands):
|
|
Technology
|
Professional Services
|
Corporate Services
|
Elimination
|
Consolidated
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
Revenues
|
$5,469
|
$13,874
|
$-
|
$(23)
|
$19,320
|
|
Gross
profit
|
3,817
|
6,468
|
-
|
(23)
|
10,262
|
|
Loss
from operations*
|
(2,259)
|
(1,560)
|
(5,293)
|
23
|
(9,089)
|
|
Loss
from operations held for sale (including impairment of goodwill of
$1,022,000)
|
-
|
(1,146)
|
-
|
-
|
(1,146)
|
|
*
Including intangible assets impairment
|
-
|
1,549
|
-
|
-
|
1,549
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Revenues
|
$3,522
|
$16,532
|
$-
|
$-
|
$20,054
|
|
Gross
profit
|
1,880
|
8,196
|
-
|
-
|
10,076
|
|
Loss
from operations
|
(832)
|
(381)
|
(3,910)
|
-
|
(5,123)
|
|
Income
from operations held for sale
|
-
|
86
|
-
|
-
|
86
|
Information about
the
Company’s revenue in different geographic regions,
which is attributable to the Company’s operations located
primarily in the United States, Canada, and other countries is as
follows (dollars in thousands):
|
|
Year ended December 31,
|
|||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
Technology
|
Professional Services
|
||
|
United
States
|
$4,052
|
$3,449
|
$13,851
|
$16,357
|
|
Canada
|
654
|
73
|
-
|
78
|
|
Other
|
763
|
-
|
-
|
97
|
|
Total
Revenue
|
$5,469
|
$3,522
|
$13,851
|
$16,532
|
Except for the United States and Canada, total revenue in any
single country was less than 10% of consolidated
revenue.
Additional information relating to
the
Company’s business
segments is as follows (dollars in thousands):
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Assets:
|
|
|
|
Technology
|
$16,625
|
$4,294
|
|
Professional
services
|
5,726
|
5,510
|
|
Corporate
services
|
509
|
1,461
|
|
Total
assets from continuing operations
|
22,860
|
11,265
|
|
Assets
from operations held for sale
|
6,132
|
6,790
|
|
Total
assets
|
$28,992
|
$18,055
|
49
Information about
the
Company’s total assets in different geographic regions
is as follows (dollars in thousands):
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
United
States
|
$1,220
|
$1,320
|
|
Canada
|
70
|
70
|
|
Accumulated
Depreciation
|
(807)
|
(928)
|
|
Total
property and equipment, net
|
$483
|
$462
|
Long-lived
assets by segment is as follows (dollars in
thousands):
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Technology
|
$14,875
|
$3,122
|
|
Professional
Services
|
540
|
2,195
|
|
Corporate
|
430
|
3
|
|
Consolidated
|
$15,845
|
$5,320
|
Total
net additions to long-lived assets by segment are as follows
(dollars in thousands):
|
|
Year ended
December 31,
|
|
|
|
2019
|
2018
|
|
Technology
|
$12,998
|
$1,013
|
|
Professional
Services
|
701
|
376
|
|
Corporate
|
564
|
-
|
|
Consolidated
|
$14,263
|
$1,389
|
Depreciation and amortization expense are allocated to all segments
based on usage. Total depreciation and amortization expense,
by segment, is as follows (dollars in thousands):
|
|
Year ended
December 31,
|
|
|
|
2019
|
2018
|
|
Technology
|
$1,245
|
$322
|
|
Professional
Services
|
485
|
725
|
|
Corporate
|
137
|
-
|
|
Consolidated
|
$1,867
|
$1,047
|
NOTE 18 – SUBSEQUENT EVENTS
Issuance of Additional Stock
As of
March 30, 2020, the Company sold an additional 536,730 shares of
common stock through its At-the-Market Sales
Agreement.
Held for Sale Operations
Subsequent to year-end, the
Board of Directors approved the plan to sale AOC Key
Solutions. As
such, the Company determined that the AOC Key Solutions
business met
the criteria for held for sale accounting because it expects to
complete the sale of AOC Key Solutions during the next 12 months.
Historically, AOC Key Solutions has been presented as part
of the Professional Services Segment. As of December 31,
2019, AOC Key Solutions has been presented as part
of continuing operations.
This pending disposition is 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.
On March 16, 2020, the
Company received an offer of $4M to purchase AOC Key
Solutions. The
offer has been made by current AOC Key Solutions
management. The
offer is currently being evaluated by members of the Company's
Board of Directors who are not related parties. The Company cannot
assure that this transaction will be closed in a timely fashion or
at all.
Increase in the Authorized Number of Shares of the Company’s
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, which was effective March 18, 2020. The rights and
privileges terms of the additional authorized shares of common
stock will be 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.
Commitments and Contingencies Subsequent to Year-end
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. The
Company has retained counsel to investigate the claims made in the
complaint and the investigation into these matters is ongoing.
Nevertheless, based on a review of the complaint, the Company
believes that it has substantial defenses to the allegations
contained in the complaint and that the validity of the patent
underlying the complaint is subject to challenge. The Company
intends to vigorously defend the allegations of the Vigilant
complaint.
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 to was licensed to PCS. On
February 19, 2020 PCS filed an answer, counterclaim and joinder in
the case, among other things, seeking to join the Company as a
party to the litigation and making counterclaims for defamation,
fraud and intentional interference with existing and future
business relationships. The Company believe that it has substantial
defenses to the counterclaims and intend to vigorously defend the
allegations of the counterclaims.
2019 Promissory Notes
In
March 2020, the Company extended the maturity date of the 2019
Promissory Notes, from March 11, 2021 to June 12, 2021.
Additionally, in March 2020, the Company received a waiver to defer
the fixed charge coverage ratio covenant related to the 2019
Promissory Notes until May 31, 2020.
Other
Items
The
spread of a novel strain of coronavirus (COVID-19) around the world
in the first quarter of 2020 has caused significant volatility in
U.S. and international markets. There is significant uncertainty
around the breadth and duration of business disruptions related to
COVID-19, as well as its impact on the U.S. and international
economies and, as such, the Company is unable to determine if it
will have a material impact to its operations.
50
On
June 28, 2019, our Audit Committee approved the dismissal of BD
& Company, Inc. (“BD & Company”), the
independent registered public accounting firm prior to such
date.
BD
& Company’s audit reports on our consolidated financial
statements as of and for the years ended December 31, 2018 and
2017 and the related financial statement schedule did not contain
any adverse opinions or disclaimers of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles. We were not required to have, nor was BD & Company
engaged to perform, audits of its internal control over financial
reporting.
During
the years ended December 31, 2018 and 2017 and in the
subsequent interim period through June 28, 2019, there were
(i) no disagreements between us and BD & Company on any
matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of BD & Company, would have
caused BD & Company to make reference to the subject matter of
the disagreement in its reports on our consolidated financial
statements for such years, and (ii) no “reportable
events” as that term is defined in Item 304(a)(1)(v) of
Regulation S-K.
The
Company provided BD & Company with a copy of the disclosures it
made in its Current Report on Form 8-K (the “Form 8-K”)
prior to the time the Form 8-K was filed with the Securities and
Exchange Commission (the “SEC”). The Company requested
that BD & Company furnish a letter addressed to the SEC stating
whether or not it agrees with the statements made herein. A copy of
BD & Company’s letter, dated June 28, 2019, was
attached as Exhibit 16.1 (the “BD & Company
Letter”) to the Form 8-K and is incorporated herein by
reference.
For
further information regarding our change in accounting firm, please
see Item 4.01 of our Report on Form 8-K filed on June 28,
2019.
Evaluation of Disclosure Controls and Procedures
We
carried out an evaluation under the supervision and with the
participation of management, including our principal executive
officer and principal financial officer, of the effectiveness of
our disclosure controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e) of the
Exchange Act) as of the end of the period covered by this Annual
Report.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as
amended (the “Securities Exchange Act”) is recorded,
processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information we are required to
disclose in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management as
appropriate to allow timely decisions regarding required
disclosure.
Based
on management’s review, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective at December
31, 2019.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f). Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
purposes in accordance with U.S. GAAP and includes those
policies and procedures that: (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect our
transactions and dispositions of our assets; (ii) provide
reasonable assurance that our transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. GAAP and that our receipts and
expenditures are being made only in accordance with authorizations;
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our consolidated
financial statements.
Under the supervision and with the participation with our
management, including our Chief Executive Officer and Chief
Financial Officer, we assessed the effectiveness of our internal
control over financial reporting as of the end of the period
covered by this report based on the framework in “Internal
Control—Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based upon this assessment, management concluded
that our internal control over financial reporting was effective as
of December 31, 2019.
In
designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met.
Attestation Report of Registered Public Accounting
Firm
This
Annual Report does not include an attestation report of our
independent registered public accounting firm because
non-accelerated filers are not required to provide such a
report.
Remediation of Material Weaknesses
In
consultation with third-party consultants, who have sufficient
expertise and experience, management developed and implemented a
remediation plan to address the material weaknesses that were
reported in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2018. To address the material
weaknesses, the Company began implementing a plan in 2019 which
included the following:
●
We hired a Chief Financial Officer, formed a disclosure control
committee, educated our Board of Directors on SEC filings and
triggering events for financial reporting, implemented a financial
reporting timetable, reviewed procedures for draft documents,
implemented monthly certification of financial reports, tracked
monthly financial activity, and had our executives review financial
results and budgets.
●
We augmented our accounting reporting staff by hiring Corporate
Controller, Accounting Manager and Financial, Planning and Analysis
Director and are realigning our accounting staff in order to
strengthen internal controls over financial reporting.
●
We implemented new ERP system across the organization (with the
exception of Global).
●
We hired third-party consultants to map our risks and initiate
improved internal control processes.
As part of these efforts, we have mapped significant controls,
implemented new control processes and, improved the design and
operational effectiveness of our control processes and systems for
financial reporting.
These
actions resulted in enhanced internal controls which were in place
for a period of time in 2019 that was sufficiently long enough for
management to conclude, through testing, that the controls are
operating effectively.
As
such, management has concluded that this material weakness was
remediated as of December 31, 2019.
Changes to Internal Control over Financial Reporting
Other
than the remediation efforts identified above to address the prior
year material weaknesses, there were no changes in our internal
control over financial reporting during our most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
None.
51
PART III
The
following table sets forth our directors and executive
officers.
|
Name
|
|
Age
|
|
Position
|
|
Executive Officers:
|
|
|
|
|
|
Robert A. Berman
|
|
60
|
|
President and Chief Executive Officer and
Director
|
|
Eyal Hen
|
|
47
|
|
Chief Financial Officer
|
|
Riaz Latifullah
|
|
63
|
|
Executive Vice President, Corporate Development
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
James K. McCarthy
|
|
68
|
|
Chairman of the Board and Strategic Advisor
|
|
Paul A. de Bary
|
|
73
|
|
Lead Director
|
|
Glenn Goord
|
|
68
|
|
Director
|
|
David Hanlon
|
|
75
|
|
Director
|
|
Christine J. Harada
|
|
47
|
|
Director
|
|
Richard Nathan, Ph. D.
|
|
75
|
|
Director
|
|
Steven D. Croxton
|
|
57
|
|
Director
|
Directors
James K. McCarthy has served as the
Chairman of our Board of Directors since March 2016 and as
Strategic Advisor to our Company since April 2018. Mr. McCarthy
served as our Chief Strategy Officer from March 2016 to March 2017,
and from April 2017 to March 2018, was the host of The Bridge, a
weekly 30- minute broadcast television program produced by us
devoted exclusively to bridging the gap between the government and
the private sector. Mr. McCarthy founded AOC Key Solutions in 1983
and served as its Technical Director until our acquisition of AOC
Key Solutions in March 2016. At AOC Key Solutions, Mr.
McCarthy’s career spans over 30 years of marketing strategy
creation, proposal development, and oral presentation coaching to
contractors seeking to expand their market shares or to enter the
government contracts market sector. Mr. McCarthy has worked at AOC
Key Solutions since 1983. Mr. McCarthy has served in an advisory
role with the George Washington University, Virginia Science and
Technology Campus, Technology Accelerator and has been a frequent
speaker with the George Mason University Procurement and Technical
Assistance Center. Mr. McCarthy has also served on the board of
Coalition for Government Procurement and on the Veterans Institute
for Procurement GovCon Council. Mr. McCarthy holds a BA in
Political Science and Government and an MA in Public Policy and
Government from Ohio University. We believe Mr. McCarthy is
qualified to serve on our board of directors due to his extensive
executive leadership and management experience and his deep
knowledge of government contracting.
Robert Berman has served as our
President and Chief Executive Officer and a member of our Board of
Directors since March 2016. Since January 2000, Mr. Berman has
served as the General Partner of Avon Road Partners, L.P., a
limited partnership investing in real estate and the broadcast
media industry. From 2006 through March 2015, Mr. Berman held the
office of Chairman and Chief Executive Officer at Cinium Financial
Services Corporation, a privately-held specialty finance company,
and its predecessor, Upper Hudson Holdings, LLC. Prior to Cinium,
Mr. Berman was Chief Executive Officer of Empire Resorts, Inc., a
NASDAQ-listed gaming company, from 2002-2005. We believe Mr.
Berman is qualified to serve on our Board of Directors due to his
extensive executive leadership and management experience, his
experience in private equity and with public companies, and his
understanding of financial markets and mergers and
acquisitions.
Richard Nathan, Ph.D., has served on
our Board of Directors since March 2016. From April 2016 until his
retirement in February 2018, Dr. Nathan served as our Chief
Operating Officer. Prior to that, Dr. Nathan was the Chief
Executive Officer of AOC Key Solutions, where he worked for over 17
years. Dr. Nathan has over 45 years of corporate management,
program management and business and proposal development experience
and experience managing service and technical contracts for federal
departments and agencies and state governments. Dr. Nathan holds a
BS in Chemistry from the Massachusetts Institute of Technology and
a PhD in Chemistry from the Polytechnic Institute of Brooklyn. We
believe Dr. Nathan is qualified to serve on our board of directors
due to his technical background, executive leadership experience
and understanding of government contracting and the aviation and
aerospace industries.
Glenn Goord has served on our Board of
Directors since March 2016. From 1996 until his retirement in 2006,
Mr. Goord served as Commissioner of the New York State Department
of Correctional Services (“NYSDCS”), where he oversaw
the state prison system. Mr. Goord received the Carl Robison Award,
the highest honor bestowed by the Middle Atlantic States
Correctional Association, in 1997. In 1998 he received the Charles
Evans Hughes Award for public service from the Albany based Capital
Area Chapter for the American Society for Public Administration
(ASPA). In 2002, ASPA awarded Mr. Goord its highest honor, the
Governor Alfred E. Smith Award, for his direction of the
NYSDCA’s efforts to aid New York City following the September
11, 2001 terrorist attack. Mr. Goord holds a BA in Psychology from
Fairleigh Dickinson University. We believe Mr. Goord is qualified
to serve on our board of directors due to his experience with
government operations and procurement.
Paul A. de Bary has served on our Board
of Directors since January 2017 and as Lead Director since November
2017. Mr. de Bary was a member of the board of managers of TDI,
LLC, an agent for a manufacturer of digital X-ray systems for
medical, veterinary and industrial applications from 2001 to 2018.
He has also served as chairman of the Board of Ethics of the Town
of Greenwich, Connecticut since 2008. From 1996 to 2015, he was a
managing director at Marquette de Bary Co., Inc., a New York based
broker-dealer, where he served as a financial advisor for state and
local government agencies, public and private corporations and
non-profit organizations, as well as general counsel. He previously
served as a director of Empire Resorts, Inc. (Nasdaq: NYNY) from
1996 to 2010, where he served as chairman of its audit committee as
well as, at various times throughout his tenure as a director, a
member of the governance and compensation committees and various
special committees. Mr. de Bary is a member of the American Bar
Association, the New York State Bar Association and the Association
of the Bar of the City of New York. Mr. de Bary holds a JD, an MBA
and an A.B. from Columbia University. We believe Mr. de Bary is
qualified to serve on our board of directors due to his legal and
investment experience and his experience as a member of several
boards of directors, including those of public
companies.
52
Christine J. Harada has served on our
Board of Directors since August 2017. Ms. Harada has over 20 years
of experience leading government and management consulting
organizations. From November 2015 to January 2017, she served as
the Federal Chief Sustainability Officer. Prior to that role, Ms.
Harada was the Acting Chief of Staff of the U.S. General Services
Administration (“GSA”) from March 2015 through November
2015. While at the GSA, Ms. Harada also served as Associate
Administrator, Government-wide Policy and Chief Acquisition Officer
for the GSA from June 2014 through February 2015. Ms.
Harada’s private sector experience includes serving as Global
Manager, Transformation/Large Scale Change Practice at the Boston
Consulting Group from May 2013 through June 2014, and her tenure as
a principal at Booz Allen Hamilton from January 2004 through April
2013. Ms. Harada holds an M.A., in International Studies from the
Lauder Institute and an MBA, Finance from the Wharton School at the
University of Pennsylvania. She also holds an M.S. in
Aeronautics/Astronautics from Stanford University and a B.S.
Aeronautics/Astronautics from the Massachusetts Institute of
Technology. We believe Ms. Harada is qualified to serve on our
board of directors due to her knowledge of the operations of the
federal government and of corporate best practices.
David Hanlon has served on our Board of
Directors since November 2018. Mr. Hanlon is a founding principal
of Executive Hospitality Partners, a strategic and asset management
firm. Since 2008, he has served as Chief Executive Officer of
Hanlon Investments which provides project development consulting
services to casinos, hotels and resorts. Mr. Hanlon has served as a
member of Cornell University’s Industry Advisory Board, as
well as on the Board of Directors of the Cornell Football
Association and was elected to be a lifetime member of the Cornell
University Administrative Advisory Board. He was also an advisor to
the Wharton Entrepreneurial Program. Mr. Hanlon holds a B.S. in
Hotel Administration from Cornell, an MBA in Finance and an M.S. in
Accounting from the Wharton School at the University of
Pennsylvania and graduated from the Advanced Management Program at
the Harvard Business School. We believe Mr. Hanlon is qualified to
serve on our board of directors due to his leadership and executive
management experience and experience serving on public company
boards of directors.
Steven D. Croxton, is Managing Director
of Rice, Voelker, LLC and has more than 30 years’ experience
in investment and commercial banking. During his career, Mr.
Croxton has been involved in financing and advisory transactions
totaling more than $35 billion for a variety of public and private
corporations. He has previously served on the Board of Directors of
Peninsula Gaming, LLC, and has held leadership roles with
responsibilities related to investment, corporate, and
international banking. Mr. Croxton earned a B.S. in Finance from
Louisiana State University, and a Master of International
Management from the American Graduate School of International
Management (now Thunderbird School of Global Management), and holds
FINRA Series 7, 24, 63, and 79 licenses. We believe Mr. Croxton is
qualified to serve on our board of directors due to his in-depth
knowledge of the capital markets, as well as extensive background
in financing and advisory of public corporations.
Executive Officers
Robert A. Berman, Chief Executive
Officer, President and Member of the Board The biography for
Robert A. Berman is set forth above in the section entitled
“Directors.”
Eyal Hen, Chief Financial Officer - Mr.
Hen has more than 16 years’ experience as a global finance
and business management executive in corporate environments, most
recently with VAYA Pharma Inc. and Ormat Technologies, Inc. (NYSE:
ORA). His expertise working as a finance executive in the public
markets, where he oversaw financial reporting, compliance
initiatives, investor communications, and financing, will be
instrumental as the Company continues its growth. Mr. Hen holds a
BA in Economics and Accounting from Ben Gurion University (Israel)
and an MBA from the University of Phoenix.
Riaz Latifullah, Executive Vice President,
Corporate Development - Mr. Latifullah serves as Executive
Vice President, Corporate Development. On May 1, 2018, Mr.
Latifullah was appointed as our Principal Financial and Accounting
Officer, a role he assumed on an interim basis upon the resignation
of our former Chief Financial Officer. Prior to joining Rekor, Mr.
Latifullah served as the Chief Financial Officer of the American
Grandparents Association / Grandparents.com. Mr. Latifullah spent
13 years with AARP, a non-profit organization that advocates on
behalf of people over age 50. With AARP he served as Vice
President, Financial Management, Senior Director Strategic Markets
and Director Brand Operations. As an in-house entrepreneur with
AARP he created and launched five start-up operations bringing
significant changes to the organization. In other positions before
AARP Mr. Latifullah served as General Manager for TV on the WEB, an
Internet video production company, a Government Relations
Representative for the U.S. Merchant Marine Academy Alumni
Foundation and an Investment Banking Associate for Ryan, Lee and
Company. Mr. Latifullah holds an MBA from Stanford University, an
MSE in Naval Architecture and Marine Engineering from the
University of Michigan and a BS in Marine Engineering from the U.S.
Merchant Marine Academy.
Independence of Directors
Our
Board is currently comprised of eight members, five of whom are
independent directors. James McCarthy, Richard Nathan and Robert A.
Berman are not independent directors.
The
Board, upon recommendation of the Governance Committee, unanimously
determined that each of our five non-employee directors is
“independent,” as such term is defined in the Nasdaq
Stock Market Rules (“Stock Market Rules”).
53
The
definition of “independent director” included in the
Stock Market Rules includes a series of objective tests, such as
that the director is not an employee of the Company, has not
engaged in various types of specified business dealings with the
Company, and does not have an affiliation with an organization that
has had specified business dealings with the Company. Consistent
with the Company’s Corporate Governance Principles, the
Board’s determination of independence is made in accordance
with the Stock Market Rules, as the Board has not adopted
supplemental independence standards. As required by the Stock
Market Rules, the Board also has made a subjective determination
with respect to each director that such director has no material
relationship with the Company (either directly or as a partner,
shareholder or officer of an organization that has a relationship
with the Company), even if the director otherwise satisfies the
objective independence tests included in the definition of an
“independent director” included in the Stock Market
Rules.
In
determining that each individual who served as a member of the
Board is independent, the Board considered that, in the ordinary
course of business, transactions may occur between the Company and
entities with which some of our directors are affiliated. The Board
unanimously determined that the relationships discussed in Item 13
below were not material. No unusual discounts or terms were
extended.
There
are no family relationships among any of our directors or executive
officers.
Committees of the Board
Our
Board has three standing committees: Audit, Compensation, and
Governance. Each of the committees is solely comprised of and
chaired by independent directors, each of whom the Board has
affirmatively determined is independent pursuant to the Stock
Market Rules. Each of the committees operates pursuant to its
charter. The committee Charters are reviewed annually by the
Governance Committee. If appropriate, and in consultation with the
chairs of the other committees, the Corporate Governance Committee
proposes revisions to the charters. The
responsibilities of each standing committee are described in more
detail below. From time to time, the Board of Directors may also
appoint special committees for specific purposes. The Board has
also chartered an Executive Committee to serve in the event that
our Chief Executive officer is unable to discharge duties for a
limited period of time. The charters for the three standing
committees are available on the Company's website at
www.rekorsystems.com by following the link to
“Investors” and then to “Corporate
Governance.”
The
Chair and members of each standing committee are summarized in the
table below:
|
Name
|
|
Audit Committee
|
|
Compensation Committee
|
|
Corporate Governance Committee
|
|
|
|
|
|
|
|
|
|
Paul A. de Bary - (Independent)
|
|
Chair
|
|
-
|
|
Member
|
|
Glenn Goord - (Independent)
|
|
Member
|
|
Chair
|
|
-
|
|
David Hanlon - (Independent)
|
|
-
|
|
Member
|
|
Member
|
|
Christine J. Harada - (Independent)
|
|
Member
|
|
Member
|
|
Chair
|
|
Steven D. Croxton - (Independent)
|
|
Member
|
|
Member
|
|
-
|
Audit Committee
We have
an Audit Committee comprised of directors who are
“independent” within the meaning of Nasdaq Rule
5605(b)(1). The Audit Committee assists our Board in overseeing the
financial reporting process and maintaining the integrity of our
financial statements, and of our financial reporting processes and
systems of internal audit controls, and our compliance with legal
and regulatory requirements. The Audit Committee is responsible for
reviewing the qualifications, independence and performance of our
independent registered public accounting firm and review our
internal controls, financial management practices and investment
functions and compliance with financial legal and regulatory
requirements. The Audit Committee is also responsible for
performing risk and risk management assessments as well as
preparing any report of the Audit Committee that may be required by
the proxy rules of the SEC to be included in the
Corporation’s annual proxy statement. Our Board has
identified and appointed Paul de Bary as its “audit committee
financial expert,” as defined by the SEC in Item 407 of
Regulation S-K. Mr. de Bary serves as the Chair of the Audit
Committee, and is joined on the committee by Ms. Harada, Mr.
Croxton, and Mr. Goord.
Compensation Committee
We have
a Compensation Committee comprised of members who are
“Non-Employee Directors” within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) and “outside directors”
within the meaning of Section 162(m) of the Code. They are also
“independent” directors within the meaning of NASDAQ
Rule 5605(b)(1). The Compensation Committee is responsible for
overseeing the establishment and maintenance of our overall
compensation and incentive programs to discharge the Board’s
responsibilities relating to compensation of our executive officers
and directors, including establishing criteria for evaluating
performance and setting appropriate levels of compensation, and to
produce an annual report on executive compensation for inclusion in
the Corporation’s proxy statement in accordance with the
rules and regulations of the SEC. The Compensation Committee
advises and makes recommendations to our Board on all matters
concerning director compensation. Mr. Goord serves as Chair of the
Compensation Committee and is joined by Ms. Harada, Mr. Croxton and
Mr. Hanlon.
Corporate Governance Committee
Our
Board has a Governance Committee that that (1) reviews and
recommends improvements to our governance guidelines and corporate
policies; (2) monitors compliance with our Code of Conduct; (3)
trains new members of the Board of Directors; (4) reviews the
performance of the Board of Directors and its various committees
and makes recommendations intended to improve that performance, (5)
evaluates and makes recommendations concerning changes in the
charters of the various Committees of the Board of Directors, (6)
evaluates the performance of the Chief Executive Officer of the
Corporation, (7) oversees the development and implementation of
succession planning for Corporation senior management positions;
(8) identifies and recommends candidates for nomination as members
of the Board of Directors and its committees; and (9) such other
matters as may be required to ensure compliance with applicable
federal and state laws or the requirements of any exchange on which
the Company maintains a listing for its securities. The committee
is required to be comprised of entirely “independent”
directors within the meaning of NASDAQ Rule 5605(b)(1). Ms. Harada
currently serves as the Chair of the Governance Committee and is
joined on the committee by Mr. Hanlon and Mr. de
Bary.
54
Compensation of Rekor Directors
The
following table provides the total compensation for each person who
served as a non-employee member of our Board of Directors during
fiscal year 2019, including all compensation awarded to, earned by
or paid to each person who served as a non-employee director for
some portion or all of fiscal year 2019:
|
|
Fees earned or paid in cash
|
Option awards
|
|
Total
|
|
Name
|
($)
|
($) (1)
|
|
($)
|
|
Paul
de Bary (2)
|
$72,000
|
$31,276
|
(2)
|
$103,276
|
|
Glenn
Goord (3)
|
47,000
|
11,465
|
(3)
|
58,465
|
|
Christine
Harada (4)
|
52,250
|
11,465
|
(4)
|
63,715
|
|
Richard
Nathan, Ph. D.
|
30,000
|
-
|
|
30,000
|
|
David
Hanlon (6)
|
39,750
|
11,465
|
(5)
|
51,215
|
|
Steven
D. Croxton
|
15,755
|
47,122
|
(6)
|
62,877
|
(1)
The amount shown
reflects the aggregate grant date fair value of option awards
computed in accordance with Financial Accounting Standards Board
Accounting Standards Codification 718.
(2)
Amount represents
the fair value of the issuances of 10,000 and 50,000 stock options
to Mr. de Bary on March 26, 2019 and May 8, 2019,
respectively.
(3)
Amount represents
the fair value of the issuances of 10,000 and 12,500 stock options
to Mr. Goord on March 26, 2019 and May 8, 2019,
respectively.
(4)
Amount represents
the fair value of the issuances of 10,000 and 12,500 stock options
to Mrs. Harada on March 26, 2019 and May 8, 2019,
respectively.
(5)
Amount represents
the fair value of the issuances of 10,000 and 12,500 stock options
to Mr. Hanlon on March 26, 2019 and May 8, 2019,
respectively.
(6)
Mr. Croxton serves
as director since June 19, 2019.
(7)
Amount represents
the fair value of the issuance of 48,499 stock options to Mr.
Croxton on June 19, 2019.
Our non-employee directors are compensated for
their services as follows:
|
|
|
Board Meeting Fee
|
Committee Meeting Fee
|
||
|
|
Annual Fee
|
In Person
|
Telephonic
|
In Person
|
Telephonic
|
|
Position
|
($) (1)
|
($)
|
($)
|
($)
|
($)
|
|
Board
Member
|
25,000
|
1,000
|
500
|
500
|
250
|
|
Audit
Committee Chair
|
20,000
|
1,500
|
500
|
500
|
250
|
|
Compensation
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Governance
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Special
Committee
|
-
|
500
|
250
|
500
|
250
|
|
Lead
Director
|
10,000
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
(1) Payments are made on a quarterly basis.
|
|
|
|
|
|
Directors who are
officers or employees of Rekor or its subsidiaries do not receive
any compensation for service on our Board, but employee directors
will be reimbursed for expenses incurred in attending meetings of
our Board or any committees thereof.
Code of Ethics
We have
adopted a Code of Conduct, which serves as our Code of Ethics,
which applies to all of our employees, including our Chief
Executive Officer and our Chief Financial Officer. Our Code of
Conduct is available on our website at www.rekorsystems.com. If we
amend or grant a waiver of one or more of the provisions of our
Code of Conduct, we intend to satisfy the requirements under Item
5.05 of Item 8-K regarding the disclosure of amendments to or
waivers from provisions of our Code of Conduct that apply to our
Principal Executive and Principal Financial Officer by posting the
required information on our website at the above address. Our
website is not part of this Annual Report on Form
10-K.
55
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the
Company’s directors, executive officers, and shareholders who
own more than 10% of the Company’s stock to file forms with
the SEC to report their ownership of the Company’s stock and
any changes in ownership. The Company assists its directors and
executives by identifying reportable transactions of which it is
aware and preparing and filing the forms on their behalf. All
persons required to file forms with the SEC must also send copies
of the forms to the Company. We have reviewed all forms provided to
us. Based on that review and on written information given to us by
our executive officers and directors, we believe that all Section
16(a) filings during the past fiscal year were filed on a timely
basis except for the following: (i) delinquent Form 4s filed for
stock option grants on May 8, 2019 and reported on Form 4s filed on
May 23, 2019 for Messrs. Paul de Bary, Glenn Goord, David Hanlon,
and Ms. Christine Harada, respectively, (ii) delinquent Form 4s for
a stock option grants on May 15, 2019 and reported on Form 4s on
May 23, 2019 to Messrs. Eyal Hen and Riaz Latiffulah, and Robert
Berman, respectively, and (iii) a delinquent Form 4 for a stock
option grant on June 19, 2019 and reported on Form 4 on July 8,
2019 for Mr. Steven Croxton, and that all directors, executive
officers and 10% beneficial owners have fully otherwise complied
with such requirements during the past fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
This
section discusses material components of our 2019 compensation
program for our named executive officers identified in the 2019
Summary Compensation Table below.
2019 Summary Compensation Table
|
Name/Capacities in which compensation was
received
|
Year
|
Base Salary
|
|
Bonus
|
Equity incentive awards
|
|
All other compensation
|
|
Total
|
|
Robert
Berman
|
2019
|
$453,205
|
(1)
|
$-
|
$46,605
|
(2)
|
$18,194
|
(3)
|
$518,004
|
|
Chief
Executive Officer
|
2018
|
395,000
|
|
-
|
-
|
|
-
|
|
395,000
|
|
Eyal
Hen
|
2019
|
202,074
|
(4)
|
-
|
26,415
|
(5)
|
2,488
|
(3)
|
230,977
|
|
Chief Financial
Officer
|
2018
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
Riaz
Latifullah
|
2019
|
289,680
|
(6)
|
-
|
10,566
|
(7)
|
17,700
|
(3)
|
317,946
|
|
EVP
Corporate Development
|
2018
|
271,667
|
|
100,000(8)
|
-
|
|
-
|
|
371,667
|
(1)
In 2019, we
increased Mr. Berman’s base salary from $395,000 to $495,000
per year effective May 15, 2019.
(2)
Amount represents
the fair value of the issuance of 100,000 stock options to Mr.
Berman on May 8, 2019.
(3)
Amount represents
401(k) matching and health insurance contributions.
(4)
Mr. Hen has served
as Chief Financial Officer since May 15, 2019.
(5)
Amount represents
the fair value of the issuance of 50,000 stock options to Mr. Hen
on May 15, 2019.
(6)
In 2019, we
increased Mr. Latifullah’s base salary from $285,000 to
$305,000 per year effective May 15, 2019 and in 2018, we increased
from $225,000 to $285,000 per year effective March 1,
2018.
(7)
Amount represents
the fair value of the issuance of 20,000 stock options to Mr.
Latifullah on May 8, 2019.
(8)
Amount represents
subjective bonus.
Narrative
Disclosure to Summary Compensation Table
The
primary components of our compensation program for named executive
officers include salary, cash incentive compensation and equity
incentive awards.
Base
Salary
We pay
our executive officers a base salary as the fixed component of our
compensation program for named executive officers.
Bonus Payments
We
offer our named executive officers the opportunity to earn annual
cash bonuses to compensate them for attaining short-term company
and individual goals as approved by our Board of Directors. For
2018, bonuses were based on attaining goals relating to individual
performance. The Compensation Committee decided that Mr. Latifullah
was eligible to receive a discretionary bonus with respect to
fiscal year 2018 due to individual contributions related to
corporate efforts, but that otherwise no discretionary bonuses
would be paid to the named executive officers.
56
Equity Incentive Awards
In
August 2017, the Company approved and adopted the 2017 Equity Award
Plan (the “2017 Plan”). The purpose of the 2017 Plan is
to promote the interests of Rekor (including its subsidiaries and
affiliates, if any) and its stockholders by using equity interests
in Rekor to attract, retain and motivate its management,
nonemployee directors and other eligible persons and to encourage
and reward their contributions to our performance and
profitability. 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. The 2017 Plan reserved
3,000,000 shares of our common stock for future grants from time to
time under awards administered by our Board of
Directors.
Rekor
has also designed the 2017 Plan to include a number of provisions
that Rekor’s management believes promote best practices by
reinforcing the alignment of equity compensation arrangements for
nonemployee directors, officers, employees, consultants and
stockholders’ interests. These provisions include, but are
not limited to, the following: no discounted awards; no repricing
without stockholder approval; no evergreen provision; no automatic
grants; no transferability; no tax gross-ups; no liberal
change-in-control definition; “double-trigger”
change-in-control vesting; no dividends on unearned performance
awards; limitation on amendments; and Clawbacks. The 2017 Plan is
administered by the Rekor Board of Directors.
Outstanding Equity Awards at Fiscal Year-End
The
following table sets forth information with respect to unexercised
stock options, stock that has not vested, and equity incentive plan
awards held by our named executive officers at December 31,
2019.
|
|
Option Awards
|
Stock Awards
|
|||||
|
Name
|
Number of Securities Underlying Unexercised Option -
Exercisable
|
Number of Securities Underlying Unexercised Options -
Unexercisable
|
|
Option Exercise Price
|
Option Expiration
Date
|
Number of Shares that Have Not Vested
|
Market Value of Shares of Stock that Have not
Vested
|
|
Robert
Berman
|
-
|
50,000
|
(1)
|
$1.00
|
5/8/2029
|
-
|
-
|
|
Robert
Berman
|
-
|
50,000
|
(1)
|
1.50
|
5/8/2029
|
-
|
-
|
|
Eyal
Hen
|
-
|
50,000
|
(1)
|
0.78
|
5/15/2029
|
-
|
-
|
|
Riaz
Latifullah
|
174,595
|
-
|
|
1.42
|
12/31/2026
|
-
|
-
|
|
Riaz
Latifullah
|
-
|
20,000
|
(1)
|
0.80
|
5/8/2029
|
-
|
-
|
(1)
The option
vests in equal annual installments over three years.
Employment Agreements and Potential Payments Upon Termination or
Change in Control
We have
entered into employment agreements with our executives in
connection with his or her commencement of employment with
us.
Berman Employment Agreement
The
Employment Agreement entered into May 15, 2019 with Robert Berman
(“Berman Employment Agreement”) provides that Mr.
Berman will serve as our Chief Executive Officer and President. The
agreement has a term of five years with automatically renewing
one-year terms thereafter. This agreement supersedes Mr.
Berman’s previous employment agreement which otherwise would
have expired by its terms on March 31, 2022. Mr. Berman’s
base salary is $495,000 per annum, and he is eligible for a bonus
as determined by our Compensation Committee. Mr. Berman is also
eligible to receive all such other benefits as are provided to
other management employees.
Mr. Berman
was granted options to purchase 100,000 shares of common stock of
the Company with an exercise price per share as follows: 50,000
shares at $1.00 and 50,000 shares at $1.50.
In the
event of a “Change of Control”, as defined in the
Berman Employment Agreement, whether during the initial term or
thereafter, we shall have the right to terminate the Berman
Employment Agreement. Mr. Berman is eligible to receive two times
his base salary then in effect if his employment with the Company
is terminated within 120 days of a change in control (as such is
defined in the Berman Employment Agreement).
Mr.
Berman also agreed as consideration for entering into the Berman
Employment Agreement, that for the period during his employment and
for twelve months thereafter, (i) he will not compete with the
Company in the “Geographic Area”, as defined in the
Berman Employment Agreement, and (ii) he will not solicit any of
our existing employees, suppliers or customers.
57
Hen Employment Agreement
The
Employment Agreement with Eyal Hen (the “Hen Employment
Agreement”) provides that Mr. Hen will serve as our Chief
Financial Officer for an initial three-year term that began on May
15, 2019, subject to automatic extension. His base salary of
$335,000 per annum and will be eligible for a bonus as determined
by the Board of Directors of the Company (the “Board”)
in its sole discretion. Mr. Hen is also eligible to receive all
such other benefits as are provided to other management
employees.
Mr. Hen
was granted options to purchase 50,000 shares of common stock of
the Company, $0.0001 par value per share (“ Common
Stock”), pursuant to the Company’s 2017 Equity Award
Plan (the “2017 Plan”), which will vest in three equal
annual installments on the first (May 15, 2020), second (May 15,
2021), and third (May 15, 2022) anniversaries of the grant date, at
a strike price of $0.78 per share, the closing price of the
Company’s Common Stock on May 15, 2019.
Mr. Hen
is eligible to receive two times his base salary then in effect if
his employment with the Company is terminated within 120 days of a
change of control (as such term is defined in the Hen Employment
Agreement).
Mr. Hen
also agreed as consideration for entering into the Hen Employment
Agreement, that for the period during his employment and for twelve
months thereafter, (i) he will not compete with the Company in the
“Geographic Area”, as defined in the Hen Employment
Agreement, and (ii) he will not solicit any of our existing
employees, suppliers or customers.
James K. McCarthy Offer Letter
The
amended and restated James K. McCarthy Offer Letter (the
“McCarthy Offer Letter”) provides that Mr. McCarthy
will continue to provide strategic support, orals coaching and
mentoring of AOC Key Solutions’ leadership staff. His
employment is at will, subject to providing 120-days’ notice
of resignation or termination. We may pay Mr. McCarthy’s
salary in lieu of notice for some or all of the 120-day notice
period. His base salary is $298,989 per annum, and he is
eligible for a bonus as determined by our Compensation Committee.
Mr. McCarthy will also be eligible to receive all such other
benefits as are provided to other management
employees.
Mr.
McCarthy also agreed that, for the period during his employment and
for two years thereafter, (i) he will not compete with the Company
in the “Restricted Territory”, as defined in Exhibit A
to the McCarthy Offer Letter, and (ii) he will not solicit any of
our existing employees, suppliers or customers.
Richard Nathan Employment Agreement
The
employment agreement with Richard Nathan (the “Nathan
Employment Agreement”) provided for Dr. Nathan to serve as
our Chief Operating Officer for a term until December 31, 2017,
with an option to extend the term. Dr. Nathan retired as Chief
Operating Officer effective February 28, 2018. His base salary was
$225,200 per annum, and he was eligible for a bonus as determined
by our Compensation Committee. Dr. Nathan also agreed that, for two
years after his employment: (i) he will not compete with the
Company in the “Restricted Territory”, as defined in
Exhibit A to the Nathan Employment Agreement; and (ii) he will not
solicit any of our existing employees, suppliers or
customers.
Riaz Latifullah Employment Agreement
The
employment agreement with Riaz Latifullah (the “Latifullah
Employment Agreement”) provides that Mr. Latifullah shall be
Executive Vice President of Corporate Development, effective May
15, 2019, for an initial term to end on April 7, 2022, subject to
automatic extension. Mr. Latifullah’s annual base salary is
$305,000, and he will be eligible for a bonus as determined by the
Board in its sole discretion. Mr. Latifullah is also eligible to
receive all such other benefits as are provided to other management
employees.
On May
8, 2019, pursuant to the Latifullah Employment Agreement, Mr.
Latifullah was granted options to purchase 20,000 shares of common
stock, pursuant to the 2017 Plan, which will vest in three equal
annual installments on the first (May 8, 2020), second (May 8,
2021), and third (May 8, 2022) anniversaries of the grant date, at
a strike price of $0.80 per share, the closing price of the
Company’s common stock on May 8, 2019 .
Mr.
Latifullah is eligible to receive two times his base salary then in
effect if Mr. Latifullah’s employment with the Company is
terminated within 120 days of a change of control (as such term is
defined in the Latifullah Employment Agreement).
Mr.
Latifullah also agreed as consideration for entering into the
Latifullah Employment Agreement, that for the period during his
employment and for twelve months thereafter, (i) he will not
compete with the Company in the “Geographic Area”, as
defined in the Latifullah Employment Agreement, and (ii) he will
not solicit any of our existing employees, suppliers or
customers.
58
Matthew Hill Employment Agreement
On
November 14, 2018, concurrent with the execution of the OpenALPR
Purchase Agreement, the Company entered into an employment
agreement with Matthew Hill (the “Hill Employment
Agreement”) which became effective as of March 12, 2019, the
closing date of the OpenALPR Purchase Agreement, pursuant to which
Mr. Hill began serving as Rekor’s Chief Science Officer. The
Hill Employment Agreement provides for a term of three years unless
earlier terminated pursuant to the terms thereof which term renews
for additional one-year terms until terminated upon ninety days
advance notice. Mr. Hill will earn an annual base salary of
$165,000.
Either
party may terminate the Hill Employment Agreement with or without
cause with notice as contemplated by the Hill Employment Agreement,
provided however, if Mr. Hill resigns, he shall provide the Company
with at least six months prior written notice. The Hill Employment
Agreement provides for the payment of severance under certain
circumstances as outlined therein.
Mr. Hill also
agreed that, for the period during his employment and for one year
thereafter, he will not compete with Rekor in the “Restricted
Territory”, as defined in Exhibit A to the Hill Employment
Agreement, and he will not solicit any of Rekor’s existing
employees, suppliers or customers.
Securities authorized for issuance under equity compensation
plans
The
following table provides information about our equity compensation
plans as of December 31, 2019.
Equity Compensation Plan Information
|
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
1,655,383
|
$1.68
|
1,330,619
|
|
Total
|
1,655,383
|
$1.68
|
1,330,619
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth, as March 30, 2020, information
concerning the beneficial ownership of our common stock by, each
person or group of persons known to beneficially own more than 5%
of the outstanding shares of our common stock, each person who
is our executive officer or director, and all such executive
officers and directors as a group. Beneficial ownership and
percentage ownership are determined in accordance with the rules of
the SEC. Under these rules, beneficial ownership generally includes
any shares as to which the individual or entity has sole or shared
voting power or investment power and includes any shares that an
individual or entity has the right to acquire beneficial ownership
of within 60 days of March 30, 2020 through the exercise of any
option, warrant, conversion privilege or similar right. In
computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of our common stock
that could be issued upon the exercise of outstanding options and
warrants that are exercisable within 60 days of March 30, 2020 are
considered to be outstanding. These shares, however, are not
considered outstanding when computing the percentage ownership of
any other person.
To our
knowledge, except as indicated in the footnotes to the following
table, all beneficial owners named in this table have sole voting
and investment power with respect to all shares shown as
beneficially owned by them. Percentage of ownership is based on
22,768,757 shares of common stock outstanding as of March 30,
2020.
|
|
Shares Beneficially Owned
|
||
|
Name and
address of beneficial owner (1)
|
Number of Shares beneficially owned (2)
|
|
Percent of class
|
|
Directors and Named Executive Officers
|
|
|
|
|
Robert
A. Berman
|
4,495,438
|
(3)
|
19.7%
|
|
James
McCarthy
|
2,725,835
|
|
12.0%
|
|
Richard
Nathan
|
1,614,666
|
(4)
|
7.1%
|
|
Matthew
Hill
|
1,155,000
|
(5)
|
4.9%
|
|
Paul
de Bary
|
118,499
|
(6)
|
*
|
|
Glenn
Goord
|
150,999
|
(7)
|
*
|
|
Christine
Harada
|
70,999
|
(8)
|
*
|
|
David
Hanlon
|
70,999
|
(8)
|
*
|
|
Steven
Croxton
|
48,499
|
(9)
|
*
|
|
Eyal
Hen
|
16,667
|
(10)
|
*
|
|
Riaz
Latifullah
|
187,929
|
(11)
|
*
|
|
All
directors and named executive officers as a group (11
persons)
|
10,655,530
|
|
44.3%
|
|
5% or Greater Shareholders
|
|
|
|
|
Avon
Road Partners, L.P.
|
4,473,438
|
(3)
|
19.5%
|
|
Superius
Securities Group Inc Profit Sharing Plan
|
1,090,639
|
(12)
|
4.8%
|
* Less
than 1%
59
(1)
Unless otherwise
indicated, the address of those listed is c/o Rekor Systems, Inc.,
7172 Columbia Gateway Drive, Suite 400, Columbia, MD 21046. Unless
otherwise indicated, all shares are owned directly by the
beneficial owner.
(2)
Based on 22,768,757
shares of our common stock issued and outstanding as of the March
30, 2020.
(3)
As the general
partner of Avon Road, Mr. Berman may be deemed to be the beneficial
owner of 4,462,104 shares of Rekor Systems, Inc. common stock, or
19.7% of the class of securities. He may be deemed to share with
Avon Road (and not with any third-party) the power to vote or
direct the vote of and to dispose or direct the disposition of the
4,440,104 shares of Rekor Systems, Inc. common stock beneficially
owned by Avon Road, or 19.5% of the class of securities. It also
consists of options to purchase 33,334 shares of our common stock
exercisable within 60 days of March 30, 2020.
(4)
Consists of:
1,593,020 shares of our common stock; a Unit Warrant to purchase
4,849 shares of our common stock exercisable within 60 days of
March 30, 2020; and 16,797 shares of our common stock acquirable
through the conversion of 10,000 shares of Rekor Systems, Inc.
Series A Preferred Stock.
(5)
Consists of 530,000
shares of Rekor Systems, Inc. common stock and warrants to purchase
625,000 shares of our common stock.
(6)
Consists of options
to purchase 108,499 shares of our common stock exercisable within
60 days of March 30, 2020, and 10,000 shares of our common
stock.
(7)
Consists of options
to purchase 70,999 shares of our common stock exercisable within 60
days of March 30, 2020, and 80,000 shares of our common
stock.
(8)
Consists of options
to purchase 70,999 shares of our common stock exercisable within 60
days of March 30, 2020.
(9)
Consists of options
to purchase 48,499 shares of our common stock exercisable within 60
days of March 30, 2020.
(10)
Mr. Hen serves as
our Chief Financial Officer and Principal Financial and Accounting
Officer since May 15, 2019 and consists of options to purchase
16,667 shares of our common stock exercisable within 60 days of
March 30, 2020.
(11)
Consists of options
to purchase 187,929 shares of our common stock exercisable within
60 days of March 30, 2020.
(12)
Based on the
Schedule 13G/A Amendment No. 1 as filed with the Securities and
Exchange Commission on January 28, 2020, reporting beneficial
ownership of 5.14% based on 21,027,401 shares issued and
outstanding. The address of the reporting person is 94 Grand Ave,
Englewood, NJ 07631.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
In
addition to the Chief Executive Officer and director compensation
arrangements discussed above under “Compensation of Rekor
Directors” and “Executive Compensation,” the
following is a description of each transaction since January 1,
2017 and
any currently proposed transaction in which: we have been or are to
be a participant; the amount involved exceeded or will exceed
the lesser of $120,000 or one percent of the average of our total
assets at year-end for the last two completed fiscal years; and any
of our directors, executive officers, holders of more than five
percent of our capital stock, or any immediate family member
of, or person sharing the household with, any of these individuals,
had or will have a direct or indirect material
interest.
Avon Road Note Purchase Agreement
On
March 16, 2016, we entered into a Subordinated Note and
Warrant Purchase Agreement (the “Avon Road Note Purchase
Agreement”) pursuant to which we agreed to issue up to
$1,000,000 in subordinated debt (the “Avon Road Note”)
and warrants to purchase up to 242,493 shares of our common stock
(the “Avon Road Subordinated Note Warrants”). The
exercise price for the Avon Road Subordinated Note Warrants is
$1.031 per share of common stock. Subordinated notes with a
face amount of $500,000 and Avon Road Subordinated Note Warrants to
purchase 121,247 shares of our common stock have been issued
pursuant to the Avon Road Note Purchase Agreement to Avon Road, an
affiliate of Robert Berman, Rekor’s Chief Executive Officer
and a member of our Board of Directors. The Avon Road Subordinated
Note Warrants expire on March 16, 2019.
The
Avon Road Note accrues simple interest on the unpaid principal of
the note at a rate equal to the lower of (a) 9% per
annum, or (b) the highest rate permitted by applicable law.
Interest is payable monthly with a maturity date of March 16,
2019. The effective interest rate of the Avon Road Note is 12.9%.
On October 23, 2018, the maturity date of this note was extended to
March 16, 2020. On March 12, 2019, the $500,000 balance due on the
Avon Road Note was retired in its entirety.
60
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
Audit Committee reviews and pre-approves both audit and all
permissible non-audit services provided by our independent
registered public accounting firm.
Friedman LLP
(Friedman”) has served as our principal auditor since June
2019. They did not provide any services, and no fees were paid to
them, in 2018. BD & Company, Inc. (“BD &
Company”) provided principal auditor services from May 2017
through June 2019.
The
Audit Committee has considered whether the provision of services,
other than services rendered in connection with the audit of our
annual financial statements, is compatible with maintaining
Friedman’s independence. The Audit Committee has determined
that the rendering of non-audit services by BD & Company during
2018 was compatible with maintaining the firm’s
independence.
Aggregate fees
billed or incurred related to the following years for professional
services rendered by Friedman for 2019 and 2018 are set forth
below.
|
|
For the Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Audit
fees
|
$168
|
$-
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
All other
fees
|
13
|
-
|
|
Total
|
$181
|
$-
|
Aggregate fees
billed or incurred related to the following years for professional
services rendered by BD & Company for 2019 and 2018 are set
forth below.
|
|
For the Year
Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Audit
fees
|
$110
|
$205
|
|
Audit-related
fees
|
-
|
104
|
|
Tax
fees
|
18
|
40
|
|
All other
fees
|
73
|
-
|
|
Total
|
$201
|
$349
|
Audit
Fees for 2019 and 2018 include fees associated with the audits of
the annual financial statements and the quarterly reviews of the
unaudited interim financial statements included in the
Company’s Quarterly Reports on Form 10-Q. Audit-related fees
for 2019 primarily include costs associated with SEC filings and
the supplemental audit and disclosure documents. Tax fees for 2019
and 2018 include fees associated with the preparation and reviews
of tax returns, advising on the impact of local tax laws, and tax
planning. All other fees for 2019 include fees associated with the
Sales Agreement with B. Riley and transition costs from BD &
Company to Friedman. In June 2019, BD & Company became our tax
provision and tax return preparer, and the fees associated with
these services are presented as tax fees in the table above.
61
PART IV
(a)
(1) List Financial Statements
See
Index to Financial Statements in Part II, Item 8 of this annual
report.
(2) List of Financial Statements Schedules
All
applicable schedule information is included in our Financial
Statements in Part II, Item 8 of this annual
report.
(b) Exhibits Index.
We hereby file, as exhibits to this Annual Report, those exhibits
listed on the Exhibit Index immediately following the signature
page hereto.
|
|
|
|
|
Incorporated by Reference
|
|
|
|
||||||
|
Exhibit
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
FilingDate
|
|
Filed/
FurnishedHerewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Amended and Restated Agreement and Plan of Merger dated July 12,
2017, by and among Novume Solutions, Inc., KeyStone Solutions,
Inc., Brekford Traffic Safety, Inc., KeyStone Merger Sub, LLC, and
Brekford Merger Sub, Inc.
|
|
S-4/A
|
|
333-216014
|
|
2.1
|
|
7/13/17
|
|
|
|
|
|
|
|
Agreement
and Plan of Merger, dated as of September 21, 2017, by and among
Novume Solutions, Inc., Global Technical Services Merger Sub, Inc.,
Global Contract Professionals Merger Sub, Inc., Global Technical
Services, Inc., Global Contract Professionals, Inc. and Paul
Milligan
|
|
8-K
|
|
000-55833
|
|
2.1
|
|
9/22/17
|
|
|
|
|
|
|
Agreement
and Plan of Merger, dated as of November 16, 2017, by and among
Novume Solutions, Inc., NeoSystems Holding, LLC, NeoSystems HoldCo,
Inc., NeoSystems LLC, Robert W. Wilson, Jr., in his personal
capacity, Michael Tinsley, in his personal capacity and Michael
Tinsley as the Stockholders’ Agent
|
|
8-K
|
|
000-55833
|
|
2.1
|
|
11/20/17
|
|
|
|
|
|
|
Amended
and Restated Certificate of Incorporation of Novume Solutions, Inc.
as filed with the Secretary of State of Delaware on August 21,
2017
|
|
8-K
|
|
333-216014
|
|
3.1
|
|
8/25/17
|
|
|
|
|
|
|
Certificate of Amendment to Certificate of Incorporation of Novume
Solutions, Inc. as filed with the Secretary of State of Delaware on
April 30, 2019
|
|
8-K
|
|
001-38338
|
|
3.1
|
|
4/30/19
|
|
|
|
|
|
|
Second Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Rekor Systems, Inc., dated March
18, 2020
|
|
8-K
|
|
001-38338
|
|
3.1
|
|
3/18/20
|
|
|
|
|
|
|
Certificate
of Designations of Series A Cumulative Convertible Redeemable
Preferred Stock as filed with the Secretary of State of Delaware on
August 25, 2017
|
|
8-K
|
|
333-216014
|
|
4.1
|
|
8/25/17
|
|
|
|
|
|
|
Certificate
of Designations of Novume Series B Cumulative Convertible Preferred
Stock as filed with the Secretary of State of Delaware on August
21, 2017
|
|
8-K
|
|
000-55833
|
|
4.2
|
|
10/4/17
|
|
|
|
|
|
Amended
and Restated Bylaws of Rekor, Inc.
|
|
8-K
|
|
001-38338
|
|
3.2
|
|
4/30/19
|
|
|
|
|
|
|
Form of
Common Stock Purchase Warrant issued by Novume Solutions, Inc. on
January 25, 2017
|
|
S-4/A
|
|
333-216014
|
|
4.3
|
|
6/9/17
|
|
|
|
|
|
|
Form of
Common Stock Purchase Warrant issued by Novume Solutions, Inc. on
January 25, 2017
|
|
S-4/A
|
|
333-216014
|
|
4.4
|
|
6/9/17
|
|
|
|
|
|
|
Form of
Warrant issued by Novume Solutions, Inc. on March 12,
2019
|
|
8-K
|
|
001-38338
|
|
4.1
|
|
3/18/19
|
|
|
|
|
|
|
Unsecured
Subordinated Promissory Note issued to Harry Rhulen by Novume
Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.2
|
|
10/3/17
|
|
|
|
|
|
|
|
Unsecured
Subordinated Promissory Note issued to Suzanne Loughlin by Novume
Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.3
|
|
10/3/17
|
|
|
|
62
|
|
|
Unsecured
Subordinated Promissory Note issued to James Satterfield by Novume
Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.4
|
|
10/3/17
|
|
|
|
|
|
Unsecured
Subordinated Promissory Note issued to Lancer Financial Group, Inc.
by Novume Solutions, Inc. on September 29, 2017
|
|
8-K
|
|
000-55833
|
|
10.5
|
|
10/3/17
|
|
|
|
|
Form of
Senior Secured Note issued by Novume Solutions, Inc. on March 12,
2019
|
|
8-K
|
|
001-38338
|
|
4.2
|
|
3/18/19
|
|
|
|
|
|
|
Note
Purchase Agreement, dated as of March 12, 2019, by and among Novume
Solutions, Inc., Cedarview Capital Management, LP, the Guarantors
from time to time party thereto, U.S. Bank National Association,
and the Purchasers from time to time party thereto
|
|
8-K
|
|
001-38338
|
|
4.3
|
|
3/18/19
|
|
|
|
|
|
Registration
Rights Agreement, dated as of October 1, 2017, by and among Novume
Solutions, Inc., G&W Ventures Inc. and Paul
Milligan
|
|
8-K
|
|
000-55833
|
|
4.1
|
|
10/4/17
|
|
|
|
|
2017
Equity Award Plan of Novume Solutions, Inc.
|
|
S-8
|
|
333-220864
|
|
4.7
|
|
10/6/17
|
|
|
|
|
|
Employment
Agreement, dated as of March 16, 2016, by and between KeyStone
Solutions, Inc. and Robert A. Berman
|
|
1-A
|
|
024-10551
|
|
6.1
|
|
5/12/16
|
|
|
|
|
|
Employment
Agreement, dated August 1, 2016, by and between KeyStone Solutions,
Inc. and Riaz Latifullah
|
|
1-A/A
|
|
024-10551
|
|
6.11
|
|
9/2/16
|
|
|
|
|
|
|
Restated,
Amended and Supplemental Employment Agreement, dated as of August
28, 2017, by and between Novume Solutions, Inc. and Riaz
Latifullah
|
|
8-K
|
|
333-216014
|
|
10.2
|
|
8/29/17
|
|
|
|
|
|
Second
Restated, Amended and Supplemental Employment Agreement, dated as
of March 29, 2018, by and between Novume Solutions, Inc. and Riaz
Latifullah
|
|
10-K
|
|
001-38338
|
|
10.24
|
|
4/12/18
|
|
|
|
|
|
Amended
and Restated Offer Letter, dated as of January 8, 2018, by and
between AOC Key Solutions, Inc. and James McCarthy
|
|
S-1/A
|
|
333-221789
|
|
10.6
|
|
1/10/18
|
|
|
|
|
Employment
Agreement, dated as of November 14, 2018, by and between Novume
Solutions, Inc. and Matthew Hill
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
11/15/18
|
|
|
|
|
|
|
Assignment
and Assumption Agreement, dated as of October 1, 2017, by and
between KeyStone Solutions LLC and Novume Solutions,
Inc.
|
|
8-K
|
|
000-55833
|
|
10.1
|
|
10/3/17
|
|
|
|
|
|
General
Continuing Guaranty, dated as of October 4, 2017, by and between
Wells Fargo Bank, National Association and Novume Solutions, Inc.
for Global Technical Services, Inc.
|
|
8-K
|
|
000-55833
|
|
10.1
|
|
10/4/17
|
|
|
|
|
|
General
Continuing Guaranty, dated as of October 4, 2017, by and between
Wells Fargo Bank, National Association and Novume Solutions, Inc.
for Global Contract Professionals, Inc.
|
|
8-K
|
|
000-55833
|
|
10.2
|
|
10/4/17
|
|
|
63
|
|
|
Security
Agreement, dated as of April 3, 2018, by and between Brekford
Traffic Safety, Inc. and Cedarview Opportunities Master Fund,
LP
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
4/9/18
|
|
|
|
|
|
Letter
of Intent, dated as of September 17, 2018, by and between Novume
Solutions, Inc. and OpenALPR Technology, Inc.
|
|
8-K
|
|
001-38338
|
|
99.2
|
|
9/20/18
|
|
|
|
|
|
Asset
Purchase Agreement, dated as of November 14, 2018, by and among
Novume Solutions, Inc., OpenALPR Technology, Inc. and Matthew
Hill
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
11/15/18
|
|
|
|
|
|
Amendment
No. 1 to Purchase Agreement, dated as of February 15, 2019, by and
among Novume Solutions, Inc., OpenALPR Technology, Inc. and Matthew
Hill
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
3/18/19
|
|
|
|
|
|
Amendment
No. 2 to Purchase Agreement, dated as of March 12, 2019, by and
among Novume Solutions, Inc., OpenALPR Technology, Inc. and Matthew
Hill
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
3/18/19
|
|
|
|
|
|
Management
Services Agreement, dated as of October 9, 2018, by and between
Novume Solutions, Inc. and OpenALPR Technologies, Inc.
|
|
10-Q
|
|
001-38338
|
|
10.2
|
|
11/13/18
|
|
|
|
10.17
|
|
Sublease
effective January 1, 2019 by and between BlueWater Federal
Solutions, Inc and AOC Key Solutions, Inc.
|
|
|
|
|
|
|
|
|
|
*
|
|
10.18#
|
|
Form of
Novume Solutions, Inc. Incentive Stock Option Award
Agreement
|
|
|
|
|
|
|
|
|
|
*
|
|
10.19#
|
|
Form of
Novume Solutions, Inc. Non-Qualified Stock Option Award
Agreement
|
|
|
|
|
|
|
|
|
|
*
|
|
|
Employment
Agreement with Eyal Hen effective May 15, 2019
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
5/21/19
|
|
|
|
|
|
Employment
Agreement with Robert Berman effective May 15, 2019
|
|
8-K
|
|
001-38338
|
|
10.2
|
|
5/21/19
|
|
|
|
|
|
Employment
Agreement with Riaz Latifullah effective May 15, 2019
|
|
8-K
|
|
001-38338
|
|
10.3
|
|
5/21/19
|
|
|
|
|
|
At
Market Issuance Sales Agreement, dated August 14, 2019, between
Rekor Systems, Inc. and B. Riley FBR, Inc.
|
|
8-K
|
|
001-38338
|
|
10.1
|
|
8/15/19
|
|
|
|
|
|
Form of
Rekor Systems, Inc. Restricted Stock Unit Agreement
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
First
Amendment to Note Purchase Agreement, dated March 26, 2020, by and
among the Company, the Purchasers from time to time party thereto
and the Agent.
|
|
8-K
|
|
001-38338
|
|
10.25
|
|
3/26/20
|
|
*
|
|
|
|
Limited
Waiver, dated as of March 26, 2020, by and among the Company and
the undersigned Purchasers.
|
|
8-K
|
|
001-38338
|
|
10.26
|
|
3/26/20
|
|
*
|
|
|
|
BD & Co Letter on Change in Certifying Accountant dated
June 28, 2019
|
|
8-K
|
|
001-38338
|
|
16.1
|
|
6/28/19
|
|
|
|
|
|
Subsidiaries
of Rekor Systems, Inc.
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Consent
of Friedman LLP., Independent Registered Public Accounting
Firm
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Consent
of BD & Co, Independent Registered Public Accounting
Firm
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
Section
1350 Certification of Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
**
|
|
|
|
Section
1350 Certification of Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
**
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
|
|
|
|
*
|
|
*
|
Filed
herewith.
|
|
**
|
Furnished
herewith.
|
|
#
|
Indicates
management contract or compensatory plan.
|
|
^
|
Confidential
treatment has been granted with respect to redacted portions of
this exhibit. Redacted portions of this exhibit have been filed
separately with the SEC.
|
ITEM
16.
FORM 10-K SUMMARY
None.
64
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
|
Rekor
Systems, Inc.
|
|
|
|
|
|
|
|
/s/
Robert A. Berman
|
|
|
Name:
|
Robert
A. Berman
|
|
|
Title:
|
President
and Chief Executive Officer
Principal
Executive Officer
|
|
Date: March 30,
2020
|
|
|
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/
Robert A. Berman
Robert A. Berman
|
Chief
Executive Officer
(Principal
Executive Officer) and Director
|
March 30, 2020
|
|
|
|
|
|
/s/
Eyal Hen
Eyal Hen
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
March 30, 2020
|
|
|
|
|
|
/s/
James K. McCarthy
James K. McCarthy
|
Chairman
of the Board and Director
|
March 30, 2020
|
|
|
|
|
|
/s/
Richard Nathan
Dr. Richard Nathan
|
Director
|
March 30, 2020
|
|
|
|
|
|
/s/
Glenn Goord
Glenn Goord
|
Director
|
March 30, 2020
|
|
|
|
|
|
/s/
Paul de Bary
Paul de Bary
|
Director
|
March 30, 2020
|
|
|
|
|
|
/s/
Christine J. Harada
Christine J. Harada
|
Director
|
March 30, 2020
|
|
/s/
David Hanlon
David Hanlon
|
Director
|
March 30, 2020
|
|
/s/
Steven D. Croxton
Steven D. Croxton
|
Director
|
March 30, 2020
|
65
Exhibit 21.1
Subsidiaries of Rekor Systems, Inc.
|
Legal Name of Subsidiary
|
Jurisdiction of Organization
|
|
AOC Key Solutions, Inc.
|
Delaware
|
|
Rekor Recognition Systems, Inc.
|
Delaware
|
|
Rekor Public Safety Network, LLC
|
Delaware
|
|
Firestorm Franchising, LLC
|
Delaware
|
|
Firestorm Holdings, LLC
|
Delaware
|
|
Firestorm Solutions, LLC
|
Delaware
|
|
Global Public Safety, LLC
|
Delaware
|
|
Global Technical Services, Inc.
|
Texas
|
|
KeyStone Solutions, LLC
|
Delaware
|
|
Novume Media, Inc.
|
Delaware
|
|
OpenALPR Software Solutions, LLC
|
Delaware
|
Exhibit 23.1
CONSENT OF INDEPNDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We
hereby consent to the incorporation by reference in the
Registration Statements of Rekor Systems, Inc. and Subsidiaries on
Forms S-8 (File No. 333-220864) and Form S-3 (File No. 333-224423)
of our report dated March 30, 2020, with respect to the
consolidated financial statements of Rekor Systems, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31,
2019.
|
/s/
Friedman LLP
|
|
East Hanover, New Jersey
|
|
March
30, 2020
|
Exhibit 23.2
Consent of Independent Registered Public Accounting
Firm
We consent to the incorporation by reference in the Registration
Statements of Rekor Systems, Inc. (previously named Novume
Solutions, Inc.) on Form S-8 (Registration No. 333-220864) and Form
S-3 (Registration No. 333-224423) of our report dated April 11,
2019, on our audit of the consolidated financial statements as of
and for the year ended December 31, 2018, which report is included
in this Annual Report on Form 10-K for the year ended December 31,
2019.
/s/ BD & Company, Inc.
Owings Mills, MD
March 30, 2020
Exhibit 31.1
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Robert A. Berman, certify that:
1. I
have reviewed this Annual Report on Form 10-K of Rekor Systems,
Inc.
2.
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report.
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report.
4. The
registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a15(f) and 15d 15(f)) for the registrant and
have:
(a)
Designed such
disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared.
(b)
Designed such
internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles.
(c)
Evaluated the
effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation.
and
(d)
Disclosed in this
report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
and
5. The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information.
and
(b)
Any fraud, whether
or not material, that involves management or other employees who
have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 30, 2020
|
/s/
Robert A. Berman
|
|
|
Robert
A. Berman
|
|
|
President
and Chief Executive Officer
|
|
|
Principal
Executive Officer
|
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eyal
Hen, certify that:
1. I
have reviewed this Annual Report on Form 10-K of Rekor Systems,
Inc.
2.
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report.
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report.
4. The
registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a15(f) and 15d 15(f)) for the registrant and
have:
(a)
Designed such
disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared.
(b)
Designed such
internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles.
(c)
Evaluated the
effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation.
and
(d)
Disclosed in this
report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
and
5. The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information.
and
(b)
Any fraud, whether
or not material, that involves management or other employees who
have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 30, 2020
|
/s/
Eyal Hen
|
|
|
Eyal
Hen
|
|
|
Chief
Financial Officer
|
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The
undersigned hereby certify, pursuant to, and as required by, 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Rekor
Systems, Inc. (the “Company”) on Form 10-K for the
period ended December 31, 2019 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and that information contained in such Annual Report on
Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
Date:
March 30, 2020
|
/s/
Robert A. Berman
|
|
|
Robert
A. Berman
|
|
|
President
and Chief Executive Officer
|
|
|
Principal
Executive Officer
|
A signed original of this written statement required by Section 906
of the Sarbanes-Oxley Act of 2002 has been provided to Rekor
Systems, Inc. and will be retained by Rekor Systems, Inc. and
furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certification is being furnished solely
pursuant to 18 U.S.C. Section 1350 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The
undersigned hereby certify, pursuant to, and as required by, 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Rekor
Systems, Inc. (the “Company”) on Form 10-K for the
period ended December 31, 2018 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and that information contained in such Annual Report on
Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
Date:
March 30, 2020
|
/s/
Eyal Hen
|
|
|
Eyal
Hen
|
|
|
Chief
Financial Officer
|
|
|
|
A signed original of this written statement required by Section 906
of the Sarbanes-Oxley Act of 2002 has been provided to Rekor
Systems, Inc. and will be retained by Rekor Systems, Inc.
and furnished to the Securities
and Exchange Commission or its staff upon request. The foregoing
certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.