Rekor Systems, Inc 8-K/A, filed Feb 15, 2024
Rekor Systems, Inc. (REKR)
About this 8-K/A
Rekor Systems, Inc filed this 8-K/A on February 15, 2024, reporting on events of January 2, 2024.
Items reported
- Item 9.01: Financial statements and exhibits
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(State or Other Jurisdiction
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(IRS Employer
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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The
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Exhibit
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Description
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23.1
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99.1
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99.2
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104
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Cover Page Interactive Data File (embedded within the Inline XBRL document)
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REKOR SYSTEMS, INC.
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Date: February 15, 2024
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/s/ Robert A. Berman
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Name: Robert A. Berman
Title: Chief Executive Officer
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EXHIBIT 23.1
Consent of Independent Auditor
We consent to the incorporation by reference in Registration Statements on Form S-8 (File Nos. 333-220864, 333-259041, and 333-260153) and Form S-3 (File Nos. 333-259447, 333-260607 and 333-274422) of Rekor Systems, Inc. of our report dated February 15, 2024 on the financial statements of All Traffic Data Services, LLC, as of December 31, 2022 and for the year ended December 31, 2022, which is included in this Current Report on Form 8-K/A of Rekor Systems, Inc.
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/s/ Crowe LLP |
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| Denver, Colorado | |
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February 15, 2024 |
Exhibit 99.1
ALL TRAFFIC DATA SERVICES, LLC
Wheat Ridge, Colorado
FINANCIAL STATEMENTS
December 31, 2022
All Traffic Data Services, LLC
Wheat Ridge, Colorado
FINANCIAL STATEMENTS
December 31, 2022
CONTENTS
| INDEPENDENT AUDITOR’S REPORT | 1 |
| FINANCIAL STATEMENTS | |
| BALANCE SHEET | 3 |
| STATEMENT OF OPERATIONS | 4 |
| STATEMENT OF MEMBER’S EQUITY | 5 |
| STATEMENT OF CASH FLOWS | 6 |
| NOTES TO FINANCIAL STATEMENTS | 7 |
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Crowe LLP Independent Member Crowe Global |
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Member of
All Traffic Data Services, LLC
Wheat Ridge, Colorado
Opinion
We have audited the financial statements of All Traffic Data Services, LLC (the “Company”), which comprise the balance sheet as of December 31, 2022, and the related statements of operations, member’s equity, and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of Matter
As discussed in Note 1 to the financial statements, effective January 1, 2022, the Company has changed its method of accounting for leases due to the adoption of the new lease accounting standard pursuant to Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The Company adopted the new lease standard using the modified retrospective approach. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company ability to continue as a going concern for one year from the date the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
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Exercise professional judgment and maintain professional skepticism throughout the audit. |
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Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
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Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
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Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
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Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.
/s/ Crowe LLP
Denver, Colorado
February 15, 2024
ALL TRAFFIC DATA SERVICES, LLC
BALANCE SHEET
December 31, 2022
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2022 |
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ASSETS |
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Current assets |
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Cash |
$ | 1,664,377 | ||
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Accounts receivable, net |
2,400,526 | |||
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Prepaid expenses and other current assets |
581,952 | |||
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Total current assets |
4,646,855 | |||
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Noncurrent assets |
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Property and equipment, net |
1,583,117 | |||
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Operating lease right of use assets, net |
319,210 | |||
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Customer relationships, net |
10,625,414 | |||
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Trademark, net |
978,611 | |||
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Goodwill |
398,174 | |||
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Total noncurrent assets |
13,904,526 | |||
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Total assets |
$ | 18,551,381 | ||
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LIABILITIES AND MEMBER'S EQUITY |
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Current liabilities |
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Accounts payable |
$ | 49,955 | ||
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Accrued expenses |
464,550 | |||
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Payroll liabilities |
178,984 | |||
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Operating lease obligations, current portion |
192,436 | |||
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Total current liabilities |
885,925 | |||
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Noncurrent liabilities |
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Operating lease obligations, net of current portion |
126,774 | |||
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Total noncurrent liabilities |
126,774 | |||
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Total liabilities |
1,012,699 | |||
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Member's equity |
17,538,682 | |||
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Total liabilities and member's equity |
$ | 18,551,381 | ||
ALL TRAFFIC DATA SERVICES, LLC
STATEMENT OF OPERATIONS
Year ended December 31, 2022
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2022 |
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Net revenues |
$ | 8,263,015 | ||
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Cost of revenues |
2,391,851 | |||
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Gross profit |
5,871,164 | |||
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Operating expenses |
2,655,188 | |||
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Depreciation and amortization |
1,648,815 | |||
| 4,304,003 | ||||
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Income before other income (expense) |
1,567,161 | |||
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Other income (expense) |
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Management and advisory expense |
(189,429 | ) | ||
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Gain on disposal of property and equipment |
30,026 | |||
| (159,403 | ) | |||
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Net income |
$ | 1,407,758 | ||
ALL TRAFFIC DATA SERVICES, LLC
STATEMENT OF MEMBER’S EQUITY
Year ended December 31, 2022
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Total |
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Contributed |
Accumulated |
Member's |
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Capital |
Deficit |
Equity |
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Balance as of January 1, 2022 |
$ | 22,559,561 | $ | (6,477,258 | ) | $ | 16,082,303 | |||||
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Incentive unit compensation expense |
- | 48,621 | 48,621 | |||||||||
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Net income |
- | 1,407,758 | 1,407,758 | |||||||||
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Balance as of December 31, 2022 |
$ | 22,559,561 | $ | (5,020,879 | ) | $ | 17,538,682 | |||||
ALL TRAFFIC DATA SERVICES, LLC
STATEMENT OF CASH FLOWS
Year ended December 31, 2022
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2022 |
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Cash flows from operating activities |
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Net income |
$ | 1,407,758 | ||
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Adjustments to reconcile consolidated net income to net cash provided by operating activities |
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Depreciation and amortization |
1,648,815 | |||
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Bad debt expense |
36,000 | |||
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Incentive unit compensation expense |
48,621 | |||
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Gain on disposal of property and equipment |
(30,026 | ) | ||
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Non-cash operating lease activity |
160,332 | |||
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Employee retention credits |
(502,841 | ) | ||
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Change in operating assets and liabilities |
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Accounts receivable |
(283,723 | ) | ||
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Prepaid expenses and other current assets |
32,031 | |||
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Accounts payable |
48,343 | |||
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Accrued expenses |
(38,915 | ) | ||
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Payroll liabilities |
(18,764 | ) | ||
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Cash paid for contingent consideration |
(262,000 | ) | ||
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Cash paid for operating leases |
(160,332 | ) | ||
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Net cash from operating activities |
2,085,299 | |||
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Cash flows from investing activities |
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Purchases of property and equipment |
(942,943 | ) | ||
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Proceeds from sale of property and equipment |
42,066 | |||
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Net cash used in investing activities |
(900,877 | ) | ||
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Net change in cash |
1,184,422 | |||
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Cash, beginning of the year |
479,955 | |||
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Cash, end of the year |
$ | 1,664,377 | ||
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Operating lease right-of-use assets entered into during the year |
$ | 186,893 | ||
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: All Traffic Data Services, LLC (the “Company”), a Colorado Limited Liability Company, is a wholly owned subsidiary of All Traffic Holdings, LLC (“Holdings”). Under the terms of the respective operating agreements, the Company has an indefinite life. The Company provides traffic data collection and reporting services to a multitude of civil engineering firms, state and local transportation networks, commercial establishments and cities across the United States of America.
Effective January 2, 2024, Rekor Systems, Inc. acquired the Company pursuant to an Interest Purchase Agreement.
Adoption of New Accounting Standards: As of January 1, 2022, the Company adopted Accounting Standard Update (“ASU”) 2016-02, Leases, which requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for most operating leases, except for those leases with an original term of 12 months or less. Accounting for finance leases is substantially unchanged. This accounting standard was adopted using a modified retrospective transition. There were no adjustments recorded to the opening balance of member’s deficit as of the effective date.
The adoption of ASU 2016-02 had an impact on the Company’s balance sheet due to the recognition of approximately $281,000 of operating lease right-of-use assets and operating lease liabilities recorded as of January 1, 2022. The Company does not have any material finance leases.
Basis of Accounting and Use of Estimates: The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Conformity with such principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. Estimates that are more susceptible to change in the near term are the Company’s allowance for doubtful accounts, useful lives and related depreciation of property and equipment and intangible assets, the valuation of equity incentive unit awards, and the valuation of long-lived assets, including goodwill. Actual results could differ from these estimates.
Concentrations of Credit Risk: The Company’s financial instruments that are at times exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains cash in bank accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to significant credit risk relating to cash because the Company maintains its cash with high credit quality institutions.
As of December 31, 2022, one customer accounted for 11% of the Company’s accounts receivables. The same customer also accounted for 8%, of the Company’s revenues for the period ended December 31, 2022.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition: The Company records revenue in accordance with FASB Accounting Standards Codification (“ASC 606”) Revenue from Contracts with Customers. Under ASC 606, revenue from goods and services is recognized when an entity transfers control of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Refer to Note 2 for additional disclosure regarding revenue recognition.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable, net consists of billed accounts receivable and allowances for doubtful accounts. Billed accounts receivable represents amounts billed to clients that have not yet been collected. Allowances for doubtful accounts represent the amounts that may become uncollectible or unrealizable in the future. The Company determines an estimated allowance for doubtful accounts based on management’s judgment regarding operating performance related to the adequacy of the services performed and delivered, and the financial condition of the Company’s clients. After all reasonable attempts to collect an account have failed, the amount receivable is written off against the allowance. As of December 31, 2022, the allowance for doubtful accounts is approximately $133,000.
Property and Equipment: Property and equipment are generally stated at cost less accumulated depreciation, except for assets acquired in a business combination, whereby these items are initially recorded at fair value at the acquisition date under FASB ASC 805, Business Combinations. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized.
Estimated useful lives are as follows:
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Service equipment |
5 years |
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Vehicles |
5 years |
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Computer and equipment software |
3-5 years |
Leases: At the inception of an arrangement, the Company determines if an arrangement is a lease based on all relevant facts and circumstances. Leases are classified as operating or finance leases at the lease commencement date. Operating leases are included in operating lease ROU assets, current operating lease liabilities and noncurrent operating lease liabilities on the balance sheet. Leases are classified between current and long-term liabilities based on their payment terms. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less (short-term leases) are not recorded on the balance sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. ROU assets also include prepaid rent and are adjusted by the unamortized balance of lease incentives. The implicit rate within the Company’s operating leases are generally not determinable and the Company uses an estimated incremental borrowing rate at the lease commencement date to determine the present value of lease payments.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Some leases include one or more options to extend the lease, with extension terms that can extend the lease term. The exercise of lease extension options is at the Company’s sole discretion. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally concludes options to extend the lease are reasonably certain to be exercised when it concludes that it is cost prohibitive to relocate operations or pursue alternative leased assets.
Goodwill: Goodwill represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value.
In testing for goodwill impairment, the Company has the option first to perform a qualitative assessment to determine whether it is more likely than not that goodwill is impaired or the entity can bypass the qualitative assessment and proceed directly to the quantitative test by comparing the carrying amount, including goodwill, of the entity with its fair value. The goodwill impairment loss, if any, is measured as the amount by which the carrying amount of the entity, including goodwill, exceeds its fair value. Subsequent increases in goodwill value are not recognized in the financial statements. The Company recorded a goodwill impairment charge of $4,470,000 during the year ended December 31, 2021. Management of the Company has determined that there was no goodwill impairment during the year ended December 31, 2022.
Identifiable Intangible Assets: Identifiable intangible assets acquired in a business combination are recorded at fair values at the date of acquisition. The Company’s intangible assets consist of a trade name and customer relationships. The trade name and customer relationship intangible assets are amortized on a straight-line basis over 15 years, which approximates useful life.
Impairment of Long-Lived Assets: The Company evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) are less than the carrying value or the value in use, a write-down is recorded to reduce the related asset to its estimated fair value.
Fair Value of Financial Instruments: The Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to generally accepted accounting principles in the United States of America requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
FASB ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FASB ASC 820 classifies the inputs used to measure fair value into the following hierarchy:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Level 2 – Significant other observable inputs other than Level 1 prices 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.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s financial instruments include cash, accounts receivable, accounts payable and equity incentive units.
The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value due to the short maturities of these instruments. Contingent consideration is recorded at fair value at the time of acquisition and re-measured at fair value each reporting period. Fair value is estimated using present value analysis of payment probability outcomes which requires judgmental Level 3 measurement assumptions. During the year ended December 31, 2022, the Company settled contingent consideration liabilities through payment of $262,000.
The fair value of equity incentive unit awards is estimated at the grant date using an option pricing model. The option pricing model requires judgmental Level 3 measurement assumptions on the date of grant including: volatility, value of the underling equity instrument and expected life.
Equity Incentive Units: The Company expenses the fair value of equity-based incentive awards on the date of grant if there is no service requisite or over the vesting period when there is a service requisite.
Advertising and Marketing Costs: The Company expenses all advertising and marketing costs as incurred. Total advertising and marketing expense was approximately $260,000 for the year ended December 31, 2022.
Income Taxes: The Company is a limited liability company and as such, is not subject to income taxes. Therefore, no provision for income taxes has been provided in the accompanying financial statements because as an LLC that has elected to file as a partnership, such taxes are the responsibility of the individual members. The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management believes that there are no current tax positions that would result in an asset or liability for taxes being recognized in the accompanying financial statements.
Contingencies and Uncertainties: Liabilities for loss contingencies arising from claims, assessments, litigation, and other sources are recorded when it is probable that a liability has been incurred and the amount of the claim, assessment, or damages can be reasonably estimated.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Under provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the subsequent extension thereof, the Company was eligible for refundable employee retention credits (“ERCs”) subject to certain criteria. The ERCs are equal to (a) 50% of qualified wages paid to employees paid during the qualifying quarters of calendar year 2020 for a maximum credit per employee of $5,000 per employee through December 31, 2020 or (b) 70% of qualified wages paid to employees during the qualifying quarters of calendar year 2021 for a maximum credit per employee of $7,000 per quarter through June 30, 2021. During the year ended December 31, 2022, the Company claimed approximately $503,000 of ERC and recorded approximately $377,000 as a reduction to cost of revenue and $126,000 as a reduction of operating expenses. As of December 31, 2022, the Company had not received any ERC refund payments and a receivable of approximately $503,000 is included in prepaid expenses and other current assets on the balance sheet. Subsequent to December 31, 2022, the Company received ERC refund payments of approximately $461,000 and also interest credit of approximately $54,000.
Litigation: In the normal course of business, the Company’s business is such that the Company is involved in a variety of claims and disputes that are associated with the performance of its services. In addition to the usual liabilities of contractors for performance and completion of contracts, including letters of credit supporting performance guarantees, the Company is involved in limited lawsuits, claims, and inquiries. It is the opinion of management, based on advice of legal counsel, that these matters will not have a material effect on the Company’s financial position, results of operations, or cash flows.
NOTE 2 - REVENUE RECOGNITION
The Company provides traffic data collection and reporting services to civil engineering firms, state and local transportation networks, commercial establishments and cities across the United States of America.
Revenue is recorded at the amount of consideration the Company expects to be entitled to in exchange for the delivered goods and services, which includes an estimate of expected returns or refunds when applicable. When the Company enters into a sales arrangement with a customer, it believes it is probable that it will collect substantially all of the consideration to which it will be entitled in exchange for the goods that will be transferred to the customer.
Revenue is recognized at the point in time when control is transferred to the customer. In general, control transfers to the customer when data and information derived from information collection process is provided to the customer. Once the data and information are provided to the customer, the customer can direct the use and obtain substantially all the remaining benefits from the asset at this point in time.
Payment from customers is typically due at the time the data and information, derived from collection services, is provided to the customer.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2022:
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2022 |
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Service equipment |
$ | 1,982,910 | ||
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Vehicles |
1,093,328 | |||
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Computer equipment and software |
191,585 | |||
| 3,267,823 | ||||
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Accumulated depreciation |
(1,684,706 | ) | ||
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Total |
$ | 1,583,117 | ||
Depreciation expense was $626,521 during the year ended December 31, 2022.
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following as of December 31, 2022:
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December 31, 2022 |
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Net |
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Useful |
Gross Carrying |
Accumulated |
Carrying |
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Life (years) |
Amount |
Amortization |
Amount |
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Customer relationships |
15 | $ | 14,034,385 | $ | (3,408,971 | ) | $ | 10,625,414 | ||||||||
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Trademark |
15 | 1,300,000 | (321,389 | ) | 978,611 | |||||||||||
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Goodwill |
Indefinite |
398,174 | - | 398,174 | ||||||||||||
| $ | 15,732,559 | $ | (3,730,360 | ) | $ | 12,002,199 | ||||||||||
Intangible asset amortization expense was $1,022,294 during year ended December 31, 2022.
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS (Continued)
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
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Customer |
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Relationships |
Trademark |
Total |
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2023 |
$ | 935,628 | $ | 86,664 | $ | 1,022,292 | ||||||
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2024 |
935,628 | 86,664 | 1,022,292 | |||||||||
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2025 |
935,628 | 86,664 | 1,022,292 | |||||||||
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2026 |
935,628 | 86,664 | 1,022,292 | |||||||||
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2027 |
935,628 | 86,664 | 1,022,292 | |||||||||
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Thereafter |
5,947,274 | 545,291 | 6,492,565 | |||||||||
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Total |
$ | 10,625,414 | $ | 978,611 | $ | 11,604,025 | ||||||
NOTE 5 - LEASE COMMITMENTS
The Company leases office and storage space from third parties and related parties. The leases expire at various dates through October 31, 2025. The Company’s lease expense, including short-term and variable lease costs expense, totaled $472,906 during the year ended December 31, 2022. A summary of amounts reported within the December 31, 2022 balance sheet is as follows:
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Operating lease right of use assets, net |
$ | 319,210 | ||
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Operating lease obligations, current portion |
$ | 192,436 | ||
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Operating lease obligations, net of current portion |
$ | 126,774 |
The estimated future minimum lease payments under non-cancellable leases as of December 31, 2022 are as follows:
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Operating lease cost |
$ | 148,449 | ||
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Short-term and variable lease cost |
324,457 | |||
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Total lease cost |
$ | 472,906 | ||
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2023 |
$ | 203,021 | ||
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2024 |
111,283 | |||
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2025 |
18,190 | |||
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Total minimum lease payments |
332,494 | |||
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Less: financing component |
(13,284 | ) | ||
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Net present value of minimum lease payments |
319,210 | |||
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Less: current portion of operating lease obligations |
(192,436 | ) | ||
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Long-term operating obligations, net of current portion |
$ | 126,774 | ||
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Weighted-average remaining lease term |
21 months |
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Weighted-average discount rate |
5.00 | % | ||
Effective in March 2023, the Company entered into a building lease agreement with a third party through February 2026. The total lease commitment during this period will be approximately $52,000.
NOTE 6 - RELATED PARTY TRANSACTIONS
As discussed in Note 5, the Company leases certain property from a related party. Lease expense includes related party lease expense of $287,000 for the year ended December 31, 2022. Each of the Company’s related party leases have lease terms of 12 months or less and are not recorded as operating lease ROU assets or lease liabilities on the Company’s balance sheet.
On April 16, 2019, the Company entered into an Investment Oversight Agreement (the “IO Agreement”) with a member of the Company. Pursuant to the IO Agreement, the member will provide the Company with ongoing financial consulting and management advisory services so long as the member or its affiliated designees have any equity ownership in the Company. A quarterly fee of $43,750 and reimbursement for out-of-pocket business expenses are due to the member subject to a 3% annual increase effective as of July 31 of each successive year. For the year ended December 31, 2022, the Company recognized management advisory fee expense of $189,429, which is included in other income (expense) in the statement of operations. As of December 31, 2022, accrued management advisory fees was $45,876.
NOTE 7 - MEMBER’S EQUITY
The Company equity consists of one class of membership interests, all of which is held by Holdings. During the year ended December 31, 2022, the Company did not receive any capital contributions or make any distributions to Holdings. Subsequent to December 31, 2022, the Company made distributions totaling $2,000,000 to Holdings.
Holdings awarded Class B incentive units to certain employees of the Company. In accordance with ASC 718, share-based payments awarded to an employee of the reporting entity by a holder of an economic interest in the entity as compensation for services provided to the entity are share-based payment transactions. The substance of such a transaction is that the economic interest holder makes a capital contribution to the reporting entity and that entity makes a share-based payment to its employee in exchange for services rendered. As Holdings is an economic interest holder of the Company, these share-based awards have been accounted for and disclosed in accordance with ASC 718.
The Class B incentive units participate in distributions from the Company to the extent such distributions exceed defined participation levels. The incentive units do not have voting rights. These units vest 20% per year on each one-year anniversary from the date of the grant. The Class B incentive units provide for accelerated vesting upon consummation of a sale transaction so long as the employee has been continuously employed by the Company thereof from the vesting start date through the date a sale transaction is consummated. Any Class B incentive units held by the employees are nontransferable. As of December 31, 2022, 5,905 Class B incentive units were vested. Unvested Class B incentive units are forfeited upon termination of employment. During the year ended December 31, 2022, 3,761 Class B incentive units were forfeited.
The Company expenses the fair value of the Class B incentive units as determined on the date of grant, over the requisite service period. The Company granted 5,261 Class B incentive units to members of Company management during the year ended December 31, 2022. As of December 31, 2022, 12,957 Class B incentive units, were outstanding. The Company recorded compensation expense of $48,621 during the year ended December 31, 2022.
NOTE 7 - MEMBER’S EQUITY (Continued)
Upon the sale of the Company to Rekor Systems, Inc. on January 2, 2024, Holdings management determined the valuation of the Company at the time of sale did not allow for Class B incentive units to participate in the sale proceeds of the Company. Therefore, no proceeds from the sale of the Company were provided to the Class B incentive unit holders and no additional compensation expense was recorded by the Company. The Class B incentive units were settled upon the sale of the Company with no carry over to the buyer.
NOTE 8 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through February 15, 2024, the date on which the Company’s financial statements were available to be issued.
On June 21, 2023, the Company acquired certain assets and operations of Traffic Survey Specialists Inc. ("TSS") for a total purchase price of $650,000, of which $300,000 was paid in cash consideration at the time of closing. The remaining $350,000 will be paid in quarterly installments. On the three-month and six-month anniversaries following the closing date $75,000 is payable to sellers. On the nine-month and twelve-month anniversaries following closing date $100,000 is payable to sellers. The Company recorded $33,800 of transaction expense related to the acquisition.
TSS provides traffic data collection and analysis services for civil engineering firms, government transportation authorities, and commercial customers in southern Florida. The acquisition expands the Company’s existing markets and access to new customers and created revenue and cost synergies which management believes will contribute to future profits. The acquisition has been accounted for as a business combination.
The excess of the consideration transferred in over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which represents the opportunity to expand existing markets and access new customers and to create revenue and cost synergies that management believes will contribute to future profits. Substantially all of goodwill is expected to be deductible for tax purposes.
The following table presents the allocation of consideration to net assets acquired, at fair value:
|
Cash consideration |
$ | 300,000 | ||
|
Consideration payable to seller |
350,000 | |||
|
Total purchase price |
$ | 650,000 | ||
|
Assets acquired |
||||
|
Prepaid expenses |
$ | 2,271 | ||
|
Accounts receivable |
51,529 | |||
|
Property and equipment |
12,000 | |||
|
Customer relationships |
405,834 | |||
|
Total assets acquired |
471,634 | |||
|
Goodwill |
178,366 | |||
| $ | 650,000 |
ALL TRAFFIC DATA SERVICES, LLC
Wheat Ridge, Colorado
FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
ALL TRAFFIC DATA SERVICES, LLC
Wheat Ridge, Colorado
FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
CONTENTS
| FINANCIAL STATEMENTS | |
| BALANCE SHEET (Unaudited) | 2 |
| STATEMENT OF OPERATIONS (Unaudited) | 3 |
| STATEMENT OF MEMBER’S EQUITY (Unaudited) | 4 |
| STATEMENT OF CASH FLOWS (Unaudited) | 5 |
| NOTES TO FINANCIAL STATEMENTS (Unaudited) | 6 |
ALL TRAFFIC DATA SERVICES, LLC
BALANCE SHEET
September 30, 2023
(Unaudited)
|
2023 |
||||
|
ASSETS |
||||
|
Current assets |
||||
|
Cash and cash equivalents |
$ | 1,886,677 | ||
|
Accounts receivable, net |
2,872,816 | |||
|
Prepaid expenses and other current assets |
285,425 | |||
|
Total current assets |
5,044,918 | |||
|
Noncurrent assets |
||||
|
Property and equipment, net |
1,828,794 | |||
|
Operating lease right of use assets, net |
307,184 | |||
|
Customer relationships, net |
10,320,507 | |||
|
Trademark, net |
913,611 | |||
|
Goodwill |
576,540 | |||
|
Total noncurrent assets |
13,946,636 | |||
|
Total assets |
$ | 18,991,554 | ||
|
LIABILITIES AND MEMBER'S EQUITY |
||||
|
Current liabilities |
||||
|
Accounts payable |
$ | 39,743 | ||
|
Accrued expenses |
597,709 | |||
|
Consideration payable to seller |
350,000 | |||
|
Payroll liabilities |
330,589 | |||
|
Operating lease obligations, current portion |
194,530 | |||
|
Total current liabilities |
1,512,571 | |||
|
Noncurrent liabilities |
||||
|
Operating lease obligations, net of current portion |
112,654 | |||
|
Total noncurrent liabilities |
112,654 | |||
|
Total liabilities |
1,625,225 | |||
|
Member's equity |
17,366,329 | |||
|
Total liabilities and member's equity |
$ | 18,991,554 | ||
ALL TRAFFIC DATA SERVICES, LLC
STATEMENT OF OPERATIONS
Period from January 1, 2023 to September 30, 2023
(Unaudited)
|
2023 |
||||
|
Net revenues |
$ | 6,890,594 | ||
|
Cost of revenues |
2,034,449 | |||
|
Gross profit |
4,856,145 | |||
|
Operating expenses |
2,575,368 | |||
|
Depreciation and amortization |
1,387,422 | |||
|
Transaction expenses |
33,800 | |||
| 3,996,590 | ||||
|
Income before other income (expense) |
859,555 | |||
|
Other income (expense) |
||||
|
Management and advisory expense |
(143,898 | ) | ||
|
Other income |
54,250 | |||
|
Gain on disposal of property and equipment |
2,137 | |||
|
Interest income |
13,741 | |||
|
Total other income (expense) |
(73,770 | ) | ||
|
Net income |
$ | 785,785 | ||
ALL TRAFFIC DATA SERVICES, LLC
STATEMENT OF MEMBER’S EQUITY
Period from January 1, 2023 to September 30, 2023
(Unaudited)
|
Total |
||||||||||||
|
Contributed |
Accumulated |
Member's |
||||||||||
|
Capital |
Deficit |
Equity |
||||||||||
|
Balance as of January 1, 2023 |
$ | 22,559,561 | $ | (5,020,879 | ) | $ | 17,538,682 | |||||
|
Incentive unit compensation expense |
- | 41,862 | 41,862 | |||||||||
|
Distribution to member |
- | (1,000,000 | ) | (1,000,000 | ) | |||||||
|
Net income |
- | 785,785 | 785,785 | |||||||||
|
Balance as of September 30, 2023 |
$ | 22,559,561 | $ | (5,193,232 | ) | $ | 17,366,329 | |||||
ALL TRAFFIC DATA SERVICES, LLC
STATEMENT OF CASH FLOWS
Period from January 1, 2023 to September 30, 2023
(Unaudited)
|
2023 |
||||
|
Cash flows from operating activities |
||||
|
Net income |
$ | 785,785 | ||
|
Adjustments to reconcile net income to net cash provided by operating activities |
||||
|
Depreciation and amortization |
1,387,422 | |||
|
Bad debt expense |
27,000 | |||
|
Incentive unit compensation expense |
41,862 | |||
|
Gain on disposal of property and equipment |
(2,137 | ) | ||
|
Non-cash operating lease activity |
170,765 | |||
|
Change in operating assets and liabilities |
||||
|
Accounts receivable |
(447,761 | ) | ||
|
Prepaid expenses and other current assets |
298,798 | |||
|
Accounts payable |
(10,212 | ) | ||
|
Accrued expenses |
133,159 | |||
|
Payroll liabilities |
151,605 | |||
|
Cash paid for operating leases |
(170,765 | ) | ||
|
Net cash from operating activities |
2,365,521 | |||
|
Cash flows from investing activities |
||||
|
Acquisition of a business |
(300,000 | ) | ||
|
Purchases of property and equipment |
(850,221 | ) | ||
|
Proceeds from sale of property and equipment |
7,000 | |||
|
Net cash used in investing activities |
(1,143,221 | ) | ||
|
Cash flows from financing activities |
||||
|
Distribution to member |
(1,000,000 | ) | ||
|
Net cash used in financing activities |
(1,000,000 | ) | ||
|
Net change in cash and cash equivalents |
222,300 | |||
|
Cash and cash equivalents, beginning of the period |
1,664,377 | |||
|
Cash and cash equivalents, end of the period |
$ | 1,886,677 | ||
|
Supplemental disclosure of cash paid for acquisition |
||||
|
Fair value of assets acquired, net of cash acquired |
$ | 650,000 | ||
|
Consideration payable to seller |
(350,000 | ) | ||
|
Cash paid for acquisition |
$ | 300,000 | ||
|
Operating lease right-of-use assets entered into during the period |
$ | 144,830 | ||
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: All Traffic Data Services, LLC (the “Company”), a Colorado Limited Liability Company, is a wholly owned subsidiary of All Traffic Holdings, LLC (“Holdings”). Under the terms of the respective operating agreements, the Company has an indefinite life. The Company provides traffic data collection and reporting services to a multitude of civil engineering firms, state and local transportation networks, commercial establishments and cities across the United States of America.
Effective January 2, 2024, Rekor Systems, Inc. acquired the Company pursuant to an Interest Purchase Agreement.
Basis of Accounting and Use of Estimates: The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Conformity with such principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. Estimates that are more susceptible to change in the near term are the Company’s allowance for doubtful accounts, useful lives and related depreciation of property and equipment and intangible assets, the valuation of equity incentive unit awards, and the valuation of long-lived assets, including goodwill. Actual results could differ from these estimates.
Adoption of New Accounting Standards: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changed how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The most significant change in this standard is a shift from the incurred loss model to the expected loss model. Under the standard, disclosures are required to provide users of the financial statements with useful information in analyzing an entity’s exposure to credit risk and the measurement of credit losses. Financial assets held by the company that are subject to the guidance in FASB ASC 326 were trade accounts receivable. The Company adopted the standard effective January 1, 2023. The adoption of this standard did not have a material impact on the Company's financial statements.
Concentrations of Credit Risk: The Company’s financial instruments that are at times exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains cash in bank accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to significant credit risk relating to cash because the Company maintains its cash with high credit quality institutions.
As of September 30, 2023, one customer accounted for 10% and another customer accounted for 10% of the Company’s accounts receivables. The same customers also accounted for 5% and 8%, of the Company’s revenues for the period from January 1, 2023 to September 30, 2023, respectively.
Cash and Cash Equivalents: Cash and cash equivalents include cash and investments with original maturities of three months or less.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition: The Company records revenue in accordance with FASB Accounting Standards Codification (“ASC 606”) Revenue from Contracts with Customers. Under ASC 606, revenue from goods and services is recognized when an entity transfers control of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Refer to Note 2 for additional disclosure regarding revenue recognition.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable, net consists of billed accounts receivable and allowances for doubtful accounts. Billed accounts receivable represents amounts billed to clients that have not yet been collected. Unbilled accounts receivable of $562,678 were included in accounts receivable, net as of September 30, 2023.
Allowances for doubtful accounts represent the amounts that may become uncollectible or unrealizable in the future. The Company determines an estimated allowance for doubtful accounts based on management’s judgment regarding operating performance related to the adequacy of the services performed and delivered, and the financial condition of the Company’s customers. After all reasonable attempts to collect an account have failed, the amount receivable is written off against the allowance. As of September 30, 2023, the allowance for doubtful accounts is approximately $160,000.
Property and Equipment: Property and equipment are generally stated at cost less accumulated depreciation, except for assets acquired in a business combination, whereby these items are initially recorded at fair value at the acquisition date under FASB ASC 805, Business Combinations. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized.
Estimated useful lives are as follows:
|
Service equipment |
5 years |
|
Vehicles |
5 years |
|
Computer and equipment software |
3 - 5 years |
Leases: At the inception of an arrangement, the Company determines if an arrangement is a lease based on all relevant facts and circumstances. Leases are classified as operating or finance leases at the lease commencement date. Operating leases are included in operating lease ROU assets, current operating lease liabilities and noncurrent operating lease liabilities in the balance sheet as of September 30, 2023. Leases are classified between current and long-term liabilities based on their payment terms. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less (short-term leases) are not recorded on the balance sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. ROU assets also include prepaid rent and are adjusted by the unamortized balance of lease incentives. The implicit rate within the Company’s operating leases are generally not determinable and the Company uses an estimated incremental borrowing rate at the lease commencement date to determine the present value of lease payments.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Some leases include one or more options to extend the lease, with extension terms that can extend the lease term. The exercise of lease extension options is at the Company’s sole discretion. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company generally concludes options to extend the lease are reasonably certain to be exercised when it concludes that it is cost prohibitive to relocate operations or pursue alternative leased assets.
Goodwill: Goodwill represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value.
In testing for goodwill impairment, the Company has the option first to perform a qualitative assessment to determine whether it is more likely than not that goodwill is impaired or the entity can bypass the qualitative assessment and proceed directly to the quantitative test by comparing the carrying amount, including goodwill, of the entity with its fair value. The goodwill impairment loss, if any, is measured as the amount by which the carrying amount of the entity, including goodwill, exceeds its fair value. Subsequent increases in goodwill value are not recognized in the financial statements. The Company recorded a goodwill impairment charge of $4,470,000 during the year ended December 31, 2021. Management of the Company has determined that there was no goodwill impairment during the period from January 1, 2023 to September 30, 2023.
Identifiable Intangible Assets: Identifiable intangible assets acquired in a business combination are recorded at fair values at the date of acquisition. The Company’s intangible assets consist of a trade name and customer relationships. The trade name and customer relationship intangible assets are amortized on a straight-line basis over 15 years, which approximates useful life.
Impairment of Long-Lived Assets: The Company evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) are less than the carrying value or the value in use, a write-down is recorded to reduce the related asset to its estimated fair value.
Fair Value of Financial Instruments: The Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820, Fair Value Measurements and Disclosures, establishes a common definition for fair value to be applied to generally accepted accounting principles in the United States of America requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
FASB ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FASB ASC 820 classifies the inputs used to measure fair value into the following hierarchy:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices 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.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and equity incentive units.
The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short maturities of these instruments. The fair value of certificates of deposit approximate deposit account balances, as no discounts for credit quality of liquidity are determined to be applicable.
The fair value of equity incentive unit awards is estimated at the grant date using an option pricing model. The option pricing model requires judgmental Level 3 measurement assumptions on the date of grant including: volatility, value of the underling equity instrument and expected life.
Equity Incentive Units: The Company expenses the fair value of equity-based incentive awards on the date of grant if there is no service requisite or over the vesting period when there is a service requisite.
Advertising and Marketing Costs: The Company expenses all advertising and marketing costs as incurred. Total advertising and marketing expense was approximately $195,000 for the period from January 1, 2023 to September 30, 2023.
Income Taxes: The Company is a limited liability company and as such, is not subject to income taxes. Therefore, no provision for income taxes has been provided in the accompanying financial statements because as an LLC that has elected to file as a partnership, such taxes are the responsibility of the individual members. The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management believes that there are no current tax positions that would result in an asset or liability for taxes being recognized in the accompanying financial statements.
Contingencies and Uncertainties: Liabilities for loss contingencies arising from claims, assessments, litigation, and other sources are recorded when it is probable that a liability has been incurred and the amount of the claim, assessment, or damages can be reasonably estimated.
Under provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the subsequent extension thereof, the Company was eligible for refundable employee retention credits (“ERCs”) subject to certain criteria. The ERCs were equal to (a) 50% of qualified wages paid to employees paid during the qualifying quarters of calendar year 2020 for a maximum credit per employee of $5,000 per employee through December 31, 2020 or (b) 70% of qualified wages paid to employees during the qualifying quarters of calendar year 2021 for a maximum credit per employee of $7,000 per quarter through June 30, 2021. During the year ended December 31, 2022, the Company claimed approximately $503,000 of ERC, of which the entire balance was recorded as a receivable within prepaid expenses and other current assets on its balance sheet. Through September 30, 2023, the Company received ERC refund payments of approximately $461,000 and also interest credit of approximately $54,000, which is recorded in other income on the statement of operations.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As of September 30, 2023, the Company has ERC receivable of approximately $42,000 recorded in prepaid expenses and other current assets on its balance sheet.
Litigation: In the normal course of business, the Company’s business is such that the Company is involved in a variety of claims and disputes that are associated with the performance of its services. In addition to the usual liabilities of contractors for performance and completion of contracts, including letters of credit supporting performance guarantees, the Company is involved in limited lawsuits, claims, and inquiries. It is the opinion of management, based on advice of legal counsel, that these matters will not have a material effect on the Company’s financial position, results of operations, or cash flows.
NOTE 2 - REVENUE RECOGNITION
The Company provides traffic data collection, equipment installation and reporting services to civil engineering firms, state and local transportation networks, commercial establishments and cities across the United States of America. Revenue is recorded at the amount of consideration the Company expects to be entitled to in exchange for the delivered goods and services, which includes an estimate of expected returns or refunds when applicable. When the Company enters into a sales arrangement with a customer, it believes it is probable that it will collect substantially all of the consideration to which it will be entitled in exchange for the goods that will be transferred to the customer.
Revenues derived from traffic data collection, reporting services and equipment installation services is recognized at a point in time when, control transfers to the customers. This typically occurs when data and information derived from information collection process is provided to the customer or the equipment is installed. Once the data, information and installed equipment are provided to the customer, the customer can direct the use and obtain substantially all the remaining benefits from the asset at this point in time.
Payment from customers is typically due at the time the data and information, derived from collection services, is provided to the customer.
NOTE 3 - ACQUISITION
On June 21, 2023, the Company acquired certain assets and operations of Traffic Survey Specialists Inc. ("TSS") for a total purchase price of $650,000, of which $300,000 was paid with cash consideration at the time of closing. The remaining $350,000 will be paid in quarterly installments and is presented in consideration payable to seller on the balance sheet. On the three-month and six-month anniversaries following the closing date $75,000, is payable to sellers. On the nine-month and twelve-month anniversaries following closing date $100,000, is payable to sellers. In October and December 2023, the Company made its required $75,000 payments to the seller pursuant to the terms of the purchase agreement.
TSS provides traffic data collection and analysis services for civil engineering firms, government transportation authorities, and commercial customers in southern Florida. The acquisition expands the Company’s existing markets and access to new customers and created revenue and cost synergies which management believes will contribute to future profits. The acquisition has been accounted for as a business combination.
NOTE 3 - ACQUISITION (Continued)
The excess of the consideration transferred in over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which represents the opportunity to expand existing markets and access new customers and to create revenue and cost synergies that management believes will contribute to future profits. Substantially all of goodwill is expected to be deductible for tax purposes.
The estimated fair values of the customer relationships were determined based on the excess earnings method and will be amortized over their remaining useful lives of 15 years.
The following table presents the allocation of consideration to net assets acquired, at fair value:
|
Cash consideration |
$ | 300,000 | ||
|
Consideration payable to seller |
350,000 | |||
|
Total purchase price |
$ | 650,000 | ||
|
Assets acquired |
||||
|
Prepaid expenses |
$ | 2,271 | ||
|
Accounts receivable |
51,529 | |||
|
Property and equipment |
12,000 | |||
|
Customer relationships |
405,834 | |||
|
Total assets acquired |
471,634 | |||
|
Goodwill |
178,366 | |||
| $ | 650,000 |
The Company recorded $33,800 of transaction expense related to the acquisition.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of September 30, 2023:
|
2023 |
||||
|
Service equipment |
$ | 2,720,792 | ||
|
Vehicles |
1,188,631 | |||
|
Computer equipment and software |
194,364 | |||
| 4,103,787 | ||||
|
Accumulated depreciation |
(2,274,993 | ) | ||
|
Total |
$ | 1,828,794 | ||
Depreciation expense was $611,681 during the period from January 1, 2023 to September 30, 2023.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following as of September 30, 2023:
|
September 30, 2023 |
||||||||||||||||
|
Net |
||||||||||||||||
|
Useful |
Gross Carrying |
Accumulated |
Carrying |
|||||||||||||
|
Life (years) |
Amount |
Amortization |
Amount |
|||||||||||||
|
Customer relationships |
15 | $ | 14,440,219 | $ | (4,119,712 | ) | $ | 10,320,507 | ||||||||
|
Trademark |
15 | 1,300,000 | (386,389 | ) | 913,611 | |||||||||||
|
Goodwill |
Indefinite |
576,540 | - | 576,540 | ||||||||||||
| $ | 16,316,759 | $ | (4,506,101 | ) | $ | 11,810,658 | ||||||||||
Intangible asset amortization expense was $775,741 during the period from January 1, 2023 to September 30, 2023.
The estimated amortization expense for intangible assets for the next five years and thereafter is as follows:
|
Customer Relationships |
Trademark |
Total |
||||||||||
|
2023 |
$ | 240,672 | $ | 21,666 | $ | 262,338 | ||||||
|
2024 |
962,688 | 86,664 | 1,049,352 | |||||||||
|
2025 |
962,688 | 86,664 | 1,049,352 | |||||||||
|
2026 |
962,688 | 86,664 | 1,049,352 | |||||||||
|
2027 |
962,688 | 86,664 | 1,049,352 | |||||||||
|
Thereafter |
6,229,083 | 545,289 | 6,774,372 | |||||||||
|
Total |
$ | 10,320,507 | $ | 913,611 | $ | 11,234,118 | ||||||
NOTE 6 - LEASE COMMITMENTS
The Company leases office and storage space from third parties and related parties. The leases expire at various dates through February 28, 2026. The Company’s lease expense, including short-term and variable lease costs expense, totaled $415,006 during the period from January 1, 2023 to September 30, 2023. A summary of amounts reported within the balance sheet as of September 30, 2023 is as follows:
|
Operating lease right of use assets, net |
$ | 307,184 | ||
|
Operating lease obligations, current portion |
$ | 194,530 | ||
|
Operating lease obligations, net of current portion |
$ | 112,654 |
The estimated future minimum lease payments under non-cancellable leases as of September 30, 2023 are as follows:
|
Operating lease cost |
$ | 170,765 | ||
|
Short-term and variable lease cost |
244,241 | |||
|
Total lease cost |
$ | 415,006 | ||
|
2023 |
$ | 60,519 | ||
|
2024 |
163,642 | |||
|
2025 |
72,573 | |||
|
2026 |
26,302 | |||
|
Total minimum lease payments |
323,036 | |||
|
Less: financing component |
(15,852 | ) | ||
|
Net present value of minimum lease payments |
307,184 | |||
|
Less: current portion of operating lease obligations |
(194,530 | ) | ||
|
Long-term operating obligations, net of current portion |
$ | 112,654 | ||
|
Weighted-average remaining lease term |
23 months |
|||
|
Weighted-average discount rate |
5.98 | % | ||
Effective in October 2023, the Company entered into a building lease agreement with a third party through October 2026. The total lease commitment during this lease period will be approximately $86,000.
NOTE 7 - RELATED PARTY TRANSACTIONS
As discussed in Note 6, the Company leases certain property from a related party. Lease expense includes related party lease expense of $206,800 for the period from January 1, 2023 to September 30, 2023. Each of the Company’s related party leases have lease terms of 12 months or less and are not recorded as operating lease ROU assets or lease liabilities on the Company’s balance sheet.
On April 16, 2019, the Company entered into an Investment Oversight Agreement (the “IO Agreement”) with a member of the Company. Pursuant to the IO Agreement, the member will provide the Company with ongoing financial consulting and management advisory services so long the member or its affiliated designees have any equity ownership in the Company. A quarterly fee of $43,750 and reimbursement for out-of-pocket business expenses are due to the member subject to a 3% annual increase effective as of July 31 of each successive year. For the period from January 1, 2023 to September 30, 2023, the Company recognized management advisory fee expense of $143,898, which is included in other income (expense) in the statement of operations. As of September 30, 2023, accrued management advisory fees were $45,876.
NOTE 8 - MEMBER’S EQUITY
The Company equity consists of one class of membership interests, all of which is held by Holdings. During the year ended December 31, 2022, the Company did not receive any capital contributions or make any distributions to Holdings. On February 13, 2023, the Company made a distribution of $1,000,000 to Holdings.
Holdings awarded Class B incentive units to certain employees of the Company. In accordance with ASC 718, share-based payments awarded to an employee of the reporting entity by a holder of an economic interest in the entity as compensation for services provided to the entity are share-based payment transactions. The substance of such a transaction is that the economic interest holder makes a capital contribution to the reporting entity and that entity makes a share-based payment to its employee in exchange for services rendered. As Holdings is an economic interest holder of the Company, these share-based awards have been accounted for and disclosed in accordance with ASC 718.
The Class B incentive units participate in distributions from the Company to the extent such distributions exceed defined participation levels. The incentive units do not have voting rights. These units vest 20% per year on each one-year anniversary from the date of the grant. The Class B incentive units provide for accelerated vesting upon consummation of a sale transaction so long as the employee has been continuously employed by the Company thereof from the vesting start date through the date a sale transaction is consummated. Any Class B incentive units held by the employees are nontransferable. As of September 30, 2023, 8,195 Class B incentive units were vested. Unvested Class B incentive units are forfeited upon termination of employment. During the period from September 1, 2023 to September 30, 2023, no Class B incentive units were forfeited.
The Company expenses the fair value of the Class B incentive units as determined on the date of grant, over the requisite service period. The Company did not grant any Class B incentive units to members of Company management during the period from January 1, 2023 to September 30, 2023. As of September 30, 2023, 12,957 Class B incentive units were outstanding. The Company recorded compensation expense of $41,862 for the period from January 1, 2023 to September 30, 2023.
Upon the sale of the Company to Rekor Systems, Inc. on January 2, 2024, Holdings management determined the valuation of the Company at the time of sale did not allow for Class B incentive units to participate in the sale proceeds of the Company. Therefore, no proceeds from the sale of the Company were provided to the Class B incentive unit holders and no additional compensation expense was recorded by the Company. The Class B incentive units were settled upon the sale of the Company with no carry over to the buyer.
NOTE 9 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through February 15, 2024, the date on which the Company’s financial statements were available to be issued.
On October 6, 2023, the Company made a distribution of $1,000,000 to Holdings.
Exhibit 99.2
Rekor Systems, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Financial Information
On January 2, 2024 (the “Closing Date”), Rekor Systems, Inc. (the “Company”) acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “Purchase Agreement”), dated as of the January 2, 2024, by and among the Company, ATD and All Traffic Holdings, LLC. ATD is engaged in the business of advanced traffic data collection. Under the terms of the Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “Acquisition”).
The following unaudited pro forma condensed combined financial information presents the historical consolidated balance sheet and statements of operations of the Company and the historical balance sheet and statements of operations of ATD, adjusted to reflect the Acquisition as of September 30, 2023 and January 1, 2022, respectively. The historical financial statements of the Company and ATD were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The unaudited pro forma condensed combined financial information is presented in accordance with the rules specified by Article 11 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and has been prepared using the assumptions described in the notes thereto. The following unaudited pro forma condensed combined balance sheet and statements of operations are provided for informational purposes only. The unaudited pro forma condensed combined statements of operations are not necessarily indicative of the Company’s historical or future results of operations or financial condition had the Acquisition been completed on the date indicated. In addition, the unaudited pro forma condensed combined balance sheet and statements of operations do not purport to project the future financial position or operating results of the combined company. The unaudited pro forma condensed combined balance sheet as of September 30, 2023 is presented as if the Acquisition had occurred on September 30, 2023. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and for the year ended December 31, 2022 are presented as if the Acquisition had occurred on January 1, 2022.
The unaudited pro forma condensed combined financial information should be read in conjunction with the Company’s historical consolidated financial statements and their accompanying notes presented in its Annual Report on Form 10-K for the year ended December 31, 2022 and its Quarterly Report on Form 10-Q for the nine months ended September 30, 2023, as well as the audited consolidated financial statements of ATD for the year ended December 31, 2022 and the unaudited interim financial statements as of and for the nine months ended September 30, 2023 included as Exhibit 99.1 to this Amendment of the Current Report on Form 8-K.
Rekor Systems, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
(Dollars in thousands, except share amounts)
|
Historical |
|||||||||||||||||
|
Rekor Systems, Inc. |
ATD |
Pro Forma Adjustments |
Notes |
Pro Forma Condensed Combined with ATD |
|||||||||||||
|
September 30, 2023 |
September 30, 2023 |
||||||||||||||||
|
ASSETS |
|||||||||||||||||
|
Current assets |
|||||||||||||||||
|
Cash and cash equivalents |
$ | 7,034 | $ | 1,887 | $ | 4,555 |
(A) |
$ | 13,476 | ||||||||
|
Restricted cash and cash equivalents |
325 | - | - | 325 | |||||||||||||
|
Accounts receivable, net |
7,024 | 2,873 | - | 9,897 | |||||||||||||
|
Inventory |
3,459 | - | - | 3,459 | |||||||||||||
|
Note receivable, current portion |
340 | - | - | 340 | |||||||||||||
|
Other current assets, net |
1,674 | 285 | - | 1,959 | |||||||||||||
|
Total current assets |
19,856 | 5,045 | 4,555 | 29,456 | |||||||||||||
|
Long-term assets |
- | ||||||||||||||||
|
Property and equipment |
14,077 | 1,829 | - | 15,906 | |||||||||||||
|
Right-of-use operating lease assets |
9,516 | 307 | - | 9,823 | |||||||||||||
|
Right-of-use financing lease assets |
1,994 | - | - | 1,994 | |||||||||||||
|
Goodwill |
20,593 | 577 | 4,341 |
(C) |
25,511 | ||||||||||||
|
Intangible assets |
18,208 | 11,234 | 566 |
(C) |
30,008 | ||||||||||||
|
Note receivable, long-term |
567 | - | - | 567 | |||||||||||||
|
Deposits |
3,348 | - | - | 3,348 | |||||||||||||
|
Total long-term assets |
68,303 | 13,947 | 4,907 | 87,157 | |||||||||||||
|
Total assets |
$ | 88,159 | $ | 18,992 | $ | 9,462 | $ | 116,613 | |||||||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|||||||||||||||||
|
Current liabilities |
|||||||||||||||||
|
Accounts payable and accrued expenses |
$ | 5,619 | $ | 637 | $ | 740 |
(G) |
$ | 6,996 | ||||||||
|
Notes payable, current portion |
1,000 | - | - | 1,000 | |||||||||||||
|
Loan payable, current portion |
83 | - | - | 83 | |||||||||||||
|
Lease liability operating, short-term |
1,143 | 195 | - | 1,338 | |||||||||||||
|
Lease liability financing, short-term |
502 | - | - | 502 | |||||||||||||
|
Contract liabilities, short-term |
4,503 | - | - | 4,503 | |||||||||||||
|
Other current liabilities |
3,427 | 681 | - | 4,108 | |||||||||||||
|
Total current liabilities |
16,277 | 1,513 | 740 | 18,530 | |||||||||||||
|
Long-term Liabilities |
|||||||||||||||||
|
Notes payable, long-term |
1,000 | - | - | 1,000 | |||||||||||||
|
2023 Promissory Notes, net of debt discount of $1,177 |
2,823 | - | - | 2,823 | |||||||||||||
|
2023 Promissory Notes - related party, net of debt discount of $2,500 |
6,000 | - | - | 6,000 | |||||||||||||
|
13.25% Series A Notes, net of debt discount of $675 |
- | - | 14,350 |
(A) |
14,350 | ||||||||||||
|
Loan payable, long-term |
292 | - | - | 292 | |||||||||||||
|
Lease liability operating, long-term |
13,395 | 113 | - | 13,508 | |||||||||||||
|
Lease liability financing, long-term |
1,082 | - | - | 1,082 | |||||||||||||
|
Contract liabilities, long-term |
1,517 | - | - | 1,517 | |||||||||||||
|
Deferred tax liability, long-term |
52 | - | 2,478 |
(B) |
2,530 | ||||||||||||
|
Other long-term liabilities |
- | - | - | - | |||||||||||||
|
Other non-current liabilities |
2,142 | - | - | 2,142 | |||||||||||||
|
Total long-term liabilities |
28,303 | 113 | 16,828 | 45,244 | |||||||||||||
|
Total liabilities |
44,580 | 1,626 | 17,568 | 63,774 | |||||||||||||
|
Commitments and contingencies |
|||||||||||||||||
|
Stockholders' equity |
|||||||||||||||||
|
Common stock, $0.0001 par value; authorized; 100,000,000 shares |
7 | - | - |
(E) |
7 | ||||||||||||
| - | - |
(D) |
- | ||||||||||||||
|
Treasury stock |
(522 | ) | - | - | (522 | ) | |||||||||||
|
Additional paid-in capital |
231,453 | 17,366 | (17,366 | ) |
(E) |
231,453 | |||||||||||
| - | - | 10,000 |
(D) |
10,000 | |||||||||||||
|
Accumulated deficit |
(187,359 | ) | - | (740 | ) |
(G) |
(188,099 | ) | |||||||||
|
Total stockholders’ equity |
43,579 | 17,366 | (8,106 | ) | 52,839 | ||||||||||||
|
Total liabilities and stockholders’ equity |
$ | 88,159 | $ | 18,992 | $ | 9,462 | $ | 116,613 | |||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
Rekor Systems, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2022
(Dollars in thousands, except share amounts)
|
Historical |
Pro Forma Adjustments |
Pro Forma Condensed Combined with ATD |
|||||||||||||||
|
Rekor Systems, Inc. |
ATD |
Notes |
|||||||||||||||
|
Year ended December 31, 2022 |
Year ended December 31, 2022 |
||||||||||||||||
|
Revenue |
$ | 19,920 | $ | 8,263 | $ | - | $ | 28,183 | |||||||||
|
Cost of revenue, excluding depreciation and amortization |
10,890 | 2,392 | - | 13,282 | |||||||||||||
|
Operating expenses: |
|||||||||||||||||
|
General and administrative expenses |
26,612 | 2,655 | 73 |
(F) |
29,340 | ||||||||||||
|
Selling and marketing expenses |
8,329 | - | - | 8,329 | |||||||||||||
|
Research and development expenses |
18,616 | - | - | 18,616 | |||||||||||||
|
Depreciation and amortization |
6,422 | 1,649 | (209 | ) |
(C) |
7,862 | |||||||||||
|
Goodwill Impairment |
34,835 | - | - | 34,835 | |||||||||||||
|
Operating expenses |
94,814 | 4,304 | (136 | ) | 98,982 | ||||||||||||
|
Loss from operations |
(85,784 | ) | 1,567 | 136 | (84,081 | ) | |||||||||||
|
Other income (expense): |
|||||||||||||||||
|
Gain on the sale of business |
2,643 | - | - | 2,643 | |||||||||||||
|
Interest expense, net |
(21 | ) | - | (2,205 | ) |
(H) |
(2,226 | ) | |||||||||
|
Other income (expense) |
(1,279 | ) | (159 | ) | - | (1,438 | ) | ||||||||||
|
Total other income (expense) |
1,343 | (159 | ) | (2,205 | ) | (1,021 | ) | ||||||||||
|
Loss before income taxes |
(84,441 | ) | 1,408 | (2,069 | ) | (85,102 | ) | ||||||||||
|
Income tax benefit (provision) |
987 | - | 987 | ||||||||||||||
|
Net loss from continuing operations |
(83,454 | ) | 1,408 | (2,069 | ) | (84,115 | ) | ||||||||||
|
Net income from discontinued operations |
339 | - | - | 339 | |||||||||||||
|
Net loss |
$ | (83,115 | ) | $ | 1,408 | $ | (2,069 | ) | $ | (83,776 | ) | ||||||
|
Loss per common share from continuing operations - basic and diluted |
$ | (1.68 | ) | $ | - | $ | - | $ | (1.58 | ) | |||||||
|
Loss per common share discontinued operations - basic and diluted |
0.01 | - | - | 0.01 | |||||||||||||
|
Loss per common share - basic and diluted |
$ | (1.67 | ) | $ | - | $ | - | $ | (1.57 | ) | |||||||
|
Weighted average shares outstanding |
|||||||||||||||||
|
Basic and diluted |
49,807,475 | - | 3,496,463 |
(D) |
53,303,938 | ||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
Rekor Systems, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months ended September 30, 2023
(Dollars in thousands, except share amounts)
|
Historical |
Pro Forma Adjustments |
Pro Forma Condensed Combined with ATD |
|||||||||||||||
|
Rekor Systems, Inc. |
ATD |
Notes |
|||||||||||||||
|
Nine Months ended September 30, 2023 |
Nine Months ended September 30, 2023 |
||||||||||||||||
|
Revenue |
$ | 23,867 | $ | 6,891 | $ | - | $ | 30,758 | |||||||||
|
Cost of revenue, excluding depreciation and amortization |
11,319 | 2,035 | - | 13,354 | |||||||||||||
|
Operating expenses: |
|||||||||||||||||
|
General and administrative expenses |
19,941 | 2,609 | 50 |
(F) |
22,600 | ||||||||||||
|
Selling and marketing expenses |
5,441 | - | - | 5,441 | |||||||||||||
|
Research and development expenses |
14,011 | - | - | 14,011 | |||||||||||||
|
Depreciation and amortization |
5,925 | 1,387 | (166 | ) |
(C) |
7,146 | |||||||||||
|
Operating expenses |
45,318 | 3,996 | (116 | ) | 49,198 | ||||||||||||
|
Loss from operations |
(32,770 | ) | 860 | 116 | (31,794 | ) | |||||||||||
|
Other income (expense): |
|||||||||||||||||
|
Gain on extinguishment of debt |
527 | - | - | 527 | |||||||||||||
|
Interest expense, net |
(2,576 | ) | - | (1,654 | ) |
(H) |
(4,230 | ) | |||||||||
|
Other income (expense) |
458 | (74 | ) | - | 384 | ||||||||||||
|
Total other income (expense) |
(1,591 | ) | (74 | ) | (1,654 | ) | (3,319 | ) | |||||||||
|
Loss before income taxes |
(34,361 | ) | 786 | (1,538 | ) | (35,113 | ) | ||||||||||
|
Income tax provision |
- | - | - | - | |||||||||||||
|
Net loss from continuing operations |
(34,361 | ) | 786 | (1,538 | ) | (35,113 | ) | ||||||||||
|
Net loss from discontinued operations |
- | - | - | - | |||||||||||||
|
Net loss |
$ | (34,361 | ) | $ | 786 | $ | (1,538 | ) | $ | (35,113 | ) | ||||||
|
Loss per common share from continuing operations - basic and diluted |
$ | (0.56 | ) | $ | - | $ | - | $ | (0.54 | ) | |||||||
|
Loss per common share discontinued operations - basic and diluted |
- | - | - | - | |||||||||||||
|
Loss per common share - basic and diluted |
$ | (0.56 | ) | $ | - | $ | - | $ | (0.54 | ) | |||||||
|
Weighted average shares outstanding |
|||||||||||||||||
|
Basic and diluted |
61,125,035 | - | 3,496,463 |
(D) |
64,621,498 | ||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
Rekor Systems, Inc. and Subsidiaries
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
NOTE 1 – BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X and present the pro forma financial position and results of operations of the combined companies based upon the historical data of the Company and ATD, after giving effect to the Acquisition and pro forma adjustments as described in these notes. The Acquisition was accounted for as a business combination in accordance with the guidance contained in the Financial Accounting Standards Board’s Accounting Standards Codification ASC Topic 805, Business Combinations (“ASC 805”).
The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” The transaction accounting adjustments consist of those necessary to account for the transaction. The unaudited pro forma condensed combined balance sheet as of September 30, 2023 is presented as if the Acquisition had occurred on September 30, 2023. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2023 and for the year ended December 31, 2022 are presented as if the Acquisition had occurred on January 1, 2022.
The unaudited pro forma combined financial information also reflects reclassification adjustments to certain financial statement captions included in ATD’s historical consolidated financial statements to align with the corresponding financial statement captions included in the Company’s historical presentation. The reclassifications had no impact on the historical results of operations, net loss, total assets, total liabilities, or total stockholders' equity reported by the Company or ATD. This information has been prepared in accordance with Article 11 of Regulation S-X, and is for informational purposes only and is subject to a number of uncertainties and assumptions as described in the accompanying notes.
The historical consolidated financial statements of the Company and ATD are prepared in accordance with U.S. GAAP and are shown in U.S. dollars. Dollar amounts, except per share data, in the notes to the unaudited condensed combined financial statements are rounded to the closest $1,000.
The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or operating results that would have been achieved had the Acquisition been completed as of the dates indicated above.
NOTE 2 – PRELIMINARY PURCHASE PRICE ALLOCATION
The table below summarizes the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on management’s preliminary estimates of their respective fair values for purposes of the pro forma financial information as of the acquisition date, January 2, 2024 (dollars in thousands):
|
Cash paid |
$ | 9,795 | ||
|
Common stock issued |
10,000 | |||
|
Total Consideration |
$ | 19,795 | ||
|
Assets |
||||
|
Cash and cash equivalents |
826 | |||
|
Accounts receivable, net |
3,351 | |||
|
Property and equipment |
1,710 | |||
|
Right-of-use operating lease assets |
257 | |||
|
Intangible assets |
11,800 | |||
|
Total assets acquired |
$ | 17,944 | ||
|
Liabilities |
||||
|
Accounts payable and accrued expenses |
$ | 486 | ||
|
Lease liability operating, short-term |
157 | |||
|
Other current liabilities |
200 | |||
|
Lease liability operating, long-term |
121 | |||
|
Deferred tax liability, long-term |
2,478 | |||
|
Total liabilities assumed |
$ | 3,442 | ||
|
Fair value of identifiable net assets acquired |
$ | 14,502 | ||
|
Goodwill |
$ | 5,293 |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheet and statement of operations. Due to the recent completion of the acquisition, the determination of the purchase price and the allocation of the purchase price used in the unaudited pro forma condensed combined financial information are based upon preliminary estimates, which are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of the assets acquired and liabilities assumed, including, but not limited accounts receivable, other current assets, property and equipment, intangible assets, accounts payable, and contract liabilities. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments.
NOTE 3 – PRO FORMA ADJUSTMENTS
The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows:
A) Cash and cash equivalents and Restricted cash and cash equivalents – Adjustment reflects $9,795,000 of cash paid as part of the closing of ATD and the execution of the Purchase Agreement. Additionally, the adjustment reflects the issuance and sale of $15,000,000 aggregate principal amount of 13.25% Series A Notes, net of debt issuance costs of $650,000. The 13.25% Series A Notes were closed on December 15, 2023 and a portion of the proceeds went towards the purchase of ATD.
B) Deferred tax liability, long-term - Adjustment reflects the addition of $2,478,000 of deferred tax liabilities resulting from purchase accounting adjustments, in particular, the step up in financial reporting basis of the intangible assets acquired. The Company's estimate for deferred taxes is preliminary and could be subject to material change based on the Company's further analysis of certain tax attributes acquired and as the Company finalizes other aspects of the allocation of the purchase price for this acquisition. This deferred tax liability was determined by multiplying the temporary differences between financial reporting and tax bases of the acquired assets by 21 percent, the 2023 corporate tax rate in the United States.
.
C) Goodwill and Intangible Assets - Adjustment reflects the preliminary estimated fair value of intangible assets of $11,800,000 and goodwill of $4,918,000 recognized upon the acquisition of ATD.
As part of the preliminary valuation analysis, the Company identified intangible assets related to its customer base and tradename. The fair value of identifiable intangible assets is estimated primarily using the “income approach”, which requires a forecast of the expected future cash flows. Since the detailed valuation analysis of ATD’s identifiable intangible assets has not been completed, the preliminary estimates of fair value will likely differ from final amounts the Company will calculate after completing a detailed valuation analysis.
The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions.
The following table presents the preliminary fair value of the identified intangible assets acquired at the date of acquisition and its estimated useful life (dollars in thousands):
|
Amortization Expense |
|||||||||||||
|
Preliminary Value |
Useful Life |
Nine Months ended September 30, 2023 |
Year ended December 31, 2022 |
||||||||||
|
Customer related |
$ | 11,600 |
15 years |
$ | 580 | $ | 773 | ||||||
|
Marketing related |
200 |
5 years |
30 | 40 | |||||||||
|
Total preliminary intangible assets subject to amortization |
$ | 11,800 | $ | 610 | $ | 813 | |||||||
|
Net decrease in amortization expense |
$ | (166 | ) | $ | (209 | ) | |||||||
The adjustment for amortization expense of the developed software is reflected as part of cost of revenue for the respective periods.
D) Common Stock and Additional Paid in Capital – Adjustment reflects issuance of 3,496,463 shares of Rekor common stock valued at $10,000,000, as part of the consideration received as a result of the Purchase Agreement.
E) Elimination of ATD Equity – Adjustments reflect an elimination of ATD’s historical equity balances, including common stock.
F) General and Administrative Expense – Adjustment represents the net increase of certain executives compensation and benefits in connection with the employment agreement for the ATD executives resulting in an increase in annual compensation concurrent with the acquisition. A break of out the adjustment is as follows (dollars in thousands):
|
Nine Months ended September 30, 2023 |
Year ended December 31, 2022 |
|||||||
|
Net increase in compensation expense |
$ | 92 | $ | 122 | ||||
|
Net decrease in share-based compensation expense |
(42 | ) | (49 | ) | ||||
|
Total |
$ | 50 | $ | 73 | ||||
G) Transaction Costs - Adjustment reflects the transaction costs incurred, or are expected to be incurred by Rekor or ATD subsequent to September 30, 2023, which have not yet been included in the historical financial statements.
H) Interest Expense - Adjustment represents the interest expense related to the contractual interest and the amortization of debt issuance costs related to the Company’s 13.25% Series A Notes (dollars in thousands):
|
Nine Months ended September 30, 2023 |
Year ended December 31, 2022 |
|||||||
|
Contractual interest |
$ | 1,491 | $ | 1,988 | ||||
|
Amortization of debt issuance costs |
163 | 217 | ||||||
|
Total interest expense |
$ | 1,654 | $ | 2,205 | ||||