10-Q 1 rekr_10q.htm QUARTERLY REPORT Blueprint
 
  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 (Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to      
 
Commission File Number: 001-38338
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
81-5266334
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
7172 Columbia Gateway Drive, Suite 400
Columbia, MD
(Address principal executive offices)
 
21046
(Zip Code)
 
(410) 762-0800
(Registrant’s telephone number, including area code)
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 
 
Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
REKR
 The Nasdaq Stock Market
 
As of November 14, 2019, the Registrant had 21,033,005 shares of common stock, $0.0001 par value per share outstanding.
 

 
 
 
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 2018 entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing.  Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
 
 
 
 
 
2
 
 
 
Table of Content
REKOR SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
  
PART I - FINANCIAL INFORMATION
4

4
5
6
7
8
36
52
52
 
 
 
PART II - OTHER INFORMATION
54
54
54
54
55
55
55
56
 
 
 
57
 
 
 
 
 
3
 
 
PART I     FINANCIAL INFORMATION
 
ITEM 1.   FINANCIAL STATEMENTS
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
 ASSETS
 
September 30,
2019
 
 
December 31,
2018
 
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
 $1,273 
 $2,069 
Restricted cash and cash equivalents
  708 
  609 
Accounts receivable, net
  4,714 
  2,976 
Inventory
  385 
  73 
Other current assets, net
  106 
  167 
Current assets held for sale
  3,529 
  2,636 
Total current assets
  10,715 
  8,530 
Property and equipment, net
  1,712 
  1,291 
Right-of-use lease assets, net
  761 
  - 
Goodwill
  6,336 
  1,402 
Intangible assets, net
  7,300 
  2,627 
Deposits and other long-term assets
  13 
  51 
Long-term assets held for sale
  3,986 
  4,154 
Total assets
 $30,823 
 $18,055 
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
    
    
Current Liabilities
    
    
Accounts payable and accrued expenses
 $5,568
 $3,437
Short-term borrowings
  1,558 
  566 
Notes payable, current portion
  - 
  2,469 
Lease liability, short-term
  296 
  - 
Contract liabilities
  720 
  207 
Current liabilities held for sale
  2,680
  1,895
Total current liabilities
  10,822 
  8,574 
Notes payable
  20,076 
  875 
Lease liability, long-term
  673 
  - 
Deferred rent
  - 
  8 
Contract liabilities, long term
  775 
  - 
Long term liabilities held for sale
  179 
  90 
Total liabilities
 $32,525 
 $9,547 
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
  5,606 
  5,052 
 
    
    
Commitments and Contingencies
    
    
 
    
    
Stockholders' (Deficit) Equity
    
    
Common stock, $0.0001 par value, 30,000,000 shares authorized, 20,406,489 and 18,767,619 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
  2 
  2 
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of September 30, 2019 and December 31, 2018, respectively
  
  
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
  - 
  - 
Additional paid-in capital
  16,526
  15,518 
Accumulated deficit
  (23,836)
  (12,064)
Total stockholders’ (deficit) equity
  (7,308)
  3,456 
Total liabilities and stockholders’ (deficit) equity
 $30,823 
 $18,055 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
 
 
 
For the Three Months ended September 30,
 
 
For the Nine Months ended September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Technology
 $1,536 
 $892 
 $3,962 
 $2,639 
Professional Services
  3,447 
  5,015 
  10,922 
  12,632 
Total revenue
  4,983 
  5,907 
  14,884 
  15,271 
 
    
    
    
    
Cost of revenue:
    
    
    
    
Technology
  390 
  405 
  1,152 
  1,101 
Professional Services
  1,842 
  2,561 
  5,868 
  6,433 
Total cost of revenue
  2,232 
  2,966 
  7,020 
  7,534 
 
    
    
    
    
Gross profit:
    
    
    
    
Technology
  1,146 
  487 
  2,810 
  1,538 
Professional Services
  1,605 
  2,454 
  5,054 
  6,199 
Gross profit
  2,751 
  2,941 
  7,864 
  7,737 
 
    
    
    
    
Operating expenses:
    
    
    
    
General and administrative expenses
 3,039
  2,954 
  10,435
  9,953 
Selling and marketing expenses
  1,343 
  297 
  2,012 
  1,095 
Research and development expenses
  450 
  5 
  757 
  127 
Impairment of intangibles
  - 
  - 
  1,549 
  - 
Operating expenses
 4,832
  3,256 
 14,753
  11,175 
 
    
    
    
    
Loss from operations
  (2,081)
  (315)
  (6,889)
  (3,438)
Other income (expense):
    
    
    
    
Loss on extinguishment of debt
  (45)
  - 
  (1,158)
  - 
Interest expense
  (1,228)
  (214)
  (2,832)
  (412)
Other income (expense)
  (102)
  1 
 (99)
  201 
Total other expense
  (1,375)
  (213)
  (4,089)
  (211)
Loss before income taxes
  (3,456)
  (528)
  (10,978)
  (3,649)
Income tax provision
  - 
  - 
  - 
  - 
Net loss from continuing operations
 $(3,456)
 $(528)
 $(10,978)
  (3,649)
Income (loss) from operations held for sale
  (160)
  47 
  (415)
  52 
Income tax provision from operations held for sale
  (12)
  (22)
  (35)
  (22)
Net income (loss) from operations held for sale
  (172)
  25 
  (450)
  30 
Net loss
 $(3,628)
 $(503)
 $(11,428)
 $(3,619)
Loss per common share from continuing operations - basic and diluted
 $(0.19)
 $(0.06)
 $(0.61)
 $(0.31)
Income (loss) per common share from operations held for sale - basic and diluted
  (0.01)
  0.01 
  (0.02)
  - 
Loss per common share - basic and diluted
 $(0.20)
 $(0.05)
 $(0.63)
 $(0.31)
 
    
    
    
    
Weighted average shares outstanding
    
    
    
    
Basic and diluted
  19,878,518 
  14,542,362 
  19,592,679 
  14,524,030 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
  
 
5
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
(Dollars in thousands, except share amounts)
(Unaudited)

 
 
Shares of Common Stock
 
 
Common Stock
 
 
Shares of Series B Preferred Stock
 
 
Series B Preferred Stock
 
 
Additional Paid-In Capital
 
 
Accumulated Deficit
 
 
Total Stockholders’ Equity (Deficit)
 
Balance as of June 30, 2019
  19,382,185 
 $2 
  240,861 
 $- 
 $16,496 
 $(20,094)
 $(3,596)
Stock-based compensation
  - 
  - 
  - 
  - 
  76 
  - 
  76 
Exercise of cashless warrants in exchange for common stock
  813,975 
  - 
  - 
  - 
  - 
  - 
  - 
Exercise of warrants in exchange for common stock
  103,125 
  - 
  - 
  - 
  103 
  - 
  103 
Issuance of common stock pursuant to at the market offering, net
  103,566 
  - 
  - 
  - 
 38
  - 
 38
Exercise of warrants related to series A preferred stock
  3,638 
  - 
  - 
  - 
  4 
  - 
  4 
Preferred stock dividends
  - 
  - 
  - 
  - 
  - 
  (114)
  (114)
Accretion of Series A preferred stock
  - 
  - 
  - 
  - 
  (191)
  - 
  (191)
Net loss
  - 
  - 
  - 
  - 
  - 
  (3,628)
  (3,628)
Balance as of September 30, 2019
  20,406,489 
 $2 
  240,861 
 $- 
 $16,526
 $(23,836)
 $(7,308)
 
    
    
    
    
    
    
    
Balance as of June 30, 2018
  14,535,695 
 $1 
  240,861 
 $- 
 $12,655 
 $(9,247)
 $3,409 
Stock-based compensation
  - 
  - 
  - 
  - 
  87 
  - 
  87 
Issuance upon exercise of stock option
  10,000 
  - 
  - 
  - 
  16 
  - 
  16 
Preferred stock dividends
  - 
  - 
  - 
  - 
  - 
  (115)
  (115)
Accretion of Series A preferred stock
  - 
  - 
  - 
  - 
  (167)
  - 
  (167)
Net loss
  - 
  - 
  - 
  - 
  - 
  (503)
  (503)
Balance as of September 30, 2018
  14,545,695 
 $1 
  240,861 
 $- 
 $12,591 
 $(9,865)
 $2,727 
 
    
    
    
    
    
    
    
Balance as of December 31, 2018
  18,767,619 
 $2 
  240,861 
 $- 
 $15,518 
 $(12,064)
 $3,456 
Stock-based compensation
  - 
  - 
  - 
  - 
  314 
  - 
  314 
Issuance of warrants in conjunction with notes payable
  - 
  - 
  - 
  - 
  706 
  - 
  706 
Exercise of cashless warrants in exchange for common stock
  828,541 
  - 
  - 
  - 
  - 
  - 
  - 
Exercise of warrants in exchange for common stock
  103,125 
  - 
  - 
  - 
  103 
  - 
  103 
Common stock issued in OpenALPR acquisition
  600,000 
  - 
  - 
  - 
  397 
  - 
  397 
Issuance of common stock pursuant to at the market offering, net
  103,566 
  - 
  - 
  - 
 38
  - 
 38
Exercise of warrants related to series A preferred stock
  3,638 
  -
  -
  -
  4 
  -
  4 
Preferred stock dividends
  - 
  - 
  - 
  - 
  - 
  (344)
  (344)
Accretion of Series A preferred stock
  - 
  - 
  - 
  - 
  (554)
  - 
  (554)
Net loss
  - 
  - 
  - 
  - 
  - 
  (11,428)
  (11,428)
Balance as of September 30, 2019
  20,406,489 
 $2 
  240,861 
 $- 
 $16,256
 $(28,836)
 $(7,308)
 
    
    
    
    
    
    
    
Balance as of December 31, 2017
  14,463,364 
 $1 
  240,861 
 $- 
 $12,343 
 $(5,834)
 $6,510 
 Cumulative effect adjustment of adopting ASU 2014-09
  - 
  - 
  -
  - 
  - 
  (67)
  (67)
Balance as of January 1, 2018
  14,463,364 
  1 
  240,861 
  - 
  12,343 
  (5,901)
  6,443 
Stock-based compensation
  - 
  - 
  - 
  - 
  296 
  - 
  296 
Issuance of warrants
  - 
  - 
  - 
  - 
  123 
  - 
  123 
Net common stock issued in Secure Education Consultants acquisition
  33,333 
  - 
  - 
  - 
  163 
  - 
  163 
Issuance related to note payable
  35,000 
  - 
  - 
  - 
  126 
  - 
  126 
Issuance upon exercise of stock options
  13,998 
  - 
  - 
  - 
  23 
  - 
  23 
Preferred stock dividends
  - 
  - 
  - 
  - 
  - 
  (345)
  (345)
Accretion of Series A preferred stock
  - 
  - 
  - 
  - 
  (483)
  - 
  (483)
Net loss
  - 
  - 
  - 
  - 
  - 
  (3,619)
  (3,619)
Balance as of September 30, 2018
  14,545,695 
 $1 
  240,861 
 $- 
 $12,591 
 $(9,865)
 $2,727 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 
 
6
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) 
 
 
 
For the Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
Cash Flows from Operating Activities
 
 
 
 
 
 
Net loss
 $(11,428)
 $(3,619)
   Adjustments to reconcile net loss to net cash used in operating activities:
    
    
      Depreciation
  295 
  236 
      Amortization of right-of-use lease asset
 158
  - 
      Share-based compensation
  314 
  296 
      Amortization of financing costs
  768 
  69 
      Deferred rent
  - 
  (11)
      Change in fair value of derivative liability
  - 
  (77)
      Amortization of intangible assets
  965 
  557 
      Impairment of intangible assets
  1,549 
  - 
      Loss on extinguishment of debt
  1,158 
  - 
      Loss on abandonment of lease
  70 
 -
      Loss on sale of Secure Education
  3 
  - 
      Changes in operating assets and liabilities:
    
    
         Accounts receivable
  (2,487)
  (106)
         Inventory
  (312)
  31 
         Deposits
  38 
  - 
         Other current assets
  74 
  33 
         Accounts payable and accrued expenses
  1,628 
  953 
         Contract liabilities
  900 
  (20)
         Lease liability
  (28)
  - 
            Net cash used in operating activities - continuing operations
  (6,335)
  (1,658)
            Net cash (used in) provided by operating activities - held for sale operations
  (2,920)
  560 
            Net cash used in operating activities
  (9,255)
  (1,098)
Cash Flows from Investing Activities
    
    
      Proceeds from sale of note receivable
  - 
  1,475 
      Proceeds from sale of Secure Education
  250 
  - 
      Capital expenditures
  (656)
  (1,007)
            Net cash (used in) provided by investing activities - continuing operations
  (406)
  468 
            Net cash provided by investing activities - held for sale operations
  - 
  51 
            Net cash (used in) provided by investing activities
  (406)
  519 
Cash Flows from Financing Activities
    
    
      Proceeds from short-term borrowings
  2,315 
  - 
      Repayments of short-term borrowings
  (296)
  (1,025)
      Net proceeds from notes payable
  3,839 
  2,000 
      Net proceeds from exercise of options
  - 
  23 
      Net proceeds from exercise of warrants
  103 
  - 
      Net proceeds from exercise of warrants associated to series A preferred stock
  4 
  - 
      Net proceeds from at-the-market agreement
 38
  - 
      Payment of preferred dividends
  (108)
  (345)
            Net cash provided by financing activities - continuing operations
 5,895
  653 
            Net cash provided by (used in) financing activities - held for sale operations
 3,205
  (547)
            Net cash provided by financing activities
 9,100
  106 
Net decrease in cash, cash equivalents and restricted cash and cash equivalents - continuing operations
  (846)
  (537)
Net increase in cash, cash equivalents and restricted cash and cash equivalents - held for sale operations
  285 
  64 
Net decrease in cash, cash equivalents and restricted cash and cash equivalents
  (561)
  (473)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period
  2,768 
  1,957 
Cash, cash equivalents and restricted cash and cash equivalents at end of period
 $2,207 
 $1,484 
 
    
    
Reconciliation of cash, cash equivalents and restricted cash:
    
    
Cash and cash equivalents at end of period - continuing operations
 $1,273 
 $1,393 
Restricted cash and cash equivalents at end of period - continuing operations
  708 
  - 
Cash and cash equivalents at end of period - held for sale operations
  226 
  91 
Cash, cash equivalents and restricted cash at end of period
 $2,207 
 $1,484 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
7
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2019, the consolidated results of operations, consolidated statements of shareholders’ (deficit) equity and consolidated statements of cash flows for the three and nine months ended September 30, 2019 and 2018.
 
The financial data and other information disclosed in the notes to the unaudited condensed consolidated financial statements related to these periods are unaudited. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
 
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The unaudited condensed consolidated balance sheet data as of December 31, 2018 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2018 but does not include all disclosures required by U.S. GAAP for annual financial statements.
 
Dollar amounts, except per share data, in the notes to these financial statements are rounded to the closest $1,000.
 
Certain prior year amounts have been reclassified to conform with the current year presentation. Beginning in the second quarter of 2019, sales and marketing expenses and research and development expenses have been presented separately from general and administrative expenses on the unaudited condensed consolidated statements of operations, whereas in prior periods these amounts were included in one caption titled "selling, general and administrative expenses." Amounts for the first quarter of 2019 and for the period ending December 31, 2018, have been reclassified to conform to the current year presentation.
 
Rekor Systems, Inc. (the “Company” or “Rekor”), (formerly Novume Solutions, Inc.) was formed in February 2017 to effectuate the mergers of, and become a holding company for KeyStone Solutions, LLC. (“KeyStone”) and Brekford Traffic Safety, Inc. (“Brekford”). On February 28, 2019, the Company changed the name of its wholly owned subsidiary, Brekford Traffic Safety, Inc. to Rekor Recognition Systems, Inc. (“Rekor Recognition”). On April 26, 2019, the Company changed its name from Novume Solutions, Inc. to Rekor Systems, Inc.
 
In March 2019, Rekor acquired certain assets and certain liabilities of OpenALPR Technology, Inc. (such assets and liabilities being referred to herein as “OpenALPR Technology”) through its subsidiary, OpenALPR Software Solutions, LLC (“OpenALPR”). The financial information in this Quarterly Report only includes OpenALPR in the results of operations beginning as of March 12, 2019 (see Note 4).
 
 
8
 
  
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
During the third quarter of 2019, the Company began to separately report the results of Global Technical Services, Inc. and Global Contract Professionals, Inc. (together “Global”), the Company’s wholly owned subsidiaries, including substantially all of the assets and liabilities comprising Global, as operations held for sale. The Company is reporting the operating results and cash flows of Global as operations held for sale, and thus they have been excluded from continuing operations and segment results for all periods presented. Prior to the third quarter of 2019, the operating results for Global were presented in the Professional Services segment. The assets and liabilities of Global are presented as current and long-term assets and liabilities held for sale in the unaudited condensed consolidated balance sheets and its results are presented as income (loss) from operations held for sale in the unaudited condensed consolidated statement of operations. In cases where the carrying value amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Due to the held for sale classification of Global, certain amounts have been reclassified in order to conform to the current period presentation. See Note 16 for additional information regarding the Company's held for sale operations.
 
Use of Estimates
 
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual amounts may differ from these estimates. On an on-going basis, the Company evaluates its estimates, including those related to collectability of accounts receivable, fair value of debt and equity instruments, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.
 
Going Concern Assessment
 
For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions. These assumptions including among other factors, the expected timing and nature of the Company’s programs and projected cash expenditures, its ability to delay or curtail these expenditures or programs and its ability to raise additional capital, if necessary, to the extent management has the proper authority to execute them and considers it probable that those implementations can be achieved within the look-forward period.
 
The Company has generated losses since its inception in August 2017 and has relied on cash on hand, secured borrowing arrangements, the sale of a note, debt financing, and public offering of its common stock, including its on-going At-the-Market Issuance Sales Agreement (the "Sales Agreement") offering as disclosed below, to support cash flows from operations. As of and for the nine months ended September 30, 2019, the Company had a net loss from continuing operations of $11,428,000 and a working capital deficit of $107,000. The Company's net cash position was decreased by $561,000 for the nine months ended September 30, 2019 due to the net loss from operations, offset by the proceeds of $20,000,000 senior secured notes, of which $5,000,000 was issued as a note payable to the seller, offset by $7,000,000 of cash paid for the acquisition of OpenALPR, and approximately $6,227,000 related to the extinguishment of debt and associated fees related to acquiring new debt (see Note 7).
 
Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections, for one year from the date of the filing of the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, indicate the Company’s ability to continue operations as a going concern for that one-year period. The Company is actively monitoring its operations, the cash on hand and working capital. Additionally, as of September 30, 2019, the Company believes it has access to raise up to $14,706,000 through the Sales Agreement (see Note 9). The Company will continue to raise capital through the Sales Agreement to help fund operations. Should access to those funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.
 
 
9
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Goodwill and Intangible Assets
 
In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment, if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually and whenever indicators of impairment exist. The Company is currently in the process of its annual impairment test. The fair value of intangible assets is compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value.
  
During the second quarter of 2019 the Company wrote-off $1,549,000 of intangible assets associated with the Company's wholly owned subsidiaries Firestorm Solutions, LLC and Firestorm Franchising LLC (collectively, “Firestorm”), and BC Management, Inc. (“BC Management”) (see Note 5).
 
 Revenue Recognition
 
The Company derives its revenues substantially from two sources: (1) subscription revenues for software licenses, technology products and services, and (2) and professional services to clients.
 
Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. If the consideration promised in the contract includes a variable amount, for example maintenance fees, the Company includes an estimate of the amount it expects to receive for the total transaction price, if it is probable that a significant reversal of cumulative revenue recognized will not occur.
 
The Company determines the amount of revenue to be recognized through application of the following steps:
 
Identification of the contract, or contracts, with a customer
 
Identification of the performance obligations in the contract
 
Determination of the transaction price
 
Allocation of the transaction price to the performance obligations in the contract
 
Recognition of revenue when, or as, performance obligations are satisfied
 
 The subscription revenues for software licenses, technology products and services revenues are comprised of fees that provide customers with access to the software licenses and related support and updates during the term of the arrangement. Revenue is generally recognized ratably over the contract term. During the second quarter of 2019, the Company changed its method of selling in the Technology Segment from perpetual software licenses to monthly service subscriptions. This change is expected to impact the Company's revenue in the short term. However, the amount of contract revenue received over the long term impact is expected to be relatively consistent. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions.
 
The Company’s professional services contracts recognize revenue based on a time and materials or fixed fees basis. These revenues are recognized as the services are rendered for time and materials contracts, on a proportional performance basis for fixed price contracts, or ratably over the contact term for fixed price contracts with subscription services.
  
 
10
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (included within accounts receivable, net), and contract liabilities (deferred revenue) on the unaudited condensed consolidated balance sheets. When billings occur after the work has been performed, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled receivables of $963,000 and $824,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. Additionally, unbilled receivables of $469,000 and $301,000 were included in current assets held for sale in the unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.
 
When the Company advance bill clients prior to the work being performed, generally, such amounts will be earned and recognized in revenue within the next six months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine months ended September 30, 2019 were not materially impacted by any other factors. Contract liabilities from the period ended September 30, 2019 and December 31, 2018 were $1,495,000 and $207,000 respectively. All contract liabilities as of September 30, 2019 and December 31, 2018 were attributable to continued operations. During the nine months ended September 30, 2019 all of the contract liabilities balance as of December 31, 2018 was recognized as revenue.
 
The services due for contract liabilities described above are shown below as of September 30, 2019 (dollars in thousands):
 
2019
 $246 
2020
  544 
2021
  223 
2022
  200 
2023
  189 
Thereafter
  93 
Total
 $1,495 
 
Segment Reporting
 
The Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Beginning with the first quarter of 2019, the Company changed its operating and reportable segments from one segment to two segments: the Technology Segment and the Professional Services Segment. The two segments reflect the Company’s separate focus on technology products and services versus professional services. (See Note 3).
 
The Technology Segment is responsible for the activities in developing technology and distributing and licensing products and services with vehicle recognition features. In connection with this effort in March 2019, the Company acquired OpenALPR Technology (See Note 4). The Professional Services Segment is responsible for the activities that provide professional services for government contracting market, as well as staffing services for the aerospace and aviation markets.
 
 
11
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Cash, Cash Equivalents and Restricted Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments purchased with the maturity of three months or less to be cash equivalents.
 
Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of September 30, 2019 and December 31, 2018 were $708,000 and $609,000, respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets.
 
Fair Value of Financial Instruments
 
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, inventory, accounts receivable and accounts payable approximate fair value as of September 30, 2019 and December 31, 2018 because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value as of September 30, 2019 and December 31, 2018 given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.
 
The determination of fair value is based upon the fair value framework established by Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
 
Level 1  Quoted prices in active markets for identical assets or liabilities.
 
Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
 
The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 2 and Level 3 inputs.
 
The Company has concluded that its Series A Preferred Stock is a Level 3 financial instrument and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through September 30, 2019. There were no changes in levels during the three and nine months ended September 30, 2019 and 2018.
 
Concentrations of Credit Risk
 
The Company places its temporary cash investments with higher rated quality financial institutions located in the United States (“U.S.”). As of September 30, 2019 and December 31, 2018, the Company had deposits from continuing operations totaling $1,981,000 and $2,678,000 from continuing operations, respectively, in two and three U.S. financial institutions that were federally insured up to $250,000 per account, respectively.
 
 
12
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The Company has a market concentration of revenue and accounts receivable, from continuing operations, in its Professional Services Segment related to its customer base.
 
Company A accounted for 21% and 17% of the Company’s total revenues for the nine months ended September 30, 2019 and 2018, respectively, and 17% and 22% of the Company’s total revenue for the three months ended September 30, 2019 and 2018, respectively.
 
Company B accounted for 16% and less than 10% of the Company’s total revenues for the nine months ended September 30, 2019 and 2018, respectively, and 12% and 11% of the Company’s total revenue for the three months ended September 30, 2019 and 2018, respectively.
 
As of September 30, 2019, accounts receivable from Company A totaled $902,000 or 19% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2018, Company A and Company B accounted for $1,043,000, or 35%, and $483,000, or 16%, respectively, of the unaudited condensed consolidated accounts receivable balance.
 
No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenue for the nine months ended September 30, 2019 or unaudited condensed consolidated accounts receivable balance as of September 30, 2019.
 

  
 
13
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS
 
New accounting pronouncements effective in the nine months ended September 30, 2019
 
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Effective January 1, 2019, the Company adopted ASU 2016-02, as amended, which requires lessees to recognize a right-of-use (“ROU”) lease assets and lease liability on the balance sheet for most lease arrangements and expands disclosures about leasing arrangements for both lessees and lessors, among other items. The Company adopted ASU 2016-02 using the optional transition method whereby the Company applied the new lease requirements under ASU 2016-02 through a cumulative-effect adjustment, which after completing the Company’s implementation analysis, resulted in no adjustment to its January 1, 2019 beginning retained earnings balance. On January 1, 2019, the Company recognized $921,000 of ROU operating lease assets and $951,000 of operating lease liabilities, including noncurrent operating lease liabilities of $728,000, as a result of adopting this standard. The difference between ROU operating lease assets and operating lease liabilities was primarily due to previously accrued rent expense relating to periods prior to January 1, 2019. The new standard provides several optional practical expedients for use in transition. The Company elected to use what the FASB has deemed the “package of practical expedients,” which allows the Company not to reassess the Company’s previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. The ASU also provides several optional practical expedients for the ongoing accounting for leases. The Company has elected the short-term lease recognition exemption for all leases that qualify, meaning that for leases with terms of twelve months or less, the Company will not recognize ROU assets or lease liabilities on the Company’s unaudited condensed consolidated balance sheet. Additionally, the Company has elected to use the practical expedient to not separate lease and non-lease components for leases of real estate, meaning that for these leases, the non-lease components are included in the associated ROU asset and lease liability balances on the Company’s unaudited condensed consolidated balance sheet. The comparative periods have not been restated for the adoption of ASU 2016-02.
 
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of Topic 606. The Company adopted the provisions of ASU 2018-07 effective January 1, 2019. Adopting ASU 2018-07 had no impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
 
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. ASU 2017-09 is effective for fiscal year 2019. The update is to be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company adopted ASU 2017-09 in 2018 and the impact of the adoption was not material to its unaudited condensed consolidated financial statements and related disclosures.
 
New accounting pronouncements not yet effective
 
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its unaudited condensed consolidated financial statements.
 
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted averageof significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the effect that ASU 2018-13 will have on its consolidated financial statements and related disclosures.
 
 
14
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). To simplify the subsequent measurement of goodwill, ASU 2017-04 requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will test goodwill for impairment within one year of the acquisition or annually as of October 1, and whenever indicators of impairment exist. The Company is currently evaluating the effect that ASU 2017-04 will have on its financial statements and related disclosures.
 
The Company does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
 
NOTE 3 – BUSINESS SEGMENTS
 
FASB ASC Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Beginning with the first quarter of 2019, the Company changed its operating and reportable segments from one segment to two segments: the Technology Segment and the Professional Services Segment. The two segments reflect the Company’s separate focus on technology products and services versus professional services.
 
The Company provides general corporate services to its segments; however, these services are not considered when making operating decisions and assessing segment performance. These services are reported under “Corporate Services” below and these include costs associated with executive management, financing activities and public company compliance.
 
Summarized financial information concerning the Company’s reportable segments is presented below (dollars in thousands):
 
 
 
Technology
 
 
Professional Services
 
 
Corporate Services
 
 
Consolidated
 
Three Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $1,536 
 $3,447 
 $- 
 $4,983 
Gross profit
  1,146 
  1,605 
  - 
  2,751 
Income (loss) from operations
  (722)
  365 
  (1,724)
  (2,081)
Loss from operations held for sale
  - 
  (21)
  - 
  (21)
 
    
    
    
    
Three Months Ended September 30, 2018
    
    
    
    
Revenues
 $892 
 $5,015 
 $- 
 $5,907 
Gross profit
  487 
  2,454 
  - 
  2,941 
Income (loss) from operations
  (83)
  446 
  (678)
  (315)
Income from operations held for sale
  - 
  77 
  - 
  77 
 
    
    
    
    
Nine Months Ended September 30, 2019
    
    
    
    
Revenues
 $3,962 
 $10,922 
 $- 
 $14,884 
Gross profit
  2,810 
  5,054 
  - 
  7,864 
Loss from operations*
  (1,312)
  (1,606)
  (3,971)
  (6,889)
Loss from operations held for sale
  - 
  (177)
  - 
  (177)
* Including intangible assets impairment
  - 
  1,549 
  - 
  1,549 
 
    
    
    
    
Nine Months Ended September 30, 2018
    
    
    
    
Revenues
 $2,639 
 $12,632 
 $- 
 $15,271 
Gross profit
  1,538 
  6,199 
  - 
  7,737 
Loss from operations
  (332)
  (48)
  (3,058)
  (3,438)
Income from operations held for sale
  - 
  148 
  - 
  148 
  
 
15
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 4 – ACQUISITIONS
 
Secure Education Consultants Acquisition
 
On January 1, 2018, the Company completed its acquisition of certain assets of Secure Education Consultants through Firestorm. Consideration paid as part of this acquisition included: $100,000 in cash; 33,333 shares of Rekor common stock valued at $163,000; warrants to purchase 33,333 shares of Rekor common stock, exercisable over a period of five years, at an exercise price of $5.44 per share, valued at $66,000; and warrants to purchase 33,333 of Rekor common stock, exercisable over a period of five years, at an exercise price of $6.53 per share, valued at $57,000.
 
The Company has completed its analysis of the purchase price allocation. The Company recorded $386,000 of customer relationships to intangible assets.
 
The table below shows the final breakdown related to the Secure Education acquisition (dollars in thousands):
 
Cash paid
 $100 
Common stock issued
  163 
Warrants issued at $5.44
  66 
Warrants issued at $6.53
  57 
Total consideration
  386 
Less intangible assets and intellectual property
  (386)
Net goodwill recorded
 $- 
 
On June 1, 2019, the Company sold all its interest in Secure Education for consideration of $250,000. As a result of the Secure Education sale, the Company disposed of $249,000 of net intangible assets, $58,000 of accounts receivables, and $54,000 of accounts payables. This resulted in a loss of $3,000 that is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations.
 
OpenALPR Acquisition
 
On November 14, 2018, the Company entered into an Asset Purchase Agreement (the “OpenALPR Purchase Agreement”) by and among the Company, OpenALPR Technology, Inc. and Matthew Hill pursuant to which the Company agreed to purchase all of the assets of OpenALPR Technology Inc. and its subsidiaries, except for certain excluded assets, and assumed certain liabilities as provided for in the OpenALPR Purchase Agreement. The Company agreed to pay $15,000,000, subject to certain adjustments, provided that OpenALPR Technology, Inc. could elect to receive up to 1,000,000 shares of the Company’s common stock, par value, $0.0001 per share, in lieu of up to $5,000,000 in cash valued at a price per share of $5.00.
 
On February 15, 2019, the Company entered into Amendment No. 1 to the OpenALPR Purchase Agreement, pursuant to which the parties agreed to amend the Base Purchase Price to $7,000,000, subject to adjustment after closing, issue a promissory note in the amount of $5,000,000, and issue 600,000 shares of Rekor common stock as consideration for the acquisition of OpenALPR Technology’s assets.
 
On March 8, 2019, the Company entered into Amendment No. 2 to the OpenALPR Asset Purchase Agreement which eliminated the working capital adjustment set forth in the OpenALPR Asset Purchase Agreement, as amended, and replaced it with an adjustment for prepaid maintenance contracts.
 
 
16
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
On March 12, 2019, the Company completed the acquisition of the of OpenALPR Technology and assumed certain assets and liabilities (the “OpenALPR Acquisition”). Consideration paid as part of the OpenALPR Acquisition was: $7,000,000 in cash, subject to adjustment after closing; 600,000 shares of Rekor common stock, valued at $397,000; and $5,000,000 of the 2019 Promissory Notes (see Note 7) principal amount, together with an accompanying warrant to purchase 625,000 shares of Rekor common stock, exercisable over a period of five years, at an exercise price of $0.74 per share, valued at $208,000 (see Note 9).
 
The purchase price allocation to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of the OpenALPR Technology occurred on March 12, 2019, the results of operations for OpenALPR from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three and nine-months ended September 30, 2019.
 
The final purchase price allocation, completed in the second quarter of 2019, resulted in adjustments to intangible assets of approximately $4,934,000, since the Company's previous estimates as of March 31, 2019, and primarily related to fair value adjustments to technology-based intangible assets. The final purchase price allocation of the acquisition of OpenALPR is as follows: intangible assets of $7,436,000 and goodwill of $4,934,000 along with net assets acquired of $415,000, and contract obligations assumed of $388,000.
 
The table below shows the breakdown related to the final purchase price allocation for the OpenALPR Technology acquisition (dollars in thousands):
 
Assets acquired
 $415 
Liabilities acquired
  (388)
Net assets acquired
  27 
Less intangible assets
  7,436 
Consideration paid (see below)
  (12,397)
Net Goodwill recorded
 $4,934 
 
    
Cash consideration
 $7,000 
Notes payable
  5,000 
Common stock consideration
  397 
Total acquisition consideration
 $12,397 
 
Hill Employment Agreement
 
On November 14, 2018, concurrent with the execution of the OpenALPR Purchase Agreement, the Company entered into an employment agreement with Matthew Hill (the “Hill Employment Agreement”) which became effective as of March 12, 2019, the closing date of the OpenALPR Purchase Agreement.
 
 
17
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Operations of Combined Entities
 
The following unaudited pro forma combined financial information gives effect to the acquisition of Secure Education and OpenALPR Technology as if they were consummated as of January 1, 2018. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2018 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
(Dollars in thousands, except per share data)
 
 
(Dollars in thousands, except per share data)
 
Revenues from continuing operations
 $4,983 
 $6,352 
 $15,853 
 $16,472 
Net loss from continuing operations
  (3,456)
  (104)
  (10,170)
  (2,817)
Basic and diluted loss per share
 $(0.19)
 $(0.03)
 $(0.56)
 $(0.24)
Basic and diluted number of shares
  19,878,518 
  15,142,362 
  19,761,363 
  15,124,030 
 
NOTE 5 – INTANGIBLE ASSETS
 
Goodwill
 
Changes in the carrying amount of goodwill by reportable business segment for the nine months ended September 30, 2019 were as follows (dollars in thousands):
 
 
Segment
 
Balance as of
December 31,
2018
 
 
Open ALPR
Acquisition
 
 
Balance as of
September 30,
2019
 
Goodwill from continuing operations
 Technology
 $1,402 
 $4,934 
 $6,336 
Goodwill from held for sale operations
 Professional Services
  1,691 
  - 
  1,691 
Total goodwill
 
 $3,093 
 $4,934 
 $8,027 
 
Intangible Assets Subject to Amortization
 
The following summarizes the change in intangible assets from December 31, 2018 to September 30, 2019 (dollars in thousands):     
 
 
 
Balance as of
December 31,
2018
 
 
Additions
 
 
Amortization
 
 
Impairment
 
 
Sale of BCM
 
 
Balance as of
September 30,
2019
 
Intangible assets subject to amortization from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 $2,475 
 $90 
 $(363)
 $(1,549)
 $(249)
 $404 
Marketing related
  69 
  223 
  (45)
  - 
  - 
  247 
Technology based
  83 
  7,123 
  (557)
  - 
  - 
  6,649 
Intangible assets subject to amortization from continuing operations
  2,627 
  7,436 
  (965)
  (1,549)
  (249)
  7,300 
Intangible assets subject to amortization from held for sale operations
  2,208 
  - 
  (214)
  - 
  - 
  1,994 
Total intangible assets subject to amortization
 $4,835 
 $7,436 
 $(1,179)
 $(1,549)
 $(249)
 $9,294 
 
 
 
18
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following provides a breakdown of identifiable intangible assets as of September 30, 2019 (dollars in thousands):
 
 
 
Customer Relationships
 
 
Marketing Related
 
 
Technology Based
 
 
Total
 
Identifiable intangible assets
 $461 
 $327 
 $7,207 
 $7,995 
Accumulated amortization
  (57)
  (80)
  (558)
  (695)
Identifiable intangible assets from continuing operations, net
  404 
  247 
  6,649 
  7,300 
Identifiable intangible assets from operations held for sale, net
  1,685 
  309 
  - 
  1,994 
Identifiable intangible assets, net
 $2,089 
 $556 
 $6,649 
 $9,294 
 
With the acquisition of OpenALPR Technology, the Company identified technology-based intangible assets of $11,845,000 in its preliminary purchase price allocation. The final purchase price allocation, completed in the second quarter of 2019, resulted in adjustments to intangible assets of approximately $4,934,000, since the Company's previous estimates as of March 31, 2019, and primarily related to fair value adjustments to technology-based intangible assets. The final purchase price allocation of the acquisition of OpenALPR is as follows: technology-based intangible assets of $7,123,000, marketing-related intangible assets of $223,000, customer-related intangible assets of $90,000 and goodwill of $4,934,000 along with net assets acquired of $27,000.
 
These intangible assets are being amortized on a straight-line basis over their weighted average estimated useful life of 6.7 years. Amortization expense attributable to continuing operations for the three months ended September 30, 2019 and 2018 was $280,000 and $127,000, respectively, and for the nine months ended September 30, 2019 and 2018 was $965,000 and $557,000, respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. Amortization expense attributable to operations held for sale for the three months ended September 30, 2019 and 2018 was $72,000, respectively, and for the nine months ended September 30, 2019 and 2018 was $214,000, and is presented as part of income (loss) from operations held for sale in the accompanying unaudited condensed consolidated statements of operations.
 
Firestorm, the Company's wholly owned subsidiary, provided services related to crisis management, crisis communications, emergency response, and business continuity and other emergency, crisis and disaster preparedness initiatives. Its fully owned subsidiary, BC Management was an executive search firm for business continuity, disaster recovery, crisis management and risk management professionals and a provider of business continuity research with annual studies covering compensation assessments, program maturity effectiveness, event impact management reviews, IT resiliency and critical supply analyses. Its other wholly owned subsidiary, Secure Education was comprised of an expert team of highly trained, former U.S. Secret Service Agents and assists clients by designing customized plans, conducting security assessments, delivering training, and responding to critical incidents.
 
On June 1, 2019, the Company completed the sale of Secure Education, which included $249,000 of intangible assets (see Note 4).
 
On June 28, 2019 the Company discontinued the operations of BC Management, resulting in an impairment of $242,000 of intangible assets related to its acquisition in December 2018. The discontinued operation of BC Management does not constitute a significant strategic shift that will have a material impact on the Company’s ongoing operations and financial results.
 
On June 30, 2019, the Company recorded an intangible assets impairment of $1,307,000 of customer relationship intangible assets from the Firestorm acquisition. In the second quarter of 2019, the Company evaluated the performance of all the franchisees of Firestorm Franchising, LLC and notified them of the termination of their agreements on the basis of non-performance. The discontinued operation of Firestorm Franchising, LLC does not constitute a significant strategic shift that will have a material impact on the Company's ongoing operations and financial results.
 
As of September 30, 2019, the estimated annual amortization expense from continuing operations for each of the next five fiscal years and thereafter is as follows (dollars in thousands):
  
2019
 $287 
2020
  1,150 
2021
  1,141 
2022
  1,117 
2023
  1,096 
Thereafter
  2,509 
Total
 $7,300 
  
 
19
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 6 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
   Supplemental disclosures of cash flow information for the nine months ended September 30, 2019 and 2018 were as follows:
 
 
 
For the Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
 
 
(Dollars in thousands)
 
Cash paid for interest - continuing operations
 $1,544 
 $298 
Cash paid for interest - held for sale operations
  220 
  96 
Cash paid for taxes - held for sale operations
  12 
  - 
Non-cash investing and financing activities
    
    
Property and equipment - continuing operations
  39 
  - 
Accounts payable - continuing operations
  (39)
  - 
Property and equipment - held for sale operations
  - 
  32 
Notes payable - held for sale operations
  - 
  (32)
Proceeds from short-term borrowing arrangement transferred to settle line of credit
  312 
  - 
Repayment of line of credit
  (312)
  - 
Business combinations, net of cash
    
    
Current assets
  415 
  - 
Intangible assets
  7,436 
  386 
Goodwill
  4,934 
  - 
Current liabilities
  (388)
  - 
Cash paid acquisition of OpenALPR Technology
  (7,000)
  - 
Note issued acquisition of OpenALPR Technology
  (5,000)
    
Issuance of common stock
  (397)
  (163)
Issuance of common stock warrants
  - 
  (123)
Sale of Secured Education
    
    
Current assets
  (58)
  - 
Intangible assets sold
  (250)
  - 
Current liabilities
  54 
  - 
Loss on sale
  3 
  - 
Financing
    
    
Notes payable - continuing operations
  21,000 
    
Debt discount financing costs
  (2,599)
  - 
Extinguishment of debt
  (1,113)
  - 
Repayment of notes payable and interest expense, net of debt discount
  (2,515)
  - 
Investment in OpenALPR Technology
  (12,000)
  - 
Issuance of warrants in conjunction with notes payable
  706 
    
Accounts Payable
  360 
  - 
Proceeds from notes payable
  3,839 
    
Common stock issued in connection with note payable
  - 
  126 
Adoption of ASC-842 Lease Accounting:
    
    
Right-of-use lease asset
  1,212 
  - 
Deferred rent
  30 
  - 
Lease liability
 $(1,242)
 $- 
 
For the nine months ended September 30, 2019 and 2018, the Company paid cash dividends of $0 and $264,000, respectively, to shareholders of record of Series A Preferred Stock. Accrued dividends payable to Series A Preferred Stock shareholders were $440,000 and $176,000 as of September 30, 2019 and December 31, 2018, respectively, and is presented as part of accounts payable and accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
 
 
20
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  
For the nine months ended September 30, 2019 and 2018, the Company paid cash dividends of $108,000 and $81,000, respectively, to shareholders of record of Series B Preferred Stock. Accrued dividends payable to Series B Preferred Stock shareholders were $27,000 and $54,000 as of September 30, 2019 and December 31, 2018, respectively, and is presented as part of accounts payable and accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
 
NOTE 7 – DEBT
 
Short-Term Borrowings
 
On August 9, 2019, Global, entered an agreement with an unrelated third party, LSQ Funding Group, L.C. (“LSQ”), pursuant to which Global sells its accounts receivable to LSQ and LSQ advances Global 90% of the value of the receivable. Global can advance up to $10,000,000 at one time. The term of the agreement is for 12 months and automatically renews for additional 12-month periods. The agreement is presented as secured borrowings, as the accounts receivable are sold with recourse back to Global, meaning that Global bears the risk of non-payment by the account debtor. The funded amount of accounts receivables that LSQ has provided to Global was $1,629,000 as of September 30, 2019 and is presented as part of current liabilities held for sale on the unaudited condensed consolidated balance sheets. To secure its obligations to LSQ, Global has granted a first priority security interest in Global’s accounts receivable and proceeds thereof. As of September 30, 2019, there were approximately $2,515,000 of receivables that are subject to collateral as part of this agreement. The receivables held as collateral are presented in assets held for sale on the unaudited condensed consolidated balance sheets.
 
On August 9, 2019, AOC Key Solutions, Inc. (“AOC”), the Company’s wholly owned subsidiary, also entered into an agreement with LSQ, as an unrelated third party, pursuant to which AOC sells its accounts receivable to LSQ and LSQ advances AOC 90% of the value of the receivable. AOC can advance up to $5,000,000 at one time. The term of the agreement is for 12 months and automatically renews for additional 12-month periods. The agreement is presented as secured borrowings, as the accounts receivable are sold with recourse back to the Company, meaning that AOC bears the risk of non-payment by the account debtor. The funded amount of accounts receivables that LSQ has provided fund to AOC was $1,558,000 as of September 30, 2019 and is presented as part of short-term borrowings on the unaudited condensed consolidated balance sheets. To secure its obligations to LSQ, AOC has granted a first priority security interest in the AOC’s accounts receivable and proceeds thereof. As of September 30, 2019, there were approximately $2,451,000 of receivables that are subject to collateral as part of this agreement. The receivables held as collateral are presented in the accounts receivable, net on the unaudited condensed consolidated balance sheets.
 
During the three and nine months ended September 30, 2019, the Company recorded $33,000, in interest expense, related to the agreement with LSQ. Additionally, during the three and nine months ended September 30, 2019, the Company recorded $80,000 in interest expense from operations held for sale, related to the agreement with LSQ.
 
Global had revolving lines of credit with Wells Fargo Bank National Association (“WFB”) (“Wells Fargo Credit Facilities”). WFB agreed to advance to Global 90% of all eligible accounts with a maximum facility amount of $5,000,000. Interest was payable under the Wells Fargo Credit Facilities at a monthly rate equal to the Three-Month LIBOR, (as such term is defined under the Wells Fargo Credit Facilities), in effect from time to time plus 3%, plus an additional margin of 3%. Payment of the revolving lines of credit was secured by the accounts receivable of Global. The term of the Wells Fargo Credit Facilities was through December 31, 2019, with automatic renewal terms of 12 months. In August 2019, Global entered in a payoff and termination agreement with WFB in which Global paid WFB $1,477,000 to retire all indebtedness and obligation to WFB. As part of payoff of the debt Global recognized $31,000 of costs in excess of the net carrying amount of the outstanding debt, which is presented in the loss on extinguishment of debt on the unaudited condensed consolidated statement of operations. The principal balance as of September 30, 2019 and December 31, 2018 was $0 and $1,095,000, respectively. 
 
 
21
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In November 2017, AOC, entered into an Account Purchase Agreement and related agreements (the “AOC Wells Agreement”) with WFB. Pursuant to the AOC Wells Agreement, AOC Key Solutions agreed to sell and assign to WFB all of its Accounts (as such term is defined in Article 9 of the Uniform Commercial Code), constituting accounts arising out of sales of Goods (as such term is defined in Article 9 of the Uniform Commercial Code) or rendition of services that WFB deemed to be eligible for borrowing under the AOC Wells Agreement. WFB agreed to advance to AOC Key Solutions 90% of all eligible accounts with a maximum facility amount of $3,000,000. Interest was payable under the AOC Wells Agreement at a monthly rate equal to the Daily One Month LIBOR, (as such term was defined under the AOC Wells Agreement), in effect from time to time plus 5%. The AOC Wells Agreement also provided for a deficit interest rate equal to the then applicable interest rate plus 50% and a default interest rate equal to the then applicable interest rate or deficit interest rate, plus 50%. The initial term of the AOC Wells Agreement ran through December 31, 2018 (the “Initial Term”), with automatic renewal terms of 12 months (the “Renewal Term”), commencing on the first day after the last day of the Initial Term. The current term of the AOC Wells Agreement ran through December 31, 2019. AOC Key Solutions was able to terminate the AOC Wells Agreement upon at least 60 days’ prior written notice, but no more than 120 days’ written notice, prior to and effective as of the last day of the Initial Term or the Renewal Term, as the case may be. In August 2019, AOC entered in a payoff and termination agreement with WFB in which AOC paid WFB $341,000 to retire all indebtedness and obligation to WFB. As part of payoff of the debt AOC recognized $45,000 of costs in excess of the net carrying amount of the outstanding debt, which is presented in the loss on extinguishment of debt on the unaudited condensed consolidated statement of operations. The principal balance as of September 30, 2019 and December 31, 2018 was $0 and $566,000, respectively.
 
Long-Term Debt
 
On March 16, 2016, the Company entered into a Subordinated Note and Warrant Purchase Agreement (the “Avon Road Note Purchase Agreement”) pursuant to which $500,000 in subordinated debt (the "Avon Road Note") was issued by the Company to Avon Road Partners, L.P. (“Avon Road”), an affiliate of Robert Berman, the Company’s President and CEO and a member of the Company’s Board of Directors. The Avon Road Subordinated Note Warrants had an expiration date of March 16, 2019. The warrants associated to this agreement were exercised in 2017.
 
On March 12, 2019, the $500,000 balance due on the Avon Road Note was retired in its entirety in exchange for an equivalent principal amount of the 2019 Promissory Notes (see below).
 
On January 25, 2017, pursuant to the terms of its acquisition of Firestorm, the Company issued $1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $500,000 payable at an interest rate of 2% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7%. The notes mature on January 25, 2022. The balance of these notes payable was $956,000 and $938,000, net of unamortized interest, as of September 30, 2019 and December 31, 2018, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $44,000 and $62,000, respectively.
 
 
22
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
On April 3, 2018, the Company entered into a transaction pursuant to which an institutional investor (the “2018 Lender”) loaned $2,000,000 to the Company (the “2018 Promissory Note”). The loan was originally due and payable on May 1, 2019 and bore interest at 15% per annum, with a minimum of 15% interest payable if the loan is repaid prior to May 1, 2019. In addition, the Company issued 35,000 shares of common stock to the 2018 Lender, which shares contained piggy-back registration rights. If the shares were not registered on the next selling shareholder registration statement, the Company would have been obligated to issue an additional 15,000 shares to the 2018 Lender. Upon the sale of Rekor Recognition Systems, Inc. (“Rekor Recognition”), the company’s wholly owned subsidiary, or its assets, the 2018 Lender was entitled to receive 7% of any proceeds received by the Company or Rekor Recognition in excess of $5,000,000 (the “Lender’s Participation”). In addition, commencing January 1, 2020, the 2018 Lender was to be paid 7% of Rekor Recognition’s earnings before interest, taxes, depreciation and amortization, less any capital expenditures, which amount was to be credited for any payments that might ultimately be paid to the 2018 Lender as its Lender’s Participation, if any. At April 3, 2018, the fair value of shares issued was $126,000. On October 24, 2018, the Company and Rekor Recognition entered a note amendment with the 2018 Lender by which the maturity date of the note was extended to May 1, 2020 (the “2018 Promissory Note Amendment”). The 2018 Promissory Note Amendment further provided for payment of interest through May 1, 2019, if the principal was repaid before May 1, 2019. At October 24, 2018, an additional $62,500 fee was paid as consideration for extending the maturity date to May 1, 2020 and designated as financing costs related to the 2018 Promissory Note Amendment. Amortized financing cost for the three months ended September 30, 2019 and 2018 was determined to be $0 and $29,000, respectively, and for the nine months ended September 30, 2019 and 2018 was determined to be $31,000 and $58,000, respectively. Amortized financing cost is presented as part of interest expense in the accompanying unaudited condensed consolidated statement of operations. The 2018 Promissory Note had an effective interest rate of 19.5%. On March 12, 2019, the $2,000,000 balance due on the 2018 Promissory Note was retired in its entirety in exchange for an equivalent principal amount of the 2019 Promissory Notes (see below). In addition, Rekor paid to the 2018 Lender $1,050,000 of consideration for the re-acquisition by the Company of the Lender’s Participation and $75,000 of interest due through May 1, 2019. All amounts paid were obtained from the proceeds of the 2019 Promissory Notes. The 2018 Lender consideration of $1,050,000 for the Lender’s Participation and unamortized financing costs of $63,000 are recorded as costs in connection with the loss on the extinguishment of debt of $1,113,000 for the nine months ended September 30, 2019.
 
2019 Promissory Notes
 
On March 12, 2019, the Company entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology, Inc. (see Note 4) (the “2019 Lenders”) loaned $20,000,000 to Rekor (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”)(See Note 4). The loan is due and payable on March 11, 2021 and bears interest at 16% per annum, of which at least 10% per annum is required to be paid in cash. Any remaining interest accrues to be paid at maturity or earlier redemption. The notes also require a $1,000,000 exit fee due at maturity, or a premium if paid before the maturity date, and compliance with affirmative, negative and financial covenants, including a fixed charge coverage ratio, minimum liquidity and maximum capital expenditures. The fixed charge coverage ratio covenant related to this note has been deferred through December 31, 2019. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. The loan is secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and are valued at $706,000. The warrants were exercisable commencing March 12, 2019 and expire on March 12, 2024. Amortized financing cost for the three and nine months ended September 30, 2019 were $328,000 and $719,000, respectively, and are included in interest expense on the unaudited condensed consolidated statement of operations. The 2019 Promissory Notes has an effective interest rate of 24.87%.
 

 
23
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The principal amounts due for long-term notes payable described above are shown below as of September 30, 2019 (dollars in thousands):
 
2019
 $- 
2020
  - 
2021
  21,000 
2022
  1,000 
2023
  - 
Thereafter
  - 
Total
 $22,000 
 
    
Less unamortized interest
  (44)
Less unamortized financing costs
  (1,880)
Notes payable
 $20,076 
 
NOTE 8 – INCOME TAXES
 
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business.
  
The 2017 Tax Cut and Jobs Act ("2017 Act") changed U.S. tax law and included various provisions that impacted the Company. The 2017 Act affected the Company by changing U.S. tax rates, increasing the Company’s ability to utilize accumulated net operating losses generated after December 31, 2017, and impacted the estimates of deferred tax assets and liabilities.
 
The Company’s income tax provision for the nine months ended September 30, 2019 and 2018 was $35,000 and $22,000, respectively. The increase in the tax expense is primarily related to state minimum taxes and the state of Texas gross receipts tax. The Company established a valuation allowance against deferred tax assets during 2017 and has continued to maintain a full valuation allowance through the nine months ended September 30, 2019. The Company’s income tax provision for the three months ended September 30, 2019 and 2018 was $12,000 and $22,000, respectively. The tax provision for the nine months ended September 30, 2019 and 2018, was fully attributable to operations that are classified as held for sale.
 
The Company files income tax returns in the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of September 30, 2019.
 
Management has evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets because management believes that it is more-likely-than-not that their benefits will not be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.
 
For the nine months ended September 30, 2019 the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The 2015 through 2018 tax years remain subject to examination by the Internal Revenue Service.
 
 
24
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 9 – STOCKHOLDERS’ (DEFICIT) EQUITY
 
Common Stock
 
The Company is authorized to issue 30,000,000 shares of common stock, $0.0001 par value. As of September 30, 2019, and December 31, 2018, the issued and outstanding common shares of Rekor were 20,406,489 and 18,767,619, respectively.
 
In January 2018, the Company issued 33,333 shares of Rekor common stock as consideration as part of its acquisition of Secure Education.
 
In April 2018, the Company issued 35,000 shares of Rekor common stock as additional consideration to the 2018 Lender in connection with the 2018 Promissory Note.
 
On November 1, 2018, the Company issued 4,125,000 shares of common stock through an underwritten public offering at a public offering price of $0.80 per share. Net proceeds to the Company was approximately $2,800,000. In addition, the Company granted underwriters a 45-day option to purchase up to 618,750 additional shares of common stock to cover over-allotment, if any. The underwriters did not exercise this option and the options were cancelled. As part of the consideration to the underwriters, the Company issued to the underwriters warrants to purchase an aggregate of 206,250 shares of common stock, exercisable over a period of five years, at an exercise price of $1.00 per share. As of September 30, 2019, the underwriter warrants had an estimated value of approximately $200,000 and became exercisable commencing April 27, 2019 and expire on October 29, 2023.
 
For the nine months ended September 30, 2018, the Company issued 13,998 shares of Rekor common stock related to the exercise of common stock options. There were no stock options exercised for the nine months ended September 30, 2019.
  
On February 15, 2019, the Company entered into Amendment No. 1 to the OpenALPR Purchase Agreement, pursuant to which the Company agreed to issue 600,000 shares of Rekor common stock as partial consideration for the acquisition of the OpenALPR Technology. On March 12, 2019, the Company issued 600,000 shares of Rekor common stock as part of the consideration for the acquisition of the OpenALPR Technology. 
 
For the nine months ended September 30, 2019 and 2018, the Company issued 1,638,870 and 82,331 shares of Rekor common stock, respectively. Out of these, 931,666 shares of Rekor common stock were issued in exchange for cash and cashless exercise of 1,149,806 warrants during 2019, 600,000 shares were issued in connection the acquisition of OpenALPR, 3,638 shares were issued as part of the exercise of warrants related to series A preferred stock and 103,566 shares were issued in connection with the Sales Agreement.
 
At-the-Market Offering
 
On August 14, 2019, the Company entered into the Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) to create an at-the-market equity program under which the Company from time to time may offer and sell shares of its common stock, having an aggregate offering price of up to $15,000,000, through or to B. Riley FBR. Subject to the terms and conditions of the Sales Agreement, B. Riley FBR will use its commercially reasonable efforts to sell the shares of the Company’s common stock from time to time, based upon the Company’s instructions. B. Riley FBR will be entitled to a commission equal to 3.0% of the gross proceeds from each sale. The Company incurred issuance costs of approximately $256,000 related to legal, accounting, and other fees in connection with the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.
 
Sales of the Company’s common stock under the Sales Agreement are to be issued and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No 333-224423), previously filed with the Securities and Exchange Commission (“SEC”) on April 24, 2018 and declared effective by the SEC on April 30, 2018. In September 2019, based on settlement date, the Company sold 103,566 shares of common stock at a weighted-average selling price of $2.84 per share in accordance with the Sales Agreement. Net cash provided from the Sales Agreement was $29,000 after paying $256,000 related to the issuance costs stated above, as well as, 3.0% or $9,000 related to cash commissions provided to B. Riley FBR. As of September 30, 2019, $14,706,000 remained available for sale under the Sales Agreement.
 
 
 
25
 
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Preferred Stock
 
The Company is authorized to issue up to 2,000,000 shares of preferred stock, $0.0001 par value. The Company’s preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into, and issued in, designated series from time to time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the power to determine the relative powers, preferences and rights of each series of preferred stock.
 
Series A Cumulative Convertible Redeemable Preferred Stock
 
Of the 2,000,000 authorized shares of preferred stock, 505,000 shares are designated as $0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock are entitled to quarterly dividends of 7.0% per annum per share. The holders of Series A Preferred Stock have a right to convert each share into common stock at an initial conversion price and a specified conversion price which increases annually based on the passage of time beginning in November 2019. The holders of Series A Preferred Stock also have a put right after 60 months from the issuance date to redeem any or all of the Series A Preferred Stock at a redemption price of $15.00 per share plus any accrued but unpaid dividends. The Company has a call right after 36 months from the issuance date to redeem all of the Series A Preferred Stock at a redemption price which increases annually based on the passage of time beginning in November 2019. The Series A Preferred Stock contains an automatic conversion feature based on a qualified initial public offering in excess of $30,000,000 or a written agreement by at least two-thirds of the holders of Series A Preferred Stock at an initial conversion price and a specified price which increases annually based on the passage of time beginning in November 2016. Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018.
 
The Company adjusts the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value was recorded through additional-paid-in-capital of $191,000 and $167,000 for the three months ended September 30, 2019 and 2018, respectively and $554,000 and $483,000 for the nine months ended September 30, 2019 and 2018, respectively.
 
As of September 30, 2019, and December 31, 2018, 502,327 shares of Series A Preferred Stock were issued and outstanding, respectively.
 
The holders of Series A Preferred Stock are entitled to quarterly cash dividends of $0.175 (7% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. For the nine months ended September 30, 2019 and 2018, the Company paid cash dividends of $0 and $264,000, respectively, to shareholders of record of Series A Preferred Stock. Accrued dividends payable to Series A Preferred Stock shareholders were $440,000 and $176,000 as of September 30, 2019 and December 31, 2018, respectively, and are presented as part of the accounts payables and accrued expenses on the accompanying unaudited condensed consolidated balance sheets.