Rekor Systems, Inc. - Quarter Report: 2020 March (Form 10-Q)

 

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 March 31, 2020

 

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 May 13, 2020, the Registrant had 22,869,494 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, 2019 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.

 

 

 

 

 

 

 

Table of Content

REKOR SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

  

PART I - FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
CONDENSED CONSOLIDATED BALANCE SHEETS		3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT		5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		45
ITEM 4. CONTROLS AND PROCEDURES		45
PART II - OTHER INFORMATION		46
ITEM 1. LEGAL PROCEEDINGS		46
ITEM 1A. RISK FACTORS		46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		47
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		48
ITEM 4. MINE SAFETY DISCLOSURES		48
ITEM 5. OTHER INFORMATION		48
ITEM 6. EXHIBITS		48
SIGNATURES		49

  

 

PART I     FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

	March 31, 2020	December 31, 2019
ASSETS
Current Assets
Cash and cash equivalents	$1,087	$1,075
Restricted cash and cash equivalents	415	461
Accounts receivable, net	737	776
Inventory	488	302
Other current assets, net	388	175
Current assets held for sale and discontinued operations	7,408	7,441
Total current assets	10,523	10,230
Property and equipment, net	480	442
Right-of-use lease assets, net	383	283
Goodwill	6,336	6,336
Intangible assets, net	7,993	8,244
Long-term assets held for sale and discontinued operations	3,407	3,457
Total assets	$29,122	$28,992
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$3,264	$3,678
Lease liability, short-term	231	148
Contract liabilities	799	749
Current liabilities held for sale and discontinued operations	5,787	5,757
Total current liabilities	10,081	10,332
Notes payable	21,922	20,409
Lease liability, long-term	172	161
Contract liabilities, long term	775	775
Deferred tax liability	10	10
Long term liabilities held for sale and discontinued operations	502	536
Total liabilities	33,462	32,223
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	6,010	5,804
Commitments and Contingencies
Stockholders' Deficit
Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 22,786,757 and 21,595,653 shares issued and outstanding as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, respectively
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	-	-
Additional paid-in capital	21,959	19,371
Accumulated deficit	(32,311)	(28,408)
Total stockholders’ deficit	(10,350)	(9,035)
Total liabilities and stockholders’ deficit	$29,122	$28,992

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

  

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

  CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in thousands, except share amounts)

(Unaudited)

 

	Three Months Ended March 31,
	2020	2019
Revenue	$1,595	$1,010
Cost of Revenue	494	490
Gross profit	1,101	520
Operating expenses:
General and administrative expenses	2,791	1,543
Selling and marketing expenses	371	158
Research and development expenses	543	5
Operating expenses	3,705	1,706
Loss from operations	(2,604)	(1,186)
Other income (expense):
Loss on extinguishment of debt	-	(1,113)
Interest expense	(1,163)	(209)
Other income	-	2
Total other expense	(1,163)	(1,320)
Loss before income taxes	(3,767)	(2,506)
Income tax provision	(7)	(12)
Net loss from continuing operations	$(3,774)	$(2,518)
Net loss from held for sale and discontinued operations	(14)	(357)
Net loss	$(3,788)	$(2,875)
Loss per common share from continuing operations - basic and diluted	(0.19)	(0.15)
Loss per common share from held for sale and discontinued operations - basic and diluted	-	(0.02)
Loss per common share - basic and diluted	$(0.19)	$(0.17)
Weighted average shares outstanding
Basic and diluted	21,929,768	18,800,496

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

  

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(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 December 31, 2019	21,595,653	2	240,861	-	19,371	(28,408)	(9,035)
Stock-based compensation	-	-	-	-	171	-	171
Exercise of cashless warrants in exchange for common stock	43,218	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	555,000	-	-	-	411	-	411
Issuance of common stock pursuant to at the market offering, net	536,730	-	-	-	2,169	-	2,169
Exercise of warrants related to series A preferred stock	36,862	-	-	-	38	-	38
Issuance upon exercise of stock options	1,294	-	-	-	5	-	5
Preferred stock dividends	-	-	-	-	-	(115)	(115)
Accretion of Series A preferred stock	-	-	-	-	(206)	-	(206)
Net loss	-	-	-	-	-	(3,788)	(3,788)
Balance as of March 31, 2020	22,768,757	$2	240,861	$-	$21,959	$(32,311)	$(10,350)
Balance as of December 31, 2018	18,767,619	$2	240,861	$-	$15,518	$(12,064)	$3,456
Stock-based compensation	-	-	-	-	63	-	63
Issuance of warrants in conjunction with notes payable	-	-	-	-	706	-	706
Common stock issued in OpenALPR acquisition	600,000	-	-	-	397	-	397
Preferred stock dividends	-	-	-	-	-	(115)	(115)
Accretion of Series A preferred stock	-	-	-	-	(179)	-	(179)
Net loss	-	-	-	-	-	(2,875)	(2,875)
Balance as of March 31, 2019	19,367,619	$2	240,861	$-	$16,505	$(15,054)	$1,453

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited) 

 

	Three Months Ended March 31,
	2020	2019
Cash Flows from Operating Activities
Net loss from continuing operations	$(3,774)	$(2,518)
Net loss from held for sale and discontinued operations	(14)	(357)
Net loss	(3,788)	(2,875)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	78	69
Amortization of right-of-use lease asset	32	-
Share-based compensation	171	63
Amortization of financing costs	330	92
Amortization of intangible assets	313	129
Loss on extinguishment of debt	-	1,113
Changes in operating assets and liabilities:
Accounts receivable	39	7
Inventory	(186)	(47)
Other current assets	(213)	(80)
Accounts payable and accrued expenses	754	(326)
Contract liabilities	(38)	(32)
Lease liability	50	-
Net cash used in operating activities - continuing operations	(2,444)	(1,530)
Net cash provided by (used in) operating activities - held for sale and discontinued operations	452	(440)
Net cash used in operating activities	(1,992)	(1,970)
Cash Flows from Investing Activities
Capital expenditures	(178)	(308)
Net cash used in by investing activities - continuing operations	(178)	(308)
Net cash used in investing activities - held for sale and discontinued operations	-	-
Net cash used in investing activities	(178)	(308)
Cash Flows from Financing Activities
Net proceeds from notes payable	-	3,839
Net proceeds from exercise of options	5	-
Net proceeds from exercise of warrants	411	-
Net proceeds from exercise of warrants associated to series A preferred stock	38	-
Net proceeds from at-the-market agreement	2,169	-
Payment of debt modification costs	(100)	-
Net cash provided by financing activities - continuing operations	2,523	3,839
Net cash provided by (used in) financing activities - held for sale and discontinued operations	(556)	723
Net cash provided by financing activities	1,967	4,562
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations	(99)	2,001
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - held for sale and discontinued operations	(104)	283
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents	(203)	2,284
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period	1,866	2,767
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$1,663	$5,051
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of period - continuing operations	$1,087	$4,125
Restricted cash and cash equivalents at end of period - continuing operations	415	577
Cash and cash equivalents at end of period - held for sale and discontinued operations	161	349
Cash, cash equivalents and restricted cash at end of period	$1,663	$5,051

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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 unaudited condensed consolidated financial position as of March 31, 2020, the unaudited condensed consolidated results of operations, consolidated statements of shareholders’ deficit and unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019.

 

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 months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

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. Amounts for the first quarter of 2020 and for the period ending December 31, 2019, have been reclassified to conform to the current year presentation. Due to the held for sale classification of Global and AOC Key Solutions, as well as, the discontinuance of all professional services activities, certain amounts have been reclassified in order to conform to the current period presentation.

 

Rekor Systems, Inc. (the “Company” or “Rekor”), was formed in February 2017. The Company is a leader in the field of vehicle identification and management systems driven by advances in artificial intelligence ("AI"). In development for over five years using AI processes, including deep machine learning algorithms, the Company’s core software enables the creation of more powerful and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional vehicle recognition systems. The software enables a wider field of view, greater light sensitivity, recognitions at faster speeds and the ability to identify the color, make and type of a vehicle as well as direction of travel. These capabilities are particularly useful in solving a wide variety of real-world roadway and vehicle related challenges. In addition, the reductions in cost have opened up a number of new uses for vehicle recognition technology that were not previously cost effective. 

 

In March 2019, 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.

 

 

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. During the first quarter of 2020, the Company began to separately report the results of AOC Key Solutions, Inc. (“AOC Key Solutions”), the Company’s wholly owned subsidiary, including substantially all of the assets and liabilities comprising AOC Key Solutions, as operations held for sale. Additionally, during the first quarter of 2020, in connection with the Company’s plan to sell AOC Key Solutions and Global, the Company determined that all of the Professionals Services segment should be classified as held for sale or discontinued operations. The Company reported Firestorm Solutions, LLC (“Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and together with Firestorm Solutions, “Firestorm”) as part of held for sale and discontinued operations. This strategic shift by the Company was done to focus on its technology offerings and products.

 

The Company is reporting the operating results and cash flows of Global, AOC Key Solutions and Firestorm as held for sale and discontinued operations, and thus they have been excluded from continuing operations for all periods presented. Prior to the Company’s decision to sell Global and AOC Key Solutions, the operating results for these subsidiaries were presented in the Professional Services segment. Prior to the Company’s decision to discontinue the operations of its Professional Services segment, the operating results of Firestorm were presented in the Professional Services segment. The assets and liabilities of Global, AOC Key Solutions and Firestorm are presented as current and long-term assets and liabilities held for sale and discontinued operations in the unaudited condensed consolidated balance sheets and its results are presented as loss from held for sale and discontinued operations in the unaudited condensed consolidated statement of operations.

 

On April 2, 2020, the Company entered into an agreement with the members of AOC Key Solutions’ management to sell AOC Key Solutions. This transaction closed on April 2, 2020, subsequent to the execution of the sales agreement and is further discussed in the Company’s Subsequent Event Note 13.

 

Going Concern Assessment

 

For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions. These assumptions including among other factors, the expected timing and nature of the Company’s programs and projected cash expenditures, its ability to delay or curtail these expenditures or programs and its ability to raise additional capital, if necessary, to the extent management has the proper authority to execute them and considers it probable that those implementations can be achieved within the look-forward period.

 

The Company has generated losses since its inception in February 2017 and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to merger and acquisition costs, public company corporate overhead and non-capital expenditures. As of and for the three months ended March 31, 2020, the Company had a net loss from continuing operations of $3,774,000 and a working capital deficit of $1,179,000. The Company's net cash position was decreased by $34,000 for the three months ended March 31, 2020 due to the net loss from operations, offset by the net proceeds of $2,169,000 from the At-the-Market Agreement and the net proceeds from the issuance of common stock in connection with exercise of warrants and stock options of $454,000.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 2020, the Company has access to raise up to $9,490,000 through the At Market Issuance Sales Agreement (the “Sales Agreement”). As of April 30, 2020, the Company has $9,490,000 available for sale under the Sales Agreement. The Company will continue to raise capital through the Sales Agreement to help fund operations. Should access to those funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.

 

The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to maintain timely collections from existing customers, as well as continue the growth of its technology business, (ii) timely completion of the disposition of the businesses in its Professional Services Segment, (iii) the continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with its lenders and financial intermediaries, (v) its ability to meet debt covenants or obtain waivers in case of noncompliance and (vi) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure new business, raise capital, complete the sale of its assets held for sale in a timely fashion and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

 

The Company’s operations have been affected by the recent and ongoing outbreak of the coronavirus disease (“COVID-19”) which was declared a pandemic by the World Health Organization in March 2020. The impact includes the need for employees to work remotely, restrictions on travel affecting the Company’s ability to attend meetings, conferences, consultations and installations and otherwise provide and market its products and services, and disruptions to its customers' operations which may affect its revenues. The Company also expects to benefit from the availability of financing under the CARES Act (see Note 13). The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by the Company.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the extensive use of management's estimates. Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual amounts may differ from these estimates. On an on-going basis, the Company evaluates its estimates, including those related to collectability of accounts receivable, fair value of debt and equity instruments and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. 

 

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair value of tangible and intangible assets acquired, net of the fair value of liabilities assumed. Goodwill is tested for impairment within one year of acquisitions or annually as of October 1, and whenever indicators of impairment exist. In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, the Company will perform a two-step impairment test. The Company will test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, based primarily on expected growth and general economic conditions.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Except for goodwill, the Company does not have any intangible assets with indefinite useful lives.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, inventory, accounts receivable and accounts payable approximate fair value as of March 31, 2020 and December 31, 2019 because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value as of March 31, 2020 and December 31, 2019 given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

 

The determination of fair value is based upon the fair value framework established by Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 

The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 2 and Level 3 inputs.

 

The Company has concluded that its Series A Preferred Stock is a Level 3 financial instrument and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through March 31, 2020. There were no changes in levels during the three months ended March 31, 2020.

 

Revenue Recognition

 

The Company derives its revenues substantially from license and subscription fees for software and related products and services.

 

Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. If the consideration promised in the contract includes a variable amount, for example maintenance fees, the Company includes an estimate of the amount it expects to receive for the total transaction price, if it is probable that a significant reversal of cumulative revenue recognized will not occur.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company determines the amount of revenue to be recognized through application of the following steps:

 

 

 

 

 

 

The following table presents a summary of revenue (dollars in thousands):

 

	Three Months Ended March 31,
	2020	2019
Revenue
Automated traffic safety enforcement	$745	$817
Licensing and subscription revenue	850	193
Total revenue	$1,595	$1,010

 

Revenues

 

The revenues for technology products and services are from fees that provide customers with software licenses and related support and service fees for various public safety services.

 

In March 2019, the Company acquired substantially all of the assets of a software development company, OpenALPR Technologies, Inc. The software acquired from this acquisition and subsequently developed by the Company have provided the basis for the Company’s licensing and subscription revenue. Licensing and subscription services include those products which operate in many installation locations with a high accuracy rate, which include a web server, a self-managed database, and access to a powerful, cross-platform application programming interface. The Company's proprietary software employs a convolutional neural network architecture to classify images and features that include seamless video analysis and data analytics. Current customers include law enforcement agencies, highway authorities, parking system operators, private security companies, and wholesale and retail operations supporting logistics and customer loyalty programs. During the second quarter of 2019, the Company changed its method of selling its software from perpetual software licenses, with associated maintenance services, to service subscriptions of limited duration. These subscriptions give the customer a license to use the latest version of the Company's software only during the term of the subscription. Revenue is generally recognized ratably over the contract term. This change is expected to impact the Company's revenue in the short term. However, the amount of contract revenue received over the long-term is expected to be relatively consistent. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Revenue is recognized ratably over the licensing or subscription term.

 

Automated traffic safety enforcement revenues reflect arrangements to provide traffic safety systems to a number of municipalities in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images, analyses the images to provide data and supports citation management services. The Company also provides an enterprise parking enforcement solution that the Company licenses to parking management companies and municipalities.  Revenue is recognized monthly based on the number of camera systems that are operated, or the number of citations issued by the relevant municipality.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For those contracts that have multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors.

 

  A performance obligation is a promise in a contract with a customer to transfer services that are distinct. The performance obligations that are not yet satisfied or partially satisfied are performance obligations that are expected to be recognized as revenue in the future for a contract with a customer which was executed as of a particular date. At March 31, 2020, the Company had approximately $13,831,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 34% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter.

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billings occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled accounts receivables of $247,000 and $440,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively. Additionally, unbilled accounts receivables of $1,751,000 and $346,000 were included in current assets held for sale and discontinued operations in the unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively.

 

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the three months ended March 31, 2020 were not materially impacted by any other factors. Contract liabilities from the period ended March 31, 2020 and December 31, 2019 were $1,574,000 and $1,524,000, respectively. All contract liabilities as of March 31, 2020 and December 31, 2019 were attributable to continued operations. During the three months ended March 31, 2020 $243,000 of the contract liabilities balance as of December 31, 2019 were recognized as revenue.

 

The services due for contract liabilities described above are shown below as of March 31, 2020 (dollars in thousands):

 

2020	$717
2021	297
2022	270
2023	195
2024	95
Total	$1,574

 

Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. As of March 31, 2020, and December 31, 2019, costs incurred to obtain contracts in excess of one year have been immaterial to date.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Segment Reporting

 

The FASB ASC Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. In 2019, the Company changed its operating and reportable segments from one segment to two segments: the Technology Segment and the Professional Services Segment. The two segments reflected the Company’s separate focus on technology products and services versus professional services.

 

As part of a strategic shift by the Company, all operations related to the Professional Services segment have been classified as held or sale and discontinued as of 2020. As of January 1, 2020, the Company had one reportable segment. Continuing operations are all operations that previously were reported as part of the Technology Segment.

  

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents 

The Company considers all highly liquid debt instruments purchased with the maturity of three months or less to be cash equivalents.

Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of March 31, 2020 and December 31, 2019 were $415,000 and $461,000, respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets. 

 

Concentrations of Credit Risk

 

The Company places its temporary cash investments with higher rated quality financial institutions located in the United States (“U.S.”). As of March 31, 2020 and December 31, 2019, the Company had deposits from continuing operations totaling $1,502,000 and $1,536,000, respectively, in one U.S. financial institution that was federally insured up to $250,000 per account.

 

The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.

 

Company A accounted for 17% and less than 10% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

Company B accounted for 13% and 27% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

Company C accounted for less than 10% and 12% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

As of March 31, 2020, accounts receivable from Company A totaled $140,000 or 19% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2019, Company A accounted for $198,000 or 26% of the unaudited condensed consolidated accounts receivable balance.

 

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenue for the three month period ended March 31, 2020 or unaudited condensed consolidated accounts receivable balance as of March 31, 2020.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Significant Accounting Policies

 

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

 

New Accounting Pronouncements Effective in the Three Months ended March 31, 2020

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s disclosures.

 

The Company does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

 

NOTE 2 - ACQUISITIONS

 

OpenALPR Technology Acquisition

 

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

 

The purchase price allocation to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the OpenALPR Technology Acquisition occurred on March 12, 2019, the results of operations including OpenALPR Technology Acquisition from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2020.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The final purchase price allocation of the OpenALPR Technology Acquisition is as follows: intangible assets of $7,436,000 and goodwill of $4,934,000 along with net assets acquired of $415,000, and contract obligations assumed of $388,000.

 

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

 

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

 

Operations of Combined Entities

 

The following unaudited pro forma combined financial information gives effect to the OpenALPR Technology Acquisition as if it was consummated as of January 1, 2019. This unaudited pro forma financial information is presented for 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, 2019 or to project potential operating results as of any future date or for any future periods.

 

	Three Months Ended March 31,
	2020	2019
	(Dollars in thousands, except per share data)
Revenue from continuing operations	$1,595	$1,979
Net loss from continuing operations	(3,774)	(1,710)
Basic and diluted loss per share continuing operations	$(0.19)	$(0.10)
Basic and diluted number of shares	21,929,768	19,367,619

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – HELD FOR SALE AND DISCONTINUED OPERATIONS

 

In September 2019 and March 2020, the Company determined that Global and AOC Key Solutions, respectively, met the criteria for held for sale accounting because it expects to complete the sale of Global and AOC Key Solutions during the next 12 months. Historically, Global and AOC Key Solutions have been presented as part of the Professional Services Segment. On April 2, 2020, AOC Key Solutions was sold pursuant to a purchase and sale agreement as further detailed in Note 13.

 

During the first quarter of 2020, in connection with the Company’s plan to sell AOC Key Solutions and Global, the Company determined that all of the historical Professionals Services Segment, not subject to sale, should be classified as discontinued operations. As part of this plan Firestorm has also been classified as discontinued operations and presented as part of held for sale and discontinued operations. Previously, Firestorm was not included as part of held or sale and discontinued operations as it did not meet the threshold of being considered a strategic shift.

 

The pending dispositions are a result of the Company’s strategic decision to concentrate resources on the development of its Technology Segment and will result in material changes in the Company's operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of Global, AOC Key Solutions and Firestorm as held for sale and discontinued operations, including for all prior periods reflected in the unaudited condensed consolidated financial statements and these notes.

 

Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations from Global, AOC Key Solutions and Firestorm for the three months ended March 31, 2020 and 2019 have been classified as held for sale and discontinued operations and presented as part of loss from held for sale and discontinued operations in the accompanying unaudited condensed consolidated statements of operations presented herein. The assets and liabilities also have been classified as held for sale and discontinued operations under the line captions of current and long term assets held for sale and discontinued operations and current and long term liabilities held for sale and discontinued operations in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

 

The assets and liabilities classified as held for sale and discontinued operations in the Company's unaudited condensed consolidated financial statements as of March 31, 2020 and December 31, 2019 are shown below (dollars in thousands). 

 

	March 31, 2020				December 31, 2019
	Global	AOC Key Solutions	Firestorm	Total	Global	AOC Key Solutions	Firestorm	Total
ASSETS
Cash and cash equivalents	$37	$118	$6	$161	$225	$93	$12	$330
Accounts receivable, net	3,183	3,866	-	7,049	2,763	4,055	-	6,818
Other current assets, net	157	41	-	198	238	52	3	293
Current assets held for sale and discontinued operations	3,377	4,025	6	7,408	3,226	4,200	15	7,441
Property and equipment, net	113	37	-	150	113	41	-	154
Right-of-use lease assets, net	105	477	-	582	130	499	-	629
Goodwill	669	-	-	669	669	-	-	669
Intangible assets, net	1,994	-	-	1,994	1,994	-	-	1,994
Deposits and other long-term assets	-	12	-	12	-	11	-	11
Long-term assets held for sale and discontinued operations	2,881	526	-	3,407	2,906	551	-	3,457
Total assets held for sale and discontinued operations	$6,258	$4,551	$6	$10,815	$6,132	$4,751	$15	$10,898
LIABILITIES
Accounts payable and accrued expenses	$724	$1,572	$29	$2,325	$461	$1,260	$33	$1,754
Lines of credit	1,776	1,404	-	3,180	1,842	1,894	-	3,736
Lease liability, short term	115	103	64	282	113	100	54	267
Current liabilities held for sale and discontinued operations	2,615	3,079	93	5,787	2,416	3,254	87	5,757
Other long-term liabilities	33	-	-	33	-	-	-	-
Lease liability, long term	-	439	30	469	30	467	39	536
Long-term liabilities held for sale and discontinued operations	33	439	30	502	30	467	39	536
Total liabilities held for sale and discontinued operations	$2,648	$3,518	$123	$6,289	$2,446	$3,721	$126	$6,293

  

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

	Three Months Ended March 31,
	2020				2019
	Global	AOC Key Solutions	Firestorm	Total	Global	AOC Key Solutions	Firestorm	Total
Revenue	$6,305	$3,392	$-	$9,697	$7,058	$2,878	$680	$10,616
Cost of revenue	5,476	1,866	-	7,342	6,146	1,592	295	8,033
Gross profit	829	1,526	-	2,355	912	1,286	385	2,583
Operating expenses:
General and administrative expenses	762	1,284	(4)	2,042	971	1,115	508	2,594
Selling and marketing expenses	39	131	-	170	82	125	63	270
Operating expenses	801	1,415	(4)	2,212	1,053	1,240	571	2,864
Income loss income from operations	28	111	4	143	(141)	46	(186)	(281)
Other income (expense):
Interest expense	(90)	(74)	-	(164)	(48)	(31)	-	(79)
Other expense	5	2	-	7	1	2	-	3
Total other expense	(85)	(72)	-	(157)	(47)	(29)	-	(76)
Income (loss) from held for sale and discontinued operations	(57)	39	4	(14)	(188)	17	(186)	(357)
Income tax provision from held for sale and discontinued operations	-	-	-	-	-	-	-	-
Net income (loss) from held for sale and discontinued operations	$(57)	$39	$4	$(14)	$(188)	$17	$(186)	$(357)

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

   Supplemental disclosures of cash flow information for the three months ended March 31, 2020 and 2019 were as follows (dollars in thousands):

 

	Three Months Ended March 31,
	2020	2019
Cash paid for interest - continuing operations	$506	$119
Cash paid for interest - held for sale and discontinued operations	106	148
Non-cash financing - paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes	(1,283)	-
Non-cash operating - paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes	1,283	-
Current assets	-	415
Intangible assets	-	7,436
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)
Financing:
Notes payable - continuing operations	-	21,000
Debt discount financing costs	-	(2,599)
Extinguishment of debt	-	(1,113)
Repayment of notes payable and interest expense, net of debt discount	-	(2,515)
Investment in OpenALPR Technology	-	(12,000)
Issuance of warrants in conjunction with notes payable	-	706
Accounts Payable	-	360
Proceeds from notes payable	-	3,839
Adoption of ASC-842 Lease Accounting:
Right-of-use lease asset	132	921
Deferred rent	-	30
Lease liability	$(132)	$(951)

  

NOTE 5 – OPERATING LEASES

 

We have operating leases for office facilities in various locations throughout the United States. The Company’s leases have remaining terms of one to five years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Operating lease expense from continuing operations for the three months ended March 31, 2020 and 2019 was $48,000 and $25,000, respectively, and is part of general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations.

 

Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $48,000 and $0 for the three months ended March 31, 2020 and 2019.

 

Supplemental balance sheet information related to leases as of March 31, 2020 was as follows (dollars in thousands): 

  

Operating lease right-of-use lease assets from continuing operations	$383
Operating lease right-of-use lease assets from held for sale and discontinued operations	582
Total operating lease right-of-use assets	$965
Lease liability, short-term	$231
Lease liability, long-term	172
Lease liability from held for sale and discontinued operations	751
Total operating lease liabilities	$1,154
Weighted Average Remaining Lease Term - operating leases from continuing operations	2.1
Weighted Average Discount Rate - operating leases	9%

 

Maturities of lease liabilities were as follows (dollars in thousands):

 

2020 (remainder 2020)	$442
2021	412
2022	177
2023	178
2024	100
Total lease payments	1,309
Less imputed interest	(155)
Maturities of lease liabilities	$1,154

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – INTANGIBLE ASSETS

 

Goodwill

 

There have been no changes from December 31, 2019 in the carrying amount of goodwill for the three months ended March 31, 2020.

 

 

Intangible Assets Subject to Amortization

 

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

 

	December 31, 2019	Additions	Amortization	March 31, 2020
Intangible assets subject to amortization from continuing operations
Customer relationships	$396	$-	$(9)	$387
Marketing related	230	-	(17)	213
Technology based	6,395	-	(256)	6,139
Internally developed capitalized software	1,223	62	(31)	1,254
Intangible assets subject to amortization from continuing operations	8,244	62	(313)	7,993
Intangible assets from held for sale and discontinued operations	1,994	-	-	1,994
Total intangible assets	$10,238	$62	$(313)	$9,987

 

The following provides a breakdown of identifiable intangible assets as of March 31, 2020 (dollars in thousands):

 

	Customer Relationships	Marketing Related	Technology Based	Internally Developed Capitalized Software	Total
Identifiable intangible assets	$461	$327	$7,206	$1,352	$9,346
Accumulated amortization	(74)	(114)	(1,067)	(98)	(1,353)
Identifiable intangible assets from continuing operations, net	387	213	6,139	1,254	7,993
Identifiable intangible assets from held for sale and discontinued operations, net	1,685	309	-	-	1,994
Identifiable intangible assets, net	$2,072	$522	$6,139	$1,254	$9,987

 

These intangible assets are being amortized on a straight-line basis over their weighted average estimated useful life of 6.0 years. Amortization expense attributable to continuing operations for the three months ended March 31, 2020 and 2019 was $313,000 and $129,000, respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. Amortization expense attributable to held for sale and discontinued operations for the three months ended March 31, 2020 and 2019 was $0 and $241,000, respectively, and is presented as part of income (loss) from held for sale and discontinued operations in the accompanying unaudited condensed consolidated statements of operations.

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of March 31, 2020, the estimated annual amortization expense from continuing operations for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

  

2020	$964
2021	1,274
2022	1,193
2023	1,105
2024	1,060
Thereafter	1,451
Capitalized software not yet placed in service	946
Total	$7,993