Rekor Systems, Inc. - Quarter Report: 2021 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, 2021

 

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 10, 2021, the Registrant had 40,994,510 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, 2020 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 divestiture, merger, acquisition, or other business combination 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, 2021

 

PART I - FINANCIAL INFORMATION		4
ITEM 1. FINANCIAL STATEMENTS		4
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS		4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)		6
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		8
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		47
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		47
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		47
ITEM 4. MINE SAFETY DISCLOSURES		47
ITEM 5. OTHER INFORMATION		47
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, 2021	December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$62,845	$20,595
Restricted cash and cash equivalents	1,005	412
Short-term investments	23,996	-
Accounts receivable, net	2,474	1,038
Inventory	1,101	1,264
Note receivable, current portion	340	340
Other current assets, net	626	469
Current assets of discontinued operations	1	2
Total current assets	92,388	24,120
Long-term Assets
Property and equipment, net	1,337	1,047
Right-of-use lease assets, net	352	426
Goodwill	6,336	6,336
Intangible assets, net	6,633	7,038
Investments in unconsolidated companies	74	75
Note receivable, long-term	1,275	1,360
Total long-term assets	16,007	16,282
Total assets	$108,395	$40,402
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$4,712	$3,898
Notes payable, current portion	985	-
Loan payable, current portion	625	517
Lease liability, short-term	199	253
Contract liabilities	1,497	1,126
Current liabilities of discontinued operations	128	124
Total current liabilities	8,146	5,918
Long-term Liabilities
Notes payable, long-term	-	980
Loan payable, long-term	350	469
Lease liability, long-term	167	188
Contract liabilities, long-term	910	958
Deferred tax liability, long-term	27	24
Long term liabilities of discontinued operations	-	5
Total long-term liabilities	1,454	2,624
Total liabilities	9,600	8,542
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value; authorized: 505,000 shares authorized at March 31, 2021 and December 31, 2020; issued and outstanding: 0 and 502,327 shares issued and outstanding at March 31, 2021 and December 31, 2020	-	6,669
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.0001 par value; authorized; 100,000,000 shares; issued: 40,972,238 shares at March 31, 2021 and 33,013,271 at December 31, 2020; outstanding: 40,952,877 shares at March 31, 2021 and 33,013,271 at December 31, 2020	4	3
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, 2021 and December 31, 2020, respectively
Series B Cumulative Convertible Preferred stock, $0.0001 par value; authorized: 240,861 shares authorized at March 31, 2021 and December 31, 2020; issued and outstanding: 0 and 240,861 shares issued and outstanding at March 31, 2021 and December 31, 2020	-	-
Treasury stock, 19,361 and 0 shares as of March 31, 2021 and December 31, 2020, respectively	(319)	-
Additional paid-in capital	147,615	68,238
Accumulated other comprehensive income	2	-
Accumulated deficit	(48,507)	(43,050)
Total stockholders’ equity	98,795	25,191
Total liabilities and stockholders’ equity	$108,395	$40,402

 

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,
	2021	2020
Revenue	$4,216	$1,595
Cost of revenue	1,962	494
Gross profit	2,254	1,101
Operating expenses:
General and administrative expenses	5,403	2,791
Selling and marketing expenses	937	371
Research and development expenses	1,222	543
Operating expenses	7,562	3,705
Loss from operations	(5,308)	(2,604)
Other income (expense):
Interest expense	(32)	(1,163)
Other income	16	-
Total other expense	(16)	(1,163)
Loss before income taxes	(5,324)	(3,767)
Income tax provision	(3)	(7)
Equity in loss of investee	(76)	-
Net loss from continuing operations	(5,403)	(3,774)
Net loss from discontinued operations	(3)	(14)
Net loss	$(5,406)	$(3,788)
Comprehensive loss:
Net loss from continuing operations	(5,403)	(3,774)
Change in unrealized gain on short-term investments	2	-
Total comprehensive loss from continuing operations	(5,401)	(3,774)
Total comprehensive loss	$(5,404)	$(3,788)
Loss per common share from continuing operations - basic and diluted	(0.15)	(0.19)
Loss per common share discontinued operations - basic and diluted	-	-
Loss per common share - basic and diluted	$(0.15)	$(0.19)
Weighted average shares outstanding
Basic and diluted	35,944,355	21,929,768

 

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

   

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands, except share amounts)

(Unaudited)

 

	Shares of Common Stock	Common Stock	Shares of Treasury Stock	Treasury Stock at Cost	Shares of Series B Preferred Stock	Series B Preferred Stock	Additional Paid-In Capital	Accumulated Other Comprehensive Income	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, 2020	33,013,271	$3	-	$-	240,861	$-	$68,238	$-	$(43,050)	$25,191
Stock-based compensation	-	-	-	-	-	-	781	-	-	781
Exercise of cashless warrants in exchange for common stock	47,612	-	-	-	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	52,013	-	-	-	-	-	294	-	-	294
Exercise of warrants related to series A preferred stock	95,864	-	-	-	-	-	99	-	-	99
Public underwriting	6,126,939	1	-	-	-	-	70,124	-	-	70,125
Conversion of series A preferred stock	899,174	-	-	-	-	-	7,775	-	-	7,775
Conversion of series B preferred stock	517,611	-	-	-	(240,861)	-	179	-	-	179
Issuance upon exercise of stock options	65,402	-	-	-	-	-	226	-	-	226
Issuance upon vesting of restricted stock units	134,991	-	-	-	-	-	-	-	-	-
Shares withheld upon vesting of restricted stock units	-	-	(19,361)	(319)	-	-	-	-	-	(319)
Preferred stock dividends	-	-	-	-	-	-	-	-	(51)	(51)
Accretion of Series A preferred stock	-	-	-	-	-	-	(101)	-	-	(101)
Change in unrealized gain on short-term investments	-	-	-	-	-	-	-	2	-	2
Net loss	-	-	-	-	-	-	-	-	(5,406)	(5,406)
Balance as of March 31, 2021	40,952,877	$4	(19,361)	$(319)	-	$-	$147,615	$2	$(48,507)	$98,795

  

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,
	2021	2020
Cash Flows from Operating Activities
Net loss from continuing operations	$(5,403)	$(3,774)
Net loss from discontinued operations	(3)	(14)
Net loss	(5,406)	(3,788)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense	24	-
Depreciation	131	78
Amortization of right-of-use lease asset	74	32
Provision for deferred taxes	3	7
Share-based compensation	781	171
Amortization of financing costs	5	330
Amortization of intangible assets	409	313
Loss due to change in value of equity investments	76	-
Changes in operating assets and liabilities:
Accounts receivable	(1,460)	39
Inventory	163	(186)
Other current assets	(157)	(213)
Accounts payable and accrued expenses	1,947	747
Contract liabilities	323	(38)
Lease liability	(75)	50
Net cash used in operating activities - continuing operations	(3,159)	(2,444)
Net cash (used in) provided by operating activities - discontinued operations	(4)	452
Net cash used in operating activities	(3,163)	(1,992)
Cash Flows from Investing Activities
Short-term investment activity, net	(23,994)	-
Capital expenditures	(425)	(178)
Investment in unconsolidated company	(75)	-
Payment of notes payable	(11)	-
Proceeds from notes receivable	85	-
Net cash used in investing activities - continuing operations	(24,420)	(178)
Cash Flows from Financing Activities
Proceeds from public offering	70,125	-
Net proceeds from exercise of options	226	5
Net proceeds from exercise of warrants	294	411
Net proceeds from exercise of warrants associated with the Series A Preferred Stock	99	38
Net proceeds from at-the-market agreement	-	2,169
Repurchases of common stock	(319)	-
Payment of debt modification costs	-	(100)
Net cash provided by financing activities - continuing operations	70,425	2,523
Net used in financing activities - discontinued operations	-	(556)
Net cash provided by financing activities	70,425	1,967
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations	42,846	(99)
Net decrease in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations	(4)	(104)
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents	42,842	(203)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period	21,009	1,866
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$63,851	$1,663
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of period - continuing operations	$62,845	$1,087
Restricted cash and cash equivalents at end of period - continuing operations	1,005	415
Cash and cash equivalents at end of period - discontinued operations	1	161
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$63,851	$1,663

 

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, 2021, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity (deficit) and unaudited condensed consolidated statements of cash flows for the three month periods ended March 31, 2021 and 2020.

 

The financial data and other information disclosed in these notes are unaudited. The results for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021.

 

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, 2020. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

 

Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000.

 

The Company is a leader in the emerging market for intelligent roadway systems developed to take advantage of recent developments in artificial intelligence ("AI"). The Company has developed advanced vehicle recognition systems that can extract more accurate and complete data from existing cameras and sensors. Rekor’s systems have also been designed to take full advantage of the latest technological advances in new cameras and sensors, edge processing and cloud computing.  The Company has also developed platforms that enable the data its systems collect to be analyzed in combination with other sources and distributed to multiple end users in real time as actionable intelligence or data collected for long range planning purposes in full compliance with the security and privacy requirements of each end user.

 

These capabilities are particularly useful to governmental entities and businesses in solving a wide variety of real-world vehicle-related operational challenges. The ability to enhance the results provided by existing Internet Protocol (“IP”) connected cameras has enabled significant new uses for vehicle recognition technology that were not previously available or cost effective. The Company provides products and services for governmental organizations and large and small businesses throughout the world. Customers use the Company’s products or services in approximately 80 countries in applications that include public safety, transportation, parking, security, customer experience, operational efficiency and logistics.

 

Rekor’s mission is to enable “AI driven decisions” by enhancing the capabilities in the governmental and commercial sectors with actionable, real-time insights. We seek to deliver these insights through an expanding software portfolio that not only addresses the challenges our customers are currently facing but empowers them to effectively deal with their evolving needs.

 

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires the extensive use of management's estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and 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, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. 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.

 

Liquidity

 

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, 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 and estimates and will make certain key assumptions. These assumptions include among other factors, its ability to raise additional capital, if necessary, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.

 

The Company has generated losses since its inception and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products. As of and for the three months ended March 31, 2021, the Company had a comprehensive loss from continuing operations of $5,401,000 and working capital of $84,369,000.

  

The Company's net cash position, from continuing operations, was increased by $42,846,000 for the three months ended March 31, 2021 primarily due to the net proceeds of $70,125,000 from the completion of the Public Offering (see NOTE 9 - STOCKHOLDERS’ EQUITY (DEFICIT) for details on the Public Offering).

 

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. Should access to 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.

 

  

Goodwill

 

The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. During the three months ended March 31, 2021 and 2020, we have not recognized any impairment to goodwill from continuing operations. 

 

Equity Method Investments

 

Investments in common stock of entities other than the Company’s consolidated subsidiaries are accounted for under the equity method in accordance with FASB ASC 323, Investments – Equity Method and Joint Ventures. Under the equity method, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets. When the fair value or income information is not readily determinable the Company has elected to apply the measurement alternative, and report the investment at cost, less impairment.

 

In June of 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. (“Roker”). In the third quarter of 2020 and the first quarter of 2021, the Company contributed $75,000 for its 50 percent equity interest for a total investment of $150,000. This investment is accounted for under the equity method. During the three months ended March 31, 2021 the Company recognized a loss in its unconsolidated investments of $76,000.

 

In February 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own 19.9% of the units of Global Public Safety. This equity investment does not have a readily determinable fair value and the Company reports this investment at cost, less impairment. In 2018, the Company recorded an impairment of $262,000, related to its investment in Global Public Safety, effectively reducing the total investment value to $0.

 

The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets. There were no distributions or earnings received from either investment in the three months ended March 31, 2021 or 2020.

 

Short-Term Investments

 

Short-term investments consist of U.S Treasury Bills. Short-term investments have maturities of greater than three months but less than a year from the balance sheet date. Short-term investments are carried at fair value and presented as short-term investments on the unaudited condensed consolidated balance sheets. Unrealized gains on investment securities are included in unrealized gain on short-term investments in the unaudited condensed consolidated statements of operations.

 

Treasury Stock

 

Treasury stock is recorded at acquisition cost. Upon disposition of treasury shares gains and losses are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.

 

 

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, short-term investments, accounts receivable and accounts payable approximate fair value as of March 31, 2021 and December 31, 2020, because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt and long-term receivables approximates fair value as of March 31, 2021 and December 31, 2020, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

 

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

 

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

 

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

 

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

 

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

 

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

  

The Company considers its note receivables to be Level 3 investments and that the fair value approximates the carrying value.

 

There were no changes in levels during the three months ended March 31, 2021.

 

Note Receivables

  

In connection with the sale of TeamGlobal in June 2020, the Company received a $1,700,000, five and a half year promissory note due December 2025, that carries an interest rate of 4% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note began in January 2021. Based on general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates current market rates.

 

Interest income recognized for the three months ended March 31, 2021 and 2020 was $16,000 and $0, respectively, and is included as part of other income on the unaudited condensed consolidated statement of operations.

 

 

Revenue Recognition

 

The Company derives its revenues substantially from license and subscription fees for software and related products and services, hardware leases and sales, and other related support services. A portion of the subscription fees are generated through the Company’s eCommerce website rather than through in-person sales. In addition, the Company derives net revenues in connection with certain citation and collection services in connection with the Company’s automated traffic solutions and parking enforcement 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 related to hardware, 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:

 

 

 

 

 

 

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

 

	Three Months ended March 31,
	2021	2020
Revenue
Licensing and subscription revenue	$3,301	$850
Automated traffic safety solutions	915	745
Total revenue	$4,216	$1,595

 

Revenues

 

Licensing and subscription revenue

 

The Company's revenues are derived principally from fees for technology products and services, including software licenses and subscriptions, hardware leases and sales, and other related support services.

 

Licensing and subscription services include providing, through a web server, access to the Company’s proprietary vehicle recognition software, a self-managed database and a powerful, cross-platform application programming interface. The Company's proprietary software employs a convolutional neural network architecture to classify images and features that include seamless video analysis and data analytics. Current customers include law enforcement agencies, highway authorities, parking system operators, private security companies, and wholesale and retail operations supporting logistics and customer loyalty programs.

 

Revenue is generally recognized ratably over the contract term. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Revenue from the Company's perpetual software licenses is recognized up-front at the point in time when the software is made available to the customer and the customer is deemed to have a right to use the software.

 

  

Automated traffic safety solutions 

 

Automated traffic safety solutions 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, analyzes the images to provide data and supports citation management services. In the first quarter of 2021, the Company launched its Uninsured Vehicle Enforcement Diversion (“UVED”) Program which includes hardware that identifies uninsured motor vehicles.  Revenue is recognized monthly based on the number of camera systems that are operated, or revenue is recognized based on the number of citations collected by the relevant municipality. The Company also installs and maintains public safety systems, which may involve a combination of installation and lease payments or simply software licenses to use the Company's software in connection with a previously installed camera network. Revenue is recognized at various stages of completion of installation and monthly for lease or license payments.

 

Revenue by Customer Type

 

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

 

	Three Months ended March 31,
	2021	2020
Revenue
Commercial customers	$3,105	$791
Government customers	1,111	804
Total revenue	$4,216	$1,595

 

Included in commercial customers is revenue that is considered eCommerce revenue. eCommerce revenue is defined by the Company as revenue earned through the Company’s eCommerce platform as well as revenue recognized from its CarCheck product. CarCheck is an application programing interface (“API”) service that analyzes still images of vehicles and responds with license plate data, as well as vehicle make, model, color, and direction of travel.

 

For the three months ended March 31, 2021 and 2020, the Company recognized eCommerce revenues of $442,000 and $177,000, respectively, which is included in licensing and subscription revenue.

 

Performance obligations 

 

A performance obligation is a promise in a contract with a customer to perform services that are distinct. 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. This may result in a deferral or acceleration of revenue recognized relative to cash received.

 

Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, they are expected to be recognized as revenue in the future. On March 31, 2021, the Company had approximately $16,186,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 32% of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter.

 

 

Unbilled accounts receivable

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days, but typically no longer than over the next twelve months. Unbilled accounts receivables of $595,000 and $600,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively.

 

Contract liabilities

 

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, 2021 were not materially impacted by any other factors. Contract liabilities as of March 31, 2021 and December 31, 2020 were $2,407,000 and $2,084,000, respectively. All contract liabilities as of March 31, 2021 and December 31, 2020 were attributable to continuing operations. During the three months ended March 31, 2021 $389,000 of the contract liabilities balance as of December 31, 2020 was recognized as revenue.

 

The services due for contract liabilities described above are shown below as of March 31, 2021 (dollars in thousands):

 

2021	$1,290
2022	553
2023	342
2024	182
2025	39
Thereafter	1
Total	$2,407

 

Costs to Obtain and Fulfill a Contract

 

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 election to expense costs to obtain a contract as incurred when the amortization period would have been one year or less.

 

In connection with the Company’s uninsured vehicle enforcement diversion program, the Company installs hardware and software at no additional charge to the end customer. The costs associated with these hardware and software installations are expected to be recouped by the Company over the course of the estimated contract period and thus are capitalized as a cost to fulfill a customer contract and amortized over the estimated contract period. As of March 31, 2021 the Company has capitalized $204,000 of such fulfillment costs, of which $199,000 are presented as part of property and equipment, net in the unaudited condensed consolidated balance sheets. As of December 31, 2020 costs incurred to fulfill contracts in excess of one year had been immaterial.

 

 

Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents 

 

The Company considers all highly liquid debt instruments, including Treasury Bills purchased with a 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, 2021 and December 31, 2020 were $1,005,000 and $412,000, 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 highly rated quality financial institutions that are federally insured up to $250,000 per account, located in the United States (“U.S.”). As of March 31, 2021 and December 31, 2020, the Company had deposits from continuing operations totaling $63,850,000 in two U.S. financial institutions and $21,007,000 in one U.S. financial institution, respectively.

 

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

 

Company A accounted for 40% and less than 10% of the Company’s total revenues for the three months ended March 31, 2021 and 2020, respectively.

 

Company B accounted for less than 10% and 17% of the Company’s total revenues for the three months ended March 31, 2021 and 2020, respectively.

 

Company C accounted for less than 10% and 13% of the Company’s total revenues for the three months ended March 31, 2021 and 2020, respectively.

 

As of March 31, 2021, accounts receivable from Company A totaled 53% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2020, Company A and Company B accounted for 43% and 20%, 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 revenues for the three months ended March 31, 2021 and 2020 or the unaudited condensed consolidated accounts receivable balance as of March 31, 2021 and December 31, 2020.

 

Significant Accounting Policies

 

Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 

 

New Accounting Pronouncements Effective in the Three Months ended March 31, 2021

 

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this guidance in the first quarter of 2021. The adoption of ASU 2020-01 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes. 

 

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 eliminated previously allowed exceptions and clarified existing guidance in the accounting for income taxes, including in the areas of franchise taxes, the tax basis of goodwill and interim period effects of changes in tax laws. The Company adopted this guidance in the first quarter of 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes.

 

New Accounting Pronouncements Effective in Future Periods

 

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, 2022. Upon adoption of the new standard, the Company will begin recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of this ASU and based on the Company’s analysis of ASU 2016-13 and the historical, current and expected credit quality of the Company’s customers, the Company does not expect this ASU to have a material impact on its unaudited condensed consolidated statement of operations and balance sheets.

 

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

 

NOTE 2 – DISCONTINUED OPERATIONS

 

In September 2019 and March 2020, the Company determined that TeamGlobal and AOC Key Solutions, respectively, met the criteria for held for sale accounting because the Company expected to complete the sale of TeamGlobal and AOC Key Solutions during the next 12 months as part of a plan to concentrate on the development of its Technology segment. Historically, TeamGlobal and AOC Key Solutions had been presented as part of the Company’s legacy Professional Services segment.

 

During the first quarter of 2020, in connection with the Company’s plan to concentrate on its Technology segment, the Company determined that the remainder of its historical Professional Services segment should be classified as discontinued operations. As part of this plan Firestorm has also been classified as discontinued operations and presented as part of discontinued operations. Previously, Firestorm was not included as part of held for sale and discontinued operations as it did not meet the applicable criteria.

 

AOC Key Solutions Sale

 

On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions management (the “AOC Key Solutions Buyer”), by which the Company agreed to sell AOC Key Solutions, to the AOC Key Solutions Buyer.

 

The AOC Key Solutions Buyer agreed to purchase all of the outstanding equity interests of AOC Key Solutions for a purchase price of $4,000,000, comprising (i) $3,400,000 in cash, and (ii) a subordinated promissory note (the “Subordinated Note”) in the initial principal amount of $600,000.

 

As of December 31, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.

 

 

TeamGlobal Sale

 

On June 29, 2020, the Company entered into a Stock Purchase Agreement (the “TeamGlobal Purchase Agreement”) by and among the Company, TeamGlobal, and Talent Teams LLC, a Texas limited liability company owned by the members of TeamGlobal’s management (the “TeamGlobal Buyer”), pursuant to which the Company agreed to sell TeamGlobal to the TeamGlobal Buyer.

 

Subject to the terms and conditions of the TeamGlobal Purchase Agreement, the TeamGlobal Buyer agreed to purchase all of the outstanding equity interests of TeamGlobal for a purchase price of $4,000,000, comprising (i) an aggregate of $2,300,000 in cash, and (ii) a secured promissory note (the “Secured Note”) in the initial principal amount of $1,700,000, with such Secured Note secured by a Pledge and Security Agreement (the “Pledge Agreement”) with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer.

 

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

 

Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations from TeamGlobal, AOC Key Solutions and Firestorm for the three months ended March 31, 2021 and 2020 have been classified as discontinued operations and presented as part of loss from discontinued operations in the accompanying unaudited condensed consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets discontinued operations and current and long term liabilities discontinued operations in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020.

 

The assets and liabilities classified as discontinued operations in the Company's unaudited condensed consolidated financial statements as of March 31, 2021 and December 31, 2020 are shown below (dollars in thousands): 

 

	March 31, 2021	December 31, 2020
	Firestorm	Firestorm
ASSETS
Cash and cash equivalents	$1	$2
Current assets of discontinued operations	1	2
Total assets of discontinued operations	$1	$2
LIABILITIES
Accounts payable and accrued expenses	$30	$31
Lease liability, short term	98	93
Current liabilities of discontinued operations	128	124
Lease liability, long term	-	5
Long-term liabilities of discontinued operations	-	5
Total liabilities of discontinued operations	$128	$129

 

 

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

 

	Three Months ended March 31,
	2021	2020
	Firestorm	Global	AOC Key Solutions	Firestorm	Total
Revenue	$-	$6,305	$3,392	$-	$9,697
Cost of revenue	-	5,476	1,866	-	7,342
Gross profit	-	829	1,526	-	2,355
Operating expenses:
General and administrative expenses	3	762	1,284	(4)	2,042
Selling and marketing expenses	-	39	131	-	170
Operating expenses	3	801	1,415	(4)	2,212
Income loss income from operations	(3)	28	111	4	143
Other (income) expense:
Interest expense	-	(90)	(74)	-	(164)
Other expense (income)	-	5	2	-	7
Total other (income) expense	-	(85)	(72)	-	(157)
Income (loss) from discontinued operations	(3)	(57)	39	4	(14)
Income tax provision from discontinued operations	-	-	-	-	-
Net income (loss) from discontinued operations	$(3)	$(57)	$39	$4	$(14)

 

 

NOTE 3 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

   Supplemental disclosures of cash flow information for the three months ended March 31, 2021 and 2020 were as follows (dollars in thousands):

 

	Three Months ended March 31,
	2021	2020
Cash paid for interest - continuing operations	$-	$506
Cash paid for taxes - continuing operations	-	-
Non-cash investing and financing activities
Paid-in-kind interest transferred from accrued interest to the principal balance of the 2019 Promissory Notes	-	1,283
Financing activities:
Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock	(1,005)	-
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock	(6,770)	-
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock	(179)	-
Adoption of ASC-842 Lease Accounting:
Right-of-use lease asset	-	132
Lease liability	$-	$(132)

   

NOTE 4 – 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 four years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.

 

Operating lease expense from continuing operations for the three months ended March 31, 2021 and 2020 was $89,000 and $48,000, 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 $85,000 and $48,000 for the three months ended March 31, 2021 and 2020, respectively.

 

In the first quarter of 2021, the Company entered into a new lease agreement for its new headquarters. The lease commencement agreement and date are expected to occur in the third quarter of 2021. As the Company does not have access to the building until the lease commencement agreement is executed, the Company has not recognized the lease as of March 31, 2021.

 

 

Supplemental balance sheet information related to leases as of March 31, 2021 was as follows (dollars in thousands): 

 

Operating lease right-of-use lease assets from continuing operations	$352
Current portion of lease liability	$199
Long-term portion of lease liability	167
Total lease liability from continuing operations	$366
Weighted average remaining lease term - operating leases from continuing operations	2.11
Weighted average discount rate - operating leases	9%
2021	$193
2022	104
2023	84
2024	19
Total lease payments	$400
Less imputed interest	34
Maturities of lease liabilities	$366

  

 

 

Intangible Assets Subject to Amortization

 

The following summarizes the change in intangible assets from December 31, 2020 to March 31, 2021 (dollars in thousands):     

 

	December 31, 2020	Additions	Amortization	March 31, 2021
Intangible assets subject to amortization from continuing operations
Customer relationships	$362	$-	$(8)	$354
Marketing related	159	-	(18)	141
Technology based	5,361	4	(262)	5,103
Internally capitalized software	1,156	-	(121)	1,035
Intangible assets subject to amortization from continuing operations	$7,038	$4	$(409)	$6,633

 

The following provides a breakdown of identifiable intangible assets as of March 31, 2021 (dollars in thousands):

 

	Customer Relationships	Marketing Related	Technology Based	Internally Capitalized Software	Total
Identifiable intangible assets	$461	$327	$7,210	$1,452	$9,450
Accumulated amortization	(107)	(186)	(2,107)	(417)	(2,817)
Identifiable intangible assets from continuing operations, net	$354	$141	$5,103	$1,035	$6,633

 

These intangible assets are being amortized on a straight-line basis over their estimated useful life. Amortization expense attributable to continuing operations for the three months ended March 31, 2021 and 2020 was $409,000 and $313,000, respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

 

As of March 31, 2021, the estimated impact on continuing operations from annual amortization from for intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

  

2021	$1,216
2022	1,543
2023	1,363
2024	1,060
2025	1,051
Thereafter	400
Total	$6,633

 

 

NOTE 6 – DEBT

 

Long-Term Debt

 

On January 25, 2017, pursuant to the terms of its acquisition of Firestorm, the Company issued $1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $500,000 payable at an interest rate of 2% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7%. The notes mature on January 25, 2022. The aggregate balance of these notes payable was $985,000 and $980,000, net of unamortized interest, as of March 31, 2021 and December 31, 2020, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $15,000 and $20,000, respectively.

 

Paycheck Protection Program Loan

 

On May 26, 2020, the Company entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $221,000 (the “Rekor PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement.

 

On June 3, 2020, the Company’s wholly owned subsidiary, Rekor Recognition Systems, Inc., entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $653,000 (the “Rekor Recognition PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor Recognition PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement.

 

The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company used the entire Loans amount for qualifying expenses and has to applied for forgiveness of the Loans in accordance with the terms of the CARES Act. The current and long-term portions of the Loans are presented as part of loans payable current portion and loans payable, long-term, respectively, on the accompanying consolidated balance sheets.

  

The Small Business Administration (“SBA”), in consultation with the Department of Treasury, issued new guidance that creates uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company applied for forgiveness with Newtek Small Business Finance, LLC. The Company's forgiveness application is being reviewed.

 

2019 Promissory Notes

 

On March 12, 2019, the Company entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology, Inc. (the “2019 Lenders”) loaned $20,000,000 to the Company (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”). The loan bore interest at 16% per annum, of which at least 10% per annum was required to be paid in cash. Any remaining interest accrued to be paid at maturity or earlier upon redemption. The notes also required 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 and minimum liquidity and maximum capital expenditures covenants. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. As of December 31, 2020, the Company had settled the full amount of the 2019 Promissory Notes. The loan was secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and were valued at $706,000, at the time of issuance. The warrants became exercisable commencing March 12, 2019 and expire on March 12, 2024. The 2019 Promissory Notes had an effective interest rate of 24.87%.

 

 

As of the first anniversary date of the commencement of the 2019 Promissory Notes $1,283,000 of the paid-in kind interest had not been paid in cash by the Company and per the purchase agreement was added to the principal balance of the 2019 Promissory Notes in March 2020. 

   

2019 Promissory Note Retirement

 

On June 30, 2020, the Company entered into Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes. Subject to the terms and conditions set forth in the Exchange Agreements, approximately $17,398,000 was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share, which was the closing price of the common stock on the date of the Exchange. On July 15, 2020, the Company completed the Note Exchange. At the time of the Exchange Agreement the net amount of long-term debt redeemed for common stock was $14,688,000. This included the existing principal balance subject to conversion, the portion of the exit fee associated with the which notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $226,000 related to the paid-in-kind (“PIK”) interest associated with the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above of $2,484,000 was recorded as part of debt extinguishments costs in the accompanying consolidated statement of operations. Following the Note Exchange, approximately $4,398,000 aggregate principal amount of the 2019 Promissory Notes remained outstanding, plus an additional $216,000 related to the exit fee.

 

The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreements. These costs are presented as a reduction to additional paid-in capital on the accompanying consolidated balance sheets.

 

On September 16, 2020, the Company issued a cash payment of $5,284,000 to complete the retirement of the remaining aggregate principal balance of the 2019 Promissory Notes. As a result of this optional prepayment, the 2019 Promissory Notes have been fully redeemed pursuant to their terms, and as a result the Company has no further obligations under the Note Purchase Agreement, as amended. The warrants previously issued pursuant to the Note Purchase Agreement remain outstanding pursuant to their terms.

 

Interest Expense

 

The following table presents the interest expense related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands):

 

	Three Months ended March 31,
	2021	2020
Contractual interest	$27	$833
Amortization of debt issuance costs	5	330
Total interest expense	$32	$1,163

 

 

Schedule of Principal Amounts Due of Debt

 

The principal amounts due for long-term notes payable are shown below as of March 31, 2021 (dollars in thousands):

 

2021	$506
2022	1,432
2023	37
Total	1,975
Less unamortized interest	(15)
Total notes payable	$1,960
Loan payable, current portion	$625
Loan payable, long-term	350
Notes payable, current portion	985
Total notes payable	$1,960