Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Mar. 31, 2019 | May 09, 2019 | |
Document And Entity Information | ||
Entity Registrant Name | Rekor Systems, Inc. | |
Entity Central Index Key | 0001697851 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2019 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Common Stock, Shares Outstanding | 19,367,619 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2019 |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheets - USD ($) | Mar. 31, 2019 | Dec. 31, 2018 |
CURRENT ASSETS | ||
Cash and cash equivalents | $ 5,051,931 | $ 2,767,183 |
Accounts receivable, net | 6,923,625 | 5,264,949 |
Inventory | 120,191 | 72,702 |
Related party receivable from acquisition | 254,340 | 0 |
Other current assets | 549,709 | 425,530 |
Total current assets | 12,899,796 | 8,530,364 |
PROPERTY AND EQUIPMENT: | ||
Capitalized Software | 1,108,157 | 913,455 |
Furniture and fixtures | 302,243 | 302,243 |
Office equipment | 549,732 | 544,533 |
Camera systems | 682,906 | 553,758 |
Vehicles | 36,020 | 36,020 |
Leasehold improvements | 95,422 | 95,422 |
Total fixed assets | 2,774,480 | 2,445,431 |
Less: accumulated depreciation | (1,049,298) | (978,150) |
Net property and equipment | 1,725,182 | 1,467,281 |
Right-of-use lease assets, net | 857,624 | 0 |
Goodwill | 3,092,616 | 3,092,616 |
Intangibles, net | 16,309,652 | 4,834,503 |
OTHER ASSETS | ||
Deposits and other long-term assets | 60,537 | 130,485 |
Total other assets | 60,537 | 130,485 |
Total Assets | 34,945,407 | 18,055,249 |
CURRENT LIABILITIES | ||
Accounts payable | 1,930,959 | 1,593,726 |
Accrued expenses | 3,030,296 | 2,643,027 |
Lines of credit | 2,414,649 | 1,661,212 |
Notes payable, current portion | 34,051 | 2,469,211 |
Lease liability, short term | 201,918 | 0 |
Deferred revenue | 505,902 | 207,059 |
Total current liabilities | 8,117,775 | 8,574,235 |
LONG-TERM LIABILITIES | ||
Notes payable | 19,424,951 | 964,733 |
Lease liability, long term | 717,681 | 0 |
Deferred rent | 1,906 | 8,475 |
Total long-term liabilities | 20,144,538 | 973,208 |
Total liabilities | 28,262,313 | 9,547,443 |
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, 2019 and December 31, 2018, respectively | 5,230,184 | 5,051,683 |
STOCKHOLDERS' EQUITY | ||
Common stock, $0.0001 par value, 30,000,000 shares authorized, 19,367,619 and 18,767,619 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | 1,937 | 1,877 |
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, 2019 and December 31, 2018, respectively | 0 | 0 |
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | 24 | 24 |
Additional paid-in capital | 16,504,847 | 15,518,013 |
Accumulated deficit | (15,053,898) | (12,063,791) |
Total Stockholders' Equity | 1,452,910 | 3,456,123 |
Total Liabilities and Stockholders' Equity | $ 34,945,407 | $ 18,055,249 |
Condensed Consolidated Balanc_2
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares | Mar. 31, 2019 | Dec. 31, 2018 |
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 2,000,000 | 2,000,000 |
Common stock, par value | $ 0.0001 | $ 0.0001 |
Common stock, authorized | 30,000,000 | 30,000,000 |
Common stock, issued | 19,367,619 | 18,767,619 |
Common stock, outstanding | 19,367,619 | 18,767,619 |
Series A | ||
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 505,000 | 505,000 |
Preferred stock, issued | 502,327 | 502,327 |
Preferred stock, outstanding | 502,327 | 502,327 |
Series B | ||
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 240,861 | 240,861 |
Preferred stock, issued | 240,861 | 240,861 |
Preferred stock, outstanding | 240,861 | 240,861 |
Condensed Consolidated Statemen
Condensed Consolidated Statements of Operations - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Income Statement [Abstract] | ||
Revenue | $ 11,626,221 | $ 11,218,769 |
Cost of revenue | 8,522,555 | 8,134,036 |
Gross profit | 3,103,666 | 3,084,733 |
OPERATING EXPENSES | ||
Selling, general, and administrative expenses | 4,569,764 | 5,280,950 |
Loss from operations | (1,466,098) | (2,196,216) |
Other expense | ||
Loss on extinguishment of debt | (1,112,609) | 0 |
Interest expense | (287,772) | (92,950) |
Other income (expense) | 3,041 | 95,322 |
Total other expense | (1,397,340) | 2,372 |
Loss before income taxes | (2,863,438) | (2,193,844) |
(Provision) benefit from income taxes | (11,761) | |
Net loss | $ (2,875,199) | $ (2,193,844) |
Loss per common share - basic | $ (0.17) | $ (0.17) |
Loss per common share - diluted | $ (0.17) | $ (0.17) |
Weighted average shares outstanding | ||
Basic | 18,800,496 | 14,496,697 |
Diluted | 18,800,496 | 14,496,697 |
Condensed Consolidated Statem_2
Condensed Consolidated Statements of Changes in Stockholders' Equity - USD ($) | Common Stock | Series B | Additional Paid-In Capital | Accumulated Deficit | Total |
Beginning balance, shares at Dec. 31, 2017 | 14,463,364 | 240,861 | |||
Beginning balance, amount at Dec. 31, 2017 | $ 1,447 | $ 24 | $ 12,342,527 | $ (5,833,660) | $ 6,510,338 |
Adjustment to adopt new accounting guidance | |||||
Revenue recognition | (67,000) | (67,000) | |||
Balance as of January 1, 2018 | 14,463,364 | 240,861 | |||
Balance as of January 1, 2018 | $ 1,447 | $ 24 | 12,342,527 | (5,900,660) | 6,443,338 |
Stock-based compensation | 112,455 | 112,455 | |||
Issuance of warrants | 123,472 | 123,472 | |||
Net common stock issued in Secure Education Consultants acquisition, shares | 33,333 | ||||
Net common stock issued in Secure Education Consultants acquisition, amount | $ 3 | 163,329 | 163,332 | ||
Preferred stock dividends | (114,908) | (114,908) | |||
Accretion of Series A preferred stock | (155,343) | (155,343) | |||
Net loss | (2,193,844) | (2,193,844) | |||
Ending balance, shares at Mar. 31, 2018 | 14,496,697 | 240,861 | |||
Ending balance, amount at Mar. 31, 2018 | $ 1,450 | $ 24 | 12,586,440 | (8,209,412) | 4,378,502 |
Beginning balance, shares at Dec. 31, 2018 | 18,767,619 | 240,861 | |||
Beginning balance, amount at Dec. 31, 2018 | $ 1,877 | $ 24 | 15,518,013 | (12,063,791) | 3,456,123 |
Adjustment to adopt new accounting guidance | |||||
Stock-based compensation | 62,852 | 62,852 | |||
Issuance of warrants | 705,943 | 705,943 | |||
Common stock issued in OpenALPR Technology acquisition, shares | 600,000 | ||||
Common stock issued in OpenALPR Technology acquisition, amount | $ 60 | 396,540 | 396,600 | ||
Preferred stock dividends | (114,908) | (114,908) | |||
Accretion of Series A preferred stock | (178,501) | (178,501) | |||
Net loss | (2,875,199) | (2,875,199) | |||
Ending balance, shares at Mar. 31, 2019 | 19,367,619 | 240,861 | |||
Ending balance, amount at Mar. 31, 2019 | $ 1,937 | $ 24 | $ 16,504,847 | $ (15,053,898) | $ 1,452,910 |
Condensed Consolidated Statem_3
Condensed Consolidated Statements of Cash Flows - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES | ||
Net loss | $ (2,875,199) | $ (2,193,844) |
Adjustments to reconcile net loss income to net cash used in operating activities: | ||
Depreciation | 71,148 | 82,039 |
Amortization of right-of-use lease asset | 63,326 | 0 |
Share-based compensation | 62,852 | 112,455 |
Amortization of financing costs | 73,535 | 0 |
Amortization of warrant feature of note payable | 18,374 | 0 |
Deferred rent | 0 | (1,889) |
Change in fair value of derivative liability | 0 | (45,754) |
Amortization of intangibles | 369,924 | 255,294 |
Loss on extinguishment of debt | 1,112,609 | 0 |
Changes in operating assets and liabilities | ||
Accounts receivable | (1,008,254) | 1,011,186 |
Inventory | (47,489) | 11,357 |
Deposits | 69,948 | (23,600) |
Other current assets | (110,755) | 142,028 |
Accounts payable | 337,233 | 616,278 |
Accrued expenses | (9,294) | 516,510 |
Deferred revenue | (88,756) | (26,810) |
Lease liability and deferred rent | (7,920) | 0 |
Net cash used in operating activities | (1,968,718) | 455,250 |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Proceeds from sale of note receivable | 0 | 1,475,000 |
Capital expenditures | (308,107) | (66,003) |
Net cash (used in) provided by investing activities | (308,107) | 1,408,997 |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Proceeds from short-term borrowings | 753,437 | 0 |
Repayments of short-term borrowings | (30,266) | (1,522,162) |
Net proceeds from notes payable | 3,838,402 | 0 |
Payment of preferred dividends | 0 | (114,908) |
Net cash provided by financing activities | 4,561,573 | (1,637,070) |
Net increase in cash and cash equivalents | 2,284,748 | 227,177 |
Cash and cash equivalents at beginning of year | 2,767,183 | 1,957,212 |
Cash and cash equivalents at end of period | $ 5,051,931 | $ 2,184,389 |
NATURE OF OPERATIONS AND RECAPI
NATURE OF OPERATIONS AND RECAPITALIZATION | 3 Months Ended |
Mar. 31, 2019 | |
Nature Of Operations And Recapitalization | |
NATURE OF OPERATIONS AND RECAPITALIZATION | Nature of Operations Rekor Systems, Inc. (the “Company” or “Rekor”), (formerly Novume Solutions, Inc.) was formed in February 2017 to effectuate the mergers of, and become a holding company for KeyStone Solutions, Inc. (“KeyStone”) and Brekford Traffic Safety, Inc. (“Brekford”). For the purposes of this Quarterly Report any references to KeyStone are to KeyStone Solutions, Inc. prior to August 28, 2017 and to KeyStone Solutions, LLC on or after August 28, 2017. On April 26, 2019, the Company changed its name from Novume Solutions, Inc. to Rekor Systems, Inc. April 26, 2019 In March 2019, Rekor acquired certain assets and certain liabilities of OpenALPR Technology, Inc. (“OpenALPR Technology”) through its subsidiary, OpenALPR Software Solutions, LLC (“OpenALPR”) (see Note 4). Beginning with the first quarter of 2019, the Company has segmented its services into two operating and reporting groups: the Technology Group; and the Professional Services Group. The following wholly owned subsidiaries are within the Technology Group: Rekor Recognition and OpenALPR. The following wholly owned subsidiaries are within the Professional Services Group: AOC Key Solutions, Inc. (“AOC Key Solutions”); Global Technical Services, Inc. (“GTS”) and Global Contract Professionals; Inc. (“GCP”) (collectively referred to as “Global” or the "Global Entities"); and Firestorm Solutions, LLC and Firestorm Franchising, LLC (collectively referred to as “Firestorm” or “Firestorm Entities”). For narrative purposes, references to the Company or Rekor include each of its wholly owned subsidiaries. The financial information in this Quarterly Report only includes OpenALPR in the results of operations beginning as of March 12, 2019 (see Note 4). Technology Group Rekor Recognition, headquartered in Hanover, Maryland, is a leading public safety technology service provider of fully-integrated artificial intelligence and machine-learning enabled automated license plate recognition (“ALPR”) systems, powered by OpenALPR software to improve the accuracy of license plate reads and to identify the make, model and color of vehicles. Rekor Recognition’s products can be used for law enforcement, security and surveillance, electronic toll collection, parking operations, banking and insurance, logistics, traffic management and customer loyalty. Its solutions include mobile and fixed license plate readers, “Move Over” law enforcement, school bus stop-arm enforcement, red light and speed enforcement, parking enforcement and citation management. On March 12, 2019, the Company acquired certain assets and assumed certain liabilities of OpenALPR Technology (see Note 4), a software development company. The assets acquired are now held within OpenALPR, headquartered in Hanover, MD. OpenALPR software currently has the capability to analyze video images produced by almost any Internet Protocol camera and to identify vehicle license plates from over 70 countries while also providing the vehicle’s make, model and color. Professional Services Group AOC Key Solutions is based in Chantilly, Virginia and provides consulting and technical support services to assist clients seeking U.S. federal government contracts in the technology, telecommunications, defense, and aerospace industries. Global is headquartered in Fort Worth, Texas, and provides the defense and the aerospace industry with experienced maintenance and modification specialists. Global provides specialized contract personnel, temp-to-hire professionals, direct hires, and temporary or seasonal hires to a diverse group of companies. Firestorm provides services related to crisis management, crisis communications, emergency response, and business continuity and other emergency, crisis and disaster preparedness initiatives. Its BC Management division is an executive search firm for business continuity, disaster recovery, crisis management and risk management professionals and a provider of business continuity research with annual studies covering compensation assessments, program maturity effectiveness, event impact management reviews, IT resiliency and critical supply analyses. Its Secure Education division is comprised of an expert team of highly trained, former U.S. Secret Service Agents and assists clients by designing customized plans, conducting security assessments, delivering training, and responding to critical incidents. |
SUMMARY OF SIGNIFICANT ACCOUNTI
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3 Months Ended |
Mar. 31, 2019 | |
Summary Of Significant Accounting Policies | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Principles of Consolidation The consolidated financial statements include the accounts of Rekor, the parent company, and its wholly owned subsidiaries: Rekor Recognition, OpenALPR, AOC Key Solutions, Global and Firestorm. The financial results of OpenALPR are included in the results of operations beginning as of March 12, 2019 (see Note 4). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. All necessary adjustments are of a normal, recurring nature. Going Concern Assessment For all annual and interim periods, management will assess going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans and external bank lines of credit, to operate for a period of at least one year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period. The Company has generated losses since its inception in August 2017 and has relied on cash on hand, external bank lines of credit, the sale of a note, debt financing and a public offering of its common stock to support cashflow from operations. The Company attributes losses to merger costs, public company corporate overhead and investments made by some of its subsidiary operations. As of, and for the three months ended March 31, 2019, the Company had working capital of approximately $4.8 million and a net loss of approximately $2.9 million. The Company’s net cash position was increased by approximately $4 million in March 2019 by the issuance of $20 million senior secured notes, of which $5 million was non-cash, offset by $7 million of cash paid for the acquisition of OpenALPR Technology, and approximately $4 million related to the extinguishment of debt and associated fees (see Notes 4 and 8). Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections, for one year from the date of the filing of the consolidated financial statements in this 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, cash on hand and working capital. 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. 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. Rekor Recognition makes collections on behalf of certain client jurisdictions. Cash balances designated for these client jurisdictions as of March 31, 2019 and December 31, 2018 were $577,408 and $608,557, respectively, and correspond to equal amounts of related accounts payable. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its clients’ financial condition, and the Company generally does not require collateral. Management reviews accounts receivable to determine if any receivables will potentially be uncollectible. Factors considered in the determination include, among other factors, number of days an invoice is past due, client historical trends, available credit ratings information, other financial data and the overall economic environment. Collection agencies may also be utilized if management so determines. The Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. The Company also considers recording as an additional allowance a certain percentage of aged accounts receivable, based on historical experience and the Company’s assessment of the general financial conditions affecting its customer base. If actual collection experience changes, revisions to the allowance may be required. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. Based on the information available, the Company determined that an allowance for loss of $45,560 and $24,405 was required as of March 31, 2019 and December 31, 2018, respectively. Accounts receivable as of March 31, 2019 and December 31, 2018 included $1,672,178 and $1,124,705 in unbilled contracts, respectively, related to work performed in the period in which the receivable was recorded. The amounts were billed in the subsequent period. Inventory Inventory principally consists of parts held temporarily until installed for service. Inventory is valued at the lower of cost or market value. The cost is determined by the lower of first-in, first-out (“FIFO”) method, while market value is determined by replacement cost for components and replacement parts. Other Current Assets, Net Other assets are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. Other assets includes a balance due of $134,818 incurred in connection with a prior financing activity. The balance due remains outstanding as of March 31, 2019 and the Company continues to carry a valuation allowance of $134,818 as of March 31, 2019. Property and Equipment The cost of furniture and fixtures and equipment is depreciated over the useful lives of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the lease. Depreciation and amortization is recorded on the straight-line basis. The range of estimated useful lives used for computing depreciation are as follows: Furniture and fixtures 2 - 10 years Office equipment 2 - 5 years Leasehold improvements 3 - 15 years Internally-developed software 3 - 5 years Automobiles 3 - 5 years Camera systems 3 years The Company capitalizes eligible costs related to internally-developed software which were incurred during the application development stage, in accordance with ASC 985-20. In accordance with ASC 985-20, capitalized internally-developed software costs, net, not yet placed in service were $1,108,157 and $913,455 as of March 31, 2019 and December 31, 2018, respectively. The Company anticipates placing this internally-developed software into service in the second quarter of 2019. Repairs and maintenance are expensed as incurred. Expenditures for additions, improvements and replacements are capitalized. Depreciation and amortization expense for the three months ended March 31, 2019 and 2018 was $71,148 and $82,039, respectively. Business Combination Management conducts a valuation analysis on the tangible and intangible assets acquired and liabilities assumed at the acquisition date thereof. During the measurement period, which may be up to one year from the Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company allocates a portion of the purchase price to the fair value of identifiable intangible assets. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The Company recorded intangible assets for the acquisitions that occurred in 2018 and 2019. The Secure Education Consultants, Inc. (“Secure Education”) and OpenALPR Technology acquisitions were business combinations, which created both book and tax bases in non-goodwill intangible assets. Secure Education’s acquisition resulted in $0.4 million of non-goodwill intangible assets. The acquisition of OpenALPR Technology resulted in $11.8 million of technology-based intangibles. Goodwill and Other Intangibles In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment, if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually as of October 1, and whenever indicators of impairment exist. The fair value of intangible assets is compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. No impairments have been recorded through March 31, 2019. Acquired identifiable intangible assets are amortized over the following periods: Acquired intangible Asset Amortization Basis Expected Life (years) Customer-Related Straight-line basis 5-15 Marketing-Related Straight-line basis 4 Technology-Based In line with underlying cash flows or straight-line basis 3-5 Revenue Recognition The Company recognizes revenues for the provision of services when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, the fee is fixed or determinable and the collectability of the related revenue is reasonably assured. The Company principally derives revenues from fees for services generated on a project-by-project basis. Revenues for time-and-materials contracts are recognized based on the number of hours worked by the employees or consultants at an agreed-upon rate per hour set forth in the Company’s contracts or purchase orders. Revenues related to firm-fixed-price contracts are primarily recognized upon completion of the project as these projects are typically short-term in nature. Revenue from the sale of individual franchises is recognized when the contract is signed and collectability is assured, unless the franchisee is required to perform certain training before operations commence. The franchisor has no obligation to the franchisee relating to store development and the franchisee is considered operational at the time the franchise agreement is signed or when required training is completed, if applicable. Royalties from individual franchises are earned based upon the terms in the franchising agreement, which are generally the greater of $1,000 or 8% of the franchisee’s monthly gross sales. For automated traffic safety enforcement revenue, the Company recognizes revenue when the required collection efforts, from citizens, are completed and posted to the municipality’s account. The respective municipality is then billed depending on the terms of the respective contract, typically 15 days after the preceding month while collections are reconciled. For contracts where the Company receives a percentage of collected fines, revenue is calculated based upon the posted payments from citizens multiplied by the Company’s contractual percentage. For contracts where the Company receives a specific, fixed monthly fee, regardless of citations issued or collected, revenue is recorded once the amount collected from citizens exceeds the monthly fee per camera. Rekor Recognition’s fixed-fee contracts typically have a revenue neutral provision whereby the municipality’s payment to Rekor Recognition cannot exceed amounts collected from citizens within a given month. OpenALPR generates revenue through a variety of services and products. Software license revenue is recognized at the time of delivery, while related maintenance service revenue is recognized over the period of performance. Cloud service software license revenue is offered as a fixed quantity over a specified term, for which revenue is recognized ratably. Advertising The Company expenses all non-direct-response advertising costs as incurred. Such costs were not material for the three months ended March 31, 2019 and 2018. Use of Estimates Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual amounts may differ from these estimates. On an on-going basis, the Company evaluates its estimates, including those related to collectability of accounts receivable, fair value of debt and equity instruments, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. Income Taxes Income tax expense consists of U.S. federal and state income taxes. The Company is required to pay income taxes in certain state jurisdictions. Historically, AOC Key Solutions and GCP initially elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, neither AOC Key Solutions nor GCP paid federal corporate income tax, and in most instances state income tax, on its taxable income. AOC Key Solutions revoked its S Corporation election upon the March 15, 2016 merger with KeyStone and GCP revoked its S Corporation election upon the acquisition by the Company, and are therefore, subject to corporate income taxes. Firestorm is a single-member LLC with KeyStone as the sole member. The Company uses the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This method requires an asset and liability approach for the recognition of deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management has evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, except for the any deferred tax liability associated with indefinite-lived goodwill or non-goodwill intangibles, because management believes that it is more-likely-than-not that their benefits will not be realized in future periods. The Company will continue to evaluate its net deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. The tax effects of uncertain tax positions are recognized in the consolidated financial statements only if the position is more-likely-than-not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized. It is the Company’s accounting policy is to account for ASC 740-10-related penalties and interest as a component of the income tax provision in the consolidated statements of operations and comprehensive loss. As of March 31, 2019 and December 31, 2018, the Company’s evaluation revealed no uncertain tax positions that would have a material impact on the financial statements. The 2016 through 2018 tax years remain subject to examination by the IRS, as of March 31, 2019. Management does not believe that any reasonably possible changes will occur within the next twelve months that will have a material impact on the financial statements. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) was enacted, which changes U.S. tax law and includes various provisions that impact the Company. The 2017 Act effects the Company by changing U.S. tax rates, increasing the Company’s ability to use accumulated net operating losses generated after December 31, 2017, and limiting the Company’s ability to deduct interest. Equity-Based Compensation The Company recognizes equity-based compensation based on the grant-date fair value of the award on a straight-line basis over the requisite service period, net of estimated forfeitures. Total equity-based compensation expense included in selling, general and administrative expenses in the accompanying consolidated statements of operations for the three months ended March 31, 2019 and 2018 was $62,852 and $112,455, respectively. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires the use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award. The fair value of each option granted has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following assumptions during the three months ended March 31, 2019: For the Three Months Ended March 31, 2019 Risk-free interest rate 2.18% Expected term 2.5 - 6.0 years Volatility 83.80% Dividend yield 0% Estimated annual forfeiture rate at time of grant 0 - 30% Risk-Free Interest Rate – Expected Term – Expected Volatility – Dividend Yield – Forfeiture Rate – Fair Value of Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value as of March 31, 2019 and December 31, 2018 because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value as of March 31, 2019 and December 31, 2018, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors. The determination of fair value is based upon the fair value framework established by Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures Level 1 – Level 2 – Level 3 – 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 on a recurring and non-recurring basis, 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, 2019. There were no changes in levels during the three months ended March 31, 2019 and 2018. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and accounts receivable. Concentrations of credit risk with respect to accounts receivable are minimal due to the collection history and due to the nature of the Company’s client base. The Company limits its credit risk with respect to cash by maintaining cash balances with high-quality financial institutions. At times, the Company’s cash may exceed U.S. federally-insured limits, and as of March 31, 2019 and December 31, 2018, the Company had $4,500,382 and $2,176,907, respectively, of cash and cash equivalents on deposit that exceeded the federally-insured limit. Earnings per Share Basic earnings per share, or EPS, is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and potentially dilutive securities outstanding during the period, except for periods of net loss for which no potentially dilutive securities are included because their effect would be anti-dilutive. Potentially dilutive securities consist of common stock issuable upon exercise of stock options or warrants using the treasury stock method. Potentially dilutive securities issuable upon conversion of the Series A and Series B Preferred Stock (see Note 10) are calculated using the if-converted method. The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. Participating securities consist of preferred stock that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common stockholders. Segment Reporting The Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting The Company’s Technology Group includes the wholly owned subsidiaries Rekor Recognition and OpenALPR. The Professional Services Group includes wholly owned subsidiaries AOC Key Solutions, Global and Firestorm. See Note 3 for further details on the Company’s reportable segments. New Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments There are currently no other accounting standards that have been issued, but not yet adopted, that will have a significant impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption. Recently Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . Leases (Topic 842): Targeted Improvements In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers Practical Expedients Election Costs to Obtain and Fulfill a Contract Revenue Recognition Revenue is recognized when control of the goods and services provided are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services using the following steps: ● Identification of the contract, or contracts, with a customer ● Identification of the performance obligations in the contract ● Determination of the transaction price ● Allocation of the transaction price to the performance obligations in the contract ● Recognition of revenue when, or as, performance obligations are satisfied The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Disaggregated Revenue The Company’s revenue by contract type is as follows: For the Three Months Ended March 31, 2019 2018 Revenues Time and materials $ 10,799,306 $ 10,321,152 Fixed price 817,265 874,202 Franchising 9,650 23,415 Total revenue $ 11,626,221 $ 11,218,769 Performance Obligations ● Time and Material Services ● Firm-Fixed-Price Services ● Franchising Services Accounts Receivable, Net The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance. Additions to the provision for bad debt are charged to expense. The Company determined that an allowance for loss of $45,560 and $24,405 was required as of March 31, 2019 and December 31, 2018, respectively. In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting |
INFORMATION ON BUSINESS SEGMENT
INFORMATION ON BUSINESS SEGMENTS | 3 Months Ended |
Mar. 31, 2019 | |
Revenue Recognition [Abstract] | |
INFORMATION ON BUSINESS SEGMENTS | FASB ASC Topic 280, Segment Reporting The Company’s Technology Group includes wholly owned subsidiaries Rekor Recognition and OpenALPR. The financial results of OpenALPR are included beginning as of March 12, 2019 (see Note 4). The Professional Services Group includes wholly owned subsidiaries AOC Key Solutions, Global, and Firestorm. The Company provides general corporate services to its segments, however, these services are not considered when making operating decisions and assessing segment performance. These services are reported as “Corporate Services” below and these include costs associated with executive management, financing activities and public company compliance. Summarized financial information concerning the Company’s reportable segments is presented below: For the Three Months Ended March 31, 2019 2018 Revenue: Technology group $ 1,009,843 $ 874,202 Professional services group 10,616,378 10,344,567 Total revenue $ 11,626,221 $ 11,218,769 Cost of revenue: Technology group $ 490,110 $ 327,796 Professional services group 8,032,445 7,806,240 Total cost of revenue $ 8,522,555 $ 8,134,036 Gross profit: Technology group $ 519,734 $ 546,406 Professional services group 2,583,933 2,538,327 Total gross profit $ 3,103,666 $ 3,084,733 Selling, general and administrative expenses: Technology group $ 718,473 $ 804,421 Professional services group 2,863,950 2,913,655 Corporate expenses 987,341 1,562,874 Total operating expenses $ 4,569,764 $ 5,280,950 Loss from operations: Technology group $ (198,739 ) $ (258,015 ) Professional services group (280,018 ) (375,327 ) Corporate expenses (987,341 ) (1,562,874 ) Total loss from operations $ (1,466,098 ) $ (2,196,216 ) |
ACQUISITIONS
ACQUISITIONS | 3 Months Ended |
Mar. 31, 2019 | |
Acquisitions | |
ACQUISITION | Secure Education Consultants Acquisition On January 1, 2018, the Company completed its acquisition of certain assets of Secure Education through Firestorm. Consideration paid as part of this acquisition included: $99,197 in cash; 33,333 shares of Rekor common stock valued at $163,332; warrants to purchase 33,333 shares of Rekor common stock, exercisable over a period of five years, at an exercise price of $5.44 per share, valued at $65,988; and warrants to purchase 33,333 of Rekor common stock, exercisable over a period of five years, at an exercise price of $6.53 per share, valued at $57,484. The Company has completed its analysis of the purchase price allocation. The Company recorded $386,001 of customer relationships as intangibles. The table below shows the final breakdown related to the Secure Education acquisition: Cash paid $ 99,197 Common stock issued 163,332 Warrants issued, at $5.44 65,988 Warrants issued, at $6.53 57,484 Total consideration 386,001 Less intangible and intellectual property (386,001 ) Net goodwill recorded $ - OpenALPR Acquisition On November 14, 2018, the Company entered into an Asset Purchase Agreement (the “OpenALPR Purchase Agreement”) by and among the Company, OpenALPR Technology and Matthew Hill pursuant to which the Company agreed to purchase all of the assets of OpenALPR Technology and its subsidiaries, except for certain excluded assets, and assumed certain liabilities as provided for in the OpenALPR Purchase Agreement. The Company agreed to pay $15,000,000, subject to certain adjustments, provided that OpenALPR Technology could elect to receive up to 1,000,000 shares of the Company’s common stock, par value, $0.0001 per share, in lieu of up to $5,000,000 in cash valued at a price per share of $5. On February 15, 2019, the Company entered into Amendment No. 1 to the OpenALPR Purchase Agreement, pursuant to which the parties agreed to amend the Base Purchase Price to $7,000,000, subject to adjustment after closing, issue a promissory note in the amount of $5,000,000, and issue 600,000 shares of Rekor common stock as consideration for the acquisition of OpenALPR Technology’s assets. On March 8, 2019, the Company entered into Amendment No. 2 to the OpenALPR Asset Purchase Agreement which eliminated the working capital adjustment set forth in the OpenALPR Asset Purchase Agreement, as amended, and replaced it with an adjustment for prepaid maintenance contracts. On March 12, 2019, the Company completed the acquisition of certain assets of OpenALPR Technology and assumed certain liabilities (the “OpenALPR Acquisition”). Consideration paid as part of the OpenALPR Acquisition was: $7,000,000 in cash, subject to adjustment after closing; 600,000 shares of Rekor common stock, valued at $396,600; and $5,000,000 of the 2019 Promissory Notes (see Note 8) 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 $208,125 (“March 2019 Warrants” see Note 8). As the OpenALPR Technology acquisition has recently been completed, the Company is currently in the process of completing the purchase price allocation treating the OpenALPR Technology acquisition as a business combination. The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of OpenALPR Technology occurred on March 12, 2019, the results of operations for OpenALPR Technology from the date of acquisition have been included in the Company’s consolidated statement of operations for the three months ended March 31, 2019. The table below shows the breakdown related to the preliminary purchase price allocation for the OpenALPR Technology acquisition: Assets acquired $ 939,127 Liabilities acquired (387,599 ) Net assets acquired 551,527 Less intangible assets 11,845,073 Consideration paid (see below) (12,396,600 ) Net goodwill recorded $ - Cash consideration $ 7,000,000 Note payable 5,000,000 Common stock consideration 396,600 Total acquisition consideration $ 12,396,600 Hill Employment Agreement On November 14, 2018, concurrent with the execution of the OpenALPR Purchase Agreement, the Company entered into an employment agreement with Matthew Hill (the “Hill Employment Agreement”) which became effective as of March 12, 2019, the closing date of the OpenALPR Purchase Agreement. Pursuant to the Hill Employment Agreement, Mr. Hill began serving as the Company’s Chief Science Officer. The Hill Employment Agreement provides for a term of three years, unless earlier terminated pursuant to the terms thereof, which term renews for additional one-year terms until terminated upon 90-days advance notice. Mr. Hill will earn an annual base salary of $165,000. Either party may terminate the Hill Employment Agreement with or without cause with notice as contemplated by the Hill Employment Agreement, provided however, if Mr. Hill resigns, he shall provide the Company with at least six months prior written notice. The Hill Employment Agreement provides for the payment of severance under certain circumstances as outlined therein. Operations of Combined Entities The following unaudited pro forma combined financial information gives effect to the acquisition of Secure Education and OpenALPR Technology as if they were consummated as of January 1, 2018. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2018 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods. Three Months Ended March 31, 2019 2018 Revenues $ 12,595,218 $ 11,421,765 Net income (loss) $ (2,067,077 ) $ (2,104,936 ) Basic earnings (loss) per share $ (0.12 ) $ (0.16 ) Diluted earnings (loss) per share $ (0.12 ) $ (0.16 ) Basic Number of Shares 19,367,619 15,130,030 Diluted Number of Shares 19,367,619 15,130,030 |
INVESTMENT AT COST AND NOTES RE
INVESTMENT AT COST AND NOTES RECEIVABLE | 3 Months Ended |
Mar. 31, 2019 | |
Investment At Cost And Notes Receivable | |
INVESTMENT AT COST AND NOTES RECEIVABLE | The Company owns a minority interest of 19.1% of Global Public Safety, LLC (“Global Public Safety”). The Company is accounting for this as an investment at cost. The Company recorded an impairment of $262,140 related to the investment in Global Public Safety for the year end December 31, 2018. In February 2018, the Company sold a $2,000,000 promissory note that it had acquired in connection with the acquisition of Rekor Recognition. The current portion of notes receivable was $0 as of March 31, 2019 and December 31, 2018. In connection with the sale, the Company indemnified the unrelated third-party buyer for any amount of principal and interest not paid by LB&B Associates, Inc. |
IDENTIFIABLE INTANGIBLE ASSETS
IDENTIFIABLE INTANGIBLE ASSETS | 3 Months Ended |
Mar. 31, 2019 | |
Identifiable Intangible Assets | |
IDENTIFIABLE INTANGIBLE ASSETS | The following provides a breakdown of identifiable intangible assets as of March 31, 2019: Customer Relationships Marketing Related Technology Based Total Identifiable intangible assets, gross $ 5,588,677 $ 730,000 $ 11,928,485 $ 18,247,162 Accumulated amortization (1,542,535 ) (280,345 ) (114,630 ) (1,937,510 ) Identifiable intangible assets, net $ 4,046,142 $ 449,655 $ 11,813,855 $ 16,309,652 With the acquisition of Secure Education, the Company identified customer relationships and marketing-related intangibles of $386,801. With the acquisition of OpenALPR Technology, the Company identified technology-based intangibles of $11,845,073 in its preliminary purchase price allocation. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 5.7 years and amortization expense amounted to $369,924 and $255,294 for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the estimated annual amortization expense for each of the next five fiscal years and thereafter is as follows: 2019 $ 2,563,497 2020 3,417,996 2021 3,365,794 2022 2,614,122 2023 2,523,612 Thereafter 1,824,631 Total $ 16,309,652 |
SUPPLEMENTAL DISCLOSURES OF CAS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | 3 Months Ended |
Mar. 31, 2019 | |
Supplemental Disclosures Of Cash Flow Information | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | Supplemental disclosures of cash flow information for the three months ended March 31, 2019 and 2018 were as follows: For the Three Months Ended March 31, 2019 2018 Cash paid for interest $ 266,601 $ 59,857 Cash paid for taxes $ - $ - Business Combinations: Current assets $ 939,127 $ - Intangible assets $ 11,845,073 $ 386,001 Acquisition of OpenALPR Technology $ (12,000,000 ) $ - Deferred revenue $ (387,599 ) $ - Issuance of common stock $ (396,600 ) $ (163,332 ) Issuance of common stock warrants $ - $ (123,472 ) Financing: Notes payable $ 21,000,000 $ - Debt discount financing costs $ (2,599,193 ) $ - Extinguishment of debt $ (1,112,609 ) $ - Repayment of notes payable and interest expense, net of debt discount $ (2,515,739 ) $ - Investment in OpenALPR Technology $ (12,000,000 ) $ - Issuance of warrants in conjunction with notes payable $ 705,943 Accounts Payable $ 360,000 $ - Adoption of ASC-842 Lease Accounting: Right-of-use lease asset $ 920,950 $ - Deferred rent $ 29,976 $ - Lease liability $ (950,926 ) $ - On January 5, 2018, April 6, 2018 and July 9, 2018, the Company paid cash dividends of $87,907 to shareholders of record of Series A Preferred Stock as of the end of the previous month. On September 30, 2018, December 31, 2018 and March 31, 2019, the Company accrued dividends of $87,907 to these Preferred Stock shareholders and did not pay dividends in cash. Accrued dividends payable to Series A Preferred Stock shareholders were $263,722 and $175,814 as of March 31, 2019 and December 31, 2018, respectively. On January 5, 2018, April 6, 2018 and July 9, 2018, the Company paid cash dividends of $27,001 to shareholders of record of Series B Preferred Stock as of the end of the previous month. On September 30, 2018, December 31, 2018 and March 31, 2019, the Company accrued dividends of $27,001 to these Preferred Stock shareholders and did not pay dividends in cash. Accrued dividends payable to Series B Preferred Stock shareholders were $81,003 and $54,002 as of March 31, 2019 and December 31, 2018, respectively. |
DEBT
DEBT | 3 Months Ended |
Mar. 31, 2019 | |
Debt | |
DEBT | Line of Credit Global has revolving lines of credit with Wells Fargo Bank National Association (“WFB”) (“Wells Fargo Credit Facilities”). WFB agreed to advance to Global, 90% of all eligible accounts with a maximum facility amount of $5,000,000. Interest is payable under the Wells Fargo Credit Facilities at a monthly rate equal to the Three-Month LIBOR, (as such term is defined under the Wells Fargo Credit Facilities), in effect from time to time plus 3%, plus an additional margin of 3%. Payment of the revolving lines of credit is secured by the accounts receivable of Global. The current term of the Wells Fargo Credit Facilities run through December 31, 2019, with automatic renewal terms of 12 months. WFB or Global may terminate the Wells Fargo Credit Facilities upon at least 60 days’ written notice prior to the last day of the current term. The principal balance as of March 31, 2019 and December 31, 2018 was $2,046,043 and $1,094,766, respectively. As part of the agreements for the Wells Fargo Credit Facilities, Global must maintain certain financial covenants. Global met all such financial covenant requirements for the three months ended March 31, 2019. On November 12, 2017, AOC Key Solutions entered into an Account Purchase Agreement and related agreements (the “AOC Wells Agreement”) with WFB. Pursuant to the AOC Wells Agreement, AOC Key Solutions agreed to sell and assign to WFB all of its Accounts (as such term is defined in Article 9 of the Uniform Commercial Code), constituting accounts arising out of sales of Goods (as such term is defined in Article 9 of the Uniform Commercial Code) or rendition of services that WFB deems to be eligible for borrowing under the AOC Wells Agreement. WFB agreed to advance to AOC Key Solutions, 90% of all eligible accounts with a maximum facility amount of $3,000,000. Interest is payable under the AOC Wells Agreement at a monthly rate equal to the Daily One Month LIBOR, (as such term is defined under the AOC Wells Agreement), in effect from time to time plus 5%. The AOC Wells Agreement also provides for a deficit interest rate equal to the then applicable interest rate plus 50% and a default interest rate equal to the then applicable interest rate or deficit interest rate, plus 50%. The initial term of the AOC Wells Agreement runs through December 31, 2018 (the “Initial Term”), with automatic renewal terms of 12 months (the “Renewal Term”), commencing on the first day after the last day of the Initial Term. The current term of the AOC Wells Agreement runs through December 31, 2019. AOC Key Solutions may terminate the AOC Wells Agreement upon at least 60 days’ prior written notice, but no more than 120 days’ written notice, prior to and effective as of the last day of the Initial Term or the Renewal Term, as the case may be. WFB may terminate the AOC Wells Agreement at any time and for any reason upon 30 days’ written notice or without notice upon the occurrence of an Event of Default (as such term is defined in the AOC Wells Agreement) after the expiration of any grace or cure period. The principal balance as of March 31, 2019 and December 31, 2018 was $368,606 and $566,447, respectively. As part of the AOC Wells Agreement, AOC Key Solutions must maintain certain financial covenants. AOC Key Solutions met all such financial covenant requirements for the three months ended March 31, 2019. Long-Term Debt On March 16, 2016, the Company entered into a Subordinated Note and Warrant Purchase Agreement (the “Avon Road Note Purchase Agreement”) pursuant to which $500,000 in subordinated debt (the "Avon Road Note") was issued by the Company to Avon Road Partners, L.P. (“Avon Road”), an affiliate of Robert Berman, the Company’s President and CEO and a member of the Company’s Board of Directors. The Avon Road Subordinated Note Warrants had an expiration date of March 16, 2019. On March 12, 2019, the $500,000 balance due on the Avon Road Note was retired in its entirety from the proceeds of the 2019 Promissory Notes (see below). On January 25, 2017, pursuant to the terms of its acquisition of Firestorm, the Company issued $1,000,000 in the aggregate of unsecured, subordinated promissory notes with interest payable over five years $500,000 of the notes are payable at an interest rate of 2% and the remaining note is payable at an interest rate of 7%. The notes mature on January 25, 2022. The balance of these notes payable was $947,531 and $938,272, net of unamortized interest, as of March 31, 2019 and December 31 2018, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $52,469 and $61,728, respectively. On April 3, 2018, the Company and Rekor Recognition entered into a transaction pursuant to which an institutional investor (the “2018 Lender”) loaned $2,000,000 to the Company and Rekor Recognition (the “2018 Promissory Note”). The loan was originally due and payable on May 1, 2019 and bears interest at 15% per annum, with a minimum of 15% interest payable if the loan is repaid prior to May 1, 2019. In addition, the Company issued 35,000 shares of common stock to the 2018 Lender, which shares contain piggy-back registration rights. If the shares are not registered on the next selling shareholder registration statement, the Company will be obligated to issue an additional 15,000 shares to the 2018 Lender. Upon the sale of Rekor Recognition or its assets, the 2018 Lender was entitled to receive 7% of any proceeds received by the Company or Rekor Recognition in excess of $5 million (the “Lender’s Participation”). In addition, commencing January 1, 2020, the 2018 Lender shall be paid 7% of Rekor Recognition’s earnings before interest, taxes, depreciation and amortization, less any capital expenditures, which amount would be credited for any payments that might ultimately be paid to the 2018 Lender as its Lender’s Participation, if any. At April 3, 2018, the fair value of shares issued was $126,000. On October 24, 2018, the Company and Rekor Recognition entered into a note amendment with the 2018 Lender by which the maturity date of the note was extended to May 1, 2020 (the “2018 Promissory Note Amendment”). The 2018 Promissory Note Amendment further provided for payment of interest through May 1, 2019, if the principal was repaid before May 1, 2019. At October 24, 2018, an additional $62,500 fee was paid as consideration for extending the maturity date to May 1, 2020 and designated as financing costs related to the 2018 Promissory Note Amendment. Amortized financing cost for the three months ended March 31, 2019 and 2018 was determined to be $31,425 and $96,378, respectively, is included in interest expense. The 2018 Promissory Note has an effective interest rate of 19.5%. On March 12, 2019, the $2,000,000 balance due on the 2018 Promissory Note was retired in its entirety and Rekor paid to the 2018 Lender $1,050,000 of consideration for the Lender’s Participation and $75,000 of interest due through May 1, 2019. All amounts paid were obtained from the proceeds of the 2019 Promissory Notes (see below). The 2018 Lender consideration of $1,050,000 for the Lender’s Participation and unamortized financing costs of $62,609 are recorded as extinguishment of debt of $1,112,609 for the three months ended March 31, 2019. 2019 Promissory Notes On March 12, 2019, Rekor entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology (see Note 4), (the “2019 Lenders”) loaned $20,000,000 to Rekor (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”). The loan is due and payable on March 11, 2021 and bears interest at 16% per annum, of which at least 10% per annum shall be paid in cash. The full remaining portion of all interest, if any, shall accrue and be paid-in-kind. The notes also require a premium, if paid before the maturity date, a $1,000,000 exit fee due at maturity, and compliance with affirmative, negative and financial covenants, including a fixed charge ratio, minimum liquidity and maximum capital expenditures, as defined. Transaction costs were approximately $403,250 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. The loan is secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and are valued at $705,943. The warrants are exercisable commencing March 12, 2019 and expire on March 12, 2024. The 2019 Promissory Notes has an effective interest rate of 24.87%. The principal amounts due for long-term notes payable described above and a minor equipment note payable are shown below as of March 31, 2019: Short-term Long-term Total 2019 $ 34,051 $ - $ 34,051 2020 - 4,665 4,665 2021 - 21,004,959 21,004,959 2022 - 1,005,273 1,005,273 2023 - 10,491 10,491 Total 34,051 22,025,388 22,059,439 Less unamortized interest - (52,469 ) (52,469 ) Less unamortized financing costs - (2,547,968 ) (2,547,968 ) 34,051 19,424,951 19,459,002 Current portion of long-term debt (34,051 ) - (34,051 ) Long-term debt $ - $ 19,424,951 $ 19,424,951 |
INCOME TAXES
INCOME TAXES | 3 Months Ended |
Mar. 31, 2019 | |
Income Taxes | |
INCOME TAXES | The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business. The 2017 Act changes U.S. tax law and includes various provisions that impact our company. The 2017 Act effects our company by changing U.S. tax rates, increasing the Company’s ability to utilize accumulated net operating losses generated after December 31, 2017, and impacts the estimates of our deferred tax assets and liabilities. The Company’s income tax provision for the three months ended March 31, 2019 and 2018 was $11,761 and $0, respectively. The increase in the tax expense is primarily related to state minimum taxes and the state of Texas gross receipts tax. The Company established a valuation allowance against deferred tax assets during 2017 and has continued to maintain a full valuation allowance through the three months ended March 31, 2019. The Company files income tax returns in the United States and in various state and foreign jurisdictions. No U.S. Federal, state or foreign income tax audits were in process as of March 31, 2019. Management has evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets because management believes that it is more-likely-than-not that their benefits will not be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. For the three months ended March 31, 2019 the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The 2015 through 2018 tax years remain subject to examination by the IRS. |
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY | 3 Months Ended |
Mar. 31, 2019 | |
Stockholders' Equity Attributable to Parent [Abstract] | |
STOCKHOLDERS' EQUITY | Common Stock The Company is authorized to issue 30,000,000 shares of common stock, $0.0001 par value. As of March 31, 2019 and December 31, 2018, the issued and outstanding common shares of Rekor were 19,367,619 and 18,767,619, respectively. In January 2018, the Company issued 33,333 shares of Rekor common stock as consideration as part of its acquisition of Secure Education. In April 2018, the Company issued 35,000 shares of Rekor common stock as additional consideration to the 2018 Lender in connection with the 2018 Promissory Note. As part of its acquisition of Brekford on August 29, 2017, the Company assumed warrants to purchase 56,000 shares of Rekor common stock (the “Brekford Warrants”) (see Note 11). Effective October 16, 2018, the Company entered into exchange agreements with holders of the Brekford Warrants pursuant to which the Company issued to the holders an aggregate of 96,924 shares of common stock in exchange for the return of the warrants to the Company for cancellation. On November 1, 2018, the Company issued 4,125,000 shares of common stock through an underwritten public offering at a public offering price of $0.80 per share. Net proceeds to the Company was approximately $2.8 million. In addition, the Company granted underwriters a 45-day option to purchase up to 618,750 additional shares of common stock to cover over-allotment, if any. The underwriters did not exercise this option and the options were cancelled. As part of the consideration to the underwriters, the Company issued to the underwriters warrants to purchase an aggregate of 206,250 shares of common stock, exercisable over a period of five years, at an exercise price of $1.00 per share. The underwriter warrants have a value of approximately $0.2 million and are exercisable commencing April 27, 2019 and expire on October 29, 2023. On December 13, 2018, the Company received a letter from the Nasdaq indicating that the Company is required to maintain a minimum bid price of $1 per share of its common stock. The Company's closing bid price of its common stock had been less than $1 for the previous 30 consecutive business days. As such, the Company was not compliant with the minimum bid price requirements under Nasdaq Listing Rule 5550(a)(2). The letter from Nasdaq provided the Company with a compliance period of 180 calendar days, or until June 11, 2019, to regain compliance with the minimum bid price requirement. If at any time during this 180-day compliance period the closing bid price of the Company’s common stock is at least $1 for a minimum of 10 consecutive business days, then Nasdaq will provide the Company with written confirmation of compliance and the matter will be closed. In the event the Company’s common stock were to be delisted from the Nasdaq, management expects that it would be traded on the OTCQB or OTCQX, which are unorganized, inter-dealer, over-the-counter markets which provides significantly less liquidity than the Nasdaq or other national securities exchanges. For the year ended December 31, 2018, the Company issued 13,998 shares of Rekor common stock related to the exercise of common stock options. On February 15, 2019, the Company entered into Amendment No. 1 to the OpenALPR Purchase Agreement, pursuant to which the Company agreed to issue 600,000 shares of Rekor common stock as partial consideration for the acquisition of the assets of OpenALPR Technology. On March 12, 2019, the Company issued 600,000 shares of Rekor common stock pursuant to the acquisition of OpenALPR Technology. For the three months ended March 31, 2019 and 2018, the Company issued 600,000 and 33,333 shares of Rekor common stock, respectively. For the three months ended March 31, 2019 and 2018, no options were exercised related to common stock. Preferred Stock The Company is authorized to issue up to 2,000,000 shares of preferred stock, $0.0001 par value. The Company’s preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into, and issued in, designated series from time to time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the power to determine the relative powers, preferences and rights of each series of preferred stock. Series A Cumulative Convertible Redeemable Preferred Stock Of the 2,000,000 authorized shares of preferred stock, 505,000 shares are designated as $0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock are entitled to quarterly dividends of 7.0% per annum per share. The holders of Series A Preferred Stock have a put right to convert each share into common stock at an initial conversion price and a specified price which increases annually based on the passage of time beginning in November 2019. The holders of Series A Preferred Stock also have a put right after 60 months from the issuance date to redeem any or all of the Series A Preferred Stock at a redemption price of $15.00 per share plus any accrued but unpaid dividends. The Company has a call right after 36 months from the issuance date to redeem all of the Series A Preferred Stock at a redemption price which increases annually based on the passage of time beginning in November 2019. The Series A Preferred Stock contains an automatic conversion feature based on a qualified initial public offering in excess of $30,000,000 or a written agreement by at least two-thirds of the holders of Series A Preferred Stock at an initial conversion price and a specified price which increases annually based on the passage of time beginning in November 2016. Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying consolidated balance sheets as of March 31, 2019 and December 31, 2018. The Company adjusts the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value is recorded through additional-paid-in-capital of $178,501 and $155,343 for the three months ended March 31, 2019 and March 31, 2018, respectively. As of March 31, 2019 and December 31, 2018, 502,327 shares of Series A Preferred Stock were issued and outstanding. The holders of Series A Preferred Stock are entitled to quarterly cash dividends of $0.175 (7% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. On January 5, 2018, April 6, 2018 and July 9, 2018, the Company paid cash dividends of $87,907 to shareholders of record of Series A Preferred Stock as of the end of the previous month. On September 30, 2018, December 31, 2018 and March 31, 2019, the Company accrued dividends of $87,907 to Series A Preferred Stock shareholders of record. Accrued dividends payable to Series A Preferred Stock shareholders were $263,722 and $175,814 as of March 31, 2019 and December 31, 2018, respectively, and are included in accrued expenses on the accompanying condensed consolidated balance sheets. On February 15, 2019, the Company’s Series A Preferred Stock, which had been designated as securities trading on the OTC Markets OTCQX exchange, was transferred to being designated as trading on the OTC Markets OTCQB exchange. Series B Cumulative Convertible Preferred Stock Of the 2,000,000 authorized shares of preferred stock, 240,861 shares are designated as $0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock"). The Series B Preferred Stock has a conversion price of $5.00 per share. Each Series B Preferred Stock has an automatic conversion feature based on the share price of the Company. The holders of Series B Preferred Stock are entitled to quarterly cash dividends of 1.121% (4.484% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. On January 5, 2018, April 6, 2018 and July 9, 2018, the Company paid cash dividends of $27,001 to shareholders of record of Series B Preferred Stock as of the end of the previous month. On September 30, 2018, December 31, 2018 and March 31, 2019, the Company accrued dividends of $27,001 to Series B Preferred Stock shareholders of record. Accrued dividends payable to Series B Preferred Stock shareholders were $81,003 and $54,002 as of March 31, 2019 and December 31, 2018, respectively, and are included in accrued expenses on the accompanying condensed consolidated balance sheets. Warrants The Company has a total of 3,973,163 and 1,473,163 warrants issued and outstanding as of March 31, 2019 and December 31, 2018, respectively. These warrants are exercisable and convertible for a total of 3,714,491 and 1,214,491 shares of Rekor common stock as of March 31, 2019 and December 31, 2018, respectively. On February 15, 2019, the Company’s Unit Warrants (see Note 10) which had been designated as securities trading on the OTC Markets OTCQX exchange were transferred to the OTC Markets OTCQB exchange. As part of its acquisition of Brekford on August 29, 2017, the Company assumed Brekford’s obligations with respect to the Brekford Warrants. The exercise price for the Brekford Warrants was $7.50 and they expired on March 31, 2020. Effective October 16, 2018, the Company entered into exchange agreements with holders of the Brekford Warrants pursuant to which the Company issued to the holders an aggregate of 96,924 shares of common stock in exchange for the return of the warrants to the Company for cancellation. As of March 31, 2019 and December 31, 2018, no Brekford Warrants were outstanding. (See Note 11). As part of a Regulation A Offering in fiscal year 2016 and 2017, the Company issued 502,327 Unit Warrants to the holders of Series A Preferred Stock. The exercise price for these Unit Warrants is $1.03 and they are convertible into a total of 243,655 shares of Rekor common stock. The Unit Warrants expire on November 23, 2023. As of March 31, 2019, and December 31, 2018, there are 502,327 Unit Warrants outstanding. On March 16, 2016, the Company entered into the Avon Road Note Purchase Agreement, as more fully described in Note 8 above, pursuant to which the Company issued warrants to purchase 121,247 shares of its common stock to Avon Road, an affiliate of Robert Berman, Rekor’s President and CEO and a member of the Company’s Board of Directors. These warrants were exercised on December 11, 2017 for proceeds of $125,006 and there were no Avon Road Subordinated Note Warrants outstanding as of March 31, 2019 and December 31, 2018. As part of the acquisition of Firestorm on January 24, 2017, the Company issued: warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $2.5744 per share; and warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $3.6083 per share (the “Firestorm Warrants”). The expiration date of the Firestorm Warrants is January 24, 2022. As of March 31, 2019 and December 31, 2018, there were 631,254 Firestorm Warrants outstanding. Pursuant to its acquisition of BC Management on December 31, 2017, the Company issued: warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $5.44 per share; and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $6.53 per share (the “BC Management Warrants”). The expiration date of the BC Management Warrants is December 31, 2022. As of March 31, 2019 and December 31, 2018, there were 66,666 BC Management Warrants outstanding. Pursuant to its acquisition of Secure Education on January 1, 2018, the Company issued: warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $5.44 per share; and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $6.53 per share (the “Secure Education Warrants”). The expiration date of the Secure Education Warrants is January 1, 2023. As of March 31, 2019 and December 31, 2018, there were 66,666 Secure Education Warrants outstanding. On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock, exercisable over a period of five years, at an exercise price of $1.00 per share. These warrants have a value of approximately $0.2 million and are exercisable commencing April 27, 2019 and expire on October 29, 2023. As of March 31, 2019 and December 31, 2018, all 206,250 warrants related to the 2018 underwritten public offering remain outstanding. On March 12, 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock, which are immediately exercisable at an exercise price of $0.74 per share, to certain individuals and entities (see Note 8). Of the 2,500,000 warrants, 625,000 were issued as partial consideration for its acquisition of certain assets of OpenALPR Technology (see Note 4). |
WARRANT DERIVATIVE LIABILITY
WARRANT DERIVATIVE LIABILITY | 3 Months Ended |
Mar. 31, 2019 | |
Warrant Derivative Liability | |
WARRANT DERIVATIVE LIABILITY | As part of its acquisition of Rekor Recognition on August 29, 2017, the Company assumed the Brekford Warrants to purchase 56,000 shares of its common stock (see Note 10). The Brekford Warrants permit the holder to purchase 56,000 shares of the Company’s common stock with an exercise price of $7.50 per share. The Brekford Warrants exercise price is subject to anti-dilution adjustments that allow for its reduction in the event the Company subsequently issues equity securities, including shares of common stock or any security convertible or exchangeable for shares of common stock, for no consideration or for consideration less than $7.50 a share. The Company accounted for the conversion option of the Brekford Warrants in accordance with ASC Topic 815. Accordingly, the conversion option is not considered to be solely indexed to the Company’s own stock and, as such, was recorded as a liability. Effective October 16, 2018, the Company entered into exchange agreements with holders of the Brekford Warrants pursuant to which the Company issued to the holders an aggregate of 96,924 shares of common stock in exchange for the return of the warrants to the Company for cancellation and extinguishment of the warrant liability. |
COMMON STOCK OPTION AGREEMENT
COMMON STOCK OPTION AGREEMENT | 3 Months Ended |
Mar. 31, 2019 | |
Common Stock Option Agreement | |
COMMON STOCK OPTION AGREEMENT | On March 16, 2016, two stockholders of the Company entered into an option agreement with Avon Road (collectively, the “Avon Road Parties”). Under the terms of this agreement Avon Road paid the stockholders $10,000 each (a total of $20,000) for the right to purchase, on a simultaneous and pro-rata basis, up to 4,318,856 shares of Rekor’s common stock owned by those two shareholders at $0.52 per share, which was determined to be the fair value. The option agreement had a two-year term which would have expired on March 16, 2018. On September 7, 2017, the Avon Road Parties entered into an amended and restated option agreement which extended the right to exercise the option up to and including March 21, 2019 (the “Amended and Restated Option Agreement”). Pursuant to the Amended and Restated Option Agreement, Avon Road exercised the option to purchase 4,318,856 shares of Rekor’s common stock. |
OPERATING LEASES
OPERATING LEASES | 3 Months Ended |
Mar. 31, 2019 | |
Notes to Financial Statements | |
OPERATING LEASES | The Company leases facilities for office space in various locations throughout the United States. The office leases have remaining lease terms of one to five years, some of which include options to terminate within one year. Operating lease expense Cash paid for amounts included in the measurement of operating lease liabilities was $$38,735 for the three months ended March 31, 2019. There were no right-of-use lease assets obtained in exchange for lease obligations for the three months ended March 31, 2019. Supplemental balance sheet information related to leases was as follows: March 31, 2019 Operating lease right-of-use lease assets $ 857,624 Lease liability, short term $ 201,918 Lease liability, long term 717,681 Total operating lease liabilities $ 919,599 Weighted Average Remaining Lease Term - operating leases 4.5 Weighted Average Discount Rate - operating leases 9 % Maturities of lease liabilities were as follows: For the Years Ended December 31, 2019 (April to December) $ 187,826 2020 302,954 2021 217,272 2022 158,113 2023 159,288 2024 81,558 Total lease payments 1,107,012 Less imputed interest 187,413 Maturities of lease liabilities $ 919,599 |
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES | 3 Months Ended |
Mar. 31, 2019 | |
Commitments And Contingencies | |
COMMITMENTS AND CONTINGENCIES | NeoSystems The Company planned to acquire NeoSystems LLC (“NeoSystems”) under an agreement entered into on November 16, 2017. The consummation of the merger was subject to, among other things, the completion of the Qualifying Offering by February 28, 2018. On March 7, 2018, the Company received notice of termination of the Agreement and Plan of Merger (the “NeoSystems Merger Agreement”). The stated basis of termination by NeoSystems was due to the Company’s failure to complete a Qualifying Offering, as defined in the NeoSystems Merger Agreement, by February 28, 2018. The terms of the NeoSystems Merger Agreement provided that upon termination, the Company was required to pay certain fees and expenses of legal counsel, financial advisors, investment bankers and accountants. On November 29, 2018, the Company paid NeoSystems $225,000 to cover such fees and expenses, which were recorded as a selling, general and administrative expense. OpenALPR Asset Purchase Agreement On November 14, 2018, the Company entered into the OpenALPR Purchase Agreement. As consideration for the OpenALPR Acquisition, the Company agreed to pay $15,000,000, subject to certain adjustments, provided that OpenALPR Technology could elect to receive up to 1,000,000 shares of the Company’s common stock, par value, $0.0001 per share, in lieu of up to $5,000,000 in cash valued at a price per share of $5. The OpenALPR Purchase Agreement was subsequently amended and on March 12, 2019, the Company completed the acquisition of certain assets of OpenALPR Technology and assumed certaim liabilities as described in Note 4. |
EQUITY INCENTIVE PLAN
EQUITY INCENTIVE PLAN | 3 Months Ended |
Mar. 31, 2019 | |
Equity Incentive Plan | |
EQUITY INCENTIVE PLAN | In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at 3,000,000 shares. Stock Options Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three to four years with a contractual term of 10 years. The 2017 Plan is administered by the Administrator, which is currently the Board of Directors of the Company. The Administrator has the exclusive authority, subject to the terms and conditions set forth in the 2017 Plan, to determine all matters relating to awards under the 2017 Plan, including the selection of individuals to be granted an award, the type of award, the number of shares of Rekor common stock subject to an award, and all terms, conditions, restrictions and limitations, if any, including, without limitation, vesting, acceleration of vesting, exercisability, termination, substitution, cancellation, forfeiture, or repurchase of an award and the terms of any instrument that evidences the award. The Company has also designed the 2017 Plan to include a number of provisions that Rekor’s management believes promote best practices by reinforcing the alignment of equity compensation arrangements for nonemployee directors, officers, employees, consultants and stockholders’ interests. These provisions include, but are not limited to, the following: No Discounted Awards No Repricing Without Stockholder Approval No Evergreen Provision No Automatic Grants No Transferability. No Tax Gross-Ups. No Liberal Change-in-Control Definition. “Double-trigger” Change in Control Vesting. No Dividends on Unearned Performance Awards Limitation on Amendments. Clawbacks. When making an award under the 2017 Plan, the Administrator may designate the award as “qualified performance-based compensation,” which means that performance criteria must be satisfied in order for an employee to be paid the award. Qualified performance-based compensation may be made in the form of restricted common stock, restricted stock units, common stock options, performance shares, performance units or other stock equivalents. The 2017 Plan includes the performance criteria the Administrator has adopted, subject to stockholder approval, for a “qualified performance-based compensation” award. A summary of stock option activity under the Company’s 2017 Plan for the three months ended March 31, 2019 is as follows: Number of Shares Subject to Option Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding Balance at January 1, 2018 1,695,375 $ 2.19 9.26 Granted 48,499 0.73 9.85 Exercised (13,998 ) 1.68 9.50 Forfeited (450,633 ) 1.82 8.71 Expired (51,686 ) 1.36 8.53 Outstanding Balance at December 31, 2018 1,227,557 $ 2.13 8.39 $ - Granted 130,000 0.68 9.99 Exercised - - - Forfeited - - - Expired (212,100 ) 1.55 8.08 Outstanding Balance at March 31, 2019 1,145,457 $ 2.08 8.41 $ 2,600 Exercisable at March 31, 2019 732,364 $ 1.87 8.21 $ 800 Vested and expected to vest at March 31, 2019 1,021,529 $ 2.03 8.37 $ 2,600 Stock compensation expense for the three months ended March 2019 and 2018 was $62,852 and $112,455, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The weighted average grant date fair value of options granted for the three months ended March 31, 2019 and 2018 was $0.68 and $2.21, respectively. The intrinsic value of the stock options granted during the three months ended March 31, 2019 was $2,600. The total fair value of shares that became vested after grant during the three months ended March 31, 2019 and 2018 was $512,657 As of March 31, 2019, there was $422,097 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over a weighted average period of 1.56 years. |
EMPLOYEE BENEFIT PLAN
EMPLOYEE BENEFIT PLAN | 3 Months Ended |
Mar. 31, 2019 | |
Retirement Benefits [Abstract] | |
EMPLOYEE BENEFIT PLAN | AOC Key Solutions has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code (the “Code”) (the “AOC 401(k) Plan”) which was amended on January 1, 2013, as required by the Code. Pursuant to the amended AOC 401(k) Plan, AOC Key Solutions will make nondiscretionary “safe harbor” matching contributions for all participants of 100% of the participant’s salary deferrals up to 3%, and 50% of deferrals up to the next 2%, of the participant’s compensation. Rekor Recognition has a defined contribution savings plan under Section 401(k) of the Code (the “Rekor Recognition 401(k) Plan”). The Rekor Recognition 401(k) Plan is a defined contribution plan, which covers substantially all U.S.-based employees who have completed three months of service. The Rekor Recognition 401(k) Plan provides that Rekor Recognition will match 50% of the participant salary deferrals up to 3% of a participant’s compensation for all participants. GCP also maintains a 401(k) plan (the “GCP 401(k) Plan”), which was amended September 15, 2014. However, GCP has not historically made matching contributions to the GCP 401(k) Plan. On January 1, 2019, the Company established the Novume Solutions, Inc. 401(k) Plan (the “Novume 401(k) Plan”), a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan, and the AOC 401(k) Plan, the Rekor Recognition 401(k) Plan, and the GCP 401(k) Plan were amended and merged into the Novume 401(k) Plan. Employees that satisfied the eligibility requirements became participants in the Novume 401(k) Plan. The Company contributes an amount equal to the sum of 100% of a participant’s elective deferrals that do not exceed 1% of participant’s compensation, plus 50% of the participant’s elective deferrals that exceed 1% of the participants compensation, but do not exceed 6% of the participant’s compensation. Employee contributions are fully vested and matching contributions are subject to a two-year service vesting schedule. The amount of contributions recorded by the Company under these plans during the three months ended March 31, 2019 and 2018 was $88,571 and $45,531, respectively. |
INVENTORY
INVENTORY | 3 Months Ended |
Mar. 31, 2019 | |
Inventory Disclosure [Abstract] | |
INVENTORY | As of March 31, 2019 and December 31, 2018, inventory consisted entirely of parts of $120,191 and $72,702, respectively. |
EARNINGS (LOSS) PER SHARE
EARNINGS (LOSS) PER SHARE | 3 Months Ended |
Mar. 31, 2019 | |
Earnings Loss Per Share | |
EARNINGS (LOSS) PER SHARE | The following table provides information relating to the calculation of earnings (loss) per common share: Three Months Ended March 31, 2019 2018 Basic and diluted (loss) earnings per share Net (loss) earnings from continuing operations $ (2,875,199 ) $ (2,193,844 ) Less: preferred stock accretion (178,501 ) (155,343 ) Less: preferred stock dividends (114,908 ) (114,908 ) Net (loss) attributable to shareholders (3,168,608 ) (2,464,095 ) Weighted average common shares outstanding - basic 18,800,496 14,496,697 Basic (loss) earnings per share $ (0.17 ) $ (0.17 ) Weighted average common shares outstanding - diluted 18,800,496 14,496,697 Diluted (loss) earnings per share $ (0.17 ) $ (0.17 ) Common stock equivalents excluded due to anti-dilutive effect 6,316,157 3,913,995 As the Company had a net loss for the three months ended March 31, 2019, the following 6,316,157 potentially dilutive securities were excluded from diluted loss per share: 3,714,491 for outstanding warrants, 974,487 related to the Series A Preferred Stock, 481,722 related to the Series B Preferred Stock and 1,145,457 related to outstanding options. As the Company had a net loss for the three months ended March 31, 2018, the following potentially 3,913,995 dilutive securities were excluded from diluted loss per share: 917,950 for outstanding warrants, 974,487 related to the Series A Preferred Stock, 481,722 related to the Series B Preferred Stock and 1,539,836 related to outstanding options. (Loss) Earnings Per Share under Two – Class Method The Series A Preferred Stock and Series B Preferred Stock have the non-forfeitable right to participate on an as converted basis at the conversion rate then in effect in any common stock dividends declared and, as such, is considered a participating security. The Series A Preferred Stock and Series B Preferred Stock are included in the computation of basic and diluted loss per share pursuant to the two-class method. Holders of the Series A Preferred Stock and Series B Preferred Stock do not participate in undistributed net losses because they are not contractually obligated to do so. The computation of diluted (loss) earnings per share attributable to common stockholders reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock that are dilutive were exercised or converted into shares of common stock (or resulted in the issuance of shares of common stock) and would then share in our earnings. During the periods in which the Company records a loss attributable to common stockholders, securities would not be dilutive to net loss per share and conversion into shares of common stock is assumed not to occur. The following table provides a reconciliation of net (loss) to preferred shareholders and common stockholders for purposes of computing net (loss) per share for the three months ended March 31, 2019 and 2018: Three Months Ended March 31, 2019 2018 Numerator: Net (loss) earnings from continuing operations $ (2,875,199 ) $ (2,193,844 ) Less: preferred stock accretion (178,501 ) (155,343 ) Less: preferred stock dividends (114,908 ) (114,908 ) Net (loss) attributable to shareholders $ (3,168,608 ) $ (2,464,095 ) Denominator (basic): Weighted average common shares outstanding 18,800,496 14,496,697 Participating securities - Series A preferred stock 974,487 974,487 Participating securities - Series B preferred stock 481,722 481,722 Weighted average shares outstanding 20,256,705 15,952,906 Loss per common share - basic under two-class method $ (0.16 ) $ (0.15 ) Denominator (diluted): Weighted average common shares outstanding 18,800,496 14,496,697 Participating securities - Series A preferred stock 974,487 974,487 Participating securities - Series B preferred stock 481,722 481,722 Weighted average shares outstanding 20,256,705 15,952,906 loss per common share - basic under two-class method $ (0.16 ) $ (0.15 ) |
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS | 3 Months Ended |
Mar. 31, 2019 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | Renaming of Novume Solutions, Inc. to Rekor Systems, Inc. and Amendment to Articles of Incorporation or Bylaws As previously reported by the Company in its Current Report on Form 8-K filed with the SEC on April 30, 2019, on April 26, 2019, Novume Solutions, Inc. changed its legal name (the “Name Change”) to Rekor Systems, Inc. by filing with the Secretary of State of the State of Delaware an amendment (the “Certificate of Amendment”) to its Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”). The Board of Directors of the Company (the “Board”) approved the Name Change pursuant to Section 242 of the General Corporation Law of the State of Delaware, under which stockholder approval is not required to effect a corporate name change. The Board also adopted the Amended and Restated Bylaws of the Company (the “Amended Bylaws”) to amend and restate the Company’s existing Amended and Restated Bylaws (the “Bylaws”) to reflect the Name Change, effective upon the filing of the Certificate of Amendment with the Secretary of State of the State of Delaware. The Name Change does not affect the rights of the Company’s stockholders, and except for the Name Change, there were no changes to the Certificate of Incorporation or By-Laws. In connection with the Name Change, the Company changed: the ticker symbol for its common stock on the Nasdaq Stock Market to “REKR” and the CUSIP number for the common stock to 759419 104; the ticker symbol for its Series A Preferred Stock on the OTC Markets OTCQB exchange to “REKRP” and the CUSIP number for the Series A Preferred Stock to 759419 203; and the ticker symbol for Unit Warrants on the OTC Markets OTCQB exchange to “REKRW” and the CUSIP number for the Unit Warrants to 759419 112. The Company also changed its website address to www.rekorsystems.com Columbia, Maryland Lease On May 9, 2019, the Company entered into a sublease agreement (the “Sublease”) with Cardinal Health 121, LLC (the “Sublandlord”) pursuant to which the Company will lease approximately 8,738 rentable square feet located at 7172 Columbia Gateway Driveway, Columbia, Maryland 21046. The term of the Sublease shall commence on the date Sublandlord tenders possession of the premises to the Company and shall expire August 31, 2021 (the “Termination Date”), unless sooner terminated as provided in the Sublease. The base rent will be $12,014.75 per month in the first year of the lease, $12,495.34 per month during the second year of the lease, and $12,997.78 per month in the third year of the lease through the Termination Date. The base rent includes the Company’s proportionate share of operating expense increases, real estate taxes and utility charges. The Sublease contains customary default and indemnification provisions. The Company is required under the terms of the Sublease to maintain customary insurance policies and to deposit security with Sublandlord. |
SUMMARY OF SIGNIFICANT ACCOUN_2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) | 3 Months Ended |
Mar. 31, 2019 | |
Accounting Policies [Abstract] | |
Principles of Consolidation | The consolidated financial statements include the accounts of Rekor, the parent company, and its wholly owned subsidiaries: Rekor Recognition, OpenALPR, AOC Key Solutions, Global and Firestorm. The financial results of OpenALPR are included in the results of operations beginning as of March 12, 2019 (see Note 4). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. All necessary adjustments are of a normal, recurring nature. |
Going Concern Assessment | For all annual and interim periods, management will assess going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans and external bank lines of credit, to operate for a period of at least one year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period. The Company has generated losses since its inception in August 2017 and has relied on cash on hand, external bank lines of credit, the sale of a note, debt financing and a public offering of its common stock to support cashflow from operations. The Company attributes losses to merger costs, public company corporate overhead and investments made by some of its subsidiary operations. As of, and for the three months ended March 31, 2019, the Company had working capital of approximately $4.8 million and a net loss of approximately $2.9 million. The Company’s net cash position was increased by approximately $4 million in March 2019 by the issuance of $20 million senior secured notes, of which $5 million was non-cash, offset by $7 million of cash paid for the acquisition of OpenALPR Technology, and approximately $4 million related to the extinguishment of debt and associated fees (see Notes 4 and 8). Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections, for one year from the date of the filing of the consolidated financial statements in this 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, cash on hand and working capital. 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. |
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. Rekor Recognition makes collections on behalf of certain client jurisdictions. Cash balances designated for these client jurisdictions as of March 31, 2019 and December 31, 2018 were $577,408 and $608,557, respectively, and correspond to equal amounts of related accounts payable. |
Accounts Receivable and Allowance for Doubtful Accounts | Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its clients’ financial condition, and the Company generally does not require collateral. Management reviews accounts receivable to determine if any receivables will potentially be uncollectible. Factors considered in the determination include, among other factors, number of days an invoice is past due, client historical trends, available credit ratings information, other financial data and the overall economic environment. Collection agencies may also be utilized if management so determines. The Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. The Company also considers recording as an additional allowance a certain percentage of aged accounts receivable, based on historical experience and the Company’s assessment of the general financial conditions affecting its customer base. If actual collection experience changes, revisions to the allowance may be required. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. Based on the information available, the Company determined that an allowance for loss of $45,560 and $24,405 was required as of March 31, 2019 and December 31, 2018, respectively. Accounts receivable as of March 31, 2019 and December 31, 2018 included $1,672,178 and $1,124,705 in unbilled contracts, respectively, related to work performed in the period in which the receivable was recorded. The amounts were billed in the subsequent period. |
Inventory | Inventory principally consists of parts held temporarily until installed for service. Inventory is valued at the lower of cost or market value. The cost is determined by the lower of first-in, first-out (“FIFO”) method, while market value is determined by replacement cost for components and replacement parts. |
Other Current Assets, Net | Other assets are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. Other assets includes a balance due of $134,818 incurred in connection with a prior financing activity. The balance due remains outstanding as of March 31, 2019 and the Company continues to carry a valuation allowance of $134,818 as of March 31, 2019. |
Property and Equipment | The cost of furniture and fixtures and equipment is depreciated over the useful lives of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the lease. Depreciation and amortization is recorded on the straight-line basis. The range of estimated useful lives used for computing depreciation are as follows: Furniture and fixtures 2 - 10 years Office equipment 2 - 5 years Leasehold improvements 3 - 15 years Internally-developed software 3 - 5 years Automobiles 3 - 5 years Camera systems 3 years The Company capitalizes eligible costs related to internally-developed software which were incurred during the application development stage, in accordance with ASC 985-20. In accordance with ASC 985-20, capitalized internally-developed software costs, net, not yet placed in service were $1,108,157 and $913,455 as of March 31, 2019 and December 31, 2018, respectively. The Company anticipates placing this internally-developed software into service in the second quarter of 2019. Repairs and maintenance are expensed as incurred. Expenditures for additions, improvements and replacements are capitalized. Depreciation and amortization expense for the three months ended March 31, 2019 and 2018 was $71,148 and $82,039, respectively. |
Business Combination | Management conducts a valuation analysis on the tangible and intangible assets acquired and liabilities assumed at the acquisition date thereof. During the measurement period, which may be up to one year from the Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company allocates a portion of the purchase price to the fair value of identifiable intangible assets. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The Company recorded intangible assets for the acquisitions that occurred in 2018 and 2019. The Secure Education Consultants, Inc. (“Secure Education”) and OpenALPR Technology acquisitions were business combinations, which created both book and tax bases in non-goodwill intangible assets. Secure Education’s acquisition resulted in $0.4 The acquisition of OpenALPR Technology resulted in $11.8 million of technology-based intangibles. |
Goodwill and Other Intangibles | In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment, if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually as of October 1, and whenever indicators of impairment exist. The fair value of intangible assets is compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. No impairments have been recorded through March 31, 2019. Acquired identifiable intangible assets are amortized over the following periods: Acquired intangible Asset Amortization Basis Expected Life (years) Customer-Related Straight-line basis 5-15 Marketing-Related Straight-line basis 4 Technology-Based In line with underlying cash flows or straight-line basis 3-5 |
Revenue Recognition | The Company recognizes revenues for the provision of services when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, the fee is fixed or determinable and the collectability of the related revenue is reasonably assured. The Company principally derives revenues from fees for services generated on a project-by-project basis. Revenues for time-and-materials contracts are recognized based on the number of hours worked by the employees or consultants at an agreed-upon rate per hour set forth in the Company’s contracts or purchase orders. Revenues related to firm-fixed-price contracts are primarily recognized upon completion of the project as these projects are typically short-term in nature. Revenue from the sale of individual franchises is recognized when the contract is signed and collectability is assured, unless the franchisee is required to perform certain training before operations commence. The franchisor has no obligation to the franchisee relating to store development and the franchisee is considered operational at the time the franchise agreement is signed or when required training is completed, if applicable. Royalties from individual franchises are earned based upon the terms in the franchising agreement, which are generally the greater of $1,000 or 8% of the franchisee’s monthly gross sales. For automated traffic safety enforcement revenue, the Company recognizes revenue when the required collection efforts, from citizens, are completed and posted to the municipality’s account. The respective municipality is then billed depending on the terms of the respective contract, typically 15 days after the preceding month while collections are reconciled. For contracts where the Company receives a percentage of collected fines, revenue is calculated based upon the posted payments from citizens multiplied by the Company’s contractual percentage. For contracts where the Company receives a specific, fixed monthly fee, regardless of citations issued or collected, revenue is recorded once the amount collected from citizens exceeds the monthly fee per camera. Rekor Recognition’s fixed-fee contracts typically have a revenue neutral provision whereby the municipality’s payment to Rekor Recognition cannot exceed amounts collected from citizens within a given month. OpenALPR generates revenue through a variety of services and products. Software license revenue is recognized at the time of delivery, while related maintenance service revenue is recognized over the period of performance. Cloud service software license revenue is offered as a fixed quantity over a specified term, for which revenue is recognized ratably. |
Advertising | The Company expenses all non-direct-response advertising costs as incurred. Such costs were not material for the three months ended March 31, 2019 and 2018. |
Use of Estimates | Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual amounts may differ from these estimates. On an on-going basis, the Company evaluates its estimates, including those related to collectability of accounts receivable, fair value of debt and equity instruments, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. |
Income Taxes | Income tax expense consists of U.S. federal and state income taxes. The Company is required to pay income taxes in certain state jurisdictions. Historically, AOC Key Solutions and GCP initially elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, neither AOC Key Solutions nor GCP paid federal corporate income tax, and in most instances state income tax, on its taxable income. AOC Key Solutions revoked its S Corporation election upon the March 15, 2016 merger with KeyStone and GCP revoked its S Corporation election upon the acquisition by the Company, and are therefore, subject to corporate income taxes. Firestorm is a single-member LLC with KeyStone as the sole member. The Company uses the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This method requires an asset and liability approach for the recognition of deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management has evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, except for the any deferred tax liability associated with indefinite-lived goodwill or non-goodwill intangibles, because management believes that it is more-likely-than-not that their benefits will not be realized in future periods. The Company will continue to evaluate its net deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. The tax effects of uncertain tax positions are recognized in the consolidated financial statements only if the position is more-likely-than-not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized. It is the Company’s accounting policy is to account for ASC 740-10-related penalties and interest as a component of the income tax provision in the consolidated statements of operations and comprehensive loss. As of March 31, 2019 and December 31, 2018, the Company’s evaluation revealed no uncertain tax positions that would have a material impact on the financial statements. The 2016 through 2018 tax years remain subject to examination by the IRS, as of March 31, 2019. Management does not believe that any reasonably possible changes will occur within the next twelve months that will have a material impact on the financial statements. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) was enacted, which changes U.S. tax law and includes various provisions that impact the Company. The 2017 Act effects the Company by changing U.S. tax rates, increasing the Company’s ability to use accumulated net operating losses generated after December 31, 2017, and limiting the Company’s ability to deduct interest. |
Equity-Based Compensation | The Company recognizes equity-based compensation based on the grant-date fair value of the award on a straight-line basis over the requisite service period, net of estimated forfeitures. Total equity-based compensation expense included in selling, general and administrative expenses in the accompanying consolidated statements of operations for the three months ended March 31, 2019 and 2018 was $62,852 and $112,455, respectively. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires the use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award. The fair value of each option granted has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following assumptions during the three months ended March 31, 2019: For the Three Months Ended March 31, 2019 Risk-free interest rate 2.18% Expected term 2.5 - 6.0 years Volatility 83.80% Dividend yield 0% Estimated annual forfeiture rate at time of grant 0 - 30% Risk-Free Interest Rate – Expected Term – Expected Volatility – Dividend Yield – Forfeiture Rate – |
Fair Value of Financial Instruments | The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value as of March 31, 2019 and December 31, 2018 because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value as of March 31, 2019 and December 31, 2018, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors. The determination of fair value is based upon the fair value framework established by Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures Level 1 – Level 2 – Level 3 – 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 on a recurring and non-recurring basis, 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, 2019. There were no changes in levels during the three months ended March 31, 2019 and 2018. |
Concentrations of Credit Risk | Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and accounts receivable. Concentrations of credit risk with respect to accounts receivable are minimal due to the collection history and due to the nature of the Company’s client base. The Company limits its credit risk with respect to cash by maintaining cash balances with high-quality financial institutions. At times, the Company’s cash may exceed U.S. federally-insured limits, and as of March 31, 2019 and December 31, 2018, the Company had $4,500,382 and $2,176,907, respectively, of cash and cash equivalents on deposit that exceeded the federally-insured limit. |
Earnings per Share | Basic earnings per share, or EPS, is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and potentially dilutive securities outstanding during the period, except for periods of net loss for which no potentially dilutive securities are included because their effect would be anti-dilutive. Potentially dilutive securities consist of common stock issuable upon exercise of stock options or warrants using the treasury stock method. Potentially dilutive securities issuable upon conversion of the Series A and Series B Preferred Stock (see Note 10) are calculated using the if-converted method. The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. Participating securities consist of preferred stock that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common stockholders. |
Segment Reporting | The Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting The Company’s Technology Group includes the wholly owned subsidiaries Rekor Recognition and OpenALPR. The Professional Services Group includes wholly owned subsidiaries AOC Key Solutions, Global and Firestorm. See Note 3 for further details on the Company’s reportable segments. |
New Accounting Pronouncements | Recently Issued Accounting Pronouncements Not Yet Adopted In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments There are currently no other accounting standards that have been issued, but not yet adopted, that will have a significant impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption. Recently Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . Leases (Topic 842): Targeted Improvements In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers Practical Expedients Election Costs to Obtain and Fulfill a Contract Revenue Recognition Revenue is recognized when control of the goods and services provided are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services using the following steps: ● Identification of the contract, or contracts, with a customer ● Identification of the performance obligations in the contract ● Determination of the transaction price ● Allocation of the transaction price to the performance obligations in the contract ● Recognition of revenue when, or as, performance obligations are satisfied The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Disaggregated Revenue The Company’s revenue by contract type is as follows: For the Three Months Ended March 31, 2019 2018 Revenues Time and materials $ 10,799,306 $ 10,321,152 Fixed price 817,265 874,202 Franchising 9,650 23,415 Total revenue $ 11,626,221 $ 11,218,769 Performance Obligations ● Time and Material Services ● Firm-Fixed-Price Services ● Franchising Services Accounts Receivable, Net The Company reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value. The estimates are based on an analysis of past due receivables, historical bad debt trends, current economic conditions, and customer specific information. After the Company has exhausted all collection efforts, the outstanding receivable balance relating to services provided is written off against the allowance. Additions to the provision for bad debt are charged to expense. The Company determined that an allowance for loss of $45,560 and $24,405 was required as of March 31, 2019 and December 31, 2018, respectively. In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting |
SUMMARY OF SIGNIFICANT ACCOUN_3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Summary Of Significant Accounting Policies Tables Abstract | |
Estimated useful lives | The range of estimated useful lives used for computing depreciation are as follows: Furniture and fixtures 2 - 10 years Office equipment 2 - 5 years Leasehold improvements 3 - 15 years Internally-developed software 3 - 5 years Automobiles 3 - 5 years Camera systems 3 years Acquired identifiable intangible assets are amortized over the following periods: Acquired intangible Asset Amortization Basis Expected Life (years) Customer-Related Straight-line basis 5-15 Marketing-Related Straight-line basis 4 Technology-Based In line with underlying cash flows or straight-line basis 3-5 |
Assumptions for options granted | For the Three Months Ended March 31, 2019 Risk-free interest rate 2.18% Expected term 2.5 - 6.0 years Volatility 83.80% Dividend yield 0% Estimated annual forfeiture rate at time of grant 0 - 30% |
Summary of Disaggregated Revenue | For the Three Months Ended March 31, 2019 2018 Revenues Time and materials $ 10,799,306 $ 10,321,152 Fixed price 817,265 874,202 Franchising 9,650 23,415 Total revenue $ 11,626,221 $ 11,218,769 |
INFORMATION ON BUSINESS SEGME_2
INFORMATION ON BUSINESS SEGMENTS (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Revenue Recognition [Abstract] | |
Summary of Segment | For the Three Months Ended March 31, 2019 2018 Revenue: Technology group $ 1,009,843 $ 874,202 Professional services group 10,616,378 10,344,567 Total revenue $ 11,626,221 $ 11,218,769 Cost of revenue: Technology group $ 490,110 $ 327,796 Professional services group 8,032,445 7,806,240 Total cost of revenue $ 8,522,555 $ 8,134,036 Gross profit: Technology group $ 519,734 $ 546,406 Professional services group 2,583,933 2,538,327 Total gross profit $ 3,103,666 $ 3,084,733 Selling, general and administrative expenses: Technology group $ 718,473 $ 804,421 Professional services group 2,863,950 2,913,655 Corporate expenses 987,341 1,562,874 Total operating expenses $ 4,569,764 $ 5,280,950 Loss from operations: Technology group $ (198,739 ) $ (258,015 ) Professional services group (280,018 ) (375,327 ) Corporate expenses (987,341 ) (1,562,874 ) Total loss from operations $ (1,466,098 ) $ (2,196,216 ) |
ACQUISITION (Tables)
ACQUISITION (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Acquisition | |
Purchase price allocation | The table below shows the final breakdown related to the Secure Education acquisition: Cash paid $ 99,197 Common stock issued 163,332 Warrants issued, at $5.44 65,988 Warrants issued, at $6.53 57,484 Total consideration 386,001 Less intangible and intellectual property (386,001 ) Net goodwill recorded $ - The table below shows the breakdown related to the preliminary purchase price allocation for the OpenALPR Technology acquisition: Assets acquired $ 939,127 Liabilities acquired (387,599 ) Net assets acquired 551,527 Less intangible assets 11,845,073 Consideration paid (see below) (12,396,600 ) Net goodwill recorded $ - Cash consideration $ 7,000,000 Note payable 5,000,000 Common stock consideration 396,600 Total acquisition consideration $ 12,396,600 |
Pro-forma financial information | Three Months Ended March 31, 2019 2018 Revenues $ 12,595,218 $ 11,421,765 Net income (loss) $ (2,067,077 ) $ (2,104,936 ) Basic earnings (loss) per share $ (0.12 ) $ (0.16 ) Diluted earnings (loss) per share $ (0.12 ) $ (0.16 ) Basic Number of Shares 19,367,619 15,130,030 Diluted Number of Shares 19,367,619 15,130,030 |
IDENTIFIABLE INTANGIBLE ASSETS
IDENTIFIABLE INTANGIBLE ASSETS (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Identifiable Intangible Assets Tables Abstract | |
Schedule of intangible assets | Customer Relationships Marketing Related Technology Based Total Identifiable intangible assets, gross $ 5,588,677 $ 730,000 $ 11,928,485 $ 18,247,162 Accumulated amortization (1,542,535 ) (280,345 ) (114,630 ) (1,937,510 ) Identifiable intangible assets, net $ 4,046,142 $ 449,655 $ 11,813,855 $ 16,309,652 |
Estimated annual amortization expense | 2019 $ 2,563,497 2020 3,417,996 2021 3,365,794 2022 2,614,122 2023 2,523,612 Thereafter 1,824,631 Total $ 16,309,652 |
SUPPLEMENTAL DISCLOSURES OF C_2
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Supplemental Disclosures Of Cash Flow Information Tables Abstract | |
Supplemental disclosures of cash flow information | For the Three Months Ended March 31, 2019 2018 Cash paid for interest $ 266,601 $ 59,857 Cash paid for taxes $ - $ - Business Combinations: Current assets $ 939,127 $ - Intangible assets $ 11,845,073 $ 386,001 Acquisition of OpenALPR Technology $ (12,000,000 ) $ - Deferred revenue $ (387,599 ) $ - Issuance of common stock $ (396,600 ) $ (163,332 ) Issuance of common stock warrants $ - $ (123,472 ) Financing: Notes payable $ 21,000,000 $ - Debt discount financing costs $ (2,599,193 ) $ - Extinguishment of debt $ (1,112,609 ) $ - Repayment of notes payable and interest expense, net of debt discount $ (2,515,739 ) $ - Investment in OpenALPR Technology $ (12,000,000 ) $ - Issuance of warrants in conjunction with notes payable $ 705,943 Accounts Payable $ 360,000 $ - Adoption of ASC-842 Lease Accounting: Right-of-use lease asset $ 920,950 $ - Deferred rent $ 29,976 $ - Lease liability $ (950,926 ) $ - |
DEBT (Tables)
DEBT (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Debt Tables Abstract | |
Future principal amounts | Short-term Long-term Total 2019 $ 34,051 $ - $ 34,051 2020 - 4,665 4,665 2021 - 21,004,959 21,004,959 2022 - 1,005,273 1,005,273 2023 - 10,491 10,491 Total 34,051 22,025,388 22,059,439 Less unamortized interest - (52,469 ) (52,469 ) Less unamortized financing costs - (2,547,968 ) (2,547,968 ) 34,051 19,424,951 19,459,002 Current portion of long-term debt (34,051 ) - (34,051 ) Long-term debt $ - $ 19,424,951 $ 19,424,951 |
OPERATING LEASES (Tables)
OPERATING LEASES (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Notes to Financial Statements | |
Summary of Operating lease | March 31, 2019 Operating lease right-of-use lease assets $ 857,624 Lease liability, short term $ 201,918 Lease liability, long term 717,681 Total operating lease liabilities $ 919,599 Weighted Average Remaining Lease Term - operating leases 4.5 Weighted Average Discount Rate - operating leases 9 % |
Maturities of lease liabilities | For the Years Ended December 31, 2019 (April to December) $ 187,826 2020 302,954 2021 217,272 2022 158,113 2023 159,288 2024 81,558 Total lease payments 1,107,012 Less imputed interest 187,413 Maturities of lease liabilities $ 919,599 |
EQUITY INCENTIVE PLAN (Tables)
EQUITY INCENTIVE PLAN (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Equity Incentive Plan Tables Abstract | |
Stock option activity | Number of Shares Subject to Option Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding Balance at January 1, 2018 1,695,375 $ 2.19 9.26 Granted 48,499 0.73 9.85 Exercised (13,998 ) 1.68 9.50 Forfeited (450,633 ) 1.82 8.71 Expired (51,686 ) 1.36 8.53 Outstanding Balance at December 31, 2018 1,227,557 $ 2.13 8.39 $ - Granted 130,000 0.68 9.99 Exercised - - - Forfeited - - - Expired (212,100 ) 1.55 8.08 Outstanding Balance at March 31, 2019 1,145,457 $ 2.08 8.41 $ 2,600 Exercisable at March 31, 2019 732,364 $ 1.87 8.21 $ 800 Vested and expected to vest at March 31, 2019 1,021,529 $ 2.03 8.37 $ 2,600 |
EARNINGS (LOSS) PER SHARE (Tabl
EARNINGS (LOSS) PER SHARE (Tables) | 3 Months Ended |
Mar. 31, 2019 | |
Earnings Loss Per Share Tables Abstract | |
Earnings (loss) per common share | Three Months Ended March 31, 2019 2018 Basic and diluted (loss) earnings per share Net (loss) earnings from continuing operations $ (2,875,199 ) $ (2,193,844 ) Less: preferred stock accretion (178,501 ) (155,343 ) Less: preferred stock dividends (114,908 ) (114,908 ) Net (loss) attributable to shareholders (3,168,608 ) (2,464,095 ) Weighted average common shares outstanding - basic 18,800,496 14,496,697 Basic (loss) earnings per share $ (0.17 ) $ (0.17 ) Weighted average common shares outstanding - diluted 18,800,496 14,496,697 Diluted (loss) earnings per share $ (0.17 ) $ (0.17 ) Common stock equivalents excluded due to anti-dilutive effect 6,316,157 3,913,995 |
Earnings (loss) per common share, Two-Class Method | Three Months Ended March 31, 2019 2018 Numerator: Net (loss) earnings from continuing operations $ (2,875,199 ) $ (2,193,844 ) Less: preferred stock accretion (178,501 ) (155,343 ) Less: preferred stock dividends (114,908 ) (114,908 ) Net (loss) attributable to shareholders $ (3,168,608 ) $ (2,464,095 ) Denominator (basic): Weighted average common shares outstanding 18,800,496 14,496,697 Participating securities - Series A preferred stock 974,487 974,487 Participating securities - Series B preferred stock 481,722 481,722 Weighted average shares outstanding 20,256,705 15,952,906 Loss per common share - basic under two-class method $ (0.16 ) $ (0.15 ) Denominator (diluted): Weighted average common shares outstanding 18,800,496 14,496,697 Participating securities - Series A preferred stock 974,487 974,487 Participating securities - Series B preferred stock 481,722 481,722 Weighted average shares outstanding 20,256,705 15,952,906 Loss per common share - basic under two-class method $ (0.16 ) $ (0.15 ) |
NATURE OF OPERATIONS AND RECA_2
NATURE OF OPERATIONS AND RECAPITALIZATION (Details Narrative) | 3 Months Ended |
Mar. 31, 2019 | |
Nature Of Operations And Recapitalization Details Narrative Abstract | |
Date of operation | Feb. 1, 2017 |
State of operation | Delaware |
SUMMARY OF SIGNIFICANT ACCOUN_4
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) | 3 Months Ended |
Mar. 31, 2019 | |
Furniture and fixtures | Minimum | |
Estimated useful life | 2 years |
Furniture and fixtures | Maximum | |
Estimated useful life | 10 years |
Office equipment | Minimum | |
Estimated useful life | 2 years |
Office equipment | Maximum | |
Estimated useful life | 5 years |
Leasehold improvements | Minimum | |
Estimated useful life | 3 years |
Leasehold improvements | Maximum | |
Estimated useful life | 15 years |
Internally-developed software | Minimum | |
Estimated useful life | 3 years |
Internally-developed software | Maximum | |
Estimated useful life | 5 years |
Automobiles | Minimum | |
Estimated useful life | 3 years |
Automobiles | Maximum | |
Estimated useful life | 5 years |
Camera systems | |
Estimated useful life | 3 years |
SUMMARY OF SIGNIFICANT ACCOUN_5
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) | 3 Months Ended |
Mar. 31, 2019 | |
Customer Relationships | |
Amortization Basis | Straight-line basis |
Customer Relationships | Minimum | |
Expected Life | 5 years |
Customer Relationships | Maximum | |
Expected Life | 15 years |
Marketing Related | |
Amortization Basis | Straight-line basis |
Expected Life | 4 years |
Technology Based | Minimum | |
Amortization Basis | In line with underlying cash flows or straight-line basis |
Expected Life | 3 years |
Technology Based | Maximum | |
Expected Life | 5 years |
SUMMARY OF SIGNIFICANT ACCOUN_6
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) | 3 Months Ended |
Mar. 31, 2018 | |
Risk-free interest rate | 2.18% |
Volatility | 83.80% |
Dividend yield | 0.00% |
Minimum | |
Expected term | 2 years 6 months |
Estimated annual forfeiture rate at time of grant | 0.00% |
Maximum | |
Expected term | 6 years |
Estimated annual forfeiture rate at time of grant | 30.00% |
SUMMARY OF SIGNIFICANT ACCOUN_7
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Revenues | $ 11,626,221 | $ 11,218,769 |
Time & Materials | ||
Revenues | 10,799,306 | 10,321,152 |
Fixed Price | ||
Revenues | 817,265 | 874,202 |
Franchising | ||
Revenues | $ 9,650 | $ 23,415 |
SUMMARY OF SIGNIFICANT ACCOUN_8
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2019 | Mar. 31, 2018 | Dec. 31, 2018 | |
Summary Of Significant Accounting Policies Details Narrative Abstract | |||
Net loss | $ (2,875,199) | $ (2,193,844) | |
Working capital | 4,800,000 | ||
Allowance for doubtful accounts | 45,560 | $ 24,405 | |
Unbilled services | 1,672,178 | 1,124,705 | |
Depreciation expense | 71,148 | 82,039 | |
Equity-based compensation expense | 62,852 | $ 112,455 | |
Uninsured cash and cash equivalents | $ 4,500,382 | $ 2,176,907 |
INFORMATION ON BUSINESS SEGME_3
INFORMATION ON BUSINESS SEGMENTS (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Revenue | $ 11,626,221 | $ 11,218,769 |
Cost of revenue | 8,522,555 | 8,134,036 |
Gross profit | 3,103,666 | 3,084,733 |
Selling, general, and administrative expenses | 4,569,764 | 5,280,950 |
Loss from operations | (1,466,098) | (2,196,216) |
Technology group | ||
Revenue | 1,009,843 | 874,202 |
Cost of revenue | 490,110 | 327,796 |
Gross profit | 519,734 | 546,406 |
Selling, general, and administrative expenses | 718,473 | 804,421 |
Loss from operations | (198,739) | (258,015) |
Professional services group | ||
Revenue | 10,616,378 | 10,344,567 |
Cost of revenue | 8,032,445 | 7,806,240 |
Gross profit | 2,583,933 | 2,538,327 |
Selling, general, and administrative expenses | 2,863,950 | 2,913,655 |
Loss from operations | (280,018) | (375,327) |
Corporate expenses | ||
Selling, general, and administrative expenses | 987,341 | 1,562,874 |
Loss from operations | $ (987,341) | $ (1,562,874) |
ACQUISITION (Details)
ACQUISITION (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Less intangible assets | $ 16,309,652 | |
Notes payable issued | 21,000,000 | $ 0 |
Less intangible assets | (11,845,073) | $ (386,001) |
Secure Education | ||
Consideration paid (see below) | 386,001 | |
Cash paid | 99,197 | |
Common stock issued | 163,332 | |
Warrants issued | 65,988 | |
Warrants issued | 57,484 | |
Total consideration | 386,001 | |
Less intangible assets | (386,001) | |
Net goodwill recorded | 0 | |
OpenALPR Technology | ||
Assets acquired | 939,127 | |
Liabilities acquired | (387,599) | |
Net assets acquired | 551,527 | |
Less intangible assets | 11,845,073 | |
Consideration paid (see below) | (12,396,600) | |
Cash paid | 7,000,000 | |
Notes payable issued | 5,000,000 | |
Common stock issued | 396,600 | |
Total consideration | (12,396,600) | |
Plus liabilities assumed | (387,599) | |
Net goodwill recorded | $ 0 |
ACQUISITION (Details 1)
ACQUISITION (Details 1) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Acquisition Details 1Abstract | ||
Revenues | $ 12,595,218 | $ 11,421,765 |
Net income (loss) | $ (2,067,077) | $ (2,104,936) |
Basic earnings (loss) per share | $ (.12) | $ (.16) |
Diluted earnings (loss) per share | $ (.12) | $ (.16) |
Basic Number of Shares | 19,367,619 | 15,130,030 |
Diluted Number of Shares | 19,367,619 | 15,130,030 |
INVESTMENT AT COST AND NOTES _2
INVESTMENT AT COST AND NOTES RECEIVABLE (Details Narrative) - USD ($) | Mar. 31, 2019 | Dec. 31, 2018 |
Investment At Cost And Notes Receivable Details Narrative Abstract | ||
Notes receivable, current | $ 254,340 | $ 0 |
IDENTIFIABLE INTANGIBLE ASSET_2
IDENTIFIABLE INTANGIBLE ASSETS (Details) | Mar. 31, 2019USD ($) |
Identifiable intangible assets, gross | $ 18,247,162 |
Accumulated amortization | (1,937,510) |
Identifiable intangible assets, net | 16,309,652 |
Customer Relationships | |
Identifiable intangible assets, gross | 5,588,677 |
Accumulated amortization | (1,542,535) |
Identifiable intangible assets, net | 4,046,142 |
Marketing Related | |
Identifiable intangible assets, gross | 730,000 |
Accumulated amortization | (280,345) |
Identifiable intangible assets, net | 449,655 |
Technology Based | |
Identifiable intangible assets, gross | 11,928,485 |
Accumulated amortization | (114,630) |
Identifiable intangible assets, net | $ 11,813,855 |
IDENTIFIABLE INTANGIBLE ASSET_3
IDENTIFIABLE INTANGIBLE ASSETS (Details 1) | Mar. 31, 2019USD ($) |
Identifiable Intangible Assets Details 1Abstract | |
2019 (remainder of year) | $ 2,563,497 |
2020 | 3,417,996 |
2021 | 3,365,794 |
2022 | 2,614,122 |
2023 | 2,523,612 |
Thereafter | 1,824,631 |
Total | $ 16,309,652 |
SUPPLEMENTAL DISCLOSURES OF C_3
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Supplemental Disclosures Of Cash Flow Information Details Abstract | ||
Cash paid for interest | $ 266,601 | $ 59,857 |
Cash paid for taxes | 0 | 0 |
Business Combinations: | ||
Current Assets | 939,127 | 0 |
Intangible assets | 11,845,073 | 386,001 |
Acquisition of OpenALPR Technology | (12,000,000) | 0 |
Deferred revenue | (387,599) | 0 |
Issuance of common stock | (396,600) | (163,332) |
Issuance of common stock warrants | 0 | (123,472) |
Financing: | ||
Notes payable | 21,000,000 | 0 |
Debt discount financing costs | (2,599,193) | 0 |
Extinguishment of debt | (1,112,609) | 0 |
Repayment of notes payable and interest expense, net of debt discount | (2,515,739) | 0 |
Investment in OpenALPR Technology | (12,000,000) | 0 |
Issuance of warrants in conjunction with notes payable | 705,943 | 0 |
Accounts Payable | 360,000 | 0 |
Adoption of ASC-842 Lease Accounting: | ||
Right-of-use lease asset | 920,950 | 0 |
Deferred rent | 29,976 | 0 |
Lease liability | $ (950,926) | $ 0 |
DEBT (Details)
DEBT (Details) - USD ($) | Mar. 31, 2019 | Dec. 31, 2018 |
2019 | $ 34,051 | |
2020 | 4,665 | |
2021 | 21,004,959 | |
2022 | 1,005,273 | |
2023 | 10,491 | |
Total | 22,059,439 | |
Less unamortized interest | (52,469) | |
Less unamortized financing costs | (2,547,968) | |
Long-term debt | 19,459,002 | |
Current portion of long-term debt | (34,051) | |
Noncurrent long-term debt | $ 19,424,951 | |
Short-term Debt | ||
2019 | $ 34,051 | |
2020 | 0 | |
2021 | 0 | |
2022 | 0 | |
2023 | 0 | |
Total | 34,051 | |
Less unamortized interest | 0 | |
Less unamortized financing costs | 0 | |
Long-term debt | 34,051 | |
Current portion of long-term debt | (34,051) | |
Noncurrent long-term debt | 0 | |
Long-term Debt | ||
2019 | 0 | |
2020 | 4,665 | |
2021 | 21,004,959 | |
2022 | 1,005,273 | |
2023 | 10,491 | |
Total | 22,025,388 | |
Less unamortized interest | (52,469) | |
Less unamortized financing costs | (2,547,968) | |
Long-term debt | 19,424,951 | |
Current portion of long-term debt | 0 | |
Noncurrent long-term debt | $ 19,424,951 |
STOCKHOLDERS' EQUITY (Details N
STOCKHOLDERS' EQUITY (Details Narrative) - $ / shares | Mar. 31, 2019 | Dec. 31, 2018 |
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 2,000,000 | 2,000,000 |
Common stock, par value | $ 0.0001 | $ 0.0001 |
Common stock, authorized | 30,000,000 | 30,000,000 |
Common stock, issued | 19,367,619 | 18,767,619 |
Common stock, outstanding | 19,367,619 | 18,767,619 |
Series B | ||
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 240,861 | 240,861 |
Preferred stock, issued | 240,861 | 240,861 |
Preferred stock, outstanding | 240,861 | 240,861 |
Series A | ||
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, authorized | 505,000 | 505,000 |
Preferred stock, issued | 502,327 | 502,327 |
Preferred stock, outstanding | 502,327 | 502,327 |
OPERATING LEASES (Details)
OPERATING LEASES (Details) - USD ($) | Mar. 31, 2019 | Dec. 31, 2018 |
Notes to Financial Statements | ||
Operating lease right-of-use lease assets | $ 857,624 | $ 0 |
Lease liability, short term | 201,918 | 0 |
Lease liability, long term | 717,681 | $ 0 |
Total operating lease liabilities | $ 919,599 | |
Weighted Average Remaining Lease Term - operating leases | 4 years 6 months | |
Weighted Average Discount Rate - operating leases | 9.00% |
OPERATING LEASES (Details 1)
OPERATING LEASES (Details 1) | Mar. 31, 2019USD ($) |
Operating Leases | |
2019 | $ 187,826 |
2020 | 302,954 |
2021 | 217,272 |
2022 | 158,113 |
2023 | 159,288 |
2024 | 81,558 |
Total | 1,107,012 |
Less imputed interest | 187,413 |
Total | $ 919,599 |
OPERATING LEASES (Details Narra
OPERATING LEASES (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Commitments Details Narrative Abstract | ||
Rent expense | $ 139,721 | $ 192,964 |
EQUITY INCENTIVE PLAN (Details)
EQUITY INCENTIVE PLAN (Details) - USD ($) | 3 Months Ended | 12 Months Ended |
Mar. 31, 2019 | Dec. 31, 2018 | |
Equity Incentive Plan Details Abstract | ||
Number of options outstanding, beginning | 1,227,557 | 1,695,375 |
Number of options, granted | 130,000 | 48,499 |
Number of options, exercised | 0 | (13,998) |
Number of options, Forfeited | 0 | (450,633) |
Number of options, expired | (212,100) | (51,686) |
Number of options outstanding, ending | 1,145,457 | 1,227,557 |
Number of options outstanding, exercisable | 732,364 | |
Number of options outstanding, vested and expected to vest | 1,021,529 | |
Weighted average exercise price outstanding, beginning | $ 2.13 | $ 2.19 |
Weighted average exercise price, granted | 0.68 | 0.73 |
Weighted average exercise price, exercised | 0 | 1.68 |
Weighted average exercise price, Forfeited | 0 | 1.82 |
Weighted average exercise price, expired | 1.55 | 1.36 |
Weighted average exercise price outstanding, ending | 2.08 | $ 2.13 |
Weighted average exercise price outstanding, exercisable | 1.87 | |
Weighted average exercise price outstanding, vested and expected to vest | $ 2.03 | |
Average remaining contractual term outstanding, beginning | 8 years 4 months 20 days | 9 years 2 months 16 days |
Average remaining contractual term, granted | 9 years 11 months 26 days | 9 years 10 months 6 days |
Average remaining contractual term, exercised | 9 years 6 months | |
Average remaining contractual term, canceled | 8 years 8 months 16 days | |
Average remaining contractual term, expired | 8 years 29 days | 8 years 6 months 11 days |
Average remaining contractual term outstanding, ending | 8 years 4 months 28 days | 8 years 4 months 20 days |
Average remaining contractual term, exercisable | 8 years 2 months 16 days | |
Average remaining contractual term, vested and expected to vest | 8 years 4 months 13 days | |
Aggregate intrinsic value outstanding, beginning | $ 0 | |
Aggregate intrinsic value outstanding, ending | 2,600 | $ 0 |
Aggregate intrinsic value outstanding, exercisable | 800 | |
Aggregate intrinsic value outstanding, vested and expected to vest | $ 2,600 |
EQUITY INCENTIVE PLAN (Details
EQUITY INCENTIVE PLAN (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Equity Incentive Plan Details Narrative Abstract | ||
Stock compensation expense | $ 62,852 | $ 112,455 |
Unrecognized stock compensation expense | $ 422,097 | |
Unrecognized stock compensation expense, recognition period | 1 year 6 months 22 days |
EARNINGS (LOSS) PER SHARE (Deta
EARNINGS (LOSS) PER SHARE (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Basic and diluted (loss) earnings per share | ||
Net (loss) earnings from continuing operations | $ (2,875,199) | $ (2,193,844) |
Less: preferred stock accretion | (178,501) | (155,343) |
Less: preferred stock dividends | (114,908) | (114,908) |
Net (loss) attributable to shareholders | $ (3,168,608) | $ (2,464,095) |
Weighted average common shares outstanding - basic | 18,800,496 | 14,496,697 |
Basic (loss) earnings per share | $ (0.17) | $ (0.17) |
Weighted average common shares outstanding - diluted | 18,800,496 | 14,496,697 |
Diluted (loss) earnings per share | $ (0.17) | $ (0.17) |
Common stock equivalents excluded due to anti-dilutive effect | 6,316,157 | 3,913,995 |
EARNINGS (LOSS) PER SHARE (De_2
EARNINGS (LOSS) PER SHARE (Details 1) - USD ($) | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Numerator: | ||
Net (loss) earnings from continuing operations | $ (2,875,199) | $ (2,193,844) |
Less: preferred stock accretion | (178,501) | (155,343) |
Less: preferred stock dividends | (114,908) | (114,908) |
Net income (loss) attributable to shareholders | $ (3,168,608) | $ (2,464,095) |
Denominator (basic): | ||
Weighted average common shares outstanding | 18,800,496 | 14,496,697 |
Participating securities - Series A preferred stock | 974,487 | 974,487 |
Participating securities - Series B preferred stock | 481,722 | 481,722 |
Weighted average shares outstanding | 20,256,705 | 15,952,906 |
Loss per common share - basic under two-class method | $ (0.16) | $ (0.15) |
Denominator (diluted): | ||
Weighted average common shares outstanding | 18,800,496 | 14,496,697 |
Participating securities - Series A preferred stock | 974,487 | 974,487 |
Participating securities - Series B preferred stock | 481,722 | 481,722 |
Weighted average shares outstanding | 20,256,705 | 15,952,906 |
Loss per common share - basic under two-class method | $ (0.16) | $ (0.15) |
EARNINGS (LOSS) PER SHARE (De_3
EARNINGS (LOSS) PER SHARE (Details Narrative) - shares | 3 Months Ended | |
Mar. 31, 2019 | Mar. 31, 2018 | |
Potentially dilutive securities excluded from loss per share | 6,316,157 | 3,913,995 |
Warrants | ||
Potentially dilutive securities excluded from loss per share | 3,714,491 | 917,950 |
Series A Preferred Stock | ||
Potentially dilutive securities excluded from loss per share | 974,487 | 974,487 |
Series B Preferred Stock | ||
Potentially dilutive securities excluded from loss per share | 481,722 | 481,722 |
Options | ||
Potentially dilutive securities excluded from loss per share | 1,145,457 | 1,539,836 |