UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 (Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to      

 

Commission File Number: 001-38338

Rekor Systems, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		81-5266334
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

7172 Columbia Gateway Drive, Suite 400

Columbia, MD

(Address principal executive offices)

 

21046

(Zip Code)

 

(410) 762-0800

(Registrant’s telephone number, including area code)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	REKR	The Nasdaq Stock Market

 

As of November 9, 2020, the Registrant had 32,974,257 shares of common stock, $0.0001 par value per share outstanding.

 

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

 

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

 

  

Table of Content

REKOR SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2020

PART I - FINANCIAL INFORMATION		4
ITEM 1. FINANCIAL STATEMENTS		4
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS		4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)		6
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		46
ITEM 4. CONTROLS AND PROCEDURES		47
PART II - OTHER INFORMATION		48
ITEM 1. LEGAL PROCEEDINGS		48
ITEM 1A. RISK FACTORS		49
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		50
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		51
ITEM 4. MINE SAFETY DISCLOSURES		51
ITEM 5. OTHER INFORMATION		51
ITEM 6. EXHIBITS		51
SIGNATURES		52

 

PART I     FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

	September 30, 2020	December 31, 2019
ASSETS
Current Assets
Cash and cash equivalents	$24,154	$1,075
Restricted cash and cash equivalents	573	461
Accounts receivable, net	966	776
Inventory	591	302
Note receivable, current portion	255	-
Other current assets, net	361	175
Current assets of discontinued operations	3	7,441
Total current assets	26,903	10,230
Long-term Assets
Property and equipment, net	554	442
Right-of-use lease assets, net	276	283
Goodwill	6,336	6,336
Intangible assets, net	7,429	8,244
Investments in unconsolidated companies	75	-
Note receivable, long-term	1,445	-
Long-term assets of discontinued operations	-	3,457
Total long-term assets	16,115	18,762
Total assets	$43,018	$28,992
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses	$3,834	$3,678
Loan payable, current portion	370	-
Lease liability, short-term	232	148
Contract liabilities	1,234	749
Current liabilities of discontinued operations	114	5,757
Total current liabilities	5,784	10,332
Long-term Liabilities
Notes payable, long-term	976	20,409
Loan payable, long-term	504	-
Lease liability, long-term	60	161
Contract liabilities, long-term	936	775
Other long-term liabilities	10	10
Long term liabilities of discontinued operations	14	536
Total long-term liabilities	2,500	21,891
Total liabilities	8,284	32,223
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	6,442	5,804
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 32,911,854 and 21,595,653 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	3	2
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of September 30, 2020 and December 31, 2019, respectively	-	-
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	-	-
Additional paid-in capital	68,117	19,371
Accumulated deficit	(39,828)	(28,408)
Total stockholders’ equity (deficit)	28,292	(9,035)
Total liabilities and stockholders’ equity (deficit)	$43,018	$28,992

 

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

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

  CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in thousands, except share amounts)

(Unaudited)

 

	Three Months ended September 30,		Nine Months ended September 30,
	2020	2019	2020	2019
Revenue	$2,126	$1,536	$6,399	$3,962
Cost of revenue	984	390	2,753	1,152
Gross profit	1,142	1,146	3,646	2,810
Operating expenses:
General and administrative expenses	3,168	2,600	8,896	6,259
Selling and marketing expenses	560	587	1,356	1,081
Research and development expenses	781	450	2,143	757
Operating expenses	4,509	3,637	12,395	8,097
Loss from operations	(3,367)	(2,491)	(8,749)	(5,287)
Other income (expense):
Loss on extinguishment of debt	(3,081)	-	(3,281)	(1,113)
Interest expense	(218)	(1,182)	(2,468)	(2,724)
Other income	6	157	27	123
Gain on sale of business	-	-	3,631	-
Total other expense	(3,293)	(1,025)	(2,091)	(3,714)
Loss before income taxes	(6,660)	(3,516)	(10,840)	(9,001)
Income tax provision	(7)	(12)	(20)	(35)
Net loss from continuing operations	$(6,667)	$(3,528)	$(10,860)	$(9,036)
Net loss from discontinued operations	(2)	(100)	(215)	(2,392)
Net loss	$(6,669)	$(3,628)	$(11,075)	$(11,428)
Loss per common share from continuing operations - basic and diluted	(0.26)	(0.19)	(0.52)	(0.51)
Loss per common share discontinued operations - basic and diluted	-	(0.01)	(0.01)	(0.12)
Loss per common share - basic and diluted	$(0.26)	$(0.20)	$(0.53)	$(0.63)
Weighted average shares outstanding
Basic and diluted	26,907,069	19,878,518	22,781,807	19,592,679

 

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

   

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands, except share amounts)

(Unaudited)

 

	Shares of Common Stock	Common Stock	Shares of Series B Preferred Stock	Series B Preferred Stock	Additional Paid-In Capital	Accumulated Deficit	Total Stockholders’ Equity (Deficit)
Balance as of June 30, 2020	22,942,546	$2	240,861	$-	$22,180	$(33,044)	$(10,862)
Stock-based compensation	-	-	-	-	202	-	202
Issuance of common stock pursuant to Exchange Agreement	4,349,497	-	-	-	17,325	-	17,325
Exercise of cashless warrants in exchange for common stock	171,522	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	625,000	-	-	-	463	-	463
Issuance of common stock pursuant to at the market offering, net	4,677,595	1	-	-	27,752	-	27,753
Exercise of warrants related to series A preferred stock	16,214	-	-	-	17	-	17
Issuance upon exercise of stock options	129,480	-	-	-	398	-	398
Preferred stock dividends	-	-	-	-	-	(115)	(115)
Accretion of Series A preferred stock	-	-	-	-	(220)	-	(220)
Net loss	-	-	-	-	-	(6,669)	(6,669)
Balance as of September 30, 2020	32,911,854	$3	240,861	$-	$68,117	$(39,828)	$28,292
Balance as of June 30, 2019	19,382,185	$2	240,861	$-	$16,496	$(20,094)	$(3,596)
Stock-based compensation	-	-	-	-	76	-	76
Exercise of cashless warrants in exchange for common stock	813,975	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	103,125	-	-	-	103	-	103
Issuance of common stock pursuant to at the market offering, net	103,566	-	-	-	38	-	38
Exercise of warrants related to series A preferred stock	3,638	-	-	-	4	-	4
Preferred stock dividends	-	-	-	-	-	(114)	(114)
Accretion of Series A preferred stock	-	-	-	-	(191)	-	(191)
Net loss	-	-	-	-	-	(3,628)	(3,628)
Balance as of September 30, 2019	20,406,489	$2	240,861	$-	$16,526	$(23,836)	$(7,308)
Balance as of December 31, 2019	21,595,653	$2	240,861	$-	$19,371	$(28,408)	$(9,035)
Stock-based compensation	-	-	-	-	539	-	539
Issuance of common stock pursuant to Exchange Agreement	4,349,497	-	-	-	17,325	-	17,325
Exercise of cashless warrants in exchange for common stock	214,740	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	1,180,000	-	-	-	874	-	874
Issuance of common stock pursuant to at the market offering, net	5,216,562	1	-	-	29,929	-	29,930
Exercise of warrants related to series A preferred stock	74,177	-	-	-	77	-	77
Issuance upon exercise of stock options	281,225	-	-	-	640	-	640
Preferred stock dividends	-	-	-	-	-	(345)	(345)
Accretion of Series A preferred stock	-	-	-	-	(638)	-	(638)
Net loss	-	-	-	-	-	(11,075)	(11,075)
Balance as of September 30, 2020	32,911,854	$3	240,861	$-	$68,117	$(39,828)	$28,292
Balance as of December 31, 2018	18,767,619	$2	240,861	$-	$15,518	$(12,064)	$3,456
Stock-based compensation	-	-	-	-	314	-	314
Issuance of warrants in conjunction with notes payable	-	-	-	-	706	-	706
Exercise of cashless warrants in exchange for common stock	828,541	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	103,125	-	-	-	103	-	103
Common stock issued in OpenALPR acquisition	600,000	-	-	-	397	-	397
Issuance of common stock pursuant to at the market offering, net	103,566	-	-	-	38	-	38
Exercise of warrants related to series A preferred stock	3,638	-	-	-	4	-	4
Preferred stock dividends	-	-	-	-	-	(344)	(344)
Accretion of Series A preferred stock	-	-	-	-	(554)	-	(554)
Net loss	-	-	-	-	-	(11,428)	(11,428)
Balance as of September 30, 2019	20,406,489	$2	240,861	$-	$16,526	$(23,836)	$(7,308)

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited) 

 

	Nine Months ended September 30,
	2020		2019
Cash Flows from Operating Activities
Net loss from continuing operations	$ (10,860)		$ (9,036)
Net loss from discontinued operations	(215)		(2,392)
Net loss	(11,075)		(11,428)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense	36		-
Depreciation	270		243
Amortization of right-of-use lease asset	139		51
Share-based compensation	539		314
Amortization of financing costs	653		768
Amortization of intangible assets	977		663
Loss on extinguishment of debt	3,281		1,113
Gain on sale of AOC Key Solutions	(2,619)		-
Gain on sale of TeamGlobal	(1,012)		-
Loss on sale of Secure Education	-		3
Changes in operating assets and liabilities:
Accounts receivable	(226)		(910)
Inventory	(289)		(312)
Other current assets	(186)		57
Accounts payable and accrued expenses	940		1,676
Contract liabilities	646		982
Lease liability	(149)		(6)
Net cash used in operating activities - continuing operations	(7,860)		(4,394)
Net cash used in operating activities - discontinued operations	(3,884)		(4,861)
Net cash used in operating activities	(11,744)		(9,255)
Cash Flows from Investing Activities
Capital expenditures	(544)		(656)
Proceeds from sale of Secure Education	-		250
Proceeds from sale of AOC Key Solutions	3,400		-
Proceeds from sale of TeamGlobal	2,300		-
Investment in equity investment	(75)		-
Proceeds from AOC Key Solutions notes receivable	600		-
Net cash provided by (used in) by investing activities - continuing operations	5,681		(406)
Net cash used in investing activities - discontinued operations	-		-
Net cash provided by (used in) investing activities	5,681		(406)
Cash Flows from Financing Activities
Proceeds from PPP loan	874		-
Payment of stock issuance costs associated with Note Exchange transaction	(73)		-
Repayments of notes payable	(7,266)		-
Net proceeds from notes payable	-		3,839
Net proceeds from exercise of options	640		-
Net proceeds from exercise of warrants	874		103
Net proceeds from exercise of warrants associated to series A preferred stock	77		4
Net proceeds from at-the-market agreement	29,930		38
Payment of preferred dividends	-		(108)
Payment of debt modification costs	(300)		-
Net cash provided by financing activities - continuing operations	24,756		3,876
Net cash provided by financing activities - discontinued operations	4,171		5,224
Net cash provided by financing activities	28,927		9,100
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations	22,577		(924)
Net increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations	287		363
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents	22,864		(561)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period	1,866		2,768
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$ 24,730		$ 2,207
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of period - continuing operations	$ 24,154		$ 885
Restricted cash and cash equivalents at end of period - continuing operations	573		708
Cash and cash equivalents at end of period - discontinued operations	3		614
Cash, cash equivalents and restricted cash at end of period	$ 24,730		$ 2,207

 

  REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2020, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity (deficit) and unaudited condensed consolidated statements of cash flows for the three and nine month periods ended September 30, 2020 and 2019.

 

The financial data and other information disclosed in these notes are unaudited. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

 

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

 

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

 

The Company was formed in February 2017 and is currently a leader in the field of artificial intelligence ("AI") enabled vehicle identification and management systems. In development for over six years using machine learning algorithms, the Company’s core software enables the creation of more powerful and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional legacy systems. The software provides a wider field of view, greater light sensitivity and recognitions at faster speeds with higher accuracy rates. It also includes the ability to identify the color, make and type of a vehicle and its direction of travel. These capabilities are particularly useful to governmental entities and businesses in solving a wide variety of real-world vehicle related operational challenges. In addition, the reduction in cost, increased number and improved performance of internet protocol connected cameras has presented significant new uses for vehicle recognition technology that were not previously available or cost effective.

 

In March 2019, through its subsidiary, OpenALPR Software Solutions, LLC (“OpenALPR”), Rekor acquired certain assets and certain liabilities of OpenALPR Technology, Inc. (such assets and liabilities being referred to herein as “OpenALPR Technology”). The financial information in this Quarterly Report only includes OpenALPR in the results of operations beginning as of March 12, 2019.

 

During the third quarter of 2019, the Company began to separately report the results of Global Technical Services, Inc. (“TeamGlobal”), the Company’s wholly owned subsidiary, as operations held for sale. TeamGlobal provides skilled technical professionals and maintenance and modification specialists to the aerospace and aviation maintenance industries. On June 29, 2020, the Company sold TeamGlobal to certain members of TeamGlobal's management team and began to separately report the results of TeamGlobal as discontinued operations. See Note 3.

 

During the first quarter of 2020, the Company began to separately report the results of AOC Key Solutions, Inc. (“AOC Key Solutions”) another of the Company’s wholly owned subsidiaries as operations held for sale. On April 2, 2020, the Company sold AOC Key Solutions to a member of AOC Key Solutions’ management and began to separately report the results of AOC Key Solutions as discontinued operations. See Note 3.

 

During the first quarter of 2020, the Board of Directors of the Company approved a strategic shift by the Company to focus on its technology services and products. In addition to the contemplated sale of AOC Key Solutions and TeamGlobal, the Company determined to present the operations of Firestorm Solutions, LLC (“Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and together with Firestorm Solutions, “Firestorm”) as discontinued operations. Prior to the Company’s decision to sell TeamGlobal and AOC Key Solutions, and discontinue the operations of Firestorm, the assets, liabilities and operating results for these subsidiaries were presented in the Professional Services segment. As a result of the decision, the Company determined that all of the Professionals Services segment should be classified as discontinued operations.

 

Since the Company is reporting the historical operating results and cash flows of the Company’s Professional Services segment as discontinued operations, they have been excluded from continuing operations for all periods presented. The assets and liabilities of the Professional Services segment are presented as current and long-term assets and liabilities of discontinued operations in the unaudited condensed consolidated balance sheets and its results are presented as a loss from discontinued operations in the unaudited condensed consolidated statement of operations.

 

 

Reclassification 

 

Certain prior year amounts have been reclassified to conform with the current year presentation. Amounts for the three and nine month periods ending September 30, 2019 and the year ending December 31, 2019, have been reclassified to conform to the current year presentation. Due to the sale of TeamGlobal, the sale of AOC Key Solutions, and the discontinuance of all professional services activities, certain amounts have been reclassified in order to conform to the current period presentation.

 

Going Concern Assessment

 

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

 

The Company has generated losses since its inception in February 2017 and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to public company corporate overhead and non-capital expenditures related to the scaling and development of new products and service offerings in connection with the focus on the technology of the Company. As of and for the nine months ended September 30, 2020, the Company had a net loss from continuing operations of $10,860,000 and working capital of $21,230,000.

  

The Company's net cash position was increased by $22,577,000 for the nine months September 30, 2020 due primarily to the net proceeds of $29,930,000 from the At Market Issuance Sales Agreement (the "Sales Agreement") and the net cash proceeds of $6,300,000 from the sale of AOC Key Solutions and TeamGlobal, which includes the repayment of the $600,000 AOC Key Solutions Subordinate Note, offset by the net loss from operations in the period. As of September 21, 2020, the Company voluntarily terminated the Sales Agreement (see Note 10).

 

Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections, for one year from the date of the filing of the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, indicate the Company’s ability to continue operations as a going concern for that one-year period. The Company is actively monitoring its operations, the cash on hand and working capital. Should access to funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available.

 

The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to continue the growth of its technology business, (ii) the continued performance of its contractors, subcontractors and vendors, (iii) its ability to maintain and build good relationships with its lenders and financial intermediaries, (iv) its ability to maintain timely collections from existing customers, and (v) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

 

The Company’s operations have been affected by the recent and ongoing outbreak of the coronavirus disease (“COVID-19”) which was declared a pandemic by the World Health Organization in March 2020. The impact has resulted in a slowdown in the Company’s rate of growth and includes disruptions in the delivery and installation of equipment, slower than expected contract approvals and implementation of projects by its customers, the need for employees to work remotely, restrictions on travel affecting the Company’s ability to attend meetings, conferences, consultations and installations and otherwise provide and market its products and services, and disruptions to its customers' operations which may affect its revenues. The Company benefited from the financing under the CARES Act. The Company continues to evaluate the potential impact of the pandemic and the ultimate disruption that may be caused by the outbreak is uncertain. Possible additional effects may include, but are not limited to, continuing disruption to the Company’s customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by the Company. As a result, the pandemic may result in a material adverse impact on the Company’s financial position, operations and cash flow.

 

 

Use of Estimates

 

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

 

Goodwill and Intangible Assets

 

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

 

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

 

Equity Method Investments

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

In June of 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. In the third quarter of 2020, the Company contributed $75,000 for its 50 percent equity interest. This investment is accounted for under the equity method.

 

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

 

The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets.

 

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, inventory, accounts receivable and accounts payable approximate fair value as of September 30, 2020 and December 31, 2019 because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt and long-term receivables approximates fair value as of September 30, 2020 and December 31, 2019 given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company has concluded that its Series A Preferred Stock is a Level 3 financial instrument and that the fair value approximates the carrying value, which includes the accretion of the discounted interest component through September 30, 2020. There were no changes in levels during the nine months ended September 30, 2020.

 

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

 

Note Receivables

 

In connection with the sale of AOC Key Solutions in April 2020, the Company received a $600,000, five-year promissory note due March 2025, that carries an interest rate of 8%. Based on the general market conditions and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.

 

In September 2020, the full principal balance of the $600,000 note associated with the sale of AOC Key Solutions was paid in full.

 

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

 

 

Revenue Recognition

 

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

 

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

 

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

 

 

 

 

 

 

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

 

	Three Months ended September 30,		Nine Months ended September 30,
	2020	2019	2020	2019
Revenue
Licensing and subscription revenue	$1,341	$575	$4,122	$1,386
Automated traffic safety enforcement	785	961	2,277	2,576
Total revenue	$2,126	$1,536	$6,399	$3,962

 

 

Revenues

 

Licensing and subscription revenue

 

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

 

In March 2019, the Company acquired substantially all of the assets of a software development company, OpenALPR Technologies, Inc. The software acquired from this acquisition and subsequently developed by the Company have provided the basis for the Company’s licensing and subscription revenue. Licensing and subscription services include providing, through a web server, access to the Company’s proprietary vehicle recognition software, a self-managed database and a powerful, cross-platform application programming interface. The Company's proprietary software employs a convolutional neural network architecture to classify images and features that include seamless video analysis and data analytics. Current customers include law enforcement agencies, highway authorities, parking system operators, private security companies, and wholesale and retail operations supporting logistics and customer loyalty programs.

 

Included in the licensing and subscription revenue is revenue that was recognized through the Company’s eCommerce platform. For the three and nine months ended September 30, 2020, the Company recognized revenues of $235,000 and $621,000, respectively, for products and services that were purchased through the Company’s eCommerce platform. For the three and nine months ended September 30, 2019, the Company recognized revenues of $167,000 and $280,000, respectively, for products and services that were purchased through the Company’s eCommerce platform.

 

During the second quarter of 2019, the Company changed its primary method of selling its software from perpetual software licenses, with associated maintenance services, to service subscriptions of limited duration. These subscriptions give the customer access to the use of the latest version of the Company's software only during the term of the subscription. Revenue is generally recognized ratably over the contract term. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Revenue from the Company's perpetual software licenses are recognized up-front at the point in time when the software is made available to the customer.

  

Automated traffic safety enforcement 

 

Automated traffic safety enforcement revenues reflect arrangements to provide traffic safety systems to a number of municipalities in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images, analyses the images to provide data and supports citation management services. The Company also provides an enterprise parking enforcement solution that the Company licenses to parking management companies and municipalities.  Revenue is recognized monthly based on the number of camera systems that are operated, or the number of citations issued by the relevant municipality. The Company also installs and maintains public safety systems, which may involve a combination of installation and lease payments or simply software licenses to use the Company's software in connection with a previously installed camera network. Revenue is recognized at various stages of completion of installation and monthly for lease or license payments.

 

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

 

  A performance obligation is a promise in a contract with a customer to transfer services that are distinct. The performance obligations that are not yet satisfied or partially satisfied are performance obligations that are expected to be recognized as revenue in the future for a contract with a customer which was executed as of a particular date. On September 30, 2020, the Company had approximately $16,459,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 27% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the next two to five years thereafter.

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled accounts receivables of $488,000 and $440,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively.

 

 

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine months ended September 30, 2020 were not materially impacted by any other factors. Contract liabilities as of September 30, 2020 and December 31, 2019 were $2,170,000 and $1,524,000, respectively. All contract liabilities as of September 30, 2020 and December 31, 2019 were attributable to continuing operations. During the nine months ended September 30, 2020 $622,000 of the contract liabilities balance as of December 31, 2019 were recognized as revenue.

 

The services due for contract liabilities described above are shown below as of September 30, 2020 (dollars in thousands):

 

2020	$607
2021	750
2022	368
2023	275
2024	160
Thereafter	10
Total	$2,170

 

Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. As of September 30, 2020, and December 31, 2019, costs incurred to obtain contracts in excess of one year have been immaterial to date.

 

Segment Reporting

 

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

 

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

  

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents 

 

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

 

Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of September 30, 2020 and December 31, 2019 were $573,000 and $461,000, respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets. 

 

Concentrations of Credit Risk

 

The Company places its temporary cash investments with higher rated quality financial institutions located in the United States (“U.S.”). As of September 30, 2020 and December 31, 2019, the Company had deposits from continuing operations totaling $24,727,000 and $1,536,000, respectively, in one U.S. financial institution that was federally insured up to $250,000 per account.

 

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

  

 

Customer A accounted for 17% and less than 10% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively. Customer A accounted for 20% and less than 10% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

 

Customer B accounted for less than 10% and 14% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively. Customer B accounted for less than 10% and 18% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

 

As of September 30, 2020, accounts receivable from Customer C and Customer D totaled 19% and 16% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2019, Customer C accounted for 26% of the unaudited condensed consolidated accounts receivable balance.

 

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenue for the three and nine month period ended September 30, 2020 and 2019 or unaudited condensed consolidated accounts receivable balance as of September 30, 2020 and December 31, 2019.

 

Significant Accounting Policies

 

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

 

New Accounting Pronouncements Effective in the Nine Months ended September 30, 2020

 

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

 

New Accounting Pronouncements Effective in Future Periods

 

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

 

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

 

NOTE 2 – ACQUISITIONS

 

OpenALPR Technology Acquisition

 

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

 

 

The purchase price allocation to the assets acquired and liabilities assumed are based on fair values as of the acquisition date. Since the OpenALPR Technology Acquisition occurred on March 12, 2019, the results of operations including OpenALPR Technology Acquisition from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2020.

 

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

 

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

 

Operations of Combined Entities

 

The following unaudited pro forma combined financial information gives effect to the OpenALPR Technology Acquisition as if it was consummated as of January 1, 2019. This unaudited pro forma financial information is presented for informational purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2019 or to project potential operating results as of any future date or for any future periods.

 

	Three Months ended September 30,		Nine Months ended September 30,
	2020	2019	2020	2019
Total revenue from continuing operations	$2,126	$1,536	$6,399	$4,931
Net loss from continuing operations	(6,667)	(3,528)	(10,860)	(8,228)
Basic and diluted loss per share from continuing operations	$(0.26)	$(0.19)	$(0.52)	$(0.46)
Basic and diluted number of shares	26,907,069	19,878,518	22,781,807	19,761,363

 

NOTE 3 – DISCONTINUED OPERATIONS

 

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

 

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

 

 

AOC Key Solutions Sale

 

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

 

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

 

As of September 30, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.

 

The table below shows the breakdown related to the AOC Key Solutions Purchase Agreement (dollars in thousands):

 

Total assets sold	$4,549
Total liabilities assumed	3,514
Net assets sold	1,035
Closing cost	346
Consideration received (see below)	4,000
Gain on sale of AOC Key Solutions	$2,619
Cash consideration	$3,400
Note receivable	600
Total AOC Key Solution Purchase Agreement consideration	$4,000

 

TeamGlobal Sale

 

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

 

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

 

The table below shows the breakdown related to the TeamGlobal Purchase Agreement (dollars in thousands):

 

Total assets sold	$9,996
Total liabilities assumed	7,130
Net assets sold	2,866
Closing cost	122
Consideration received (see below)	4,000
Gain on sale of TeamGlobal	$1,012
Cash consideration	$2,300
Note receivable	1,700
Total TeamGlobal Purchase Agreement consideration	$4,000

 

 

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

 

Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations from TeamGlobal, AOC Key Solutions and Firestorm for the three and nine months ended September 30, 2020 and 2019 have been classified as discontinued operations and presented as part of loss from discontinued operations in the accompanying unaudited condensed consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets discontinued operations and current and long term liabilities discontinued operations in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019.

 

The assets and liabilities classified as discontinued operations in the Company's unaudited condensed consolidated financial statements as of September 30, 2020 and December 31, 2019 are shown below (dollars in thousands): 

 

	September 30. 2020				December 31, 2020
	Global	AOC Key Solutions	Firestorm	Total	Global	AOC Key Solutions	Firestorm	Total
ASSETS
Cash and cash equivalents	$-	$-	$3	$3	$225	$93	$12	$330
Accounts receivable, net	-	-	-	-	2,763	4,055	-	6,818
Other current assets, net	-	-	-	-	238	52	3	293
Current assets of discontinued operations	-	-	3	3	3,226	4,200	15	7,441
Property and equipment, net	-	-	-	-	113	41	-	154
Right-of-use lease assets, net	-	-	-	-	130	499	-	629
Goodwill	-	-	-	-	669	-	-	669
Intangible assets, net	-	-	-	-	1,994	-	-	1,994
Deposits and other long-term assets	-	-	-	-	-	11	-	11
Long-term assets of discontinued operations	-	-	-	-	2,906	551	-	3,457
Total assets of discontinued operations	$-	$-	$3	$3	$6,132	$4,751	$15	$10,898
LIABILITIES
Accounts payable and accrued expenses	$-	$-	$31	$31	$461	$1,260	$33	$1,754
Lines of credit	-	-	-	-	1,842	1,894	-	3,736
Lease liability, short term	-	-	83	83	113	100	54	267
Current liabilities of discontinued operations	-	-	114	114	2,416	3,254	87	5,757
Lease liability, long term	-	-	14	14	30	467	39	536
Long-term liabilities of discontinued operations	-	-	14	14	30	467	39	536
Total liabilities of discontinued operations	$-	$-	$128	$128	$2,446	$3,721	$126	$6,293