10-Q 1 rekr20240630_10q.htm FORM 10-Q rekr20240630_10q.htm
0001697851 Rekor Systems, Inc. false --12-31 Q2 2024 0 1,012 0 2,149 372 447 186 223 0.0001 0.0001 2,000,000 2,000,000 505,000 505,000 240,861 240,861 0 0 0 0 0.0001 0.0001 300,000,000 300,000,000 86,371,359 69,273,334 86,216,706 69,176,826 154,653 96,508 12 5 664,329 2,832,135 3.14 15 5 106 0 0 0 0 0 5 5 5 5 5 5 false false false false On January 18, 2023, in connection with the 2023 Promissory Notes, the Company issued warrants to the investors to purchase 6,250,000 shares of its common stock, exercisable over a period of five years, at an exercise price of $2.00 per share. These warrants were exercisable commencing January 18, 2023 and expire on January 18, 2028. As part of the Warrant Exercise Agreements, explained in detail above, the Exercising Holders reduced the number of warrants help by 1,575,000. On July 25, 2023, in connection with the 2023 Letter Agreement, the Company issued warrants to purchase 2,850,000 shares of its common stock, exercisable over a period of five and half years, at an exercise price of $3.25 per share. These warrants were exercisable commencing July 25, 2023 and expire on January 25, 2029. On March 23, 2023, in connection with the 2023 Registered Direct Offering the Company issued warrants to the placement agent to purchase up to 481,100 shares of common stock. Each warrant for the placement agent is exercisable for one share of common stock at an exercise price of $1.8188 per share. 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Table of Contents



 

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 June 30, 2024

 

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.)

 

6721 Columbia Gateway Drive, Suite 400

Columbia, MD

(Address principal executive offices)

 

21046

(Zip Code)

 

(410) 762-0800

(Registrants 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 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 August 14, 2024, the Registrant had 88,503,505 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, 2023 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.

 

 

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2024

 

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

 

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

 

26

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

38

ITEM 4.

CONTROLS AND PROCEDURES

 

38

       

PART II - OTHER INFORMATION

 

39

ITEM 1.

LEGAL PROCEEDINGS

 

39

ITEM 1A.

RISK FACTORS

 

40

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

40

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

41

ITEM 4.

MINE SAFETY DISCLOSURES

 

41

ITEM 5.

OTHER INFORMATION

 

41

ITEM 6.

EXHIBITS

 

41

       

SIGNATURES

 

42

 

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

 

  

June 30, 2024

  

December 31, 2023

 
   (Unaudited)     

ASSETS

 

Current assets

        

Cash and cash equivalents

 $3,089  $15,385 

Restricted cash

  328   328 

Accounts receivable, net

  9,015   4,955 

Inventory

  3,627   3,058 

Note receivable, current portion

  340   340 

Other current assets

  1,382   1,270 

Total current assets

  17,781   25,336 

Long-term assets

        

Property and equipment, net

  13,212   13,188 

Right-of-use operating lease assets, net

  9,527   9,584 

Right-of-use financing lease assets, net

  2,252   1,989 

Goodwill

  24,313   20,593 

Intangible assets, net

  26,996   17,239 

Note receivable, long-term

  312   482 

Deposits

  3,485   3,740 

Total long-term assets

  80,097   66,815 

Total assets

 $97,878  $92,151 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current liabilities

        

Accounts payable and accrued expenses

  6,272   5,139 

Notes payable, current portion

  2,000   1,000 

Loan payable, current portion

  77   75 

Lease liability operating, short-term

  1,741   1,261 

Lease liability financing, short-term

  720   547 

Contract liabilities

  3,617   3,604 

Liability for ATD Holdback Shares

  890   - 

Other current liabilities

  5,839   5,610 

Total current liabilities

  21,156   17,236 

Long-term Liabilities

        

Notes payable, long-term

  -   1,000 

2023 Promissory Notes, net of debt discount of $0 and $1,012, respectively

  -   2,988 

2023 Promissory Notes - related party, net of debt discount of $0 and $2,149, respectively

  -   6,351 

Series A Prime Revenue Sharing Notes, net of debt discount of $372 and $447, respectively

  9,628   9,553 

Series A Prime Revenue Sharing Notes - related party, net of debt discount of $186 and $223, respectively

  4,814   4,777 

Loan payable, long-term

  234   273 

Lease liability operating, long-term

  12,823   13,445 

Lease liability financing, long-term

  1,090   1,057 

Contract liabilities, long-term

  1,325   1,449 

Deferred tax liability

  65   65 

Other non-current liabilities

  587   587 

Total long-term liabilities

  30,566   41,545 

Total liabilities

  51,722   58,781 

Commitments and contingencies (Note 7)

          

Stockholders' equity

        

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 June 30, 2024 and December 31, 2023, respectively. No preferred stock was issued or outstanding as of June 30, 2024 or December 31, 2023, respectively.

  -   - 

Common stock, $0.0001 par value; authorized; 300,000,000 shares; issued: 86,371,359 shares as of June 30, 2024 and 69,273,334 as of December 31, 2023; outstanding: 86,216,706 shares as of June 30, 2024 and 69,176,826 as of December 31, 2023.

  9   7 

Treasury stock, 154,653 and 96,508 shares as of June 30, 2024 and December 31, 2023, respectively.

  (702)  (522)

Additional paid-in capital

  273,941   232,568 

Accumulated deficit

  (227,092)  (198,683)

Total stockholders’ equity

  46,156   33,370 

Total liabilities and stockholders’ equity

 $97,878  $92,151 

 

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

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2024

  

2023

  

2024

  

2023

 

Revenue

 $12,427  $8,563  $22,205  $14,748 

Cost of revenue, excluding depreciation and amortization

  5,776   4,131   11,061   6,999 
                 

Operating expenses:

                

General and administrative expenses

  7,370   5,873   15,032   13,078 

Selling and marketing expenses

  2,021   2,053   4,435   3,943 

Research and development expenses

  4,991   4,783   9,992   9,740 

Depreciation and amortization

  2,344   2,003   4,676   3,954 

Total operating expenses

  16,726   14,712   34,135   30,715 
                 

Loss from operations

  (10,075)  (10,280)  (22,991)  (22,966)

Other income (expense):

                

(Loss) gain on extinguishment of debt

  -   -   (4,693)  527 

Interest expense, net

  (544)  (908)  (1,598)  (1,668)

Gain on remeasurement of ATD Holdback Shares

  745   -   745   - 

Other income

  79   75   128   312 

Total other income (expense)

  280   (833)  (5,418)  (829)

Net loss

 $(9,795) $(11,113) $(28,409) $(23,795)

Loss per common share

 $(0.12) $(0.18) $(0.35) $(0.41)

Weighted average shares outstanding

                

Basic and diluted

  84,932,611   61,816,279   81,929,347   58,353,534 

 

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 

(Dollars in thousands, except share amounts)

(Unaudited)

 

  

Shares of Common Stock

  

Common Stock

  

Shares of Treasury Stock

  

Treasury Stock at Cost

  

Additional Paid-In Capital

  

Accumulated Deficit

  

Total Stockholders' Equity

 

Balance as of March 31, 2024

  84,660,589  $8   154,653  $(702) $270,864  $(217,297) $52,873 

Stock-based compensation

  -   -   -   -   1,115   -   1,115 

Issuance upon exercise of stock options

  3,500   -   -   -   3   -   3 

Issuance upon vesting of restricted stock units

  152,617   -   -   -   -   -   - 

Issuance upon exercise of 2023 Warrants

  1,400,000   1   -   -   1,959   -   1,960 

Net loss

  -   -   -   -   -   (9,795)  (9,795)

Balance as of June 30, 2024

  86,216,706  $9   154,653  $(702) $273,941  $(227,092) $46,156 
                             

Balance as of March 31, 2023

  61,030,637  $6   91,491  $(506) $218,157  $(165,680)  51,977 

Stock-based compensation

  -   -   -   -   1,044   -   1,044 

Issuance upon exercise of stock options

  18,000   -   -   -   16   -   16 

Issuance upon vesting of restricted stock units

  130,721   -   -   -   -   -   - 

Issuance of common stock upon exercise of pre-funded warrants

  772,853   -   -   -   1   -   1 

Net loss

  -   -   -   -   -   (11,113)  (11,113)

Balance as of June 30, 2023

  61,952,211  $6   91,491  $(506) $219,218  $(176,793) $41,925 
                             

Balance as of January 1, 2024

  69,176,826  $7   96,508  $(522) $232,568  $(198,683) $33,370 

Stock-based compensation

  -   -   -   -   2,282   -   2,282 

Issuance upon exercise of stock options

  3,500   -   -   -   3   -   3 

Issuance upon vesting of restricted stock units

  612,390   -   -   -   -   -   - 

Shares withheld upon vesting of restricted stock units

  (58,145)  -   58,145   (180)  -   -   (180)

Shares issued as part of the ATD Acquisition

  2,832,135   -   -   -   8,893   -   8,893 

Retirement of the 2023 Promissory Notes

  750,000   -   -   -   1,875   -   1,875 

2024 Public Offering

  11,500,000   1   -   -   26,361   -   26,362 

Issuance upon exercise of 2023 Warrants

  1,400,000   1   -   -   1,959   -   1,960 

Net loss

  -   -   -   -   -   (28,409)  (28,409)

Balance as of June 30, 2024

  86,216,706  $9   154,653  $(702) $273,941  $(227,092) $46,156 
                             

Balance as of January 1, 2023

  54,405,080  $5   41,522  $(417) $202,747  $(152,998) $49,337 

Stock-based compensation

  -   -   -   -   2,156   -   2,156 

Issuance upon exercise of stock options

  36,333   -   -   -   31   -   31 

Issuance upon vesting of restricted stock units

  687,914   -   -   -   -   -   - 

Fair value allocated to warrants with 2023 Promissory Notes

  -   -   -   -   5,125   -   5,125 

Shares withheld upon vesting of restricted stock units

  (49,969)  -   49,969   (89)  -   -   (89)

Issuance of common stock and warrants

  6,100,000   1   -   -   9,158   -   9,159 

Issuance of common stock upon exercise of pre-funded warrants

  772,853   -   -   -   1   -   1 

Net loss

  -   -   -   -   -   (23,795)  (23,795)

Balance as of June 30, 2023

  61,952,211  $6   91,491  $(506) $219,218  $(176,793) $41,925 

 

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

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

  

Six Months Ended June 30,

 
  

2024

  

2023

 

Cash Flows from Operating Activities:

        

Net loss

 $(28,409) $(23,795)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Bad debt expense

  314   43 

Depreciation

  1,949   1,859 

Amortization of right-of-use financing lease asset

  384   22 

Non-cash operating lease expense

  455   314 

Share-based compensation

  2,282   2,156 

Amortization of debt discount

  455   960 

Amortization of intangible assets

  2,343   2,073 

Impairment of SAFE Agreement

  -   101 

Loss due to the remeasurement of the STS Earnout and Contingent Consideration

  100   91 

Gain on remeasurement of ATD Holdback Shares

  (745)  - 

Loss on the sale of property and equipment

  8   16 

Loss (gain) on extinguishment of debt

  4,693   (527)

Changes in operating assets and liabilities:

        

Accounts receivable

  (1,191)  (2,508)

Inventory

  302   (1,064)

Other current assets

  42   (194)

Deposits

  12   12 

Accounts payable, accrued expenses and other current liabilities

  (269)  885 

Contract liabilities

  (111)  1,074 

Lease liability

  (540)  (718)

Net cash used in operating activities - continuing operations

  (17,926)  (19,200)

Net cash used in operating activities - discontinued operations

  -   (449)

Net cash used in operating activities

  (17,926)  (19,649)

Cash Flows from Investing Activities:

        

Capital expenditures

  (512)  (490)

Proceeds from the sale of property and equipment

  27   14 

Cash paid for ATD acquisition, net

  (9,222)  - 

Net cash used in investing activities

  (9,707)  (476)

Cash Flows from Financing Activities:

        

Proceeds from the public offering

  26,362   - 

Net proceeds 2022 Promissory Notes - related party, exchanged for 2023 Promissory Notes - related party

  -   400 

Net proceeds 2023 Promissory Notes

  -   4,000 

Net proceeds 2023 Promissory Notes - related party

  -   7,100 

Net proceeds 2023 Registered Direct Offering

  -   9,159 

Net proceeds from the exercise of the pre-funded warrants

  -   1 

Proceeds from notes receivable

  170   170 

Net proceeds from exercise of options

  3   31 

Net proceeds from exercise of warrants

  1,960   - 

Repayments of loans payable

  (37)  (54)

Payments for financing leases

  (441)  (277)

Repurchases of common stock

  (180)  (89)

Repayment of 2023 Promissory Notes

  (12,500)  - 

Net cash provided by financing activities

  15,337   20,441 

Net (decrease) increase in cash, cash equivalents and restricted cash - continuing operations

  (12,296)  765 

Net decrease in cash, cash equivalents and restricted cash - discontinued operations

  -   (449)

Net (decrease) increase in cash, cash equivalents and restricted cash

  (12,296)  316 

Cash, cash equivalents and restricted cash at beginning of period

  15,713   2,468 

Cash, cash equivalents and restricted cash at end of period

 $3,417  $2,784 
         

Reconciliation of cash, cash equivalents and restricted cash:

        

Cash and cash equivalents at end of period

 $3,089  $2,438 

Restricted cash at end of period

  328   346 

Cash, cash equivalents and restricted cash at end of period

 $3,417  $2,784 

 

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

 

 

REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

Rekor Systems, Inc. (“Rekor”) was formed in  February 2017. The consolidated financial statements include the accounts of Rekor, the parent company, and its wholly-owned subsidiaries Rekor Recognition Systems, Inc., Waycare Technologies Inc. and Waycare Technologies Ltd. (collectively, "Waycare"), Southern Traffic Services, Inc. ("STS") and All Traffic Data Services, LLC ("ATD") (collectively, the “Company”). The Company serves the roadway intelligence sector, developing products and services to be used in advancing public safety, urban mobility, and transportation management. The Company's vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities. The Company works towards this vision by collecting, connecting, and organizing mobility data, and making it accessible and useful to its customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.

 

On January 2, 2024, the Company completed the acquisition of ATD by acquiring 100% of the issued and outstanding capital stock of ATD, which is now a wholly-owned subsidiary of the Company.

 

These unaudited condensed consolidated interim financial statements of 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 statements as of and for the periods ended  June 30, 2024.

 

The financial data and other information disclosed in these notes are unaudited. The results for the three and six months ended June 30, 2024, are not necessarily indicative of the results to be expected for the year ending December 31, 2024.

 

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, 2023. 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 nearest $1,000.

 

8

 

Correction of Previously Issued (Unaudited) Interim Financial Statements

 

While undergoing a review of its unaudited condensed consolidated interim financial statements, the Company determined it had incorrectly classified the ATD Holdback Shares issued in connection with the acquisition of ATD as equity classified instead of liability classified. This impacted previously reported amounts for goodwill, current liabilities and additional paid in capital, among other line items in the unaudited condensed consolidated interim financial statements as of and for the three months ended March 31, 2024.

 

In accordance with Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company evaluated the adjustment detailed above, and determined the related impact did not materially misstate its unaudited condensed consolidated financial statements as of and for the three month period ended March 31, 2024. Although the Company concluded that the misstatement was not material to its unaudited condensed consolidated financial statements as of and for the three month period ended March 31, 2024, the Company has determined it is appropriate to adjust its unaudited condensed consolidated financial statements as of March 31, 2024 on a prospective basis to provide appropriate context to stakeholders within comparative financial statements. The impact on the statement of operations will be displayed on the Company’s unaudited condensed consolidated financial statements for the three and six month periods ended June 30, 2024. The following tables set forth the effects of the error corrections on affected items within the Company’s previously reported interim unaudited condensed consolidated balance sheet and statement of shareholders' equity as of the periods indicated had the adjustments been made in the corresponding quarter (dollars in thousands):

 

  

March 31, 2024

 

Changes in Condensed Consolidated Balance Sheet

  As reported   Adjusted   As corrected 

Long-term assets

            

Goodwill

 $24,161  $(452) $23,709 

Total assets

  107,150   (452)  106,698 

Current liabilities

            

Liability for ATD Holdback Shares

  -   1,634   1,634 

Total liabilities

  52,191   1,634   53,825 

Stockholders' equity

            

Additional paid-in capital

  272,950   (2,086)  270,864 

Total stockholders’ equity

 $54,959  $(2,086) $52,873 

Changes in Condensed Consolidated Statement of Shareholders' Equity

            

Shares of common stock outstanding

  85,324,918   (664,329)  84,660,589 

 

The following tables set forth the effects of the error corrections on affected items within the Company’s previously reported interim condensed statements of operations for the periods indicated had the adjustments been made in the corresponding quarters (dollars in thousands, except share amounts):

 

  

Three Months Ended March 31, 2024

 

Changes in Condensed Consolidated Statements of Operations

  As reported   Adjusted   As corrected 

Loss per common share

 $(0.23) $(0.01) $(0.24)

Weighted average shares outstanding basic and diluted

  79,558,346   (664,329)  78,894,017 

 

Use of Estimates

 

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

 

Liquidity and Going Concern

 

Management has assessed going concern uncertainty to determine whether there is sufficient cash on hand, together with expected capital raises and working capital, to assure operations for a period of at least one year from the date these unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management has considered various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.

 

The Company has generated losses and negative operating cashflows since its inception and has relied on external sources of financing to support cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products and services, development of new products and services and marketing efforts associated with these products and services. As of and for the six months ended June 30, 2024, the Company had a working capital deficit of $3,375,000 and a net loss of $28,409,000.

 

Our cash decreased by $12,296,000 for the six months ended June 30, 2024 primarily due to the cash paid to acquire ATD and redeem the 2023 Promissory Notes and the net loss of $28,409,000, partially offset by external financing activity. 

 

Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund its current level of operations for the next twelve months following the issuance of these unaudited condensed consolidated financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

The Company is actively monitoring its operations, cash on hand and working capital. The Company is currently in the process of reviewing and exploring external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to continue to reduce or defer expenses and cash outlays in the look-forward period.

 

Significant Accounting Policies

 

Goodwill

 

The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. Goodwill is subject to impairment testing on an annual basis. The Company will assess goodwill for impairment annually on  October 1st of each year, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The Company will perform a qualitative assessment, to determine its fair value which includes an evaluation of relevant events and circumstances, including macroeconomic, industry and market conditions, the Company's overall financial performance, and trends in the value of the Company's common stock. As of June 30, 2024, the Company did not identify any events that would cause it to assess goodwill for impairment.

 

 

9

 

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 acquisition date, the Company  may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

 

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 a detailed valuation that uses 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.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for accounts receivable, notes receivable and accounts payable approximate fair value as of  June 30, 2024 and December 31, 2023 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  June 30, 2024 and December 31, 2023, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

 

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

 

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

 

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

 observable market data for substantially the full term of the assets or liabilities.

 

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

 

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

within the fair value hierarchy.

 

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

 

The Company does not have any Level 1 or Level 2 assets or liabilities. The Company considers its contingent consideration and ATD Holdback Shares to be Level 3 investments as the fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 fair value measurement.

 

There were no changes in levels during the period ended June 30, 2024.

 

The following is a rollforward of the company’s contingent consideration and ATD Holdback Share liabilities:

 

  

STS Contingent Consideration

 

Balance as of January 1, 2024

 $1,800 

Loss (gain) due to change in fair value

  100 

Balance as of June 30, 2024

 $1,900 
  

ATD Holdback Shares

 

Acquisition of ATD January 2, 2024

 $1,635 

Loss (gain) due to change in fair value

  (745)

Balance as of June 30, 2024

 $890 

 

The following are the inputs in company’s ATD Holdback Share as of January 2, 2024 and June 30, 2024:

 

  

January 2, 2024

  

June 30, 2024

 

Closing stock price

 $3.14  $1.55 

Discount for marketability

 $(0.68) $(0.21)

 

10

 

Revenue Recognition

 

The Company derives its revenues primarily from the licensing and sale of its roadway data and traffic management product and service offerings. These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services, as well as software and hardware. 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.

 

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five 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 following table presents a summary of revenue (dollars in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2024

  

2023

  

2024

  

2023

 

Recurring revenue

 $6,284  $5,772  $11,246  $9,976 

Product and service revenue

  6,143   2,791   10,959   4,772 

Total revenue

 $12,427  $8,563  $22,205  $14,748 

 

Revenues

 

Recurring revenue

 

Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue. The Company generates recurring revenue both from long-term contracts with customers that provide for periodic payments and from short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and eCommerce sales.

 

Recurring revenues are generated through the Company’s Software-as-a-Service ("SaaS") model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services   may vary at the customer’s discretion. The contracts with customers are generally for a term of one to five years. The payments for SaaS solutions   may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these arrangements ratably over the term of the contractual agreement.

 

The Company also currently receives recurring revenues under contracts entered into using a subscription model for data collection services and bundled hardware and software over a period. Payments for these services and subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing, through a web server, access to the Company’s software solutions, a self-managed database, and a cross-platform application programming interface. The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the Company’s solutions over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, any fixed consideration related to the arrangement is generally recognized as recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided.

 

eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software that can be purchased online and activated through a digital key. The Company's contracts with eCommerce customers are generally for a term of one month with automatic renewal each month. The Company invoices and receives fees from its customers monthly.

 

Customer support revenue is associated with perpetual licenses and long-term subscription arrangements and consists primarily of technical support and product updates. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract term. The customer benefits evenly throughout the contract period from the guarantee that the customer support resources and personnel will be available to them. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with a long-term license for software. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such licenses for the same duration of time. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the customer support obligation, in line with how the Company believes services are provided.

 

11

 

Product and service revenue

 

Product and service revenue is defined as the Company’s implementation revenue, perpetual license sales, hardware sales, engineering services and contactless compliance revenue.

 

Implementation revenue is recognized when the Company provides  installation, construction and other implementation services to its customers. These services involve a fee and are typically associated with the sale of the Company’s data collection services, software and hardware. The Company’s implementation revenue is recognized over time as the implementation is completed.

 

In addition to recurring revenue from software sales, the Company recognizes point-in-time revenue related to the sale of perpetual software licenses. The Company sells perpetual licenses that provide customers the right to use software for an indefinite period in exchange for a one-time license fee, which is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and has significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.

 

The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company provides hardware installation services to customers which range from one to six months. The revenue related to the installation component is recognized over time as the implementation is completed.

 

Contactless compliance revenues reflect arrangements to provide hardware systems and services that identify uninsured motor vehicles, notify owners of non-compliance through a diversion citation, and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of diversion citations collected by the relevant jurisdiction.

 

The Company also generates revenue through its engineering services. These services are provided at the request of its customers and the revenue related to these services is recognized over time as the service is completed.

 

Revenue by Customer Type

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2024

  

2023

  

2024

  

2023

 

Urban Mobility

 $8,139  $3,574  $13,754  $6,329 

Transportation Management

  723   881   1,387   1,611 

Public Safety

  3,565   4,108   7,064   6,808 

Total revenue

 $12,427  $8,563  $22,205  $14,748 

 

Urban Mobility 

 

Urban Mobility revenue consists of revenue derived from the Company's roadway data aggregation activities. These activities can include the use of software applications that are part of the Rekor Discover™ platform, the primary application being Rekor’s count, class & speed application. This application fully automates the aggregation of Federal Highway Administration (“FHWA”) 13-bin vehicle classification, speed, and volume data. Revenues associated with the deployment of other traffic sensors, traffic studies, or construction associated with traffic data collection are also part of data aggregation revenue, which is generated through both recurring pay-for-data contracts and hardware sales with a recurring software maintenance component.

 

Transportation Management 

 

Transportation Management revenue is associated with the Rekor Command™ platform and the associated applications underneath the platform. These provide traffic operations and traffic management centers with support through actionable, real-time incident reports integrated into a cross-agency communication and response system. Revenue is generated through contracts that include an upfront as well as recurring component.

 

Public Safety

 

Public Safety revenue consists of licensing of the Rekor Scout™ platform, licensing of Rekor CarCheck™ API, licensing of Rekor’s vehicle recognition software, as well as systems deployed for security, contactless compliance and public safety. Revenue is generated through recurring and perpetual license sales as well as one-time hardware sales.

 

Performance obligations

 

The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This  may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation. 

 

Where performance obligations for the remaining term of a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future. As of June 30, 2024, the unsatisfied portion of the remaining performance obligation was approximately $21,023,000. The Company expects to recognize approximately $15,578,000 of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized within the next five years thereafter.

 

12

 

Unbilled accounts receivable

 

The timing of revenue recognition, billings and cash collections result 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 $1,530,000 and $946,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023, respectively.

 

Contract liabilities

 

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six months to five years, depending on the length of the period during which services are to be provided. This revenue and the corresponding decrease in liabilities is recognized on a contract-by-contract basis at the end of each reporting period and reflected on the unaudited condensed consolidated balance sheet for such period. Changes in the contract balances during the six months ended June 30, 2024 were not materially impacted by any other factors. During the six months ended June 30, 2024, $2,565,000 of the contract liabilities balance as of December 31, 2023 was recognized as revenue.

 

The services due for contract liabilities described above are shown below as of June 30, 2024 (dollars in thousands):

 

2024, remaining

 $2,837 

2025

  1,268 

2026

  490 

2027

  201 

2028

  118 

Thereafter

  28 

Total

 $4,942 

 

Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments to be cash equivalents.

 

Cash subject to contractual restrictions and not readily available for use is classified as restricted cash. 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  June 30, 2024 and December 31, 2023 were $328,000 and $328,000, respectively, and correspond to equal amounts of related liabilities.

 

13

 

Concentrations of Credit Risk

 

The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to $250,000 per account. As of June 30, 2024 and December 31, 2023, the Company had deposits from operations totaling $3,417,000 and $15,713,000, respectively, in multiple U.S. financial institutions and one Israeli financial institution.

 

No single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenues for the three and six months ended June 30, 2024 and 2023, respectively, except that Customer A accounted for 12% of the unaudited condensed consolidated revenue for the six months ended  June 30, 2023.

 

As of June 30, 2024, no single customer accounted for more than 10% of the Company's unaudited condensed consolidated accounts receivable balance. As of December 31, 2023, Customer A and Customer B accounted for 22% and 13%, respectively, of the unaudited condensed consolidated accounts receivable balance. No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated accounts receivable balance as of  December 31, 2023.

 

Accounts Payable, Accrued and Other Current Liabilities

 

As of June 30, 2024 and December 31, 2023, amounts owed to related parties of $189,000 and $253,000 were presented as part of accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets. 

 

A summary of other current liabilities is as follows (in thousands):

 

  

June 30, 2024

  

December 31, 2023

 

Payroll and payroll related expense

 $3,098  $2,824 

Right of offset to restricted cash

  328   328 

STS Contingent Consideration

  1,900   1,800 

Other

  513   658 

Total

 $5,839  $5,610 

 

New Accounting Pronouncements Effective in Future Periods

 

In  November 2023, FASB issued ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within the reported measure(s) of a segment's profit or loss, the amount and composition of any other segment items, the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment's profit or loss to assess performance and decide how to allocate resources. The guidance is effective for our annual period beginning  January 1, 2025, and interim periods thereafter, applied retrospectively with early adoption permitted. The Company is currently evaluating the impact of adoption of this standard on its financial statements and disclosures.

 

In  December 2023, the FASB issued ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide greater disaggregation within their annual rate reconciliation, including new requirements to present reconciling items on a gross basis in specified categories, disclose both percentages and dollar amounts, and disaggregate individual reconciling items by jurisdiction and nature when the effect of the items meet a quantitative threshold. The guidance also requires disaggregating the annual disclosure of income taxes paid, net of refunds received, by federal (national), state, and foreign taxes, with separate presentation of individual jurisdictions that meet a quantitative threshold. The guidance is effective for the Company's annual periods beginning  January 1, 2025 on a prospective basis, with a retrospective option, and early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard on its financial statements and disclosures.

 

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

 

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, 2023.

 

14

 
 

NOTE 2 ACQUISITION

 

ATD Acquisition

 

On  January 2, 2024 (the “Closing Date”), the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “ATD Purchase Agreement”), dated as of the Closing Date, by and among the Company, ATD and All Traffic Holdings, LLC (the “Seller”). The Seller is a portfolio company of Seaport Capital, a private equity firm.  ATD is engaged in the business of advanced traffic data collection. Under the terms of the ATD Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”).

 

The acquisition met the criteria to be accounted for as a business in accordance with ASC 805, Business Combinations (“ASC 805”). This method requires, among other things, that assets acquired, and liabilities assumed be recognized at their fair values as of the acquisition date and that the difference between the fair value of the consideration paid for the acquired entity and the fair value of the net assets acquired be recorded as goodwill, which is not amortized but is tested at least annually for impairment. The aggregate purchase price for the interests of ATD was approximately $20,576,000, subject to a customary working capital adjustments. The purchase price comprised approximately $10,048,000 in cash, which included closing adjustments and 3,496,464 unregistered shares of the Company’s common stock (the “Stock Consideration”), based on a volume weighted average trading price of the Company’s common stock over a thirty consecutive trading day period prior to the date of the ATD Purchase Agreement, which was $2.86. 2,832,135 of the Stock Consideration was issued at closing, while the other 664,329 shares of the Stock Consideration will be issued and delivered to the Seller on the twelve-month anniversary of the Closing Date (the "ATD Holdback Shares"), subject to cutback for working capital adjustments and/or indemnification claims favoring the Company, if any. Subsequent to this transaction these shares have been registered on a Form S-3. See NOTE 8 – STOCKHOLDERS EQUITY for additional information. As the total number of ATD Holdback Shares to be issued to the Seller is not fixed, the ATD Holdback Shares were deemed to be liability classified and are measured at fair value each reporting period. The ATD Holdback Shares will be issued to the Seller on the twelve-month anniversary of the Closing Date, subject to cutback from indemnification claims favoring the Company, if any.  As a result of the transaction, ATD became a wholly-owned subsidiary of the Company and ATD’s key employees have agreed to continue employment with the Company or one of its affiliates.

 

The Company incurred $548,000 in legal and professional fees related to the acquisition which were expensed as incurred and recognized in general and administrative expenses in the unaudited condensed consolidated statement of operations.

 

In accordance with the acquisition method of accounting for a business combination, the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the Closing Date. Since the acquisition of ATD occurred on  January 2, 2024, the results of operations for ATD from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three months ended  June 30, 2024. The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands):

 

Consideration

    

Cash paid

 $10,048 

Liability classified holdback shares (664,329 shares measured at fair value as of the Closing Date)

  1,635 

Common stock issued (2,832,135 shares at closing price of $3.14 per share)

  8,893 

Total Consideration

 $20,576 
     

Recognized amounts of identifiable assets acquired and liabilities assumed

  Estimated Fair Value 

Assets

    

Cash and cash equivalents

 $826 

Accounts receivable

  3,183 

Property and equipment

  1,565 

Right-of-use operating lease assets

  269 

Other current assets

  154 

Intangible assets

  12,100 

Total assets acquired

 $18,097 

Liabilities

    

Accounts payable and accrued expenses

 $715 

Lease liability operating

  269 

Other current liabilities

  257 

Total liabilities assumed

 $1,241 

Fair value of identifiable net assets acquired

  16,856 

Purchase price consideration

  20,576 

Goodwill

 $3,720 

 

15

 

Operations of Combined Entities

 

The following unaudited pro forma combined financial information gives effect to the acquisition of ATD and the Series A Prime Revenue Sharing Notes interest expense, as if they were consummated as of  January 1, 2023. A portion of the proceeds from the Series A Prime Revenue Sharing Notes was used to fund the acquisition of ATD and therefore the Company has included the impact of the issuance of the debt in its pro forma financial information. 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 and the issuance of the Series A Prime Revenue Sharing Notes been completed as of  January 1, 2023 (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 June 30,

  

Six Months Ended June 30,

 
  

2024

  

2023

  

2024

  

2023

 
  

(Dollars in thousands, except per share data)

  

(Dollars in thousands except for per share data)

 

Total revenue

 $12,427  $11,234  $22,205  $19,180 

Net loss

 $(9,795) $(10,454) $(28,409) $(24,191)

Basic and diluted

 $(0.12) $(0.16) $(0.35) $(0.40)

Basic and diluted number of shares

  84,932,611   64,648,414   81,929,347   61,185,669 

  

 

NOTE 3  SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION

 

Supplemental disclosures of cash flow information for the six months ended June 30, 2024 and 2023 were as follows (dollars in thousands):

 

  

Six Months Ended June 30,

 
  

2024

  

2023

 

Cash paid for interest

 $1,408  $709 

Cash paid for taxes

  50   5 

Decrease in accounts payable and accrued expenses related to purchases of property and equipment

  -   (658)

Increase (decrease) in accounts payable and accrued expenses related to purchases of inventory

  559   (374)

Decrease in deposits related to property and equipment received

  243   295 

Decrease in property and equipment that was uninstalled and moved to inventory

  312   - 

Non-cash financing activities:

        

2022 Promissory Notes exchanged for 2023 Promissory Notes - related party

  -   1,000 

Warrants issued in connection with the 2023 Promissory Notes

  -   1,640 

Warrants issued in connection with the 2023 Promissory Notes - related party

  -   3,485 

Fair market value of shares issued in connection with the acquisition of ATD

  8,893   - 

Fair market value of ATD Holdback Shares

  1,635   - 

2023 Promissory Note redemption premium settled in shares of the Company’s common stock

  1,875   - 

New Leases under ASC-842:

        

Right-of-use assets obtained in exchange for new operating lease liabilities

  129   - 

Right-of-use assets obtained in exchange for new finance lease liabilities

  485   939 

 

16

 
 

NOTE 4  INTANGIBLE ASSETS AND GOODWILL

 

ATD Acquisition

 

The purchase price for the ATD acquisition has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition occurred on January 2, 2024, the results of operations for ATD from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2024. As part of the Company's preliminary purchase price allocation for the acquisition, the Company recognized $3,720,000 in goodwill, $11,900,000 in customer relationships, assigned a 15-year useful life, and $200,000 of marketing related intangible assets related to the ATD tradename, assigned a five-year useful life.

 

Intangible Assets Subject to Amortization

 

The following provides a breakdown of identifiable intangible assets, net as of  June 30, 2024 and  December 31, 2023 (dollars in thousands):

 

  

June 30, 2024

  

December 31, 2023

 

Customer relationships

 $15,761  $3,861 

Marketing related

  1,227   1,027 

Technology based

  24,107   24,107 

Internally capitalized software

  1,236   1,236 

Total

  42,331   30,231 

Less: accumulated amortization

  (15,335)  (12,992)

Identifiable intangible assets, net

 $26,996  $17,239 

 

These intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization expense for the three months ended   June 30, 2024 and 2023 was $1,171,000 and $1,032,000, respectively, and for the six months ended  June 30, 2024 and 2023 was $2,343,000 and $2,073,000, respectively and is presented as part of depreciation and amortization in the unaudited condensed consolidated statements of operations. During the current period there have been no events that would cause the Company to evaluate its intangible assets for impairment.  

 

17

 

As of June 30, 2024, the estimated impact from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

 

2024, remaining

 $2,333 

2025

  4,665 

2026

  3,853 

2027

  3,578 

2028

  2,602 

Thereafter

  9,965 

Total

 $26,996 

 

 

NOTE 5  DEBT

 

STS Notes
              

On  June 17, 2022, pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $2,000,000 of notes payable in the form of two unsecured, subordinated promissory notes, each in the principal amount of $1,000,000 and bearing an interest rate of 3.0% per annum, payable quarterly. The notes currently mature on September 30, 2024 and  June 17, 2025, respectively. In June 2024, the Company and noteholders amended the $1,000,000 June 2024 maturity payment of the subordinated promissory notes to September 30, 2024. As of June 30, 2024, the aggregate balance of these notes payable was $2,000,000 which was included in notes payable current portion in the unaudited condensed consolidated balance sheets. 

 

2023 Promissory Notes

 

On   January 18, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes (the “2023 Promissory Notes”), and (ii) warrants to purchase, for an exercise price of $2.00 per share, up to an aggregate of 7,500,000 shares of common stock of the Company, par value $0.0001 per share. In connection with the initial closing on  January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of 2023 Promissory Notes and warrants to purchase 6,250,000 shares of Common Stock. 

 

On  March 4, 2024, the Company elected to prepay the outstanding 2023 Promissory Notes. The 2023 Promissory Notes were redeemed at the redemption price of 115% of the $12,500,000 aggregate principal amount of the 2023 Promissory Notes, or approximately $14,375,000, plus accrued and unpaid interest to the redemption date of approximately $263,000 (the “Redemption Payment”). The noteholders elected to accept $1,875,000 of the Redemption Payment in the form of 750,000 unregistered shares of the Company’s common stock, par value $0.0001 per share, having a value of $2.50 per share, with the remainder of the Redemption Payment to be paid in cash. Subsequent to this transaction these shares have been registered on a Form S-3. See NOTE 8 – STOCKHOLDERS EQUITY for additional information. As a result of the Redemption Payment, the Company recognized a loss on extinguishment of debt of $4,693,000, which included $1,875,000 related to the early termination payment and $2,818,000 related to unamortized issuance costs.

 

The 2023 Promissory Notes were a senior secured obligation of the Company and ranked senior to all indebtedness of the Company, subject to certain exceptions, had a maturity date of  July 18, 2025 (the “Maturity Date”), and bore an interest rate of 12% per annum. No 2023 Promissory Notes remain outstanding.

 

18

 

Series A Prime Revenue Sharing Notes

 

On  December 15, 2023, the Company issued $15,000,000 in Series A Prime Revenue Sharing Notes. Interest accrues on the Series A Prime Revenue Sharing Notes at a fixed annual rate of 13.25% and is paid monthly. The entire outstanding principal balance, together with all interest accrued and unpaid is due and payable on the maturity date of  December 15, 2026. Debt issuance costs paid in connection with the Series A Prime Revenue Sharing Notes were $670,000 and are being amortized as interest expense using a straight-line method over the term of the Series A Prime Revenue Sharing Notes. The Company has a material relationship with Arctis Global, LLC, which invested $5,000,000 in connection with the $15,000,000 initial closing of the Series A Prime Revenue Sharing Notes.

 

Interest will be paid based on revenue received from an initial pool of “prime” accounts which are related to contracts from customers in five states, each of which has been rated for their respective unsecured general obligation debt by nationally recognized credit rating agencies. The Company entered into a base Indenture for the Series A Prime Revenue Sharing Notes as of  December 15, 2023 with Argent Institutional Trust Company, as trustee. The Indenture creates a first priority security interest for the benefit of the holders of all subsequent notes issued under the Indenture. The Series A Prime Revenue Sharing Notes rank senior to the Company’s existing and future secured and unsecured debt with respect to the pool of revenue securing the Series A Prime Revenue Sharing Notes.

 

As part of the terms of the Series A Prime Revenue Sharing Notes the Company is required to maintain an interest reserve related to not less than three times the next monthly interest payment. Additionally, there is a sinking fund requirement which takes effect if the three year value of eligible contracts is less than 170% of the aggregate outstanding principal amount of Series A Prime Revenue Sharing Notes. If the sinking fund requirement takes effect, the Company is required to maintain a cash balance sufficient to amortize the principal amount due on all series of Prime Revenue Sharing Notes outstanding under the Indenture in equal monthly installments by the respective due dates of each such series. The amount related to the interest reserve was $500,000 as of  June 30, 2024 and is held by a third party and is presented as part of deposits on the consolidated balance sheets. The Company is not in default of any requirements as they relate to the Series A Prime Revenue Sharing Notes and the sinking fund requirement has not been triggered as of June 30, 2024.

 

The Company  may prepay the Series A Prime Revenue Sharing Notes at any time after December 15, 2024 until  December 15, 2026 by paying a premium ranging from 103% to 106%. Thereafter, the Series A Prime Revenue Sharing Notes  may be prepaid by the Company at par value. Repayment of the Series A Prime Revenue Sharing Notes at par, plus any unpaid accrued interest,  may also be accelerated by the noteholder upon a change in control or event of default. For the three and six months ended June 30, 2024, the Company recognized $497,000 and $993,000 in interest expense, respectively, related to the Series A Prime Revenue Sharing Notes.

 

Interest Expense

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2024

  

2023

  

2024

  

2023

 

Contractual interest expense

 $559  $403  $1,357  $731 

Amortization of debt issuance costs

  56   516   455   960 

Total interest expense

  615   919   1,812   1,691 

Less: interest income

  71   11   214   23 

Total interest expense, net

 $544  $908  $1,598  $1,668 

  

19

 

Schedule of Principal Amounts Due of Debt

 

The principal amounts due for long-term notes payable are shown below as of June 30, 2024 (dollars in thousands):

 

2024, remaining

 $1,037 

2025

  1,078 

2026

  15,083 

2027

  86 

2028

  27 

Thereafter

  - 

Total

  17,311 

Less unamortized debt discount

  (558)