Novume(US:REKR)2020-08-03 20:31PART I - FINANCIAL INFORMATION Financial Statements This section presents Rekor Systems, Inc.'s unaudited condensed consolidated financial statements as of June 30, 2020, and for the three and six-month periods then ended, reflecting a strategic shift to technology services and the classification of professional services as discontinued operations Condensed Consolidated Balance Sheets As of June 30, 2020, Rekor Systems reported total assets of $22,603 thousand, a decrease from $28,992 thousand at year-end 2019, with total liabilities decreasing to $27,243 thousand from $32,223 thousand, resulting in a total stockholders' deficit of $(10,862) thousand Condensed Consolidated Balance Sheet Data (in thousands) | | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $5,478 | $10,230 | | Total Assets | $22,603 | $28,992 | | Total Current Liabilities | $5,670 | $10,332 | | Total Liabilities | $27,243 | $32,223 | | Total Stockholders' Deficit | $(10,862) | $(9,035) | - As of June 30, 2020, notes payable subject to an exchange for common stock agreement amounted to $14,600 thousand, with this exchange completed subsequent to the quarter-end12 Condensed Consolidated Statements of Operations For the six months ended June 30, 2020, revenue from continuing operations increased 76% to $4,273 thousand, with a net loss from continuing operations of $4,193 thousand, significantly reduced by a $3,600 thousand gain on business sales Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,677 | $1,416 | $4,273 | $2,426 | | Gross Profit | $1,401 | $1,145 | $2,503 | $1,665 | | Loss from Operations | $(2,779) | $(1,609) | $(5,382) | $(2,795) | | Net Loss from Continuing Operations | $(419) | $(2,991) | $(4,193) | $(5,509) | | Loss per Share - Continuing Ops | $(0.03) | $(0.17) | $(0.22) | $(0.32) | - A significant gain on the sale of business of $3,600 thousand was recognized in the second quarter of 2020, which substantially reduced the net loss15 Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash used in operating activities from continuing operations was $(6,234) thousand, offset by $5,253 thousand from investing activities and $1,264 thousand from financing activities, leading to a net cash increase of $283 thousand Cash Flow Summary - Continuing Operations (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(6,234) | $(2,913) | | Net Cash Provided by (Used in) Investing Activities | $5,253 | $(265) | | Net Cash Provided by Financing Activities | $1,264 | $3,839 | - The company received $5,700 thousand in proceeds from the sale of AOC Key Solutions and TeamGlobal during the first six months of 202020 - Financing activities in 2020 included $2,200 thousand in net proceeds from an at-the-market agreement and $874 thousand from a PPP loan, offset by $2,200 thousand in repayments of notes payable20 Notes to Condensed Consolidated Financial Statements The notes detail the company's strategic shift to AI-enabled vehicle identification technology, classifying Professional Services as discontinued operations, and highlight key events including the $8,000 thousand sale of subsidiaries and a $17,400 thousand debt-for-equity exchange - The company has strategically shifted to focus on its technology services and products, classifying the entire Professional Services segment (including TeamGlobal, AOC Key Solutions, and Firestorm) as discontinued operations3032 - On June 30, 2020, the company entered into Exchange Agreements to redeem approximately $17,400 thousand of its 2019 Promissory Notes in exchange for 4,349,497 shares of common stock at $4.00 per share, with the transaction completed on July 15, 202036122172 - The company sold AOC Key Solutions on April 2, 2020, for $4,000 thousand, recognizing a gain of $2,600 thousand, and sold TeamGlobal on June 29, 2020, for $4,000 thousand, recognizing a gain of $1,000 thousand889091 - As of June 30, 2020, the company had approximately $15,200 thousand of remaining performance obligations, with about 33% expected to be recognized as revenue in the next twelve months64 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the strategic focus on AI-enabled vehicle identification systems, noting 76% revenue growth in H1 2020, decreased gross margin due to initial infrastructure costs, increased operating expenses including a 344% surge in R&D, and a post-quarter $17,400 thousand debt-for-equity exchange improving liquidity - The company has completed its strategic shift to focus on its core technology segment by selling its professional services subsidiaries, AOC Key Solutions and TeamGlobal183214 Revenue from Continuing Operations (in thousands) | Period | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $2,677 | $1,416 | $1,261 | 89% | | Six Months Ended June 30 | $4,273 | $2,426 | $1,847 | 76% | - Gross margin decreased to 52% in Q2 2020 from 81% in Q2 2019, primarily due to higher initial costs associated with building infrastructure for large new software and hardware contracts217 - Research and Development expenses increased by 344% for the six months ended June 30, 2020, compared to the same period in 2019, reflecting the strategic shift to develop new products and enhance software capabilities218221 - Subsequent to the quarter end, the company completed a Note Exchange, converting approximately $17,400 thousand of debt and associated fees into 4.35 million shares of common stock, significantly improving the company's balance sheet234236 Quantitative and Qualitative Disclosures About Market Risk As a 'smaller reporting company,' Rekor Systems, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - The company is classified as a "smaller reporting company" and is therefore exempt from providing quantitative and qualitative disclosures about market risk252 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 30, 2020, with no material changes reported during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020256 - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of June 30, 2020258 - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls260 PART II - OTHER INFORMATION Legal Proceedings The company is involved in multiple legal proceedings, including a suit against former Firestorm executives, defense against a patent infringement claim by Vigilant Solutions, and a dispute with a former OpenALPR customer - The company is suing former executives of Firestorm, alleging fraudulent inducement in the acquisition of Firestorm263 - Vigilant Solutions, LLC, a subsidiary of Motorola, has filed a patent infringement complaint against the company, which the company is defending266 - The company's subsidiary, OpenALPR, is involved in a breach of contract and defamation lawsuit with a former customer, Plate Capture Solutions, Inc (PCS)267 Risk Factors This section supplements risk factors with new disclosures concerning the unpredictable impact of the COVID-19 pandemic and the potential non-forgiveness or negative public perception risks associated with the $874 thousand PPP loan - The company is unable to predict the extent to which the global COVID-19 pandemic may adversely impact its business operations, financial performance, and stock price due to curtailed business activity and market volatility271 - There is a risk that the company's PPP loans, totaling $874 thousand, may not qualify for forgiveness, which would require repayment and could negatively affect operations, and the company also faces risks of penalties or negative public perception related to receiving these loans as a public company272273 Unregistered Sales of Equity Securities and Use of Proceeds This section details equity activities, including the sale of 538,967 common shares for $2,177 thousand via ATM, an increase in authorized shares to 100 million, and a post-quarter debt-for-equity exchange of $17,400 thousand in promissory notes for 4,349,497 shares - In the six months ended June 30, 2020, the company sold 538,967 shares of common stock for net proceeds of $2,177 thousand through its At-the-Market (ATM) sales agreement276 - In March 2020, the company increased its authorized number of common stock shares from 30,000,000 to 100,000,000277 - A Note Exchange agreement was reached on June 30, 2020, and completed on July 15, 2020, where 4,349,497 shares of common stock were issued to redeem approximately $17,400 thousand in promissory notes and associated fees278279 Defaults Upon Senior Securities No defaults upon senior securities were reported - The company reported no defaults upon senior securities282 Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company283 Other Information No other information was reported for this item - The company reported no other information for this item284 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with this report include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, as well as XBRL interactive data files285