REKOR SYSTEMS, INC. Cautionary Note Regarding 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 endedDecember 31, 2021 , 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 theSecurities and Exchange Commission (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 divestitures, mergers, acquisitions, or other business combinations 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.
Specific factors that might cause actual results to differ from our expectations include, but are not limited to:
? significant risks, uncertainties and other considerations discussed in this
report;
? operating risks, including supply chain, equipment or system failures, cyber
and other malicious attacks and other events that could affect the amounts and
timing of revenues and expenses;
? reputational risks affecting customer confidence or willingness to do business
with us;
? financial market conditions and the results of financing efforts;
? our ability to successfully identify, integrate and complete acquisitions and
dispositions, including the integration of the Waycare Acquisition and STS
Acquisition;
? our continued ability to successfully access the public markets for debt or
equity capital;
? political, legal, regulatory, governmental, administrative and economic
conditions and developments in
in which we operate and, in particular, the impact of recent and future
federal, state and local regulatory proceedings and changes, including
legislative and regulatory initiatives associated with our products;
? current and future litigation;
? competition from other companies with an established position in the markets
we have recently entered or are seeking to enter or from other companies who
are seeking to enter markets we already serve;
? our failure to successfully develop products using our technology that are
accepted by the markets we serve or intend to serve or the development of new
technologies that change the nature of our business or provide our customers
with products or services superior to or less expensive than ours;
? the inability of our strategic plans and goals to expand our geographic
markets, customer base and product and service offerings;
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? risks associated with pandemics and other global health emergencies, such as
the spread of a novel strain of coronavirus ("COVID-19") around the world
since the first quarter of 2020 which has caused significant volatility in
the breadth and duration of business disruptions related to COVID-19, as well
as its impact on the
? risks associated with cyberattacks on international, national, local and
Company information infrastructure by rogue businesses or criminal elements or
by agents of governments engaged in asymmetric disruptions for competitive,
economic, or military reasons.
Investors are cautioned that these forward-looking statements are inherently
uncertain. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein. Other than as required by law, we
undertake no obligation to update forward-looking statements even though our
situation may change in the future. Given these risks and uncertainties, readers
are cautioned not to place undue reliance on such forward-looking statements.
The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited condensed consolidated
financial statements and related notes included elsewhere in this report and the
"Risk Factors" section of our Annual Report on Form 10-K for the year ended
December 31, 2021 (the "2021 Annual Report") and any updates contained herein as
well as those set forth in our reports and other filings made with the SEC .
General
Overview
We are a roadway intelligence and data services company providing products and
solutions to meet the increasing demand for smarter, safer, and greener
intelligent transportation infrastructure. Our operations are conducted by our
wholly-owned subsidiaries, Rekor Recognition Systems, Inc. , or Rekor
Recognition , Waycare Technologies, Ltd. , or ("Waycare"), and Southern Traffic
Services, Inc. , or ("STS").
We specialize in: 1) the collection and aggregation of roadway and mobility
related data from multiple sources, 2) the analysis and transformation of that
data into knowledge and actionable insights, and 3) the distribution of those
insights to multiple users in a secure environment using the highest levels of
encryption and privacy standards. Our intellectual property and proprietary
technologies harness the latest advancements in artificial intelligence, machine
learning, data analysis, edge processing and communications to address critical
challenges in transportation management, public safety, urban mobility, and key
commercial markets. Our objective has been to create a collection and
distribution service that aggregates multiple streams of data relevant to a
transportation and mobility network, converges, processes and analyzes them, and
provides real-time and predictive information to decision makers and users of
that network in a flexible and rich user environment based on individual needs
and use-cases. Our Rekor OneTM platform serves as a uniform architecture and
backbone for the collection and delivery of roadway intelligence to increase
roadway safety, efficiency and sustainability of roadways, and make communities
safer, smarter, greener and more connected. Providing products and services
across 80 countries, we deliver intelligent infrastructure solutions for
government agencies and commercial clients in the United States and around the
world.
Transportation infrastructure is the backbone of a functioning economy. People,
vehicles, materials, and information all require 24/7 mobility, something that
depends on well-maintained, synchronized networks and systems. The cost,
complexity and interdependency of these systems has made it difficult to keep
pace in a rapidly growing and changing world. Rekor's data-driven solutions help
make better use of existing infrastructure and have also been developed to aid
in planning and implementing the next generation of transportation
infrastructure, as well as be part of that infrastructure. Roads, bridges,
tunnels, and residential areas have much to tell us if we gather and analyze the
data they can provide and exploit the knowledge that gives us about how to
optimally serve the public with an efficient, safe, and healthy living
environment. Rekor is driven to help its customers generate and make intelligent
use of that knowledge.
Spurred by the 2021 Infrastructure Investment and Jobs Act, we expect the United
Sates to make an unprecedented investment in transportation infrastructure. The
bill allocates $550 billion in new spending, spread out over five years, to
rebuild roads, bridges and rails, and airports, in addition to providing
high-speed internet access and addressing climate concerns. As part of this,
federal, state, and local governments are prioritizing strategic investments
dedicated to improving existing transportation management and increasing public
safety through modern, efficient and connected infrastructure. We expect to play
an important role in meeting the need for improved data as agencies plan for and
build the transportation networks of the future. Once completed, we also expect
those networks to be data interactive: generating and distributing real-time
intelligence that can be used to improve traffic management, public safety,
maintenance and emergency services, as well as by planning agencies and users
such as connected and autonomous vehicles. Our primary objective has been to
develop the technology that will play a central role in that process.
Our first step was to develop the ability to extract a more accurate and
detailed information of roadway and mobility activity than existing technology.
We call this "ground truth data" and have used artificial intelligence
algorithms and machine learning to design computer-vision software that provides
a wealth of important data about the movements of motorized and non-motorized
vehicles, including bicycles and pedestrians. It includes vehicle
classifications, counts, direction of travel, speed, make, model, color and
other data. Our technology allows this ground truth data to be extracted by
optical and IoT sensors at the "edge" of the network, close to the source of the
activity being evaluated. Extracting relevant data at the edge improves the
ability to generate and communicate timely insights by reducing latency,
response time, and the volume of raw data that needs to be communicated through
the network.
Our platform also provides the ability to anonymize vehicle information and to
distribute discrete information to multiple users based on the specific data
that each user needs to know. This permits us to provide unmatched cross-agency
and public/private entity collaboration using a single source-of-truth while
presenting customized information to multiple users simultaneously, where
previously agencies would derive information from separate sources, at different
times and with varying degrees of accuracy. As a result, we can provide
simultaneous alerts and consistent, real-time situational awareness during
emergencies to separate agencies such as first-responders, police, fire and
medical support, while also providing other agencies with the benefit of
comprehensive, accurate and fully up-to-date archival information for use in
planning, management and maintenance. The ability of our platform to allow each
sensor in the network to be linked together and to supply customized data to
multiple users can provide significant reductions in costs for our clients as
compared to the installation and maintenance of separate dedicated systems.
Thus, the combination of our software's data extraction and distribution
capabilities allows us to simplify the network environment while enhancing its
functionality at the same time. Simply put, we can dramatically increase the
amount of usable data and actionable insights available to our clients at the
same time that we can significantly reduce the number of sensors and
infrastructure required to collect that data.
Another advantage of our software is that it can be used with a wide variety of
commercially available sensors, allowing customers as to achieve superior
results leveraging existing infrastructure investments, and with much less
expensive equipment than was previously necessary. This makes applications of
Rekor technology feasible in environments where costs were previously
prohibitive or inaccessible. While Rekor has developed a line of optical and IoT
sensors that are purpose-built to make the most efficient use of our software,
customers can use it with existing sensor systems and integrate to our network
seamlessly, without needing to install new equipment. This reduces installation
and lead time in the adoption of our solutions and facilitates cross agency
adoption and data unification.
Having achieved the ability to obtain comprehensive ground truth data more
accurately and at less expense than existing systems, our next objective was to
develop the ability to aggregate multiple sources of third-party data into the
platform. We have designed our platform to serve as a central exchange, so that
third party data can be used in tandem with our ground truth data to provide a
more holistic view of the transportation network within a particular region. We
call this the Rekor Partner Network (RPN). RPN members include Waze, Mobileye,
Wejo, Otonomo, TomTom, Tomorrow.io, and dozens of other leading data companies
around the world. By incorporating weather forecasts, event and dispatch
schedules, historical patterns and similar data into our analysis, we can
provide a wide variety and volume of diverse and related insights that are more
comprehensive, and predictive. Using these additional sources of data, we are
able to provide our clients with a regional technology environment that ingests
and analyzes data from both existing infrastructure and third-party sources,
producing superior visibility of the transportation and mobility network in real
time, together with improved identification and predictions of disruptive
events.
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Intelligence-Driven Innovation
We currently provide software, hardware and services to support intelligent transportation networks and enhance community safety and security. These products and services have been designed to support a single integrated platform: Rekor OneTM. Using this proprietary platform,Rekor can extract real time data about the activity on a transportation network, aggregate it with multiple streams of data from other sources, analyze and reprocess it holistically, and then use it to distribute coherent information to customers that can be used to make decisions about how the network should be used and managed. We have concentrated on developing a platform that facilitates the efficient collection, analysis and distribution of a large volume and variety of data. The velocity and veracity of data that we have captured and applied in building our proprietary artificial intelligence and machine learning models have provided us with a significant first-mover advantage. From the very beginning, we have been collecting, aggregating, cleansing, extracting, transforming, and using data to build and improve our models. Today, we can extract and process a deeply detailed picture of a roadway environment and what is moving in that environment with an unmatched level of accuracy in our inferences, predictive analytics, and insights. We are rapidly growing the geographic area connected by smart optical IoT devices at-the-edge to the open architecture of our Rekor One intelligence platform. In addition to digitizing existing infrastructure by capturing real-time data from new and existing roadway devices, our platform enables us to extend the scope of our knowledge via proprietary algorithms that pull the data and process it through our models. Beyond this, we are augmenting our data through a growing network of data partners. This provides multiple trillions of additional data points that unlock further real-time and predictive operational insights about what is happening in a given transportation environment at every moment. Example data sources from our partner network include mobility, navigation, and traffic applications, in-vehicle data, connected, autonomous vehicles datasets, weather, supply chain, event management, and a rapidly growing list of customer-provided and crowd-sourced data. The more data we capture and inject into our machine learning models, the smarter and more accurate they become. Due to the incredible strength and accuracy of our models, we can extract more data from the roadways than ever before possible, and generate rich multi-dimensional insights for our customers about what is happening in real-time. In addition, we use AI-driven predictive analytics to forecast what will happen in the next five minutes, in 12 or 24 hours, and even days and months into the future. From these insights, customers can make better informed proactive decisions and achieve improved operational efficiency through a more strategic allocation of resources. At the core of all our intelligent infrastructure solutions is the Rekor OneTM intelligence platform. Fueled by rich data and powered by AI, Rekor OneTM is purpose-built to be a single source of truth and insights serving multiple customer segments and multiple missions. Built on the foundation of Rekor One, we can simultaneously deliver vertical-specific solutions for traffic management, public safety, and commercial markets. With our advanced technology and domain expertise, we have developed solutions that address diverse use cases across a number of public and private sector segments. Example use-cases we can support include: ? Traffic management and analytics ? Predictive traffic congestion modeling and forecasting ? Roadway monitoring and incident detection and response ? Support systems for integrated corridor management ? Electric vehicle adoption and charge station planning ? Commercial vehicle and tonnage monitoring and analysis ? Real-time emissions analysis, sustainability, and green initiatives ? Live and archival HD video management and traffic surveillance ? Law enforcement and intelligence-based policing ? Contactless compliance and enforcement ? Vehicle and license plate recognition for public safety With access to multiple sources of data and our award-winning AI-driven innovations, we believe we have established a leadership position in providing these intelligent infrastructure solutions. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities. Using our proprietary centralized platform we can collect, analyze, and turn infrastructure data into insights with new products and services that help governments and businesses increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions. The Road Ahead We believe the world is at an inflection point. In the next five years, governments will make significant investments to improve aging infrastructure. Recent technological developments such as edge- and cloud-based computing artificial intelligence, advances in rich data management and the internet of things, have put us in a unique position to help revolutionize mobility by developing intelligent infrastructure that closes the gap between rapidly evolving technology and aging, legacy infrastructure. These are not just our aspirational goals, but things we're working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it using artificial intelligence, and packaging it to provide real-time insights and long-term solutions, we can help governments and businesses address issues of aging infrastructure as well as the unprecedented mobility, public safety and environmental challenges they face. We believe our leadership in in using advanced technology to develop intelligent infrastructure solutions puts us in an advantaged market position at the forefront of developing a new economy. As we provide governments and businesses with new products and services that use trillions of intelligent infrastructure interactions to increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people, we expect to serve both our shareholders and the world at large. 31
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Opportunities, Trends and Uncertainties
We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:
? Growing Smart City Market - According to a
two-thirds of the world population will live in urban areas by 2050.
Our cities are getting larger, with longer commutes, biggerroads and
the resulting impact on the environment and the quality of life. This
trend requires forward-thinking officials to manage assets and
resources more efficiently. We believe that advancements in "big
data" connected devices and artificial intelligence can provide
Intelligent Transportation System ("ITS") solutions that can be used to
reduce congestion, keep travelers safe, improve transportation, protect
the environment, respond to climate change, and enhance thequality of
life. We believe our data-driven, artificial intelligence-aided
solutions provide useful tools that can effectively tackle the
challenges cities and communities are facing today and will face over
the coming decades.
? AI for Infrastructure - We believe that the application of AI to the
analysis of conditions on roadways and other infrastructure can
significantly affect the safety and efficiency of vehiculartravel in
the future. As vehicles move towards full automation, there is a need
for real-time data and actionable insights around traffic flow,
identification of anomalous and unsafe movements - e.g. wrong way
vehicles, stopped vehicles, or/and pedestrians on the roadway.
Marketers and drive-thru retailers with loyalty programs can also
benefit from rapid, lower cost identification of existing andpotential
customers in streamlining and accelerating local vehicular flow as well
as data about the vehicles on the roadway.
? Connected Vehicle Data - Today's new vehicles are equipped with dozens
of sensors, collecting information about internal systems,external
hazards, and driving behaviors. This data is an untapped resource for
cities and transportation agencies alike. Notably, the data from these
vehicles represent a virtual network that is independent of the
infrastructure which is maintained and operated by the public agencies.
Connected vehicle sensors provide important information related to
hazardous conditions, speed variations, intersectionperformance, and
more. This data can help agencies and cities gain more visibility on
their roads, supplementing data from existing infrastructure and
providing untapped transportation information from rural areas that are
not served by ITS infrastructure.? New and Expanded Uses for Vehicle Recognition Systems - We believe that
reductions in the cost of vehicle recognition products andservices
will significantly broaden the market for these systems. Wecurrently
serve many users who could not afford the cost, or adapt to the
restrictions of, conventional vehicle recognition systems. These
include smaller municipalities, homeowners' associations, and
organizations finding new applications such as innovativecustomer
loyalty programs. We have seen and responded to an increase in the
number of smaller jurisdictions and municipalities that aretesting
vehicle recognition systems or that issued requests for proposals to
install a network of vehicle recognition sensors. We also expect the
availability of faster, higher-accuracy, lower-cost systems to
dramatically increase the ability of crowded urban areas to manage
traffic congestion and implement smart city programs.? Adaptability of the Market - We have made a considerable investment in
our advanced vehicle recognition systems because we believetheir
increased accuracy, affordability and ability to capture additional
vehicle data will allow them to compete effectively with existing
providers. Based on published benchmarks, our software currently
outperforms competitors. However, large users of existingtechnology,
such as toll road operators, have long-term contracts with service
providers that have made considerable investments in their existing
technologies and may not consider the improvements in accuracy or
reductions in cost sufficient to justify abandoning their current
systems in the near future. In addition, existing providers may be able
to reduce the cost of their current offerings or elect to reduce prices
and accept reduced profitability while working to develop their own or
secure advanced vehicle recognition systems from others who are also
working to develop them. As a result, our success inestablishing a
major position in these markets will depend on being able to
effectively communicate our presence, develop strong customer
relationships, and maintain leadership in providing the capabilities
that customers want. As with any large market, this will require
considerable effort and resources.
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? Expansion of Automated Enforcement of Motor Vehicle Laws - We expect
contactless compliance programs to be expanded as the types of vehicle
related violations authorized for automated enforcement increase and
experience provides localities with a better understanding of the
circumstances where it is and is not beneficial. We believe that future
legislation will increasingly allow for automated enforcement of
regulations such as motor vehicle insurance requirements.Communities
are currently searching for better means of achieving compliance with
minor vehicle offenses, such as lapsed registrations, and safety issues
such as motorists who fail to stop for school buses. Forexample, due
to high rates of fatalities and injuries to law enforcement and other
emergency response crews on roadsides, several states areconsidering
authorizing automated enforcement of violations where motorists fail to
slow down and/or move over for emergency responders and lawenforcement
vehicles at the side of the road. To the extent that legislative
implementation is required, a deliberative and necessarily
time-consuming process is involved. However, as states expand auto
enforcement, the market for our products and services shouldbroaden in
the public safety market.
? Graphic Processing Unit ("GPU") Improvements - We expect our business
to benefit from more powerful and affordable GPU hardware that has
recently been developed. These GPUs are more efficient for image
processing because their highly parallel structure makes them more
efficient than general-purpose central processing units ("CPUs") for
algorithms that process large blocks of data, such as thoseproduced by
video streams. GPUs also provide superior memory bandwidth and
efficiencies as compared to their CPU counterparts. The most recent
versions of our software have been designed to use the increased GPU
speeds to accelerate image recognition. The GPU market ispredicted to
grow as a result of a surge in the adoption of the Internet of Things
("IoT") by the industrial and automotive sectors. As GPU manufacturers
increase production volume, we hope to benefit from the reduced cost to
manufacture the hardware included in our products or available to
others using our services.
? Edge Processing - Demand for actionable roadway information continues
to grow in parallel with camera resolutions. Over the last several
decades, cameras have evolved and unlocked new capabilities with each
advancement. Further, cellular networks have been optimized for
downloading data rather than uploading data. As a result, while
download speeds have improved significantly due to largeinvestments in
cellular infrastructure, this has resulted in relatively small
improvements to cellular upload speeds. With roadside deployments
experiencing explosive growth in count and density, scalability,
latency and bandwidth have become aspects of competition in the market.
Our systems have been designed to address these issues through the use
of more effective edge processing, enabled both by incorporating the
increasingly effective new GPUs into our systems and continual
improvements in the efficiency of our AI algorithms. Our edge
processing systems ingest local HD video streams at the source and
convert the raw video data to text data, dramatically reducing the
volume of data that needs to be transferred through the network. Edge
processing allows us to scale a network dramatically without the
bandwidth, cost, latency and dependability limitations that are
experienced by other networks where raw video needs to bestreamed to
the cloud for processing.
? Accelerated Business Development and Marketing - Our ability to compete
in a large, competitive and rapidly evolving industry willrequire us
to achieve and maintain a visible leadership position. As aresult, we
have accelerated our business development marketing and eCommerce
activities to increase awareness and market adoption of our new
technology and products within the market. We anticipate that an
increased presence in the market, the continued development of
strategic partnerships and other economies of scale will significantly
reduce the level of costs necessary to support sales of our products
and services. However, the speed at which these markets grow to the
degree to which our products and services are adopted isuncertain.
? COVID 19 - The spread of a novel strain of COVID-19 around the world
since the first quarter of 2020 has caused significant volatility in
U.S. and international markets. Despite the roll-out of
vaccinations,
there continues to be significant uncertainty around the breadth and
duration of business disruptions related to COVID-19, as well as its
impact on the U.S. and international economies. As such, we are unable
to determine the full impact on our operations. However, we have also
seen a positive impact of COVID-19 on the technology sector, in which
we are competing. The pandemic has accelerated the adoption of new
technologies by businesses. According to a McKinsey Global Survey of
executives, their companies have accelerated the digitization of their
customer and supply-chain interactions and their internaloperations by
three to four years. Funding for digital initiatives has increased,
creating opportunities for innovative solution providers such as Rekor .
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? Pressure on Government Budgets - COVID-19 has caused significant strain
on government budgets. With less money to spend and more need for
resources, government agencies need affordable, effective, and scalable
solutions for revenue recovery and discovery. With subscription pricing
and an intelligent infrastructure platform that accomplishes multiple
agency missions, we are uniquely positioned to provide agencies with
force-multiplying tools when money and human resources are limited.
Agencies can be better positioned to improve public safety, manage
resources more effectively, and make an impact on their citizen's
quality of life with limited capital expenditure. In addition, states
adopting contactless compliance programs may be able to garner
significant net cash contributions to their annual budgets while
reducing the number of non-compliant vehicles on their roadways.
?
law on
in the transportation systems in
billion in new spending on roadway infrastructure, including intelligent
transportation systems. We believe that our comprehensive offering of
solutions positions the Company well to emerge as a technology leader in
the expanded market for intelligent infrastructure that will benefit
from this legislation. We have identified opportunities to access
federal funding streams, and we are working to implement a program that
capitalizes on this unprecedented
safety, homeland security, and transportation infrastructure and ensures
that our customers are positioned to capture as much of this
extraordinary government spending as possible. Beyond the many recurring
federal grant programs that could support customer purchases, and the
$350 billion in American Rescue Plan Act allocations that public
agencies are receiving now, we are particularly excited about the
prospect of engaging in the following new funding streams that are
contained in the IIJA.
?$200 million annually for a "Safe Streets and Roads for All" programthat would make competitive grants for state projects that significantly
reduce or eliminate transportation-related fatalities.
?$150 million for the current administration to establish a grant
program to modernize state data collection systems
?$500 million for the Strengthening Mobility and RevolutionizingTransportation ("SMART") Grant Program that would support demonstration
projects on smart technologies that improve transportation efficiency
and safety
Components of Operating Results
Revenues
We derive revenues substantially from the sale of software, hardware and related services.
Software sales include subscriptions for the use of our software as a service
("SaaS") and software licenses. SaaS revenues are treated as recurring revenue
and provided both through negotiated agreements with larger governmental and
commercial customers and through subscriptions from smaller customers. License
sales are typically term agreements, including agreements for perpetual
licenses, that may include maintenance obligations for software updates that
keep up with changes in vehicle models and license plate designs.
Hardware is sold through direct sales or subscriptions and is typically sold
with a software subscription or license arrangement. Revenue from direct sales
is generally recognized when the hardware is delivered, or installation is
completed in accordance with the terms of the contract. Revenue from hardware
subscriptions may include software subscriptions and are recognized as recurring
revenue throughout the term of the subscription agreement.
Our related services include customer support and implementation services, as
well as management services such as violation notices, billing and collections,
website portals and call centers related to programs that employ our software
solutions. In addition, we engage in pilot programs with governmental and
commercial entities that include extension or renewal features that may result
in recurring revenues and/or additional point-in-time revenues at the completion
of the pilot program.
Costs of revenues, excluding depreciation and amortization
Direct costs of revenues consist primarily of the portion of technical and
non-technical salaries and wages and payroll-related costs incurred in
connection with revenue-generating activities. Direct costs of revenues also
include production expenses, data subscriptions, sub-consultant services and
other expenses that are incurred in connection with our revenue-generating
activities. Direct costs of revenues exclude the portion of technical and
non-technical salaries and wages related to marketing efforts, vacations,
holidays, and other time not spent directly generating fees under existing
contracts. Such costs are included in operating expenses. We expense direct
costs of revenues when incurred.
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Table of Contents Operating Expenses Our operating expenses consist of general and administrative expenses, sales and marketing, research and development and depreciation and amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expenses. Operating expenses also include depreciation, amortization and impairment of assets. General and Administrative
General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include office leases, professional fees and insurance.
We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, insurance and investor relations as a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term. Sales and Marketing Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base. Research and Development Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services. We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our AI solutions. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses
Depreciation and Amortization
Depreciation and amortization expenses are primarily attributable to our capital
investments and consist of fixed asset depreciation, amortization of
right-of-use assets, amortization of intangibles considered to have definite
lives, and amortization of capitalized internal-use software costs.
Other Income (Expense)
Other income (expense) consists primarily of interest expense in connection with
our debt arrangements, costs associated with the extinguishment of our debt
arrangements, gains on the sale of subsidiaries, gains or losses on the sale of
fixed assets, and interest income earned on cash and cash equivalents,
short-term investments and note receivables.
Income Tax Provision
Income tax provision consists primarily of income taxes in certain domestic
jurisdictions in which we conduct business. We have recorded deferred tax assets
for which a full valuation allowance has been provided, including net operating
loss carryforwards and tax credits. We expect to maintain this full valuation
allowance for the foreseeable future as it is more likely than not that some or
all of those deferred tax assets may not be realized based on our history of
losses.
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Critical Accounting Estimates and Assumptions
A comprehensive discussion of our critical accounting estimates and assumptions is included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . New Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated financial statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.
Results of Operations
Our historical operating results in dollars are presented below. This analysis
of operation is solely related to continuing operations and does not consider
the results of discontinued operations.
Nine Months Ended September
Three Months Ended September 30, 30,
(Dollars in thousands) 2022 2021 2022 2021
Revenue $ 7,425 $ 2,615 $ 15,371 $ 11,105
Cost of revenue, excluding depreciation
and amortization 4,119 1,402 8,780 4,705
Operating expenses:
General and administrative expenses 6,841 6,813 22,541 16,094
Selling and marketing expenses 2,432 1,125 6,390 3,044
Research and development expenses 4,911 2,000 13,772 4,741
Goodwill impairment 34,835 - 34,835 -
Depreciation and amortization 1,926 930 4,846 2,169
Total operating expenses 50,945 10,868 82,384 26,048
Loss from operations (47,639 ) (9,655 ) (75,793 ) (19,648 )
Other income (expense):
Interest expense (21 ) (21 ) (46 ) (72 )
Other (expense) income (1,379 ) 66 (1,403 ) 103
Total other income (expense) (1,400 ) 45 (1,449 ) 31
Loss before income taxes and equity
method investments (49,039 ) (9,610 ) (77,242 ) (19,617 )
Income tax benefit (provision) 954 (3 ) 954 (10 )
Equity in loss of investee - - - (150 )
Net loss from continuing operations
36
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Table of Contents
Comparison of the Three and Nine Months Ended
Total Revenue
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
(Dollars in
thousands) 2022 2021 $ % 2022 2021 $ %
Revenue $ 7,425 $ 2,615 $ 4,810 184 % $ 15,371 $ 11,105 $ 4,266 38 %
Revenue increased 184% to $7,425,000 for the three months ended September 30,
2022 , compared to the prior corresponding quarter. The increase in revenue for
the three months ended September 30, 2022 , compared to the three months ended
September 30, 2021 , was primarily attributable to the synergies with our recent
acquisitions. During the three months ended September 30, 2022 , revenue
attributable to our acquisition of STS was $3,503,000 .
Revenue increased 38% to $15,371,000 for the nine months ended September 30,
2022 , compared to the corresponding prior nine-month period. The increase in
revenue for the nine months ended September 30, 2022 , compared to the nine
months ended September 30, 2021 , was primarily a result of our recent
acquisition of STS and its existing customer base. During the nine months ended
September 30, 2022 , revenue attributable our STS acquisition was $3,990,000 . As
part of our change in selling strategy, we have focused on a sales model that
employs contracts with recurring revenue. We expect these contracts to provide a
more predictable stream of revenues, compared to one-time sales of hardware and
software licenses which are generally more difficult to predict.
Cost of Revenue, Excluding Depreciation and Amortization
Three Months Ended Nine Months Ended September
September 30, Change 30, Change
(Dollars in
thousands) 2022 2021 $ % 2022 2021 $ %Cost of revenue, excluding depreciation and amortization$ 4,119 $ 1,402 $ 2,717 194 %$ 8,780 $ 4,705 $ 4,075 87 % For the three and nine months endedSeptember 30, 2022 , cost of revenue, excluding depreciation and amortization increased by$2,717,000 and$4,075,000 compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our new go-to-market strategy. As part of a sales strategy to more quickly expand our market reach, we have recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to establish the program, which will not be incurred again if the pilot program is converted into a long-term program. In addition, the Company experienced lower margins on certain hardware sales during these quarters. Operating Expenses Three Months Ended Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2022 2021 $ % 2022 2021 $ % Operating expenses: General and administrative expenses$ 6,841 $ 6,813 $ 28 0 %$ 22,541 $ 16,094 $ 6,447 40 % Selling and marketing expenses 2,432 1,125 1,307 116 % 6,390 3,044 3,346 110 % Research and development expenses 4,911 2,000 2,911 146 % 13,772 4,741 9,031 190 % Goodwill impairment 34,835 - 34,835 - 34,835 - 34,835 - Depreciation and amortization 1,926 930 996 107 % 4,846 2,169 2,677 123 % Total operating expenses$ 50,945 $ 10,868 $ 40,077 369 %$ 82,384 $ 26,048 $ 56,336 216 %
General and Administrative Expenses
The increase in general and administrative expenses during the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 , were primarily due to a$1,863,000 and$5,654,000 increase in personnel costs related to an increase in headcount, including a$62,000 and$184,000 increase in stock-based compensation, respectively. Additionally, for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 , we saw an increase in rent expenses mainly associated with our new offices throughoutthe United States andIsrael . During the three months endedSeptember 30, 2022 we saw a decrease in professional fees compared to the same three month period in 2021 due to merger and acquisition activity experienced in the third quarter of 2021, which was related to the Waycare acquisition.
Selling and Marketing Expenses
The increase in selling and marketing expenses during the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 , was attributable mainly to increased marketing efforts to promote our products and services including digital marketing and other sales efforts. In connection with these efforts, for the three and nine months endedSeptember 30, 2022 , there was an increase in staffing to support our growth plan which led to a$1,454,000 and$3,533,000 increase in personnel costs, including a$304,000 and$931,000 increase in stock-based compensation, respectively.
Research and Development Expense
The increase in research and development expenses during the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 , was primarily attributable to the development of new products and additional software capabilities, mainly as a result of an increase in headcount and hours associated with research and development activities. For the three and nine months endedSeptember 30, 2022 , there was an increase in staffing to support the Company's new products which led to a$2,215,000 and$7,162,000 increase in personnel costs, including a$520,000 and$1,559,000 increase in stock-based compensation, respectively. Additionally, there was an increase in sub-contractor labor associated with the development of new products and software of$1,014,000 during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . 37
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Table of Contents Goodwill Impairment
During the third quarter of 2022, we experienced a significant decline in
our market capitalization, which management deemed a triggering event related to
goodwill. As a result, we performed an interim impairment assessment as of
Depreciation and Amortization
The increase in depreciation and amortization during the year is attributable
primarily to increased technology-based intangible assets that were acquired as
part of our acquisition of Waycare.
Other Expense
Three Months Ended September
30, Change Nine Months Ended September 30, Change(Dollars in thousands) 2022 2021 $ % 2022 2021 $ % Other income (expense): Interest expense$ (21 ) $ (21 ) $ - 0 %$ (46 ) $ (72 ) $ 26 36 % Other (expense) income (1,379 ) 66 (1,445 ) -2189 % (1,403 ) 103 (1,506 ) (1462 )% Total other income (expense)$ (1,400 ) $ 45$ (1,445 ) 3211 %$ (1,449 ) $ 31$ (1,480 ) 4774 %
Interest expense and other income remained consistent period over period. Other expense increased as a result of a legal settlement.
Non-GAAP Measures: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in theU.S. ("U.S. GAAP") and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance withU.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company's ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.
The following table sets forth the components of the EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):
Nine Months Ended September
Three Months Ended September 30, 30,
2022 2021 2022 2021
Net loss from continuing operations $ (48,085 ) $ (9,613 ) $ (76,288 ) $ (19,777 )
Income taxes (954 ) 3 (954 ) 10
Interest 21 21 46 72
Depreciation and amortization 1,926 930 4,846 2,169
EBITDA $ (47,092 ) $ (8,659
)
Share-based compensation$ 1,628 $ 694$ 5,413 $ 2,600 Loss due to change in value of equity investments - - - 150 Goodwill impairment 34,835 - 34,835 - Legal settlements 1,385 - 1,433 - One-time consulting fees - 1,249 1,024 2,025 Adjusted EBITDA$ (9,244 ) $ (6,716
)$ (29,645 ) $ (12,751 )
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue
less cost of revenue, excluding depreciation and amortization. We define
Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We
expect Adjusted Gross Margin to continue to improve over time to the extent that
we can gain efficiencies through the adoption of our technology and successfully
cross-selling and upselling our current and future offerings. However, our
ability to improve Adjusted Gross Margin overtime is not guaranteed and could be
impacted by the factors affecting our performance. We believe Adjusted Gross
Profit and Adjusted Gross Margin are useful to investors, as they eliminate the
impact of certain non-cash expenses and allow a direct comparison of these
measures between periods without the impact of non-cash expenses and certain
other nonrecurring operating expenses.
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Table of Contents
The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(Dollars in thousands, except (Dollars in thousands, except
percentages) percentages)
Revenue $ 7,425 $ 2,615 $ 15,371 $ 11,105
Cost of revenue, excluding depreciation
and amortization 4,119 1,402 8,780 4,705
Adjusted Gross Profit $ 3,306 $ 1,213 $ 6,591 $ 6,400
Adjusted Gross Margin 44.5 % 46.4 % 42.9 % 57.6 %
Adjusted Gross Margin, for the three and nine months ended September 30, 2022
and 2021 decreased to 44.5% from 46.4%, and 42.9% from 57.6%, respectively. As
part of a sales strategy to more quickly expand our market reach, we have
recently offered certain customers short-term pilot programs which range from
three to six months. Our pilot programs generally have lower margins due to
additional upfront costs we incur to establish the program, which will not be
incurred again if the pilot program is converted into a long-term program. In
addition, the Company experienced lower margins on certain hardware sales during
these quarters.
Key Performance Indicators
We regularly review several indicators, including the following key indicators,
to evaluate our business, measure our performance, identify trends affecting our
business, formulate financial projections and make strategic decisions.
Recurring Revenue Growth
Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business.
Three Months Ended Nine Months Ended September
September 30, Change 30, Change
2022 2021 $ % 2022 2021 $ %
Recurring revenue $ 4,839 $ 1,233 $ 3,606 292 % $ 8,616 $ 3,142 $ 5,474 174 %
As we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in future periods to continue to increase as we move to market our suite of products through our Rekor One™ platform.
Total Contract Value There are certain assumptions that we make when determining the total contract value of an agreement, such as the success rate of renewal periods, cancellations and usage estimates. For the nine months endedSeptember 30, 2022 we won contracts valued at$8,297,000 , compared to$7,294,000 of contracts won for the nine months endedSeptember 30, 2021 . This represents a$1,003,000 or 14% increase, period over period. The increase in total contract value is partially related to our strategy of entering into pilot programs that require low initial commitments by our customers in the short term in the expectation that they will develop into larger commitments over time. This helps grow our pipeline and demand for our products. As pilot programs convert into longer term and larger scale contracts, we expect to see our KPIs improve. 39
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Table of Contents Performance Obligations As ofSeptember 30, 2022 , we had approximately$28,606,000 of contracts that were closed prior toSeptember 30, 2022 but have a contractual period beyondSeptember 30, 2022 . This represents an increase of$6,019,000 or 27% compared to$22,587,000 of performance obligations as ofDecember 31, 2021 . These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately 58% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.
The increase in total our performance obligations is primarily related to our acquisition of STS.
Lease Obligations
As of
?Columbia, Maryland - The corporate headquarters ?Tel Aviv, Israel
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of our planned operations.
Liquidity and Capital Resources
The following table sets forth the components of our cash flows for the period included (dollars in thousands):
Nine Months Ended September 30,
2022 2021 Change
$ %
Net cash used in operating activities
76 %
Net cash provided by financing
activities 22,817 70,874 (48,057 ) -68 %
Net (decrease) increase in cash, cash
equivalents and restricted cash and cash
equivalents $ (17,847 ) $ 15,161 $ (33,008 ) -218 %
Net cash used in operating activities for the nine months ended September 30,
2022 had a net decrease of $17,772,000 , which was attributable to the increase
in the loss from continuing operations of $76,288,000 . This amount was partially
offset by an increase in share-based compensation expense, a non-cash
adjustment, which increased $2,813,000 to $5,413,000 for the nine months ended
September 30, 2022 compared to $2,600,000 for the nine months ended September
30, 2021 . This increase is due to the number of equity incentive shares that
were issued to employees and directors. Additionally, for the nine months ended
September 30, 2022 we recognized an impairment related our goodwill of
$34,835,000 .
The net increase in net cash used in investing activities of $32,821,000 was
primarily due to an increase in the outflow of funds related to merger and
acquisition activities. During the nine months ended September 30, 2022 , the
Company had net cash outflows of $6,389,000 related to the acquisition of
STS. During the nine months ended September 30, 2021 , the Company had net cash
outflows of $40,699,000 related to the acquisition of Waycare.
Net cash provided by financing activities for the nine months ended September
30, 2022 decreased by $48,057,000 from the prior nine month period ended
September 30, 2021 . During the nine months ended September 30, 2022 , as part of
our 2022 Sales Agreement, we received net proceeds after deducting the
underwriting discounts and commissions and offering expenses payable by us, of
$22,758,000 . In the prior comparable quarterly period, through our 2021 Public
Offering, we received net proceeds, after deducting the underwriting discounts
and commissions and offering expenses payable by us, of $70,125,000 .
For the three and nine months ended September 30, 2022 and 2021, we funded our
operations primarily through cash from operating activities and the sale of
equity. As of September 30, 2022 , we had cash and cash equivalents from
continuing operations of $8,757,000 and a working capital deficit of $1,054,000 ,
as compared to cash and cash equivalents of $26,600,000 and working capital
of $16,989,000 as of December 31, 2021 .
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Table of Contents Liquidity For all annual and interim periods, we will assess going concern uncertainty in our unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand, capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the "look-forward period", as defined inU.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of our programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent we have the proper authority to do so and consider probable that those implementations can be achieved within the look-forward period. We have generated losses since our inception and have relied on cash on hand and external sources of financing to support cash flow from operations. We attribute losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the nine months endedSeptember 30, 2022 , we had a working capital deficit from continuing operations of$1,054,000 and a loss from continuing operations of$76,288,000 . Our cash decreased by$17,844,000 for the nine months endedSeptember 30, 2022 primarily due to the loss from continuing operations of$76,288,000 . The decrease in cash was partially offset by offset by certain non cash adjustments such as the goodwill impairment of$34,835,000 . Additionally, the decrease in cash was offset by the net proceeds of$22,758,000 from the 2022 Sales Agreement (see NOTE 10 - STOCKHOLDERS' EQUITY for details on the 2022 Sales Agreement). Assuming the ability to complete sales of shares at current market prices under stable market conditions, as ofSeptember 30, 2022 , we had$26,278,000 of gross funds available under the 2022 Sales Agreement. 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 operations for the next twelve months following the issuance of these unaudited condensed financial statements. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period. 2021 Public Offering OnFebruary 9, 2021 , we issued and sold 6,126,939 shares of our common stock (which included 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the "2021 Public Offering"). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by us, were approximately$70,125,000 . Waycare Acquisition OnAugust 18, 2021 , we entered into a share purchase agreement (the "Purchase Agreement") by and among the Company, Waycare, the sellers of Waycare named in the Purchase Agreement (the "Sellers") andShareholder Representative Services LLC , solely in its capacity as the representative of the Sellers, pursuant to which we acquired 100% of the issued and outstanding capital stock of Waycare from the Sellers (the "Acquisition"). The aggregate purchase price for the shares of Waycare was$61,100,000 , less the amount of Waycare's debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of$40,813,000 of cash and 2,784,474 shares of our common stock, valued at$20,287,000 . As a result of the transaction, Waycare became our wholly-owned subsidiary. STS Acquisition OnJune 17, 2022 , the Company completed its acquisition ofSouthern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition included total consideration of$12,799,000 including; cash consideration of$6,500,000 , 798,666 shares of the Company's common stock, valued at$2,000,000 ,$1,001,000 related to an earnout based on the achievement of certain performance metrics,$1,298,000 contingent on the closing of a future contract and a$2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company. At-the-Market Offering OnFebruary 24, 2022 , we entered into an At-the-Market Issuance Sales Agreement (the "2022 Sales Agreement") withB. Riley Securities, Inc. (the "Agent") to create an at the market equity program under which we from time to time may offer and sell shares of our common stock, par value$0.0001 per share, having an aggregate offering price of up to$50,000,000 (the "Shares") through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately$169,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets. For the nine months endedSeptember 30, 2022 , the Company sold 9,019,062 shares of common stock at a weighted-average selling price of$2.62 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was$22,758,000 after paying$169,000 related to the issuance cost, as well as 3.0% or$709,000 related to cash commissions provided to the Agent.
As of
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