REKOR SYSTEMS, INC. The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report and the historical financial statements ofRekor Systems, Inc. , and the related notes thereto. OverviewRekor is leading the charge to become the premier provider of roadway intelligence and data-driven mobility insights on a global scale. As a technology company, we are dedicated to transforming the public safety, urban mobility, and transportation management market segments worldwide with our cutting-edge, AI-driven solutions tailored specifically to the unique needs of each sector. Our commitment to delivering mission-critical solutions for roadway intelligence is driven by our vision of creating smarter, safer, and more sustainable streets for all communities. To achieve this vision, we strive to collect, connect, and organize the world's mobility data, harnessing its full potential to provide the most essential, real-time, and predictive actionable mobility insights. With our innovative approach and relentless pursuit of excellence, we are working to make mobility data universally accessible and, empowering our customers to make informed decisions and drive meaningful progress towards a better future. General The information provided in this discussion and analysis ofRekor's financial condition and results of operations covers the years endedDecember 31, 2022 and 2021. In 2022, we divested our Automated Traffic Safety Enforcement ("ATSE") business, a non-core business unit. As a result of the divestiture, we determined that ATSE met the criteria to be considered discontinued and it is no longer presented with continuing operations. Additionally, in 2022, we completed the acquisition of 100% of the issued and outstanding capital stock ofSouthern Traffic Services, Inc. ("STS") and in 2021, we completed the acquisition of 100% of the issued and outstanding capital stock ofWaycare Technologies, Ltd. These acquisitions are included in the presentation of our operations. 36
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Table of Contents Acquisitions and Dispositions
On
OnJune 17, 2022 , we completed the acquisition of 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 ,$1,001,000 related to an earnout based on the achievement of certain performance metrics ("STS Earnout") and$1,298,000 contingent on the closing of a future contract ("STS Contingent Consideration"), 798,666 shares of the Company's common stock, valued at$2,000,000 , and a$2,000,000 note.
On
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 aUnited Nations report, about two-thirds of the world population will live in urban areas by 2050. The
world's cities are getting larger, with longer commutes 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 the quality of life. We believe our data-driven, artificialintelligence-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 transportation infrastructure can
significantly affect the safety and efficiency of travel 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
and potential 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 a resource that transportation and other
agencies are beginning to find valuable uses for. 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 can provide important information related to hazardous conditions,
speed variations, intersection performance, and more. This data can help
agencies and municipalities gain more visibility about conditions on their
roads, supplementing data from existing infrastructure and allowing
transportation information from rural areas that are not served by ITS
infrastructure to be integrated into the overall analysis.
? New and Expanded Uses for Vehicle Recognition Systems - We believe that
reductions in the cost of vehicle recognition products and services will
significantly broaden the market for these systems. We currently 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 innovative customer loyalty programs. We have seen and
responded to an increase in the number of smaller jurisdictions that are
testing 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 believe their 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 existing technology, 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 systems or secure advanced
systems from others who are also working to develop them. As a result, our
success in establishing 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 expectcontactless 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
and registration 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. For example, due to high rates of fatalities and injuries to law
enforcement and other emergency response crews on roadsides, several states
are considering authorizing automated enforcement of violations where
motorists fail to slow down and/or move over for emergency responders and law
enforcement 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 these products and services should broaden 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 those produced 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 is predicted 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 sensor improvements, such as increasingly sophisticated
internal software and optical and other hardware adapted to the use of this
software. Over the last several decades, sensors 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 large investments 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 be streamed to the cloud for processing.
? Accelerated Business Development and Marketing - Our ability to compete in a
large, competitive and rapidly evolving industry will require us to achieve
and maintain a visible leadership position. As a result, we have made
significant investments in our business development marketing and eCommerce
activities to increase awareness and market adoption of our products and
services within key markets. We anticipate that a sustained presence in the
market, the continued development of strategic partnerships and other
economies of scale will 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 is uncertain.
? Resurgent 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
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
international economies. As such, we are unable to determine the full impact
on our operations should the global pandemic resurface in 2023. The pandemic
has accelerated the adoption of new technologies by businesses. According to a
digitization of their customer and supply-chain interactions and their
internal operations by three to four years. Funding for digital initiatives
has increased, creating opportunities for innovative solution providers such
as
? 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.
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? Infrastructure Investment and Jobs Act ("IIJA") and the Bipartisan
Infrastructure Law ("BIL") - The IIJA, signed into law on
provides for significant national investments in the transportation systems in
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 roadway intelligence 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
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
Act allocations that public agencies are receiving now, we are particularly
excited about the prospect of benefitting from the following new grant sources
that are contained in the IIJA:
Roads for All" program that would make competitive grants for state projects
that significantly reduce or eliminate transportation-related fatalities.
million for the current administration to establish a grant program to
modernize state data collection systems
Mobility and Revolutionizing Transportation ("SMART") Grant Program that would
support demonstration projects on smart technologies that improve
transportation efficiency and safety.
? Recent Acquisitions - Over the past two years,
subsidiaries as part of its plans to advance its appeal to national and local
transportation agencies. In the first of these acquisitions, we acquired an
award winning leader in the development of predictive analytics for traffic
management using a combination of internally generated an third party data
sources. This acquisition was designed to assure transportation agencies that
we were developing the most advanced data analysis systems to support their
missions in safety and efficiency. In the second acquisition, we acquired one
of the leading existing providers of traffic data services in the United
States. Uniquely, this Company had innovated a change in the service model
from providing, servicing and maintaining agency resources to a data services
model where overlapping entities could benefit from our modular approach to
data collection and dissemination. Each of these acquisitions has led to
increased visibility for the Company among national and state level DOTs in
? Challenges to Executing on the Corporate Strategy - As an acquirer and
integrator of established technology companies in the ITS industry, there is
an inherent risk associated with the successful implementation and execution
of the strategy. If
plans, there could be a material and adverse effect on the Company's business,
results of operations, and financial condition.
? Inability to Achieve Profitability -
operating expenses and capital expenditures have increased and it has not yet
achieved the level of sustaining profitability. As a result, if the Company is
unable to generate additional revenue or achieve planned efficiencies in
operations, or if its revenue declines significantly,
achieve profitability in the future, which would materially and adversely
affect the Company's business.
? Inability to Retain Qualified Personnel - Rekor's success depends on the
continued efforts and abilities of the senior management team and key
engineering and marketing specialists. Although Rekor has employmentagreements with these employees, they may not choose to remain employed by
competitor, the Company's business, operating results, and financial condition
can be adversely affected.
? Inability to Compete Effectively - Competition and technology advancements by
others may erode the Company's business and result in inability to capture new
business and revenue. Each business line faces significant competitive
pressures within the markets in which they operate. While
work to develop and strengthen its competitive advantages, many factors such
as market and technology changes may erode or prevent this. If the Company is
unable to successfully maintain its competitive advantage, the Company's
business, operating results, and financial condition can be adversely
affected.
? Cyber Security Risks -
of its business. A significant disruption or failure in the information
technology systems could result in services interruptions, safety failures,
security violations, regulatory compliance failures, an inability to protect
information and assets against intruders, and other operational difficulties.
This could result in the loss of assets and critical information and expose
the Company to remediation costs and reputational damage. Although
reasonable steps intended to mitigate these risks, a significant disruption or
cyber intrusion could lead to misappropriation of assets or data corruption
and could adversely affect the Company's results of operations, financial
condition, and liquidity.
? Intellectual Property Claims - Third parties that have been issued patents or
have filed for patent applications similar to those used by the Company's
operating subsidiaries may result in intellectual property claims against the
Company.
patents or the issuance of any future third party patents would require any of
its operating subsidiaries to alter their respective technologies, obtain
licenses or cease certain activities. Should the Company be unable to defend
against such claims, the Company's business, operating results, and financial
condition can be adversely affected.
Other than as discussed above and elsewhere in this Annual Report on Form 10-K,
we are not aware of any trends, events or uncertainties that are likely to have
a material effect on our financial condition.
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Table of Contents
Components of Operating Results
Revenues The Company derives its revenues primarily from the sale of its roadway data aggregation, traffic management and licensing offerings. These offerings typically, include a mixture of data collection, software, hardware, implementation, engineering services, customer support and maintenance services. Revenue is recognized upon transfer of control of promised products and services to the Company's customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
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, our general and administrative expenses have decreased as a percentage of our revenue and, to the extent we continue to be successful in generating increased revenue, 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 will require significant investments in our sales and marketing expenses to continue the rate of growth in our revenues, further penetrate existing markets and expand our customer base into new markets. 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 products and services. Our research and development expenses increased in 2022 as we focused on a significant expansion of the capabilities of ourRekor suite of products and may continue to fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, to the extent we continue to be successful in generating increased revenue, we expect our research and development expenses to decrease as a percentage of our revenue over the long term.
Depreciation and Amortization
Depreciation and amortization expenses are primarily attributable to our capital
investments and consist of fixed asset depreciation, amortization of intangibles
considered to have definite lives, and amortization of capitalized internal-use
software costs.
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Other Income (Expense)
Other income (expense) consists primarily of legal settles, legal
judgements, 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, interest income
earned on cash and cash equivalents, short-term investments and note
receivables.
Income Tax Benefit
Income tax benefit consists primarily of the tax impact related to the step-up
in the basis of tangible and intangible assets related to our acquisitions
and 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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Results of Operations
Our historical operating results in dollars are presented below. The analysis of
operation is solely related to continuing operations and does not consider the
results of discontinued operations. The following selected consolidated
financial data should be read in conjunction with the foregoing information
contained in this Item 7 and with the consolidated financial statements and the
notes thereto in Item 8 of Part II, "Financial Statements and Supplementary
Data." Only historical operating results are presented below. Historical results
are not necessarily indicative of future results.
Year ended December 31,
(Dollars in thousands) 2022 2021
Revenue $ 19,920 $ 11,575
Cost of revenue, excluding depreciation and amortization 10,890 4,549
Operating expenses: General and administrative expenses 26,612
23,006
Selling and marketing expenses 8,329
4,474
Research and development expenses 18,616 8,292 Goodwill impairment 34,835 - Depreciation and amortization 6,422 3,088 Total operating expenses 94,814 38,860 Loss from continuing operations (85,784 ) (31,834 ) Other income (expense): Interest expense, net (21 ) (27 ) Other expense, net (1,279 ) (90 ) Gain on the sale of business 2,643 - Gain on extinguishment of debt - 886 Total other income 1,343 769 Loss before income taxes (84,441 ) (31,065 ) Income tax benefit 987 3,819 Equity in loss of investee - (150 ) Net loss from continuing operations$ (83,454 ) $ (27,396 ) 43
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Comparison of the Years Ended
Revenue
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Revenue $ 19,920 $ 11,575 $ 8,345 72 %
The increase in revenue for the year ended December 31, 2022 , compared to the
year ended December 31, 2021 , was primarily a result of our recent acquisition
of STS and its existing customer base. During the year ended December 31, 2022 ,
revenue attributable to our STS acquisition was $7,692,000 . 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.
Our revenue with the discontinued operations of our ATSE business were
Cost of Revenue, Excluding Depreciation and Amortization
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Cost of revenue, excluding depreciation
and amortization $ 10,890 $ 4,549 $ 6,341 139 %
For the year ended December 31, 2022 , cost of revenue, excluding depreciation
and amortization increased 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 go-to-market strategy and increase of revenue. 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
the year.
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Operating Expenses
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Operating expenses:
General and administrative expenses $ 26,612 $ 23,006 $ 3,606 16 %
Selling and marketing expenses 8,329 4,474 3,855 86 %
Research and development expenses 18,616 8,292 10,324 125 %
Goodwill impairment 34,835 - 34,835 -
Depreciation and amortization 6,422 3,088 3,334 108 %
Total operating expenses $ 94,814 $ 38,860 $ 55,954 144 %
General and Administrative Expenses
The increase in general and administrative expenses during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , were primarily due to a$3,894,000 increase in personnel costs related to an increase in headcount, and increase of$1,326,000 of rent expense primarily related to our leased space inColumbia, Maryland andTel Aviv, Israel . These increases in expenses were partially offset by a$2,180,000 decrease in our professional services expenses which primarily related to merger and acquisition activities that took place in 2021.
Selling and Marketing Expenses
The increase in selling and marketing expenses during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 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 year endedDecember 31, 2022 , there was an increase in staffing to support our growth plan which led to a$4,223,000 increase in personnel costs, including a$1,215,000 increase in stock-based compensation, compared to the year endedDecember 31, 2021 .
Research and Development Expense
The increase in research and development expenses during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 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 year endedDecember 31, 2022 , there was an increase in staffing to support the Company's new products which led to a$8,227,000 increase in personnel costs, including a$1,498,000 increase in stock-based compensation, compared to the year endedDecember 31, 2021 . Additionally, there was an increase in sub-contractor labor associated with the development of new products and software of$1,062,000 during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . 45
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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 and the customer relationships and the trade name that was acquired as part of our acquisition of STS.
Operating Expenses Excluding Goodwill Impairment, Depreciation and Amortization
In the third quarter of 2022, we started to see a reduction in our operating expenses as a result of streamlining activities and business processes. During the fourth quarter we saw the full impact of these activities which resulted in a reduction of$2,842,000 of operating expenses across our general and administrative, sales and marketing and research and development expenses, during the fourth quarter of 2022 compared to the third quarter of 2022. Other Income (Expense) Year ended December 31, Change (Dollars in thousands) 2022 2021 $ % Other income (expense): Interest expense, net $ (21 )$ (27 ) $ 6 22 % Other expense, net (1,279 ) (90 ) (1,189 ) -1321 % Gain on the sale of business 2,643 - 2,643 - Gain on extinguishment of debt - 886 (886 ) -100 % Total other income$ 1,343 $ 769 $ 574 -75 %
The increase is other expense in the current year was related to legal
judgements and settlements that happened during the year ended
In connection with the sale of ATSE, we recognized a gain on the sale of the
business of
The gain on the extinguishment of debt for the year ended
Income Tax Benefit The income tax benefit for the year endedDecember 31, 2022 , was$987,000 , which is due primarily to the step-up in the basis of tangible and intangible assets related to the STS acquisition, as compared to tax benefit of$3,819,000 for the year endedDecember 31, 2021 , which is due primarily to the step-up in the basis of intangible assets related to the Waycare acquisition. We established a valuation allowance against deferred tax assets in the fourth quarter of 2017 and have continued to maintain a full valuation allowance through the year endedDecember 31, 2022 . 46
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Table of Contents Non-GAAP Measures 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) one-time consulting fees, (vii) legal judgements and settlements, (viii) gains or losses on the remeasurement of earnouts or contingent considerations, and (ix) 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):
Year ended December 31,
2022 2021
Net loss from continuing operations $ (83,454 ) $ (27,396 )
Income tax benefit (987 ) (3,819 )
Interest expense, net 21 27
Depreciation and amortization 6,422 3,088
EBITDA$ (77,998 )
Gain on extinguishment of debt $ -$ (886 ) Share-based compensation 6,616 3,909 Gain on the sale of ATSE (2,643 ) -
Gain due to the remeasurement of the STS Earnout and Contingent Consideration, net
(883 ) -
Goodwill impairment 34,835 -
Loss due to change in value of equity investments - 150
Legal judgements and settlements 1,608 136 One-time consulting fees 1,024 2,025 Adjusted EBITDA$ (37,441 ) $ (22,766 ) 47
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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 improve over time to the extent that we can gain efficiencies through the broader 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.
The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:
Year ended December 31,
2022 2021
(Dollars in thousands, except
percentages)
Revenue $ 19,920 $ 11,575
Cost of revenue, excluding depreciation and amortization 10,890 4,549
Adjusted Gross Profit $ 9,030 $ 7,026
Adjusted Gross Margin 45.3 % 60.7 %
Adjusted Gross Margin, for the year ended December 31, 2022 decreased to
45.3% from 60.7% for the year ended December 31, 2021 . As part of an effort to
more quickly expand our market reach, we offered certain customers short-term
pilot programs in 2022 which have ranged from three to six months. Our pilot
programs generally have lower margins due to the 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 the year.
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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
As more fully described in the discussion of Revenue Recognition below, we
derive recurring revenue from long-term contracts with customers that provide
for periodic payments over time and short-term contracts that are automatically
invoiced on a monthly basis and renewed upon payment. The growth of our
recurring revenue provides some insights into our future operating results and
cash flow from operations. This enables us to better manage and invest in our
business.
Year ended December 31,
2022 2021 Change
$ %
Recurring revenue $ 13,091 $ 4,634 $ 8,457 182 %
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 The total contract value of contracts won in the current period also provides us some visibility into our future operating results and cash flows from operations. Total contract value is a non-GAAP measure in which 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 year endedDecember 31, 2022 , we won contracts valued at$21,962,000 , compared to$8,936,000 of contracts won for the year endedDecember 31, 2021 . This represents growth of$13,026,000 or 146%, period over period. Performance Obligations While a portion of the total contract value won in a particular period represents point-in-time revenue or recurring revenue earned during the period, the remainder represents future performance obligations that can provide an indication of our future revenues. As ofDecember 31, 2022 , we had approximately$21,412,000 of performance obligations with respect to contracts that were closed prior toDecember 31, 2022 but have a contractual period beyondDecember 31, 2022 . This represents growth of$6,636,000 or 45% compared to$14,776,000 of performance obligations as ofDecember 31, 2021 . These contracts generally cover a term of one to five years, which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately$12,678,000 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. 49
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Table of Contents 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.
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Liquidity and Capital Resources
The net cash flows from operating, investing and financing activities for the periods below were as follows (dollars in thousands):
Year ended December 31,
2022 2021 Change
$ %
Net cash used in operating activities -
continuing operations $ (40,070 ) $ (18,893 ) $ (21,177 ) -112 %
Net cash used in investing activities -
continuing operations (8,264 ) (47,318 ) 39,054 -83 %
Net cash provided by financing
activities - continuing operations 23,868 70,992 (47,124 ) -66 %
Net (decrease) increase in cash, cash
equivalents and restricted cash and cash
equivalents - continuing operations $ (24,466 ) $ 4,781 $ (29,247 ) -612 %
Net cash used in operating activities for the year ended December 31, 2022 , had
a net increase of $21,177,000 , which was attributable to the increase in the
loss from continuing operations of $56,058,000 . This amount was partially offset
by an increase in share-based compensation expense, a non-cash adjustment, which
increased $2,707,000 to $6,616,000 for the year ended December 31, 2022 compared
to $3,909,000 for the year ended December 31, 2021 . This increase is due to the
number of equity incentive shares that were issued to employees and directors.
Additionally, for the year ended December 31, 2022 we recognized an impairment
related to our goodwill of $34,835,000 .
The net decrease in net cash used in investing activities of $39,054,000 was
primarily due to a decrease in the outflow of funds related to merger and
acquisition activities. During the year ended December 31, 2022 , the Company had
net cash outflows of $6,389,000 related to the acquisition of STS. During the
year ended December 31, 2021 , the Company had net cash outflows of $39,770,000
related to the acquisition of Waycare.
Net cash provided by financing activities for the year ended December 31,
2022 decreased by $47,124,000 from the prior year ended December 31, 2021 .
During the year ended December 31, 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 $22,754,000 . In the prior
comparable 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 year ended December 31, 2022 and 2021, we funded our operations
primarily through cash from the sale of equity, operating activities from our
subsidiaries, the sale of our subsidiaries and the issuance of debt. As of
December 31, 2022 , we had unrestricted cash and cash equivalents from continuing
operations of $1,924,000 and working capital deficit of $6,010,000 , as compared
to unrestricted cash and cash equivalents of $25,796,000 and working capital of
$16,911,000 as of December 31, 2021 . As more fully described in the discussion
of Going Concern, Liquidity and Management's Plan below, 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 the audited financial
statements. These factors raise substantial doubt regarding the Company's
ability to continue as a going concern.
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Balance Sheet Arrangements, Contractual Obligations and Commitments
As of the date of this Annual Report on Form 10-K, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of our operations is based upon our audited consolidated financial statements as of and for the years endedDecember 31, 2022 and 2021, which have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ from these estimates under different assumptions or conditions. We believe the application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change.Rekor bases its estimates on historical experience and on various other assumptions that the management ofRekor believes to be reasonable under the circumstances, the results of which form management's basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates. For further information on all of our significant accounting policies, see Note 1 - Business and Significant Accounting Policies in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 52
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Table of Contents Revenue Recognition The Company derives its revenues primarily from the sale of its roadway data aggregation, traffic management and licensing offerings. These offerings typically, include a mixture of data collection, software, hardware, implementation, engineering services, customer support and maintenance services. Revenue is recognized upon transfer of control of promised products and services to the Company's customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
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
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Revenues
Recurring revenue
Recurring revenue includes the Company's SaaS revenue, subscription revenue,
eCommerce revenue and customer support revenue. The Company generates recurring
revenue from long-term contracts with customers that provide periodic payments
and 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 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 Company's
contracts with customers are generally for a term of one to five years. The
payment 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
which can be purchased online and activated through a digital key. The Company's
contracts with 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.
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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 implementation or
construction services to its customers. These services, involve a fee for the
implementations services 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 the recurring software sales, the Company will recognize revenue
related to the sale of perpetual software licenses. The Company sells perpetual
licenses which 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 have 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 inside 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 offers hardware installment to
customers which ranges from one to six months. The revenue related to the
installation component is recognized over time as the implementation
is completed.
Contactless compliance solutions revenues reflect arrangements to provide
hardware systems 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 services are completed.
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Table of ContentsGoodwill The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill.Goodwill is not amortized but rather subject to a periodic impairment testing on an annual basis. The Company will assess goodwill for impairment annually onOctober 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. 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. 56
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Income Taxes
We use the liability method of accounting for income taxes as set forth in the
authoritative guidance for accounting for income taxes. This method requires an
asset and liability approach for the recognition of deferred tax assets and
liabilities. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Management has evaluated the recoverability of the net deferred income tax
assets and the level of the valuation allowance required with respect to such
net deferred income tax assets. After considering all available facts, we fully
reserved for our net deferred tax assets because management believes that it is
more likely than not that their benefits will not be realized in future periods.
We will continue to evaluate net deferred tax assets to determine whether any
changes in circumstances could affect the realization of their future benefit.
If it is determined in future periods that portions of the net deferred income
tax assets satisfy the realization standard, the valuation allowance will be
reduced accordingly.
The tax effects of uncertain tax positions are recognized in the consolidated
financial statements only if the position is more likely than not to be
sustained on audit, based on the technical merits of the position. For tax
positions meeting the more likely than not threshold, the amount recognized in
the consolidated financial statements is the largest benefit that has a greater
than 50% likelihood of being realized. It is our accounting policy to account
for Accounting Standards Codification ("ASC") 740-10-25-related penalties and
interest as a component of the income tax provision in the consolidated
statements of operations.
As of
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Going Concern, Liquidity and Management's Plan
For all annual and interim periods, management will assess going concern uncertainty in the Company's consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the 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 management, management 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, if necessary, 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 since its inception and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company's non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cash flow from operations. The Company attributes 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 year endedDecember 31, 2022 , the Company had a net loss from continuing operations of$83,454,000 and a working capital deficit of$6,010,000 . The Company's net cash position was decreased by$24,133,000 for the year endedDecember 31, 2022 primarily due to the loss from continuing operations of$83,454,000 . The loss from continuing operations was partially 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$22,754,000 from the 2022 Sales Agreement (see NOTE 14 - STOCKHOLDERS' EQUITY for details on the 2022 Sales Agreement). The Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to continue the growth of its technology business, (ii) the continued performance of its contractors, subcontractors and vendors, (iii) its ability to maintain and build good relationships with its lenders and financial intermediaries, (iv) its ability to maintain timely collections from existing customers, and (v) the stability of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results. The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of restructuring its operations to focus on supporting its existing customer base and continuing to develop the growth opportunities that present the highest immediate value. The Company will continue to evaluate the most sensible external financing options in order to sustain its operations. If additional financing is not available, the Company may be required to further reduce or defer expenses and cash outlays. 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 the audited financial statements. These factors raise substantial doubt regarding the Company's ability to continue as a going concern for the next twelve months from the issuance of the Annual Report on Form 10-K.
New Accounting Pronouncements
See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 1 - Business and Significant Accounting Policies"
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