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;
? our ability to 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 global leader in the development and implementation of intelligent
infrastructure focused on addressing critical challenges across transportation
management, public safety, and key commercial markets. With a real-time
intelligence platform driven by deep access to data, AI-powered software, and
smart optical devices at-the-edge, we combine our industry expertise and
advanced proprietary technologies to deliver unrivaled insights that increase
roadway safety, efficiency, and sustainability while enabling safer, smarter,
and more connected cities and communities. We provide products and services
across 80 countries as we deliver transformative mission-critical intelligent
infrastructure solutions and services for government agencies and commercial
clients in the United States and around the world.
Digital Divide
Society is increasingly digital, automated, and information flows occur in
real-time. Technological advancements in the past decade have transformed the
way people connect, interact, and transact with others and with the world around
them. 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. Unfortunately, many areas of
the world are faced with aging and legacy infrastructure today resulting from
decades of neglect and underinvestment, particularly in the sectors of
transportation, mobility, and public safety. The cost, complexity and
interdependency of these systems have made many organizations slow to adopt
advances in technology. This creates a digital divide between what is made
possible by technology, and the current reality of infrastructure today.
Continued population growth and increased urbanization present unprecedented
economic, mobility, public safety, and environmental challenges to cities,
states, and metropolitan areas. Today's challenges cannot be solved by simply
replicating existing approaches and adding more legacy technology. For the
ongoing mobility transformation to keep up with fast-changing global dynamics
requires inventive approaches. Enhancements in data collection, analytics and
communications can be employed.
Smarter, data-driven solutions can make better use of existing infrastructure,
rather than tearing it up and starting over. Roads, bridges, tunnels, and
residential areas have much "to tell us" about how to optimally serve the public
with an efficient, safe, and healthy living environment if we tap into the data
it can provide and exploit that knowledge intelligently. Successful approaches
will leverage AI-powered software, smart devices, data, and solutions that can
integrate into existing infrastructure and workflows. We see this as the path to
intelligence-driven infrastructure and one that gives us a clear market
advantage.
Bridging the Divide
Spurred by the 2021 Infrastructure Investment and Jobs Act in the United States ,
we expect the world to see a once-in-a-generation surge of investment in
infrastructure and competitiveness. 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. Officials are also planning for roadways of the
future that can account for connected and autonomous vehicles. With these
investments, we estimate an addressable global intelligent infrastructure market
of $148 billion by 2026.
With access to multiple sources of data and our award winning AI-driven
innovations, we believe we have established a leadership position in intelligent
infrastructure solutions that puts us at the center of this emerging
opportunity. 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. Using our proprietary centralized platform to maximize
the value of our technology to customers, we are well positioned to help
governments and businesses collect, analyze and turn infrastructure data into
insights with new products and services that increase mobility and safety, drive
revenue, and power innovation for billions of people and trillions of
interactions.
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Intelligence-Driven Innovation
As described below, we have concentrated on developing our intelligent
infrastructure solutions to work through a single integrated platform, which
creates a unique, market-advantaged position for us. The volume, variety,
velocity, and veracity of data that we capture and apply to our proprietary
artificial intelligence and machine learning models provide us with an even
greater 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 look at the roadway and extract and process a deeply detailed
picture of the 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. This reduces our clients' need to invest in
legacy system upgrades and gives them the ability to gain additional value from
existing infrastructure. 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 ("CAV") 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. All of this is facilitated by our
proprietary Rekor One™ intelligence platform.
Fueled by Data and Artificial Intelligence
At the core of all our intelligent infrastructure solutions is the Rekor One intelligence platform. Fueled by rich data and powered by AI, Rekor One is purpose-built to be a single source of truth and insights serving multiple customer segments and multiple missions. From Rekor One, we can simultaneously deliver vertical-specific solutions for traffic management, public safety, and commercial markets. With the Rekor One platform as our foundation, we collect and transform data into information, and information into knowledge to give governments and businesses a comprehensive picture of roadways, vehicles, traffic, incidents, and more. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
Built on the foundation of Rekor One, we deliver vertical-specific solutions for traffic management, public safety, and commercial markets.
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 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, roadway conditions, and public safety via modern, efficient, and connected infrastructure. Recent technological developments such as artificial intelligence, the internet of things, edge- and cloud-based computing, and advances in rich data management have put us in a unique position to help revolutionize mobility through intelligent infrastructure and close 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 for intelligent infrastructure, we sustainably help governments and businesses address both issues of aging infrastructure and the unprecedented mobility, public safety, economic, and environmental challenges they face. We believe our leadership in intelligent infrastructure solutions, advanced technology, and breadth of use cases across multiple industries puts us in an advantaged market position at the forefront of developing a new economy and poised to unlock massive gains 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.
Our operations are conducted by our wholly-owned subsidiaries,
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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 byincorporating 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. Subscription revenues
may include hardware and software subscriptions and are recognized as recurring
revenue throughout the term of the lease 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. The analysis of
operation is solely related to continuing operations and does not consider the
results of discontinued operations.
Three Months Ended March 31,
(Dollars in thousands) 2022 2021
Revenue $ 3,608 $ 4,216
Cost of revenue, excluding depreciation and amortization 1,983 1,922
Operating expenses:
General and administrative expenses 7,388 4,907
Selling and marketing expenses 1,352 937
Research and development expenses 4,092 1,222
Depreciation and amortization 1,399 536
Total operating expenses 14,231 7,602
Loss from operations (12,606 ) (5,308 )
Other income (expense):
Interest expense (9 ) (32 )
Other income 14 16
Total other income (expense) 5 (16 )
Loss before income taxes and equity method investments (12,601 ) (5,324 )
Income tax provision - (3 )
Equity in loss of investee - (76 )
Net loss from continuing operations $ (12,601 ) $ (5,403 )
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Comparison of the Three months endedMarch 31, 2022 and the Three months endedMarch 31, 2021 Total Revenue Three Months Ended March 31, Change (Dollars in thousands) 2022 2021 $ % Revenue$ 3,608 $ 4,216 $ (608 ) -14 % The decrease in revenue for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , was a result of a decrease in product and service revenue in the current period. 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. During the three months endedMarch 31, 2021 , there was one customer who accounted for$1,673,000 of revenue as a result of a one-time sale of hardware and software. The decrease in one-time sale revenues during the three months endedMarch 31, 2022 , was partially offset by an$831,000 increase in recurring revenue during the period. The increase in recurring revenue is primarily attributable to our Waycare acquisition and our current land and expand strategy, which involves expanding the services and solutions we provide to existing customers, and also facilitating cooperation between our existing customers and new customers as part of a broader information network.
Cost of Revenue, Excluding Depreciation and Amortization
Three Months Ended March 31, Change
(Dollars in thousands) 2022 2021 $ %
Cost of revenue, excluding depreciation
and amortization $ 1,983 $ 1,922 $ 61 3 %
For the three months ended March 31, 2022 , cost of revenue, excluding
depreciation and amortization increased by $61,000 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.
Operating Expenses
Three Months Ended March 31, Change
(Dollars in thousands) 2022 2021 $ %
Operating expenses:
General and administrative expenses $ 7,388
53 %
Selling and marketing expenses 1,352 937 415 44 %
Research and development expenses 4,092 1,222 2,870 235 %
Depreciation and amortization 1,399 614 785 128 %
Total operating expenses $ 14,231 $ 7,602 $ 6,629 87 %
General and Administrative Expenses
The increase in general and administrative expenses during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , were primarily due to a$2,319,000 increase in personnel costs related to an increase in headcount, including a$473,000 increase in stock-based compensation.
Selling and Marketing Expenses
The increase in selling and marketing expenses during the three months endedMarch 31, 2022 , compared to the three months endedMarch 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, there was an increase in staffing to support our growth plan which led to a$513,000 increase in personnel costs, including a$125,000 increase in stock-based compensation.
Research and Development Expense
The increase in research and development expenses during the three months endedMarch 31, 2022 , compared to the three months endedMarch 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. In the current period, there was an increase in staffing to support the Company's new products which led to a$1,811,000 increase in personnel costs, including a$476,000 increase in stock-based compensation. 37
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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 March 31, Change
(Dollars in thousands) 2022 2021 $ %
Other income (expense):
Interest expense $ (9 ) $ (32 ) $ 23 72 %
Other income, net 14 16 (2 ) -13 %
Total other income (expense) $ 5 $ (16 ) $ 21 131 %
Interest expense and other income remained consistent period over period.
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):
Three Months Ended March 31,
2022 2021
Net loss from continuing operations $ (12,601 ) $ (5,403 )
Income taxes - 3
Interest 9 32
Depreciation and amortization 1,399 614
EBITDA $ (11,193 ) $ (4,754 )
Share-based compensation $ 1,900 $ 781
Loss due to change in value of equity investments - 76
Adjusted EBITDA $ (9,293 ) $ (3,897 ) 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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The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:
Three Months Ended March 31,
2022 2021
(Dollars in thousands, except
percentages)
Revenue $ 3,608 $ 4,216
Cost of revenue, excluding depreciation and amortization 1,983 1,922
Adjusted Gross Profit $ 1,625 $ 2,294
Adjusted Gross Margin 45.0 % 54.4 %
Adjusted Gross Margin, for the three months ended March 31, 2022 and
2021 decreased to 45.0% from 54.4%, respectively. Fluctuations in Adjusted Gross
Margin are primarily the result of the mix of software and hardware sales
experienced in the quarter. Software sales carry a higher margin than hardware
sales as there are fewer costs associated with software sales, while hardware
sales are typically associated with a software component which increases
our performance obligations and provides higher margin recurring revenue in the
future. However, as part of our planned go-to-market strategy, 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.
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 March 31, Change
2022 2021 $ %
Recurring revenue $ 1,695 $ 864 $ 831 96 %
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 three months endedMarch 31, 2022 we won contracts valued at$1,525,000 , compared to$2,531,000 of contracts won for the three months endedMarch 31, 2021 . This decline represents a$1,006,000 or 40% decline, period over period. 39
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Table of Contents Performance Obligations As ofMarch 31, 2022 , we had approximately$21,288,000 of contracts that were closed prior toMarch 31, 2022 but have a contractual period beyondMarch 31, 2022 . This represents a decline of$1,299,000 or 6% 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 41% 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 decrease in total contract value and performance obligations is partially related to our go-to-market strategy. Our go-to-market strategy involves entering into pilot programs that require low initial commitments by our customers in the short term and 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. Lease Obligations
As of
?Columbia, Maryland - The corporate headquarters ? Linthicum,Maryland ?Orlando, Florida ?Tel Aviv, Israel ?Los Angeles, California
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):
Three Months Ended March 31,
2022 2021 Change
$ %
Net cash used in operating activities
92 %
Net cash provided by financing
activities 3,113 70,499 (67,386 ) -96 %
Net (decrease) increase in cash, cash
equivalents and restricted cash and cash
equivalents $ (11,007 ) $ 42,846 $ (53,853 ) -126 %
Net cash used in operating activities for the three months ended March 31, 2022
had a net decrease of $8,997,000 , which was attributable to the increase in the
loss from continuing operations of $12,601,000 . This amount was partially offset
by an increase in share-based compensation expense, a non-cash adjustment, which
increased $1,119,000 to $1,900,000 for the three months ended March 31, 2022
compared to $781,000 for the three months ended March 31, 2021 . This increase is
due to the number of equity incentive shares that were issued to employees and
directors.
The net decrease in net cash used in investing activities of $22,530,000 was
primarily due to a decrease in short-term investments that were previously made
in during the three months ended March 31, 2021 , of $23,994,000 which were
previously invested in U.S. Treasury Bills that have maturity dates over three
months, but less than a year.
Net cash provided by financing activities for the three months ended March 31,
2022 decreased by $67,386,000 from the prior three month period ended March 31,
2022 . During the three months ended March 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 $3,134,000 . 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 months ended March 31, 2022 and 2021, we funded our operations
primarily through cash from operating activities and the sale of equity. As of
March 31, 2022 , we had cash and cash equivalents from continuing operations
of $15,593,000 and working capital of $9,297,000 , 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 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. 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 three months endedMarch 31, 2022 , based on the settlement date, we sold 728,452 shares of common stock at a weighted-average selling price of$4.67 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was$3,134,000 after paying$169,000 related to the issuance cost, as well as, 3.0% or$102,000 related to cash commissions provided to the Agent.
As of
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