Rekor Systems, Inc 10-K for FY2023
Rekor Systems, Inc. (REKR)
About this 10-K
Rekor Systems, Inc filed this 10-K on March 25, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $34.93M
- up 75.4% from $19.92M a year earlier
- Net loss
- $45.69M
- compared with a net loss of $83.12M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
OR
For the transition period from to
Commission File Number:
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| | Smaller reporting company Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2023 was approximately $
As of March 25, 2024, the Registrant had
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CERTAIN TERMS
Unless the context requires otherwise, all references in this Annual Report on Form 10-K (the “Annual Report”) to “Rekor Systems, Inc.,” “Rekor,” “Company,” “we,” “our” and “us” refer to Rekor Systems, Inc. and its consolidated subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the U.S. federal securities laws. All statements other than statements of historical facts, such as statements regarding the objectives of management, timing and the likelihood of success of various activities, the future performance of current and prospective products and services and our future results of operations and financial position, are forward-looking statements, which include all expressions of the expectations, hopes, beliefs, intentions, plans, prospects or strategies of the Company. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “target,” “expect,” “project,” “intend,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “possible,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements are based on certain assumptions and analyses made by the management of the Company in light of their respective experience and perception of historical trends, current conditions and expected future developments and their potential effects on the Company as well as other factors they believe are appropriate in the circumstances. They speak only as of the date of this Annual Report and are subject to several substantial risks, uncertainties and assumptions described under the sections entitled “Risk Factors” and elsewhere in this Annual Report. 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, actual results or performance to be materially different from those expressed or implied and you should not rely on these forward-looking statements as predictions of future events. There can be no assurance that future developments affecting the Company will be those anticipated. Should one or more of these risks or uncertainties materialize or should any of the assumptions being made prove incorrect, actual results may vary in material respects. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
Overview
Rekor is working to revolutionize public safety, urban mobility, and transportation management using AI-powered solutions designed to meet the distinct demands of each market we serve. We work hand-in-hand with our customers to deliver mission-critical traffic and engineering services that assist them in achieving their goals. Our vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities. We work towards this by collecting, connecting, and organizing mobility data, and making it accessible and useful to our customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.
To achieve these goals, we have developed a robust, interconnected hardware infrastructure and advanced, purpose-built software platforms. These powerful tools, enriched by a diverse range of data and state-of-the-art AI, can produce a level of roadway intelligence that we believe is unmatched. Our solutions empower clients to efficiently manage and optimize the complex interactions of vehicles in motion, ensuring smooth operations within and around public safety, urban mobility, and transportation systems.
Our operations are conducted primarily by our wholly-owned subsidiaries, Rekor Recognition Systems, Inc. ("Rekor Recognition"), Waycare Technologies, Ltd. (“Waycare”), Southern Traffic Services, Inc. (“STS”), and All Traffic Data Systems (“ATD”).
A New Operating System for Roadways
The condition of national transportation infrastructure systems is a matter of great concern, particularly in the United States.
As the private sector continues to innovate and make headlines with cutting-edge technologies such as autonomous vehicles, flying taxis, and smart delivery drones, it's paradoxical that essential issues such as roadway congestion, safety, vehicle emissions and equitable access are worsening at an alarming rate. On February 2, 2023, the US Department of Transportation declared a national crisis and state of emergency for roadway safety and launched an urgent roadway safety call-to-action demanding stakeholders to commit to specific actions to reverse the spike in serious injuries and deaths on our roadways.
According to a report from the American Society of Civil Engineers ("ASCE"), US infrastructure has been graded a C minus, indicating that there is significant and urgent need for improvement. Over 65% of the 4.2 million miles of US roadways are rated in poor condition, which impacts the safety of drivers and passengers. The issue of congestion is also a serious concern, estimated to cost US citizens a whopping $120 billion per year in economic and productivity losses. Furthermore, transportation-related greenhouse gas emissions – motorists' emissions, particularly when trapped in traffic account for a significant proportion of the country's total emissions are a leading contributor to declining sustainability, which has far-reaching environmental impacts. Addressing the road infrastructure issue is imperative for both economic and ecological reasons. Last but not least, tragically, more than 43,000 people lose their lives each year while using the nation's transportation network of streets, roads, and highways, which represents a stark failure in public safety and policy. If these transportation network issues remain unaddressed, it has been projected that the United States will face a $10 trillion loss in its gross domestic product.
To address these urgent issues and ensure the competitiveness of the US economy, an unprecedented amount of funding has been made available from the federal government through the Infrastructure Investment and Jobs Act ("IIJA"), the Inflation Reduction Act, and the CHIPS and Science Act, that is available to help create a digitally-enabled transportation infrastructure that can serve the public good and provide new economic value. This represents a once-in-a-generation level of investment and bipartisan support for creating and scaling digital transportation infrastructure for the 21st century. Rather than a complete reset or rebuilding of infrastructure, the focus is rather to leverage their power of funding and policymaking to build on previous investments, promote new technology layers, and ensure universal access to digital infrastructure systems throughout the country.
The ultimate objective is to adopt an augmented approach to existing physical infrastructure that blends the strengths of physical, digital, and operational infrastructure with mobility data, including mobile phones, connected vehicles, roadway sensors, and more. The goal is to enable and coordinate private and public collaboration through a digital-enabled mobility internet and operating system for the roadways that will advance smarter, safer, greener roadways for all.
This is a unique moment for Rekor, and one that we have been preparing for since 2018.
Roadway Intelligence
Rekor has become a leader in roadway intelligence by collecting, connecting, and organizing global mobility data since its inception. Today, our comprehensive portfolio of products and services offers multiple cutting-edge Internet of Things ("IoT") devices for roadside data collection, an array of curated and integrated data sets from a network of transportation ecosystem data providers, as well as platforms, applications, and data streams that have been tailored for use by a demanding customer base consisting of federal state and local government agencies and large corporate clients.
We specialize in collecting and aggregating mobility-related data from multiple sources into our Rekor One® roadway intelligence engine, transforming this data into knowledge and actionable insights, and securely distributing those insights to multiple users across various software platforms and applications. Our proprietary technologies use recent advances in artificial intelligence, machine learning, data analysis, edge processing, and communications. They are designed to be integrated into existing roadway and roadway sensor infrastructure to deliver real-time and predictive analytics that address critical challenges in transportation management, public safety, urban mobility, and other key commercial markets.
By applying a multi-layer architectural approach and protocols inspired by the Open System Interconnection ("OSI") model, which was instrumental in creating computer operating systems in the 1970s and the internet in the 1980s, we are collaborating with members of the Rekor Partner Network to integrate various transportation infrastructure systems – hardware, technology, and datasets - into a cohesive network of roadway intelligence assets and insights. This involves consolidating fragmented and disparate systems, as well as adding new layers of connectivity, to create a unified environment. To achieve this goal, we are working closely with a wide range of stakeholders, including local and federal government agencies, law enforcement, transit providers, infrastructure owners/operators, automotive OEMs, and technology, communications and data providers.
At Rekor, we are forging a future where the mobility internet is not just connected, but interactive, delivering real-time roadway intelligence to revolutionize traffic management, public safety, maintenance, emergency services, and planning agencies, as well as supporting connected and autonomous vehicles. Our enduring mission is to innovate and perfect a unique, AI-driven, and edge-based IoT network. This network is designed to be pivotal in this transformation, working in harmony with key partners in the transportation and public safety ecosystem to deliver the most comprehensive insights impacting safety, health, and sustainability for roadways, communities, and citizens.
Our commitment is to continue to focus our investments, merging physical and digital infrastructure to lay the groundwork for a new, advanced operating system for roadways. As we move forward, Rekor is positioned to play an indispensable and impactful role, supporting private and public agencies as they design and construct digital infrastructure operating system of the future. We are dedicated to fulfilling the critical demand for real-time and predictive roadway intelligence, ensuring that our solutions are not just innovative but also instrumental in shaping the future of public safety, urban mobility, and transportation management.
Roadway Intelligence Powered by Rekor
Our Rekor One® roadway intelligence engine is purpose-built to be a single source of truth, powered by AI and fueled by rich data. With access to multiple sources of data and our award-winning AI-driven innovations, we provide a range of solutions that address diverse use cases across various public and private sector segments. Our platforms facilitate the efficient collection, analysis, and distribution of vast amounts of data, unlocking real-time and predictive operational insights that have previously been unavailable. Using our advanced technology and centralized platform, we are well-positioned to provide a single-source of truth for roadway intelligence, and help governments and businesses turn infrastructure data into actionable insights that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.
Our Rekor One® roadway intelligence engine allows us to deliver a range of solutions that serve government and commercial customers in the public safety, urban mobility and transportation management areas. Within the Rekor One® environment, our proprietary algorithms curate data from multiple sources, including edge-based IoT devices, existing roadway sensors, and a growing network of transportation data partners, unlocking multiple trillions of additional data points. We use this data to generate multi-dimensional insights in real-time, and AI-driven predictive analytics that leverage patterns of what happened in the past so that we can forecast what will happen in the future. These insights enable our customers to make better-informed proactive decisions and achieve improved operational efficiency through strategic resource allocation.
Rekor's solutions support diverse use cases, including: 1) traffic reports, including counts showing Federal Highway Administration ("FHWA") mandated vehicle classifications and speed, analytics for bicycle, pedestrians, and other micro-mobility modes, as well as patterns and hot spots for greenhouse gas emissions, 2) data driven traffic operations and traffic management, real-time incident detection and response, including proactive traffic calming around events, and 3) high-definition ("HD") video traffic surveillance, to assist law enforcement and support intelligence-based policing, including contactless compliance and enforcement, among others. With our advanced technology and domain expertise, we are well-equipped to serve multiple public agencies and private sector segments with comprehensive roadway intelligence.
To summarize, the Rekor One® roadway intelligence engine, along with our Rekor Partner Network allows us to collect, connect, and organize more data from the roadways than ever before possible, and generate rich insights that enable our customers to make thoughtful decisions impacting their communities every day. With our deep expertise and technology, Rekor is well positioned to help businesses and governments unlock the true potential of their infrastructure data, driving innovation and enhancing the lives of billions of people worldwide.
The Road Ahead
The United States government is investing heavily in upgrading and digitizing the nation’s outdated infrastructure. Recent technological advances, such as edge- and cloud-based computing, artificial intelligence, and the internet of things, have given us an unprecedented opportunity to revolutionize mobility and bridge the divide between rapidly evolving technology and aging infrastructure. We are actively engaged in providing state-of-the-art AI-driven roadway intelligence solutions to enhance public safety, urban mobility, and transportation management. By collecting, connecting, and organizing the world’s mobility data, Rekor delivers precise, real-time, and predictive actionable insights for any moving objects on roadways. We are dedicated to delivering mission-critical solutions that help to create intelligent, secure, and sustainable streets for all communities. The ultimate objective is for Rekor to be a foundational partner in building a digitally-enabled internet and operating system for roadways that will enable smarter, safer, and more eco-friendly mobility for all. Rekor is making mobility data widely accessible and useful for all, empowering customers to make informed decisions and drive meaningful progress towards a brighter future.
Platforms, Products, and Solutions
Rekor's revenue streams are driven by our cutting-edge software and data services, along with complementary hardware and peripheral products. The Rekor One® platform is the central hub of an integrated operating system, supporting the assimilation, analysis, and distribution of data from various sources. Our sales strategy involves offering subscriptions for our software solutions, utilizing the software as a service (“SaaS”) model. These subscriptions can be provided with or without hardware sales, and our platform is designed to enable customers to enhance their existing sensor network by integrating our proprietary sensors into the network over time. While we may continue to offer long-term licenses for certain strategic partnerships, we anticipate that the bulk of our revenue will come from our innovative subscription-based model.
Rekor One® Intelligence Platform
Rekor One®, is the bedrock of our cutting-edge AI-powered roadway intelligence platforms, serving multiple missions with modular and rapid development capabilities. Our proprietary technology and machine learning models power all our solutions, including Rekor Command™ for transportation management, Rekor Discover™ for urban mobility, Rekor Scout® for public safety, plus various commercial use cases.
The security of Rekor One®, and all our market facing solutions is our top priority. We use industry-leading security technologies and standards, including end-to-end encryption and proprietary data filters, to ensure that all captured and connected data is protected from unauthorized access or use. We adhere to strict privacy protocols and provide customers with 24/7 access to their data until it is purged. Our platform is hosted on AWS GovCloud for secure data handling and stored in secure databases with limited access only to authorized system administrators. Moreover, Rekor One® incorporates a privacy filter that uses a proprietary algorithm to strip personally identifiable information (“PII”) from data, ensuring that data privacy is safeguarded.
Rekor Command™ for Transportation Management
Commuters today face staggering congestion, widespread safety concerns, and rising fatalities that are made far worse by outdated, siloed transportation and traffic management systems that are often overwhelmed by large amounts of unusable data. Rekor enables municipalities to transform their approach to transportation management by sourcing, managing, and transforming massive amounts of data, including connected vehicle, event, construction, weather, telematics, existing customer infrastructure, and much more, into actionable insights through AI-enabled technology. Authorities can now shift from being siloed and reactive to an interoperable and proactive approach, saving lives, improving traffic flow, and reducing pollution in their cities. Rekor Command™ acts as a seamless command center for traffic operations and traffic management centers so they can have a holistic view of their roadways in real-time, and take appropriate action to help improve safety, sustainability, and efficiency for citizens across their communities. It’s been built to identify more incidents faster, to enable proactive traffic management through crash-risk prediction, and to do this in a collaborative way connecting agencies and stakeholders, including notifying citizens and the public. As a comprehensive cross-agency platform, Rekor Command™ offers dedicated applications for traffic management centers, freeway service patrol, first responders and maintenance crews, aligning them all to better address traffic challenges while arming them with the vital information needed to identify, manage, and recover from incidents, events and irregularities on their roadways.
Rekor Command™ – Roadway Monitoring Core Application & Events Management Application
The Roadway Monitoring Core application and Events Management application are fundamental applications that sit within the Rekor Command™ platform providing cross-agency incident detection and management functionality that allows customers to effectively implement incident detection and management within their existing workflows while accessing real-time information needed to rapidly identify, manage, and recover from incidents. Traffic management agencies are able to access a live map view of their roadways and are alerted to irregular events and potential incidents that have been identified through AI assisted analysis of multiple sources of data. Once confirmed by the agency, multiple responders are notified to rapidly approach and clear the roadways, enabling traffic to continue and roadway safety to improve.
Rekor Command™ – Community Connect Application
The Community Connect application within the Rekor Command™ platform allows agencies to integrate with systems that can notify public in real-time of events or incidents that are impacting the roadway. This application is a channel for agencies to interact directly with the public, keeping citizens up to date and aware of potentially dangerous events and incidents to help prevent additional incidents from occurring.
Rekor Command™ – Advanced Analytics Application
The Advanced Analytics application within the Rekor Command™ platform provides agencies with reporting capabilities to archive incident and event information, as well as analytics to help users better understand trends, patterns, and planning. This helps Departments of Transportation ("DOTs") to understand historic patterns and arms them with the insights needed to make more proactive decisions around resource allocation and planning.
Rekor Command™ – Road Conditions Application
The Road Conditions application within the Rekor Command™ platform provides several layers of critical information about real-time conditions happening on an agency’s roadways, including real-time weather information with high geospatial specificity, regular and irregular congestion, heightened crash risk, transit impact, and current roadway status. These additional insights and data feeds help further the real-time view agencies have of their roadways and provide additional layers of information that drive decision-making.
Rekor Command™ – Asset View Application
The Asset View application within the Rekor Command™ platform allows agencies to integrate with their existing assets on the roadway and showcase these assets in real-time within the Command platform. Agency assets become an additional layer of data to drive decision making and resource allocation. Assets that are typically integrated include freeway service patrol vehicles, highway police vehicles, city police vehicles, fire department vehicles, construction vehicles, EMS, maintenance vehicles, street sweep vehicles, and snowplows.
Rekor Discover™ for Urban Mobility
Traditional approaches to capturing roadway and infrastructure analytics for planning and engineering employ expensive, manual processes that use antiquated technology to capture a fraction of the information needed for a fraction of the time. Cities, states, and municipalities know that having a clear and accurate picture of what’s happening in and around the roadway is critical as they plan and invest in the infrastructure needed for smart cities, smart transit, self-driving vehicles, and multi-modal movement across their geographies. The Rekor Discover™ platform ingests data from Rekor’s state-of-the-art hardware and fully automates comprehensive analytics and actionable insights about the movement of objects across the roadway. Whether its passenger vehicles, or multi-axle commercial trucks, Rekor Discover™ pulls ground truth insights, both in real-time and historically, allowing agencies to better organize and execute their next-generation roadway planning and city building initiatives in a smart, safe, and future-proof way. Customers access their dashboard on web-based cloud instances and review on-demand traffic reports and analytics that breakdown vehicle volumes and patterns, FHWA 13-bin vehicle classification, electric vehicle volumes and hot spots, geospatial greenhouse gas emissions from vehicles, smog scores, average and spot speeds, along with a variety of other insights. In addition to agencies, many businesses need to understand the vehicle flow, patterns, types, and other important analytics regarding vehicles in their geographies. Whether it is an engineering firm collecting roadway data for their customers, or a real estate developer planning development in a specific area, the capture of accurate, holistic roadway data is valuable for their unique use cases.
Rekor Discover™ – Count, Class and Speed Application
The Count, Class and Speed ("CCS") application within the Rekor Discover™ platform delivers per vehicle record ("PVR") data and analytics that fully automate FHWA reporting requirements for 13-bin classification. Agencies can leverage Rekor’s portable or fixed AI-based systems to capture this data in a fully automated way and then access this rich data in real-time through the CCS application's cloud-based dashboards. In addition to FHWA-13 vehicle category classification, the application also provides vehicle counting, traffic data, and speed reporting, all accessible by different agencies determined time frames. Agencies can generate reports and extract data through a REST API or also by exporting data in multiple Traffic Monitoring Guide ("TMG") standard formats (PRN, .CSV, and .PDF) for integration with the tools they may already be using. With this technology agencies can make better-informed planning decisions with ground truth information.
Rekor Discover™ – Vehicle Insite Application
Rekor Discover’s Vehicle Insite application analyzes real-time video to provide actionable, on-property vehicle intelligence such as vehicle characteristics, Electric Vehicle (EV) statistics and other visit metrics. Utilizing state-of-the-art AI and high-definition camera systems, Vehicle Insite delivers real-time traffic data to deepen the customer’s understanding of the vehicles visiting their properties, enabling enriched experiences and targeted marketing initiatives. Our Visit Metrics feature assists in the analysis of traffic flow patterns to prepare and plan for volume fluctuations, enabling a smooth and efficient experience. Our Vehicle Characteristics feature provides vehicle demographics to leverage in the creation of targeted marketing campaigns that engage and attract the ideal customer segments. Our Vehicle Characteristics feature provides vehicle demographics to leverage in the creation of targeted marketing campaigns that engage and attract the ideal customer segments. The Vehicle Insite application helps users better plan for electric vehicle ("EV") charge station deployment, understand the movement of EVs and their adoption, and gather insights on where emissions and greenhouse gases are emitted from the roadway. The application provides cloud-based dashboards and reports the count of EVs, provides heatmaps for EVs as well as a breakdown of EV models, greenhouse gas emissions and smog, and other useful metrics. Agencies can leverage Rekor’s AI-based systems to capture this data in a fully automated way and then access this rich data in real-time through the sustainability planning application.
Rekor Scout® for Public Safety
Rekor is helping to transform the typically siloed, reactive, single-purpose world of legacy law enforcement and security technology with real-time, AI-driven solutions that act as connectors between agencies and force multipliers in a chronically under-resourced space. The Rekor Scout® platform fully automates previously manual processes with collaborative solutions that keep all stakeholders apprised of developing situations and accelerate reaction times to incidents and offenders. The platform provides accurate license plate and vehicle recognition on nearly any IP, traffic, or security camera. It provides integrated AI support for both existing cameras and any proprietary Rekor AI systems in the network and displays results on a web-based dashboard that can be accessed from anywhere by any authorized user. The platform can connect authorized law enforcement agencies to National Crime Information Center (“NCIC”) lists, allowing them to establish customized hotlists with alerts, apply customized data retention policies and share data with other agencies. Vehicles listed on "blacklists" (stolen, terrorists, amber alerts, etc.) generate an alarm in the dispatching room so that they can be intercepted by a patrol. Millions of cars per week are automatically checked in this way. Through this platform agencies can access real-time alerting, forensic research tools, and investigative tools that accelerate public safety and security missions. Agencies and customers can access plate data by state or province from over 50 countries together with the vehicles’ make, model, color, body type, and direction of travel. Users can also access subtle and unique vehicle characteristics including rust, the presence of a roof rack, mismatched paint, or the like, which can be used for investigative policing and forensics. When combined with high performance reads, parallel processing capability and best-in-class hardware such as those built and deployed by Rekor, Rekor Scout® can be an absolute force multiplier capturing license plate data and vehicle characteristics across multiple lanes at high vehicle speeds with a high degree of accuracy.
Rekor Scout® can also be accessed through a smartphone app designed specifically for law enforcement. This app enables advanced data capture by public safety officers in the palm of the hand, providing access to extremely accurate license plate recognition in areas not covered by stationary or mobile sensors, even where there is no network connectivity. The mobile application retrieves vehicle license plate number and state of registration and automatically organizes information by sessions, capturing date, location, and timestamp. Verified reads then sync with the Rekor Scout® platform, and users can receive in-app alerts using plate matches from custom and connected hotlists. With on-device encrypted lists and data, the mobile application is compliant with the Federal Bureau of Investigation’s Criminal Justice Information System (“CJIS”).
Through our eCommerce platform, we also offer commercial versions of Rekor Scout® which are sold as a subscription service. Rekor Scout® for commercial users includes specialized offerings that bring value to a variety of industries including parking, retail, logistics and security.
Additional Products Supporting Additional and Commercial Use-Cases
Rekor AutoNotice™ Application for Contactless Compliance
Rekor’s AutoNotice is a cloud-based financial management application that delivers a turnkey information and citation management solution for cities, states, and municipalities for both primary and secondary offenses. Our plate-based application provides a safe, equitable, and unbiased enforcement method that requires no human involvement. The application issues notices and/or sends information to registered vehicle owners when a non-compliant vehicle is detected by a Rekor AI system. Non-compliant vehicles are any vehicles actively detected to be violating the law or otherwise requiring a compliance notice. Non-compliance may include uninsured vehicles, vehicles with expired registration, and vehicles with outdated emissions/inspection statuses. In addition to the application, there is an application programming interface for third-party payment gateways for credit card transactions to accommodate both phone and web payments. The interface can also automatically record payments in the system and provide functionality to research, manage unapplied payments, and reconcile receipts. A full call-center is also provided with our AutoNotice application to help facilitate payment or information distribution to non-compliant citizens remotely. We have active deployments of our AutoNotice application for contactless compliance scanning millions of plates and delivering thousands of notices/tickets, including a program for the State of Oklahoma that facilitates enrolling uninsured motorists into a diversion program.
Rekor CarCheck® Application Program Interface ("API")
Rekor CarCheck® allows our powerful AI based vehicle and license plate recognition technology to be conveniently accessed for a wide range of commercial applications. This API supports nearly any programming language, analyzes still images of vehicles from different countries and responds in seconds with accurate license plate data, vehicle make, model, body type, color and orientation.
Rekor Hardware Products
Rekor’s portfolio of AI-based state-of-the-art hardware products are purpose-built to optimize the value of our software as well as bring the advantages of edge processing to capture real-time roadway data. Data capture, aggregation and AI/ML analysis is done on device, at the point of capture on the roadway, so that it can be efficiently delivered to the point of use without processing delays. This reduces costs and enables our systems to work with significantly reduced bandwidth requirements, allowing us to deploy in almost any area, at scale, gathering insights from the roadway in real-time where it matters.
Rekor Edge Max™
Rekor Edge Max™ is a fixed traffic data collection system that captures and transforms high-resolution roadway data into holistic traffic insights. Engineered for high-speed primary roadways and highways up to 120 mph, 3-4 lanes (up to 6 lanes with dual cameras), and 300 ft max range, Edge Max seamlessly captures and processes vehicle data on-device and from advanced distances. The system features a durable enclosure, onboard modem, easy mounting, optional solar power, and can be configured with two cameras to increase capture range. The system captures and analyzes vehicles using the embedded Edge Processing Unit ("EPU") and AI-powered video processing. The Edge Max can be integrated into a network and features an onboard modem, easy mounting, optional solar power, and can even be configured with multiple cameras to increase capture range.
Rekor Edge Pro™
Rekor Edge Pro™ is a complete vehicle recognition solution that can be used on a standalone basis or integrated into a network. Engineered for roadway speeds up to 70 mph, 1-2 lanes, and 75 ft max range, the system can be deployed in neighborhoods, campuses, business districts, and can also be used for parking and access control. It captures and processes data on-device within a durable enclosure. The unit is simple to install and features optional solar power that expands the number of locations where Rekor Edge Pro™ can meet the customer’s needs.
Rekor Edge Flex™
Rekor Edge Flex™ is a non-intrusive, portable data collection system that captures and transforms high-speed roadway data into holistic traffic insights. Powered by a range of modular batteries, the Edge Flex is designed for temporary studies lasting 1 to 7 days. Edge Flex captures up to 12 lanes of traffic and employs AI-powered video processing to analyze it on site using the embedded EPU. Vehicle category classification, vehicle counts, and speed reports are made available in web-based dashboards or exported in multiple file formats that meet TMG standards.
Rekor Traffic Services
With the addition of STS in 2022 and ATD in 2024, Rekor offers 3000+ personnel-years of unparalleled traffic data collection and traffic engineering expertise and services to our customers using both traditional and AI-based approaches. Traffic services include, but are not limited to the following:
Our global presence features an installation base spanning the United States and several international countries, allowing us to deploy our highly experienced field staff anywhere to ensure our commercial and government clients receive tailored solutions irrespective of their geographical location.
Traditional Traffic Studies
Rekor's traditional traffic studies serve as the cornerstone for both permanent and temporary traffic analytics projects, delivering vital data and insights for those involved in the planning and management of roadway infrastructure and commercial initiatives. Our team of experts provides accurate vehicle volume counts all year round, every hour of the day, supporting trend analysis, real-time adjustments, and the advancement of traffic management systems. We emphasize tailoring our approach to meet specific goals, ensuring that each project is conducted efficiently, effectively, and in a cost-conscious manner.
Innovative AI-driven Traffic Studies
For agencies seeking to enhance their traffic management services, Rekor presents the cutting-edge AI-driven Rekor Edge Series. These solutions, available in both portable and permanent formats, mark a significant departure from traditional methods. They can be deployed quickly at roadside locations, eliminating the need for manual data collection in potentially dangerous or traffic-heavy areas.
Transitioning to Rekor’s AI-driven systems not only increases the accuracy and efficiency of traffic data collection but also prioritizes the safety of road workers by minimizing their need to work in risky conditions or disrupt traffic flow. This innovative approach is swiftly gaining favor among commercial and public entities for its ability to ensure safety, minimize road disruptions, and deliver scalable and speedy solutions. These AI-powered systems are redefining the standards of efficiency and precision, allowing clients to adeptly meet contemporary traffic management challenges.
Extensive Traffic Engineering Services
Rekor is dedicated to offering comprehensive traffic engineering services, leveraging both historical and newly gathered data. Our advanced analytical methods convert raw data into actionable insights, supporting a wide range of studies, including:
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Origin-Destination Studies: Map vehicle routes to support urban development planning. |
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Travel Time Studies: Provide insights into travel efficiency and congestion patterns. |
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Occupancy Studies: Analyze parking and vehicle occupancy to understand utilization trends. |
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Traffic Impact & Operations Analysis: Forecast the implications of new developments and refine traffic control strategies. |
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Access Management Studies: Formulate approaches to manage vehicular access points effectively. |
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Traffic Signal Warrant Analysis: Evaluate the necessity for traffic signal installations. |
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Traffic Signal System Timing Analysis and Design: Optimize traffic signal timings for smoother traffic flow. |
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Intersection Improvements: Upgrade intersections to bolster safety and improve traffic movement. |
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Turning Movement Counts: Document the volume and direction of vehicles, pedestrians, or cyclists at specific road locations to enhance road design, traffic signal management, and overall traffic efficiency. |
Our extensive technology portfolio, combined with our ability to deploy skilled teams anywhere in the world for traffic engineering and traffic services, positions us as a leading force in shaping the future of traffic management and infrastructure development.
Competitive Strengths
Our unparalleled, patented technology has been prominently featured by renowned outlets and has driven our global expansion. We have repeatedly earned trust and business over established incumbents in highly competitive bidding processes, owing to our award-winning proprietary technology and exceptional customer service. We provide a unique breadth, depth, and sophistication that our integrated platform delivers to multiple missions and agencies. We maintain our first-mover advantage by tirelessly investing in our competitive strengths and key differentiators.
In the transportation management, public safety, urban mobility, and commercial markets, we possess and continue to cultivate a variety of competitive strengths that set us apart:
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Solution-driven Approach: Our customers are often overwhelmed with an immense amount of data from a wide range of sources. We bridge the gap between data and actionable solutions by converting data into information, knowledge, and insights through our proprietary technology and platform, enabling customers to make informed decisions. |
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Single Source Provider: Unlike other organizations that provide only disconnected products, we deliver an integrated platform of solutions to meet the needs of transportation management, public safety, and commercial markets. As we are infrastructure and data agnostic, we can serve as a single source provider to customers for any of their requirements. |
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One Device Multiple Missions: Our advanced IOT devices are powerful performer that support multiple value-added AI-based data collection and analytic services on the same unit simultaneously, thereby providing extreme value, extensibility, and ability for customers to future-proof their investments well into the future as needed. |
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Cross-Agency Functionality: Our platform supports multiple missions with the same, unified operating system. By integrating our platform directly into agency workflows, we empower our customers to address the growing concerns around safety, equity, and sustainability effectively. |
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Industry-leading Privacy and Security: We use the most advanced security technologies and standards to safeguard all captured and connected data from unauthorized access or use. Our platform also employs proprietary algorithms to strip PII from data, protecting the privacy of our customers and their data. |
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Enhanced Accuracy and Capture for Vehicle Recognition: Our AI software achieves superior accuracy rates under broader parameters of vehicle speed, camera viewing angles, and lighting conditions, capturing vehicle traits, rust, damage, and other unique signatures that can be used to aid investigations |
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Technology leading Vehicle Classification, Count, and Speed: Our AI software achieves superior accuracy and performance rates across all 13 classes and deep classification of vehicles for DOT studies in line with the latest FHWA guidelines. |
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Intelligence-Based Policing: Our comprehensive data capture allows us to detect patterns and analytics around vehicles of interest for law enforcement, significantly enhancing the value of our products and services. |
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Functionality with any IP Cameras: Our AI software supports images and vehicle recognition captured by almost any digital camera, providing a flexible, infrastructure-agnostic solution that is easily scalable across geographies. |
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Edge Processing: Our hardware delivers low-latency alerting via defined edge processing at the edge of the network, enabling real-time data processing and scale without the need for expensive infrastructure such as fiber. |
We are dedicated to continuously enhancing our competitive advantages and differentiators, driving innovation in the transportation management, public safety, and commercial markets.
Customer Segments and Markets
Our technology and solutions are transforming the transportation infrastructure landscape, empowering customers in 80 countries around the world. With many markets currently relying on outdated physical infrastructure, or in the early stages of technology adoption, we see immense potential for growth. Our diverse customer base includes cities, states, municipalities, law enforcement agencies, and more, and our success is evidenced by our multiple pilots, proof of concept, and full-scale deployment agreements throughout the Americas.
While we will continue to pursue opportunities to sell perpetual licenses and hardware, our primary focus is on providing cutting-edge SaaS offerings and services with recurring annual revenues. Our eCommerce site allows us to serve individuals and smaller organizations at scale using a self-service recurring revenue model.
We expect the market for our solutions and services to be extraordinary. We are dedicated to addressing a wide range of market segments, including intelligent transportation systems, smart mobility, traffic analytics, incident detection and location systems, traffic and parking management, smart cities, vehicle regulatory compliance programs, and more.
Since the launch of our Rekor One® roadway intelligence Engine in 2020, our market-specific solutions have gained increased adoption, both in the government and commercial sectors. We are confident in our competitive position and look forward to continued growth and success as we lead the way in intelligent infrastructure.
Business Drivers and Growth Strategies
Our products and services have demonstrated the ability to provide significant improvements in public safety and transportation management and we anticipate that this will drive our growth. The transportation infrastructure market is in the process of transformative change due to a convergence of political, economic, societal, and technological forces. These include rising safety concerns, rapid urbanization and a heightened awareness of the impact human mobility has on the planet. Both governments and businesses are seeking out new technologies and better ways to manage public safety, urban mobility and transportation management challenges. As a result, there has been a significant increase in government funding available to digitize transportation infrastructure in the United States and other countries with a focus on deploying proven near-term solutions that are scalable, efficient, equitable and sustainable. We believe the technologies that we have developed and are continuing to develop have positioned us to take advantage of these market forces.
Our use of AI to extract information about the movements of vehicles and other objects on the roadway has proven to be a core strength, allowing us to capture comprehensive and detailed roadway data with superior accuracy and speed. The modular design of our Rekor One® intelligence platform, in tandem with our proprietary edge processing and filtering technologies, have positioned us to emerge as a leader in facilitating the emerging industry of interactive roadway intelligence. Our mission is to gather the most accurate and detailed data that can be obtained from the roadway in real time and facilitate the aggregation and analysis of that data with other sources, so that insights drawn from that aggregation and analysis can be delivered securely and efficiently to the persons who can make the best use of it. Automotive OEMs and government agencies in the transportation industry are starting to focus on how to leverage connected vehicle data with AI to improve safety. We are building partnerships and enhancing our solutions with data to facilitate the delivery of real-time information to citizens. With Rekor Command™ for transportation management, we are at the forefront of developing predictive analytics that deliver insights based on the analysis of aggregated data from a variety of sources. These sources include real time information drawn from roadway sensors and connected vehicles, off roadway sources such as weather and event data, as well as daily, seasonal and historical trend data.
The enhanced information we provide on roadway conditions is valuable to a wide range of stakeholders. During the past three years, we have initiated the delivery of products and services to a wide range of governmental and business customers. These customers are diverse, ranging from large government entities to small entrepreneurs, and the uses they make of our technology are varied. We have used these customer relationships as an opportunity to assess the full potential of the technologies we have been developing and to learn by doing as well as imagining. When the capital markets were strong, we pursued this strategy aggressively and independently.
In the transportation management and public safety areas, where we are furthest along with the delivery of revenue producing products and services, we expect to continue to employ a "land and expand" growth strategy. This focuses on scaling our resources to supporting growth within these industry segments through expansion of the products and services delivered to existing customers, as well as recruitment of new customers who become familiar with our products and services. By expanding our services and solutions to existing customers while also facilitating cooperation between our existing and new customers we expect to continually expand our information network.
As we develop our sales and marketing capabilities, we are concentrating primarily on subscription-based solutions, with hardware sales used primarily to drive these subscriptions. We continue to explore opportunities for acquisitions or strategic investments in complementary businesses, products, services, or technologies, including those that might benefit most from the use of our technology. These strategic partnerships, mergers, and acquisitions will be attractive to us when they allow us to accelerate our growth or expand our capability to continue leading the roadway intelligence industry.
Competition
Our strategy is to disrupt the transportation infrastructure industry by offering cutting-edge, data-driven solutions that provide unparalleled roadway intelligence, surpassing our competitors. The competition in roadway intelligence takes various forms - some solely focused on Automatic License Plate Recognition ("ALPR") and vehicle recognition technology, while others specialize in data creation, aggregation, insights platforms, or smart city technologies. Additionally, there are a variety of vendors supporting the classification, counting, and speed of vehicles according to FHWA guidelines.
To lead in this highly competitive industry, we must innovate and deliver new, groundbreaking products and services that set us apart from the competition. Our ability to efficiently collect massive amounts of data from existing infrastructure, combine it with third-party data sets, and process and transform this data into actionable insights using advanced AI and data analytical tools gives us a competitive edge. We also excel by providing tailored datasets and integrated solutions and workflows to multiple agencies through a single platform, allowing us to meet the unique needs of various markets.
Our unique approach allows us to collect vehicle classification, counts and speed across all 13 FHWA classes. We also provide deeper classification for both traditional vehicles, connected vehicles, hybrid-electric vehicles, and can report on the interactions of these modes of transport with non-motorized roadway users – including bicycles and pedestrians. In the transportation management sector, these data collection and analysis abilities differentiate our results from others in the market. In addition, we have the ability to accomplish this data collection without intruding on the roadway, which presents a leapfrog opportunity for us to gain and accelerate market segment share because of the serious concerns that our customers have for human safety. We believe that we can sustain our success in the roadway intelligence market because we have developed groundbreaking, innovative offerings that surpass the high standards set by established industry leaders. To penetrate these established markets, we must challenge the status quo, drive the evolution of industry standards, and deliver superior price and performance characteristics.
Although we were an early leader in the successful application of AI to vehicle recognition and continue to see significant potential for innovative applications of AI in the roadway intelligence area, we do not see the use of AI itself as a proprietary advantage. Rather our early start in using AI and machine learning to develop vehicle recognition and roadway data analysis algorithms for a diverse customer base has allowed us to maintain a lead over others who have had access to the same non-proprietary AI and machine learning techniques but have not used it as early or as widely as we have. As we increase our footprint in the industry, we preserve this advantage. However, the roadway is constantly changing with the introduction of new models and types of vehicles, as well as other modifications, such as plate designs. In order to minimize potential threats from others seeking to match our performance or undercut our prices, we must remain committed to delivering differentiated, unique solutions that provide greater value and benefits to our customers. Where we have developed proprietary technologies, such as our unique edge processing and privacy filter technologies, we have taken action to protect our innovations and intellectual property rights. However, our primary strategy for establishing ourselves as a leader in the industry has been the pursuit of innovation and quality. . To maintain our competitive edge, we prioritize key factors such as design innovation, security and privacy features, product quality and reliability, and exceptional service and support.
We face intense competition in the transportation and public safety markets, pitted against rival companies with significant technical, marketing, distribution, and resource advantages, as well as established hardware, software, and service offerings. Furthermore, several competitors possess a larger installed base of active devices, making the competition even more fierce. By providing a comprehensive set of solutions across a wide range of use cases, however, we feel that we can stand apart from most of our competitors, who only operate in a narrow segment of the market. We are concentrating on providing data resources that are more reliable, efficient and readily available. This includes upgrading existing infrastructure to efficiently collect reliable data, aggregating that data with third-party data, processing the data with superior analytical tools, and delivering datasets and actionable insights tailored to the specific needs of multiple agencies through a single platform. Throughout the development of our products and platforms, we have paid particular attention to network and data processing efficiency to allow results to be distributed more effectively through existing communications networks. By facilitating a variety of modular upgrades to existing infrastructure, combining data from various sources, and providing valuable real-time, historical, and predictive insights, Rekor can continue to deliver solutions that meet the needs of customers across the value chain.
Marketing and Sales
We offer products and services in multiple markets, using direct sales, an eCommerce platform and extensive partnerships and alliances. Our direct sales force is organized into groups aligned to the Intelligent Traffic Systems (“ITS”) chapters and other targeted market segments, with a primary focus on direct-to-end-user sales through a high-touch consultative process. In addition, we have established partnerships and strategic alliances that allow us to bundle our technology into purpose-built solutions for various national and global market segments.
As we continue to increase our roadway intelligence engagement with national, state and municipal DOTs, we remain focused on law enforcement communities – both directly and indirectly through strategic partners and resellers/integrators. Our market-leading solutions provide significant value to DOTs for traffic management, planning and operations, and to municipal planning organizations for urban mobility. In addition to these agencies, our solutions also enable law enforcement, intelligence-based policing, corporate campus security, and regulatory compliance for public security. Our technology enables us to understand vehicle characteristics and behaviors beyond simple license plate capture, and digital vehicle signatures – extending into traffic analytics, sustainability metrics, and weigh-in-motion studies for motorized as well as non-motorized movements, such as bicycles and pedestrians. In 2024, we will be working to extend our reach into smaller communities as we continue to serve medium-large DOT and law enforcement departments with our direct sales representatives.
Given that our primary market is state and local governments in the United States, the majority of our sales efforts involve a request for proposal process and/or grant application process. In 2024, we will continue to capture and submit proposals and apply for grants for our customers, while also seeking opportunities to submit concurrently with strategic partners.
Our eCommerce platform offers businesses and individuals around the world a convenient way to purchase our high-value vehicle recognition solutions with just a credit card and a click. The platform allows for self-service sign-up and a range of subscription options while also funneling customers directly to our sales support team if they need more information. Our Edge Pro camera system is the first hardware device for sale directly through the eCommerce platform. With our ALPR software preloaded, customers can activate AI-based vehicle recognition services through a subscription online or by telephone. The device is shipped globally, with optional enhancements for solar power and various pole configurations.
Research and Development
The highly competitive industries where we compete are defined by swift technological advancements. As such, our success is reliant upon a consistent and timely release of innovative products, new rich data services, and advanced technologies to the market. To ensure our competitive edge, we are constantly developing cutting-edge technologies to enhance our existing offerings, expanding our range of solutions through rigorous research and development, as well as developing new AI models and algorithms, licensing intellectual property, and acquiring third-party datasets and technology. We are committed to staying abreast of our customers' technological developments, adhering to industry standards, and meeting their increasingly stringent demands for performance, productivity, quality, and predictability. As a result, we will continue to make significant investments in research and development and data and analytics as we strive to maintain our position as a leader in our field.
Proprietary Technology and Intellectual Property
Our innovative hardware devices, accessories, software, and services are protected by a collection of patents, copyrights, trademarks, service marks, trade dress, and other forms of intellectual property rights both in the United States and foreign countries. While we recognize the importance of owning these intellectual property rights and believe they contribute to our success, we know that the know-how of our skilled personnel and their technical competence and marketing abilities are the foundation of our Company's achievements.
To ensure our continued success, we prioritize the filing of patent applications to safeguard the innovations that arise from our research, development, and design efforts, and we are currently pursuing multiple patent applications. With our commitment to intellectual property rights and our talented personnel, we are well-positioned to lead the market in delivering cutting-edge solutions and services.
Acquisitions
On June 17, 2022, we completed the STS Acquisition.
On January 2, 2024, we completed the ATD Acquisition. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 17 — Subsequent Events”
Additional information concerning the STS and ATD Acquisitions is provided in this Annual Report on Form 10-K under ITEM 7 “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
Human Capital Management
We look for our employees to represent the best and brightest in our industry and the talent we select to be a part of our team defines our culture and success. Our global workforce is highly educated, technical and specialized, with a substantial majority of employees working in technical roles.
As of March 25, 2024, we had 351 employees, of which 347 were full-time and four considered part-time. We consider our employee relations to be good. To date, we have been able to locate and engage highly qualified employees as needed and do not expect our growth efforts to be constrained by a lack of qualified personnel.
Seasonality
We derive revenues substantially from the sale of software, hardware and related services and do not currently anticipate a significant seasonality impact on our revenues. There is a portion of our revenue that requires our technicians and field support team to work outside, their ability to work and provide services to our end customers can be impacted by inclement weather in the winter months. Should our penetration of tolling and other markets involving per recognition fees expand, we would expect to become more subject to seasonal traffic patterns.
Insurance and Risk Management
We maintain insurance covering professional liability and claims involving bodily injury, property and economic loss. We consider our present limits of coverage, deductibles, and reserves to be adequate. Whenever possible, we endeavor to eliminate or reduce the risk of loss on a project through quality assurance and control, risk management, workplace safety, and other similar methods.
Risk management is an integral part of our project management approach for fixed-price contracts and our project execution process. We also evaluate risk through internal risk analyses in which our management reviews higher-risk projects, contracts, or other business decisions that require corporate legal and risk management approval.
Regulation
We are regulated in some of the fields in which we operate. When working with governmental agencies and entities, we must comply with laws and regulations relating to the formation, administration, and performance of contracts. These laws and regulations contain terms that, among other things, may require certification and disclosure of all costs or pricing data in connection with various contract negotiations. We are subject to the laws and regulations that restrict the use and dissemination of information classified for national security purposes.
To help ensure compliance with these laws and regulations, our employees are sometimes required to complete tailored ethics and other compliance training relevant to their position and our operations.
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.
Risks Relating to Our Corporate Structure and Business
We are currently not profitable, and we may be unable to become profitable on a quarterly or annual basis.
For the year ended December 31, 2023, we had a loss from continuing operations of $45,685,000. We cannot assure that we will be profitable in the future or that our financial performance will sustain a sufficient level to completely support operations. Our ability to become profitable in future periods could be impacted by government activity and regulation, economic instability and other items that are not in our control. A significant portion of our expenses are fixed in advance. In addition, we have experienced and expect to continue to experience significant expenses related to acquisitions and the development of new products and services. Our success as a technology-based company focused on roadway intelligence will require us to generate sufficient new revenues from the roadway intelligence market to support our business plan while continuing to operate as a public company. As a result, we may continue to experience operating losses and net losses in the future, which would make it difficult to fund operations and achieve our business plan and could cause the market price of our common stock to decline.
The market for certain of our solutions is new and unproven, may decline or experience limited growth and is dependent in part on our ability to attract new customers to adopt our platform and use our services.
The market for an ecosystem that connects government agencies, service providers and, ultimately, drivers is relatively new and some aspects of it are unproven, therefore, it is subject to several risks and uncertainties. We believe that our future success will significantly depend in large part on the growth, if any, of this market. The use of advanced vehicle recognition systems and marketplace data to obtain data on vehicles, drivers and the environment is still relatively new and potential customers may not recognize the need for, or benefits of, our platform and solutions. Moreover, if they do not recognize the need for and benefits of our platform and solutions, they may decide to adopt alternative services to satisfy some portion of their business needs.
Our ability to expand the market that our platforms and solutions address depends upon a number of factors, including the cost, performance and perceived value associated with them. The market for our platforms and solutions could fail to grow significantly or there could be a reduction in demand for its services as a result of a lack of acceptance, technological challenges, competing services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth, or demand for our services decreases, then our business, results of operations, and financial condition could be adversely affected.
We depend on component and product manufacturing provided by outsourcing partners, most of which are located outside of the U.S.
We rely on outsourcing partners primarily located in Europe and Asia to supply and manufacture many components of substantially all of our hardware products. Any failure of these partners to perform can have a negative impact on our cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations can be disrupted for a variety of reasons, including natural and man-made disasters, information technology system failures, commercial disputes, military actions, economic, business, labor, environmental, public health or political issues, or international trade disputes.
Our internal investments and go-to-market strategy may place downward pressure on our operating margins.
To increase our revenue growth, we continue to invest in our business, including investments into new markets and in innovation and product development to expand the suite of solutions we provide to our customers. Our operating margins experience downward pressure in the short term as a result of these investments. Furthermore, our investments may not produce the expected results. If we are unable to successfully execute our go-to-market strategy and product development activities, we may experience continued losses.
We have not been a leading provider of traffic management and public safety products and services in the past and do not have the level of established contacts and existing business relationships that some of our competitors have.
Although it is growing, our presence in the transportation and public safety markets has been limited. As a result of this, although we believe our products and services have significant competitive advantages, we may encounter difficulties in establishing widespread market acceptance of our products in various markets and regions. Early successes in penetrating these markets and regions may not be able to be sustained once our ability to compete with our more established competitors comes to their attention. They may seek to develop more competitive products before their existing contracts expire, reduce prices, use to advantage their past association as a trusted provider and their superior financial and marketing resources and use other stratagems to competitive advantage, which could significantly impact our ability to continue to grow.
We may need to raise additional capital in the future, which may not be available on acceptable terms, or at all.
We have experienced fluctuations in earnings and cash flows from operations from year to year. To support business growth, or if our business declines, we may need to raise additional capital to support operations, pursue acquisitions or expand our operations. Such additional capital may be raised through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders.
Our capital requirements will depend on many factors, including, but not limited to: our ability to increase revenue, reduce net losses and generate net income; market acceptance of our services, and the overall level of sales of our services; our need to respond to technological advancements and our competitors’ introductions of new products, services or technologies; our ability to control costs; promptness of customer payments; our ability to successfully negotiate arrangements with credit providers; and enhancements to subsidiaries’ infrastructure and systems.
If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, and such securities may have rights, preferences and privileges senior to our common stock. Additional equity or debt financing may not be available on favorable terms, on a timely basis, or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to continue our operations as planned, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures, or we may be forced to sell assets at prices below their stated value.
If we experience declining or flat revenues and fail to manage such declines effectively, we may be unable to execute our business plans and may experience future weaknesses in operating results.
To achieve future growth, we will need to continue to employ qualified personnel and invest in additional research and development and sales and marketing activities, which could limit our ability to reduce expenses or lead to increases in our expenses and result in future declines in operating results. In addition, our future expansion is expected to place a significant strain on our managerial, administrative, operational, financial and other resources. If we are unable to manage these activities or any revenue declines successfully, our business, financial condition and results of operations could be adversely affected.
If we are unable to retain our existing customers, our revenue and results of operations would be adversely affected.
Customers have no obligation to renew their contracts or subscriptions after they expire, and these contracts and subscriptions may not be renewed on the same or more profitable terms. In addition, many of our large governmental contracts are subject to termination on short notice without cause. As a result, our ability to sustain our revenue base depends in part on contracts and subscription renewals. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our products and services, the prices of our services, the prices of the products and services offered by our competitors or reductions in our customers’ spending levels. If our customers do not renew their contracts and subscriptions for our products and services, renew on less favorable terms, or do not purchase additional functionality, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.
Our sales cycles for commercial and government clients can be long, unpredictable and require considerable time and expense, which may cause our operating results to fluctuate.
The timing of our revenue from sales to commercial and government clients is difficult to predict. These efforts require us to educate our clients about the use and benefit of our services, including the technical capabilities and potential cost savings to an organization. Commercial clients typically undertake a significant evaluation and pilot testing process that has in the past, resulted in lengthy sales cycles, typically several months. We spend substantial time, effort and money on our commercial sales efforts without any assurance that these efforts will produce any sales. In addition, subscriptions are frequently subject to budget constraints and unplanned administrative, processing and other delays. If sales expected from a specific client for a particular reporting period are not realized in that period or at all, our results could fall short of expectations and our business, operating results and financial condition could be adversely affected.
Industry consolidation may result in increased competition.
Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer a more comprehensive service than they had offered individually. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships. We expect these trends to continue as companies attempt to strengthen or maintain their market positions. Many of the companies driving this trend have significantly greater financial, technical and other resources than we do and may be better positioned to acquire and offer complementary services and technologies. Such combinations and realignments may create more compelling service offerings or offer greater pricing flexibility than we can or may engage in business practices that make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or service functionality. These pressures could result in a loss of customers, reduction in revenues or limitation on our ability to grow.
We may not be able to respond to rapid technological changes in time to address the needs of our customers, which could have a material adverse effect on our sales and profitability.
The cloud-based services and AI-based product markets in which many of our products and services compete are characterized by rapid technological change, frequent introduction of new products and services and evolving industry standards. Our ability to remain competitive will depend in large part on our ability to continue to enhance our existing products and services and develop new service offerings that keep pace with these markets’ rapid technological developments. Additionally, to achieve market acceptance, we must effectively anticipate and offer products and services that meet changing client demands in a timely manner. Clients may require features and capabilities that our current products and services do not have. If we fail to develop products and services that satisfy customer requirements in a timely and cost-effective manner, our ability to renew subscriptions with existing clients and our ability to create or increase demand for our products and services will be harmed, and our revenue and results of operations would be adversely affected.
The success of our business will depend, in part, on the continued services of certain key personnel and our ability to attract and retain qualified personnel.
The success of our business will depend, in part, on the continued services of certain members of our management. Our inability to attract and retain qualified personnel could significantly disrupt our business.
Although we take prudent steps to retain key personnel, we face competition for qualified individuals from numerous professional services and technology companies. For example, our competitors may be able to attract and retain more qualified professional and technical personnel by offering more competitive compensation packages. If we are unable to attract new personnel and retain our current personnel, we may not be able to develop and maintain our services at the same levels as our competitors and we may, therefore, lose potential customers and sales penetration in certain markets. It may also be difficult to attract and retain qualified individuals in the timeframe demanded by our clients. Furthermore, some of our contracts may require us to employ only individuals who have particular government security clearance levels.
We may fail to realize the anticipated benefits of acquisitions which we consummate, and we may be subject to business uncertainties.
Uncertainties about the effect of our recent and planned acquisitions on employees and customers may have an adverse effect on our Company. These uncertainties may impair our ability to attract, retain and motivate key personnel for a period of time after the acquisitions, and could cause customers, suppliers and others that deal with us to seek to change existing business relationships with us, which may have an adverse effect on our Company. Employee retention may be particularly challenging, as employees may experience uncertainty about their future roles with us.
The achievement of the benefits expected from the integration of acquired companies may require us to incur significant costs. The incurrence of any such costs, as well as any unexpected costs or delays, in connection with such integration, could have a material adverse effect on our business, operating results or financial condition.
We may be required to write-down certain assets after completing our required annual evaluations, which may affect our reported financial results.
The initial determination of the fair value of assets we acquire upon consummation of an acquisition is based upon an internal valuation. We are required to analyze the carrying value of our acquired intangibles and goodwill on an annual basis going forward. After the detailed annual evaluation of the carrying value of the intangible assets, as supported by external analysis, we may be required to make adjustments to our consolidated balance sheet and/or statement of operations. Any adjustments will affect our reported financial results.
Our operating results may be harmed if we are required to collect sales or other related taxes for our licensing and subscription products and services or pay regulatory fees in jurisdictions where we have not historically done so.
Primarily due to the nature of our cloud-based services in certain states and countries, we do not believe we are required to collect sales or other related taxes from our customers in certain states or countries. However, one or more other states or countries may seek to impose sales, regulatory fees or other tax collection obligations on us, including for past sales by us or our resellers and other partners. A successful assertion that we should be collecting sales or other related taxes on our services or paying regulatory fees could result in substantial tax liabilities for past sales, discourage customers from purchasing our services or otherwise harm our business and operating results.
Improper disclosure of confidential and personal data could result in liability and harm to our reputation.
Our handling and storage of the data we collect from some of our customers, vendors and employees, and our processing of data, which may include confidential or personally identifiable information, through the services we provide, may be subject to a variety of laws and regulations, which have been adopted by various federal, state and foreign governments to regulate the collection, distribution, use and storage of personal information of individuals. Several foreign countries in which we conduct business, including the European Economic Area (“EEA”) and Canada, currently have in place or have recently proposed, laws or regulations concerning privacy, data protection and information security, which are more restrictive than those imposed in the United States. Some of these laws are in their early stages and we cannot yet determine the impact these revised laws and regulations, if implemented, may have on our business. However, any failure or perceived failure by us to comply with these privacy laws, regulations, policies or obligations or any security incident that results in the unauthorized release or transfer of personally identifiable information or other customer data in our possession, could result in government enforcement actions, litigation, fines and penalties and/or adverse publicity, all of which could have an adverse effect on our reputation and business.
For example, the EEA wide General Data Protection Regulation (“GDPR”) became applicable on May 25, 2018, replacing the data protection laws of each EEA member state. The GDPR implemented more stringent operational requirements for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, increased requirements to erase an individual’s information upon request, mandatory data breach notification requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. It also significantly increases penalties for non-compliance, including where we act as a service provider (e.g. data processor). If our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data or our marketing practices, fines, for example, of up to 20 million Euros or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is higher) under the GDPR, or other liabilities, as well as negative publicity and a potential loss of business.
Data protection regulation remains an area of increased focus in all jurisdictions and data protection regulations continue to evolve. There is no assurance that we will be able to meet new requirements that may be imposed on the transfer of personally identifiable information from the EU to the United States without incurring substantial expense or at all. European and/or multi-national customers may be reluctant to purchase or continue to use our services due to concerns regarding their data protection obligations. In addition, we may be subject to claims, legal proceedings or other actions by individuals or governmental authorities if they have reason to believe that our data privacy or security measures fail to comply with current or future laws and regulations.
Moreover, we must ensure that certain vendors and customers who have access to such information also have the appropriate privacy policies, procedures and protections in place. Although we take customary measures to protect such information, the continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. If our security measures are breached as a result of third-party action, employee or subcontractor error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to customer data, our reputation may be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and are growing increasingly sophisticated. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.
This environment demands that we continuously improve our design and coordination of security controls throughout our business. Despite these efforts, it is possible that our security controls over data, training and other practices we follow may not prevent the improper disclosure of personally identifiable or other confidential information.
If an actual or perceived breach of our security occurs, we could be liable under laws and regulations that protect personal or other confidential data resulting in increased costs or loss of revenues and the market perception of our services could be harmed.
Our business could be negatively impacted by cyber and other security threats or disruptions.
We face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information and networks; insider threats; threats to the security of our facilities and infrastructure; and threats from terrorist acts or other acts of aggression. Cyber threats are constant and evolving and include, but are not limited to, computer viruses, malicious software, destructive malware, attacks by computer hackers attempts to gain unauthorized access to data, disruption or denial of service attacks, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release or loss of confidential, personal or otherwise protected information (ours or that of our employees, customers or subcontractors), and corruption of data, networks or systems. In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’ systems that are used in connection with our business. Our clients and subcontractors face similar threats and/or they may not be able to detect or deter them, or effectively mitigate resulting losses. These threats could damage our reputation as well as our subcontractor’s ability to perform and could affect our client’s ability to pay.
Although we use various procedures and controls to monitor and mitigate the risk of these threats to us, our clients and our partners, there can be no assurance that these procedures and controls will be sufficient. The impact of these factors is difficult to predict, but one or more of them could result in the loss of information or capabilities, harm to individuals or property, damage to our reputation and/or require remedial actions or lead to loss of business, regulatory actions potential liability and financial loss, any one of which could have a material adverse effect on our financial position, results of operations and/or cash flows.
We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and telecommunications systems, our customer and worker relationships and our ability to attract new customers may be adversely affected.
Our business could be interrupted by damage to or disruption of our computer, telecommunications equipment, software systems, or software applications. Our customers’ businesses may be adversely affected by any system, application or equipment failure we experience. As a result of any of the foregoing, our relationships with our customers may be impaired, we may lose customers, our ability to attract new customers may be adversely affected and we could be exposed to contractual liability. Precautions in place to protect us from, or minimize the effect of, such events may not be adequate.
In addition, the failure or disruption of mail, communications and/or utilities could cause an interruption or suspension of our operations or otherwise harm our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, revenue, profits and operating results could be adversely affected.
If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive, and the demand for our services will likely decline.
The markets in which we operate are in general characterized by the following factors: changes due to rapid technological advances; additional qualification requirements related to technological challenges; and evolving industry standards and changes in the regulatory and legislative environment. Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards and to effectively develop, introduce, market and gain broad acceptance of new product and service enhancements incorporating the latest technological advancements.
A downturn of the U.S. or global economy or in our ability to provide customers with a sustained level of support could result in our customers using fewer products and services or becoming unable to pay us for our services on a timely basis or at all, which would materially adversely affect our business.
Because demand for our solutions and services are sensitive to changes in the level of economic activity, our business may suffer during economic downturns. During periods of weak economic growth or economic contraction, the demand for outsourced services could decline. In addition, market forces may restrict our ability to sustain funding for our sales and support efforts. When the level of demand for our products and services drops, our operating profit could be impacted unfavorably because expenses may not decline as quickly as revenues. In these periods, we can only reduce selling and administrative expenses to a certain level without negatively impacting the long-term potential of our business.
Additionally, during economic downturns, government agencies and companies may slow the rate at which they pay their vendors, or they may become unable to pay their obligations. If our customers become unable to pay amounts owed to us or pay us more slowly, then our cash flow and profitability may suffer significantly.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations, which could subject our business to higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can offset future taxable income for U.S. federal and state income tax purposes. As of December 31, 2023, we had gross federal and state net operating loss carryforwards, or NOLs, of approximately $156,392,000 and $149,122,000, respectively. A lack of future taxable income could adversely affect our ability to use these NOLs. In addition, future changes in our stock ownership, including through acquisitions, could result in ownership changes under Section 382 of the Internal Revenue Code and may result in a limitation on the amount of NOL carryforwards that could be used annually to offset future taxable income and taxes payable. Our NOLs at December 31, 2023 may also be impaired under similar provisions of state law and may expire unused or underused, which would prevent us from using our NOL carryforwards to offset future taxable income.
Assertions by a third party that our services and solutions infringe its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or result in settlements or licensing arrangements that could affect our short-term or long-term profitability.
There is frequent litigation in the software and technology industries based on allegations of infringement or other violations of intellectual property rights. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to develop non-infringing technology or enter into license agreements. Because of the potential for court awards that are difficult to predict, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. In addition, our service agreements may require us to indemnify our customers from certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. Competitors may also seek to use these claims and the pendency of associated litigation as a means of attempting to discredit us or make potential customers fearful of using us, which could harm our relationships with our customers, deter future customers from subscribing to our services or expose us to further litigation. These costs, monetary or otherwise, associated with defending against third-party allegations of infringement could have negative effects on our business, financial condition and operating results.
If our services are used to commit intentional or illegal acts, we may incur significant liabilities, our services may be perceived as not secure, and customers may curtail or stop using our services.
Certain services offered by us enable customers to capture data from video images. Although our service agreements require our customers to comply with all applicable laws, we do not exercise direct control overuse or content of information obtained by our customers through the use of our services. If our services are used by others to commit bad or illegal acts, we may become subject to claims and subject to other potential liabilities. Defending against such claims could be expensive and time-consuming, and there is a possibility that we could incur significant liability to entities who were harmed by such acts. As a result, our business may suffer, and our reputation may be damaged.
We use a limited number of data centers to deliver our services. Any disruption of service at these facilities could harm our business.
Our cloud-based services are hosted from third-party data center facilities located in various parts of the United States. We also use these facilities for some of our development efforts. We do not control the operation of these facilities. The owners of these data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so. In addition, our operations and development efforts could be seriously affected by failures or interruptions in service at these facilities. Any changes in third-party service levels at these third-party data centers or any errors, defects, disruptions or other performance problems with our services related to the non-performance of these facilities could harm our reputation and may damage our clients’ businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to clients, subject us to potential liability, cause clients to terminate their subscriptions or harm our renewal rates.
Our data centers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster, an act of terrorism, vandalism or other misconduct, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.
Our long-term success depends, in part, on our ability to expand the sales of our services to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations.
Conducting international operations subjects us to other risks than those we have generally faced in the United States. These risks include: localization of our services and adaptation for local practices, differences in local, legal standards and regulatory requirements; difficulties in managing and staffing international operations; fluctuations in currency exchange rates; dependence on customers, third parties, and channel partners with whom we do not have extensive experience; potentially adverse tax consequences, including the complexities of foreign value-added or other tax systems; reduced or varied protection for intellectual property rights in some countries; and increased financial accounting and reporting burdens and complexities. Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.
Our success depends in part on our ability to protect and enforce our intellectual property rights.
We rely on a combination of trade secret, patent, copyright, service mark and trademark laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our intellectual property rights, all of which can provide only limited protection. In addition, we have not patented significant technologies used to provide our services. We cannot assure you any future patents that may be applied for and issued will not be challenged, invalidated or circumvented. Any patents that we may issue in the future from future patent applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark or trademark registrations will be issued for pending or future applications or that any registered service marks or trademarks will be enforceable or provide adequate protection of our proprietary rights.
We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. Enforcement of our intellectual property rights also depends on our successful legal actions against these infringers, but these actions may not be successful, even when our rights have been infringed.
Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.
Material defects or errors in the software that we use to deliver our services could harm our reputation, result in significant costs to us and impair our ability to sell our solutions.
The software applications underlying our products and services are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. Any defects that cause interruptions to the availability of our products and services could result in: a reduction in sales or delay in market acceptance of our services; sales credits or refunds to customers; loss of existing customers and difficulty in attracting new customers; reputational harm; and diversion of internal resources. The costs incurred in correcting any material defects or errors in our products and services may be substantial and could harm our operating results.
Government regulation of the Internet, telecommunications and other communications technologies could harm our business and operating results.
As internet commerce and telecommunications continue to evolve, increasing regulation by federal, state or foreign governments and agencies becomes more likely. Any increase in regulation could affect our clients’ ability to collect and share data, potentially reducing demand for our products and services. In addition, taxation of products and services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet or utilizing telecommunications services may also be imposed. Any regulation imposing greater fees for internet use or restricting the exchange of information over the internet could diminish the viability of our services, which could harm our business and operating results.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage our business and operating results.
In the event of natural disasters, public health crises, such as pandemics and epidemics, including from the continued effects of the COVID-19 pandemic, political crises, such as terrorism, war, political instability or other conflicts, or other events outside of our control, our business and operating results could suffer. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results.
Risks relating to our common stock
If securities or industry analysts do not publish research or publish inaccurate or unfavorable reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease covering us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Sales of a substantial number of shares of our common stock may cause the price of our common stock to decline.
As of March 25, 2024, we have a total of 85,324,918 shares of common stock outstanding. Based on shares outstanding as of March 25, 2024, 4,388,872 shares of common stock, or 5.1%, are beneficially owned by our officers, directors and their affiliated entities, and will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, 12,395,649 shares of our common stock that are subject to outstanding options, restricted stock units and warrants as of March 25, 2024, will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, and Rules 144 and 701 under the Securities Act.
We cannot predict what effect, if any, sales of our shares in the public market or the availability of shares for sale will have on the market price of our common stock. However, future sales of substantial amounts of our common stock in the public market, including shares issued on exercise of outstanding options, or the perception that such sales may occur, could adversely affect the market price of our common stock.
The market price of our common stock may be volatile and this may adversely affect our stockholders.
The price at which our common stock trades may be volatile. The stock market can experience significant price and volume fluctuations that affect the market prices of all securities, including securities of companies like us. The market price of our common stock may be influenced by many factors, including:
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our operating and financial performance; |
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variances in our quarterly financial results compared to expectations; |
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future sales of common stock or debt or the perception that sales could occur; |
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investor perception of our business and our prospects; |
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developments relating to the occurrence of risks impacting our company, including any of the risk factors set forth herein; or |
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general economic and stock market conditions. |
In addition, the stock market in general has experienced price and volume fluctuations that have often been unrelated to or disproportionate to the operating performance of companies in our industry. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
Investors may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. We cannot assure investors that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors, and investors purchasing our shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we may sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock in future transactions may be higher or lower than the price per share paid by investors.
We do not intend to pay dividends on our common stock for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends on our common stock in the foreseeable future. We currently anticipate that for the foreseeable future we will retain all of our future earnings for the development, operation and growth of our business and general corporate purposes. Any future determination to pay dividends on our common stock will be at the discretion of our Board of Directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Our executive officers, directors, principal stockholders and their affiliates will continue to exercise significant influence over our company, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.
As of March 25, 2024, our executive officers, directors, five percent or greater stockholders and their respective affiliates owned in the aggregate approximately 5.1% of our common stock.
These stockholders have the ability to influence us through this ownership position and may have a determining role in matters requiring stockholder approval. For example, these stockholders may be able to ultimately determine elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.
We are a “smaller reporting company” and, as a result of the reduced disclosure and governance requirements applicable to smaller reporting companies, our common stock may be less attractive to investors.
We are currently a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a “smaller reporting company,” and have had annual revenues of less than $100 million and public float of less than $700 million during the most recently completed fiscal year. As a “smaller reporting company,” we are subject to lesser disclosure obligations in our SEC filings compared to other issuers. Specifically, "smaller reporting companies" are able to provide simplified executive compensation disclosures in their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited consolidated financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors to analyze our operating results and financial prospects.
Delaware law and provisions in our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.
The anti-takeover provisions of the Delaware General Corporation Law, or the DGCL, may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with stockholders owning in excess of 15% of our outstanding voting stock for three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult, including that: the request of one or more stockholders holding shares in the aggregate entitled to cast not less than 35% of the vote at a meeting is required to call a stockholder meeting. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take certain actions you desire.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Rekor recognizes the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data and our exposure management solutions. Our assessment and management of material risks from cybersecurity threats are integrated into our overall risk management processes. We implement and maintain various technical, physical, and organizational measures, processes, standards and policies designed to manage and mitigate material risks from cybersecurity threats to our information systems and data depending on the environment.
We have an established policy on information security, as well as overall corporate information, workforce and workplace standards policies. These are collectively designed to establish auditable procedures for information security oversight by management, including: 1) identification of different types and forms of information, 2) guidelines for acceptable use and dissemination of information, 3) handling use and destruction of information, 4) personnel and physical site security, 5) incident reporting and response, 6) recovery plans, and 7) standards for web-based applications, communications and mobile devices. Three levels of security procedures have been identified as relating to the sensitivity of the information we manage in connection with different operations. Our policies call for the individuals assigned to these procedures to review and certify them annually and to recommend changes where appropriate. All breaches are required to be reported to senior management and the Board, together with a report on response and recovery, as well as recommendations to address further challenges.
Our information security procedures are overseen by our Chief Information Security Officer, supported by our Chief Technology Officer and our IT Manager, who are responsible to provide regular reports to our Chief Executive Officer and Chief Financial Officer as well as the technology and social responsibility committee and the governance committee of our Board. These procedures are responsible for identifying, assessing, and managing cybersecurity threats and risks and work to monitor and evaluate our threat environment and risk profile using various methods. These methods include evaluating our and our industry’s risk profile, coordinating with law enforcement concerning select threats, and engaging with third parties to conduct external audits and threat assessments for certain systems.
Our Information Security Policy and procedures are reviewed on an ongoing basis. These procedures are implemented by our Chief Information Security Officer, assisted by Managed Service Provider (“MSP”). Our MSP has over 15 years of experience and possesses various cybersecurity certifications. Third-party service providers can assist us from time to time in identifying, assessing, and managing material risks from cybersecurity threats, including for example cybersecurity consultants and software providers, managed cybersecurity service providers, threat intelligence service providers, forensic investigators, penetration testing firms, dark web monitoring services, and professional services firms, including legal counsel and auditors. By partnering with these specialized providers, we can leverage their insights and expertise to implement cybersecurity strategies and processes that are designed to align with industry best practices.
Our senior management evaluates material risks from cybersecurity threats against our overall business objectives and this evaluation and the management of material risks from cybersecurity threats is integrated into our overall risk management processes. This integration is designed to ensure that cybersecurity considerations are part of our decision-making processes. In addition, the Board’s Technology and Social Responsibility Committee includes a member who has had extensive experience in cybersecurity, including in particular cybersecurity standards for smart city transportation systems.
See Risk Factors in this Annual Report on Form 10-K for a description of the risks from cybersecurity threats that may materially affect us and how they may do so.
Our principal executive offices are located at 6721 Columbia Gateway Drive, Suite 400, Columbia, Maryland 21046 and 55a Yigal Alon Street, Tel-Aviv, Israel. We do not own any real property. We do not consider any of our leased properties to be materially important to us. While we believe it is necessary to maintain offices through which our services are coordinated, we feel there are sufficient available office rental properties to adequately serve our needs should we need to relocate or expand our operations.
From time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the Company’s opinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole.
Firestorm Principals
On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. The Firestorm Principals answered together with counterclaims on February 28, 2020. In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel.
On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals. Pursuant to the terms of the settlement agreement, the parties have mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the Company transferred certain Firestorm assets to CrisisRisk Strategies, LLC, made a payment of $175,000, and the Firestorm Principals extinguished of all rights to enforce their claims for payment with respect to principal and interest on the promissory notes issued in connection with the Company’s acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same.
As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities already presented as discontinued operations. The Company also cancelled warrants to purchase 631,254 shares of common stock, which were issued in connection with the acquisition of Firestorm.
H.C Wainwright & Co., LLC
In March 2023, the Company entered into an engagement letter with H.C. Wainwright & Co., LLC, ("HCW"), related to a previous capital raise the Company completed in March 2023. That letter agreement contained provisions for both a “tail” fee due to HCW for any subsequent transactions the Company may enter into during the specified tail period with investors introduced to the Company by HCW during the term of the letter, as well as a right of first refusal ("ROFR"), to act as the Company's exclusive underwriter or placement agent on any subsequent financing transactions utilizing an underwriter or placement agent occurring within twelve months from the consummation of a transaction pursuant to the engagement letter.
In July 2023, subsequent to the announcement of an agreement the Company entered into with one of its stockholders in connection with the exercise of warrants held by the stockholder, which the Company refers to as the July Warrant Exercise Transaction, the Company received a letter from HCW claiming entitlement to certain “tail” fees and warrant consideration stemming from the agreement with the Company's stockholder. The Company believed then, and believes now, that this claim is without merit. As a result of this claim and for other reasons articulated to HCW, the Company terminated its engagement letter with HCW, including for cause, which, the Company believes, eliminated both the “tail” provision and the ROFR provision with respect to this transaction.
On or about October 23, 2023, HCW filed a complaint in New York State Supreme Court asserting a claim for breach of contract against the Company relating to the July Warrant Exercise Transaction. HCW sought to recover compensatory and consequential damages and certain warrants under its letter agreement with Rekor and other fees, not less than a cash fee of $825,000 and the value of warrants to purchase an aggregate of up to 481,100 shares of common stock of the company at an exercise price of $2.00 per share as well as attorneys’ fees. On February 29, 2024, HCW filed a notice of discontinuance without prejudice and advised the court that it intends to commence a new proceeding by filing a new complaint that would address the claim in this lawsuit and subsequent events. On March 4, 2024, the court discontinued this lawsuit without prejudice.
On February 29, 2024, HCW initiated a new action with the filing of complaint in New York State Supreme Court. In this lawsuit, HCW advances the same breach of contract theory and seeks to recover the same damages as sought in the prior now-dismissed lawsuit. In addition, HCW seeks to recover an additional $2,156,000 in damages plus the value of warrants to purchase an aggregate of up to 805,000 shares of common stock at an exercise price of $3.125 per share in connection with Rekor’s February 2024 offering. HCW alleges that Rekor breached its engagement letter with HCW by failing to give Rekor notice of this offering and failing to provide HCW with the opportunity to exercise the ROFR with respect to this transaction.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
Occupational Safety and Health Administration (“OSHA”) Claim
In 2023 two previous employees of the Company (the “Claimants”) filed a complaint with OSHA (the “OSHA Complaints”) against the Company. Shortly after the OSHA Complaints were filed against the Company, the Company filed a position statement to address the OSHA Complaints. On November 30, 2023, OSHA issued its determination that, based on the information gathered thus far in its investigation, OSHA was unable to conclude that there was reasonable cause to believe that a violation of the statute occurred. OSHA thereby dismissed the complaint.
Thereafter, Claimants appealed the determination by filing objections and requesting a hearing before an Administrative Law Judge. The Company likewise filed a request for an award of attorneys’ fees. On January 4, 2024, the Office of Administrative Law Judges (“OALJ”) processed the appeals and issued its Notice of Docketing and Order of Consolidation. On February 28, 2024, the OALJ issued an Order setting forth a revised schedule governing the case with the start of the hearing schedule for December 2, 2024.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the Nasdaq Capital Market under the symbol “REKR”.
Holders
As of March 25, 2024, there were 58 registered holders of record of our common stock, excluding stockholders for whom shares are held in “nominee” or “street name.” The actual number of common stockholders is greater than the number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently do not anticipate paying any cash dividends for the foreseeable future. Instead, we anticipate that all of our earnings will be used to provide working capital, to support our operations, and to finance the growth and development of our business, including potentially the acquisition of, or investment in, businesses, technologies or products that complement our existing business. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including, but not limited to, our future earnings, capital requirements, financial condition, future prospects, applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits and other factors our Board of Directors might deem relevant.
Recent Sales of Unregistered Securities
STS Acquisition
As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2022, as part of the purchase price the Company issued to the sellers of STS 798,666 unregistered shares of the Company’s common stock, valued at $2,000,000. The stock consideration paid to the sellers was issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D, as promulgated thereunder.
Senior Notes with Warrants
As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on January 18, 2023, the Company entered into a securities purchase agreement with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes, and (ii) warrants to purchase up to an aggregate of 7,500,000 shares of common stock of the Company. In connection with the initial closing on January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company of $12,500,000 before reimbursement of expenses.
ATD Acquisition
As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on January 3, 2024, as part of the purchase price the Company issued to the sellers of ATD 3,496,464 unregistered shares of the Company’s common stock, valued at $10,000,000. The stock consideration paid to the sellers was issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D, as promulgated thereunder. On February 27, 2024, the Company filed a registration statement on Form S-3 to register these shares.
2023 Promissory Notes Redemption
On March 4, 2024, the Company completed the redemption of all its outstanding senior secured notes (the “2023 Promissory Notes”). The 2023 Promissory Notes were redeemed at the redemption price of 115% of the $12,500,000 aggregate principal amount of the 2023 Promissory Notes, or approximately $14,375,000, plus accrued and unpaid interest to the redemption date of approximately $263,000 (the “Redemption Payment”). The noteholders elected to accept $1,875,000 of the Redemption Payment in the form of 750,000 unregistered shares of the Company’s common stock, par value $0.0001 per share, having a value of $2.50 per share, with the remainder of the Redemption Payment to be paid in cash.
Use of Proceeds
We have generated losses since our inception and have relied on cash on hand, external bank lines of credit, short-term borrowing arrangements, issuance of debt, the sale of a note, sale of our non-core subsidiaries, and the sale of common stock to provide cash for operations. We attribute losses to financing costs, public company corporate overhead, lower than expected revenue, and lower gross profit of some of our subsidiaries. Our cash proceeds have been primarily used for the acquisitions described above, research and development, legal, financing costs, acquisition costs and sales and marketing expenses related to new product development and our strategic shift to develop and promote the capabilities of our technology offerings.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 of Rekor Systems, Inc., and the related notes thereto.
Overview
Rekor is working to revolutionize public safety, urban mobility, and transportation management using AI-powered solutions designed to meet the distinct demands of each market we serve. We work hand-in-hand with our customers to deliver mission-critical traffic and engineering services that assist them in achieving their goals. Our vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities. We work towards this by collecting, connecting, and organizing the world’s mobility data, and making it accessible and useful to our customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.
General
The information provided in this discussion and analysis of Rekor’s financial condition, and results of operations covers the years ended December 31, 2023 and 2022. 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 was no longer presented with continuing operations. Additionally, in 2022, we completed the acquisition of 100% of the issued and outstanding capital stock of Southern Traffic Services, Inc. ("STS"). This acquisition is included in the presentation of our continuing operations.
Acquisitions and Dispositions
On June 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 December 6, 2022, we divested our ATSE business, a non-core business unit, for approximately $3,390,000.
On January 2, 2024, we completed the acquisition of All Traffic Data Services, LLC (“ATD”) for an aggregate purchase price of $19,795,000, consisting of $9,795,000 in cash which included closing adjustments and $10,000,000 of stock consideration.
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 United 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, 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 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. |
| ● | 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 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. |
| ● | Infrastructure Investment and Jobs Act (“IIJA”) and the Bipartisan Infrastructure Law (“BIL”) - The IIJA, signed into law on November 15, 2021, provides for significant national investments in the transportation systems in the United States, including over $150 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 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 U.S. federal investment in public 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 benefitting from the following new grant sources that are contained in the IIJA: $200 million annually for a “Safe Streets and Roads for All” program that 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 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, Rekor has acquired two subsidiaries as part of its plans to advance its appeal to national and local transportation agencies. In the first of these acquisitions, we acquired a leader in the development of predictive analytics for traffic management using a combination of internally generated and 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 the United States and Israel. | |
| ● | 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 Rekor is unable to successfully implement and execute its plans, there could be a material and adverse effect on the Company’s business, results of operations, and financial condition. | |
| ● | Inability to Achieve Profitability - Rekor continues to grow its business, its 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, Rekor may not be able to 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 employment agreements with these employees, they may not choose to remain employed by Rekor. Should one or more key personnel leave the Company or join a competitor, the Company’s business, operating results, and financial condition can be adversely affected. | |
| ● | Inability to Compete Effectively - Competition and technological 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 Rekor continues to 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 - Rekor relies on information technology in all aspects 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 Rekor takes 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. Rekor cannot determine with certainty whether existing third-party 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.
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 include a mixture of data collection, implementation, engineering, customer support and maintenance services as well as software and hardware. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
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 they incur.
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 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, legal, 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.
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.
Other Income (Expense)
Other income (expense) consists primarily of legal settlements, legal judgements, interest income and 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 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.
Results of Operations
Our historical operating results in dollars are presented below. The analysis of operations 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) |
2023 | 2022 | ||||||
| Revenue |
$ | 34,933 | $ | 19,920 | ||||
| Cost of revenue, excluding depreciation and amortization |
16,499 | 10,890 | ||||||
| Operating expenses: |
||||||||
| General and administrative expenses |
27,038 | 26,612 | ||||||
| Selling and marketing expenses |
7,347 | 8,329 | ||||||
| Research and development expenses |
18,271 | 18,616 | ||||||
| Depreciation and amortization |
7,894 | 6,422 | ||||||
| Goodwill impairment |
- | 34,835 | ||||||
| Total operating expenses |
60,550 | 94,814 | ||||||
| Loss from continuing operations |
(42,116 | ) | (85,784 | ) | ||||
| Other income (expense): |
||||||||
| Gain on extinguishment of debt |
527 | - | ||||||
| Gain on the sale of business |
- | 2,643 | ||||||
| Interest expense, net |
(3,596 | ) | (21 | ) | ||||
| Other expense, net |
(468 | ) | (1,279 | ) | ||||
| Total other income (expense) |
(3,537 | ) | 1,343 | |||||
| Loss before income taxes |
(45,653 | ) | (84,441 | ) | ||||
| (Provision) benefit for income taxes |
(32 | ) | 987 | |||||
| Net loss from continuing operations |
$ | (45,685 | ) | $ | (83,454 | ) | ||
Comparison of the Years Ended December 31, 2023 and 2022
Revenue
| Year ended December 31, |
Change |
|||||||||||||||
| (Dollars in thousands) |
2023 |
2022 |
$ |
% |
||||||||||||
| Revenue |
$ | 34,933 | $ | 19,920 | $ | 15,013 | 75 | % | ||||||||
The increase in revenue for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily attributable to our Urban Mobility product line. During the year ended December 31, 2023, revenue attributable to our Urban Mobility product line was $16,773,000, compared to $7,692,000 compared for the year ended December 31, 2022. Additionally, our contactless compliance revenue increased $1,110,000 for the year ended December 31, 2023 compared to the year ended December 31, 2022. The remaining increase in revenue growth during the year ended December 31, 2023, compared to the year ended December 31, 2022 was primarily attributable to increased sales in sales of the Company's software and hardware products.
Cost of Revenue, Excluding Depreciation and Amortization
| Year ended December 31, |
Change |
|||||||||||||||
| (Dollars in thousands) |
2023 |
2022 |
$ |
% |
||||||||||||
| Cost of revenue, excluding depreciation and amortization |
$ | 16,499 | $ | 10,890 | $ | 5,609 | 52 | % | ||||||||
For the year ended December 31, 2023, 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 increase in revenue. The costs of revenue increased at a lower rate than our revenue increased as the Company was able to realize efficiencies in its operations and better manage its software costs.
Operating Expenses
| Year ended December 31, |
Change |
|||||||||||||||
| (Dollars in thousands) |
2023 |
2022 |
$ |
% |
||||||||||||
| Operating expenses: |
||||||||||||||||
| General and administrative expenses |
$ | 27,038 | $ | 26,612 | $ | 426 | 2 | % | ||||||||
| Selling and marketing expenses |
7,347 | 8,329 | (982 | ) | -12 | % | ||||||||||
| Research and development expenses |
18,271 | 18,616 | (345 | ) | -2 | % | ||||||||||
| Depreciation and amortization |
7,894 | 6,422 | 1,472 | 23 | % | |||||||||||
| Goodwill impairment |
- | 34,835 | (34,835 | ) | -100 | % | ||||||||||
| Total operating expenses |
$ | 60,550 | $ | 94,814 | $ | (34,264 | ) | -36 | % | |||||||
General and Administrative Expenses
The increase in general and administrative expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, were primarily due to increases related to our automobile fleet and insurance. These costs were partially offset due to a decrease in our personnel costs related to a reduction of salaries and overall payroll during the year. Additionally, for the year ended December 31, 2022, the Company recognized a $1,001,000 gain related to the remeasurement of the STS Earnout which decreased the Company's general and administrative expenses during the period.
Selling and Marketing Expenses
The decrease in selling and marketing expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to a $965,000 decrease in stock-based compensation expenses.
Research and Development Expense
The decrease in research and development expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily attributable to a decrease in subcontractor labor expenses as the Company utilized its current workforce to focus on the development of new products and software.
Depreciation and Amortization
The increase in depreciation and amortization during the period is attributable primarily to the increased technology-based intangible assets that were acquired as part of our acquisition of STS.
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 September 30, 2022 and determined that as of the reporting date we had an impairment related to goodwill in the amount of $34,835,000.
Other Income (Expense)
| Year ended December 31, |
Change |
|||||||||||||||
| (Dollars in thousands) |
2023 |
2022 |
$ |
% |
||||||||||||
| Other income (expense): |
||||||||||||||||
| Gain on extinguishment of debt |
$ | 527 | $ | - | $ | 527 | - | |||||||||
| Gain on the sale of business |
- | 2,643 | (2,643 | ) | -100 | % | ||||||||||
| Interest expense, net |
(3,596 | ) | (21 | ) | (3,575 | ) | -17024 | % | ||||||||
| Other expense, net |
(468 | ) | (1,279 | ) | 811 | 63 | % | |||||||||
| Total other income (expense) |
$ | (3,537 | ) | $ | 1,343 | $ | (4,880 | ) | 363 | % | ||||||
Interest expense increased period over period due to the issuance of the 2023 Promissory Notes.
Other expense, net increased in the current period compared to the prior period as a result of legal judgements and settlements that happened during the year ended December 31, 2022. For additional details regarding our legal settlements please see Item 3 of Part I, “Legal Proceedings”.
In connection with the sale of ATSE, we recognized a gain on the sale of the business of $2,643,000 during the year ended December 31, 2022.
Gain on extinguishment of debt is a result of the settlement agreement in the Firestorm litigation. As part of the settlement, we recorded a reduction to notes payable, the related accrued interest and other assets and liabilities which were part of the Firestorm entities.
Income Tax Provision (Benefit)
The provision for income taxes for the year ended December 31, 2023, was $32,000, as compared to tax benefit of $987,000 for the year ended December 31, 2022, which is due primarily to the step-up in the basis of intangible assets related to the STS 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 ended December 31, 2023.
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) 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 the U.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 with U.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, |
||||||||
| 2023 |
2022 |
|||||||
| Net loss from continuing operations |
$ | (45,685 | ) | $ | (83,454 | ) | ||
| Provision (benefit) for income taxes |
32 | (987 | ) | |||||
| Interest expense, net |
3,596 | 21 | ||||||
| Depreciation and amortization |
7,894 | 6,422 | ||||||
| EBITDA |
$ | (34,163 | ) | $ | (77,998 | ) | ||
| Gain on extinguishment of debt |
$ | (527 | ) | $ | - | |||
| Share-based compensation |
4,352 | 6,616 | ||||||
| Gain on the sale of ATSE |
- | (2,643 | ) | |||||
| Loss (gain) due to the remeasurement of the STS Earnout and Contingent Consideration, net |
384 | (883 | ) | |||||
| Impairment of SAFE agreement |
101 | - | ||||||
| Goodwill impairment |
- | 34,835 | ||||||
| Legal judgements and settlements |
801 | 1,608 | ||||||
| One-time consulting fees |
365 | 1,024 | ||||||
| Adjusted EBITDA |
$ | (28,687 | ) | $ | (37,441 | ) | ||
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-sell and upsell our current and future offerings. However, our ability to improve Adjusted Gross Margin over time 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 (dollars in thousands):
| Year ended December 31, |
||||||||
| 2023 |
2022 |
|||||||
| (Dollars in thousands, except percentages) |
||||||||
| Revenue |
$ | 34,933 | $ | 19,920 | ||||
| Cost of revenue, excluding depreciation and amortization |
16,499 | 10,890 | ||||||
| Adjusted Gross Profit |
$ | 18,434 | $ | 9,030 | ||||
| Adjusted Gross Margin |
52.8 | % | 45.3 | % | ||||
Adjusted Gross Margin, for the year ended December 31, 2023 increased to 52.8% from 45.3% for the year ended December 31, 2022. As the Company continues to scale and standardize its product offerings it has begun to realize operational efficiencies that have resulted in an improved Adjusted Gross Margin. Additionally, the Company has worked diligently to reduce its software and data costs.
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 part of the ongoing development of our selling strategy, we have been focusing on sales that employ 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 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. The following table sets forth our recurring revenue for the periods included (dollars in thousands):
| Year ended December 31, |
||||||||||||||||
| 2023 |
2022 |
Change |
||||||||||||||
| $ |
% |
|||||||||||||||
| Recurring revenue |
$ | 20,755 | $ | 13,091 | $ | 7,664 | 59 | % | ||||||||
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. However, procurement requirements for some of our largest customers may result in periods when there is an increase one-time sales as compared to recurring revenues, which may cause the proportion of recurring revenues generated in those periods to fluctuate.
Total Contract Value
The total contract value of contracts won in the current period also provides us with 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 ended December 31, 2023, we won contracts valued at $49,087,000, compared to $21,962,000 of contracts won for the year ended December 31, 2022. This represents growth of $27,125,000 or 124%, period over period.
Performance Obligations
While a portion of the total contract value won in a particular period represents revenue earned during the period, the remainder represents future performance obligations that can provide an indication of our future revenues. As of December 31, 2023, we had approximately $26,390,000 of performance obligations with respect to contracts that were closed prior to December 31, 2023 but have a contractual period beyond December 31, 2023. This represents growth of $4,978,000 or 23% compared to $21,412,000 of performance obligations as of December 31, 2022. These contracts generally cover a term of one to five years, during which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately $18,624,000 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.
Lease Obligations
As of December 31, 2023, we had significant leased building space at the following locations:
| ● |
Columbia, Maryland – The corporate headquarters |
|
| ● |
Tel Aviv, Israel |
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of our planned operations.
Liquidity and Capital Resources
The net cash flows from operating, investing and financing activities for the periods below were as follows (dollars in thousands):
| Year ended December 31, |
||||||||||||||||
| 2023 |
2022 |
Change |
||||||||||||||
| $ |
% |
|||||||||||||||
| Net cash used in operating activities - continuing operations |
$ | (32,178 | ) | $ | (40,070 | ) | $ | 7,892 | 20 | % | ||||||
| Net cash provided by (used in) investing activities - continuing operations |
270 | (8,264 | ) | 8,534 | -103 | % | ||||||||||
| Net cash provided by financing activities - continuing operations |
45,602 | 23,868 | 21,734 | 91 | % | |||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations |
$ | 13,694 | $ | (24,466 | ) | $ | 38,160 | -156 | % | |||||||
Net cash used in operating activities for the year ended December 31, 2023, had a net decrease of $7,892,000, which was attributable to the improvement of our Adjusted EBITDA of $8,754,000 which saw a 23% improvement period over period.
The net increase in net cash used in investing activities of $8,534,000 was primarily due to a decrease in the outflow of funds related to merger and acquisition activities and capital expenditures. During the year ended December 31, 2023, the Company had net cash outflows of $1,388,000 related to capital expenditures compared to $4,171,000 for the year ended December 31, 2022. Additionally, during the year ended December 31, 2022, the Company had net cash outflows of $6,389,000 related to the acquisition of STS. This outflow was partially offset by $3,051,000 in cash proceeds from the sale of the Company's ATSE business unit.
Net cash provided by financing activities for the year ended December 31, 2023 increased by $21,734,000 from the prior year ended December 31, 2022. During the year ended December 31, 2023, as part of our 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds of $11,100,000 and $9,159,000, respectively. Additionally, in the third quarter of 2023, we received gross proceeds of $10,996,000 related to the exercise of warrants associated to the 2023 Registered Direct Offering. Lastly, in the fourth quarter of 2023, we raised $14,330,000 related to our Series A Prime Revenue Sharing Notes. In the prior comparable period, through 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.
For the years ended December 31, 2023 and 2022, we funded our operations primarily through cash from the sale of equity, operating activities from our subsidiaries and the issuance of debt. As of December 31, 2023, we had unrestricted cash and cash equivalents from continuing operations of $15,385,000 and working capital of $8,100,000, as compared to unrestricted cash and cash equivalents of $1,924,000 and a working capital deficit of $6,010,000 as of December 31, 2022.
Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund its current level of operations for the next twelve months following the issuance of these consolidated financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
The Company's ability to generate positive operating results and execute its business strategy will depend on (i) its ability to continue the growth of its customer base, (ii) its ability to continue to improve its quarterly financial metrics such as net loss and cash used from operating activities (iii) the continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with investors, lenders and other financial intermediaries, (v) its ability to maintain timely collections from existing customers, and (vi) the ability to scale its business processes. 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.
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 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 ended December 31, 2023 and 2022, which have been prepared in accordance with U.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 the estimates inherently required therein, are reasonable. These 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 of Rekor 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.
Revenue Recognition
Judgment is required for the estimation of the standalone selling price (“SSP”) and the allocation of the transaction price by relative SSPs. We have arrangements that include multiple performance obligations in which we need to allocate the transaction price using the SSP. Our customer arrangements containing multiple performance obligations typically include the sale and installation of cameras systems, licensing of our software and the performance of maintenance services over a contractual term. In most instances, we have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from other promises in the contract. For arrangements that contain multiple performance obligations, we exercise judgment in allocating the transaction price based on the relative SSP method by comparing the SSP of each distinct performance obligation to the total value of the contract. We apply judgment in determining the SSP for each distinct performance obligation.
Liquidity Analysis
Our liquidity analysis requires a blend of judgment and estimation, relying on both quantitative data and qualitative insights to assess our ability to sustain our operations over the forward-looking period. Management’s analysis involves a comprehensive evaluation of numerous factors to determine whether we can continue our operations during the look-forward period.
We evaluate our recent financial performance, liquidity position, and our ability to meet our financial obligations as they become due. Factors such as financial projections, profitability, cash flow, and debt commitments require estimation and are examined to gauge our financial health.
Our ability to manage our cash flow is another critical aspect of the analysis. Effective cash flow management ensures that we have sufficient liquidity to cover our operating expenses, debt repayments, and other financial obligations. Our cash flow projections are reviewed to determine whether we can generate enough cash to sustain our operations during the look-forward period. Our estimates over our financial projections play a vital role in our analysis. We utilize various assumptions and factors such as market conditions, customer relationships, our sales pipeline, industry trends, and our strategic initiatives to develop and validate our financial projections.
Conducting a liquidity analysis is an exercise in judgment, requiring us to evaluate data points, forecasts, and qualitative insights to arrive at a comprehensive assessment of our ability to remain cash flow positive during the look-forward period. In this process, we must exercise caution, recognizing the inherent uncertainties and limitations of our estimations and financial analysis while striving to provide feasible plan that can successfully mitigate conditions and events that may raise doubt of our ability to continue as a going concern.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Rekor Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rekor Systems, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant losses and may need to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Critical Audit Matter – Going Concern
As part of our audit of the Company’s financial statements, a matter arose that was communicated to the audit committee and is considered to be a critical audit matter. Critical audit matters are those matters that, in our professional judgment, were of most significance in our audit of the current period's financial statements and are therefore included in this report. The following matter was identified as a critical audit matter due to the significant judgment by management in determining whether substantial doubt about the entity's ability to continue as a going concern exists.
During the course of our audit, we identified conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. These conditions include, but are not limited to, ongoing losses from operations, negative cash flows from operating activities, and an accumulated deficit. The Company's financial statements disclose information about these conditions and management's plans to mitigate them, which include efforts to secure additional funding and implement strategic initiatives intended to improve the Company's operational efficiency and revenue generation.
We devoted significant audit attention to the aforementioned conditions and the related disclosures in the financial statements. Our audit procedures included, among other things, evaluating the adequacy of the related disclosures and the application of accounting principles generally accepted in the United States of America in the assessment of the Company's ability to continue as a going concern. We also assessed the feasibility of management's plans to mitigate the substantial doubt and the likelihood that such plans would be effectively implemented within the going concern assessment period. The process of evaluating the impacts of these conditions and management's mitigation plans involved a high degree of auditor judgment and an increased extent of audit effort.
The conclusion regarding the existence of substantial doubt about the Company's ability to continue as a going concern has been appropriately disclosed in Note 1 to the financial statements. The audit procedures applied in the area of management’s going concern assessment, relative to the Company's financial condition and prospects, were determined to be a matter of most significance in the audit and therefore is considered a critical audit matter.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2019
March 25, 2024
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| December 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Accounts receivable (net of allowance for credit losses of $ and $ at December 31, 2023 and 2022, respectively) | ||||||||
| Inventory | ||||||||
| Note receivable, current portion | ||||||||
| Other current assets | ||||||||
| Current assets of discontinued operations | ||||||||
| Total current assets | ||||||||
| Long-term assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use operating lease assets, net | ||||||||
| Right-of-use financing lease assets, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Note receivable, long-term | ||||||||
| SAFE investment | ||||||||
| Deposits | ||||||||
| Total long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Notes payable, current portion | ||||||||
| Notes payable, related party | ||||||||
| Loans payable, current portion | ||||||||
| Lease liability operating, short-term | ||||||||
| Lease liability financing, short-term | ||||||||
| Contract liabilities | ||||||||
| Other current liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Notes payable, long-term | ||||||||
| 2023 Promissory Notes, net of debt discount of $ | ||||||||
| 2023 Promissory Notes - related party, net of debt discount of $ | ||||||||
| Series A Prime Revenue Sharing Notes, net of debt discount of $ | ||||||||
| Series A Prime Revenue Sharing Notes - related party, net of debt discount of $ | ||||||||
| Loans payable, long-term | ||||||||
| Lease liability operating, long-term | ||||||||
| Lease liability financing, long-term | ||||||||
| Contract liabilities, long-term | ||||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (note 13) | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, $ par value, authorized, shares designated as Series A and shares designated as Series B as of December 31, 2023 and December 31, 2022, respectively. preferred stock was issued or outstanding as of December 31, 2023 or 2022, respectively. | ||||||||
| Common stock, $ par value; authorized; shares; issued: , shares at December 31, 2023 and at December 31, 2022; outstanding: shares at December 31, 2023 and at December 31, 2022 | ||||||||
| Treasury stock - at cost, and shares as of December 31, 2023 and 2022, respectively | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
| Year ended December 31, |
||||||||
| 2023 |
2022 |
|||||||
| Revenue |
$ | $ | ||||||
| Cost of revenue, excluding depreciation and amortization |
||||||||
| Operating expenses: |
||||||||
| General and administrative expenses |
||||||||
| Selling and marketing expenses |
||||||||
| Research and development expenses |
||||||||
| Depreciation and amortization |
||||||||
| Goodwill impairment |
||||||||
| Total operating expenses |
||||||||
| Loss from continuing operations |
( |
) | ( |
) | ||||
| Other income (expense): |
||||||||
| Gain on extinguishment of debt |
||||||||
| Gain on the sale of business |
||||||||
| Interest expense, net |
( |
) | ( |
) | ||||
| Other expense, net |
( |
) | ( |
) | ||||
| Total other income (expense) |
( |
) | ||||||
| Loss before income taxes |
( |
) | ( |
) | ||||
| (Provision) benefit for income taxes |
( |
) | ||||||
| Net loss from continuing operations |
( |
) | ( |
) | ||||
| Net income from discontinued operations |
||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Loss per common share from continuing operations - basic and diluted |
( |
) | ( |
) | ||||
| Earnings per common share discontinued operations - basic and diluted |
||||||||
| Loss per common share - basic and diluted |
$ | ( |
) | $ | ( |
) | ||
| Weighted average shares outstanding |
||||||||
| Basic and diluted |
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
| Shares of Common Stock |
Common Stock |
Shares of Treasury Stock |
Treasury Stock at Cost |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
||||||||||||||||||||||
| Balance as of December 31, 2021 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of common stock pursuant to at the market offering, net |
||||||||||||||||||||||||||||
| Issuance upon exercise of stock options |
||||||||||||||||||||||||||||
| Issuance upon vesting of restricted stock units |
||||||||||||||||||||||||||||
| Shares withheld upon vesting of restricted stock units |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Shares issued as part of the STS Acquisition |
||||||||||||||||||||||||||||
| Net loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance as of December 31, 2022 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
| Stock-based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance upon exercise of stock options |
||||||||||||||||||||||||||||
| Issuance upon vesting of restricted stock units |
||||||||||||||||||||||||||||
| Fair value allocated to warrants with 2023 Promissory Notes |
- | - | ||||||||||||||||||||||||||
| Shares withheld upon vesting of restricted stock units |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Issuance upon exercise of Series A warrants |
||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of pre-funded warrants |
||||||||||||||||||||||||||||
| Net proceeds from 2023 Registered Direct Offering |
||||||||||||||||||||||||||||
| Issuance upon exercise of 2023 Registered Direct Offering Warrants |
||||||||||||||||||||||||||||
| Net loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance as of December 31, 2023 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Year ended December 31, |
||||||||
| 2023 |
2022 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net loss from continuing operations |
$ | ( |
) | $ | ( |
) | ||
| Net income from discontinued operations |
||||||||
| Net loss |
( |
) | ( |
) | ||||
| Adjustments required to reconcile net loss to net cash used in operating activities: |
||||||||
| Bad debt expense |
||||||||
| Depreciation |
||||||||
| Amortization of right-of-use financing lease asset |
||||||||
| Non-cash operating lease expense |
||||||||
| Provision (benefit) for deferred income taxes |
( |
) | ||||||
| Stock-based compensation |
||||||||
| Amortization of debt discount |
||||||||
| Amortization of intangible assets |
||||||||
| Goodwill impairment |
||||||||
| Impairment of SAFE Agreement |
||||||||
| Loss (gain) due to the remeasurement of the STS Earnout and Contingent Consideration, net |
( |
) | ||||||
| Gain on the sale of property and equipment |
( |
) | ||||||
| Gain on the sale of ATSE |
( |
) | ||||||
| Gain on extinguishment of debt |
( |
) | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventory |
( |
) | ||||||
| Other current assets |
||||||||
| Deposits |
( |
) | ( |
) | ||||
| Accounts payable, accrued expenses and other current liabilities |
( |
) | ||||||
| Contract liabilities |
||||||||
| Operating lease liability |
( |
) | ||||||
| Net cash used in operating activities - continuing operations |
( |
) | ( |
) | ||||
| Net cash (used in) provided by operating activities - discontinued operations |
( |
) | ||||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| Cash Flows from Investing Activities: |
||||||||
| SAFE Investment |
( |
) | ||||||
| Capital expenditures |
( |
) | ( |
) | ||||
| Down payment on capital expenditures |
( |
) | ||||||
| Proceeds from the sale of property and equipment |
||||||||
| Cash paid for STS acquisition, net |
( |
) | ||||||
| Proceeds from the Roker SAFE |
||||||||
| Proceeds from the sale of ATSE, net |
||||||||
| Net cash provided by (used in) investing activities - continuing operations |
( |
) | ||||||
| Net cash used in investing activities - discontinued operations |
( |
) | ||||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash Flows from Financing Activities: |
||||||||
| Net proceeds 2022 Promissory Notes - related party, exchanged for 2023 Promissory Notes - related party |
||||||||
| Payment of notes payable |
( |
) | ||||||
| Proceeds from notes receivable |
||||||||
| Payments related to financing leases |
( |
) | ||||||
| Net proceeds from exercise of options |
||||||||
| Net proceeds from exercise of the warrants associated with series A preferred stock |
||||||||
| Net proceeds from Series A Prime Revenue Sharing Notes |
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| Net proceeds from Series A Prime Revenue Sharing Notes - related party |
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| Net proceeds from 2023 Promissory Notes |
||||||||
| Net proceeds from 2023 Promissory Notes - related party |
||||||||
| Net proceeds from 2023 Registered Direct Offering |
||||||||
| Net proceeds from the exercise of the warrants associated to 2023 Registered Direct Offering |
||||||||
| Net proceeds from the exercise of the pre-funded warrants |
||||||||
| Repayments of loans payable |
( |
) | ||||||
| Net proceeds from at-the-market agreement |
||||||||
| Repurchases of common stock |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations |
( |
) | ||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations |
( |
) | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents |
( |
) | ||||||
| Cash, cash equivalents and restricted cash and cash equivalents at beginning of the period |
||||||||
| Cash, cash equivalents and restricted cash and cash equivalents at end of the period |
$ | $ | ||||||
| Reconciliation of cash, cash equivalents and restricted cash: |
||||||||
| Cash and cash equivalents at end of the period - continuing operations |
$ | $ | ||||||
| Restricted cash and cash equivalents at end of the period - continuing operations |
||||||||
| Cash and cash equivalents at end of the period - discontinued operations |
||||||||
| Cash, cash equivalents and restricted cash and cash equivalents at end of the period |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Rekor Systems, Inc. (“Rekor”) was formed in February 2017. The consolidated financial statements include the accounts of Rekor, the parent company, and its wholly-owned subsidiaries Rekor Recognition Systems, Inc., Waycare Technologies Inc. and Waycare Technologies Ltd. (collectively, "Waycare") and Southern Traffic Services, Inc. ("STS") (collectively, the “Company”). The Company stands at the forefront of the roadway intelligence sector, revolutionizing public safety, urban mobility, and transportation management on a global scale. The Company's vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities. The Company works towards this vision by collecting, connecting, and organizing the world’s mobility data, and making it accessible and useful to its customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.
On December 6, 2022, the Company divested its Automated Traffic Safety and Enforcement ("ATSE") business, a non-core business unit. As of December 31, 2022, the Company determined that the ATSE business unit met the criteria to be presented as discontinued operations.
On June 17, 2022, the Company completed the acquisition of STS by acquiring
Basis of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.
Liquidity and Going Concern
Management has assessed going concern uncertainty to determine whether there is sufficient cash on hand, together with expected capital raises and working capital, to assure operations for a period of at least one year from the date these consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management has considered various scenarios, forecasts, projections, and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.
The Company has generated losses and negative operating cashflows since its inception and has relied on external sources of financing to support the cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products and services, development of new products and services and marketing efforts associated with these existing and new products and services. As of and for the year ended December 31, 2023, the Company had working capital from continuing operations of $
Our cash increased by $
Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund its current level of operations for the next twelve months following the issuance of these consolidated financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
The Company's ability to generate positive operating results and execute its business strategy will depend on (i) its ability to continue the growth of its customer base, (ii) its ability to continue to improve its quarterly financial metrics such as net loss and cash used from operating activities (iii) the continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with investors, lenders and other financial intermediaries, (v) its ability to maintain timely collections from existing customers, and (vi) the ability to scale its business processes. 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.
Rounding
Dollar amounts, except per share data, in the notes to these consolidated financial statements are rounded to the closest $1,000.
Functional Currency
The U.S. dollar (“U.S. dollar” or “$“) is the currency of the primary economic environment in which the operations of the Company is conducted. Substantial revenues and a substantial portion of the operational costs are denominated in U.S. dollars. Accordingly, the functional currency of the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. For non-U.S. dollar transactions and other items in the financial statements, the following exchange rates are used: (i) for transactions – exchange rates at transaction dates or average exchange rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation and amortization) – historical exchange rates. Currency transaction gains and losses are presented in other expense, net on the consolidated statement of operations. The currency transaction gain for the year ended December 31, 2023 and 2022 was $
Concentration of Risk
The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to $250,000 per account. As of December 31, 2023, and 2022, the Company had deposits, including restricted cash, totaling $
For the year ended December 31, 2023, Customer A accounted for
As of December 31, 2023 Customer A and Customer B accounted for
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments to be cash equivalents.
Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of December 31, 2023 and 2022 were $
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its clients’ financial condition, and the Company generally does not require collateral.
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled accounts receivables of $
The Company maintains an allowance for credit losses at an amount estimated to be sufficient to cover the risk of collecting less than full payment of the receivables. The Company estimates losses on receivables based on expected losses, including our historical experience of actual losses. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. At each balance sheet date, the Company evaluates its receivables and will assess the allowance for credit losses based on specific customer collection issues and historical write-off trends. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance.
Note Receivables
In connection with the sale of its former TeamGlobal subsidiaries in June 2020, the Company received a and a half year promissory note due December 2025, that carries an interest rate of
Inventory
Inventory principally consists of parts and finished goods held temporarily until installed for service. The Company regularly evaluates its ability to realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated current and future market values and new product introductions. Inventory is valued at the lower of cost or net realizable value. The cost is determined by the first-in, first-out (“FIFO”) method.
Accounts Payable, Accrued and Other Current Liabilities
As of December 31, 2023 and 2022, amounts owed to related parties of $
A summary of other current liabilities is as follows (in thousands):
| December 31, 2023 | December 31, 2022 | |||||||
| Payroll and payroll related | ||||||||
| Right of offset to restricted cash | ||||||||
| STS Contingent Consideration | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Property and Equipment
Property and equipment are stated at cost or fair value at acquisition date for assets obtained through business combinations, less accumulated depreciation. Depreciation expense is presented as part of depreciation and amortization on the consolidated statements of operations.
Depreciation is recorded on a straight-line basis over the following estimated lives:
| Class of assets | Useful life (in years) | |||
| Furniture and fixtures | ||||
| Office equipment | ||||
| Leasehold improvements | Shorter of asset life or lease term | |||
| Automobiles | ||||
| Roadway monitoring systems | ||||
Repairs and maintenance are expensed as incurred. Expenditures for additions, improvements and replacements are capitalized.
The Company tests its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Recoverability of property and equipment is measured by comparing the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the sum of the expected undiscounted cash flow is less than the carrying amount of the asset, the Company recognizes an impairment loss, which is the excess of the carrying amount over the fair value of the asset, using the expected future discounted cash flows.
As of December 31, 2023 and 2022, the Company did not recognize an impairment loss on its property and equipment.
Deposits
Deposits consist of cash payments made by the Company related to security deposits for leased assets and deposits on property and equipment which the Company has not yet received.
Research and Development Costs
Research and development costs to develop software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility for the related software product. There were no capitalized internally developed software costs not yet placed in service as of December 31, 2023 and 2022, respectively.
Intangible Assets
Intangible assets include capitalized internally developed software and amounts recognized in connection with acquisitions, including customer relationships, technology and marketing related assets. Intangible assets, other than software development costs, are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. Amortization expense related to intangible assets is presented as part of depreciation and amortization on the consolidated statements of operations. As of December 31, 2023 and 2022, the Company did not recognize an impairment loss on its intangible assets.
Leases
The Company accounts for its leases in accordance with Accounting Standard Codification (“ASC”) Topic 842, Leases ("ASC 842"). The standard provides several optional practical expedients for use in transition. The Company elected to use what the Financial Accounting Standard Board (“FASB”) has deemed the “package of practical expedients,” which allows the Company not to reassess the Company’s previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. ASU 2016-02 also provided several optional practical expedients for the ongoing accounting for leases. The Company has elected the short-term lease recognition exemption for all leases that qualify, meaning that for leases with terms of twelve months or less, the Company will not recognize right-of-use ("ROU") assets or lease liabilities on the Company’s consolidated balance sheets. Additionally, the Company has elected to use the practical expedient to not separate lease and non-lease components for leases of real estate, meaning that for these leases, the non-lease components are included in the associated ROU asset and lease liability balances on the Company’s consolidated balance sheets.
The Company determines if an arrangement contains a lease and the classification of that lease, if applicable, at inception. Operating leases are included in right-of-use operating lease assets, net, lease liabilities operating, short-term and lease liabilities operating, long-term, in the consolidated balance sheets. Financing leases are included in right-of-use financing lease assets, net, lease liabilities financing, short-term and lease liabilities financing, long-term, in the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments under the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determined the incremental borrowing rate for each lease using the Company’s current borrowing rate, adjusted for various factors including level of collateralization and term to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. Certain of the Company’s leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain the Company will exercise that option. An option to terminate is considered unless it is reasonably certain the Company will not exercise the option.
Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
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.
Goodwill
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 on October 1st of each year, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The Company will perform a qualitative assessment, to determine its fair value which includes an evaluation of relevant events and circumstances, including macroeconomic, industry and market conditions, the Company's overall financial performance, and trends in the value of the Company's common stock. During the year ended December 31, 2023, the Company did recognize any impairment to goodwill.
During the third quarter of 2022, the Company experienced a significant decline in its market capitalization, which management deemed a triggering event related to goodwill. As a result, the Company performed an interim impairment assessment as of September 30, 2022, and determined that as of the reporting date the Company had an impairment related to its goodwill in the amount of $
The Company utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of the reporting unit. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon the reporting unit's weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value of Financial Instruments section below. Key assumptions used in the market-based approach included the selection of appropriate peer group companies and the associated valuation multiples. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result.
Revenue Recognition
The Company derives its revenues primarily from the licensing and sale of its roadway data and traffic management product and service offerings. These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services, as well as software and hardware. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
| ● | Identification of the contract, or contracts, with a customer | |
| ● | Identification of the performance obligations in the contract | |
| ● | Determination of the transaction price | |
| ● | Allocation of the transaction price to the performance obligations in the contract | |
| ● | Recognition of revenue when, or as, performance obligations are satisfied |
The following table presents a summary of revenue (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Recurring revenue | $ | $ | ||||||
| Product and service revenue | ||||||||
| Total revenue | $ | $ | ||||||
Information about the Company’s revenue in different geographic regions, which is attributable to the Company’s operations located primarily in the United States and other countries is as follows (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| United States | $ | $ | ||||||
| Other | ||||||||
| Total revenue | $ | $ | ||||||
For the year ended December 31, 2023, except for the United States, total revenue in any single country was less than 10% of consolidated revenue.
Revenues
Recurring revenue
Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue. The Company generates recurring revenue both from long-term contracts with customers that provide for periodic payments and from short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and eCommerce sales.
Recurring revenues are generated through the Company’s Software-as-a-Service ("SaaS") model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The contracts with customers are generally for a term of one to five years. The payments for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these arrangements ratably over the term of the contractual agreement.
The Company also currently receives recurring revenues under contracts entered into using a subscription model for data collection services and bundled hardware and software over a period. Payments for these services and subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing, through a web server, access to the Company’s software solutions, a self-managed database, and a cross-platform application programming interface. The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the Company’s solutions over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, any fixed consideration related to the arrangement is generally recognized as recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided.
eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software 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.
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 implementation 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 recurring revenue from software sales, the Company recognizes point-in-time revenue related to the sale of perpetual software licenses. The Company sells perpetual licenses that provide customers the right to use software for an indefinite period in exchange for a one-time license fee, which is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and has significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.
The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company provides hardware installation services to customers which range from one to six months. The revenue related to the installation component is recognized over time as the implementation is completed.
Contactless compliance revenues reflect arrangements to provide hardware systems and services that identify uninsured motor vehicles, notify owners of non-compliance through a diversion citation, and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of diversion citations collected by the relevant jurisdiction.
The Company also generates revenue through its engineering services. These services are provided at the request of its customers and the revenue related to these services is recognized over time as the service is completed.
Revenue by Customer Type
The following table presents a summary of revenue by revenue type (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Urban mobility | $ | $ | ||||||
| Transportation management | ||||||||
| Public safety | ||||||||
| Total revenue | $ | $ | ||||||
Urban mobility
Urban mobility revenue consists of revenue derived from the Company's roadway data aggregation activities. These activities can include the use of software applications that are part of the Rekor Discover™ platform, the primary application being Rekor’s count, class & speed application. The Company initiated this platform in June of 2022 and is in the process of deploying it for its existing customers as well as initiating deployments for new customers. The application fully automates the aggregation of Federal Highway Administration (“FHWA”) 13-bin vehicle classification, speed, and volume data. Revenues associated with the deployment of other traffic sensors, traffic studies, or construction associated with traffic data collection are also part of data aggregation revenue, which is generated through both recurring pay-for-data contracts and hardware sales with a recurring software maintenance component.
Transportation management
Transportation management revenue is associated with the Rekor Command™ platform and the associated applications underneath the platform. These provide traffic operations and traffic management centers with support through actionable, real-time incident reports integrated into a cross-agency communication and response system. Revenue is generated through contracts that include an upfront as well as recurring component.
Public Safety
Public safety revenue consists of licensing of the Rekor Scout™ platform, licensing of Rekor CarCheck™ API, licensing of Rekor’s vehicle recognition software, as well as systems deployed for security, contactless compliance and public safety. Revenue is generated through recurring and perpetual license sales as well as one-time hardware sales.
Performance obligations
The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation.
Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future. As of December 31, 2023 the Company had approximately $
Contract liabilities
When the Company advance bills clients prior to providing services, revenue will generally be earned and recognized within the next month to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the year ended December 31, 2023, were not materially impacted by any other factors. Contract liabilities as of December 31, 2023 and December 31, 2022, were $
The contract liabilities as of December 31, 2023, are expected to be recognized as revenue during the following years ended December 31, (dollars in thousands):
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total | $ |
Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract
The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. As of December 31, 2023, and 2022, costs incurred to obtain contracts in excess of one year have been immaterial to date.
Advertising
The Company expenses all non-direct response advertising costs as incurred. Advertising costs for the years ended December 31, 2023 and 2022 were $
Segment Information
The Company operates as operating segment as its chief executive officer, who is our chief operating decision maker ("CODM"), reviews financial information on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
Income Taxes
Provision (benefit) for income tax consists of U.S. federal and state income taxes. The Company is required to pay income taxes in certain state jurisdictions.
The Company uses 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.
The Company evaluates 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, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite-lived intangible, because management believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its 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 Company’s 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 the Company’s accounting policy to account for ASC 740-10 related penalties and interest as a component of the income tax provision in the consolidated statements of operations and comprehensive loss.
As of December 31, 2023, and 2022, the Company’s evaluation revealed no uncertain tax positions that would have a material impact on the financial statements.
Equity-Based Compensation
The Company recognizes equity-based compensation costs related to all share-based payments, including stock options and restricted stock units (“RSUs”), based on the grant-date fair value of the award on a straight-line basis over the requisite service period, net of actual forfeitures. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The Company accounts for forfeitures as they occur.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for accounts receivable, notes receivable and accounts payable approximate fair value as of December 31, 2023 and December 31, 2022, because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt and long-term receivables approximates fair value as of December 31, 2023 and December 31, 2022, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.
The determination of fair value is based upon the fair value framework established by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 3 inputs.
The Company considers its contingent consideration to be Level 3 investments and that the fair value approximates the carrying value.
There were no changes in levels during the year ended December 31, 2023.
Earnings (Loss) per Share
Basic loss per share or earnings per share ("EPS"), is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and potentially dilutive securities outstanding during the period, except for periods of net loss for which no potentially dilutive securities are included because their effect would be anti-dilutive. Potentially dilutive securities consist of common stock issuable upon exercise of stock options or warrants using the treasury stock method. Potentially dilutive securities issuable upon conversion of the Series A Preferred Stock are calculated using the if-converted method.
The Company calculates basic and diluted loss per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed.
Treasury shares are presented as a reduction of equity, at their cost to the Company.
N
ew Accounting Pronouncements Effective in the Current Period
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. Upon adoption of the new standard, the Company began recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016-13 and based on the Company’s analysis of ASU 2016-13 and the historical, current and expected credit quality of the Company’s customers, ASU 2016-13 did not have a material impact on its consolidated statements of operations and balance sheets.
Recently Issued Accounting Pronouncements
In November 2023, FASB issued ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the CODM and included within the reported measure(s) of a segment's profit or loss, the amount and composition of any other segment items, the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment's profit or loss to assess performance and decide how to allocate resources. The guidance is effective for our annual period beginning January 1, 2025, and interim periods thereafter, applied retrospectively with early adoption permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide greater disaggregation within their annual rate reconciliation, including new requirements to present reconciling items on a gross basis in specified categories, disclose both percentages and dollar amounts, and disaggregate individual reconciling items by jurisdiction and nature when the effect of the items meet a quantitative threshold. The guidance also requires disaggregating the annual disclosure of income taxes paid, net of refunds received, by federal (national), state, and foreign taxes, with separate presentation of individual jurisdictions that meet a quantitative threshold. The guidance is effective for the Company's annual periods beginning January 1, 2025 on a prospective basis, with a retrospective option, and early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures.
NOTE 2 – BUSINESS ACQUISITIONS
STS Acquisition
On June 17, 2022, the Company completed its acquisition of STS by acquiring
The STS Contingent Consideration in the amount of $2,000,000 will be paid in cash if on or prior to October 30, 2024, the Company enters into a multi-year extension of the Georgia Department of Transportation Contract on substantially similar terms and conditions as the contract being extended. The STS Contingent Consideration shall be payable within 30 days of the effectiveness of the extension of the Georgia Department of Transportation Contract. STS Contingent Consideration is presented as part of other non-current liabilities on the consolidated balance sheets and is remeasured on a quarterly basis. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Contingent Consideration at the time of acquisition and determined the fair value to be $
The Company was to pay the STS Earnout payment, up to $
The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of STS occurred on June 17, 2022, the results of operations for STS from the date of acquisition have been included in the Company’s consolidated statement of operations for the years ended December 31, 2023 and 2022. The table below shows the breakdown related to the purchase price allocation for the acquisition (dollars in thousands):
| Cash paid | $ | |||
| Common stock issued | ||||
| Earnout consideration | ||||
| Contingent consideration | ||||
| Note consideration | ||||
| Total consideration | $ | |||
| Assets | ||||
| Cash and cash equivalents | $ | |||
| Inventory | ||||
| Accounts receivable | ||||
| Other current assets | ||||
| Customer relationships | ||||
| Tradename | ||||
| Property and equipment | ||||
| Right-of-use assets | ||||
| Total assets acquired | $ | |||
| Liabilities | ||||
| Accounts payable and accrued expenses | $ | |||
| Contract liabilities | ||||
| Other current and non-current liabilities | ||||
| Lease liability | ||||
| Deferred tax liability | ||||
| Total liabilities assumed | $ | |||
| Fair value of identifiable net assets acquired | $ | |||
| Goodwill | $ |
The customer relationships and tradename acquired by the Company as part of the acquisition has an estimated useful life of
Operations of Combined Entities
The following unaudited pro forma combined financial information gives effect to the acquisition of STS as if it were consummated as of January 1, 2022. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2022 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| (Dollars in thousands, except per share data) | ||||||||
| Total revenue from continuing operations | $ | $ | ||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted number of shares | ||||||||
ATD Acquisition
On January 2, 2024 the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “Purchase Agreement”), dated as of the January 2, 2024, by and among the Company, ATD and All Traffic Holdings, LLC. ATD is engaged in the business of advanced traffic data collection. Under the terms of the Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”). See NOTE 17 – SUBSEQUENT EVENTS for additional information on the ATD Acquisition.
NOTE 3 – INVESTMENTS
Investments in Unconsolidated Companies
In 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own
There were
Roker
In June 2020, the Company announced a joint venture in which the Company would have a
In 2021, in exchange for $
During the year ended December 31, 2023, the Company recognized an impairment of $
During the year ended December 31, 2023, the Company entered into an agreement to sell substantially all of the assets of Roker, which initiated a triggering event related to the Company's Roker SAFE agreements. As result of the triggering event the Company received cash proceeds of $
NOTE 4 – DISCONTINUED OPERATIONS
ATSE Sale
On December 8, 2022, the Company sold its ATSE business, a non-core component, for approximately $
The table below shows the breakdown related to the sale of ATSE (dollars in thousands):
| Total assets sold | $ | |||
| Total liabilities assumed | ||||
| Net assets sold | ||||
| Closing costs | ||||
| Cash received | $ | |||
| Cash held in escrow | ||||
| Total consideration | ||||
| Gain on sale of ATSE | $ |
The disposition of ATSE is the result of the Company’s strategic decision to prioritize its core data services business and will result in material changes in the Company’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of ATSE as discontinued operations, including for all prior periods reflected in the consolidated financial statements and these notes.
Results of Discontinued Operations
Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations from ATSE for the years ended December 31, 2023 and 2022 have been classified as discontinued operations and presented as part of net income from discontinued operations in the accompanying consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets, net of discontinued operations and current and long term liabilities of discontinued operations in the accompanying consolidated balance sheets as of December 31, 2023 and December 31, 2022.
There was no balance sheet information related to our discontinued operations as of December 31, 2023. The assets and liabilities classified as discontinued operations in the Company's consolidated financial statements as of December 31, 2022 are shown below (dollars in thousands):
| December 31, 2022 | ||||||||||||
| Firestorm | ATSE | Total | ||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Restricted cash and cash equivalents | ||||||||||||
| Accounts receivable, net | ||||||||||||
| Inventory | ||||||||||||
| Total current assets | ||||||||||||
| Long-term assets | ||||||||||||
| Property and equipment, net | ||||||||||||
| Right-of-use lease assets, net | ||||||||||||
| Intangible assets, net | ||||||||||||
| Total long-term assets, net | ||||||||||||
| Total assets | $ | $ | $ | |||||||||
| LIABILITIES | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | |||||||||
| Lease liability, short-term | ||||||||||||
| Other current liabilities | ||||||||||||
| Total current liabilities | ||||||||||||
| Long-Term Liabilities | ||||||||||||
| Lease liability, long-term | ||||||||||||
| Total liabilities | $ | $ | $ | |||||||||
There were no operations related to our discontinued operations for the year ended December 31, 2023. The major components of the discontinued operations, net of tax, are presented in the consolidated statements of operations for the year ended December 31, 2022 are shown below (dollars in thousands):
| Year ended December 31, 2022 | ||||||||||||
| Firestorm | ATSE | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Cost of revenue, excluding depreciation and amortization | ||||||||||||
| Operating expenses: | ||||||||||||
| General and administrative expenses | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Total operating expenses | ||||||||||||
| Net (loss) income from discontinued operations | $ | ( | ) | $ | $ | |||||||
NOTE 5 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years ended December 31, 2023 and 2022 were as follows (dollars in thousands):
| Year ended December 31, |
||||||||
| 2023 |
2022 |
|||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for taxes |
||||||||
| Decrease in accounts payable and accrued expenses related to purchases of property and equipment |
( |
) | ( |
) | ||||
| (Increase) decrease in accounts payable and accrued expenses related to purchases of inventory |
( |
) | ||||||
| Increase in inventory related to the transfer of property and equipment |
||||||||
| Decrease in deposits related to property and equipment received |
||||||||
| Non-cash investing activities: |
||||||||
| Fair market value of shares issued in connection with the acquisition of STS |
||||||||
| Contingent Consideration in connection with the acquisition of STS |
||||||||
| Earnout Consideration in connection with the acquisition of STS |
||||||||
| Note Consideration in connection with the acquisition of STS |
||||||||
| Deferred tax liabilities resulting from purchase accounting adjustments in connection with the acquisition of STS |
||||||||
| Loans issued for property and equipment |
( |
) | ||||||
| Non-cash financing activities: |
||||||||
| 2022 Promissory Notes exchanged for 2023 Promissory Notes - related party |
||||||||
| Warrants issued in connection with the 2023 Promissory Notes |
||||||||
| Warrants issued in connection with the 2023 Promissory Notes - related party |
||||||||
| New Leases under ASC-842 |
||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities |
||||||||
| Recognition of operating lease - right-of-use lease asset |
||||||||
| Lease incentive recognized in current assets |
||||||||
| Recognition of operating lease - lease liability |
$ | ( |
) | $ | ( |
) | ||
NOTE 6 – INVENTORY
As of December 31, 2023 and 2022, inventory consisted entirely of the following (dollars in thousands):
| December 31, |
||||||||
| 2023 |
2022 |
|||||||
| Parts and cameras |
$ | $ | ||||||
| Finished goods |
||||||||
| Total inventory |
$ | $ | ||||||
NOTE 7 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (dollars in thousands):
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Furniture and fixtures | $ | $ | ||||||
| Office equipment | ||||||||
| Roadway monitoring systems placed in service | ||||||||
| Vehicles | ||||||||
| Leasehold improvements | ||||||||
| Roadway monitoring systems not yet placed in service | ||||||||
| Total | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation related to property and equipment, net for the years ended December 31, 2023 and 2022 was $
Information about the Company’s total assets in different geographic regions is as follows (dollars in thousands):
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| United States | $ | $ | ||||||
| Other | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
NOTE 8 – LEASES
The Company has operating leases for office facilities in various locations throughout the United States and Israel. Additionally, the Company has financing leases for vehicles it uses for its operations throughout the United States. The Company’s leases have remaining terms of to years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.
Lease cost recognized in our consolidated statements of operations is summarized as follows (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Finance lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
For the year ended December 31, 2023, the Company had $
Other information about lease amounts recognized in our consolidated financial statements is as follows:
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Weighted-average remaining lease term (years) - operating leases | ||||||||
| Weighted-average remaining lease term (years) - financing leases | - | |||||||
| Weighted-average discount rate - operating leases | % | % | ||||||
| Weighted-average discount rate - financing leases | % | - | ||||||
Maturities of operating and financing lease liabilities for continuing operations at December 31, 2023 were as follows (dollars in thousands):
| Operating Leases | Financing Leases | |||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ||||||||
| Maturities of lease liabilities | $ | $ | ||||||
NOTE 9 – INTANGIBLE ASSETS
Goodwill
There were no changes to goodwill during the year ended December 31, 2023. The following summarizes the change in goodwill from December 31, 2021 to December 31, 2022 (dollars in thousands):
| December 31, 2021 | STS Acquisition | Impairment | December 31, 2022 | |||||||||||||
| Goodwill | $ | $ | $ | ( | ) | $ | ||||||||||
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from December 31, 2021 to December 31, 2023 (dollars in thousands):
| December 31, 2021 | Additions | Amortization | December 31, 2022 | Additions | Amortization | December 31, 2023 | ||||||||||||||||||||||
| Intangible assets subject to amortization from continuing operations | ||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Marketing related | ( | ) | ( | ) | ||||||||||||||||||||||||
| Technology based | ( | ) | ( | ) | ||||||||||||||||||||||||
| Internally capitalized software | ( | ) | ( | ) | ||||||||||||||||||||||||
| Intangible assets subject to amortization from continuing operations | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The following provides a breakdown of identifiable intangible assets as of December 31, 2023 and 2022 (dollars in thousands):
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Customer relationships | $ | $ | ||||||
| Marketing related | ||||||||
| Technology based | ||||||||
| Internally capitalized software | ||||||||
| Total | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Identifiable intangible assets from continuing operations, net | $ | $ | ||||||
These intangible assets are being amortized on a straight-line basis over their weighted average remaining estimated useful life of
As of December 31, 2023, the estimated annual amortization expense from continuing operations for each of the next five fiscal years and thereafter is as follows (dollars in thousands):
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
NOTE 10 – DEBT
STS Notes
On June 17, 2022, pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $
Loans Payable
As part of its operations the Company enters loans related to purchases of its vehicles. These loans have maturities between 2024 and 2028 and carry interest rates ranging from
2022 Promissory Notes
On December 20, 2022, the Company entered into a Promissory Note Agreement (the “2022 Promissory Notes”) with (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a
2023 Promissory Notes
On January 18, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $
The 2023 Promissory Notes are a senior secured obligation of the Company and rank senior to all indebtedness of the Company, subject to certain exceptions. The 2023 Promissory Notes have a maturity date of July 18, 2025 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due. The 2023 Promissory Notes bear an interest rate of
At any time, the Company may prepay all, or any portion of, the 2023 Promissory Notes by redemption at a price equal to (i)
The Company determined that the holder redemption and mandatory redemption options would qualify as derivatives and be subject to accounting under ASC Topic 815, Derivatives and Hedging. The Company believes that the fair value associated with the embedded derivatives related to the holder and mandatory redemption rights are inconsequential.
The Securities Purchase Agreement contains customary representations and warranties of the Company and the investors. The Company has a material relationship with two of the investors, (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a
The Securities Purchase Agreement further provides Arctis with the right to designate a director to be seated on the Company’s board of directors (the “Board”) for a term expiring at the Company’s 2023 annual meeting of stockholders, at which meeting such director shall be nominated by the Board to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders. Arctis has a right to a Board designee for so long as it holds the 2023 Promissory Notes, and such right may not be sold or transferred to any party not affiliated with Arctis. As a result of this right, on September 14, 2023, a director designated by Arctis was elected by the Company’s stockholders at the Company’s 2023 annual meeting of stockholders.
The 2023 Promissory Notes impose certain financial covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, and restrict the declaration of any dividends or other distributions, subject to specified exceptions. In connection with the Series A Prime Revenue Sharing Notes, the holders of the 2023 Promissory Notes signed a waiver to allow for the issuance of additional debt by the Company. If an event of default under the 2023 Promissory Notes occurs, the investors can elect to redeem the 2023 Promissory Notes for cash in accordance with the Early Redemption Schedule, plus default interest, which accrues at a rate per annum equal to
The warrants issued in connection with the initial closing have an exercise price of $
Subsequent to year-end all of the 2023 Promissory Notes were fully redeemed. See NOTE 17 – SUBSEQUENT EVENTS for additional information related to the redemption of the 2023 Promissory Notes.
Series A Prime Revenue Sharing Notes
On December 15, 2023, the Company issued $
Interest will be paid based on revenue received from an initial pool of “prime” accounts which are related to contracts from customers in five states, each of which has been rated at or above AAA/AA+/Aal for their respective unsecured general obligation debt by nationally recognized credit rating agencies. The Company entered into a base Indenture for the Series A Prime Revenue Sharing Notes as of December 15, 2023 with Argent Institutional Trust Company, as trustee. The Indenture creates a first priority security interest for the benefit of the holders of all subsequent notes issued under the Indenture. The Series A Prime Revenue Sharing Notes rank senior to the Company’s existing and future secured and unsecured debt with respect to the pool of revenue securing the Series A Prime Revenue Sharing Notes.
As part of the terms of the Series A Prime Revenue Sharing Notes the Company is required to maintain an interest reserve related to not less than three times the next monthly interest payment. Additionally, there is a sinking fund requirement which states if the three year value of eligible contracts is less than
The Company may prepay the Series A Prime Revenue Sharing Notes at anytime up until December 15, 2026 by paying a premium ranging from
Interest Expense, net
The following table presents the interest expense and interest income related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Contractual interest | $ | |||||||
| Amortization of debt issuance costs | ||||||||
| Total interest expense, net | ||||||||
| Less: interest income | ( | ) | ( | ) | ||||
| Total interest expense, net | $ | $ | ||||||
Schedule of Principal Amounts Due on Debt
The principal amounts due for notes payable and loans payable are shown below as of December 31, 2023 (dollars in thousands):
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | ||||
| Less unamortized financing costs | ( | ) | ||
| Total notes payable | $ |
NOTE 11 – INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business.
The provision (benefit) for income taxes for the years ended December 31, 2023 and 2022 consists of the following (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Federal: | ||||||||
| Deferred | $ | $ | ( | ) | ||||
| Total federal | ( | ) | ||||||
| State: | ||||||||
| Current | ||||||||
| Total state | ||||||||
| Provision (benefit) for income taxes | $ | $ | ( | ) | ||||
The components of deferred income tax assets and liabilities are as follows on December 31, 2023 and 2022 (dollars in thousands):
| Year ended December 31, | ||||||||
| Deferred tax assets | 2023 | 2022 | ||||||
| Net operating loss | $ | $ | ||||||
| 163(j) limitation | ||||||||
| Lease liabilities | ||||||||
| Research and development | ||||||||
| Other | ||||||||
| Total gross deferred tax assets | ||||||||
| Valuation allowance for deferred tax assets | ( | ) | ( | ) | ||||
| Total deferred tax assets | $ | $ | ||||||
| Deferred tax liabilities: | ||||||||
| Right-of-use asset | ( | ) | ( | ) | ||||
| Goodwill and intangibles | ( | ) | ( | ) | ||||
| Fixed assets | ( | ) | ( | ) | ||||
| Total gross deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax liabilities | $ | ( | ) | $ | ( | ) | ||
The difference between the income tax provision (benefit) computed at the U.S. Federal statutory rate and the effective tax rate is as follows for the years ended December 31, 2023 and 2022:
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| U.S. statutory federal rate | % | % | ||||||
| (Decrease) increase in taxes resulting from: | ||||||||
| State income tax rate, net of U.S. Federal benefit | % | % | ||||||
| True-ups | % | % | ||||||
| Other | ( | )% | ( | )% | ||||
| Valuation allowance | ( | )% | ( | )% | ||||
| Effective tax rate | ( | )% | % | |||||
The Company files income tax returns in the United States and various state and foreign jurisdictions. No U.S. Federal, state or foreign income tax audits were in process as of December 31, 2023.
The Company 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, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the goodwill, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its 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 Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.
As of December 31, 2023, the Company had gross federal and state net operating loss carryforwards of $
As of December 31, 2022, Rekor had gross federal and state net operating loss carryforwards of $
The federal and state net operating loss and credit carryforwards may be subject to significant limitations under Sections 382 and 383 of the Internal Revenue Code ("Code") and similar provisions of state law. These Code sections limit the federal net operating loss and credit carryforwards that may be used in any year in the event of an “ownership change”. A Section 382 “ownership change” generally occurs if one or more shareholders or groups of shareholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 “ownership changes”. If so, the Company may lose some or all of the tax benefits of its NOLs and tax credits. The extent of such limitations for prior years, if any, has not been determined.
For the years ended December 31, 2023 and 2022, the Company did record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax benefit.
As a result of the acquisition of STS in 2022, the Company recognized identified definite-lived tangible and intangible asset related to customer relationships, trade names, property and equipment for which the Company received no tax basis due to the stock acquisition. As a result, the Company recorded a deferred tax liability of $
NOTE 12 – EMPLOYEE BENEFIT PLAN
401 (k) Plan
In 2019, Rekor established the Rekor Systems, Inc. 401(k) Plan (the “Rekor 401(k) Plan”), a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan. Employees that satisfied the eligibility requirements became participants in the Rekor 401(k) Plan. The Company contributes an amount equal to the sum of
Employee Severance Benefits
In accordance with the current employment terms with all its employees (Section 14 of the Israeli Severance Pay Law, 1963) located in Israel, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee’s full retirement benefit and severance obligation. The Company is relieved from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts funded, as of the respective agreement dates, are not reflected on the Company’s consolidated balance sheet, as the amounts funded are not under the control and management of the Company and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies.
The amount of contributions recorded by the Company under these plans during the years ended December 31, 2023 and 2022 were $
NOTE 13 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated.
Firestorm Principals
On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. The Firestorm Principals answered together with counterclaims on February 28, 2020. In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel.
On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals. Pursuant to the terms of the settlement agreement, the parties have mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the Company will transfer certain Firestorm assets to CrisisRisk Strategies, LLC, make a payment of $
As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities that was presented as discontinued operations. The Company also cancelled warrants to purchase
H.C Wainwright & Co., LLC
In March 2023, the Company entered into an engagement letter with H.C. Wainwright & Co., LLC, ("HCW"), related to a previous capital raise the Company completed in March 2023. That letter agreement contained provisions for both a “tail” fee due to HCW for any subsequent transactions the Company may enter into during the specified tail period with investors introduced to the Company by HCW during the term of the letter, as well as a right of first refusal ("ROFR"), to act as the Company's exclusive underwriter or placement agent on any subsequent financing transactions utilizing an underwriter or placement agent occurring within twelve months from the consummation of a transaction pursuant to the engagement letter.
In July 2023, subsequent to the announcement of an agreement the Company entered into with one of its stockholders in connection with the exercise of warrants held by the stockholder, which the Company refers to as the July Warrant Exercise Transaction, the Company received a letter from HCW claiming entitlement to certain “tail” fees and warrant consideration stemming from the agreement with the Company's stockholder. The Company believed then, and believes now, that this claim is without merit. As a result of this claim and for other reasons articulated to HCW, the Company terminated its engagement letter with HCW, including for cause, which, the Company believes, eliminated both the “tail” provision and the ROFR provision with respect to this transaction.
On or about October 23, 2023, HCW filed a complaint in New York State Supreme Court asserting a claim for breach of contract against the Company relating to the July Warrant Exercise Transaction. HCW sought to recover compensatory and consequential damages and certain warrants under its letter agreement with Rekor and other fees, not less than a cash fee of $
On February 29, 2024, HCW initiated a new action with the filing of complaint in New York State Supreme Court. In this lawsuit, HCW advances the same breach of contract theory and seeks to recover the same damages as sought in the prior now-dismissed lawsuit. In addition, HCW seeks to recover an additional $
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
Occupational Safety and Health Administration (“OSHA”) Claim
In 2023 two previous employees of the Company (the “Claimants”) filed a complaint with OSHA (the “OSHA Complaints”) against the Company. Shortly after the OSHA Complaints were filed against the Company, the Company filed a position statement to address the OSHA Complaints. On November 30, 2023, OSHA issued its determination that, based on the information gathered thus far in its investigation, OSHA was unable to conclude that there was reasonable cause to believe that a violation of the statute occurred. OSHA thereby dismissed the complaint.
Thereafter, Claimants appealed the determination by filing objections and requesting a hearing before an Administrative Law Judge. The Company likewise filed a request for an award of attorneys’ fees. On January 4, 2024, the Office of Administrative Law Judges (“OALJ”) processed the appeals and issued its Notice of Docketing and Order of Consolidation. On February 28, 2024, the OALJ issued an Order setting forth a revised schedule governing the case with the start of the hearing scheduled for December 2, 2024.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
NOTE 14 – STOCKHOLDERS’ EQUITY
Common Stock
Effective March 18, 2020, the Company adopted and approved an amendment to increase the number of authorized shares of common stock from
2023 Registered Direct Offering
On March 23, 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and issuance by the Company in a registered direct offering of an aggregate of: (i)
The Company entered into an engagement letter with H.C. Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts basis, in connection with the offering. The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering. The Company also paid the placement agent $
During the year ended December 31, 2023,
2023 Letter Agreement
On July 25, 2023, the Company entered into a letter agreement (the “2023 Letter Agreement”) with the same institutional investor connected to the 2023 Registered Direct Offering, pursuant to which the investor and the Company agreed that the investor would exercise all its Register Direct Warrants for shares of common stock underlying the Registered Direct Warrants at $
The 2023 Private Warrants were valued using the Black-Scholes pricing model at a total of $
2023 Warrants
In connection with the initial closing of the 2023 Promissory Notes on January 18, 2023, the Company issued warrants to purchase
The Company estimated the fair value of the warrants using the Black-Scholes pricing model. The use of the Black-Scholes pricing model requires the use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award. The fair value of each warrant granted has been estimated as of the date of the grant using the Black-Scholes pricing model with the following assumptions:
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Volatility | % | |||
| Dividend yield | % | |||
| Estimated annual forfeiture rate at the time of grant | % |
The Company treats the warrants as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as interest expense, net in the consolidated statements of operations.
At-the-Market Offering
Under the S-3 registration filed in September 2021, on February 24, 2022, the Company entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company from time to time may offer and sell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $
For the year ended December 31, 2022, the Company sold
In December of 2022 the Company terminated the 2022 Sales Agreement.
STS Acquisition
In connection with the acquisition as described in NOTE 2 – ACQUISITIONS, the Company issued
2024 Public Offering
On February 9, 2024, the Company issued and sold
Preferred Stock
The Company is authorized to issue up to
Series A Cumulative Convertible Redeemable Preferred Stock
Of the
Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying consolidated balance sheets.
Series B Cumulative Convertible Preferred Stock
Of the
Warrants
A summary of the warrant activity for the Company for the period ended December 31, 2023 and December 31, 2022 is as follows:
| Series A Preferred Stock Warrants (1) | Firestorm Warrants (2) | Secure Education Warrants (3) | 2018 Public Offering Warrants (4) | 2023 Promissory Notes (5) | 2023 Registered Direct Offering (6) | 2023 Private Warrants (7) | Total | |||||||||||||||||||||||||
| Active warrants January 1, 2022 | ||||||||||||||||||||||||||||||||
| Exercised warrants | ||||||||||||||||||||||||||||||||
| Outstanding warrants December 31, 2022 | ||||||||||||||||||||||||||||||||
| Weighted average strike price of outstanding warrants as of December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Intrinsic value of outstanding warrants as of December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Shares of common stock issued for warrant exercises during the year ended December 31, 2022 | ||||||||||||||||||||||||||||||||
| Active warrants January 1, 2023 | ||||||||||||||||||||||||||||||||
| Issued warrants | ||||||||||||||||||||||||||||||||
| Exercised warrants | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Expired warrants | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Cancelled warrants | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Outstanding warrants December 31, 2023 | ||||||||||||||||||||||||||||||||
| Weighted average strike price of outstanding warrants as of December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Intrinsic value of outstanding warrants as of December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Shares of common stock issued for warrant exercises during the year ended December 31, 2023 | ||||||||||||||||||||||||||||||||
| (1) | As part of a Regulation A Offering in fiscal years 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the “Series A Preferred Stock Warrants”). The exercise price for these warrants is $ | |
| (2) | As part of the acquisition of Firestorm on January 24, 2017, the Company issued warrants to purchase | |
| (3) | Pursuant to the Company’s acquisition of Secure Education Consultants on January 1, 2018, the Company issued warrants to purchase | |
| (4) | On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase | |
| (5) | On January 18, 2023, in connection with the 2023 Promissory Notes, the Company issued the investors warrants to purchase | |
| (6) | On March 23, 2023, in connection with the 2023 Register Direct Offering the Company issued (i) pre-funded warrants exercisable for up to an aggregate of | |
| (7) | On July 25, 2023, in connection with the 2023 Letter Agreement, the Company issued warrants to purchase |
NOTE 15 – EQUITY INCENTIVE PLAN
In 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at
In 2021, the Company filed a registration statement on Form S-8 solely to register an additional
Stock-based compensation expense included in the consolidated statements of operations was as follows (dollars in thousands):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cost of revenue, excluding depreciation and amortization | $ | $ | ||||||
| General and administrative expenses | ||||||||
| Selling and marketing expenses | ||||||||
| Research and development expenses | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
Stock Options
Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally years with a contractual term of years.
Stock compensation expense related to stock options for the years ended December 31, 2023 and 2022 was $
A summary of stock option activity under the Company’s 2017 Plan for the years ended December 31, 2023 and 2022 is as follows:
| Number of Shares Subject to Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding balance at January 1, 2022 | $ | $ | ||||||||||||||
| Exercised | ( | ) | - | |||||||||||||
| Forfeited | ( | ) | - | |||||||||||||
| Expired | ( | ) | - | |||||||||||||
| Outstanding balance at December 31, 2022 | $ | $ | ||||||||||||||
| Exercised | ( | ) | - | |||||||||||||
| Forfeited | - | |||||||||||||||
| Expired | ( | ) | - | |||||||||||||
| Outstanding balance at December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2023 | $ | $ | ||||||||||||||
There were
As of December 31, 2023, there was
Restricted Stock Units
Stock compensation expense related to RSU’s for the years ended December 31, 2023 and 2022 was $
A summary of RSU activity under the Company’s 2017 Plan for years ended December 31, 2023 and 2022 is as follows:
| Number of Shares | Weighted Average Unit Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| Outstanding balance at January 1, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | - | |||||||||
| Forfeited | ( | ) | - | |||||||||
| Outstanding balance at December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | ||||||||||
| Forfeited | ( | ) | ||||||||||
| Outstanding balance at December 31, 2023 | $ | |||||||||||
All RSUs granted vest upon the satisfaction of a service-based vesting condition.
As of December 31, 2023, there was $
NOTE 16 – LOSS PER SHARE
The following table provides information relating to the calculation of loss per common share (dollars in thousands, except per share data):
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Basic and diluted loss per share | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net income attributable to shareholders from discontinued operations | ||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic and diluted | ||||||||
| Basic and diluted loss per share from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted earnings per share from discontinued operations | ||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||
| Common stock equivalents excluded due to anti-dilutive effect | ||||||||
As the Company had a net loss for the year ended December 31, 2023, the following
As the Company had a net loss for the year ended December 31, 2022, the following
NOTE 17 – SUBSEQUENT EVENTS
ATD Acquisition
On January 2, 2024 (the “Closing Date”), the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “ATD Purchase Agreement”), dated as of the Closing Date, by and among the Company, ATD and All Traffic Holdings, LLC (the “Seller”). The Seller is a portfolio company of Seaport Capital, a private equity firm. ATD is engaged in the business of advanced traffic data collection. Under the terms of the ATD Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”).
The aggregate purchase price for the interests of ATD was approximately $
ATD Preliminary Purchase Price Allocation
The table below summarizes the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on management’s preliminary estimates of their respective fair values for purposes of the pro forma financial information as of the acquisition date, January 2, 2024 (dollars in thousands):
| Cash paid | $ | |||
| Common stock issued | ||||
| Total Consideration | $ | |||
| Assets | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Property and equipment | ||||
| Right-of-use operating lease assets | ||||
| Intangible assets | ||||
| Total assets acquired | $ | |||
| Liabilities | ||||
| Accounts payable and accrued expenses | $ | |||
| Lease liability operating, short-term | ||||
| Other current liabilities | ||||
| Lease liability operating, long-term | ||||
| Deferred tax liability, long-term | ||||
| Total liabilities assumed | $ | |||
| Fair value of identifiable net assets acquired | $ | |||
| Goodwill | $ |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma operations of combined entities below. Due to the recent completion of the acquisition, the determination of the purchase price and the allocation of the purchase price used in the unaudited pro forma condensed combined financial information are based upon preliminary estimates, which are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of the assets acquired and liabilities assumed, including, but not limited accounts receivable, property and equipment, intangible assets and accounts payable. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments.
ATD Operations of Combined Entities
The following unaudited pro forma combined financial information gives effect to the acquisition of ATD and the Series A Prime Revenue Sharing Notes as if they were consummated as of January 1, 2022. A portion of the proceeds from the Series A Prime Revenue Sharing Notes was used to fund the acquisition of ATD and therefore the Company has included the impact of the issuance of the debt in its pro forma financial information. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition and the issuance of the Series A Prime Revenue Sharing Notes been completed as of January 1, 2022 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| (Dollars in thousands, except per share data) | ||||||||
| Total revenue from continuing operations | $ | $ | ||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted number of shares | ||||||||
2024 Public Offering
In the first quarter of 2024, the “Company issued and sold
On February 9, 2024, the Underwriters exercised in-full their option to purchase up to
Retirement of the 2023 Promissory Notes
On March 4, 2024, the Company completed the redemption of all its outstanding 2023 Promissory Notes. The 2023 Promissory Notes were redeemed at the redemption price of
Board Election's
Pursuant to the terms of the ATD Acquisition, the Seller was granted the right to designate a director to be seated on the Company’s board of directors (the “Board”) for a term expiring at the Company’s 2024 annual meeting of stockholders, at which meeting such director shall be nominated by the Board to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders. The Seller has a right to a Board designee for so long as it holds at least 50% of the Stock Consideration.
On January 2, 2024, at the designation of Seller, the Board appointed Andrew (Drew) Meyers as a member of the Board, with such appointment to take effect immediately. In connection with Mr. Meyer’s appointment, the Board voted to increase the size of the Board to eight members, and appointed Mr. Meyers to fill the resulting vacancy.
On March 1, 2024, the Board of the Company approved an increase to the size of the Board by one seat, to nine members, and appointed Anne Townsend to fill the resulting vacancy. Ms. Townsend will serve for a term expiring at the Company’s 2024 annual meeting of stockholders, at which meeting she will be nominated by the Board to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Based on management’s review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Under the supervision and with the participation with our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2023.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Attestation Report of Registered Public Accounting Firm
This Annual Report does not include an attestation report of our independent registered public accounting firm because non-accelerated filers are not required to provide such a report.
Changes to Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2023 annual meeting of stockholders, or the Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2023, under the captions "Information about the Board of Directors and Committees," "Election of Directors" and "Executive Officers" and is incorporated in this report by reference.
Code of Ethics
We have adopted a Code of Conduct, which serves as our Code of Ethics, which applies to all of our employees, including our executive officers. Our Code of Conduct is available on our website at www.rekor.ai. If we amend or grant a waiver of one or more of the provisions of our Code of Conduct, we intend to satisfy the requirements under Item 5.05 of Item 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Conduct that apply to our Principal Executive and Principal Financial Officer by posting the required information on our website at the above address. Our website is not part of this Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy Statement under the captions "Executive Compensation," "Pay Versus Performance" and "Compensation of Rekor Directors" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth in the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the Proxy Statement under the captions "Certain Relationships and Related Transactions and Director Independence" and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the Proxy Statement under the caption "Ratification of the Appointment of Independent Registered Public Accounting Firm" and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(a) (1) List Financial Statements
See Index to Financial Statements in Part II, Item 8 of this annual report.
(2) List of Financial Statements Schedules
All applicable schedule information is included in our Financial Statements in Part II, Item 8 of this annual report.
(b) Exhibits Index. We hereby file, as exhibits to this Annual Report, those exhibits listed on the Exhibit Index immediately following the signature page hereto.
| Incorporated by Reference |
||||||||||||
| Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
FilingDate |
Filed/ FurnishedHerewith |
||||||
| 2.1 |
S-4/A |
333-216014 |
2.1 |
7/13/17 |
||||||||
| 3.1 |
8-K |
333-216014 |
3.1 |
8/25/17 |
||||||||
| 3.2 |
8-K |
001-38338 |
3.1 |
4/30/19 |
||||||||
| * |
Filed herewith. |
| ** |
Furnished herewith. |
| # |
Indicates management contract or compensatory plan. |
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Rekor Systems, Inc. |
||
| /s/ Robert A. Berman |
||
| Name: |
Robert A. Berman |
|
| Title: |
Chief Executive Officer Principal Executive Officer |
|
| Date: |
March 25, 2024 |
| /s/ Eyal Hen |
||
| Name: |
Eyal Hen |
|
| Title: |
Chief Financial Officer (Principal Financial and Accounting Officer) |
|
| Date: |
March 25, 2024 |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature |
Title |
Date |
||
| /s/ Robert A. Berman Robert A. Berman |
Chief Executive Officer (Principal Executive Officer), Chairman of the Board and Director |
March 25, 2024 |
||
| /s/ Eyal Hen Eyal Hen |
Chief Financial Officer (Principal Financial and Accounting Officer) |
March 25, 2024 | ||
| /s/ Glenn Goord Glenn Goord |
Director |
March 25, 2024 | ||
| /s/ Paul de Bary Paul de Bary |
Director |
March 25, 2024 | ||
| /s/ David Hanlon David Hanlon |
Director |
March 25, 2024 | ||
| /s/ Steven D. Croxton Steven D. Croxton |
Director |
March 25, 2024 | ||
| /s/ Sanjay Sarma Sanjay Sarma |
Director
|
March 25, 2024
|
||
| /s/ Tim Davenport Tim Davenport |
Director |
March 25, 2024
|
||
| /s/ Drew Meyers Drew Meyers |
Director |
March 25, 2024
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| /s/ Anne Townsend Anne Townsend |
Director |
March 25, 2024
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Exhibit 21.1
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Subsidiaries of Rekor Systems, Inc. |
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Legal Name of Subsidiary |
Jurisdiction of Organization |
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Rekor Recognition Systems, Inc. |
Delaware |
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Rekor Public Safety Network, LLC |
Delaware |
| All Traffic Data Services, LLC |
Colorado |
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Global Public Safety, LLC (19.99% ownership) |
Delaware |
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Columbia Gateway Investors, LLC |
Delaware |
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OpenALPR Software Solutions, LLC |
Delaware |
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Ollie Dee LLC |
Delaware |
| Waycare Technologies Ltd. | Israel |
| Waycare Technologies Inc. | Delaware |
| Southern Traffic Services, Inc. | Florida |
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements of Rekor Systems, Inc. on Form S-8 (File Nos. 333-220864, 333-259041, and 333-260153) and Form S-3 (File Nos. 333-259447, 333-260607, 333-274422 and 333-277393) of our report dated March 25, 2024, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of Rekor Systems, Inc. and Subsidiaries as of and for the years ended December 31, 2023 and 2022, which report is included in this Annual Report on Form 10-K of Rekor Systems, Inc. and Subsidiaries for the year ended December 31, 2023.
/s/ Marcum LLP
Marcum LLP
East Hanover, New Jersey
March 25, 2024
Exhibit 31.1
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert A. Berman, certify that:
1. I have reviewed this Annual Report on Form 10-K of Rekor Systems, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d 15(f)) for the registrant and have:
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared. |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information. and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: March 25, 2024 |
/s/ Robert A. Berman |
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Robert A. Berman |
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Chief Executive Officer |
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Principal Executive Officer |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eyal Hen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Rekor Systems, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d 15(f)) for the registrant and have:
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared. |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information. and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: March 25, 2024 |
/s/ Eyal Hen |
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Eyal Hen |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Rekor Systems, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: March 25, 2024 |
/s/ Robert A. Berman |
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Robert A. Berman |
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Chief Executive Officer |
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Principal Executive Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Rekor Systems, Inc. and will be retained by Rekor Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Rekor Systems, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: March 25, 2024 |
/s/ Eyal Hen |
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Eyal Hen |
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Chief Financial Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Rekor Systems, Inc. and will be retained by Rekor Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 97
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REKOR SYSTEMS, INC. CLAWBACK POLICY |
PURPOSE
Rekor’s Code of Conduct establishes standards for ethical behavior to which all directors, officers and staff of Rekor Systems, Inc., its subsidiaries and affiliates (the “Company”) are expected to adhere to. They are expected to act with honesty and integrity and avoid activities that interfere with good judgment or expose them and their colleagues, or the Company, its shareholders, customers and business associates, to injury, exploitation or other harm.
The Company is committed to make financial and other reports in a way that is accurate, timely and in full compliance with all legal requirements. The Board of Directors believes that it is in the best interests of the Company and its stockholders to create and maintain a culture that emphasizes integrity and accountability while reinforcing the Company’s pay-for-performance compensation philosophy. This policy provides for the recoupment of certain executive compensation in the event of an accounting restatement resulting from material noncompliance with financial reporting requirements under the federal securities laws. It is designed to reinforce our Code of Conduct and ensure strict compliance with the Clawback Requirements applicable under federal securities laws and NASDAQ rules as currently in effect or as amended from time to time=
APPLICABILITY
This Policy applies to all Covered Executives of the Company. It may be amended and revised from time to time by an affirmative vote of the majority of the Board of Directors. Limited exceptions may be permitted in special circumstances with the approval of the Compensation Committee of the Board of Directors, provided that the Company’s General Counsel has given an opinion that the exception does not result in non-compliance with the Clawback Requirements.
The Board of Directors intends that this policy will be applied to the fullest extent of the law and may require that any employment agreement, equity award agreement, or similar agreement entered into on or after the effective date shall, as a condition to the grant of any benefit thereunder, require a Covered Executive to agree to abide by the terms of this policy. In the event of any inconsistency between the terms of the policy and the terms of any employment agreement, equity award agreement, or similar agreement under which Incentive Compensation has been granted, awarded, earned or paid to a Covered Executive, whether or not deferred, the terms of the policy shall govern.
RECOUPMENT OF INCENTIVE COMPENSATION
If the Company is required to prepare a Restatement, the Board of Directors will require reimbursement or forfeiture of any Excess Incentive Compensation received by any Covered Executive during the three completed fiscal years immediately preceding the date on which the Company is required to prepare the Restatement (plus any transition period of less than nine months that is within or immediately following the three completed fiscal years and that results from a change in the Company’s fiscal year). Such date will be considered the earlier of: (i) the date the Board of Directors, a committee of the Board or, if Board action is not required, the officer or officers of the Company authorized to take such action, concludes, or reasonably should have concluded, that the Company is required to prepare a Restatement, or (ii) the date a court, regulator or other legally authorized body directs the Company to prepare a Restatement. Recovery of any Excess Incentive Compensation under the Policy is not dependent on if or when the Restatement is actually filed.
The Company shall recover any Excess Incentive Compensation in accordance with this Policy unless such recovery would be impracticable, as determined by the Board of Directors in accordance with the Clawback Requirements. If the Board of Directors cannot determine the amount of Excess Incentive Compensation received by the Covered Executive directly from the information in the accounting restatement, then it may make its determination based on a reasonable estimate of the effect of the accounting restatement.
Upon recommendation from the Compensation Committee, the Board of Directors will determine, in its sole discretion, the method for recouping Excess Incentive Compensation hereunder which may include, without limitation:
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a. |
requiring reimbursement of any Excess Incentive Compensation previously paid in cash; |
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b. |
seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; |
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c. |
offsetting the recouped amount from any compensation otherwise owed by the Company to the Covered Executive; |
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d. |
cancelling outstanding vested or unvested equity awards; and/or |
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e. |
taking any other remedial and recovery action permitted by law, as determined by the Board of Directors. |
It is the intention of this policy that it shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal representatives Any right of recoupment under this policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, equity award agreement, or similar agreement and any other legal remedies available to the Company.
The Company shall make appropriate provisions for the enforcement of this policy in its employment contracts and shall not indemnify any Covered Executives against the loss of any Excess Incentive Compensation.
IMPLEMENTATION
The Compensation Committee shall have responsibility for the implementation of this policy. The Compensation Committee is authorized to engage professional assistance in implementing this policy and may designate a subcommittee or individual to monitor the implementation of this policy with respect to the Company’s employment arrangements with any Covered Executive.
This Policy shall be effective as of October 2, 2023 (the “Effective Date”) and shall apply to Incentive Compensation that is received by Covered Executives on or after October 2, 2023, even if such Incentive Compensation was approved, awarded, or granted to Covered Executives prior to October 2, 2023.
The Board may amend this policy from time to time in its discretion and shall amend this policy as it deems necessary to reflect final regulations adopted by the Securities and Exchange Commission under Section 10D of the Exchange Act and to comply with the Clawback Requirements as in effect from time to time and any other rules or standards adopted by a national securities exchange on which the Company’s securities are listed. The Board may terminate this policy at any time.
DEFINITIONS AND INTERPRETATION
Certain capitalized words and terms have been defined below and are used in this policy as so defined. Unless so defined, words and terms used in this policy should be interpreted according to their general usage as reflected in standard dictionaries of American English. Translation into other languages shall be for reference and convenience and such translations do not change the intended meaning.
It is intended that this policy be interpreted in a manner that is consistent with the requirements of the Clawback Requirements. References to “we” or “us” should be considered to include all Company directors, officers and employees, any agent of or consultant for the Company and any affiliated individual or organization covered by this policy.
Definitions: As used in this policy, the following words and terms have the respective meanings given below, unless the context clearly requires otherwise:
“Board of Directors” means the Board of Directors of Rekor Systems, Inc.
“Clawback Requirements” means Section 10D of the Securities Exchange Act of 1934 (the “Exchange Act”) and Nasdaq Listing Rule 5608, as they may be amended or replaced by similar rules from time to time.
“Compensation Committee” means the Compensation Committee of the Board of Directors.
“Covered Executives” means all current and former directors and executive officers of the Company, as determined by the Compensation Committee in accordance with the definitions contained in the Clawback Requirements.
“Excess Incentive Compensation” means the excess of the Incentive Compensation paid to the Covered Executive based on erroneous information over the Incentive Compensation that would have been paid to the Covered Executive had it been based on the restated results, as determined by the Board, without regard to any taxes paid by the Covered Executive in respect of the Incentive Compensation paid based on the erroneous information.
“Incentive Compensation” means any of the following that is granted, earned, or vested based wholly or in part on the attainment of a Financial Reporting Measure:
Annual bonuses and other short-term and long-term cash incentives.
Stock options.
Stock appreciation rights.
Restricted stock.
Restricted stock units.
Performance shares.
Performance units.
“Financial Reporting Measures” mean and include:
The price of the Company’s stock or other securities.
Total stockholder return.
Revenues.
Net income.
Earnings before interest, taxes, depreciation, and amortization (EBITDA).
Funds from operations.
Liquidity measures such as working capital or operating cash flow.
Return measures such as return on invested capital or return on assets.
Earnings measures such as earnings per share.
“Restatement” means an accounting restatement required due to material noncompliance by the Company with any financial reporting requirement under the securities laws, including (i) to correct an error in previously issued financial statements that is material to the previously issued financial statements (commonly referred to as a “Big R” restatement) or (ii) to correct an error in previously issued financial statements that is not material to the previously issued financial statements but that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (commonly referred to as a “little r” restatement). Changes to the Company’s financial statements that do not represent error corrections under the then-current relevant accounting standards will not constitute Restatements.