UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _________ to _________
Commission File Number:
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Rekor Systems, Inc. |
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(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address principal executive offices)
(Zip Code)
(
(Registrant ’ s telephone number, including area code)
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.
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Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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☒ |
Smaller reporting company |
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Emerging growth company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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The
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As of Novemb
er 14, 2022
, the Registrant
had
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties, including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 2021 entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestiture, merger, acquisition, or other business combination that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2022
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
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September 30, 2022 |
December 31, 2021 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts receivable, net |
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Inventory |
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Note receivable, current portion |
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Other current assets, net |
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Current assets of discontinued operations |
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Total current assets |
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Long-term assets |
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Property and equipment, net |
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Right-of-use lease assets, net |
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Goodwill |
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Intangible assets, net |
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Note receivable, long-term |
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SAFE investment |
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Deposits |
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Total long-term assets |
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Total assets |
$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable and accrued expenses |
$ |
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$ |
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Notes payable, current portion |
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Loan payable, current portion |
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Lease liability, short-term |
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Contract liabilities, short-term |
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Other current liabilities |
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Current liabilities of discontinued operations |
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Total current liabilities |
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Long-term Liabilities |
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Notes payable, long-term |
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Loan payable, long-term |
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Lease liability, long-term |
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Contract liabilities, long-term |
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Deferred tax liability |
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Other non-current liabilities |
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Total long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 9) |
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Stockholders' equity |
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Common stock, $ par value; authorized; shares; issued: , shares as of September 30, 2022 and as of December 31, 2021; outstanding: shares as of September 30, 2022 and as of December 31, 2021 |
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Treasury stock, and shares as of September 30, 2022 and December 31, 2021, respectively, at cost |
(
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) |
(
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) | ||||
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Additional paid-in capital |
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Accumulated deficit |
(
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) |
(
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) | ||||
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ |
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$ |
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||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
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2022 |
2021 |
2022 |
2021 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Cost of revenue, excluding depreciation and amortization |
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Operating expenses: |
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General and administrative expenses |
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Selling and marketing expenses |
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Research and development expenses |
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Goodwill impairment |
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Depreciation and amortization |
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Total operating expenses |
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Loss from operations |
(
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) |
(
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(
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(
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) | ||||||||
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Other income (expense): |
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Interest expense |
(
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) |
(
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) |
(
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(
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) | ||||||||
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Other (expense) income |
(
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) |
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(
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) |
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Total other income (expense) |
(
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) |
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(
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) |
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||||||||||
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Loss before income taxes and equity method investments |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
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Income tax benefit (provision) |
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(
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) |
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(
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) | ||||||||||
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Equity in loss of investee |
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(
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) | |||||||||||
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Net loss from continuing operations |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
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Net loss from discontinued operations |
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(
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) | |||||||||||
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Net loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Comprehensive loss: |
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Net loss from continuing operations |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
|
Change in unrealized gain on short-term investments |
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Foreign currency translation gain |
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Total comprehensive loss from continuing operations |
(
|
) |
(
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) |
(
|
) |
(
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) | ||||||||
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Total comprehensive loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
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) | $ |
(
|
) | ||||
|
Loss per common share from continuing operations - basic and diluted |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
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Loss per common share discontinued operations - basic and diluted |
|
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||||||||||||
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Loss per common share - basic and diluted |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
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) | ||||
|
Weighted average shares outstanding |
||||||||||||||||
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Basic and diluted |
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||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY
(Dollars in thousands, except share amounts)
(Unaudited)
|
Shares of Common Stock |
Common Stock |
Shares of Treasury Stock |
Treasury Stock at Cost |
Shares of Series B Preferred Stock |
Series B Preferred Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Income |
Accumulated Deficit |
Total Stockholders' Equity |
|||||||||||||||||||||||||||||||
|
Balance as of July 1, 2022 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||
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Stock-based compensation |
- |
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- |
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- |
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|
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||||||||||||||||||||||||||||||
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Issuance of common stock pursuant to at the market offering, net |
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Issuance upon exercise of stock options |
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Issuance upon vesting of restricted stock units |
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||||||||||||||||||||||||||||||
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Foreign currency translation gain, net of income taxes |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
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Net loss |
- |
|
- |
|
- |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||||||||
|
Balance as of September 30, 2022 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||
|
Balance as of July 1, 2021 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||
|
Stock-based compensation |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Exercise of warrants related to series A preferred stock |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Shares issued as part of the Waycare Acquisition |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Issuance upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Issuance upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Change in unrealized gain on short-term investments |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net loss |
- |
|
- |
|
- |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||||||||
|
Balance as of September 30, 2021 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||
|
Balance as of January 1, 2022 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) |
|
|||||||||||||||||||||
|
Stock-based compensation |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Issuance of common stock pursuant to at the market offering, net |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
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Issuance upon exercise of stock options |
|
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||||||||||||||||||||||||||||||
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Issuance upon vesting of restricted stock units |
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||||||||||||||||||||||||||||||
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Shares withheld upon vesting of restricted stock units |
|
|
(
|
) |
(
|
) |
|
|
|
|
|
(
|
) | |||||||||||||||||||||||||||
|
Shares issued as part of the STS Acquisition |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Foreign currency translation gain, net of income taxes |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net loss |
- |
|
- |
|
- |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||||||||
|
Balance as of September 30, 2022 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||
|
Balance as of January 1, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||||
|
Stock-based compensation |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
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Exercise of cashless warrants in exchange for common stock |
|
|
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|
|
|
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|
|
|
||||||||||||||||||||||||||||||
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Exercise of warrants in exchange for common stock |
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|
|
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|
||||||||||||||||||||||||||||||
|
Exercise of warrants related to series A preferred stock |
|
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|
|
|
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||||||||||||||||||||||||||||||
|
Public underwriting |
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Shares issued as part of the Waycare Acquisition |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Conversion of series A preferred stock |
|
|
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|
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|
|
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|
||||||||||||||||||||||||||||||
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Conversion of series B preferred stock |
|
|
|
|
(
|
) |
|
|
|
|
|
|||||||||||||||||||||||||||||
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Issuance upon exercise of stock options |
|
|
|
|
|
|
|
|
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||||||||||||||||||||||||||||||
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Issuance upon vesting of restricted stock units |
|
|
|
|
|
|
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|
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|
||||||||||||||||||||||||||||||
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Shares withheld upon vesting of restricted stock units |
|
|
(
|
) |
(
|
) |
|
|
|
|
|
(
|
) | |||||||||||||||||||||||||||
|
Preferred stock dividends |
- |
|
- |
|
- |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||||||||
|
Accretion of Series A preferred stock |
- |
|
- |
|
- |
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||||||||
|
Change in unrealized gain on short-term investments |
- |
|
- |
|
- |
|
|
|
|
|
||||||||||||||||||||||||||||||
|
Net loss |
- |
|
- |
|
- |
|
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||||||||
|
Balance as of September 30, 2021 |
|
$ |
|
(
|
) | $ |
(
|
) |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
Nine Months Ended September 30, |
||||||||
|
2022 |
2021 |
|||||||
|
Cash Flows from Operating Activities: |
||||||||
|
Net loss from continuing operations |
$ |
(
|
) | $ |
(
|
) | ||
|
Net loss from discontinued operations |
|
(
|
) | |||||
|
Net loss |
(
|
) |
(
|
) | ||||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Bad debt expense |
|
|
||||||
|
Depreciation |
|
|
||||||
|
Amortization of right-of-use lease asset |
|
|
||||||
|
(Benefit) provision for deferred taxes |
(
|
) |
|
|||||
|
Share-based compensation |
|
|
||||||
|
Amortization of financing costs |
|
|
||||||
|
Amortization of intangible assets |
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|
||||||
|
Goodwill impairment |
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|
||||||
|
Loss due to change in value of equity investments |
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|
||||||
|
Unrealized gain on short-term investments |
|
(
|
) | |||||
|
Changes in operating assets and liabilities: |
||||||||
|
Accounts receivable |
|
(
|
) | |||||
|
Inventory |
(
|
) |
(
|
) | ||||
|
Other current assets |
|
(
|
) | |||||
|
Other long-term assets |
(
|
) |
(
|
) | ||||
|
Accounts payable, accrued expenses and other current liabilities |
|
|
||||||
|
Contract liabilities |
|
|
||||||
|
Lease liability |
|
(
|
) | |||||
|
Net cash used in operating activities - continuing operations |
(
|
) |
(
|
) | ||||
|
Net cash provided by (used in) operating activities - discontinued operations |
|
(
|
) | |||||
|
Net cash used in operating activities |
(
|
) |
(
|
) | ||||
|
Cash Flows from Investing Activities: |
||||||||
|
Cash paid for Waycare acquisition, net |
|
(
|
) | |||||
|
SAFE Investment |
(
|
) |
(
|
) | ||||
|
Capital expenditures |
(
|
) |
(
|
) | ||||
|
Down payment on capital expenditures |
(
|
) |
|
|||||
|
Cash paid for STS acquisition, net |
(
|
) |
|
|||||
|
Investment in unconsolidated company |
|
(
|
) | |||||
|
Net cash used in investing activities |
(
|
) |
(
|
) | ||||
|
Cash Flows from Financing Activities: |
||||||||
|
Proceeds from public offering |
|
|
||||||
|
Payment of notes payable |
|
(
|
) | |||||
|
Proceeds from notes receivable |
|
|
||||||
|
Net proceeds from exercise of options |
|
|
||||||
|
Net proceeds from exercise of warrants |
|
|
||||||
|
Net proceeds from exercise of warrants associated with the Series A Preferred Stock |
|
|
||||||
|
Repayments of loans payable |
(
|
) |
|
|||||
|
Net proceeds from at-the-market agreement |
|
|
||||||
|
Repurchases of common stock |
(
|
) |
(
|
) | ||||
|
Net cash provided by financing activities |
|
|
||||||
|
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations |
(
|
) |
|
|||||
|
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations |
|
(
|
) | |||||
|
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents |
(
|
) |
|
|||||
|
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
|
|
||||||
|
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
$ |
|
$ |
|
||||
|
Reconciliation of cash, cash equivalents and restricted cash: |
||||||||
|
Cash and cash equivalents at end of period - continuing operations |
$ |
|
$ |
|
||||
|
Restricted cash and cash equivalents at end of period - continuing operations |
|
|
||||||
|
Cash and cash equivalents at end of period - discontinued operations |
|
|
||||||
|
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
$ |
|
$ |
|
||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2022 , the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity and unaudited condensed consolidated statements of cash flows for the three and nine month periods ended September 30, 2022 and 2021 .
The financial data and other information disclosed in these notes are unaudited. The results for the three and nine months ended September 30, 2022 , are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2021 . The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000.
Rekor is a global leader in intelligent infrastructure focused on addressing the world’s most critical challenges across transportation management, public safety, and key commercial markets. With a real-time intelligence platform driven by deep access to data, AI-powered software, and smart optical devices at-the-edge, the Company combines its industry expertise and advanced proprietary technologies to deliver insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
On
June 17, 2022,
the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring
On
August 18, 2021,
the Company completed its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring
Use of Estimates
The preparation of the unaudited condensed 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
For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.
The Company has generated losses since its inception and has relied on cash on hand, external sources of financing to support cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the
nine
months ended
September 30, 2022
, the Company had a working capital deficit from continuing operations of $
The Company’s cash decreased 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 operations for the next twelve months following the issuance of these unaudited condensed financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period.
Goodwill
The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, 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 performs its annual impairment assessment on October 1, or more frequently, when events or circumstances indicate impairment may have occurred.
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 Measurements 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.
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value as of September 30, 2022 and December 31, 2021 , because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt, contingent consideration and long-term receivables approximates fair value as of September 30, 2022 and December 31, 2021 , 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.
There were no changes in levels during the nine months ended September 30, 2022 .
Revenue Recognition
The Company derives its revenues primarily from the sale of software, hardware and related services, including customer support and implementation services and management services in connection with our traffic safety solutions. 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):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Recurring revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Product and service revenue |
|
|
|
|
||||||||||||
|
Total 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 from long-term contracts with customers that provide periodic payments and short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and eCommerce sales.
Recurring revenues are generated through the Company’s SaaS model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The Company's contracts with customers are generally for a term of one to five years. The payment for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these arrangements ratably over the term of the contractual agreement.
The Company also currently receives recurring revenues under contracts entered into using a subscription model for bundled hardware and software over a period. Payments for these 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 access through a web server 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 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 the 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 contactless compliance revenue, implementation revenue, perpetual license sales and hardware sales.
Contactless compliance revenues reflect arrangements to provide traffic safety systems to several jurisdictions in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images and analyzes the images to provide data and support citation management services. In the first quarter of 2021, the Company launched a new service offering for the State of Oklahoma to support its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and services to identify uninsured motor vehicles, notify owners of non-compliance and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of citations collected by the relevant jurisdiction.
Implementation revenue is recognized when the Company provides pilot programs to customers. Pilot programs may involve a one -time fee for a defined period in which the customer can use the Company’s software in connection with a previously installed camera network or connected vehicle data. At the end of the pilot program, the customer can convert from a pilot program to a subscription model which has a typical term between one and five years. The Company’s pilot program revenue is recognized at various stages of completion.
In addition to the recurring software sales, the Company recognizes 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 have significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.
The Company generates revenue through the sale of hardware through its partner program distribution channels and direct sales. The Company satisfies its performance obligation and invoices end-user customers upon transfer of control of the hardware to the customers. The Company offers hardware installment to customers which ranges from one to six months. The revenue related to the installation component is recognized at various stages of completion.
Revenue by Customer Type
The following table presents a summary of revenue by customer type (dollars in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Government customers |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Commercial customers |
|
|
|
|
||||||||||||
|
Total revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
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. When the Company recognizes revenue due to the sale of hardware or perpetual software licenses, the impact on the overall unsatisfied performance obligations is relatively small as the Company satisfies most of its performance obligations at the point in time that the control of the hardware or software has transferred to the customer.
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
September 30, 2022
, the Company had approximately $
Unbilled accounts receivable
The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed 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 $
Contract liabilities
When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next
six
months to
five
years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed 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
nine
months ended
September 30, 2022
were
not
materially impacted by any other factors. Contract liabilities as of
September 30, 2022
and
December 31, 2021
we
re
$
The services due for contract liabilities described above are shown below as of September 30, 2022 (dollars in thousands):
|
2022, remaining |
$ |
|
||
|
2023 |
|
|||
|
2024 |
|
|||
|
2025 |
|
|||
|
2026 |
|
|||
|
Thereafter |
|
|||
|
Total |
$ |
|
Costs to Obtain and Fulfill a Contract
Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. When the amortization period would be one year or less, the Company elects to use the practical expedient election to expense the costs to obtain a contract as they are incurred.
Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents
The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with a maturity of three months or less, 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
September 30, 2022
and
December 31, 2021
were $
Concentrations of Credit Risk
The Company deposits its temporary cash investments with highly rated 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
September 30, 2022
and
December 31, 2021,
the Company had deposits from continuing operations totaling $
The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.
Customer A accounted for
Customer B accounted for less than
Customer C accounted for less than
Customer D accounted for less than
No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenues for the three and nine months ended September 30, 2022 and 2021 .
As of
September 30, 2022
,
no
single customer accounted for more than
10%
of the unaudited condensed consolidated accounts receivable balance. As of
December 31, 2021
, Company E accounted for
No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated accounts receivable balance as of December 31, 2021 .
Other Current Liabilities
A summary of other current liabilities is as follows (in thousands):
|
September 30, 2022 |
December 31, 2021 |
|||||||
|
Payroll and payroll related |
$ |
|
$ |
|
||||
|
STS earnout |
|
|
||||||
|
Right of offset to restricted cash |
|
|
||||||
|
Other |
|
|
||||||
|
Total |
$ |
|
$ |
|
||||
Significant Accounting Policies
New Accounting Pronouncements Effective in Future Periods
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 will begin 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, the Company does not expect ASU 2016 - 13 to have a material impact on its unaudited condensed consolidated statements of operations and balance sheets.
The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10 -K for the year ended December 31, 2021 .
NOTE 2 – ACQUISITIONS
STS Acquisition
On
June 17, 2022,
the Company completed its acquisition of Southern Traffic Services ("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. 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 unaudited condensed consolidated balance sheets.
The Company shall pay the STS Earnout payment based on the STS EBITDA for the
twelve
month period ended
December 31, 2022.
The STS Earnout payment shall in
no
event exceed $
The purchase price for the acquisition of STS has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. The table below shows the breakdown related to the preliminary 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 |
$ |
|
Waycare Acquisition
On
August 18, 2021,
the Company completed its acquisition of Waycare by acquiring
The purchase price for the acquisition of Waycare has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. The table below shows the breakdown related to the purchase price allocation for the acquisition (dollars in thousands):
|
Cash paid |
$ |
|
||
|
Common stock issued |
|
|||
|
Total consideration |
$ |
|
||
|
Assets |
||||
|
Cash and cash equivalents |
$ |
|
||
|
Restricted cash and cash equivalents |
|
|||
|
Accounts receivable |
|
|||
|
Other current assets |
|
|||
|
Property and equipment |
|
|||
|
Acquired technology |
|
|||
|
Total assets acquired |
|
|||
|
Liabilities |
||||
|
Accounts payable and accrued expenses |
|
|||
|
Contract liabilities |
|
|||
|
Deferred tax liability |
|
|||
|
Total liabilities assumed |
|
|||
|
Fair value of identifiable net assets acquired |
|
|||
|
Goodwill |
$ |
|
The technology acquired by the Company as part of the acquisition of Waycare has an estimated useful life of seven years and is presented as part of intangible assets, net on the unaudited condensed consolidated balance sheets.
Operations of Combined Entities
The following unaudited pro forma combined financial information gives effect to the acquisition of Waycare and STS as if it was consummated as of January 1, 2021. 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, 2021 ( the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
(Dollars in thousands, except per share data) |
(Dollars in thousands except for per share data) |
|||||||||||||||
|
Total revenue from continuing operations |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Net loss from continuing operations |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Basic and diluted loss per share from continuing operations |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Basic and diluted number of shares |
|
|
|
|
||||||||||||
NOTE 3 – INVESTMENTS
Investments in Unconsolidated Companies
In
February 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
In
June 2020,
the Company announced a joint venture in which the Company would have a
There have been
Roker SAFE
In
April 2021,
in exchange for $
NOTE 4 – SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION
Supplemental non cash disclosures of cash flow information for the nine months ended September 30, 2022 and 2021 were as follows (dollars in thousands):
|
Nine Months Ended September 30, |
||||||||
|
2022 |
2021 |
|||||||
|
Cash paid for interest |
$ |
|
$ |
|
||||
|
Cash paid for taxes |
|
|
||||||
|
Increase in accounts payable and accrued expenses related to purchases of property and equipment |
|
|
||||||
|
Investing activities: |
||||||||
|
Fair market value of shares issued in connection with the acquisition of Waycare |
|
|
||||||
|
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 |
|
|
||||||
|
Financing activities: |
||||||||
|
Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock |
|
(
|
) | |||||
|
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock |
|
(
|
) | |||||
|
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock |
|
(
|
) | |||||
|
New Leases under ASC-842: |
||||||||
|
Recognition of operating lease - right-of-use lease asset |
|
|
||||||
|
Lease incentives |
|
|
||||||
|
Recognition of operating lease - lease liability |
$ |
(
|
) | $ |
(
|
) | ||
NOTE 5 – OPERATING LEASES
The Company has operating leases for office facilities in various locations throughout the United States and Israel. 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.
Operating lease expense from continuing operations for the
three
months ended
September 30, 2022
and
2021
was $
Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $
In the
first
quarter of
2022,
the Company entered into a lease agreement for its Israeli operations. As part of the lease agreement, there were $
Supplemental balance sheet information related to leases as of September 30, 2022 was as follows (dollars in thousands):
|
Operating lease right-of-use lease assets |
$ |
|
||
|
Current portion of lease liability |
$ |
|
||
|
Long-term portion of lease liability |
|
|||
|
Total lease liability |
$ |
|
||
|
Weighted average remaining lease term - operating leases (years) |
|
|||
|
Weighted average discount rate - operating leases |
|
% | ||
|
2022, remaining |
$ |
|
||
|
2023 |
|
|||
|
2024 |
|
|||
|
2025 |
|
|||
|
2026 |
|
|||
|
Thereafter |
|
|||
|
Total lease payments |
$ |
|
||
|
Less imputed interest |
|
|||
|
Maturities of lease liabilities |
$ |
|
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
STS Acquisition
The purchase price has been preliminarily 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
three
and
nine
months ended
September
30,
2022
. As part of the Company's preliminary purchase price allocation for the acquisition, the Company recognized $
Intangible Assets Subject to Amortization
The following summarizes the change in intangible assets from December 31, 2021 to September 30, 2022 (dollars in thousands):
|
Useful Life (in Years) |
December 31, 2021 |
Additions |
Amortization |
September 30, 2022 |
|||||||||||||||
|
Intangible assets subject to amortization |
|||||||||||||||||||
|
Customer relationships |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||||
|
Marketing related |
|
|
|
(
|
) |
|
|||||||||||||
|
Technology based |
|
|
|
(
|
) |
|
|||||||||||||
|
Internally capitalized software |
|
|
|
(
|
) |
|
|||||||||||||
|
Intangible assets subject to amortization |
$ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||
The following provides a breakdown of identifiable intangible assets as of September 30, 2022 (dollars in thousands):
|
Customer Relationships |
Marketing Related |
Technology Based |
Internally Capitalized Software |
Total |
||||||||||||||||
|
Identifiable intangible assets |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Accumulated amortization |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||
|
Identifiable intangible assets, net |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
These intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization expense for the
three
months ended
September 30, 2022
and
2021
was $
As of September 30, 2022 , the estimated impact from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):
|
2022, remaining |
$ |
|
||
|
2023 |
|
|||
|
2024 |
|
|||
|
2025 |
|
|||
|
2026 |
|
|||
|
Thereafter |
|
|||
|
Total |
$ |
|
NOTE 7 – DEBT
STS Notes
On
June 17, 2022,
pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $
Firestorm Notes
On
January 25, 2017,
pursuant to the terms of the Company’s acquisition of certain now discontinued subsidiaries (collectively referred to herein as “Firestorm”), the Company issued $
Interest Expense
The following table presents the interest expense related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Contractual interest |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Amortization of debt issuance costs |
|
|
|
|
||||||||||||
|
Total interest expense |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
Schedule of Principal Amounts Due of Debt
The principal amounts due for long-term notes payable are shown below as of September 30, 2022 (dollars in thousands):
|
2022, remaining |
$ |
|
||
|
2023 |
|
|||
|
2024 |
|
|||
|
2025 |
|
|||
|
2026 |
|
|||
|
Thereafter |
|
|||
|
Total notes payable |
$ |
|
NOTE 8 – INCOME TAXES
The Company maintains a full valuation allowance against its net deferred taxes, outside of the deferred tax liability related to the indefinite lived intangible, through September 30, 2022 .
The Company files income tax returns in Israel, the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of September 30, 2022 .
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 indefinite lived intangible, 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.
For the three and nine months ended September 30, 2022 and 2021, 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 expense. The 2018 through 2021 tax years remain subject to examination by the Internal Revenue Service.
As a result of the acquisition of STS, the Company recognized a $
NOTE 9 – COMMITMENTS AND CONTINGENCIES
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 (the “Firestorm Principals”) who were founders of two related former subsidiaries—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19 -cv- 07767 -VEC. On January 30, 2020, we filed a Second Amended Complaint (the “Complaint”). The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company in exchange for cash, the Firestorm Notes, the Firestorm Warrants and other consideration. The Complaint also alleges claims for breach of fiduciary duty, conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of the acquisition transaction, including relieving the Company from further obligations with respect to the Firestorm Notes and Firestorm Warrants, and monetary damages.
The Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, the Company moved to dismiss the counterclaims against certain directors and officers named as counterclaim-defendants, resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter the Company filed its response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which the Company opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.
In
April 2021,
the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed its opposition to the partial summary judgment motion on
June 21, 2021.
The Firestorm Principals filed their reply in support of their partial summary judgment motion on
July 9, 2021.
On
March 14, 2022,
the Court issued an opinion and order which denied summary judgment to the Firestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment to the Firestorm Principals on their breach of warrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. The Court granted summary judgment to the Firestorm Principals on our CFAA claims, based on recent case law clarifying that such claims do
not
apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment to
one
defendant on our conversion, and trespass to chattels claims because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on
one
breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $
In April 2022, The Company filed a notice of motion seeking partial summary judgement on several of the of the Company’s claims and the Firestorm Principals’ counterclaims, which the Firestorm Principals opposed. On July 29 th , 2022, the Court issued an opinion and order, which granted the motion in part and denied it in part. The order dismissed the Firestorm Principal’s counterclaim against the Company for libel. The order also dismissed the Company’s claim for breach of fiduciary duty against one defendant on the ground that he was not employed by the Company, but by a subsidiary of the Company that is not a party to the case. The court also denied summary judgement to the Company as to the breach of fiduciary duty claim against the other defendants and as to the trespass to chattels and conversion claims as to all defendants, on the ground that issues of fact remain contested. On the same ground, the court also denied summary judgement to the Company as to a breach of contract claim by one defendant relating to an alleged change in employment status.
In July 2022, the Firestorm Principals obtained new counsel. On July 21, 2022, the Firestorm Principals’ new counsel requested an adjournment of the October 17, 2022 trial date and related pre-trial deadlines, which the Company did not oppose. On July 22, 2022, the Court granted the request and rescheduled trial to begin on February 13, 2023.
In related lawsuits, 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 for failure to pay the Firestrom Notes and allow the exercise of the Firestorm Warrants and libel for disclosures related to its claims in the Company’s quarterly filing on Form 10 -Q. The defendants in the suits moved to dismiss the amended complaint. At this stage of these litigations, the suits against two of the directors have been completely dismissed. Appeal of the dismissal has been denied in one of these cases and is pending in the other.and one has been permitted to proceed although the Firestorm Principals have not done so. On March 16, 2022, the court in the Virginia action dismissed the breach of fiduciary duty claim without prejudice, which would permit it to be refiled in Delaware Chancery Court, although the Firestorm Principals have not done so. The Virginia Court denied the motion to dismiss the defamation claim on jurisdictional grounds. The defamation claim in Virginia will now be challenged considering the dismissal on substantive grounds. The Delaware court has denied our motion to dismiss, but there was only limited discovery before the deadline expired. The Firestrom Principals are now requesting an extension of the discovery deadline, which the defendant directors are opposing.
At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome, except where dismissal has been upheld on appeal. We intend to continue vigorously litigating our claims against the Firestorm Principals and believe that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.
Fordham
On
September 18, 2020,
Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company in the Supreme Court for the State of New York, New York County. Fordham alleged that the Company offended an underwriting agreement with Fordham and brought claims for breach of contract. On
October
17,
2022,
the Court granted Fordham’s motion for summary judgment and denied the Company’s cross-motions for summary judgment and to compel discovery. The Court awarded Fordham $
In addition, 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.
NOTE 10 – STOCKHOLDERS ’ EQUITY
At-the-Market Offering
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 t
he
nine
months ended
September
30,
2022,
the
Company sold
STS Acquisition
In connection with the acquisition as described in
NOTE
2
–
ACQUISITIONS
, the Company issued
Waycare Acquisition
In connection with the acquisition as described in
NOTE
2
–
ACQUISITIONS
, the Company issued
2021 Public Offering
On
February 9, 2021,
the Company issued and sold
Preferred Stock
The Company is authorized to issue up to
Warrants
A summary of the warrant activity for the Company for the period ended September 30, 2022 is as follows:
|
Series A Preferred Stock Warrants (1) |
Firestorm Warrants (2) |
Secure Education Warrants (3) |
2018 Public Offering Warrants (4) |
Total |
||||||||||||||||
|
Active warrants as of January 1, 2022 |
|
|
|
|
|
|||||||||||||||
|
Exercised warrants |
|
|
|
|
|
|||||||||||||||
|
Outstanding warrants as of September 30, 2022 |
|
|
|
|
|
|||||||||||||||
|
Weighted average strike price of outstanding warrants as of September 30, 2022 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Intrinsic value of outstanding warrants as of September 30, 2022 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
( 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
|
NOTE 11 – EQUITY INCENTIVE PLAN
In
August 2017,
the Company approved and adopted the
2017
Equity Award Plan (the
“2017
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
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
three
months ended
September 30, 2022
and
2021
was $
A summary of stock option activity under the Company’s 2017 Plan for the period ended September 30, 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 as of December 31, 2021 |
|
$ |
|
|
$ |
|
||||||||||
|
Exercised |
(
|
) |
|
|||||||||||||
|
Forfeited |
(
|
) |
|
|||||||||||||
|
Expired |
(
|
) |
|
|||||||||||||
|
Outstanding balance as of September 30, 2022 |
|
$ |
|
|
$ |
|
||||||||||
|
Exercisable as of September 30, 2022 |
|
$ |
|
|
$ |
|
||||||||||
As of
September 30, 2022
, there was
$
Restricted Stock Units
Stock compensation expense related to RSU’s for the
three
months ended
September 30, 2022
and
2021
was $
Pursuant to the terms of the Waycare purchase agreement, the Company reserved for issuance to Waycare’s continuing employees an aggregate of
A summary of RSU activity under the Company’s 2017 Plan for the nine months ended September 30, 2022 is as follows:
|
Number of Shares |
Weighted Average Unit Price |
Weighted Average Remaining Contractual Term (Years) |
||||||||||
|
Outstanding balance as of December 31, 2021 |
|
$ |
|
|||||||||
|
Granted |
|
|
|
|||||||||
|
Vested |
(
|
) |
|
|||||||||
|
Forfeited |
(
|
) |
|
|||||||||
|
Outstanding balance as of September 30, 2022 |
|
$ |
|
|
||||||||
The grant date fair value is based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition.
As of
September 30, 2022
, ther
e was $
NOTE 12 – LOSS PER SHARE
The following table provides information relating to the calculation of loss per common share:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
(Dollars in thousands, except per share data) |
(Dollars in thousands, except per share data) |
|||||||||||||||
|
Basic and diluted loss per share |
||||||||||||||||
|
Net loss from continuing operations |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Less: preferred stock accretion |
|
|
|
(
|
) | |||||||||||
|
Less: preferred stock dividends |
|
|
|
(
|
) | |||||||||||
|
Net loss attributable to shareholders from continuing operations |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Net loss attributable to shareholders from discontinued operations |
|
|
|
(
|
) | |||||||||||
|
Net loss attributable to shareholders |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Weighted average common shares outstanding - basic and diluted |
|
|
|
|
||||||||||||
|
Basic and diluted loss per share from continuing operations |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Basic and diluted loss per share from discontinued operations |
|
|
|
(
|
) | |||||||||||
|
Basic and diluted loss per share |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
|
Common stock equivalents excluded due to the anti-dilutive effect |
|
|
|
|
||||||||||||
As the Company had a net loss for the
three
and
nine
months ended
September 30, 2022
, the follo
wing
As the Company had a net loss for the
three
and
nine
months ended
September 30, 2021
,
NOTE 13 – SUBSEQUENT EVENTS
Roker SAFE
In the
fourth
quarter of
2022
,
the Company invested an additional $
Fordham
On
October 17, 2022,
a summary judgment was issued against the Company in the previously disclosed lawsuit brought by the Fordham. In exchange for a payment of $
ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 2021, entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
Specific factors that might cause actual results to differ from our expectations include, but are not limited to:
|
● |
significant risks, uncertainties and other considerations discussed in this report; |
|
● |
operating risks, including supply chain, equipment or system failures, cyber and other malicious attacks and other events that could affect the amounts and timing of revenues and expenses; |
|
● |
reputational risks affecting customer confidence or willingness to do business with us; |
|
● |
financial market conditions and the results of financing efforts; |
|
● |
our ability to successfully identify, integrate and complete acquisitions and dispositions, including the integration of the Waycare Acquisition and STS Acquisition; |
|
● |
our continued ability to successfully access the public markets for debt or equity capital; |
|
● |
political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives associated with our products; |
|
● |
current and future litigation; |
|
● |
competition from other companies with an established position in the markets we have recently entered or are seeking to enter or from other companies who are seeking to enter markets we already serve; |
|
● |
our failure to successfully develop products using our technology that are accepted by the markets we serve or intend to serve or the development of new technologies that change the nature of our business or provide our customers with products or services superior to or less expensive than ours; |
|
● |
the inability of our strategic plans and goals to expand our geographic markets, customer base and product and service offerings; |
|
● |
risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020 which has caused significant volatility in U.S. and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies; and |
|
● |
risks associated with cyberattacks on international, national, local and Company information infrastructure by rogue businesses or criminal elements or by agents of governments engaged in asymmetric disruptions for competitive, economic, or military reasons. |
Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Other than as required by law, we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.
General
Overview
We are a roadway intelligence and data services company providing products and solutions to meet the increasing demand for smarter, safer, and greener intelligent transportation infrastructure. Our operations are conducted by our wholly-owned subsidiaries, Rekor Recognition Systems, Inc., or Rekor Recognition, Waycare Technologies, Ltd., or (“Waycare”), and Southern Traffic Services, Inc., or (“STS”).
We specialize in: 1) the collection and aggregation of roadway and mobility related data from multiple sources, 2) the analysis and transformation of that data into knowledge and actionable insights, and 3) the distribution of those insights to multiple users in a secure environment using the highest levels of encryption and privacy standards. Our intellectual property and proprietary technologies harness the latest advancements in artificial intelligence, machine learning, data analysis, edge processing and communications to address critical challenges in transportation management, public safety, urban mobility, and key commercial markets. Our objective has been to create a collection and distribution service that aggregates multiple streams of data relevant to a transportation and mobility network, converges, processes and analyzes them, and provides real-time and predictive information to decision makers and users of that network in a flexible and rich user environment based on individual needs and use-cases. Our Rekor One TM platform serves as a uniform architecture and backbone for the collection and delivery of roadway intelligence to increase roadway safety, efficiency and sustainability of roadways, and make communities safer, smarter, greener and more connected. Providing products and services across 80 countries, we deliver intelligent infrastructure solutions for government agencies and commercial clients in the United States and around the world.
Transportation infrastructure is the backbone of a functioning economy. People, vehicles, materials, and information all require 24/7 mobility, something that depends on well-maintained, synchronized networks and systems. The cost, complexity and interdependency of these systems has made it difficult to keep pace in a rapidly growing and changing world. Rekor’s data-driven solutions help make better use of existing infrastructure and have also been developed to aid in planning and implementing the next generation of transportation infrastructure, as well as be part of that infrastructure. Roads, bridges, tunnels, and residential areas have much to tell us if we gather and analyze the data they can provide and exploit the knowledge that gives us about how to optimally serve the public with an efficient, safe, and healthy living environment. Rekor is driven to help its customers generate and make intelligent use of that knowledge.
Spurred by the 2021 Infrastructure Investment and Jobs Act, we expect the United Sates to make an unprecedented investment in transportation infrastructure. The bill allocates $550 billion in new spending, spread out over five years, to rebuild roads, bridges and rails, and airports, in addition to providing high-speed internet access and addressing climate concerns. As part of this, federal, state, and local governments are prioritizing strategic investments dedicated to improving existing transportation management and increasing public safety through modern, efficient and connected infrastructure. We expect to play an important role in meeting the need for improved data as agencies plan for and build the transportation networks of the future. Once completed, we also expect those networks to be data interactive: generating and distributing real-time intelligence that can be used to improve traffic management, public safety, maintenance and emergency services, as well as by planning agencies and users such as connected and autonomous vehicles. Our primary objective has been to develop the technology that will play a central role in that process.
Our first step was to develop the ability to extract a more accurate and detailed information of roadway and mobility activity than existing technology. We call this “ground truth data” and have used artificial intelligence algorithms and machine learning to design computer-vision software that provides a wealth of important data about the movements of motorized and non-motorized vehicles, including bicycles and pedestrians. It includes vehicle classifications, counts, direction of travel, speed, make, model, color and other data. Our technology allows this ground truth data to be extracted by optical and IoT sensors at the “edge” of the network, close to the source of the activity being evaluated. Extracting relevant data at the edge improves the ability to generate and communicate timely insights by reducing latency, response time, and the volume of raw data that needs to be communicated through the network.
Our platform also provides the ability to anonymize vehicle information and to distribute discrete information to multiple users based on the specific data that each user needs to know. This permits us to provide unmatched cross-agency and public/private entity collaboration using a single source-of-truth while presenting customized information to multiple users simultaneously, where previously agencies would derive information from separate sources, at different times and with varying degrees of accuracy. As a result, we can provide simultaneous alerts and consistent, real-time situational awareness during emergencies to separate agencies such as first-responders, police, fire and medical support, while also providing other agencies with the benefit of comprehensive, accurate and fully up-to-date archival information for use in planning, management and maintenance. The ability of our platform to allow each sensor in the network to be linked together and to supply customized data to multiple users can provide significant reductions in costs for our clients as compared to the installation and maintenance of separate dedicated systems. Thus, the combination of our software’s data extraction and distribution capabilities allows us to simplify the network environment while enhancing its functionality at the same time. Simply put, we can dramatically increase the amount of usable data and actionable insights available to our clients at the same time that we can significantly reduce the number of sensors and infrastructure required to collect that data.
Another advantage of our software is that it can be used with a wide variety of commercially available sensors, allowing customers as to achieve superior results leveraging existing infrastructure investments, and with much less expensive equipment than was previously necessary. This makes applications of Rekor technology feasible in environments where costs were previously prohibitive or inaccessible. While Rekor has developed a line of optical and IoT sensors that are purpose-built to make the most efficient use of our software, customers can use it with existing sensor systems and integrate to our network seamlessly, without needing to install new equipment. This reduces installation and lead time in the adoption of our solutions and facilitates cross agency adoption and data unification.
Having achieved the ability to obtain comprehensive ground truth data more accurately and at less expense than existing systems, our next objective was to develop the ability to aggregate multiple sources of third-party data into the platform. We have designed our platform to serve as a central exchange, so that third party data can be used in tandem with our ground truth data to provide a more holistic view of the transportation network within a particular region. We call this the Rekor Partner Network (RPN). RPN members include Waze, Mobileye, Wejo, Otonomo, TomTom, Tomorrow.io, and dozens of other leading data companies around the world. By incorporating weather forecasts, event and dispatch schedules, historical patterns and similar data into our analysis, we can provide a wide variety and volume of diverse and related insights that are more comprehensive, and predictive. Using these additional sources of data, we are able to provide our clients with a regional technology environment that ingests and analyzes data from both existing infrastructure and third-party sources, producing superior visibility of the transportation and mobility network in real time, together with improved identification and predictions of disruptive events.
Intelligence-Driven Innovation
We currently provide software, hardware and services to support intelligent transportation networks and enhance community safety and security. These products and services have been designed to support a single integrated platform: Rekor One TM . Using this proprietary platform, Rekor can extract real time data about the activity on a transportation network, aggregate it with multiple streams of data from other sources, analyze and reprocess it holistically, and then use it to distribute coherent information to customers that can be used to make decisions about how the network should be used and managed.
We have concentrated on developing a platform that facilitates the efficient collection, analysis and distribution of a large volume and variety of data. The velocity and veracity of data that we have captured and applied in building our proprietary artificial intelligence and machine learning models have provided us with a significant first-mover advantage. From the very beginning, we have been collecting, aggregating, cleansing, extracting, transforming, and using data to build and improve our models. Today, we can extract and process a deeply detailed picture of a roadway environment and what is moving in that environment with an unmatched level of accuracy in our inferences, predictive analytics, and insights.
We are rapidly growing the geographic area connected by smart optical IoT devices at-the-edge to the open architecture of our Rekor One intelligence platform. In addition to digitizing existing infrastructure by capturing real-time data from new and existing roadway devices, our platform enables us to extend the scope of our knowledge via proprietary algorithms that pull the data and process it through our models. Beyond this, we are augmenting our data through a growing network of data partners. This provides multiple trillions of additional data points that unlock further real-time and predictive operational insights about what is happening in a given transportation environment at every moment. Example data sources from our partner network include mobility, navigation, and traffic applications, in-vehicle data, connected, autonomous vehicles datasets, weather, supply chain, event management, and a rapidly growing list of customer-provided and crowd-sourced data. The more data we capture and inject into our machine learning models, the smarter and more accurate they become. Due to the incredible strength and accuracy of our models, we can extract more data from the roadways than ever before possible, and generate rich multi-dimensional insights for our customers about what is happening in real-time. In addition, we use AI-driven predictive analytics to forecast what will happen in the next five minutes, in 12 or 24 hours, and even days and months into the future. From these insights, customers can make better informed proactive decisions and achieve improved operational efficiency through a more strategic allocation of resources.
At the core of all our intelligent infrastructure solutions is the Rekor One TM intelligence platform. Fueled by rich data and powered by AI, Rekor One TM is purpose-built to be a single source of truth and insights serving multiple customer segments and multiple missions. Built on the foundation of Rekor One, we can simultaneously deliver vertical-specific solutions for traffic management, public safety, and commercial markets. With our advanced technology and domain expertise, we have developed solutions that address diverse use cases across a number of public and private sector segments. Example use-cases we can support include:
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Traffic management and analytics |
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Predictive traffic congestion modeling and forecasting |
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Roadway monitoring and incident detection and response |
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Support systems for integrated corridor management |
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Electric vehicle adoption and charge station planning |
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Commercial vehicle and tonnage monitoring and analysis |
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Real-time emissions analysis, sustainability, and green initiatives |
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Live and archival HD video management and traffic surveillance |
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Law enforcement and intelligence-based policing |
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Contactless compliance and enforcement |
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Vehicle and license plate recognition for public safety |
With access to multiple sources of data and our award-winning AI-driven innovations, we believe we have established a leadership position in providing these intelligent infrastructure solutions. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities. Using our proprietary centralized platform we can collect, analyze, and turn infrastructure data into insights with new products and services that help governments and businesses increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.
The Road Ahead
We believe the world is at an inflection point. In the next five years, governments will make significant investments to improve aging infrastructure. Recent technological developments such as edge- and cloud-based computing artificial intelligence, advances in rich data management and the internet of things, have put us in a unique position to help revolutionize mobility by developing intelligent infrastructure that closes the gap between rapidly evolving technology and aging, legacy infrastructure. These are not just our aspirational goals, but things we’re working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it using artificial intelligence, and packaging it to provide real-time insights and long-term solutions, we can help governments and businesses address issues of aging infrastructure as well as the unprecedented mobility, public safety and environmental challenges they face.
We believe our leadership in in using advanced technology to develop intelligent infrastructure solutions puts us in an advantaged market position at the forefront of developing a new economy. As we provide governments and businesses with new products and services that use trillions of intelligent infrastructure interactions to increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people, we expect to serve both our shareholders and the world at large.
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:
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Growing Smart City Market – According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050. Our cities are getting larger, with longer commutes, bigger roads 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. |
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AI for Infrastructure – We believe that the application of AI to the analysis of conditions on roadways and other infrastructure can significantly affect the safety and efficiency of vehicular 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. |
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Connected Vehicle Data – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is an untapped resource for cities and transportation agencies alike. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and cities gain more visibility on their roads, supplementing data from existing infrastructure and providing untapped transportation information from rural areas that are not served by ITS infrastructure. |
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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 and municipalities 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. |
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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 or secure advanced vehicle recognition systems from others who are also working to develop them. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources. |
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Expansion of Automated Enforcement of Motor Vehicle Laws – We expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement of regulations such as motor vehicle insurance requirements. Communities are currently searching for better means of achieving compliance with minor vehicle offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses. 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 our products and services should broaden in the public safety market. |
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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. |
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Edge Processing – Demand for actionable roadway information continues to grow in parallel with camera resolutions. Over the last several decades, cameras have evolved and unlocked new capabilities with each advancement. Further, cellular networks have been optimized for downloading data rather than uploading data. As a result, while download speeds have improved significantly due to 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. |
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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 accelerated our business development marketing and eCommerce activities to increase awareness and market adoption of our new technology and products within the market. We anticipate that an increased presence in the market, the continued development of strategic partnerships and other economies of scale will significantly reduce the level of costs necessary to support sales of our products and services. However, the speed at which these markets grow to the degree to which our products and services are adopted is uncertain. |
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COVID 19 - The spread of a novel strain of COVID-19 around the world since the first quarter of 2020 has caused significant volatility in U.S. and international markets. Despite the roll-out of vaccinations, there continues to be significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. As such, we are unable to determine the full impact on our operations. However, we have also seen a positive impact of COVID-19 on the technology sector, in which we are competing. The pandemic has accelerated the adoption of new technologies by businesses. According to a McKinsey Global Survey of executives, their companies have accelerated the digitization of their customer and supply-chain interactions and their internal operations by three to four years. Funding for digital initiatives has increased, creating opportunities for innovative solution providers such as Rekor. |
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Pressure on Government Budgets – COVID-19 has caused significant strain on government budgets. With less money to spend and more need for resources, government agencies need affordable, effective, and scalable solutions for revenue recovery and discovery. With subscription pricing and an intelligent infrastructure platform that accomplishes multiple agency missions, we are uniquely positioned to provide agencies with force-multiplying tools when money and human resources are limited. Agencies can be better positioned to improve public safety, manage resources more effectively, and make an impact on their citizen's quality of life with limited capital expenditure. In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of non-compliant vehicles on their roadways. |
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Infrastructure Investment and Jobs Act ( “ IIJA ” ) - 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 intelligent infrastructure that will benefit from this legislation. We have identified opportunities to access federal funding streams, and we are working to implement a program that capitalizes on this unprecedented 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 engaging in the following new funding streams 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 |
Components of Operating Results
Revenues
We derive revenues substantially from the sale of software, hardware and related services.
Software sales include subscriptions for the use of our software as a service (“SaaS”) and software licenses. SaaS revenues are treated as recurring revenue and provided both through negotiated agreements with larger governmental and commercial customers and through subscriptions from smaller customers. License sales are typically term agreements, including agreements for perpetual licenses, that may include maintenance obligations for software updates that keep up with changes in vehicle models and license plate designs.
Hardware is sold through direct sales or subscriptions and is typically sold with a software subscription or license arrangement. Revenue from direct sales is generally recognized when the hardware is delivered, or installation is completed in accordance with the terms of the contract. Revenue from hardware subscriptions may include software subscriptions and are recognized as recurring revenue throughout the term of the subscription agreement.
Our related services include customer support and implementation services, as well as management services such as violation notices, billing and collections, website portals and call centers related to programs that employ our software solutions. In addition, we engage in pilot programs with governmental and commercial entities that include extension or renewal features that may result in recurring revenues and/or additional point-in-time revenues at the completion of the pilot program.
Costs of revenues, excluding depreciation and amortization
Direct costs of revenues consist primarily of the portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with revenue-generating activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and other expenses that are incurred in connection with our revenue-generating activities. Direct costs of revenues exclude the portion of technical and non-technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts. Such costs are included in operating expenses. We expense direct costs of revenues when incurred.
Operating Expenses
Our operating expenses consist of general and administrative expenses, sales and marketing, research and development and depreciation and amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expenses. Operating expenses also include depreciation, amortization and impairment of assets.
General and Administrative
General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include office leases, professional fees and insurance.
We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, insurance and investor relations as a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.
Sales and Marketing
Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base.
Research and Development
Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services.
We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our AI solutions. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses
Depreciation and Amortization
Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of right-of-use assets, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.
Other Income (Expense)
Other income (expense) consists primarily of interest expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed assets, and interest income earned on cash and cash equivalents, short-term investments and note receivables.
Income Tax Provision
Income tax provision consists primarily of income taxes in certain domestic jurisdictions in which we conduct business. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.
Critical Accounting Estimates and Assumptions
A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2021.
New Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated financial statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.
Results of Operations
Our historical operating results in dollars are presented below. This analysis of operation is solely related to continuing operations and does not consider the results of discontinued operations.
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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(Dollars in thousands) |
2022 |
2021 |
2022 |
2021 |
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Revenue |
$ | 7,425 | $ | 2,615 | $ | 15,371 | $ | 11,105 | ||||||||
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Cost of revenue, excluding depreciation and amortization |
4,119 | 1,402 | 8,780 | 4,705 | ||||||||||||
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Operating expenses: |
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General and administrative expenses |
6,841 | 6,813 | 22,541 | 16,094 | ||||||||||||
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Selling and marketing expenses |
2,432 | 1,125 | 6,390 | 3,044 | ||||||||||||
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Research and development expenses |
4,911 | 2,000 | 13,772 | 4,741 | ||||||||||||
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Goodwill impairment |
34,835 | - | 34,835 | - | ||||||||||||
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Depreciation and amortization |
1,926 | 930 | 4,846 | 2,169 | ||||||||||||
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Total operating expenses |
50,945 | 10,868 | 82,384 | 26,048 | ||||||||||||
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Loss from operations |
(47,639 | ) | (9,655 | ) | (75,793 | ) | (19,648 | ) | ||||||||
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Other income (expense): |
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Interest expense |
(21 | ) | (21 | ) | (46 | ) | (72 | ) | ||||||||
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Other (expense) income |
(1,379 | ) | 66 | (1,403 | ) | 103 | ||||||||||
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Total other income (expense) |
(1,400 | ) | 45 | (1,449 | ) | 31 | ||||||||||
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Loss before income taxes and equity method investments |
(49,039 | ) | (9,610 | ) | (77,242 | ) | (19,617 | ) | ||||||||
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Income tax benefit (provision) |
954 | (3 | ) | 954 | (10 | ) | ||||||||||
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Equity in loss of investee |
- | - | - | (150 | ) | |||||||||||
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Net loss from continuing operations |
$ | (48,085 | ) | $ | (9,613 | ) | $ | (76,288 | ) | $ | (19,777 | ) | ||||
Comparison of the Three and Nine Months Ended September 30, 2022 and the Three and Nine Months Ended September 30, 2021
Total Revenue
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Three Months Ended September 30, |
Change |
Nine Months Ended September 30, |
Change |
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(Dollars in thousands) |
2022 |
2021 |
$ |
% |
2022 |
2021 |
$ |
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Revenue |
$ | 7,425 | $ | 2,615 | $ | 4,810 | 184 | % | $ | 15,371 | $ | 11,105 | $ | 4,266 | 38 | % | ||||||||||||||||
Revenue increased 184% to $7,425,000 for the three months ended September 30, 2022, compared to the prior corresponding quarter. The increase in revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily attributable to the synergies with our recent acquisitions. During the three months ended September 30, 2022, revenue attributable to our acquisition of STS was $3,503,000.
Revenue increased 38% to $15,371,000 for the nine months ended September 30, 2022, compared to the corresponding prior nine-month period. The increase in revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily a result of our recent acquisition of STS and its existing customer base. During the nine months ended September 30, 2022, revenue attributable our STS acquisition was $3,990,000. As part of our change in selling strategy, we have focused on a sales model that employs contracts with recurring revenue. We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and software licenses which are generally more difficult to predict.
Cost of Revenue, Excluding Depreciation and Amortization
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Three Months Ended September 30, |
Change |
Nine Months Ended September 30, |
Change |
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(Dollars in thousands) |
2022 |
2021 |
$ |
% |
2022 |
2021 |
$ |
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Cost of revenue, excluding depreciation and amortization |
$ | 4,119 | $ | 1,402 | $ | 2,717 | 194 | % | $ | 8,780 | $ | 4,705 | $ | 4,075 | 87 | % | ||||||||||||||||
For the three and nine months ended September 30, 2022, cost of revenue, excluding depreciation and amortization increased by $2,717,000 and $4,075,000 compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our new go-to-market strategy. As part of a sales strategy to more quickly expand our market reach, we have recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to establish the program, which will not be incurred again if the pilot program is converted into a long-term program. In addition, the Company experienced lower margins on certain hardware sales during these quarters.
Operating Expenses
|
Three Months Ended September 30, |
Change |
Nine Months Ended September 30, |
Change |
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|
(Dollars in thousands) |
2022 |
2021 |
$ |
% |
2022 |
2021 |
$ |
% |
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|
Operating expenses: |
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|
General and administrative expenses |
$ | 6,841 | $ | 6,813 | $ | 28 | 0 | % | $ | 22,541 | $ | 16,094 | $ | 6,447 | 40 | % | ||||||||||||||||
|
Selling and marketing expenses |
2,432 | 1,125 | 1,307 | 116 | % | 6,390 | 3,044 | 3,346 | 110 | % | ||||||||||||||||||||||
|
Research and development expenses |
4,911 | 2,000 | 2,911 | 146 | % | 13,772 | 4,741 | 9,031 | 190 | % | ||||||||||||||||||||||
|
Goodwill impairment |
34,835 | - | 34,835 | - | 34,835 | - | 34,835 | - | ||||||||||||||||||||||||
|
Depreciation and amortization |
1,926 | 930 | 996 | 107 | % | 4,846 | 2,169 | 2,677 | 123 | % | ||||||||||||||||||||||
|
Total operating expenses |
$ | 50,945 | $ | 10,868 | $ | 40,077 | 369 | % | $ | 82,384 | $ | 26,048 | $ | 56,336 | 216 | % | ||||||||||||||||
General and Administrative Expenses
The increase in general and administrative expenses during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, were primarily due to a $1,863,000 and $5,654,000 increase in personnel costs related to an increase in headcount, including a $62,000 and $184,000 increase in stock-based compensation, respectively. Additionally, for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021, we saw an increase in rent expenses mainly associated with our new offices throughout the United States and Israel. During the three months ended September 30, 2022 we saw a decrease in professional fees compared to the same three month period in 2021 due to merger and acquisition activity experienced in the third quarter of 2021, which was related to the Waycare acquisition.
Selling and Marketing Expenses
The increase in selling and marketing expenses during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, was attributable mainly to increased marketing efforts to promote our products and services including digital marketing and other sales efforts. In connection with these efforts, for the three and nine months ended September 30, 2022, there was an increase in staffing to support our growth plan which led to a $1,454,000 and $3,533,000 increase in personnel costs, including a $304,000 and $931,000 increase in stock-based compensation, respectively.
Research and Development Expense
The increase in research and development expenses during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, was primarily attributable to the development of new products and additional software capabilities, mainly as a result of an increase in headcount and hours associated with research and development activities. For the three and nine months ended September 30, 2022, there was an increase in staffing to support the Company’s new products which led to a $2,215,000 and $7,162,000 increase in personnel costs, including a $520,000 and $1,559,000 increase in stock-based compensation, respectively. Additionally, there was an increase in sub-contractor labor associated with the development of new products and software of $1,014,000 during t he nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 .
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.
Depreciation and Amortization
The increase in depreciation and amortization during the year is attributable primarily to increased technology-based intangible assets that were acquired as part of our acquisition of Waycare.
Other Expense
|
Three Months Ended September 30, |
Change |
Nine Months Ended September 30, |
Change |
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|
(Dollars in thousands) |
2022 |
2021 |
$ |
% |
2022 |
2021 |
$ |
% |
||||||||||||||||||||||||
|
Other income (expense): |
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|
Interest expense |
$ | (21 | ) | $ | (21 | ) | $ | - | 0 | % | $ | (46 | ) | $ | (72 | ) | $ | 26 | 36 | % | ||||||||||||
|
Other (expense) income |
(1,379 | ) | 66 | (1,445 | ) | -2189 | % | (1,403 | ) | 103 | (1,506 | ) | (1462 | )% | ||||||||||||||||||
|
Total other income (expense) |
$ | (1,400 | ) | $ | 45 | $ | (1,445 | ) | 3211 | % | $ | (1,449 | ) | $ | 31 | $ | (1,480 | ) | 4774 | % | ||||||||||||
Interest expense and other income remained consistent period over period. Other expense increased as a result of a legal settlement.
Non-GAAP Measures: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in 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):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Net loss from continuing operations |
$ | (48,085 | ) | $ | (9,613 | ) | $ | (76,288 | ) | $ | (19,777 | ) | ||||
|
Income taxes |
(954 | ) | 3 | (954 | ) | 10 | ||||||||||
|
Interest |
21 | 21 | 46 | 72 | ||||||||||||
|
Depreciation and amortization |
1,926 | 930 | 4,846 | 2,169 | ||||||||||||
|
EBITDA |
$ | (47,092 | ) | $ | (8,659 | ) | $ | (72,350 | ) | $ | (17,526 | ) | ||||
|
Share-based compensation |
$ | 1,628 | $ | 694 | $ | 5,413 | $ | 2,600 | ||||||||
|
Loss due to change in value of equity investments |
- | - | - | 150 | ||||||||||||
|
Goodwill impairment |
34,835 | - | 34,835 | - | ||||||||||||
|
Legal settlements |
1,385 | - | 1,433 | - | ||||||||||||
|
One-time consulting fees |
- | 1,249 | 1,024 | 2,025 | ||||||||||||
|
Adjusted EBITDA |
$ | (9,244 | ) | $ | (6,716 | ) | $ | (29,645 | ) | $ | (12,751 | ) | ||||
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we can gain efficiencies through the adoption of our technology and successfully cross-selling and upselling our current and future offerings. However, our ability to improve Adjusted Gross Margin overtime is not guaranteed and could be impacted by the factors affecting our performance. We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.
The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
(Dollars in thousands, except percentages) |
(Dollars in thousands, except percentages) |
|||||||||||||||
|
Revenue |
$ | 7,425 | $ | 2,615 | $ | 15,371 | $ | 11,105 | ||||||||
|
Cost of revenue, excluding depreciation and amortization |
4,119 | 1,402 | 8,780 | 4,705 | ||||||||||||
|
Adjusted Gross Profit |
$ | 3,306 | $ | 1,213 | $ | 6,591 | $ | 6,400 | ||||||||
|
Adjusted Gross Margin |
44.5 | % | 46.4 | % | 42.9 | % | 57.6 | % | ||||||||
Adjusted Gross Margin, for the three and nine months ended September 30, 2022 and 2021 decreased to 44.5% from 46.4% , and 42.9% from 57.6%, respe ctively. As part of a sales strategy to more quickly expand our market reach, we have recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to establish the program, which will not be incurred again if the pilot program is converted into a long-term program. In addition, the Company experienced lower margins on certain hardware sales during these quarters.
Key Performance Indicators
We regularly review several indicators, including the following key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Recurring Revenue Growth
Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business.
|
Three Months Ended September 30, |
Change |
Nine Months Ended September 30, |
Change |
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|
2022 |
2021 |
$ |
% |
2022 |
2021 |
$ |
% |
|||||||||||||||||||||||||
|
Recurring revenue |
$ | 4,839 | $ | 1,233 | $ | 3,606 | 292 | % | $ | 8,616 | $ | 3,142 | $ | 5,474 | 174 | % | ||||||||||||||||
As we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in future periods to continue to increase as we move to market our suite of products through our Rekor One™ platform.
Total Contract Value
There are certain assumptions that we make when determining the total contract value of an agreement, such as the success rate of renewal periods, cancellations and usage estimates. For the nine months ended September 30, 2022 we won contracts value d at $8,297,000 , compared to $7,294,000 of contracts won for the nine months ended September 30, 2021 . This represents a $1,003,000 or 14% increase, period over period. The increase in total contract value is partially related to our strategy of entering into pilot programs that require low initial commitments by our customers in the short term in the expectation that they will develop into larger commitments over time. This helps grow our pipeline and demand for our products. As pilot programs convert into longer term and larger scale contracts, we expect to see our KPIs improve.
Performance Obligations
As of September 30, 2022, we had approxim ately $28,606,000 of contracts that were closed prior to September 30, 2022 but have a contractual period beyond September 30, 2022 . This represents an increase of $6,019,000 or 27% compared to $22,587,000 of performance obligations as of December 31, 2021. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately 58% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.
The increase in total our performance obligations is primarily related to our acquisition of STS.
Lease Obligations
As of September 30, 2022, we had material leased building space at the following locations in the U.S. and Israel:
|
● |
Columbia, Maryland – The corporate headquarters |
|
|
● |
Tel Aviv, Israel |
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of our planned operations.
Liquidity and Capital Resources
The following table sets forth the components of our cash flows for the period included (dollars in thousands):
|
Nine Months Ended September 30, |
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|
2022 |
2021 |
Change |
||||||||||||||
|
$ |
% |
|||||||||||||||
|
Net cash used in operating activities |
$ | (30,093 | ) | $ | (12,321 | ) | $ | (17,772 | ) | -144 | % | |||||
|
Net cash used in investing activities |
(10,571 | ) | (43,392 | ) | 32,821 | 76 | % | |||||||||
|
Net cash provided by financing activities |
22,817 | 70,874 | (48,057 | ) | -68 | % | ||||||||||
|
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents |
$ | (17,847 | ) | $ | 15,161 | $ | (33,008 | ) | -218 | % | ||||||
Net cash used in operating activities for the nine months ended September 30, 2022 had a net decrease of $17,772,000, which was attributable to the increase in the loss from continuing operations of $76,288,000. This amount was partially offset by an increase in share-based compensation expense, a non-cash adjustment, which increased $2,813,000 to $5,413,000 for the nine months ended September 30, 2022 compared to $2,600,000 for the nine months ended September 30, 2021. This increase is due to the number of equity incentive shares that were issued to employees and directors. Additionally, for the nine months ended September 30, 2022 we recognized an impairment related our goodwill of $34,835,000.
The net increase in net cash used in investing activities of $32,821,000 was primarily due to an increase in the outflow of funds related to merger and acquisition activities. During the nine months ended September 30, 2022, the Company had net cash outflows of $6,389,000 related to the acquisition of STS. During the nine months ended September 30, 2021, the Company had net cash outflows of $40,699,000 related to the acquisition of Waycare.
Net cash provided by financing activities for the nine months ended September 30, 2022 decreased by $48,057,000 from the prior nine month period ended September 30, 2021. During the nine months ended September 30, 2022, as part of our 2022 Sales Agreement, we received net proceeds after deducting the underwriting discounts and commissions and offering expenses payable by us, of $22,758,000. In the prior comparable quarterly period, through our 2021 Public Offering, we received net proceeds, after deducting the underwriting discounts and commissions and offering expenses payable by us, of $70,125,000.
For the three and nine months ended September 30, 2022 and 2021, we funded our operations primarily through cash from operating activities and the sale of equity. As of September 30, 2022, we had cash and cash equivalents from continuing operations of $8,757,000 and a working capital deficit of $1,054,000, as compared to cash and cash equivalents of $26,600,000 and working capital of $16,989,000 as of December 31, 2021.
For all annual and interim periods, we will assess going concern uncertainty in our unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand, capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of our programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent we have the proper authority to do so and consider probable that those implementations can be achieved within the look-forward period.
We have generated losses since our inception and have relied on cash on hand and external sources of financing to support cash flow from operations. We attribute losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the nine months ended September 30, 2022, we had a working capital deficit from continuing operations of $1,054,000 and a loss from continuing operations of $76,288,000.
Our cash decreased by $17,844,000 for the nine months ended September 30, 2022 primarily due to the loss from continuing operations of $76,288,000. The decrease in cash was partially offset by offset by certain non cash adjustments such as the goodwill impairment of $34,835,000. Additionally, the decrease in cash was offset by the net proceeds of $22,758,000 fro m the 2022 Sales Agreement (see NOTE 10 - STOCKHOLDERS ’ EQUITY for details on the 2022 Sales Agreement). Assuming the ability to complete sales of shares at current market prices under stable market conditions, as of September 30, 2022, we had $26,278,000 of gross funds available under the 2022 Sales Agreement.
Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund operations for the next twelve months following the issuance of these unaudited condensed financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period.
2021 Public Offering
On February 9, 2021, we issued and sold 6,126,939 shares of our common stock (which included 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the “2021 Public Offering”). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by us, were approximately $70,125,000.
Waycare Acquisition
On August 18, 2021, we entered into a share purchase agreement (the “Purchase Agreement”) by and among the Company, Waycare, the sellers of Waycare named in the Purchase Agreement (the “Sellers”) and Shareholder Representative Services LLC, solely in its capacity as the representative of the Sellers, pursuant to which we acquired 100% of the issued and outstanding capital stock of Waycare from the Sellers (the “Acquisition”). The aggregate purchase price for the shares of Waycare was $61,100,000, less the amount of Waycare’s debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474 shares of our common stock, valued at $20,287,000. As a result of the transaction, Waycare became our wholly-owned subsidiary.
STS Acquisition
On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition included total consideration of $12,799,000 including; cash consideration of $6,500,000, 798,666 shares of the Company’s common stock, valued at $2,000,000, $1,001,000 related to an earnout based on the achievement of certain performance metrics, $1,298,000 contingent on the closing of a future contract and a $2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company.
At-the-Market Offering
On February 24, 2022 , we 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 we from time to time may offer and sell shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately $169,000 rel ated to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.
For t he nine months ended September 30, 2022, the Company sold 9,019,062 shares of common stock at a weighted-average selling price of $2.62 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $22,758,000 after paying $169,000 related to the issuance cost, as well as 3.0% or $709,000 related to cash commissions provided to the Agent.
As of September 30, 2022, we did not have any material commitments for capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, Rekor is not required to provide the information required by Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation 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 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 as of September 30, 2022.
Changes to Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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. On January 30, 2020, we filed a Second Amended Complaint (the “Complaint”). The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company. The Complaint also alleges claims for breach of fiduciary duty, violations of the Computer Fraud and Abuse Act (“CFAA”), conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of the acquisition transaction and monetary damages.
The Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, we moved to dismiss certain counterclaims against certain directors and officers named as counterclaim-defendants, resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter the Company filed its response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which we opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.
In April 2021, the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed its opposition to the partial summary judgment motion on June 21, 2021. The Firestorm Principals filed their reply in support of their partial summary judgment motion on July 9, 2021. On March 14, 2022, the Court issued an opinion and order which denied summary judgment to the Firestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment to the Firestorm Principals on their breach of warrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. The Court granted summary judgment to the Firestorm Principals on our CFAA claims, based on recent case law clarifying that such claims do not apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment to one defendant on our conversion, and trespass to chattels claims because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on one breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $25,500 amount at issue could not be set off by or recouped from our damages in this case.
In April 2022, The Company filed a notice of motion seeking partial summary judgement on several of the of the Company’s claims and the Firestorm Principals’ counterclaims, which the Firestorm Principals opposed. On July 29 th , 2022, the Court issued an opinion and order, which granted the motion in part and denied it in part. The order dismissed the Firestorm Principal’s counterclaim against the Company for libel. The order also dismissed the Company’s claim for breach of fiduciary duty against one defendant on the ground that he was not employed by the Company, but by a subsidiary of the Company that is not a party to the case. The court also denied summary judgement to the Company as to the breach of fiduciary duty claim against the other defendants and as to the trespass to chattels and conversion claims as to all defendants, on the ground that issues of fact remain contested. On the same ground, the court also denied summary judgement to the Company as to a breach of contract claim by one defendant relating to an alleged change in employment status.
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. The defendants in the suits moved to dismiss the amended complaint. At this stage of these litigations, the suits against two of the directors have been dismissed and one has been permitted to proceed. On September 28, 2021, the Delaware court issued an order denying the defendant’s motion to dismiss. On October 21, 2021, the defendants filed a motion for reconsideration of the Delaware court’s dismissal order; which was denied on February 28, 2022. On March 16, 2022, the court in the Virginia action dismissed the breach of fiduciary duty claim without prejudice (so it can be refiled in Delaware Chancery Court) and denied the motion with respect to the defamation claim on jurisdictional grounds. The defamation claim in Virginia will now be challenged on substantive grounds.
In July 2022, the Firestorm Principals obtained new counsel. On July 21, 2022, the Firestorm Principals’ new counsel requested an adjournment of the October 17, 2022 trial date and related pre-trial deadlines, which the Company did not oppose. On July 22, 2022, the Court granted the request and rescheduled trial to begin on February 13, 2023.
At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome. We intend to continue vigorously litigating its claims against the Firestorm Principals and believe that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.
Fordham
On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company in the Supreme Court for the State of New York, New York County. Fordham alleged that the Company offended an underwriting agreement with Fordham and brought claims for breach of contract. On October 17, 2022, the Court granted Fordham’s motion for summary judgment and denied the Company’s cross-motions for summary judgment and to compel discovery. The Court awarded Fordham $1,025,000, representing 3% of the gross proceeds generated from the Company’s previously announced and concluded at-the-market equity program commenced on August 14, 2019, plus pre-judgment interest accruing at 9% per annum since April 14, 2019, and reasonable attorneys’ fees. The Company chose not to appeal the decision and satisfied the judgement. In exchange for a payment of $1,320,000 by the Company, the plaintiff agreed to a full and complete discharge of the plaintiff’s claim. This amount was recorded in other (expense) income on the Company's unaudited condensed consolidated statements of operations.
In addition, from time to time, we 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 we accrue reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is our opinion that the outcome of these proceedings, individually and collectively, will not be material to our consolidated financial statements as a whole.
There have been no material changes to the risk factors disclosed in “Risk Factors” in our Annual Report on Form 10-K as filed with the SEC on March 31, 2022. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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.
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 proceeds have been primarily used for 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 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
(a) Exhibits
|
Incorporated by Reference |
Filed/Furnished |
|||||||||||
|
Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Filing Date |
Herewith |
||||||
|
3.1 |
8-K |
333-216014 |
3.1 |
8/25/17 |
||||||||
|
3.2 |
8-K |
001-38338 |
3.1 |
4/30/19 |
||||||||
|
3.3 |
8-K |
001-38338 |
3.1 |
3/18/20 |
||||||||
|
3.4 |
8-K |
001-38338 |
3.2 |
12/15/21 |
||||||||
|
31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
* |
||||||||||
|
31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
* |
||||||||||
|
32.1 |
** |
|||||||||||
|
32.2 |
** |
|||||||||||
|
101.INS |
Inline XBRL Instance Document |
* |
||||||||||
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
* |
||||||||||
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
* |
||||||||||
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
* |
||||||||||
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
* |
||||||||||
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
* |
||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) | |||||||||||
* Filed herewith.
** Furnished herewith.
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. |
|||
|
By: |
/s/ Robert A. Berman |
||
|
Name: |
Robert A. Berman |
||
|
Title: |
Chief Executive Officer Principal Executive Officer |
||
|
Date: |
November 14, 2022 |
||
|
By: |
/s/ Eyal Hen |
||
|
Name: |
Eyal Hen |
||
|
Title: |
Chief Financial Officer Principal Financial and Accounting Officer |
||
|
Date: |
November 14, 2022 |
||