Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the "Quarterly Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , entitled "Risk Factors" and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with theSecurities and Exchange Commission (the "SEC") that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
Certain factors that could cause actual results to differ from our expectations include, but are not limited to:
? significant risks, uncertainties and other considerations discussed therein
report;
? operational risks, including supply chain, equipment or system failure, cyber
and other malicious attacks and other events that affect the amount and
timing of revenues and expenses;
? reputational risks that affect 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 merger of Waycare Acquisition and STS
Acquisition; ? our ability to access the public markets for debt or equity capital; ? political, legal, regulatory, governmental, administrative and economic
condition and development of
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 established market positions
we have recently entered or are trying to enter or from other companies that
seeking to enter markets we already serve;
? our failure to successfully develop products using our technology that
accepted by the markets we serve or intend to serve or to develop new ones
technologies that change the nature of our business or provide for our customers
with products or services superior to or less expensive than ours;
? the inability of our strategic plans and goals to expand our geographic
markets, customer base and product and service offerings;
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? risks associated with pandemics and other global health emergencies, such as
the spread of a new strain of coronavirus (“COVID-19”) around the world
since the first quarter of 2020 that has caused a big change in
the extent and duration of business disruptions related to COVID-19, as well
for its effect on
? risks associated with cyberattacks at international, national, local and
Information infrastructure of the company by bad businesses or criminal elements or
through agents of governments involved in asymmetric disruptions to competition,
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 endedDecember 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 theSEC . General Overview We are a global leader in the development and implementation of intelligent infrastructure focused on addressing critical challenges across transportation management, public safety, and key commercial markets. With a real-time intelligence platform driven by deep access to data, AI-powered software, and smart optical devices at-the-edge, we combine our industry expertise and advanced proprietary technologies to deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities. We provide products and services across 80 countries as we deliver transformative mission-critical intelligent infrastructure solutions and services for government agencies and commercial clients inthe United States and around the world. Digital Divide Society is increasingly digital, automated, and information flows occur in real-time. Technological advancements in the past decade have transformed the way people connect, interact, and transact with others and with the world around them. Infrastructure is the backbone of a functioning economy: people, vehicles, materials, and information all require 24/7 mobility, something that depends on well-maintained, synchronized networks and systems. Unfortunately, many areas of the world are faced with aging and legacy infrastructure today resulting from decades of neglect and underinvestment, particularly in the sectors of transportation, mobility, and public safety. The cost, complexity and interdependency of these systems have made many organizations slow to adopt advances in technology. This creates a digital divide between what is made possible by technology, and the current reality of infrastructure today. Continued population growth and increased urbanization present unprecedented economic, mobility, public safety, and environmental challenges to cities, states, and metropolitan areas. Today's challenges cannot be solved by simply replicating existing approaches and adding more legacy technology. For the ongoing mobility transformation to keep up with fast-changing global dynamics requires inventive approaches. Enhancements in data collection, analytics and communications can be employed. Smarter, data-driven solutions can make better use of existing infrastructure, rather than tearing it up and starting over. Roads, bridges, tunnels, and residential areas have much "to tell us" about how to optimally serve the public with an efficient, safe, and healthy living environment if we tap into the data it can provide and exploit that knowledge intelligently. Successful approaches will leverage AI-powered software, smart devices, data, and solutions that can integrate into existing infrastructure and workflows. We see this as the path to intelligence-driven infrastructure and one that gives us a clear market advantage. Bridging the Divide Spurred by the 2021Infrastructure Investment and Jobs Act inthe United States , we expect the world to see a once-in-a-generation surge of investment in infrastructure and competitiveness. The bill allocates$550 billion in new spending, spread out over five years, to rebuild roads, bridges and rails, and airports, in addition to providing high-speed internet access and addressing climate concerns. As part of this, federal, state, and local governments are prioritizing strategic investments dedicated to improving existing transportation management and increasing public safety through modern, efficient and connected infrastructure. Officials are also planning for roadways of the future that can account for connected and autonomous vehicles. With these investments, we estimate an addressable global intelligent infrastructure market of$148 billion by 2026. With access to multiple sources of data and our award winning AI-driven innovations, we believe we have established a leadership position in intelligent infrastructure solutions that puts us at the center of this emerging opportunity. With our advanced technology and domain expertise, we have developed solutions that address diverse use cases across a number of public and private sector segments. Using our proprietary centralized platform to maximize the value of our technology to customers, we are well positioned to help governments and businesses collect, analyze and turn infrastructure data into insights with new products and services that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions. 30
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Innovation Driven by Intelligence
As described below, we have concentrated on developing our intelligent
infrastructure solutions to work through a single integrated platform, which
creates a unique, market-advantaged position for us. The volume, variety,
velocity, and veracity of data that we capture and apply to our proprietary
artificial intelligence and machine learning models provide us with an even
greater advantage. From the very beginning, we have been collecting,
aggregating, cleansing, extracting, transforming, and using data to build and
improve our models.
Today, we can look at the roadway and extract and process a deeply detailed
picture of the environment and what is moving in that environment with an
unmatched level of accuracy in our inferences, predictive analytics, and
insights. We are rapidly growing the geographic area connected by smart optical
IoT devices at-the-edge to the open architecture of our Rekor One intelligence
platform. In addition to digitizing existing infrastructure by capturing
real-time data from new and existing roadway devices, our platform enables us to
extend the scope of our knowledge via proprietary algorithms that pull the data
and process it through our models. This reduces our clients' need to invest in
legacy system upgrades and gives them the ability to gain additional value from
existing infrastructure. Beyond this, we are augmenting our data through a
growing network of data partners. This provides multiple trillions of
additional data points that unlock further real-time and predictive operational
insights about what is happening in a given transportation environment at every
moment. Example data sources from our partner network include mobility,
navigation, and traffic applications, in-vehicle data, connected, autonomous
vehicles ("CAV") datasets, weather, supply chain, event management, and a
rapidly growing list of customer-provided and crowd-sourced data. The more data
we capture and inject into our machine learning models, the smarter and more
accurate they become. Due to the incredible strength and accuracy of our models,
we can extract more data from the roadways than ever before possible, and
generate rich multi-dimensional insights for our customers about what is
happening in real-time. In addition, we use AI-driven predictive analytics to
forecast what will happen in the next five minutes, in 12 or 24 hours, and even
days and months into the future. From these insights, customers can make better
informed proactive decisions and achieve improved operational efficiency through
a more strategic allocation of resources. All of this is facilitated by our
proprietary Rekor One™ intelligence platform.
Powered by Data and Artificial Intelligence
At the core of all our intelligent infrastructure solutions is the Rekor One intelligence platform. Fueled by rich data and powered by AI, Rekor One is purpose-built to be a single source of truth and insights serving multiple customer segments and multiple missions. From Rekor One, we can simultaneously deliver vertical-specific solutions for traffic management, public safety, and commercial markets. With the Rekor One platform as our foundation, we collect and transform data into information, and information into knowledge to give governments and businesses a comprehensive picture of roadways, vehicles, traffic, incidents, and more. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
Built on the foundation of Rekor One, we deliver vertical-specific solutions for the traffic management, public safety, and commercial markets.
Example use cases we can support include:
? Traffic management and analytics ? Predictive traffic congestion modeling and forecasting ? Roadway monitoring and incident detection and response ? Support systems for integrated corridor management ? Electric vehicle adoption and charge station planning ? Commercial vehicle and tonnage monitoring and analysis ? Real-time emissions analysis, sustainability, and green initiatives ? Live and archival HD video management and traffic surveillance ? Law enforcement and intelligence-based policing ? Contactless compliance and enforcement ? Vehicle and license plate recognition for public safety The Road Ahead We believe the world is at an inflection point. In the next five years, governments will make significant investments to improve aging infrastructure, roadway conditions, and public safety via modern, efficient, and connected infrastructure. Recent technological developments such as artificial intelligence, the internet of things, edge- and cloud-based computing, and advances in rich data management have put us in a unique position to help revolutionize mobility through intelligent infrastructure and close the gap between rapidly evolving technology and aging, legacy infrastructure. These are not just our aspirational goals, but things we're working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it using artificial intelligence, and packaging it to provide real-time insights and long-term solutions for intelligent infrastructure, we sustainably help governments and businesses address both issues of aging infrastructure and the unprecedented mobility, public safety, economic, and environmental challenges they face. We believe our leadership in intelligent infrastructure solutions, advanced technology, and breadth of use cases across multiple industries puts us in an advantaged market position at the forefront of developing a new economy and poised to unlock massive gains as we provide governments and businesses with new products and services that use trillions of intelligent infrastructure interactions to increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people. Our operations are conducted by our wholly-owned subsidiaries,Rekor Recognition Systems, Inc. ("Rekor Recognition"),Waycare Technologies, Ltd. ("Waycare") andSouthern Traffic Services, Inc. ("STS"). 31
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Opportunities, Trends and Uncertainties
We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:
? Growing Smart City Market – According to a
two-thirds of the world population will live in urban areas by
2050.
Our cities are getting larger, with longer commutes, bigger
roads and
the resulting impact on the environment and the quality of life.
it
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
ago
reduce congestion, keep travelers safe, improve transportation,
protecting
the environment, respond to climate change, and enhance the
quality of
life. We believe our data-driven, artificial intelligence-aided
solutions provide useful tools that can effectively tackle the
challenges cities and communities are facing today and will face over
the coming decades.
? AI for Infrastructure - We believe that the application of AI to the
analysis of conditions on roadways and other infrastructure can
significantly affect the safety and efficiency of vehicular
travel to
the future. As vehicles move towards full automation, there is a need
for real-time data and actionable insights around traffic flow,
identification of anomalous and unsafe movements - e.g. wrong way
vehicles, stopped vehicles, or/and pedestrians on the roadway.
Marketers and drive-thru retailers with loyalty programs can also
benefit from rapid, lower cost identification of existing and
potential
customers in streamlining and accelerating local vehicular flow
as well
as data about the vehicles on the roadway.
? Connected Vehicle Data – New vehicles are now equipped with dozens
of sensors, collecting information about internal systems,
save
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 of
their roads, supplementing data from existing infrastructure and
providing untapped transportation information from rural areas that are
not served by ITS infrastructure.
? New and Expanded Uses for Vehicle Identification Systems – We believe in that
reductions in the cost of vehicle recognition products and
SERVICES
will significantly broaden the market for these systems. We
at the moment
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
customers
loyalty programs. We have seen and responded to an increase in
the
number of smaller jurisdictions and municipalities that are
test
vehicle recognition systems or that issued requests for
suggestions of
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.
? Market Adaptation – We have made a big investment in
our advanced vehicle recognition systems because we believe
wilderness
increased accuracy, affordability and ability to capture
more
vehicle data will allow them to compete effectively with
available
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
construction 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
for example, because
to high rates of fatalities and injuries to law enforcement and
OTHERS
emergency response crews on roadsides, several states are
thought
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
expand to
the public safety market.
? Graphics Processing Unit (“GPU”) Enhancements – 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
made of
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 by
grow as a result of a surge in the adoption of the Internet of
Things
("IoT") by the industrial and automotive sectors. As GPU
manufacturers
increase production volume, we hope to benefit from the reduced cost to
manufacture the hardware included in our products or available to
others using our services.
? Edge Processing - Demand for actionable roadway information continues
to grow in parallel with camera resolutions. Over the last several
decades, cameras have evolved and unlocked new capabilities with each
advancement. Further, cellular networks have been optimized for
downloading data rather than uploading data. As a result, while
download speeds have improved significantly due to 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
including
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
flowed by
the cloud for processing.
? Accelerated Business Development and Marketing – Our ability to compete
in a large, competitive and rapidly evolving industry will
needs 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
uncertainty.
? COVID 19 – The spread of a new strain of COVID-19 around the world
since the first quarter of 2020 has caused significant
volatility of
U.S. and international markets. Despite the roll-out of
vaccination,
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
wilderness
customer and supply-chain interactions and their internal
operations by
three to four years. Funding for digital initiatives has
adds,
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? Pressure on Government Budgets - COVID-19 has caused significant strain
on government budgets. With less money to spend and more need for
resources, government agencies need affordable, effective, and scalable
solutions for revenue recovery and discovery. With subscription pricing
and an intelligent infrastructure platform that accomplishes multiple
agency missions, we are uniquely positioned to provide agencies with
force-multiplying tools when money and human resources are limited.
Agencies can be better positioned to improve public safety, manage
resources more effectively, and make an impact on their citizen's
quality of life with limited capital expenditure. In addition, states
adopting contactless compliance programs may be able to garner
significant net cash contributions to their annual budgets while
reducing the number of non-compliant vehicles on their roadways.
?
law of
in transportation systems of
billion in new spending on road infrastructure, including smart
transportation system. We believe that our comprehensive offering of
The solutions position the Company well to emerge as a technology leader
the expanded market for smart infrastructure will benefit
from this law. We recognize access opportunities
federal funding streams, and we are working to implement a program that
taking advantage of it like never before
safety, homeland security, and transportation infrastructure and ensures
that our customers are positioned to get most of it
exceptional government spending as much as possible. More than a lot of repeats
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
which can make competitive grants for state projects essential
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 to support the demonstration
projects on smart technologies that improve transportation efficiency
and safety
Components of Operating Results
Revenues
We derive revenues from the sale of software, hardware and related services.
Software sales include subscriptions for the use of our software as a service
("SaaS") and software licenses. SaaS revenues are treated as recurring revenue
and provided both through negotiated agreements with larger governmental and
commercial customers and through subscriptions from smaller customers. License
sales are typically term agreements, including agreements for perpetual
licenses, that may include maintenance obligations for software updates that
keep up with changes in vehicle models and license plate designs.
Hardware is sold through direct sales or subscriptions and is typically sold
with a software subscription or license arrangement. Revenue from direct sales
is generally recognized when the hardware is delivered, or installation is
completed in accordance with the terms of the contract. Subscription revenues
may include hardware and software subscriptions and are recognized as recurring
revenue throughout the term of the lease agreement.
Our related services include customer support and implementation services, as
well as management services such as violation notices, billing and collections,
website portals and call centers related to programs that employ our software
solutions. In addition, we engage in pilot programs with governmental and
commercial entities that include extension or renewal features that may result
in recurring revenues and/or additional point-in-time revenues at the completion
of the pilot program.
Costs of revenues, excluding depreciation and amortization
Direct costs of revenues consist primarily of the portion of technical and
non-technical salaries and wages and payroll-related costs incurred in
connection with revenue-generating activities. Direct costs of revenues also
include production expenses, data subscriptions, sub-consultant services and
other expenses that are incurred in connection with our revenue-generating
activities. Direct costs of revenues exclude the portion of technical and
non-technical salaries and wages related to marketing efforts, vacations,
holidays, and other time not spent directly generating fees under existing
contracts. Such costs are included in operating expenses. We expense direct
costs of revenues when incurred.
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Table of Contents Operating Expenses Our operating expenses consist of general and administrative expenses, sales and marketing, research and development and depreciation and amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expenses. Operating expenses also include depreciation, amortization and impairment of assets. General and Administrative
General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional costs include office rent, professional fees and insurance.
We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, insurance and investor relations as a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term. Sales and Marketing Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base. Research and Development Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services. We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our AI solutions. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses
Depreciation and Amortization
Depreciation and amortization expenses are primarily attributable to our capital
investments and consist of fixed asset depreciation, amortization of
right-of-use assets, amortization of intangibles considered to have definite
lives, and amortization of capitalized internal-use software costs.
Other Income (Expense)
Other income (expense) consists primarily of interest expense in connection with
our debt arrangements, costs associated with the extinguishment of our debt
arrangements, gains on the sale of subsidiaries, gains or losses on the sale of
fixed assets, and interest income earned on cash and cash equivalents,
short-term investments and note receivables.
Income Tax Provision
Income tax provision consists primarily of income taxes in certain domestic
jurisdictions in which we conduct business. We have recorded deferred tax assets
for which a full valuation allowance has been provided, including net operating
loss carryforwards and tax credits. We expect to maintain this full valuation
allowance for the foreseeable future as it is more likely than not that some or
all of those deferred tax assets may not be realized based on our history of
losses.
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Critical Accounting Estimates and Assumptions
A comprehensive discussion of our critical accounting estimates and assumptions is included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . New Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated financial statements set forth in Item 1 of this quarterly report for information about new accounting pronouncements.
Results of Operations
Our historical operating results in dollars are presented below. The analysis of
operation is solely related to continuing operations and does not consider the
results of discontinued operations.
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2022 2021 2022 2021
Revenue $ 4,334 $ 4,274 $ 7,942 $ 8,491
Cost of revenue, excluding depreciation
and amortization 2,666 1,381 4,648 3,303
Operating expenses:
General and administrative expenses 8,323 4,450 15,711 9,280
Selling and marketing expenses 2,649 984 3,958 1,919
Research and development expenses 4,727 1,519 8,861 2,741
Depreciation and amortization 1,520 625 2,919 1,239
Total operating expenses 17,219 7,578 31,449 15,179
Loss from operations (15,551 ) (4,685 ) (28,155 ) (9,991 )
Other income (expense):
Interest expense (17 ) (18 ) (26 ) (50 )
Other (expense) income (34 ) 19 (22 ) 34
Total other income (expense) (51 ) 1 (48 ) (16 )
Loss before income taxes and equity
method investments (15,602 ) (4,684 ) (28,203 ) (10,007 )
Income tax provision - (3 ) - (7 )
Equity in loss of investee - (74 ) - (150 )
Net loss from continuing operations
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Comparison of Three and Six Months Ended
Total Revenue
Three Months Ended June 30, Change Six Months Ended June 30, Change
(Dollars in
thousands) 2022 2021 $ % 2022 2021 $ %
Revenue $ 4,334 $ 4,274 $ 60 1 % $ 7,942 $ 8,491 $ (549 ) -6 %
The increase in revenue for the three months ended, June 30, 2022 , compared to
the three months ended June 30, 2021 , was primarily attributable to the
synergies with our recent acquisitions and our land and expand strategy, which
involves expanding the services and solutions we provide to existing customers
and also facilitating cooperation between our existing customers and new
customers as part of a broader information network. During the three months
ended June 30, 2022 , revenue increased $603,000 and $485,000 as a result of our
acquisition of Waycare and STS, respectively.
The decrease in revenue for the six months ended June 30, 2022 , compared to the
six months ended June 30, 2021 , was primarily a result of a decrease in product
and service revenue in the current period. As part of our change in selling
strategy, we have focused on a sales model that employs contracts with recurring
revenue. We expect these contracts to provide a more predictable stream of
revenues, compared to one-time sales of hardware and software licenses which are
generally more difficult to predict. During the six months ended June 30, 2021 ,
there was one customer who accounted for $1,673,000 of revenue as a result of a
one-time sale of hardware and software. The decrease in one-time sale revenues
during the six months ended June 30, 2022 , was partially offset by revenue
attributable to the synergies with our recent acquisitions and our land and
expand strategy as described above. During the six months ended June 30, 2022 ,
revenue increased $1,310,000 and $485,000 as a result of our acquisition of
Waycare and STS, respectively.
Cost of Income, Excluding Depreciation and Amortization
Three Months Ended June 30, Change Six Months Ended June 30, Change
(Dollars in
thousands) 2022 2021 $ % 2022 2021 $ %
Cost of revenue,
excluding
depreciation and
amortization $ 2,666 $ 1,381 $ 1,285
93 %$ 4,648 $ 3,303 $ 1,345 41 % For the three and six months endedJune 30, 2022 , cost of revenue, excluding depreciation and amortization increased by$1,285,000 and$1,345,000 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 June 30, Change Six Months Ended June 30, Change (Dollars in thousands) 2022 2021 $ % 2022 2021 $ % Operating expenses: General and administrative expenses$ 8,323 $ 4,450 $ 3,873 87 %$ 15,711 $ 9,280 $ 6,431 69 % Selling and marketing expenses 2,649 984 1,665 169 % 3,958 1,919 2,039 106 % Research and development expenses 4,727 1,519 3,208 211 % 8,861 2,741 6,120 223 % Depreciation and amortization 1,520 625 895 143 % 2,919 1,239 1,680 136 % Total operating expenses$ 17,219 $ 7,578 $ 9,641 127 %$ 31,449 $ 15,179 $ 16,270 107 %
General and Administrative Expenses
The increase in general and administrative expenses during the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 , were primarily due to a$1,414,000 and$3,560,000 increase in personnel costs related to an increase in headcount, including a$351,000 decrease and$121,000 increase in stock-based compensation, respectively. Additionally, for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 , we saw an increase in professional fees mainly associated with our merger and acquisition activities and rent expenses mainly associated with our new offices throughoutthe United States andIsrael .
Selling and Marketing Expenses
The increase in selling and marketing expenses during the three and six months endedJune 30, 2022 , compared to the three and six months endedJune 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 six month periods endedJune 30, 2022 , there was an increase in staffing to support our growth plan which led to a$1,549,000 and$2,089,000 increase in personnel costs, including a$503,000 and$627,000 increase in stock-based compensation, respectively.
Research and Development Costs
The increase in research and development expenses during the three and six months endedJune 30, 2022 , compared to the three and six months endedJune 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 six months endedJune 30, 2022 , there was an increase in staffing to support the Company's new products which led to a$3,058,000 and$4,975,000 increase in personnel costs, including a$561,000 and$1,039,000 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$671,000 during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . 37
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Depreciation and Amortization
The increase in depreciation and amortization during the year is attributable
primarily to increased technology-based intangible assets that were acquired as
part of our acquisition of Waycare.
Other Expense
Three Months Ended June 30, Change Six Months Ended June 30, Change
(Dollars in
thousands) 2022 2021 $ % 2022 2021 $ %
Other income
(expense):
Interest expense $ (17 ) $ (18 ) $ 1 6 % $ (26 ) $ (50 ) $ 24 48 %
Other (expense)
income (34 ) 19 (53 ) -279 % (22 ) 34 (56 ) (165 )%
Total other
income (expense) $ (51 ) $ 1 $ (52 ) 5200 % $ (48 ) $ (16 ) $ (32 ) -200 %
Interest expense and other income remain constant over time.
Non-GAAP Measures: EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in theU.S. ("U.S. GAAP") and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance withU.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company's ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.
The following table sets forth the components of EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net loss from continuing operations $ (15,602 ) $ (4,761 ) $ (28,203 ) $ (10,164 )
Income taxes - 3 - 7
Interest 17 18 26 50
Depreciation and amortization 1,520 625 2,919 1,239
EBITDA $ (14,065 ) $
(4,115)
Share-based compensation $ 1,885$ 1,125 $ 3,785 $ 1,906 Loss due to change in value of equity investments - 74 - 150 One-time consulting fees 1,024 - 1,024 776 Adjusted EBITDA$ (11,156 ) $ (2,916 ) $ (20,449 ) $ (6,036 )
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue
less cost of revenue, excluding depreciation and amortization. We define
Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We
expect Adjusted Gross Margin to continue to improve over time to the extent that
we can gain efficiencies through the adoption of our technology and successfully
cross-selling and upselling our current and future offerings. However, our
ability to improve Adjusted Gross Margin overtime is not guaranteed and could be
impacted by the factors affecting our performance. We believe Adjusted Gross
Profit and Adjusted Gross Margin are useful to investors, as they eliminate the
impact of certain non-cash expenses and allow a direct comparison of these
measures between periods without the impact of non-cash expenses and certain
other nonrecurring operating expenses.
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The following table sets forth the components of Adjusted Gross Revenue and Adjusted Gross Margin for the periods included:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands, except (Dollars in thousands, except
percentages) percentages)
Revenue $ 4,334 $ 4,274 $ 7,942 $ 8,491
Cost of revenue, excluding depreciation
and amortization 2,666 1,381 4,648 3,303
Adjusted Gross Profit $ 1,668 $ 2,893 $ 3,294 $ 5,188
Adjusted Gross Margin 38.5 % 67.7 % 41.5 % 61.1 %
Adjusted Gross Margin, for the three and six months ended June 30, 2022 and
2021 decreased to 38.5% from 67.7%, and 41.5% from 61.1%, respectively. As part
of a sales strategy to more quickly expand our market reach, we have recently
offered certain customers short-term pilot programs which range from three to
six months. Our pilot programs generally have lower margins due to additional
upfront costs we incur to establish the program, which will not be incurred
again if the pilot program is converted into a long-term program. In addition,
the Company experienced lower margins on certain hardware sales during these
quarters.
Key Performance Indicators
We regularly review several indicators, including the following key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Recurring Revenue Growth
Our recurring revenue model and revenue retention rates provide valuable insight into our future operating results and cash flows from operations. This visibility enables us to better manage and invest in our business.
Three Months Ended June 30, Change Six Months Ended June 30, Change
2022 2021 $ % 2022 2021 $ %
Recurring income
While we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in the coming periods to continue to increase as we move to sell the 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 six months endedJune 30, 2022 we won contracts valued at$4,979,000 , compared to$5,785,000 of contracts won for the six months endedJune 30, 2021 . This decline represents a$806,000 or 14% decline, period over period. The decrease in total contract value is partially related to our strategy of entering into pilot programs that require low initial commitments by our customers in the short term in the expectation that they will develop into larger commitments over time. This helps grow our pipeline and demand for our products. As pilot programs convert into longer term and larger scale contracts, we expect to see our KPIs improve. 39
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Table of Contents Performance Obligations As ofJune 30, 2022 , we had approximately$31,940,000 of contracts that were closed prior toJune 30, 2022 but have a contractual period beyondJune 30, 2022 . This represents an increase of$9,353,000 or 41% compared to$22,587,000 of performance obligations as ofDecember 31, 2021 . These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately 57% 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 the totality of our performance obligations is related to our acquisition of STS.
Lease Obligations
As in
?Columbia, Maryland - The corporate headquarters ?Tel Aviv, Israel
We believe that our facilities are in good condition and adequate for their current use. We expect to develop, replace and add facilities as deemed 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):
Six Months Ended June 30,
2022 2021 Change
$ %
Net cash used in operating activities
37 % Net cash provided by financing activities 20,486 70,589 (50,103 ) -71 % Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents$ (11,750 ) $ 48,883 $ (60,633 ) -124 % Net cash used in operating activities for the six months endedJune 30, 2022 had a net increase of$15,986,000 , which was attributable to the increase in the loss from continuing operations of$28,203,000 . This amount was partially offset by an increase in share-based compensation expense, a non-cash adjustment, which increased$1,879,000 to$3,785,000 for the six months endedJune 30, 2022 compared to$1,906,000 for the six months endedJune 30, 2021 . This increase is due to the number of equity incentive shares that were issued to employees and directors. The net decrease in net cash used in investing activities of$5,456,000 was primarily due to a decrease in short-term investments that were previously made during the six months endedJune 30, 2021 , of$12,995,000 which were previously invested inU.S. Treasury Bills that have maturity dates over three months, but less than a year. During the six months endedJune 30, 2022 , the Company had net cash outflows of$,6,389,000 related to the acquisition of STS. Net cash provided by financing activities for the six months endedJune 30, 2022 decreased by$50,103,000 from the prior six month period endedJune 30, 2021 . During the six months endedJune 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$20,408,000 . 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 six months endedJune 30, 2022 and 2021, we funded our operations primarily through cash from operating activities and the sale of equity. As ofJune 30, 2022 , we had cash and cash equivalents from continuing operations of$14,853,000 and working capital of$7,285,000 , as compared to cash and cash equivalents of$26,600,000 and working capital of$16,989,000 as ofDecember 31, 2021 . 40
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Table of Contents Liquidity For all annual and interim periods, we will assess going concern uncertainty in our unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand, capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the "look-forward period", as defined inU.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of our programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent we have the proper authority to do so and consider probable that those implementations can be achieved within the look-forward period. We have generated losses since our inception and have relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of our non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of our common stock 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 six months endedJune 30, 2022 , the had working capital from continuing operations of$7,285,000 and a loss from continuing operations of$28,203,000 .
Our money is down to
mainly due to the loss of continuous operation of
We believe that based on relevant conditions and events that are known and reasonably knowable, our current forecasts and projections for one year from the date of the filing of the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, indicate our ability to continue operations as a going concern for at least that one-year period. We are actively monitoring its operations, the cash on hand and working capital. Should access to funds be unavailable, we will need to seek out additional sources of funding. If additional financing is not available, we have contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period. 2021 Public Offering OnFebruary 9, 2021 , we issued and sold 6,126,939 shares of our common stock (which included 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the "2021 Public Offering"). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by us, were approximately$70,125,000 . Waycare Acquisition OnAugust 18, 2021 , we entered into a share purchase agreement (the "Purchase Agreement") by and among the Company, Waycare, the sellers of Waycare named in the Purchase Agreement (the "Sellers") andShareholder Representative Services LLC , solely in its capacity as the representative of the Sellers, pursuant to which we acquired 100% of the issued and outstanding capital stock of Waycare from the Sellers (the "Acquisition"). The aggregate purchase price for the shares of Waycare was$61,100,000 , less the amount of Waycare's debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of$40,813,000 of cash and 2,784,474 shares of our common stock, valued at$20,287,000 . As a result of the transaction, Waycare became our wholly-owned subsidiary. STS Acquisition OnJune 17, 2022 , the Company completed its acquisition ofSouthern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition included total consideration of$14,500,000 including; cash consideration of$6,500,000 , 798,666 shares of the Company's common stock, valued at$2,000,000 ,$2,000,000 related to an earnout based on the achievement of certain performance metrics,$2,000,000 contingent on the closing of a future contract and a$2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company. At-the-Market Offering OnFebruary 24, 2022 , we entered into an At-the-Market Issuance Sales Agreement (the "2022 Sales Agreement") withB. Riley Securities, Inc. (the "Agent") to create an at the market equity program under which we from time to time may offer and sell shares of our common stock, par value$0.0001 per share, having an aggregate offering price of up to$50,000,000 (the "Shares") through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately$169,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets. For the six months endedJune 30, 2022 , based on the settlement date, the Company sold 7,598,801 shares of common stock at a weighted-average selling price of$2.79 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was$20,408,000 after paying$169,000 related to the issuance cost, as well as 3.0% or$635,000 related to cash commissions provided to the Agent.
As in
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