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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38338
Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
6721 Columbia Gateway Drive, Suite 400
Columbia, MD
(Address of Principal Executive Offices)
81-5266334
(I.R.S. Employer Identification No.)
21046
(Zip Code)
(410) 762-0800
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Common Stock, $0.0001 par value per share
Trading Symbol(s)
REKR
Name of each exchange on which registered
The Nasdaq Stock Market
Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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. Yes ☒ No ☐
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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☒
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. Yes ☐ No ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2023 was
approximately $85.8 million.
As of March 25, 2024, the Registrant had 85,324,918 shares of common stock, $0.0001 par value per share outstanding.
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TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statements Schedules
Form 10-K Summary.
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CERTAIN TERMS
Unless the context requires otherwise, all references in this Annual Report on Form 10-K (the “Annual Report”) to “Rekor Systems, Inc.,” “Rekor,”
“Company,” “we,” “our” and “us” refer to Rekor Systems, Inc. and its consolidated subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the U.S. federal securities laws. All statements other than statements of
historical facts, such as statements regarding the objectives of management, timing and the likelihood of success of various activities, the future
performance of current and prospective products and services and our future results of operations and financial position, are forward-looking statements,
which include all expressions of the expectations, hopes, beliefs, intentions, plans, prospects or strategies of the Company. These statements involve known
and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by these statements. In some cases, you can identify forward-looking statements by
terms such as “may,” “might,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “target,” “expect,” “project,” “intend,” “contemplates,” “believes,”
“estimates,” “predicts,” “potential,” “possible,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements
are based on certain assumptions and analyses made by the management of the Company in light of their respective experience and perception of historical
trends, current conditions and expected future developments and their potential effects on the Company as well as other factors they believe are appropriate
in the circumstances. They speak only as of the date of this Annual Report and are subject to several substantial risks, uncertainties and assumptions
described under the sections entitled “Risk Factors” and elsewhere in this Annual Report. Because forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, actual results or performance to be
materially different from those expressed or implied and you should not rely on these forward-looking statements as predictions of future events. There can
be no assurance that future developments affecting the Company will be those anticipated. Should one or more of these risks or uncertainties materialize or
should any of the assumptions being made prove incorrect, actual results may vary in material respects. We undertake no obligation to update any forward-
looking statement as a result of new information, future events or otherwise.
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ITEM 1. BUSINESS
Overview
PART I
Rekor is working to revolutionize public safety, urban mobility, and transportation management using AI-powered solutions designed to meet the
distinct demands of each market we serve. We work hand-in-hand with our customers to deliver mission-critical traffic and engineering services that assist
them in achieving their goals. Our vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways
and communities. We work towards this by collecting, connecting, and organizing mobility data, and making it accessible and useful to our customers for
real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure
planning and reporting.
To achieve these goals, we have developed a robust, interconnected hardware infrastructure and advanced, purpose-built software platforms. These
powerful tools, enriched by a diverse range of data and state-of-the-art AI, can produce a level of roadway intelligence that we believe is unmatched. Our
solutions empower clients to efficiently manage and optimize the complex interactions of vehicles in motion, ensuring smooth operations within and
around public safety, urban mobility, and transportation systems.
Our operations are conducted primarily by our wholly-owned subsidiaries, Rekor Recognition Systems, Inc. ("Rekor Recognition"), Waycare
Technologies, Ltd. (“Waycare”), Southern Traffic Services, Inc. (“STS”), and All Traffic Data Systems (“ATD”).
A New Operating System for Roadways
The condition of national transportation infrastructure systems is a matter of great concern, particularly in the United States.
As the private sector continues to innovate and make headlines with cutting-edge technologies such as autonomous vehicles, flying taxis, and smart
delivery drones, it's paradoxical that essential issues such as roadway congestion, safety, vehicle emissions and equitable access are worsening at an
alarming rate. On February 2, 2023, the US Department of Transportation declared a national crisis and state of emergency for roadway safety and
launched an urgent roadway safety call-to-action demanding stakeholders to commit to specific actions to reverse the spike in serious injuries and deaths on
our roadways.
According to a report from the American Society of Civil Engineers ("ASCE"), US infrastructure has been graded a C minus, indicating that there is
significant and urgent need for improvement. Over 65% of the 4.2 million miles of US roadways are rated in poor condition, which impacts the safety of
drivers and passengers. The issue of congestion is also a serious concern, estimated to cost US citizens a whopping $120 billion per year in economic and
productivity losses. Furthermore, transportation-related greenhouse gas emissions – motorists' emissions, particularly when trapped in traffic account for a
significant proportion of the country's total emissions are a leading contributor to declining sustainability, which has far-reaching environmental impacts.
Addressing the road infrastructure issue is imperative for both economic and ecological reasons. Last but not least, tragically, more than 43,000 people lose
their lives each year while using the nation's transportation network of streets, roads, and highways, which represents a stark failure in public safety and
policy. If these transportation network issues remain unaddressed, it has been projected that the United States will face a $10 trillion loss in its gross
domestic product.
To address these urgent issues and ensure the competitiveness of the US economy, an unprecedented amount of funding has been made available from
the federal government through the Infrastructure Investment and Jobs Act ("IIJA"), the Inflation Reduction Act, and the CHIPS and Science Act, that is
available to help create a digitally-enabled transportation infrastructure that can serve the public good and provide new economic value. This represents a
once-in-a-generation level of investment and bipartisan support for creating and scaling digital transportation infrastructure for the 21st century. Rather than
a complete reset or rebuilding of infrastructure, the focus is rather to leverage their power of funding and policymaking to build on previous investments,
promote new technology layers, and ensure universal access to digital infrastructure systems throughout the country.
The ultimate objective is to adopt an augmented approach to existing physical infrastructure that blends the strengths of physical, digital, and
operational infrastructure with mobility data, including mobile phones, connected vehicles, roadway sensors, and more. The goal is to enable and
coordinate private and public collaboration through a digital-enabled mobility internet and operating system for the roadways that will advance smarter,
safer, greener roadways for all.
This is a unique moment for Rekor, and one that we have been preparing for since 2018.
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Roadway Intelligence
Rekor has become a leader in roadway intelligence by collecting, connecting, and organizing global mobility data since its inception. Today, our
comprehensive portfolio of products and services offers multiple cutting-edge Internet of Things ("IoT") devices for roadside data collection, an array of
curated and integrated data sets from a network of transportation ecosystem data providers, as well as platforms, applications, and data streams that have
been tailored for use by a demanding customer base consisting of federal state and local government agencies and large corporate clients.
We specialize in collecting and aggregating mobility-related data from multiple sources into our Rekor One® roadway intelligence engine,
transforming this data into knowledge and actionable insights, and securely distributing those insights to multiple users across various software platforms
and applications. Our proprietary technologies use recent advances in artificial intelligence, machine learning, data analysis, edge processing, and
communications. They are designed to be integrated into existing roadway and roadway sensor infrastructure to deliver real-time and predictive analytics
that address critical challenges in transportation management, public safety, urban mobility, and other key commercial markets.
By applying a multi-layer architectural approach and protocols inspired by the Open System Interconnection ("OSI") model, which was instrumental in
creating computer operating systems in the 1970s and the internet in the 1980s, we are collaborating with members of the Rekor Partner Network to
integrate various transportation infrastructure systems – hardware, technology, and datasets - into a cohesive network of roadway intelligence assets and
insights. This involves consolidating fragmented and disparate systems, as well as adding new layers of connectivity, to create a unified environment. To
achieve this goal, we are working closely with a wide range of stakeholders, including local and federal government agencies, law enforcement, transit
providers, infrastructure owners/operators, automotive OEMs, and technology, communications and data providers.
At Rekor, we are forging a future where the mobility internet is not just connected, but interactive, delivering real-time roadway intelligence to
revolutionize traffic management, public safety, maintenance, emergency services, and planning agencies, as well as supporting connected and autonomous
vehicles. Our enduring mission is to innovate and perfect a unique, AI-driven, and edge-based IoT network. This network is designed to be pivotal in this
transformation, working in harmony with key partners in the transportation and public safety ecosystem to deliver the most comprehensive insights
impacting safety, health, and sustainability for roadways, communities, and citizens.
Our commitment is to continue to focus our investments, merging physical and digital infrastructure to lay the groundwork for a new, advanced
operating system for roadways. As we move forward, Rekor is positioned to play an indispensable and impactful role, supporting private and public
agencies as they design and construct digital infrastructure operating system of the future. We are dedicated to fulfilling the critical demand for real-time
and predictive roadway intelligence, ensuring that our solutions are not just innovative but also instrumental in shaping the future of public safety, urban
mobility, and transportation management.
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Roadway Intelligence Powered by Rekor
Our Rekor One® roadway intelligence engine is purpose-built to be a single source of truth, powered by AI and fueled by rich data. With access to
multiple sources of data and our award-winning AI-driven innovations, we provide a range of solutions that address diverse use cases across various public
and private sector segments. Our platforms facilitate the efficient collection, analysis, and distribution of vast amounts of data, unlocking real-time and
predictive operational insights that have previously been unavailable. Using our advanced technology and centralized platform, we are well-positioned to
provide a single-source of truth for roadway intelligence, and help governments and businesses turn infrastructure data into actionable insights that increase
mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.
Our Rekor One® roadway intelligence engine allows us to deliver a range of solutions that serve government and commercial customers in the public
safety, urban mobility and transportation management areas. Within the Rekor One® environment, our proprietary algorithms curate data from multiple
sources, including edge-based IoT devices, existing roadway sensors, and a growing network of transportation data partners, unlocking multiple trillions of
additional data points. We use this data to generate multi-dimensional insights in real-time, and AI-driven predictive analytics that leverage patterns of what
happened in the past so that we can forecast what will happen in the future. These insights enable our customers to make better-informed proactive
decisions and achieve improved operational efficiency through strategic resource allocation.
Rekor's solutions support diverse use cases, including: 1) traffic reports, including counts showing Federal Highway Administration ("FHWA")
mandated vehicle classifications and speed, analytics for bicycle, pedestrians, and other micro-mobility modes, as well as patterns and hot spots for
greenhouse gas emissions, 2) data driven traffic operations and traffic management, real-time incident detection and response, including proactive traffic
calming around events, and 3) high-definition ("HD") video traffic surveillance, to assist law enforcement and support intelligence-based policing,
including contactless compliance and enforcement, among others. With our advanced technology and domain expertise, we are well-equipped to serve
multiple public agencies and private sector segments with comprehensive roadway intelligence.
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To summarize, the Rekor One® roadway intelligence engine, along with our Rekor Partner Network allows us to collect, connect, and organize more
data from the roadways than ever before possible, and generate rich insights that enable our customers to make thoughtful decisions impacting their
communities every day. With our deep expertise and technology, Rekor is well positioned to help businesses and governments unlock the true potential of
their infrastructure data, driving innovation and enhancing the lives of billions of people worldwide.
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The Road Ahead
The United States government is investing heavily in upgrading and digitizing the nation’s outdated infrastructure. Recent technological advances,
such as edge- and cloud-based computing, artificial intelligence, and the internet of things, have given us an unprecedented opportunity to revolutionize
mobility and bridge the divide between rapidly evolving technology and aging infrastructure. We are actively engaged in providing state-of-the-art AI-
driven roadway intelligence solutions to enhance public safety, urban mobility, and transportation management. By collecting, connecting, and organizing
the world’s mobility data, Rekor delivers precise, real-time, and predictive actionable insights for any moving objects on roadways. We are dedicated to
delivering mission-critical solutions that help to create intelligent, secure, and sustainable streets for all communities. The ultimate objective is for Rekor to
be a foundational partner in building a digitally-enabled internet and operating system for roadways that will enable smarter, safer, and more eco-friendly
mobility for all. Rekor is making mobility data widely accessible and useful for all, empowering customers to make informed decisions and drive
meaningful progress towards a brighter future.
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Platforms, Products, and Solutions
Rekor's revenue streams are driven by our cutting-edge software and data services, along with complementary hardware and peripheral products.
The Rekor One® platform is the central hub of an integrated operating system, supporting the assimilation, analysis, and distribution of data from various
sources. Our sales strategy involves offering subscriptions for our software solutions, utilizing the software as a service (“SaaS”) model. These
subscriptions can be provided with or without hardware sales, and our platform is designed to enable customers to enhance their existing sensor network by
integrating our proprietary sensors into the network over time. While we may continue to offer long-term licenses for certain strategic partnerships, we
anticipate that the bulk of our revenue will come from our innovative subscription-based model.
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Rekor One® Intelligence Platform
Rekor One®, is the bedrock of our cutting-edge AI-powered roadway intelligence platforms, serving multiple missions with modular and rapid
development capabilities. Our proprietary technology and machine learning models power all our solutions, including Rekor Command™ for
transportation management, Rekor Discover™ for urban mobility, Rekor Scout® for public safety, plus various commercial use cases.
The security of Rekor One®, and all our market facing solutions is our top priority. We use industry-leading security technologies and standards,
including end-to-end encryption and proprietary data filters, to ensure that all captured and connected data is protected from unauthorized access or use. We
adhere to strict privacy protocols and provide customers with 24/7 access to their data until it is purged. Our platform is hosted on AWS GovCloud for
secure data handling and stored in secure databases with limited access only to authorized system administrators. Moreover, Rekor One® incorporates a
privacy filter that uses a proprietary algorithm to strip personally identifiable information (“PII”) from data, ensuring that data privacy is safeguarded.
Rekor Command™ for Transportation Management
Commuters today face staggering congestion, widespread safety concerns, and rising fatalities that are made far worse by outdated, siloed
transportation and traffic management systems that are often overwhelmed by large amounts of unusable data. Rekor enables municipalities to transform
their approach to transportation management by sourcing, managing, and transforming massive amounts of data, including connected vehicle, event,
construction, weather, telematics, existing customer infrastructure, and much more, into actionable insights through AI-enabled technology. Authorities can
now shift from being siloed and reactive to an interoperable and proactive approach, saving lives, improving traffic flow, and reducing pollution in their
cities. Rekor Command™ acts as a seamless command center for traffic operations and traffic management centers so they can have a holistic view of their
roadways in real-time, and take appropriate action to help improve safety, sustainability, and efficiency for citizens across their communities. It’s been built
to identify more incidents faster, to enable proactive traffic management through crash-risk prediction, and to do this in a collaborative way connecting
agencies and stakeholders, including notifying citizens and the public. As a comprehensive cross-agency platform, Rekor Command™ offers dedicated
applications for traffic management centers, freeway service patrol, first responders and maintenance crews, aligning them all to better address traffic
challenges while arming them with the vital information needed to identify, manage, and recover from incidents, events and irregularities on their
roadways.
Rekor Command™ – Roadway Monitoring Core Application & Events Management Application
The Roadway Monitoring Core application and Events Management application are fundamental applications that sit within the Rekor Command™
platform providing cross-agency incident detection and management functionality that allows customers to effectively implement incident detection and
management within their existing workflows while accessing real-time information needed to rapidly identify, manage, and recover from incidents. Traffic
management agencies are able to access a live map view of their roadways and are alerted to irregular events and potential incidents that have been
identified through AI assisted analysis of multiple sources of data. Once confirmed by the agency, multiple responders are notified to rapidly approach and
clear the roadways, enabling traffic to continue and roadway safety to improve.
Rekor Command™ – Community Connect Application
The Community Connect application within the Rekor Command™ platform allows agencies to integrate with systems that can notify public in real-
time of events or incidents that are impacting the roadway. This application is a channel for agencies to interact directly with the public, keeping citizens up
to date and aware of potentially dangerous events and incidents to help prevent additional incidents from occurring.
Rekor Command™ – Advanced Analytics Application
The Advanced Analytics application within the Rekor Command™ platform provides agencies with reporting capabilities to archive incident and
event information, as well as analytics to help users better understand trends, patterns, and planning. This helps Departments of Transportation ("DOTs") to
understand historic patterns and arms them with the insights needed to make more proactive decisions around resource allocation and planning.
Rekor Command™ – Road Conditions Application
The Road Conditions application within the Rekor Command™ platform provides several layers of critical information about real-time conditions
happening on an agency’s roadways, including real-time weather information with high geospatial specificity, regular and irregular congestion, heightened
crash risk, transit impact, and current roadway status. These additional insights and data feeds help further the real-time view agencies have of their
roadways and provide additional layers of information that drive decision-making.
Rekor Command™ – Asset View Application
The Asset View application within the Rekor Command™ platform allows agencies to integrate with their existing assets on the roadway and
showcase these assets in real-time within the Command platform. Agency assets become an additional layer of data to drive decision making and resource
allocation. Assets that are typically integrated include freeway service patrol vehicles, highway police vehicles, city police vehicles, fire department
vehicles, construction vehicles, EMS, maintenance vehicles, street sweep vehicles, and snowplows.
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Rekor Discover™ for Urban Mobility
Traditional approaches to capturing roadway and infrastructure analytics for planning and engineering employ expensive, manual processes that use
antiquated technology to capture a fraction of the information needed for a fraction of the time. Cities, states, and municipalities know that having a clear
and accurate picture of what’s happening in and around the roadway is critical as they plan and invest in the infrastructure needed for smart cities, smart
transit, self-driving vehicles, and multi-modal movement across their geographies. The Rekor Discover™ platform ingests data from Rekor’s state-of-the-
art hardware and fully automates comprehensive analytics and actionable insights about the movement of objects across the roadway. Whether its
passenger vehicles, or multi-axle commercial trucks, Rekor Discover™ pulls ground truth insights, both in real-time and historically, allowing agencies to
better organize and execute their next-generation roadway planning and city building initiatives in a smart, safe, and future-proof way. Customers access
their dashboard on web-based cloud instances and review on-demand traffic reports and analytics that breakdown vehicle volumes and patterns, FHWA 13-
bin vehicle classification, electric vehicle volumes and hot spots, geospatial greenhouse gas emissions from vehicles, smog scores, average and spot speeds,
along with a variety of other insights. In addition to agencies, many businesses need to understand the vehicle flow, patterns, types, and other important
analytics regarding vehicles in their geographies. Whether it is an engineering firm collecting roadway data for their customers, or a real estate developer
planning development in a specific area, the capture of accurate, holistic roadway data is valuable for their unique use cases.
Rekor Discover™ – Count, Class and Speed Application
The Count, Class and Speed ("CCS") application within the Rekor Discover™ platform delivers per vehicle record ("PVR") data and analytics that
fully automate FHWA reporting requirements for 13-bin classification. Agencies can leverage Rekor’s portable or fixed AI-based systems to capture this
data in a fully automated way and then access this rich data in real-time through the CCS application's cloud-based dashboards. In addition to FHWA-13
vehicle category classification, the application also provides vehicle counting, traffic data, and speed reporting, all accessible by different agencies
determined time frames. Agencies can generate reports and extract data through a REST API or also by exporting data in multiple Traffic Monitoring
Guide ("TMG") standard formats (PRN, .CSV, and .PDF) for integration with the tools they may already be using. With this technology agencies can make
better-informed planning decisions with ground truth information.
Rekor Discover™ – Vehicle Insite Application
Rekor Discover’s Vehicle Insite application analyzes real-time video to provide actionable, on-property vehicle intelligence such as vehicle
characteristics, Electric Vehicle (EV) statistics and other visit metrics. Utilizing state-of-the-art AI and high-definition camera systems, Vehicle Insite
delivers real-time traffic data to deepen the customer’s understanding of the vehicles visiting their properties, enabling enriched experiences and targeted
marketing initiatives. Our Visit Metrics feature assists in the analysis of traffic flow patterns to prepare and plan for volume fluctuations, enabling a smooth
and efficient experience. Our Vehicle Characteristics feature provides vehicle demographics to leverage in the creation of targeted marketing campaigns
that engage and attract the ideal customer segments. Our Vehicle Characteristics feature provides vehicle demographics to leverage in the creation of
targeted marketing campaigns that engage and attract the ideal customer segments. The Vehicle Insite application helps users better plan for electric vehicle
("EV") charge station deployment, understand the movement of EVs and their adoption, and gather insights on where emissions and greenhouse gases are
emitted from the roadway. The application provides cloud-based dashboards and reports the count of EVs, provides heatmaps for EVs as well as a
breakdown of EV models, greenhouse gas emissions and smog, and other useful metrics. Agencies can leverage Rekor’s AI-based systems to capture this
data in a fully automated way and then access this rich data in real-time through the sustainability planning application.
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Rekor Scout® for Public Safety
Rekor is helping to transform the typically siloed, reactive, single-purpose world of legacy law enforcement and security technology with real-time,
AI-driven solutions that act as connectors between agencies and force multipliers in a chronically under-resourced space. The Rekor Scout® platform fully
automates previously manual processes with collaborative solutions that keep all stakeholders apprised of developing situations and accelerate reaction
times to incidents and offenders. The platform provides accurate license plate and vehicle recognition on nearly any IP, traffic, or security camera. It
provides integrated AI support for both existing cameras and any proprietary Rekor AI systems in the network and displays results on a web-based
dashboard that can be accessed from anywhere by any authorized user. The platform can connect authorized law enforcement agencies to National Crime
Information Center (“NCIC”) lists, allowing them to establish customized hotlists with alerts, apply customized data retention policies and share data with
other agencies. Vehicles listed on "blacklists" (stolen, terrorists, amber alerts, etc.) generate an alarm in the dispatching room so that they can be intercepted
by a patrol. Millions of cars per week are automatically checked in this way. Through this platform agencies can access real-time alerting, forensic research
tools, and investigative tools that accelerate public safety and security missions. Agencies and customers can access plate data by state or province from
over 50 countries together with the vehicles’ make, model, color, body type, and direction of travel. Users can also access subtle and unique vehicle
characteristics including rust, the presence of a roof rack, mismatched paint, or the like, which can be used for investigative policing and forensics. When
combined with high performance reads, parallel processing capability and best-in-class hardware such as those built and deployed by Rekor, Rekor Scout®
can be an absolute force multiplier capturing license plate data and vehicle characteristics across multiple lanes at high vehicle speeds with a high degree of
accuracy.
Rekor Scout® can also be accessed through a smartphone app designed specifically for law enforcement. This app enables advanced data capture by
public safety officers in the palm of the hand, providing access to extremely accurate license plate recognition in areas not covered by stationary or mobile
sensors, even where there is no network connectivity. The mobile application retrieves vehicle license plate number and state of registration and
automatically organizes information by sessions, capturing date, location, and timestamp. Verified reads then sync with the Rekor Scout® platform, and
users can receive in-app alerts using plate matches from custom and connected hotlists. With on-device encrypted lists and data, the mobile application is
compliant with the Federal Bureau of Investigation’s Criminal Justice Information System (“CJIS”).
Through our eCommerce platform, we also offer commercial versions of Rekor Scout® which are sold as a subscription service. Rekor Scout® for
commercial users includes specialized offerings that bring value to a variety of industries including parking, retail, logistics and security.
Additional Products Supporting Additional and Commercial Use-Cases
Rekor AutoNotice™ Application for Contactless Compliance
Rekor’s AutoNotice is a cloud-based financial management application that delivers a turnkey information and citation management solution for cities,
states, and municipalities for both primary and secondary offenses. Our plate-based application provides a safe, equitable, and unbiased enforcement
method that requires no human involvement. The application issues notices and/or sends information to registered vehicle owners when a non-compliant
vehicle is detected by a Rekor AI system. Non-compliant vehicles are any vehicles actively detected to be violating the law or otherwise requiring a
compliance notice. Non-compliance may include uninsured vehicles, vehicles with expired registration, and vehicles with outdated emissions/inspection
statuses. In addition to the application, there is an application programming interface for third-party payment gateways for credit card transactions to
accommodate both phone and web payments. The interface can also automatically record payments in the system and provide functionality to research,
manage unapplied payments, and reconcile receipts. A full call-center is also provided with our AutoNotice application to help facilitate payment or
information distribution to non-compliant citizens remotely. We have active deployments of our AutoNotice application for contactless compliance
scanning millions of plates and delivering thousands of notices/tickets, including a program for the State of Oklahoma that facilitates enrolling uninsured
motorists into a diversion program.
Rekor CarCheck® Application Program Interface ("API")
Rekor CarCheck® allows our powerful AI based vehicle and license plate recognition technology to be conveniently accessed for a wide range of
commercial applications. This API supports nearly any programming language, analyzes still images of vehicles from different countries and responds in
seconds with accurate license plate data, vehicle make, model, body type, color and orientation.
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Rekor Hardware Products
Rekor’s portfolio of AI-based state-of-the-art hardware products are purpose-built to optimize the value of our software as well as bring the advantages
of edge processing to capture real-time roadway data. Data capture, aggregation and AI/ML analysis is done on device, at the point of capture on the
roadway, so that it can be efficiently delivered to the point of use without processing delays. This reduces costs and enables our systems to work with
significantly reduced bandwidth requirements, allowing us to deploy in almost any area, at scale, gathering insights from the roadway in real-time where it
matters.
Rekor Edge Max™
Rekor Edge Max™ is a fixed traffic data collection system that captures and transforms high-resolution roadway data into holistic traffic insights.
Engineered for high-speed primary roadways and highways up to 120 mph, 3-4 lanes (up to 6 lanes with dual cameras), and 300 ft max range, Edge Max
seamlessly captures and processes vehicle data on-device and from advanced distances. The system features a durable enclosure, onboard modem, easy
mounting, optional solar power, and can be configured with two cameras to increase capture range. The system captures and analyzes vehicles using the
embedded Edge Processing Unit ("EPU") and AI-powered video processing. The Edge Max can be integrated into a network and features an onboard
modem, easy mounting, optional solar power, and can even be configured with multiple cameras to increase capture range.
Rekor Edge Pro™
Rekor Edge Pro™ is a complete vehicle recognition solution that can be used on a standalone basis or integrated into a network. Engineered for
roadway speeds up to 70 mph, 1-2 lanes, and 75 ft max range, the system can be deployed in neighborhoods, campuses, business districts, and can also be
used for parking and access control. It captures and processes data on-device within a durable enclosure. The unit is simple to install and features optional
solar power that expands the number of locations where Rekor Edge Pro™ can meet the customer’s needs.
Rekor Edge Flex™
Rekor Edge Flex™ is a non-intrusive, portable data collection system that captures and transforms high-speed roadway data into holistic traffic
insights. Powered by a range of modular batteries, the Edge Flex is designed for temporary studies lasting 1 to 7 days. Edge Flex captures up to 12 lanes of
traffic and employs AI-powered video processing to analyze it on site using the embedded EPU. Vehicle category classification, vehicle counts, and speed
reports are made available in web-based dashboards or exported in multiple file formats that meet TMG standards.
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Rekor Traffic Services
With the addition of STS in 2022 and ATD in 2024, Rekor offers 3000+ personnel-years of unparalleled traffic data collection and traffic engineering
expertise and services to our customers using both traditional and AI-based approaches. Traffic services include, but are not limited to the following:
Our global presence features an installation base spanning the United States and several international countries, allowing us to deploy our highly
experienced field staff anywhere to ensure our commercial and government clients receive tailored solutions irrespective of their geographical location.
Traditional Traffic Studies
Rekor's traditional traffic studies serve as the cornerstone for both permanent and temporary traffic analytics projects, delivering vital data and insights
for those involved in the planning and management of roadway infrastructure and commercial initiatives. Our team of experts provides accurate vehicle
volume counts all year round, every hour of the day, supporting trend analysis, real-time adjustments, and the advancement of traffic management systems.
We emphasize tailoring our approach to meet specific goals, ensuring that each project is conducted efficiently, effectively, and in a cost-conscious manner.
Innovative AI-driven Traffic Studies
For agencies seeking to enhance their traffic management services, Rekor presents the cutting-edge AI-driven Rekor Edge Series. These solutions,
available in both portable and permanent formats, mark a significant departure from traditional methods. They can be deployed quickly at roadside
locations, eliminating the need for manual data collection in potentially dangerous or traffic-heavy areas.
Transitioning to Rekor’s AI-driven systems not only increases the accuracy and efficiency of traffic data collection but also prioritizes the safety of
road workers by minimizing their need to work in risky conditions or disrupt traffic flow. This innovative approach is swiftly gaining favor among
commercial and public entities for its ability to ensure safety, minimize road disruptions, and deliver scalable and speedy solutions. These AI-powered
systems are redefining the standards of efficiency and precision, allowing clients to adeptly meet contemporary traffic management challenges.
Extensive Traffic Engineering Services
Rekor is dedicated to offering comprehensive traffic engineering services, leveraging both historical and newly gathered data. Our advanced analytical
methods convert raw data into actionable insights, supporting a wide range of studies, including:
● Origin-Destination Studies: Map vehicle routes to support urban development planning.
● Travel Time Studies: Provide insights into travel efficiency and congestion patterns.
● Occupancy Studies: Analyze parking and vehicle occupancy to understand utilization trends.
● Traffic Impact & Operations Analysis: Forecast the implications of new developments and refine traffic control strategies.
● Access Management Studies: Formulate approaches to manage vehicular access points effectively.
● Traffic Signal Warrant Analysis: Evaluate the necessity for traffic signal installations.
● Traffic Signal System Timing Analysis and Design: Optimize traffic signal timings for smoother traffic flow.
● Intersection Improvements: Upgrade intersections to bolster safety and improve traffic movement.
● Turning Movement Counts: Document the volume and direction of vehicles, pedestrians, or cyclists at specific road locations to enhance
road design, traffic signal management, and overall traffic efficiency.
Our extensive technology portfolio, combined with our ability to deploy skilled teams anywhere in the world for traffic engineering and traffic services,
positions us as a leading force in shaping the future of traffic management and infrastructure development.
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Competitive Strengths
Our unparalleled, patented technology has been prominently featured by renowned outlets and has driven our global expansion. We have repeatedly
earned trust and business over established incumbents in highly competitive bidding processes, owing to our award-winning proprietary technology and
exceptional customer service. We provide a unique breadth, depth, and sophistication that our integrated platform delivers to multiple missions and
agencies. We maintain our first-mover advantage by tirelessly investing in our competitive strengths and key differentiators.
In the transportation management, public safety, urban mobility, and commercial markets, we possess and continue to cultivate a variety of competitive
strengths that set us apart:
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Solution-driven Approach: Our customers are often overwhelmed with an immense amount of data from a wide range of sources. We bridge the gap
between data and actionable solutions by converting data into information, knowledge, and insights through our proprietary technology and platform,
enabling customers to make informed decisions.
Single Source Provider: Unlike other organizations that provide only disconnected products, we deliver an integrated platform of solutions to meet the
needs of transportation management, public safety, and commercial markets. As we are infrastructure and data agnostic, we can serve as a single
source provider to customers for any of their requirements.
One Device Multiple Missions: Our advanced IOT devices are powerful performer that support multiple value-added AI-based data collection and
analytic services on the same unit simultaneously, thereby providing extreme value, extensibility, and ability for customers to future-proof their
investments well into the future as needed.
Cross-Agency Functionality: Our platform supports multiple missions with the same, unified operating system. By integrating our platform directly
into agency workflows, we empower our customers to address the growing concerns around safety, equity, and sustainability effectively.
Industry-leading Privacy and Security: We use the most advanced security technologies and standards to safeguard all captured and connected data
from unauthorized access or use. Our platform also employs proprietary algorithms to strip PII from data, protecting the privacy of our customers and
their data.
Enhanced Accuracy and Capture for Vehicle Recognition: Our AI software achieves superior accuracy rates under broader parameters of vehicle
speed, camera viewing angles, and lighting conditions, capturing vehicle traits, rust, damage, and other unique signatures that can be used to aid
investigations
Technology leading Vehicle Classification, Count, and Speed: Our AI software achieves superior accuracy and performance rates across all 13 classes
and deep classification of vehicles for DOT studies in line with the latest FHWA guidelines.
Intelligence-Based Policing: Our comprehensive data capture allows us to detect patterns and analytics around vehicles of interest for law
enforcement, significantly enhancing the value of our products and services.
Functionality with any IP Cameras: Our AI software supports images and vehicle recognition captured by almost any digital camera, providing a
flexible, infrastructure-agnostic solution that is easily scalable across geographies.
Edge Processing: Our hardware delivers low-latency alerting via defined edge processing at the edge of the network, enabling real-time data
processing and scale without the need for expensive infrastructure such as fiber.
We are dedicated to continuously enhancing our competitive advantages and differentiators, driving innovation in the transportation management,
public safety, and commercial markets.
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Customer Segments and Markets
Our technology and solutions are transforming the transportation infrastructure landscape, empowering customers in 80 countries around the world.
With many markets currently relying on outdated physical infrastructure, or in the early stages of technology adoption, we see immense potential for
growth. Our diverse customer base includes cities, states, municipalities, law enforcement agencies, and more, and our success is evidenced by our multiple
pilots, proof of concept, and full-scale deployment agreements throughout the Americas.
While we will continue to pursue opportunities to sell perpetual licenses and hardware, our primary focus is on providing cutting-edge SaaS offerings
and services with recurring annual revenues. Our eCommerce site allows us to serve individuals and smaller organizations at scale using a self-service
recurring revenue model.
We expect the market for our solutions and services to be extraordinary. We are dedicated to addressing a wide range of market segments, including
intelligent transportation systems, smart mobility, traffic analytics, incident detection and location systems, traffic and parking management, smart cities,
vehicle regulatory compliance programs, and more.
Since the launch of our Rekor One® roadway intelligence Engine in 2020, our market-specific solutions have gained increased adoption, both in the
government and commercial sectors. We are confident in our competitive position and look forward to continued growth and success as we lead the way in
intelligent infrastructure.
Business Drivers and Growth Strategies
Our products and services have demonstrated the ability to provide significant improvements in public safety and transportation management and we
anticipate that this will drive our growth. The transportation infrastructure market is in the process of transformative change due to a convergence of
political, economic, societal, and technological forces. These include rising safety concerns, rapid urbanization and a heightened awareness of the impact
human mobility has on the planet. Both governments and businesses are seeking out new technologies and better ways to manage public safety, urban
mobility and transportation management challenges. As a result, there has been a significant increase in government funding available to digitize
transportation infrastructure in the United States and other countries with a focus on deploying proven near-term solutions that are scalable, efficient,
equitable and sustainable. We believe the technologies that we have developed and are continuing to develop have positioned us to take advantage of these
market forces.
Our use of AI to extract information about the movements of vehicles and other objects on the roadway has proven to be a core strength, allowing us to
capture comprehensive and detailed roadway data with superior accuracy and speed. The modular design of our Rekor One® intelligence platform, in
tandem with our proprietary edge processing and filtering technologies, have positioned us to emerge as a leader in facilitating the emerging industry of
interactive roadway intelligence. Our mission is to gather the most accurate and detailed data that can be obtained from the roadway in real time and
facilitate the aggregation and analysis of that data with other sources, so that insights drawn from that aggregation and analysis can be delivered securely
and efficiently to the persons who can make the best use of it. Automotive OEMs and government agencies in the transportation industry are starting to
focus on how to leverage connected vehicle data with AI to improve safety. We are building partnerships and enhancing our solutions with data to facilitate
the delivery of real-time information to citizens. With Rekor Command™ for transportation management, we are at the forefront of developing predictive
analytics that deliver insights based on the analysis of aggregated data from a variety of sources. These sources include real time information drawn from
roadway sensors and connected vehicles, off roadway sources such as weather and event data, as well as daily, seasonal and historical trend data.
The enhanced information we provide on roadway conditions is valuable to a wide range of stakeholders. During the past three years, we have initiated
the delivery of products and services to a wide range of governmental and business customers. These customers are diverse, ranging from large government
entities to small entrepreneurs, and the uses they make of our technology are varied. We have used these customer relationships as an opportunity to assess
the full potential of the technologies we have been developing and to learn by doing as well as imagining. When the capital markets were strong, we
pursued this strategy aggressively and independently.
In the transportation management and public safety areas, where we are furthest along with the delivery of revenue producing products and services,
we expect to continue to employ a "land and expand" growth strategy. This focuses on scaling our resources to supporting growth within these industry
segments through expansion of the products and services delivered to existing customers, as well as recruitment of new customers who become familiar
with our products and services. By expanding our services and solutions to existing customers while also facilitating cooperation between our existing and
new customers we expect to continually expand our information network.
As we develop our sales and marketing capabilities, we are concentrating primarily on subscription-based solutions, with hardware sales used
primarily to drive these subscriptions. We continue to explore opportunities for acquisitions or strategic investments in complementary businesses,
products, services, or technologies, including those that might benefit most from the use of our technology. These strategic partnerships, mergers, and
acquisitions will be attractive to us when they allow us to accelerate our growth or expand our capability to continue leading the roadway intelligence
industry.
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Competition
Our strategy is to disrupt the transportation infrastructure industry by offering cutting-edge, data-driven solutions that provide unparalleled roadway
intelligence, surpassing our competitors. The competition in roadway intelligence takes various forms - some solely focused on Automatic License Plate
Recognition ("ALPR") and vehicle recognition technology, while others specialize in data creation, aggregation, insights platforms, or smart city
technologies. Additionally, there are a variety of vendors supporting the classification, counting, and speed of vehicles according to FHWA guidelines.
To lead in this highly competitive industry, we must innovate and deliver new, groundbreaking products and services that set us apart from the
competition. Our ability to efficiently collect massive amounts of data from existing infrastructure, combine it with third-party data sets, and process and
transform this data into actionable insights using advanced AI and data analytical tools gives us a competitive edge. We also excel by providing tailored
datasets and integrated solutions and workflows to multiple agencies through a single platform, allowing us to meet the unique needs of various markets.
Our unique approach allows us to collect vehicle classification, counts and speed across all 13 FHWA classes. We also provide deeper classification for
both traditional vehicles, connected vehicles, hybrid-electric vehicles, and can report on the interactions of these modes of transport with non-motorized
roadway users – including bicycles and pedestrians. In the transportation management sector, these data collection and analysis abilities differentiate our
results from others in the market. In addition, we have the ability to accomplish this data collection without intruding on the roadway, which presents a
leapfrog opportunity for us to gain and accelerate market segment share because of the serious concerns that our customers have for human safety. We
believe that we can sustain our success in the roadway intelligence market because we have developed groundbreaking, innovative offerings that surpass
the high standards set by established industry leaders. To penetrate these established markets, we must challenge the status quo, drive the evolution of
industry standards, and deliver superior price and performance characteristics.
Although we were an early leader in the successful application of AI to vehicle recognition and continue to see significant potential for innovative
applications of AI in the roadway intelligence area, we do not see the use of AI itself as a proprietary advantage. Rather our early start in using AI and
machine learning to develop vehicle recognition and roadway data analysis algorithms for a diverse customer base has allowed us to maintain a lead over
others who have had access to the same non-proprietary AI and machine learning techniques but have not used it as early or as widely as we have. As we
increase our footprint in the industry, we preserve this advantage. However, the roadway is constantly changing with the introduction of new models and
types of vehicles, as well as other modifications, such as plate designs. In order to minimize potential threats from others seeking to match our performance
or undercut our prices, we must remain committed to delivering differentiated, unique solutions that provide greater value and benefits to our customers.
Where we have developed proprietary technologies, such as our unique edge processing and privacy filter technologies, we have taken action to protect
our innovations and intellectual property rights. However, our primary strategy for establishing ourselves as a leader in the industry has been the pursuit of
innovation and quality. . To maintain our competitive edge, we prioritize key factors such as design innovation, security and privacy features, product
quality and reliability, and exceptional service and support.
We face intense competition in the transportation and public safety markets, pitted against rival companies with significant technical, marketing,
distribution, and resource advantages, as well as established hardware, software, and service offerings. Furthermore, several competitors possess a larger
installed base of active devices, making the competition even more fierce. By providing a comprehensive set of solutions across a wide range of use cases,
however, we feel that we can stand apart from most of our competitors, who only operate in a narrow segment of the market. We are concentrating on
providing data resources that are more reliable, efficient and readily available. This includes upgrading existing infrastructure to efficiently collect reliable
data, aggregating that data with third-party data, processing the data with superior analytical tools, and delivering datasets and actionable insights tailored
to the specific needs of multiple agencies through a single platform. Throughout the development of our products and platforms, we have paid particular
attention to network and data processing efficiency to allow results to be distributed more effectively through existing communications networks. By
facilitating a variety of modular upgrades to existing infrastructure, combining data from various sources, and providing valuable real-time, historical, and
predictive insights, Rekor can continue to deliver solutions that meet the needs of customers across the value chain.
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Marketing and Sales
We offer products and services in multiple markets, using direct sales, an eCommerce platform and extensive partnerships and alliances. Our direct
sales force is organized into groups aligned to the Intelligent Traffic Systems (“ITS”) chapters and other targeted market segments, with a primary focus on
direct-to-end-user sales through a high-touch consultative process. In addition, we have established partnerships and strategic alliances that allow us to
bundle our technology into purpose-built solutions for various national and global market segments.
As we continue to increase our roadway intelligence engagement with national, state and municipal DOTs, we remain focused on law enforcement
communities – both directly and indirectly through strategic partners and resellers/integrators. Our market-leading solutions provide significant value to
DOTs for traffic management, planning and operations, and to municipal planning organizations for urban mobility. In addition to these agencies, our
solutions also enable law enforcement, intelligence-based policing, corporate campus security, and regulatory compliance for public security. Our
technology enables us to understand vehicle characteristics and behaviors beyond simple license plate capture, and digital vehicle signatures – extending
into traffic analytics, sustainability metrics, and weigh-in-motion studies for motorized as well as non-motorized movements, such as bicycles and
pedestrians. In 2024, we will be working to extend our reach into smaller communities as we continue to serve medium-large DOT and law enforcement
departments with our direct sales representatives.
Given that our primary market is state and local governments in the United States, the majority of our sales efforts involve a request for proposal
process and/or grant application process. In 2024, we will continue to capture and submit proposals and apply for grants for our customers, while also
seeking opportunities to submit concurrently with strategic partners.
Our eCommerce platform offers businesses and individuals around the world a convenient way to purchase our high-value vehicle recognition
solutions with just a credit card and a click. The platform allows for self-service sign-up and a range of subscription options while also funneling customers
directly to our sales support team if they need more information. Our Edge Pro camera system is the first hardware device for sale directly through the
eCommerce platform. With our ALPR software preloaded, customers can activate AI-based vehicle recognition services through a subscription online or by
telephone. The device is shipped globally, with optional enhancements for solar power and various pole configurations.
Research and Development
The highly competitive industries where we compete are defined by swift technological advancements. As such, our success is reliant upon a
consistent and timely release of innovative products, new rich data services, and advanced technologies to the market. To ensure our competitive edge, we
are constantly developing cutting-edge technologies to enhance our existing offerings, expanding our range of solutions through rigorous research and
development, as well as developing new AI models and algorithms, licensing intellectual property, and acquiring third-party datasets and technology. We
are committed to staying abreast of our customers' technological developments, adhering to industry standards, and meeting their increasingly stringent
demands for performance, productivity, quality, and predictability. As a result, we will continue to make significant investments in research and
development and data and analytics as we strive to maintain our position as a leader in our field.
Proprietary Technology and Intellectual Property
Our innovative hardware devices, accessories, software, and services are protected by a collection of patents, copyrights, trademarks, service marks,
trade dress, and other forms of intellectual property rights both in the United States and foreign countries. While we recognize the importance of owning
these intellectual property rights and believe they contribute to our success, we know that the know-how of our skilled personnel and their technical
competence and marketing abilities are the foundation of our Company's achievements.
To ensure our continued success, we prioritize the filing of patent applications to safeguard the innovations that arise from our research, development,
and design efforts, and we are currently pursuing multiple patent applications. With our commitment to intellectual property rights and our talented
personnel, we are well-positioned to lead the market in delivering cutting-edge solutions and services.
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Acquisitions
On June 17, 2022, we completed the STS Acquisition.
On January 2, 2024, we completed the ATD Acquisition. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary
Data — Note 17 — Subsequent Events”
Additional information concerning the STS and ATD Acquisitions is provided in this Annual Report on Form 10-K under ITEM 7 “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations.”
Human Capital Management
We look for our employees to represent the best and brightest in our industry and the talent we select to be a part of our team defines our culture and
success. Our global workforce is highly educated, technical and specialized, with a substantial majority of employees working in technical roles.
As of March 25, 2024, we had 351 employees, of which 347 were full-time and four considered part-time. We consider our employee relations to be
good. To date, we have been able to locate and engage highly qualified employees as needed and do not expect our growth efforts to be constrained by a
lack of qualified personnel.
Seasonality
We derive revenues substantially from the sale of software, hardware and related services and do not currently anticipate a significant seasonality
impact on our revenues. There is a portion of our revenue that requires our technicians and field support team to work outside, their ability to work and
provide services to our end customers can be impacted by inclement weather in the winter months. Should our penetration of tolling and other markets
involving per recognition fees expand, we would expect to become more subject to seasonal traffic patterns.
Insurance and Risk Management
We maintain insurance covering professional liability and claims involving bodily injury, property and economic loss. We consider our present limits
of coverage, deductibles, and reserves to be adequate. Whenever possible, we endeavor to eliminate or reduce the risk of loss on a project through quality
assurance and control, risk management, workplace safety, and other similar methods.
Risk management is an integral part of our project management approach for fixed-price contracts and our project execution process. We also evaluate
risk through internal risk analyses in which our management reviews higher-risk projects, contracts, or other business decisions that require corporate legal
and risk management approval.
Regulation
We are regulated in some of the fields in which we operate. When working with governmental agencies and entities, we must comply with laws and
regulations relating to the formation, administration, and performance of contracts. These laws and regulations contain terms that, among other things, may
require certification and disclosure of all costs or pricing data in connection with various contract negotiations. We are subject to the laws and regulations
that restrict the use and dissemination of information classified for national security purposes.
To help ensure compliance with these laws and regulations, our employees are sometimes required to complete tailored ethics and other compliance
training relevant to their position and our operations.
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ITEM 1A. RISK FACTORS
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks
and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial
statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are
unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following
risks occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the
trading price of our common stock could decline, and you could lose part or all of your investment.
Risks Relating to Our Corporate Structure and Business
We are currently not profitable, and we may be unable to become profitable on a quarterly or annual basis.
For the year ended December 31, 2023, we had a loss from continuing operations of $45,685,000. We cannot assure that we will be profitable in the
future or that our financial performance will sustain a sufficient level to completely support operations. Our ability to become profitable in future periods
could be impacted by government activity and regulation, economic instability and other items that are not in our control. A significant portion of our
expenses are fixed in advance. In addition, we have experienced and expect to continue to experience significant expenses related to acquisitions and the
development of new products and services. Our success as a technology-based company focused on roadway intelligence will require us to generate
sufficient new revenues from the roadway intelligence market to support our business plan while continuing to operate as a public company. As a result, we
may continue to experience operating losses and net losses in the future, which would make it difficult to fund operations and achieve our business plan and
could cause the market price of our common stock to decline.
The market for certain of our solutions is new and unproven, may decline or experience limited growth and is dependent in part on our ability to attract
new customers to adopt our platform and use our services.
The market for an ecosystem that connects government agencies, service providers and, ultimately, drivers is relatively new and some aspects of it are
unproven, therefore, it is subject to several risks and uncertainties. We believe that our future success will significantly depend in large part on the growth,
if any, of this market. The use of advanced vehicle recognition systems and marketplace data to obtain data on vehicles, drivers and the environment is still
relatively new and potential customers may not recognize the need for, or benefits of, our platform and solutions. Moreover, if they do not recognize the
need for and benefits of our platform and solutions, they may decide to adopt alternative services to satisfy some portion of their business needs.
Our ability to expand the market that our platforms and solutions address depends upon a number of factors, including the cost, performance and
perceived value associated with them. The market for our platforms and solutions could fail to grow significantly or there could be a reduction in demand
for its services as a result of a lack of acceptance, technological challenges, competing services, decreases in spending by current and prospective
customers, weakening economic conditions and other causes. If our market does not experience significant growth, or demand for our services decreases,
then our business, results of operations, and financial condition could be adversely affected.
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We depend on component and product manufacturing provided by outsourcing partners, most of which are located outside of the U.S.
We rely on outsourcing partners primarily located in Europe and Asia to supply and manufacture many components of substantially all of our hardware
products. Any failure of these partners to perform can have a negative impact on our cost or supply of components or finished goods. In addition,
manufacturing or logistics in these locations or transit to final destinations can be disrupted for a variety of reasons, including natural and man-made
disasters, information technology system failures, commercial disputes, military actions, economic, business, labor, environmental, public health or
political issues, or international trade disputes.
Our internal investments and go-to-market strategy may place downward pressure on our operating margins.
To increase our revenue growth, we continue to invest in our business, including investments into new markets and in innovation and product
development to expand the suite of solutions we provide to our customers. Our operating margins experience downward pressure in the short term as a
result of these investments. Furthermore, our investments may not produce the expected results. If we are unable to successfully execute our go-to-market
strategy and product development activities, we may experience continued losses.
We have not been a leading provider of traffic management and public safety products and services in the past and do not have the level of established
contacts and existing business relationships that some of our competitors have.
Although it is growing, our presence in the transportation and public safety markets has been limited. As a result of this, although we believe our
products and services have significant competitive advantages, we may encounter difficulties in establishing widespread market acceptance of our products
in various markets and regions. Early successes in penetrating these markets and regions may not be able to be sustained once our ability to compete with
our more established competitors comes to their attention. They may seek to develop more competitive products before their existing contracts expire,
reduce prices, use to advantage their past association as a trusted provider and their superior financial and marketing resources and use other stratagems to
competitive advantage, which could significantly impact our ability to continue to grow.
We may need to raise additional capital in the future, which may not be available on acceptable terms, or at all.
We have experienced fluctuations in earnings and cash flows from operations from year to year. To support business growth, or if our business
declines, we may need to raise additional capital to support operations, pursue acquisitions or expand our operations. Such additional capital may be raised
through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on
acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders.
Our capital requirements will depend on many factors, including, but not limited to: our ability to increase revenue, reduce net losses and generate net
income; market acceptance of our services, and the overall level of sales of our services; our need to respond to technological advancements and our
competitors’ introductions of new products, services or technologies; our ability to control costs; promptness of customer payments; our ability to
successfully negotiate arrangements with credit providers; and enhancements to subsidiaries’ infrastructure and systems.
If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be
reduced, and such securities may have rights, preferences and privileges senior to our common stock. Additional equity or debt financing may not be
available on favorable terms, on a timely basis, or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to
continue our operations as planned, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or
respond to competitive pressures, or we may be forced to sell assets at prices below their stated value.
If we experience declining or flat revenues and fail to manage such declines effectively, we may be unable to execute our business plans and may
experience future weaknesses in operating results.
To achieve future growth, we will need to continue to employ qualified personnel and invest in additional research and development and sales and
marketing activities, which could limit our ability to reduce expenses or lead to increases in our expenses and result in future declines in operating results.
In addition, our future expansion is expected to place a significant strain on our managerial, administrative, operational, financial and other resources. If we
are unable to manage these activities or any revenue declines successfully, our business, financial condition and results of operations could be adversely
affected.
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If we are unable to retain our existing customers, our revenue and results of operations would be adversely affected.
Customers have no obligation to renew their contracts or subscriptions after they expire, and these contracts and subscriptions may not be renewed on
the same or more profitable terms. In addition, many of our large governmental contracts are subject to termination on short notice without cause. As a
result, our ability to sustain our revenue base depends in part on contracts and subscription renewals. We may not be able to accurately predict future trends
in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction
with our products and services, the prices of our services, the prices of the products and services offered by our competitors or reductions in our customers’
spending levels. If our customers do not renew their contracts and subscriptions for our products and services, renew on less favorable terms, or do not
purchase additional functionality, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.
Our sales cycles for commercial and government clients can be long, unpredictable and require considerable time and expense, which may cause our
operating results to fluctuate.
The timing of our revenue from sales to commercial and government clients is difficult to predict. These efforts require us to educate our clients about
the use and benefit of our services, including the technical capabilities and potential cost savings to an organization. Commercial clients typically undertake
a significant evaluation and pilot testing process that has in the past, resulted in lengthy sales cycles, typically several months. We spend substantial time,
effort and money on our commercial sales efforts without any assurance that these efforts will produce any sales. In addition, subscriptions are frequently
subject to budget constraints and unplanned administrative, processing and other delays. If sales expected from a specific client for a particular reporting
period are not realized in that period or at all, our results could fall short of expectations and our business, operating results and financial condition could be
adversely affected.
Industry consolidation may result in increased competition.
Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer a more
comprehensive service than they had offered individually. In addition, new entrants not currently considered to be competitors may enter the market
through acquisitions, partnerships or strategic relationships. We expect these trends to continue as companies attempt to strengthen or maintain their market
positions. Many of the companies driving this trend have significantly greater financial, technical and other resources than we do and may be better
positioned to acquire and offer complementary services and technologies. Such combinations and realignments may create more compelling service
offerings or offer greater pricing flexibility than we can or may engage in business practices that make it more difficult for us to compete effectively,
including on the basis of price, sales and marketing programs, technology or service functionality. These pressures could result in a loss of customers,
reduction in revenues or limitation on our ability to grow.
We may not be able to respond to rapid technological changes in time to address the needs of our customers, which could have a material adverse effect
on our sales and profitability.
The cloud-based services and AI-based product markets in which many of our products and services compete are characterized by rapid technological
change, frequent introduction of new products and services and evolving industry standards. Our ability to remain competitive will depend in large part on
our ability to continue to enhance our existing products and services and develop new service offerings that keep pace with these markets’ rapid
technological developments. Additionally, to achieve market acceptance, we must effectively anticipate and offer products and services that meet changing
client demands in a timely manner. Clients may require features and capabilities that our current products and services do not have. If we fail to develop
products and services that satisfy customer requirements in a timely and cost-effective manner, our ability to renew subscriptions with existing clients and
our ability to create or increase demand for our products and services will be harmed, and our revenue and results of operations would be adversely
affected.
The success of our business will depend, in part, on the continued services of certain key personnel and our ability to attract and retain qualified
personnel.
The success of our business will depend, in part, on the continued services of certain members of our management. Our inability to attract and retain
qualified personnel could significantly disrupt our business.
Although we take prudent steps to retain key personnel, we face competition for qualified individuals from numerous professional services and
technology companies. For example, our competitors may be able to attract and retain more qualified professional and technical personnel by offering more
competitive compensation packages. If we are unable to attract new personnel and retain our current personnel, we may not be able to develop and maintain
our services at the same levels as our competitors and we may, therefore, lose potential customers and sales penetration in certain markets. It may also be
difficult to attract and retain qualified individuals in the timeframe demanded by our clients. Furthermore, some of our contracts may require us to employ
only individuals who have particular government security clearance levels.
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We may fail to realize the anticipated benefits of acquisitions which we consummate, and we may be subject to business uncertainties.
Uncertainties about the effect of our recent and planned acquisitions on employees and customers may have an adverse effect on our Company. These
uncertainties may impair our ability to attract, retain and motivate key personnel for a period of time after the acquisitions, and could cause customers,
suppliers and others that deal with us to seek to change existing business relationships with us, which may have an adverse effect on our Company.
Employee retention may be particularly challenging, as employees may experience uncertainty about their future roles with us.
The achievement of the benefits expected from the integration of acquired companies may require us to incur significant costs. The incurrence of any
such costs, as well as any unexpected costs or delays, in connection with such integration, could have a material adverse effect on our business, operating
results or financial condition.
We may be required to write-down certain assets after completing our required annual evaluations, which may affect our reported financial results.
The initial determination of the fair value of assets we acquire upon consummation of an acquisition is based upon an internal valuation. We are
required to analyze the carrying value of our acquired intangibles and goodwill on an annual basis going forward. After the detailed annual evaluation of
the carrying value of the intangible assets, as supported by external analysis, we may be required to make adjustments to our consolidated balance sheet
and/or statement of operations. Any adjustments will affect our reported financial results.
Our operating results may be harmed if we are required to collect sales or other related taxes for our licensing and subscription products and services
or pay regulatory fees in jurisdictions where we have not historically done so.
Primarily due to the nature of our cloud-based services in certain states and countries, we do not believe we are required to collect sales or other related
taxes from our customers in certain states or countries. However, one or more other states or countries may seek to impose sales, regulatory fees or other
tax collection obligations on us, including for past sales by us or our resellers and other partners. A successful assertion that we should be collecting sales
or other related taxes on our services or paying regulatory fees could result in substantial tax liabilities for past sales, discourage customers from purchasing
our services or otherwise harm our business and operating results.
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Improper disclosure of confidential and personal data could result in liability and harm to our reputation.
Our handling and storage of the data we collect from some of our customers, vendors and employees, and our processing of data, which may include
confidential or personally identifiable information, through the services we provide, may be subject to a variety of laws and regulations, which have been
adopted by various federal, state and foreign governments to regulate the collection, distribution, use and storage of personal information of individuals.
Several foreign countries in which we conduct business, including the European Economic Area (“EEA”) and Canada, currently have in place or have
recently proposed, laws or regulations concerning privacy, data protection and information security, which are more restrictive than those imposed in the
United States. Some of these laws are in their early stages and we cannot yet determine the impact these revised laws and regulations, if implemented, may
have on our business. However, any failure or perceived failure by us to comply with these privacy laws, regulations, policies or obligations or any security
incident that results in the unauthorized release or transfer of personally identifiable information or other customer data in our possession, could result in
government enforcement actions, litigation, fines and penalties and/or adverse publicity, all of which could have an adverse effect on our reputation and
business.
For example, the EEA wide General Data Protection Regulation (“GDPR”) became applicable on May 25, 2018, replacing the data protection laws of
each EEA member state. The GDPR implemented more stringent operational requirements for processors and controllers of personal data, including, for
example, expanded disclosures about how personal information is to be used, limitations on retention of information, increased requirements to erase an
individual’s information upon request, mandatory data breach notification requirements and higher standards for data controllers to demonstrate that they
have obtained valid consent for certain data processing activities. It also significantly increases penalties for non-compliance, including where we act as a
service provider (e.g. data processor). If our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may
be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data or our marketing practices,
fines, for example, of up to 20 million Euros or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is higher) under
the GDPR, or other liabilities, as well as negative publicity and a potential loss of business.
Data protection regulation remains an area of increased focus in all jurisdictions and data protection regulations continue to evolve. There is no
assurance that we will be able to meet new requirements that may be imposed on the transfer of personally identifiable information from the EU to the
United States without incurring substantial expense or at all. European and/or multi-national customers may be reluctant to purchase or continue to use our
services due to concerns regarding their data protection obligations. In addition, we may be subject to claims, legal proceedings or other actions by
individuals or governmental authorities if they have reason to believe that our data privacy or security measures fail to comply with current or future laws
and regulations.
Moreover, we must ensure that certain vendors and customers who have access to such information also have the appropriate privacy policies,
procedures and protections in place. Although we take customary measures to protect such information, the continued occurrence of high-profile data
breaches provides evidence of an external environment increasingly hostile to information security. If our security measures are breached as a result of
third-party action, employee or subcontractor error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to customer data, our
reputation may be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage
systems change frequently and are growing increasingly sophisticated. As a result, we may be unable to anticipate these techniques or to implement
adequate preventative measures.
This environment demands that we continuously improve our design and coordination of security controls throughout our business. Despite these
efforts, it is possible that our security controls over data, training and other practices we follow may not prevent the improper disclosure of personally
identifiable or other confidential information.
If an actual or perceived breach of our security occurs, we could be liable under laws and regulations that protect personal or other confidential data
resulting in increased costs or loss of revenues and the market perception of our services could be harmed.
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Our business could be negatively impacted by cyber and other security threats or disruptions.
We face various cyber and other security threats, including attempts to gain unauthorized access to sensitive information and networks; insider threats;
threats to the security of our facilities and infrastructure; and threats from terrorist acts or other acts of aggression. Cyber threats are constant and evolving
and include, but are not limited to, computer viruses, malicious software, destructive malware, attacks by computer hackers attempts to gain unauthorized
access to data, disruption or denial of service attacks, and other electronic security breaches that could lead to disruptions in mission critical systems,
unauthorized release or loss of confidential, personal or otherwise protected information (ours or that of our employees, customers or subcontractors), and
corruption of data, networks or systems. In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use
or in our partners’ or customers’ systems that are used in connection with our business. Our clients and subcontractors face similar threats and/or they may
not be able to detect or deter them, or effectively mitigate resulting losses. These threats could damage our reputation as well as our subcontractor’s ability
to perform and could affect our client’s ability to pay.
Although we use various procedures and controls to monitor and mitigate the risk of these threats to us, our clients and our partners, there can be no
assurance that these procedures and controls will be sufficient. The impact of these factors is difficult to predict, but one or more of them could result in the
loss of information or capabilities, harm to individuals or property, damage to our reputation and/or require remedial actions or lead to loss of business,
regulatory actions potential liability and financial loss, any one of which could have a material adverse effect on our financial position, results of operations
and/or cash flows.
We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and telecommunications
systems, our customer and worker relationships and our ability to attract new customers may be adversely affected.
Our business could be interrupted by damage to or disruption of our computer, telecommunications equipment, software systems, or software
applications. Our customers’ businesses may be adversely affected by any system, application or equipment failure we experience. As a result of any of the
foregoing, our relationships with our customers may be impaired, we may lose customers, our ability to attract new customers may be adversely affected
and we could be exposed to contractual liability. Precautions in place to protect us from, or minimize the effect of, such events may not be adequate.
In addition, the failure or disruption of mail, communications and/or utilities could cause an interruption or suspension of our operations or otherwise
harm our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any
system or operational failure or disruption and, as a result, revenue, profits and operating results could be adversely affected.
If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive, and the demand for
our services will likely decline.
The markets in which we operate are in general characterized by the following factors: changes due to rapid technological advances; additional
qualification requirements related to technological challenges; and evolving industry standards and changes in the regulatory and legislative environment.
Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards and to effectively develop,
introduce, market and gain broad acceptance of new product and service enhancements incorporating the latest technological advancements.
A downturn of the U.S. or global economy or in our ability to provide customers with a sustained level of support could result in our customers using
fewer products and services or becoming unable to pay us for our services on a timely basis or at all, which would materially adversely affect our
business.
Because demand for our solutions and services are sensitive to changes in the level of economic activity, our business may suffer during economic
downturns. During periods of weak economic growth or economic contraction, the demand for outsourced services could decline. In addition, market
forces may restrict our ability to sustain funding for our sales and support efforts. When the level of demand for our products and services drops, our
operating profit could be impacted unfavorably because expenses may not decline as quickly as revenues. In these periods, we can only reduce selling and
administrative expenses to a certain level without negatively impacting the long-term potential of our business.
Additionally, during economic downturns, government agencies and companies may slow the rate at which they pay their vendors, or they may
become unable to pay their obligations. If our customers become unable to pay amounts owed to us or pay us more slowly, then our cash flow and
profitability may suffer significantly.
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Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations, which could subject our business to
higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can offset future taxable income for U.S. federal and state income tax
purposes. As of December 31, 2023, we had gross federal and state net operating loss carryforwards, or NOLs, of approximately $156,392,000 and
$149,122,000, respectively. A lack of future taxable income could adversely affect our ability to use these NOLs. In addition, future changes in our stock
ownership, including through acquisitions, could result in ownership changes under Section 382 of the Internal Revenue Code and may result in a
limitation on the amount of NOL carryforwards that could be used annually to offset future taxable income and taxes payable. Our NOLs at December 31,
2023 may also be impaired under similar provisions of state law and may expire unused or underused, which would prevent us from using our NOL
carryforwards to offset future taxable income.
Assertions by a third party that our services and solutions infringe its intellectual property, whether or not correct, could subject us to costly and time-
consuming litigation or result in settlements or licensing arrangements that could affect our short-term or long-term profitability.
There is frequent litigation in the software and technology industries based on allegations of infringement or other violations of intellectual property
rights. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel
or require us to develop non-infringing technology or enter into license agreements. Because of the potential for court awards that are difficult to predict, it
is not unusual to find even arguably unmeritorious claims settled for significant amounts. In addition, our service agreements may require us to indemnify
our customers from certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and
may require that we pay damages if there were an adverse ruling related to any such claims. Competitors may also seek to use these claims and the
pendency of associated litigation as a means of attempting to discredit us or make potential customers fearful of using us, which could harm our
relationships with our customers, deter future customers from subscribing to our services or expose us to further litigation. These costs, monetary or
otherwise, associated with defending against third-party allegations of infringement could have negative effects on our business, financial condition and
operating results.
If our services are used to commit intentional or illegal acts, we may incur significant liabilities, our services may be perceived as not secure, and
customers may curtail or stop using our services.
Certain services offered by us enable customers to capture data from video images. Although our service agreements require our customers to comply
with all applicable laws, we do not exercise direct control overuse or content of information obtained by our customers through the use of our services. If
our services are used by others to commit bad or illegal acts, we may become subject to claims and subject to other potential liabilities. Defending against
such claims could be expensive and time-consuming, and there is a possibility that we could incur significant liability to entities who were harmed by such
acts. As a result, our business may suffer, and our reputation may be damaged.
We use a limited number of data centers to deliver our services. Any disruption of service at these facilities could harm our business.
Our cloud-based services are hosted from third-party data center facilities located in various parts of the United States. We also use these facilities for
some of our development efforts. We do not control the operation of these facilities. The owners of these data center facilities have no obligation to renew
their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we
may be required to transfer to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so. In
addition, our operations and development efforts could be seriously affected by failures or interruptions in service at these facilities. Any changes in third-
party service levels at these third-party data centers or any errors, defects, disruptions or other performance problems with our services related to the non-
performance of these facilities could harm our reputation and may damage our clients’ businesses. Interruptions in our services might reduce our revenue,
cause us to issue credits to clients, subject us to potential liability, cause clients to terminate their subscriptions or harm our renewal rates.
Our data centers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires,
war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural
disaster, an act of terrorism, vandalism or other misconduct, a decision to close the facilities without adequate notice or other unanticipated problems could
result in lengthy interruptions in our services.
Our long-term success depends, in part, on our ability to expand the sales of our services to customers located outside of the United States, and thus our
business is susceptible to risks associated with international sales and operations.
Conducting international operations subjects us to other risks than those we have generally faced in the United States. These risks include: localization
of our services and adaptation for local practices, differences in local, legal standards and regulatory requirements; difficulties in managing and staffing
international operations; fluctuations in currency exchange rates; dependence on customers, third parties, and channel partners with whom we do not have
extensive experience; potentially adverse tax consequences, including the complexities of foreign value-added or other tax systems; reduced or varied
protection for intellectual property rights in some countries; and increased financial accounting and reporting burdens and complexities. Operating in
international markets also requires significant management attention and financial resources. The investment and additional resources required to establish
operations and manage growth in other countries may not produce desired levels of revenue or profitability.
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Our success depends in part on our ability to protect and enforce our intellectual property rights.
We rely on a combination of trade secret, patent, copyright, service mark and trademark laws, as well as confidentiality procedures and contractual
restrictions, to establish and protect our intellectual property rights, all of which can provide only limited protection. In addition, we have not patented
significant technologies used to provide our services. We cannot assure you any future patents that may be applied for and issued will not be challenged,
invalidated or circumvented. Any patents that we may issue in the future from future patent applications may not provide sufficiently broad protection or
they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark or trademark
registrations will be issued for pending or future applications or that any registered service marks or trademarks will be enforceable or provide adequate
protection of our proprietary rights.
We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access to
and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our
technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. Enforcement of our
intellectual property rights also depends on our successful legal actions against these infringers, but these actions may not be successful, even when our
rights have been infringed.
Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our
services are available. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in
Internet-related industries are uncertain and still evolving.
Material defects or errors in the software that we use to deliver our services could harm our reputation, result in significant costs to us and impair our
ability to sell our solutions.
The software applications underlying our products and services are inherently complex and may contain material defects or errors, particularly when
first introduced or when new versions or enhancements are released. Any defects that cause interruptions to the availability of our products and services
could result in: a reduction in sales or delay in market acceptance of our services; sales credits or refunds to customers; loss of existing customers and
difficulty in attracting new customers; reputational harm; and diversion of internal resources. The costs incurred in correcting any material defects or errors
in our products and services may be substantial and could harm our operating results.
Government regulation of the Internet, telecommunications and other communications technologies could harm our business and operating results.
As internet commerce and telecommunications continue to evolve, increasing regulation by federal, state or foreign governments and agencies
becomes more likely. Any increase in regulation could affect our clients’ ability to collect and share data, potentially reducing demand for our products and
services. In addition, taxation of products and services provided over the Internet or other charges imposed by government agencies or by private
organizations for accessing the Internet or utilizing telecommunications services may also be imposed. Any regulation imposing greater fees for internet
use or restricting the exchange of information over the internet could diminish the viability of our services, which could harm our business and operating
results.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage our business
and operating results.
In the event of natural disasters, public health crises, such as pandemics and epidemics, including from the continued effects of the COVID-19
pandemic, political crises, such as terrorism, war, political instability or other conflicts, or other events outside of our control, our business and operating
results could suffer. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity,
globally, which could adversely impact our operating results.
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Risks relating to our common stock
If securities or industry analysts do not publish research or publish inaccurate or unfavorable reports about our business, our stock price and trading
volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our
business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our
shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease covering us or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Sales of a substantial number of shares of our common stock may cause the price of our common stock to decline.
As of March 25, 2024, we have a total of 85,324,918 shares of common stock outstanding. Based on shares outstanding as of March 25, 2024,
4,388,872 shares of common stock, or 5.1%, are beneficially owned by our officers, directors and their affiliated entities, and will be subject to volume
limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, 12,395,649 shares of our common stock that are subject to
outstanding options, restricted stock units and warrants as of March 25, 2024, will become eligible for sale in the public market to the extent permitted by
the provisions of various vesting agreements, and Rules 144 and 701 under the Securities Act.
We cannot predict what effect, if any, sales of our shares in the public market or the availability of shares for sale will have on the market price of our
common stock. However, future sales of substantial amounts of our common stock in the public market, including shares issued on exercise of outstanding
options, or the perception that such sales may occur, could adversely affect the market price of our common stock.
The market price of our common stock may be volatile and this may adversely affect our stockholders.
The price at which our common stock trades may be volatile. The stock market can experience significant price and volume fluctuations that affect the
market prices of all securities, including securities of companies like us. The market price of our common stock may be influenced by many factors,
including:
• our operating and financial performance;
• variances in our quarterly financial results compared to expectations;
• future sales of common stock or debt or the perception that sales could occur;
• investor perception of our business and our prospects;
• developments relating to the occurrence of risks impacting our company, including any of the risk factors set forth herein; or
• general economic and stock market conditions.
In addition, the stock market in general has experienced price and volume fluctuations that have often been unrelated to or disproportionate to the
operating performance of companies in our industry. These broad market and industry factors may materially reduce the market price of our common stock,
regardless of our operating performance.
Investors may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or
exchangeable for our common stock. We cannot assure investors that we will be able to sell shares or other securities in any other offering at a price per
share that is equal to or greater than the price per share paid by investors, and investors purchasing our shares or other securities in the future could have
rights superior to existing stockholders. The price per share at which we may sell additional shares of our common stock or other securities convertible into
or exchangeable for our common stock in future transactions may be higher or lower than the price per share paid by investors.
We do not intend to pay dividends on our common stock for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends on our common stock in the
foreseeable future. We currently anticipate that for the foreseeable future we will retain all of our future earnings for the development, operation and growth
of our business and general corporate purposes. Any future determination to pay dividends on our common stock will be at the discretion of our Board of
Directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any
future gains on their investments.
Our executive officers, directors, principal stockholders and their affiliates will continue to exercise significant influence over our company, which will
limit your ability to influence corporate matters and could delay or prevent a change in corporate control.
As of March 25, 2024, our executive officers, directors, five percent or greater stockholders and their respective affiliates owned in the aggregate
approximately 5.1% of our common stock.
These stockholders have the ability to influence us through this ownership position and may have a determining role in matters requiring stockholder
approval. For example, these stockholders may be able to ultimately determine elections of directors, amendments of our organizational documents, or
approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for
our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always
coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those
of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.
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We are a “smaller reporting company” and, as a result of the reduced disclosure and governance requirements applicable to smaller reporting
companies, our common stock may be less attractive to investors.
We are currently a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned
subsidiary of a parent company that is not a “smaller reporting company,” and have had annual revenues of less than $100 million and public float of less
than $700 million during the most recently completed fiscal year. As a “smaller reporting company,” we are subject to lesser disclosure obligations in our
SEC filings compared to other issuers. Specifically, "smaller reporting companies" are able to provide simplified executive compensation disclosures in
their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms
provide an attestation report on the effectiveness of internal control over financial reporting and have certain other decreased disclosure obligations in their
SEC filings, including, among other things, only being required to provide two years of audited consolidated financial statements in annual reports.
Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors to analyze our operating
results and financial prospects.
Delaware law and provisions in our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby
depressing the trading price of our common stock.
The anti-takeover provisions of the Delaware General Corporation Law, or the DGCL, may discourage, delay or prevent a change of control by
prohibiting us from engaging in a business combination with stockholders owning in excess of 15% of our outstanding voting stock for three years after the
person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of
incorporation and bylaws contain provisions that may make the acquisition of our company more difficult, including that: the request of one or more
stockholders holding shares in the aggregate entitled to cast not less than 35% of the vote at a meeting is required to call a stockholder meeting. These
provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us
to take certain actions you desire.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBERSECURITY
Rekor recognizes the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information
systems and protect the confidentiality, integrity, and availability of our data and our exposure management solutions. Our assessment and management of
material risks from cybersecurity threats are integrated into our overall risk management processes. We implement and maintain various technical, physical,
and organizational measures, processes, standards and policies designed to manage and mitigate material risks from cybersecurity threats to our
information systems and data depending on the environment.
We have an established policy on information security, as well as overall corporate information, workforce and workplace standards policies. These are
collectively designed to establish auditable procedures for information security oversight by management, including: 1) identification of different types and
forms of information, 2) guidelines for acceptable use and dissemination of information, 3) handling use and destruction of information, 4) personnel and
physical site security, 5) incident reporting and response, 6) recovery plans, and 7) standards for web-based applications, communications and mobile
devices. Three levels of security procedures have been identified as relating to the sensitivity of the information we manage in connection with different
operations. Our policies call for the individuals assigned to these procedures to review and certify them annually and to recommend changes where
appropriate. All breaches are required to be reported to senior management and the Board, together with a report on response and recovery, as well as
recommendations to address further challenges.
Our information security procedures are overseen by our Chief Information Security Officer, supported by our Chief Technology Officer and our IT
Manager, who are responsible to provide regular reports to our Chief Executive Officer and Chief Financial Officer as well as the technology and social
responsibility committee and the governance committee of our Board. These procedures are responsible for identifying, assessing, and managing
cybersecurity threats and risks and work to monitor and evaluate our threat environment and risk profile using various methods. These methods include
evaluating our and our industry’s risk profile, coordinating with law enforcement concerning select threats, and engaging with third parties to conduct
external audits and threat assessments for certain systems.
Our Information Security Policy and procedures are reviewed on an ongoing basis. These procedures are implemented by our Chief Information
Security Officer, assisted by Managed Service Provider (“MSP”). Our MSP has over 15 years of experience and possesses various cybersecurity
certifications. Third-party service providers can assist us from time to time in identifying, assessing, and managing material risks from cybersecurity
threats, including for example cybersecurity consultants and software providers, managed cybersecurity service providers, threat intelligence service
providers, forensic investigators, penetration testing firms, dark web monitoring services, and professional services firms, including legal counsel and
auditors. By partnering with these specialized providers, we can leverage their insights and expertise to implement cybersecurity strategies and processes
that are designed to align with industry best practices.
Our senior management evaluates material risks from cybersecurity threats against our overall business objectives and this evaluation and the
management of material risks from cybersecurity threats is integrated into our overall risk management processes. This integration is designed to ensure
that cybersecurity considerations are part of our decision-making processes. In addition, the Board’s Technology and Social Responsibility Committee
includes a member who has had extensive experience in cybersecurity, including in particular cybersecurity standards for smart city transportation systems.
See Risk Factors in this Annual Report on Form 10-K for a description of the risks from cybersecurity threats that may materially affect us and how
they may do so.
ITEM 2. PROPERTIES
Our principal executive offices are located at 6721 Columbia Gateway Drive, Suite 400, Columbia, Maryland 21046 and 55a Yigal Alon Street, Tel-
Aviv, Israel. We do not own any real property. We do not consider any of our leased properties to be materially important to us. While we believe it is
necessary to maintain offices through which our services are coordinated, we feel there are sufficient available office rental properties to adequately serve
our needs should we need to relocate or expand our operations.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the
ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property
damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such
lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the
Company’s opinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial
statements as a whole.
Firestorm Principals
On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the
Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no.
1:19-cv-07767-VEC. The Firestorm Principals answered together with counterclaims on February 28, 2020. In 2020, the Firestorm Principals filed various
suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel.
On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals. Pursuant to the terms of the settlement agreement,
the parties have mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or
claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the
Company transferred certain Firestorm assets to CrisisRisk Strategies, LLC, made a payment of $175,000, and the Firestorm Principals extinguished of all
rights to enforce their claims for payment with respect to principal and interest on the promissory notes issued in connection with the Company’s
acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same.
As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities
already presented as discontinued operations. The Company also cancelled warrants to purchase 631,254 shares of common stock, which were issued in
connection with the acquisition of Firestorm.
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H.C Wainwright & Co., LLC
In March 2023, the Company entered into an engagement letter with H.C. Wainwright & Co., LLC, ("HCW"), related to a previous capital raise the
Company completed in March 2023. That letter agreement contained provisions for both a “tail” fee due to HCW for any subsequent transactions the
Company may enter into during the specified tail period with investors introduced to the Company by HCW during the term of the letter, as well as a right
of first refusal ("ROFR"), to act as the Company's exclusive underwriter or placement agent on any subsequent financing transactions utilizing an
underwriter or placement agent occurring within twelve months from the consummation of a transaction pursuant to the engagement letter.
In July 2023, subsequent to the announcement of an agreement the Company entered into with one of its stockholders in connection with the exercise
of warrants held by the stockholder, which the Company refers to as the July Warrant Exercise Transaction, the Company received a letter from HCW
claiming entitlement to certain “tail” fees and warrant consideration stemming from the agreement with the Company's stockholder. The Company believed
then, and believes now, that this claim is without merit. As a result of this claim and for other reasons articulated to HCW, the Company terminated its
engagement letter with HCW, including for cause, which, the Company believes, eliminated both the “tail” provision and the ROFR provision with respect
to this transaction.
On or about October 23, 2023, HCW filed a complaint in New York State Supreme Court asserting a claim for breach of contract against the Company
relating to the July Warrant Exercise Transaction. HCW sought to recover compensatory and consequential damages and certain warrants under its letter
agreement with Rekor and other fees, not less than a cash fee of $825,000 and the value of warrants to purchase an aggregate of up to 481,100 shares of
common stock of the company at an exercise price of $2.00 per share as well as attorneys’ fees. On February 29, 2024, HCW filed a notice of
discontinuance without prejudice and advised the court that it intends to commence a new proceeding by filing a new complaint that would address the
claim in this lawsuit and subsequent events. On March 4, 2024, the court discontinued this lawsuit without prejudice.
On February 29, 2024, HCW initiated a new action with the filing of complaint in New York State Supreme Court. In this lawsuit, HCW advances the
same breach of contract theory and seeks to recover the same damages as sought in the prior now-dismissed lawsuit. In addition, HCW seeks to recover an
additional $2,156,000 in damages plus the value of warrants to purchase an aggregate of up to 805,000 shares of common stock at an exercise price of
$3.125 per share in connection with Rekor’s February 2024 offering. HCW alleges that Rekor breached its engagement letter with HCW by failing to give
Rekor notice of this offering and failing to provide HCW with the opportunity to exercise the ROFR with respect to this transaction.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
Occupational Safety and Health Administration (“OSHA”) Claim
In 2023 two previous employees of the Company (the “Claimants”) filed a complaint with OSHA (the “OSHA Complaints”) against the Company.
Shortly after the OSHA Complaints were filed against the Company, the Company filed a position statement to address the OSHA Complaints.
On November 30, 2023, OSHA issued its determination that, based on the information gathered thus far in its investigation, OSHA was unable to conclude
that there was reasonable cause to believe that a violation of the statute occurred. OSHA thereby dismissed the complaint.
Thereafter, Claimants appealed the determination by filing objections and requesting a hearing before an Administrative Law Judge. The Company
likewise filed a request for an award of attorneys’ fees. On January 4, 2024, the Office of Administrative Law Judges (“OALJ”) processed the appeals and
issued its Notice of Docketing and Order of Consolidation. On February 28, 2024, the OALJ issued an Order setting forth a revised schedule governing the
case with the start of the hearing schedule for December 2, 2024.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is listed on the Nasdaq Capital Market under the symbol “REKR”.
Holders
As of March 25, 2024, there were 58 registered holders of record of our common stock, excluding stockholders for whom shares are held in “nominee”
or “street name.” The actual number of common stockholders is greater than the number of record holders and includes stockholders who are beneficial
owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders
whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently do not anticipate paying any cash dividends for the foreseeable
future. Instead, we anticipate that all of our earnings will be used to provide working capital, to support our operations, and to finance the growth and
development of our business, including potentially the acquisition of, or investment in, businesses, technologies or products that complement our existing
business. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of
factors, including, but not limited to, our future earnings, capital requirements, financial condition, future prospects, applicable Delaware law, which
provides that dividends are only payable out of surplus or current net profits and other factors our Board of Directors might deem relevant.
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Recent Sales of Unregistered Securities
STS Acquisition
As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2022, as part of the purchase
price the Company issued to the sellers of STS 798,666 unregistered shares of the Company’s common stock, valued at $2,000,000. The stock
consideration paid to the sellers was issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D,
as promulgated thereunder.
Senior Notes with Warrants
As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on January 18, 2023, the Company
entered into a securities purchase agreement with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in
a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes, and (ii) warrants to purchase up
to an aggregate of 7,500,000 shares of common stock of the Company. In connection with the initial closing on January 18, 2023, the Company issued
$12,500,000 in aggregate principal amount of notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company
of $12,500,000 before reimbursement of expenses.
ATD Acquisition
As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on January 3, 2024, as part of the purchase
price the Company issued to the sellers of ATD 3,496,464 unregistered shares of the Company’s common stock, valued at $10,000,000. The stock
consideration paid to the sellers was issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D,
as promulgated thereunder. On February 27, 2024, the Company filed a registration statement on Form S-3 to register these shares.
2023 Promissory Notes Redemption
On March 4, 2024, the Company completed the redemption of all its outstanding senior secured notes (the “2023 Promissory Notes”). The 2023
Promissory Notes were redeemed at the redemption price of 115% of the $12,500,000 aggregate principal amount of the 2023 Promissory Notes, or
approximately $14,375,000, plus accrued and unpaid interest to the redemption date of approximately $263,000 (the “Redemption Payment”). The
noteholders elected to accept $1,875,000 of the Redemption Payment in the form of 750,000 unregistered shares of the Company’s common stock, par
value $0.0001 per share, having a value of $2.50 per share, with the remainder of the Redemption Payment to be paid in cash.
Use of Proceeds
We have generated losses since our inception and have relied on cash on hand, external bank lines of credit, short-term borrowing arrangements,
issuance of debt, the sale of a note, sale of our non-core subsidiaries, and the sale of common stock to provide cash for operations. We attribute losses to
financing costs, public company corporate overhead, lower than expected revenue, and lower gross profit of some of our subsidiaries. Our cash proceeds
have been primarily used for the acquisitions described above, research and development, legal, financing costs, acquisition costs and sales and marketing
expenses related to new product development and our strategic shift to develop and promote the capabilities of our technology offerings.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes included in this Annual Report and the historical financial statements of Rekor Systems, Inc., and the
related notes thereto.
Overview
Rekor is working to revolutionize public safety, urban mobility, and transportation management using AI-powered solutions designed to meet the
distinct demands of each market we serve. We work hand-in-hand with our customers to deliver mission-critical traffic and engineering services that assist
them in achieving their goals. Our vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways
and communities. We work towards this by collecting, connecting, and organizing the world’s mobility data, and making it accessible and useful to our
customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and
infrastructure planning and reporting.
General
The information provided in this discussion and analysis of Rekor’s financial condition, and results of operations covers the years ended December 31,
2023 and 2022. In 2022, we divested our Automated Traffic Safety Enforcement ("ATSE") business, a non-core business unit. As a result of the divestiture,
we determined that ATSE met the criteria to be considered discontinued and it was no longer presented with continuing operations. Additionally, in 2022,
we completed the acquisition of 100% of the issued and outstanding capital stock of Southern Traffic Services, Inc. ("STS"). This acquisition is included in
the presentation of our continuing operations.
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Acquisitions and Dispositions
On June 17, 2022, we completed the acquisition of STS by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition
included total consideration of $12,799,000 including: cash consideration of $6,500,000, $1,001,000 related to an earnout based on the achievement of
("STS Contingent
certain performance metrics
Consideration"), 798,666 shares of the Company’s common stock, valued at $2,000,000, and a $2,000,000 note.
("STS Earnout") and $1,298,000 contingent on
the closing of a
future contract
On December 6, 2022, we divested our ATSE business, a non-core business unit, for approximately $3,390,000.
On January 2, 2024, we completed the acquisition of All Traffic Data Services, LLC (“ATD”) for an aggregate purchase price of $19,795,000,
consisting of $9,795,000 in cash which included closing adjustments and $10,000,000 of stock consideration.
Opportunities, Trends and Uncertainties
We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that
impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of
operations and financial condition for the foreseeable future will be primarily affected by the following:
● Growing Smart City Market – According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050. The
world’s cities are getting larger, with longer commutes and the resulting impact on the environment and the quality of life. This trend requires
forward-thinking officials to manage assets and resources more efficiently. We believe that advancements in “big data” connected devices and
artificial intelligence can provide Intelligent Transportation System (“ITS”) solutions that can be used to reduce congestion, keep travelers safe,
improve transportation, protect the environment, respond to climate change, and enhance the quality of life. We believe our data-driven, artificial
intelligence-aided solutions provide useful tools that can effectively tackle the challenges cities and communities are facing today and will face over
the coming decades.
● AI for Infrastructure – We believe that the application of AI to the analysis of conditions on roadways and other transportation infrastructure can
significantly affect the safety and efficiency of travel in the future. As vehicles move towards full automation, there is a need for real-time data and
actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g. wrong way vehicles, stopped vehicles, or/and
pedestrians on the roadway. Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of
existing and potential customers in streamlining and accelerating local vehicular flow as well as data about the vehicles on the roadway.
● Connected Vehicle Data – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external
hazards, and driving behaviors. This data is a resource that transportation and other agencies are beginning to find valuable uses for. Notably, the
data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public
agencies. Connected vehicle sensors can provide important information related to hazardous conditions, speed variations, intersection performance,
and more. This data can help agencies and municipalities gain more visibility about conditions on their roads, supplementing data from existing
infrastructure and allowing transportation information from rural areas that are not served by ITS infrastructure to be integrated into the overall
analysis.
● New and Expanded Uses for Vehicle Recognition Systems – We believe that reductions in the cost of vehicle recognition products and services will
significantly broaden the market for these systems. We currently serve many users who could not afford the cost, or adapt to the restrictions of,
conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new
applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions that
are testing vehicle recognition systems or that issued requests for proposals to install a network of vehicle recognition sensors. We also expect the
availability of faster, higher-accuracy, lower-cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion
and implement smart city programs.
● Adaptability of the Market – We have made a considerable investment in our advanced vehicle recognition systems because we believe their
increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. Based
on published benchmarks, our software currently outperforms competitors. However, large users of existing technology, such as toll road operators,
have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the
improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing
providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to
develop their own systems or secure advanced systems from others who are also working to develop them. As a result, our success in establishing a
major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and
maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources.
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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 and registration requirements. Communities are currently searching for better means of achieving compliance with minor vehicle
offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses. For example, due to high rates of
fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states are considering authorizing automated
enforcement of violations where motorists fail to slow down and/or move over for emergency responders and law enforcement vehicles at the side of
the road. To the extent that legislative implementation is required, a deliberative and necessarily time-consuming process is involved. However, as
states expand auto-enforcement, the market for these products and services should broaden in the public safety market.
● Graphic Processing Unit (“GPU”) Improvements – We expect our business to benefit from more powerful and affordable GPU hardware that has
recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than
general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams. GPUs
also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have
been designed to use the increased GPU speeds to accelerate image recognition. The GPU market is predicted to grow as a result of a surge in the
adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors. As GPU manufacturers increase production volume, we hope to
benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.
● Edge Processing – Demand for actionable roadway information continues to grow in parallel with sensor improvements, such as increasingly
sophisticated internal software and optical and other hardware adapted to the use of this software. Over the last several decades, sensors have
evolved and unlocked new capabilities with each advancement. Further, cellular networks have been optimized for downloading data rather than
uploading data. As a result, while download speeds have improved significantly due to large investments in cellular infrastructure, this has resulted
in relatively small improvements to cellular upload speeds. With roadside deployments experiencing explosive growth in count and density,
scalability, latency and bandwidth have become aspects of competition in the market. Our systems have been designed to address these issues
through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and
continual improvements in the efficiency of our AI algorithms. Our edge processing systems ingest local HD video streams at the source and convert
the raw video data to text data, dramatically reducing the volume of data that needs to be transferred through the network. Edge processing allows us
to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that are experienced by other networks where raw
video needs to be streamed to the cloud for processing.
● Accelerated Business Development and Marketing – Our ability to compete in a large, competitive and rapidly evolving industry will require us to
achieve and maintain a visible leadership position. As a result, we have made significant investments in our business development, marketing and
eCommerce activities to increase awareness and market adoption of our products and services within key markets. We anticipate that a sustained
presence in the market, the continued development of strategic partnerships and other economies of scale will reduce the level of costs necessary to
support sales of our products and services. However, the speed at which these markets grow to the degree to which our products and services are
adopted is uncertain.
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● Infrastructure Investment and Jobs Act (“IIJA”) and the Bipartisan Infrastructure Law (“BIL”) - The IIJA, signed into law on November 15, 2021,
provides for significant national investments in the transportation systems in the United States, including over $150 billion in new spending on
roadway infrastructure, including intelligent transportation systems. We believe that our comprehensive offering of solutions positions the Company
well to emerge as a technology leader in the expanded market for roadway intelligence that will benefit from this legislation. We have identified
opportunities to access federal funding streams, and we are working to implement a program that capitalizes on this unprecedented U.S. federal
investment in public safety, homeland security, and transportation infrastructure and ensures that our customers are positioned to capture as much of
this extraordinary government spending as possible. Beyond the many recurring federal grant programs that could support customer purchases, and
the $350 billion in American Rescue Plan Act allocations that public agencies are receiving now, we are particularly excited about the prospect of
benefitting from the following new grant sources that are contained in the IIJA: $200 million annually for a “Safe Streets and Roads for
All” program that would make competitive grants for state projects that significantly reduce or eliminate transportation-related fatalities. $150
million for the current administration to establish a grant program to modernize state data collection systems $500 million for the Strengthening
Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that
improve transportation efficiency and safety.
● Recent Acquisitions - Over the past two years, Rekor has acquired two subsidiaries as part of its plans to advance its appeal to national and local
transportation agencies. In the first of these acquisitions, we acquired a leader in the development of predictive analytics for traffic management
using a combination of internally generated and third party data sources. This acquisition was designed to assure transportation agencies that we
were developing the most advanced data analysis systems to support their missions in safety and efficiency. In the second acquisition, we acquired
one of the leading existing providers of traffic data services in the United States. Uniquely, this Company had innovated a change in the service
model from providing, servicing and maintaining agency resources to a data services model where overlapping entities could benefit from our
modular approach to data collection and dissemination. Each of these acquisitions has led to increased visibility for the Company among national
and state level DOTs in the United States and Israel.
● Challenges to Executing on the Corporate Strategy – As an acquirer and integrator of established technology companies in the ITS industry, there is
an inherent risk associated with the successful implementation and execution of the strategy. If Rekor is unable to successfully implement and
execute its plans, there could be a material and adverse effect on the Company’s business, results of operations, and financial condition.
● Inability to Achieve Profitability - Rekor continues to grow its business, its operating expenses and capital expenditures have increased, and it has
not yet achieved the level of sustaining profitability. As a result, if the Company is unable to generate additional revenue or achieve planned
efficiencies in operations, or if its revenue declines significantly, Rekor may not be able to achieve profitability in the future, which would materially
and adversely affect the Company’s business.
● Inability to Retain Qualified Personnel – Rekor’s success depends on the continued efforts and abilities of the senior management team and key
engineering and marketing specialists. Although Rekor has employment agreements with these employees, they may not choose to remain employed
by Rekor. Should one or more key personnel leave the Company or join a competitor, the Company’s business, operating results, and financial
condition can be adversely affected.
● Inability to Compete Effectively - Competition and technological advancements by others may erode the Company’s business and result in inability
to capture new business and revenue. Each business line faces significant competitive pressures within the markets in which they operate. While
Rekor continues to work to develop and strengthen its competitive advantages, many factors such as market and technology changes may erode or
prevent this. If the Company is unable to successfully maintain its competitive advantage, the Company’s business, operating results, and financial
condition can be adversely affected.
● Cyber Security Risks - Rekor relies on information technology in all aspects of its business. A significant disruption or failure in the information
technology systems could result in services interruptions, safety failures, security violations, regulatory compliance failures, an inability to protect
information and assets against intruders, and other operational difficulties. This could result in the loss of assets and critical information and expose
the Company to remediation costs and reputational damage. Although Rekor takes reasonable steps intended to mitigate these risks, a significant
disruption or cyber intrusion could lead to misappropriation of assets or data corruption and could adversely affect the Company’s results of
operations, financial condition, and liquidity.
● Intellectual Property Claims - Third parties that have been issued patents or have filed for patent applications similar to those used by the
Company’s operating subsidiaries may result in intellectual property claims against the Company. Rekor cannot determine with certainty whether
existing third-party patents or the issuance of any future third party patents would require any of its operating subsidiaries to alter their respective
technologies, obtain licenses or cease certain activities. Should the Company be unable to defend against such claims, the Company’s business,
operating results, and financial condition can be adversely affected.
Other than as discussed above and elsewhere in this Annual Report on Form 10-K, we are not aware of any trends, events or uncertainties that are
likely to have a material effect on our financial condition.
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Components of Operating Results
Revenues
The Company derives its revenues primarily from the sale of its roadway data aggregation, traffic management and licensing offerings. These offerings
include a mixture of data collection, implementation, engineering, customer support and maintenance services as well as software and hardware. Revenue
is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the
Company expects to receive in exchange for those products and services.
Costs of revenues, excluding depreciation and amortization
Direct costs of revenues consist primarily of the portion of technical and non-technical salaries and wages and payroll-related costs incurred in
connection with revenue-generating activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and
other expenses that are incurred in connection with our revenue-generating activities. Direct costs of revenues exclude the portion of technical and non-
technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts.
Such costs are included in operating expenses. We expense direct costs of revenues when they incur.
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Operating Expenses
Our operating expenses consist of general and administrative expenses, sales and marketing, research and development and depreciation and
amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-
based compensation expenses. Operating expenses also include impairment of assets.
General and Administrative
General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources, and administrative departments.
Additional expenses include office leases, professional fees, and insurance.
We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth
and the costs of accounting, compliance, legal, insurance, and investor relations as a public company. Our general and administrative expenses may
fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, our general and administrative
expenses have decreased as a percentage of our revenue and, to the extent we continue to be successful in generating increased revenue, we expect our
general and administrative expenses to decrease as a percentage of our revenue over the long term.
Sales and Marketing
Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel,
expenses for conferences and trade shows. We will require significant investments in our sales and marketing expenses to continue the rate of growth in our
revenues, further penetrate existing markets and expand our customer base into new markets.
Research and Development
Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-
party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our
existing products and services, as well as develop new products and services.
Depreciation and Amortization
Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of
intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.
Other Income (Expense)
Other income (expense) consists primarily of legal settlements, legal judgements, interest income and expense in connection with our debt
arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed
assets, interest income earned on cash and cash equivalents, short-term investments and note receivables.
Income Tax Provision
Income tax provision consists primarily of income taxes in certain domestic jurisdictions in which we conduct business. We have recorded deferred tax
assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full
valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our
history of losses.
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Results of Operations
Our historical operating results in dollars are presented below. The analysis of operations is solely related to continuing operations and does not
consider the results of discontinued operations. The following selected consolidated financial data should be read in conjunction with the foregoing
information contained in this Item 7 and with the consolidated financial statements and the notes thereto in Item 8 of Part II, “Financial Statements and
Supplementary Data.” Only historical operating results are presented below. Historical results are not necessarily indicative of future results.
(Dollars in thousands)
Revenue
Cost of revenue, excluding depreciation and amortization
Operating expenses:
General and administrative expenses
Selling and marketing expenses
Research and development expenses
Depreciation and amortization
Goodwill impairment
Total operating expenses
Loss from continuing operations
Other income (expense):
Gain on extinguishment of debt
Gain on the sale of business
Interest expense, net
Other expense, net
Total other income (expense)
Loss before income taxes
(Provision) benefit for income taxes
Net loss from continuing operations
Year ended December 31,
2023
2022
$
34,933 $
16,499
27,038
7,347
18,271
7,894
-
60,550
(42,116)
527
-
(3,596)
(468)
(3,537)
(45,653)
(32)
(45,685) $
$
41
19,920
10,890
26,612
8,329
18,616
6,422
34,835
94,814
(85,784)
-
2,643
(21)
(1,279)
1,343
(84,441)
987
(83,454)
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Comparison of the Years Ended December 31, 2023 and 2022
Revenue
(Dollars in thousands)
Revenue
Year ended December 31,
2023
2022
Change
$
%
$
34,933 $
19,920 $
15,013
75%
The increase in revenue for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily attributable to
our Urban Mobility product line. During the year ended December 31, 2023, revenue attributable to our Urban Mobility product line was $16,773,000,
compared to $7,692,000 compared for the year ended December 31, 2022. Additionally, our contactless compliance revenue increased $1,110,000 for the
year ended December 31, 2023 compared to the year ended December 31, 2022. The remaining increase in revenue growth during the year ended
December 31, 2023, compared to the year ended December 31, 2022 was primarily attributable to increased sales in sales of the Company's software and
hardware products.
Cost of Revenue, Excluding Depreciation and Amortization
(Dollars in thousands)
Cost of revenue, excluding depreciation and amortization
Year ended December 31,
2023
2022
Change
$
%
$
16,499 $
10,890 $
5,609
52%
For the year ended December 31, 2023, cost of revenue, excluding depreciation and amortization increased compared to the corresponding prior
periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our increase in revenue. The costs of
revenue increased at a lower rate than our revenue increased as the Company was able to realize efficiencies in its operations and better manage its
software costs.
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Table of Contents
Operating Expenses
(Dollars in thousands)
Operating expenses:
General and administrative expenses
Selling and marketing expenses
Research and development expenses
Depreciation and amortization
Goodwill impairment
Total operating expenses
General and Administrative Expenses
Year ended December 31,
2023
2022
Change
$
%
$
$
27,038 $
7,347
18,271
7,894
-
60,550 $
26,612 $
8,329
18,616
6,422
34,835
94,814 $
426
(982)
(345)
1,472
(34,835)
(34,264)
2%
-12%
-2%
23%
-100%
-36%
The increase in general and administrative expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, were
primarily due to increases related to our automobile fleet and insurance. These costs were partially offset due to a decrease in our personnel costs related to
a reduction of salaries and overall payroll during the year. Additionally, for the year ended December 31, 2022, the Company recognized a $1,001,000 gain
related to the remeasurement of the STS Earnout which decreased the Company's general and administrative expenses during the period.
Selling and Marketing Expenses
The decrease in selling and marketing expenses during the year ended December 31, 2023, compared to the year ended December 31,
2022, was primarily due to a $965,000 decrease in stock-based compensation expenses.
Research and Development Expense
The decrease in research and development expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, was
primarily attributable to a decrease in subcontractor labor expenses as the Company utilized its current workforce to focus on the development of new
products and software.
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Depreciation and Amortization
The increase in depreciation and amortization during the period is attributable primarily to the increased technology-based intangible assets that were
acquired as part of our acquisition of STS.
Goodwill Impairment
During the third quarter of 2022, we experienced a significant decline in our market capitalization, which management deemed a triggering event
related to goodwill. As a result, we performed an interim impairment assessment as of September 30, 2022 and determined that as of the reporting date we
had an impairment related to goodwill in the amount of $34,835,000.
Other Income (Expense)
(Dollars in thousands)
Other income (expense):
Gain on extinguishment of debt
Gain on the sale of business
Interest expense, net
Other expense, net
Total other income (expense)
Year ended December 31,
2023
2022
Change
$
%
$
$
527 $
-
(3,596)
(468)
(3,537) $
- $
2,643
(21)
(1,279)
1,343 $
527
(2,643)
(3,575)
811
(4,880)
-
-100%
-17024%
63%
363%
Interest expense increased period over period due to the issuance of the 2023 Promissory Notes.
Other expense, net increased in the current period compared to the prior period as a result of legal judgements and settlements that happened during the
year ended December 31, 2022. For additional details regarding our legal settlements please see Item 3 of Part I, “Legal Proceedings”.
In connection with the sale of ATSE, we recognized a gain on the sale of the business of $2,643,000 during the year ended December 31, 2022.
Gain on extinguishment of debt is a result of the settlement agreement in the Firestorm litigation. As part of the settlement, we recorded a reduction to
notes payable, the related accrued interest and other assets and liabilities which were part of the Firestorm entities.
Income Tax Provision (Benefit)
The provision for income taxes for the year ended December 31, 2023, was $32,000, as compared to tax benefit of $987,000 for the year ended
December 31, 2022, which is due primarily to the step-up in the basis of intangible assets related to the STS acquisition. We established a valuation
allowance against deferred tax assets in the fourth quarter of 2017 and have continued to maintain a full valuation allowance through the year ended
December 31, 2023.
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Non-GAAP Measures
EBITDA and Adjusted EBITDA
We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest,
taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation,
(iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii)
other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting
principles generally accepted in the U.S. (“U.S. GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating
activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S.
GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested
parties in the evaluation of a company’s ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and
Adjusted EBITDA differently than we do.
The following table sets forth the components of the EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):
Net loss from continuing operations
Provision (benefit) for income taxes
Interest expense, net
Depreciation and amortization
EBITDA
Gain on extinguishment of debt
Share-based compensation
Gain on the sale of ATSE
Loss (gain) due to the remeasurement of the STS Earnout and Contingent Consideration, net
Impairment of SAFE agreement
Goodwill impairment
Legal judgements and settlements
One-time consulting fees
Adjusted EBITDA
45
Year ended December 31,
2022
2023
(45,685) $
32
3,596
7,894
(34,163) $
(527) $
4,352
-
384
101
-
801
365
(28,687) $
(83,454)
(987)
21
6,422
(77,998)
-
6,616
(2,643)
(883)
-
34,835
1,608
1,024
(37,441)
$
$
$
$
Table of Contents
Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization. We
define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to
the extent that we can gain efficiencies through the adoption of our technology and successfully cross-sell and upsell our current and future offerings.
However, our ability to improve Adjusted Gross Margin over time is not guaranteed and could be impacted by the factors affecting our performance. We
believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a
direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.
The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included (dollars in thousands):
Year ended December 31,
2023
2022
(Dollars in thousands, except
percentages)
Revenue
Cost of revenue, excluding depreciation and amortization
Adjusted Gross Profit
Adjusted Gross Margin
$
$
$
34,933
16,499
18,434
$
52.8%
19,920
10,890
9,030
45.3%
Adjusted Gross Margin, for the year ended December 31, 2023 increased to 52.8% from 45.3% for the year ended December 31, 2022. As the
Company continues to scale and standardize its product offerings it has begun to realize operational efficiencies that have resulted in an improved Adjusted
Gross Margin. Additionally, the Company has worked diligently to reduce its software and data costs.
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Key Performance Indicators
We regularly review several indicators, including the following key indicators, to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic decisions.
Recurring Revenue
As part of the ongoing development of our selling strategy, we have been focusing on sales that employ contracts with recurring revenue. We expect
these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and software licenses which are generally more
difficult to predict. Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow
from operations. This visibility enables us to better manage and invest in our business. The following table sets forth our recurring revenue for the periods
included (dollars in thousands):
Year ended December 31,
2023
2022
Change
$
%
Recurring revenue
$
20,755 $
13,091 $
7,664
59%
As we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in future
periods to continue to increase as we move to market our suite of products through our Rekor One™ platform. However, procurement requirements for
some of our largest customers may result in periods when there is an increase one-time sales as compared to recurring revenues, which may cause the
proportion of recurring revenues generated in those periods to fluctuate.
Total Contract Value
The total contract value of contracts won in the current period also provides us with visibility into our future operating results and cash flows from
operations. Total contract value is a non-GAAP measure in which there are certain assumptions that we make when determining the total contract value of
an agreement, such as the success rate of renewal periods, cancellations and usage estimates. For the year ended December 31, 2023, we won contracts
valued at $49,087,000, compared to $21,962,000 of contracts won for the year ended December 31, 2022. This represents growth of $27,125,000 or 124%,
period over period.
Performance Obligations
While a portion of the total contract value won in a particular period represents revenue earned during the period, the remainder represents future
performance obligations that can provide an indication of our future revenues. As of December 31, 2023, we had approximately $26,390,000 of
performance obligations with respect to contracts that were closed prior to December 31, 2023 but have a contractual period beyond December 31, 2023.
This represents growth of $4,978,000 or 23% compared to $21,412,000 of performance obligations as of December 31, 2022. These contracts generally
cover a term of one to five years, during which the Company will recognize revenue ratably over the contract term. We currently expect to recognize
approximately $18,624,000 of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four
years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract
related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.
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Lease Obligations
As of December 31, 2023, we had significant leased building space at the following locations:
● Columbia, Maryland – The corporate headquarters
● Tel Aviv, Israel
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered
appropriate to meet the needs of our planned operations.
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Table of Contents
Liquidity and Capital Resources
The net cash flows from operating, investing and financing activities for the periods below were as follows (dollars in thousands):
Net cash used in operating activities - continuing operations
Net cash provided by (used in) investing activities - continuing operations
Net cash provided by financing activities - continuing operations
Net increase (decrease) in cash, cash equivalents and restricted cash and cash
equivalents - continuing operations
Year ended December 31,
2023
2022
Change
$
%
$
(32,178) $
270
45,602
(40,070) $
(8,264)
23,868
7,892
8,534
21,734
$
13,694 $
(24,466) $
38,160
20%
-103%
91%
-156%
Net cash used in operating activities for the year ended December 31, 2023, had a net decrease of $7,892,000, which was attributable to the
improvement of our Adjusted EBITDA of $8,754,000 which saw a 23% improvement period over period.
The net increase in net cash used in investing activities of $8,534,000 was primarily due to a decrease in the outflow of funds related to merger and
acquisition activities and capital expenditures. During the year ended December 31, 2023, the Company had net cash outflows of $1,388,000 related to
capital expenditures compared to $4,171,000 for the year ended December 31, 2022. Additionally, during the year ended December 31, 2022, the Company
had net cash outflows of $6,389,000 related to the acquisition of STS. This outflow was partially offset by $3,051,000 in cash proceeds from the sale of the
Company's ATSE business unit.
Net cash provided by financing activities for the year ended December 31, 2023 increased by $21,734,000 from the prior year ended December 31,
2022. During the year ended December 31, 2023, as part of our 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds
of $11,100,000 and $9,159,000, respectively. Additionally, in the third quarter of 2023, we received gross proceeds of $10,996,000 related to the exercise
of warrants associated to the 2023 Registered Direct Offering. Lastly, in the fourth quarter of 2023, we raised $14,330,000 related to our Series A Prime
Revenue Sharing Notes. In the prior comparable period, through our 2022 Sales Agreement, we received net proceeds, after deducting the underwriting
discounts and commissions and offering expenses payable by us, of $22,754,000.
For the years ended December 31, 2023 and 2022, we funded our operations primarily through cash from the sale of equity, operating activities from
our subsidiaries and the issuance of debt. As of December 31, 2023, we had unrestricted cash and cash equivalents from continuing operations of
$15,385,000 and working capital of $8,100,000, as compared to unrestricted cash and cash equivalents of $1,924,000 and a working capital deficit of
$6,010,000 as of December 31, 2022.
Liquidity and Going Concern
Management has assessed going concern uncertainty to determine whether there is sufficient cash on hand, together with expected capital raises and
working capital, to assure operations for a period of at least one year from the date these consolidated financial statements are issued, which is referred to as
the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to
management, management has considered various scenarios, forecasts, projections, and estimates and will make certain key assumptions. These
assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected
cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers
it probable that those implementations can be achieved within the look-forward period.
The Company has generated losses and negative operating cashflows since its inception and has relied on external sources of financing to support the
cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products and services, development
of new products and services and marketing efforts associated with these existing and new products and services. As of and for the year ended December
31, 2023, the Company had working capital from continuing operations of $8,100,000 and a loss from continuing operations of $45,685,000.
Our cash increased by $13,245,000 for the year ended December 31, 2023 primarily due to net cash provided by financing activities of $45,602,000
which was offset by the net cash used in operating activities of $32,627,000.
Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient
to fund its current level of operations for the next twelve months following the issuance of these consolidated financial statements. These factors raise
substantial doubt regarding the Company’s ability to continue as a going concern.
The Company's ability to generate positive operating results and execute its business strategy will depend on (i) its ability to continue the growth of its
customer base, (ii) its ability to continue to improve its quarterly financial metrics such as net loss and cash used from operating activities (iii) the
continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with investors, lenders and
other financial intermediaries, (v) its ability to maintain timely collections from existing customers, and (vi) the ability to scale its business processes. To
the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect
payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise,
depending on the severity of such impact, materially adversely affect its operating results.
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Table of Contents
Balance Sheet Arrangements, Contractual Obligations and Commitments
As of the date of this Annual Report on Form 10-K, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have
a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of our operations is based upon our audited consolidated financial statements as of
and for the years ended December 31, 2023 and 2022, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and
related disclosures. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that
we believe are reasonable under the circumstances. Our actual results could differ from these estimates under different assumptions or conditions.
We believe the application of the estimates inherently required therein, are reasonable. These estimates are periodically reevaluated, and adjustments
are made when facts and circumstances dictate a change. Rekor bases its estimates on historical experience and on various other assumptions that the
management of Rekor believes to be reasonable under the circumstances, the results of which form management’s basis for making judgments about the
carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions, or if management made different judgments or utilized different estimates.
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Table of Contents
Revenue Recognition
Judgment is required for the estimation of the standalone selling price (“SSP”) and the allocation of the transaction price by relative SSPs. We have
arrangements that include multiple performance obligations in which we need to allocate the transaction price using the SSP. Our customer arrangements
containing multiple performance obligations typically include the sale and installation of cameras systems, licensing of our software and the performance
of maintenance services over a contractual term. In most instances, we have determined these performance obligations qualify as distinct performance
obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our
promise to transfer the service is separately identifiable from other promises in the contract. For arrangements that contain multiple performance
obligations, we exercise judgment in allocating the transaction price based on the relative SSP method by comparing the SSP of each distinct performance
obligation to the total value of the contract. We apply judgment in determining the SSP for each distinct performance obligation.
Liquidity Analysis
Our liquidity analysis requires a blend of judgment and estimation, relying on both quantitative data and qualitative insights to assess our ability to
sustain our operations over the forward-looking period. Management’s analysis involves a comprehensive evaluation of numerous factors to determine
whether we can continue our operations during the look-forward period.
We evaluate our recent financial performance, liquidity position, and our ability to meet our financial obligations as they become due. Factors such as
financial projections, profitability, cash flow, and debt commitments require estimation and are examined to gauge our financial health.
Our ability to manage our cash flow is another critical aspect of the analysis. Effective cash flow management ensures that we have sufficient liquidity
to cover our operating expenses, debt repayments, and other financial obligations. Our cash flow projections are reviewed to determine whether we can
generate enough cash to sustain our operations during the look-forward period. Our estimates over our financial projections play a vital role in our analysis.
We utilize various assumptions and factors such as market conditions, customer relationships, our sales pipeline, industry trends, and our strategic
initiatives to develop and validate our financial projections.
Conducting a liquidity analysis is an exercise in judgment, requiring us to evaluate data points, forecasts, and qualitative insights to arrive at a
comprehensive assessment of our ability to remain cash flow positive during the look-forward period. In this process, we must exercise caution,
recognizing the inherent uncertainties and limitations of our estimations and financial analysis while striving to provide feasible plan that can successfully
mitigate conditions and events that may raise doubt of our ability to continue as a going concern.
New Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Business and Significant Accounting Policies”
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (Marcum LLP, PCAOB ID 688)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
52
53
55
56
57
58
59
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Rekor Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rekor Systems, Inc. (the “Company”) as of December 31, 2023 and 2022, the related
consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the
period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred significant losses and may need to raise additional funds to meet its obligations and sustain its operations.
These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical
audit matter or on the accounts or disclosures to which it relates.
Critical Audit Matter – Going Concern
As part of our audit of the Company’s financial statements, a matter arose that was communicated to the audit committee and is considered to be a
critical audit matter. Critical audit matters are those matters that, in our professional judgment, were of most significance in our audit of the current
period's financial statements and are therefore included in this report. The following matter was identified as a critical audit matter due to the
significant judgment by management in determining whether substantial doubt about the entity's ability to continue as a going concern exists.
During the course of our audit, we identified conditions and events that raise substantial doubt about the Company’s ability to continue as a going
concern within one year after the date that the financial statements are issued. These conditions include, but are not limited to, ongoing losses from
operations, negative cash flows from operating activities, and an accumulated deficit. The Company's financial statements disclose information about
these conditions and management's plans to mitigate them, which include efforts to secure additional funding and implement strategic initiatives
intended to improve the Company's operational efficiency and revenue generation.
We devoted significant audit attention to the aforementioned conditions and the related disclosures in the financial statements. Our audit procedures
included, among other things, evaluating the adequacy of the related disclosures and the application of accounting principles generally accepted in the
United States of America in the assessment of the Company's ability to continue as a going concern. We also assessed the feasibility of management's
plans to mitigate the substantial doubt and the likelihood that such plans would be effectively implemented within the going concern assessment
period. The process of evaluating the impacts of these conditions and management's mitigation plans involved a high degree of auditor judgment and
an increased extent of audit effort.
The conclusion regarding the existence of substantial doubt about the Company's ability to continue as a going concern has been appropriately
disclosed in Note 1 to the financial statements. The audit procedures applied in the area of management’s going concern assessment, relative to the
Company's financial condition and prospects, were determined to be a matter of most significance in the audit and therefore is considered a critical
audit matter.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2019
East Hanover, NJ
March 25, 2024
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REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
December 31, 2023
December 31,
2022
ASSETS
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents
Accounts receivable (net of allowance for credit losses of $101 and $69 at December 31, 2023 and 2022,
respectively)
Inventory
Note receivable, current portion
Other current assets
Current assets of discontinued operations
Total current assets
Long-term assets
Property and equipment, net
Right-of-use operating lease assets, net
Right-of-use financing lease assets, net
Goodwill
Intangible assets, net
Note receivable, long-term
SAFE investment
Deposits
Total long-term assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses
Notes payable, current portion
Notes payable, related party
Loans payable, current portion
Lease liability operating, short-term
Lease liability financing, short-term
Contract liabilities
Other current liabilities
Current liabilities of discontinued operations
Total current liabilities
Long-term liabilities
Notes payable, long-term
2023 Promissory Notes, net of debt discount of $1,012
2023 Promissory Notes - related party, net of debt discount of $2,149
Series A Prime Revenue Sharing Notes, net of debt discount of $447
Series A Prime Revenue Sharing Notes - related party, net of debt discount of $223
Loans payable, long-term
Lease liability operating, long-term
Lease liability financing, long-term
Contract liabilities, long-term
Deferred tax liability
Other long-term liabilities
Total long-term liabilities
Total liabilities
$
$
15,385 $
328
4,955
3,058
340
1,270
-
25,336
13,188
9,584
1,989
20,593
17,239
482
-
3,740
66,815
92,151 $
5,139
1,000
-
75
1,261
547
3,604
5,610
-
17,236
1,000
2,988
6,351
9,553
4,777
273
13,445
1,057
1,449
65
587
41,545
58,781
1,924
254
3,238
1,986
340
1,202
331
9,275
16,733
9,662
-
20,593
21,299
822
2,005
3,451
74,565
83,840
5,963
1,000
1,000
106
1,069
-
3,044
2,772
490
15,444
2,000
-
-
-
-
349
14,237
-
1,005
52
1,416
19,059
34,503
Commitments and contingencies (note 13)
Stockholders' equity
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861
shares designated as Series B as of December 31, 2023 and December 31, 2022, respectively. No preferred
stock was issued or outstanding as of December 31, 2023 or 2022, respectively.
Common stock, $0.0001 par value; authorized; 100,000,000 shares; issued: 69,273,334, shares at December
31, 2023 and 54,446,602 at December 31, 2022; outstanding: 69,176,826 shares at December 31, 2023 and
54,405,080 at December 31, 2022
Treasury stock - at cost, 96,508 and 41,522 shares as of December 31, 2023 and 2022, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
-
-
7
(522)
232,568
(198,683)
33,370
92,151 $
5
(417)
202,747
(152,998)
49,337
83,840
$
The accompanying notes are an integral part of these consolidated financial statements.
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REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Year ended December 31,
2022
2023
Revenue
Cost of revenue, excluding depreciation and amortization
$
34,933 $
16,499
Operating expenses:
General and administrative expenses
Selling and marketing expenses
Research and development expenses
Depreciation and amortization
Goodwill impairment
Total operating expenses
Loss from continuing operations
Other income (expense):
Gain on extinguishment of debt
Gain on the sale of business
Interest expense, net
Other expense, net
Total other income (expense)
Loss before income taxes
(Provision) benefit for income taxes
Net loss from continuing operations
Net income from discontinued operations
Net loss
Loss per common share from continuing operations - basic and diluted
Earnings per common share discontinued operations - basic and diluted
Loss per common share - basic and diluted
Weighted average shares outstanding
Basic and diluted
19,920
10,890
26,612
8,329
18,616
6,422
34,835
94,814
(85,784)
-
2,643
(21)
(1,279)
1,343
(84,441)
987
(83,454)
339
(83,115)
(1.68)
0.01
(1.67)
27,038
7,347
18,271
7,894
-
60,550
(42,116)
527
-
(3,596)
(468)
(3,537)
(45,653)
(32)
(45,685)
-
(45,685) $
(0.72)
-
(0.72) $
$
$
The accompanying notes are an integral part of these consolidated financial statements.
56
63,168,299
49,807,475
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REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share data)
Shares of
Common
Stock
Common
Stock
Shares of
Treasury
Stock
Treasury
Stock at
Cost
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
(22,161)
-
22,161
(98)
Balance as of December 31, 2021
Stock-based compensation
Issuance of common stock pursuant to at
the market offering, net
Issuance upon exercise of stock options
Issuance upon vesting of restricted stock
units
Shares withheld upon vesting of
restricted stock units
Shares issued as part of the STS
Acquisition
Net loss
Balance as of December 31, 2022
Stock-based compensation
Issuance upon exercise of stock options
Issuance upon vesting of restricted stock
units
Fair value allocated to warrants with
2023 Promissory Notes
Shares withheld upon vesting of
restricted stock units
Issuance upon exercise of Series A
warrants
Issuance of common stock upon exercise
of pre-funded warrants
Net proceeds from 2023 Registered
Direct Offering
Issuance upon exercise of 2023
Registered Direct Offering Warrants
Net loss
Balance as of December 31, 2023
43,987,896 $
-
9,019,062
99,970
521,647
4
-
1
-
-
798,666
-
54,405,080 $
-
141,166
903,485
-
-
-
5
-
-
-
-
36,375
772,853
6,100,000
6,872,853
-
69,176,826 $
-
-
1
1
-
7
19,361 $
-
(319) $
-
171,285 $
6,616
(69,883) $
-
101,087
6,616
-
-
-
-
-
-
22,753
93
-
-
-
-
-
-
-
-
41,522 $
-
-
-
-
(417) $
-
-
2,000
-
202,747 $
4,352
158
-
(83,115)
(152,998) $
-
-
-
-
-
-
-
5,125
-
32
1
-
-
-
9,158
-
-
-
-
-
-
-
-
-
96,508 $
-
-
(522) $
10,995
-
232,568 $
(45,685)
(198,683) $
22,754
93
-
(98)
2,000
(83,115)
49,337
4,352
158
-
5,125
(105)
32
1
9,159
10,996
(45,685)
33,370
(54,986)
-
54,986
(105)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
2022
2023
Cash Flows from Operating Activities:
Net loss from continuing operations
Net income from discontinued operations
Net loss
$
(45,685) $
-
(45,685)
Adjustments required to reconcile net loss to net cash used in operating activities:
Bad debt expense
Depreciation
Amortization of right-of-use financing lease asset
Non-cash operating lease expense
Provision (benefit) for deferred income taxes
Stock-based compensation
Amortization of debt discount
Amortization of intangible assets
Goodwill impairment
Impairment of SAFE Agreement
Loss (gain) due to the remeasurement of the STS Earnout and Contingent Consideration, net
Gain on the sale of property and equipment
Gain on the sale of ATSE
Gain on extinguishment of debt
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Other current assets
Deposits
Accounts payable, accrued expenses and other current liabilities
Contract liabilities
Operating lease liability
Net cash used in operating activities - continuing operations
Net cash (used in) provided by operating activities - discontinued operations
Net cash used in operating activities
Cash Flows from Investing Activities:
SAFE Investment
Capital expenditures
Down payment on capital expenditures
Proceeds from the sale of property and equipment
Cash paid for STS acquisition, net
Proceeds from the Roker SAFE
Proceeds from the sale of ATSE, net
Net cash provided by (used in) investing activities - continuing operations
Net cash used in investing activities - discontinued operations
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Net proceeds 2022 Promissory Notes - related party, exchanged for 2023 Promissory Notes - related
party
Payment of notes payable
Proceeds from notes receivable
Payments related to financing leases
Net proceeds from exercise of options
Net proceeds from exercise of the warrants associated with series A preferred stock
Net proceeds from Series A Prime Revenue Sharing Notes
Net proceeds from Series A Prime Revenue Sharing Notes - related party
Net proceeds from 2023 Promissory Notes
Net proceeds from 2023 Promissory Notes - related party
Net proceeds from 2023 Registered Direct Offering
Net proceeds from the exercise of the warrants associated to 2023 Registered Direct Offering
Net proceeds from the exercise of the pre-funded warrants
Repayments of loans payable
Net proceeds from at-the-market agreement
Repurchases of common stock
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing
operations
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued
operations
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
Cash, cash equivalents and restricted cash and cash equivalents at beginning of the period
160
3,517
317
727
13
4,352
1,991
4,060
-
101
384
(28)
-
(527)
(1,877)
(687)
144
(495)
1,600
1,004
(1,249)
(32,178)
(449)
(32,627)
-
(1,388)
-
177
-
1,481
-
270
-
270
400
-
340
(702)
158
32
9,553
4,777
4,000
7,100
9,159
10,996
1
(107)
-
(105)
45,602
13,694
(449)
13,245
2,468
(83,454)
339
(83,115)
86
2,359
-
362
(987)
6,616
2
4,063
34,835
-
(883)
-
(2,643)
-
729
209
331
(292)
(2,229)
587
239
(40,070)
458
(39,612)
(755)
(2,990)
(1,181)
-
(6,389)
-
3,051
(8,264)
(125)
(8,389)
1,000
(79)
198
-
93
-
-
-
-
-
-
-
-
-
22,754
(98)
23,868
(24,466)
333
(24,133)
26,601
Cash, cash equivalents and restricted cash and cash equivalents at end of the period
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of the period - continuing operations
Restricted cash and cash equivalents at end of the period - continuing operations
Cash and cash equivalents at end of the period - discontinued operations
Cash, cash equivalents and restricted cash and cash equivalents at end of the period
$
$
$
15,713 $
2,468
15,385 $
328
-
15,713 $
1,924
254
290
2,468
The accompanying notes are an integral part of these consolidated financial statements.
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REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Rekor Systems, Inc. (“Rekor”) was formed in February 2017. The consolidated financial statements include the accounts of Rekor, the parent
company, and its wholly-owned subsidiaries Rekor Recognition Systems, Inc., Waycare Technologies Inc. and Waycare Technologies Ltd. (collectively,
"Waycare") and Southern Traffic Services, Inc. ("STS") (collectively, the “Company”). The Company stands at the forefront of the roadway intelligence
sector, revolutionizing public safety, urban mobility, and transportation management on a global scale. The Company's vision is to improve the lives of
citizens and the world around them by enabling safer, smarter, and greener roadways and communities. The Company works towards this vision by
collecting, connecting, and organizing the world’s mobility data, and making it accessible and useful to its customers for real-time insights and decisioning
for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.
On December 6, 2022, the Company divested its Automated Traffic Safety and Enforcement ("ATSE") business, a non-core business unit. As of
December 31, 2022, the Company determined that the ATSE business unit met the criteria to be presented as discontinued operations.
On June 17, 2022, the Company completed the acquisition of STS by acquiring 100% of the issued and outstanding capital stock of STS, which is
now a wholly-owned subsidiary of the Company.
Basis of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and in accordance with the accounting rules under Regulation S-X, as promulgated by the Securities and Exchange Commission (“SEC”). All
significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s
estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. On an ongoing basis, the Company
evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and
equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual
results may differ from those estimates under different assumptions or conditions.
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Liquidity and Going Concern
Management has assessed going concern uncertainty to determine whether there is sufficient cash on hand, together with expected capital raises and
working capital, to assure operations for a period of at least one year from the date these consolidated financial statements are issued, which is referred to as
the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to
management, management has considered various scenarios, forecasts, projections, and estimates and will make certain key assumptions. These
assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected
cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers
it probable that those implementations can be achieved within the look-forward period.
The Company has generated losses and negative operating cashflows since its inception and has relied on external sources of financing to support the
cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products and services, development
of new products and services and marketing efforts associated with these existing and new products and services. As of and for the year ended December
31, 2023, the Company had working capital from continuing operations of $8,100,000 and a loss from continuing operations of $45,685,000.
Our cash increased by $13,245,000 for the year ended December 31, 2023 primarily due to net cash provided by financing activities
of $45,602,000 which was offset by the net cash used in operating activities of $32,627,000.
Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient
to fund its current level of operations for the next twelve months following the issuance of these consolidated financial statements. These factors raise
substantial doubt regarding the Company’s ability to continue as a going concern.
The Company's ability to generate positive operating results and execute its business strategy will depend on (i) its ability to continue the growth of its
customer base, (ii) its ability to continue to improve its quarterly financial metrics such as net loss and cash used from operating activities (iii) the
continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with investors, lenders and
other financial intermediaries, (v) its ability to maintain timely collections from existing customers, and (vi) the ability to scale its business processes. To
the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect
payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise,
depending on the severity of such impact, materially adversely affect its operating results.
Rounding
Dollar amounts, except per share data, in the notes to these consolidated financial statements are rounded to the closest $1,000.
Functional Currency
The U.S. dollar (“U.S. dollar” or “$“) is the currency of the primary economic environment in which the operations of the Company is conducted.
Substantial revenues and a substantial portion of the operational costs are denominated in U.S. dollars. Accordingly, the functional currency of the
Company is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. For non-U.S. dollar transactions and other
items in the financial statements, the following exchange rates are used: (i) for transactions – exchange rates at transaction dates or average exchange rates;
and (ii) for other items (derived from non-monetary balance sheet items such as depreciation and amortization) – historical exchange rates. Currency
transaction gains and losses are presented in other expense, net on the consolidated statement of operations. The currency transaction gain for the year
ended December 31, 2023 and 2022 was $55,000 and $306,000, respectively.
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Concentration of Risk
The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel.
The United States deposits are federally insured up to $250,000 per account. As of December 31, 2023, and 2022, the Company had deposits, including
restricted cash, totaling $15,713,000 and $2,468,000, respectively, in multiple U.S. financial institutions and one Israeli financial institution.
For the year ended December 31, 2023, Customer A accounted for 18% of the Company's total revenues. For the year ended December 31, 2022 no
customer accounted for more than 10% of the Company's total revenue.
As of December 31, 2023 Customer A and Customer B accounted for 22% and 13%, respectively, of the Company's consolidated accounts receivable
balance. As of December 31, 2022, no single customer accounted for more than 10% of the Company's consolidated accounts receivable balance.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments to be cash equivalents.
Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted
cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client
jurisdictions as of December 31, 2023 and 2022 were $328,000 and $254,000, respectively, and correspond to equal amounts of related liabilities.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its clients’
financial condition, and the Company generally does not require collateral.
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract
liabilities on the consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the consolidated
balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days
but typically no longer than over the next twelve months. Unbilled accounts receivables of $946,000 and $935,000 were included in accounts receivable,
net, in the consolidated balance sheets as of December 31, 2023 and December 31, 2022, respectively.
The Company maintains an allowance for credit losses at an amount estimated to be sufficient to cover the risk of collecting less than full payment of
the receivables. The Company estimates losses on receivables based on expected losses, including our historical experience of actual losses. Receivables
are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the
agreement. At each balance sheet date, the Company evaluates its receivables and will assess the allowance for credit losses based on specific customer
collection issues and historical write-off trends. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is
written off against the allowance.
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Note Receivables
In connection with the sale of its former TeamGlobal subsidiaries in June 2020, the Company received a $1,700,000, five and a half year promissory
note due December 2025, that carries an interest rate of 4% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly
principal payments on the promissory note began in 2021. Based on the general market conditions, the security interest held by the Company and the credit
quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximated the current market rate. The remaining
balance due from TeamGlobal as of December 31, 2023 and 2022, was $822,000 and $1,162,000, respectively and is presented as part of notes receivable,
current portion and note receivable, long-term on the consolidated balance sheets.
Inventory
Inventory principally consists of parts and finished goods held temporarily until installed for service. The Company regularly evaluates its ability to
realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated current
and future market values and new product introductions. Inventory is valued at the lower of cost or net realizable value. The cost is determined by the first-
in, first-out (“FIFO”) method.
Accounts Payable, Accrued and Other Current Liabilities
As of December 31, 2023 and 2022, amounts owed to related parties of $105,000 and $253,000 were presented as part of accounts payable and
accrued expenses on the consolidated balance sheets.
A summary of other current liabilities is as follows (in thousands):
Payroll and payroll related
Right of offset to restricted cash
STS Contingent Consideration
Other
Total
December 31, 2023
December 31,
2022
2,824
328
1,800
658
5,610 $
2,483
243
-
46
2,772
$
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Property and Equipment
Property and equipment are stated at cost or fair value at acquisition date for assets obtained through business combinations, less accumulated
depreciation. Depreciation expense is presented as part of depreciation and amortization on the consolidated statements of operations.
Depreciation is recorded on a straight-line basis over the following estimated lives:
Class of assets
Furniture and fixtures
Office equipment
Leasehold improvements
Automobiles
Roadway monitoring systems
Useful life (in years)
2 - 10
2 - 5
Shorter of asset life or
lease term
3 - 5
3 - 5
Repairs and maintenance are expensed as incurred. Expenditures for additions, improvements and replacements are capitalized.
The Company tests its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. Recoverability of property and equipment is measured by comparing the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the sum of the expected undiscounted cash flow is less than the carrying amount of
the asset, the Company recognizes an impairment loss, which is the excess of the carrying amount over the fair value of the asset, using the expected future
discounted cash flows.
As of December 31, 2023 and 2022, the Company did not recognize an impairment loss on its property and equipment.
Deposits
Deposits consist of cash payments made by the Company related to security deposits for leased assets and deposits on property and equipment which
the Company has not yet received.
Research and Development Costs
Research and development costs to develop software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility
for the related software product. There were no capitalized internally developed software costs not yet placed in service as of December 31, 2023 and 2022,
respectively.
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Intangible Assets
Intangible assets include capitalized internally developed software and amounts recognized in connection with acquisitions, including customer
relationships, technology and marketing related assets. Intangible assets, other than software development costs, are initially valued at fair market value
using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the
estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise.
Amortization expense related to intangible assets is presented as part of depreciation and amortization on the consolidated statements of operations. As of
December 31, 2023 and 2022, the Company did not recognize an impairment loss on its intangible assets.
Leases
The Company accounts for its leases in accordance with Accounting Standard Codification (“ASC”) Topic 842, Leases ("ASC 842"). The standard
provides several optional practical expedients for use in transition. The Company elected to use what the Financial Accounting Standard Board (“FASB”)
has deemed the “package of practical expedients,” which allows the Company not to reassess the Company’s previous conclusions about lease
identification, lease classification and the accounting treatment for initial direct costs. ASU 2016-02 also provided several optional practical expedients for
the ongoing accounting for leases. The Company has elected the short-term lease recognition exemption for all leases that qualify, meaning that for leases
with terms of twelve months or less, the Company will not recognize right-of-use ("ROU") assets or lease liabilities on the Company’s consolidated
balance sheets. Additionally, the Company has elected to use the practical expedient to not separate lease and non-lease components for leases of real
estate, meaning that for these leases, the non-lease components are included in the associated ROU asset and lease liability balances on the Company’s
consolidated balance sheets.
The Company determines if an arrangement contains a lease and the classification of that lease, if applicable, at inception. Operating leases are
included in right-of-use operating lease assets, net, lease liabilities operating, short-term and lease liabilities operating, long-term, in the consolidated
balance sheets. Financing leases are included in right-of-use financing lease assets, net, lease liabilities financing, short-term and lease liabilities financing,
long-term, in the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to
make lease payments under the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease
payments over the lease term. The implicit rate within the Company’s operating leases are generally not determinable and the Company uses its
incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s
incremental borrowing rate requires judgment. The Company determined the incremental borrowing rate for each lease using the Company’s current
borrowing rate, adjusted for various factors including level of collateralization and term to align with the terms of the lease. The operating lease ROU asset
also includes any lease prepayments, offset by lease incentives. Certain of the Company’s leases include options to extend or terminate the lease. An option
to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain the Company will exercise
that option. An option to terminate is considered unless it is reasonably certain the Company will not exercise the option.
Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
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Business Combination
Management conducts a valuation analysis on the tangible and intangible assets acquired and liabilities assumed at the acquisition date thereof. During
the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible
and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related
valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement
period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to
the Company’s consolidated statements of operations.
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.
The Company allocates a portion of the purchase price to the fair value of identifiable intangible assets. The fair value of identifiable intangible assets is
based on a detailed valuation that uses information and assumptions provided by management. The Company allocates any excess purchase price over the
fair value of the net tangible and intangible assets acquired to goodwill.
Goodwill
The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. Goodwill is not amortized but rather
subject to a periodic impairment testing on an annual basis. The Company will assess goodwill for impairment annually on October 1st of each year, or
more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The
Company will perform a qualitative assessment, to determine its fair value which includes an evaluation of relevant events and circumstances, including
macroeconomic, industry and market conditions, the Company's overall financial performance, and trends in the value of the Company's common stock.
During the year ended December 31, 2023, the Company did not recognize any impairment to goodwill.
During the third quarter of 2022, the Company experienced a significant decline in its market capitalization, which management deemed a triggering
event related to goodwill. As a result, the Company performed an interim impairment assessment as of September 30, 2022, and determined that as of the
reporting date the Company had an impairment related to its goodwill in the amount of $34,835,000. As of December 31, 2022, the Company did not
identify any events that would cause it to assess goodwill for further impairment.
The Company utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of the reporting
unit. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital
expenditures and future working capital requirements, terminal growth rates, and discount rates based upon the reporting unit's weighted-average cost of
capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that
were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value of Financial
Instruments section below. Key assumptions used in the market-based approach included the selection of appropriate peer group companies and the
associated valuation multiples. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value
and the impairment test result.
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Revenue Recognition
The Company derives its revenues primarily from the licensing and sale of its roadway data and traffic management product and service offerings.
These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services, as well as software and
hardware. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the
consideration the Company expects to receive in exchange for those products and services.
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the
following five steps:
●
●
●
●
●
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied
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The following table presents a summary of revenue (dollars in thousands):
Recurring revenue
Product and service revenue
Total revenue
Year ended December 31,
2022
2023
$
$
20,755 $
14,178
34,933 $
13,091
6,829
19,920
Information about the Company’s revenue in different geographic regions, which is attributable to the Company’s operations located primarily in the
United States and other countries is as follows (dollars in thousands):
United States
Other
Total revenue
Year ended December 31,
2022
2023
$
$
32,386 $
2,547
34,933 $
17,889
2,031
19,920
For the year ended December 31, 2023, except for the United States, total revenue in any single country was less than 10% of consolidated revenue.
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Revenues
Recurring revenue
Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue. The Company
generates recurring revenue both from long-term contracts with customers that provide for periodic payments and from short-term contracts that are
automatically invoiced on a monthly basis. The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and
eCommerce sales.
Recurring revenues are generated through the Company’s Software-as-a-Service ("SaaS") model, where the Company provides customers with the
right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual
period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The contracts with customers are generally for a
term of one to five years. The payments for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement.
These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as
such, we recognize revenue for these arrangements ratably over the term of the contractual agreement.
The Company also currently receives recurring revenues under contracts entered into using a subscription model for data collection services and
bundled hardware and software over a period. Payments for these services and subscriptions are received periodically over the term of the agreement and
revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing, through a web server,
access to the Company’s software solutions, a self-managed database, and a cross-platform application programming interface. The subscription
arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead,
customers are granted continuous access to the Company’s solutions over the contractual period. The Company’s subscription services arrangements are
non-cancelable and do not contain refund-type provisions. Accordingly, any fixed consideration related to the arrangement is generally recognized as
recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided.
eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s
eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software which can be purchased online and activated through
a digital key. The Company's contracts with customers are generally for a term of one month with automatic renewal each month. The Company invoices
and receives fees from its customers monthly.
Customer support revenue is associated with perpetual licenses and long-term subscription arrangements and consists primarily of technical support
and product updates. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract
term. The customer benefits evenly throughout the contract period from the guarantee that the customer support resources and personnel will be available
to them. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is
considered a distinct performance obligation when sold together with a long-term license for software. Customer support for perpetual and term licenses is
renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such
licenses for the same duration of time. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the
customer support obligation, in line with how the Company believes services are provided.
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Product and service revenue
Product and service revenue is defined as the Company’s implementation revenue, perpetual license sales, hardware sales, engineering services and
contactless compliance revenue.
Implementation revenue is recognized when the Company provides implementation or construction services to its customers. These services involve a
fee for the implementation services and are typically associated with the sale of the Company’s data collection services, software and hardware. The
Company’s implementation revenue is recognized over time as the implementation is completed.
In addition to recurring revenue from software sales, the Company recognizes point-in-time revenue related to the sale of perpetual software licenses.
The Company sells perpetual licenses that provide customers the right to use software for an indefinite period in exchange for a one-time license fee, which
is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and
has significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer
has access to the software, which normally occurs once software activation keys have been made available to the customer.
The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution channels. The
Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon
transfer of control of the hardware to its customers. The Company provides hardware installation services to customers which range
from one to six months. The revenue related to the installation component is recognized over time as the implementation is completed.
Contactless compliance revenues reflect arrangements to provide hardware systems and services that identify uninsured motor vehicles, notify owners
of non-compliance through a diversion citation, and assist them in obtaining the required insurance as an alternative to traditional enforcement methods.
Revenue is recognized monthly based on the number of diversion citations collected by the relevant jurisdiction.
The Company also generates revenue through its engineering services. These services are provided at the request of its customers and the revenue
related to these services is recognized over time as the service is completed.
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Revenue by Customer Type
The following table presents a summary of revenue by revenue type (dollars in thousands):
Urban mobility
Transportation management
Public safety
Total revenue
Urban mobility
Year ended December 31,
2022
2023
$
$
16,773 $
3,286
14,874
34,933 $
7,692
2,787
9,441
19,920
Urban mobility revenue consists of revenue derived from the Company's roadway data aggregation activities. These activities can include the use of
software applications that are part of the Rekor Discover™ platform, the primary application being Rekor’s count, class & speed application. The Company
initiated this platform in June of 2022 and is in the process of deploying it for its existing customers as well as initiating deployments for new customers.
The application fully automates the aggregation of Federal Highway Administration (“FHWA”) 13-bin vehicle classification, speed, and volume
data. Revenues associated with the deployment of other traffic sensors, traffic studies, or construction associated with traffic data collection are also part of
data aggregation revenue, which is generated through both recurring pay-for-data contracts and hardware sales with a recurring software maintenance
component.
Transportation management
Transportation management revenue is associated with the Rekor Command™ platform and the associated applications underneath the platform. These
provide traffic operations and traffic management centers with support through actionable, real-time incident reports integrated into a cross-agency
communication and response system. Revenue is generated through contracts that include an upfront as well as recurring component.
Public Safety
Public safety revenue consists of licensing of the Rekor Scout™ platform, licensing of Rekor CarCheck™ API, licensing of Rekor’s vehicle
recognition software, as well as systems deployed for security, contactless compliance and public safety. Revenue is generated through recurring and
perpetual license sales as well as one-time hardware sales.
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Performance obligations
The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some
contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the
Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on
the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of
revenue recognized relative to cash received for each distinct performance obligation.
Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the
unsatisfied portion is to be recognized as revenue in the future. As of December 31, 2023 the Company had approximately $26,390,000 of remaining
performance obligations not yet satisfied or partially satisfied related to continuing operations. The Company expects to recognize approximately 71% of
this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter.
Contract liabilities
When the Company advance bills clients prior to providing services, revenue will generally be earned and recognized within the next month to five
years, depending on the subscription or licensing period. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-
contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the year ended December 31, 2023, were not
materially impacted by any other factors. Contract liabilities as of December 31, 2023 and December 31, 2022, were $5,053,000 and $4,049,000,
respectively. All contract liabilities as of December 31, 2023 and December 31, 2022, were attributable to continuing operations. During the year ended
December 31, 2023, $2,930,000 of the contract liabilities balance as of December 31, 2022, was recognized as revenue.
The contract liabilities as of December 31, 2023, are expected to be recognized as revenue during the following years ended December 31, (dollars in
thousands):
2024
2025
2026
2027
2028
Total
$
$
3,604
822
396
165
66
5,053
Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract
The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient to expense
costs to obtain a contract as incurred when the amortization period would have been one year or less. As of December 31, 2023, and 2022, costs incurred to
obtain contracts in excess of one year have been immaterial to date.
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Advertising
The Company expenses all non-direct response advertising costs as incurred. Advertising costs for the years ended December 31, 2023 and 2022 were
$231,000 and $588,000, respectively, and are included in selling and marketing expenses in the consolidated statement of operations.
Segment Information
The Company operates as one operating segment as its chief executive officer, who is our chief operating decision maker ("CODM"), reviews financial
information on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
Income Taxes
Provision (benefit) for income tax consists of U.S. federal and state income taxes. The Company is required to pay income taxes in certain state
jurisdictions.
The Company uses the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This
method requires an asset and liability approach for the recognition of deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company evaluates the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such
net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax
liability related to the indefinite-lived intangible, because management believes that it is not more likely than not that their benefits will be realized in
future periods. The Company will continue to evaluate its net deferred tax assets to determine whether any changes in circumstances could affect the
realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization
standard, the valuation allowance will be reduced accordingly.
The tax effects of uncertain tax positions are recognized in the consolidated financial statements only if the position is more likely than not to be
sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the
consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized. It is the Company’s accounting policy to
account for ASC 740-10 related penalties and interest as a component of the income tax provision in the consolidated statements of operations and
comprehensive loss.
As of December 31, 2023, and 2022, the Company’s evaluation revealed no uncertain tax positions that would have a material impact on the financial
statements.
Equity-Based Compensation
The Company recognizes equity-based compensation costs related to all share-based payments, including stock options and restricted stock units
(“RSUs”), based on the grant-date fair value of the award on a straight-line basis over the requisite service period, net of actual forfeitures. The fair value of
RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The Company accounts for forfeitures as they
occur.
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Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for accounts receivable, notes receivable and accounts payable approximate fair
value as of December 31, 2023 and December 31, 2022, because of the relatively short-term maturity of these financial instruments. The carrying amount
reported for long-term debt and long-term receivables approximates fair value as of December 31, 2023 and December 31, 2022, given management’s
evaluation of the instrument’s current rate compared to market rates of interest and other factors.
The determination of fair value is based upon the fair value framework established by ASC Topic 820, Fair Value Measurements and Disclosures
(“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in
valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the
observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring
basis for impairment, respectively, using Level 3 inputs.
The Company considers its contingent consideration to be Level 3 investments and that the fair value approximates the carrying value.
There were no changes in levels during the year ended December 31, 2023.
Earnings (Loss) per Share
Basic loss per share or earnings per share ("EPS"), is computed using the weighted average number of common shares outstanding during the period.
Diluted EPS is computed using the weighted average number of common and potentially dilutive securities outstanding during the period, except for
periods of net loss for which no potentially dilutive securities are included because their effect would be anti-dilutive. Potentially dilutive securities consist
of common stock issuable upon exercise of stock options or warrants using the treasury stock method. Potentially dilutive securities issuable upon
conversion of the Series A Preferred Stock are calculated using the if-converted method.
The Company calculates basic and diluted loss per common share using the two-class method. Under the two-class method, net earnings are allocated
to each class of common stock and participating security as if all of the net earnings for the period had been distributed.
Treasury shares are presented as a reduction of equity, at their cost to the Company.
N
ew Accounting Pronouncements Effective in the Current Period
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets
held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more
timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after
December 15, 2022. Upon adoption of the new standard, the Company began recognizing an allowance for credit losses based on the estimated lifetime
expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts
receivable and a note receivable) currently within the scope of ASU 2016-13 and based on the Company’s analysis of ASU 2016-13 and the historical,
current and expected credit quality of the Company’s customers, ASU 2016-13 did not have a material impact on its consolidated statements of operations
and balance sheets.
Recently Issued Accounting Pronouncements
In November 2023, FASB issued ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires
public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on
an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the CODM and included
within the reported measure(s) of a segment's profit or loss, the amount and composition of any other segment items, the title and position of the CODM,
and how the CODM uses the reported measure(s) of a segment's profit or loss to assess performance and decide how to allocate resources. The guidance is
effective for our annual period beginning January 1, 2025, and interim periods thereafter, applied retrospectively with early adoption permitted. The
Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public
entities to provide greater disaggregation within their annual rate reconciliation, including new requirements to present reconciling items on a gross basis in
specified categories, disclose both percentages and dollar amounts, and disaggregate individual reconciling items by jurisdiction and nature when the effect
of the items meet a quantitative threshold. The guidance also requires disaggregating the annual disclosure of income taxes paid, net of refunds received, by
federal (national), state, and foreign taxes, with separate presentation of individual jurisdictions that meet a quantitative threshold. The guidance is effective
for the Company's annual periods beginning January 1, 2025 on a prospective basis, with a retrospective option, and early adoption is permitted. The
Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures.
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NOTE 2 – BUSINESS ACQUISITIONS
STS Acquisition
On June 17, 2022, the Company completed its acquisition of STS by acquiring 100% of the issued and outstanding capital stock of STS. The
acquisition included total consideration of $12,799,000 including; cash consideration of $6,500,000, $1,001,000 related to an earnout based on the
achievement of certain performance metrics ("STS Earnout") and $1,298,000 contingent on the closing of a future contract ("STS Contingent
Consideration"), 798,666 shares of the Company’s common stock, valued at $2,000,000, and a $2,000,000 note. As a result of the transaction, STS has
become a wholly-owned subsidiary of the Company.
The STS Contingent Consideration in the amount of $2,000,000 will be paid in cash if on or prior to October 30, 2024, the Company enters into a
multi-year extension of the Georgia Department of Transportation Contract on substantially similar terms and conditions as the contract being extended.
The STS Contingent Consideration shall be payable within 30 days of the effectiveness of the extension of the Georgia Department of
Transportation Contract. STS Contingent Consideration is presented as part of other non-current liabilities on the consolidated balance sheets and is
remeasured on a quarterly basis. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Contingent
Consideration at the time of acquisition and determined the fair value to be $1,298,000. For the year ended December 31, 2023 and 2022 the Company
recognized $384,000 and $118,000, respectively, in expense related to the remeasurement of the STS Contingent Consideration which is presented with
general and administrative expenses on the consolidated statement of operations.
The Company was to pay the STS Earnout payment, up to $2,000,000, within 60 days of December 31, 2022 based on the STS EBITDA for
the twelve month period ended December 31, 2022. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS
Earnout at the time of acquisition and determined the fair value to be $1,001,000. As of December 31, 2022, it was determined that the STS Earnout was
not achieved and thus the Company recognized a gain related to the remeasurement of the STS Earnout of $1,001,000. The gain related to the
remeasurement of the STS Earnout is presented with general and administrative expenses on the consolidated statement of operations.
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The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition
of STS occurred on June 17, 2022, the results of operations for STS from the date of acquisition have been included in the Company’s consolidated
statement of operations for the years ended December 31, 2023 and 2022. The table below shows the breakdown related to the purchase price allocation for
the acquisition (dollars in thousands):
Cash paid
Common stock issued
Earnout consideration
Contingent consideration
Note consideration
Total consideration
Assets
Cash and cash equivalents
Inventory
Accounts receivable
Other current assets
Customer relationships
Tradename
Property and equipment
Right-of-use assets
Total assets acquired
Liabilities
Accounts payable and accrued expenses
Contract liabilities
Other current and non-current liabilities
Lease liability
Deferred tax liability
Total liabilities assumed
Fair value of identifiable net assets acquired
Goodwill
$
$
$
$
$
$
$
$
6,500
2,000
1,001
1,298
2,000
12,799
111
295
2,761
159
3,400
700
5,510
399
13,335
880
190
43
399
1,001
2,513
10,822
1,977
The customer relationships and tradename acquired by the Company as part of the acquisition has an estimated useful life of 15 and five years,
respectively, and are presented as part of intangible assets, net on the consolidated balance sheets.
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Operations of Combined Entities
The following unaudited pro forma combined financial information gives effect to the acquisition of STS as if it were consummated as of January 1,
2022. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would
have been attained had the acquisition been completed as of January 1, 2022 (the beginning of the earliest period presented) or to project potential
operating results as of any future date or for any future periods.
Year ended December 31,
2022
2023
Total revenue from continuing operations
Net loss from continuing operations
Basic and diluted loss per share continuing operations
Basic and diluted number of shares
ATD Acquisition
(Dollars in thousands, except per share
data)
34,933 $
(45,685) $
(0.72) $
63,168,299
25,805
(84,254)
(1.68)
50,184,867
$
$
$
On January 2, 2024 the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain
Interest Purchase Agreement (the “Purchase Agreement”), dated as of the January 2, 2024, by and among the Company, ATD and All Traffic Holdings,
LLC. ATD is engaged in the business of advanced traffic data collection. Under the terms of the Purchase Agreement, the Company acquired all of the
issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”). See NOTE 17 – SUBSEQUENT EVENTS for additional
information on the ATD Acquisition.
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NOTE 3 – INVESTMENTS
Investments in Unconsolidated Companies
In 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety
(the “GPS Closing”). After the GPS Closing, the Company continues to own 19.9% of the units of Global Public Safety. This equity investment does not
have a readily determinable fair value and the Company reports this investment at cost, less impairment. As of December 31, 2023 and 2022 the investment
in Global Public Safety had a value of $0.
There were no distributions or earnings received from this investment in the year ended December 31, 2023 and 2022.
Roker
In June 2020, the Company announced a joint venture in which the Company would have a 50% equity interest in Roker Inc. (“Roker”). In the third
quarter of 2020 and the first quarter of 2021, the Company contributed $75,000 for its 50% equity interest for a total investment of $150,000. This
investment is accounted for under the equity method. As of December 31, 2023 and 2022 the investment in Roker had a value of $0.
In 2021, in exchange for $1,250,000 the Company entered into a Simple Agreement for Future Equity with Roker (the “Roker SAFE”). In 2022, the
Company invested an additional $755,000 in the Roker SAFE. The Roker SAFE allows the Company to participate in future equity financings of Roker,
through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of
control or an initial public offering (other than a qualified financing), the Company has the option to receive either (i) cash payment equal to the invested
amount under the Roker SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the
Roker SAFE. The Company’s investment in the Roker SAFE was recorded on the cost method of accounting and included under the Roker SAFE
investment on the consolidated balance sheets and is shown as long-term, as it was not readily convertible into cash.
During the year ended December 31, 2023, the Company recognized an impairment of $101,000 related to the Roker SAFE that is presented as part of
general and administrative expenses in the consolidated statements of operations.
During the year ended December 31, 2023, the Company entered into an agreement to sell substantially all of the assets of Roker, which initiated a
triggering event related to the Company's Roker SAFE agreements. As result of the triggering event the Company received cash proceeds of $1,904,000 of
which includes $423,000 that was held in escrow as of December 31, 2023 and was presented as part of other current assets, net and deposits on the
consolidated balance sheets. The Company will receive 50% of the amount held in escrow on July 25, 2024 and the other 50% of the amount held in
escrow on July 25, 2025.
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NOTE 4 – DISCONTINUED OPERATIONS
ATSE Sale
On December 8, 2022, the Company sold its ATSE business, a non-core component, for approximately $3,390,000. The buyer agreed to certain assets
and liabilities of the ATSE component for a purchase price of $3,390,000, comprising (i) $3,390,000 in cash of which includes $339,000 that was held in
escrow as of December 31, 2022 and was presented as part of other current assets on the consolidated balance sheets.
The table below shows the breakdown related to the sale of ATSE (dollars in thousands):
Total assets sold
Total liabilities assumed
Net assets sold
Closing costs
Cash received
Cash held in escrow
Total consideration
Gain on sale of ATSE
$
$
$
347
13
334
413
3,051
339
3,390
2,643
The disposition of ATSE is the result of the Company’s strategic decision to prioritize its core data services business and will result in material changes
in the Company’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of ATSE as
discontinued operations, including for all prior periods reflected in the consolidated financial statements and these notes.
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Results of Discontinued Operations
Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations from ATSE for the years
ended December 31, 2023 and 2022 have been classified as discontinued operations and presented as part of net income from discontinued operations in
the accompanying consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations
under the line captions of current and long term assets, net of discontinued operations and current and long term liabilities of discontinued operations in the
accompanying consolidated balance sheets as of December 31, 2023 and December 31, 2022.
There was no balance sheet information related to our discontinued operations as of December 31, 2023. The assets and liabilities classified as
discontinued operations in the Company's consolidated financial statements as of December 31, 2022 are shown below (dollars in thousands):
ASSETS
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents
Accounts receivable, net
Inventory
Total current assets
Long-term assets
Property and equipment, net
Right-of-use lease assets, net
Intangible assets, net
Total long-term assets, net
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued expenses
Lease liability, short-term
Other current liabilities
Total current liabilities
Long-Term Liabilities
Lease liability, long-term
Total liabilities
Firestorm
December 31, 2022
ATSE
Total
$
$
$
$
- $
-
-
-
-
-
-
-
-
- $
33 $
99
-
132
-
132 $
- $
290
41
-
331
-
-
-
-
331 $
68 $
-
290
358
-
358 $
-
290
41
-
331
-
-
-
-
331
101
99
290
490
-
490
There were no operations related to our discontinued operations for the year ended December 31, 2023. The major components of the discontinued
operations, net of tax, are presented in the consolidated statements of operations for the year ended December 31, 2022 are shown below (dollars in
thousands):
Revenue
Cost of revenue, excluding depreciation and amortization
Operating expenses:
General and administrative expenses
Depreciation and amortization
Total operating expenses
Net (loss) income from discontinued operations
Firestorm
Year ended December 31, 2022
ATSE
Total
- $
-
1
-
1
(1) $
2,360 $
1,645
215
160
375
340 $
2,360
1,645
216
160
376
339
$
$
79
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NOTE 5 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years ended December 31, 2023 and 2022 were as follows (dollars in thousands):
Cash paid for interest
Cash paid for taxes
Decrease in accounts payable and accrued expenses related to purchases of property and equipment
(Increase) decrease in accounts payable and accrued expenses related to purchases of inventory
Increase in inventory related to the transfer of property and equipment
Decrease in deposits related to property and equipment received
Non-cash investing activities:
Fair market value of shares issued in connection with the acquisition of STS
Contingent Consideration in connection with the acquisition of STS
Earnout Consideration in connection with the acquisition of STS
Note Consideration in connection with the acquisition of STS
Deferred tax liabilities resulting from purchase accounting adjustments in connection with the acquisition
of STS
Loans issued for property and equipment
Non-cash financing activities:
2022 Promissory Notes exchanged for 2023 Promissory Notes - related party
Warrants issued in connection with the 2023 Promissory Notes
Warrants issued in connection with the 2023 Promissory Notes - related party
New Leases under ASC-842
Right-of-use assets obtained in exchange for new finance lease liabilities
Recognition of operating lease - right-of-use lease asset
Lease incentive recognized in current assets
Recognition of operating lease - lease liability
80
Year ended December 31,
2022
2023
1,648 $
9
(749)
(550)
935
417
-
-
-
-
-
-
1,000
1,640
3,485
1,837
649
-
(649) $
59
60
(528)
724
-
-
2,000
1,298
1,001
2,000
1,001
(460)
-
-
-
-
3,508
919
(4,427)
$
$
Table of Contents
NOTE 6 – INVENTORY
As of December 31, 2023 and 2022, inventory consisted entirely of the following (dollars in thousands):
Parts and cameras
Finished goods
Total inventory
December 31,
2023
2022
$
$
2,633 $
425
3,058 $
1,154
832
1,986
81
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NOTE 7 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (dollars in thousands):
Furniture and fixtures
Office equipment
Roadway monitoring systems placed in service
Vehicles
Leasehold improvements
Roadway monitoring systems not yet placed in service
Total
Less: accumulated depreciation
Property and equipment, net
December 31,
2023
2022
1,959 $
4,945
4,928
2,052
4,508
1,305
19,697 $
(6,509)
13,188 $
1,959
3,969
3,999
2,539
4,459
3,144
20,069
(3,336)
16,733
$
$
$
Depreciation related to property and equipment, net for the years ended December 31, 2023 and 2022 was $3,517,000 and $2,359,000, respectively,
and is presented as part of depreciation and amortization in the accompanying consolidated statements of operations.
Information about the Company’s total assets in different geographic regions is as follows (dollars in thousands):
United States
Other
Accumulated depreciation
Total property and equipment, net
82
December 31,
2023
2022
$
$
18,036 $
1,661
(6,509)
13,188 $
18,465
1,604
(3,336)
16,733
Table of Contents
NOTE 8 – LEASES
The Company has operating leases for office facilities in various locations throughout the United States and Israel. Additionally, the Company has
financing leases for vehicles it uses for its operations throughout the United States. The Company’s leases have remaining terms of one to nine years.
Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is
reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of
determining total future lease payments.
Lease cost recognized in our consolidated statements of operations is summarized as follows (dollars in thousands):
Operating lease cost
Finance lease cost
Amortization of right-of-use assets
Interest on lease liabilities
Finance lease cost
Total lease cost
Year ended December 31,
2022
2023
$
2,091 $
317
76
393
2,484 $
$
2,040
-
-
-
2,040
For the year ended December 31, 2023, the Company had $469,000 in cash payments related to its financing leases prior to the lease commencement
date.
Other information about lease amounts recognized in our consolidated financial statements is as follows:
Weighted-average remaining lease term (years) - operating leases
Weighted-average remaining lease term (years) - financing leases
Weighted-average discount rate - operating leases
Weighted-average discount rate - financing leases
83
Year ended December 31,
2022
2023
8.47
2.84
9%
9%
9.45
-
9%
-
Table of Contents
Maturities of operating and financing lease liabilities for continuing operations at December 31, 2023 were as follows (dollars in thousands):
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less imputed interest
Maturities of lease liabilities
84
Operating Leases Financing Leases
669
$
669
401
54
27
-
1,820
216
1,604
2,516 $
2,529
2,410
2,352
2,388
8,795
20,990
6,284
14,706 $
$
Table of Contents
NOTE 9 – INTANGIBLE ASSETS
Goodwill
There were no changes to goodwill during the year ended December 31, 2023. The following summarizes the change in goodwill from December 31,
2021 to December 31, 2022 (dollars in thousands):
Goodwill
Intangible Assets Subject to Amortization
December 31,
2021
STS
Acquisition
Impairment
December 31,
2022
$
53,451 $
1,977 $
(34,835) $
20,593
The following summarizes the change in intangible assets from December 31, 2021 to December 31, 2023 (dollars in thousands):
Intangible assets subject to amortization
from continuing operations
Customer relationships
Marketing related
Technology based
Internally capitalized software
Intangible assets subject to amortization
from continuing operations
December
31, 2021 Additions Amortization
December
31, 2022 Additions Amortization
December
31, 2023
$
328 $
97
20,304
533
3,400 $
700
-
-
(147) $
(113)
(3,455)
(348)
3,581 $
684
16,849
185
$
21,262 $
4,100 $
(4,063) $
21,299 $
- $
-
-
-
- $
(260) $
(185)
(3,430)
(185)
3,321
499
13,419
-
(4,060) $
17,239
85
Table of Contents
The following provides a breakdown of identifiable intangible assets as of December 31, 2023 and 2022 (dollars in thousands):
Customer relationships
Marketing related
Technology based
Internally capitalized software
Total
Less: accumulated amortization
Identifiable intangible assets from continuing operations, net
December 31,
2023
2022
$
$
3,861 $
1,027
24,107
1,236
30,231
(12,992)
17,239 $
3,861
1,027
24,107
1,236
30,231
(8,932)
21,299
These intangible assets are being amortized on a straight-line basis over their weighted average remaining estimated useful life of 5.6 years.
Amortization expense attributable to continuing operations for the year ended December 31, 2023 and 2022 was $4,060,000 and $4,063,000, respectively,
and is presented as part of depreciation and amortization in the accompanying consolidated statements of operations.
As of December 31, 2023, the estimated annual amortization expense from continuing operations for each of the next five fiscal years and thereafter is
as follows (dollars in thousands):
2024
2025
2026
2027
2028
Thereafter
Total
$
$
3,841
3,832
3,019
2,744
1,769
2,034
17,239
86
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NOTE 10 – DEBT
STS Notes
On June 17, 2022, pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $2,000,000 of notes payable in the
form of two unsecured, subordinated promissory notes, each in the principal amount of $1,000,000 and bearing an interest rate of 3.0% per annum, payable
quarterly. The notes mature on June 14, 2024 and June 17, 2025, respectively. The aggregate balance of these notes payable was $2,000,000 as of
December 31, 2022 and is included in notes payable long-term, in the consolidated balance sheets. As of December 31, 2023, the aggregate balance of
these notes payable was $2,000,000 of which $1,000,000 was included in notes payable current portion and $1,000,000 was included in notes payable long-
term, respectively, in the consolidated balance sheets.
Loans Payable
As part of its operations the Company enters loans related to purchases of its vehicles. These loans have maturities between 2024 and 2028 and carry
interest rates ranging from 0% to 6.99%. These loans primarily have equal monthly payments over the life of the respective loan. The loans are presented as
part of loans payable, current portion and loans payable long-term on the consolidated balance sheet.
2022 Promissory Notes
On December 20, 2022, the Company entered into a Promissory Note Agreement (the “2022 Promissory Notes”) with (i) Robert A. Berman, the
Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC,
a 10.3% holder of Common Stock of the Company based on its Schedule 13G filed with the Securities and Exchange Commission on May 20,
2022, pursuant to which the lenders loaned $1,000,000 to the Company. During the first quarter of 2023, Robert A. Berman invested an additional
$400,000 under the same terms as the 2022 Promissory Notes. The lenders were determined to be related parties. No 2022 Promissory Notes remain
outstanding, as all 2022 Promissory Notes were exchanged in connection with the private placement of 2023 Promissory Notes described below.
2023 Promissory Notes
On January 18, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited
investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $15,000,000 in aggregate
principal amount of senior secured promissory notes (the “2023 Promissory Notes”), and (ii) warrants to purchase, for an exercise price of $2.00 per
share, up to an aggregate of 7,500,000 shares of common stock of the Company, par value $0.0001 per share. In connection with the initial closing on
January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of 2023 Promissory Notes and warrants to purchase 6,250,000 shares of
Common Stock, resulting in proceeds to the Company of $12,500,000 before reimbursement of expenses. See NOTE 14 – STOCKHOLDERS' EQUITY for
additional information related to the warrants. Pursuant to the terms of the Securities Purchase Agreement, the 2022 Promissory Notes were exchanged for
equal principal amounts of the 2023 Promissory Notes which are included in the proceeds of $12,500,000. As a result, the 2022 Promissory Notes were
exchanged with no further force and effect as of the effective date of the Securities Purchase Agreement.
The 2023 Promissory Notes are a senior secured obligation of the Company and rank senior to all indebtedness of the Company, subject to certain
exceptions. The 2023 Promissory Notes have a maturity date of July 18, 2025 (the “Maturity Date”), at which time all remaining outstanding principal and
accrued but unpaid interest will be due. The 2023 Promissory Notes bear an interest rate of 12% per annum, and the Company will be required to pay
interest quarterly during each calendar year through and including the Maturity Date.
At any time, the Company may prepay all, or any portion of, the 2023 Promissory Notes by redemption at a price equal to (i) 120% of the then-
outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed on or prior to the first anniversary of
issuance, (ii) 115% of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after
the first anniversary of issuance and on or prior to the second anniversary of issuance, or (iii) 110% of the then-outstanding principal amount under
the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the second anniversary of issuance and prior to the Maturity Date (the
“Early Redemption Schedule”). The Investors will also have the option of requiring the Company to redeem the 2023 Promissory Notes in accordance with
the Early Redemption Schedule if the Company undergoes a fundamental change.
The Company determined that the holder redemption and mandatory redemption options would qualify as derivatives and be subject to accounting
under ASC Topic 815, Derivatives and Hedging. The Company believes that the fair value associated with the embedded derivatives related to the holder
and mandatory redemption rights are inconsequential.
The Securities Purchase Agreement contains customary representations and warranties of the Company and the investors. The Company has a material
relationship with two of the investors, (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global
Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a 11.64% holder of Common Stock of the Company based on its Schedule 13G/A filed
with the Securities and Exchange Commission on February 14, 2024. Mr. Berman and Arctis invested $2,000,000 and $6,500,000, respectively, in
connection with the $12,500,000 initial closing of the private placement. These lenders were determined to be related parties. Mr. Berman had the option,
upon request of the Company made within six months of the initial closing, to invest up to an additional $2,500,000 in a subsequent closing, or series of
closings, on the same terms. In aggregate, such subsequent closings would have resulted in the issuance of senior secured notes in the original principal
amount of up to $2,500,000 and warrants to purchase up to 1,250,000 shares of Common Stock. This option was not exercised and has expired as of
December 31, 2023.
The Securities Purchase Agreement further provides Arctis with the right to designate a director to be seated on the Company’s board of directors (the
“Board”) for a term expiring at the Company’s 2023 annual meeting of stockholders, at which meeting such director shall be nominated by the Board to
stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders. Arctis has a right to a Board
designee for so long as it holds the 2023 Promissory Notes, and such right may not be sold or transferred to any party not affiliated with Arctis. As a
result of this right, on September 14, 2023, a director designated by Arctis was elected by the Company’s stockholders at the Company’s 2023 annual
meeting of stockholders.
The 2023 Promissory Notes impose certain financial covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries
from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, and restrict the declaration of any dividends or other
distributions, subject to specified exceptions. In connection with the Series A Prime Revenue Sharing Notes, the holders of the 2023 Promissory Notes
signed a waiver to allow for the issuance of additional debt by the Company. If an event of default under the 2023 Promissory Notes occurs, the investors
can elect to redeem the 2023 Promissory Notes for cash in accordance with the Early Redemption Schedule, plus default interest, which accrues at a rate
per annum equal to 14% from the date of an event of default.
The warrants issued in connection with the initial closing have an exercise price of $2.00 per share, subject to adjustment for stock splits, reverse stock
splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a
cash or cashless basis at the election of the holder.
Subsequent to year-end all of the 2023 Promissory Notes were fully redeemed. See NOTE 17 – SUBSEQUENT EVENTS for additional information
related to the redemption of the 2023 Promissory Notes.
87
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Series A Prime Revenue Sharing Notes
On December 15, 2023, the Company issued $15,000,000 in Series A Prime Revenue Sharing Notes. Interest accrues on the Series A Prime Revenue
Sharing Notes at a fixed annual rate of 13.25% and is paid monthly. The entire outstanding principal balance, together with all interest accrued and unpaid
is due and payable on the maturity date of December 15, 2026. Debt issuance costs paid in connection with the Series A Prime Revenue Sharing Notes
were $670,000 and are being amortized as interest expense using a straight-line method over the term of the Series A Prime Revenue Sharing Notes. The
Company has a material relationship with Arctis, which invested $5,000,000 in connection with the $15,000,000 initial closing of the Series A Prime
Revenue Sharing Notes.
Interest will be paid based on revenue received from an initial pool of “prime” accounts which are related to contracts from customers in five states,
each of which has been rated at or above AAA/AA+/Aal for their respective unsecured general obligation debt by nationally recognized credit rating
agencies. The Company entered into a base Indenture for the Series A Prime Revenue Sharing Notes as of December 15, 2023 with Argent Institutional
Trust Company, as trustee. The Indenture creates a first priority security interest for the benefit of the holders of all subsequent notes issued under the
Indenture. The Series A Prime Revenue Sharing Notes rank senior to the Company’s existing and future secured and unsecured debt with respect to the
pool of revenue securing the Series A Prime Revenue Sharing Notes.
As part of the terms of the Series A Prime Revenue Sharing Notes the Company is required to maintain an interest reserve related to not less than three
times the next monthly interest payment. Additionally, there is a sinking fund requirement which states if the three year value of eligible contracts is less
than 170% of the aggregate outstanding principal amount of Series A Prime Revenue Sharing Notes the Company must maintain a cash balance sufficient
to amortize the principal amount due on the Series A Prime Revenue Sharing Notes in equal monthly installments by the respective due dates of such
series. The amount related to the interest reserve and sinking fund was $500,000 as of December 31, 2023 and is held by a third party and is presented as
part of deposits on the consolidated balance sheets. The Company is not in default of any requirements as they relate to the Series A Prime Revenue
Sharing Notes.
The Company may prepay the Series A Prime Revenue Sharing Notes at anytime up until December 15, 2026 by paying a premium ranging from
103% to 106%. Thereafter, the Series A Prime Revenue Sharing Notes may be prepaid by the Company at par value; provided, however, that the Series A
Prime Revenue Sharing Notes may not be redeemed prior to December 15, 2024. Repayment of the Series A Prime Revenue Sharing Notes consisting of
all principal, plus any unpaid accrued interest, may also be accelerated by the noteholder upon a change in control or event of default. As of the year ended
December 31, 2023, the Company recognized $83,000 in interest expense related to the Series A Prime Revenue Sharing Notes.
Interest Expense, net
The following table presents the interest expense and interest income related to the contractual interest and the amortization of debt issuance costs for
the Company’s debt arrangements (dollars in thousands):
Contractual interest
Amortization of debt issuance costs
Total interest expense, net
Less: interest income
Total interest expense, net
Schedule of Principal Amounts Due on Debt
Year ended December 31,
2022
2023
$
$
1,648
1,991
3,639
(43)
3,596 $
The principal amounts due for notes payable and loans payable are shown below as of December 31, 2023 (dollars in thousands):
2024
2025
2026
2027
2028
Thereafter
Total
Less unamortized financing costs
Total notes payable
88
$
$
70
2
72
(51)
21
1,074
13,578
15,083
86
27
-
29,848
(3,831)
26,017
Table of Contents
NOTE 11 – INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be
realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of
ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business.
The provision (benefit) for income taxes for the years ended December 31, 2023 and 2022 consists of the following (dollars in thousands):
Federal:
Deferred
Total federal
State:
Current
Total state
Provision (benefit) for income taxes
Year ended December 31,
2022
2023
$
$
13 $
13
19
19
32 $
(987)
(987)
-
-
(987)
89
Table of Contents
The components of deferred income tax assets and liabilities are as follows on December 31, 2023 and 2022 (dollars in thousands):
Deferred tax assets
Net operating loss
163(j) limitation
Lease liabilities
Research and development
Other
Total gross deferred tax assets
Valuation allowance for deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Right-of-use asset
Goodwill and intangibles
Fixed assets
Total gross deferred tax liabilities
Net deferred tax liabilities
Year ended December 31,
2022
2023
40,361 $
3,186
4,085
3,891
1,646
53,169
(46,531)
6,638 $
(2,912)
(3,020)
(771)
(6,703)
(65) $
29,402
2,158
3,906
4,551
511
40,528
(35,606)
4,922
(895)
(3,976)
(103)
(4,974)
(52)
$
$
$
90
Table of Contents
The difference between the income tax provision (benefit) computed at the U.S. Federal statutory rate and the effective tax rate is as follows for the
years ended December 31, 2023 and 2022:
U.S. statutory federal rate
(Decrease) increase in taxes resulting from:
State income tax rate, net of U.S. Federal benefit
True-ups
Other
Valuation allowance
Effective tax rate
Year ended December 31,
2022
2023
21.00%
21.00%
4.42%
0.70%
(0.59)%
(25.60)%
(0.07)%
3.10%
4.20%
(0.60)%
(26.50)%
1.20%
The Company files income tax returns in the United States and various state and foreign jurisdictions. No U.S. Federal, state or foreign income tax
audits were in process as of December 31, 2023.
The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such
net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax
liability related to the goodwill, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The
Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future
benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation
allowance will be reduced accordingly.
As of December 31, 2023, the Company had gross federal and state net operating loss carryforwards of $156,392,000 and $149,122,000, respectively.
The gross NOLs generated in the years ended December 31, 2023 and 2022 of $31,599,000 and $54,495,000, respectively, will be carried forward
indefinitely and are subject to the annual 80 percent limitation. As of December 31, 2023, Rekor had net federal and state net operating loss (“NOL”)
carryforwards of $33,063,000 and $7,298,000, respectively. The net federal and state NOLs of $33,063,000 and $7,298,000, respectively, are scheduled to
begin to expire in 2035 and are grandfathered under the Tax Cuts and Jobs Act; thus, these NOLs are not subject to the 80 percent limitation.
As of December 31, 2022, Rekor had gross federal and state net operating loss carryforwards of $114,742,000 and $106,866,000, respectively. As of
December 31, 2022, Rekor had net federal and state net operating loss carryforwards of $24,096,000 and $5,306,000, respectively.
The federal and state net operating loss and credit carryforwards may be subject to significant limitations under Sections 382 and 383 of the Internal
Revenue Code ("Code") and similar provisions of state law. These Code sections limit the federal net operating loss and credit carryforwards that may be
used in any year in the event of an “ownership change”. A Section 382 “ownership change” generally occurs if one or more shareholders or groups of
shareholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership
percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382
“ownership changes”. If so, the Company may lose some or all of the tax benefits of its NOLs and tax credits. The extent of such limitations for prior years,
if any, has not been determined.
For the years ended December 31, 2023 and 2022, the Company did not record any interest or penalties related to unrecognized tax benefits. It is the
Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax benefit.
As a result of the acquisition of STS in 2022, the Company recognized identified definite-lived tangible and intangible asset related to customer
relationships, trade names, property and equipment for which the Company received no tax basis due to the stock acquisition. As a result, the Company
recorded a deferred tax liability of $1,001,000 which increased the Company's goodwill related to the STS acquisition. Due to the overall valuation
allowance position of the Company, the deferred tax liability was used to offset the Company's deferred tax asset and thus reducing the total valuation
allowance. This impact to the valuation allowance was booked as a tax benefit. The tax benefit of $1,001,000 was offset by $14,000 of deferred tax expense
for the year ended December 31, 2022.
91
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NOTE 12 – EMPLOYEE BENEFIT PLAN
401 (k) Plan
In 2019, Rekor established the Rekor Systems, Inc. 401(k) Plan (the “Rekor 401(k) Plan”), a Qualified Automatic Contribution Arrangement (QACA)
safe harbor plan. Employees that satisfied the eligibility requirements became participants in the Rekor 401(k) Plan. The Company contributes an amount
equal to the sum of 100% of a participant’s elective deferrals that do not exceed 1% of participant’s compensation, plus 50% of the participant’s elective
deferrals that exceed 1% of the participants compensation, but do not exceed 6% of the participant’s compensation. Employee contributions are fully
vested, and matching contributions are subject to a two-year service vesting schedule.
Employee Severance Benefits
In accordance with the current employment terms with all its employees (Section 14 of the Israeli Severance Pay Law, 1963) located in Israel, the
Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee’s
full retirement benefit and severance obligation. The Company is relieved from any severance pay liability with respect to each such employee after it
makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts funded, as of the respective agreement
dates, are not reflected on the Company’s consolidated balance sheet, as the amounts funded are not under the control and management of the Company
and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies.
The amount of contributions recorded by the Company under these plans during the years ended December 31, 2023 and 2022 were $1,270,000 and
$1,338,000, respectively.
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NOTE 13 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the
ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property
damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such
lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated.
Firestorm Principals
On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the
Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no.
1:19-cv-07767-VEC. The Firestorm Principals answered together with counterclaims on February 28, 2020. In 2020, the Firestorm Principals filed various
suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel.
On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals. Pursuant to the terms of the settlement agreement,
the parties have mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or
claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the
Company will transfer certain Firestorm assets to CrisisRisk Strategies, LLC, make a payment of $175,000, and the Firestorm Principals have agreed to the
extinguishment of all rights to enforce their claims for payment with respect to principal and interest on the promissory notes issued in connection with the
Company’s acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same.
As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities
that was presented as discontinued operations. The Company also cancelled warrants to purchase 631,254 shares of common stock, which were issued in
connection with the acquisition of Firestorm.
H.C Wainwright & Co., LLC
In March 2023, the Company entered into an engagement letter with H.C. Wainwright & Co., LLC, ("HCW"), related to a previous capital raise the
Company completed in March 2023. That letter agreement contained provisions for both a “tail” fee due to HCW for any subsequent transactions the
Company may enter into during the specified tail period with investors introduced to the Company by HCW during the term of the letter, as well as a right
of first refusal ("ROFR"), to act as the Company's exclusive underwriter or placement agent on any subsequent financing transactions utilizing an
underwriter or placement agent occurring within twelve months from the consummation of a transaction pursuant to the engagement letter.
In July 2023, subsequent to the announcement of an agreement the Company entered into with one of its stockholders in connection with the exercise
of warrants held by the stockholder, which the Company refers to as the July Warrant Exercise Transaction, the Company received a letter from HCW
claiming entitlement to certain “tail” fees and warrant consideration stemming from the agreement with the Company's stockholder. The Company believed
then, and believes now, that this claim is without merit. As a result of this claim and for other reasons articulated to HCW, the Company terminated its
engagement letter with HCW, including for cause, which, the Company believes, eliminated both the “tail” provision and the ROFR provision with respect
to this transaction.
On or about October 23, 2023, HCW filed a complaint in New York State Supreme Court asserting a claim for breach of contract against the Company
relating to the July Warrant Exercise Transaction. HCW sought to recover compensatory and consequential damages and certain warrants under its letter
agreement with Rekor and other fees, not less than a cash fee of $825,000 and the value of warrants to purchase an aggregate of up to 481,100 shares of
common stock of the company at an exercise price of $2.00 per share as well as attorneys’ fees. On February 29, 2024, HCW filed a notice of
discontinuance without prejudice and advised the court that it intended to commence a new proceeding by filing a new complaint that would address the
claim in this lawsuit and subsequent events. On March 4, 2024, the court discontinued this lawsuit without prejudice.
On February 29, 2024, HCW initiated a new action with the filing of complaint in New York State Supreme Court. In this lawsuit, HCW advances the
same breach of contract theory and seeks to recover the same damages as sought in the prior now-dismissed lawsuit. In addition, HCW seeks to recover an
additional $2,156,000 in damages plus the value of warrants to purchase an aggregate of up to 805,000 shares of common stock at an exercise price of
$3.125 per share in connection with Rekor’s February 2024 offering. HCW alleges that Rekor breached its engagement letter with HCW by failing to give
Rekor notice of this offering and failing to provide HCW with the opportunity to exercise the ROFR with respect to this transaction.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
Occupational Safety and Health Administration (“OSHA”) Claim
In 2023 two previous employees of the Company (the “Claimants”) filed a complaint with OSHA (the “OSHA Complaints”) against the Company.
Shortly after the OSHA Complaints were filed against the Company, the Company filed a position statement to address the OSHA Complaints. On
November 30, 2023, OSHA issued its determination that, based on the information gathered thus far in its investigation, OSHA was unable to conclude that
there was reasonable cause to believe that a violation of the statute occurred. OSHA thereby dismissed the complaint.
Thereafter, Claimants appealed the determination by filing objections and requesting a hearing before an Administrative Law Judge. The Company
likewise filed a request for an award of attorneys’ fees. On January 4, 2024, the Office of Administrative Law Judges (“OALJ”) processed the appeals and
issued its Notice of Docketing and Order of Consolidation. On February 28, 2024, the OALJ issued an Order setting forth a revised schedule governing the
case with the start of the hearing scheduled for December 2, 2024.
The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit.
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NOTE 14 – STOCKHOLDERS’ EQUITY
Common Stock
Effective March 18, 2020, the Company adopted and approved an amendment to increase the number of authorized shares of common stock from
30,000,000 to 100,000,000, $0.0001 par value. The rights and privileges terms of the additional authorized shares of common stock are identical to those of
the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe
for any new issuances of common stock, the subsequent potential issuance of additional shares of common stock will reduce the current stockholders’
percentage ownership interest in the total outstanding shares of common stock. The Amendment and the creation of additional shares of authorized
common stock will not alter current stockholders’ relative rights and limitations.
2023 Registered Direct Offering
On March 23, 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and
issuance by the Company in a registered direct offering of an aggregate of: (i) 6,100,000 shares of the Company’s common stock, (ii) pre-funded warrants
exercisable for up to an aggregate of 772,853 shares of common stock, and (iii) warrants to purchase up to 6,872,853 shares of common stock (the
"Registered Direct Warrants"). The offering price per share of common stock and associated warrant was $1.455 and the offering price per pre-
funded warrant and associated warrant was $1.454. Each pre-funded warrant is exercisable for one share of common stock at an exercise price of
$0.001 per share and will expire when exercised in full. The warrants to purchase common stock are exercisable immediately upon issuance, will
expire five years following the issuance date and have an exercise price of $1.60 per share. The Company received gross proceeds from
the 2023 Registered Direct Offering of approximately $10,000,000. The Offering closed on March 27, 2023.
The Company entered into an engagement letter with H.C. Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts
basis, in connection with the offering. The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering.
The Company also paid the placement agent $75,000 for non-accountable expenses and $16,000 for clearing fees. Additionally, the Company issued
designees of the placement agent, as compensation, warrants to purchase up to 481,100 shares of common stock, equal to 7.0% of the aggregate number of
shares of common stock and pre-funded warrants placed in the offering. The warrants issued to the placement agent have a term of five years and an
exercise price of $1.8188 per share of common stock.
During the year ended December 31, 2023, 772,853 of the pre-funded warrants were exercised for 772,853 shares of the Company's common stock.
2023 Letter Agreement
On July 25, 2023, the Company entered into a letter agreement (the “2023 Letter Agreement”) with the same institutional investor connected to
the 2023 Registered Direct Offering, pursuant to which the investor and the Company agreed that the investor would exercise all its Register
Direct Warrants for shares of common stock underlying the Registered Direct Warrants at $1.60 per share of common stock. In consideration for exercising
the Registered Direct Warrants and in exchange for the imposition of volume and trading restrictions on the 6,872,853 shares of common stock issued to
the institutional investor in connection with exercise of the Registered Direct Warrants, the 2023 Letter Agreement provided for the issuance of
unregistered warrants to purchase up to an aggregate of 2,850,000 shares of common stock (the “2023 Private Warrants”). The shares of common stock
underlying the 2023 Private Warrants have been registered for resale on a registration statement declared effective by the SEC on September 29, 2023.
The 2023 Private Warrants will expire on January 25, 2029 and have an exercise price of $3.25.
The 2023 Private Warrants were valued using the Black-Scholes pricing model at a total of $6,757,000 based on a five year term, volatility of 115%, a
risk-free of 4.15%, and stock price of $2.85. The fair value of the 2023 Private Warrants were treated as an equity financing cost and recorded as part of the
Company’s additional paid-in capital. This resulted in a net zero impact within the Company’s additional paid-in capital.
2023 Warrants
In connection with the initial closing of the 2023 Promissory Notes on January 18, 2023, the Company issued warrants to purchase 6,250,000 shares of
common stock. The warrants issued in connection with the initial closing have an exercise price of $2.00 per share, subject to adjustment for stock splits,
reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are
exercisable on a cash or cashless basis at the election of the holder. The 2023 Warrants were valued at $5,125,000, based on the relative fair value basis,
compared to the total proceeds received.
The Company estimated the fair value of the warrants using the Black-Scholes pricing model. The use of the Black-Scholes pricing model requires the
use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award. The
fair value of each warrant granted has been estimated as of the date of the grant using the Black-Scholes pricing model with the following assumptions:
Risk-free interest rate
Expected term (in years)
Volatility
Dividend yield
Estimated annual forfeiture rate at the time of grant
3.42%
5
113%
0%
0%
The Company treats the warrants as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the
underlying debt as interest expense, net in the consolidated statements of operations.
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At-the-Market Offering
Under the S-3 registration filed in September 2021, on February 24, 2022, the Company entered into an At-the-Market Issuance Sales Agreement
(the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company from time to
time may offer and sell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $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. The Company incurred issuance costs
of approximately $174,000 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 consolidated balance sheets.
For the year ended December 31, 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 $22,754,000 after paying $174,000 related to the
issuance cost, as well as 3.0% or $709,000 related to cash commissions provided to the Agent.
In December of 2022 the Company terminated the 2022 Sales Agreement.
STS Acquisition
In connection with the acquisition as described in NOTE 2 – ACQUISITIONS, the Company issued 798,666 shares of the Company’s common stock as
part of the consideration.
2024 Public Offering
On February 9, 2024, the Company issued and sold 10,000,000 shares of its common stock and the underwriters exercised an option to purchase an
additional 1,500,000 shares of its common stock (the “2024 Public Offering”). The net proceeds to the Company, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the Company, were approximately $26,463,000. See NOTE 17 – SUBSEQUENT
EVENTS for additional information on the 2024 Public Offering.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred stock, $0.0001 par value. The Company’s preferred stock may be entitled to
preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the
Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of
the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into, and issued in, designated series from time to
time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the
power to determine the relative powers, preferences and rights of each series of preferred stock.
Series A Cumulative Convertible Redeemable Preferred Stock
Of the 2,000,000 authorized shares of preferred stock, 505,000 shares were designated as $0.0001 par value Series A Cumulative Convertible
Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock were entitled to quarterly dividends of 7.0% per
annum per share. As of December 31, 2023 and 2022, there are no outstanding shares of the Company's Series A Preferred Stock.
Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity
in the accompanying consolidated balance sheets.
Series B Cumulative Convertible Preferred Stock
Of the 2,000,000 authorized shares of preferred stock, 240,861 shares were designated as $0.0001 par value Rekor Series B Cumulative Convertible
Preferred Stock (the “Series B Preferred Stock”). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $0.0001 par value Series B
Preferred Stock. All Series B Preferred Stock was issued at a price of $10.00 per share as part of the acquisition of TeamGlobal. The Series B Preferred
Stock had a conversion price of $5.00 per share. Each Series B Preferred Stock had an automatic conversion feature based on the share price of Rekor. As
of December 31, 2023 and 2022, there are no outstanding shares of the Company's Series B Preferred Stock.
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Warrants
A summary of the warrant activity for the Company for the period ended December 31, 2023 and December 31, 2022 is as follows:
Series A
Preferred
Stock
Warrants
(1)
Firestorm
Warrants
(2)
Secure
Education
Warrants
(3)
2018
Public
Offering
Warrants
(4)
2023
Registered
Direct
Offering
(6)
2023
Private
Warrants
(7)
2023
Promissory
Notes (5)
41,996
-
631,254
-
15,556
-
3,505
-
41,996
631,254
15,556
3,505
-
-
-
-
-
-
Total
-
-
-
692,311
-
692,311
$
1.03 $
3.09 $
6.06 $
1.00 $
- $
- $
- $
3.02
$
7,000 $
- $
- $
1,000 $
- $
- $
- $
8,000
-
-
-
-
-
-
-
-
41,996
-
(36,375)
(5,621)
-
631,254
-
-
-
(631,254)
15,556
-
-
(15,556)
-
-
3,505
692,311
- 6,250,000 8,126,806 2,850,000 17,226,806
- (7,682,081)
-
(24,682)
-
(3,505)
(631,254)
-
-
- (7,645,706)
-
-
-
-
-
-
-
-
-
- 6,250,000
481,100 2,850,000 9,581,100
- $
- $
- $
- $
2.00 $
1.82 $
3.25 $
2.36
- $
- $
- $
- $ 8,313,000 $
727,000 $
228,000 $ 9,268,000
$
$
36,375
-
-
-
- 7,645,706
- 7,682,081
Active warrants January 1,
2022
Exercised warrants
Outstanding warrants
December 31, 2022
Weighted average strike price
of outstanding warrants as of
December 31, 2022
Intrinsic value of outstanding
warrants as of December 31,
2022
Shares of common stock
issued for warrant exercises
during the year ended
December 31, 2022
Active warrants January 1,
2023
Issued warrants
Exercised warrants
Expired warrants
Cancelled warrants
Outstanding warrants
December 31, 2023
Weighted average strike price
of outstanding warrants as of
December 31, 2023
Intrinsic value of outstanding
warrants as of December 31,
2023
Shares of common stock
issued for warrant exercises
during the year ended
December 31, 2023
(1) As part of a Regulation A Offering in fiscal years 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the
“Series A Preferred Stock Warrants”). The exercise price for these warrants is $1.03. The expiration date of the Series A Preferred Stock Warrants
was November 8, 2023.
(2) As part of the acquisition of Firestorm on January 24, 2017, the Company issued warrants to purchase 315,627 shares of its common stock,
exercisable over a period of five years, at an exercise price of $2.5744 per share, and warrants to purchase 315,627 shares of its common stock,
exercisable over a period of five years, at an exercise price of $3.6083 per share (the “Firestorm Warrants”). The expiration date of the Firestorm
Warrants was January 24, 2022. As part of the settlement of the Firestorm litigation, these warrants were cancelled (see NOTE - 13
COMMITMENTS AND CONTINGENCIES).
(3) Pursuant to the Company’s acquisition of Secure Education Consultants on January 1, 2018, the Company issued warrants to
purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $5.44 per share, and warrants to
purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $6.53 per share (the “Secure Education
Warrants”). The expiration date of the Secure Education Warrants was January 1, 2023.
(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 206,250 shares of its common stock (the “2018 Public Offering Warrants”), exercisable over a period of five years, at an exercise
price of $1.00 per share. These warrants were exercisable commencing April 27, 2019 and expired on October 29, 2023.
(5) On January 18, 2023, in connection with the 2023 Promissory Notes, the Company issued the investors warrants to purchase 6,250,000 shares of
its common stock, exercisable over a period of five years, at an exercise price of $2.00 per share. These warrants were exercisable commencing
January 18, 2023 and expire on January 18, 2028.
(6) On March 23, 2023, in connection with the 2023 Register Direct Offering the Company issued (i) pre-funded warrants exercisable for up to an
aggregate of 772,853 shares of common stock, (ii) warrants to purchase up to 6,872,853 shares of common stock, and (iii) warrants to the
placement agent to purchase up to 481,100 shares of common stock. The exercise price per share of the warrants was $1.455 and each pre-
funded warrant is exercisable for one share of common stock at an exercise price of $0.001 per share and will expire when exercised in full. Each
warrant for the placement agent is exercisable for one share of common stock at an exercise price of $1.8188 per share. These warrants were
exercisable commencing March 27, 2023 and expire on March 27, 2028.
(7) On July 25, 2023, in connection with the 2023 Letter Agreement, the Company issued warrants to purchase 2,850,000 shares of its common
stock, exercisable over a period of five and half years, at an exercise price of $3.25 per share. These warrants were exercisable commencing July
25, 2023 and expire on January 25, 2029.
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NOTE 15 – EQUITY INCENTIVE PLAN
In 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016
Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance
awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available
under the 2017 Plan were initially set at 3,000,000 shares.
In 2021, the Company filed a registration statement on Form S-8 solely to register an additional 4,368,733 shares of its common stock available for
issuance under the 2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and by the Company’s stockholders on
September 14, 2021 at the Company’s annual meeting.
Stock-based compensation expense included in the consolidated statements of operations was as follows (dollars in thousands):
Cost of revenue, excluding depreciation and amortization
General and administrative expenses
Selling and marketing expenses
Research and development expenses
Total stock-based compensation expense
Stock Options
Year ended December 31,
2022
2023
20 $
2,155
413
1,764
4,352 $
152
2,988
1,378
2,098
6,616
$
$
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 three years with a contractual term of ten years.
Stock compensation expense related to stock options for the years ended December 31, 2023 and 2022 was $0 and $43,000, respectively, and is
presented as part of general and administrative expenses in the accompanying consolidated statements of operations.
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Table of Contents
A summary of stock option activity under the Company’s 2017 Plan for the years ended December 31, 2023 and 2022 is as follows:
Outstanding balance at January 1, 2022
Exercised
Forfeited
Expired
Outstanding balance at December 31, 2022
Exercised
Forfeited
Expired
Outstanding balance at December 31, 2023
Exercisable at December 31, 2023
Number of Shares
Subject to Option
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(Years)
Aggregate Intrinsic
Value
1,012,336 $
(99,970)
(6,999)
(42,987)
862,380 $
(141,166)
-
(32,373)
688,841 $
688,841 $
1.28
0.93
0.90
2.25
1.27
1.12
-
3.44
1.20
1.20
6.50 $
-
-
-
5.29 $
-
-
-
3.70 $
3.70 $
5,002,000
172,000
1,478,000
1,478,000
There were no options granted in the years ended December 31, 2023 and 2022. The total fair value of shares that became vested after grant during the
years ended December 31, 2023 and 2022 was $0 and $113,000, respectively.
As of December 31, 2023, there was no unrecognized stock compensation expense related to stock options granted under the 2017 Plan.
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Restricted Stock Units
Stock compensation expense related to RSU’s for the years ended December 31, 2023 and 2022 was $4,352,000 and $6,573,000, respectively, and was
presented as part of operating expenses in the accompanying consolidated statements of operations.
A summary of RSU activity under the Company’s 2017 Plan for years ended December 31, 2023 and 2022 is as follows:
Outstanding balance at January 1, 2022
Granted
Vested
Forfeited
Outstanding balance at December 31, 2022
Granted
Vested
Forfeited
Outstanding balance at December 31, 2023
Number of Shares
Weighted Average
Unit Price
Weighted Average
Remaining
Contractual Term
(Years)
1,347,879 $
1,601,213
(521,647)
(487,185)
1,940,260 $
898,440
(903,485)
(187,757)
1,747,458 $
10.94
3.74
10.64
9.61
5.58
1.92
5.83
3.49
3.79
2.20
1.98
-
-
1.81
1.65
0.66
1.38
1.39
All RSUs granted vest upon the satisfaction of a service-based vesting condition.
As of December 31, 2023, there was $4,077,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan
that will be recognized over an average remaining period of 1.39 years.
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Table of Contents
NOTE 16 – LOSS PER SHARE
The following table provides information relating to the calculation of loss per common share (dollars in thousands, except per share data):
Basic and diluted loss per share
Net loss from continuing operations
Net income attributable to shareholders from discontinued operations
Net loss attributable to common shareholders
Weighted average common shares outstanding - basic and diluted
Basic and diluted loss per share from continuing operations
Basic and diluted earnings per share from discontinued operations
Basic and diluted loss per share
Common stock equivalents excluded due to anti-dilutive effect
Year ended December 31,
2023
2022
(45,685) $
-
(45,685) $
63,168,299
(0.72) $
-
(0.72) $
12,017,399
(83,454)
339
(83,115)
49,807,475
(1.68)
0.01
(1.67)
3,494,951
$
$
$
$
As the Company had a net loss for the year ended December 31, 2023, the following 12,017,399 potentially dilutive securities were excluded from
diluted loss per share: 9,581,100 for outstanding warrants, 688,841 related to outstanding options and 1,747,458 related to outstanding RSUs.
As the Company had a net loss for the year ended December 31, 2022, the following 3,494,951 potentially dilutive securities were excluded from
diluted loss per share: 692,311 for outstanding warrants, 862,380 related to outstanding options and 1,940,260 related to outstanding RSUs.
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NOTE 17 – SUBSEQUENT EVENTS
ATD Acquisition
On January 2, 2024 (the “Closing Date”), the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”),
pursuant to that certain Interest Purchase Agreement (the “ATD Purchase Agreement”), dated as of the Closing Date, by and among the Company, ATD and
All Traffic Holdings, LLC (the “Seller”). The Seller is a portfolio company of Seaport Capital, a private equity firm. ATD is engaged in the business of
advanced traffic data collection. Under the terms of the ATD Purchase Agreement, the Company acquired all of the issued and outstanding limited liability
company interests of ATD (the “ATD Acquisition”).
The aggregate purchase price for the interests of ATD was approximately $19,750,000, subject to a customary working capital adjustment. The
purchase price comprises approximately $9,750,000 in cash which included closing adjustments and 3,496,463 unregistered shares of the Company’s
common stock (the “Stock Consideration”), based on a volume weighted average trading price of the Company’s common stock over a thirty consecutive
trading day period prior to the date of the ATD Purchase Agreement, which was $2.86. 662,329 of the 3,496,463 shares of the Stock Consideration will be
issued and delivered to the Seller on the twelve-month anniversary of the Closing Date, subject to cutback for working capital adjustments and/or
indemnification claims favoring the Company, if any. As a result of the transaction, ATD is a wholly-owned subsidiary of the Company and ATD’s key
employees have agreed to continue employment with the Company or one of its affiliates.
ATD Preliminary Purchase Price Allocation
The table below summarizes the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on
management’s preliminary estimates of their respective fair values for purposes of the pro forma financial information as of the acquisition date, January 2,
2024 (dollars in thousands):
Cash paid
Common stock issued
Total Consideration
Assets
Cash and cash equivalents
Accounts receivable
Property and equipment
Right-of-use operating lease assets
Intangible assets
Total assets acquired
Liabilities
Accounts payable and accrued expenses
Lease liability operating, short-term
Other current liabilities
Lease liability operating, long-term
Deferred tax liability, long-term
Total liabilities assumed
Fair value of identifiable net assets acquired
Goodwill
$
$
$
$
$
$
$
$
9,795
10,000
19,795
826
3,351
1,710
257
11,800
17,944
486
157
200
121
2,478
3,442
14,502
5,293
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma operations of combined entities
below. Due to the recent completion of the acquisition, the determination of the purchase price and the allocation of the purchase price used in the
unaudited pro forma condensed combined financial information are based upon preliminary estimates, which are subject to change during the measurement
period (up to one year from the acquisition date) as the Company finalizes the valuations of the assets acquired and liabilities assumed, including, but not
limited accounts receivable, property and equipment, intangible assets and accounts payable. The final allocation could differ materially from the
preliminary allocation used in the pro forma adjustments.
ATD Operations of Combined Entities
The following unaudited pro forma combined financial information gives effect to the acquisition of ATD and the Series A Prime Revenue Sharing
Notes as if they were consummated as of January 1, 2022. A portion of the proceeds from the Series A Prime Revenue Sharing Notes was used to fund the
acquisition of ATD and therefore the Company has included the impact of the issuance of the debt in its pro forma financial information. This unaudited
pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had
the acquisition and the issuance of the Series A Prime Revenue Sharing Notes been completed as of January 1, 2022 (the beginning of the earliest period
presented) or to project potential operating results as of any future date or for any future periods.
Year ended December 31,
2022
2023
Total revenue from continuing operations
Net loss from continuing operations
Basic and diluted loss per share continuing operations
Basic and diluted number of shares
101
(Dollars in thousands, except per share
data)
44,709 $
(46,521) $
(0.70) $
66,664,762
28,183
(84,115)
(1.58)
53,303,938
$
$
$
2024 Public Offering
In the first quarter of 2024, the “Company issued and sold 10,000,000 shares of its common stock, at an offering price of $2.50 per share of common
stock (the “2024 Public Offering Price”) in a registered public offering by the Company (the “ 2024 Public Offering”), pursuant to an underwriting
agreement with William Blair & Company, L.L.C., as representative of the several underwriters named therein (collectively, the “Underwriters”).
On February 9, 2024, the Underwriters exercised in-full their option to purchase up to 1,500,000 additional shares of common stock at the 2024 Public
Offering Price (the “Underwriters’ Option”). The exercise closed on February 13, 2024. The net proceeds to the Company for the exercise of the
Underwriters’ Option, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, was expected
to be approximately $2,287,000, or approximately $26,463,000 in aggregate for the 2024 Public Offering including the exercise of the Underwriters’
Option.
Retirement of the 2023 Promissory Notes
On March 4, 2024, the Company completed the redemption of all its outstanding 2023 Promissory Notes. The 2023 Promissory Notes were redeemed
at the redemption price of 115% of the $12,500,000 aggregate principal amount of the 2023 Promissory Notes, or approximately $14,375,000, plus accrued
and unpaid interest to the redemption date of approximately $263,000 (the “Redemption Payment”). The noteholders elected to accept $1,875,000 of the
Redemption Payment in the form of 750,000 unregistered shares of the Company’s common stock, par value $0.0001 per share, having a value of $2.50 per
share, with the remainder of the Redemption Payment to be paid in cash.
Board Election's
Pursuant to the terms of the ATD Acquisition, the Seller was granted the right to designate a director to be seated on the Company’s board of directors
(the “Board”) for a term expiring at the Company’s 2024 annual meeting of stockholders, at which meeting such director shall be nominated by the Board
to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders. The Seller has a right to a
Board designee for so long as it holds at least 50% of the Stock Consideration.
On January 2, 2024, at the designation of Seller, the Board appointed Andrew (Drew) Meyers as a member of the Board, with such appointment to take
effect immediately. In connection with Mr. Meyer’s appointment, the Board voted to increase the size of the Board to eight members, and appointed Mr.
Meyers to fill the resulting vacancy.
On March 1, 2024, the Board of the Company approved an increase to the size of the Board by one seat, to nine members, and appointed Anne
Townsend to fill the resulting vacancy. Ms. Townsend will serve for a term expiring at the Company’s 2024 annual meeting of stockholders, at which
meeting she will be nominated by the Board to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of
the stockholders.
102
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of
the end of the period covered by this Annual Report.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management
as appropriate to allow timely decisions regarding required disclosure.
Based on management’s review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective at December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act
Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide
reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that
our receipts and expenditures are being made only in accordance with authorizations; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Under the supervision and with the participation with our management, including our Chief Executive Officer and Chief Financial Officer, we assessed
the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in “Internal
Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment,
management concluded that our internal control over financial reporting was effective as of December 31, 2023.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Attestation Report of Registered Public Accounting Firm
This Annual Report does not include an attestation report of our independent registered public accounting firm because non-accelerated filers are not
required to provide such a report.
Changes to Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal year that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
103
Table of Contents
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
104
Table of Contents
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
PART III
The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2023 annual
meeting of stockholders, or the Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31,
2023, under the captions "Information about the Board of Directors and Committees," "Election of Directors" and "Executive Officers" and is incorporated
in this report by reference.
Code of Ethics
We have adopted a Code of Conduct, which serves as our Code of Ethics, which applies to all of our employees, including our executive officers. Our
Code of Conduct is available on our website at www.rekor.ai. If we amend or grant a waiver of one or more of the provisions of our Code of Conduct, we
intend to satisfy the requirements under Item 5.05 of Item 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of
Conduct that apply to our Principal Executive and Principal Financial Officer by posting the required information on our website at the above address. Our
website is not part of this Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy Statement under the captions "Executive Compensation," "Pay
Versus Performance" and "Compensation of Rekor Directors" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth in the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the Proxy Statement under the captions "Certain Relationships and Related Transactions and
Director Independence" and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the Proxy Statement under the caption "Ratification of the Appointment of Independent
Registered Public Accounting Firm" and is incorporated herein by reference.
105
Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(a) (1) List Financial Statements
See Index to Financial Statements in Part II, Item 8 of this annual report.
(2) List of Financial Statements Schedules
All applicable schedule information is included in our Financial Statements in Part II, Item 8 of this annual report.
(b) Exhibits Index. We hereby file, as exhibits to this Annual Report, those exhibits listed on the Exhibit Index immediately following the signature
page hereto.
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit FilingDate
Filed/
FurnishedHerewith
Incorporated by Reference
2.1
3.1
3.2
Second Amended and Restated Agreement and Plan
of Merger dated July 12, 2017, by and among
Novume Solutions, Inc., KeyStone Solutions, Inc.,
Brekford Traffic Safety, Inc., KeyStone Merger Sub,
LLC, and Brekford Merger Sub, Inc.
Amended and Restated Certificate of Incorporation
of Novume Solutions, Inc. as filed with the
Secretary of State of Delaware on August 21, 2017
Certificate of Amendment to Certificate of
Incorporation of Novume Solutions, Inc. as filed
with the Secretary of State of Delaware on April 30,
2019
S-4/A
333-216014
2.1
7/13/17
8-K
333-216014
8-K
001-38338
3.1
3.1
8/25/17
4/30/19
106
Table of Contents
3.3
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
10.1#
10.2
10.3#
10.4#
10.5#
Second Certificate of Amendment to the Amended
and Restated Certificate of Incorporation of Rekor
Systems, Inc., dated March 18, 2020
Amended and Restated Bylaws of Rekor Systems,
Inc.
Form of Common Stock Purchase Warrant issued by
Novume Solutions, Inc. on January 25, 2017
Form of Common Stock Purchase Warrant issued by
Novume Solutions, Inc. on January 25, 2017
Unsecured Subordinated Promissory Note issued to
Harry Rhulen by Novume Solutions, Inc. on
September 29, 2017
Unsecured Subordinated Promissory Note issued to
Suzanne Loughlin by Novume Solutions, Inc. on
September 29, 2017
Unsecured Subordinated Promissory Note issued to
James Satterfield by Novume Solutions, Inc. on
September 29, 2017
Unsecured Subordinated Promissory Note issued to
Lancer Financial Group, Inc. by Novume Solutions,
Inc. on September 29, 2017
Form of Warrant (January 2023)
Form of Senior Secured Note (January 2023)
Form of Pre-Funded Common Stock Purchase
Warrant (March 2023)
Form of Common Stock Purchase Warrant (March
2023)
Form of Placement Agent Common Stock Purchase
Warrant (March 2023)
Form of Common Stock Purchase Warrant (July
2023)
Form Series A Prime Revenue Sharing Notes
Indenture (Series A Prime Revenue Sharing Notes)
First Supplemental Indenture (Series A Prime
Revenue Sharing Notes)
Second Supplemental Indenture (Series A Prime
Revenue Sharing Notes)
2017 Equity Award Plan of Novume Solutions,
Inc. (as amended and restated as of September 14,
2021)
Assignment and Assumption Agreement, dated as of
October 1, 2017, by and between KeyStone
Solutions LLC and Novume Solutions, Inc.
Form of Rekor Systems, Inc. Incentive Stock Option
Award Agreement
Form of Rekor Systems, Inc. Non-Qualified Stock
Option Award Agreement
Employment Agreement with Eyal Hen effective
May 15, 2019
8-K
001-38338
8-K
001-38338
S-4/A
333-216014
S-4/A
333-216014
3.1
3.2
4.3
4.4
3/18/20
12/15/21
6/9/17
6/9/17
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-K
000-55833
10.2
10/3/17
000-55833
10.3
10/3/17
000-55833
10.4
10/3/17
000-55833
10.5
10/3/17
001-38338
001-38338
001-38338
001-38338
000-38338
000-38338
000-38338
000-38338
000-38338
000-38338
4.1
4.2
4.1
4.2
4.3
4.1
4.1
4.2
4.3
4.4
1/23/23
1/23/23
3/27/23
3/27/23
3/27/23
7/27/23
12/15/23
12/15/23
12/15/23
12/15/23
001-38338
10.1
3/31/22
8-K
000-55833
10.1
10/3/17
10-K
10-K
8-K
001-38338
001-38338
10.18
10.19
4/11/19
4/11/19
001-38338
10.1
5/21/19
107
Table of Contents
10.6#
10.7#
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
21.1
23.1
31.1
31.2
32.1
32.2
97
Employment Agreement with Robert Berman
effective May 15, 2019
Employment Agreement with David Desharnais
dated as of December 10, 2021
Form of Rekor Systems, Inc. Restricted Stock Unit
Agreement
First Amendment to Note Purchase Agreement,
dated March 26, 2020, by and among the Company,
the Purchasers from time to time party thereto and
the Agent.
Limited Waiver, dated as of March 26, 2020, by and
among the Company and the undersigned
Purchasers.
Share Purchase Agreement, dated August 6, 2021,
by and among Rekor Systems Inc., Waycare
Technologies Ltd., the sellers named therein, and
Shareholder Representative Services LLC, solely in
its capacity as representative of the sellers.
Securities Purchase Agreement, dated as of January
18, 2023, by and among the Company and the
investors party thereto
Form of Securities Purchase Agreement (March
2023)
Form of Inducement Offer to Exercise Common
Stock Purchase Warrants
Form of Subscription Agreement (Series A Prime
Revenue Sharing Notes)
Interest Purchase Agreement, dated January 2, 2024,
by and Among Rekor Systems, Inc., All Traffic Data
Services, LLC and All Traffic Holdings
Underwriting Agreement, dated as of February 7,
2024, by and between Rekor Systems, Inc. and
William Blair & Company, L.L.C., as representative
of the several underwriters named therein
8-K
8-K
10-K
8-K
001-38338
001-38338
001-38338
001-38338
10.2
10.1
10.8
10.1
5/21/19
1/3/22
3/31/22
3/26/20
8-K
001-38338
10.2
3/26/20
8-K
001-38338
10.1
8/9/21
8-K
8-K
8-K
8-K
8-K
8-K
001-38338
10.1
1/23/23
001-38338
001-38338
001-38338
001-38338
10.1
10.1
10.1
10.1
3/27/23
7/25/23
12/15/23
1/3/24
001-38338
1.1
2/9/24
Subsidiaries of Rekor Systems, Inc.
Consent of Marcum LLP., Independent Registered
Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
Section 1350 Certification of Chief Executive
Officer
Section 1350 Certification of Chief Financial Officer
Clawback Policy
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 (formatted in Inline XBRL and included in Exhibit
101)
* Filed herewith.
** Furnished herewith.
# Indicates management contract or compensatory plan.
108
*
*
*
*
**
**
*
*
*
*
*
*
*
Table of Contents
ITEM 16. FORM 10-K SUMMARY
None.
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.
SIGNATURES
Rekor Systems, Inc.
/s/ Robert A. Berman
Robert A. Berman
Chief Executive Officer
Principal Executive Officer
March 25, 2024
/s/ Eyal Hen
Eyal Hen
Chief Financial Officer (Principal Financial and Accounting Officer)
March 25, 2024
Name:
Title:
Date:
Name:
Title:
Date:
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature
Title
/s/ Robert A. Berman
Robert A. Berman
Chief Executive Officer
(Principal Executive Officer), Chairman of the Board and Director
/s/ Eyal Hen
Eyal Hen
/s/ Glenn Goord
Glenn Goord
/s/ Paul de Bary
Paul de Bary
/s/ David Hanlon
David Hanlon
/s/ Steven D. Croxton
Steven D. Croxton
/s/ Sanjay Sarma
Sanjay Sarma
/s/ Tim Davenport
Tim Davenport
/s/ Drew Meyers
Drew Meyers
/s/ Anne Townsend
Anne Townsend
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
109
Date
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
March 25, 2024
Subsidiaries of Rekor Systems, Inc.
Legal Name of Subsidiary
Rekor Recognition Systems, Inc.
Rekor Public Safety Network, LLC
All Traffic Data Services, LLC
Global Public Safety, LLC (19.99% ownership)
Columbia Gateway Investors, LLC
OpenALPR Software Solutions, LLC
Ollie Dee LLC
Waycare Technologies Ltd.
Waycare Technologies Inc.
Southern Traffic Services, Inc.
Exhibit 21.1
Jurisdiction of Organization
Delaware
Delaware
Colorado
Delaware
Delaware
Delaware
Delaware
Israel
Delaware
Florida
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements of Rekor Systems, Inc. on Form S-8 (File Nos. 333-220864, 333-259041, and
333-260153) and Form S-3 (File Nos. 333-259447, 333-260607, 333-274422 and 333-277393) of our report dated March 25, 2024, which includes an
explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of
Rekor Systems, Inc. and Subsidiaries as of and for the years ended December 31, 2023 and 2022, which report is included in this Annual Report on Form
10-K of Rekor Systems, Inc. and Subsidiaries for the year ended December 31, 2023.
Exhibit 23.1
/s/ Marcum LLP
Marcum LLP
East Hanover, New Jersey
March 25, 2024
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Robert A. Berman, certify that:
1. I have reviewed this Annual Report on Form 10-K of Rekor Systems, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d 15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared.
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting. and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information. and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 25, 2024
/s/ Robert A. Berman
Robert A. Berman
Chief Executive Officer
Principal Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Eyal Hen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Rekor Systems, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d 15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared.
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting. and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information. and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 25, 2024
/s/ Eyal Hen
Eyal Hen
Chief Financial Officer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that the Annual Report of Rekor Systems, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report
on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Exhibit 32.1
Date: March 25, 2024
/s/ Robert A. Berman
Robert A. Berman
Chief Executive Officer
Principal Executive Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Rekor Systems, Inc. and will be
retained by Rekor Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being
furnished solely pursuant to 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that the Annual Report of Rekor Systems, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report
on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Exhibit 32.2
Date: March 25, 2024
/s/ Eyal Hen
Eyal Hen
Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Rekor Systems, Inc. and will be
retained by Rekor Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being
furnished solely pursuant to 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
Exhibit 97
PURPOSE
REKOR SYSTEMS, INC.
CLAWBACK POLICY
Rekor’s Code of Conduct establishes standards for ethical behavior to which all directors, officers and staff of Rekor Systems, Inc., its subsidiaries and
affiliates (the “Company”) are expected to adhere to. They are expected to act with honesty and integrity and avoid activities that interfere with good
judgment or expose them and their colleagues, or the Company, its shareholders, customers and business associates, to injury, exploitation or other harm.
The Company is committed to make financial and other reports in a way that is accurate, timely and in full compliance with all legal requirements. The
Board of Directors believes that it is in the best interests of the Company and its stockholders to create and maintain a culture that emphasizes integrity and
accountability while reinforcing the Company’s pay-for-performance compensation philosophy. This policy provides for the recoupment of certain
executive compensation in the event of an accounting restatement resulting from material noncompliance with financial reporting requirements under the
federal securities laws. It is designed to reinforce our Code of Conduct and ensure strict compliance with the Clawback Requirements applicable under
federal securities laws and NASDAQ rules as currently in effect or as amended from time to time=
APPLICABILITY
This Policy applies to all Covered Executives of the Company. It may be amended and revised from time to time by an affirmative vote of the majority of
the Board of Directors. Limited exceptions may be permitted in special circumstances with the approval of the Compensation Committee of the Board of
Directors, provided that the Company’s General Counsel has given an opinion that the exception does not result in non-compliance with the Clawback
Requirements.
The Board of Directors intends that this policy will be applied to the fullest extent of the law and may require that any employment agreement, equity
award agreement, or similar agreement entered into on or after the effective date shall, as a condition to the grant of any benefit thereunder, require a
Covered Executive to agree to abide by the terms of this policy. In the event of any inconsistency between the terms of the policy and the terms of any
employment agreement, equity award agreement, or similar agreement under which Incentive Compensation has been granted, awarded, earned or paid to a
Covered Executive, whether or not deferred, the terms of the policy shall govern.
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RECOUPMENT OF INCENTIVE COMPENSATION
If the Company is required to prepare a Restatement, the Board of Directors will require reimbursement or forfeiture of any Excess Incentive
Compensation received by any Covered Executive during the three completed fiscal years immediately preceding the date on which the Company is
required to prepare the Restatement (plus any transition period of less than nine months that is within or immediately following the three completed fiscal
years and that results from a change in the Company’s fiscal year). Such date will be considered the earlier of: (i) the date the Board of Directors, a
committee of the Board or, if Board action is not required, the officer or officers of the Company authorized to take such action, concludes, or reasonably
should have concluded, that the Company is required to prepare a Restatement, or (ii) the date a court, regulator or other legally authorized body directs the
Company to prepare a Restatement. Recovery of any Excess Incentive Compensation under the Policy is not dependent on if or when the Restatement is
actually filed.
The Company shall recover any Excess Incentive Compensation in accordance with this Policy unless such recovery would be impracticable, as determined
by the Board of Directors in accordance with the Clawback Requirements. If the Board of Directors cannot determine the amount of Excess Incentive
Compensation received by the Covered Executive directly from the information in the accounting restatement, then it may make its determination based on
a reasonable estimate of the effect of the accounting restatement.
Upon recommendation from the Compensation Committee, the Board of Directors will determine, in its sole discretion, the method for recouping Excess
Incentive Compensation hereunder which may include, without limitation:
a. requiring reimbursement of any Excess Incentive Compensation previously paid in cash;
b. seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards;
c. offsetting the recouped amount from any compensation otherwise owed by the Company to the Covered Executive;
d. cancelling outstanding vested or unvested equity awards; and/or
e.
taking any other remedial and recovery action permitted by law, as determined by the Board of Directors.
It is the intention of this policy that it shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors,
administrators or other legal representatives Any right of recoupment under this policy is in addition to, and not in lieu of, any other remedies or rights of
recoupment that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, equity award agreement, or
similar agreement and any other legal remedies available to the Company.
The Company shall make appropriate provisions for the enforcement of this policy in its employment contracts and shall not indemnify any Covered
Executives against the loss of any Excess Incentive Compensation.
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IMPLEMENTATION
The Compensation Committee shall have responsibility for the implementation of this policy. The Compensation Committee is authorized to engage
professional assistance in implementing this policy and may designate a subcommittee or individual to monitor the implementation of this policy with
respect to the Company’s employment arrangements with any Covered Executive.
This Policy shall be effective as of October 2, 2023 (the “Effective Date”) and shall apply to Incentive Compensation that is received by Covered
Executives on or after October 2, 2023, even if such Incentive Compensation was approved, awarded, or granted to Covered Executives prior to October 2,
2023.
The Board may amend this policy from time to time in its discretion and shall amend this policy as it deems necessary to reflect final regulations adopted
by the Securities and Exchange Commission under Section 10D of the Exchange Act and to comply with the Clawback Requirements as in effect from time
to time and any other rules or standards adopted by a national securities exchange on which the Company’s securities are listed. The Board may terminate
this policy at any time.
DEFINITIONS AND INTERPRETATION
Certain capitalized words and terms have been defined below and are used in this policy as so defined. Unless so defined, words and terms used in this
policy should be interpreted according to their general usage as reflected in standard dictionaries of American English. Translation into other languages
shall be for reference and convenience and such translations do not change the intended meaning.
It is intended that this policy be interpreted in a manner that is consistent with the requirements of the Clawback Requirements. References to “we” or “us”
should be considered to include all Company directors, officers and employees, any agent of or consultant for the Company and any affiliated individual or
organization covered by this policy.
Definitions: As used in this policy, the following words and terms have the respective meanings given below, unless the context clearly requires otherwise:
“Board of Directors” means the Board of Directors of Rekor Systems, Inc.
“Clawback Requirements” means Section 10D of the Securities Exchange Act of 1934 (the “Exchange Act”) and Nasdaq Listing Rule 5608, as they may
be amended or replaced by similar rules from time to time.
“Compensation Committee” means the Compensation Committee of the Board of Directors.
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“Covered Executives” means all current and former directors and executive officers of the Company, as determined by the Compensation Committee in
accordance with the definitions contained in the Clawback Requirements.
“Excess Incentive Compensation” means the excess of the Incentive Compensation paid to the Covered Executive based on erroneous information over
the Incentive Compensation that would have been paid to the Covered Executive had it been based on the restated results, as determined by the Board,
without regard to any taxes paid by the Covered Executive in respect of the Incentive Compensation paid based on the erroneous information.
“Incentive Compensation” means any of the following that is granted, earned, or vested based wholly or in part on the attainment of a Financial Reporting
Measure:
Annual bonuses and other short-term and long-term cash incentives.
Stock options.
Stock appreciation rights.
Restricted stock.
Restricted stock units.
Performance shares.
Performance units.
“Financial Reporting Measures” mean and include:
The price of the Company’s stock or other securities.
Total stockholder return.
Revenues.
Net income.
Earnings before interest, taxes, depreciation, and amortization (EBITDA).
Funds from operations.
Liquidity measures such as working capital or operating cash flow.
Return measures such as return on invested capital or return on assets.
Earnings measures such as earnings per share.
“Restatement” means an accounting restatement required due to material noncompliance by the Company with any financial reporting requirement under
the securities laws, including (i) to correct an error in previously issued financial statements that is material to the previously issued financial statements
(commonly referred to as a “Big R” restatement) or (ii) to correct an error in previously issued financial statements that is not material to the previously
issued financial statements but that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current
period (commonly referred to as a “little r” restatement). Changes to the Company’s financial statements that do not represent error corrections under the
then-current relevant accounting standards will not constitute Restatements.
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