Novume(US:REKR)2022-03-31 20:04markdown Part I [Business](index=4&type=section&id=Item%201.%20Business) Rekor Systems, Inc. offers AI-powered intelligent infrastructure solutions for transportation and public safety, focusing on SaaS and strategic growth - Rekor positions itself as a leader in intelligent infrastructure, using its **AI-powered platform**, software, and smart optical devices to address challenges in transportation management and public safety across **80 countries**[14](index=14&type=chunk) - The company's core business model is shifting towards subscription-based **Software as a Service (SaaS)** offerings, although it continues to provide long-term licenses and hardware sales for strategic and large-scale projects[30](index=30&type=chunk) - Rekor estimates a total addressable global intelligent infrastructure market of **$148 billion by 2026**, driven by initiatives like the **2021 Infrastructure Investment and Jobs Act**[18](index=18&type=chunk)[60](index=60&type=chunk) - The company's growth strategy includes a "**land and expand**" approach, focusing on scaling its **Rekor One™ platform**, expanding services to existing customers, and fostering cooperation within its network. Future growth may be accelerated through strategic partnerships, mergers, and acquisitions[66](index=66&type=chunk)[67](index=67&type=chunk)[69](index=69&type=chunk) - On **August 18, 2021**, Rekor completed the acquisition of **Waycare Technologies, Ltd.**, a key strategic move to enhance its intelligent infrastructure solutions[85](index=85&type=chunk) [Platforms, Products, and Solutions](index=8&type=section&id=Platforms%2C%20Products%2C%20and%20Solutions) Rekor's AI-powered Rekor One™ platform supports its Traffic Management and Public Safety solutions, complemented by software and Edge Series hardware - The core of the company's technology is the **Rekor One™ platform**, a single, **AI-powered** intelligence system that serves as the foundation for all its solutions across traffic management, public safety, and commercial markets[31](index=31&type=chunk) - **Traffic Management Solutions**, built on **Rekor One™**, include modules for Roadway Monitoring and Response (RMR), Traffic and Infrastructure Analytics (TIA), and Live and Archival Traffic View (LATV)[34](index=34&type=chunk) - **Public Safety Solutions** leverage license plate and vehicle recognition technology. Key products include **Rekor Contactless Compliance** for automated violation management, **Rekor Scout™** for camera-based vehicle recognition, and **Rekor Blue™**, a mobile app for law enforcement[42](index=42&type=chunk)[43](index=43&type=chunk)[44](index=44&type=chunk) - The company offers a differentiated portfolio of **AI-based hardware**, the **Rekor Edge Series (Edge Pro and Edge Max)**, designed for edge processing to capture and transform roadway data at the source in real-time[51](index=51&type=chunk)[52](index=52&type=chunk)[53](index=53&type=chunk) [Competition](index=18&type=section&id=Competition) Rekor competes across intelligent infrastructure segments, including ALPR, differentiating itself with comprehensive, single-platform solutions - Competitors are classified into **four main groups**: data creators, data aggregators, insights platforms, and smart city technology providers[71](index=71&type=chunk)[76](index=76&type=chunk) - The company also faces competition from specialized **ALPR** and vehicle recognition vendors in public safety, as well as providers of automated safety solutions for red-light and speed enforcement[72](index=72&type=chunk) - Rekor's competitive differentiation strategy relies on providing end-to-end solutions on a **single platform**, efficiently collecting and aggregating data, and delivering tailored, actionable insights to multiple agencies[75](index=75&type=chunk) [Human Capital](index=20&type=section&id=Human%20Capital) As of March 31, 2022, Rekor employed 250 highly technical personnel, maintaining good employee relations and anticipating no staffing constraints - As of **March 31, 2022**, the company had **250 employees**, of whom **249** were full-time[86](index=86&type=chunk) - The workforce is described as highly educated and technical, with a substantial majority in technical roles. The company reports good employee relations[85](index=85&type=chunk)[86](index=86&type=chunk) [Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks including unprofitability, reliance on third-party data, an unproven market, competition, long sales cycles, cybersecurity, data privacy, and macroeconomic impacts - The company is not currently profitable, reporting a loss from continuing operations of **$26.8 million** for the year ended **December 31, 2021**, and may not achieve profitability in the future[95](index=95&type=chunk) - The market for the **Rekor One platform** is new and unproven, and its success depends on attracting new customers to adopt the platform and its services[98](index=98&type=chunk) - The business relies on third-party data providers and access to existing camera networks; failure to maintain these relationships could adversely impact growth[96](index=96&type=chunk) - The company may need to raise additional capital in the future, which may not be available on acceptable terms, or at all, potentially leading to dilution for existing stockholders[103](index=103&type=chunk) - The company faces risks related to data privacy and security, including compliance with regulations like **GDPR**, and could incur liability from improper disclosure of confidential or personal data[119](index=119&type=chunk)[120](index=120&type=chunk) - As of **December 31, 2021**, the company had significant federal and state net operating loss (NOL) carryforwards of approximately **$51.8 million** and **$43.6 million**, respectively, whose future use may be limited[134](index=134&type=chunk) [Properties](index=32&type=section&id=Item%202.%20Properties) Rekor Systems, Inc. leases all its office properties, including its principal executive offices in Columbia, Maryland, deeming them adequate for current and future needs - The company does not own any real property and leases all its office spaces, including its principal executive offices in **Columbia, Maryland**[161](index=161&type=chunk) [Legal Proceedings](index=33&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in several legal proceedings, including a lawsuit against former Firestorm executives for fraudulent inducement and a breach of contract claim from Fordham Financial Management - Rekor is in ongoing litigation with former executives of its acquired subsidiary, **Firestorm**, alleging fraudulent inducement and seeking rescission of the acquisition. The defendants have filed counterclaims[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk) - **Fordham Financial Management, Inc.** has sued the company for an alleged breach of an underwriting agreement. The company believes the claims have no merit and is vigorously defending the action[168](index=168&type=chunk)[170](index=170&type=chunk) - A putative shareholder class action lawsuit filed in **June 2021**, alleging violations of the Securities Exchange Act, was voluntarily dismissed without prejudice in **November 2021**[171](index=171&type=chunk) - A lawsuit filed by subsidiary **OpenALPR** against a former customer, **Plate Capture Solutions, Inc. (PCS)**, was dismissed with prejudice in **August 2021**, closing the matter[167](index=167&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=36&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Rekor's common stock trades on Nasdaq under "REKR"; the company has never paid dividends, and preferred stock converted to common stock after a 2021 public offering and Waycare acquisition - The company's common stock is listed on the **Nasdaq Capital Market** under the symbol "**REKR**"[176](index=176&type=chunk) - Rekor has never paid cash dividends and does not plan to in the foreseeable future, intending to reinvest all earnings into the business[178](index=178&type=chunk) - Following a public offering in **February 2021**, all outstanding **Series A** and **Series B Preferred Stock** automatically converted into an aggregate of **1,416,785 shares** of common stock[179](index=179&type=chunk)[180](index=180&type=chunk) - The acquisition of **Waycare** on **August 18, 2021**, was paid for with **$39.9 million** in cash and **2,784,474 shares** of common stock valued at **$20.3 million**[182](index=182&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In FY2021, Rekor's revenue grew 55% to $14.3 million, but net loss widened to $26.8 million due to increased operating expenses, while key performance indicators show positive recurring revenue and performance obligations - The company completed the acquisition of **Waycare Technologies Ltd.** on **August 18, 2021**, and sold its professional services subsidiaries, **AOC Key Solutions** and **TeamGlobal**, in **2020**, shifting its focus entirely to its technology operations[187](index=187&type=chunk)[189](index=189&type=chunk)[190](index=190&type=chunk) - Key market opportunities driving the business include the growing **Smart City market**, the application of **AI for infrastructure**, connected vehicle data, and the expansion of automated motor vehicle law enforcement[192](index=192&type=chunk) - The **Infrastructure Investment and Jobs Act (IIJA)**, signed in **November 2021**, is identified as a significant business driver, providing substantial new federal funding for intelligent transportation systems[199](index=199&type=chunk) [Results of Operations](index=44&type=section&id=Results%20of%20Operations) In 2021, revenue increased 55% to $14.3 million due to new programs and Waycare, but operating loss widened to $31.2 million from $11.8 million in 2020 due to higher operating expenses and M&A costs Consolidated Results of Operations (Continuing Operations) | (Dollars in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | **Revenue** | **$14,294** | **$9,234** | | Cost of revenue | $6,236 | $3,518 | | **Loss from operations** | **$(31,215)** | **$(11,848)** | | Total other income (expense) | $769 | $(2,091) | | Income tax benefit (provision) | $3,819 | $(23) | | **Net loss from continuing operations** | **$(26,777)** | **$(13,962)** | - Revenue increased by **$5.1 million** (**55%**) in **2021**, driven by new offerings like the **Oklahoma's UVED Program** (which generated **$1.3 million**) and revenue from the newly acquired **Waycare** (**$925,000**)[213](index=213&type=chunk)[214](index=214&type=chunk)[215](index=215&type=chunk) - Total operating expenses increased by **124%** to **$39.3 million** in **2021**. This was primarily due to a **$12.7 million** increase in G&A expenses (including **$2.0 million** in M&A costs) and a **$5.1 million** increase in R&D expenses, both driven by higher headcount[219](index=219&type=chunk)[220](index=220&type=chunk)[222](index=222&type=chunk) [Non-GAAP Measures](index=48&type=section&id=Non-GAAP%20Measures) Adjusted EBITDA for 2021 was a loss of $21.8 million, widening from $9.0 million in 2020, while Adjusted Gross Margin decreased to 56.4% due to a higher mix of lower-margin hardware sales Adjusted EBITDA Reconciliation | (Dollars in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net loss from continuing operations | $(26,777) | $(13,962) | | Income tax (benefit) provision | $(3,819) | $23 | | Interest expense | $89 | $2,503 | | Depreciation and amortization | $3,552 | $1,961 | | **EBITDA** | **$(26,955)** | **$(9,475)** | | Adjustments: | | | | (Gain) loss on extinguishment of debt | $(886) | $3,281 | | Share-based compensation | $3,909 | $796 | | Merger and acquisition transaction costs | $2,025 | - | | **Adjusted EBITDA** | **$(21,757)** | **$(9,029)** | Adjusted Gross Profit and Margin | (Dollars in thousands, except percentages) | 2021 | 2020 | | :--- | :--- | :--- | | Revenue | $14,294 | $9,234 | | Cost of revenue, excluding D&A | $6,236 | $3,518 | | **Adjusted Gross Profit** | **$8,058** | **$5,716** | | **Adjusted Gross Margin** | **56.4%** | **61.9%** | [Key Performance Indicators](index=50&type=section&id=Key%20Performance%20Indicators) Key performance indicators show recurring revenue grew 28% to $4.6 million, total contract value won increased 35% to $8.9 million, and remaining performance obligations rose 35% to $22.6 million in 2021 Key Performance Indicators (YoY Growth) | Indicator | 2021 | 2020 | Growth | Growth % | | :--- | :--- | :--- | :--- | :--- | | Recurring Revenue | $4,634,000 | $3,616,000 | $1,018,000 | 28% | | Total Contract Value Won | $8,936,000 | $6,613,000 | $2,323,000 | 35% | | Performance Obligations (Year-End) | $22,587,000 | $16,705,000 | $5,882,000 | 35% | - Of the **$22.6 million** in remaining performance obligations at year-end **2021**, the company expects to recognize approximately **41%** as revenue over the succeeding twelve months[238](index=238&type=chunk) [Liquidity and Capital Resources](index=52&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2021, Rekor had $25.8 million in cash; net cash used in operations increased to $18.0 million, while financing activities provided $71.0 million, primarily from a public offering Cash Flow Summary (Continuing Operations) | (Dollars in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,028) | $(11,175) | | Net cash (used in) provided by investing activities | $(47,367) | $4,588 | | Net cash provided by financing activities | $70,992 | $25,447 | - The company ended **2021** with **$25.8 million** in unrestricted cash and cash equivalents and **$17.0 million** in working capital[245](index=245&type=chunk) - Management believes it has the ability to continue as a going concern for at least **one year** from the filing date, supported by current cash and a new at-the-market equity program established in **February 2022** for up to **$50 million**[245](index=245&type=chunk)[277](index=277&type=chunk) [Financial Statements and Supplementary Data](index=53&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2021 and 2020, along with Friedman LLP's auditor report, which includes critical audit matters such as revenue, liquidity, and the Waycare acquisition - The independent auditor, **Friedman LLP**, issued an unqualified opinion on the financial statements. Critical Audit Matters identified were: evaluation of standalone selling prices for revenue, liquidity, and the accounting for the acquisition of **Waycare Technologies, Ltd.**[284](index=284&type=chunk)[288](index=288&type=chunk) Consolidated Balance Sheet Highlights | (Dollars in thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$125,879** | **$40,402** | | Cash and cash equivalents | $25,796 | $20,595 | | Goodwill | $53,451 | $6,336 | | Intangible assets, net | $21,406 | $7,038 | | **Total Liabilities** | **$24,792** | **$8,542** | | **Total Stockholders' Equity** | **$101,087** | **$25,191** | - The acquisition of **Waycare** for **$60.2 million** resulted in the preliminary allocation of **$47.1 million** to goodwill and **$16.9 million** to acquired technology intangible assets[411](index=411&type=chunk)[412](index=412&type=chunk) - In **2020**, the company sold its subsidiaries **AOC Key Solutions** and **TeamGlobal**, which comprised its Professional Services Segment. The results of these operations are now classified as discontinued operations[311](index=311&type=chunk)[422](index=422&type=chunk) [Controls and Procedures](index=113&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes reported during the fiscal year - Management concluded that the company's disclosure controls and procedures were effective as of **December 31, 2021**[530](index=530&type=chunk) - Based on the **COSO 2013 framework**, management concluded that the company's internal control over financial reporting was effective as of **December 31, 2021**[532](index=532&type=chunk) - No changes in internal control over financial reporting occurred during the fiscal year that materially affected, or are reasonably likely to materially affect, these controls[535](index=535&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=114&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company's executive team includes Robert A. Berman (CEO), Eyal Hen (CFO), and Rodney Hillman (COO); the Board has six members, five independent, with four standing committees and a Code of Conduct - The executive team is led by **Robert A. Berman** (CEO & Executive Chairman), **David Desharnais** (President, as of Jan 2022), **Eyal Hen** (CFO), and **Rodney Hillman** (COO)[540](index=540&type=chunk) - The Board of Directors is comprised of **six members**, with **five** determined to be independent under Nasdaq rules. **Robert A. Berman** is the only non-independent director[552](index=552&type=chunk) - The Board has **four standing committees: Audit, Compensation, Governance, and Nominations**, all chaired by and composed of independent directors[556](index=556&type=chunk)[557](index=557&type=chunk) - The company has adopted a **Code of Conduct** that serves as its **Code of Ethics** and is available on its website[568](index=568&type=chunk) [Executive Compensation](index=122&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation in 2021 primarily comprised base salary and equity awards, with CEO Robert A. Berman receiving $1.67 million, and awards granted under the 2017 Equity Award Plan 2021 Summary Compensation Table | Name | Position | Base Salary ($) | Equity Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Robert Berman | CEO | 645,000 | 1,000,004 | 1,669,881 | | Eyal Hen | CFO | 405,000 | 187,900 | 600,768 | | Rodney Hillman | COO | 342,500 | - | 354,858 | - The company's **2017 Equity Award Plan** is the primary vehicle for equity incentive awards. In **2021**, the number of shares available for issuance under the plan was increased by **4,368,733**[579](index=579&type=chunk) - Employment agreements provide for severance payments of **two times** base salary if a named executive officer is terminated within **120 days** of a Change of Control[596](index=596&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=127&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of March 31, 2022, directors and executive officers collectively owned 12.4% of common stock, with Robert A. Berman holding 7.3%, and other significant shareholders including Goldman Sachs, Arctis Global, and BlackRock - As of **March 31, 2022**, all directors and named executive officers as a group beneficially owned **5,564,807 shares**, representing **12.4%** of the outstanding common stock[602](index=602&type=chunk) - CEO **Robert A. Berman** beneficially owned **3,265,323 shares**, or **7.3%** of the class[602](index=602&type=chunk) - Shareholders beneficially owning more than **5%** of common stock include **Goldman Sachs Group Inc.** (**5.1%**), **Arctis Global, LLC** (**5.2%**), and **BlackRock, Inc.** (**5.0%**)[602](index=602&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=128&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The Governance Committee reviews related-party transactions, including the 2020 sale of AOC Key Solutions and CEO Robert Berman's participation in a promissory note exchange and stock purchase - The **Governance Committee**, composed of independent directors, reviews and approves related-party transactions[606](index=606&type=chunk)[607](index=607&type=chunk) - In **April 2020**, the company sold its **AOC Key Solutions** subsidiary to an entity formed by the subsidiary's management. Directors with relationships to the founders recused themselves from the decision[608](index=608&type=chunk) - In **July 2020**, affiliates of CEO **Robert Berman** and CSO **Matt Hill** participated in an exchange of **2019 Promissory Notes** for company common stock[609](index=609&type=chunk) [Principal Accountant Fees and Services](index=130&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Friedman LLP serves as the principal auditor, with all services pre-approved by the Audit Committee; aggregate fees were $289,000 in 2021 and $220,000 in 2020, primarily for audit services Accountant Fees | (Dollars in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | $289 | $204 | | All other fees | - | $16 | | **Total** | **$289** | **$220** | - The company's principal auditor is **Friedman LLP**, and the Audit Committee pre-approves all services[612](index=612&type=chunk)[613](index=613&type=chunk) Part IV [Exhibits, Financial Statements Schedules](index=131&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statements%20Schedules) This section lists the financial statements and schedules, as detailed in Item 8, and provides an index of all filed exhibits, including governance documents and material contracts - This section lists the financial statements and schedules included in the report and provides an index of all exhibits filed, such as the **Certificate of Incorporation**, **bylaws**, and **material agreements**[616](index=616&type=chunk)[617](index=617&type=chunk)[618](index=618&type=chunk)