Annual Report for Fiscal Year Ending 12-31, 2024 (Form 10-K)

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, 2024 and 2023. In 2024, we completed the acquisition of 100% of the issued and outstanding limited liability company interests of All Traffic Data Systems ("ATD").

Acquisitions and Dispositions

On January 2, 2024, we completed the acquisition of All Traffic Data Services, LLC ("ATD") for an aggregate purchase price of $20,576,000. See Note 2 to our consolidated financial statements for additional information related to our acquisition of ATD.

Opportunities, Trends and Uncertainties

We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:

	●	Growing Smart City Market - According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050. The world's cities are getting larger, with longer commutes and the resulting impact on the environment and the quality of life. This trend requires forward-thinking officials to manage assets and resources more efficiently. We believe that advancements in "big data" connected devices and artificial intelligence can provide Intelligent Transportation System ("ITS") solutions that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life. We believe our data-driven, artificial intelligence-aided solutions provide useful tools that can effectively tackle the challenges cities and communities are facing today and will face over the coming decades.
	●	AI for Infrastructure - We believe that the application of AI to the analysis of conditions on roadways and other transportation infrastructure can significantly affect the safety and efficiency of travel in the future. As vehicles move towards full automation, there is a need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements - e.g. wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway. Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating local vehicular flow as well as data about the vehicles on the roadway.
	●	Connected Vehicle Data - Today's new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is a resource that transportation and other agencies are beginning to find valuable uses for. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors can provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and municipalities gain more visibility about conditions on their roads, supplementing data from existing infrastructure and allowing transportation information from rural areas that are not served by ITS infrastructure to be integrated into the overall analysis.
	●	New and Expanded Uses for Vehicle Recognition Systems - We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We currently serve many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems. These include smaller municipalities, homeowners' associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions that are testing vehicle recognition systems or that issued requests for proposals to install a network of vehicle recognition sensors. We also expect the availability of faster, higher-accuracy, lower-cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs.
	●	Adaptability of the Market - We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. Based on published benchmarks, our software currently outperforms competitors. However, large users of existing technology, such as toll road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop their own systems or secure advanced systems from others who are also working to develop them. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources.
	●	Expansion of Automated Enforcement of Motor Vehicle Laws - We expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement of regulations such as motor vehicle insurance and registration requirements. Communities are currently searching for better means of achieving compliance with minor vehicle offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses. For example, due to high rates of fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states are considering authorizing automated enforcement of violations where motorists fail to slow down and/or move over for emergency responders and law enforcement vehicles at the side of the road. To the extent that legislative implementation is required, a deliberative and necessarily time-consuming process is involved. However, as states expand auto-enforcement, the market for these products and services should broaden in the public safety market.
	●	Graphic Processing Unit ("GPU") Improvements - We expect our business to benefit from more powerful and affordable GPU hardware that has recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units ("CPUs") for algorithms that process large blocks of data, such as those produced by video streams. GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognition. The GPU market is predicted to grow as a result of a surge in the adoption of the Internet of Things ("IoT") by the industrial and automotive sectors. As GPU manufacturers increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.
	●	Edge Processing - Demand for actionable roadway information continues to grow in parallel with sensor improvements, such as increasingly sophisticated internal software and optical and other hardware adapted to the use of this software. Over the last several decades, sensors have evolved and unlocked new capabilities with each advancement. Further, cellular networks have been optimized for downloading data rather than uploading data. As a result, while download speeds have improved significantly due to large investments in cellular infrastructure, this has resulted in relatively small improvements to cellular upload speeds. With roadside deployments experiencing explosive growth in count and density, scalability, latency and bandwidth have become aspects of competition in the market. Our systems have been designed to address these issues through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and continual improvements in the efficiency of our AI algorithms. Our edge processing systems ingest local HD video streams at the source and convert the raw video data to text data, dramatically reducing the volume of data that needs to be transferred through the network. Edge processing allows us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that are experienced by other networks where raw video needs to be streamed to the cloud for processing.

	●	Accelerated Business Development and Marketing - Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a visible leadership position. As a result, we have made significant investments in our business development, marketing and eCommerce activities to increase awareness and market adoption of our products and services within key markets. If we are able to maintain a sustained presence in the market, the continued development of strategic partnerships and other economies of scale will reduce the level of costs necessary to support sales of our products and services. However, the speed at which these markets grow to the degree to which our products and services are adopted is uncertain.
	●	Infrastructure Investment and Jobs Act ("IIJA") and the Bipartisan Infrastructure Law ("BIL") - The IIJA, signed into law on November 15, 2021, provides for significant national investments in the transportation systems in the United States, including over $150 billion in new spending on roadway infrastructure, including intelligent transportation systems. We believe that there will continue to be bi-partisan support for these programs and 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 Acquisition - In the current year, Rekor has acquired one subsidiary as part of its plans to advance its appeal to national and local transportation agencies. We acquired one of the leading existing providers of traffic data services in the United States. This acquisition has led to increased visibility for the Company among national and state level DOTs in the United States.
	●	Challenges to Executing on the Corporate Strategy - As an acquirer and integrator of established technology companies in the ITS industry, there is an inherent risk associated with the successful implementation and execution of the strategy. If Rekor is unable to successfully implement and execute its plans, there could be a material and adverse effect on the Company's business, results of operations, and financial condition.
	●	Inability to Achieve Profitability - Rekor continues to grow its business, its operating expenses and capital expenditures have increased, and it has not yet achieved the level of sustaining profitability. As a result, if the Company is unable to generate additional revenue or achieve planned efficiencies in operations, or if its revenue declines significantly, Rekor may not be able to achieve profitability in the future, which would materially and adversely affect the Company's business.
	●	Inability to Retain Qualified Personnel - Rekor's success depends on the continued efforts and abilities of the senior management team and key engineering and marketing specialists. Although Rekor has employment agreements with these employees, they may not choose to remain employed by Rekor. Should one or more key personnel leave the Company or join a competitor, the Company's business, operating results, and financial condition can be adversely affected.
	●	Inability to Compete Effectively - Competition and technological advancements by others may erode the Company's business and result in inability to capture new business and revenue. Each business line faces significant competitive pressures within the markets in which they operate. While Rekor continues to work to develop and strengthen its competitive advantages, many factors such as market and technology changes may erode or prevent this. If the Company is unable to successfully maintain its competitive advantage, the Company's business, operating results, and financial condition can be adversely affected.
	●	Cyber Security Risks - Rekor relies on information technology in all aspects of its business. A significant disruption or failure in the information technology systems could result in services interruptions, safety failures, security violations, regulatory compliance failures, an inability to protect information and assets against intruders, and other operational difficulties. This could result in the loss of assets and critical information and expose the Company to remediation costs and reputational damage. Although Rekor takes reasonable steps intended to mitigate these risks, a significant disruption or cyber intrusion could lead to misappropriation of assets or data corruption and could adversely affect the Company's results of operations, financial condition, and liquidity.
	●	Intellectual Property Claims - Third parties that have been issued patents or have filed for patent applications similar to those used by the Company's operating subsidiaries may result in intellectual property claims against the Company. Rekor cannot determine with certainty whether existing third-party patents or the issuance of any future third party patents would require any of its operating subsidiaries to alter their respective technologies, obtain licenses or cease certain activities. Should the Company be unable to defend against such claims, the Company's business, operating results, and financial condition can be adversely affected.

Other than as discussed above and elsewhere in this Annual Report on Form 10-K, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

Components of Operating Results

Revenues

The Company derives its revenues primarily from the sale of its roadway data aggregation, traffic management and licensing offerings. These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services as well as software and hardware. Revenue is recognized upon transfer of control of promised products and services to the Company's customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.

Costs of revenues, excluding depreciation and amortization

Direct costs of revenues consist primarily of the portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with revenue-generating activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and other expenses that are incurred in connection with our revenue-generating activities. Direct costs of revenues exclude the portion of technical and non-technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts. Such costs are included in operating expenses. We expense direct costs of revenues when they incur.

Operating Expenses

Our operating expenses consist of general and administrative expenses, sales and marketing, research and development and depreciation and amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expenses. Operating expenses also include impairment of assets.

General and Administrative

General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources, and administrative departments. Additional expenses include office leases, professional fees, and insurance.

We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, legal, insurance, and investor relations as a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, our general and administrative expenses have decreased as a percentage of our revenue and, to the extent we continue to be successful in generating increased revenue, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.

Sales and Marketing

Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We will require significant investments in our sales and marketing expenses to continue the rate of growth in our revenues, further penetrate existing markets and expand our customer base into new markets.

Research and Development

Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services.

Depreciation and Amortization

Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of intangibles considered to have finite 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 those deferred tax assets may not be realized based on our history of losses.

Results of Operations

Our historical operating results in dollars are presented below. The following selected consolidated financial data should be read in conjunction with the foregoing information contained in this Item 7 and with the consolidated financial statements and the notes thereto in Item 8 of Part II, "Financial Statements and Supplementary Data." Only historical operating results are presented below. Historical results are not necessarily indicative of future results.

		Year ended December 31,
(Dollars in thousands)			2024				2023
Revenue		$	46,028			$	34,933
Cost of revenue, excluding depreciation and amortization			23,344				16,499
Operating expenses:
General and administrative expenses			30,676				27,038
Selling and marketing expenses			7,858				7,347
Research and development expenses			18,766				18,271
Impairment of intangible assets			10,214				-
Depreciation and amortization			9,493				7,894
Total operating expenses			77,007				60,550
Loss from continuing operations			(54,323	)			(42,116	)
Other income (expense):
(Loss) gain on extinguishment of debt			(4,693	)			527
Interest expense, net			(2,645	)			(3,596	)
Gain on remeasurement of ATD Holdback Shares			599				-
Loss on offering costs - Prepaid Advance			(888	)			-
Loss on settlement of Prepaid Advance			(900	)			-
Gain on the sale of Global Public Safety			1,500				-
Other expense, net			(15	)			(468	)
Total other expense, net			(7,042	)			(3,537	)
Loss before income taxes			(61,365	)			(45,653	)
Provision for income taxes			45				32
Net loss		$	(61,410	)		$	(45,685	)

Comparison of the Years Ended December 31, 2024 and 2023

Revenue

		Year ended December 31,								Change
(Dollars in thousands)		2024				2023				$				%
Revenue		$	46,028			$	34,933			$	11,095				32	%

The increase in revenue for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily attributable to our Urban Mobility product line. During the year ended December 31, 2024, revenue attributable to our Urban Mobility product line was $28,688,000 compared to $16,773,000 for the year ended December 31, 2023. During the year ended December 31, 2024, revenue attributable to our ATD acquisition was $10,125,000 and is included as part of our Urban Mobility revenue stream.

Cost of Revenue, Excluding Depreciation and Amortization

		Year ended December 31,								Change
(Dollars in thousands)		2024				2023				$				%
Cost of revenue, excluding depreciation and amortization		$	23,344			$	16,499			$	6,845				41	%

For the year ended December 31, 2024, cost of revenue, excluding depreciation and amortization increased compared to prior year 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 higher rate than our revenue increased as our mix of revenue shifted to more labor intensive activities. As we continue to deploy our technology, we anticipate our margins to improve. Additionally, during the year ended December 31, 2024, $3,672,000 of the increase was related to our acquisition of ATD.

Operating Expenses

		Year ended December 31,								Change
(Dollars in thousands)		2024				2023				$				%
Operating expenses:
General and administrative expenses		$	30,676			$	27,038			$	3,638				13	%
Selling and marketing expenses			7,858				7,347				511				7	%
Research and development expenses			18,766				18,271				495				3	%
Impairment of intangible assets			10,214				-				10,214				-
Depreciation and amortization			9,493				7,894				1,599				20	%
Total operating expenses		$	77,007			$	60,550			$	16,457				27	%

General and Administrative Expenses

For the year ended December 31, 2024, the increase in general and administrative expenses compared to the year ended December 31, 2023, was primarily due to:

●	a $2,150,000 increase in payroll and payroll related expenses which includes $1,294,000 related to our operations of ATD.
●	a $661,000 and $323,000 increase in rent and utility expense, respectively, which are primarily related to the additional leases as part of the ATD acquisition.
●	a $269,000 increase in insurance expense which is primarily related to higher premiums and the addition of the ATD operations.
●	a $236,000 increase in board fees, excluding share-based compensation due to the additional board members in 2024.

Selling and Marketing Expenses

The increase in selling and marketing expenses during the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily due to a $610,000 increase as result of the acquisition of ATD.

Research and Development Expense

Research and development expenses during the year ended December 31, 2024, compared to the year ended December 31, 2023, remained consistent.

Impairment of Intangible Assets

As a result of sales performance being below expectation in part due to slower customer adoption, longer sales cycles and market conditions, the Company identified a triggering event and performed an analysis of its intangible assets. As a result of the forementioned factors and their potential future impact, the Company recognized an impairment charge of $10,214,000 as of December 31, 2024.

Depreciation and Amortization

The increase in depreciation and amortization during the year is attributable primarily to the intangible assets that were acquired as part of our acquisition of ATD.

Other Income (Expense)

		Year ended December 31,								Change
(Dollars in thousands)		2024				2023				$				%
Other income (expense):
(Loss) gain on extinguishment of debt		$	(4,693	)		$	527			$	(5,220	)			-991	%
Interest expense, net			(2,645	)			(3,596	)			951				26	%
Gain on remeasurement of ATD Holdback Shares			599				-				599				-
Loss on offering costs - Prepaid Advance			(888	)			-				(888	)			-
Loss on settlement of Prepaid Advance			(900	)			-				(900	)			-
Gain on the sale of Global Public Safety			1,500				-				1,500				-
Other expense, net			(15	)			(468	)			453				97	%
Total other expense, net		$	(7,042	)		$	(3,537	)		$	(3,505	)			-99	%

Loss on extinguishment of debt was a result of early redemption of the 2023 Promissory Notes. As part of the redemption, we recorded accelerated debt issuance costs of $2,818,000 and a Redemption Payment of $1,875,000 which we settled through the issuance of common stock.

Interest expense decreased period over period due to the early redemption of the 2023 Promissory Notes.

In connection with the sale of Global Public Safety, we recognized a gain on the sale of the business of $1,500,000 during the year ended December 31, 2024.

On August 14, 2024, we entered into a Prepaid Advance Agreement under which funds were advanced to the Company and the lender had the ability to satisfy the advance in exchange for shares in the Company. We incurred issuance costs and original issuance discounts totaling approximately $888,000 associated with the issuance of the Prepaid Advance. Additionally, during the year the Company elected to terminate the Prepaid Advance Agreement. All amounts due were settled and we recorded $900,000 in charges related to the settlement of the Prepaid Advance liability.

Non-GAAP Measures

EBITDA and Adjusted EBITDA

We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S. ("U.S. GAAP") and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company's ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.

The following table sets forth the components of the EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):

		Year ended December 31,
		2024				2023
Net loss		$	(61,410	)		$	(45,685	)
Provision for income taxes			45				32
Interest expense, net			2,645				3,596
Depreciation and amortization			9,493				7,894
EBITDA		$	(49,227	)		$	(34,163	)
Share-based compensation			4,829				4,352
Loss (gain) on extinguishment of debt			4,693				(527	)
Impairment of intangible assets			10,214				-
Loss on offering costs - Prepaid Advance			888				-
Loss on settlement of Prepaid Advance			900				-
Gain on the sale of Global Public Safety			(1,500	)			-
Loss due to the remeasurement of the STS Earnout and Contingent Consideration, net			100				384
Impairment of SAFE agreement			-				101
Adjusted EBITDA		$	(29,103	)		$	(29,853	)

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,
		2024				2023
		(Dollars in thousands, except percentages)
Revenue		$	46,028			$	34,933
Cost of revenue, excluding depreciation and amortization			23,344				16,499
Adjusted Gross Profit		$	22,684			$	18,434
Adjusted Gross Margin			49.3	%			52.8	%

Adjusted Gross Margin for the year ended December 31, 2024 decreased from 52.8% to 49.3% compared to the year ended December 31, 2023. The fluctuation in Adjusted Gross Margin is typically correlated to the mix of software sales versus service type work. Typically our software sales carry a higher Adjusted Gross Margin.

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,
		2024				2023				Change
										$				%
Recurring revenue		$	22,590			$	20,755			$	1,835				9	%

We expect to continue efforts to secure long-term contracts with recurring revenue as part of our business model, which is intended to cause recurring revenue growth in future periods to continue to increase. 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. In addition, there may be an increase in one time sales as a result of initial installations related to the development of recurring revenue.

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, 2024, we had approximately $14,450,000 of performance obligations with respect to contracts that were closed prior to December 31, 2024but have a contractual period beyond December 31, 2024. 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 $12,036,000 of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.

Lease Obligations

As of December 31, 2024, we had significant leased building space at the following locations:

	●	Columbia, Maryland - The corporate headquarters
	●	Tel Aviv, Israel

We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of our planned operations.

Liquidity and Capital Resources

The net cash flows from operating, investing and financing activities for the periods below were as follows (dollars in thousands):

		Year ended December 31,
		2024				2023				Change
										$				%
Net cash used in operating activities - continuing operations		$	(32,469	)		$	(32,178	)		$	(291	)			-1	%
Net cash (used in) provided by investing activities			(9,370	)			270				(9,640	)			-3570	%
Net cash provided by financing activities			31,455				45,602				(14,147	)			-31	%
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations		$	(10,384	)		$	13,694			$	(24,078	)			-176	%

Net cash used in operating activities for the year ended December 31, 2024, increased by $291,000, which was primarily attributable to an increased loss which was offset by non-cash adjustments during the year, primarily the loss on extinguishment of debt of $4,693,000.

The increase in net cash used in investing activities was primarily due to the net cash outflow of $9,222,000 related to the acquisition of ATD.

Net cash provided by financing activities for the year ended December 31, 2024 decreased by $14,147,000 from the year ended December 31, 2023. During the year ended December 31, 2024, as part of our 2024 Public Offering and Prepaid Advance, we received net proceeds of $26,362,000 and $14,100,000, respectively, these proceeds were partially offset by the repayment of our 2023 Promissory Notes. 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.

For the years ended December 31, 2024 and 2023, we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity. As of December 31, 2024, we had unrestricted cash and cash equivalents of $5,329,000 and working capital of $1,707,000, as compared to unrestricted cash and cash equivalents of $15,713,000 and working capital of $8,100,000 as of December 31, 2023.

Off-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.

We have certain contractual obligations for future payments. See Note 7 to our consolidated financial statements for our required operating and financing lease payments and Note 9 for our required debt payments.

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, 2024 and 2023, 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.

Valuation of long lived assets

Fixed assets and amortizable intangible assets are reviewed for impairment as events or changes in circumstances occur indicating that the carrying value of the asset may not be recoverable. Undiscounted cash flow analyses are used to determine if the carrying amount of the asset is recoverable. If impairment is determined to exist, the charge is calculated based on estimated fair value.

Our 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 and our ability to meet our projected financial performance. Factors such as financial projections, profitability and cash flow require estimation and are examined to gauge our financial health.

Conducting a fair value 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 derive value from our assets 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.

Business Combinations

We account for business combinations by recognizing the fair value of acquired assets and liabilities. The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets such as identified customer relationships and trade names. We generally determine the fair value of acquired customer relationships using the multi-period excess earnings method, a form of the income approach. Estimates in valuing identifiable intangible assets include, but are not limited to, projected revenue growth rates, customer retention rates and an appropriate discount rate. Our estimate of fair value is based upon assumptions we believe to be reasonable, but which are inherently uncertain and, as a result, actual results may differ from estimates. During the measurement period, we may make adjustments to the fair value of assets acquired and liabilities assumed, with offsetting adjustments to goodwill.