Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
 
    September 30, 2022
    December 31, 2021
 
ASSETS
 
Current assets
               
Cash and cash equivalents
  $ 7,869     $ 25,796  
Restricted cash and cash equivalents
    888       804  
Accounts receivable, net
    4,315       1,173  
Inventory
    3,069       1,194  
Note receivable, current portion
    340       340  
Other current assets, net
    1,266       1,374  
Current assets of discontinued operations
    -       1  
Total current assets
    17,747       30,682  
Long-term assets
               
Property and equipment, net
    16,674       9,929  
Right-of-use lease assets, net
    9,809       6,163  
Goodwill
    20,533       53,451  
Intangible assets, net
    22,451       21,406  
Note receivable, long-term
    850       1,020  
SAFE investment
    1,860       1,250  
Deposits
    3,534       1,978  
Total long-term assets
    75,711       95,197  
Total assets
  $ 93,458     $ 125,879  
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities
               
Accounts payable and accrued expenses
  $ 8,183     $ 7,087  
Notes payable, current portion
    1,000       998  
Loan payable, current portion
    101       37  
Lease liability, short-term
    1,066       229  
Contract liabilities, short-term
    3,568       2,437  
Other current liabilities
    4,883       2,904  
Current liabilities of discontinued operations
    132       129  
Total current liabilities
    18,933       13,821  
Long-term Liabilities
               
Notes payable, long-term
    2,000       -  
Loan payable, long-term
    380       37  
Lease liability, long-term
    14,493       10,061  
Contract liabilities, long-term
    1,018       835  
Deferred tax liability
    38       38  
Other non-current liabilities
    1,298       -  
Total long-term liabilities
    19,227       10,971  
Total liabilities
    38,160       24,792  
Commitments and contingencies (Note 9)
                   
Stockholders' equity
               
Common stock, $ 0.0001 par value; authorized; 100,000,000 shares; issued: 54,330,133 , shares as of September 30, 2022 and 44,007,257 as of December 31, 2021; outstanding: 54,288,611 shares as of September 30, 2022 and 43,987,896 as of December 31, 2021
    5       4  
Treasury stock, 41,522 and 19,361 shares as of September 30, 2022 and December 31, 2021, respectively, at cost
    ( 417 )     ( 319 )
Additional paid-in capital
    201,495       171,285  
Accumulated deficit
    ( 146,171 )     ( 69,883 )
Accumulated other comprehensive income
    386       -  
Total stockholders’ equity
    55,298       101,087  
Total liabilities and stockholders’ equity
  $ 93,458     $ 125,879  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
4
Table of Contents
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2022
 
 
2021
 
 
2022
 
 
2021
 
Revenue
 
$
7,425
 
 
$
2,615
 
 
$
15,371
 
 
$
11,105
 
Cost of revenue, excluding depreciation and amortization
 
 
4,119
 
 
 
1,402
 
 
 
8,780
 
 
 
4,705
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
 
6,841
 
 
 
6,813
 
 
 
22,541
 
 
 
16,094
 
Selling and marketing expenses
 
 
2,432
 
 
 
1,125
 
 
 
6,390
 
 
 
3,044
 
Research and development expenses
 
 
4,911
 
 
 
2,000
 
 
 
13,772
 
 
 
4,741
 
Goodwill impairment
 
 
34,835
 
 
 
-
 
 
 
34,835
 
 
 
-
 
Depreciation and amortization
 
 
1,926
 
 
 
930
 
 
 
4,846
 
 
 
2,169
 
Total operating expenses
 
 
50,945
 
 
 
10,868
 
 
 
82,384
 
 
 
26,048
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
( 47,639
)
 
 
( 9,655
)
 
 
( 75,793
)
 
 
( 19,648
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
( 21
)
 
 
( 21
)
 
 
( 46
)
 
 
( 72
)
Other (expense) income
 
 
( 1,379
)
 
 
66
 
 
 
( 1,403
)
 
 
103
 
Total other income (expense)
 
 
( 1,400
)
 
 
45
 
 
 
( 1,449
)
 
 
31
 
Loss before income taxes and equity method investments
 
 
( 49,039
)
 
 
( 9,610
)
 
 
( 77,242
)
 
 
( 19,617
)
Income tax benefit (provision)
 
 
954
 
 
 
( 3
)
 
 
954
 
 
 
( 10
)
Equity in loss of investee
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 150
)
Net loss from continuing operations
 
 
( 48,085
)
 
 
( 9,613
)
 
 
( 76,288
)
 
 
( 19,777
)
Net loss from discontinued operations
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 4
)
Net loss
 
$
( 48,085
)
 
$
( 9,613
)
 
$
( 76,288
)
 
$
( 19,781
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss from continuing operations
 
 
( 48,085
)
 
 
( 9,613
)
 
 
( 76,288
)
 
 
( 19,777
)
Change in unrealized gain on short-term investments
 
 
-
 
 
 
3
 
 
 
-
 
 
 
6
 
Foreign currency translation gain
 
 
51
 
 
 
-
 
 
 
386
 
 
 
-
 
Total comprehensive loss from continuing operations
 
 
( 48,034
)
 
 
( 9,610
)
 
 
( 75,902
)
 
 
( 19,771
)
Total comprehensive loss
 
$
( 48,034
)
 
$
( 9,610
)
 
$
( 75,902
)
 
$
( 19,775
)
Loss per common share from continuing operations - basic and diluted
 
 
( 0.90
)
 
 
( 0.23
)
 
 
( 1.58
)
 
 
( 0.52
)
Loss per common share discontinued operations - basic and diluted
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Loss per common share - basic and diluted
 
$
( 0.90
)
 
$
( 0.23
)
 
$
( 1.58
)
 
$
( 0.52
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
 
53,482,110
 
 
 
41,938,863
 
 
 
48,279,713
 
 
 
38,357,167
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
5
Table of Contents
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY 
(Dollars in thousands, except share amounts)
(Unaudited)
 
 
 
Shares of Common Stock
 
 
Common Stock
 
 
Shares of Treasury Stock
 
 
Treasury Stock at Cost
 
 
Shares of Series B Preferred Stock
 
 
Series B Preferred Stock
 
 
Additional Paid-In Capital
 
 
Accumulated Other Comprehensive Income
 
 
Accumulated Deficit
 
 
Total Stockholders' Equity
 
Balance as of July 1, 2022
 
 
52,621,305
 
 
$
5
 
 
 
( 41,522
)
 
$
( 417
)
 
 
-
 
 
$
-
 
 
$
197,512
 
 
$
335
 
 
$
( 98,086
)
 
$
99,349
 
Stock-based compensation
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
1,628
 
 
 
-
 
 
 
-
 
 
 
1,628
 
Issuance of common stock pursuant to at the market offering, net
 
 
1,420,261
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
2,350
 
 
 
-
 
 
 
-
 
 
 
2,350
 
Issuance upon exercise of stock options
 
 
6,000
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
5
 
 
 
-
 
 
 
-
 
 
 
5
 
Issuance upon vesting of restricted stock units
 
 
241,045
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Foreign currency translation gain, net of income taxes
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
51
 
 
 
-
 
 
 
51
 
Net loss
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 48,085
)
 
 
( 48,085
)
Balance as of September 30, 2022
 
 
54,288,611
 
 
$
5
 
 
 
( 41,522
)
 
$
( 417
)
 
 
-
 
 
$
-
 
 
$
201,495
 
 
$
386
 
 
$
( 146,171
)
 
$
55,298
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of July 1, 2021
 
 
41,012,766
 
 
$
4
 
 
 
( 19,361
)
 
$
( 319
)
 
 
-
 
 
$
-
 
 
$
148,754
 
 
$
3
 
 
$
( 53,269
)
 
$
95,173
 
Stock-based compensation
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
694
 
 
 
-
 
 
 
-
 
 
 
694
 
Exercise of warrants related to series A preferred stock
 
 
1,213
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
1
 
 
 
-
 
 
 
-
 
 
 
1
 
Shares issued as part of the Waycare Acquisition
 
 
2,784,474
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
20,287
 
 
 
-
 
 
 
-
 
 
 
20,287
 
Issuance upon exercise of stock options
 
 
130,380
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
208
 
 
 
-
 
 
 
-
 
 
 
208
 
Issuance upon vesting of restricted stock units
 
 
19,448
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Change in unrealized gain on short-term investments
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
3
 
 
 
-
 
 
 
3
 
Net loss
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 9,613
)
 
 
( 9,613
)
Balance as of September 30, 2021
 
 
43,948,281
 
 
$
4
 
 
 
( 19,361
)
 
$
( 319
)
 
 
-
 
 
$
-
 
 
$
169,944
 
 
$
6
 
 
$
( 62,882
)
 
$
106,753
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2022
 
 
43,987,896
 
 
$
4
 
 
 
( 19,361
)
 
$
( 319
)
 
 
-
 
 
$
-
 
 
$
171,285
 
 
$
-
 
 
$
( 69,883
)
 
 
101,087
 
Stock-based compensation
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
5,413
 
 
 
-
 
 
 
-
 
 
 
5,413
 
Issuance of common stock pursuant to at the market offering, net
 
 
9,019,062
 
 
 
1
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
22,757
 
 
 
-
 
 
 
-
 
 
 
22,758
 
Issuance upon exercise of stock options
 
 
25,638
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
40
 
 
 
-
 
 
 
-
 
 
 
40
 
Issuance upon vesting of restricted stock units
 
 
457,349
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Shares withheld upon vesting of restricted stock units
 
 
-
 
 
 
-
 
 
 
( 22,161
)
 
 
( 98
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 98
)
Shares issued as part of the STS Acquisition
 
 
798,666
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
2,000
 
 
 
-
 
 
 
-
 
 
 
2,000
 
Foreign currency translation gain, net of income taxes
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
386
 
 
 
-
 
 
 
386
 
Net loss
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 76,288
)
 
 
( 76,288
)
Balance as of September 30, 2022
 
 
54,288,611
 
 
$
5
 
 
 
( 41,522
)
 
$
( 417
)
 
 
-
 
 
$
-
 
 
$
201,495
 
 
$
386
 
 
$
( 146,171
)
 
$
55,298
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2021
 
 
33,013,271
 
 
$
3
 
 
 
-
 
 
$
-
 
 
 
240,861
 
 
$
-
 
 
$
68,238
 
 
$
-
 
 
$
( 43,050
)
 
$
25,191
 
Stock-based compensation
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
2,600
 
 
 
-
 
 
 
-
 
 
 
2,600
 
Exercise of cashless warrants in exchange for common stock
 
 
62,921
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Exercise of warrants in exchange for common stock
 
 
54,235
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
307
 
 
 
-
 
 
 
-
 
 
 
307
 
Exercise of warrants related to series A preferred stock
 
 
97,805
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
101
 
 
 
-
 
 
 
-
 
 
 
101
 
Public underwriting
 
 
6,126,939
 
 
 
1
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
70,124
 
 
 
-
 
 
 
-
 
 
 
70,125
 
Shares issued as part of the Waycare Acquisition
 
 
2,784,474
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,287
 
 
 
 
 
 
 
 
 
20,287
 
Conversion of series A preferred stock
 
 
899,174
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
7,775
 
 
 
-
 
 
 
-
 
 
 
7,775
 
Conversion of series B preferred stock
 
 
517,611
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 240,861
)
 
 
-
 
 
 
179
 
 
 
-
 
 
 
-
 
 
 
179
 
Issuance upon exercise of stock options
 
 
195,782
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
434
 
 
 
-
 
 
 
-
 
 
 
434
 
Issuance upon vesting of restricted stock units
 
 
196,069
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Shares withheld upon vesting of restricted stock units
 
 
-
 
 
 
-
 
 
 
( 19,361
)
 
 
( 319
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
 
 
 
( 319
)
Preferred stock dividends
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 51
)
 
 
( 51
)
Accretion of Series A preferred stock
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 101
)
 
 
-
 
 
 
-
 
 
 
( 101
)
Change in unrealized gain on short-term investments
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
6
 
 
 
-
 
 
 
6
 
Net loss
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
( 19,781
)
 
 
( 19,781
)
Balance as of September 30, 2021
 
 
43,948,281
 
 
$
4
 
 
 
( 19,361
)
 
$
( 319
)
 
 
-
 
 
$
-
 
 
$
169,944
 
 
$
6
 
 
$
( 62,882
)
 
$
106,753
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
6
Table of Contents
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
 
2022
 
 
2021
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
Net loss from continuing operations
 
$
( 76,288
)
 
$
( 19,777
)
Net loss from discontinued operations
 
 
-
 
 
 
( 4
)
Net loss
 
 
( 76,288
)
 
 
( 19,781
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
Bad debt expense
 
 
-
 
 
 
24
 
Depreciation
 
 
1,530
 
 
 
431
 
Amortization of right-of-use lease asset
 
 
261
 
 
 
209
 
(Benefit) provision for deferred taxes
 
 
( 954
)
 
 
10
 
Share-based compensation
 
 
5,413
 
 
 
2,600
 
Amortization of financing costs
 
 
2
 
 
 
14
 
Amortization of intangible assets
 
 
3,055
 
 
 
1,529
 
Goodwill impairment
 
 
34,835
 
 
 
-
 
Loss due to change in value of equity investments
 
 
-
 
 
 
150
 
Unrealized gain on short-term investments
 
 
-
 
 
 
( 6
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
479
 
 
 
( 936
)
Inventory
 
 
( 1,585
)
 
 
( 558
)
Other current assets
 
 
249
 
 
 
( 1,537
)
Other long-term assets
 
 
( 290
)
 
 
( 127
)
Accounts payable, accrued expenses and other current liabilities
 
 
1,113
 
 
 
4,275
 
Contract liabilities
 
 
1,258
 
 
 
1,596
 
Lease liability
 
 
829
 
 
 
( 218
)
Net cash used in operating activities - continuing operations
 
 
( 30,093
)
 
 
( 12,321
)
Net cash provided by (used in) operating activities - discontinued operations
 
 
3
 
 
 
( 4
)
Net cash used in operating activities
 
 
( 30,090
)
 
 
( 12,325
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
Cash paid for Waycare acquisition, net
 
 
-
 
 
 
( 40,699
)
SAFE Investment
 
 
( 610
)
 
 
( 1,000
)
Capital expenditures
 
 
( 2,306
)
 
 
( 1,618
)
Down payment on capital expenditures
 
 
( 1,266
)
 
 
-
 
Cash paid for STS acquisition, net
 
 
( 6,389
)
 
 
-
 
Investment in unconsolidated company
 
 
-
 
 
 
( 75
)
Net cash used in investing activities
 
 
( 10,571
)
 
 
( 43,392
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
Proceeds from public offering
 
 
-
 
 
 
70,125
 
Payment of notes payable
 
 
-
 
 
 
( 29
)
Proceeds from notes receivable
 
 
170
 
 
 
255
 
Net proceeds from exercise of options
 
 
40
 
 
 
434
 
Net proceeds from exercise of warrants
 
 
-
 
 
 
307
 
Net proceeds from exercise of warrants associated with the Series A Preferred Stock
 
 
-
 
 
 
101
 
Repayments of loans payable
 
 
( 53
)
 
 
-
 
Net proceeds from at-the-market agreement
 
 
22,758
 
 
 
-
 
Repurchases of common stock
 
 
( 98
)
 
 
( 319
)
Net cash provided by financing activities
 
 
22,817
 
 
 
70,874
 
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations
 
 
( 17,847
)
 
 
15,161
 
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations
 
 
3
 
 
 
( 4
)
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents
 
 
( 17,844
)
 
 
15,157
 
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period
 
 
26,601
 
 
 
21,009
 
Cash, cash equivalents and restricted cash and cash equivalents at end of period
 
$
8,757
 
 
$
36,166
 
 
 
 
 
 
 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period - continuing operations
 
$
7,869
 
 
$
35,102
 
Restricted cash and cash equivalents at end of period - continuing operations
 
 
888
 
 
 
1,063
 
Cash and cash equivalents at end of period - discontinued operations
 
 
-
 
 
 
1
 
Cash, cash equivalents and restricted cash and cash equivalents at end of period
 
$
8,757
 
 
$
36,166
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
7
Table of Contents
 
REKOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2022 , the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity and unaudited condensed consolidated statements of cash flows for the three and nine  month periods ended September 30, 2022 and 2021 .
 
The financial data and other information disclosed in these notes are unaudited. The results for the three and nine months ended September 30, 2022 , are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
 
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2021 . The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
 
Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000.
 
Rekor is a global leader in intelligent infrastructure focused on addressing the world’s most critical challenges across transportation management, public safety, and key commercial markets. With a real-time intelligence platform driven by deep access to data, AI-powered software, and smart optical devices at-the-edge, the Company combines its industry expertise and advanced proprietary technologies to deliver insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
 
On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 100 % of the issued and outstanding capital stock of STS, which is now a wholly-owned subsidiary of the Company. 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 unaudited condensed consolidated statement of operations for the three and nine  months ended September  30, 2022.
 
On August 18, 2021, the Company completed its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring 100 % of the issued and outstanding capital stock of Waycare, which is now a wholly-owned subsidiary of the Company.
 
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Use of Estimates
 
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are  not  apparent from other sources. Actual results  may  differ from those estimates under different assumptions or conditions.
 
Liquidity and Going Concern
 
For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.
 
The Company has generated losses since its inception and has relied on cash on hand, external sources of financing to support cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the nine months ended September 30, 2022 , the Company had a working capital deficit from continuing operations of $ 1,054,000  and a loss from continuing operations of $ 76,288,000 .
 
The Company’s cash decreased by $ 17,844,000  for the nine months ended September 30, 2022 , primarily due to the loss from continuing operations of $ 76,288,000 . The decrease in cash was primarily a result of the loss from continuing operations, which was partially offset by certain non cash adjustments such as the goodwill impairment of $34,835,000 . Additionally, the decrease in cash was offset by the net proceeds of $ 22,758,000  fro m the 2022 Sales Agreement (see NOTE 10 - STOCKHOLDERS ’ EQUITY for details on the 2022 Sales Agreement). Assuming the ability to complete sales of shares at current market prices under stable market conditions, as of Septem ber  30, 2022, th e Company had $ 26,364,000 of gross funds available under the 2022 Sales Agreement. 
 
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Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund operations for the next twelve months following the issuance of these unaudited condensed financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
 
The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period.
 
Goodwill
 
The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The Company performs its annual impairment assessment on October 1, or more frequently, when events or circumstances indicate impairment may have occurred.
 
During the third quarter of 2022, the Company experienced a significant decline in its market capitalization, which management deemed a triggering event related to goodwill. As a result, the Company performed an interim impairment assessment as of September  30, 2022, and determined that as of the reporting date the Company had an impairment related to its goodwill in the amount of $ 34,835,000 . 
 
The Company utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of the reporting unit. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon the reporting unit's weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value Measurements section below. Key assumptions used in the market-based approach included the selection of appropriate peer group companies and the associated valuation multiples. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result.
 
Fair Value of Financial Instruments
 
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value as of September 30, 2022 and December 31, 2021 , because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt, contingent consideration and long-term receivables approximates fair value as of September 30, 2022 and December 31, 2021 , given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.
 
The determination of fair value is based upon the fair value framework established by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820” ). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
 
There were no changes in levels during the nine months ended September 30, 2022 .
 
Revenue Recognition
 
The Company derives its revenues primarily from the sale of software, hardware and related services, including customer support and implementation services and management services in connection with our traffic safety solutions. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.
 
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
 
  ●
Identification of the contract, or contracts, with a customer
  ●
Identification of the performance obligations in the contract
  ●
Determination of the transaction price
  ●
Allocation of the transaction price to the performance obligations in the contract
  ●
Recognition of revenue when, or as, performance obligations are satisfied
 
 
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The following table presents a summary of revenue (dollars in thousands):
 
    Three Months Ended September 30,
    Nine Months Ended September 30,
 
    2022
    2021
    2022
    2021
 
Recurring revenue
  $ 4,839     $ 1,233     $ 8,616     $ 3,142  
Product and service revenue
    2,586       1,382       6,755       7,963  
Total revenue
  $ 7,425     $ 2,615     $ 15,371     $ 11,105  
 
Revenues
 
Recurring revenue
 
Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue. The Company generates recurring revenue from long-term contracts with customers that provide periodic payments and short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and eCommerce sales.
 
Recurring revenues are generated through the Company’s SaaS model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The Company's contracts with customers are generally for a term of one to five years. The payment for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these arrangements ratably over the term of the contractual agreement.
 
The Company also currently receives recurring revenues under contracts entered into using a subscription model for bundled hardware and software over a period. Payments for these subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing access through a web server to the Company’s software solutions, a self-managed database, and a cross-platform application programming interface. The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted access to the Company’s solutions over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, any fixed consideration related to the arrangement is generally recognized as recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided.
 
eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software which can be purchased online and activated through a digital key. The Company's contracts with customers are generally for a term of one month with automatic renewal each month. The Company invoices and receives fees from its customers monthly.
 
Customer support revenue is associated with perpetual licenses and long-term subscription arrangements and consists primarily of technical support and product updates. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract term. The customer benefits evenly throughout the contract period from the guarantee that the customer support resources and personnel will be available to them. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with a long-term license for the software. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such licenses for the same duration of time. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the customer support obligation, in line with how the Company believes services are provided.
 
Product and service revenue
 
Product and service revenue is defined as the Company’s contactless compliance revenue, implementation revenue, perpetual license sales and hardware sales.
 
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Contactless compliance revenues reflect arrangements to provide traffic safety systems to several jurisdictions in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images and analyzes the images to provide data and support citation management services. In the first quarter of 2021, the Company launched a new service offering for the State of Oklahoma to support its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and services to identify uninsured motor vehicles, notify owners of non-compliance and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of citations collected by the relevant jurisdiction.
 
Implementation revenue is recognized when the Company provides pilot programs to customers. Pilot programs may involve a one -time fee for a defined period in which the customer can use the Company’s software in connection with a previously installed camera network or connected vehicle data. At the end of the pilot program, the customer can convert from a pilot program to a subscription model which has a typical term between one and five years. The Company’s pilot program revenue is recognized at various stages of completion.
 
In addition to the recurring software sales, the Company recognizes revenue related to the sale of perpetual software licenses. The Company sells perpetual licenses that provide customers the right to use software for an indefinite period in exchange for a one -time license fee, which is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and have significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.
 
The Company generates revenue through the sale of hardware through its partner program distribution channels and direct sales. The Company satisfies its performance obligation and invoices end-user customers upon transfer of control of the hardware to the customers. The Company offers hardware installment to customers which ranges from one to six months. The revenue related to the installation component is recognized at various stages of completion.
 
Revenue by Customer Type
 
The following table presents a summary of revenue by customer type (dollars in thousands):
 
    Three Months Ended September 30,
    Nine Months Ended September 30,
 
    2022
    2021
    2022
    2021
 
Government customers
  $ 5,548     $ 1,548     $ 9,942     $ 4,186  
Commercial customers
    1,877       1,067       5,429       6,919  
Total revenue
  $ 7,425     $ 2,615     $ 15,371     $ 11,105  
 
Performance obligations
 
The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation. When the Company recognizes revenue due to the sale of hardware or perpetual software licenses, the impact on the overall unsatisfied performance obligations is relatively small as the Company satisfies most of its performance obligations at the point in time that the control of the hardware or software has transferred to the customer.
 
Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future. As of September 30, 2022 , the Company had approximately $ 28,606,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 58 %  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.
 
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Unbilled accounts receivable
 
The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days, but typically no longer than over the next twelve months. Unbilled accounts receivables of $ 605,000  and $ 415,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 , respectively.
 
Contract liabilities
 
When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six  months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine months ended September 30, 2022 were not materially impacted by any other factors. Contract liabilities as of September 30, 2022 and December 31, 2021 we re $ 4,586,000  and $ 3,272,000 , respec tively. During the nine months ended September 30, 2022 , $ 2,023,000 of th e contract liabilities balance as of December 31, 2021 was recognized as revenue.
 
The services due for contract liabilities described above are shown below as of September 30, 2022 (dollars in thousands):
 
2022, remaining
  $ 1,549  
2023
    2,200  
2024
    521  
2025
    204  
2026
    88  
Thereafter
    24  
Total
  $ 4,586  
 
Costs to Obtain and Fulfill a Contract
 
Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. When the amortization period would be one year or less, the Company elects to use the practical expedient election to expense the costs to obtain a contract as they are incurred.
 
Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with a maturity of three months or less, to be cash equivalents.
 
Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of September 30, 2022 and December 31, 2021 were $ 888,000  and $ 804,000 , res pectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets.
 
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Concentrations of Credit Risk
 
The Company deposits its temporary cash investments with highly rated financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to $250,000 per account. As of September 30, 2022  and December 31, 2021, the Company had deposits from continuing operations totaling $ 8,757,000  and $ 26,600,000 , respectively, in five  U.S. financial institutions and one Israeli financial institution.
 
The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.
 
Customer A accounted for  13 % and less than 10 % of the Company’s unaudited condensed consolidated revenues for the three months ended September 30, 2022 and 2021 , respectively. 
 
Customer B accounted for less than 10 % and 13 % of the Company’s unaudited condensed consolidated revenues for the three months ended September 30, 2022 and 2021 , respectively. 
 
Customer C accounted for less than 10 % and 13 % of the Company’s unaudited condensed consolidated revenues for the nine  months ended September 30, 2022 and 2021 , respectively. 
 
Customer D accounted for less than 10 % and 19 % of the Company’s unaudited condensed consolidated revenues for the nine  months ended September 30, 2022 and 2021 , respectively. 
 
No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenues for the  three and nine months ended September 30, 2022 and 2021 .
 
As of September 30, 2022 , no single customer accounted for more than 10%  of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2021 , Company E accounted for 13 % of the unaudited condensed consolidated accounts receivable balance.
 
No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated accounts receivable balance as of  December 31, 2021 .
 
Other Current Liabilities
 
A summary of other current liabilities is as follows (in thousands):
 
    September 30, 2022
    December 31, 2021
 
Payroll and payroll related
  $ 2,648     $ 1,673  
STS earnout
    1,001       -  
Right of offset to restricted cash
    883       752  
Other
    351       479  
Total
  $ 4,883     $ 2,904  
 
Significant Accounting Policies
 
New Accounting Pronouncements Effective in Future Periods
 
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016 - 13 Financial Instruments-Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments (“ASU 2016 - 13” ) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016 - 13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016 - 13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. Upon adoption of the new standard, the Company will begin recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016 - 13 and based on the Company’s analysis of ASU 2016 - 13 and the historical, current and expected credit quality of the Company’s customers, the Company does not expect ASU 2016 - 13 to have a material impact on its unaudited condensed consolidated statements of operations and balance sheets.
 
The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
 
Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10 -K for the year ended December 31, 2021 .
 
 
NOTE 2 – ACQUISITIONS
 
STS Acquisition
 
On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 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. The STS Contingent Consideration shall be payable within 30  days of the effectiveness of the extension of the Georgia Department of Transportation Contract. STS Contingent Consideration is presented as part of other non-current liabilities on the unaudited condensed consolidated balance sheets.
 
The Company shall pay the STS Earnout payment based on the STS EBITDA for the twelve month period ended December 31, 2022.  The STS Earnout payment shall in no event exceed $ 2,000,000 . Any payment related to the STS Earnout will be paid within 60 days of December  31, 2022. The STS Earnout is presented as part of other current liabilities on the unaudited condensed consolidated balance sheets. 
 
The purchase price for the acquisition of STS has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands):
 
Cash paid
  $ 6,500  
Common stock issued
    2,000  
Earnout consideration
    1,001  
Contingent consideration
    1,298  
Note consideration
    2,000  
Total consideration
  $ 12,799  
Assets
       
Cash and cash equivalents
  $ 111  
Inventory
    290  
Accounts receivable
    2,702  
Other current assets
    141  
Customer relationships
    3,400  
Tradename
    700  
Property and equipment
    5,509  
Right of use assets
    399  
Total assets acquired
    13,252  
Liabilities
       
Accounts payable and accrued expenses
    913  
Contract liabilities
    56  
Other current and non-current liabilities
    48  
Lease liability
    399  
Deferred tax liability
    954  
Total liabilities assumed
    2,370  
Fair value of identifiable net assets acquired
    10,882  
Goodwill
  $ 1,917  
 
Waycare Acquisition
 
On August 18, 2021, the Company completed its acquisition of Waycare by acquiring 100 % of the issued and outstanding capital stock of Waycare. The aggregate purchase price for the shares of Waycare was $ 60,171,000 . The purchase price was comprised of $ 39,884,000 of cash and 2,784,474 shares of the Company’s common stock, valued at $ 20,287,000 . As a result of the transaction, Waycare has become a wholly-owned subsidiary of the Company.
 
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The purchase price for the acquisition of Waycare has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. The table below shows the breakdown related to the purchase price allocation for the acquisition (dollars in thousands):
 
Cash paid
  $ 39,884  
Common stock issued
    20,287  
Total consideration
  $ 60,171  
Assets
       
Cash and cash equivalents
  $ 25  
Restricted cash and cash equivalents
    89  
Accounts receivable
    486  
Other current assets
    150  
Property and equipment
    72  
Acquired technology
    16,897  
Total assets acquired
    17,719  
Liabilities
       
Accounts payable and accrued expenses
    794  
Contract liabilities
    36  
Deferred tax liability
    3,833  
Total liabilities assumed
    4,663  
Fair value of identifiable net assets acquired
    13,056  
Goodwill
  $ 47,115  
 
The technology acquired by the Company as part of the acquisition of Waycare has an estimated useful life of seven years and is presented as part of intangible assets, net on the unaudited condensed consolidated balance sheets.
 
Operations of Combined Entities
 
The following unaudited pro forma combined financial information gives effect to the acquisition of Waycare and STS as if it was consummated as of January 1, 2021. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2021 ( the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
 
    Three Months Ended September 30,
    Nine Months Ended September 30,
 
    2022
    2021
    2022
    2021
 
    (Dollars in thousands, except per share data)
    (Dollars in thousands except for per share data)
 
Total revenue from continuing operations
  $ 7,425     $ 6,358     $ 21,256     $ 22,314  
Net loss from continuing operations
  $ ( 48,085 )   $ ( 9,916 )   $ ( 76,961 )   $ ( 21,866 )
Basic and diluted loss per share from continuing operations
  $ ( 0.90 )   $ ( 0.22 )   $ ( 1.57 )   $ ( 0.52 )
Basic and diluted number of shares
    53,482,110       45,522,003       49,078,379       41,940,307  
 
 
NOTE 3 – INVESTMENTS
 
Investments in Unconsolidated Companies
 
In February 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own 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 September 30, 2022 and December 31, 2021 the investment in Global Public Safety had a value of $ 0 .
 
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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. During the three and nine  months ended September  30, 2021, the Company recognized a loss in its unconsolidated investments of $ 74,000  and $ 150,000 , respectively. As of September 30, 2022 and December 31, 2021 the investment in Roker had a value of $0 .
 
There have been no distributions or earnings received from either investment. 
 
Roker SAFE
 
In April 2021, in exchange for $ 1,000,000 the Company entered into a SAFE with Roker (the “Roker SAFE”). In  October 2021   and during the  2022 fiscal year, the Company invested an additional $ 250,000 and $ 610,000 , respectively, 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 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 is recorded on the cost method of accounting and included under SAFE investment on the unaudited condensed consolidated balance sheets and is shown as long-term, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment, the Company will review the investment for impairment. No factors indicative of impairment were identified during the three months ended September  30, 2022.  
 
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NOTE 4   – SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION
 
Supplemental non cash disclosures of cash flow information for the  nine months ended September 30, 2022 and 2021 were as follows (dollars in thousands):
 
    Nine Months Ended September 30,
 
    2022
    2021
 
Cash paid for interest
  $ 26     $ -  
Cash paid for taxes
    22       -  
Increase in accounts payable and accrued expenses related to purchases of property and equipment
    -       2,479  
Investing activities:
               
Fair market value of shares issued in connection with the acquisition of Waycare
    -       20,287  
Fair market value of shares issued in connection with the acquisition of STS
    2,000
      -  
Contingent Consideration in connection with the acquisition of STS
    1,298       -  
Earnout Consideration in connection with the acquisition of STS
    1,001       -  
Note Consideration in connection with the acquisition of STS
    2,000       -  
Deferred tax liabilities resulting from purchase accounting adjustments in connection with the acquisition of STS
    954        
Loans issued for property and equipment
    460       -  
Financing activities:
               
Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock
    -       ( 1,005 )
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock
    -       ( 6,770 )
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock
    -       ( 179 )
New Leases under ASC-842:
               
Recognition of operating lease - right-of-use lease asset
    3,508       6,039  
Lease incentives
    919       3,833  
Recognition of operating lease - lease liability
  $ ( 4,427 )   $ ( 9,872 )
 
 
NOTE 5   – OPERATING LEASES
 
The Company has operating leases for office facilities in various locations throughout the United States and Israel. The Company’s leases have remaining terms of one to ten years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.
 
Operating lease expense from continuing operations for the three months ended September 30, 2022 and 2021 was $ 618,000  and $ 105,000 , and for the  nine months ended September 30, 2022 and 2021  was $ 1,533,000  and $ 278,000 , respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
 
Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $ 273,000  and $ 245,000 fo r the nine months ended September 30, 2022 and 2021 , respectively.
 
In the first  quarter of 2022, the Company entered into a lease agreement for its Israeli operations. As part of the lease agreement, there were $ 919,000 in lease incentives provided to the Company which will be used to update the structure of the leased space and furnish the leased space.
 
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Supplemental balance sheet information related to leases as of  September 30, 2022 was as follows (dollars in thousands):
 
Operating lease right-of-use lease assets
  $ 9,809  
         
Current portion of lease liability
  $ 1,066  
Long-term portion of lease liability
    14,493  
Total lease liability
  $ 15,559  
         
Weighted average remaining lease term - operating leases (years)
    9.68  
         
Weighted average discount rate - operating leases
    9.0 %
         
2022, remaining
  $ 601  
2023
    2,400  
2024
    2,349  
2025
    2,306  
2026
    2,270  
Thereafter
    13,523  
Total lease payments
  $ 23,449  
Less imputed interest
    7,890  
Maturities of lease liabilities
  $ 15,559  
 
 
NOTE 6   – INTANGIBLE ASSETS AND GOODWILL
 
STS Acquisition
 
The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of STS occurred on June  17, 2022, the results of operations for STS from the date of acquisition have been included in the Company’s consolidated statement of operations for the three and nine  months ended September  30, 2022 . As part of the Company's preliminary purchase price allocation for the acquisition, the Company recognized $ 1,917,000 in goodwill, $ 3,400,000  in customer relationships and $ 700,000 of marketing related intangible assets related to the STS tradename. 
 
Intangible Assets Subject to Amortization
 
The following summarizes the change in intangible assets from December 31, 2021 to September 30, 2022 (dollars in thousands):
 
    Useful Life (in Years)
    December 31, 2021
    Additions
    Amortization
    September 30, 2022
 
Intangible assets subject to amortization
                                     
Customer relationships
  10 - 15
    $ 328     $ 3,400     $ ( 68 )   $ 3,660  
Marketing related
  5
      97       700       ( 68 )     729  
Technology based
  3 - 10
      20,304       -       ( 2,595 )     17,709  
Internally capitalized software
  3
      677             ( 324 )     353  
Intangible assets subject to amortization
        $ 21,406     $ 4,100     $ ( 3,055 )   $ 22,451  
 
The following provides a breakdown of identifiable intangible assets as of September 30, 2022 (dollars in thousands):
 
    Customer Relationships
    Marketing Related
    Technology Based
    Internally Capitalized Software
    Total
 
Identifiable intangible assets
  $ 3,861     $ 1,027     $ 24,107     $ 1,452     $ 30,447  
Accumulated amortization
    ( 201 )     ( 298 )     ( 6,398 )     ( 1,099 )     ( 7,996 )
Identifiable intangible assets, net
  $ 3,660     $ 729     $ 17,709     $ 353     $ 22,451  
 
These intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization expense for the three months ended  September 30, 2022 and 2021 was $ 1,063,000 and $ 713,000 , respectively, and for the  nine months ended September 30, 2022 and 2021 was  $ 3,055,000  and $ 1,529,000 , r espectively and is presented as part of depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations.
 
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As of September 30, 2022 , the estimated impact from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):
 
2022, remaining
  $ 1,055  
2023
    4,157  
2024
    3,841  
2025
    3,832  
2026
    3,019  
Thereafter
    6,547  
Total
  $ 22,451  
 
 
NOTE 7   – DEBT
 
STS Notes
               
On June 17, 2022, pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $ 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  September 30, 2022  and is included in Notes payable long-term, in the unaudited condensed consolidated balance sheets.
 
Firestorm Notes
 
On January 25, 2017, pursuant to the terms of the Company’s acquisition of certain now discontinued subsidiaries (collectively referred to herein as “Firestorm”), the Company issued $ 1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $ 500,000 payable at an interest rate of 2.0 % and the remaining three notes are evenly divided over the remaining $ 500,000 and payable at an interest rate of 7.0 %. The notes mature on January 25, 2022. The aggregate balance of these notes payable was  $ 1,000,000 and $ 998,000 , net of unamortized interest, as of September 30, 2022 and December 31, 2021 , respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $ 0 and $ 2,000 , respectively. The Company is not paying current interest on these notes and did  not pay the principal due in January 2022 as the Company has requested rescission in connection with the Firestorm acquisition and is currently in litigation with the sellers (see NOTE 9 - COMMITMENTS AND CONTINGENCIES ).
 
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Interest Expense
 
The following table presents the interest expense related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands):
 
    Three Months Ended September 30,
    Nine Months Ended September 30,
 
    2022
    2021
    2022
    2021
 
Contractual interest
  $ 21     $ 17     $ 44     $ 58  
Amortization of debt issuance costs
    -       4       2       14  
Total interest expense
  $ 21     $ 21     $ 46     $ 72  
 
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Schedule of Principal Amounts Due of Debt
 
The principal amounts due for long-term notes payable are shown below as of September 30, 2022 (dollars in thousands):
 
2022, remaining
  $ 1,026  
2023
    106  
2024
    1,074  
2025
    1,078  
2026
    83  
Thereafter
    114  
Total notes payable
  $ 3,481  
 
 
NOTE 8   – INCOME TAXES
 
The Company maintains a full valuation allowance against its net deferred taxes, outside of the deferred tax liability related to the indefinite lived intangible, through  September 30, 2022 .
 
The Company files income tax returns in Israel, the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of September 30, 2022 .
 
The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangible, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.
 
For the three and  nine months ended September 30, 2022  and 2021, the Company did 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 expense. The 2018  through 2021  tax years remain subject to examination by the Internal Revenue Service.
 
As a result of the acquisition of STS, the Company recognized a $ 4,545,000 in identified definite-lived tangible and intangible assets for which the Company received  no  tax basis due to the stock acquisition. As a result, the Company recorded a deferred tax liability of $ 954,000  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 $ 954,000  was recorded for the three and nine months ended September  30, 2022.  
 
NOTE 9   – COMMITMENTS AND CONTINGENCIES
 
Firestorm Principals
 
On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company (the “Firestorm Principals”) who were founders of two related former subsidiaries—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19 -cv- 07767 -VEC. On January 30, 2020, we filed a Second Amended Complaint (the “Complaint”). The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company in exchange for cash, the Firestorm Notes, the Firestorm Warrants and other consideration. The Complaint also alleges claims for breach of fiduciary duty, conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of the acquisition transaction, including relieving the Company from further obligations with respect to the Firestorm Notes and Firestorm Warrants,  and monetary damages.
 
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The Firestorm Principals answered together with counterclaims on  February 28, 2020.  Thereafter, on  March 30,  the Company moved to dismiss the counterclaims against certain directors and officers named as counterclaim-defendants, resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter the Company filed its response and affirmative defenses to the Counterclaims on  April 22, 2020.  On  April 27, 2020,  the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which the Company opposed. In addition, on  December 9, 2019,  the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s  November 23, 2020  order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.
 
In  April 2021,  the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed its opposition to the partial summary judgment motion on  June 21, 2021.  The Firestorm Principals filed their reply in support of their partial summary judgment motion on  July 9, 2021.  On  March 14, 2022,  the Court issued an opinion and order which denied summary judgment to the Firestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment to the Firestorm Principals on their breach of warrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. The Court granted summary judgment to the Firestorm Principals on our CFAA claims, based on recent case law clarifying that such claims do  not  apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment to one defendant on our conversion, and trespass to chattels claims because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on  one  breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $ 25,500  amount at issue could  not  be set off by or recouped from our damages in this case.
 
In April 2022, The Company filed a notice of motion seeking partial summary judgement on several of the of the Company’s claims and the Firestorm Principals’ counterclaims, which the Firestorm Principals opposed. On July 29 th , 2022, the Court issued an opinion and order, which granted the motion in part and denied it in part. The order dismissed the Firestorm Principal’s counterclaim against the Company for libel. The order also dismissed the Company’s claim for breach of fiduciary duty against one  defendant on the ground that he was not employed by the Company, but by a subsidiary of the Company that is not a party to the case. The court also denied summary judgement to the Company as to the breach of fiduciary duty claim against the other defendants and as to the trespass to chattels and conversion claims as to all defendants, on the ground that issues of fact remain contested. On the same ground, the court also denied summary judgement to the Company as to a breach of contract claim  by one defendant relating to an alleged change in employment status.
 
In July 2022, the Firestorm Principals obtained new counsel.  On July 21, 2022, the Firestorm Principals’ new counsel requested an adjournment of the October 17, 2022 trial date and related pre-trial deadlines, which the Company did not oppose.  On July 22, 2022, the Court granted the request and rescheduled trial to begin on February 13, 2023.
 
In related lawsuits, in 2020,  the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty for failure to pay the Firestrom Notes and allow the exercise of the Firestorm Warrants and libel for disclosures related to its claims in the Company’s quarterly filing on Form 10 -Q. The defendants in the suits moved to dismiss the amended complaint. At this stage of these litigations, the suits against  two  of the directors have been completely dismissed. Appeal of the dismissal has been denied in one of these cases and is pending in the other.and  one  has been permitted to proceed although the Firestorm Principals have not done so. On  March 16, 2022,  the court in the Virginia action dismissed the breach of fiduciary duty claim without prejudice, which would permit it to be refiled in Delaware Chancery Court, although the Firestorm Principals have not done so. The Virginia Court denied the motion to dismiss the defamation claim on jurisdictional grounds. The defamation claim in Virginia will now be challenged considering the dismissal on substantive grounds. The Delaware court has denied our motion to dismiss, but there was only limited discovery before the deadline expired. The Firestrom Principals are now requesting an extension of the discovery deadline, which the defendant directors are opposing. 
 
At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome, except where dismissal has been upheld on appeal. We intend to continue vigorously litigating our claims against the Firestorm Principals and believe that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.
 
Fordham
 
On  September 18, 2020,  Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company in the Supreme Court for the State of New York, New York County. Fordham alleged that the Company offended an underwriting agreement with Fordham and brought claims for breach of contract. On October  17, 2022, the Court granted Fordham’s motion for summary judgment and denied the Company’s cross-motions for summary judgment and to compel discovery. The Court awarded Fordham $ 1,025,000 , representing 3 % of the gross proceeds generated from the Company’s previously announced and concluded at-the-market equity program commenced on August  14, 2019, plus pre-judgment interest accruing at 9 % per annum since April  14, 2019, and reasonable attorneys’ fees. The Company chose not to appeal the decision and satisfied the judgement. In exchange for a payment of $ 1,320,000  by the Company, the plaintiff agreed to a full and complete discharge of the plaintiff’s claim. This amount was recorded in other (expense) income on the Company's unaudited condensed consolidated statements of operations. 
 
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In addition, from time to time, the Company  may  be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the Company’s opinion that the outcome of these proceedings, individually and collectively, will  not  be material to the Company’s consolidated financial statements as a whole.
 
 
NOTE 10   – STOCKHOLDERS ’ EQUITY
 
At-the-Market Offering
 
On  February  24,   2022 ,  the Company entered into an At-the-Market Issuance Sales Agreement (the  “2022  Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company from time to time  may  offer and sell shares of its common stock, par value $0.0001  per share, having an aggregate offering price of up to $ 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 approximate ly $ 169,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.
 
For t he  nine  months ended September  30, 2022,  the Company sold 9,019,062  shares of common stock at a weighted-average selling price of $ 2.62  per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $ 22,758,000  after paying $169,000 related to the issuance cost, as well as 3.0% or $ 709,000 related to cash commissions provided to the Agent.
 
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.
 
Waycare Acquisition
 
In connection with the acquisition as described in NOTE 2 – ACQUISITIONS , the Company issued 2,784,474 shares of the Company’s common stock as part of the consideration.
 
2021 Public Offering
 
On February 9, 2021, the Company issued and sold 6,126,939 shares of its common stock (which includes 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the “2021 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 $ 70,125,000 . 
 
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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.
 
Warrants
 
A summary of the warrant activity for the Company for the period ended September 30, 2022 is as follows:
 
    Series A Preferred Stock Warrants (1)
    Firestorm Warrants (2)
    Secure Education Warrants (3)
    2018 Public Offering Warrants (4)
    Total
 
Active warrants as of January 1, 2022
    41,996       631,254       15,556       3,505       692,311  
Exercised warrants
    -       -       -       -       -  
Outstanding warrants as of September 30, 2022
    41,996       631,254       15,556       3,505       692,311  
Weighted average strike price of outstanding warrants as of September 30, 2022
  $ 1.03     $ 3.09     $ 6.06     $ 1.00     $ 3.02  
Intrinsic value of outstanding warrants as of September 30, 2022
  $ -     $ -     $ -     $ -     $ -  
 
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  ( 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 is 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. The Company has rejected requests from the holders of the Firestorm Warrants to exercise them pending resolution of pending litigation (see NOTE - 9  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 is 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 expire on October 29, 2023.
 
 
NOTE 11   – EQUITY INCENTIVE PLAN
 
In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at 3,000,000 shares. In October 2021, the Company announced it had registered an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan.
 
Stock Options
 
Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three years with a contractual term of ten years.
 
Stock compensation expense related to stock options for the three months ended  September 30, 2022 and 2021 was $ 2,000  and $ 30,000 , respectively, and for the nine  months ended September  30, 2022 and 2021 was $ 43,000  and $ 90,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the accompanying unaudited condensed consolidated statements of operations.  
 
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A summary of stock option activity under the Company’s 2017 Plan for the period ended September 30, 2022 is as follows:
 
    Number of Shares Subject to Option
    Weighted Average Exercise Price
    Weighted Average Remaining Contractual Term (Years)
    Aggregate Intrinsic Value
 
Outstanding Balance as of December 31, 2021
    1,012,336     $ 1.28       6.50     $ 5,002,000  
Exercised
    ( 25,638 )     1.54                  
Forfeited
    ( 6,999 )     0.90                  
Expired
    ( 19,547 )     2.78                  
Outstanding balance as of September 30, 2022
    960,152     $ 1.24       5.44     $ 95,000  
Exercisable as of September 30, 2022
    959,319     $ 1.24       5.43     $ 95,000  
 
As of September 30, 2022 , there was $ 0 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan.
 
Restricted Stock Units
 
Stock compensation expense related to RSU’s for the three months ended  September 30, 2022 and 2021  was $ 1,626,000  and $ 664,000 , respectively, and for the nine  months ended September  30, 2022 and 2021 was $ 5,370,000  and $ 2,510,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the accompanying unaudited condensed consolidated statements of operations.
 
Pursuant to the terms of the Waycare purchase agreement, the Company reserved for issuance to Waycare’s continuing employees an aggregate of 686,248 restricted stock units, which were issued on October 28, 2021, pursuant to the terms of the Company’s 2017 Equity Award Plan, as amended. The restricted stock units are subject to customary vesting schedules and are intended to incentivize the continued performance of Waycare’s employees.
 
A summary of RSU activity under the Company’s 2017 Plan for the nine months ended September 30, 2022 is as follows:
 
    Number of Shares
    Weighted Average Unit Price
    Weighted Average Remaining Contractual Term (Years)
 
Outstanding balance as of December 31, 2021
    1,347,879     $ 10.94       2.20  
Granted
    1,566,213       3.82       2.03  
Vested
    ( 496,928 )     10.85          
Forfeited
    ( 360,576 )     10.53          
Outstanding balance as of September 30, 2022
    2,056,588     $ 5.76       1.67  
 
The grant date fair value is based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition.
 
As of September 30, 2022 , ther e was $ 9,404,000 of unre cognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining p eriod of 1.67  years.
 
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NOTE 12   – LOSS PER SHARE
 
The following table provides information relating to the calculation of loss per common share:
 
    Three Months Ended September 30,
    Nine Months Ended September 30,
 
    2022
    2021
    2022
    2021
 
    (Dollars in thousands, except per share data)
    (Dollars in thousands, except per share data)
 
Basic and diluted loss per share
                               
Net loss from continuing operations
  $ ( 48,085 )   $ ( 9,613 )   $ ( 76,288 )   $ ( 19,777 )
Less: preferred stock accretion
    -       -       -       ( 101 )
Less: preferred stock dividends
    -       -       -       ( 51 )
Net loss attributable to shareholders from continuing operations
  $ ( 48,085 )   $ ( 9,613 )   $ ( 76,288 )   $ ( 19,929 )
Net loss attributable to shareholders from discontinued operations
    -       -       -       ( 4 )
Net loss attributable to shareholders
  $ ( 48,085 )   $ ( 9,613 )   $ ( 76,288 )   $ ( 19,933 )
Weighted average common shares outstanding - basic and diluted
    53,482,110       41,938,863       48,279,713       38,357,167  
Basic and diluted loss per share from continuing operations
  $ ( 0.90 )   $ ( 0.23 )   $ ( 1.58 )   $ ( 0.52 )
Basic and diluted loss per share from discontinued operations
    -       -       -       ( 0.00 )
Basic and diluted loss per share
  $ ( 0.90 )   $ ( 0.23 )   $ ( 1.58 )   $ ( 0.52 )
Common stock equivalents excluded due to the anti-dilutive effect
    3,709,051       2,429,924       3,709,051       2,429,924  
 
As the Company had a net loss for the three and nine months ended September 30, 2022 , the follo wing 3,709,051  potentially dilutive securities were excluded from diluted loss per share:  692,311 for outstanding warrants,  960,152 related to outstanding options and 2,056,588  related to outstanding RSUs.
 
As the Company had a net loss for the three and nine months ended September 30, 2021 ,  2,429,924  potentially dilutive securities were excluded from diluted loss per share:  694,299  for outstanding warrants,  1,082,971  related to outstanding options and  652,654  related to outstanding RSUs.
 
 
NOTE 13   – SUBSEQUENT EVENTS
 
Roker SAFE
 
In the fourth  quarter of 2022 ,  the Company invested an additional $ 145,000  in the Roker SAFE. 
 
Fordham
 
On October 17, 2022,  a summary judgment was issued against the Company in the previously disclosed lawsuit brought by the Fordham. In exchange for a payment of $ 1,320,000  by the Company, the plaintiff agreed to a full and complete discharge of the plaintiff’s claim.
 
 
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ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 2021, entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.
 
Specific factors that might cause actual results to differ from our expectations include, but are not limited to:
 
 
●
significant risks, uncertainties and other considerations discussed in this report;
 
●
operating risks, including supply chain, equipment or system failures, cyber and other malicious attacks and other events that could affect the amounts and timing of revenues and expenses;
 
●
reputational risks affecting customer confidence or willingness to do business with us;
 
●
financial market conditions and the results of financing efforts;
 
●
our ability to successfully identify, integrate and complete acquisitions and dispositions, including the integration of the Waycare Acquisition and STS Acquisition;
 
●
our continued ability to successfully access the public markets for debt or equity capital;
 
●
political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives associated with our products;
 
●
current and future litigation;
 
●
competition from other companies with an established position in the markets we have recently entered or are seeking to enter or from other companies who are seeking to enter markets we already serve;
 
●
our failure to successfully develop products using our technology that are accepted by the markets we serve or intend to serve or the development of new technologies that change the nature of our business or provide our customers with products or services superior to or less expensive than ours;
 
●
the inability of our strategic plans and goals to expand our geographic markets, customer base and product and service offerings;
 
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●
risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020 which has caused significant volatility in U.S. and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies; and
 
●
risks associated with cyberattacks on international, national, local and Company information infrastructure by rogue businesses or criminal elements or by agents of governments engaged in asymmetric disruptions for competitive, economic, or military reasons.
 
Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Other than as required by law, we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
 
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.
 
General
 
Overview
 
We are a roadway intelligence and data services company providing products and solutions to meet the increasing demand for smarter, safer, and greener intelligent transportation infrastructure. Our operations are conducted by our wholly-owned subsidiaries, Rekor Recognition Systems, Inc., or Rekor Recognition, Waycare Technologies, Ltd., or (“Waycare”), and Southern Traffic Services, Inc., or (“STS”).
 
We specialize in: 1) the collection and aggregation of roadway and mobility related data from multiple sources, 2) the analysis and transformation of that data into knowledge and actionable insights, and 3) the distribution of those insights to multiple users in a secure environment using the highest levels of encryption and privacy standards. Our intellectual property and proprietary technologies harness the latest advancements in artificial intelligence, machine learning, data analysis, edge processing and communications to address critical challenges in transportation management, public safety, urban mobility, and key commercial markets. Our objective has been to create a collection and distribution service that aggregates multiple streams of data relevant to a transportation and mobility network, converges, processes and analyzes them, and provides real-time and predictive information to decision makers and users of that network in a flexible and rich user environment based on individual needs and use-cases. Our Rekor One TM   platform serves as a uniform architecture and backbone for the collection and delivery of roadway intelligence to increase roadway safety, efficiency and sustainability of roadways, and make communities safer, smarter, greener and more connected. Providing products and services across 80 countries, we deliver intelligent infrastructure solutions for government agencies and commercial clients in the United States and around the world.
 
Transportation infrastructure is the backbone of a functioning economy. People, vehicles, materials, and information all require 24/7 mobility, something that depends on well-maintained, synchronized networks and systems. The cost, complexity and interdependency of these systems has made it difficult to keep pace in a rapidly growing and changing world. Rekor’s data-driven solutions help make better use of existing infrastructure and have also been developed to aid in planning and implementing the next generation of transportation infrastructure, as well as be part of that infrastructure. Roads, bridges, tunnels, and residential areas have much to tell us if we gather and analyze the data they can provide and exploit the knowledge that gives us about how to optimally serve the public with an efficient, safe, and healthy living environment. Rekor is driven to help its customers generate and make intelligent use of that knowledge.
 
Spurred by the 2021 Infrastructure Investment and Jobs Act, we expect the United Sates to make an unprecedented investment in transportation infrastructure. The bill allocates $550 billion in new spending, spread out over five years, to rebuild roads, bridges and rails, and airports, in addition to providing high-speed internet access and addressing climate concerns. As part of this, federal, state, and local governments are prioritizing strategic investments dedicated to improving existing transportation management and increasing public safety through modern, efficient and connected infrastructure. We expect to play an important role in meeting the need for improved data as agencies plan for and build the transportation networks of the future. Once completed, we also expect those networks to be data interactive: generating and distributing real-time intelligence that can be used to improve traffic management, public safety, maintenance and emergency services, as well as by planning agencies and users such as connected and autonomous vehicles. Our primary objective has been to develop the technology that will play a central role in that process.
 
Our first step was to develop the ability to extract a more accurate and detailed information of roadway and mobility activity than existing technology. We call this “ground truth data” and have used artificial intelligence algorithms and machine learning to design computer-vision software that provides a wealth of important data about the movements of motorized and non-motorized vehicles, including bicycles and pedestrians. It includes vehicle classifications, counts, direction of travel, speed, make, model, color and other data. Our technology allows this ground truth data to be extracted by optical and IoT sensors at the “edge” of the network, close to the source of the activity being evaluated. Extracting relevant data at the edge improves the ability to generate and communicate timely insights by reducing latency, response time, and the volume of raw data that needs to be communicated through the network.
 
Our platform also provides the ability to anonymize vehicle information and to distribute discrete information to multiple users based on the specific data that each user needs to know. This permits us to provide unmatched cross-agency and public/private entity collaboration using a single source-of-truth while presenting customized information to multiple users simultaneously, where previously agencies would derive information from separate sources, at different times and with varying degrees of accuracy. As a result, we can provide simultaneous alerts and consistent, real-time situational awareness during emergencies to separate agencies such as first-responders, police, fire and medical support, while also providing other agencies with the benefit of comprehensive, accurate and fully up-to-date archival information for use in planning, management and maintenance. The ability of our platform to allow each sensor in the network to be linked together and to supply customized data to multiple users can provide significant reductions in costs for our clients as compared to the installation and maintenance of separate dedicated systems. Thus, the combination of our software’s data extraction and distribution capabilities allows us to simplify the network environment while enhancing its functionality at the same time. Simply put, we can dramatically increase the amount of usable data and actionable insights available to our clients at the same time that we can significantly reduce the number of sensors and infrastructure required to collect that data. 
 
Another advantage of our software is that it can be used with a wide variety of commercially available sensors, allowing customers as to achieve superior results leveraging existing infrastructure investments, and with much less expensive equipment than was previously necessary. This makes applications of Rekor technology feasible in environments where costs were previously prohibitive or inaccessible. While Rekor has developed a line of optical and IoT sensors that are purpose-built to make the most efficient use of our software, customers can use it with existing sensor systems and integrate to our network seamlessly, without needing to install new equipment. This reduces installation and lead time in the adoption of our solutions and facilitates cross agency adoption and data unification.
 
Having achieved the ability to obtain comprehensive ground truth data more accurately and at less expense than existing systems, our next objective was to develop the ability to aggregate multiple sources of third-party data into the platform. We have designed our platform to serve as a central exchange, so that third party data can be used in tandem with our ground truth data to provide a more holistic view of the transportation network within a particular region. We call this the Rekor Partner Network (RPN).  RPN members include Waze, Mobileye, Wejo, Otonomo, TomTom, Tomorrow.io, and dozens of other leading data companies around the world. By incorporating weather forecasts, event and dispatch schedules, historical patterns and similar data into our analysis, we can provide a wide variety and volume of diverse and related insights that are more comprehensive, and predictive. Using these additional sources of data, we are able to provide our clients with a regional technology environment that ingests and analyzes data from both existing infrastructure and third-party sources, producing superior visibility of the transportation and mobility network in real time, together with improved identification and predictions of disruptive events. 
 
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Intelligence-Driven Innovation
 
We currently provide software, hardware and services to support intelligent transportation networks and enhance community safety and security.  These products and services have been designed to support a single integrated platform: Rekor One TM . Using this proprietary platform, Rekor can extract real time data about the activity on a transportation network, aggregate it with multiple streams of data from other sources, analyze and reprocess it holistically, and then use it to distribute coherent information to customers that can be used to make decisions about how the network should be used and managed.
 
We have concentrated on developing a platform that facilitates the efficient collection, analysis and distribution of a large volume and variety of data. The velocity and veracity of data that we have captured and applied in building our proprietary artificial intelligence and machine learning models have provided us with a significant first-mover advantage. From the very beginning, we have been collecting, aggregating, cleansing, extracting, transforming, and using data to build and improve our models. Today, we can extract and process a deeply detailed picture of a roadway environment and what is moving in that environment with an unmatched level of accuracy in our inferences, predictive analytics, and insights.
 
We are rapidly growing the geographic area connected by smart optical IoT devices at-the-edge to the open architecture of our Rekor One intelligence platform. In addition to digitizing existing infrastructure by capturing real-time data from new and existing roadway devices, our platform enables us to extend the scope of our knowledge via proprietary algorithms that pull the data and process it through our models. Beyond this, we are augmenting our data through a growing network of data partners.  This provides multiple trillions of additional data points that unlock further real-time and predictive operational insights about what is happening in a given transportation environment at every moment. Example data sources from our partner network include mobility, navigation, and traffic applications, in-vehicle data, connected, autonomous vehicles datasets, weather, supply chain, event management, and a rapidly growing list of customer-provided and crowd-sourced data. The more data we capture and inject into our machine learning models, the smarter and more accurate they become. Due to the incredible strength and accuracy of our models, we can extract more data from the roadways than ever before possible, and generate rich multi-dimensional insights for our customers about what is happening in real-time. In addition, we use AI-driven predictive analytics to forecast what will happen in the next five minutes, in 12 or 24 hours, and even days and months into the future. From these insights, customers can make better informed proactive decisions and achieve improved operational efficiency through a more strategic allocation of resources.
 
At the core of all our intelligent infrastructure solutions is the Rekor One TM intelligence platform. Fueled by rich data and powered by AI, Rekor One TM is purpose-built to be a single source of truth and insights serving multiple customer segments and multiple missions. Built on the foundation of Rekor One, we can simultaneously deliver vertical-specific solutions for traffic management, public safety, and commercial markets. With our advanced technology and domain expertise, we have developed solutions that address diverse use cases across a number of public and private sector segments. Example use-cases we can support include:
 
 
●
Traffic management and analytics
 
●
Predictive traffic congestion modeling and forecasting
 
●
Roadway monitoring and incident detection and response
 
●
Support systems for integrated corridor management
 
●
Electric vehicle adoption and charge station planning
 
●
Commercial vehicle and tonnage monitoring and analysis
 
●
Real-time emissions analysis, sustainability, and green initiatives
 
●
Live and archival HD video management and traffic surveillance
 
●
Law enforcement and intelligence-based policing
 
●
Contactless compliance and enforcement
 
●
Vehicle and license plate recognition for public safety
 
With access to multiple sources of data and our award-winning AI-driven innovations, we believe we have established a leadership position in providing these intelligent infrastructure solutions. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities. Using our proprietary centralized platform we can collect, analyze, and turn infrastructure data into insights with new products and services that help governments and businesses increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.
 
The Road Ahead
 
We believe the world is at an inflection point. In the next five years, governments will make significant investments to improve aging infrastructure. Recent technological developments such as edge- and cloud-based computing artificial intelligence, advances in rich data management and the internet of things, have put us in a unique position to help revolutionize mobility by developing intelligent infrastructure that closes the gap between rapidly evolving technology and aging, legacy infrastructure. These are not just our aspirational goals, but things we’re working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it using artificial intelligence, and packaging it to provide real-time insights and long-term solutions, we can help governments and businesses address issues of aging infrastructure as well as the unprecedented mobility, public safety and environmental challenges they face.
 
We believe our leadership in in using advanced technology to develop intelligent infrastructure solutions puts us in an advantaged market position at the forefront of developing a new economy.  As we provide governments and businesses with new products and services that use trillions of intelligent infrastructure interactions to increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people, we expect to serve both our shareholders and the world at large.
 
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Opportunities, Trends and Uncertainties
 
We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:
 
 
●
Growing Smart City Market  – According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050. Our cities are getting larger, with longer commutes, bigger roads and the resulting impact on the environment and the quality of life. This trend requires forward-thinking officials to manage assets and resources more efficiently. We believe that advancements in “big data” connected devices and artificial intelligence can provide Intelligent Transportation System (“ITS”) solutions that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life. We believe our data-driven, artificial intelligence-aided solutions provide useful tools that can effectively tackle the challenges cities and communities are facing today and will face over the coming decades.
 
●
AI for Infrastructure – We believe that the application of AI to the analysis of conditions on roadways and other infrastructure can significantly affect the safety and efficiency of vehicular travel in the future. As vehicles move towards full automation, there is a need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g. wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway. Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating local vehicular flow as well as data about the vehicles on the roadway.
 
●
Connected Vehicle Data  – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is an untapped resource for cities and transportation agencies alike. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and cities gain more visibility on their roads, supplementing data from existing infrastructure and providing untapped transportation information from rural areas that are not served by ITS infrastructure.
 
●
New and Expanded Uses for Vehicle Recognition Systems  – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We currently serve many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions and municipalities that are testing vehicle recognition systems or that issued requests for proposals to install a network of vehicle recognition sensors. We also expect the availability of faster, higher-accuracy, lower-cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs.
 
●
Adaptability of the   Market  – We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. Based on published benchmarks, our software currently outperforms competitors. However, large users of existing technology, such as toll road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop their own or secure advanced vehicle recognition systems from others who are also working to develop them. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources.
 
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●
Expansion of Automated Enforcement of Motor Vehicle Laws  – We expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement of regulations such as motor vehicle insurance requirements. Communities are currently searching for better means of achieving compliance with minor vehicle offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses. For example, due to high rates of fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states are considering authorizing automated enforcement of violations where motorists fail to slow down and/or move over for emergency responders and law enforcement vehicles at the side of the road. To the extent that legislative implementation is required, a deliberative and necessarily time-consuming process is involved. However, as states expand auto enforcement, the market for our products and services should broaden in the public safety market.
 
●
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 camera resolutions. Over the last several decades, cameras have evolved and unlocked new capabilities with each advancement. Further, cellular networks have been optimized for downloading data rather than uploading data. As a result, while download speeds have improved significantly due to large investments in cellular infrastructure, this has resulted in relatively small improvements to cellular upload speeds. With roadside deployments experiencing explosive growth in count and density, scalability, latency and bandwidth have become aspects of competition in the market. Our systems have been designed to address these issues through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and continual improvements in the efficiency of our AI algorithms. Our edge processing systems ingest local HD video streams at the source and convert the raw video data to text data, dramatically reducing the volume of data that needs to be transferred through the network. Edge processing allows us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that are experienced by other networks where raw video needs to be streamed to the cloud for processing.
 
●
Accelerated Business Development and Marketing  – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a visible leadership position. As a result, we have accelerated our business development marketing and eCommerce activities to increase awareness and market adoption of our new technology and products within the market. We anticipate that an increased presence in the market, the continued development of strategic partnerships and other economies of scale will significantly reduce the level of costs necessary to support sales of our products and services. However, the speed at which these markets grow to the degree to which our products and services are adopted is uncertain.
 
●
COVID 19   -  The spread of a novel strain of COVID-19 around the world since the first quarter of 2020 has caused significant volatility in U.S. and international markets. Despite the roll-out of vaccinations, there continues to be significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. As such, we are unable to determine the full impact on our operations. However, we have also seen a positive impact of COVID-19 on the technology sector, in which we are competing. The pandemic has accelerated the adoption of new technologies by businesses. According to a McKinsey Global Survey of executives, their companies have accelerated the digitization of their customer and supply-chain interactions and their internal operations by three to four years. Funding for digital initiatives has increased, creating opportunities for innovative solution providers such as Rekor.
 
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●
Pressure on Government Budgets  – COVID-19 has caused significant strain on government budgets. With less money to spend and more need for resources, government agencies need affordable, effective, and scalable solutions for revenue recovery and discovery. With subscription pricing and an intelligent infrastructure platform that accomplishes multiple agency missions, we are uniquely positioned to provide agencies with force-multiplying tools when money and human resources are limited. Agencies can be better positioned to improve public safety, manage resources more effectively, and make an impact on their citizen's quality of life with limited capital expenditure. In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of non-compliant vehicles on their roadways.
 
●
Infrastructure Investment and Jobs Act ( “ IIJA ” ) -  The IIJA , signed into law on November 15, 2021, provides for significant national investments in the transportation systems in the United States, including over $150 billion in new spending on roadway infrastructure, including intelligent transportation systems. We believe that our comprehensive offering of solutions positions the Company well to emerge as a technology leader in the expanded market for intelligent infrastructure that will benefit from this legislation. We have identified opportunities to access federal funding streams, and we are working to implement a program that capitalizes on this unprecedented U.S. federal investment in public safety, homeland security, and transportation infrastructure and ensures that our customers are positioned to capture as much of this extraordinary government spending as possible. Beyond the many recurring federal grant programs that could support customer purchases, and the $350 billion in American Rescue Plan Act allocations that public agencies are receiving now, we are particularly excited about the prospect of engaging in the following new funding streams that are contained in the IIJA.
●$200 million annually for a “Safe Streets and Roads for All” program that would make competitive grants for state projects that significantly reduce or eliminate transportation-related fatalities.
●$150 million for the current administration to establish a grant program to modernize state data collection systems
●$500 million for the Strengthening Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that improve transportation efficiency and safety
 
Components of Operating Results
 
Revenues
 
We derive revenues substantially from the sale of software, hardware and related services.
 
Software sales include subscriptions for the use of our software as a service (“SaaS”) and software licenses. SaaS revenues are treated as recurring revenue and provided both through negotiated agreements with larger governmental and commercial customers and through subscriptions from smaller customers. License sales are typically term agreements, including agreements for perpetual licenses, that may include maintenance obligations for software updates that keep up with changes in vehicle models and license plate designs.
 
Hardware is sold through direct sales or subscriptions and is typically sold with a software subscription or license arrangement. Revenue from direct sales is generally recognized when the hardware is delivered, or installation is completed in accordance with the terms of the contract. Revenue from hardware subscriptions may include software subscriptions and are recognized as recurring revenue throughout the term of the subscription agreement.
 
Our related services include customer support and implementation services, as well as management services such as violation notices, billing and collections, website portals and call centers related to programs that employ our software solutions. In addition, we engage in pilot programs with governmental and commercial entities that include extension or renewal features that may result in recurring revenues and/or additional point-in-time revenues at the completion of the pilot program.
 
Costs of revenues, excluding depreciation and amortization
 
Direct costs of revenues consist primarily of the portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with revenue-generating activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and other expenses that are incurred in connection with our revenue-generating activities. Direct costs of revenues exclude the portion of technical and non-technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts. Such costs are included in operating expenses. We expense direct costs of revenues when incurred.
 
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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 depreciation, amortization and impairment of assets.
 
General and Administrative
 
General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include office leases, professional fees and insurance.
 
We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, insurance and investor relations as a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.
 
Sales and Marketing
 
Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base.
 
Research and Development
 
Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services.
 
We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our AI solutions. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses
 
Depreciation and Amortization
 
Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of right-of-use assets, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.
 
Other Income (Expense)
 
Other income (expense) consists primarily of interest expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed assets, and interest income earned on cash and cash equivalents, short-term investments and note receivables.
 
Income Tax Provision
 
Income tax provision consists primarily of income taxes in certain domestic jurisdictions in which we conduct business. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.
 
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Critical Accounting Estimates and Assumptions
 
A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2021.
 
New Accounting Pronouncements
 
See Note 1 to our unaudited condensed consolidated financial statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.
 
Results of Operations
 
Our historical operating results in dollars are presented below. This analysis of operation is solely related to continuing operations and does not consider the results of discontinued operations.
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
(Dollars in thousands)
 
2022
 
 
2021
 
 
2022
 
 
2021
 
Revenue
 
$
7,425
 
 
$
2,615
 
 
$
15,371
 
 
$
11,105
 
Cost of revenue, excluding depreciation and amortization
 
 
4,119
 
 
 
1,402
 
 
 
8,780
 
 
 
4,705
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
 
6,841
 
 
 
6,813
 
 
 
22,541
 
 
 
16,094
 
Selling and marketing expenses
 
 
2,432
 
 
 
1,125
 
 
 
6,390
 
 
 
3,044
 
Research and development expenses
 
 
4,911
 
 
 
2,000
 
 
 
13,772
 
 
 
4,741
 
Goodwill impairment
 
 
34,835
 
 
 
-
 
 
 
34,835
 
 
 
-
 
Depreciation and amortization
 
 
1,926
 
 
 
930
 
 
 
4,846
 
 
 
2,169
 
Total operating expenses
 
 
50,945
 
 
 
10,868
 
 
 
82,384
 
 
 
26,048
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(47,639
)
 
 
(9,655
)
 
 
(75,793
)
 
 
(19,648
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(21
)
 
 
(21
)
 
 
(46
)
 
 
(72
)
Other (expense) income
 
 
(1,379
)
 
 
66
 
 
 
(1,403
)
 
 
103
 
Total other income (expense)
 
 
(1,400
)
 
 
45
 
 
 
(1,449
)
 
 
31
 
Loss before income taxes and equity method investments
 
 
(49,039
)
 
 
(9,610
)
 
 
(77,242
)
 
 
(19,617
)
Income tax benefit (provision)
 
 
954
 
 
 
(3
)
 
 
954
 
 
 
(10
)
Equity in loss of investee
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(150
)
Net loss from continuing operations
 
$
(48,085
)
 
$
(9,613
)
 
$
(76,288
)
 
$
(19,777
)
 
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Table of Contents
 
Comparison of the Three and Nine Months Ended September 30, 2022 and the Three and Nine Months Ended September 30, 2021
 
Total Revenue
 
 
 
Three Months Ended September 30,
 
 
Change
 
 
Nine Months Ended September 30,
 
 
Change
 
(Dollars in thousands)
 
2022
 
 
2021
 
 
$
 
 
%
 
 
2022
 
 
2021
 
 
$
 
 
%
 
Revenue
 
$
7,425
 
 
$
2,615
 
 
$
4,810
 
 
 
184
%
 
$
15,371
 
 
$
11,105
 
 
$
4,266
 
 
 
38
%
 
Revenue increased 184% to $7,425,000 for the three months ended September 30, 2022, compared to the prior corresponding quarter. The increase in revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily attributable to the synergies with our recent acquisitions. During the three months ended September 30, 2022, revenue attributable to our acquisition of STS was $3,503,000. 
 
Revenue increased 38% to $15,371,000 for the nine months ended September 30, 2022, compared to the corresponding prior nine-month period. The increase in revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily a result of our recent acquisition of STS and its existing customer base. During the nine months ended September 30, 2022, revenue attributable our STS acquisition was $3,990,000. As part of our change in selling strategy, we have focused on a sales model that employs contracts with recurring revenue. We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and software licenses which are generally more difficult to predict.
 
Cost of Revenue, Excluding Depreciation and Amortization
 
 
 
Three Months Ended September 30,
 
 
Change
 
 
Nine Months Ended September 30,
 
 
Change
 
(Dollars in thousands)
 
2022
 
 
2021
 
 
$
 
 
%
 
 
2022
 
 
2021
 
 
$
 
 
%
 
Cost of revenue, excluding depreciation and amortization
 
$
4,119
 
 
$
1,402
 
 
$
2,717
 
 
 
194
%
 
$
8,780
 
 
$
4,705
 
 
$
4,075
 
 
 
87
%
 
For the three and nine months ended September 30, 2022, cost of revenue, excluding depreciation and amortization increased by $2,717,000 and $4,075,000 compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our new go-to-market strategy. As part of a sales strategy to more quickly expand our market reach, we have recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to establish the program, which will not be incurred again if the pilot program is converted into a long-term program. In addition, the Company experienced lower margins on certain hardware sales during these quarters.
 
Operating Expenses
 
 
 
Three Months Ended September 30,
 
 
Change
 
 
Nine Months Ended September 30,
 
 
Change
 
(Dollars in thousands)
 
2022
 
 
2021
 
 
$
 
 
%
 
 
2022
 
 
2021
 
 
$
 
 
%
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
6,841
 
 
$
6,813
 
 
$
28
 
 
 
0
%
 
$
22,541
 
 
$
16,094
 
 
$
6,447
 
 
 
40
%
Selling and marketing expenses
 
 
2,432
 
 
 
1,125
 
 
 
1,307
 
 
 
116
%
 
 
6,390
 
 
 
3,044
 
 
 
3,346
 
 
 
110
%
Research and development expenses
 
 
4,911
 
 
 
2,000
 
 
 
2,911
 
 
 
146
%
 
 
13,772
 
 
 
4,741
 
 
 
9,031
 
 
 
190
%
Goodwill impairment
 
 
34,835
 
 
 
-
 
 
 
34,835
 
 
 
-
 
 
 
34,835
 
 
 
-
 
 
 
34,835
 
 
 
-
 
Depreciation and amortization
 
 
1,926
 
 
 
930
 
 
 
996
 
 
 
107
%
 
 
4,846
 
 
 
2,169
 
 
 
2,677
 
 
 
123
%
Total operating expenses
 
$
50,945
 
 
$
10,868
 
 
$
40,077
 
 
 
369
%
 
$
82,384
 
 
$
26,048
 
 
$
56,336
 
 
 
216
%
 
General and Administrative Expenses
 
The increase in general and administrative expenses during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, were primarily due to a $1,863,000 and $5,654,000 increase in personnel costs related to an increase in headcount, including a $62,000 and $184,000 increase in stock-based compensation, respectively. Additionally, for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021, we saw an increase in rent expenses mainly associated with our new offices throughout the United States and Israel. During the three months ended September 30, 2022 we saw a decrease in professional fees compared to the same three month period in 2021 due to merger and acquisition activity experienced in the third quarter of 2021, which was related to the Waycare acquisition. 
 
Selling and Marketing Expenses
 
The increase in selling and marketing expenses during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, was attributable mainly to increased marketing efforts to promote our products and services including digital marketing and other sales efforts. In connection with these efforts, for the three and nine months ended September 30, 2022, there was an increase in staffing to support our growth plan which led to a $1,454,000 and $3,533,000 increase in personnel costs, including a $304,000 and $931,000 increase in stock-based compensation, respectively.
 
Research and Development Expense
 
The increase in research and development expenses during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, was primarily attributable to the development of new products and additional software capabilities, mainly as a result of an increase in headcount and hours associated with research and development activities. For the three and nine months ended September 30, 2022, there was an increase in staffing to support the Company’s new products which led to a $2,215,000 and $7,162,000 increase in personnel costs, including a $520,000 and $1,559,000 increase in stock-based compensation, respectively. Additionally, there was an increase in sub-contractor labor associated with the development of new products and software of $1,014,000 during t he nine  months ended September 30, 2022 compared to the nine months ended September 30, 2021 . 
 
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Table of Contents
 
Goodwill Impairment
 
During the third quarter of 2022, we experienced a significant decline in our market capitalization, which management deemed a triggering event related to goodwill. As a result, we performed an interim impairment assessment as of September 30, 2022 and determined that as of the reporting date we had an impairment related to goodwill in the amount of $34,835,000. 
 
Depreciation and Amortization
 
The increase in depreciation and amortization during the year is attributable primarily to increased technology-based intangible assets that were acquired as part of our acquisition of Waycare.
 
Other Expense
 
 
 
Three Months Ended September 30,
 
 
Change
 
 
Nine Months Ended September 30,
 
 
Change
 
(Dollars in thousands)
 
2022
 
 
2021
 
 
$
 
 
%
 
 
2022
 
 
2021
 
 
$
 
 
%
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
(21
)
 
$
(21
)
 
$
-
 
 
 
0
%
 
$
(46
)
 
$
(72
)
 
$
26
 
 
 
36
%
Other (expense) income
 
 
(1,379
)
 
 
66
 
 
 
(1,445
)
 
 
-2189
%
 
 
(1,403
)
 
 
103
 
 
 
(1,506
)
 
 
(1462
)%
Total other income (expense)
 
$
(1,400
)
 
$
45
 
 
$
(1,445
)
 
 
3211
%
 
$
(1,449
)
 
$
31
 
 
$
(1,480
)
 
 
4774
%
 
Interest expense and other income remained consistent period over period. Other expense increased as a result of a legal settlement. 
 
Non-GAAP Measures: EBITDA and Adjusted EBITDA
 
EBITDA and Adjusted EBITDA
 
We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S. (“U.S. GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company’s ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.
 
The following table sets forth the components of the EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2022
 
 
2021
 
 
2022
 
 
2021
 
Net loss from continuing operations
 
$
(48,085
)
 
$
(9,613
)
 
$
(76,288
)
 
$
(19,777
)
Income taxes
 
 
(954
)
 
 
3
 
 
 
(954
)
 
 
10
 
Interest
 
 
21
 
 
 
21
 
 
 
46
 
 
 
72
 
Depreciation and amortization
 
 
1,926
 
 
 
930
 
 
 
4,846
 
 
 
2,169
 
EBITDA
 
$
(47,092
)
 
$
(8,659
)
 
$
(72,350
)
 
$
(17,526
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
 
$
1,628
 
 
$
694
 
 
$
5,413
 
 
$
2,600
 
Loss due to change in value of equity investments
 
 
-
 
 
 
-
 
 
 
-
 
 
 
150
 
Goodwill impairment
 
 
34,835
 
 
 
-
 
 
 
34,835
 
 
 
-
 
Legal settlements
 
 
1,385
 
 
 
-
 
 
 
1,433
 
 
 
-
 
One-time consulting fees
 
 
-
 
 
 
1,249
 
 
 
1,024
 
 
 
2,025
 
Adjusted EBITDA
 
$
(9,244
)
 
$
(6,716
)
 
$
(29,645
)
 
$
(12,751
)
 
Adjusted Gross Profit and Adjusted Gross Margin
 
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we can gain efficiencies through the adoption of our technology and successfully cross-selling and upselling our current and future offerings. However, our ability to improve Adjusted Gross Margin overtime is not guaranteed and could be impacted by the factors affecting our performance. We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.
 
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Table of Contents
 
The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2022
 
 
2021
 
 
2022
 
 
2021
 
 
 
(Dollars in thousands, except percentages)
 
 
(Dollars in thousands, except percentages)
 
Revenue
 
$
7,425
 
 
$
2,615
 
 
$
15,371
 
 
$
11,105
 
Cost of revenue, excluding depreciation and amortization
 
 
4,119
 
 
 
1,402
 
 
 
8,780
 
 
 
4,705
 
Adjusted Gross Profit
 
$
3,306
 
 
$
1,213
 
 
$
6,591
 
 
$
6,400
 
Adjusted Gross Margin
 
 
44.5
%
 
 
46.4
%
 
 
42.9
%
 
 
57.6
%
 
Adjusted Gross Margin, for the three and nine months ended September 30, 2022 and 2021 decreased to  44.5% from 46.4% , and 42.9% from 57.6%, respe ctively. As part of a sales strategy to more quickly expand our market reach, we have recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to establish the program, which will not be incurred again if the pilot program is converted into a long-term program. In addition, the Company experienced lower margins on certain hardware sales during these quarters.
 
Key Performance Indicators
 
We regularly review several indicators, including the following key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
 
Recurring Revenue Growth
 
Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business.
 
 
 
Three Months Ended September 30,
 
 
Change
 
 
Nine Months Ended September 30,
 
 
Change
 
 
 
2022
 
 
2021
 
 
$
 
 
%
 
 
2022
 
 
2021
 
 
$
 
 
%
 
Recurring revenue
 
$
4,839
 
 
$
1,233
 
 
$
3,606
 
 
 
292
%
 
$
8,616
 
 
$
3,142
 
 
$
5,474
 
 
 
174
%
 
As we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in future periods to continue to increase as we move to market our suite of products through our Rekor One™ platform.
 
Total Contract Value
 
There are certain assumptions that we make when determining the total contract value of an agreement, such as the success rate of renewal periods, cancellations and usage estimates. For the nine months ended September 30, 2022 we won contracts value d at $8,297,000 , compared to  $7,294,000 of contracts won for the nine months ended September 30, 2021 . This represents a $1,003,000  or 14%  increase, period over period.  The increase in total contract value is partially related to our strategy of entering into pilot programs that require low initial commitments by our customers in the short term in the expectation that they will develop into larger commitments over time. This helps grow our pipeline and demand for our products. As pilot programs convert into longer term and larger scale contracts, we expect to see our KPIs improve. 
 
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Table of Contents
 
Performance Obligations
 
As of September 30, 2022, we had approxim ately $28,606,000 of contracts that were closed prior to September 30, 2022 but have a contractual period beyond September 30, 2022 . This represents an increase of $6,019,000 or 27% compared to $22,587,000 of performance obligations as of December 31, 2021. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately 58% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.
 
The increase in total our performance obligations is primarily related to our acquisition of STS. 
 
Lease Obligations
 
As of September 30, 2022, we had material leased building space at the following locations in the U.S. and Israel:
 
 
●
Columbia, Maryland – The corporate headquarters
 
●
Tel Aviv, Israel
 
We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of our planned operations.
 
Liquidity and Capital Resources
 
The following table sets forth the components of our cash flows for the period included (dollars in thousands):
 
 
 
Nine Months Ended September 30,
 
 
 
2022
 
 
2021
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
$
 
 
%
 
Net cash used in operating activities
 
$
(30,093
)
 
$
(12,321
)
 
$
(17,772
)
 
 
-144
%
Net cash used in investing activities
 
 
(10,571
)
 
 
(43,392
)
 
 
32,821
 
 
 
76
%
Net cash provided by financing activities
 
 
22,817
 
 
 
70,874
 
 
 
(48,057
)
 
 
-68
%
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents
 
$
(17,847
)
 
$
15,161
 
 
$
(33,008
)
 
 
-218
%
 
Net cash used in operating activities for the nine months ended September 30, 2022 had a net decrease of $17,772,000, which was attributable to the increase in the loss from continuing operations of $76,288,000. This amount was partially offset by an increase in share-based compensation expense, a non-cash adjustment, which increased $2,813,000 to $5,413,000 for the nine months ended September 30, 2022 compared to $2,600,000 for the nine months ended September 30, 2021. This increase is due to the number of equity incentive shares that were issued to employees and directors. Additionally, for the nine months ended September 30, 2022 we recognized an impairment related our goodwill of $34,835,000. 
 
The net increase in net cash used in investing activities of $32,821,000 was primarily due to an increase in the outflow of funds related to merger and acquisition activities. During the nine months ended September 30, 2022, the Company had net cash outflows of $6,389,000 related to the acquisition of STS. During the nine months ended September 30, 2021, the Company had net cash outflows of $40,699,000 related to the acquisition of Waycare. 
 
Net cash provided by financing activities for the nine months ended September 30, 2022 decreased by $48,057,000 from the prior nine month period ended September 30, 2021. During the nine months ended September 30, 2022, as part of our 2022 Sales Agreement, we received net proceeds after deducting the underwriting discounts and commissions and offering expenses payable by us, of $22,758,000. In the prior comparable quarterly period, through our 2021 Public Offering, we received net proceeds, after deducting the underwriting discounts and commissions and offering expenses payable by us, of $70,125,000.
 
For the three and nine months ended September 30, 2022 and 2021, we funded our operations primarily through cash from operating activities and the sale of equity. As of September 30, 2022, we had cash and cash equivalents from continuing operations of $8,757,000 and a working capital deficit of $1,054,000, as compared to cash and cash equivalents of $26,600,000 and working capital of $16,989,000 as of December 31, 2021.
 
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Table of Contents
 
Liquidity
 
For all annual and interim periods, we will assess going concern uncertainty in our unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand, capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of our programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent we have the proper authority to do so and consider probable that those implementations can be achieved within the look-forward period.
 
We have generated losses since our inception and have relied on cash on hand and external sources of financing to support cash flow from operations. We attribute losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the nine months ended September 30, 2022, we had a working capital deficit from continuing operations of $1,054,000 and a loss from continuing operations of $76,288,000.
 
Our cash decreased by $17,844,000 for the nine months ended September 30, 2022 primarily due to the loss from continuing operations of $76,288,000. The decrease in cash was partially offset by offset by certain non cash adjustments such as the goodwill impairment of $34,835,000. Additionally, the decrease in cash was offset by the net proceeds of $22,758,000  fro m the 2022 Sales Agreement (see NOTE 10 - STOCKHOLDERS ’ EQUITY for details on the 2022 Sales Agreement). Assuming the ability to complete sales of shares at current market prices under stable market conditions,  as of September 30, 2022, we had $26,278,000 of gross funds available under the 2022 Sales Agreement. 
 
Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund operations for the next twelve months following the issuance of these unaudited condensed financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
 
The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period.
 
2021 Public Offering
 
On February 9, 2021, we issued and sold 6,126,939 shares of our common stock (which included 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the “2021 Public Offering”). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by us, were approximately $70,125,000.
 
Waycare Acquisition
 
On August 18, 2021, we entered into a share purchase agreement (the “Purchase Agreement”) by and among the Company, Waycare, the sellers of Waycare named in the Purchase Agreement (the “Sellers”) and Shareholder Representative Services LLC, solely in its capacity as the representative of the Sellers, pursuant to which we acquired 100% of the issued and outstanding capital stock of Waycare from the Sellers (the “Acquisition”). The aggregate purchase price for the shares of Waycare was $61,100,000, less the amount of Waycare’s debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474 shares of our common stock, valued at $20,287,000. As a result of the transaction, Waycare became our wholly-owned subsidiary.
 
STS Acquisition
 
On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition included total consideration of  $12,799,000  including; cash consideration of $6,500,000, 798,666 shares of the Company’s common stock, valued at $2,000,000,  $1,001,000 related to an earnout based on the achievement of certain performance metrics,  $1,298,000 contingent on the closing of a future contract and a $2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company. 
 
At-the-Market Offering
 
On February 24, 2022 ,  we entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which we from time to time may offer and sell shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately $169,000 rel ated to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.
 
For t he nine months ended September 30, 2022, the Company sold 9,019,062 shares of common stock at a weighted-average selling price of $2.62 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $22,758,000 after paying $169,000 related to the issuance cost, as well as 3.0% or $709,000 related to cash commissions provided to the Agent.
 
As of September 30, 2022, we did not have any material commitments for capital expenditures.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, Rekor is not required to provide the information required by Item 3.
 
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