What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 531 added, 727 removed, 754 unchanged (63% of the section changed)

4 unchanged sentences

(Dollars in thousands, except share amounts)

September 30, 2022

March 31, 2023

December 31, 2022

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21,330  

30,682  

Long-term assets

1 unchanged sentence

16,007  

16,733  

Right-of-use lease assets, net

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Notes payable, current portion

Related party notes

Loan payable, current portion

8 unchanged sentences

Notes payable, long-term

2023 Promissory Notes, net of debt discount of $ 1,507

2023 Promissory Notes - related party, net of debt discount of $ 3,201

Loan payable, long-term

15 unchanged sentences

100,000,000 shares;

54,330,133 , shares as of September 30, 2022 and 44,007,257 as of December 31, 2021;

54,288,611 shares as of September 30, 2022 and 43,987,896 as of December 31, 2021

Treasury stock, 41,522 and 19,361 shares as of September 30, 2022 and December 31, 2021, respectively, at cost

61,122,128 , shares as of March 31, 2023 and 54,446,602 as of December 31, 2022;

61,030,637 shares as of March 31, 2023 and 54,405,080 as of December 31, 2022.

Preferred stock, $ 0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of March 31, 2023 and December 31, 2022, respectively.

No preferred stock was issued or outstanding as of March 31, 2023 or December 31, 2022, respectively.

Treasury stock, 91,491 and 41,522 shares as of March 31, 2023 and December 31, 2022, respectively.

( 506 )  

4 unchanged sentences

( 165,680 )  

Accumulated other comprehensive income

Total stockholders’

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(Dollars in thousands, except share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of revenue, excluding depreciation and amortization

3 unchanged sentences

Research and development expenses

Goodwill impairment

Depreciation and amortization

2 unchanged sentences

Other income (expense):

Interest expense

Other (expense) income

Gain on extinguishment of debt

Interest expense, net

Total other income (expense)

Loss before income taxes and equity method investments

Loss before income taxes

Income tax benefit (provision)

Equity in loss of investee

Net loss from continuing operations

Net loss from discontinued operations

Comprehensive loss:

Net loss from continuing operations

Change in unrealized gain on short-term investments

Foreign currency translation gain

Total comprehensive loss from continuing operations

Total comprehensive loss

Net income from discontinued operations

Loss per common share from continuing operations - basic and diluted

Loss per common share discontinued operations - basic and diluted

Earning per common share discontinued operations - basic and diluted

Loss per common share - basic and diluted

9 unchanged sentences

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

Stock-based compensation

Issuance of common stock pursuant to at the market offering, net

Issuance upon exercise of stock options

Issuance upon vesting of restricted stock units

Foreign currency translation gain, net of income taxes

Balance as of September 30, 2022

Balance as of July 1, 2021

Stock-based compensation

Exercise of warrants related to series A preferred stock

Shares issued as part of the Waycare Acquisition

Issuance upon exercise of stock options

Issuance upon vesting of restricted stock units

Change in unrealized gain on short-term investments

Balance as of September 30, 2021

Balance as of January 1, 2023

Stock-based compensation

Issuance of common stock pursuant to at the market offering, net

Issuance upon exercise of stock options

Issuance upon vesting of restricted stock units

Fair value allocated to warrants with 2023 Promissory Notes

Shares withheld upon vesting of restricted stock units

Shares issued as part of the STS Acquisition

Foreign currency translation gain, net of income taxes

Balance as of September 30, 2022

Issuance of common stock and warrants

Balance as of March 31, 2023

Balance as of January 1, 2022

Stock-based compensation

Exercise of cashless warrants in exchange for common stock

Exercise of warrants in exchange for common stock

Exercise of warrants related to series A preferred stock

Public underwriting

Shares issued as part of the Waycare Acquisition

Conversion of series A preferred stock

Conversion of series B preferred stock

Issuance of common stock pursuant to at the market offering, net

Issuance upon exercise of stock options

1 unchanged sentence

Shares withheld upon vesting of restricted stock units

Preferred stock dividends

Accretion of Series A preferred stock

Change in unrealized gain on short-term investments

Balance as of September 30, 2021

Balance as of March 31, 2022

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3 unchanged sentences

(Dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows from Operating Activities:

Net loss from continuing operations

Net loss from discontinued operations

Net income from discontinued operations

Adjustments to reconcile net loss to net cash used in operating activities:

1 unchanged sentence

Amortization of right-of-use lease asset

(Benefit) provision for deferred taxes

Share-based compensation

Amortization of financing costs

Amortization of debt discount

Amortization of intangible assets

Goodwill impairment

Loss due to change in value of equity investments

Unrealized gain on short-term investments

Loss due to the remeasurement of the STS Contingent Consideration

Gain on extinguishment of debt

Changes in operating assets and liabilities:

1 unchanged sentence

Other current assets

Other long-term assets

Accounts payable, accrued expenses and other current liabilities

2 unchanged sentences

Net cash used in operating activities - continuing operations

Net cash provided by (used in) operating activities - discontinued operations

Net cash provided by operating activities - discontinued operations

Net cash used in operating activities

Cash Flows from Investing Activities:

Cash paid for Waycare acquisition, net

SAFE Investment

Capital expenditures

Down payment on capital expenditures

Cash paid for STS acquisition, net

Investment in unconsolidated company

Net cash used in investing activities - continuing operations

Net cash used in investing activities - discontinued operations

Net cash used in investing activities

Cash Flows from Financing Activities:

Proceeds from public offering

Payment of notes payable

Net proceeds 2022 Promissory Notes - related party, exchanged for 2023 Promissory Notes - related party

Net proceeds 2023 Promissory Notes

Net proceeds 2023 Promissory Notes - related party

Net proceeds 2023 Registered Direct Offering

Proceeds from notes receivable

Net proceeds from exercise of options

Net proceeds from exercise of warrants

Net proceeds from exercise of warrants associated with the Series A Preferred Stock

Repayments of loans payable

2 unchanged sentences

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations

Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations

Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents

Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations

Net increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations

Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents

Cash, cash equivalents and restricted cash and cash equivalents at beginning of period

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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 .

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 March 31, 2023 , 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 month periods ended March 31, 2023 and 2022 .

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.

The results for the three months ended March 31, 2023 , are not necessarily indicative of the results to be expected for the year ending December 31, 2023 .

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, 2022 .

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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.

The Company provides products and services for the collection, distribution and analysis of transportation data and is a global leader in the development and implementation of advanced roadway intelligence 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 

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.

On December 6, 2022, the Company divested its Automated Traffic Safety and Enforcement ("ATSE") business, a non-core business unit. As of December 31, 2022, the Company determined that the ATSE business unit met the criteria to be presented as discontinued operations. Amounts for the three months ended March 31, 2022, 

have been reclassified to conform to the current year’s presentation.

June 17, 2022 ,  the Company completed the acquisition of STS by acquiring 

100 % of the issued and outstanding capital stock of STS, which is now a wholly-owned subsidiary of the Company.

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 months ended March 31, 2023 .

Use of Estimates

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differ from those estimates under different assumptions or conditions.

Reclassifications

Certain amounts in the prior year's unaudited condensed consolidated financial statements have been reclassified to conform to the current year's presentation.

Amortization related to the Company's right-of-use assets is presented as part of general and administrative expenses on the unaudited condensed consolidated statements of operations, whereas in prior periods these amounts were presented as part of depreciation and amortization on the unaudited condensed consolidated statements of operations.

Additionally, as of December 

31, 2022,  the Company began to present interest income and interest expense as a net amount on the unaudited condensed consolidated statements of operations, whereas in prior periods, interest income was presented as part of other expense, net on the unaudited condensed consolidated statements of operations.

Amounts for the three months ended March 31, 2022, 

have been reclassified to conform to the current year’s presentation.

Liquidity and Going Concern

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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. 

As of and for the three months ended March 31, 2023 , the Company had working capital from continuing operations of $ 6,974,000  and a loss from continuing operations of $ 12,682,000 .

The Company’s cash increased by $ 10,555,000  during the three months ended March 31, 2023 , primarily due external financing related to the 2023 Promissory Notes and the 2023 Registered Direct Offering.

These cash inflows were partially offset by the loss from continuing operations of $ 12,682,000 .

(see NOTE 7 - DEBT and  

NOTE 10 - STOCKHOLDERS ’

EQUITY  for details on the 2023  Promissory Notes and 2023 Registered Direct Offering, respectively). 

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.

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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.

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 continue to reduce or defer expenses and cash outlays should operations weaken in the look-forward period.

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.

As of March 31, 2023 , the Company did not identify any events that would cause it to assess goodwill for impairment. 

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 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 March 31, 2023 and December 31, 2022 , because of the relatively short-term maturity of these financial instruments.

The carrying amount reported for long-term debt, contingent consideration and long-term receivables approximates fair value as of March 31, 2023 and December 31, 2022 , given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

The determination of fair value is based upon the fair value framework established by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”

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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 .

There were no changes in levels during the three months ended March 31, 2023 .

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.

The Company derives its revenues primarily from the licensing and sale of its roadway data and traffic management product and service offerings.

These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services, as well as software and hardware.

Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.

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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,

Three Months Ended March 31,

Recurring revenue

1 unchanged sentence

$ 1,695  

$ 8,616  

$ 3,142  

Product and service revenue

2 unchanged sentences

$ 2,975  

$ 15,371  

$ 11,105  

Recurring revenue

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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.

Recurring revenues are generated through the Company’s Software-as-a-Service ("SaaS") model, where the Company provides customers with the right to access the Company’s software solutions for a fee.

These services are made available to the customer continuously throughout the contractual period.

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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.

The payments for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement.

These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these arrangements ratably over the term of the contractual agreement.

The Company also currently receives recurring revenues under contracts entered into using a subscription model for 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 Company also currently receives recurring revenues under contracts entered into using a subscription model for data collection services and bundled hardware and software over a period.

Payments for these services and subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement.

In addition, some of our subscription revenue includes providing, through a web server, access to the Company’s software solutions, a self-managed database, and a cross-platform application programming interface.

The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time.

Instead, customers are granted access to the Company’s solutions over the contractual period.

Instead, customers are granted continuous access to the Company’s solutions over the contractual period.

The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions.

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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.

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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.

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.

Product and service revenue is defined as the Company’s implementation revenue, perpetual license sales, hardware sales, engineering services and contactless compliance revenue.

Implementation revenue is recognized when the Company provides implementation or construction services to its customers.

These services, involve a fee for the implementation services and are typically associated with the sale of the Company’s data collection services, software and hardware.

The Company’s implementation revenue is recognized over time as the implementation is completed.

In addition to the recurring software sales, the Company will recognize 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.

The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and has significant stand-alone functionality.

Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.

The Company 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.

The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution channels.

The Company satisfies its performance obligation upon the transfer of control of hardware to its customers.

The Company invoices end-user customers upon transfer of control of the hardware to its customers.

The Company provides hardware installation services to customers which range from one to six months.

The revenue related to the installation component is recognized over time as the implementation is completed.

Contactless compliance revenues reflect arrangements to provide hardware systems and services that identify uninsured motor vehicles, notify owners of non-compliance through a diversion citation, and assist them in obtaining the required insurance as an alternative to traditional enforcement methods.

Revenue is recognized monthly based on the number of diversion citations collected by the relevant jurisdiction.

The Company also generates revenue through its engineering services.

These services are provided at the request of its customers and the revenue related to these services is recognized over time as the service is completed.

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,

Government customers

$ 5,548  

$ 1,548  

$ 9,942  

Three Months Ended March 31,

Urban mobility

$ 2,754  

Commercial customers

Traffic management

Licensing and other revenue

Total revenue

1 unchanged sentence

$ 2,975  

$ 15,371  

$ 11,105  

Urban mobility  

Urban mobility revenue consists of revenue derived from the Company's roadway data aggregation activities.

These activities include the use of software applications that are part of the Rekor Discover™

platform, the primary application being Rekor’s count, class & speed application.

The application fully automates the aggregation of Federal Highway Administration (“FHWA”) 13 -bin vehicle classification, speed, and volume data. Revenues associated with the deployment of other traffic sensors, traffic studies, or construction associated with traffic data collection are also part of data aggregation revenue, which is generated through both recurring pay-for-data contracts and hardware sales with a recurring software maintenance component.

The Company initiated these traffic data collection activities in June of 2022.

Traffic management  

Traffic management revenue is associated with the Rekor Command™

platform and the associated applications underneath the platform.

These provide traffic operations and traffic management centers with support through actionable, real-time incident reports integrated into a cross-agency communication and response system.

Revenue is generated through contracts that include an upfront as well as recurring component.

Licensing and other revenue

Licensing and other revenue consists of licensing of the Rekor Scout™

platform, licensing of Rekor CarCheck™

API, licensing of Rekor’s vehicle recognition software, as well as systems deployed for security, contactless compliance and public safety.

Revenue is generated through recurring and perpetual license sales as well as one -time hardware sales.

Performance obligations

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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.

For 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.

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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.

As of March 31, 2023 , the Company had approximately $ 24,330,000  of remaining performance obligations not yet satisfied or partially satisfied.

The Company expects to recognize approximately 67 %  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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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.

Unbilled accounts receivables of $ 1,149,000  and $ 935,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 , respectively.

Contract liabilities

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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):

Changes in the contract asset and liability balances during the three months ended March 31, 2023 were not materially impacted by any other factors.

Contract liabilities as of March 31, 2023 and December 31, 2022 were $ 5,591,000  and $ 4,049,000 , respectively.

During the three months ended March 31, 2023 , $ 1,134,000 of the contract liabilities balance as of December 31, 2022 was recognized as revenue.

The services due for contract liabilities described above are shown below as of March 31, 2023 (dollars in thousands):

2023, remaining

1 unchanged sentence

$ 5,591  

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.

The Company considers all highly liquid debt instruments to be cash equivalents.

Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents.

The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions.

Restricted cash and cash equivalents for these client jurisdictions as of 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.

The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. R estricted cash and cash equivalents for these client jurisdictions as of March 31, 2023 and December 31, 2022 were $ 378,000  and $ 254,000 , respectively, 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.

Concentrations of Credit Risk

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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.

As of March 31, 2023  and December 31, 2022, the Company had deposits from continuing operations totaling $ 12,444,000  and $ 2,178,000 , respectively, in multiple 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.

The Company had a 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. 

13 % and less than 10 % of the Company’s unaudited condensed consolidated revenues for the three months ended March 31, 2023 and 2022 , 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 

three months ended March 31, 2023 and 2022 .

As of March 31, 2023 , Customer B accounted for more than 14 % of the unaudited condensed consolidated accounts receivable balance.

As of December 31, 2022 , no  single customer accounted for more than 

10%  of the Company's 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 March 31, 2023 and 

December 31, 2022 .

Other Current Liabilities

Accounts Payable, Accrued  

and Other Current Liabilities

As of March 31, 2023 and December 31, 2022, 

amounts owed to related parties of $ 280,000  and $ 253,000  were presented as part of accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets.

A summary of other current liabilities is as follows (in thousands):

September 30, 2022

March 31, 2023

December 31, 2022

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Significant Accounting Policies

New Accounting Pronouncements Effective in Future Periods

New Accounting Pronouncements Effective in the Current Period

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016 - 13 Financial Instruments-Credit Losses (Topic 326 ):

3 unchanged sentences

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.

Upon adoption of the new standard, the Company began recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets.

Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016 - 13 and based on the Company’s analysis of ASU 2016 - 13 and the historical, current and expected credit quality of the Company’s customers, ASU 2016 - 13 did not have a material impact on its 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.

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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;

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 

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):

$ 6,500  

Common stock issued

Earnout consideration

Contingent consideration

Note consideration

Total consideration

$ 12,799  

Cash and cash equivalents

Accounts receivable

Other current assets

Customer relationships

Property and equipment

Right of use assets

Total assets acquired

13,252  

Accounts payable and accrued expenses

Contract liabilities

Other current and non-current liabilities

Lease liability

Deferred tax liability

Total liabilities assumed

Fair value of identifiable net assets acquired

10,882  

$ 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.

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):

$ 39,884  

Common stock issued

20,287  

Total consideration

$ 60,171  

Cash and cash equivalents

Restricted cash and cash equivalents

Accounts receivable

Other current assets

Property and equipment

Acquired technology

16,897  

Total assets acquired

17,719  

Accounts payable and accrued expenses

Contract liabilities

Deferred tax liability

Total liabilities assumed

Fair value of identifiable net assets acquired

13,056  

$ 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.

The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date.

Since the acquisition of STS occurred on June 

17, 2022, the results of operations for STS from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2023 .

As part of the Company's purchase price allocation for the acquisition, the Company recognized 

$ 1,977,000 in goodwill, 

$ 3,400,000  in customer relationships and 

$ 700,000 of marketing related intangible assets related to the STS tradename.

The STS Contingent Consideration in the amount of 

$2,000,000  will be paid in cash if on or prior to 

October 30, 2024, 

the Company enters into a multi-year extension of the Georgia Department of Transportation Contract on substantially similar terms and conditions as the contract being extended.

The STS Contingent Consideration shall be payable within 

30  days of the effectiveness of the extension of the Georgia Department of Transportation Contract. STS Contingent Consideration is presented as part of other non-current liabilities on the unaudited condensed consolidated balance sheets and remeasu red on a quarterly basis.

In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Contingent Consideration at the time of acquisition and determined the fair value to be $ 1,298,000 .

For the three months ended March 31, 2023 , the Company recognized $ 45,000 in expe nse related to the remeasurement of the STS Contingent Consideration which is presented with general and administrative expenses on the unaudited condensed consolidated statement of operations. 

The Company was to pay the STS Earnout payment, up to $ 2,000,000 , within 60 days of December 31, 2022 

based on the STS EBITDA for the 

twelve  month period ended 

December 31, 2022. 

In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Earnout at the time of acquisition and determined the fair value to be $ 1,001,000 .

As of December 31, 2022, it was determined that the STS Earnout was not achieved and thus the Company recognized a gain related to the remeasurement of the STS Earnout of $ 1,001,000 .

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.

The following unaudited pro forma combined financial information gives effect to the acquisition of STS as if it was consummated as of January 1, 2022.

This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2022 ( the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands, except per share data)

(Dollars in thousands except for per share data)

Total revenue from continuing operations

1 unchanged sentence

$ 5,581  

$ 21,256  

$ 22,314  

Net loss from continuing operations

$ ( 12,682 )  

$ ( 9,916 )  

$ ( 76,961 )  

Basic and diluted loss per share from continuing operations

$ ( 0.23 )  

$ ( 0.22 )  

$ ( 1.57 )  

Basic and diluted number of shares

1 unchanged sentence

44,886,577  

49,078,379  

41,940,307  

NOTE 3 –

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”).

In February 2017, the Company contributed substantially all 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 .

As of March 31, 2023 and December 31, 2022 the investment in Global Public Safety had a value of $ 0 .

In June 2020, the Company announced a joint venture in which the Company would have a 50 % equity interest in Roker Inc.

2 unchanged sentences

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 .

 As of March 31, 2023 and December 31, 2022 the investment in Roker had a value of $ 0 .

There have been no distributions or earnings received from either investment. 

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”).

In April 2021, the Company entered into a SAFE with Roker (the “Roker SAFE”).

From 2021 through 2022 the Company made multiple investments totaling $ 2,005,000  in the Roker SAFE. The Roker SAFE allows the Company to participate in future equity financing 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.

1 unchanged sentence

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 

No factors indicative of impairment were identified during the three months ended March 31, 2023 . 

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,

Supplemental disclosures of cash flow information for the 

three months ended March 31, 2023 and 2022 were as follows (dollars in thousands):

Three Months Ended March 31,

Cash paid for interest

Cash paid for taxes

Increase in accounts payable and accrued expenses related to purchases of property and equipment

Investing activities:

Fair market value of shares issued in connection with the acquisition of Waycare

Decrease in accounts payable and accrued expenses related to purchases of property and equipment

( 656 )  

Fair market value of shares issued in connection with the acquisition of STS

Contingent Consideration in connection with the acquisition of STS

Earnout Consideration in connection with the acquisition of STS

Note Consideration in connection with the acquisition of STS

Deferred tax liabilities resulting from purchase accounting adjustments in connection with the acquisition of STS

Loans issued for property and equipment

Decrease in accounts payable and accrued expenses related to purchases of inventory

( 698 )  

Decease in deposits related to property and equipment received

Financing activities:

Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock

Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock

Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock

2022 Promissory Notes exchanged for 2023 Promissory Notes - related party

Warrants issued in connection with the 2023 Promissory Notes

Warrants issued in connection with the 2023 Promissory Notes - related party

New Leases under ASC-842:

Recognition of operating lease - right-of-use lease asset

Lease incentives

Lease incentive recognized in current assets

Recognition of operating lease - lease liability

$ ( 4,427 )  

NOTE 5  

1 unchanged sentence

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.

The Company’s leases have remaining terms of one to nine years.

Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term.

When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.

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.

Operating lease expense from continuing operations 

for the 

three months ended March 31, 2023 and 2022  was $ 524,000  and $ 408,000 , 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 $ 594,000  and $ 22,000 for the three months ended March 31, 2023 and 2022 , 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.

As part of the lease agreement, there were $ 919,000 in lease incentives provided to the Company which were used to update the structure of the leased space and furnish the leased space.

Supplemental balance sheet information related to leases as of 

September 30, 2022 was as follows (dollars in thousands):

March 31, 2023 was as follows (dollars in thousands):

Operating lease right-of-use lease assets

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$ 1,776  

11,159  

Total lease payments

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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 

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):

The following summarizes the change in intangible assets, net from December 31, 2022 to March 31, 2023 (dollars in thousands):

Useful Life (in Years)

December 31, 2022

September 30, 2022

March 31, 2023

Intangible assets subject to amortization

3 unchanged sentences

$ ( 65 )  

$ 3,516  

Marketing related

4 unchanged sentences

( 863 )  

15,986  

Internally capitalized software

4 unchanged sentences

$ 20,258  

$ 22,451  

The following provides a breakdown of identifiable intangible assets as of September 30, 2022 (dollars in thousands):

The following provides a breakdown of identifiable intangible assets  (dollars in thousands):

March 31, 2023

December 31, 2022

Customer relationships

$ 3,861  

Marketing related

Technology based

Internally Capitalized Software

Identifiable intangible assets

24,107  

$ 24,107  

Internally capitalized software

30,231  

2 unchanged sentences

( 9,973 )  

( 298 )  

( 6,398 )  

( 1,099 )  

Identifiable intangible assets, net

$ 3,660  

Identifiable intangible assets from continuing operations, net

$ 20,258  

1 unchanged sentence

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.

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):

Amortization expense for the three months ended March 31, 2023 and 2022 was 

$ 1,041,000  and $ 983,000 , respectively and is presented as part of depreciation and amortization in the unaudited condensed consolidated statements of operations.

As of March 31, 2023 , 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):

2023, remaining

2 unchanged sentences

NOTE 7  

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 ).

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 

June 17, 

2025,  respectively.

The aggregate balance of these notes payable was

$ 2,000,000  as of 

December 31, 2022 

and is included in notes payable long-term, in the consolidated balance sheets.

2022 Promissory Notes  

On December 20, 2022, the Company entered into a Promissory Note Agreement (the “2022 Promissory Notes”) with (i) Robert A.

Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a 10.3 % holder of Common Stock of the Company based on its Schedule 13G filed with the Securities and Exchange Commission on May 20, 2022, pursuant to which the lenders loaned $ 1,000,000 to the Company.

During the first quarter of 2023, Robert A.

Berman invested an additional $ 400,000 under the same terms as the 2022 Promissory Notes.

The lenders were determined to be related parties. 

No 2022 Promissory Notes remain outstanding, as all 2022 Promissory Notes were cancelled in connection with the private placement of 2023 Promissory Notes described below. 

2023  Promissory Notes

On January 18, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $ 15,000,000 in aggregate principal amount of senior secured promissory notes (the “2023 Promissory Notes”), and (ii) warrants to purchase, for an exercise price of $ 2.00 per share, up to an aggregate of 7,500,000 shares of common stock of the Company, par value $ 0.0001 per share. 

In connection with the initial closing on January 18, 2023, the Company issued $ 12,500,000 in aggregate principal amount of 2023 Promissory Notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company of $ 12,500,000 before reimbursement of expenses.

Pursuant to the terms of the Securities Purchase Agreement, the 2022 Promissory Notes were exchanged for equal principal amounts of the 2023 Promissory Notes which are included in the proceeds of $ 12,500,000 .

As a result of the Securities Purchase Agreement, the 2022 Promissory Notes were exchanged for equal principal amounts of 2023 Promissory Notes.

As a result, the 

2022 Promissory Notes were cancelled with no further force and effect as of the effective date of the Securities Purchase Agreement.

The 2023 Promissory Notes are a senior secured obligation of the Company and rank senior to all indebtedness of the Company, subject to certain exceptions.

The 2023 Promissory Notes have a maturity date of July 18, 2025 ( the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due.

The 2023 Promissory Notes bear an interest rate of 12 % per annum, and the Company will be required to pay interest quarterly during each calendar year through and including the Maturity Date.

At any time, the Company may prepay all, or any portion of, the 2023 Promissory Notes by redemption at a price equal to (i) 120 % of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed on or prior to the first anniversary of issuance, (ii) 115 % of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the first anniversary of issuance and on or prior to the second anniversary of issuance, or (iii) 110 % of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the second anniversary of issuance and prior to the Maturity Date (the “Early Redemption Schedule”).

The Investors will also have the option of requiring the Company to redeem the 2023  Promissory Notes in accordance with the Early Redemption Schedule if the Company undergoes a fundamental change.

The Company determined that the holder redemption and mandatory redemption options would qualify as derivatives and be subject to accounting under ASC Topic 815, Derivatives and Hedging .

The Company believes that the fair value associated with the embedded derivatives related to the holder and mandatory redemption rights are inconsequential.

The Securities Purchase Agreement contains customary representations and warranties of the Company and the investors.

The Company has a material relationship with two of the investors, (i) Robert A.

Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a 10.51 % holder of Common Stock of the Company based on its Schedule 13G filed with the Securities and Exchange Commission on February 14, 2023. 

Berman and Arctis invested $ 2,000,000 and $ 6,500,000 , respectively, in connection with the $ 12,500,000 initial closing of the private placement.

Berman has an option, upon request of the Company made within six months of the initial closing, to invest up to an additional $ 2,500,000 million in a subsequent closing, or series of closings, on the same terms.

In aggregate, such subsequent closings may result in the issuance of senior secured notes in the original principal amount of up to $ 2,500,000 and warrants to purchase up to 1,250,000 shares of Common Stock. These lenders were determined to be related parties. 

The Securities Purchase Agreement further provides Arctis with the right to designate a director to be seated on the Company’s board of directors (the “Board”) for a term expiring at the Company’s 2023 annual meeting of stockholders, at which meeting such director shall be nominated by the Board to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders.

Arctis has a right to a Board designee for so long as it holds the 2023 Promissory Notes, and such right may not be sold or transferred to any party not affiliated with Arctis.

As of the filing date of this Quarterly Report on Form 10 -Q, Arctis has not exercised its right to designate a director to the Board. 

The 2023 Promissory Notes impose certain customary affirmative and negative covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, and restrict the declaration of any dividends or other distributions, subject to specified exceptions.

If an event of default under the 2023 Promissory Notes occurs, the investors can elect to redeem the 2023 Promissory Notes for cash in accordance with the Early Redemption Schedule, plus default interest, which accrues at a rate per annum equal to 14 % from the date of an event of default.

The warrants issued in connection with the initial closing have an exercise price of $ 2.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder.

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,

Contractual interest

Amortization of debt issuance costs

Total interest expense

Three Months Ended March 31,

Contractual interest expense (income), net

Amortization of debt discount

Total interest expense, net

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):

The principal amounts due for long-term notes payable are shown below as of March 31, 2023 (dollars in thousands):

2023, remaining

13,578  

14,928  

Less unamortized debt discount

Total notes payable

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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 .

March 31, 2023 .

The Company files income tax returns in Israel, the United States and in various states.

Federal, state or foreign income tax audits were in process as of September 30, 2022 .

Federal, state or foreign income tax audits were in process as of March 31, 2023 .

The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets.

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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.

three months ended March 31, 2023  and 2022, the Company did not record any interest or penalties related to unrecognized tax benefits.

It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax 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 

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.

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.

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. 

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.

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. 

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.

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.

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’

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. 

In addition, from time to time, the Company 

There is 

no litigation pending against the Company at this time.

From time to time, the Company 

be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business.

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not  be material to the Company’s consolidated financial statements as a whole.

Firestorm Principals

On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc.

Suzanne Loughlin, et al., Case no.

1:19 -cv- 07767 -VEC.

The Firestorm Principals answered together with counterclaims on February 28, 2020.

2020,  the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. 

On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals.

Pursuant to the terms of the settlement agreement, the parties have mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the Company will transfer certain Firestorm assets to CrisisRisk Strategies, LLC, make a payment of $ 175,000 , and the Firestorm Principals have agreed to the extinguishment of all rights to enforce their claims for payment with respect to principal and interest on the promissory notes issued in connection with the Company’s acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same.

As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities.

The Company also cancelled warrants to purchase 631,254 shares of common stock, which were issued in connection with the acquisition of Firestorm. 

NOTE 10  

STOCKHOLDERS ’

2023 Registered Direct Offering 

On March 

23, 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and issuance by the Company in a registered direct offering of an aggregate of:

(i) 6,100,000 shares of the Company’s common stock, (ii) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, and (iii) warrants to purchase up to 6,872,853 shares of common stock.

The offering price per share of common stock and associated warrant was $ 1.455 and the offering price per pre-funded warrant and associated warrant was $ 1.454 .

Each pre-funded warrant is exercisable for one share of common stock at an exercise price of $ 0.001 per share and will expire when exercised in full.

The warrants to purchase common stock are exercisable immediately upon issuance, will expire five years following the issuance date and have an exercise price of $ 1.60 per share.

The Company received gross proceeds from the 2023 Registered Direct Offering of approximately $ 10,000,000 .

The Offering closed on March 

The Company entered into an engagement letter with H.C.

Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts basis, in connection with the offering.

The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering.

The Company also paid the placement agent $ 75,000 for non-accountable expenses and $ 16,000  for clearing fees.

Additionally, the Company issued designees of the placement agent, as compensation, warrants to purchase up to 481,100 shares of common stock, equal to 7.0% of the aggregate number of shares of common stock and pre-funded warrants placed in the offering.

The warrants issued to the placement agent have a term of five  years and an exercise price of $ 1.8188 per share of common stock.

2023 Warrants

In connection with the initial closing of the 2023  Promissory Notes on 

January 18, 2023, the Company issued warrants to purchase 6,250,000 shares of common stock. The warrants issued in connection with the initial closing have an exercise price of $ 2.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder.

The 2023 Warrants were valued at $ 5,125,000 , at the time of issuance.

The warrants issued with the 2023 Promissory Notes qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480,  

Distinguishing Liabilities from Equity.

The Company estimated the fair value of the warrants using the Black-Scholes pricing model.

The use of the Black-Scholes pricing model requires the use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award.

The fair value of each warrant granted has been estimated as of the date of the grant using the Black-Scholes pricing model with the following assumptions:

Risk-free interest rate

Expected term (in years)

Dividend yield

Estimated annual forfeiture rate at the time of grant

The Company treats the warrants as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as interest expense, net in the unaudited condensed consolidated statements of operations.

At-the-Market Offering

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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.

The Agent was entitled to a commission equal to 3.0 % of the gross proceeds from each sale.

The Company incurred issuance costs of approximately $ 169,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.

For the 

three  months ended 

March 31, 2022, 

based on the settlement date, the Company sold 

728,452  shares of common stock at a weighted-average selling price of $ 4.67  per share in accordance with the 

2022  Sales Agreement.

Net cash provided from the 

2022  Sales Agreement was $ 3,134,000  after paying $ 169,000  related to the issuance cost, as well as, 

3.0 % or $ 102,000  related to cash commissions provided to the Agent.

December 

2022  the Company terminated the 

2022  Sales Agreement. 

STS Acquisition

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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 . 

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.

A summary of the warrant activity for the Company for the period ended September 30, 2022 is as follows:

A summary of the warrant activity for the Company for the period ended March 31, 2023 is as follows:

Series A Preferred Stock Warrants (1)

2 unchanged sentences

2018 Public Offering Warrants (4)

2023 Promissory Notes (5)

2023 Registered Direct Offering (6)

Active warrants as of January 1, 2023

3 unchanged sentences

692,311  

Issued warrants

6,250,000  

8,126,806  

14,376,806  

Exercised warrants

Outstanding warrants as of September 30, 2022

Expired warrants

( 15,556 )  

Cancelled warrants

( 631,254 )  

Outstanding warrants as of March 31, 2023

41,996  

6,250,000  

Weighted average strike price of outstanding warrants as of September 30, 2022

8,126,806  

14,422,307  

Weighted average strike price of outstanding warrants as of March 31, 2023

$ 1.03  

1 unchanged sentence

$ 2.00  

Intrinsic value of outstanding warrants as of September 30, 2022

$ 1.46  

$ 1.69  

Intrinsic value of outstanding warrants as of March 31, 2023

$ 9,000  

$ 1,000  

$ 965,000  

$ 975,000  

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”).

4 unchanged sentences

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 ).

As part of the settlement of the Firestorm litigation, these warrants were cancelled (see NOTE - 9  COMMITMENTS AND CONTINGENCIES ).

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.

The expiration date of the Secure Education Warrants was 

January 1, 2023.

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.

On January 18, 2023, in connection with the 2023 Promissory Notes, the Company issued the investors warrants to purchase 6,250,000 shares of its common stock, exercisable over a period of five years, at an exercise price of $2.00 per share.

These warrants were exercisable commencing January 18, 2023 and expire on January 18, 2028.

On March 23, 2023, in connection with the 2023 Register Direct Offering the Company issued (i) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, (ii) warrants to purchase up to 6,872,853 shares of common stock, and (iii) warrants to the placement agent to purchase up to 481,100 shares of common stock.

The exercise price per share of the warrants was $1.455 and each pre-funded warrant is exercisable for one share of common stock at an exercise price of $0.001 per share and will expire when exercised in full.

Each warrant for the placement agent is exercisable for one share of common stock at an exercise price of $1.8188 per share.

These warrants were exercisable commencing March 27, 2023 and expire on March 27, 2028.

NOTE 11  

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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.

A summary of stock option activity under the Company’s 2017 Plan for the period ended September 30, 2022 is as follows:

Stock compensation expense related to stock options for the three months ended March 31, 2023 and 2022  was $ 0  and $ 28,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the unaudited condensed consolidated statements of operations. 

A summary of stock option activity under the Company’s 2017 Plan for the period ended March 31, 2023 is as follows:

Number of Shares Subject to Option

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Aggregate Intrinsic Value

Outstanding Balance as of December 31, 2021

1,012,336  

Outstanding Balance as of January 1, 2023

862,380  

3 unchanged sentences

( 15,913 )  

Outstanding balance as of September 30, 2022

Outstanding balance as of March 31, 2023

828,134  

1 unchanged sentence

$ 185,000  

Exercisable as of September 30, 2022

Exercisable as of March 31, 2023

828,134  

1 unchanged sentence

$ 185,000  

As of September 30, 2022 , there was $ 0 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan.

As of March 31, 2023 , 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:

Stock compensation expense related to RSU’s for the three months ended March 31, 2023 and 2022  was $ 1,112,000  and $ 1,872,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the unaudited condensed consolidated statements of operations.

A summary of RSU activity under the Company’s 2017 Plan for the three months ended March 31, 2023 is as follows:

Number of Shares

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Weighted Average Remaining Contractual Term (Years)

Outstanding balance as of December 31, 2021

Outstanding balance as of January 1, 2023

1,940,260  

3 unchanged sentences

( 84,829 )  

Outstanding balance as of September 30, 2022

Outstanding balance as of March 31, 2023

1,898,228  

$ 4.43  

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.

As of March 31, 2023 , there was $ 6,678,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 2.09  years.

NOTE 12  

1 unchanged sentence

The following table provides information relating to the calculation of loss per common share:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands, except per share data)

Three Months Ended March 31,

(Dollars in thousands, except per share data)

2 unchanged sentences

$ ( 12,682 )  

$ ( 9,613 )  

$ ( 76,288 )  

preferred stock accretion

preferred stock dividends

Net loss attributable to shareholders from continuing operations

$ ( 48,085 )  

$ ( 9,613 )  

$ ( 76,288 )  

Net loss attributable to shareholders from discontinued operations

Net income attributable to shareholders from discontinued operations

Net loss attributable to shareholders

$ ( 12,682 )  

$ ( 9,613 )  

$ ( 76,288 )  

Weighted average common shares outstanding - basic and diluted

1 unchanged sentence

44,087,911  

48,279,713  

38,357,167  

Basic and diluted loss per share from continuing operations

$ ( 0.23 )  

$ ( 1.58 )  

Basic and diluted loss per share from discontinued operations

Basic and diluted earnings per share from discontinued operations

Basic and diluted loss per share

$ ( 0.23 )  

$ ( 1.58 )  

Common stock equivalents excluded due to the anti-dilutive effect

1 unchanged sentence

3,858,220  

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 , 

The exercise of the pre-funded warrants was determined to be virtually assured because the underlying common shares will be issued for little or no cash consideration.

As a result, the Company determined that all necessary conditions for issuance of the underlying common shares were met when the pre-funded warrants were issued and therefore, the 

772,853 pre-funded warrants are included in the denominator of both the basic and diluted loss per share. 

As the Company had a net loss for the three months ended March 31, 2023 , the following 16,375,816  potentially dilutive securities were excluded from diluted loss per share: 

14,422,307 for outstanding warrants, less the 772,853 pre-funded warrants, 

828,134 related to outstanding options and 1,898,228  related to outstanding RSUs. 

As the Company had a net loss for the three months ended March 31, 2022 , 

the following 

3,858,220  potentially dilutive securities were excluded from diluted loss per share: 

2 unchanged sentences

2,169,044  related to outstanding RSUs.

NOTE 13  

SUBSEQUENT EVENTS

In the fourth  quarter of 2022 ,  the Company invested an additional $ 145,000  in the Roker SAFE. 

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.

MANAGEMENT ’

31 unchanged sentences

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;

financial market conditions , including the continuation of significant national and global uncertainties that may affect these conditions, a nd the results of financing efforts;

our ability to successfully identify, integrate and complete acquisitions and dispositions, including the integration of the 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;

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;

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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.

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. 

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.

section of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “

2022 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

Rekor’s mission is to become the premier provider of roadway intelligence and data-driven mobility insights on a global scale.

As a technology company, we are dedicated to transforming the public safety, urban mobility, and transportation management market segments worldwide with our cutting-edge, AI-driven solutions tailored specifically to the unique needs of each sector.

Our commitment to delivering mission-critical solutions for roadway intelligence is driven by our vision of creating smarter, safer, and more sustainable streets for all communities.

To achieve this vision, we strive to collect, connect, and organize the world's mobility data, harnessing its full potential to provide the most essential, real-time, and predictive actionable mobility insights.

Our innovative approach is designed to make roadway mobility data readily accessible and useful, empowering our customers to make informed decisions and drive meaningful progress towards a better future.

Our operations are conducted primarily by our wholly-owned subsidiaries, Rekor Recognition Systems, Inc., or ("Rekor Recognition"), Waycare Technologies, Ltd., or (“Waycare”), and Southern Traffic Services, Inc., or (“STS”).

Roadway Intelligence

Rekor has been dedicated to being a leader in roadway intelligence by collecting, connecting, and organizing global mobility data since its inception.

Today, our comprehensive portfolio offers multiple cutting-edge, AI-driven, edge-based Internet of Things ("IoT") devices for roadside data collection, a vast array of curated and integrated data sets from a network of transportation ecosystem data providers, tailored platforms, applications, and data streams that provide accurate, real-time, and predictive actionable insights for any moving objects on roadways.

We specialize in collecting and aggregating mobility-related data from multiple sources into our Rekor One™ roadway intelligence engine, transforming this data into knowledge and actionable insights, and securely distributing those insights to multiple users across our software platforms and applications.

Our proprietary technologies use recent advances in artificial intelligence, machine learning, data analysis, edge processing, and communications.

They are designed to be integrated into existing roadway and roadway sensor infrastructure to deliver real-time and predictive analytics that address critical challenges in transportation management, public safety, urban mobility, and other key commercial markets.

By applying a multi-layer architectural approach and protocols inspired by the Open System Interconnection ("OSI") model, which was instrumental in creating computer operating systems in the 1970s and the internet in the 1980s, we are collaborating with members of the Rekor Partner Network to integrate various transportation infrastructure systems into a cohesive network of roadway intelligence assets and insights.

This involves consolidating fragmented and disparate systems, as well as adding new layers of connectivity, to create a unified infrastructure.

To achieve this goal, we are working closely with a wide range of stakeholders, including local and federal government agencies, law enforcement, transit providers, infrastructure owners/operators, automotive OEMs, and technology, communications and data providers.

At Rekor, we are building a future for our customers where the mobility internet is interactive, generating and distributing real-time transportation intelligence to improve traffic management, public safety, maintenance, and emergency services, and planning agencies, as well as by connected and autonomous vehicles.

Our primary objective has been and remains to develop unique and differentiated AI-based and edge-based IoT that will play a central role in facilitating this process, while aligning with key partners in the transportation ecosystem to provide the most comprehensive view of roadways.

We will continue to optimize our investments to uniquely combine physical and digital infrastructure that is foundational to a new operating system for the roadways.

As agencies plan for and build the transportation network of the future, Rekor expects to play a critical and disproportionately valuable role in meeting the essential need for real-time and predictive roadway intelligence.

Roadway Intelligence Powered by Rekor

Rekor's cutting-edge technology and domain expertise gives us a position of strength in the emerging field of roadway intelligence.

Rekor One™

roadway intelligence engine is purpose-built to be a single source of truth, fueled by rich data and powered by AI.

With access to multiple sources of data and our award-winning AI-driven innovations, we provide a range of solutions that address diverse use cases across various public and private sector segments.

Our platform facilitates the efficient collection, analysis, and distribution of vast amounts of data, unlocking real-time and predictive operational insights like never before.

Using our advanced technology and centralized platform, we are well-positioned to provide a single-source of truth for roadway intelligence, and help governments and businesses turn infrastructure data into actionable insights that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.

At the core of our roadway intelligence solutions is the Rekor One roadway intelligence engine.

It is through this engine that we deliver a range of solutions that cater to public safety, urban mobility, transportation management, and commercial markets.

Within Rekor One, our proprietary algorithms curate data from multiple sources, including edge-based IoT devices, existing roadway sensors, and a growing network of transportation data partners, unlocking multiple trillions of additional data points.

We use this data to generate multi-dimensional insights in real-time, and AI-driven predictive analytics that leverage patterns of what happened in the past so that we can forecast what will happen in the future.

These insights enable our customers to make better-informed proactive decisions and achieve improved operational efficiency through strategic resource allocation.

Rekor's solutions can support diverse use cases, including real-time incident detection and response, data driven traffic operations and traffic management, proactive traffic calming around events, Federal Highway Administration ("FHWA") mandated vehicle classification, counts, and speed collection and reporting, analytics for bicycle, pedestrians, and other micromobility modes, patterns and hot spots for greenhouse gas emissions, high-definition ("HD") video management and traffic surveillance, law enforcement and intelligence-based policing, citation management, contactless compliance and enforcement, among others.

With our advanced technology and domain expertise, we are well-equipped to serve multiple public agencies and private sector segments with comprehensive roadway intelligence.

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.

We find ourselves at a pivotal moment in history, where governments are investing heavily in upgrading and digitizing outdated infrastructure.

Recent technological advances, such as edge- and cloud-based computing, artificial intelligence, and the internet of things, have given us an unprecedented opportunity to revolutionize mobility and bridge the divide between rapidly evolving technology and aging infrastructure.

These endeavors are not simply aspirations, but active pursuits we are currently engaged in as described in detail below.

Rekor is a technology company that provides state-of-the-art AI-driven roadway intelligence solutions to enhance public safety, urban mobility, and transportation management.

By collecting, connecting, and organizing the world’s mobility data, Rekor delivers precise, real-time, and predictive actionable insights for any moving objects on roadways.

Our unwavering dedication to delivering mission-critical solutions is propelled by our vision of helping to creating intelligent, secure, and sustainable streets for all communities.

The ultimate objective is for Rekor to be the foundation of a digital-enabled internet and operating system for roadways that will enable smarter, safer, and more eco-friendly mobility for all.

Rekor is making mobility data widely accessible and useful for all, empowering customers to make informed decisions and drive meaningful progress towards a brighter future.

Opportunities, Trends and Uncertainties

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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.

The world’s cities are getting larger, with longer commutes and the resulting impact on the environment and the quality of life.

This trend requires forward-thinking officials to manage assets and resources more efficiently.

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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.

AI for Infrastructure  – We believe that the application of AI to the analysis of conditions on roadways and other transportation infrastructure can significantly affect the safety and efficiency of travel in the future.

As vehicles move towards full automation, there is a need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g.

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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.

This data is a resource that transportation and other agencies are beginning to find valuable uses for.

Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies.

Connected vehicle sensors 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.

Connected vehicle sensors can provide important information related to hazardous conditions, speed variations, intersection performance, and more.

This data can help agencies and municipalities gain more visibility about conditions on their roads, supplementing data from existing infrastructure and allowing transportation information from rural areas that are not served by ITS infrastructure to be integrated into the overall analysis.

New and Expanded Uses for Vehicle Recognition Systems  – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems.

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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 have seen and responded to an increase in the number of smaller jurisdictions that are testing vehicle recognition systems or that issued requests for proposals to install a network of vehicle recognition sensors.

We also expect the availability of faster, higher-accuracy, lower-cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs.

Adaptability of the  

Market  – We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers.

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.

In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop their own systems or secure advanced systems from others who are also working to develop them.

As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want.

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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.

We believe that future legislation will increasingly allow for automated enforcement of regulations such as motor vehicle insurance and registration requirements.

Communities are currently searching for better means of achieving compliance with minor vehicle offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses.

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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.

However, as states expand auto-enforcement, the market for these products and services should broaden in the public safety market.

Graphic Processing Unit ( “

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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.

Edge Processing  – Demand for actionable roadway information continues to grow in parallel with sensor improvements, such as increasingly sophisticated internal software and optical and other hardware adapted to the use of this software.

Over the last several decades, sensors have evolved and unlocked new capabilities with each advancement.

Further, cellular networks have been optimized for downloading data rather than uploading data.

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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.

As a result, we have made significant investments in our business development marketing and eCommerce activities to increase awareness and market adoption of our products and services within key markets.

We anticipate that a sustained presence in the market, the continued development of strategic partnerships and other economies of scale will reduce the level of costs necessary to support sales of our products and services.

However, the speed at which these markets grow to the degree to which our products and services are adopted is uncertain.

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.

Resurgent 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.

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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.

As such, we are unable to determine the full impact on our operations should the global pandemic resurface in 2023.

The pandemic has accelerated the adoption of new technologies by businesses.

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Funding for digital initiatives has increased, creating opportunities for innovative solution providers such as Rekor.

Pressure on Government Budgets  – COVID-19 has caused significant strain on government budgets.

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.

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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

) and the Bipartisan Infrastructure Law ( “

)  - The IIJA, signed into law on November 15, 2021, provides for significant national investments in the transportation systems in the United States, including over $150 billion in new spending on roadway infrastructure, including intelligent transportation systems.

We believe that our comprehensive offering of solutions positions the Company well to emerge as a technology leader in the expanded market for roadway intelligence that will benefit from this legislation.

We have identified opportunities to access federal funding streams, and we are working to implement a program that capitalizes on this unprecedented U.S.

Beyond the many recurring federal grant programs that could support customer purchases, and the $350 billion in American Rescue Plan Act allocations that public agencies are receiving now, we are particularly excited about the prospect of benefitting from the following new grant sources that are contained in the IIJA:

$200 million annually for a “Safe Streets and Roads for All” program that would make competitive grants for state projects that significantly reduce or eliminate transportation-related fatalities.  $150 million for the current administration to establish a grant program to modernize state data collection systems $500 million for the Strengthening Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that improve transportation efficiency and safety.

Components of Operating Results

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.

The Company derives its revenues primarily from the sale of its roadway data aggregation, traffic management and licensing offerings.

These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services as well as software, hardware.

Costs of revenues, excluding depreciation and amortization

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Such costs are included in operating expenses.

We expense direct costs of revenues when incurred.

We expense direct costs of revenues when they incur.

Operating Expenses

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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.

However, our general and administrative expenses have decreased as a percentage of our revenue and, to the extent we continue to be successful in generating increased revenue, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.

Sales and Marketing

Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows.

We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base.

We will require significant investments in our sales and marketing expenses to continue the rate of growth in our revenues, further penetrate existing markets and expand our customer base into new markets.

Research and Development

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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.

Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.

Other Income (Expense)

Other income (expense) consists primarily of 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.

Other income (expense) consists primarily of legal settles, legal judgements, 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, interest income earned on cash and cash equivalents, short-term investments and note receivables.

Income Tax Provision

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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,

Three Months Ended March 31,

(Dollars in thousands)

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Research and development expenses

Goodwill impairment

Depreciation and amortization

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Other income (expense):

Interest expense

Other (expense) income

Gain on extinguishment of debt

Interest expense, net

Total other income (expense)

Loss before income taxes and equity method investments

Income tax benefit (provision)

Equity in loss of investee

Net loss from continuing operations

Comparison of the Three and Nine Months Ended September 30, 2022 and the Three and Nine Months Ended September 30, 2021

Comparison of the Three Months Ended 

March 31, 2023 and the Three Months Ended March 31, 2022

Total Revenue

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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.

The increase in revenue for the three months ended March 31, 2023 , compared to the three months ended March 31, 2022 , was primarily attributable to our recent acquisition.

During the three months ended March 31, 2023 , revenue attributable to our acquisition of STS was $2,754,000. 

As part of the ongoing development of our  selling strategy, we have been focusing on sales that employ contracts with recurring revenue.

We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and software licenses which are generally more difficult to predict.

Cost of Revenue, Excluding Depreciation and Amortization

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

Cost of revenue, excluding depreciation and amortization

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.

For the three months ended March 31, 2023 , cost of revenue, excluding depreciation and amortization increased compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our increase in revenue

Operating Expenses

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Research and development expenses

Goodwill impairment

Depreciation and amortization

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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. 

The decrease in general and administrative expenses during the three months ended March 31, 2023 , compared to the three months ended March 31, 2022 , was primarily due to a $1,282,000 decrease in personnel costs which was primarily related to a decrease in bonus and share-based compensation expense. This decrease in expense was partially offset by an increase in our professional services expenses of $454,000 for the 

three months ended March 31, 2023 , compared to the three months ended March 31, 2022 .

The decrease in expenses was also offset by additional expenses related to our acquisition of STS.  

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.

The increase in selling and marketing expenses during the three months ended March 31, 2023 , compared to the three months ended March 31, 2022 , 

was attributable mainly to increased marketing efforts to promote our products and services including digital marketing and targeted sales efforts related to the acquisition of STS .

In connection with these efforts, for the three months ended March 31, 2023 , there was an increase in staffing to support our growth plan which led to a $540,000 increase in personnel costs which includes increased expenses due to our sales incentives and higher revenue.

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 . 

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. 

The increase in research and development expenses during the three months ended March 31, 2023 , compared to the three months ended March 31, 2022 , 

was primarily attributable to development expenses as we completed and began production deployment of our count, class and speed application . 

For the three months ended March 31, 2023 , there was an increase in staffing to develop new transportation management products which led to a 

$848,000 increase in personnel costs. 

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,

Nine Months Ended September 30,

The increase in depreciation and amortization during the period is attributable primarily to increased technology-based intangible assets that were acquired as part of our acquisition of STS.

Other Income (Expense)

Three Months Ended March 31,

(Dollars in thousands)

Other income (expense):

Interest expense

Other (expense) income

Gain on extinguishment of debt

Interest expense, net

Total other income (expense)

Interest expense and other income remained consistent period over period.

Other expense increased as a result of a legal settlement. 

Interest expense increased period over period due to the issuance of the 2023 Promissory notes. 

Gain on extinguishment of debt and the increase to other income is a result of the settlement agreement in the Firestorm litigation.

As part of the settlement, we recorded a reduction to notes payable, the related accrued interest and other assets and liabilities which we part of the Firestorm entities. 

Non-GAAP Measures

EBITDA and Adjusted EBITDA

We calculate EBITDA as net loss before interest, taxes, depreciation and amortization.

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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,

Three Months Ended March 31,

Net loss from continuing operations

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Share-based compensation

Loss due to change in value of equity investments

Goodwill impairment

Legal settlements

One-time consulting fees

Gain on extinguishment of debt

Adjusted EBITDA

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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,

(Dollars in thousands, except percentages)

Three Months Ended March 31,

(Dollars in thousands, except percentages)

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Adjusted Gross Margin

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.

Adjusted Gross Margin for the 

three months ended March 31, 2023 and 2022  increased to 

53.6% from 48.3% .

As Company continues to scale and standardize it product offerings it has begun to realize operational efficiencies that have resulted in an improved Adjusted Gross Margin.  

Key Performance Indicators

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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,

Nine Months Ended September 30,

This visibility enables us to better manage and invest in our business. 

The following table sets forth our recurring revenue for the periods included:

Three Months Ended March 31,

Recurring revenue

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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. 

For the three months ended March 31, 2023 we won contracts valued at $12,083,000 , compared to 

$1,525,000 of contracts won for the three months ended March 31, 2022 .

This represents a $10,558,000  or 692%  increase, period over period. The increase in total contract value is primarily related to a large statewide contract that closed with the Florida DOT in which we will provide our class, count and speed application.

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.

As of March 31, 2023 , we had approximately 

$24,330,000 of contracts that were closed prior to March 31, 2023 but have a contractual period beyond March 31, 2023 . This represents an increase of 

$2,918,000  or 

14% compared to 

$21,412,000 of performance obligations as of December 31, 2022. 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 

67% 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. 

The increase in total 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.

March 31, 2023 , we had material leased building space at the following locations in the U.S.

Columbia, Maryland – The corporate headquarters

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The following table sets forth the components of our cash flows for the period included (dollars in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities

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Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents

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.

Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents

Net cash used in operating activities for the 

three months ended March 31, 2023 had a net decrease of $2,770,000 , which was attributable to the increase in non-cash related expenses such as depreciation of property and equipment and amortization of debt financing costs.

These amounts were partially offset by an increase in the loss from continuing operations.

During the three months ended March 31, 2023 compared to the three months ended March 2022, we had large, non-recurring, cash outlays related to professional services and payments to vendors carried from 2022 due to cash constrains , however, even with these factors we were able to improve the overall cash used in operating activities and believe we will be able to continue to show improvements in our operating cash flow. 

The net decrease in net cash used in investing activities of 

$1,236,000 was primarily due to an decrease in the outflow of funds used for capital expenditures. 

Net cash provided by financing activities for the three months ended March 31, 2023  increased by 

$17,530,000 from the prior 

three month period ended March 31, 2022 .

During the three months ended March 31, 2023 , as part of our 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds of $11,100,000 and $9,159,000, respectively.  In the prior comparable quarterly period, through our 2022 Sales Agreement, we received net proceeds, after deducting the underwriting discounts and commissions and offering expenses payable by us, of $3,134,000.

For the three months ended March 31, 2023 and 2022 , we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity.

As of March 31, 2023 , we had cash and cash equivalents from continuing operations of 

$12,444,000 and working capital of $6,974,000 , as compared to cash and cash equivalents of 

$2,178,000 and a working capital deficit of 

$6,010,000 as of December 31, 2022 .

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.

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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. 

As of and for the three months ended March 31, 2023 , we had working capital from continuing operations of $6,974,000  and a loss from continuing operations of $12,682,000 .

Our cash increased by $10,555,000  for the three months ended March 31, 2023 primarily due external financing which was offset by the loss from continuing operations of $12,682,000 .

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The Company is actively monitoring its operations, the cash on hand and working capital.

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.

The Company is currently in the process of reviewing external financing options in order to sustain its operations. During the third quarter of 2022 and the first quarter of 2023, the Company implemented strategic expense reductions in certain areas to better align its operations with near term revenue generating opportunities.

If additional financing is not available, the Company has contingency plans to further reduce or defer expenses and cash outlays in the look-forward period.

STS Acquisition

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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.

2023 Promissory Notes with Warrants

On January 18, 2023, the Company entered into a securities purchase agreement with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes, and (ii) warrants to purchase up to an aggregate of 7,500,000 shares of common stock of the Company. 

In connection with the initial closing on January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company of $12,500,000 before reimbursement of expenses.

2023 Registered Public Offering

On March 23, 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and issuance by the Company in a registered direct offering of an aggregate of:

(i) 6,100,000 shares of the Company’s common stock, (ii) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, and (iii) warrants to purchase up to 6,872,853 shares of common stock.

The offering price per share of common stock and associated warrant was $1.455 and the offering price per pre-funded warrant and associated warrant was $1.454.

Each pre-funded warrant is exercisable for one share of common stock at an exercise price of $0.001 per share and will expire when exercised in full.

The warrants to purchase common stock became exercisable immediately upon issuance, will expire five years following the issuance date and have an exercise price of $1.60 per share.

The Company received gross proceeds from the Registered Direct Offering of approximately $10,000,000.

The Offering closed on March 27, 2023.

The Company entered into an engagement letter with H.C.

Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts basis, in connection with the offering.

The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering.

The Company also paid the placement agent $75,000 for non-accountable expenses and $16,000 for clearing fees.

Additionally, the Company issued designees of the placement agent, as compensation, warrants to purchase up to 481,100 shares of common stock, equal to 7.0% of the aggregate number of shares of common stock and pre-funded warrants placed in the offering.

The warrants issued to the placement agent have a term of five (5) years and an exercise price of $1.8188 per share of common stock.

As of March 31, 2023 , we did not have any material commitments for capital expenditures.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements