What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2023-05-15 · 467 added, 271 removed, 1014 unchanged (42% of the section changed)

4 unchanged sentences

(Dollars in thousands, except share amounts)

March 31, 2023

June 30, 2023

December 31, 2022

14 unchanged sentences

16,733  

Right-of-use lease assets, net

Right-of-use operating lease assets, net

Right-of-use financing lease assets, net

20,593  

16 unchanged sentences

Notes payable, current portion

Related party notes

Related party notes, current portion

Loan payable, current portion

Lease liability, short-term

Lease liability operating, short-term

Lease liability financing, short-term

Contract liabilities, short-term

9 unchanged sentences

Loan payable, long-term

Lease liability, long-term

Lease liability operating, long-term

13,509  

14,237  

Lease liability financing, long-term

Contract liabilities, long-term

11 unchanged sentences

100,000,000 shares;

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.

62,043,702 , shares as of June 30, 2023 and 54,446,602 as of December 31, 2022;

61,952,211 shares as of June 30, 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 June 30, 2023 and December 31, 2022, respectively.

No preferred stock was issued or outstanding as of June 30, 2023 or December 31, 2022, respectively.

Treasury stock, 91,491 and 41,522 shares as of June 30, 2023 and December 31, 2022, respectively.

( 506 )  

15 unchanged sentences

(Dollars in thousands, except share amounts)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

$ 8,563  

$ 3,698  

$ 14,748  

$ 6,673  

Cost of revenue, excluding depreciation and amortization

1 unchanged sentence

General and administrative expenses

13,078  

15,802  

Selling and marketing expenses

2 unchanged sentences

Total operating expenses

14,712  

17,131  

30,715  

31,246  

Loss from operations

( 10,280 )  

( 15,674 )  

( 22,966 )  

Other income (expense):

1 unchanged sentence

Interest expense, net

( 908 )  

( 17 )  

( 1,668 )  

Total other income (expense)

( 833 )  

( 829 )  

Loss before income taxes

( 11,113 )  

( 15,390 )  

( 23,795 )  

Income tax benefit (provision)

Net loss from continuing operations

( 11,113 )  

( 15,390 )  

( 23,795 )  

Net income from discontinued operations

$ ( 11,113 )  

$ ( 15,267 )  

$ ( 23,795 )  

Loss per common share from continuing operations - basic and diluted

$ ( 0.18 )  

$ ( 0.33 )  

$ ( 0.41 )  

Earning per common share discontinued operations - basic and diluted

Loss per common share - basic and diluted

$ ( 0.18 )  

$ ( 0.33 )  

$ ( 0.41 )  

Weighted average shares outstanding

Basic and diluted

61,816,279  

47,154,453  

58,353,534  

45,625,492  

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

9 unchanged sentences

Total Stockholders' Equity

Balance as of March 31, 2023

61,030,637  

91,491  

$ ( 506 )  

$ 218,157  

$ ( 165,680 )  

$ 51,977  

Stock-based compensation

Issuance upon exercise of stock options

18,000  

Issuance upon vesting of restricted stock units

130,721  

Issuance of common stock upon exercise of pre-funded warrants

772,853  

( 11,113 )  

Balance as of June 30, 2023

61,952,211  

91,491  

$ ( 506 )  

$ 219,218  

$ ( 176,793 )  

$ 41,925  

Balance as of March 31, 2022

44,908,417  

( 41,522 )  

$ ( 417 )  

$ 176,348  

$ ( 82,484 )  

93,451  

Stock-based compensation

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

6,870,349  

17,273  

17,274  

Issuance upon exercise of stock options

Issuance upon vesting of restricted stock units

37,206  

Shares issued as part of the STS Acquisition

798,666  

( 15,267 )  

Balance as of June 30, 2022

52,621,305  

( 41,522 )  

$ ( 417 )  

$ 197,512  

$ ( 97,751 )  

$ 99,349  

Balance as of January 1, 2023

54,405,080  

41,522  

$ ( 417 )  

$ 202,747  

$ ( 152,998 )  

$ 49,337  

Stock-based compensation

Issuance upon exercise of stock options

36,333  

Issuance upon vesting of restricted stock units

687,914  

Fair value allocated to warrants with 2023 Promissory Notes

Shares withheld upon vesting of restricted stock units

( 49,969 )  

49,969  

( 89 )  

Issuance of common stock and warrants

Balance as of March 31, 2023

6,100,000  

Issuance of common stock upon exercise of pre-funded warrants

772,853  

( 23,795 )  

Balance as of June 30, 2023

61,952,211  

91,491  

$ ( 506 )  

$ 219,218  

$ ( 176,793 )  

$ 41,925  

Balance as of January 1, 2022

43,987,896  

( 19,361 )  

$ ( 319 )  

$ 171,285  

$ ( 69,883 )  

$ 101,087  

Stock-based compensation

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

7,598,801  

20,407  

20,408  

Issuance upon exercise of stock options

19,638  

Issuance upon vesting of restricted stock units

216,304  

Shares withheld upon vesting of restricted stock units

Balance as of March 31, 2022

( 22,161 )  

( 98 )  

Shares issued as part of the STS Acquisition

798,666  

( 27,868 )  

Balance as of June 30, 2022

52,621,305  

( 41,522 )  

$ ( 417 )  

$ 197,512  

$ ( 97,751 )  

$ 99,349  

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

3 unchanged sentences

(Dollars in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash Flows from Operating Activities:

Net loss from continuing operations

$ ( 23,795 )  

Net income from discontinued operations

( 23,795 )  

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

Bad debt expense

Amortization of right-of-use lease asset

Amortization of right-of-use financing lease asset

Non-cash operating lease expense

Share-based compensation

1 unchanged sentence

Amortization of intangible assets

Impairment of SAFE Agreement

Loss due to the remeasurement of the STS Contingent Consideration

Loss on the sale of property and equipment

Gain on extinguishment of debt

( 527 )  

Changes in operating assets and liabilities:

Accounts receivable

( 2,508 )  

( 1,064 )  

Other current assets

( 194 )  

Accounts payable, accrued expenses and other current liabilities

Contract liabilities

Lease liability

Operating lease liability

( 718 )  

Net cash used in operating activities - continuing operations

Net cash provided by operating activities - discontinued operations

( 19,200 )  

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

( 449 )  

Net cash used in operating activities

( 19,649 )  

Cash Flows from Investing Activities:

1 unchanged sentence

Capital expenditures

( 490 )  

Proceeds from the sale of property and equipment

Cash paid for STS acquisition, net

Net cash used in investing activities - continuing operations

( 476 )  

Net cash used in investing activities - discontinued operations

Net cash used in investing activities

( 476 )  

Cash Flows from Financing Activities:

6 unchanged sentences

Repayments of loans payable

( 54 )  

Payments for financing leases

( 277 )  

Net proceeds from at-the-market agreement

20,408  

Repurchases of common stock

( 89 )  

Net cash provided by financing activities

20,441  

20,486  

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

( 449 )  

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

26,601  

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

$ 2,784  

$ 14,854  

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents at end of period - continuing operations

$ 2,438  

$ 13,988  

Restricted cash and cash equivalents at end of period - continuing operations

1 unchanged sentence

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

$ 2,784  

$ 14,854  

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

4 unchanged sentences

GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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 th

three and six months ended June 30, 2022

, h ave been reclassified to conform to the current year’s presentation.

June 17, 2022

,  the Company completed the acquisition of Southern Traffic Services, Inc.

("STS") by acquiring 

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

These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc.

3 unchanged sentences

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 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 .

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 June 30, 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 and six months ended June 30, 2023 and 2022 .

The financial data and other information disclosed in these notes are unaudited.

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 .

The results for the three and six months ended June 30, 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 .

1 unchanged sentence

Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000.

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

11 unchanged sentences

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.

Amounts for the three and six months ended June 30, 2022 , have been reclassified to conform to the current period’s presentation.

Liquidity and Going Concern

For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S.

Management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S.

As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions.

These assumptions include, among other factors, its ability to raise additional capital, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.

The Company has generated losses since its inception and has relied on cash on hand, external sources of financing to support cash flow from operations.

The Company has generated losses since its inception and has relied on cash on hand and external sources of financing to support cash flow from operations.

The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services.

As of and for the 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). 

As of and for the six months ended June 30, 2023 , the Company had a working capital deficit from continuing operations of $ 1,692,000  and a loss from continuing operations of $ 23,795,000 .

Our cash increased by $ 316,000  for the six months ended June 30, 2023 primarily due to external financing which was offset by the loss from continuing operations of $ 23,795,000 . 

As described in NOTE 13 - 

SUBSEQUENT EVENTS , the Company received aggregate gross proceeds of approximately $ 10,997,000  as a result of a warrant exercise on July 25, 2023.

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.

4 unchanged sentences

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. 

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 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”

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability.

The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1 –

Quoted prices in active markets for identical assets or liabilities.

Level 2 –

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;

quoted prices in markets that are not active;

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 –

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements.

Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

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

As of June 30, 2023 , the Company did not identify any events that would cause it to assess goodwill for impairment.

Revenue Recognition

9 unchanged sentences

The following table presents a summary of revenue (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Recurring revenue

1 unchanged sentence

$ 2,078  

$ 9,976  

$ 3,773  

Product and service revenue

2 unchanged sentences

$ 3,698  

$ 14,748  

$ 6,673  

Recurring revenue

Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue.

The Company generates recurring revenue from long-term contracts with customers that provide periodic payments and short-term contracts that are automatically invoiced on a monthly basis.

The Company generates recurring revenue both from long-term contracts with customers that provide for periodic payments and from short-term contracts that are automatically invoiced on a monthly basis.

The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and eCommerce sales.

26 unchanged sentences

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.

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.

In addition to recurring revenue from software sales, the Company recognizes point-in-time revenue related to the sale of perpetual software licenses.

The Company sells perpetual licenses that provide customers the right to use software for an indefinite period in exchange for a one -time license fee, which is generally paid at contract inception.

12 unchanged sentences

The following table presents a summary of revenue by customer type (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Urban mobility

$ 3,574  

$ 6,329  

Traffic management

3 unchanged sentences

$ 3,698  

$ 14,748  

$ 6,673  

Urban mobility  

21 unchanged sentences

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

As of June 30, 2023 , the Company had approximately 

$ 31,774,000  of remaining performance obligations not yet satisfied or partially satisfied.

The Company expects to recognize approximately 69 %  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.

3 unchanged sentences

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 $ 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.

Unbilled accounts receivables of $ 1,381,000  and $ 935,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 , respectively.

Contract liabilities

1 unchanged sentence

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 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):

Changes in the contract asset and liability balances during the six months ended June 30, 2023 were not materially impacted by any other factors.

Contract liabilities as of June 30, 2023 and December 31, 2022 were $ 5,123,000  and $ 4,049,000 , respectively.

During the six months ended June 30, 2023 , $ 2,092,000 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 June 30, 2023 (dollars in thousands):

2023, remaining

2 unchanged sentences

Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents

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

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

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

The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain clients. R estricted cash and cash equivalents for these clients as of June 30, 2023 and December 31, 2022 were $ 346,000  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

The Company deposits its temporary cash investments with highly rated financial institutions that are located in the United States and Israel.

The United States deposits are federally insured up to $250,000 per account.

As of 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.

The United States deposits are federally insured only up to $250,000.

As of June 30, 2023  and December 31, 2022, the Company had deposits from continuing operations totaling $ 2,784,000  and $ 2,178,000 , respectively, in multiple U.S.

financial institutions and one Israeli financial institution.

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 March 31, 2023 and 2022 , respectively. 

12 % of the unaudited condensed consolidated revenue for the six months ended 

June 30, 2023 . 

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenues for the 

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.

three and six months ended June 30, 2023 and 2022 , respectively. 

As of June 30, 2023 , Customer B accounted for 

11 % 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 

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated accounts receivable balance as of 

June 30, 2023 and 

December 31, 2022 .

1 unchanged sentence

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.

As of June 30, 2023  and December 31, 2022, the Company owed $ 348,000  and $ 253,000 to its board members, which the Company considers to be related parties, these 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):

March 31, 2023

June 30, 2023

December 31, 2022

26 unchanged sentences

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 .

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 six months ended June 30, 2023 .

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

9 unchanged sentences

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. 

For the three and six months ended June 30, 2023 , the Company recognized $ 46,000 and $ 91,000 , respectively, 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 

7 unchanged sentences

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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands, except per share data)

(Dollars in thousands except for per share data)

Total revenue from continuing operations

1 unchanged sentence

$ 7,462  

$ 14,748  

$ 13,043  

Net loss from continuing operations

$ ( 11,113 )  

$ ( 15,876 )  

$ ( 23,795 )  

Basic and diluted loss per share from continuing operations

$ ( 0.18 )  

$ ( 0.33 )  

$ ( 0.41 )  

Basic and diluted number of shares

1 unchanged sentence

47,882,126  

58,353,534  

46,388,662  

NOTE 3 –

3 unchanged sentences

This equity investment does not have a readily determinable fair value and the Company reports this investment at cost, less impairment.

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.

As of June 30, 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 acquired a 50 % equity interest in a newly formed entity, Roker Inc.

(“Roker”).

1 unchanged sentence

This investment is accounted for under the equity method.

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

 As of June 30, 2023 and December 31, 2022 the investment in Roker had a value of $ 0 .

Subsequent to the quarter end the Company entered into an agreement to sell substantially all of the assets of Roker.

(see NOTE 13  - SUBSEQUENT EVENTS  for more details).

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

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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 March 31, 2023 . 

Subsequent to the quarter end substantially all of the assets of Roker were sold which initiated a triggering event related to the Company's SAFE agreements.

(see NOTE 13  - SUBSEQUENT EVENTS  for more details).

During the 

three and six months ended June 30, 2023 , the Company recognized an impairment of $ 101,000 related to the SAFE that is presented as part of general and administrative expenses in the unaudited condensed consolidated statements of operations. 

NOTE 4  

1 unchanged sentence

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,

six months ended June 30, 2023 and 2022 were as follows (dollars in thousands):

Six Months Ended June 30,

Cash paid for interest

4 unchanged sentences

( 374 )  

Decease in deposits related to property and equipment received

Financing activities:

Decrease in deposits related to property and equipment received

Non-cash investing activities:

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

Contingent Consideration in connection with the acquisition of STS

Earnout Consideration in connection with the acquisition of STS

Note Consideration in connection with the acquisition of STS

Loans issued for property and equipment

Non-cash financing activities:

2022 Promissory Notes exchanged for 2023 Promissory Notes - related party

2 unchanged sentences

New Leases under ASC-842:

Right-of-use assets obtained in exchange for new finance lease liabilities

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

2 unchanged sentences

NOTE 5  

OPERATING LEASES

The Company has operating leases for office facilities in various locations throughout the United States and Israel.

Additionally, the Company has financing leases for vehicles it uses for its operations throughout the United States.

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

1 unchanged sentence

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 

The following table is a summary of the components of net lease cost for the period ended June 30 ( dollars in thousands ):

Three Months Ended June,

Six Months Ended June,

Finance lease cost

Amortization of right-of-use assets

Interest on lease liabilities

Operating lease cost

Total lease cost

$ 1,082  

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 were used to update the structure of the leased space and furnish the leased space.

three and six months ended June 30, 2023 , the Company had $ 249,000 in cash payments related to its financing leases prior to the lease commencement date. 

Supplemental balance sheet information related to leases as of 

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

Operating lease right-of-use lease assets

$ 9,509  

Current portion of lease liability

$ 1,074  

Long-term portion of lease liability

13,867  

Total lease liability

$ 14,941  

Weighted average remaining lease term - operating leases (years)

Weighted average discount rate - operating leases

June 30, 2023 was as follows (dollars in thousands):

Year ending June 30, 2023

Weighted-average remaining lease term (years)

Operating leases

Financing leases

Weighted-average discount rate

Operating leases

Financing leases

Operating Leases

Financing Leases

2023, remaining

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INTANGIBLE ASSETS AND GOODWILL

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

March 31, 2023

Intangible assets subject to amortization

Customer relationships

10 - 15  

$ 3,581  

$ ( 65 )  

$ 3,516  

Marketing related

( 43 )  

Technology based

3 - 10  

16,849  

( 863 )  

15,986  

Internally capitalized software

( 70 )  

Intangible assets subject to amortization

$ 21,299  

$ ( 1,041 )  

$ 20,258  

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

March 31, 2023

The following provides a breakdown of identifiable intangible assets, net as of 

June 30, 2023  and  

December 31, 2022 (dollars in thousands):

June 30, 2023

December 31, 2022

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These intangible assets are amortized on a straight-line basis over their estimated useful life.

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

Amortization expense 

for the 

three  months ended  

June 30, 2023  and 

2022  was $ 1,032,000  and $ 973,000 , respectively, and 

for the six months ended June 30, 2023 and 2022 was 

$ 2,073,000  and $ 1,956,000 , 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):

During the current period there have been no events that would cause the Company to reevaluate its intangible assets.  

As of June 30, 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

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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 

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. 

3 unchanged sentences

2025,  respectively.

The aggregate balance of these notes payable was

$ 2,000,000  as of 

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.

and is included in notes payable long-term, in the consolidated balance sheets. As of June 30, 2023, the aggregate balance of these notes payable was $ 2,000,000 of which $ 1,000,000 was included in notes payable current portion and $ 1,000,000 was included in notes payable long-term, respectively, in the unaudited condensed consolidated balance sheets.

2022 Promissory Notes  

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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. 

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

2023  Promissory Notes

2 unchanged sentences

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.

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

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

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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. 

These lenders were determined to be related parties.

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 in a subsequent closing, or series of closings, on the same terms.

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.

Arctis has a right to a Board designee for so long as it holds the 2023 Promissory Notes, and such right may not be sold or transferred to any party not affiliated with Arctis. As a result of this right, the Nominations Committee of the Company’s Board of Directors has nominated a director designated by Arctis to stand for election by the Company’s stockholders at the Company’s 2023 annual meeting of stockholders. 

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

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.

1 unchanged sentence

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 March 31,

Contractual interest expense (income), net

The following table presents the interest expense net of interest income related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Contractual interest expense, net

Amortization of debt discount

Total interest expense, net

$ 1,668  

Schedule of Principal Amounts Due of Debt

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

The principal amounts due for long-term notes payable are shown below as of June 30, 2023 (dollars in thousands):

2023, remaining

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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 

March 31, 2023 .

June 30, 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 March 31, 2023 .

Federal, state or foreign income tax audits were in process as of June 30, 2023 .

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

After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangible, because the Company believes that it is not more likely than not that their benefits will be realized in future periods.

After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangibles, because the Company does not believe that it is more likely than not that their benefits will be realized in future periods.

The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit.

1 unchanged sentence

For the three and 

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

six months ended June 30, 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 of June 30, 2023 and December 31, 2022, our evaluation revealed no uncertain tax positions that would have a material impact on the unaudited condensed consolidated financial statements. 

NOTE 9  

COMMITMENTS AND CONTINGENCIES

There is 

no litigation pending against the Company at this time.

From time to time, the Company 

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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.

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 and 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.

5 unchanged sentences

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 .

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

During the second quarter of 2023, 772,853 of the pre-funded warrants were exercised for 772,853 shares of the Company's common stock. 

Subsequent to the period end, the institutional investor connected to the 2023 Registered Direct Offering exercised 6,872,853 of the Registered Direct Warrants into an equal number of shares of the Company's common stock.

See NOTE 13 - SUBSEQUENT EVENTS for details on the transaction.

2023 Warrants

2 unchanged sentences

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.

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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 

six  months ended 

June 30, 2022, 

the Company sold 

7,598,801  shares of common stock at a weighted-average selling price of $ 2.79  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.

2022  Sales Agreement was $ 20,408,000  after paying $ 169,000  related to the issuance cost, as well as 

3.0 % or $ 635,000  related to cash commissions provided to the Agent.

December 

4 unchanged sentences

ACQUISITIONS , the Company issued 798,666 shares of the Company’s common stock as part of the consideration.

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

A summary of the warrant activity for the Company for the period ended June 30, 2023 is as follows:

Series A Preferred Stock Warrants (1)

14 unchanged sentences

Exercised warrants

( 772,853 )  

Expired warrants

2 unchanged sentences

( 631,254 )  

Outstanding warrants as of March 31, 2023

Outstanding warrants as of June 30, 2023

41,996  

2 unchanged sentences

13,649,454  

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

Weighted average strike price of outstanding warrants as of June 30, 2023

$ 1.03  

3 unchanged sentences

$ 1.79  

Intrinsic value of outstanding warrants as of March 31, 2023

Intrinsic value of outstanding warrants as of June 30, 2023

$ 31,000  

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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 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:

Stock compensation expense related to stock options for the three  months ended  

June 30, 2023 

2022 was $ 0  and $ 14,000 , respectively, and for the six months ended June 30, 2023 and 2022  was $ 0  and $ 42,000 , 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 June 30, 2023 is as follows:

Number of Shares Subject to Option

8 unchanged sentences

( 32,373 )  

Outstanding balance as of March 31, 2023

Outstanding balance as of June 30, 2023

793,674  

1 unchanged sentence

$ 509,000  

Exercisable as of March 31, 2023

Exercisable as of June 30, 2023

793,674  

1 unchanged sentence

$ 509,000  

As of March 31, 2023 , there was $ 0 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan.

As of June 30, 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 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:

Stock compensation expense related to RSU’s for the three months ended June 30, 2023 and 2022  was $ 1,044,000 and $ 1,871,000 , respectively, and for the six months ended June 30, 2023 and 2022  was $ 2,156,000  and $ 3,743,000 , 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 six months ended June 30, 2023 is as follows:

Number of Shares

7 unchanged sentences

( 144,902 )  

Outstanding balance as of March 31, 2023

Outstanding balance as of June 30, 2023

1,757,484  

1 unchanged sentence

All RSUs granted vest upon the satisfaction of a service-based vesting condition.

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.

As of June 30, 2023 , there was $ 5,559,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.87  years.

NOTE 12  

1 unchanged sentence

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands, except per share data)

Basic and diluted loss per share

1 unchanged sentence

$ ( 11,113 )  

$ ( 15,390 )  

$ ( 23,795 )  

Net income attributable to shareholders from discontinued operations

1 unchanged sentence

$ ( 11,113 )  

$ ( 15,267 )  

$ ( 23,795 )  

Weighted average common shares outstanding - basic and diluted

1 unchanged sentence

47,154,453  

58,353,534  

45,625,492  

Basic and diluted loss per share from continuing operations

$ ( 0.18 )  

$ ( 0.33 )  

$ ( 0.41 )  

Basic and diluted earnings per share from discontinued operations

1 unchanged sentence

$ ( 0.18 )  

$ ( 0.33 )  

$ ( 0.41 )  

Common stock equivalents excluded due to the anti-dilutive effect

1 unchanged sentence

4,180,940  

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, 

16,200,612  

4,180,940  

As the Company had a net loss for the three and six months ended June 30, 2023 , the following 

16,200,612 potentially dilutive securities were excluded from diluted loss per share: 

13,649,454 for outstanding warrants, 

793,674 related to outstanding options and 1,757,484  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: 

As the Company had a net loss for the three and six months ended June 30, 2022 , 

the following 4,180,940  potentially dilutive securities were excluded from diluted loss per share: 

692,311  for outstanding warrants, 

1 unchanged sentence

2,507,597  related to outstanding RSUs.

NOTE 13  

 SUBSEQUENT EVENTS

Roker Sale 

On July 25, 2023, a buyer acquired substantially all of the assets of Roker.

This was deemed to be a triggering event under the Roker SAFE Agreement. As result of the triggering of the Roker SAFE Agreement, the Company expects to receive substantially of its investment in the Roker SAFE.

Warrant Exercise

On July 

25, 2023, the Company entered into a letter agreement (the “Letter Agreement”) with the holder (the “Exercising Holder”) of the Registered Direct Warrants to purchase for cash an aggregate of 6,872,853 shares of Common Stock, representing all of the shares of Common Stock underlying the Registered Direct Warrants.

Pursuant to the Letter Agreement, the Exercising Holder and the Company agreed that the Exercising Holder would exercise all of its Registered Direct Warrants for shares of Common Stock underlying the Registered Direct Warrants (the “Exercised Shares”) at $ 1.60 per share of Common Stock.

In consideration for exercising the Registered Direct Warrants, the Letter Agreement provides for the issuance of new warrants to purchase up to an aggregate of 2,850,000 shares of Common Stock (the “New Warrants”).

The New Warrants terminate on January 

25, 2029, and are exercisable after issuance only for cash, subject to exception if the shares of Common Stock underlying the New Warrants are not registered in accordance with the terms of the Letter Agreement.

The New Warrants have an exercise price of $ 3.25 per share.

The New Warrants and the shares of Common Stock issuable upon the exercise of the New Warrants are not being registered under the Securities Act of 1933, and are being offered pursuant to the exemption provided in Section 

4 (a)( 2 ) under the Securities Act.

The Exercised Shares are registered for resale on an effective registration statement previously filed by the Company with the SEC.

The Company has received aggregate gross proceeds of $ 10,997,000  from the exercise of the Registered Direct Warrants by the Exercising Holder and issue an aggregate of 6,872,853 shares of Common Stock and New Warrants to purchase an aggregate of up to 2,850,000 shares of Common Stock to the Exercising Holder.

MANAGEMENT ’

51 unchanged sentences

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.

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

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.

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

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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.

Today, our comprehensive portfolio offers multiple cutting-edge 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.

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.

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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.

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

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

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

Rekor One™

The Rekor One™

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

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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.

It is through this engine that we deliver a range of solutions that serve government and commercial customers in the public safety, urban mobility and transportation management areas.

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.

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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.

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

Our unwavering dedication to delivering mission-critical solutions is propelled by our vision of helping to create 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.

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

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

Based on published benchmarks, our software currently outperforms competitors.

However, large users of existing technology, such as toll road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future.

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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.

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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Other Income (Expense)

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.

Other income (expense) consists primarily of legal settlements, 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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

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Net loss from continuing operations

Comparison of the Three Months Ended 

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

Comparison of the Three and Six Months Ended June 30, 2023 and the Three and Six Months Ended June 30, 2022

Total Revenue

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

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.

The increase in revenue for the three and six months ended June 30, 2023 , compared to the three and six months ended June 30, 2022, was primarily attributable to our acquisition of STS in June 2022.

During the three and six months ended June 30, 2023, revenue attributable to our acquisition of STS was $3,574,000 and $6,327,000, respectively.

The other main driver of revenue growth during the year was attributable to sales of the Company's software which increased for the 

three and six months ended June 30, 2023 , compared to the three and six months ended June 30, 2022, as a result of the Company's go to market strategy and its expanded customer base. 

Cost of Revenue, Excluding Depreciation and Amortization

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

Cost of revenue, excluding depreciation and amortization

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

For the three and six months ended June 30, 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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

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General and Administrative Expenses

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.  

The decrease in general and administrative expenses during the three months ended June 30, 2023 , compared to the three months ended June 30, 2022 , was primarily due to a $1,505,000 decrease in personnel costs which was primarily related to a decrease in bonus and share-based compensation expense and a $1,513,000 decrease in professional services which was primarily related to fees associated with our acquisition of STS in 2022. 

The decrease in general and administrative expenses during the six months ended June 30, 2023 , compared to the six months ended June 30, 2022 , was primarily due to 

a $2,590,000 decrease in personnel costs which was primarily related to a decrease in bonus and share-based compensation expense. 

The additional expenses related to our acquisition of STS in 2022 were more than offset by an overall decrease in personnel costs during the three and six months ended June 30, 2023.

Selling and Marketing Expenses

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.

The decrease in selling and marketing expenses during the three months ended June 30, 2023 , compared to the three months ended June 30, 2022 , 

was attributable mainly to personnel costs which was primarily related to a decrease in share-based compensation expense. 

Selling and marketing expenses during the six months ended June 30, 2023 , compared to the six months ended June 30, 2022 , remained consistent period over period. 

Research and Development Expense

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

Research and development expenses during the three months ended June 30, 2023, compared to the three months ended June 30, 2022 , remained consistent period over period.

The increase in research and development expenses during the six months ended June 30, 2023 , compared to the six months ended June 30, 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 

For the six months ended June 30, 2023 , there was an increase in staffing to develop new products which led to a 

$923,000 increase in personnel costs. 

Depreciation and Amortization

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.

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

Other Income (Expense)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

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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. 

Gain on extinguishment of debt is a result of the settlement agreement in the Firestorm litigation.

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

Non-GAAP Measures

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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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net loss from continuing operations

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We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue.

We expect Adjusted Gross Margin to continue to improve over time to the extent that we can gain efficiencies through the adoption of our technology and successfully cross-selling and upselling our current and future offerings.

However, our ability to improve Adjusted Gross Margin overtime is not guaranteed and could be impacted by the factors affecting our performance.

We expect Adjusted Gross Margin to continue to improve over time to the extent that we can gain efficiencies through the adoption of our technology and successfully cross-sell and upsell our current and future offerings.

However, our ability to improve Adjusted Gross Margin over time is not guaranteed and could be impacted by the factors affecting our performance.

We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.

The following table sets forth the components of the Adjusted Gross Profit and Adjusted Gross Margin for the periods included:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands, except percentages)

Cost of revenue, excluding depreciation and amortization

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Adjusted Gross Margin

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.  

Adjusted Gross Margin for the three and six months ended June 30, 2023 

increased compared to the three and six months ended June 30, 2022 . 

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. Additionally, during the  three and six months ended June 30, 2023 , the Company had a higher mix of software sales which typically carry a higher Adjusted Gross Margin. 

Key Performance Indicators

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Recurring Revenue Growth

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

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

Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operations.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Recurring revenue

As we continue to focus on long-term contracts with recurring revenue as part of our business model, we expect recurring revenue growth in future periods to continue to increase as we move to market our suite of products through our Rekor One™

Total Contract Value

There are certain assumptions that we make when determining the total contract value of an agreement, such as the success rate of renewal periods, cancellations and usage estimates.

For the 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.

The following table presents a summary of total contract value (dollars in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Total Contract Value

The increase in total contract value is primarily related to large statewide contracts that closed across all three customer markets.

Performance Obligations

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 

As of June 30, 2023 , we had approximately 

$31,774,000 of contracts that were closed prior to June 30, 2023 but have a contractual period beyond June 30, 2023 . This represents an increase of 

$10,362,000  or 

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Lease Obligations

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

June 30, 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):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash used in operating activities

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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. 

six months ended June 30, 2023 had a decrease of $3,893,000 , which was primarily attributable to the decrease of $4,268,000 in the loss from continuing operations. 

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 

$8,877,000 was primarily due to a decrease in the outflow of funds used for capital expenditures.

Additionally, d uring the six months ended June 30, 2022, the Company had net cash outflows of $6,389,000 related to the acquisition of STS.

Net cash provided by financing activities for the six months ended June 30, 2023  decreased by 

$45,000 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 

six month period ended June 30, 2022 .

During the six months ended June 30, 2023 , as part of our 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds of $11,100,000 and $9,160,000, 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 $20,408,000.

For the three and six months ended June 30, 2023 and 2022 , we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity.

As of June 30, 2023 , we had cash and cash equivalents from continuing operations of 

$2,784,000 and a working capital deficit of $1,692,000 , 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.

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.

As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions.

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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 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 .

As of and for the six months ended June 30, 2023 , we had a working capital deficit from continuing operations of $1,692,000  and a loss from continuing operations of $23,795,000 .

Our cash increased by $316,000  for the six months ended June 30, 2023 primarily due to external financing which was offset by the loss from continuing operations of $23,795,000 . 

As described in NOTE 13 - SUBSEQUENT EVENTS to the financial statements included in Item 1 hereof, the Company received aggregate gross proceeds of approximately $10,997,000 as a result of a warrant exercise on July 25, 2023.

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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

On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS.

The acquisition included total consideration of 

$12,799,000  including;

cash consideration of $6,500,000, 798,666 shares of the Company’s common stock, valued at $2,000,000, 

$1,001,000 related to an earnout based on the achievement of certain performance metrics, 

$1,298,000 contingent on the closing of a future contract and a $2,000,000 note.

As a result of the transaction, STS has become a wholly-owned subsidiary of the Company. 

2023 Promissory Notes with Warrants

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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.

As of June 30, 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