Rekor Systems, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ( Marcum LLP , PCAOB ID 688 ) 53 Consolidated Balance Sheets as of December 31, 2023 and 2022 55 Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 56 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2023 and 2022 57 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 58 Notes to Consolidated Financial Statements 59 52 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Rekor Systems, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Rekor Systems, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant losses and may need to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit s . We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 53 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Critical Audit Matter – Going Concern As part of our audit of the Company ’ s financial statements, a matter arose that was communicated to the audit committee and is considered to be a critical audit matter. Critical audit matters are those matters that, in our professional judgment, were of most significance in our audit of the current period's financial statements and are therefore included in this report. The following matter was identified as a critical audit matter due to the significant judgment by management in determining whether substantial doubt about the entity's ability to continue as a going concern exists. During the course of our audit, we identified conditions and events that raise substantial doubt about the Company ’ s ability to continue as a going concern within one year after the date that the financial statements are issued. These conditions include, but are not limited to, ongoing losses from operations, negative cash flows from operating activities, and an accumulated deficit. The Company's financial statements disclose information about these conditions and management's plans to mitigate them, which include efforts to secure additional funding and implement strategic initiatives intended to improve the Company's operational efficiency and revenue generation. We devoted significant audit attention to the aforementioned conditions and the related disclosures in the financial statements. Our audit procedures included, among other things, evaluating the adequacy of the related disclosures and the application of accounting principles generally accepted in the United States of America in the assessment of the Company's ability to continue as a going concern. We also assessed the feasibility of management's plans to mitigate the substantial doubt and the likelihood that such plans would be effectively implemented within the going concern assessment period. The process of evaluating the impacts of these conditions and management's mitigation plans involved a high degree of auditor judgment and an increased extent of audit effort. The conclusion regarding the existence of substantial doubt about the Company's ability to continue as a going concern has been appropriately disclosed in Note 1 to the financial statements. The audit procedures applied in the area of management ’ s going concern assessment, relative to the Company's financial condition and prospects, were determined to be a matter of most significance in the audit and therefore is considered a critical audit matter. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2019 East Hanover, NJ March 25, 2024 54 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) December 31, 2023 December 31, 2022 ASSETS Current assets Cash and cash equivalents $ 15,385 $ 1,924 Restricted cash and cash equivalents 328 254 Accounts receivable (net of allowance for credit losses of $ 101 and $ 69 at December 31, 2023 and 2022, respectively) 4,955 3,238 Inventory 3,058 1,986 Note receivable, current portion 340 340 Other current assets 1,270 1,202 Current assets of discontinued operations - 331 Total current assets 25,336 9,275 Long-term assets Property and equipment, net 13,188 16,733 Right-of-use operating lease assets, net 9,584 9,662 Right-of-use financing lease assets, net 1,989 - Goodwill 20,593 20,593 Intangible assets, net 17,239 21,299 Note receivable, long-term 482 822 SAFE investment - 2,005 Deposits 3,740 3,451 Total long-term assets 66,815 74,565 Total assets $ 92,151 $ 83,840 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses 5,139 5,963 Notes payable, current portion 1,000 1,000 Notes payable, related party - 1,000 Loans payable, current portion 75 106 Lease liability operating, short-term 1,261 1,069 Lease liability financing, short-term 547 - Contract liabilities 3,604 3,044 Other current liabilities 5,610 2,772 Current liabilities of discontinued operations - 490 Total current liabilities 17,236 15,444 Long-term liabilities Notes payable, long-term 1,000 2,000 2023 Promissory Notes, net of debt discount of $ 1,012 2,988 - 2023 Promissory Notes - related party, net of debt discount of $ 2,149 6,351 - Series A Prime Revenue Sharing Notes, net of debt discount of $ 447 9,553 - Series A Prime Revenue Sharing Notes - related party, net of debt discount of $ 223 4,777 - Loans payable, long-term 273 349 Lease liability operating, long-term 13,445 14,237 Lease liability financing, long-term 1,057 - Contract liabilities, long-term 1,449 1,005 Deferred tax liability 65 52 Other long-term liabilities 587 1,416 Total long-term liabilities 41,545 19,059 Total liabilities 58,781 34,503 Commitments and contingencies (note 13) Stockholders' equity 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 December 31, 2023 and December 31, 2022, respectively. No preferred stock was issued or outstanding as of December 31, 2023 or 2022, respectively. - - Common stock, $ 0.0001 par value; authorized; 100,000,000 shares; issued: 69,273,334 , shares at December 31, 2023 and 54,446,602 at December 31, 2022; outstanding: 69,176,826 shares at December 31, 2023 and 54,405,080 at December 31, 2022 7 5 Treasury stock - at cost, 96,508 and 41,522 shares as of December 31, 2023 and 2022, respectively ( 522 ) ( 417 ) Additional paid-in capital 232,568 202,747 Accumulated deficit ( 198,683 ) ( 152,998 ) Total stockholders’ equity 33,370 49,337 Total liabilities and stockholders’ equity $ 92,151 $ 83,840 The accompanying notes are an integral part of these consolidated financial statements. 55 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data) Year ended December 31, 2023 2022 Revenue $ 34,933 $ 19,920 Cost of revenue, excluding depreciation and amortization 16,499 10,890 Operating expenses: General and administrative expenses 27,038 26,612 Selling and marketing expenses 7,347 8,329 Research and development expenses 18,271 18,616 Depreciation and amortization 7,894 6,422 Goodwill impairment - 34,835 Total operating expenses 60,550 94,814 Loss from continuing operations ( 42,116 ) ( 85,784 ) Other income (expense): Gain on extinguishment of debt 527 - Gain on the sale of business - 2,643 Interest expense, net ( 3,596 ) ( 21 ) Other expense, net ( 468 ) ( 1,279 ) Total other income (expense) ( 3,537 ) 1,343 Loss before income taxes ( 45,653 ) ( 84,441 ) (Provision) benefit for income taxes ( 32 ) 987 Net loss from continuing operations ( 45,685 ) ( 83,454 ) Net income from discontinued operations - 339 Net loss $ ( 45,685 ) $ ( 83,115 ) Loss per common share from continuing operations - basic and diluted ( 0.72 ) ( 1.68 ) Earnings per common share discontinued operations - basic and diluted - 0.01 Loss per common share - basic and diluted $ ( 0.72 ) $ ( 1.67 ) Weighted average shares outstanding Basic and diluted 63,168,299 49,807,475 The accompanying notes are an integral part of these consolidated financial statements. 56 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (Dollars in thousands, except share data) Shares of Common Stock Common Stock Shares of Treasury Stock Treasury Stock at Cost Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Equity Balance as of December 31, 2021 43,987,896 $ 4 19,361 $ ( 319 ) $ 171,285 $ ( 69,883 ) $ 101,087 Stock-based compensation - - - - 6,616 - 6,616 Issuance of common stock pursuant to at the market offering, net 9,019,062 1 - - 22,753 - 22,754 Issuance upon exercise of stock options 99,970 - - - 93 - 93 Issuance upon vesting of restricted stock units 521,647 - - - - - - Shares withheld upon vesting of restricted stock units ( 22,161 ) - 22,161 ( 98 ) - - ( 98 ) Shares issued as part of the STS Acquisition 798,666 - - - 2,000 - 2,000 Net loss - - - - - ( 83,115 ) ( 83,115 ) Balance as of December 31, 2022 54,405,080 $ 5 41,522 $ ( 417 ) $ 202,747 $ ( 152,998 ) $ 49,337 Stock-based compensation - - - - 4,352 - 4,352 Issuance upon exercise of stock options 141,166 - - - 158 - 158 Issuance upon vesting of restricted stock units 903,485 - - - - - - Fair value allocated to warrants with 2023 Promissory Notes - - - - 5,125 - 5,125 Shares withheld upon vesting of restricted stock units ( 54,986 ) - 54,986 ( 105 ) - - ( 105 ) Issuance upon exercise of Series A warrants 36,375 - - - 32 - 32 Issuance of common stock upon exercise of pre-funded warrants 772,853 - - - 1 1 Net proceeds from 2023 Registered Direct Offering 6,100,000 1 - - 9,158 9,159 Issuance upon exercise of 2023 Registered Direct Offering Warrants 6,872,853 1 - - 10,995 10,996 Net loss - - - - - ( 45,685 ) ( 45,685 ) Balance as of December 31, 2023 69,176,826 $ 7 96,508 $ ( 522 ) $ 232,568 $ ( 198,683 ) $ 33,370 The accompanying notes are an integral part of these consolidated financial statements. 57 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year ended December 31, 2023 2022 Cash Flows from Operating Activities: Net loss from continuing operations $ ( 45,685 ) $ ( 83,454 ) Net income from discontinued operations - 339 Net loss ( 45,685 ) ( 83,115 ) Adjustments required to reconcile net loss to net cash used in operating activities: Bad debt expense 160 86 Depreciation 3,517 2,359 Amortization of right-of-use financing lease asset 317 - Non-cash operating lease expense 727 362 Provision (benefit) for deferred income taxes 13 ( 987 ) Stock-based compensation 4,352 6,616 Amortization of debt discount 1,991 2 Amortization of intangible assets 4,060 4,063 Goodwill impairment - 34,835 Impairment of SAFE Agreement 101 - Loss (gain) due to the remeasurement of the STS Earnout and Contingent Consideration, net 384 ( 883 ) Gain on the sale of property and equipment ( 28 ) - Gain on the sale of ATSE - ( 2,643 ) Gain on extinguishment of debt ( 527 ) - Changes in operating assets and liabilities: Accounts receivable ( 1,877 ) 729 Inventory ( 687 ) 209 Other current assets 144 331 Deposits ( 495 ) ( 292 ) Accounts payable, accrued expenses and other current liabilities 1,600 ( 2,229 ) Contract liabilities 1,004 587 Operating lease liability ( 1,249 ) 239 Net cash used in operating activities - continuing operations ( 32,178 ) ( 40,070 ) Net cash (used in) provided by operating activities - discontinued operations ( 449 ) 458 Net cash used in operating activities ( 32,627 ) ( 39,612 ) Cash Flows from Investing Activities: SAFE Investment - ( 755 ) Capital expenditures ( 1,388 ) ( 2,990 ) Down payment on capital expenditures - ( 1,181 ) Proceeds from the sale of property and equipment 177 - Cash paid for STS acquisition, net - ( 6,389 ) Proceeds from the Roker SAFE 1,481 - Proceeds from the sale of ATSE, net - 3,051 Net cash provided by (used in) investing activities - continuing operations 270 ( 8,264 ) Net cash used in investing activities - discontinued operations - ( 125 ) Net cash provided by (used in) investing activities 270 ( 8,389 ) Cash Flows from Financing Activities: Net proceeds 2022 Promissory Notes - related party, exchanged for 2023 Promissory Notes - related party 400 1,000 Payment of notes payable - ( 79 ) Proceeds from notes receivable 340 198 Payments related to financing leases ( 702 ) - Net proceeds from exercise of options 158 93 Net proceeds from exercise of the warrants associated with series A preferred stock 32 - Net proceeds from Series A Prime Revenue Sharing Notes 9,553 - Net proceeds from Series A Prime Revenue Sharing Notes - related party 4,777 - Net proceeds from 2023 Promissory Notes 4,000 - Net proceeds from 2023 Promissory Notes - related party 7,100 - Net proceeds from 2023 Registered Direct Offering 9,159 - Net proceeds from the exercise of the warrants associated to 2023 Registered Direct Offering 10,996 - Net proceeds from the exercise of the pre-funded warrants 1 - Repayments of loans payable ( 107 ) - Net proceeds from at-the-market agreement - 22,754 Repurchases of common stock ( 105 ) ( 98 ) Net cash provided by financing activities 45,602 23,868 Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations 13,694 ( 24,466 ) Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations ( 449 ) 333 Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents 13,245 ( 24,133 ) Cash, cash equivalents and restricted cash and cash equivalents at beginning of the period 2,468 26,601 Cash, cash equivalents and restricted cash and cash equivalents at end of the period $ 15,713 $ 2,468 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents at end of the period - continuing operations $ 15,385 $ 1,924 Restricted cash and cash equivalents at end of the period - continuing operations 328 254 Cash and cash equivalents at end of the period - discontinued operations - 290 Cash, cash equivalents and restricted cash and cash equivalents at end of the period $ 15,713 $ 2,468 The accompanying notes are an integral part of these consolidated financial statements. 58 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Rekor Systems, Inc. (“Rekor”) was formed in February 2017. The consolidated financial statements include the accounts of Rekor, the parent company, and its wholly-owned subsidiaries Rekor Recognition Systems, Inc., Waycare Technologies Inc. and Waycare Technologies Ltd. (collectively, "Waycare") and Southern Traffic Services, Inc. ("STS") (collectively, the “Company”). The Company stands at the forefront of the roadway intelligence sector, revolutionizing public safety, urban mobility, and transportation management on a global scale. The Company's vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities. The Company works towards this vision by collecting, connecting, and organizing the world’s mobility data, and making it accessible and useful to its customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting. 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. On 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. Basis of Consolidation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the accounting rules under Regulation S- X, as promulgated by the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. 59 Table of Contents Liquidity and Going Concern Management has assessed going concern uncertainty to determine whether there is sufficient cash on hand, together with expected capital raises and working capital, to assure operations for a period of at least one year from the date these consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management has considered 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 and negative operating cashflows since its inception and has relied on external sources of financing to support the cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products and services, development of new products and services and marketing efforts associated with these existing and new products and services. As of and for the year ended December 31, 2023, the Company had working capital from continuing operations of $ 8,100,000 and a loss from continuing operations of $ 45,685,000 . Our cash increased by $ 13,245,000 for the year ended December 31, 2023 primarily due to net cash provided by financing acti vities of $ 45,602,000 which was offset by the net cash used in operating activities of $ 32,627,000 . 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 its current level of operations for the next twelve months following the issuance of these consolidated financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company's ability to generate positive operating results and execute its business strategy will depend on (i) its ability to continue the growth of its customer base, (ii) its ability to continue to improve its quarterly financial metrics such as net loss and cash used from operating activities (iii) the continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with investors, lenders and other financial intermediaries, (v) its ability to maintain timely collections from existing customers, and (vi) the ability to scale its business processes. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results. Rounding Dollar amounts, except per share data, in the notes to these consolidated financial statements are rounded to the closest $1,000. Functional Currency The U.S. dollar (“U.S. dollar” or “$“) is the currency of the primary economic environment in which the operations of the Company is conducted. Substantial revenues and a substantial portion of the operational costs are denominated in U.S. dollars. Accordingly, the functional currency of the Company is the U.S. dollar. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. For non-U.S. dollar transactions and other items in the financial statements, the following exchange rates are used: (i) for transactions – exchange rates at transaction dates or average exchange rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation and amortization) – historical exchange rates. Currency transaction gains and losses are presented in other expense, net on the consolidated statement of operations. The currency transaction gain for the year ended December 31, 2023 and 2022 was $ 55,000 and $ 306,000 , respectively. 60 Table of Contents Concentration of Risk The Company deposits its temporary cash investments with highly rated quality 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 December 31, 2023 , and 2022 , the Company had deposits, including restricted cash, totalin g $ 15,713,000 and $ 2,468,000 , respective ly, in multiple U.S. financial institutions and one Israeli financial institution. For the year ended December 31, 2023 , Customer A accounted for 18 % of the Company's total revenues. For the year ended December 31, 2022 no customer accounted for more than 10% of the Company's total revenue. As of December 31, 2023 Customer A and Customer B accounted for 22 % and 13%, respectively, of the Company's consolidated accounts receivable balance. As of December 31, 2022 , no single customer accounted for more than 10% of the Company's consolidated accounts receivable balance. 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. Restricted cash and cash equivalents for these client jurisdictions as of December 31, 2023 and 2022 were $ 328,000 and $ 254,000 , respectively, and correspond to equal amounts of related liabilities. Accounts Receivable and Allowance for Credit Losses Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its clients’ financial condition, and the Company generally does not require collateral. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. Unbilled accounts receivables of $ 946,000 and $ 935,000 were included in accounts receivable, net, in the consolidated balance sheets as of December 31, 2023 and December 31, 2022 , respectively. The Company maintains an allowance for credit losses at an amount estimated to be sufficient to cover the risk of collecting less than full payment of the receivables. The Company estimates losses on receivables based on expected losses, including our historical experience of actual losses. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. At each balance sheet date, the Company evaluates its receivables and will assess the allowance for credit losses based on specific customer collection issues and historical write-off trends. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. 61 Table of Contents Note Receivables In connection with the sale of its former TeamGlobal subsidiaries in June 2020, the Company received a $1,700,000, five and a half year promissory note due December 2025, that carries an interest rate of 4 % and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note began in 2021. Based on the general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximated the current market rate. The remaining balance due from TeamGlobal as of December 31, 2023 and 2022 , was $ 822,000 and $ 1,162,000 , respectively and is presented as part of notes receivable, current portion and note receivable, long-term on the consolidated balance sheets. Inventory Inventory principally consists of parts and finished goods held temporarily until installed for service. The Company regularly evaluates its ability to realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, estimated current and future market values and new product introductions. Inventory is valued at the lower of cost or net realizable value. The cost is determined by the first -in, first -out (“FIFO”) method. Accounts Payable, Accrued and Other Current Liabilities As of December 31, 2023 and 2022 , amounts owed to related parties of $ 105,000 and $ 253,000 were presented as part of accounts payable and accrued expenses on the consolidated balance sheets. A summary of other current liabilities is as follows (in thousands): December 31, 2023 December 31, 2022 Payroll and payroll related 2,824 2,483 Right of offset to restricted cash 328 243 STS Contingent Consideration 1,800 - Other 658 46 Total $ 5,610 $ 2,772 62 Table of Contents Property and Equipment Property and equipment are stated at cost or fair value at acquisition date for assets obtained through business combinations, less accumulated depreciation. Depreciation expense is presented as part of depreciation and amortization on the consolidated statements of operations. Depreciation is recorded on a straight-line basis over the following estimated lives: Class of assets Useful life (in years) Furniture and fixtures 2 - 10 Office equipment 2 - 5 Leasehold improvements Shorter of asset life or lease term Automobiles 3 - 5 Roadway monitoring systems 3 - 5 Repairs and maintenance are expensed as incurred. Expenditures for additions, improvements and replacements are capitalized. The Company tests its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Recoverability of property and equipment is measured by comparing the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the sum of the expected undiscounted cash flow is less than the carrying amount of the asset, the Company recognizes an impairment loss, which is the excess of the carrying amount over the fair value of the asset, using the expected future discounted cash flows. As of December 31, 2023 and 2022 , the Company did not recognize an impairment loss on its property and equipment. Deposits Deposits consist of cash payments made by the Company related to security deposits for leased assets and deposits on property and equipment which the Company has not yet received. Research and Development Costs Research and development costs to develop software to be sold, leased or marketed are expensed as incurred up to the point of technological feasibility for the related software product. There were no capitalized internally developed software costs not yet placed in service as of December 31, 2023 and 2022 , respectively. 63 Table of Contents Intangible Assets Intangible assets include capitalized internally developed software and amounts recognized in connection with acquisitions, including customer relationships, technology and marketing related assets. Intangible assets, other than software development costs, are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. Amortization expense related to intangible assets is presented as part of depreciation and amortization on the consolidated statements of operations. As of December 31, 2023 and 2022, the Company did not recognize an impairment loss on its intangible assets. Leases The Company accounts for its leases in accordance with Accounting Standard Codification (“ASC”) Topic 842, Leases ("ASC 842" ). The standard provides several optional practical expedients for use in transition. The Company elected to use what the Financial Accounting Standard Board (“FASB”) has deemed the “package of practical expedients,” which allows the Company not to reassess the Company’s previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. ASU 2016 - 02 also provided several optional practical expedients for the ongoing accounting for leases. The Company has elected the short-term lease recognition exemption for all leases that qualify, meaning that for leases with terms of twelve months or less, the Company will not recognize right-of-use ("ROU") assets or lease liabilities on the Company’s consolidated balance sheets. Additionally, the Company has elected to use the practical expedient to not separate lease and non-lease components for leases of real estate, meaning that for these leases, the non-lease components are included in the associated ROU asset and lease liability balances on the Company’s consolidated balance sheets. The Company determines if an arrangement contains a lease and the classification of that lease, if applicable, at inception. Operating leases are included in right-of-use operating lease assets, net, lease liabilities operating, short-term and lease liabilities operating, long-term, in the consolidated balance sheets. Financing leases are included in right-of-use financing lease assets, net, lease liabilities financing, short-term and lease liabilities financing, long-term, in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments under the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determined the incremental borrowing rate for each lease using the Company’s current borrowing rate, adjusted for various factors including level of collateralization and term to align with the terms of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. Certain of the Company’s leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain the Company will exercise that option. An option to terminate is considered unless it is reasonably certain the Company will not exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease. 64 Table of Contents Business Combination Management conducts a valuation analysis on the tangible and intangible assets acquired and liabilities assumed at the acquisition date thereof. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company allocates a portion of the purchase price to the fair value of identifiable intangible assets. The fair value of identifiable intangible assets is based on a detailed valuation that uses information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. Goodwill The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. Goodwill is not amortized but rather subject to a periodic impairment testing on an annual basis. The Company will assess goodwill for impairment annually on October 1st of each year, 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 will perform a qualitative assessment, to determine its fair value which includes an evaluation of relevant events and circumstances, including macroeconomic, industry and market conditions, the Company's overall financial performance, and trends in the value of the Company's common stock. During the year ended December 31, 2023, the Company did not recognize any impairment to goodwill. During the third quarter of 2022, the Company experienced a significant decline in its market capitalization, which management deemed a triggering event related to goodwill. As a result, the Company performed an interim impairment assessment as of September 30, 2022, and determined that as of the reporting date the Company had an impairment related to its goodwill in the amount of $ 34,835,000 . As of December 31, 2022, the Company did not identify any events that would cause it to assess goodwill for further impairment. The Company utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of the reporting unit. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon the reporting unit's weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value of Financial Instruments section below. Key assumptions used in the market-based approach included the selection of appropriate peer group companies and the associated valuation multiples. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result. 65 Table of Contents Revenue Recognition The Company derives its revenues primarily from the licensing and sale of its roadway data and traffic management product and service offerings. These offerings include a mixture of data collection, implementation, engineering, customer support and maintenance services, as well as software and hardware. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: ● Identification of the contract, or contracts, with a customer ● Identification of the performance obligations in the contract ● Determination of the transaction price ● Allocation of the transaction price to the performance obligations in the contract ● Recognition of revenue when, or as, performance obligations are satisfied 66 Table of Contents The following table presents a summary of revenue (dollars in thousands): Year ended December 31, 2023 2022 Recurring revenue $ 20,755 $ 13,091 Product and service revenue 14,178 6,829 Total revenue $ 34,933 $ 19,920 Information about the Company’s revenue in different geographic regions, which is attributable to the Company’s operations located primarily in the United States and other countries is as follows (dollars in thousands): Year ended December 31, 2023 2022 United States $ 32,386 $ 17,889 Other 2,547 2,031 Total revenue $ 34,933 $ 19,920 For the year ended December 31, 2023 , except for the United States, total revenue in any single country was less than 10% of consolidated revenue. 67 Table of Contents Revenues Recurring revenue Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue. 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. Recurring revenues are generated through the Company’s Software-as-a-Service ("SaaS") model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The contracts with customers are generally for a term of one to five years. The payments for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these arrangements ratably over the term of the contractual agreement. The Company also currently receives recurring revenues under contracts entered into using a subscription model for data collection services and bundled hardware and software over a period. Payments for these services and subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing, through a web server, access to the Company’s software solutions, a self-managed database, and a cross-platform application programming interface. The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the Company’s solutions over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, any fixed consideration related to the arrangement is generally recognized as recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided. eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software which can be purchased online and activated through a digital key. The Company's contracts with customers are generally for a term of one month with automatic renewal each month. The Company invoices and receives fees from its customers monthly. Customer support revenue is associated with perpetual licenses and long-term subscription arrangements and consists primarily of technical support and product updates. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract term. The customer benefits evenly throughout the contract period from the guarantee that the customer support resources and personnel will be available to them. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with a long-term license for software. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such licenses for the same duration of time. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the customer support obligation, in line with how the Company believes services are provided. 68 Table of Contents Product and service revenue Product and service revenue is defined as the Company’s implementation revenue, perpetual license sales, hardware sales, engineering services and contactless compliance revenue. Implementation revenue is recognized when the Company provides implementation or construction services to its customers. These services involve a fee for the implementation services and are typically associated with the sale of the Company’s data collection services, software and hardware. The Company’s implementation revenue is recognized over time as the implementation is completed. In addition to 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. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and has significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer. The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company provides hardware installation services to customers which range from one to six months. The revenue related to the installation component is recognized over time as the implementation is completed. Contactless compliance revenues reflect arrangements to provide hardware systems and services that identify uninsured motor vehicles, notify owners of non-compliance through a diversion citation, and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of diversion citations collected by the relevant jurisdiction. The Company also generates revenue through its engineering services. These services are provided at the request of its customers and the revenue related to these services is recognized over time as the service is completed. 69 Table of Contents Revenue by Customer Type The following table presents a summary of revenue by revenue type (dollars in thousands): Year ended December 31, 2023 2022 Urban mobility $ 16,773 $ 7,692 Transportation management 3,286 2,787 Public safety 14,874 9,441 Total revenue $ 34,933 $ 19,920 Urban mobility Urban mobility revenue consists of revenue derived from the Company's roadway data aggregation activities. These activities can include the use of software applications that are part of the Rekor Discover™ platform, the primary application being Rekor’s count, class & speed application. The Company initiated this platform in June of 2022 and is in the process of deploying it for its existing customers as well as initiating deployments for new customers. The application fully automates the aggregation of Federal Highway Administration (“FHWA”) 13 -bin vehicle classification, speed, and volume data. Revenues associated with the deployment of other traffic sensors, traffic studies, or construction associated with traffic data collection are also part of data aggregation revenue, which is generated through both recurring pay-for-data contracts and hardware sales with a recurring software maintenance component. Transportation management Transportation management revenue is associated with the Rekor Command™ platform and the associated applications underneath the platform. These provide traffic operations and traffic management centers with support through actionable, real-time incident reports integrated into a cross-agency communication and response system. Revenue is generated through contracts that include an upfront as well as recurring component. Public Safety Public safety revenue consists of licensing of the Rekor Scout™ platform, licensing of Rekor CarCheck™ API, licensing of Rekor’s vehicle recognition software, as well as systems deployed for security, contactless compliance and public safety. Revenue is generated through recurring and perpetual license sales as well as one -time hardware sales. 70 Table of Contents Performance obligations The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation. 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 December 31, 2023 the Company had approximately $ 26,390,000 of remaining performance obligations not yet satisfied or partially satisfied related to continuing operations. The Company expects to recognize approximately 71 % 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. Contract liabilities When the Company advance bills clients prior to providing services, revenue will generally be earned and recognized within the next month to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the 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 year ended December 31, 2023 , were not materially impacted by any other factors. Contract liabilities as of December 31, 2023 and December 31, 2022 , were $ 5,053,000 and $ 4,049,000 , respectively. All contract liabilities as of December 31, 2023 and December 31, 2022 , were attributable to continuing operations. During the year ended December 31, 2023 , $ 2,930,000 o f the contract liabilities balance as of December 31, 2022 , was recognized as revenue. The contract liabilities as of December 31, 2023 , are expected to be recognized as revenue during the following years ended December 31, ( dollars in thousands): 2024 $ 3,604 2025 822 2026 396 2027 165 2028 66 Total $ 5,053 Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. As of December 31, 2023 , and 2022 , costs incurred to obtain contracts in excess of one year have been immaterial to date. 71 Table of Contents Advertising The Company expenses all non-direct response advertising costs as incurred. Advertising costs for the years ended December 31, 2023 and 2022 we re $ 231,000 and $ 588,000 , respectively, and are included in selling and marketing expenses in the consolidated statement of operations. Segment Information The Company operates as one operating segment as its chief executive officer, who is our chief operating decision maker ("CODM"), reviews financial information on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. Income Taxes Provision (benefit) for income tax consists of U.S. federal and state income taxes. The Company is required to pay income taxes in certain state jurisdictions. The Company uses the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This method requires an asset and liability approach for the recognition of deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates 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 management believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its net deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. The tax effects of uncertain tax positions are recognized in the consolidated financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized. It is the Company’s accounting policy to account for ASC 740 - 10 related penalties and interest as a component of the income tax provision in the consolidated statements of operations and comprehensive loss. As of December 31, 2023 , and 2022 , the Company’s evaluation revealed no uncertain tax positions that would have a material impact on the financial statements. Equity-Based Compensation The Company recognizes equity-based compensation costs related to all share-based payments, including stock options and restricted stock units (“RSUs”), based on the grant-date fair value of the award on a straight-line basis over the requisite service period, net of actual forfeitures. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The Company accounts for forfeitures as they occur. 72 Table of Contents Fair Value of Financial Instruments The carrying amounts reported in the consolidated balance sheets for accounts receivable, notes receivable and accounts payable approximate fair value as of December 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 and long-term receivables approximates fair value as of December 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. The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 3 inputs. The Company considers its contingent consideration to be Level 3 investments and that the fair value approximates the carrying value. There were no changes in levels during the year ended December 31, 2023 . Earnings (Loss) per Share Basic loss per share or earnings per share ("EPS"), is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and potentially dilutive securities outstanding during the period, except for periods of net loss for which no potentially dilutive securities are included because their effect would be anti-dilutive. Potentially dilutive securities consist of common stock issuable upon exercise of stock options or warrants using the treasury stock method. Potentially dilutive securities issuable upon conversion of the Series A Preferred Stock are calculated u sing the if-converted method. The Company calculates basic and diluted loss per common share using the two -class method. Under the two -class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. Treasury shares are presented as a reduction of equity, at their cost to the Company. N ew Accounting Pronouncements Effective in the Current Period In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016 - 13 Financial Instruments-Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments (“ASU 2016 - 13” ) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016 - 13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016 - 13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. Upon adoption of the new standard, the Company began recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016 - 13 and based on the Company’s analysis of ASU 2016 - 13 and the historical, current and expected credit quality of the Company’s customers, ASU 2016 - 13 did not have a material impact on its consolidated statements of operations and balance sheets. Recently Issued Accounting Pronouncements In November 2023, FASB issued ASU 2023 - 07 - Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic 280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the CODM and included within the reported measure(s) of a segment's profit or loss, the amount and composition of any other segment items, the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment's profit or loss to assess performance and decide how to allocate resources. The guidance is effective for our annual period beginning January 1, 2025, and interim periods thereafter, applied retrospectively with early adoption permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures. In December 2023, the FASB issued ASU 2023 - 09 - Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures, which requires public entities to provide greater disaggregation within their annual rate reconciliation, including new requirements to present reconciling items on a gross basis in specified categories, disclose both percentages and dollar amounts, and disaggregate individual reconciling items by jurisdiction and nature when the effect of the items meet a quantitative threshold. The guidance also requires disaggregating the annual disclosure of income taxes paid, net of refunds received, by federal (national), state, and foreign taxes, with separate presentation of individual jurisdictions that meet a quantitative threshold. The guidance is effective for the Company's annual periods beginning January 1, 2025 on a prospective basis, with a retrospective option, and early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures. 73 Table of Contents NOTE 2 – BUSINESS ACQUISITIONS STS Acquisition On June 17, 2022, the Company completed its acquisition of STS by acquiring 100 % of the issued and outstanding capital stock of STS. The acquisition included total consideration of $ 12,799,000 including; cash consideration of $ 6,500,000 , $ 1,001,000 related to an earnout based on the achievement of certain performance metrics ("STS Earnout") and $ 1,298,000 contingent on the closing of a future contract ("STS Contingent Consideration"), 798,666 shares of the Company’s common stock, valued at $ 2,000,000 , and a $ 2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company. The STS Contingent Consideration in the amount of $2,000,000 will be paid in cash if on or prior to October 30, 2024, the Company enters into a multi-year extension of the Georgia Department of Transportation Contract on substantially similar terms and conditions as the contract being extended. The STS Contingent Consideration shall be payable within 30 days of the effectiveness of the extension of the Georgia Department of Transportation Contract. STS Contingent Consideration is presented as part of other non-current liabilities on the consolidated balance sheets and is remeasured on a quarterly basis. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Contingent Consideration at the time of acquisition and determined the fair value to be $ 1,298,000 . For the year ended December 31, 2023 and 2022 the Company recognized $ 384,000 and $ 118,000 , respectively, in expense related to the remeasurement of the STS Contingent Consideration which is presented with general and administrative expenses on the consolidated statement of operations . The Company was to pay the STS Earnout payment, up to $ 2,000,000 , within 60 days of December 31, 2022 based on the STS EBITDA for the twelve month period ended December 31, 2022. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Earnout at the time of acquisition and determined the fair value to be $ 1,001,000 . As of December 31, 2022, it was determined that the STS Earnout was not achieved and thus the Company recognized a gain related to the remeasurement of the STS Earnout of $ 1,001,000 . The gain related to the remeasurement of the STS Earnout is presented with general and administrative expenses on the consolidated statement of operations . 74 Table of Contents The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of STS occurred on June 17, 2022, the results of operations for STS from the date of acquisition have been included in the Company’s consolidated statement of operations for the years ended December 31, 2023 and 2022. The table below shows the breakdown related to the purchase price allocation for the acquisition (dollars in thousands): Cash paid $ 6,500 Common stock issued 2,000 Earnout consideration 1,001 Contingent consideration 1,298 Note consideration 2,000 Total consideration $ 12,799 Assets Cash and cash equivalents $ 111 Inventory 295 Accounts receivable 2,761 Other current assets 159 Customer relationships 3,400 Tradename 700 Property and equipment 5,510 Right-of-use assets 399 Total assets acquired $ 13,335 Liabilities Accounts payable and accrued expenses $ 880 Contract liabilities 190 Other current and non-current liabilities 43 Lease liability 399 Deferred tax liability 1,001 Total liabilities assumed $ 2,513 Fair value of identifiable net assets acquired $ 10,822 Goodwill $ 1,977 The customer relationships and tradename acquired by the Company as part of the acquisition has an estimated useful life of 15 and five years, respectively, and are presented as part of intangible assets, net on the consolidated balance sheets. 75 Table of Contents Operations of Combined Entities The following unaudited pro forma combined financial information gives effect to the acquisition of STS as if it were consummated as of January 1, 2022. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2022 ( the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods. Year ended December 31, 2023 2022 (Dollars in thousands, except per share data) Total revenue from continuing operations $ 34,933 $ 25,805 Net loss from continuing operations $ ( 45,685 ) $ ( 84,254 ) Basic and diluted loss per share continuing operations $ ( 0.72 ) $ ( 1.68 ) Basic and diluted number of shares 63,168,299 50,184,867 ATD Acquisition On January 2, 2024 the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “Purchase Agreement”), dated as of the January 2, 2024, by and among the Company, ATD and All Traffic Holdings, LLC. ATD is engaged in the business of advanced traffic data collection. Under the terms of the Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”). See NOTE 17 – SUBSEQUENT EVENTS for additional information on the ATD Acquisition. 76 Table of Contents NOTE 3 – INVESTMENTS Investments in Unconsolidated Companies In 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own 19.9 % of the units of Global Public Safety. This equity investment does not have a readily determinable fair value and the Company reports this investment at cost, less impairment. As of December 31, 2023 and 2022 the investment in Global Public Safety had a value of $ 0 . There were no distributions or earnings received from this investment in the year ended December 31, 2023 and 2022 . Roker In June 2020, the Company announced a joint venture in which the Company would have a 50 % equity interest in Roker Inc. (“Roker”). In the third quarter of 2020 and the first quarter of 2021, the Company contributed $ 75,000 for its 50 % equity interest for a total investment of $ 150,000 . This investment is accounted for under the equity method. As of December 31, 2023 and 2022 the investment in Roker had a value of $ 0 . In 2021, in exchange for $ 1,250,000 the Company entered into a Simple Agreement for Future Equity with Roker (the “Roker SAFE”). In 2022, the Company invested an additional $ 755,000 in the Roker SAFE. The Roker SAFE allows the Company to participate in future equity financings of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company has the option to receive either (i) cash payment equal to the invested amount under the Roker SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the Roker SAFE. The Company’s investment in the Roker SAFE was recorded on the cost method of accounting and included under the Roker SAFE investment on the consolidated balance sheets and is shown as long-term, as it was not readily convertible into cash. During the year ended December 31, 2023, the Company recognized an impairment of $ 101,000 related to the Roker SAFE that is presented as part of general and administrative expenses in the consolidated statements of operations. During the year ended December 31, 2023, the Company entered into an agreement to sell substantially all of the assets of Roker, which initiated a triggering event related to the Company's Roker SAFE agreements. As result of the triggering event the Company received cash proceeds of $ 1,904,000 of which includes $ 423,000 that was held in escrow as of December 31, 2023 and was presented as part of other current assets, net and deposits on the consolidated balance sheets. The Company will receive 50 % of the amount held in escrow on July 25, 2024 and the other 50 % of the amount held in escrow on July 25, 2025. 77 Table of Contents NOTE 4 – DISCONTINUED OPERATIONS ATSE Sale On December 8, 2022, the Company sold its ATSE business, a non-core component, for approximately $ 3,390,000 . The buyer agreed to certain assets and liabilities of the ATSE component for a purchase price of $ 3,390,000 , comprising (i) $ 3,390,000 in cash of which includes $ 339,000 that was held in escrow as of December 31, 2022 and was presented as part of other current assets on the consolidated balance sheets. The table below shows the breakdown related to the sale of ATSE (dollars in thousands): Total assets sold $ 347 Total liabilities assumed 13 Net assets sold 334 Closing costs 413 Cash received $ 3,051 Cash held in escrow 339 Total consideration 3,390 Gain on sale of ATSE $ 2,643 The disposition of ATSE is the result of the Company’s strategic decision to prioritize its core data services business and will result in material changes in the Company’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of ATSE as discontinued operations, including for all prior periods reflected in the consolidated financial statements and these notes. 78 Table of Contents Results of Discontinued Operations Pursuant to ASC Topic 205 - 20, Presentation of Financial Statements - Discontinued Operations , the results of operations from ATSE for the years ended December 31, 2023 and 2022 have been classified as discontinued operations and presented as part of net income from discontinued operations in the accompanying consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets, net of discontinued operations and current and long term liabilities of discontinued operations in the accompanying consolidated balance sheets as of December 31, 2023 and December 31, 2022 . There was no balance sheet information related to our discontinued operations as of December 31, 2023 . The assets and liabilities classified as discontinued operations in the Company's consolidated financial statements as of December 31, 2022 are shown below (dollars in thousands): December 31, 2022 Firestorm ATSE Total ASSETS Current assets Cash and cash equivalents $ - $ - $ - Restricted cash and cash equivalents - 290 290 Accounts receivable, net - 41 41 Inventory - - - Total current assets - 331 331 Long-term assets Property and equipment, net - - - Right-of-use lease assets, net - - - Intangible assets, net - - - Total long-term assets, net - - - Total assets $ - $ 331 $ 331 LIABILITIES Current liabilities Accounts payable and accrued expenses $ 33 $ 68 $ 101 Lease liability, short-term 99 - 99 Other current liabilities - 290 290 Total current liabilities 132 358 490 Long-Term Liabilities Lease liability, long-term - - - Total liabilities $ 132 $ 358 $ 490 There were no operations related to our discontinued operations for the year ended December 31, 2023 . The major components of the discontinued operations, net of tax, are presented in the consolidated statements of operations for the year ended December 31, 2022 are shown below (dollars in thousands): Year ended December 31, 2022 Firestorm ATSE Total Revenue $ - $ 2,360 $ 2,360 Cost of revenue, excluding depreciation and amortization - 1,645 1,645 Operating expenses: General and administrative expenses 1 215 216 Depreciation and amortization - 160 160 Total operating expenses 1 375 376 Net (loss) income from discontinued operations $ ( 1 ) $ 340 $ 339 79 Table of Contents NOTE 5 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information for the years ended December 31, 2023 and 2022 were as follows (dollars in thousands): Year ended December 31, 2023 2022 Cash paid for interest $ 1,648 $ 59 Cash paid for taxes 9 60 Decrease in accounts payable and accrued expenses related to purchases of property and equipment ( 749 ) ( 528 ) (Increase) decrease in accounts payable and accrued expenses related to purchases of inventory ( 550 ) 724 Increase in inventory related to the transfer of property and equipment 935 - Decrease in deposits related to property and equipment received 417 - Non-cash investing activities: Fair market value of shares issued in connection with the acquisition of STS - 2,000 Contingent Consideration in connection with the acquisition of STS - 1,298 Earnout Consideration in connection with the acquisition of STS - 1,001 Note Consideration in connection with the acquisition of STS - 2,000 Deferred tax liabilities resulting from purchase accounting adjustments in connection with the acquisition of STS - 1,001 Loans issued for property and equipment - ( 460 ) Non-cash financing activities: 2022 Promissory Notes exchanged for 2023 Promissory Notes - related party 1,000 - Warrants issued in connection with the 2023 Promissory Notes 1,640 - Warrants issued in connection with the 2023 Promissory Notes - related party 3,485 - New Leases under ASC-842 Right-of-use assets obtained in exchange for new finance lease liabilities 1,837 - Recognition of operating lease - right-of-use lease asset 649 3,508 Lease incentive recognized in current assets - 919 Recognition of operating lease - lease liability $ ( 649 ) $ ( 4,427 ) 80 Table of Contents NOTE 6 – INVENTORY As of December 31, 2023 and 2022 , inventory consisted entirely of the following (dollars in thousands): December 31, 2023 2022 Parts and cameras $ 2,633 $ 1,154 Finished goods 425 832 Total inventory $ 3,058 $ 1,986 81 Table of Contents NOTE 7 – PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following (dollars in thousands): December 31, 2023 2022 Furniture and fixtures $ 1,959 $ 1,959 Office equipment 4,945 3,969 Roadway monitoring systems placed in service 4,928 3,999 Vehicles 2,052 2,539 Leasehold improvements 4,508 4,459 Roadway monitoring systems not yet placed in service 1,305 3,144 Total $ 19,697 $ 20,069 Less: accumulated depreciation ( 6,509 ) ( 3,336 ) Property and equipment, net $ 13,188 $ 16,733 Depreciation related to property and equipment, net for the years ended December 31, 2023 and 2022 was $ 3,517,000 and $ 2,359,000 , respectively, and is presented as part of depreciation and amortization in the accompanying consolidated statements of operations. Information about the Company’s total assets in different geographic regions is as follows (dollars in thousands): December 31, 2023 2022 United States $ 18,036 $ 18,465 Other 1,661 1,604 Accumulated depreciation ( 6,509 ) ( 3,336 ) Total property and equipment, net $ 13,188 $ 16,733 82 Table of Contents NOTE 8 – 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. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments. Lease cost recognized in our consolidated statements of operations is summarized as follows (dollars in thousands): Year ended December 31, 2023 2022 Operating lease cost $ 2,091 $ 2,040 Finance lease cost Amortization of right-of-use assets 317 - Interest on lease liabilities 76 - Finance lease cost 393 - Total lease cost $ 2,484 $ 2,040 For the year ended December 31, 2023, the Company had $ 469,000 in cash payments related to its financing leases prior to the lease commencement date. Other information about lease amounts recognized in our consolidated financial statements is as follows: Year ended December 31, 2023 2022 Weighted-average remaining lease term (years) - operating leases 8.47 9.45 Weighted-average remaining lease term (years) - financing leases 2.84 - Weighted-average discount rate - operating leases 9 % 9 % Weighted-average discount rate - financing leases 9 % - 83 Table of Contents Maturities of operating and financing lease liabilities for continuing operations at December 31, 2023 were as follows (dollars in thousands): Operating Leases Financing Leases 2024 $ 2,516 $ 669 2025 2,529 669 2026 2,410 401 2027 2,352 54 2028 2,388 27 Thereafter 8,795 - Total lease payments 20,990 1,820 Less imputed interest 6,284 216 Maturities of lease liabilities $ 14,706 $ 1,604 84 Table of Contents NOTE 9 – INTANGIBLE ASSETS Goodwill There were no changes to goodwill during the year ended December 31, 2023 . The following summarizes the change in goodwill from December 31, 2021 to December 31, 2022 ( dollars in thousands): December 31, 2021 STS Acquisition Impairment December 31, 2022 Goodwill $ 53,451 $ 1,977 $ ( 34,835 ) $ 20,593 Intangible Assets Subject to Amortization The following summarizes the change in intangible assets from December 31, 2021 to December 31, 2023 (dollars in thousands): December 31, 2021 Additions Amortization December 31, 2022 Additions Amortization December 31, 2023 Intangible assets subject to amortization from continuing operations Customer relationships $ 328 $ 3,400 $ ( 147 ) $ 3,581 $ - $ ( 260 ) $ 3,321 Marketing related 97 700 ( 113 ) 684 - ( 185 ) 499 Technology based 20,304 - ( 3,455 ) 16,849 - ( 3,430 ) 13,419 Internally capitalized software 533 - ( 348 ) 185 - ( 185 ) - Intangible assets subject to amortization from continuing operations $ 21,262 $ 4,100 $ ( 4,063 ) $ 21,299 $ - $ ( 4,060 ) $ 17,239 85 Table of Contents The following provides a breakdown of identifiable intangible assets as of December 31, 2023 and 2022 (dollars in thousands): December 31, 2023 2022 Customer relationships $ 3,861 $ 3,861 Marketing related 1,027 1,027 Technology based 24,107 24,107 Internally capitalized software 1,236 1,236 Total 30,231 30,231 Less: accumulated amortization ( 12,992 ) ( 8,932 ) Identifiable intangible assets from continuing operations, net $ 17,239 $ 21,299 These intangible assets are being amortized on a straight-line basis over their weighted average remaining estimated useful life of 5.6 years. Am ortization expense attributable to continuing operations for the year ended December 31, 2023 and 2022 was $ 4,060,000 and $ 4,063,000 , respectively, and is presented as part of depreciation and amortization in the accompanying consolidated statements of operations. As of December 31, 2023 , the estimated annual amortization expense from continuing operations for each of the next five fiscal years and thereafter is as follows (dollars in thousands): 2024 $ 3,841 2025 3,832 2026 3,019 2027 2,744 2028 1,769 Thereafter 2,034 Total $ 17,239 86 Table of Contents NOTE 10 – DEBT STS Notes On June 17, 2022, pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $ 2,000,000 of notes payable in the form of two unsecured, subordinated promissory notes, each in the principal amount of $ 1,000,000 and bearing an interest rate of 3.0 % per annum, payable quarterly. The notes mature on June 14, 2024 and June 17, 2025, respectively. The aggregate balance of these notes payable was $ 2,000,000 as of December 31, 2022 and is included in notes payable long-term, in the consolidated balance sheets. As of December 31, 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 consolidated balance sheets. Loans Payable As part of its operations the Company enters loans related to purchases of its vehicles. These loans have maturities between 2024 and 2028 and carry interest rates ranging from 0 % to 6.99 %. These loans primarily have equal monthly payments over the life of the respective loan. The loans are presented as part of loans payable, current portion and loans payable long-term on the consolidated balance sheet. 2022 Promissory Notes On December 20, 2022, the Company entered into a Promissory Note Agreement (the “2022 Promissory Notes”) with (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a 10.3 % holder of Common Stock of the Company based on its Schedule 13G filed with the Securities and Exchange Commission on May 20, 2022, pursuant to which the lenders loaned $ 1,000,000 to the Company. During the first quarter of 2023, Robert A. Berman invested an additional $ 400,000 under the same terms as the 2022 Promissory Notes. The lenders were determined to be related parties. No 2022 Promissory Notes remain outstanding, as all 2022 Promissory Notes were exchanged in connection with the private placement of 2023 Promissory Notes described below. 2023 Promissory Notes On January 18, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $ 15,000,000 in aggregate principal amount of senior secured promissory notes (the “2023 Promissory Notes”), and (ii) warrants to purchase, for an exercise price of $ 2.00 per share, up to an aggregate of 7,500,000 shares of common stock of the Company, par value $ 0.0001 per share. In connection with the initial closing on January 18, 2023, the Company issued $ 12,500,000 in aggregate principal amount of 2023 Promissory Notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company of $ 12,500,000 before reimbursement of expenses. See NOTE 14 – STOCKHOLDERS' EQUITY for additional information related to the warrants. 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, the 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. The 2023 Promissory Notes have a maturity date of July 18, 2025 ( the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due. The 2023 Promissory Notes bear an interest rate of 12 % per annum, and the Company will be required to pay interest quarterly during each calendar year through and including the Maturity Date. At any time, the Company may prepay all, or any portion of, the 2023 Promissory Notes by redemption at a price equal to (i) 120 % of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed on or prior to the first anniversary of issuance, (ii) 115 % of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the first anniversary of issuance and on or prior to the second anniversary of issuance, or (iii) 110 % of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the second anniversary of issuance and prior to the Maturity Date (the “Early Redemption Schedule”). The Investors will also have the option of requiring the Company to redeem the 2023 Promissory Notes in accordance with the Early Redemption Schedule if the Company undergoes a fundamental change. The Company determined that the holder redemption and mandatory redemption options would qualify as derivatives and be subject to accounting under ASC Topic 815, Derivatives and Hedging. The Company believes that the fair value associated with the embedded derivatives related to the holder and mandatory redemption rights are inconsequential. The Securities Purchase Agreement contains customary representations and warranties of the Company and the investors. The Company has a material relationship with two of the investors, (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), an affiliate of Arctis Global, LLC, a 11.64 % holder of Common Stock of the Company based on its Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2024. Mr. 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. These lenders were determined to be related parties. Mr. Berman had the 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. In aggregate, such subsequent closings would have resulted 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. This option was not exercised and has expired as of December 31, 2023 . 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 a result of this right, on September 14, 2023, a director designated by Arctis was elected 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. In connection with the Series A Prime Revenue Sharing Notes, the holders of the 2023 Promissory Notes signed a waiver to allow for the issuance of additional debt by the Company. If an event of default under the 2023 Promissory Notes occurs, the investors can elect to redeem the 2023 Promissory Notes for cash in accordance with the Early Redemption Schedule, plus default interest, which accrues at a rate per annum equal to 14 % from the date of an event of default. The warrants issued in connection with the initial closing have an exercise price of $ 2.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder. Subsequent to year-end all of the 2023 Promissory Notes were fully redeemed. See NOTE 17 – SUBSEQUENT EVENTS for additional information related to the redemption of the 2023 Promissory Notes. 87 Table of Contents Series A Prime Revenue Sharing Notes On December 15, 2023, the Company issued $ 15,000,000 in Series A Prime Revenue Sharing Notes. Interest accrues on the Series A Prime Revenue Sharing Notes at a fixed annual rate of 13.25 % and is paid monthly. The entire outstanding principal balance, together with all interest accrued and unpaid is due and payable on the maturity date of December 15, 2026. Debt issuance costs paid in connection with the Series A Prime Revenue Sharing Notes were $ 670,000 and are being amortized as interest expense using a straight-line method over the term of the Series A Prime Revenue Sharing Notes. The Company has a material relationship with Arctis, which invested $ 5,000,000 in connection with the $ 15,000,000 initial closing of the Series A Prime Revenue Sharing Notes. Interest will be paid based on revenue received from an initial pool of “prime” accounts which are related to contracts from customers in five states, each of which has been rated at or above AAA/AA+/Aal for their respective unsecured general obligation debt by nationally recognized credit rating agencies. The Company entered into a base Indenture for the Series A Prime Revenue Sharing Notes as of December 15, 2023 with Argent Institutional Trust Company, as trustee. The Indenture creates a first priority security interest for the benefit of the holders of all subsequent notes issued under the Indenture. The Series A Prime Revenue Sharing Notes rank senior to the Company’s existing and future secured and unsecured debt with respect to the pool of revenue securing the Series A Prime Revenue Sharing Notes. As part of the terms of the Series A Prime Revenue Sharing Notes the Company is required to maintain an interest reserve related to not less than three times the next monthly interest payment. Additionally, there is a sinking fund requirement which states if the three year value of eligible contracts is less than 170 % of the aggregate outstanding principal amount of Series A Prime Revenue Sharing Notes the Company must maintain a cash balance sufficient to amortize the principal amount due on the Series A Prime Revenue Sharing Notes in equal monthly installments by the respective due dates of such series. The amount related to the interest reserve and sinking fund was $ 500,000 as of December 31, 2023 and is held by a third party and is presented as part of deposits on the consolidated balance sheets. The Company is not in default of any requirements as they relate to the Series A Prime Revenue Sharing Notes. The Company may prepay the Series A Prime Revenue Sharing Notes at anytime up until December 15, 2026 by paying a premium ranging from 103 % to 106%. Thereafter, the Series A Prime Revenue Sharing Notes may be prepaid by the Company at par value; provided, however, that the Series A Prime Revenue Sharing Notes may not be redeemed prior to December 15, 2024. Repayment of the Series A Prime Revenue Sharing Notes consisting of all principal, plus any unpaid accrued interest, may also be accelerated by the noteholder upon a change in control or event of default. As of the year ended December 31, 2023, the Company recognized $ 83,000 in interest expense related to the Series A Prime Revenue Sharing Notes. Interest Expense, net The following table presents the interest expense and interest income related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands): Year ended December 31, 2023 2022 Contractual interest $ 1,648 70 Amortization of debt issuance costs 1,991 2 Total interest expense, net 3,639 72 Less: interest income ( 43 ) ( 51 ) Total interest expense, net $ 3,596 $ 21 Schedule of Principal Amounts Due on Debt The principal amounts due for notes payable and loans payable are shown below as of December 31, 2023 (dollars in thousands): 2024 $ 1,074 2025 13,578 2026 15,083 2027 86 2028 27 Thereafter - Total 29,848 Less unamortized financing costs ( 3,831 ) Total notes payable $ 26,017 88 Table of Contents NOTE 11 – INCOME TAXES The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections and the overall prospects of the Company’s business. The provision (benefit) for income taxes for the years ended December 31, 2023 and 2022 consists of the following (dollars in thousands): Year ended December 31, 2023 2022 Federal: Deferred $ 13 $ ( 987 ) Total federal 13 ( 987 ) State: Current 19 - Total state 19 - Provision (benefit) for income taxes $ 32 $ ( 987 ) 89 Table of Contents The components of deferred income tax assets and liabilities are as follows on December 31, 2023 and 2022 (dollars in thousands): Year ended December 31, Deferred tax assets 2023 2022 Net operating loss $ 40,361 $ 29,402 163(j) limitation 3,186 2,158 Lease liabilities 4,085 3,906 Research and development 3,891 4,551 Other 1,646 511 Total gross deferred tax assets 53,169 40,528 Valuation allowance for deferred tax assets ( 46,531 ) ( 35,606 ) Total deferred tax assets $ 6,638 $ 4,922 Deferred tax liabilities: Right-of-use asset ( 2,912 ) ( 895 ) Goodwill and intangibles ( 3,020 ) ( 3,976 ) Fixed assets ( 771 ) ( 103 ) Total gross deferred tax liabilities ( 6,703 ) ( 4,974 ) Net deferred tax liabilities $ ( 65 ) $ ( 52 ) 90 Table of Contents The difference between the income tax provision (benefit) computed at the U.S. Federal statutory rate and the effective tax rate is as follows for the years ended December 31, 2023 and 2022 : Year ended December 31, 2023 2022 U.S. statutory federal rate 21.00 % 21.00 % (Decrease) increase in taxes resulting from: State income tax rate, net of U.S. Federal benefit 4.42 % 3.10 % True-ups 0.70 % 4.20 % Other ( 0.59 )% ( 0.60 )% Valuation allowance ( 25.60 )% ( 26.50 )% Effective tax rate ( 0.07 )% 1.20 % The Company files income tax returns in the United States and various state and foreign jurisdictions. No U.S. Federal, state or foreign income tax audits were in process as of December 31, 2023 . The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the goodwill, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. As of December 31, 2023 , the Company had gross federal and state net operating loss carryforwards of $ 156,392,000 and $ 149,122,000 , respectively. The gross NOLs generated in the years ended December 31, 2023 and 2022 of $ 31,599,000 and $ 54,495,000 , respectively, will be carried forward indefinitely and are subject to the annual 80 percent limitation. As of December 31, 2023 , Rekor had net federal and state net operating loss (“NOL”) carryforwards of $ 33,063,000 and $ 7,298,000 , respectively. The net federal and state NOLs of $ 33,063,000 and $ 7,298,000 , respectively, are scheduled to begin to expire in 2035 and are grandfathered under the Tax Cuts and Jobs Act; thus, these NOLs are not subject to the 80 percent limitation. As of December 31, 2022 , Rekor had gross federal and state net operating loss carryforwards of $ 114,742,000 and $ 106,866,000 , respectively. As of December 31, 2022 , Rekor had net federal and state net operating loss carryforwards of $ 24,096,000 and $ 5,306,000 , respectively. The federal and state net operating loss and credit carryforwards may be subject to significant limitations under Sections 382 and 383 of the Internal Revenue Code ("Code") and similar provisions of state law. These Code sections limit the federal net operating loss and credit carryforwards that may be used in any year in the event of an “ownership change”. A Section 382 “ownership change” generally occurs if one or more shareholders or groups of shareholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three -year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 “ownership changes”. If so, the Company may lose some or all of the tax benefits of its NOLs and tax credits. The extent of such limitations for prior years, if any, has not been determined. For the years ended December 31, 2023 and 2022 , the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax benefit. As a result of the acquisition of STS in 2022, the Company recognized identified definite-lived tangible and intangible asset related to customer relationships, trade names, property and equipment for which the Company received no tax basis due to the stock acquisition. As a result, the Company recorded a deferred tax liability of $ 1,001,000 which increased the Company's goodwill related to the STS acquisition. Due to the overall valuation allowance position of the Company, the deferred tax liability was used to offset the Company's deferred tax asset and thus reducing the total valuation allowance. This impact to the valuation allowance was booked as a tax benefit. The tax benefit of $ 1,001,000 was offset by $ 14,000 of deferred tax expense for the year ended December 31, 2022. 91 Table of Contents NOTE 12 – EMPLOYEE BENEFIT PLAN 401 (k) Plan In 2019, Rekor established the Rekor Systems, Inc. 401 (k) Plan (the “Rekor 401 (k) Plan”), a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan. Employees that satisfied the eligibility requirements became participants in the Rekor 401 (k) Plan. The Company contributes an amount equal to the sum of 100 % of a participant’s elective deferrals that do not exceed 1% of participant’s compensation, plus 50 % of the participant’s elective deferrals that exceed 1% of the participants compensation, but do not exceed 6 % of the participant’s compensation. Employee contributions are fully vested, and matching contributions are subject to a two -year service vesting schedule. Employee Severance Benefits In accordance with the current employment terms with all its employees (Section 14 of the Israeli Severance Pay Law, 1963 ) located in Israel, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee’s full retirement benefit and severance obligation. The Company is relieved from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts funded, as of the respective agreement dates, are not reflected on the Company’s consolidated balance sheet, as the amounts funded are not under the control and management of the Company and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies. The amount of contributions recorded by the Company under these plans during the years ended December 31, 2023 and 2022 we re $ 1,270,000 an d $ 1,338,000 , respectively. 92 Table of Contents NOTE 13 – COMMITMENTS AND CONTINGENCIES From time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. Firestorm Principals On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19 -cv- 07767 -VEC. The Firestorm Principals answered together with counterclaims on February 28, 2020. In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals. Pursuant to the terms of the settlement agreement, the parties have mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the Company will transfer certain Firestorm assets to CrisisRisk Strategies, LLC, make a payment of $ 175,000 , and the Firestorm Principals have agreed to the extinguishment of all rights to enforce their claims for payment with respect to principal and interest on the promissory notes issued in connection with the Company’s acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same. As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities that was presented as discontinued operations. The Company also cancelled warrants to purchase 631,254 shares of common stock, which were issued in connection with the acquisition of Firestorm. H.C Wainwright & Co., LLC In March 2023, the Company entered into an engagement letter with H.C. Wainwright & Co., LLC, ("HCW"), related to a previous capital raise the Company completed in March 2023. That letter agreement contained provisions for both a “tail” fee due to HCW for any subsequent transactions the Company may enter into during the specified tail period with investors introduced to the Company by HCW during the term of the letter, as well as a right of first refusal ("ROFR"), to act as the Company's exclusive underwriter or placement agent on any subsequent financing transactions utilizing an underwriter or placement agent occurring within twelve months from the consummation of a transaction pursuant to the engagement letter. In July 2023, subsequent to the announcement of an agreement the Company entered into with one of its stockholders in connection with the exercise of warrants held by the stockholder, which the Company refers to as the July Warrant Exercise Transaction, the Company received a letter from HCW claiming entitlement to certain “tail” fees and warrant consideration stemming from the agreement with the Company's stockholder. The Company believed then, and believes now, that this claim is without merit. As a result of this claim and for other reasons articulated to HCW, the Company terminated its engagement letter with HCW, including for cause, which, the Company believes, eliminated both the “tail” provision and the ROFR provision with respect to this transaction. On or about October 23, 2023, HCW filed a complaint in New York State Supreme Court asserting a claim for breach of contract against the Company relating to the July Warrant Exercise Transaction. HCW sought to recover compensatory and consequential damages and certain warrants under its letter agreement with Rekor and other fees, not less than a cash fee of $ 825,000 and the value of warrants to purchase an aggregate of up to 481,100 shares of common stock of the company at an exercise price of $ 2.00 per share as well as attorneys’ fees. On February 29, 2024, HCW filed a notice of discontinuance without prejudice and advised the court that it intended to commence a new proceeding by filing a new complaint that would address the claim in this lawsuit and subsequent events. On March 4, 2024, the court discontinued this lawsuit without prejudice. On February 29, 2024, HCW initiated a new action with the filing of complaint in New York State Supreme Court. In this lawsuit, HCW advances the same breach of contract theory and seeks to recover the same damages as sought in the prior now-dismissed lawsuit. In addition, HCW seeks to recover an additional $ 2,156,000 in damages plus the value of warrants to purchase an aggregate of up to 805,000 shares of common stock at an exercise price of $ 3.125 per share in connection with Rekor’s February 2024 offering. HCW alleges that Rekor breached its engagement letter with HCW by failing to give Rekor notice of this offering and failing to provide HCW with the opportunity to exercise the ROFR with respect to this transaction. The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit. Occupational Safety and Health Administration ( “ OSHA ” ) Claim In 2023 two previous employees of the Company (the “Claimants”) filed a complaint with OSHA (the “OSHA Complaints”) against the Company. Shortly after the OSHA Complaints were filed against the Company, the Company filed a position statement to address the OSHA Complaints. On November 30, 2023, OSHA issued its determination that, based on the information gathered thus far in its investigation, OSHA was unable to conclude that there was reasonable cause to believe that a violation of the statute occurred. OSHA thereby dismissed the complaint. Thereafter, Claimants appealed the determination by filing objections and requesting a hearing before an Administrative Law Judge. The Company likewise filed a request for an award of attorneys’ fees. On January 4, 2024, the Office of Administrative Law Judges (“OALJ”) processed the appeals and issued its Notice of Docketing and Order of Consolidation. On February 28, 2024, the OALJ issued an Order setting forth a revised schedule governing the case with the start of the hearing scheduled for December 2, 2024. The Company believes these claims are without merit. The Company intends to vigorously defend itself in this lawsuit. 93 Table of Contents NOTE 14 – STOCKHOLDERS ’ EQUITY Common Stock Effective March 18, 2020, the Company adopted and approved an amendment to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000 , $ 0.0001 par value. The rights and privileges terms of the additional authorized shares of common stock are identical to those of the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe for any new issuances of common stock, the subsequent potential issuance of additional shares of common stock will reduce the current stockholders’ percentage ownership interest in the total outstanding shares of common stock. The Amendment and the creation of additional shares of authorized common stock will not alter current stockholders’ relative rights and limitations. 2023 Registered Direct Offering On March 23, 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and issuance by the Company in a registered direct offering of an aggregate of: (i) 6,100,000 shares of the Company’s common stock, (ii) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, and (iii) warrants to purchase up to 6,872,853 shares of common stock (the "Registered Direct Warrants"). The offering price per share of common stock and associated warrant was $ 1.455 and the offering price per pre-funded warrant and associated warrant was $ 1.454 . Each pre-funded warrant is exercisable for one share of common stock at an exercise price of $ 0.001 per share and will expire when exercised in full. The warrants to purchase common stock are exercisable immediately upon issuance, will expire five years following the issuance date and have an exercise price of $ 1.60 per share. The Company received gross proceeds from the 2023 Registered Direct Offering of approximately $ 10,000,000 . The Offering closed on March 27, 2023. The Company entered into an engagement letter with H.C. Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts basis, in connection with the offering. The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering. The Company also paid the placement agent $ 75,000 for non-accountable expenses and $ 16,000 for clearing fees. Additionally, the Company issued designees of the placement agent, as compensation, warrants to purchase up to 481,100 shares of common stock, equal to 7.0% of the aggregate number of shares of common stock and pre-funded warrants placed in the offering. The warrants issued to the placement agent have a term of five years and an exercise price of $ 1.8188 per share of common stock. During the year ended December 31, 2023, 772,853 of the pre-funded warrants were exercised for 772,853 shares of the Company's common stock. 2023 Letter Agreement On July 25, 2023, the Company entered into a letter agreement (the “2023 Letter Agreement”) with the same institutional investor connected to the 2023 Registered Direct Offering, pursuant to which the investor and the Company agreed that the investor would exercise all its Register Direct Warrants for shares of common stock underlying the Registered Direct Warrants at $ 1.60 per share of common stock. In consideration for exercising the Registered Direct Warrants and in exchange for the imposition of volume and trading restrictions on the 6,872,853 shares of common stock issued to the institutional investor in connection with exercise of the Registered Direct Warrants, the 2023 Letter Agreement provided for the issuance of unregistered warrants to purchase up to an aggregate of 2,850,000 shares of common stock (the “2023 Private Warrants”). The shares of common stock underlying the 2023 Private Warrants have been registered for resale on a registration statement declared effective by the SEC on September 29, 2023. The 2023 Private Warrants will expire on January 25, 2029 and have an exercise price of $ 3.25 . The 2023 Private Warrants were valued using the Black-Scholes pricing model at a total of $ 6,757,000 based on a five year term, volatility of 115 %, a risk-free of 4.15 %, and stock price of $ 2.85 . The fair value of the 2023 Private Warrants were treated as an equity financing cost and recorded as part of the Company’s additional paid-in capital. This resulted in a net zero impact within the Company’s additional paid-in capital. 2023 Warrants In connection with the initial closing of the 2023 Promissory Notes on January 18, 2023, the Company issued warrants to purchase 6,250,000 shares of common stock. The warrants issued in connection with the initial closing have an exercise price of $ 2.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder. The 2023 Warrants were valued at $ 5,125,000 , based on the relative fair value basis, compared to the total proceeds received. The Company estimated the fair value of the warrants using the Black-Scholes pricing model. The use of the Black-Scholes pricing model requires the use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award. The fair value of each warrant granted has been estimated as of the date of the grant using the Black-Scholes pricing model with the following assumptions: Risk-free interest rate 3.42 % Expected term (in years) 5 Volatility 113 % Dividend yield 0 % Estimated annual forfeiture rate at the time of grant 0 % The Company treats the warrants as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as interest expense, net in the consolidated statements of operations. 94 Table of Contents At-the-Market Offering Under the S- 3 registration filed in September 2021, on February 24, 2022, the Company entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company from time to time may offer and sell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $ 50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a commission equal to 3.0 % of the gross proceeds from each sale. The Company incurred issuance costs of approximately $ 174,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying consolidated balance sheets. For the year ended December 31, 2022, the Company sold 9,019,062 shares of common stock at a weighted-average selling price of $ 2.62 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $ 22,754,000 after paying $ 174,000 related to the issuance cost, as well as 3.0 % or $ 709,000 related to cash commissions provided to the Agent. In December of 2022 the Company terminated the 2022 Sales Agreement. STS Acquisition In connection with the acquisition as described in NOTE 2 – ACQUISITIONS , the Company issued 798,666 shares of the Company’s common stock as part of the consideration. 2024 Public Offering On February 9, 2024, the Company issued and sold 10,000,000 shares of its common stock and the underwriters exercised an option to purchase an additional 1,500,000 shares of its common stock (the “2024 Public Offering”). The net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, were approximately $ 26,463,000 . See NOTE 17 – SUBSEQUENT EVENTS for additional information on the 2024 Public Offering. Preferred Stock The Company is authorized to issue up to 2,000,000 shares of preferred stock, $ 0.0001 par value. The Company’s preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into, and issued in, designated series from time to time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the power to determine the relative powers, preferences and rights of each series of preferred stock. Series A Cumulative Convertible Redeemable Preferred Stock Of the 2,000,000 authorized shares of preferred stock, 505,000 shares were designated as $ 0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock were entitled to quarterly dividends of 7.0 % per annum per share. As of December 31, 2023 and 2022, there are no outstanding shares of the Company's Series A Preferred Stock. Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying consolidated balance sheets. Series B Cumulative Convertible Preferred Stock Of the 2,000,000 authorized shares of preferred stock, 240,861 shares were designated as $ 0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $ 0.0001 par value Series B Preferred Stock. All Series B Preferred Stock was issued at a price of $ 10.00 per share as part of the acquisition of TeamGlobal. The Series B Preferred Stock had a conversion price of $ 5.00 per share. Each Series B Preferred Stock had an automatic conversion feature based on the share price of Rekor. As of December 31, 2023 and 2022, there are no outstanding shares of the Company's Series B Preferred Stock. 95 Table of Contents Warrants A summary of the warrant activity for the Company for the period ended December 31, 2023 and December 31, 2022 is as follows: Series A Preferred Stock Warrants (1) Firestorm Warrants (2) Secure Education Warrants (3) 2018 Public Offering Warrants (4) 2023 Promissory Notes (5) 2023 Registered Direct Offering (6) 2023 Private Warrants (7) Total Active warrants January 1, 2022 41,996 631,254 15,556 3,505 - - - 692,311 Exercised warrants - - - - - - - - Outstanding warrants December 31, 2022 41,996 631,254 15,556 3,505 - - - 692,311 Weighted average strike price of outstanding warrants as of December 31, 2022 $ 1.03 $ 3.09 $ 6.06 $ 1.00 $ - $ - $ - $ 3.02 Intrinsic value of outstanding warrants as of December 31, 2022 $ 7,000 $ - $ - $ 1,000 $ - $ - $ - $ 8,000 Shares of common stock issued for warrant exercises during the year ended December 31, 2022 - - - - - - - - Active warrants January 1, 2023 41,996 631,254 15,556 3,505 - - - 692,311 Issued warrants - - - - 6,250,000 8,126,806 2,850,000 17,226,806 Exercised warrants ( 36,375 ) - - - - ( 7,645,706 ) - ( 7,682,081 ) Expired warrants ( 5,621 ) - ( 15,556 ) ( 3,505 ) - - - ( 24,682 ) Cancelled warrants - ( 631,254 ) - - - - - ( 631,254 ) Outstanding warrants December 31, 2023 - - - - 6,250,000 481,100 2,850,000 9,581,100 Weighted average strike price of outstanding warrants as of December 31, 2023 $ - $ - $ - $ - $ 2.00 $ 1.82 $ 3.25 $ 2.36 Intrinsic value of outstanding warrants as of December 31, 2023 $ - $ - $ - $ - $ 8,313,000 $ 727,000 $ 228,000 $ 9,268,000 Shares of common stock issued for warrant exercises during the year ended December 31, 2023 36,375 - - - - 7,645,706 - 7,682,081 ( 1 ) As part of a Regulation A Offering in fiscal years 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the “Series A Preferred Stock Warrants”). The exercise price for these warrants is $ 1.03 . The expiration date of the Series A Preferred Stock Warrants was November 8, 2023. ( 2 ) As part of the acquisition of Firestorm on January 24, 2017, the Company issued warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 2.5744 per share, and warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 3.6083 per share (the “Firestorm Warrants”). The expiration date of the Firestorm Warrants was January 24, 2022. As part of the settlement of the Firestorm litigation, these warrants were cancelled (see NOTE - 13 COMMITMENTS AND CONTINGENCIES ). ( 3 ) Pursuant to the Company’s acquisition of Secure Education Consultants on January 1, 2018, the Company issued warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 5.44 per share, and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 6.53 per share (the “Secure Education Warrants”). The expiration date of the Secure Education Warrants was January 1, 2023. ( 4 ) On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock (the “2018 Public Offering Warrants”), exercisable over a period of five years, at an exercise price of $ 1.00 per share. These warrants were exercisable commencing April 27, 2019 and expired on October 29, 2023. ( 5 ) On January 18, 2023, in connection with the 2023 Promissory Notes, the Company issued the investors warrants to purchase 6,250,000 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 2.00 per share. These warrants were exercisable commencing January 18, 2023 and expire on January 18, 2028. ( 6 ) On March 23, 2023, in connection with the 2023 Register Direct Offering the Company issued (i) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, (ii) warrants to purchase up to 6,872,853 shares of common stock, and (iii) warrants to the placement agent to purchase up to 481,100 shares of common stock. The exercise price per share of the warrants was $ 1.455 and each pre-funded warrant is exercisable for one share of common stock at an exercise price of $ 0.001 per share and will expire when exercised in full. Each warrant for the placement agent is exercisable for one share of common stock at an exercise price of $ 1.8188 per share. These warrants were exercisable commencing March 27, 2023 and expire on March 27, 2028. ( 7 ) On July 25, 2023, in connection with the 2023 Letter Agreement, the Company issued warrants to purchase 2,850,000 shares of its common stock, exercisable over a period of five and half years, at an exercise price of $ 3.25 per share. These warrants were exercisable commencing July 25, 2023 and expire on January 25, 2029. 96 Table of Contents NOTE 15 – EQUITY INCENTIVE PLAN In 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at 3,000,000 shares. In 2021, the Company filed a registration statement on Form S- 8 solely to register an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and by the Company’s stockholders on September 14, 2021 at the Company’s annual meeting. Stock-based compensation expense included in the consolidated statements of operations was as follows (dollars in thousands) : Year ended December 31, 2023 2022 Cost of revenue, excluding depreciation and amortization $ 20 $ 152 General and administrative expenses 2,155 2,988 Selling and marketing expenses 413 1,378 Research and development expenses 1,764 2,098 Total stock-based compensation expense $ 4,352 $ 6,616 Stock Options Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three years with a contractual term of ten years. Stock compensation expense related to stock options for the years ended December 31, 2023 and 2022 was $ 0 and $ 43,000 , respectively, and is presented as part of general and administrative expenses in the accompanying consolidated statements of operations. 97 Table of Contents A summary of stock option activity under the Company’s 2017 Plan for the years ended December 31, 2023 and 2022 is as follows: Number of Shares Subject to Option Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding balance at January 1, 2022 1,012,336 $ 1.28 6.50 $ 5,002,000 Exercised ( 99,970 ) 0.93 - Forfeited ( 6,999 ) 0.90 - Expired ( 42,987 ) 2.25 - Outstanding balance at December 31, 2022 862,380 $ 1.27 5.29 $ 172,000 Exercised ( 141,166 ) 1.12 - Forfeited - - - Expired ( 32,373 ) 3.44 - Outstanding balance at December 31, 2023 688,841 $ 1.20 3.70 $ 1,478,000 Exercisable at December 31, 2023 688,841 $ 1.20 3.70 $ 1,478,000 There were no options granted in the years ended December 31, 2023 and 2022 . The total fair value of shares that became vested after grant during the years ended December 31, 2023 and 2022 was $ 0 and $113 ,000 , respectively. As of December 31, 2023 , there was no unrecognized stock compensation expense related to stock options granted under the 2017 Plan . 98 Table of Contents Restricted Stock Units Stock compensation expense related to RSU’s for the years ended December 31, 2023 and 2022 was $ 4,352,000 a nd $ 6,573,000 , respectively, and was presented as part of operating expenses in the accompanying consolidated statements of operations. A summary of RSU activity under the Company’s 2017 Plan for years ended December 31, 2023 and 2022 is as follows: Number of Shares Weighted Average Unit Price Weighted Average Remaining Contractual Term (Years) Outstanding balance at January 1, 2022 1,347,879 $ 10.94 2.20 Granted 1,601,213 3.74 1.98 Vested ( 521,647 ) 10.64 - Forfeited ( 487,185 ) 9.61 - Outstanding balance at December 31, 2022 1,940,260 $ 5.58 1.81 Granted 898,440 1.92 1.65 Vested ( 903,485 ) 5.83 0.66 Forfeited ( 187,757 ) 3.49 1.38 Outstanding balance at December 31, 2023 1,747,458 $ 3.79 1.39 All RSUs granted vest upon the satisfaction of a service-based vesting condition. As of December 31, 2023 , there was $ 4,077,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.39 years. 99 Table of Contents NOTE 16 – LOSS PER SHARE The following table provides information relating to the calculation of loss per common share (dollars in thousands, except per share data): Year ended December 31, 2023 2022 Basic and diluted loss per share Net loss from continuing operations $ ( 45,685 ) $ ( 83,454 ) Net income attributable to shareholders from discontinued operations - 339 Net loss attributable to common shareholders $ ( 45,685 ) $ ( 83,115 ) Weighted average common shares outstanding - basic and diluted 63,168,299 49,807,475 Basic and diluted loss per share from continuing operations $ ( 0.72 ) $ ( 1.68 ) Basic and diluted earnings per share from discontinued operations - 0.01 Basic and diluted loss per share $ ( 0.72 ) $ ( 1.67 ) Common stock equivalents excluded due to anti-dilutive effect 12,017,399 3,494,951 As the Company had a net loss for the year ended December 31, 2023 , the following 12,017,399 potentially dilutive securities were excluded from diluted loss per share: 9,581,100 for outstanding warrants, 688,841 related to outstanding options and 1,747,458 related to outstanding RSUs. As the Company had a net loss for the year ended December 31, 2022 , the following 3,494,951 potentially dilutive securities were excluded from diluted loss per share: 692,311 for outstanding warrants, 862,380 related to outstanding options and 1,940,260 related to outstanding RSUs. 100 Table of Contents NOTE 17 – SUBSEQUENT EVENTS ATD Acquisition On January 2, 2024 ( the “Closing Date”), the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “ATD Purchase Agreement”), dated as of the Closing Date, by and among the Company, ATD and All Traffic Holdings, LLC (the “Seller”). The Seller is a portfolio company of Seaport Capital, a private equity firm. ATD is engaged in the business of advanced traffic data collection. Under the terms of the ATD Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”). The aggregate purchase price for the interests of ATD was approximately $ 19,750,000 , subject to a customary working capital adjustment. The purchase price comprises approximately $ 9,750,000 in cash which included closing adjustments and 3,496,463 unregistered shares of the Company’s common stock (the “Stock Consideration”), based on a volume weighted average trading price of the Company’s common stock over a thirty consecutive trading day period prior to the date of the ATD Purchase Agreement, which was $ 2.86 . 662,329 of the 3,496,463 shares of the Stock Consideration will be issued and delivered to the Seller on the twelve -month anniversary of the Closing Date, subject to cutback for working capital adjustments and/or indemnification claims favoring the Company, if any. As a result of the transaction, ATD is a wholly-owned subsidiary of the Company and ATD’s key employees have agreed to continue employment with the Company or one of its affiliates. ATD Preliminary Purchase Price Allocation The table below summarizes the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on management’s preliminary estimates of their respective fair values for purposes of the pro forma financial information as of the acquisition date, January 2, 2024 ( dollars in thousands): Cash paid $ 9,795 Common stock issued 10,000 Total Consideration $ 19,795 Assets Cash and cash equivalents $ 826 Accounts receivable 3,351 Property and equipment 1,710 Right-of-use operating lease assets 257 Intangible assets 11,800 Total assets acquired $ 17,944 Liabilities Accounts payable and accrued expenses $ 486 Lease liability operating, short-term 157 Other current liabilities 200 Lease liability operating, long-term 121 Deferred tax liability, long-term 2,478 Total liabilities assumed $ 3,442 Fair value of identifiable net assets acquired $ 14,502 Goodwill $ 5,293 This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma operations of combined entities below. Due to the recent completion of the acquisition, the determination of the purchase price and the allocation of the purchase price used in the unaudited pro forma condensed combined financial information are based upon preliminary estimates, which are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of the assets acquired and liabilities assumed, including, but not limited accounts receivable, property and equipment, intangible assets and accounts payable. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. ATD Operations of Combined Entities The following unaudited pro forma combined financial information gives effect to the acquisition of ATD and the Series A Prime Revenue Sharing Notes as if they were consummated as of January 1, 2022. A portion of the proceeds from the Series A Prime Revenue Sharing Notes was used to fund the acquisition of ATD and therefore the Company has included the impact of the issuance of the debt in its pro forma financial information. 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 and the issuance of the Series A Prime Revenue Sharing Notes 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. Year ended December 31, 2023 2022 (Dollars in thousands, except per share data) Total revenue from continuing operations $ 44,709 $ 28,183 Net loss from continuing operations $ ( 46,521 ) $ ( 84,115 ) Basic and diluted loss per share continuing operations $ ( 0.70 ) $ ( 1.58 ) Basic and diluted number of shares 66,664,762 53,303,938 101 2024 Public Offering In the first quarter of 2024, the “Company issued and sold 10,000,000 shares of its common stock, at an offering price of $ 2.50 per share of common stock (the “2024 Public Offering Price”) in a registered public offering by the Company (the “ 2024 Public Offering”), pursuant to an underwriting agreement with William Blair & Company, L.L.C., as representative of the several underwriters named therein (collectively, the “Underwriters”). On February 9, 2024, the Underwriters exercised in-full their option to purchase up to 1,500,000 additional shares of common stock at the 2024 Public Offering Price (the “Underwriters’ Option”). The exercise closed on February 13, 2024. The net proceeds to the Company for the exercise of the Underwriters’ Option, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, was expected to be approximately $ 2,287,000 , or approximately $ 26,463,000 in aggregate for the 2024 Public Offering including the exercise of the Underwriters’ Option. Retirement of the 2023 Promissory Notes On March 4, 2024, the Company completed the redemption of all its outstanding 2023 Promissory Notes. The 2023 Promissory Notes were redeemed at the redemption price of 115 % of the $ 12,500,000 aggregate principal amount of the 2023 Promissory Notes, or approximately $ 14,375,000 , plus accrued and unpaid interest to the redemption date of approximately $ 263,000 (the “Redemption Payment”). The noteholders elected to accept $ 1,875,000 of the Redemption Payment in the form of 750,000 unregistered shares of the Company’s common stock, par value $ 0.0001 per share, having a value of $ 2.50 per share, with the remainder of the Redemption Payment to be paid in cash. Board Election's Pursuant to the terms of the ATD Acquisition, the Seller was granted 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 2024 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. The Seller has a right to a Board designee for so long as it holds at least 50% of the Stock Consideration. On January 2, 2024, at the designation of Seller, the Board appointed Andrew (Drew) Meyers as a member of the Board, with such appointment to take effect immediately. In connection with Mr. Meyer’s appointment, the Board voted to increase the size of the Board to eight members, and appointed Mr. Meyers to fill the resulting vacancy. On March 1, 2024, the Board of the Company approved an increase to the size of the Board by one seat, to nine members, and appointed Anne Townsend to fill the resulting vacancy. Ms. Townsend will serve for a term expiring at the Company’s 2024 annual meeting of stockholders, at which meeting she will 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. 102 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.