What changed in this filing

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Item 1. Financial Statements

2024-05-15 compared with 2023-11-14 · 635 added, 1046 removed, 432 unchanged (80% of the section changed)

4 unchanged sentences

(Dollars in thousands, except share amounts)

September 30, 2023

March 31, 2024

December 31, 2023

1 unchanged sentence

Cash and cash equivalents

$ 7,034  

$ 1,924  

$ 11,881 $ 15,385

Restricted cash and cash equivalents

1 unchanged sentence

Note receivable, current portion

Other current assets, net

Current assets of discontinued operations

Other current assets

Total current assets

19,856  

25,563 25,336

Long-term assets

Property and equipment, net

14,077  

16,733  

13,876 13,188

Right-of-use operating lease assets, net

Right-of-use financing lease assets, net

20,593  

24,161 20,593

Intangible assets, net

18,208  

21,299  

28,167 17,239

Note receivable, long-term

SAFE investment

Total long-term assets

68,303  

74,565  

$ 88,159  

$ 83,840  

81,587 66,815

$ 107,150 $ 92,151

LIABILITIES AND SHAREHOLDERS' EQUITY

1 unchanged sentence

Accounts payable and accrued expenses

$ 5,619  

$ 5,963  

Notes payable, current portion

Related party notes, current portion

Loan payable, current portion

1 unchanged sentence

Lease liability financing, short-term

Contract liabilities, short-term

Contract liabilities

Other current liabilities

Current liabilities of discontinued operations

Total current liabilities

16,277  

15,444  

20,322 17,236

Long-term Liabilities

Notes payable, long-term

2023 Promissory Notes, net of debt discount of $ 1,177

2023 Promissory Notes - related party, net of debt discount of $ 2,500

2023 Promissory Notes, net of debt discount of $ 0 and $ 1,012 , respectively

2023 Promissory Notes - related party, net of debt discount of $ 0 and $ 2,149 , respectively

Series A Prime Revenue Sharing Notes, net of debt discount of $ 409 and $ 447 , respectively

Series A Prime Revenue Sharing Notes - related party, net of debt discount of $ 205 and $ 223 , respectively

Loan payable, long-term

Lease liability operating, long-term

13,395  

14,237  

13,216 13,445

Lease liability financing, long-term

3 unchanged sentences

Total long-term liabilities

28,303  

19,059  

31,869 41,545

Total liabilities

44,580  

34,503  

52,191 58,781

Commitments and contingencies (Note 7)

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 March 31, 2024 and December 31, 2023, respectively.

No preferred stock was issued or outstanding as of March 31, 2024 or December 31, 2023, respectively.

Common stock, $ 0.0001 par value;

300,000,000 shares;

69,233,969 , shares as of September 30, 2023 and 54,446,602 as of December 31, 2022;

69,137,461 shares as of September 30, 2023 and 54,405,080 as of December 31, 2022.

Preferred stock, $ 0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of September 30, 2023 and December 31, 2022, respectively.

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

Treasury stock, 96,508 and 41,522 shares as of September 30, 2023 and December 31, 2022, respectively.

( 522 )  

85,479,571 shares as of March 31, 2024 and 69,273,334 as of December 31, 2023;

85,324,918 shares as of March 31, 2024 and 69,176,826 as of December 31, 2023.

Treasury stock, 154,653 and 96,508 shares as of March 31, 2024 and December 31, 2023, respectively.

( 702 ) ( 522 )

Additional paid-in capital

231,453  

202,747  

272,950 232,568

Accumulated deficit

( 187,359 )  

Total stockholders’

43,579  

49,337  

Total liabilities and stockholders’

$ 88,159  

$ 83,840  

( 217,297 ) ( 198,683 )

Total stockholders’ equity

54,959 33,370

Total liabilities and stockholders’ equity

$ 107,150 $ 92,151

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

3 unchanged sentences

(Dollars in thousands, except share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

$ 9,119  

$ 6,778  

$ 23,867  

$ 13,455  

Three Months Ended March 31,

Cost of revenue, excluding depreciation and amortization

11,319  

Operating expenses:

General and administrative expenses

19,941  

22,232  

Selling and marketing expenses

Research and development expenses

14,011  

13,772  

Depreciation and amortization

Goodwill impairment

34,835  

Total operating expenses

14,602  

50,805  

45,318  

81,706  

Loss from operations

( 9,803 )  

( 47,682 )  

( 32,770 )  

Other income (expense):

Gain on extinguishment of debt

(Loss) gain on extinguishment of debt

Interest expense, net

( 906 )  

( 21 )  

( 2,576 )  

Other income (expense)

( 1,379 )  

Total other income (expense)

( 763 )  

( 1,400 )  

( 1,591 )  

Loss before income taxes

( 10,566 )  

( 49,082 )  

( 34,361 )  

Income tax benefit

Net loss from continuing operations

( 10,566 )  

( 48,128 )  

( 34,361 )  

Net income from discontinued operations

$ ( 10,566 )  

$ ( 48,034 )  

$ ( 34,361 )  

Loss per common share from continuing operations - basic and diluted

$ ( 0.16 )  

$ ( 0.90 )  

$ ( 0.56 )  

Earning per common share discontinued operations - basic and diluted

Loss per common share - basic and diluted

$ ( 0.16 )  

$ ( 0.90 )  

$ ( 0.56 )  

Loss per common share

Weighted average shares outstanding

Basic and diluted

66,671,622  

53,482,110  

61,125,035  

48,279,713  

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

1 unchanged sentence

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY

(Dollars in thousands, except share amounts)

5 unchanged sentences

Total Stockholders' Equity

Balance as of June 30, 2023

61,952,211  

91,491  

$ ( 506 )  

$ 219,218  

$ ( 176,793 )  

$ 41,925  

Stock-based compensation

Issuance upon exercise of stock options

102,500  

Issuance upon vesting of restricted stock units

183,389  

Shares withheld upon vesting of restricted stock units

( 5,017 )  

( 16 )  

Issuance upon exercise of Series A warrants

31,525  

Issuance upon exercise of 2023 Registered Direct Offering Warrants

6,872,853  

10,995  

10,996  

( 10,566 )  

Balance as of September 30, 2023

69,137,461  

96,508  

$ ( 522 )  

$ 231,453  

$ ( 187,359 )  

$ 43,579  

Balance as of June 30, 2022

52,621,305  

( 41,522 )  

$ ( 417 )  

$ 197,512  

$ ( 97,751 )  

99,349  

Stock-based compensation

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

1,420,261  

Issuance upon exercise of stock options

Issuance upon vesting of restricted stock units

241,045  

( 48,034 )  

Balance as of September 30, 2022

54,288,611  

( 41,522 )  

$ ( 417 )  

$ 201,495  

$ ( 145,785 )  

$ 55,298  

Balance as of January 1, 2024

54,405,080  

41,522  

$ ( 417 )  

$ 202,747  

$ ( 152,998 )  

$ 49,337  

Stock-based compensation

Issuance upon exercise of stock options

138,833  

Issuance upon vesting of restricted stock units

871,303  

Fair value allocated to warrants with 2023 Promissory Notes

Shares withheld upon vesting of restricted stock units

( 54,986 )  

54,986  

( 105 )  

Issuance upon exercise of Series A warrants

31,525  

Issuance of common stock upon exercise of pre-funded warrants

772,853  

Net proceeds from 2023 Registered Direct Offering

6,100,000  

Issuance upon exercise of 2023 Registered Direct Offering Warrants

6,872,853  

10,995  

10,996  

( 34,361 )  

Balance as of September 30, 2023

69,137,461  

96,508  

$ ( 522 )  

$ 231,453  

$ ( 187,359 )  

$ 43,579  

Shares issued as part of the ATD Acquisition

Retirement of the 2023 Promissory Notes

2024 Public Offering

Balance as of March 31, 2024

Balance as of January 1, 2023

43,987,896  

( 19,361 )  

$ ( 319 )  

$ 171,285  

$ ( 69,883 )  

$ 101,087  

Stock-based compensation

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

9,019,062  

22,757  

22,758  

Issuance upon exercise of stock options

25,638  

Issuance upon vesting of restricted stock units

457,349  

Fair value allocated to warrants with 2023 Promissory Notes

Shares withheld upon vesting of restricted stock units

( 22,161 )  

( 98 )  

Shares issued as part of the STS Acquisition

798,666  

( 75,902 )  

Balance as of September 30, 2022

54,288,611  

( 41,522 )  

$ ( 417 )  

$ 201,495  

$ ( 145,785 )  

$ 55,298  

Issuance of common stock and warrants

Balance as of March 31, 2023

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

3 unchanged sentences

(Dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows from Operating Activities:

Net loss from continuing operations

$ ( 34,361 )  

Net income from discontinued operations

( 34,361 )  

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

Bad debt expense

Amortization of right-of-use financing lease asset

Amortization of right-of-use lease asset

Non-cash operating lease expense

Benefit for deferred taxes

Share-based compensation

Amortization of debt discount

Goodwill impairment

34,835  

Amortization of intangible assets

Impairment of SAFE Agreement

Loss due to the remeasurement of the STS Contingent Consideration

Gain on the sale of property and equipment

( 23 )  

Gain on extinguishment of debt

( 527 )  

Loss (gain) on extinguishment of debt

Changes in operating assets and liabilities:

Accounts receivable

( 3,919 )  

( 1,291 )  

Other current assets

( 260 )  

Accounts payable, accrued expenses and other current liabilities

1 unchanged sentence

Operating lease liability

( 1,111 )  

Net cash used in operating activities - continuing operations

( 26,666 )  

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

( 449 )  

Net cash provided by operating activities - discontinued operations

Net cash used in operating activities

( 27,115 )  

Cash Flows from Investing Activities:

SAFE Investment

Capital expenditures

( 944 )  

Proceeds from the Roker SAFE

Proceeds from the sale of property and equipment

Cash paid for STS acquisition, net

Net cash provided by (used in) investing activities - continuing operations

Net cash used in investing activities - discontinued operations

Net cash provided by (used in) investing activities

Cash paid for ATD acquisition, net

Net cash used in investing activities

Cash Flows from Financing Activities:

Proceeds from the public offering

Repayment of 2023 Promissory Notes

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

2 unchanged sentences

Net proceeds 2023 Registered Direct Offering

Net proceeds from the exercise of the warrants associated with 2023 Registered Direct Offering

10,996  

Net proceeds from the exercise of the pre-funded warrants

Proceeds from notes receivable

Net proceeds from exercise of options

Net proceeds from exercise of warrants associated with series A preferred stock

Payments related to financing leases

Repayments of loans payable

( 80 )  

Payments for financing leases

( 556 )  

Net proceeds from at-the-market agreement

22,758  

Repurchases of common stock

( 105 )  

Net cash provided by financing activities

31,360  

22,817  

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

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

( 449 )  

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

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

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

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

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

26,601  

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

$ 7,359  

$ 8,757  

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents at end of period - continuing operations

$ 7,034  

$ 7,869  

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

1 unchanged sentence

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

$ 7,359  

$ 8,757  

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

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –

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

The Company provides products and services for the collection, distribution and analysis of transportation data and is a global leader in the development and implementation of advanced roadway intelligence infrastructure focused on addressing the world’s most critical challenges across transportation management, public safety, and key commercial markets. 

With a suite of real-time intelligence platforms driven by deep access to data, AI-powered software, years of machine learning and smart optical devices at-the-edge, the Company combines its industry expertise and advanced proprietary technologies to deliver insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.

June 17, 2022 ,  the Company completed the acquisition of Southern Traffic Services, Inc.

("STS") by acquiring 

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

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

three and nine months ended September 30, 2022

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

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

and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.

NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF 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"), Southern Traffic Services, Inc.

("STS") and All Traffic Data Services, LLC ("ATD") (collectively, the “Company”).

The Company serves the roadway intelligence sector, developing product and services intended to revolutionize 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 January 2, 2024 , the Company completed the acquisition of ATD by acquiring 100 % of the issued and outstanding capital stock of ATD, which is now a wholly-owned subsidiary of the Company.

These unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.

Accordingly, they do not contain all information and notes required by U.S.

GAAP for annual financial statements.

In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2023 , the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’

equity and unaudited condensed consolidated statements of cash flows for the three and nine months ended September 30, 2023 and 2022 .

In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of March 31, 2024 , the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity and unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 .

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

The results for the three and nine months ended September 30, 2023 , are not necessarily indicative of the results to be expected for the year ending December 31, 2023 .

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022 .

The results for the three months ended March 31, 2024 , are not necessarily indicative of the results to be expected for the year ending December 31, 2024 .

The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S.

1 unchanged sentence

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S.

GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements.

Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are 

not  apparent from other sources.

Actual results 

differ from those estimates under different assumptions or conditions.

Reclassifications

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

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

Additionally, as of December 

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

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

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.

Actual results may differ from those estimates under different assumptions or conditions.

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 unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S.

As part of this assessment, based on conditions that are known and reasonably knowable to management, management 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 cash flow from operations.

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

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

As of and for the nine months ended September 30, 2023 , the Company had working capital from continuing operations of $ 3,579,000  and a loss from continuing operations of $ 34,361,000 .

Our c ash increased by $ 4,891,000  for the nine months ended September 30, 2023 primarily due to external financing which was offset by the loss from continuing operations of $ 34,361,000 . 

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 unaudited condensed financial statements.

These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

As of and for the three months ended March 31, 2024 , the Company had working capital of $ 5,241,000 and a net loss of $ 18,614,000 .

Our cash decreased by $ 3,446,000 for the three months ended March 31, 2024 primarily due to the cash paid to acquire ATD and redeem the 2023 Promissory Notes and the net loss of $ 18,614,000 , partially offset by external financing activity.

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 unaudited condensed consolidated financial statements.

These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

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

The Company is currently in the process of reviewing and exploring external financing options in order to sustain its operations. If additional financing is not available, the Company also has contingency plans to continue to reduce or defer expenses and cash outlays in the look-forward period.

The Company is currently in the process of reviewing and exploring external financing options in order to sustain its operations.

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

Significant Accounting Policies

The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill.

The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The Company performs its annual impairment assessment on October 1, or more frequently, when events or circumstances indicate impairment may have occurred. As of September 30, 2023 , the Company did not identify any events that would cause it to assess goodwill for impairment. 

Goodwill is subject to 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.

As of March 31, 2024 , the Company did not identify any events that would cause it to assess goodwill for impairment.

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.

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 March 31, 2024 and December 31, 2023 , 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 March 31, 2024 and December 31, 2023 , 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 March 31, 2024 .

Revenue Recognition

1 unchanged sentence

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:

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

4 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Recurring revenue

$ 4,827  

$ 4,839  

$ 14,803  

$ 8,616  

$ 4,963 $ 4,204

Product and service revenue

Total revenue

$ 9,119  

$ 6,778  

$ 23,867  

$ 13,455  

$ 9,778 $ 6,185

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.

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 Company's contracts with customers are generally for a term of one to five years.

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.

2 unchanged sentences

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 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.

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 eCommerce 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.

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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.

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.

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.

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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.

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.

1 unchanged sentence

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.

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

Revenue by Customer Type

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Urban Mobility

$ 4,413  

$ 3,504  

$ 10,742  

$ 2,077  

Traffic management

Licensing and other revenue

10,848  

$ 5,614 $ 2,754

Transportation Management

Public Safety

Total revenue

$ 9,119  

$ 6,778  

$ 23,867  

$ 13,455  

Urban mobility  

$ 9,778 $ 6,185

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.

Traffic management  

Traffic management revenue is associated with the Rekor Command™

platform and the associated applications underneath the platform.

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 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.

Licensing and other revenue

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

platform, licensing of Rekor CarCheck™

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

Public Safety

P ublic 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.

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The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time.

Some contracts include several distinct services.

For contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors.

Some contracts include performance obligations for several distinct services.

For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors.

This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation.

When the Company recognizes revenue due to the sale of hardware or perpetual software licenses, the impact on the overall unsatisfied performance obligations is relatively small as the Company satisfies most of its performance obligations at the point in time that the control of the hardware or software has transferred to the customer.

Where performance obligations for the remaining term of a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future.

As of September 30, 2023 , the unsatisfied portion of the remaining performance obligation was approximately $ 30,203,000 .

The Company expects to recognize approximately 73%  of this amount as revenue over the succeeding twelve months, and the remaind er is expected to be recognized within the next five years thereafter.

As of March 31, 2024 , the unsatisfied portion of the remaining performance obligation was approximately $ 22,912,000 .

The Company expects to recognize approximately $ 17,494,000 of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized within the next five years thereafter.

Unbilled accounts receivable

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When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days, but typically no longer than over the next twelve months.

Unbilled accounts receivables of $ 1,971,000  and $ 935,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 , respectively.

Unbilled accounts receivables of $ 1,367,000 and $ 946,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023 , respectively.

Contract liabilities

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six  months to five years, depending on the length of the period during which services are to be provided.

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next six months to five years, depending on the length of the period during which services are to be provided.

This revenue and the corresponding decrease in liabilities is recognized on a contract-by-contract basis at the end of each reporting period and reflected on the unaudited condensed consolidated balance sheet for such period.

Changes in the contract balances during the nine months ended September 30, 2023 were not materially impacted by any other factors.

Contract liabilities as of September 30, 2023 and December 31, 2022 were $ 6,020,000  and $ 4,049,000 , res pectively.

During the nine months ended September 30, 2023 , $ 2,778,000 of t he contract liabilities balance as of December 31, 2022 was recognized as revenue.

The services due for contract liabilities described above are shown below as of September 30, 2023 (dollars in thousands):

Changes in the contract balances during the three months ended March 31, 2024 were not materially impacted by any other factors.

During the three months ended March 31, 2024 , $ 1,449,000 of the contract liabilities balance as of December 31, 2023 was recognized as revenue.

The services due for contract liabilities described above are shown below as of March 31, 2024 (dollars in thousands):

2024, remaining

$ 1,844  

$ 6,020  

Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents

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

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

The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain clients. Restricted cash and cash equivalents for these clients as of September 30, 2023 and December 31, 2022 were $ 325,000  and $ 254,000 , respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

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

Restricted cash and cash equivalents for these client jurisdictions as of March 31, 2024 and December 31, 2023 were $ 386,000 and $ 328,000 , respectively, and correspond to equal amounts of related liabilities.

Concentrations of Credit Risk

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

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

As of September 30, 2023  and December 31, 2022, the Company had deposits from continuing operations totaling $ 7,359,000  and $ 2,178,000 , respectively, in multiple U.S.

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 March 31, 2024 and December 31, 2023 , the Company had deposits from operations totaling $ 12,267,000 and $ 15,713,000 , respectively, in multiple U.S.

financial institutions and one Israeli financial institution.

Customer A accounted for 13 % and 12 % of the unaudited condensed consolidated revenue for the three and nine  months ended 

September 30, 2023  and 13 % of the unaudited condensed consolidated revenue for the three months ended September 30, 2022, respectively. Customer B accounted for 10 % of the unaudited condensed consolidated revenue for the three months ended 

September 30, 2023 .

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

three and nine months ended September 30, 2023 and 2022 , respectively. 

As of September 30, 2023 , Customer C accounted for 

13 % of the unaudited condensed consolidated accounts receivable balance.

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

10%  of the Company's unaudited condensed consolidated accounts receivable balance.

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

September 30, 2023 and 

December 31, 2022 .

Accounts Payable, Accrued  

and Other Current Liabilities

As of September 30, 2023  and December 31, 2022, the Company owed $ 125,000  and $ 253,000 to its board members, which the Company considers to be related parties, these were presented as part of accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets. 

Customer A accounted for 13 % of the unaudited condensed consolidated revenue for the three months ended March 31, 2023.

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenues for the three months ended March 31, 2024 and 2023 , respectively.

As of March 31, 2024 , no single customer accounted for more than 10% of the Company's unaudited condensed consolidated accounts receivable balance.

As of December 31, 2023 , Customer A and Customer B accounted for 22 % and 13 % of the unaudited condensed consolidated accounts receivable balance, no other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated accounts receivable balance as of December 31, 2023 .

Accounts Payable, Accrued and Other Current Liabilities

As of March 31, 2024 and December 31, 2023 , amounts owed to related parties of $ 210,000 and $ 253,000 were presented as part of accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets.

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

September 30, 2023

March 31, 2024

December 31, 2023

Payroll and payroll related

$ 3,102  

$ 2,483  

Payroll and payroll related expense

$ 2,871 $ 2,824

Right of offset to restricted cash

$ 3,427  

$ 2,772  

New Accounting Pronouncements Effective in the Current Period

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

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 unaudited condensed consolidated statements of operations and balance sheets.

STS Contingent Consideration

$ 5,760 $ 5,610

New Accounting Pronouncements Effective in Future Periods

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 chief operating decision maker ("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 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 financial statements and disclosures.

The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements.

As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022 .

NOTE 2 –

STS Acquisition

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

The acquisition included total consideration of 

$ 12,799,000 including;

cash consideration of $ 6,500,000 , $ 1,001,000  related to an earnout based on the achievement of certain performance metrics ("STS Earnout") and $ 1,298,000  contingent on the closing of a future contract ("STS Contingent Consideration"), 798,666  shares of the Company’s common stock, valued at $ 2,000,000 , and a $ 2,000,000 note.

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

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

Since the acquisition of STS occurred on June 

17, 2022, the results of operations for STS from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2023 .

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

$ 1,977,000 in goodwill, 

$ 3,400,000  in customer relationships and 

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

The STS Contingent Consideration in the amount of 

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

October 30, 2024, 

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

The STS Contingent Consideration shall be payable within 

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

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

For the three and nine months ended September 30, 2023 , the Company recognized $ 48,000 and $ 139,000 , respectively, in expense related to the remeasurement of the STS Contingent Consideration which is presented with general and administrative expenses on the unaudited condensed consolidated statement of operations. 

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

based on the STS EBITDA for the 

twelve  month period ended 

December 31, 2022. 

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

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

Additional significant accounting policies of the Company are also described in Note 1 of the Company’s Annual Report on Form 10 -K for the year ended December 31, 2023 .

NOTE 2 – ACQUISITION

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 acquisition meets the criteria to be accounted for as a business in accordance with ASC 805, Business Combinations (“ASC 805” ).

This method requires, among other things, that assets acquired, and liabilities assumed be recognized at their fair values as of the acquisition date and that the difference between the fair value of the consideration paid for the acquired entity and the fair value of the net assets acquired be recorded as goodwill, which is not amortized but is tested at least annually for impairment.

The aggregate purchase price for the interests of ATD was approximately $ 20,774,000 , subject to a customary working capital adjustments.

The purchase price comprised approximately $ 9,795,000 in cash, which included closing adjustments and 3,496,464 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 3,496,464 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 became 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.

In accordance with the acquisition method of accounting for a business combination, the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the Closing Date.

Since the acquisition of ATD occurred on January 2, 2024, the results of operations for ATD from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2024.

The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands):

Consideration

Common stock issued (3,496,464 shares at closing price of $3.14 per share)

Total Consideration

Recognized amounts of identifiable assets acquired and liabilities assumed

Estimated Fair Value

Cash and cash equivalents

Accounts receivable

Property and equipment

Right-of-use operating lease assets

Other current assets

Intangible assets

Total assets acquired

Accounts payable and accrued expenses

Lease liability operating

Other current liabilities

Total liabilities assumed

Fair value of identifiable net assets acquired

Purchase price consideration

Operations of Combined Entities

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

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, 2023.

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, 2023 ( the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

Three Months Ended March 31,

(Dollars in thousands, except per share data)

(Dollars in thousands except for per share data)

Total revenue from continuing operations

$ 9,119  

$ 6,778  

$ 23,867  

$ 19,340  

Net loss from continuing operations

$ ( 10,566 )  

$ ( 48,128 )  

$ ( 34,361 )  

Basic and diluted loss per share from continuing operations

$ ( 0.16 )  

$ ( 0.90 )  

$ ( 0.56 )  

Total revenue

$ 9,778 $ 7,946

$ ( 18,614 ) $ ( 13,230 )

Basic and diluted

$ ( 0.23 ) $ ( 0.23 )

Basic and diluted number of shares

66,671,622  

53,482,110  

61,125,035  

49,078,379  

NOTE 3 –

Investments in Unconsolidated Companies

In February 2017, the Company contributed substantially all the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”).

After the GPS Closing, the Company continues to own 19.9 % of the units of Global Public Safety.

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

As of September 30, 2023 and December 31, 2022 the investment in Global Public Safety had a value of $ 0 .

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

In June 2020, the Company announced a joint venture in which the Company acquired a 50 % equity interest in a newly formed entity, Roker Inc.

(“Roker”).

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

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

From 2021 through 2022 the Company made multiple investments totaling $ 2,005,000  in the Roker SAFE. The Roker SAFE allowed the Company to participate in future equity financing of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”).

Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company had the option to receive either (i) cash payment equal to the invested amount under the SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the Roker SAFE.

The Company’s investment in the Roker SAFE was recorded on the cost method of accounting. 

During the second quarter of 2023,  the Company recognized an impairment of $ 101,000  related to the SAFE that is presented as part of general and administrative expenses in the unaudited condensed consolidated statements of operations. 

During the third quarter of 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 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 September 

 As of 

September 30, 2023, 

the amount held in escrow of $ 423,000  was presented as part of other current assets, net and deposits on the unaudited condensed consolidated balance sheets.

NOTE 4  

SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow information for the 

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

Nine Months Ended September 30,

79,558,346 58,176,511

NOTE 3 – SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow information for the three months ended March 31, 2024 and 2023 were as follows (dollars in thousands):

Three Months Ended March 31,

Cash paid for interest

$ 1,099  

Cash paid for taxes

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

( 602 )  

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

( 335 )  

Increase in inventory related to the transfer of property and equipment

( 517 )  

( 42 ) ( 698 )

Decrease in deposits related to property and equipment received

Non-cash investing activities:

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

Contingent Consideration in connection with the acquisition of STS

Earnout Consideration in connection with the acquisition of STS

Note Consideration in connection with the acquisition of STS

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

Loans issued for property and equipment

Decrease in property and equipment that was uninstalled and moved to inventory

Non-cash financing activities:

2 unchanged sentences

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

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

2023 Promissory Note redemption premium settled in shares of the Company’s common stock

New Leases under ASC-842:

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

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

Lease incentive recognized in current assets

Recognition of operating lease - lease liability

$ ( 343 )  

NOTE 5  

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.

The following table i s a summary of the components of net lease cost for the period ended September 30, 2023 and 2022 (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Finance lease cost

Amortization of right-of-use assets

Interest on lease liabilities

Operating lease cost

Total lease cost

$ 1,761  

$ 1,524  

For the 

nine months ended September 30, 2023 , the Company had $ 446,000 in cash payments related to its financing leases prior to the lease commencement date. 

Supplemental balance sheet information related to leases as of 

September 30, 2023  and 2022 was as follows (dollars in thousands):

Year ending September 30,

Weighted-average remaining lease term (years)

Operating leases

Financing leases

Weighted-average discount rate

Operating leases

Financing leases

Maturities of operating and financing lease liabilities for continuing operations at  

September 30, 2023  were as follows (dollars in thousands):

Operating Leases

Financing Leases

2023, remaining

11,038  

Total lease payments

21,026  

Less imputed interest

Maturities of lease liabilities

$ 14,538  

$ 1,584  

NOTE 6  

INTANGIBLE ASSETS AND GOODWILL

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

September 30, 2023  and  

December 31, 2022 (dollars in thousands):

September 30, 2023

NOTE 4 – INTANGIBLE ASSETS AND GOODWILL

ATD Acquisition

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

As part of the Company's preliminary purchase price allocation for the acquisition, the Company recognized $ 3,568,000 in goodwill, $ 11,900,000 in customer relationships, assigned a 15 -year useful life, and $ 200,000 of marketing related intangible assets related to the ATD tradename, assigned an five -year useful life.

Intangible Assets Subject to Amortization

The following provides a breakdown of identifiable intangible assets, net as of March 31, 2024 and December 31, 2023 (dollars in thousands):

March 31, 2024

December 31, 2023

Customer relationships

$ 3,861  

$ 15,761 $ 3,861

Marketing related

Technology based

24,107  

24,107 24,107

Internally capitalized software

30,231  

42,331 30,231

accumulated amortization

( 12,023 )  

Identifiable intangible assets from continuing operations, net

$ 18,208  

$ 21,299  

( 14,164 ) ( 12,992 )

Identifiable intangible assets, net

$ 28,167 $ 17,239

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

Amortization expense for the 

three  months ended 

September  

30, 2023  and 

2022  was $ 1,018,000  and $ 1,045,000 , resp ectively, and for the nine months ended September 30, 2023 and 2022 was 

$ 3,091,000  and $ 3,001,000 , respectively and is presented as part of depreciation and amortization in the unaudited condensed consolidated statements of operations.

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

As of September 30, 2023 , the estimated impact from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

Amortization expense for the three months ended March 31, 2024 and 2023 was $ 1,172,000 and $ 1,041,000 , respectively and is presented as part of depreciation and amortization in the unaudited condensed consolidated statements of operations.

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

As of March 31, 2024 , the estimated impact from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

2024, remaining

$ 18,208  

NOTE 7  

June 17, 2022, 

pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $ 2,000,000  of notes payable in the form of 

two  unsecured, subordinated promissory notes, each in the principal amount of $ 1,000,000  and bearing an interest rate of 

3.0 % per annum, payable quarterly. 

The notes mature on 

June 14, 2024 

June 17, 

2025,  respectively.

The aggregate balance of these notes payable was $ 2,000,000  as of 

December 31, 2022 

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

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

2022 Promissory Notes  

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.

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 10.51 % holder of Common Stock of the Company based on its Schedule 13G filed with the Securities and Exchange Commission on February 14, 2023. 

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

These lenders were determined to be related parties.

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 September 30, 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 stockh olders 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.

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.

NOTE 5 – DEBT

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.

As of March 31, 2024 and 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 unaudited condensed consolidated balance sheets.

Interest expense related to these notes was $ 14,000 and $ 14,000 for the three months ended March 31, 2024 and 2023, respectively.

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.

On March 4, 2024, the Company elected to prepay the 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.

As a result of the Redemption Payment, the Company recognized a loss on extinguishment of debt of $ 4,693,000 , which included 1,875,000 related to the early termination payment and $ 2,818,000 related to unamortized issuance costs.

The 2023 Promissory Notes were a senior secured obligation of the Company and ranked senior to all indebtedness of the Company, subject to certain exceptions, had a maturity date of July 18, 2025 ( the “Maturity Date”), and bore an interest rate of 12 % per annum.

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.

In the event that the sinking fund requirement is triggered, to meet the sinking fund requirement the Company would be required to 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 was $ 500,000 as of March 31, 2024 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 and the sinking fund has not been triggered as of March 31, 2024.

The Company may prepay the Series A Prime Revenue Sharing Notes at any time 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.

For the three months ended March 31, 2024, the Company recognized $ 496,000 in interest expense related to the Series A Prime Revenue Sharing Notes.

Interest Expense

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

Three Months Ended September 30,

Nine Months Ended September 30,

Contractual interest expense, net

$ 1,101  

Amortization of debt discount

Three Months Ended March 31,

Contractual interest expense

Amortization of debt issuance costs

Total interest expense

interest income

( 139 ) ( 12 )

Total interest expense, net

$ 2,576  

$ 1,054 $ 761

Schedule of Principal Amounts Due of Debt

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

The principal amounts due for long-term notes payable are shown below as of March 31, 2024 (dollars in thousands):

2024, remaining

13,578  

14,875  

Less unamortized debt discount

Total notes payable

$ 11,198  

NOTE 8  

The Company maintains a full valuation allowance against its net deferred taxes, outside of the deferred tax liability related to the indefinite lived intangible, through 

September 30, 2023 .

NOTE 6 – INCOME TAXES

The Company maintains a full valuation allowance against its net deferred taxes, outside of the deferred tax liability related to the indefinite lived intangible, through March 31, 2024 .

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

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

Federal, state or foreign income tax audits were in process as of March 31, 2024 .

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

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

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

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

If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.

For the three and 

nine months ended September 30, 2023  and 2022, the Company did not record any interest or penalties related to unrecognized tax benefits.

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

The 2019  through 2022  tax years remain subject to examination by the Internal Revenue Service. As of September 30, 2023  and December 31, 2022 , our evaluation revealed no uncertain tax positions that would have a material impact on the unaudited condensed consolidated financial statements. 

NOTE 9  

COMMITMENTS AND CONTINGENCIES

From time to time, the Company 

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

If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.

For the three months ended March 31, 2024 and 2023, the Company did not record any interest or penalties related to unrecognized tax benefits.

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

The 2019 through 2023 tax years remain subject to examination by the Internal Revenue Service.

As of March 31, 2024 and December 31, 2023 , our evaluation revealed no uncertain tax positions that would have a material impact on the unaudited condensed consolidated financial statements.

For the three months ended March 31, 2024 and 2023, the Company did not record any expense or benefit related to income tax.

NOTE 7 – 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.

It is the Company’s opinion that the outcome of these proceedings, individually and collectively, will 

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

Firestorm Principals

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

Suzanne Loughlin, et al., Case no.

1:19 -cv- 07767 -VEC.

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

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

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

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

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

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

NOTE 10  

STOCKHOLDERS ’

2023 Registered Direct Offering 

On March 

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

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

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 capital raise (see Note 8 – 2023 Registered Direct Offering).

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, the Company entered into an agreement 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.

Subsequent to 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 the 2023 Registered Direct Offering.

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 the 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 HCW notice of this offering and failing to provide HCW with the opportunity to exercise the ROFR with respect to this transaction.

On May 3, 2024, Rekor answered HCW’s complaint and filed counterclaims against HCW and Armistice Capital LLC ("Armistice") relating to Rekor’s March 2023 Registered Direct Offering, Armistice’s trading activity in Rekor common stock, and Rekor’s 2024 Public Offering.

Rekor’s counterclaims include causes of action for fraud, breach of fiduciary duty, and tortious interference.

Rekor seeks to recover damages from HCW and Armistice.

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.

NOTE 8 – STOCKHOLDERS ’ EQUITY

ATD Acquisition

In connection with the acquisition as described in NOTE 2 – ACQUISITION , the Company issued 3,496,464 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, 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 offering expenses payable by the Company, was $ 2,388,000 , or approximately $ 26,362,000 in aggregate for the 2024 Public Offering including the exercise of the Underwriters’ Option.

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 was exercisable for one share of common stock at an exercise price of $ 0.001 per share and expired when exercised in full.

The Registered Direct Warrants were exercisable immediately upon issuance, had an expiration date five years following the issuance date and had 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.

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

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

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 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 and half 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.

On July 25, 2023, the Company entered into a letter agreement (the “2023 Letter Agreement”) with the purchaser of 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 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 , at the time of issuance.

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

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

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

Risk-free interest rate

Expected term (in years)

Dividend yield

Estimated annual forfeiture rate at the time of grant

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

At-the-Market Offering

February 

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 

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

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

For the 

nine  months ended 

September 

2022,  the Company sold 

9,019,062  shares of common stock at a weighted-average selling price of $ 2.62  per share in accordance with the 

2022  Sales Agreement.

Net cash provided from the 

2022  Sales Agreement was $ 22,758,000  after paying $ 169,000  related to the issuance cost, as well as 

3.0 % or $ 709,000  related to cash commissions provided to the Agent.

December 

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.

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

Series A Preferred Stock Warrants (1)

Firestorm Warrants (2)

Secure Education Warrants (3)

2018 Public Offering Warrants (4)

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 2023 Warrants were valued at $ 5,125,000 , based on the relative fair value basis, compared to the total proceeds received.

A summary of the warrant activity for the Company for the period ended March 31, 2024 is as follows:

2023 Promissory Notes (1)

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Active warrants as of January 1, 2024

41,996  

631,254  

15,556  

692,311  

6,250,000 481,100 2,850,000 9,581,100

Issued warrants

6,250,000  

8,126,806  

2,850,000  

17,226,806  

Exercised warrants

( 31,525 )  

( 7,645,706 )  

Outstanding warrants as of March 31, 2024

6,250,000 481,100 2,850,000 9,581,100

Expired warrants

( 15,556 )  

Cancelled warrants

( 631,254 )  

Outstanding warrants as of September 30, 2023

10,471  

6,250,000  

481,100  

2,850,000  

9,595,076  

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

$ 1.03  

$ 1.00  

$ 2.00  

$ 1.82  

$ 3.25  

$ 2.36  

Intrinsic value of outstanding warrants as of September 30, 2023

$ 19,000  

$ 6,000  

$ 5,125,000  

$ 482,000  

$ 5,632,000  

As part of a Regulation A Offering in fiscal years 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the “Series A Preferred Stock Warrants”).

The exercise price for these warrants is $ 1.03 .

The expiration date of the Series A Preferred Stock Warrants is November 8, 2023.

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 - 9  COMMITMENTS AND CONTINGENCIES ).

Pursuant to the Company’s acquisition of Secure Education Consultants on January 1, 2018, the Company issued warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 5.44 per share, and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 6.53 per share (the “Secure Education Warrants”).

The expiration date of the Secure Education Warrants was 

January 1, 2023.

On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock (the “2018 Public Offering Warrants”), exercisable over a period of five years, at an exercise price of $ 1.00 per share.

These warrants were exercisable commencing April 27, 2019 and expire on October 29, 2023.

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

Weighted average strike price of outstanding warrants as of March 31, 2024

$ 2.00 $ 1.82 $ 3.25 $ 2.36

Intrinsic value of outstanding warrants as of March 31, 2024

$ 1,813,000 $ 227,000 $ - 2,040,000

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

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

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

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

On March 23, 2023, in connection with the 2023 Registered Direct Offering the Company issued warrants to the placement agent to purchase up to 481,100 shares of common stock.

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

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These warrants were exercisable commencing July 25, 2023 and expire on January 25, 2029.

NOTE 11  

EQUITY INCENTIVE PLAN

In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”).

NOTE 9 – EQUITY INCENTIVE PLAN

In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”).

The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants.

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In October 2021, the Company announced it had registered an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan.

On April 29, 2024, the Company filed a registration statement on Form S- 8 solely to register an additional 7,912,216 shares of its common stock available for issuance under the 2017 Plan.

This increase was approved by the Company’s Board of Directors on March 22, 2024, and by the Company’s stockholders on April 18, 2024 at the Company’s annual meeting.

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.

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The vesting period is generally three years with a contractual term of ten years.

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

30, 2023  and 

2022 was $ 0  and $ 2,000 , respectively, and for the nine months ended September 30, 2023 and 2022  was $ 0  and $ 43,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the unaudited condensed consolidated statements of operations. 

A summary of stock option activity under the Company’s 2017 Plan for the period ended September 30, 2023 is as follows:

A summary of stock option activity under the Company’s 2017 Plan for the period ended March 31, 2024 is as follows:

Number of Shares Subject to Option

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Outstanding balance as of January 1, 2024

862,380  

$ 1.27  

$ 172,000  

( 138,833 )  

( 32,373 )  

Outstanding balance as of September 30, 2023

691,174  

$ 1.20  

$ 1,143,000  

Exercisable as of September 30, 2023

691,174  

$ 1.20  

$ 1,143,000  

As of September 30, 2023 , there was $ 0 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan.

688,841 $ 1.20 3.70 $ 1,478,000

Outstanding balance as of March 31, 2024

688,841 $ 1.20 3.41 $ 788,000

Exercisable as of March 31, 2024

688,841 $ 1.20 3.41 $ 788,000

As of March 31, 2024 , there was $ 0 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan.

Restricted Stock Units

Stock compensation expense related to RSU’s for the three months ended September 30, 2023 and 2022  was $ 1,081,000 and $ 1,626,000 , respectively, and for the nine months ended September 30, 2023 and 2022  was $ 3,237,000  and $ 5,370,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the unaudited condensed consolidated statements of operations.

A summary of RSU activity under the Company’s 2017 Plan for the nine months ended September 30, 2023 is as follows:

Stock compensation expense related to RSU’s for the three months ended March 31, 2024 and 2023 was $ 1,167,000 and $ 1,112,000 , respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the unaudited condensed consolidated statements of operations.

A summary of RSU activity under the Company’s 2017 Plan for the three months ended March 31, 2024 is as follows:

Number of Shares

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Outstanding balance as of January 1, 2024

1,940,260  

$ 5.58  

813,740  

( 871,303 )  

( 167,266 )  

Outstanding balance as of September 30, 2023

1,715,431  

$ 3.82  

1,747,458 $ 3.79 1.39

424,899 3.10 2.49

( 459,773 ) 3.76 0.96

( 36,180 ) 2.73 1.78

Outstanding balance as of March 31, 2024

1,676,404 $ 3.70 1.65

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

As of September 30, 2023 , there was $ 4,977,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.71 years.

NOTE 12  

LOSS PER SHARE

As of March 31, 2024 , there was $ 4,124,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.65 years.

NOTE 10 – LOSS PER SHARE

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

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands, except per share data)

Three Months Ended March 31,

(Dollars in thousands, except per share data)

Basic and diluted loss per share

Net loss from continuing operations

$ ( 10,566 )  

$ ( 48,128 )  

$ ( 34,361 )  

Net income attributable to shareholders from discontinued operations

Net loss attributable to shareholders

$ ( 10,566 )  

$ ( 48,034 )  

$ ( 34,361 )  

$ ( 18,614 ) $ ( 12,682 )

Weighted average common shares outstanding - basic and diluted

66,671,622  

53,482,110  

61,125,035  

48,279,713  

Basic and diluted loss per share from continuing operations

$ ( 0.16 )  

$ ( 0.90 )  

$ ( 0.56 )  

Basic and diluted earnings per share from discontinued operations

79,558,346 54,680,048

Basic and diluted loss per share

$ ( 0.16 )  

$ ( 0.90 )  

$ ( 0.56 )  

$ ( 0.23 ) $ ( 0.23 )

Common stock equivalents excluded due to the anti-dilutive effect

12,001,681  

3,709,051  

12,001,681  

3,709,051  

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

12,001,681 potentially dilutive securities were excluded from diluted loss per share: 

9,595,076 for outstanding warrants, 

691,174 related to outstanding options and 1,715,431  related to outstanding RSUs. 

As the Company had a net loss for the three and nine months ended September 30, 2022 , the following the following 

3,709,051  potentially dilutive securities were excluded from diluted loss per share: 

692,311  for outstanding warrants, 

960,152  related to outstanding options and 

2,056,588  related to outstanding RSUs.

MANAGEMENT ’

S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

11,946,345 16,375,816

As the Company had a net loss for the three months ended March 31, 2024 , the following 11,946,345 potentially dilutive securities were excluded from diluted loss per share:

9,581,100 for outstanding warrants, 688,841 related to outstanding options and 1,676,404 related to outstanding RSUs.

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

14,422,307 for outstanding warrants, less the 772,853 pre-funded warrants, 828,134 related to outstanding options and 1,898,228 related to outstanding RSUs.

NOTE 11 – SUBSEQUENT EVENTS

Authorized Common Stock

On April 22, 2024, the Company increased the number of authorized shares of common stock from 100,000,000 to 300,000,000 .

The number of authorized shares of the Company’s preferred stock was not affected by this amendment and remained unchanged at 2,000,000 shares.

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services.

These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply.

In some cases, you can identify forward-looking statements by terms such as “may,”

“will,”

“should,”

“expect,”

“plan,”

“anticipate,”

“could,”

“intend,”

“target,”

“project,”

“contemplates,”

“believes,”

“estimates,”

“predicts,”

“potential,”

or “continue”

or the negative of these terms or other similar expressions.

These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 2022, entitled “Risk Factors”

and elsewhere in this Quarterly Report.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business.

The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing.

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significant risks, uncertainties and other considerations discussed in this report;

operating risks, including supply chain, equipment or system failures, cyber and other malicious attacks and other events that could affect the amounts and timing of revenues and expenses;

operating risks, including supply chain, equipment or system failures, cyber and other malicious attacks, local conflicts and other events that could affect the amounts and timing of revenues and expenses;

reputational risks affecting customer confidence or willingness to do business with us;

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

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

our continued ability to successfully access the public markets for debt or equity capital;

political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives associated with our products;

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

our continued ability to successfully access the public markets for debt or equity capital;

political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives associated with our products;

current and future litigation;

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the inability of our strategic plans and goals to expand our geographic markets, customer base and product and service offerings;

risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020 which has caused significant volatility in U.S.

and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S.

and international economies;

risks associated with pandemics and other global health emergencies, and their impact U.S.

and international markets and economies;

risks associated with cyberattacks on international, national, local and Company information infrastructure by rogue businesses or criminal elements or by agents of governments engaged in asymmetric disruptions for competitive, economic, or military reasons.

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Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

section of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

Rekor is a technology company dedicated to transforming public safety, urban mobility, and transportation management worldwide.

Our AI-driven solutions have been tailored specifically to the unique needs of our customer base in each of these areas.

We are working to collect, connect, and organize the world's mobility data, harnessing its full potential to provide in real-time the most essential, actionable and predictive insights.

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

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

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

Rekor is working to revolutionize public safety, urban mobility, and transportation management using AI-powered solutions designed to meet the distinct demands of each market we serve.

We work hand-in-hand with our customers to deliver mission-critical traffic and engineering services that assist them in achieving their goals.

Our vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities.

We work towards this by collecting, connecting, and organizing mobility data, and making it accessible and useful to our customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.

To achieve these goals, we have developed a robust, interconnected hardware infrastructure and advanced, purpose-built software platforms.

These powerful tools, enriched by a diverse range of data and state-of-the-art AI, can produce a level of roadway intelligence that we believe is unmatched.

Our solutions empower clients to efficiently manage and optimize the complex interactions of vehicles in motion, ensuring smooth operations within and around public safety, urban mobility, and transportation systems.

Our operations are conducted primarily by our wholly-owned subsidiaries, Rekor Recognition Systems, Inc., or ("Rekor Recognition"), Waycare Technologies Inc.

and Waycare Technologies Ltd.

(collectively, "Waycare"), Southern Traffic Services, Inc., or (“STS”), and All Traffic Data Solutions, LLC or ("ATD").

A New Operating System for Roadways

The condition of national transportation infrastructure systems is a matter of great concern, particularly in the United States.

As the private sector continues to innovate and make headlines with cutting-edge technologies such as autonomous vehicles, flying taxis, and smart delivery drones, it's paradoxical that essential issues such as roadway congestion, safety, vehicle emissions and equitable access are worsening at an alarming rate.

On February 2, 2023, the US Department of Transportation declared a national crisis and state of emergency for roadway safety and launched an urgent roadway safety call-to-action demanding stakeholders to commit to specific actions to reverse the spike in serious injuries and deaths on our roadways.

According to a report from the American Society of Civil Engineers ("ASCE"), US infrastructure has been graded a C minus, indicating that there is significant and urgent need for improvement.

Over 65% of the 4.2 million miles of US roadways are rated in poor condition, which impacts the safety of drivers and passengers.

The issue of congestion is also a serious concern, estimated to cost US citizens a whopping $120 billion per year in economic and productivity losses.

Furthermore, transportation-related greenhouse gas emissions – motorists' emissions, particularly when trapped in traffic account for a significant proportion of the country's total emissions are a leading contributor to declining sustainability, which has far-reaching environmental impacts.

Addressing the road infrastructure issue is imperative for both economic and ecological reasons.

Last but not least, tragically, more than 43,000 people lose their lives each year while using the nation's transportation network of streets, roads, and highways, which represents a stark failure in public safety and policy.

If these transportation network issues remain unaddressed, it has been projected that the United States will face a $10 trillion loss in its gross domestic product.

To address these urgent issues and ensure the competitiveness of the US economy, an unprecedented amount of funding has been made available from the federal government through the Infrastructure Investment and Jobs Act ("IIJA"), the Inflation Reduction Act, and the CHIPS and Science Act, that is available to help create a digitally-enabled transportation infrastructure that can serve the public good and provide new economic value.

This represents a once-in-a-generation level of investment and bipartisan support for creating and scaling digital transportation infrastructure for the 21st century.

Rather than a complete reset or rebuilding of infrastructure, the focus is rather to leverage their power of funding and policymaking to build on previous investments, promote new technology layers, and ensure universal access to digital infrastructure systems throughout the country.

The ultimate objective is to adopt an augmented approach to existing physical infrastructure that blends the strengths of physical, digital, and operational infrastructure with mobility data, including mobile phones, connected vehicles, roadway sensors, and more.

The goal is to enable and coordinate private and public collaboration through a digital-enabled mobility internet and operating system for the roadways that will advance smarter, safer, greener roadways for all.

Roadway Intelligence

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Today, our comprehensive portfolio of products and services offers multiple cutting-edge Internet of Things ("IoT") devices for roadside data collection, an array of curated and integrated data sets from a network of transportation ecosystem data providers, as well as platforms, applications, and data streams that have been tailored for use by a demanding customer base consisting of federal state and local government agencies and large corporate clients.

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

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

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

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

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

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

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

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

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

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

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

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

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

At Rekor, we are forging a future where the mobility internet is not just connected, but interactive, delivering real-time roadway intelligence to revolutionize traffic management, public safety, maintenance, emergency services, and planning agencies, as well as supporting connected and autonomous vehicles.

Our enduring mission is to innovate and perfect a unique, AI-driven, and edge-based IoT network.

This network is designed to be pivotal in this transformation, working in harmony with key partners in the transportation and public safety ecosystem to deliver the most comprehensive insights impacting safety, health, and sustainability for roadways, communities, and citizens.

Our commitment is to continue to focus our investments, merging physical and digital infrastructure to lay the groundwork for a new, advanced operating system for roadways.

As we move forward, Rekor is positioned to play an indispensable and impactful role, supporting private and public agencies as they design and construct digital infrastructure operating system of the future.

We are dedicated to fulfilling the critical demand for real-time and predictive roadway intelligence, ensuring that our solutions are not just innovative but also instrumental in shaping the future of public safety, urban mobility, and transportation management.

Roadway Intelligence Powered by Rekor

Our Rekor One™

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

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

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

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Rekor's solutions support diverse use cases, including:

1) traffic reports, including counts showing Federal Highway Administration ("FHWA") mandated vehicle classifications and speed, analytics for bicycle, pedestrians, and other micromobility modes, as well as patterns and hot spots for greenhouse gas emissions, 2) data driven traffic operations and traffic management, real-time incident detection and response, including proactive traffic calming around events, and 3) high-definition ("HD") video traffic surveillance, to assist law enforcement and support intelligence-based policing, including contactless compliance and enforcement, among others.

1) traffic reports, including counts showing Federal Highway Administration ("FHWA") mandated vehicle classifications and speed, analytics for bicycle, pedestrians, and other micro-mobility modes, as well as patterns and hot spots for greenhouse gas emissions, 2) data driven traffic operations and traffic management, real-time incident detection and response, including proactive traffic calming around events, and 3) high-definition ("HD") video traffic surveillance, to assist law enforcement and support intelligence-based policing, including contactless compliance and enforcement, among others.

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

The Road Ahead

The United States government is investing heavily in upgrading and digitizing the nation’s outdated infrastructure.

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

We are actively engaged in providing state-of-the-art AI-driven roadway intelligence solutions to enhance public safety, urban mobility, and transportation management.

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

We are dedicated to delivering mission-critical solutions that help to create intelligent, secure, and sustainable streets for all communities.

The ultimate objective is for Rekor to be a foundational partner in building a digitally-enabled internet and operating system for roadways that will enable smarter, safer, and more eco-friendly mobility for all.

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

Opportunities, Trends and Uncertainties

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Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:

New Efficiencies and Expanded Uses for Roadway Intelligence  – The suite of products and services that we have developed makes use of recent technological developments that significantly lower the cost of existing roadway deployments.

These technological developments include the development of improved graphic processing units (“GPU’s”) that feature greater bandwidth and are structured to facilitate parallel processing of larger blocks of data, improvements in cellular technologies that we can take advantage of through more efficient edge processing techniques.

Our systems have also been designed to address developments in cellular communications networks through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and continual improvements in the efficiency of our AI algorithms.

Our edge processing systems ingest local HD video streams at the source and convert the raw video data to text data, dramatically reducing the volume of data that needs to be transferred through the network.

Edge processing allows us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that are experienced by other networks where raw video needs to be streamed to the cloud for processing.

The reduced cost and additional capabilities realized as a result of these technological developments have also enabled us to deliver products and services that were previously either unavailable or available only at prohibitive cost.

Although our customer base is currently anchored by large government institutions and commercial enterprises,  we currently also serve many users who could not afford the cost, or adapt to the restrictions of, conventional systems.

These include smaller municipalities, homeowners’ associations, and smaller businesses finding new applications for our software and hardware.

AI for Infrastructure  – We have been able to develop applications of AI that improve the analysis of conditions on roadways and significantly affect the safety and efficiency of travel.

As vehicles move towards further automation, we expect there to be a growing need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g.

wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway.

Businesses can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating local vehicular flow as well as data about the vehicles on the roadway.

Connected Vehicle Data  – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors.

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

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

Growing Smart City Market 

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

According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050.

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

Growing Smart City Market – According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050.

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

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

We believe that advancements in “big data” connected devices and artificial intelligence can provide Intelligent Transportation System (“ITS”) solutions that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life.

We believe that advancements in “big data” connected devices and artificial intelligence can provide Intelligent Transportation System (“ITS”) solutions that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life.

We believe our data-driven, artificial intelligence-aided solutions provide useful tools that can effectively tackle the challenges cities and communities are facing today and will face over the coming decades.

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

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

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

wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway.

Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating local vehicular flow as well as data about the vehicles on the roadway.

Connected Vehicle Data – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors.

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

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

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

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

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

We currently serve many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems.

These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs.

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

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

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

Based on published benchmarks, our software currently outperforms competitors.

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

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As with any large market, this will require considerable effort and resources.

Expansion of Contactless Compliance Programs  – We expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial.

Expansion of Automated Enforcement of Motor Vehicle Laws – We expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial.

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

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

Business Development and Marketing  – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a visible leadership position.

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

Graphic Processing Unit (“GPU”) Improvements – We expect our business to benefit from more powerful and affordable GPU hardware that has recently been developed.

These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams.

GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts.

The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognition.

The GPU market is predicted to grow as a result of a surge in the adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors.

As GPU manufacturers increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.

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

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

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

As a result, while download speeds have improved significantly due to large investments in cellular infrastructure, this has resulted in relatively small improvements to cellular upload speeds.

With roadside deployments experiencing explosive growth in count and density, scalability, latency and bandwidth have become aspects of competition in the market.

Our systems have been designed to address these issues through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and continual improvements in the efficiency of our AI algorithms.

Accelerated Business Development and Marketing – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a visible leadership position.

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

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

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

Pressure on Government Budgets –With increasing needs for resources, government agencies need increasingly affordable, effective, and scalable solutions.

With subscription pricing and an intelligent infrastructure approach that accomplishes multiple agency missions, we are uniquely positioned to provide agencies with force-multiplying tools when money and human resources are limited.

Agencies are looking to improve public safety, manage resources more effectively, and make an impact on their citizen's quality of life with limited capital expenditure.

In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of non-compliant vehicles on their roadways.

Infrastructure Investment and Jobs Act ( “

IIJA ”

) and the Bipartisan Infrastructure Law ( “

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

Infrastructure Investment and Jobs Act (“IIJA”) and the Bipartisan Infrastructure Law (“BIL”) - The IIJA, signed into law on November 15, 2021, provides for significant national investments in the transportation systems in the United States, including over $150 billion in new spending on roadway infrastructure, including intelligent transportation systems.

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

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

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

$150 million for the current administration to establish a grant program to modernize state data collection systems $500 million for the Strengthening Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that improve transportation efficiency and safety.

Recent Acquisitions - Over the past two years, Rekor has acquired two subsidiaries as part of its plans to advance its appeal to national and local transportation agencies.

In the first of these acquisitions, we acquired a leader in the development of predictive analytics for traffic management using a combination of internally generated and third party data sources.

This acquisition was designed to assure transportation agencies that we were developing the most advanced data analysis systems to support their missions in safety and efficiency.

In the second acquisition, we acquired one of the leading existing providers of traffic data services in the United States.

Uniquely, this Company had innovated a change in the service model from providing, servicing and maintaining agency resources to a data services model where overlapping entities could benefit from our modular approach to data collection and dissemination.

Each of these acquisitions has led to increased visibility for the Company among national and state level DOTs in the United States.

Challenges to Executing on the Corporate Strategy – As an acquirer and integrator of established technology companies in the ITS industry, there is an inherent risk associated with the successful implementation and execution of the strategy.

If Rekor is unable to successfully implement and execute its plans, there could be a material and adverse effect on the Company’s business, results of operations, and financial condition.

Inability to Achieve Profitability - Rekor continues to grow its business, its operating expenses and capital expenditures have increased, and it has not yet achieved the level of sustaining profitability.

As a result, if the Company is unable to generate additional revenue or achieve planned efficiencies in operations, or if its revenue declines significantly, Rekor may not be able to achieve profitability in the future, which would materially and adversely affect the Company’s business.

Inability to Retain Qualified Personnel – Rekor’s success depends on the continued efforts and abilities of the senior management team and key engineering and marketing specialists.

Although Rekor has employment agreements with these employees, they may not choose to remain employed by Rekor.

Should one or more key personnel leave the Company or join a competitor, the Company’s business, operating results, and financial condition can be adversely affected.

Inability to Compete Effectively - Competition and technological advancements by others may erode the Company’s business and result in inability to capture new business and revenue.

Each business line faces significant competitive pressures within the markets in which they operate.

While Rekor continues to work to develop and strengthen its competitive advantages, many factors such as market and technology changes may erode or prevent this.

If the Company is unable to successfully maintain its competitive advantage, the Company’s business, operating results, and financial condition can be adversely affected.

Cyber Security Risks - Rekor relies on information technology in all aspects of its business.

A significant disruption or failure in the information technology systems could result in services interruptions, safety failures, security violations, regulatory compliance failures, an inability to protect information and assets against intruders, and other operational difficulties.

This could result in the loss of assets and critical information and expose the Company to remediation costs and reputational damage.

Although Rekor takes reasonable steps intended to mitigate these risks, a significant disruption or cyber intrusion could lead to misappropriation of assets or data corruption and could adversely affect the Company’s results of operations, financial condition, and liquidity.

Intellectual Property Claims - Third parties that have been issued patents or have filed for patent applications similar to those used by the Company’s operating subsidiaries may result in intellectual property claims against the Company.

Rekor cannot determine with certainty whether existing third-party patents or the issuance of any future third party patents would require any of its operating subsidiaries to alter their respective technologies, obtain licenses or cease certain activities.

Should the Company be unable to defend against such claims, the Company’s business, operating results, and financial condition can be adversely affected.

Components of Operating Results

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

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

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

Costs of revenues, excluding depreciation and amortization

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Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation expenses.

Operating expenses also include impairment of assets.

General and Administrative

General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources, and administrative departments.

General and administrative expenses consist of personnel costs for our executive, finance, legal, human resources, and administrative departments.

Additional expenses include office leases, professional fees, and insurance.

We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, legal, insurance, and investor relations as a public company.

We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, legal, insurance, and investor relations as a public company.

Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

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Research and Development

Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources.

Research and development expenses consist of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources.

Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services.

Depreciation and Amortization

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

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

Other Income (Expense)

Other income (expense) consists primarily of legal settlements, legal judgements, interest expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed assets, interest income earned on cash and cash equivalents, short-term investments and note receivables.

Other income (expense) consists primarily of legal settlements, legal judgements, interest income and expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed assets, interest income earned on cash and cash equivalents and note receivables.

Income Tax Provision

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Critical Accounting Estimates and Assumptions

A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

section in our Annual Report on Form 10-K for the year ended December 31, 2022.

Business Combination

The Company has made a preliminary estimate of the allocation of the preliminary purchase price of ATD to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value.

The Company is still evaluating the fair value of intangible assets, and income taxes, in addition to ensuring all other assets and liabilities have been identified and recorded.

The Company has estimated the preliminary fair value of assets acquired and liabilities assumed based on information currently available and will continue to adjust those estimates as additional information pertaining to events or circumstances become available.

The Company will reflect measurement period adjustments, in the period in which the adjustments occur, and the Company will finalize its accounting for the acquisition within one year from the Closing Date.

A change in the fair value of the net assets may change the amount of the purchase price allocable to goodwill.

If the final fair value estimates and tax adjustments related to the net assets acquired decrease from their preliminary estimates, the amount of goodwill will increase.

In addition, the final fair value estimates related to the net assets acquired could impact the amount of amortization expense recorded associated with amounts allocated to tangible and intangible assets.

The fair value measurements were primarily based on significant inputs that are not observable in the market, such as discounted cash flow ("DCF") analyses, and thus represent Level 3 fair value measurements.

A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2023.

New Accounting Pronouncements

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Our historical operating results in dollars are presented below.

This analysis of operation is solely related to continuing operations and does not consider the results of discontinued operations.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Depreciation and amortization

Goodwill impairment

Total operating expenses

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Other income (expense):

Gain on extinguishment of debt

(Loss) gain on extinguishment of debt

Interest expense, net

Other income (expense)

Total other income (expense)

Loss before income taxes

Comparison of the Three and Nine Months Ended September 30, 2023 and the Three and Nine Months Ended September 30, 2022

Comparison of the Three Months Ended March 31, 2024 and the Three Months Ended March 31, 2023

Total Revenue

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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

During the nine months ended September 30, 2023, revenue attributable to STS was $10,740,000, compared to $3,990,000 for the nine months ended September 30, 2022.

The other main driver of revenue growth during three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022 was attributable to sales of the Company's software and its contactless compliance program which both increased in revenue. 

The increase in revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was primarily attributable to our acquisition of ATD in January 2024.

During the three months ended March 31, 2024, revenue attributable to ATD was $2,364,000.

Cost of Revenue, Excluding Depreciation and Amortization

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

Cost of revenue, excluding depreciation and amortization

For the three and nine months ended September 30, 2023, cost of revenue, excluding depreciation and amortization increased compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our increase in revenue.

For the three months ended March 31, 2024, cost of revenue, excluding depreciation and amortization increased compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our increase in revenue.

Additionally, $829,000 of the increase was related to our acquisition of ATD.

Operating Expenses

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Depreciation and amortization

Goodwill impairment

Total operating expenses

General and Administrative Expenses

General and administrative expenses during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, remained consistent period over period.

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

a $3,458,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses, as well as share-based compensation expense.

This decrease was partially offset by a $429,000 increase in our insurance expenses. 

The increase in general and administrative expenses of $461,000 was primarily due to:

a $816,000 increase in general and administrative expenses as a result of the acquisition of ATD.

a $149,000 increase in software expense related to hosting of data.

a $98,000 increase in expenses related to our directors, mainly as a result the addition of two new members to our Board of Directors.

These expenses were offset by

a $337,000 decrease in payroll and payroll related expenses related to our operations excluding ATD.

a $390,000 decrease in professional services related to our operations excluding ATD.

Selling and Marketing Expenses

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

was primarily due to a $645,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses.  

The decrease in selling and marketing expenses during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to a $551,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses.

Additionally, there was a $267,000 decrease in advertising expenses.  

The increase in selling and marketing expenses of $524,000 was primarily due to:

a $377,000 increase in payroll and payroll related costs, primarily to support our sales strategy.

a $163,000 increase in advertising expense, of which approximately $91,000 was related to our acquisition of ATD.

Research and Development Expense

The decrease in research and development expenses during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to a $427,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses.

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

Goodwill Impairment

During the third quarter of 2022, we experienced a significant decline in our market capitalization, which management deemed a triggering event related to goodwill.

As a result, we performed an interim impairment assessment as of September 30, 2022 and determined that as of the reporting date we had an impairment related to goodwill in the amount of $34,835,000. 

Research and development expenses during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, remained consistent period over period.

Depreciation and Amortization

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

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

Other Income (Expense)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

Other income (expense):

Gain on extinguishment of debt

(Loss) gain on extinguishment of debt

Interest expense, net

Other income (expense)

Total other income (expense)

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

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

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

Other income (expense) increased in the current period compared to the prior period as a result of a legal settlement. 

Interest expense increased period over period due to the issuance of the Series A Prime Revenue Sharing Notes.

(Loss) gain on extinguishment of debt is a result of early redemption of the 2023 Promissory Notes.

As part of the redemption, we recorded a Redemption Payment of $1,875,000 which we settled through the issuance of common stock and accelerated debt issuance costs of $2,818,000.

Non-GAAP Measures

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EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S.

(“U.S.

GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S.

EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company’s ability to service and/or incur debt.

However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Net loss from continuing operations

Three Months Ended March 31,

Depreciation and amortization

Share-based compensation

Goodwill impairment

Gain on extinguishment of debt

Loss (gain) on extinguishment of debt

Adjusted EBITDA

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

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

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands, except percentages)

Three Months Ended March 31,

(Dollars in thousands, except percentages)

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Adjusted Gross Margin

Adjusted Gross Margin for the three and nine months ended September 30, 2023 increased compared to the three and nine months ended September 30, 2022. As the Company continues to scale and standardize it product offerings it has begun to realize operational efficiencies that have resulted in an improved Adjusted Gross Margin. Additionally, during the three and nine months ended September 30, 2023, the Company had a higher mix of software sales which typically carry a higher Adjusted Gross Margin. 

Adjusted Gross Margin for the three months ended March 31, 2024 decreased compared to the three months ended March 31, 2023.

During the three months ended March 31, 2024, the Company had a lower mix of software sales which typically carry a higher Adjusted Gross Margin.

Key Performance Indicators

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Recurring Revenue Growth

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

We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and software licenses which are generally more difficult to predict. Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operations.

This visibility enables us to better manage and invest in our business. The following table sets forth our recurring revenue for the periods included:

Three Months Ended September 30,

Nine Months Ended September 30,

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

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

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

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

The following table sets forth our recurring revenue for the periods included (dollars in thousands):

Three Months Ended March 31,

Recurring revenue

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

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

However, procurement requirements for some of our largest customers may result in periods when there is an increase one-time sales as compared to recurring revenues, which may cause the proportion of recurring revenues generated in those periods to fluctuate.

Total Contract Value

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

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

Three Months Ended March 31,

Total Contract Value

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

The decrease in total contract value is primarily related to large statewide contracts that closed in the first quarter of 2023.

These multi-year contracts are still in effect in 2024.

Performance Obligations

As of September 30, 2023, we had approximately $30,203,000 of contracts that were closed prior to September 30, 2023 but have a contractual period beyond September 30, 2023. This represents an increase of $8,791,000 or 41% compared to $21,412,000 of performance obligations as of December 31, 2022. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term.

We currently expect to recognize approximately 73% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years.

As of March 31, 2024, we had approximately $22,912,000 of contracts that were closed prior to March 31, 2024 but have a contractual period beyond March 31, 2024.

This represents a decrease of $3,478,000 or 13% compared to $26,390,000 of performance obligations as of December 31, 2023.

These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term.

We currently expect to recognize approximately $17,494,000 of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years.

On occasion, our customers will prepay the full contract or a substantial portion of the contract.

Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.

The increase in total performance obligations is primarily related to our acquisition of STS. 

Lease Obligations

As of September 30, 2023, we had material leased building space at the following locations in the U.S.

Columbia, Maryland – The corporate headquarters

As of March 31, 2024, we had material leased building space at the following locations in the U.S.

Columbia, Maryland – The corporate headquarters

Tel Aviv, Israel

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Liquidity and Capital Resources

The following table sets forth the components of our cash flows from continuing operations for the periods included (dollars in thousands):

Nine Months Ended September 30,

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

Three Months Ended March 31,

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash used in investing activities

Net cash provided by financing activities

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

Net cash used in operating activities for the nine months ended September 30, 2023 had a decrease of $3,708,000, which was primarily attributable to the reductions in expenses from continuing operations. 

The net decrease in net cash used in investing activities of $11,093,000 was primarily due to a decrease in the outflow of funds used for capital expenditures.

Additionally, during the nine months ended September 30, 2022, the Company had net cash outflows of $6,389,000 related to the acquisition of STS.

Net cash provided by financing activities for the nine months ended September 30, 2023 increased by $8,543,000 from the prior nine month period ended September 30, 2022.

During the nine months ended September 30, 2023, as part of our 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds of $11,100,000 and $9,159,000, respectively.

Additionally, in the third quarter of 2023, we received gross proceeds of $10,996,000 related to the exercise of warrants associated to the 2023 Registered Direct Offering. In the prior comparable quarterly period, through our 2022 Sales Agreement, we received net proceeds, after deducting the underwriting discounts and commissions and offering expenses payable by us, of $22,758,000.

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

As of September 30, 2023, we had cash and cash equivalents from continuing operations of $7,359,000 and working capital of $3,579,000, as compared to cash and cash equivalents of $2,178,000 and a working capital deficit of $6,010,000 as of December 31, 2022.

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

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

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

We have generated losses since our inception and have relied on cash on hand and external sources of financing to support cash flow from operations.

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

As of and for the nine months ended September 30, 2023, we had working capital from continuing operations of $3,579,000 and a loss from continuing operations of $34,361,000.

Our cash increased by $4,891,000 for the nine months ended September 30, 2023 primarily due to external financing which was offset by the loss from continuing operations of $34,361,000. 

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 operations for the next twelve months following the issuance of these unaudited condensed financial statements.

These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

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

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

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

2023 Promissory Notes with Warrants

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

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

2023 Registered Public Offering

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

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

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

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

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

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

The Offering closed on March 27, 2023.

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

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

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

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

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

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

During the third quarter of 2023, the institutional investor connected to the 2023 Registered Direct Offering exercised 6,872,853 of the Registered Direct Warrants into an equal number of shares of the Company's common stock. The Company received gross proceeds from the exercise of the Registered Direct Warrants of approximately $10,996,000.

As of September 30, 2023, we did not have any material commitments for capital expenditures.

Net cash used in operating activities for the three months ended March 31, 2024 had a decrease of $1,604,000, which was primarily attributable to the timeliness of collections related to our accounts receivable balance.

The increase in net cash used in investing activities of $8,402,000 was primarily due to the net cash outflow of $8,969,000 related to the acquisition of ATD.

Net cash provided by financing activities for the three months ended March 31, 2024 decreased by $7,073,000 from the prior three month period ended March 31, 2023.

During the three months ended March 31, 2024, as part of our 2024 Public Offering, we received net proceeds of $26,362,000, these proceeds were partially offset by the repayment of our 2023 Promissory Notes.

During the three months ended March 31, 2023, as part of the 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds of $11,100,000 and $9,159,000, respectively.

For the three months ended March 31, 2024 and 2023, we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity.

As of March 31, 2024, we had cash and cash equivalents of $12,267,000 and working capital of $5,241,000, as compared to cash and cash equivalents of $15,713,000 and working capital of $8,100,000 as of December 31, 2023.

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.

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.

We have generated losses since our inception and have relied on cash on hand and external sources of financing to support cash flow from operations.

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

As of and for the three months ended March 31, 2024, we had working capital of $5,241,000 and a loss of $18,614,000.

Our cash decreased by $3,446,000 for the three months ended March 31, 2024 primarily due to the cash paid to acquire ATD and redeem the 2023 Promissory Notes and the net loss of $18,614,000, partially offset by external financing activity.

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 unaudited condensed 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.

2024 Public Offering

On February 9, 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”).

The purchase 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 $2,388,000, or approximately $26,362,000 in aggregate for the 2024 Public Offering including the exercise of the Underwriters’ Option.

As of March 31, 2024, we did not have any material commitments for capital expenditures.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company”

as defined by Item 10 of Regulation S-K, Rekor is not required to provide the information required by Item 3.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, Rekor is not required to provide the information required by Item 3.

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

What changed 10-Q

Item 1. Financial Statements